COPT Defense Properties (CDP) 2006 Q4 法說會逐字稿

(technical difficulty) measures referenced throughout this call.

Also under the Investor Relations section of our Web site, you'll find a reconciliation of our annual 2007 guidance.

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

In just a minute, they will review the results of the fourth quarter and the 12 months of 2006.

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 or projections are based on 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 release space under favorable terms, regulatory changes, changes in the economy, the successful or 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, and good afternoon, everyone.

2006 was a year of both transition and significant accomplishments for COPT in many ways that we will detail today.

Our 2006 FFO per share was on the low end of the guidance, reaching $1.99 per share prior to the write-off of $0.08 per share in non-cash charges related to original issuance costs for our Series E and Series F preferred shares that we redeemed in 2006.

With regard to FFO growth, prior to the preferred share issuance cost write-off, we increased FFO per diluted share by 7% over 2005 and project increasing 2007 FFO per diluted share in the 9.5 to 14% range.

For 2006, we generated a 46% total return for shareholders.

We've been one of the top-performing public REITs in terms of shareholder return for the past five years with a 426% total shareholder return.

We believe we are well-positioned to continue this performance, due to strong earnings growth, our strategic relationships with growing tenants, and our locations within excellent markets that have exhibited significant and consistent job growth over the past ten years.

We've grown significantly over the past year, reaching $4.3 billion in total market cap at the end of 2006.

With our recent $362 million acquisition of the Nottingham office portfolio several weeks ago, we expect to be close to $5 billion by the end of 2007.

Looking at our acquisitions for the year, we've purchased $129 million of operating properties, adding 1 million square feet to our portfolio during 2006.

We expanded within our Colorado Springs market through both acquisition and development, increasing the portfolio to 767,000 square feet owned with 135,000 square feet under construction or redevelopment and with land to accommodate over 2.6 million square feet of future development.

All of this growth has occurred since our entry into the market in June 2005.

Also during 2006, we closed on the acquisition of 500 of the 591-acre former Fort Ritchie Army Base, an opportunity that we have pursued for over two years.

We plan to redevelop the site into a mix of office, residential and service uses that will in turn drive tenant demand and create job growth.

We expect to work with the community to restore the economic engine that was lost when the base was closed during the 1995 BRAC.

We ended 2006 with close to 16 million square feet in our portfolio and land control to support another 12 million square feet of development capacity, including our joint venture ownership.

With the recent Nottingham portfolio acquisition, we now own over 18 million square feet of office space and control 14 million square feet of development capacity.

During the year, we made progress on our strategy to dispose of assets in noncore markets, selling eight buildings totaling 689,000 square feet and generating $87.4 million.

We accomplished sales in the noncore New Jersey market, several noncore assets in the BWI market, and started the sales of noncore properties purchased last year from General Growth Properties.

Looking at our development pipeline, we continue to see strong demand in the Baltimore-Washington corridor, particularly at the National Business Park, as well as in our tenant-driven locations.

We executed on the first opportunity to partner with one of our tenants that we outlined one year ago.

We are now under construction on two buildings totaling $86 million that are leased to Northrop Grumman.

These buildings will house their Information Technology sector that will work with the Commonwealth of Virginia to centralize technology services for the state.

We expect to see additional opportunities to partner with this tenant in the future.

As we look at 2007, we have the following challenges ahead of us.

First is positioning the Company to capture the contractor portion of the 60,000 net new jobs coming into Maryland as a result of the BRAC.

Second is executing leases for our construction and development pipeline.

Third is focusing on costs control of our property-level operating expenses through improving cost efficiencies as a result of our increased size in certain markets; and fourth, bringing our Baltimore County portfolio, which is currently 83% occupied, up to our usual standard of 94% over the next two years.

In summary, we're comfortable with our results with your 2006, and we look forward to continuing our active development pipeline and achieving double-digit FFO growth for 2007.

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

Thanks, Rand.

