COPT Defense Properties (CDP) 2005 Q2 法說會逐字稿

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

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

At this time I'd like to turn the call over to the Company's Vice President of Finance and Investor Relations, Ms. Mary Ellen Fowler.

Ms. Fowler, please go ahead.

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 both documents from the Investor Relations section of our Web site at www.copt.com.

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

With me today is Rand Griffin, our President and CEO, and Roger Waesche, our CFO.

In just a minute, we will review the results of the second quarter, 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 upon 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 re-lease 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 will turn the call over to Rand.

Thanks, Mary Ellen, and good afternoon, everyone.

We have a number of positive events to share with you today.

First, we are reporting an excellent quarter.

We generated $0.47 per share in FFO for the quarter, $0.02 above our guidance and consensus.

When you compare our results to second quarter 2004, as you may recall, we had unusually high lease termination fees.

While we are reporting a 6% decrease in FFO per share, quarter-over-quarter, if you look at our performance on an operating basis, we increased FFO per share significantly.

Second, we are announcing our entrance into the Colorado Springs market, through the recent closing on an acquisition of the land and the fully leased build-to-suit development project for a defense contractor.

Colorado Springs is our second expansion city located outside of the Greater Washington D.C. region.

We are continuing to execute on our strategy of meeting demand from our core tenants for space in locations where we have the opportunity to create a cluster of our core tenants around a key demand driver.

In this case, the key demand driver is Peterson Air Force Base.

We have several opportunities lined up in addition to the first acquisition and believe we will create the critical mass necessary to obtain operating efficiencies.

We will discuss this acquisition in more detail in a few minutes.

Third, with regard to our strategy to dispose of properties located outside of the Greater Washington D.C. region, we now have three office buildings in our New Jersey portfolio under hard contract with a closing expected by the end of the third quarter.

Fourth, the acquisition environment continues to be very challenging.

However, we are maintaining our rigorous underwriting standards.

As of June 30, we have acquired $91 million in buildings and land parcels.

We are focusing our efforts on pursuing value-added acquisitions and positioning our development pipeline for expansion through our land control, both in our core markets and in our new expansion markets.

Fifth, with regard to recent base realignment and closer announcements, or BRAC, as it is commonly referred to, we believe that the majority of the proposed recommendations will in fact be approved and that Maryland will be a net winner with 5 to 6,000 jobs being moved to Fort Mead, which is adjacent to our National Business Park.

We plan to discuss the BRAC in more detail in a few minutes.

Finally, market fundamentals continue to improve in our core markets and we have increased both our occupancy and percentage leased since last quarter.

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

Thanks, Rand.

Please note that all per-share amounts are presented on a fully-diluted basis and include the effects of FAS 141.

In addition, you'll see, for the first time in awhile, a line for discontinued operations on our income statement.

This line reflects the breakout of the assets held for sale in New Jersey that Rand mentioned previously.

Turning to our performance, FFO for the second quarter totaled $21.8 million or $0.47 per share.

That's compared to FFO for the second quarter of last year of $24.1 million or $0.50 per share, representing a 2% increase in totaled FFO and a 6% decrease on a per-share basis.

The second quarter of 2004 included $4.9 million of lease termination fees, while this year's second quarter only included $1.4 million.

Our overperformance for the second quarter of this year resulted from improved occupancy and operating-cost control.

Turning to AFFO, after adjusting for capital expenditures and straightening of rents, our adjusted Funds From Operations increased 22% for the second quarter compared to the second quarter of '04.

Our capital expenditures for the second quarter were approximately $1.5 million lower than the last four quarters, which is a function of both timing and improving market conditions.

Payout ratios declined for the third quarter in a row and were very strong at 53.1% for FFO and 68.2% for AFFO for the quarter ending June, 2005.

In the Company's EBITDA to interest expense was 2.9-to-1 and our EBITDA to fixed charge coverage was 2.3-to-1.

