COPT Defense Properties (CDP) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Corporate Office Properties Trust fourth quarter and year-end earnings review conference call.

As a reminder, today's conference is being recorded.

At this time, I will turn the call over to Ms. Mary Ellen Fowler.

Thank you and good afternoon, everyone.

Yesterday, our earnings 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 friendly supplemental package, please contact me after the call or you can access both documents from the Investor Relations section of our website at www.COPT.com.

Within the supplemental package, you will find a reconciliation of non-GAAP financial measures to GAAP measures referenced throughout this call.

Also under the Investor Relations section of our website, you'll find a reconciliation of our first quarter and the annual 2005 guidance.

With me today is Clay Hamlin, our CEO;

Rand Griffin, our President and COO; and Roger Waesche, our CFO.

In just a minute they will review the results for the fourth quarter and year 2004 and then the call will be opened up for your 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 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although such statements and projections are based on what we believe to be reasonable assumptions, actual results may differ from those projected.

These factors that could cause actual results to differ materially include, without limitation, the ability to renew or release (indiscernible) under favorable terms, regulatory changes, changes in the economy, the successful 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 Securities and Exchange Commission.

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

Thanks, Mary Ellen.

Good afternoon, everyone.

We're pleased to announce that for 2004 we generated a 45 percent total shareholder return.

When we look at our performance over the past five years, we've achieved a 427 percent shareholder return.

We have come a long way in five years.

In fact, in 1999, we were the top performing office (indiscernible) and finished the year with about 721 million in total assets.

Our stock price averaged about $8 and our dividend was 66 cents for the year.

But we had a creative, highly motivated, and entrepreneurial management team.

Our goal was to build a high-growth real estate company with an ability to create value every year in a variety of ways.

And our articulated real estate strategy at the time was first, to maintain geographic focus in select suburban submarkets; second, to own high-quality portfolio located in the finest office parks; third, to create a dominant franchise position in our markets; fourth, to create value through acquisitions, development, and tenant services; and fifth and finally, to become the landlord of choice.

Five years later, I'm pleased to say that we have consistently performed on our strategy.

The right strategy in the right markets executed exceptionally well by our team has resulted in steady, consistent, and sector leading growth.

And we are strongly positioned today for the next five years.

I say that because of our even greater strength today, both financially and in our markets.

We will continue to adhere to our long-term strategy as we grow our business in our targeted markets, through strategic acquisitions, demand-driven developments, and finding new ways to serve our tenants.

In 2004 we expanded into contiguous geographic markets to be able to better serve our government and defense contractor tenants.

Besides expanding into additional geographic markets in the greater Washington area, in the future we plan to seek opportunities to serve those tenants in select additional markets.

Thus, our expansion strategy will continue to allow to be not only geographic based but selectively tenant based.

This reflects the fact that we have achieved not only a geographic based franchise, but as landlord of choice in many cases, a tenant based franchise.

We believe that seeking ways to capitalize on both of our franchises will yield positive long-term results for the Company.

Now I'd like to turn to our results.

For 2004, our FFO increased to 11.5 percent on a diluted, per-share basis from $1.56 to $1.74.

That is among the highest in our sector.

We raised our dividend 8.5 percent in September, continuing our record of strong dividend growth each year.

As we had projected previously, we ended the year at 94 percent occupied.

That is up from about 91.2 percent at December 31, 2003.

And we were 95 percent leased at the end of 2004.

Although we will have some challenges this year, we still expect to reach 95 percent occupancy by year-end 2005.

For 2004, we significantly exceeded our net acquisition goal of $100 million.

We acquired $264 million of properties.

Through these acquisitions, we strategically entered two new submarkets, Tysons Corner and St. Mary's/King George Counties, where we expect to grow our presence over time, and Rand will discuss those acquisitions.

Based on our solid tenant demand, our development pipeline continues to increase, with over 900,000 square feet under construction and another 537,000 square feet in the development stage currently.

We continue to be optimistic about our development activities, which are very strategic for us and have been producing going-in returns 200 to 300 basis points higher than our going-in returns on our acquisitions.

Along with the results just mentioned, we have been working diligently on the 404 compliance and expect to complete testing of our financial controls by March 15.

As we look at 2005, we're focused on accomplishing the following.

First, increasing our occupancy, releasing spaces that we have identified we will vacate and proactively managing our lease rollovers for 2005 and beyond.

Second, pursuing attractive acquisition opportunities while maintaining our investment parameters in a highly competitive acquisition market.

Third, moving our large development pipeline forward by executing leases with existing and new tenants that need to expand.

Fourth, taking advantage of the strong sales market to profitably dispose of nonstrategic assets and recycle the proceeds into core assets.

And fifth, conservatively managing our debt position including interest rate risk while at the same time maintaining financial flexibility needed in a growth environment.

In summary, we are very pleased with our results for 2004 and we look forward to the challenges and opportunities in 2005.

With regard to our guidance for 2005, we are affirming our guidance provided in our last call -- that is, FFO in the $1.78 to $1.85 per share range, which is in line with current consensus of $1.84 per share for the year.

Now with that, I will turn the call over to Roger and Rand to take you through more details.

