COPT Defense Properties (CDP) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Corporate Office Properties Trust first-quarter earnings conference call.

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

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

Please go ahead, Ms. Fowler.

Thank you.

Good afternoon, everyone.

Yesterday, our earnings press release was faxed or e-mailed to each of you.

If there's 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 those documents from the Investor Relations section of our Web site 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.

With me today is Clay Hamlin, Vice Chairman of the Board of Trustees, Rand Griffin, our President and CEO, and Roger Waesche, our CFO.

In just a minute, they will review the result of the first quarter.

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 meaning of the Private Securities Litigation Reform Act of 1995.

Although such statements and projections are based on what was believed 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 space 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, and good afternoon, everyone.

We're very pleased to report strong first-quarter results for the Company.

Total FFO for this quarter grew by 30% over the first quarter of last year.

That represents a 12.5% increase on a diluted per-share basis.

More importantly, the Company made great progress with acquisitions this quarter and completed some other important steps which positions the Company for growth in the future.

As we move into 2005 and beyond, we're focused on continuing a number of initiatives.

The first will be looking at accelerating disposition of assets located in the low-growth and noncore markets, where we do not have a critical mass of our core strategic tenants.

We hope to announce the first disposition in the second quarter of this year.

Rand will expand on this in a moment.

Our second initiative is our plan to recycle capital from these dispositions into acquisitions and development in high-growth markets where our core strategic tenants need to locate.

An example is our San Antonio acquisition that marks the first transaction of this type.

With regard to acquisitions in a still very competitive market, we have held to our strategy of not paying more than replacement cost, yet we continue to find niche opportunities in our existing core markets.

Third, along with acquisitions, we have increased our development pipeline.

As outlined in our supplemental package in more detail, we now have approximately 1.2 million square feet under construction, another 469,000 square feet under redevelopment, and close to 286,000 square feet under development.

A majority of the properties under construction are located in the B/W Corridor, where we have a large ownership position, and one is in northern Virginia, where we are large and increasing our position.

As the buildings become operational later this year and into 2006, it should add to earnings for both 2006 and 2007.

Our fourth initiative is land control.

We have acquired additional land positions within our business parks as part of our acquisitions this year, as well as entered into a joint venture to accept additional land.

We view these critical steps to control land as the raw material for our future growth.

Turning to other accomplishments for the quarter, we're pleased to report that we've completed the Sarbanes-Oxley-mandated review of our financial control and have no material weaknesses.

We thank our team for all our hard work and time devoted to the successful completion of this critical task.

We are also very pleased to report that we achieved a best-in-industry ranking for 2004 by CEL and Associates in a survey of tenants in over 8,500 buildings nationwide.

This award recognizes our commitment to the highest level of quality and service to our tenants.

We also tied for first place for the 2004 National Commercial Real Estate Customer Service Award for Excellence for Category One properties.

Category One properties are also referred to as the A-list award.

There are four companies owning 100 properties and is the largest of the categories.

Good service, the key to satisfying our tenants and the basis for excellent relationships, is also the foundation of our tenant-expansion strategy.

Lastly, as you are probably aware, I retired as CEO effective April 1 and have been named Vice Chairman of the Board of Trustees.

Rand has succeeded me as CEO.

He has built a deep team over the past 12 years that will continue to manage the growth of the Company.

I've signed a three-year consulting agreement and will be involved in acquisitions and other strategic initiatives.

However, going forward, I will not be participating on these quarterly earnings calls.

I take great pride in the financial results and growth we've accomplished for our shareholders since the formation of the Company in 1997, and I look forward to supporting the team on new initiatives as we continue to move forward.

Next, I'd like to turn the call over to Roger.

Thanks, Clay.

I will 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 41.

FFO for the first quarter totaled $21.1 million, or $0.45 per share, as compared to FFO for the first quarter last year of $16.3 million, or $0.40 per share, representing a 12.5% per-share increase.

This was $0.01 over our First Call consensus.

Several factors impacted first-quarter results.

On the negative side, we did lose AT&T in our 431 property in Princeton Technology Center in February and heavy snowfall cost about $2.1 million this quarter.