Looking at GAAP earnings for the second quarter, we recorded earnings of $0.14 per share versus $0.13 per share for the second quarter of 2004.

In terms of same-property net operating income for the 128 comparative properties representing 86% of our portfolio, same-property cash NOI decreased 6.1% from the second quarter of 2004.

The same-store results would have been positive if not for the high lease termination fees we experienced during the second quarter of 2004.

Turning to our portfolio performance, we ended the quarter at 92.9% occupied, up from 92.4% at March 31, and we were 93.8% leased.

Occupancy increased 0.5% during the quarter despite the Company acquiring 87,000 square feet of vacancy in the Rockville Corporate Center acquisition.

Our largest vacancies, in addition to Rockville, are the 46,000 square feet at our Dulles Tech Two building in Herndon and the 143,000 square feet at 431 Ridge Road in New Jersey, which is the former AT&T space.

We have good activity on the Ridge Road space, and hope to announce a lease during the third quarter and have a tenant in occupancy by the fourth quarter of this year.

Therefore, we believe we are on track to meet our projected occupancy of 95% by year-end.

In terms of leasing statistics for the quarter, we renewed and retenanted a total of approximately 320,000 square feet.

Of this total, renewed space was 208,000 square feet, equating to a 64% renewal rate at an average committed capital cost of $4.44 per square foot.

Although our renewal rate was down from previous quarters, occupancy increased as retenanting of vacant space exceeded our nonrenewals.

Average rental rates for the renewed and re-tenanted space increased by 5.5% for total rent on a straight line basis and total rate was flat on a cash basis.

For renewed and re-tenanted space, the average committed capital cost was $9.28 per square foot.

Looking at our lease expiration schedule across our portfolio for the remainder of this year, we have substantially reduced our renewal exposure from 9.8% at the beginning of the year to only 3.5% of our revenues at June 30, which now represents about 369,000 square feet remaining.

We have also proactively managed our lease expirations for 2006 down to 8.9% of our revenue.

With respect to market conditions in general, in BWI submarket, as of June 30, vacancy, including sublease, stood at 5.5%, of which 5.4% was direct vacancy, down from 6.7 and 5.3% respectively in the second quarter of 2004.

Our BWI portfolio, totaling 3.6 million square feet, was 96% leased at June 30.

Turning next to the Columbia submarket in Howard County, at June 30, vacancy with sublease was 10.5%, of which 7.5% was direct vacancy.

This overall vacancy has decreased from 14.7% and 10.9% one year ago.

Our properties in the Columbia market total 1.6 million square feet and are currently 97% leased.

Lastly, with regard to the Northern Virginia market, overall vacancy continued to decrease to 10.5%, the lowest level since the third quarter of 2001.

This market is one of the strongest in the nation with positive job growth and positive net absorption of over 1 million square feet for the quarter.

Construction activity is strong with 1 million square feet delivered for the quarter.

Three-quarters of the new space delivered on the market was pre-leased with three of the seven buildings being 100% pre-leased.

Within the Dulles south submarket in Northern Virginia, three new buildings were delivered, bringing the total to six so far for the year.

Positive net absorption was 304,000 square feet, causing the vacancy rate to decline to 9.7%, of which 7.1% was direct vacancy, down from 13% and 11.6% respectively, a year ago.

Our operating portfolio of eight buildings totaling just over 1.2 million square feet is 99% leased.

Lastly, with regard to our 2005 FFO guidance, our previous guidance was $1.78 to $1.85 per share.

We are now projecting that FFO for 2005 will be in the $1.81 to $1.85 per-share range.

This guidance reflects strong first-half results but also conservatively takes into consideration the variability of timing with regard to the lease-up of the Ridge Road space and the closing of acquisitions and dispositions.

Our guidance does not reflect an equity raise this year.

However, this is dependent upon the timing of asset sales and the magnitude of acquisitions.

Now, I will turn the call over to Mary Ellen.

Thanks, Roger.

