COPT Defense Properties (CDP) 2005 Q4 法說會逐字稿

Welcome to the Corporate Office Properties Trust fourth quarter and year end 2005 earnings conference call.

As a reminder, today's call is being recorded. (Operator Instructions).

At this time, I will turn the call over to Ms. Mary Ellen Fowler, 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 at 410-992-7324, or you can access both documents from the investor relations section of our web site at www.copt.com.

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

Also under the investor relations section of our web site, you will find a reconciliation of our first quarter and annual 2006 guidance.

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

In just a minute, they will review the results of the fourth quarter and 12 months of 2005 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 the 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.

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.

Thank you, Mary Ellen, good afternoon everyone.

I apologize for my voice, I have a touch of laryngitis, I hope I get through it.

We are pleased to announce that for 2005, we met our FFO goal at the high end of our guidance, reaching $1.86 per share.

For 2005, we generated a 25% total return for our shareholders and a 365% return for five years.

We have been the top performing public office REIT in terms of shareholder return for the past 3-, 5- and 7-year time frames.

We believe these consistently high returns result from our strong earnings growth, our strategic relationships with growing tenants and our locations within excellent markets that have exhibited job growth over the past several years.

Looking at our results for the year, we closed on $364 million in acquisitions, substantially exceeding our goal of $200 million.

We entered two new expansion markets based on tenant demand and we more than doubled our development capacity through ground control in both our existing submarkets in the Greater Washington D.C. region and new expansion markets.

During the year, we made substantial progress on our strategy to dispose of assets in noncore markets, generating close to $100 million through sales in both Harrisburg and New Jersey.

Subsequent to year end, we have closed on another sale, which Roger will cover in a minute.

We plan to continue disposing of noncore assets throughout 2006 and 2007.

Looking at our development pipeline, we continue to see strong demand in the B/W Corridor, particularly in the National Business Park.

Overall during 2005, we had about 1 million square feet under construction and expect to continue at that level throughout 2006.

Given the competitive acquisition environment and our unwillingness to overpay for properties, we have looked for new growth drivers for our company, and these growth drivers fall primarily into four categories.

First, we implemented a tenant-driven expansion strategy during 2005, entering two new cities -- San Antonio and Colorado Springs -- where our key tenants need to locate.

We believe both cities will provide good growth opportunities for us over the next several years.

Second, we have formed several joint ventures, one to develop new office space in our existing core market and the second to acquire warehouse properties located within our core markets that will be redeveloped into office space.

We believe the redevelopment program will provide office space to our existing and new tenants at a price point below the level of our existing class A space and provide the opportunity to expand our tenant relationships.

We expect the first tranche will be an investment of about $300 million.

Third is the addition of ground and strategic locations, thereby expanding our land inventory.

Our strategy that we have followed over the past several years of acquiring land while market prices were depressed has positioned the Company with land control at much lower costs than where our competitors are purchasing land today, which should give us a competitive advantage when we develop in the future.

Lastly, we are also evaluating additional growth opportunities similar to our new expansion cities that are based on the needs of our core tenants.

We are looking at the possibility of partnering with some of our defense tenants to provide design build comprehensive real estate solutions needed by several of these existing tenants.

These opportunities may be located outside of our core market and opportunistically even outside our expansion markets if they are design-build in nature.

We believe this could be an expansion of our existing business model where we can further utilize the core competencies that we have developed.

The relationships that we have developed, coupled with our design, construction and management expertise will provide opportunities that we believe will add a new avenue of growth for our company.

These new growth drivers, coupled with our strong development pipeline and acquisition successes, should position us for continued double-digit FFO growth over the next few years.

As we look at 2006 we are focused on the following goals.

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

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

Third, taking advantage of the strong sales market to profitably dispose of non-strategic assets and recycle the proceeds in the core assets, and fourth, continuing to strengthen our management team to support our growth.

In summary, we are pleased with our results for the year 2005 and look forward to continuing the growth and meeting our objectives for 2006.

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

Thanks, Rand.