At year-end, our wholly-owned portfolio totaled 170 suburban office properties with 15 million square feet in operation.

We ended the year at 92.8% occupied and 95.5% leased.

The slight decrease in occupancy resulted from placing our 223,000 square foot Washington Tech Park II recently constructed property into service in the fourth quarter.

That was 100% leased and will be fully occupied in early 2007.

The leased but unoccupied space in this building is 146,000 square feet, or 1% of our operational square footage.

In terms of our largest tenants, government and defense now totals 54% of our revenue with the government increasing to 16.3% of revenues.

We continue to expand our relationships with existing tenants such as Northrop Grumman with two development leases this year for a total of 296,000 square feet, as well as new leases with tenants such as SI International.

With respect to leasing, we had an active year, signing leases for 2.9 million square feet of space.

This total includes 1.8 million square feet of renewed and retenanted space, and 922,000 square feet of development leasing.

We had a total of 2 million square feet expire, of which we've renewed 1.1 million square feet, equating to a 55.4% renewal rate for the year.

We include, in our non-renewal square footage, leases that terminate early, even if we have an immediate tenant to backfill the space.

For example, in the fourth quarter, we included the VeriSign early termination of 100,000 square feet at Dulles Tower as a nonrenewal even though we had signed Booz-Allen to retenant the space.

For the quarter, we had a total of 172,000 square feet that did not renew, but was immediately retenanted.

With regard to renewed and retenanted space for the year, total rent increased 7.6% on a straight line basis.

On a cash basis, total rent increased 0.5%.

For renewed and retenanted space, our average per-square-foot capital cost was a low $11.04, which has been consistent over the past three years.

For the fourth quarter of 2006, we renewed 181,000 square feet or 34.3% of expiring space.

Fourth-quarter renewals were impacted by the VeriSign termination I mentioned a moment ago.

For renewed and retenanted space of 291,000 square feet, total rent on a GAAP basis increased 1%, and on a cash basis decreased 4.6%.

Our average square foot capital cost for renewed and retenanted space for the quarter was $4.78.

Looking forward to 2007, about 1 (technical difficulty) million square feet equating to 12.4% of our revenue is scheduled to expire.

The average total rent for this space is $21.04 per square foot, which remains (technical difficulty) to an average approximately 10% below market, excluding the Nottingham portfolio.

We have 11 leases that are approximately 50,000 square feet or greater expiring, and we expect 9 of those leases to renew.

Turning now to our markets, first within the entire Baltimore-Washington corridor submarket, which totals 19.5 million square feet, total office vacancy, direct and subleased, stands at 9.4% for the fourth quarter of 2006 versus 11.7% a year earlier.

Our wholly-owned portfolio representing 35% of this market was 96% occupied at year-end.

Within the BWI submarket in Anne Arundel County, as of December 31, market vacancy for Class A space was 7.5%.

About 456,000 square feet of Class A space was absorbed over the past 12 months.

Demand is driven almost solely by the defense industry.

During 2006, 219,000 square feet was delivered.

Our properties located in the BWI submarket are 96% occupied.

Howard County, in the Baltimore-Washington corridor, had a vacancy rate, including sublease space, of 11.3% at the end of 2006.

We are starting to see new development in Howard County with 685,000 square feet delivered in 2005, 534,000 square feet delivered in 2006, and 612,000 square feet under construction.

Our Howard County portfolio, consisting of 2.6 million square feet, is currently 96% occupied.

Overall, for Northern Virginia, the vacancy rate remains steady at 10.3% at year-end, compared to year-end 2005.

Absorption in Northern Virginia totaled 4.6 million square feet, compared to 6 million square feet for 2005.

Within our submarkets in Northern Virginia of Herndon, Tyson's Corner and Dulles South, the total office vacancy rate, including subleased space, was 10.6%.

There was 1.2 million square feet of positive net absorption for these three submarkets during 2006, down from 2.2 million square feet for 2005.

Our portfolio, consisting of 2.5 million square feet, is currently 99% leased.

