COPT Defense Properties (CDP) 2005 Q3 法說會逐字稿

Welcome to the Corporate Office Properties Trust third-quarter earnings conference call.

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

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

Ms. Fowler, please go ahead.

Thank you and 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 or you can access those 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.

Please refer to our Form 8-K or to our web site for definitions of certain financial terms referred to on this call.

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

In just a minute, they will review the results of the third 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 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 will turn the call over to Rand.

Thanks, Mary Ellen, and good afternoon everyone.

We had a very active and productive quarter and a busy year so far that has positioned us to accomplish or exceed virtually all of our objectives established at the beginning of the year.

Just mention a few highlights, first, we made great strides with our disposition activity, closing on over $100 million, double our goal for the year.

Second, we signed a 171,000 square foot lease in our Princeton Tech Center property in central New Jersey, backfilling the largest vacancy in our portfolio.

This lease execution was key for us in moving forward to sell these buildings over the next several years as we continue to execute on our strategy to exit the New Jersey market overtime.

Third, we continued to close on acquisitions and with our announcement on Monday, we've closed so far this year on $185 million in acquisitions, including land.

Despite the competitive market, we continue to find value-added acquisition opportunities both within our core markets and in our new tenant-driven market locations.

We're on track to exceed our stated $200 million goal for the year.

Lastly, based on our earnings, our Board approved a 9.8% increase in our common dividend, the eighth year in a row of progressively increasing dividends.

Looking at year end, we are tightening and increasing our range for our 2005 FFO guidance to $1.84 to $1.86 per diluted share, which would result in a 7% year-over-year increase at the high end of the range.

Our initial 2006 annual FFO guidance range is $1.97 to $2.05 per share, which positions us for a 10% per share FFO growth next year based on the high end of our ranges.

This projection takes into consideration rising interest rates, a challenging acquisition environment and a few other components.

Roger will go through our assumptions in more detail in a minute.

And with that, I will turn the call back over to Mary Ellen.

Thanks, Rand.

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

FFO for the third quarter totaled $22.1 million, or $0.40 per diluted share, as compared to FFO for the third quarter last year of $17.4 million, or $0.39 per diluted share, representing a 20.5% increase on a per-share basis.

Included in FFO for the third quarter last year was recognition of a $0.4 accounting charge representing the write-off of initial offering costs for Series B preferred share recorded at the time of redemption.

Without this $0.04 charge, FFO per-share would have been $0.43 and the quarter to quarter FFO per-share increase would be 9.3%.

For the third quarter, we recorded one $1 million in lease termination fees and a total of $3.6 million so far this year.

Turning to AFFO, after adjusting for capital expenditures and straight-lining of rents, our adjusted funds from operations increased 35% from $11.8 million for the third quarter last year to $15.9 million for third quarter 2005.

With regard to dividends, we increased our common dividend 9.8% during September and paid out $0.28 per share for the quarter ending September 30.

This equated to a 60.6% FFO payout ratio as compared to a 65.9% FFO payout ratio for the third quarter of 2004.

AFFO payout ratio was 84.4% compared to 97.3% for the third quarter of 2004.

Looking at GAAP earnings for the third quarter, we reported earnings of $0.18 per share versus net income of $0.12 per share for the third quarter of 2004.

Included in the third quarter of 2004 was a Series B accounting charge mentioned previously, without which, we would have earned $0.17.

In terms of same property net operating income, for the 111 comparative properties representing 84.4% of our portfolio, same-property cash NOI increased by a strong 9%.

This increase was primarily due to higher rental rates and improved occupancy in our BW Porter and our Northern Virginia portfolios.

Turning to our balance sheet, at September 30, our total market capitalization was approximately $3 billion with $1.1 billion of debt outstanding developing at a 37.6% debt to total market cap ratio.

Subsequent to quarter end, we closed on a $103 million 10-year interest-only mortgage loan fixed at 5.53%. $73 million of this debt had been previously fixed through a forward swap.

At September 30, 30% of our debt was floating and 70% was fixed.

With this new loan closed, our floating debt decreased slightly.

We continue to carry higher floating-rate debt than normal due to construction loans on our large development pipeline as well as floating-rate debt financing for assets in non-core markets.

We expect to fix additional debt before year end and are currently in the market with another non-recourse fixed rate loan in the 50 to $100 million range.