Turning to our balance sheet, at June 30, our total market capitalization was approximately $2.7 billion with $1.2 billion of debt outstanding, resulting in a 43.5% debt-to-total market cap.

At June 30, 32% of our debt was floating and 68% was fixed.

As we mentioned on last quarter's call, we have a higher-than-normal level of floating-rate debt due to the bond of construction underway all financed with short-term debt.

Our target is to decrease the percentage of floating-rate debt due to the 20% range by the end of this year.

As a first step, we're currently in the market with a $100 million package that will be financed on a long-term, nonrecourse, fixed-rate basis.

We expect to circle the rate on that financing within the next two weeks and close by mid-October.

In addition, we're looking at several alternatives for another fixed rate financing in the $75 million range that would close before the year-end.

With regard to the construction financing, we closed on a $44 million loan for two buildings under construction, 306 and 322 NBP, and we're currently financed finalizing terms for two more loans.

The first will finance buildings 302 and 320 at NBP and the second will finance 6711 Columbia Gateway Drive in the Columbia Gateway Business Park.

Also during the quarter, we raised our borrowing capacity under our unsecured revolving line from 300 million to $400 million, extended the maturity until March of 2008 and brought in one additional top-tier bank.

As a result of using our land as equity, coupled with our recent and proposed construction financings, we believe we have sufficient capital to fund construction through the balance of the year.

Similarly, if we execute on our asset sales as planned, coupled with the fixed-rate financings and the revolving line of credit availability, we will have sufficient capital to fund our acquisition pipeline for the balance of the year.

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

Thanks, Mary Ellen.

Starting with acquisitions, we recently closed on a $10 million acquisition in Colorado Springs that includes 64 acres of land in a park known as Patriot Park and the development rights to build a two-story, 50,000 square foot Class A building on approximately 5 acres within the Park.

The building is 100% pre-leased on the long-term lease to a defense contractor.

The remaining 59 acres can be developed with 650,000 square feet of office space.

Patriot Park is located near the north entrance to Peterson Air Force Base.

Peterson was ranked third in the nation in strategic military value out of 334 bases evaluated during the recent BRAC process and is experiencing significant growth.

Peterson Air Force Base is home to three major government facilities.

The first is NORAD, the North American Aerospace Defense Command that provides surveillance and control of the Aerospace for Canada and the United States, using data from satellites and ground-based radar; second is NORTHCOM, the U.S.

Northern command that is the single command for the various homeland defense missions being performed by other Department of Defense agencies; third, the Air Force space command that defends North America through its space and Intercontinental Ballistic Missile operations.

Needless to say, we're very excited about this new market and in addition to Patriot Park, we are hard on a contract for an additional office building and in the final negotiations on several more, so we can expect to grow our presence fairly rapidly through both acquisition and development activities.

We believe that we can achieve the critical mass necessary to rapidly become a major player in this market.

All of our top seven defense contractor tenants are located in this market, and many have expansion requirements.

In addition to existing demand from our core tenants, Colorado Springs, home of the Air Force Academy, is attractive for employees due to its quality-of-life and low traffic congestion.

The other major employers in the market are financial institutions, engineering and tech companies, as well as religious organizations.

With regard to management, initially we plan to hire a strong local asset manager with extensive experience in the market to manage our leasing efforts and create investment opportunities.

We will create a regional office that will support both our property management and our developing opportunities.

We do not anticipate entering any more expansion cities for the balance of this year, but instead will be concentrating on expanding our presence in San Antonio and Colorado Springs and executing on our acquisition and development activities elsewhere in our portfolio.

Turning to other acquisitions is a quick update on Ft. Richie.

We are hard on the contract and are waiting for three lawsuits to work their way through the legal system before we close.

There's been some progress on all three suits, and we remain hopeful of closing by the end of this year.

We do have the right to extend the purchase contract for 18 additional months.

We continue to believe that we will have tenant demand for this location once we close on the site.

Despite the competitiveness of the market, we are generating consistent acquisition opportunities.