With regard to acquisitions for the year for our wholly-owned portfolio, we acquired seven suburban office properties, encompassing 1 million square feet, for an aggregate investment of $129 million.

Although we did not achieve our 2006 goal of $300 million by year-end, early in 2007, we did close on the $362 million Nottingham office portfolio, adding 2.4 million square feet of office space and a minimum of 2 million square feet of development capacity to our portfolio.

With this acquisition, we were able to immediately become the largest owner in Baltimore County and in the high-growth submarket of White Marsh, as well as add 440,000 square feet to our Columbia portfolio.

We paid for this acquisition through a combination of assumed debt, cash, and the issuance of common and preferred shares.

The Nottingham acquisition was very strategic for our company, marking the first opportunity we've had to merge an existing company and operating platform into our company.

We look forward to the challenge of creating more value in the Nottingham portfolio through aggressive leasing efforts as well as additional development of entitled land that we acquire.

With regard to our strategy for 2007, we will be concentrating on improving our same-office results through rent growth and controlling costs.

We will continue to selectively pursue acquisitions and will act when we find value-add opportunities.

We will position ourselves to respond to the BRAC and we will continue to evaluate other office portfolios.

With that, I will turn the call to Steve.

Thanks, Roger.

Turning to our results, based on reported FFO of $1.91 per diluted share, FFO for 2006 increased 2.7% over 2005.

Excluding the $3.9 million in non-cash charges for the write-off of issuance costs for the 10.25% Series E and the 9.875% Series F preferred shares that were redeemed, FFO was $1.99 per diluted share, equating to a 7% increase over 2005.

FFO for the fourth quarter of 2006 totaled $25 million or $0.48 per share, flat with our fourth-quarter 2005 results.

FFO for the fourth quarter was impacted by a $0.04 write-off for the Series F preferred issuance costs.

Excluding this write-off, FFO for the fourth quarter was $0.52 per diluted share or an increase of 8.3% increase per diluted share FFO over the fourth quarter of 2005.

Looking at our GAAP earnings for the fourth quarter, the Company reported earnings per diluted share of $0.08 per share, as compared to the $0.16 per diluted share for the fourth quarter of 2005.

For the year, the Company reported $0.69 of earnings per diluted shares, as compared to $0.63 per diluted share for the year ended 2005.

Included in 2006 net income is a $14.8 million gain on the sale of real estate properties--that's net of minority interest--as compared to a $3.8 million gain on the sale of real estate properties, net of minority interest, for 2005.

For the fourth quarter of 2006 and for the year 2006, net income was negatively impacted by the write-off of $0.05 and $0.09, respectively, of issuance costs related to the two series of preferred shares that we redeemed.

Our 2006 and our fourth-quarter 2006 G&A have been impacted by increased option expense in accordance with FAS 123R and also costs related to laying the groundwork to support our growth, which includes moving into our new headquarters, adding to the team, solidifying our vision and mission for the team by rolling out [eyesight], as Rand had discussed in our last quarter call, and outside professional fees that supported these initiatives.

As indicated in our previous guidance, we still estimate G&A to be about $3 million greater for 2007 than in 2006.

After adjusting for capital expenditures, the straight lining of rents and FAS 141 revenue, our adjusted funds from operation, AFFO, for the fourth quarter totaled $17.7 million, as compared to AFFO of $15.9 million for the fourth quarter of 2005.

That represents an increase of 11.3%.

AFFO for the year totaled $74.7 million as compared to $63.4 million in 2005, representing a strong increase of 17.8%.

We raised our quarterly dividend 10.7% in September from $0.28 to $0.31 per share.

However, our FFO payout ratio was 63.5% for the quarter and 60.3% for the year.

Our AFFO payout ratios were 89.9% for the quarter and for 2006, 79.9%.

Looking at our same-office results for fourth quarter 2006, for the 133 properties or 78.8% of the total square footage owned, same-office cash NOI increased by 4.6%.