Our goal is to reduce floating-rate debt to the mid-20% range by the end of the first quarter 2006.

Turning to equity, during the quarter, we issued 2.3 million common shares generating net proceeds of $75.3 million.

We had over 30 institutions purchase stock with several new investors for the company.

The decision to raise equity was based on the fact that acquisitions were accelerating and there were only a few windows of opportunity left to raise equity for the balance of the year.

For the third quarter 2005, the Company's EBITDA at the interest expense was 3.2-to-1 and our EBITDA to fixed charge coverage improved to 2.5-to-1.

Now I will turn the call over to Roger.

Thanks, Mary Ellen, and good afternoon everyone.

With regard to guidance, for our 2005 FFO guidance, we started the year with a range of $1.78 to $1.85 per diluted share.

Subsequently on the second-quarter call, we increased the bottom end of our range to $1.81 to $1.85.

We're now tightening the range and increasing the top end to $1.84 to $1.86 per share.

As Rand mentioned, our initial FFO guidance for 2006 is $1.97 to $2.05 per diluted share.

The assumptions for our 2006 guidance include, first, for our existing portfolio, occupancy begins the year at 94.5 to 95% and increases by 1% over the year.

Almost half of the expiring space is represented by fixed leases.

Of those, the largest at 98,000 square feet will not renew, four are expected to renew, and one is uncertain at this time.

Second, average rental rate rolloffs of 7 to 10% were maturing in new leases.

Third, lease termination fees will be in the $2 million range, which is about half our normal fees per year.

No fees are identified as of today.

Fourth, $300 million in acquisitions with $100 million of dispositions for a net growth of $200 million.

Acquisitions and dispositions are projected ratably per quarter throughout the year.

Fifth, with development coming online as outlined on page 31 of our supplement at 80% pre-leased on average when delivered.

Sixth, redemption of our 10.25% Series E and 9-7/8% Series F preferred shares in the second half of 2006.

Seventh, assuming we achieve our investment goals, we will require $140 million of equity, of which $64 million will be used to redeem the Series E and Series F preferred shares.

Eighth, increase in G&A expense of about $1.7 million.

Finally, increase in short-term interest rates of 25 basis points per quarter with an initial LIBOR rate of 4-3/8%.

To summarize all of the above, we start with an approximate current quarterly FFO run rate of $0.47 per diluted share, or $1.88 annually.

From our current run rate, increased G&A will cost per share $0.04 annually.

Increased interest rates will cost $0.03 to $0.04 per share.

Same-office NOI is forecast at a positive $0.04 to $0.06 per share.

Development is projected to be $0.08 to $0.10 accretive net of interest.

Net acquisitions are projected to be $0.05 to $0.08 net of interest.

The aggregate of these assumptions when added to our run rate creates an FFO per-share guidance range of $1.97 to $2.05.

These numbers exclude -- underlying exclude a $3.9 million accounting charge for the preferred share reductions.

Our anticipated sources and uses for 2006 are as follows.

Per uses, we have acquisitions of $300 million, development $100 million, preferred redemption (technical difficulty) $64 million, total uses of $464 million.

Sources consist of sales of properties $100 million, new debt on a net basis $224 million, equity $140 million, total sources of $464 million.

This is our initial look at 2006 and we expect to further refine the details next quarter and as we move through the year.

Turning to our portfolio, with the sale of our Harrisburg properties into a joint venture, starting this quarter we are reporting our portfolio occupancy two ways; first, based only on our wholly-owned properties and, secondly, based on our entire portfolio consisting of wholly-owned and joint venture asset.

Occupancy statistics for our joint venture assets are broken out separately on page 22 of our supplement.

With that in mind at September 30, our wholly-owned portfolio consisted of 136 properties totaling 11.7 million square feet, a large portion of our leasing progress centered on 177,000 square feet of space formerly occupied by AT&T in New Jersey.

This lease was signed with a large credit-worthy tenant during September and the tenant commenced paying rent at that time, which was about a month and a half earlier than our forecast.

The tenant also at leased 30,000 square feet at 437 Ridge Road that will become effective in January 2007.

In addition, we have signed a lease for about 47,000 square feet of space at our 15 Gouty (ph) Drive property in Rockville, which will bring that property to 64%.

Overall, we're on track to being near 95% occupancy by year end.

In terms of leasing statistics, we have renewed and re-tenanted a total of 454,000 square feet for the quarter.