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

Turning to our results, FFO for 2005 increased 6.9% on a diluted per share basis from $1.74 to $1.86.

FFO for the quarter totaled $24 million, or $0.48 per share, a 6.7% increase in per share FFO over the fourth quarter 2004.

FFO for 2004 was positively impacted by unusually high lease termination fees, $10.1 million, versus the $4.6 million we realized during 2005.

For 2006, we expect lease term fees to be in the $2 to $3 million range.

Looking at our GAAP earnings for the fourth quarter, the Company recorded $0.16 per share, slightly above the $0.15 per share for the fourth quarter of 2004.

For the year, the Company recorded earnings of $0.63 per share as compared to $0.54 per share for the year ended 2004. 2004 earnings were impacted by a $1.8 million charge related to the original issuance cost for our 10% series B shares redeemed during the year.

On the expensive side, our 2005 G&A has been impacted by higher costs associated with increased restricted stock expenses and higher payroll due to new employees hired during 2005 to support our growth.

After adjusting for capital expenditures, straight-lining of rents and FAS 141 revenue, our adjusting funds from operations for the fourth quarter totaled $15.9 million as compared to AFFO of $13.2 million for the fourth quarter 2004, representing an increase of 21%.

AFFO for the year totaled $63.4 million as compared to $51.4 million in 2004.

This represents a 23% increase in total AFFO.

We raised our dividend 9.8% during September, which we believe was one of the largest increases in the office sector.

This continues our record of increasing dividend 70% over the last seven years.

For the fourth quarter and for the year, the Company distributed $0.28 and $1.07 per share, respectively, resulting in an FFO payout ratio of 57% for the quarter and 56.3% for the year.

Our AFFO payout ratios were 85.3% for the fourth quarter of 2005 and 78.8% for the year.

Looking at our same office results for fourth quarter 2005, for the 115 properties, or 77% of the total square footage owned, same office cash NOI increased by 10%.

On a GAAP basis, the increase was 5.8%, both significantly higher than a year ago.

Turning to the balance sheet, at December 31 the Company had a total market cap of approximately $3.2 billion with $1.3 billion of debt outstanding, resulting in a debt to market cap of 41.5%.

During the year, we raised $75.3 million in common equity and locked in $212 million in long-term fixed rate financing at an average rate of 5.5%.

For 2006, we expect to fund our construction and acquisitions through a combination of new construction debt, advances under our existing revolver and proceeds from the sales of non-core assets.

At year end, 68% of our debt was fixed.

We will continue our practice of fixing additional debt during 2006 through secured fixed rate financing on stabilized assets.

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

Our weighted average cost to that for the fourth quarter was 5.9%.

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

We expect to close on construction financing for the next two buildings in Phase II at NBP as well as the range for construction financing for the joint venture redevelopment projects, and later this year, financing for the first building Arundel Preserve.

In terms of coverage ratios for the fourth quarter, the Company's EBITDA to interest expense was 2.8 times, our fixed charge coverage remained a consistent 2.3 times.

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

Thanks, Mary Allen, and good afternoon everyone.

Turning to our guidance for a moment, our initial FFO guidance for 2006 was $1.97 to $2.05 per diluted share, which we are now modifying slightly to $1.98 to $2.05 per share.

As we mentioned on our last call, the variability in our guidance is impacted by the competitive investment environment and is largely a result of the volume and timing of acquisitions and dispositions of non-core assets.

Our guidance excludes charges we would incur from the write-off of issuance costs on our 10.25% Series E and our 9-7/8% Series F preferred shares.

In terms of our 2006 first-quarter guidance, we expect FFO to be in the $0.48 to $0.50 range, which would represent 6.7 to 11.1% growth above the first quarter of 2005.

Turning to our wholly-owned portfolio, we had 165 suburban office properties in operation totaling 13.7 million square feet at year end.

We ended the year at 94% occupied and 95.4% leased.

As you may recall, at the end of the year, we acquired a 21-building portfolio in our core market that was 87% occupied.

Without this acquisition, our wholly-owned portfolio would have been 94.9% occupied and 96.1% leased at year end.