The same-office results were positively impacted by an increase of $2.5 million in termination fees and negatively impacted by the retenanting of 161,000 square feet of space in our Northern Virginia portfolio, or $1 million of NOI.

The increase in term fees for the fourth quarter related to a tenant in our New Jersey portfolio.

The termination of this space will allow us to accelerate the sale of three buildings at the Princeton Technology Center to a user over the next two years.

Termination fees for the year were $5.7 million, as compared to $4.6 million in 2005.

Now, turning to the balance sheet, at December 31, the Company had a total market cap of approximately $4.3 billion with $1.5 billion of debt outstanding, resulting in a debt to market cap ratio of 34.9%.

In terms of our equity structure, we redeemed the Series E and F preferred shares for a total of $64.4 million.

We raised $82.6 million in common equity and $82.1 million through our 7.625% Series J preferred offering.

With regard to our debt, we raised $200 million through our 3.35% exchangeable note offering, and used a portion of the proceeds to repay variable-rate construction debt.

During the fourth quarter, we closed on a $146 million, ten-year loan that was fixed at 5.43%, which, coupled with the exchangeable notes, lowered our floating-rate debt to 11.7% at year-end, versus 32% just one year ago.

We expect to refinance a portion of our debt maturing during 2007, with secured fixed rate financing on stabilized assets.

Our weighted average cost of debt for the fourth quarter is 5.9%; that's the same as one year ago.

In terms of coverage ratios for the quarter, the Company's EBITDA to interest expense ratio was 2.7 times, and our fixed-charge coverage ratio was comparable to the prior year at 2.2 times.

Turning to our guidance, we have previously provided 2007 guidance of $2.18 to $2.27 per diluted share of FFO.

We currently reaffirm this guidance, which represents a healthy FFO per diluted share growth range of 9.5% to 14%.

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

Thanks, Steve.

Turning to development, during 2006, we placed into service seven buildings totaling 793,000 square feet that are 95% leased at year-end.

Three of the properties are at least full building users.

In terms of development activity at year-end, we had eight buildings under construction for a total of 831,000 square feet at a cost of $194 million that were 79.5% preleased.

Five of these buildings have full-building leases.

Our cash-on-cash unleveraged returns on development are still in the 10 to 11% range, excluding build-to-suits, making this a very accretive growth engine for the Company.

Under redevelopment are four buildings for 740,000 square feet and total cost of $89 million.

Two of these buildings are also 100% leased.

In addition, at year-end, we have underdevelopment close to 1.3 million square feet at a projected total cost of $258 million.

These projects are in the design and permitting phase.

With regard to our land inventory, we more than doubled our land control, increasing from 532 acres and 7.7 million square feet of development capacity at year-end 2005 to owning or controlling 1400 acres that can support 12.5 million square feet of development capacity at the end of 2006.

Of this total, 300 acres and 4 million square feet are owned with joint venture partners.

With the Nottingham acquisition, we've now increased our land control by an additional 187 acres and our development capacity by a minimum of an additional 2 million square feet.

During 2006, we added to our land inventory primarily in three locations, San Antonio, where reacquired ground adjacent to our existing building, at NBP, where we acquired additional land that will become an extension of National Business Park for Phase III of the Park, and over 500 acres at Fort Ritchie.

In addition to all that we have discussed, during 2006, we spent time strengthening and adding to our team.

We moved our headquarters to a new location, and we defined our core purpose and mission, vision and values statement.

All of these activities create an improved platform which positions our company for the next round of growth.

We want to thank our entire team of employees for all the effort, the creativity and perseverance that enabled COPT to create increased value for our shareholders during 2006.

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

Thank you.

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

Michael Bilerman, Citigroup.

Good afternoon.

Steve, maybe you can talk a little bit more about Q4 results.

Your guidance was 51 to 53, which it assumed lease termination fees around 700,000.

They obviously came in at 3.4.