On the positive side, we generated over $900,000 pretax from our service company.

After adjusting FFO for capital expenditures, straightlining of rents and FAS 41 income, our adjusted Funds From Operations for the first quarter totaled $14.8 million, compared to $12.2 million in AFFO during the first quarter of 2004, representing an increase of 20.9%.

For the quarter, we had a 55% FFO Payout ratio, compared to a 57% FFO Payout ratio for the first quarter of '04, and our AFFO payout ratio was 78% compared to 76% in the first quarter of 2004.

For the first quarter 2005, the Company's EBITDA and interest expense was 2.9-to-1 and our fixed charge EBITDA coverage continues at a solid 2.3-to-1 ratio.

Looking at GAAP earnings for the first quarter, we reported earnings of $0.14 per share, the same as the first quarter of 2004.

In terms of same-property net operating income for the 119 properties, same-property cash NOI decreased slightly by 1.2% over the first quarter of 2004.

The decrease was due primarily to a drop of $1.1 million in base rent and termination fees associated with the vacated AT&T space and lower other termination fees.

These were somewhat offset by higher occupancy in the Baltimore/Washington Corridor.

In the first quarter of 2005, we earned $1.1 million of net term fees, versus $2.4 million in the first quarter of 2004.

Turning to our balance sheet, at March 31, our total market capitalization was approximately $2.5 billion with $1.1 billion of debt outstanding, equating to a 44% debt-to-total market cap ratio.

During the quarter, we closed on a $32 million construction financing that will fund the development of Washington Tech Park II in Westfield.

As of March 31, 33% of our debt was floating and 67% was fixed.

Since quarter end, we've executed a forward slop (ph) with a notional amount of $73.4 million that will lower our floating-rate debt to 27% based on quarter-end numbers.

The large amount of construction and development we have underway is impacting the higher than normal floating-rate debt we're carrying.

We will continue to look for opportunities to lower our percentage of floating-rate debt with a target of around 20% by year-end.

With regard to capital for the year, we're looking at several long-term fixed-rate financing scenarios that will sit well with our debt-maturity schedule.

In addition, we plan to continue using construction financing to fund new development.

We look to utilize sales proceeds to fund some of our equity requirements, and we look to fund the balance as necessary through an equity raise.

With regard to FFO guidance on a quarterly basis, we expect FFO for the second quarter to be in the $0.44 to $0.46 range, which takes into account a number of factors.

First, we're projecting no net increase in occupancy for the quarter.

Second, the San Antonio acquisition does not come online until fourth quarter of this year.

Third, the Rockville Corporate Center acquisition will not be accretive to earnings until the 39% of the building not leaseback by the seller is released.

Operating expenses will decrease over the first quarter due to no (ph) snow removal costs but will be somewhat offset by higher maintenance and landscaping costs driven by seasonal activities.

As for our annual guidance, we are keeping the wide range of $1.78 to $1.85 FFO per-share for now, uncertainty regarding the timing of certain events.

We have a number of positive events underway, including three leased construction projects that will come online this year, and we hope to close several more acquisitions.

These will be offset by the uncertainty regarding timing for lease-up of the former AT&T space and the potential impact of accelerating dispositions.

Now, I will turn the call over to Ran.

Thanks, Roger, and good afternoon, everyone.

On March 31, our portfolio ended the quarter at 92.4% occupied and 93.2% leased.

As we mentioned on the last call, we expected occupancy to decrease to 92% in the first quarter due to the AT&T space vacating.

With regard to that space, we have interest from a number of both full and partial building users and would hope to announce an initial lease this summer.

We are still expecting our overall portfolio to be at a 95% occupancy level by year-end.

In terms of leasing statistics, we renewed 361,000 square feet, equating to an 80% renewal rate at an average capital cost of $1.80 per square foot.

Average rental rates for the renewed and retenanted space for 472,000 square feet increased 5% for total rent on a straight-line basis and decreased 1.9% on a cash basis.

We would expect to improve this number as we move through the year, since most of the remaining renewals are in our Baltimore/Washington portfolio, where we are seeing strong demand.