We have closed on $68 million in buildings and 691,000 square feet so far this year, as well as entered two new cities.

We have offers out for $83 million, and we are working hard to meet our acquisition goal of $200 million for 2005.

With regard to dispositions, we're making progress with three of our New Jersey buildings under hard contract.

We continue to push forward as well with our plans to sell our joint venture, the Harrisburg assets.

If we are able to execute on our plans for the year, we'd now expect that dispositions could be closer to $100 million versus the $50 million we projected at the beginning of the year.

Turning to development, we've added one building to our development pipeline, a 56,000 square foot building located on Commerce Drive in our Dahlgren, Virginia Park.

With the Dahlgren building, we now have three buildings for $62 million and 342,000 square feet under development.

We did not add any new buildings to our construction pipeline this quarter and as a result continue to have nine buildings for $203 million and 1.2 million square feet under construction.

The overall leasing for the construction pipeline was 46% at June 30 and breaks down as follows -- first, we have three NBP buildings that are 100% leased and all or on track to become operational starting in the third quarter of this year through the first quarter of 2006.

Of the next two buildings under construction at NBP, we have strong interest in 322 NBP and we recently signed a 61,000 square foot lease at 306 NBP, bringing that building to 39% leased with other leases out for signature.

These buildings will deliver during the second and third quarter of 2006.

Second, at Columbia Gateway, our 8621 Robert Fulton Drive building is 77% leased and will deliver in the fourth quarter of this year.

We have no leasing yet on 6711 Columbia Gateway, but do have good leasing activity.

Third, our Expedition Six building in St. Mary's County is 24% leased and also has good activity.

Finally, our 204,000 square foot Washington Tech Park Two building in Northern Virginia has no signed leases, but we're seeing strong activity from a number of defense contractors and are in advanced discussions with several of these tenants.

With regard to land control, this quarter, we've added 10 acres for 215,000 square feet in Rockville, Maryland, 27 acres with a potential 350,000 square feet in San Antonio, and the Arundel Preserve joint venture for 63 acres and up to 1.8 million square feet.

This brings our total land either owned or under option to 367 acres that could support approximately 6.2 million square feet.

The last item I would like to cover is our view of the effect of BRAC on our company.

Overall, we think it's a net positive for us.

Information released publicly indicates that, in addition to the jobs to be consolidated into Ft. Mead, both the Patuxent River Naval Air Station and the Dahlgren Naval Surface worker center will not be negatively impacted.

We believe we are very well positioned, given our office park locations and our expertise, to benefit from the base realignment process.

In summary, we have made good progress on a number of initiatives so far this year.

Market fundamentals continue to improve, leading to increased occupancy and strengthening in rents.

We are clearly benefiting from our dominant franchise in our core markets and our opportunistic expansion strategy.

With regard to our dividend, we will address this at our September Board meeting and anticipate an increase commensurate with our growth.

Looking ahead this year and into 2006, our challenges are finding accretive acquisition properties, moving forward on completing our development pipeline, and executing on our disposition strategy.

We believe that we have the opportunity to create strong FFO growth over the next several years as a result of our land position, our expansion strategy, and our focused market and tenant niche.

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 Haley with Wachovia Securities.

Good afternoon.

Congratulations on a nice quarter.

I wanted to go through the sources and uses a little bit if you can.

You mentioned sales will fund your development activity or acquisition activity.

I wanted to get a rundown in terms of what you have the full-year numbers for '05 for acquisitions, development capital and sales, just to make sure I have them correct.

Well, Chris, in terms of sales, Rand mentioned that we originally thought about -- we were going to attempt to sell $50 million, and now the internal goal is $100 million.

I think we're making a lot of progress towards that.

Is that 100 million part of guidance?

Yes.

Okay, all right.

In terms of acquisitions, we've made $68 million of building acquisitions year-to-date.

We've done $23 million of other land acquisitions.