You know, where did the negativity come in terms of that 2.5 million, relative to your estimates?

First of all, Michael, we only give guidance on an annual basis, so we didn't give specific fourth-quarter guidance, so we were at $1.99 to $2.01.

We did have more term fees, I think that we anticipated.

I think we had a little bit more G&A for the reasons that I outlined in the call.

We had costs related to the FAS 123 impact of options and some of the costs related to building the team, and professional fees and things going on with the Company.

We also, as Roger pointed out, had some vacancy temporary for lease space in our Northern Virginia portfolio that will be coming back into revenue quickly.

Roger, do you want to comment on anything else?

The other thing I would say, Michael, is we did have a few more buildings become fully operational, from the accounting standpoint in the fourth quarter, than we thought initially.

So we bore more interest expense than we thought we would.

Now, we will get the benefit of the good multiple on that when the leasing that is in place that hasn't commenced yet starts sometime in the first and second quarters of '07.

Just on that, how much, dollar-wise, came into service and what would be the sort of current yield on it today relative to what you are forecasting?

Well, we had about $76 million of development that we placed into service in the fourth quarter that we started expensing interest on.

Those properties on average were only about 60% occupied--much higher leased, closing to 90% leased but only 60% occupied.

So we bore the operating costs for those properties, plus the interest expense.

Then thinking, Steve, about G&A, you talk about it going up to about I guess about 20 million next year.

It's about 5 million a quarter, which is really where you ended off in the fourth quarter.

Without even adjusting for Nottingham in that number, what is non-run-rate in the fourth quarter that doesn't continue then?

I don't have that number in front of me.

One other number that I would add to my last answer also, was last time we gave guidance, we had actually anticipated closing the Nottingham transaction in the fourth quarter, so we didn't have the big contribution to NOI from Nottingham.

We had--we probably had some of the costs related to the moving of the headquarters and the [eyesight] and some professional fees for some of the changes that will be somewhat non-recurring in 2007, but we're going to get the full-year impact of having built maybe $800,000 there.

But we're still finishing building out the team and you're going to see the annualized effect of having made some of the improvements, which are the platform for the growth, to support Nottingham.

So that's why I wanted to give you some feeling for what I thought the total G&A expense would be for the year 2007, as we get through sort of the transition period here at the end of this year and the first quarter of next year.

But you should have a pretty good estimate of G&A for the full year of 2007.

Mike, this is Rand.

I wouldn't overplay the G&A increase related to Nottingham because the 19 people of that we brought on board, all but 2 of them really were related directly to the White Marsh. 15 of them are property management people, which are by and large covered by the properties and the fees there.

A couple were leasing people and then two are capitalized in our development area.

We will add a few people in the back of the house in terms of lease administration, and so on like that but it's a fairly minimal cost for the size of the portfolio that was bought on.

Those costs are included in my total estimate for next year.

Can you just, Roger, maybe expand a little bit on the leasing spreads going into next year?

I think your original forecast was for up 8.

Obviously, the fourth quarter was negative and so maybe you can just talk a little bit about what the trend was, what may have affected 4Q and sort of your outlook for next year.

Well, specifically, we had one lease in Colorado Springs where we had bought a building a year ago that had some TI embedded in the rent that rolled off when we renewed the tenant.

Then in the Baltimore-Washington corridor, we had two tenants, one where we leased the space at the top of the market in 2000.

It was a development property and so the rent rolled down a little bit there.

Then we had a second tenant that also have a little bit of TI in it in the corridor that rolled off.

But we've done a tenant-by-tenant analysis of the portfolio and we feel comfortable with the 8% up.

That's GAAP or cash?

That's cash.

What would the GAAP--what would that translate to on a GAAP basis?

You know, a couple more basis points higher than that.

Okay, thank you.

John Guinee, Stifel Nicolaus.

Now that you've got as much land as you do on the balance sheet, are you capitalizing or expensing the interest carry and miscellaneous taxes?

John, it's split, obviously.