Existing rents in our Baltimore/Washington portfolio are at least 10% below market on expiring leases.

For renewed and retenanted space for the quarter, the average capital cost was a low $5.66.

We've made a lot of progress on our lease expirations for 2005 and now have only 5.3% of our total revenue expiring, down from 9.8% at the beginning of the year.

In addition, we have already dealt with some of our 2006 lease expirations and have decreased the percentage expiring to 9.1% of the portfolio from 9.8% at the beginning of this year.

With regards to our markets, we continue to outperform in each of our core markets.

With respect to specific conditions, in the BWI submarket, as of March 31, vacancy, including sublease, stood at a low 6.5%, down from 10.8% one year ago.

Our BWI portfolio totaling 3.6 million square feet and representing 77% of the BWI submarket ended the quarter at 95.4% leased.

Turning next to the Columbia submarket in Howard County, on March 31, vacancy with sublease was 11.5%, down from 14.4% one year ago.

Our properties in the Howard County market total 1.6 million square feet and are currently 94.2% leased.

In the Dulles South submarket in northern Virginia, the vacancy rate continues to decrease, ending the first quarter at 10.2%, down from 13.3% one year ago.

Our operating portfolio of eight buildings totaling 1.2 million square feet is 97.4% leased.

Before turning to acquisition activities, I wanted to take a few minutes to discuss our future portfolio strategy.

We have evaluated our markets and are assessing the potential impact on the Company of cycling out of some of our assets located in low or no-growth noncore markets, where we do not have a concentration of our core strategic tenants, and redeploying the capital into growing markets where our strategic tenants are locating.

We are, therefore, accelerating the sale of some of our assets in Harrisburg and New Jersey and will recycle the capital from the sales into new acquisition and development opportunities.

Through the balance of this year, we will continue to target, for disposition, assets not located in growth markets.

We believe this strategy will improve our future growth prospects.

We plan to redeploy capital from dispositions into acquisition and development in our existing markets in the greater D.C. region.

In addition, we expect to selectively enter new markets as part of our growth strategy, where we are acquiring and building to meet the needs of our core strategic tenants.

The first of these new markets is suburban San Antonio, where we purchased approximately 469,000 square feet in two buildings for $30.5 million, along with 15.7 acres of land for $3 million.

This facility is a former Sony chip-manufacturing plant.

We have signed a long-term lease for the entire building.

The building is under redevelopment, and we expect to spend about $7.5 million before the tenant takes occupancy in the fourth quarter of this year.

Shortly after our press release announcing the acquisition, a local San Antonio newspaper article announced the government's intention to locate at the former Sony plant, as well as their plan to hire 1,500 employees for this location with a total occupancy of 2,200 employees.

The article may be accessed via a link on our Web site.

Along with the buildings, the land on the existing site can support another 150,000 square feet of office space.

In addition, we announced that we have 27 acres of land adjacent to the San Antonio property under contract that will close in the second quarter and that can support an additional 350,000 square feet.

Our expectation is that we will, over time, create what we've created in several of our other locations, a clustering of tenants around a key demand driver.

We are already starting to see interest from some of our top 20 tenants for space in this location.

We believe that the San Antonio site is the first of a select few cities, all in different locations around the country, that we will consider for acquisition and development opportunities to meet the needs of our core tenant base over the next several years.

We hope to enter a second tenant demand-driven location later this year.

At the same time, we will continue to seek acquisitions in our existing markets and look to expand into targeted submarkets, as is evidenced by our recent purchase of two office buildings totaling 222,000 square feet and a corporate sale leaseback of the Celera headquarters for $43.3 million in Rockville, Maryland.

Included in the purchase price is 9.7 acres of excess adjacent land that can support development of an additional 215,000 square feet of entitled office space.

This property represents our entry into Rockville, an excellent submarket that we have targeted for some time.

This is also our second location along the I-270 corridor.

We're very excited about entering the Rockville market and will continue to look for opportunities to increase our presence in this attractive submarket over time.

We also continue to increase our land holdings, both on and off-balance sheet, in strategic locations in anticipation of tenant demand.