Of this total, renewed space was about 165,000 square feet, equating to a 65% annual rate at an average capital cost of $9.22 per square foot.

Average rental rates for the renewed and re-tenanted space decreased by about 14.3% for total rent on a straight-line basis and decreased 22.5% on a cash basis.

The decrease in rent resulted solely from two transactions.

First, in re-tenanting the former AT&T space, we were able to re-lease the space to a credit-worthy tenant for 10 years at a very low capital cost.

The rent was discounted for the first two years as the tenant designed and built out a data center.

Rents for this space decreased 36% on a straight-line basis upon re-tenanting.

However, the Company did recognize $4.6 million in lease termination fees for this space over the last 18 months.

Secondly, we executed a blend and extend of an existing lease at our Pinnacle Towers building in Northern Virginia that we acquired last year.

The 56,000 square foot lease was extended for 10 years and the rent was reset at market with escalations going forward.

For all renewed and re-tenanted space, the average capital cost was $9.04.

Looking at our lease expiration schedule across our portfolio for the remainder of this year, at September 30, we have only 1.3% of our revenues expiring, representing about 139,000 square feet.

For 2006, we have 8.8% of our revenues expiring, down from 9.8% at the beginning of 2005.

With respect to marketing conditions in general, in the BWI sub market, as of September 30, vacancies stood at 7.9%. up from the previous quarter as a result of several new buildings coming online.

There's 436,000 square feet under construction in this market.

Our BWI portfolio, totaling 3.7 million square feet and representing 70.3% of the BWI sub market, improved by 1.1% to reach 97.2% leased and 96.3% occupied at September 30.

Turning next to Columbia sub market in Howard County, at September 30, vacancy was 10.5%.

The overall vacancy has increased slightly from the second quarter level of 7.5% due primarily to two tenants leaving space.

Our properties in the Columbia market totaled 1.8 million square feet and are currently 95.4% leased and occupied.

And lastly in the Dulles South sub market in Northern Virginia, the vacancy rate continues to decrease ending the third quarter at 9.0%, down from 10.5% at the end of the second quarter.

Our operating portfolio of eight buildings totaling just over 1.2 million square feet is 99.2% leased and 97.6% occupied.

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

Thank you, Roger.

Turning first to acquisitions, during the quarter we were able to expand our presence within one of our new target markets, Colorado Springs.

We closed on three office buildings totaling 203,000 square feet.

In addition to these three buildings, we have a 50,000 foot fully-leased office building under construction and ground control in two locations that over time can support 1.6 million square feet of office development.

We are rapidly adding to our presence in this strategic location and see strong demand from the defense sector.

Overall market conditions for Class A space are improving with a 10.9% vacancy rate being the lowest in the past four years and adsorption at its highest level for the past four years.

Within our core greater Washington markets, we have purchased six additional buildings all located in Howard County.

Five of these buildings are located within Columbia Gateway Business Park where we are the largest owner with 22 buildings and over 1.3 million square feet.

On Monday, we announced the closing of a 118,000 square foot office building on a 21-acre site in Frederick, Maryland, a targeted submarket for the Company within the greater Washington region.

This property is a sale leaseback with Farmers and Mechanics Bank.

We leased 58% of the square footage for 10 years for their corporate headquarters.

Along with existing building, we can develop another 80,000 square feet.

For those of you that don't know Frederick, we believe that the Frederick market is a strategic for us due to its close proximity to Fort Dietrich.

Fort Dietrich is an Army medical installation that is home to the United States Army Medical Research and Materiel Command, the National Cancer Institute and 37 other tenant organizations which consist of both Department of Defense as well as non-defense units.

The primary missions for Fort Dietrich are biomedical research and development of medical and materiel management and global communications.

The units at Fort Dietrich are leading the way in medical biological defense and, hence, we expect that Fort Dietrich will continue to play a vital role for our country's defense in the future.

Based on our acquisition pipeline, we expect to surpass our $200 million acquisition goal for the year.

Although cap rates still continue to be aggressive, particularly in the Northern Virginia submarkets, we're starting to see some effect from rising interest rates as measured by an acceleration deals coming to market for sale as well as some softening on the pricing being achieved.

With regard to dispositions, during the quarter, we disposed of three buildings in our New Jersey portfolio, generating proceeds of $22 million and sold an 80% interest in the 16 buildings comprising our Harrisburg portfolio valued at $73 million.