If we are actively developing a property that is spending money on construction or spending heavy money on design, we are capitalizing those costs.

Likewise, if we are not, if things like right now Fort Ritchie and leased initially, then some of the Nottingham land we are not actively developing, so we are expensing the costs on those properties.

Do you have any sense as to what your expense cost on the land is as a drag to FFO?

We haven't looked at it closely in the last two quarters, but it was approximately 50% of the land, so we're talking about close to $100 million on our balance sheet of development assets that we are expensing, both from an interest standpoint and from a property tax and insurance standpoint.

Okay, only one other question--if I look at your occupancy numbers on Page 29 for the year, and then look at your retention and capital costs and all that sort of thing, the Baltimore-Washington corridor appears very, very strong but not much else is that inspiring.

Is that the right way to look at it?

Well, obviously, Northern Virginia has been impacted by a transition year, so we are, in another two months, we will be 99% occupied in Northern Virginia.

In suburban Maryland, we have a 57,000 square foot lease that's signed and another 20,000 square foot lease that's signed that will take place in '07.

So on a lease basis, we're almost 95% there.

The big hole in our portfolio is suburban Baltimore.

That's both our existing portfolio that we bought from GGP a little over year a ago, plus the Nottingham portfolio that we just acquired.

So the upside in the Company, as Rand had mentioned in his remarks, is taking that portfolio, which average is 83% occupied, up to 94%, and we believe we can do that within 24 months.

Yes, actually I apologize.

I wasn't specific enough.

I think your occupancy numbers are in fact very impressive.

It's the flat cash rental rate growth combined with fairly high capital costs in every market besides Baltimore.

Do you see that changing, the Baltimore-Washington corridor?

I'm sorry.

Well, I think the capital costs, absent Northern Virginia, are very, very low and even our Northern Virginia capital costs are low.

As you saw, for the last three years, we've been approximately $11, $10 and $9 per square foot, capital costs.

We think, nationally, that's a very low number.

That's both renewal and retenanted.

Got you.

Thank you.

Were there more questions?

Operator?

Chris Haley.

Good afternoon, Rand and Roger and Steve.

Congratulations on a good year.

Just a couple of follow-up questions on NOI and same-store.

The same-store number that you've reported, Steve, of a little over 4%, that was influenced largely by the Princeton Center assets.

Is that correct?

Yes.

What specifically occurred there during the fourth quarter?

Chris, we have a tenant in that market who would like to buy the building, but they need the building to be empty in order to acquire it.

So we had to do a lease termination in the fourth quarter, which accelerates that sale into sometime in '07.

Okay, so that was in addition to what was occurring in the (indiscernible) the fee that was also related to Northern Virginia?

There's no fee related to Northern Virginia.

So, the term fee was the Princeton property.

Okay, just Princeton, all right.

Great.

(technical difficulty) had some vacancy this quarter, space that wasn't occupied that was leased.

So we had some downtime that had an impact on same-store.

Okay, so the 3.5 million of termination fees compares--that gets you, it's part of 5.5 million, 5.7 million in '06, for the full year.

What are you assuming for 2007?

We have a range of 3 to 4 million for term fees in 2007.

Okay.

Then if you look at the same-store numbers without New Jersey, without the termination fees, do you have a sense as to what that would have been for the full year and the fourth quarter?

Well for the full year, Chris, we believe our same-store cash NOI was 2.95%.

That includes the, as you mentioned, $5.7 million of term fees, which is pretty consistent with the historical run-rate of this company.

We had 4.6 in 2005 and $10 million in 2004.

Okay.

Then looking at the--based upon I think your prior disclosure for same-store for 2007, could you give us some additional color or as your pencils have been sharpened for 2007, where do you think cash NOI, same-store NOI might be?

I think it will grow 2 to 2.5% for cash NOI in 2007.

Okay.

Then on the NOI run-rate, I look at your GAAP NOI of around 55;

I think it's $55 million.