Now, the goal for the 200 million was really of building acquisitions, and so, since we don't have to tell you how difficult it is to (indiscernible) in the market so we are -- but we do have things lined up and we think it's reasonably possible we could get to the $200 million gross building acquisition goal.

Okay.

Then in terms of development, what we thought for the year is that we would spend approximately $100 million on construction.

So, we have 200 million in total projects underway at this point, of which some was spent last year and some will be spent this year, and a little into next year.

So what actually would get spent this year would be $100 million.

Where would that put your year-end balance sheet leverage at?

From a debt-to-undepreciated-book-value basis, it would be in the about 63, 64% range, assuming we do $100 million of dispositions.

What is the near-term and then longer-term goal, given your expansion into new markets and what's on your plate for development for that ratio?

Well, to be honest with you, the ratio that we focus on the most is fixed-charge coverage.

Our goal is to maintain a fixed-charge coverage ratio greater than 2 times and currently we are at 2.3 times.

Okay, well then I guess what would your ratio look like going at year-end '05, looking into '06 then?

2.15.

That's helpful.

Thank you.

Dave Aubuchon with A.G. Edwards.

Good afternoon.

Can you talk a little bit about -- you mentioned how aggressive the acquisition market is and you had a very fairly bullish story on the development side, and now you have initiatives in both San Antonio and Colorado Springs.

Can you talk about how you balance the capital allocation decision, looking at acquisitions versus really focusing on the capital on the development side?

I'm assuming you have higher risk-adjusted returns.

Yes.

Clearly, we've been a big loser in terms of all the bidding that's going on in the Baltimore/Washington corridor and Northern Virginia.

In terms of core product, you know, we're just not going to do 6.5% cap-rate deals and 150% of replacement costs.

So what we've emphasized, our acquisitions year-to-date has been San Antonio that is a value-added transaction, and then secondly Rockville, where we did a sale partial leaseback and we can do a value-add both on leasing up for the balance of the space plus the extra ground that we acquired.

In addition we've, as Rand mentioned, acquired a lot of land this year that we think we can put into the pipeline pretty quickly, so all of our investment objectives are today focused on value-added transactions, where we can get returns commensurate with our cost of capital.

So do you envision a point where you pretty much just shut off looking at acquisitions and kind of focus on the development pipeline, because -- I don't know, I guess, in your opinion, what do you see the next 6 to 12 months bringing you in terms of cap rates?

Well, I think it's going to be more of the same for the rest of the six months.

But what we're focused on is, because we do have a strong network in the markets in which we operate and we do believe we will be able to do some sales/leasebacks because price is not the ultimate arbiter of who gets those -- a lot of times, it's the long-term landlord relationship situation, so it's those kind of activities that we are focused on.

Okay.

Eduardo Abush (ph) with Millennium Partners.

Congratulations on a very good quarter.

Two questions -- first is could you give us a flavor of what like comparable billings tiers are selling for now in your different geographies, first?

Second, I know you're not giving '06 guidance or anything but as you think about your growth rate in '06, kind of what areas should we be targeting in terms of looking at you and in terms of how the developments come online and stuff like that?

In terms of asset sales prices, prices are in the very high $100-a-square-foot range for the Baltimore/Washington corridor, up to $200 a square foot.

That doesn't count, of course, our National Business Park where there are no sales but where buildings would trade for well in excess of $200 a square foot.

Northern Virginia transaction prices are $200 to $350 per square foot, depending on the submarket and depending on where NOIs are as relative to above or below-market rents.

In terms of guidance for 2006, you heard pretty well today in our comments that we are very focused on our development pipeline and we think we will deliver the $200 million of construction for the balance of this year.

It will give us a good run rate into next year.

We also have a significant development pipeline and we are positioning the Company for additional growth from land deals over the next several years.

First Call has us at I think $2.03.

You have some of the analysts moving up into the $2.10 range.