I will discuss this acquisition more in a few moments.

Our largest leasing challenge for 2005 was the 170,000 square foot vacancy at our Princeton Technology building in New Jersey.

We re-leased this building in September of last year, a little earlier than we had anticipated.

Combining both the wholly-owned and joint venture portfolio, we had a total of 183 operating properties and close to 14.6 million square feet that was 93.4% occupied and 94.8% leased at year end.

In terms of leasing, we had an active year, signing leases for 2.1 million square feet of space.

This total includes 1.5 million square feet of renewed and retenanted space with 188,000 square feet in renewed space, equating to a 67% annual rate for the year.

Included in the 2.1 million is 380,000 square feet in development leasing.

For the year 2005, renewed and retenanted space, total rent decreased 1.5% on a straight-line basis.

Increases in straight-line rents for the Maryland portfolio were more than offset by decreases primarily from the northern Virginia, New Jersey and Harrisburg portfolio.

On a cash basis, total rent decreased 8.6%, again primarily due to the decreases in the same three portfolios.

The decreases related to two leases.

The first was the 170,000 square feet at Princeton Technology in New Jersey where we realized a lower going-in lease rate in exchange for immediate occupancy and no TI.

The second lease was a blend-and-extend of a lease at Pinnacle Towers and Tyson's Corner, a transaction contemplated at the time we purchased the building.

Excluding these two leases, our GAAP rent increased 4.7% and our cash rent decreased 1.7% for the year.

For renewed and retenanted space, our average square foot capital cost was $8.23.

For the fourth quarter of 2005, we renewed 51% of the 303,000 square feet that expired.

For renewed and retenanted space, total rent on a GAAP basis increased about 7.5% and on a cash basis, was flat.

Our average square foot capital cost for renewed and retenanted space for the quarter was $10.54.

Looking forward to 2006, about 1.2 million square feet equating to 9.3% of our revenue is scheduled to expire.

The average total rent for this space is $20.45 per square foot, which remains on average approximately 10% below market.

The majority of the leases expiring are in the bottom of Washington Carter.

We have five leases greater than 50,000 square feet, one of which will not renew and we believe the other four will renew.

Looking specifically at each of our submarkets, first within the entire Baltimore Washington Corridor submarket, which totals 21.2 million square feet, total office vacancy direct and subleased stands at 11% for fourth quarter 2005 versus 9.5% a year earlier.

The slight uptick is due primarily to the 1.4 million square feet of construction deliveries last year that were on average 63% leased.

Our wholly-owned portfolio representing 28% of this market was 96% occupied at year end.

Within the BWI submarket and Anne Arundel County as of December 31, market vacancy for Class A space was 7.4%.

About 474,000 square feet of Class A space was absorbed over the past 12 months.

Demand is driven almost solely by the defense industry.

During 2005, 743,000 square feet was delivered that was 80% leased.

Our properties located in the BWI submarket are 97% occupied.

Howard County in the Baltimore Washington Carter had a vacancy rate including sublease space of 16.1% at the end of 2005.

We are starting to see new development in Howard County with 685,000 square feet delivered in 2005 that was 44% leased.

Our Howard County portfolio, consisting of 1.9 million square feet, is currently 95% occupied.

Overall for northern Virginia, the vacancy rate remains at 10.3% at year end 2005.

Absorption in northern Virginia totaled 6 million square feet, compared to 6.3 million square feet for 2004.

Sublease space dropped to 2.4 million square feet, which is 1.4% of the total northern Virginia market.

Within our submarkets in northern Virginia -- Herndon, Tyson's Corner and Bell South -- the total office vacancy rate, including subleased space was 11%.

It was 2.2 million square feet of positive net absorption for these three submarkets during the year.

Our portfolio consisting of 2.2 million square feet is currently 96% occupied.

Turning to acquisitions for the year, through our wholly-owned portfolio we acquired 38 suburban office properties, encompassing 25 million square feet, gives us 85% occupied on average at acquisition for an aggregate investment of $284 million, easily surpassing our goal of acquiring $200 million.