This quarter, in addition to the San Antonio land, we purchased 19 acres in Westfield's Corporate Center adjacent to our Washington Tech Park I building in northern Virginia and 39 acres adjacent to our properties in Dahlgren Technology Center in King George County, Virginia.

At quarter end, we controlled 276 acres of land that can support 3.9 million square feet of office space, not including the excess land on the San Antonio site.

In addition to the land on our balance sheet, we have recently announced a joint venture giving us the capacity to build up to 1.8 million square feet of office space in a new mixed-use community to be known as Arundel Preserve in Hanover, Maryland.

Our joint venture partner will contribute the land and we will develop, lease and manage the office space.

We're very excited about this development, as we expect it to become one of the premier office parks in the area.

We view this location near the Arundel Mills Mall and close to our National Business Park as the next logical extension for our development in the B/W Corridor.

Lastly, on the acquisition front, we are patiently awaiting the closing of the Fort Ritchie property and would hope that it takes place in the next couple of months.

We are hard on the contract and awaiting the resolution of a title issue in order to close.

Turning to development, at quarter end, we had about 1.2 million square feet under construction, consisting of five buildings in the National Business Park, three of which are completely leased, two buildings in Howard County, one of which is partially leased, and one building each in Westfields and in St. Mary's County.

In addition, based on tenant demand, we have two buildings under development in NBP as well as the San Antonio property that's being redeveloped but is 100% leased.

With regard to our organizational structure and as a result of our focus on the intelligence and defense contractors who service the government, we have formed a Government Services division to address the needs of these tenants.

This team has the employees that are able to construct and manage facilities to meet the unique requirements of these tenants.

The division is currently generating fee income for our company through construction and property management services for select third-party project.

We hope to continue to expand the Government Services activities through involvement in several additional government programs.

Adding to the depth of this team, we have hired Chuck Thiala (ph) as Senior Vice President of Government Services, who started this week.

Chuck is a West Point graduate with a Masters in civil engineering from Purdue, who retired in 2003 from the Army Corps of Engineers as a Colonel after 25 years of service.

His last command was the Baltimore district of the Army Corps of Engineers.

Since 2003, he has been with Kellogg Brown & Root as its Director of Installation Support Programs Operations, Maintenance and Logistics.

Chuck brings extensive government and real estate experience to our team, which should help to accelerate our expansion strategy.

With regard to our San Antonio location, we have hired one on-site person and would expect to ramp up hiring over the balance of the year.

In summary, we continue to look for new ways to grow the Company by building on our strengths.

We are very well-positioned, from a market, personnel and strategy standpoint, to generate consistent above-sector growth to our shareholders, and we are off to a very good start for this year.

With that, we will open up the call for your questions.

Thank you.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

Chris Lucas with Robert Baird.

Good afternoon, all.

Very nice quarter.

Rand, you talked about the accelerating dispositions for this year.

I guess does that include a larger-than-previously-expected amount of dispositions?

I think the number going in was around maybe $50 million.

Yes, we had given guidance on the last call for the year of $50 million.

I would think that we probably will look to exceed that figure somewhere between the 50 and at a maximum 100 million.

Then in terms of the acquisition environment that you're seeing, can you sort of comment on how that changed over the last year and what you're seeing in terms of volume of opportunities in front of you?

Well, as Clay said in his comments, it's a tough market out there.

We're digging for every deal.

We're not winning the auction deals.

What we are winning are tax-sensitive deals where they need an (indiscernible) transaction or, as you see from the Celera and we had a similar one last year, we are fairly successful on sale leasebacks where, once you are in the range -- we are not necessary the highest price -- they then focus as a seller on who's going to be managing the building and are you going to be there long-term.

With our excellent service and the fact that we are local and will be here a long time, we tend to be winning those transactions.

So the third is really where we have that certain expertise with the government and tenant -- the government and the defense contractor, and a lot of instances -- like last year they had come to us and said, you guys really need to be in certain locations, and that's been very instrumental in helping us with those.

But you know, we have to dig for these and we are very disciplined on not paying above replacement cost, so yet we still see pretty much a similar volume this year to last year at the current levels.