We will continue to manage the Harrisburg properties under a five-year contract.

With these sales, we have almost doubled our target disposition goal of $50 million for the year.

These two transactions generated about $90 million of proceeds that we were able to redeploy into new acquisitions and development.

We plan to use the strong sales market to not only exit our New Jersey and Bluebell properties over the next two to three years, but also as an opportunity to sell several non-core properties, including Brown's Wharf in Baltimore City and three suburban Maryland buildings.

During 2006, we plan to start marketing our remaining New Jersey properties as well as develop an exit strategy for our Bluebell campus.

As Roger mentioned, we leased our largest vacant space located in Princeton Technology Center to a creditworthy tenant that we expect will purchase three of the buildings on this campus at some point over the next two to three years, thereby enhancing our exit strategy for New Jersey.

Turning to our development activity, at September 30, we had 1.1 million square feet under construction, totaling $200 million.

We have four buildings under construction at National Business Park.

One change to note -- for those of you to follow properties by street address, our new buildings in Phase II of NBP were formerly on Carena (ph) Road and we have changed that name to Sentinel Drive.

With regard to development leasing, both 318 and 304 NBP are fully leased and 322 NBP is fully committed with a lease out for signature.

We have to signed leases totaling over 93,000 square feet to bring 306 NBP to 59% leased.

Moving on to Howard County, we have two buildings at Columbia Gateway under construction; 85,000 square feet on Robert Fulton Drive and 125,000 square feet at 6711 Columbia Gateway Drive.

The Robert Fulton Drive building is 76% leased and we have signed a lease to take approximately 53,000 square feet at 6711 Corporate -- or Columbia Gateway Drive for our new corporate headquarters.

The balance of the construction is in three locations.

The first one is at Washington Tech, two at Westfield's Corporate Center in Northern Virginia where we are just nearing completion of shell construction.

Even though we have no signed leases currently for this space, there is over 600,000 square feet of demand in the market and we expect to be signing leases later this quarter.

The balance of our portfolio in Westfields is well leased at 99.2%.

Second location, Expedition Six (ph) in St. Mary's County, is 24% leased and the third location, 50,000 square feet in Patriot Park in Colorado Springs, is fully leased.

During the quarter, we placed into service 191 NBP that is fully leased and subsequent to quarter end, we placed into service 318 NBP and our San Antonio property, both of which are also fully leased.

Our underdevelopment pipeline remains the same as last quarter with three buildings for 342,000 square feet.

Looking at our land control, we added 200 acres in Colorado Springs that can support 1.6 million square feet, including 132 acres owned through a joint venture that can support 935,000 square feet.

At September 30, we owned 555 acres of land that can support approximately 7.8 million square feet of office space.

With regard to additional land control, we are still waiting resolution of lawsuits that encumber Fort Richie, and of course Fort Richie can accommodate another 1.7 million square feet of office space.

The second of the three lawsuits has been dismissed by the judge during the quarter and we are hopeful that the remaining lawsuits can be resolved by year end or early spring 2006; that would allow us to then close.

With regard to construction costs, many of you have asked what we increases we're seeing and how that is affecting our development yields.

With regard to construction cost, we believe 2004 costs increased 6 to 7% from 2003 levels and 2005 costs have increased 9 to 10% from the previous year's levels.

Specific items that have increased include steel by about 40%, concrete 25%, drywall 20% and most other materials are 5 to 10% higher.

With regard to land costs, we're seeing large increases in land prices in our quarter markets.

We believe land prices increased 15% last year and close to 30% this year to become the largest component of increased development costs.

So far, we have been able to maintain our unleveraged cash-on-cash yields in the 11 to 12% range as we have been able to increase rents based on the low vacancy rates in our markets and the demand for space.

We expect this to continue for the near-term.

One advantage that we have is since we have acquired much of our land through the downmarket of the last four years, we have a relatively low cost basis for a majority of the land.

Before we leave our discussion regarding construction, I would like to mention that our company was honored by NAOP (ph) last week at their national convention with its first ever National Green Development Award for our first lead certified building that was just completed at National Business Park.

Lead buildings are constructed to be environmentally friendly, using new technology such as highly filtered air, efficient mechanical systems, water usage reduction and an extensive greenhouse keeping program.

Our company has among the most green buildings in for certification of anybody in the country with a total of 12 buildings.