Thanks, Clay.

As a note, all per-share amounts are presented on a fully diluted basis and take into account the effects of FAS 141.

Looking our GAAP earnings for the fourth quarter, the Company reported 15 cents per share, slightly above the 14 cents per share for the fourth quarter of 2003.

For the year, the Company recorded earnings of 54 cents per share as compared to 27 cents per share for the year ended 2003. 2004 earnings were impacted by a $1.8 million charge related to original issuance costs for our 10 percent Series B shares redeemed during the year.

2003 earnings were reduced by a $11.2 million or 39 cent charge to earnings associated with our repurchase of the Series C convertible preferred units.

FFO for the quarter totaled $20.9 million, or 45 cents per share, a 29 percent increase in total FFO and a 12.5 percent increase in per-share FFO over the fourth quarter 2003.

For the year, FFO totaled $76.2 million, or $1.74 per share, compared to $61.3 million, or $1.56 per share, for the year 2003, as adjusted for FAS 141, representing a 24.3 percent increase in total FFO and an 11.5 percent per-share increase. 2004 FFO was impacted by unusually high lease termination fees; $10.1 million versus $4.7 million we realized during 2003.

For 2005, we expect lease term fees to be a more normalized level of 3 to $5 million.

On the expense side, as we mentioned on the last call, our 2004 G&A has been impacted by higher costs associated with Sarbanes-Oxley, which were more than $600,000, increased restricted stock expenses and higher payroll due to new employees hired during 2004.

FFO for the year was also impacted by $1.8 million, or 4 cents a share, reduction related to our Series B redemption, mentioned previously.

For the fourth quarter, net operating income was positively impacted by our annual tenant CAM reconciliation of approximately $1.3 million.

G&A was negatively impacted by $400,000 for the accelerated vesting of options for our retiring General Counsel and by audit costs related to 404 compliance testing.

After adjusting for capital expenditures, straight lining of rents, and FAS 141 revenue, our adjusted funds from operations for the fourth quarter totaled $13.1 million, as compared to AFFO of $11.1 million for the fourth quarter of 2003, representing an increase of 19 percent.

AFFO for the year totaled $51.3 million, as compared to $43.2 million in 2003.

This represents a 19 percent increase in total AFFO.

During 2004, the Company distributed 98 cents per share in common dividends, representing a 7.7 percent increase over 2003.

For the fourth quarter, the Company distributed 25.5 cents per share, resulting in an FFO payout ratio of 55.4 percent and a 55.7 percent ratio for the year.

Our AFFO payout ratios were 87.9 percent for the fourth quarter 2004 and 82.7 percent for the year.

Each was impacted by the quarterly recognition of approximately $1.4 million in straight-line rent from the Booz Allen Hamilton lease at One Dulles Tower in northern Virginia.

This lease is signed and in effect, but the tenant was not paying rent on the space until January 2005.

Without this adjustment to straight line rent, our AFFO payout ratio would have been approximately 80 percent.

In the fourth quarter, we committed $15.76 per square foot on average for TI and commissions related to renewed and retenanted space.

Included are the retenanting costs related to moving the last significant non-contractor tenant out of the National Business Park.

Without these costs, our average lease costs for renewed and retenanting would have been approximately $11.50 per square foot.

Looking at fourth quarter 2004 for the 116 properties, or 81 percent of our total square footage owned, GAAP same office NOI increased by 1.5 percent and decreased by 1.1 percent on a cash basis as compared to the fourth quarter of 2003.

Turning to the balance sheet at December 31, the Company had a total market cap of approximately $2.5 billion, with $1 billion of debt outstanding, resulting in a debt-to-market cap of 40 percent.

During the year, we raised $116 million in common equity and locked in $115 million in long-term fixed-rate financing.

For 2005, we expect to fund our construction and acquisitions through a combination of new construction debt, advances under our existing revolver, and 50 to $75 million of equity.

At year-end, 77 percent of our debt was fixed.

We will continue our practice of fixing additional debt during 2005 with the goal of having our floating-rate debt be at or below 20 percent.

Our guidance does include a 25 basis point increase in interest rates each quarter.

Our weighted average cost of debt for the fourth quarter was a low 5.9 percent.

With regard to funding our development pipeline, we are working on several initiatives.

We expect to close on a $30 million construction financing for Washington Tech Park II, located in Westfields.

During September of last year, we closed on a $63 million loan to finance the construction of the first three buildings in Phase II at NBP, and now we will seek construction financing for the next round of buildings in this phase.

In terms of coverage ratios for the quarter, the Company's EBITDA to interest expense ratio was 3 times.

Our fixed charge coverage ratio remained a healthy 2.3 times.

And lastly, with respect to FFO guidance for this year, as Clay mentioned, we are confirming our previous guidance of $1.78 to $1.85 per share.

The variability in our guidance is largely a result of two factors, timing of lease-up of 143,000 square feet at Princeton Tech Center that AT&T vacated at the end of January, and the volume and timing of acquisitions, given the competitive investment environment.

With regard to the AT&T space, we projected in our guidance that it would not be leased until November this year.