Although the acquisition environment remains very competitive, we were able to accomplish the following.

First, we entered two new markets -- San Antonio, Texas and Colorado Springs, Colorado.

Second, we entered two new submarkets in our core region -- Frederick and Rockville, Maryland -- both properties for sale in partial lease-back opportunities.

Third, we expanded our ownership position in Howard County by purchasing seven buildings.

And finally, fourth, we expanded our product play by forming a joint venture to redevelop two warehouse properties into office space.

Our largest acquisition was the purchase of a $124 million portfolio located in Hunt Valley in Rutherford, Maryland, consisting of 21 buildings and 1.1 million square feet.

This portfolio is located near several of our buildings in our existing portfolio.

We view this acquisition as a good fit as we were able to purchase at a low cost of $112 per square foot.

We believe we can improve from the 84% occupancy of purchase, make the necessary capital improvements and bring a strong property management team to the portfolio.

This acquisition was immediately accretive and we expect to generate a double-digit stabilized return.

With regard to the two submarkets, the Rutherford properties are located near the Social Security Administration Headquarters, as well as the Centers for Medicare and Medicaid.

The hunt Valley market is a supply constrained infill market with good amenities, good access to highways and adjacency to executive housing.

Our goal is to execute a value-add opportunity, and then we expect to selectively dispose of some of these assets over time.

With regard to the dispositions, we sold $95.5 million of assets during the year.

This included our sale of Harrisburg into a joint venture and the sale of several New Jersey properties.

Last week, we closed on the sale of two buildings totaling 142,000 square feet located in Laurel, Maryland, for $17 million that were not core to our strategy.

We hope to make continued progress on sales of assets in New Jersey and Pennsylvania over the next two years.

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

Thanks, Roger.

Turning to development, during 2005, we completed five properties totaling 764,000 square feet that are 100% leased at year end.

Four of the properties are leased to full-building users.

Subsequent to year end, we completed 304 NBP and began collecting rent as of January 1, 2006.

In terms of development activity at year end, we had nine buildings under construction for a total of 1.2 million square feet at a cost of $220 million that were 42% pre-leased.

Five of these buildings are located in NBP, of which two have full-building leases and a third is 60% leased.

We still expect to achieve on average over an 11% unleveraged cash yield on our development for the year.

In addition, at year end we have under development 722,000 square feet at a projected total cost of $135 million.

These projects are in the design and permitting phase and, therefore, we do not yet have any leasing.

With regard to our land inventory, we more than doubled our capacity, increasing from 218 acres and a potential 3.5 million square feet at year end 2004 to owning or controlling 532 acres, permitting 7.7 million square feet of development capacity at year end 2005.

Of this amount, 199 acres and 2.8 million square feet of capacity are owned with joint venture partners.

We have added to our land inventory through our acquisitions in San Antonio where today we own 58 acres that can support an additional 725,000 square feet adjacent to our 470,000 square foot Military Drive property.

Our tenant has announced the potential for a major expansion at this location.

With the ground control we have acquired this past year, we believe we are well positioned to meet demand that will come from defense contractors that will need to serve our tenant.

We expect this demand to materialize over the next four years.

Through our acquisitions in Colorado Springs, we have quickly added to our land control, owning ground to support 560,000 square feet at Patriot Park.

We believe that over time this location will prove to be a very significant location for us as it is at the entrance to Peterson Air Force Base, which was ranked third in strategic value out of all 334 bases ranked in the recent [BRAC] announcement.

In addition, the 935,000 square feet we control through a joint venture at the InterQuest Park in the northern I-25 Colorado Springs corridor will be important as it is the next growth area appealing to nondefense tenants, such as insurance, finance and technology companies.

We are working through development plans for InterQuest and hope to start a building there later this year.

The last large ground position that we added during 2005 is our joint venture at Arundel Preserve where we are poised to build up to 1.8 million square feet as our next growth opportunity in close proximity to Ft. Meade.

This site is near the very successful Arundel Mills Mall and it is located between our National Business Park and our Airport Square portfolio at BWI.