Basically staying away from the portfolio?

You know, we haven't really seen any portfolios that economically or strategically make sense at this point.

Then, Roger, can you sort of update us on the G&A run-rate sequentially down quarter-to-quarter but a fairly hefty year-over-year increase in G&A?

Is the current quarter G&A level what you would expect for the remainder of the year or are there some one-time items or some just sort of high relative to the rest of the year?

There's a little bit of one-time.

The first quarter tends to be a little bit because of annual report costs, etc., but I think, on balance, we're looking at 3 to $3.3 million a quarter run-rate going forward.

The last question I have is just, in terms of the renewals and what you're seeing in terms of the market for your available space, what are you seeing in terms of the tenant improvement requirements and free rent type requirements in your markets relative to, say, a year or two ago?

Well, in the B/W Corridor in northern Virginia, supply and demand is in balance or, in a lot of cases, in favor of the landlords, so we don't have a lot of issues with tenant improvements and there is upper pressure on rental rates.

The only place we have some softness would be up in Harrisburg and still a little bit up in New Jersey, but where the bulk of our NOI is, 75% of our NOI, the markets are strong and rates and there are no concessions in terms of TI; we've seen that mitigated.

Jessica Toley (ph) with Credit Suisse First Boston.

Good afternoon.

I just wondered if you could ask -- maybe just give a little bit more color on northern Virginia, because it was down I guess, on the same-store basis I'm looking at, 95.5 down to 93.8 in average occupancy.

Was that just noise or -- you know that kind of surprised me.

The same-store was down because, in the first quarter of '04, we had a $1.3 million lease termination fee that does not exist in the first quarter of '05.

Absent that, same-store would have been positive.

Occupancy was down nominally.

We did lose one tenant who had 30,000 square feet of space.

Besides that, the portfolio was upwardly filling in terms of rental rates and very positive.

I was really thinking more of the occupancy than 95.5 to 93.8 but you think you'll get that back?

Yes.

Then also, I wanted to talk about some of your development pipeline.

You've done a great job in getting things leased up.

Do you have indications of interest for some of those that are early 2006.

I mean, you've got Expedition Drive and another on Carina Road and right now, they are at zero leased or committed.

I just wondered what your prospects are.

Yes, we have proposals out for really every property that is on the under-construction table, and we believe that that's real demand and that we will signed leases over the balance of the year to bring our percentage leased up significantly.

(OPERATOR INSTRUCTIONS).

Rich Anderson for Maxcor.

I guess my first question is on -- back to Harrisburg and New Jersey.

I mean, to me, it's always been a fairly obvious disposition target for you guys, considering where your strengths are.

So what pushed you over the edge?

Is there more opportunity out there?

Has the diversification strategy required maybe some more need to get some more capital?

Is there anything that specifically said, okay, we need to maybe generate some more capital?

I think it's, Rich, really more just the timing.

The seller's market is obviously a great one.

Secondly, we -- our properties, some of them had some leasing holes.

We've moved to solve those, so the properties are ready now.

They may not have been as ready in the past.

Thirdly, thirdly from the use of proceeds, we do see ourselves in some excellent opportunities with the San Antonio-type investments in front of us.

So I think it was those three items.

In terms of new market, I assume you're not going to tell us which ones they might be, but what would be like a count?

Like how many, outside of Mid-Atlantic markets, could you envision getting into over some timeframe?

You know, we said, in the call, several -- you know, we're not going to mention a specific number.

We have a certain number in mind which I'd really not identify that at this stage.

Back to the asset sales, do you have a timeframe on getting out of Harrisburg and New Jersey?

I think over the next -- a portion of it over this year and into next year certainly.

Okay.

I guess that's -- you indicated that that's sort of a wild-card for your guidance.

I assume proceeds sitting on your balance sheet from that activity would have an at least near-term negative impact on your FFO.

Would that be a fair statement?

That's correct.

I mean, we are currently earning more than our cost of debt on those assets, so it would be near-term dilutive.

That's why we are hoping to do some acquisitions in this market or a few new markets and then also get the development going.