We have been marketing this space and have strong demand as a result of the location, which is sufficient distance outside of New York City.

This location fits the parameters for use as a back office or a redundant location for financial institutions operating in New York.

For our guidance, we projected acquisitions of $200 million net of sales of $50 million.

In terms of our 2005 first-quarter guidance, we expect FFO to be in the 43 to 44 cent range, which would represent 7 to 10 percent growth above the first quarter of '04.

With that, I will turn the call over to Rand.

Thanks, Roger, and good afternoon, everyone.

We currently have 145 suburban office properties in operation, totaling 12 million square feet.

We ended the fourth quarter at 94 percent occupied and 95 percent leased.

In terms of leasing, we had a very active year, signing leases for 2.4 million square feet of space.

This total includes 1.7 million square feet of renewed and retenanted space, with 948,000 square feet in renewed space, equating to a 71 percent renewal rate.

We signed leases for 331,000 square feet in new buildings under construction and 394,000 square feet of space in recently completed buildings.

As of year end, 47 percent of our revenue was in the intelligence and defense sector, up from 26 percent just two years ago.

Importantly, we are seeing continued strong leasing demand from the intelligence and defense sectors, as evidenced by this morning's announcement of a 126,000 square foot lease for all of 318 NBP.

In addition, we are seeing new emerging demand from other important business sectors.

For 2004 renewed and retenanted space, we achieved a 7.2 percent increase in base rent and a 5.1 percent increase in total rent on a straight-line basis.

On a cash basis, we achieved a 2.2 percent increase in base rent and a 0.05 percent increase in total rent.

For renewed and retenanted space, our average per square capital cost was $10.86.

Looking forward to 2005, about 1.1 million square feet, equating to 9.8 percent of our revenue, is scheduled to expire.

The average total rent for this space is $20.71 per square foot, which remains on average 10 percent below market and should help our same-store growth in 2005.

Turning to the economy, the Bureau of Labor Statistics recently reported that the Washington D.C. region added 79,000 new jobs during 2004, with about 20 percent being professional and business service sector.

This is the most jobs added to the region since the year 2000.

Local economists are projecting that 83,000 jobs will be added in 2005, which should bode well for our leasing efforts.

Looking specifically at each of our submarkets, first, we see fairly steady improvement within the entire Baltimore/Washington Corridor submarket, which totaled 11 million square feet, with total office vacancies, including both direct and indirect space, at 9.5 percent for fourth quarter 2004 versus 13.3 percent a year earlier.

Our portfolio representing 32 percent of this market was 95.6 percent occupied at year-end.

Within the BWI submarket in Anne Arundel county as of December 31, market vacancy for Class A space was 5.8 percent.

About 220,000 square feet of Class A space was absorbed over the past six months.

Demand is driven almost solely by the defense and intelligence industry.

Over the last six months within our National Business Park, we have signed leases on new space for close to 400,000 square feet.

Our properties located in the BWI submarket are 95.2 percent occupied.

Howard County in the Baltimore/Washington corridor has a vacancy rate, including sublease space, of 11.6 percent, down from 14.9 percent at the end of 2003.

After almost two years with no new construction and a rebound in demand, leasing activity in Howard County is now robust, with much of the demand coming from the defense sector.

We are also seeing demand for professional services, health care, and the education sector.

We are starting to see new development in Howard County, as the Class A vacancy rate outside of Columbia Town Center is a low 3.8 percent.

Our Howard County portfolio, consisting of 1.6 million square feet, is currently 96 percent occupied.

Overall for Northern Virginia, vacancy rate was 10.3 percent, compared to 12.5 percent at year-end 2003.

Absorption in Northern Virginia totaled 6.3 million square feet, compared to 4.9 million square feet for 2003.

Sublease space dropped to 4.2 million square feet, which is 2.8 percent of the total Northern Virginia market.

This reflects a decrease of 1.1 million square feet since 2003 and almost 50 percent from the high of 8 million square feet in 2001.

The pace of leasing activity in 2004 was comparable to that of 2000 and surpassed that of 2003.

The 3.9 million square feet development pipeline for 2005/2006 delivery is 60 percent preleased.

Within our three submarkets in Northern Virginia, the total office vacancy rating, including subleased space, was 14.4 percent.

There was 2.3 million square feet of positive net absorption for these submarkets, three submarkets, during 2004.

Our portfolio, consisting of 2.2 million square feet, is currently 94.3 percent occupied.

Turning to acquisitions for the year, we acquired 22 suburban office properties, encompassing 1.6 million square feet, that were 92 percent occupied upon acquisition, for an aggregate investment of $264 million.

We more than doubled our goal of acquiring a net $100 million.

Although the acquisition environment remains very competitive, we were able to acquire properties and situations that were tax driven or that required assumption of above market rate debt or required the ability to underwrite a particular government installation and surrounding market dynamics.

Through these acquisitions, we entered two new submarkets, Tysons Corner and Northern Virginia and St. Mary's/King George counties, located in southern Maryland and northeast Virginia, respectively.

The properties located in Tysons Corner provide a toehold that we can build upon and also provide diversity to our tenant base, with Wachovia Bank now becoming our ninth largest tenant.