We believe that in the future, our government tenants will require lead certified buildings and that over time, you will see other industries follow suit.

Needless to say, we are very proud to be on the cutting edge of this technology and believe it will be a major design focus for new construction in the future.

And lastly with regard to personnel, we were pleased to announce that we brought on board George Swint (ph) as our Vice President of Asset Management for the Colorado Springs portfolio.

George brings 25 years of real estate experience in the Colorado Springs market with a focus on the government and defense sector.

We're excited to be working with George as he moves forward to expand our presence in the Colorado Springs market.

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

(Operator Instructions) John Guinee, Legg Mason.

John Guinee with David Ficke (ph) here.

Hey Rand, nice job.

Can you talk about the size and the depth of the San Antonio and Colorado Springs market, and what sort of critical mass you can get there?

Each of those markets, as you know, has about 24 million square feet of office space even though San Antonio is the eighth largest in the country in population and Colorado Springs us the 49th largest.

They're a little different in terms of our plans.

As you know in San Antonio, we have a major tenant and a major complex there, 47,000 square feet.

We did buy adjacent ground and we expect that over time we will end up with about a million square feet on that campus.

We have started to look at some other locations within San Antonio but are not really projecting any expansion much beyond that million-dollar above all.

Colorado Springs, we see that as a very dynamic market.

It does have, as you know, the third most strategic base in the country out of 334 basis with Peterson Air Force Base and we're seeing a lot of demand.

So we think that between the location at Peterson where we have enough ground with some of the things we're doing in some other buildings to have at least 1 million, 1.5 million square foot expansion there.

And then on the other market, the Colorado North market on I-25, the ground that we have as well as other things we're doing, ending up with another million square foot campus.

So we think we will be in the 2 to 2.5 million square-foot range there, which is a very nice market for us.

One other question.

Obviously big news in Sun and the Post and all of that, is a shift from technology to people's size (ph), et cetera.

Can you walk through your thoughts on that?

For those of you that maybe didn't see it, there were a couple of articles in the paper today that Negraponte (ph), the new DNI director, had made a comment yesterday regarding the fact that they would like to as part of their strategy, which was really nothing new.

It was articulated in the recommendations of the 911 conference, the panel recommendations.

But he said they would shift a little more from technology to sort of the people aspect.

We think that's actually when you think it through good news for us because that requires more translators, more analysts, more office space, frankly, and it's also consistent with our strategy.

If you look it that, we have been diversifying.

We serve many agencies in the intelligence community, we have been carefully diversifying that and I think in general it's consistent with our expectations and really good news for us.

Thank you very much.

(Operator Instructions).

David Aubuchon, AG Edwards.

Thank you.

Rand, can you elaborate on your commentary regarding some recent softening in cap rates I guess in some of the acquisitions that you have been looking at?

And I guess contrast that to what your expectations were on some of your asset sales this quarter, specifically Harrisburg, and then maybe what you anticipate over the coming few quarters relative to your sales initiative of some of your non-core assets?

I'm going to think the reality is on the sales.

We were slightly over 8 cap on Harrisburg.

We thought that was a great cap rate for that market.

We would expect to be certainly in that level on the rest of our dispositions, if not slightly better.

And again, it depends on where you are on lease rates and how far below market some of our leases in those markets are quite far below market, and so you get some excellent IRR's as you ran that out.

On the acquisitions side, what we have started to see, and we have commented on this for -- in some other meetings -- recently that we're starting to see, A, people are coming to market very quickly.

They think the peak has probably been reached and they may have missed that or are afraid they have missed it.

And so there is this acceleration that I mentioned of product coming on the market.

And secondly, we are seeing some where we have lost out on some auction biz, if you would, and they did not close for whatever reason or they are being rebid down.

And we're seeing some things come back to us, and I hear that from others as well.

So it may be that it's hard to guess the peak or the valleys of these things and maybe that we have seen it, and you will see that improve over time.

So you think this acceleration on deals may generate some bigger portfolios that you may or may not have seen in the past?

We think that's true, yes.

And the cap rates trends -- I guess I'm interested in what kind of a spread you can get.

If the spread is narrowed at all on your dispositions versus what you expect again on the acquisition side?

Because you're saying your dispositions are still north of -- or around and 8% hurdle.

I guess on the acquisitions, you're still seeing that 6 to 7% cap rate range?

We're doing much better than that.