We've been pretty good, though, at balancing those, matching the timing of dispositions, we think, with the timing of acquisitions.

What do you think you can get, cap rate-wise, in those markets?

I think 8-something cap rates would be appropriate for both of those markets.

In terms of the land holdings, how much would you say that those land initiatives that you have in-place -- how much do you think that is having an impact on your FFO?

I mean, that would be a few pennies or so dilutive, just because it's sitting not earning anything.

Is that a fair statement?

That's correct.

We had capitalized interest of about 1.67 million for the quarter and our average interest rate is about 5.75%, so we're capitalizing, what, about 115 or $20 million and I think we're showing about 165 or 70 on our balance sheet, so there is some land that we are carrying that's obviously falling to the bottom line, both in terms of carry costs and real estate taxes, etc.

Last question, from a leasing standpoint, are you guys pushing for longer-term leases, or are you pushing maybe to shorten them with the hope that the rental market will present more opportunities a few years from now?

I think we try to take a balanced approach.

First of all, we try to satisfy our tenants' needs; secondly, we do look at our lease maturity schedule and try to make it so that we don't have an imbalance where, in any one year, we have too many leases maturing, so that, if we were to hit a soft patch, that we wouldn't have a real negative situation for the Company.

Chris Haley with Wachovia Securities.

Good afternoon.

On your development activity, what do you think your maximum capacity or your maximum level of annual development completions would look like, given your current build?

You know, I think, if we were running in this 1 million, 1.5 million a year kind of in-place and on a constant basis, we're pretty comfortable with that for now.

You know, again, we're not building just to build; we're building based on demand, you know, in each of the markets that we have properties and probably a few more that we haven't started copies or buildings yet, we have demand and we need to be responding to that demand.

How do you think that 1 million, 1.5 million might break down regionally?

Help us out in terms of cost dollars.

We still see demand in St. Mary's, that we could be doing more buildings down there, and the Dahlgren Technology Center, both of those.

We obviously are continuing to see significant demand in the National Business Park, in that area.

Howard County, very interestingly, has come back very strong where, if you are a 30,000 tenant in that marketplace in Gateway, you cannot find space, so we are responding accordingly with that building and the second one is pretty well committed.

Northern Virginia, Northern Virginia has gone from a market where last year a lot of the large tenants grabbed big chunks of space; you still have very large RFPs from government agencies and a few select defense contractors out there, but you're seeing the 30 to 50,000 square foot needs now coming forth.

So, we see that there is a continuing need for buildings there with our types of tenants.

So, those would be -- you know, it kind of breaks down in that category.

(indiscernible) those of four of five, thinking to Maryland and northern Virginia on the development side, what would you say market value of land is today?

Bring me up-to-date in terms of where land plus soft and hard costs would put me into a new build, moderate-sized building.

Well, I think it's moving, Chris.

If you would have thought that National Business Park in the $25 all-in (indiscernible) foot is probably on its way towards the $30 range.

Clearly you're seeing a significant rebound in northern Virginia, where those prices ,if you are along the tollway, where even there you're having structured parking, we're seeing those numbers move from the last year at this time a $22 range to a probably $32 range today -- Some quotes, some big, large packages out there as you know, and those quotes are probably headed north of that.

Those were dirt foot (ph)?

Those are -- no, per FAR foot.

Okay, so bring me up (indiscernible) what kind of coverage would I get off that?

A third?

Then bring me up to the full building cost and for Maryland and northern Virginia today.

Okay, they are moving.

Maryland, you are probably -- and this is nonstructured surface parking -- we're probably seeing 178 to 185 a foot.

Now, these are five-story buildings with lead certified, which is adding a little bit, and we do have a few costs in there for the forest protection requirements.

Northern Virginia, which is of course tending to move towards the structured parking again with some pressure on the rates, you know, you're up over -- what did you say, Roger? 210, 220 even a foot, NFAR (ph) foot now.

Okay.

Then last question having to do with the assets in non-strategic markets -- how would you, relative to what's on your balance sheet, what would you view the net of debt repayment?

What would you view your potential proceeds or the redeployed capital could be over the next couple of years from those recycling activities?