Our acquisitions adjacent to Patuxent River Naval Air Station and Dahlgren Naval Surface Warfare Center evidence our ability to find properties located near important government installations, where we enter the market with a significant position with the opportunity to grow the position over time through additional acquisitions and development.

Since our properties at Patuxent River and Dahlgren are in close proximity, we can efficiently manage all of the buildings from one regional property management office.

During December, our Board approved an expansion of a tenant-driven strategy, allowing us to pursue specific opportunities in other markets within the United States in order to meet the existing and future tenant demand.

We expect these opportunities will include existing buildings that will be redeveloped, as well as construction of new buildings, most of which would be preleased.

We hope to announce later this year the closing on the first of these opportunities.

Turning to development, during 2004, we completed and put into service three buildings totaling 301,000 square feet that are 90 percent leased at year-end.

Two of the buildings, 220 NBP and Greens III, are leased to full building users.

In terms of development activity at year-end, we had seven buildings under construction for a total of $158 million, with 907,000 square feet that were 37 percent preleased.

With our announcement this morning, we are now at a 50 percent preleased level.

Four of these buildings are located in National Business Park and three of these have full building leases to Northrop Grumman, Booz Allen Hamilton, and a large creditworthy tenant.

The remaining three buildings consist of 82,000 square feet at Robert Fulton Drive under construction, of which 65,000 square feet is preleased to Cadmus Journal Systems.

Secondly, 213,000 square feet at Washington Tech Park II in Westfields, and finally 60,000 feet in Expedition Six at Patuxent River.

We would still expect to achieve on average going-in, unleveraged cash-on-cash yield of over 11 percent.

Subsequent to year-end, we started construction of 322 NBP totaling 126,000 square feet.

In addition, we have under development 320 and 302 NBP that will total another 286,000 square feet and will start construction later this year.

Many of the new buildings at NBP are designed with the new forced protection requirements that will be designated lead certified or green buildings.

We are working on increasing the density on Phase II at NBP so that we can likely add another 300 to 400,000 square feet to the 1.3 million square feet currently approved.

As a result, we have in the construction or development stage a total $257 million in 11 buildings comprising 1.4 million square feet.

We ended the year owning 218 acres, allowing 3.6 million square feet of development capacity, and we are working diligently on additional ground control.

Recently we acquired 19 acres of Westfields adjacent to our Washington Tech building that can support an additional 250,000 square feet, and we have negotiated but not yet signed several joint ventures that, along with our Fort Ritchie acquisition, will add an additional 4.5 million square feet, thereby increasing our development capacity to over 8 million square feet.

In summary, we have good momentum going into 2005 and believe we are very well-positioned for 2006 and 2007 as our development pipeline begins to come online.

With that, we would be happy to address any questions that you may have.

(OPERATOR INSTRUCTIONS) Jessica Tulley (ph) with CS First Boston.

I was wondering if you could talk a little bit about the Unisys campus and what you plan in Pennsylvania.

Is that going to be defense-related, because I was just curious, because it's a little further outfield from a lot of your D.C. properties.

This is Clay.

We are currently working on a number of initiatives with that particular property.

As you know, the property is net leased to Unisys through June 30, 2009, and there are two five-year options beyond that.

At the same time, Unisys has downsized out of one building, Building B, which has not been utilized by them that much in the last several years.

And currently ongoing with that particular building is a lot of subleasing activity, with several large tenants in the mix to take that building in the next year.

Right now, we don't know for sure whether that will happen, but remember that we have four years left on that property.

The second thing that is occurring with regard to the Unisys campus is that we are in the process of completing with the township an increase in the total square foot capacity of that from the current amount of 960,000 square feet to about 1.9 million square feet, by going into the township and getting plan approvals for that additional development.

In an area where there is very little land, free land -- it is a very infill site -- we view that is a very advantageous and valuable thing that we are doing and we are quite confident that that will be completed and approved in the next four to five months with that site.

So in summary, we are continuing to work that site to create value there.

We think we have very low leases in terms of lease rates and think that we have a lot of ways to create value over that in the long-term.

Would that be defense customers, do you think?

Probably not, but it is not impossible.

There are a few up there but there's a lot more down in our other markets.

Thanks very much.

David Fick with Legg Mason.

Good afternoon.

I was wondering if you could comment in a little bit more detail about the program at Fort Ritchie.

Sure.

As you know, that is a 600 acre site, of which about 350 acres is developable.

And just to update everyone on the status of that, we are under contract.

We are hard on that contract.

We are waiting for the elimination of one title issue that relates to a previously filed lawsuit that is in the final process of being eliminated and we are still hopeful of being able to close in this first quarter.

Existing on this site is a mixture of both residential and about 1.2 million square feet of existing buildings.

It would be our intention that about 440,000 of those buildings would be retained.

A number of those buildings are skiff buildings and require a little bit of rehab, but not much.

So the remainder of those buildings, it would be our intention to demolish those.

And our plan that has been approved by PenMar, the agency overseeing this, would be the ability to construct 1.7 million square feet of office space.