But that's what you see in other parts of the market.

We're averaging not too far off of where we were last year, still maybe 50, 100 basis points better than what you indicated.

And then a question on the development pipeline, I just noticed in the supplemental this quarter that three projects were pushed out two quarters.

Is that related to just maybe timing issues relative to the leasing that's going on, or is it related to just general construction activity and you're having -- trouble may not be the right word, but more difficulty getting the supplies and the construction materials, et cetera, in getting the project completed on time?

It's not troubled, but there's enough activity going on.

There is some delaying of availability of materials and that is affecting the starts somewhat.

We have pre-tax concrete for example and the initial quote we got was shoved off a year.

And then we've gone back and tightened that time frame up.

But the shortages, as it did back several years ago, it can crop up and that can affect the leverage.

So we're seeing that a little bit, and the other was just some consciousness in terms of making sure that we don't bring too much supply onto the market.

Excellent, thank you.

Chris Haley, Wachovia Securities.

Congratulations on a nice quarter.

Roger, in your same-store, probably your overall '06 expectations, you provided a same-store contribution.

Could you repeat that for me?

We said $0.04 to $0.06 per share, and that includes really two elements.

Number one, a slightly higher occupancy on average, about a half a percent; and then secondly, rent roll-ups for renewed and re-tenanted space of about 7 to 10%.

Okay.

In light of that last comment, I would just look at your activities, leasing activity for both renewed and re-tenanted in the first, second and third quarter, none of them were positive on a cash basis.

On the GAAP basis, they were let's just call it a wash.

And there was continued relative consistent weakness in your Northern Virginia portfolios, Northern Virginia assets.

I wanted to know if you could give us maybe a sense as to either what may have been driving the numbers down, particularly during the 2005 time period, and what makes you confident that you will be high-single digits up in '06?

I'm assuming that was a GAAP increase.

I think some of it has to do specifically with just certain leases.

If you look at the BW (ph) corridor where the majority of our square footage is, we have been positive, both in all quarters.

And Northern Virginia is really an anomaly.

Again this quarter, 60,000 square feet had to do with one lease.

We knew we took on an-above market lease and decided to deal with it so that we didn't have an early termination of that lease, which was the possibility.

But if you look at our renewal rental rates and look at the expiring rental rate, what you will see is that for the 2006 year, we do have a pretty low -- on average actually, our renewals, or our maturing leases are $20 a square foot.

So we feel confident that we will be in the $21.50 to $22.00 a square foot rental rate on average.

Can you provide a breakdown, quarterly breakdown, by region, where your expirations are, or an annual expiration by region?

We don't do it by region, we do it by just in total.

So there's a bent (ph) toward a higher proportion of your roll (ph) occurring in the VW corridor, is that correct?

yes.

And you have to remember, we did have Harrisburg for the first half of the year, and that was -- they were rolling negatively, so that's now gone.

When you look at your -- thank you for that -- and when you look at your sources and uses, I think (ph) you outlined 400 million plus, what does that imply to a debt to gross assets or debt preferred and -- debt and preferred at year end '06?

That would be just over 60%.

But our focus --.

I'm sorry, in terms of absolute numbers?

On depreciated book value, debt.

I'm sorry, I was talking about debt to undepreciated book value would be just over 60%, and then with preferreds, it would be in the mid '60s.

But our focus is on fixed charge coverage.

On a normalized basis, we were running about 2.25 times and with taking out the two very high preferreds in the third quarter of '06, that will move us up to about 2.5 times.

So that gives us room to come down to our minimum target level of 2.0 times.

Okay, and that 2.5 is before replacing a higher percentage of (indiscernible) rate debt with fixed?

Yes, although --.

Probably a wash in terms of your preferred savings and terming out some debt.

So the overall goal though in terms of your development activity and investment activity, it sounds like a couple of hundred million dollars a year.

Is there a goal to move leverage ratios or fixed charge ratios up a little higher for either unsecured debt positions or flexibility in terms of assets funding?

Again, right now, we're just focused on fixed charge.

I guess if your question is, are we trying to position the Company in the next 12 to 24 months to be rated debt, that is not a current goal of the Company.

Okay, thank you.

(Operator Instructions).

Rich Anderson, Harris Nesbitt.

I got on the call a little bit late, but I just wanted to understand something about the same store NOI growth rate of 9%, improving from a negative 6.1% last quarter.