We will give our guidance at the -- on the next call, but I think it's safe to say our goal is to certainly be at or above the 10% per-year FFO per-share growth. (multiple speakers) -- that kind of growth coming from us, I would think as a result of the activities we mentioned on the call.

Just lastly, if I understood correctly, you were saying you basically won't need to raise equity to finance the construction pipeline, right?

That all assumes that we execute the asset sales that we have in front of us, and number two, that our acquisition opportunities don't get ahead of the numbers that we've quoted today.

Thank you very much.

Congratulations, guys.

John Guinee with Legg Mason.

How are you?

Rand, first, that Wall Street Journal article a few weeks ago -- did you write that yourself?

No, they came and interviewed us and spent a lot of time on questions and so on like that, but you never know on those things.

Well done, well done.

Is San Antonio or Colorado Springs -- are those going to be multi-story product markets or single-story product markets?

No, they are -- well, the buildings that we bought in San Antonio were very large foot plates (indiscernible) with two stories; the other ones that we would anticipate building, as we see the demand coming, would be our typical three and four-story, and the same thing really the -- while the first building at Patriot Park is a two-story, we are really looking at our product line being in the three to four-story as well.

We think we add a lot of expertise and certainly we have the strong relationships in Colorado Springs.

So, we're very excited about that market in particular, what we can bring to it.

To the extent you can do it off the top of your head, can you compare development costs, maybe using the National Business Park as a benchmark, in terms of how much more or less your development costs will be in Northern Virginia versus Colorado Springs, versus San Antonio?

If you take our current five-story building surface park at a 4.5 parking ratio at National Business Park, you know, you are in the 185 a foot range, all-in -- comparable in Colorado Springs, because the land is a little cheaper and you probably aren't doing five-story; you're probably doing three to four stories, slightly different building codes and some other construction issues.

You're going to be more in the $155 range, all-in.

Northern Virginia, to contrast that again -- surface park, you're probably moving now up past the $200 a foot range.

Rich Schmor (ph) with KeyBanc Capital Markets.

Good afternoon.

It's actually Mike Swinsky;

I'm with Rich here.

I just had a couple of quick questions.

Kind of going forward, what are you looking for in terms of development fees related to BRAC?

I mean, will that have a positive impact going forward on the development fees?

We think so, but it's something that has a little more volatility than our normal rental revenue, so we don't -- we generally project about 300 to $1 million a quarter of net fee income to the Company.

But we do believe that we are well-positioned, as the activity level increases in our markets, to pick up a high percentage of the market of that.

Okay.

With your current guidance, with your -- you've got your revised guidance.

How much have you assumed in terms of development fees in there?

Approximately 500,000 per quarter.

In terms of BRAC, I know it's a couple of years out.

When do you think the benefits will start impacting?

I mean, have you seen any pickup in leasing currently or is that kind of a couple of years out?

You know, the BRAC process, people get real excited about it and you see a lot of articles, but the reality is that BRACs are a very extended process, as we see at Fort Richie.

I mean, Fort Richie was a victim of the BRAC that occurred in 1995 and they closed in 1997 and nothing has happened there.

So, the BRAC that relates to closing of bases, that component of it, and shifting of those operations elsewhere is quite a long-term process.

I mean, they, theoretically, according to the Congressional timelines, are supposed to have that accomplished in a five to six year timeframe, but I think those tend to get extended.

The more important component we think is the realignments where, in this particular BRAC, which is a very major one, they are also shifting around a lot of operations in the country, somewhat we think to reduce employment, somewhat to achieve very significant operating efficiencies.

Those will start to occur more rapidly.

Those could be in the two to three year timeframe, we could start to see some of the impact from those, because you don't have to go through the closure process in the BRACs and you don't have to go through all of the other notices and the challenges and the legal issues that have extended that process.

So the BRAC timetable is August.

They need to -- I guess it's September 8 actually the Commission will submit their recommendations to the President.

He has 45 days to do a yes or a no, and if it is a yes, he forwards to Congress and then they have to approve or disapprove sometime in the November timeframe.