Then I believe the NOI--does the NOI number of 55 include the termination fees?

It does.

It does?

What would my current NOI run-rate look like today, going into the beginning of 2007? (multiple speakers) building sales and leasing.

We view it as we had about $2 million of excess term fees in the fourth quarter, but we also had the One Dulles Tower asset down at 7 to $800,000 for a quarter.

Then we've got other leasing that will kick in, in Northern Virginia, the Pinnacle Towers building and then we had previously mentioned that we've put four assets into service, development assets in the fourth quarter and bore the interest and operating costs but they were not yet fully occupied, although they are very highly leased.

All of that added up to about $2.3 million of NOI that is leased but not contributing to the fourth quarter.

Okay, so if you had to look at the progression and just taking $1.99 up to approximately $2.20, $2.27--$2.19, $2.27, my initial look would be it's maybe 60/40 back-end weighted, second half versus first-half.

Could you give us any color regarding progression and anything that might impact early results to keep an eye out on?

The only thing we should say is that the two big leases in Northern Virginia don't kick in until March.

That's the 146,000 square foot Washington Tech Park lease and the 70,000 square foot lease in Pinnacle Towers.

So the first two months of '07 will still be at the old run-rate, if you will.

Then a lot of the development coming online is in the second half.

Okay.

Last question, in terms of asset pricing--in your core markets here in Baltimore-Washington, Northern Virginia, how would you characterize the current investor requirements, yield requirements and longer-term return requirements for your single-tenant and multi-tenant assets?

Our yield requirements or investors in general?

Investors at your (multiple speakers) you have an outstanding venture, but that's more opportunistic.

But in terms of those that might be willing to partner, or as you had negotiations recently regarding joint ventures, where were those initial and longer-term return targets?

Well, we're not in the market every day with venture partners but what we've been told is that venture partners are willing to accept 8 to 9% leverage returns over a reasonable holding period.

Is that your primary markets or overall?

How would you--is that multi-tenant?

That's probably in the better markets, and they are probably 100 basis points higher than that in other markets.

Okay.

Great, thank you.

Sri Nagarajan, RBC Capital.

Rand, I think you mentioned about suburban Baltimore, the challenge and goal for 2007, and I guess your percentage [lease] about 85% or so.

Do you have some more color on what do you see the challenge and options to be there for suburban Baltimore in particular Hunt Valley?

Well, I think, as Roger said also, I think that's our area of opportunity.

I mean, we are 83% occupied in Baltimore County, and a combination of--we bought some vacancy when we had the General Growth acquisition at the end of '05, and then a similar situation on the acquisition in January of Nottingham.

So we look at it that is our area of marginal increase or opportunity for the Company.

Over a two-year period, we think we can add about $6 million of NOI.

In terms of the guidance, what assumptions are you making in terms of lease up, vis-a-vis the Nottingham portfolio as well as the GGP portfolio?

I think it's got to go over two years (multiple speakers) going from 83 and kind of almost a pro rata throughout the year, two years to get to the 94%.

You know, sometimes, the situation with Nottingham, we've had great activity; there's a strong pent-up demand as a result of that company being in a sale transition for really a year and a half and just not making decisions.

So we are much more aggressive.

We've seen a lot of activity.

We just need to start to translate that into signed deals.

We are very comfortable that we can accelerate things well but I think it's a two-year process.

Okay, a couple of bookkeeping questions, actually.

What was the capitalized interest for the quarter, and following up on an earlier question [during] the land bank that you guys own, what would be a good run-rate to use for '07?

Well, capitalized interest in the fourth quarter and was $3.240 million.

Okay, for the run-rate for the year?

Well, obviously, we are always adding dollars to our development pile.

Every month, we are paying out construction requisitions.

But that's a good going-in run-rate with increases as we spend money.

But on our existing portfolio, our existing balance sheet, that's a good number.

Okay, one last question (indiscernible) be on bookkeeping.

You mentioned earlier about a couple of early construction deliveries that kind of brought up the interest expense.