In addition, about 92 of the existing residential units that are pretty well fully leased would be retained, and over time, the balance of the units on site, which are probably another 3 to 400 units, would be torn down and we have approval to do a total of 673 units, which we will be doing the land development and then selling those sites off to probably national developers.

So this is, again, about a ten-year program.

There is no real income shown in 2005 from this property.

I understand that.

I guess this is where the sensitivity comes in.

This is sort of Northwest of the Patuxent Mountains.

Where is 1.7 million square feet of office demand going to come from?

David, without going through too much sensitive information, this site is strategically located in the middle of three very important and very sensitive and secret locations, military and other kind of locations.

The communications for those three facilities are secured communications and they run right through Fort Ritchie.

Fort Ritchie, which was originally sort of a site designed to teach spies and interrogators in World War II and kind of carried on that mission, gradually became an intelligence center before its closure in 1997.

And we have indications of very strong demand that needs to be there, and this is particularly -- while you say it's a remote site, it is both -- that's its positive and its negative.

And the fact that it's remote makes it exactly a perfect site for the sort of back office operations for actually both financial institutions, a number of which have expressed interest, as well as the intelligence community.

The other point is that a successful financial outcome for the company doesn't require $1.7 million of new construction at that location.

I understand.

Your total investment is less than 10 million so far, right?

Right.

Okay.

On to a questions with fewer national secure ramifications.

At what point to do you envision the Howard County office market supporting speculative construction?

I know you finished the last building at Gateway a couple years ago.

It was a little bit slow on the lease-up, but now things are really tightening up.

Where do you get back into the spec construction?

It's there now.

As we said on the call, Dave, we have the one building toward the back of Gateway (multiple speakers) Conference Center, 65,000 feet of it leased to Cadmus.

And we anticipate now probably starting in the first quarter here the next of those buildings, 6711 right up in front.

I'm sorry.

I missed that.

We didn't say that in the call, but we are now at a point where if you are a 20, 30,000 foot tenant, you literally cannot find any space in the Columbia Gateway Center.

How big would that be in terms of GLA (ph)?

It's the same.

It's 125,000 square feet and we currently plan on relocating our headquarters to a portion of the building.

You don't want to be behind the Burger King anymore?

Come on.

Well, we sold that building as soon as they announced Giant quite a few years ago.

So we are tired of paying rent to someone else.

We would love to be in our own building.

And it will just be a twin?

It is exactly a twin..

Perfect.

Thanks.

Chris Haley with Wachovia.

Good afternoon.

Could you provide some color on your expectations for capital expenditures going into '05 versus the upward trend '03 to '04, given how tight your markets are?

Chris, I mentioned in my remarks that on a normalized basis, we think that for the fourth quarter absent the retenanting of the one space at the National Business Park that moved the tenant over to Columbia, that we were in the $11.50 a square foot range, which is pretty consistent with the second quarter of '04.

So we think going into '05 that we should be in the $10 a square foot range on balance, on average, between renewals and retenanting.

Obviously, renewals will be cheaper and retenanting will probably be a little more than 10, but on average, we think we will come in at about $10 a square foot.

Would you care to go into any specifics on why the NBP move was so expensive?

Why won't that recur?

It was an opportunity to move our last noncontractor tenant out of there and over to Columbia, and it allowed us to take a couple of our customers that were in the Park that needed more space and to provide them an opportunity to continue to grow.

It was a data center, so it had a fairly significant raised flooring requirement and new HVAC and an (indiscernible) unit and things like that.

The other thing is we got much higher rents from the contractors than we did from the tenant that was the noncontractor by tearing up the lease.

The difference being?

It was about $2 a square foot.

Okay, so if I look at this on a per-year basis, even taking that into account, I'm looking, assuming a five-year lease, in the fourth quarter, I was around $3 a foot per year and your rents signed in the quarter were low 20s?

On average, they were $22.54.

Okay.

And does that relationship -- you think that relationship holds then or goes down based upon the mix of your portfolio going into '05, as you have more Northern Virginia assets?

We don't have a lot of Northern Virginia maturities in '05.

It is going to be largely the Baltimore/Washington corridor.

So if we're spending $10 and our average lease term is five or a little more than that, we're looking at about $2 per square foot of year -- of term.

And we are seeing, Chris, in that corridor, we have moved rates up now and we are continuing to see pretty nice pricing power.

So we do expect when we average 7 percent on renewals increase I think will be closer towards 10 in this year.

Clay, last question.

You mentioned in your prepared remarks that there were five goals, one of which to was -- the fourth being take advantage of the sales market, and you're only assuming 50 million in sales.

Could you refresh my memory what you have sold in the last couple years?

And why not be more aggressive, given you have a growing development pipeline?

One of the reasons we're being a little conservative is that we have not been -- have not achieved our goals in terms of selling in the last several years.

Some of that actually has to do with the fact that the sales market has gotten a lot more attractive and some of the properties that we feel we can possibly sell this year were probably not ready to be sold because of insufficient leasing prior.

So we have a plan, and I think that it will either be slightly less than the 50 or slightly more.

But I feel pretty good about that and I will tell you that there are some additional opportunities beyond 50 million that we think would be attractive to sell and are in the right nonstrategic kind of situation for us to sell.