So, if you look at that as chewing up all of '05, you can start to see, we think, where, by '07, there will be some benefits occurring from BRAC.

You know there's a lot of leasing discussions out there starting but I think it's premature until you go through that timetable.

Finally, with the entrance into San Antonio and the entrance into Colorado Springs, I know you said that you're going to build up your position this year.

Are you looking to enter additional markets next year?

As we've said on the last call, we have ten markets that we are studying.

We've now entered one of those ten, and we will continue to finalize our study and we just see how it unfolds next year.

In our planning, we were thinking of possibly two more markets next year, but we haven't finalized that guidance.

Rich Anderson with Harris Nesbitt.

Thank you and good afternoon.

I am sorry;

I probably missed this.

But you beat your number for the second quarter but you have maybe some dilutive issues to deal with with stepping up dispositions.

What are the key factors behind you increasing your guidance?

I think the increasing guidance is simply taking what actually occurred in the first and second quarter and then with 50% of the year gone and looking at the last two quarters and given the fact that there's still some variability around acquisitions and dispositions, the range that we gave, $1.81 to $1.85, is where we are comfortable.

Thanks for that.

In terms of the assets for sale in New Jersey and you mentioned also, Rand, looking into Harrisburg a little bit more closely -- what would you say the spread would be, from a cap-rate perspective, relative to deals that you're trying to get involved with in the DC area?

Well, I think, in terms of sales in New Jersey and Harrisburg, we would be selling in the low to mid 8% cap-rate range.

In terms of the Baltimore/Washington -- Greater Washington region, you can buy today at 6, 6.5 or 7%, and that's the product that we have not been chasing.

So there would be a negative arbitrage.

What we're planning to do is take the capital from dispositions and find other development and find other value-added investments to fund.

Okay.

The last question is when you enter a market like Colorado Springs, which is a world away, and San Antonio, can you sort of discuss the competitive landscape for your secure product?

I mean, is it just as much of a monopoly on the East Coast as -- out there as you do here?

If I'm saying that greatly?

Just are other -- you're seeing other entrants getting in it.

What is the competitive landscape for your specific products? (multiple speakers).

Well, I think our attorneys don't like us to use the word "monopoly", so -- but I think we believe an element of our decision on entering cities is the competitive landscape of those cities.

In both of those cities, we feel, while there are other developers, it's a fragmented market, both of them, and there really is no one like us that has the relationships and the expertise and the credentials and the things we do with our kinds to tenants to take advantage of those needs that are there.

So, we really see that that's a very strong position for us, and we particularly see that in Colorado Springs, where we've come in.

If you look in the landscape, all of our top seven defense contractors are there.

They've grown over the years.

They are in multiple buildings; they need to consolidate.

They are winning new contracts.

Typically, the developers there have not been well-financed or have not understood this sort of landscape that's going on, and so we think that we will provide a very important element in that city.

Could you identify a market or two where there's a fairly evident defense component but one that you would not be interested in because you know that there's competition for the product out there that just makes it not risk/reward-attractive?

I don't think, Rich, our study has taken us that far yet.

We are still in the early stages of studying the other nine markets and we don't totally understand the competitive landscape, nor do we understand the totality of the government opportunities and our contractor opportunities in those markets.

(OPERATOR INSTRUCTIONS).

Chris Haley with Wachovia Securities.

I can't let you go yet, Rand.

I wanted to just doublecheck a few things.

In terms of rates of return on these developments, I recall the San Antonio project was a cash yield of 10, or an anomaly yield of 10?

Cash.

Cash.

Okay.

Where do you look at the -- if you can, where are you looking in terms of Colorado Springs?

I think, on the development opportunities, we will be there or above.

We've been a little bit more successful than that on our other development opportunities, and we think we will be fortunate in that same situation.

Okay.

Then on the acquisition side, where were you at the beginning of the year regarding yields and what have you done so far in terms of rates of return?

Well, we've only done two building acquisition so far.