At the present time, the road is being cut in and we expect to start on the first building later this year.

Along with our land control added during 2005, we have been in negotiations but not yet signed on several joint ventures that, along with Ft. Richey, will add an additional 4 million square feet of capacity, thereby increasing our development capacity to almost 12 million square feet.

In summary, we are well positioned both within our core markets and within our new expansion markets.

We expect to post FFO growth over the next few years at the upper end of the office sector.

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

(Operator Instructions).

Chris Haley, Wachovia Securities.

Hi, guys, it's Gregg Korondi.

Couple of quick questions.

You mentioned the older (indiscernible) assets being accretive in double-digit terms after the reposition and leased up.

Could you comment a little bit on where the initial yields were and how that translates into Q1 guidance in terms of accretion?

We have an agreement with General (technical difficulty) to quote the filling-in yield or the selling yield until we're going to honor that.

But needless to say, the acquisition will be accretive in the first quarter and beyond, even without some additional lease-up.

But with the leasing in place at in the one case 84% Hunt Valley and about 90% in Rutherford, the acquisition is accretive to the Company.

So with Q4 ending at $0.58, where were the offsets for your Q1 guidance, or (indiscernible) that led to the $0.58 to $0.60 range?

A couple of things.

One, first quarter historically, we have significant snow.

Secondly, we did have one, we have a couple of other sales that are in the pipeline and we don't anticipate making any acquisitions in the first quarter.

Have you guys changed your sales or acquisition assumptions?

I think you're $300 million in acquisitions, 100 million in (MULTIPLE SPEAKERS)?

That's correct.

The acquisitions would be back-end loaded for the last three quarters and the sales activity will probably be more accelerated than ratable over the year.

But still, maybe it would help me if you could walk us through a cash sources and uses for '06 expectations.

The number one priority in terms of investment for the Company in 2006 is to complete its construction and development pipeline.

And as Mary Ellen mentioned, we are positioned with construction loans on all of our assets so that we can fund those with construction debt.

The number two priority is to take out the Series E and Series F preferreds on July 15 and October 15; that totals $64 million.

And so if we made no acquisitions for the year, we could fund that with debt.

The third priority is to continue, as Rand said, to pursue build-to-suit opportunities with our tenants which have more of a 2007 investment horizon.

And then finally, acquisitions where we said we would do $300 million.

But from an investment priority, that is our fourth priority, but one that we are working in earnest to do.

So (indiscernible) the simple math, if we -- we will need $64 million to take out the preferreds, and we will need -- the development is funded at this point, and so acquisitions would be funded either from debt or asset sales for the rest of the year.

So no assumption of additional equity?

We're going to see where the market is.

A lot of it depends on the timing of acquisitions and the timing of sales.

But again, our priorities are to take out those preferreds on time because that is the most accretive investment we can make this year.

I yield the floor.

[David Vick], Stifel Nicolaus.

Hi Randy, Mary Ellen, Roger;

John Guinee here.

Can you talk through your projections on job growth, vis-a-vis the BRAC initiatives, particularly at Fort Mead and Aberdeen Proving Grounds, and where you are specifically with sites contiguous to Aberdeen Proving Grounds?

In terms of job growth, we read what you read, which is that over long periods of time, there will be maybe 5,000 jobs on site at Aberdeen and 10 or 15 in total with contractor follow-on.

And at Fort Mead, the numbers range from 10 to 15 to 20,000 jobs over time.

We're obviously well positioned at Fort Mead.

We're in the process of expanding our land development capability, our building capabilities at the National Business Park by getting more FAR approved, which is the 100% site in Fort Mead.

But we also as we mentioned on call have Arundel Preserve teed up, which has 1.2 million square feet, and we are aggressively pursuing a few other sites nearby to Fort Mead.

With respect to Aberdeen, we have a lot of sites in mind, but nothing that is firmed up at this point.

But we are trying to pursue some opportunities in that market.

Second and last question.

When you redevelop industrial into office, the end is a result is a high TI cost relative to your total development cost.

As we all know, TIs depreciate over time.