And what I will tell you is if we get high enough prices and it's good enough for the company, we will sell those; so could be more.

Let's take Unisys for example, though.

How will it get better for '05 (ph) -- we progress further to '09.

Unless something were to happen to Unisys on the positive side, give me the rationale why that has not already been sold.

(multiple speakers) The reason really is that in the last couple of years, we were finishing the creation of a ton of value there in terms of increasing -- really creating a land development plan allows for building of another million square feet.

So while the Unisys project is not necessarily strategic for us, it is very stable and there are a lot of opportunities there to create value.

At the same time, we understand that we have the obligation to look at, for any asset, especially ones that are nonstrategic, all possible ways to create value for the Company and that would include targeted dispositions, and we continuously explore those things with many, many, many of our properties -- really almost all of them.

Regarding Princeton, the AT&T moveout, what are you marketing that space for today roughly in terms of a gross rent?

About $22.50 a square foot.

We have $22.50.

And at that particular property, we have rents that are in general significantly below market.

And so we have the advantage of a tenant that is now merging who doesn't want their space long-term, so we have a long time to release it and feel we are going to get higher rents on the tenant's nickel.

Pretty confident in that.

And we also have a very efficient redevelopment plan for that park in place to create tremendously altered and beneficial image for not a lot of dollars.

So the combination of that, we think, is going to be a very low-risk strategy, not a lot of money going in and really strong potential that that can be released as a profit, and then we will take appropriate actions with it.

What are your yield expectations on your 200 million in gross deals this year, initial and stabilized?

That's a hard call, Chris, because it just depends on an awful lot of factors, but we are hopeful to be closer to 9 than to 8 on going in cash-on-cash yields (indiscernible).

Rich Anderson with Maxcor Financial.

What is your G&A run rate or would you say an annual G&A number would be for '05?

I think we're looking at starting at about $2.9 million in the first quarter.

We're at 3.4 and a half million in the fourth quarter, and that included 400,000 for the option vesting that we mentioned, plus it had about 150,000 extra of Sarbanes-Oxley that we won't see going forward.

We will have some in the future, but that was sort of the extraordinary amount that hit in the fourth quarter.

You might have said this, but on your schedule for your quarterly renewals, the change in total rent in the Baltimore/Washington corridor was 24 percent.

Can you just quantify that; what was that all about?

Give me the dollars.

They're scratching their heads and looking it up.

I can go on to my next question.

Maybe this is a question for you, Clay.

When you talk about new markets and being tenant focused as well as geographically focused, is there any situation where a market could be too far away, physically too far away, or could you see yourself as far away as the West Coast?

One of the things we look at is the type of transaction we are doing, so that if you do an entirely net lease transaction where your operational elements are well controlled, you have the ability to go outside our core markets and perform.

Clearly, that is what we look to do if we would go with the tenant to a remote location, and we would not be looking to duplicate the kind of core-dominant position operating strategy that we do here.

This is kind of a shotgun approach, very, hopefully, high returns for us and low risk and low operating type of format or responsibilities for us.

Okay, but are you constrained at all by distance away from the (multiple speakers)?

Not really, no.

Okay.

Do you have an answer yet to that one other question?

It is a combination of a bunch of tenants, but on balance, we have a lot of low rent leases at the Airport Square portfolio; on balance, we are at about $17 or $18 a square foot there.

So we had some renewals at the airport that are driving the rent increases substantially.

And as I also mentioned, at the National Business Park, moving that tenant over to Columbia, we were able to generate about 15 percent on that one.

Why wouldn't that be just in base rent?

Why is that only in total rents

It has to do with the rent structure.

Okay.

My last question is just in terms of the growth of the Company, it looks like over the past two years you added 3 million square feet to the operating portfolio, I think roughly 8.2 to 11.2 today.

What do you think?

Can you double the size of the Company from this point forward over the next, say, five or seven years?

Is that a reasonable projection in your mind?

I think so, yes.

We sort of internally believe that we will be at the kind of 3 billion level sometime next year and the 4 billion level within that five-year timeframe.

And I think that does not necessarily assume a lot of large M&A activity or larger portfolio acquisitions.

We have not been successful on those to date and so we have been in a grind it out mode along with the development.

So yes, we think we can continue pretty significant growth.

And in terms of manpower, we obviously have increased employees somewhat, but we feel that we have the infrastructure in place to accommodate this fairly well.

Okay, thank you.

Frank Greywitt with KeyBank McDonald.

A quick question on your entry into new markets.

You indicated that it could potentially be a remote location, so how should we think about it?

Would it be both traditional office locations, along with more specialized remote locations, or how should we look at that?

I think our strategy is to locate around demand drivers, just like we have done in our other major submarkets here.

So it is conventional office space, but of the kind that we typically deal with.

And it has to be of a large enough substance and a critical mass enough to warrant going outside of our core marketplaces.

Okay.

Then moving on, on the land acquisition strategy, you indicated I believe $50 million that you look to put out.

You have also indicated that you might do some JVs for the land.

Can you indicate how these JVs would work and would the land be off-balance sheet or on?

The land would be off-balance sheet.