That's the San Antonio, where we expect to get a 10% yield, and then the Rockville Corporate Center, which is a sale/partial leaseback.

Our anticipation is, upon stabilization, we will be approximately 9.5% cash yield.

Where are you today on that?

We are about 4%.

I'm sorry, so -- I was asking actually in San Antonio.

I was asking what do you think your develop yields are going to be in San Antonio?

I recall the -- that's what I was asking?

11%.

11-ish, okay.

But in terms of -- and that's because you had some land adjacent to the asset, whereas looking at new market opportunities, you are suggesting 10, 10-plus?

Correct.

Then, what were you in terms of, as part of your guidancing, which is including another 130 million of acquisitions, what type of rates of return should we be looking at there?

It clearly depends on the market.

If it's in San Antonio or Colorado Springs, we would be in the 9% range.

If it's in the Greater Washington market, we would be in the -- I don't know -- 7.5, 8% if we got lucky.

Right, okay, so out-of-market versus in-market.

Okay.

In your sales, obviously it just depends upon which assets go out.

The earlier question was I guess relating to potential dilution.

How should I look at the aggregate value?

I think I've asked this before; maybe you can give us a fresh update on the noncore assets you intend to sale.

Could you give us a sense as where you think values of those assets is?

We believe Harrisburg to be in the 70 to $75 million range.

We believe New Jersey to be in the 100 to $105 million range, and Blueville (ph), we're not sure because of the development element of that property.

Right.

Wasn't there some land that had to be rezoned?

Correct.

Well, it's not -- it's zoned adequately; it's just we're very close to finishing up some entitlements that will double the square footage (inaudible).

Okay.

On your expirations for '06, could you give us a sense as to what you think your mark-to-market is on a cash cap basis?

We think, at this point, we are at 10% under-market.

Roger, that's overall?

Correct.

Any particular variance in '06 or '06 looks like a -- obviously, it depends upon this part of the space, but it looks like a lower expiring rent year.

Correct, it's a little under 9% at this point.

Thank you very much.

Chris Lucas with Robert Baird.

Just to follow up a little bit on Chris' questions -- just get an update on what the rough yield on development is on the existing Baltimore/Washington projects.

We think we will be in the 11.5 to 12.5% range. (multiple speakers).

Cash on leverage (ph).

The just again on the follow-up on the BRAC, Rand, the personnel moves there reflect primarily military personnel being moved to these various bases.

Is that correct?

Well, what they've done, if you go through the extensive document, is they -- it's kind of interesting; they've specified military and then they also do note contractors.

So for example, at Fort Mead, where they talked about 5,300 jobs shifting in there specifically related to several units, 1,900 jobs of the 5,300 are civilian contractors.

Where we see the significance to us, in that particular number, is that those contractors typically will not be on the base, so it provides us with -- that's the equivalent of three office buildings' size, say National Business Park in terms of square footage to the number of people.

There have been other reports.

You may have seem some -- that really then talked about the ratio of other contractors not specifically identified that tends to double that.

So the local papers have been talking about 10,000 people coming to (indiscernible) jobs coming to Fort Mead rather than the 5,300.

The same thing occurs up in Aberdeen and other locations, so we view it very positively.

Is that also true down at Patuxent as well?

Is that a ratio that kind of holds true throughout, or is it very specific?

I think it's specific to the contracts.

You have, for example, in Colorado, we didn't mention it but Colorado Springs has 4,200 people identified or military as moving on.

There will probably be very few contractor jobs moving with that, so it depends a lot on the type of unit that's moving.

Okay, thank you.

There are no further questions, so I'd like to turn the call back to Mary Ellen Fowler for any additional or closing remarks.

Thank you again for joining us today.

As always, we greatly appreciate your participation and support.

Rand, Roger and I are available to answer any questions you may have.

In addition, we intend to hold our third-quarter conference call on October 27.

Thank you and have a good day, everyone.

Thank you.

That does conclude our conference.