Is this a build-to-sell program or a build-to-hold program?

I think it's both.

I think if there are markets, core properties and have core tenants, we will retain those assets.

If the buildings are not quite as core or don't have tenants that we have long-term relationships with, it could be a build-to-sell program.

Great, thank you.

Jessica Tully, Credit Suisse First Boston.

Good afternoon.

I was wondering if you could clarify something, I might have misunderstood it.

But when you were talking about Colorado Springs, I think you mentioned that you were going to -- or you had acquired some land or were ready to soon start construction on buildings in an area that was not defense-related, maybe that had a lot of insurance companies or other people in Colorado Springs.

And I just wondered why going into a relatively new market, you are expanding away from what your core tenant base is.

I think part of the strategy just as we have done in our other core markets, like Howard County and Arundel County and so on, is once we are there, Jessica, we do start to look at opportunities where we may have other tenants who have a desire to be in those locations.

Some may be defense, but in the case of this site, it's a joint venture with a local landowner and developer and he has a major retail presence starting across the highway, and we think it's a great site.

There are a number of key tenants around the site, including Intel, Ford Motor Company, Lockheed Martin and so on.

We did buy two buildings, now a third building, so we do own three buildings immediately adjacent to that site.

So we are starting to create a critical mass.

And interestingly, there's very little space available in that corner of the marketplace.

So we think we will be well positioned.

And if you look at the Company, 50% of our revenue is intelligence and defense, we clearly have another 50% that is nondefense, and so it's perfectly compatible with our overall strategy.

Thank you.

And then going on with that kind of sentiment, in terms of acquisitions, you did last year about $364 million.

What percentage roughly would you say would be defense and intelligence related in terms of the tenants in the building that you purchased?

Approximately one-third.

One-third, okay.

And then Roger, if you could give me just some comments about G&A, I think last year, G&A was up about 17%, and I wondered what you were thinking for this year?

We said on our last call that we thought G&A would go up by $1.7 million from '05 calendar year to '06 calendar year, and that is a reflection of just normal growth, and then secondly the fact that we need to increase the number of people to support our growth.

Thank you.

(Operator Instructions).

Sri Nagarajan, KeyBanc.

Thank you.

Quick question on your disposition in exiting noncore markets.

I remember that you mentioned last quarter that you're talking about a two- to three-year time frame in exiting core markets (indiscernible) non-core markets [or other].

Are you seeing any interest in an acceleration in this plan at all, or are you still assuming a two- to three-year time period?

It's probably, when we met with your and talked about that, it was -- 2005 was included as part of the three-year.

So we're really looking at it as two years remaining, '06, '07, some potential for acceleration, but we are proceeding cautiously.

You commented briefly on the land inventory that you have of about 200 acres, mostly, and again in Colorado Springs and San Antonio.

I also remember that you talked about other markets potentially, entering into other markets.

Could you care to give us some color on what other markets you're looking at right now?

We had said on previous calls that we're looking at 10 other markets that would have a similar government demand driver scenario as Colorado Springs and San Antonio.

We're not in a position to announce those markets.

We don't really expect there to be any momentum this year in any of those cities announced this year.

We do think that the other part of the strategy that I talked about doing some design builds in other locations would probably be the events that you would see this year.

One last question, just a bookkeeping question.

Can you just remind us, in terms of the same-store NOI growth and event rollups for 2006 that you're assuming in your guidance?

What we said is that we thought the rents would increase 7 to 10% on average, and that in terms of occupancy that our occupancy on average would increase by 0.5%

Thank you so much.

Chris Haley, Wachovia Securities.

I just wanted to follow up.

Q4, your leasing costs on a per square foot lease year basis kind of ramped up a little bit more than I (indiscernible) above the four-year average.

Can you kind of touch on what was driving that and what are your expectations going forward?

I think on balance, costs are increasing for tenants improvements and we've factored that into our business model.

So I think you will see some inflation in our cost, simply because costs are going up pretty significantly.

On the other hand, we do believe we're in balance from a supply and demand standpoint.

So the tenants don't have it over us in terms of their ability to push TI too much.