It would be in some cases where a landowner would contribute their land to a joint venture with us and we would put up the balance of the capital and we would go forward on that basis.

So yes, the land in all of those cases would be off balance sheet.

Is it still in the $50 million range?

Yes.

I'm not sure if I am mistaken, but I think on the last conference call you indicated it would be on balance sheet.

Are there different land portfolios that you have found or is it a change in strategy or could there be some upside potentially to -- as far as the amount of nonproducing, non-income-producing assets on your balance sheet?

During '04, we did buy some land that came on balance sheet and we will continue to do some of that.

But some of the bigger plays that we were pursuing at this point are ventures with landowners.

Other than Fort Ritchie, we will be on balance sheet.

I guess finally, there has been some talk and I know you have indicated before that you might try to play the life science industry a little bit.

Is there something specific about the life science industry that you like and want to join in on, or is it more of a play just to help service your defense contractors in the federal government?

I don't know that it is so much a life science as it is a locational strategy.

We like the 270 corridor very much in Montgomery County, Maryland.

We do have several properties there -- not corridors generally known as life sciences corridor.

We do have a property that we bought a couple years ago that is literately behind the new FDA location that is just finishing up this year.

So you have NIH, FDA, National Cancer and a large grouping of government agencies.

So part of an ancillary strategy to the intelligence defense sector is to take that demand driver and that sector of the government and start to also develop a base around that.

But it is not intended to be lab space, kind of like what Alexandria does.

It is more geared to companies that may be in that business but are generally in that location.

A lot of those companies are very concerned about who the landlord is, the quality of service.

They are looking for long-term relationships because they invest a lot of money in the space and so they want to make sure that the landlord will be there long-term and they have fairly intensive management requirements.

And as we matched up our skill set in dealing with the intelligence and defense sector and the kinds of excellent managing property management that we do, it matched very, very well with the requirements in that sector.

And so we have discovered that we are fairly attractive as far as an owner and are starting to see some opportunities.

Would you put the types of TIs into that space that is normally required for lab space?

No.

This is more office space than TI -- than for life sciences (ph).

Were there any onetime items in the quarter, either for the lease terms or maybe even to help on the expense side?

In terms of lease termination fees for the quarter, we had $1.35 million.

And I need to go back and clarify something I said earlier and that is the annual CAM reconciliation was 1.3 million, but 450,000 of that -- I'm sorry -- 550,000 of that had hit in an earlier quarter.

So what actually hit in the fourth quarter was about 750,000.

And that is really it, other than the G&A that we talked about, which was high by about 550,000.

Okay, great.

Two more things.

Capitalized interest during the quarter?

Just under $1.7 million.

And average lease terms for the total leases assigned?

5.43 years.

Great, thanks a lot.

(OPERATOR INSTRUCTIONS) Marti Tirinnanzi with Ferris Baker Watts.

Congratulations on a good year.

When do you get to sleep?

Next year.

Maybe 2006.

I am curious about the tenant-driven strategy.

I think that that probably has a lot of promise for you because of the relationships you have.

You mentioned Booz Allen, Northrup, Wachovia.

Do you see your Company like evolving into the dedicated developer, where half of your business -- I'm going to ask you how much of your value do you think will be driven by these relationships going forward?

What were some of the driving factors behind your Board's decision to pursue that strategy?

Well, if you look at the top 20 list in the supplement and you look at the number of repeat leases, we have been doing that strategy for a while.

I mean, even in 2004, to go to St. Mary's County and to go to Dahlgren, when you look at those tenants, virtually all of them are existing tenants, some of whom said you need to be here because we need your quality of ownership and your ability to develop new buildings.

So I think that this is just we have these extra relationships multiple years, multiple leases, and these tenants are now coming to us and saying, we would like you to be elsewhere in the country with us.

Can you go there and satisfy their particular requirements.

So it is hard to say what percentage of it it is going to be, but it is something that we think does add an element of growth that probably a lot of you have not factored in to our forecast into the future, and it is something that we feel very excited about that we can really build on in a multiple location scenario.

So two, three years from now, maybe that's 20, 30 percent of the growth of the Company.

I assume that this is substantially less risk than going out and developing a spec building.

Is it also similar -- just a more profitable business?

Let me say that -- and then, Rand, you can jump in.

But in some cases, we are kind of trading on unique abilities that we have.

And in those cases, those relationships allow us to go into a transaction with the tenants in hand.

In all these cases, I can assure you that these tenants have excellent credit ratings.

So given that, you're talking about a lower risk strategy, and we think if it is efficient for us to do and it's doable, then we need to look at it if we can create high returns and create value without disrupting our existing business.

And that's the criteria we look at.

So we have to be opportunistic.

We owe it to our shareholders.

And we look a lot of things outside the box and this is one of them that is starting to make it inside the box.

Thank you.

Chris Haley with Wachovia.

Glad to hear we made it in your top 10 list, Rand.

Absolutely.

Worry about that credit.

What is going on with the Rouse (ph) assets?

We have heard nothing.

We understand that they have been very busy financing their assets that they purchased and trying to get their arms around a community development business in land, and just heard nothing whatsoever on the office part.