Did you address that, and the volatility quarter over quarter what your -- what attributed to that and what you expect for the near-term future?

In this current quarter, the (indiscernible) beneficiary was two things.

One, in northern Virginia, the Booz Allen Hamilton lease was in-place last year, but we were not collecting cash rent.

The cash rent began January 1 of '05, and so we were picking up about 1.5 million hours (ph) a quarter of cash rent that we weren't in the second and third quarters and fourth quarters of '05.

And then in the BWI corridor, we just had improved occupancy helping the calls (ph).

One other comment from the press release was, you achieved almost all of your goals for 2005.

Which ones haven't you achieved?

I think, Rich, we are still -- we're not quite at the 200 million, we're at 185 acquisitions.

We said we wanted to do 200 million.

So we feel very comfortable, as I said, in the call several times that we're going to now exceed that, but we sought to finish that out.

I think the second thing would be, we did accomplish the two cities and the expansion and we got that very comfortably underway and feel very, very good about that.

I would like to see the remaining few development projects solidify some leases, particularly Washington Tech, but we're comfortable that we'll accomplish.

So we're very, very far down the road on finishing out a very strong year.

Will 2006 bring new markets to the mix?

We said on the last call we were studying 10 markets; that's still true.

We're not going to expand to all 10, we're still in that the evaluation process and not sure at this time.

At the most, we would do two markets.

My guess is it might be more like 18 months instead of next year.

Last question is, the increasing land bank, is that inherently dilutive in the near-term?

It is.

In general the land that we have required over the last half of the year as we're not capitalizing interest on, so we are expensing interest, and yes, we're carrying it to our P&L.

Okay, thank you.

Chris Haley, Wachovia.

The 100 million of asset sales next year, that is a gross value to you guys?

Is that correct?

Yes.

And what would -- you how would you ascribe -- before you sell the Baltimore area asset, what would you ascribe within a bigger than a bread box, smaller than a house, how would you describe the -- how would you put the value of the Jersey, the remaining Jersey and PA. assets that you target to sell?

Pennsylvania is just down UNISYS, and that's about 960,000 square feet and the NOI is approximately $10 million.

And then in New Jersey, we thought the assets were worth about $100 million and we sold 22 million, so we're somewhere around $75 million of assets.

So 75 million and then whatever the value of the UNISYS project is.

Will you retain the land, or do you think that the land is going to have to go with UNISYS?

It would go.

Okay.

So if we were just to play a rough game, we're doing $120, $140 million, let's just call it.

So you have about $200 million -- let's just use round numbers -- $200 million worth of sales left before the Maryland sales and you're going to sell $100 million, maybe $100 million the year after.

And I have $300 million worth of acquisitions, correct?

Is that a reasonable run rate going forward per year?

Yes.

Okay.

And is your funding activity expected to be the same in '06 -- I mean '06 out to -- I'm just trying to think of the long-term forces and uses planning as those -- we're extremely excited about the recycling activity.

Is this something that you hope to continue, or is this selling out of New Jersey and Pennsylvania kind of it?

I think the goal is to sell out of Pennsylvania and New Jersey and to continue to prune our existing portfolio when we think assets of maximize their value or we deem some risk out on the horizon that we don't want to have to mitigate.

Okay.

So a big variable to the forward growth rate is the ability then to access external capital.

Have you thought about that risk in terms of your acquisition activity?

In terms of our development activity, we've funded the land, and so that sort of is the equity for that asset growth.

And so all we need to do is put the debt attached to well-located, well-leased properties.

In terms of the acquisitions, the goal is to grow that by a couple hundred million dollars a year and to sell some of our existing portfolio, prune those assets that we deem appropriate and then equity would be the shortfall.

Okay, rather then equity would be the last resort I guess upon acquisitions?

Yes.

Okay.

And how would you characterize the mix of your new acquisitions between in-market versus new-market over the next two to three years.

We're probably still going to be 70% in the Greater Washington area and 30% externally.

Alright, great.

Thank you very much.

And we have no other questions at this time.

I will turn things back over to our presenters for any additional or closing comments.

Thank you for joining us today, and as always, we appreciate your participation and support.

Mary Allen and Roger and I will be available to answer any other questions you might have.

And for those of you that want to tune in next quarter, we intend to hold our fourth quarter conference call on February 16, 2006.

Thank you and have a good day everyone.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.