So I do think you will see some upward movement, but not overly significant.

Now is that cost increase driven by market demand profile or --?

It's the cost of the materials and labor have gone up significantly for tenant improvements.

And you guys aren't -- how much of that are you able to pass onto tenants?

That's a reflection of how much we can increase rental rates.

That is how we would pass it on.

Gotcha, thanks.

(Operator Instructions).

Chris Lucas, Robert W. Baird.

A couple of housekeeping questions.

On the retention rate for the quarter, it was somewhat lower than the year trend.

Is there anything in that, or is it just sort of a lease-by-lease issue?

It was just lease by lease.

If you also look, we didn't have a lot of turnover in the fourth quarter relative to the first three quarters.

So, it was a low quarter in terms of volume and it was just an anomaly in terms of the tenants.

But, we will state the obvious, that the occupancy held and actually improved if you adjust for the GTP acquisition.

Okay.

And then on the -- Rand, you had mentioned that there are some things that you're looking at right now in terms of negotiations that would add up to 4 million square feet of additional developable land.

Included in that is the 1.7 million feet at Port Richie?

Yes.

And are those projects that you're looking at, are they in the Baltimore-Washington corridor, or do they include stuff outside of D.C.?

No, they're all in the B/W quarter.

Then, can you just give us an update on where you are with Fort Richie?

Sure.

Three lawsuits are working their way through the court system.

The first lawsuit is, the judge has ruled against the [Lamaze] of America, asked that the plan be resubmitted to HUD for approval; that was accomplished late last year.

The Army as a major item recently ruled on our record of environmental standing that they would not need to do another environmental assessment.

And so it's literally in the judge's lap now to make a final determination to eliminate the injunction.

The second one also, the judge ruled against Lamaze of America.

They appealed it and we're in the appeal process going through that.

And the third one is on an accelerated basis that the judge has put us on and responding back and forth.

And that will come to hearing we think early in the second quarter.

So we are hopeful, and we said that last year, but we are hopeful that we can get close this year and get on with it.

I'm assuming, Roger, that Fort Richie is not in your guidance numbers at all?

That is correct.

And then in terms of just flavor for the market, can you talk a little bit about, well, first off on the development yields, with rising costs, are you -- as fast as they have risen over the last couple of years, how do you see your development yields compared to a year ago?

I think at the National Business Park, we've been able to maintain our margins because we've been able to raise rents as fast as costs have gone up.

In other locations, we'll probably have a little bit of yield compression by about 0.5% related to cost acceleration that cannot be covered by rental rate growth.

So in the NBP market going out as far as your 2008 development projects, you would continue to think that 11% plus yields is okay?

Outside of that, you would suggest a lower number then?

Correct.

If you look at it on a blended, we're still thinking we'd end up around 11.

Across the board?

Right.

Okay.

And then, just in terms of leasing activity in your markets, if you could just kind of walk through (technical difficulty)?

I think demand is pretty steady.

We obviously had a thrust of government and government contractors who needed large box of space in the last couple of years; that demand seems to be filled.

So what we're seeing is consistent demand, but it's not on the same scale in terms of square footage per tenant that we saw in the past couple of years.

So we're cautiously optimistic that things are steady in the greater Washington market and that BRAC will kick in, but several years out.

You will note in the Northern Virginia building, we did not have any leasing in [Wash Tech II] at year-end, but in talking to [Derek Bogner], our head of asset management who runs the division there, we have about enough activity to fill the building two times over.

And it has just been an issue of who signs first and the overall strategy of where within the building we put people.

So we are very comfortable with that.

We will [lease up] this year.

Okay, that's it for me.

Thank you.

We have no further questions in our queue at this time.

I will turn the call back over to Rand Griffin for any additional or closing remarks.

Thank you for joining us today and sharing the results.

As always, we appreciate your participation and support.

Roger, Mary Ellen and I are available to answer any other questions you might have.

We will be holding our first quarter conference call on Thursday, April 27.

And thank you and have a good everyone.

And that does conclude our conference call for today.

We do thank you for your participation.