Is there any land opportunity in addition to the vertical assets?

Well, we would hope so, but it is just very difficult right now to approach them because they are still trying to digest what they've taken on.

And there have been a lot of people leave over there, a lot more leaving, we understand.

And so it's just hard to know who to talk to and if you get decisions.

It's sort of a noncore for them off on the side and we just have to see.

What is the square footage within your contiguous or the same markets you're in?

What is the square footage that could overlap for you?

Overlap with --?

How much would you be interested in if it is the same market?

I think if, given price and a few other factors, we would be interested in the downtown Columbia, which is about one million square feet.

There's the Hunt Valley properties, which if you took just the office component -- they have a lot of industrial in flex -- but just the office component is probably 800,000 feet.

Those would be the two that would be most interest.

There is 700,000 feet at Owens Mills (ph).

There's some others scattered elsewhere that become a little less desirable.

It's the kind of thing, Chris, that probably needs to be multiple purchasers carving it up.

You have industrial, you have flex, and you have office.

You could probably put together three to four buyers who would be looking at it versus just one singular package.

Well, in today's marketplace, at least according to some of your public brethren who are looking at JV fund money on a prospective basis, it seems as though the rates of return are pretty low, in some cases moving down into the single digit level on a levered basis.

So it's hard to imagine the inability to lay off some of that stuff.

Some of it though, Chris, is tied in with pretty complex tax restraints that don't really go away until 2008.

And there are solutions out there for it, but you really have to -- you sit down and go through it very carefully.

It is not something that you could do an auction and just choose the best price and run, because it requires a lot of creative tax work to solve that.

The problem there also (indiscernible) collateralized with debt, which makes it very, very awkward, since the debt isn't prepayable without huge penalties.

So it is just not a portfolio that was geared for a sale.

Roger, in your capital comments or balance sheet comments, netting 200 million less 50 million of sales, and I guess leveraged free cash flow, would you say your debt to asset ratio, with or without preferred, would be unchanged?

Are you assuming equity for the year?

It could go up or down depending on market environment.

But fortunately, a lot of the guaranteed asset growth this year is on the development side and the equity is there with the land.

So we can fund the majority of the asset growth with project financing.

So theoretically, we could get through a lot of the year without equity if we needed to.

Okay, thanks.

Paul Puryear with Raymond James.

Just a quick question.

Rand, in the past year what do you think development costs have escalated -- at what rate of escalation?

It is interesting, Paul.

They actually went up in the beginning of '04, kind of the end of '03/'04.

And then the steel component has come back down a little bit, but it has been replaced by drywall that has accelerated, partially because of your hurricanes down in your neck of the woods, and then just the oil-based components.

Your carpet had six price increases last year and paint and the asphalt and rubber roofs and so on like that.

So we are seeing probably in total costs excluding land and soft costs has probably gone up 15 percent I would say.

Now, when you have bulk kind of purchasing like we're doing and the kind of volume that we're doing, I think we're not totally eating all of that 10, 15 percent.

I think that there is more in the 7, 8 percent increase for year-over-year bidding.

We actually have had -- the two sister buildings were actually cheaper than the first two ones that we started in Phase II of NBP.

So our guys are doing a good job of doing some value engineering and aggressively bidding (multiple speakers).

So over the last three years, how much do you think those costs have gone up?

Is it 7, 8 percent a year?

More than that?

I don't think so, no.

I think it is lower than that, Paul.

I would say it's in the 5 percent range.

5 percent, okay.

And really just out of curiosity, land cost -- take the BWI corridor -- what sort of escalation rate do you think is in play here right now?

I think it goes up sort of equivalent to rental rates.

So if rental rates are going up 5 or 10 percent, then land costs are going up by that amount.

There's generally a relationship between land costs and rental rates.

Also, I think that if you've seen a greater increase in the cost of land in certain markets like Northern Virginia, where we made a couple of very smart bargain purchases now that look very --roughly 20 percent of the value it is today, because prices of land sunk a couple years ago when the (indiscernible) development market was on its back.

And now the prices are coming back and over time you'll see land probably escalate at 5 to 6 percent a year in the good markets, in the strong markets, many of which we are in.

But it can also go down a lot and then up a lot.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Chris Lucas with Robert W. Baird.

Good afternoon.

Can you comment or talk a little bit about the University of Maryland project and kind of where that stands and what can you tell me about that project at this point?

There has been some press about that and we are in negotiations with the University of Maryland to joint venture a parcel of land that they have adjacent to their main campus, and nothing is done at this point.

Discussions are ongoing.

We're hoping that a deal will happen and we are optimistic that if it does that it will be very positive for the Company.

But we can't promise anything, and our policy is not to announce any transaction until it is done -- it is acquired.

Okay, thanks.

And we have no further questions.

I will turn the conference back over to our speakers for additional or closing remarks.

Thanks again for everybody for joining us today and we appreciate your participation and support.

Rand, Roger, Mary Ellen and I are available answer other questions you may have.

We plan to hold our first-quarter conference call on Tuesday, May 3, 2005.

Thanks and good day.

That does conclude today's conference.

We thank you for your participation and have a great day.