Say 150 to $200 million.

On a net basis, net of debt?

Correct.

150 to 200?

Correct.

Okay, great.

Thank you very much.

(OPERATOR INSTRUCTIONS).

David Fick with Legg Mason.

I'm actually there with John Griney (ph).

We really have just one question, and it's a follow-up to one that we've been talking about for the last few quarters.

That is, on today's general (ph) growth earnings call, they mentioned that they are selling two groups of noncore assets out of the Ralph's (ph) portfolio.

The first were two jets for $24 million and the others were 2.3 million square feet of office, primarily in the Baltimore area. (multiple speakers) -- interest in either of those now that they don't consider them to be tax impaired anymore.

I can say, unequivocally, we've no interest in the jets! (LAUGHTER).

Beyond that, we really -- until we see the details of it, you know, we have to really understand that.

I mean, there are pockets of their portfolio that we would have an interest in.

There are others that we would not, so we need to see the whole breakdown.

Perhaps they own more than that, so we will have to see how that breaks down.

But it's something that if it fit your -- if you could carve out Columbia and downtown Baltimore from one another, you would be interested in doing that?

You know, Columbia is an interesting dilemma, because I think the last numbers we saw, it was 84% occupied.

The buildings need a fair amount of work.

The tenants are not particularly happy through the years of some service issues, and we think that the downtown is not as favorable as out at Gateway and some of these other locations.

They tend to be smaller (indiscernible) and a little bit more traffic congestion and so, that it an issue.

You know, we would have to really understand those, how they are positioning those and the expirations, get into the details, to understand that.

Paul Puryear with Raymond James.

Good afternoon, guys.

Rand, could you talk about rental rates in some of your markets?

I mean, it sounds like the lease-up in Howard County, BWI, south Dulles is going extremely well.

I'm just curious where the rental rate -- what kind of rental rate movement you're seeing right now and what you expect here for the next few quarters.

We have been, like some of the other owners and developers locally, trying to really start to push those rates.

There's a lack of supply that is tightening up pretty rapidly, so we are, in National Business Park, bumping up pretty very close to the $30 range, or 29.50 probably.

The next building will go over $30 gross with a $7 stop.

In Howard County, we've probably moved the rates $2 this year, and on the new building, starting to approach the 27.50 to $28 range.

Northern Virginia is coming -- if you down in the (indiscernible) area, it's starting to approach those levels.

If you are up along the tollway, you are now back over 30.

Interestingly, when we bought Pinnacle Towers last year, we had one vacancy looming in '06, and that vacancy was at a $24.50 rate.

We hope, in '06, to get $30.

We had one other vacancy.

We just are very close to finishing a lease there that's over $30 already, so we've seen nice acceleration, really more rapid than we thought in the marketplace.

So --.

This so-called soft patch in the economy, have you seen that in any of your markets?

Not really.

I mean, you see it in terms of -- well, you read about it obviously, and you see it in some of the consumer spending slowing down a little.

But the tenants that we have, which are, as you know, a lot -- 47% of our revenue at the end of the quarter was the intelligence community, defense contractors.

They are still winning contracts; the government is still awarding contracts.

There is still strong demand, so we've not seen a slowdown whatsoever.

You know, in northern Virginia, as I said, we've seen somewhat of a slowdown in the larger tenants that sort grabbed some space last year, but that's been made up by government agencies that have large RFPs and a couple of other defense contractors that have large RFPs out, so no, we've not seen a slowdown at all.

(OPERATOR INSTRUCTIONS).

We've no questions in the queue.

I'd like to turn the conference back to Ms. Fowler for any additional or closing remarks.

I will take care of that, thank you.

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

Rand, Roger, Mariel (ph) and I are available to answer any questions you may have, in addition to what we did today.

We plan to hold our second-quarter conference call on July 28.

Also, for those of you who might be interested, we're holding our annual meeting at 9:30 AM on May 19 at the World Trade Center building in Baltimore, where we had it last year.

So thanks again and have a good day, everyone.

Ladies and gentlemen, this does conclude today's teleconference.

We appreciate your participation, and you may disconnect your phone lines at this time.