I noticed that a couple of properties also slipped by a quarter.

Can you give us some color on the slippage, or is there anything that we should--it's just something in the ordinary course of business there?

I think it's the ordinary course of business, it just takes longer to get tenants in.

All right, great.

Thanks a lot.

Chris Lucas, Robert Baird.

Just a couple of quick questions.

What can you tell me in terms of the status of the sale of the Unisys properties?

We had it--we did a feeler out on sort of a preliminary marketing last year.

Tied into that was a hospital that was looking at the entire property.

We think that created some distraction for potential purchasers.

At the same time, I think Unisys is going through their analysis of what they want to do with their lease on a long-term basis, and so we are in the process of sort of going through that right now.

We've got a lot of leasing interest, some interest in potential lease with the right to buy for a part of the campus and Unisys is trying to decide their things.

They have to give us notice of the end of the year here.

So I think that it will sort itself out this year, Chris.

It's a significant upside for us and you know, it's a very low lease rate and really the last remaining large piece of property in the market.

So we're taking our time and doing it right.

How does that factor into the sort of guidance for the year in terms of what (multiple speakers)?

Not at all.

Not at all? (multiple speakers) okay.

It's just the run-rate of leases.

Then in terms of just the timing on the occupancy, you have Northrop Grumman at WTP II.

When is that expected to occur?

Early March, '07.

Okay.

Then the same with the Booz-Allen occupancy at the Dulles Tower?

That was actually January 1, or December 28, actually.

So you are collecting on that for the full quarter?

Yes.

Okay.

Then kind of a follow-up question on the development schedule, a couple of the--and I haven't really paid that close his attention over the years, and there seem to be some fairly significant variants in some of the projects in terms of size and cost sort of sequentially from quarter-to-quarter.

If you could go through those, I would appreciate it.

The 300 NBP, the costs looked like they were up to about 15% on a square footage basis; it brought the size down.

What's going on with that?

Well, the size actually, we just showed the office component of it.

Really the size of the building is 210,000 square feet.

It's got some retail where we wanted to add additional services.

The second part is, included in that, we are building a 1600-car garage to be shared by that property and then that allows us to then add one additional building at the other end of the garage, which will be NBP 316--or 308, rather.

So what you see is just a combination of those costs in there.

Okay.

Then over at 6721 Gateway, there was a drop, a 21% per square foot drop in projected costs.

That's the third building in Gateway.

Yes, that had to do with--we built a garage to support the three buildings and we've taken the cost of that and allocated it over the buildings now.

Across the three buildings together?

Okay.

Yes.

Then on the 2900 Towerview joint venture, part of that is a condo sale.

How does that split with your partner?

Well, we own 92.5% of the venture, and that property has an existing building of almost 140,000 square feet where we did a sale partial leaseback.

We are in the process of redeveloping the existing building to bring it up to today's standards.

Then, secondly, we do have extra land and we've started construction to on a 56,000 square foot building, warehouse building that can be condominiumized.

Whether we will elect to lease or sell, we're not sure yet.

We're just starting to market that, but we will probably have that known sometime in mid-2007.

Okay, thanks a lot, guys.

I appreciate it.

Rich Anderson, BMO Capital.

Good afternoon, everybody.

Rand, I guess this question is for you.

I guess, to preface it, we hope that you are around for many years to come.

But can you comment on succession at OFC, considering all the new hires and the fact that management means so much to this story?

We appreciate that.

I mean, I hope that I am around forever too, but I think that prudency would state that the Company should always be positioned for an orderly succession.

A lot of companies have not done that in the REIT world, and you see the results of that.

So we've been working diligently on a succession plan, moving Roger to COO as part of that and bringing Steve into help strengthen the Company and the various people that he's bringing on.

So I think it's partially--those moves have partially been the size of the Company.

You know, we added a lot last year and have really tripled the size of the Company in the last 3.5, 4 years.

So part of moves are to get us where we should be in terms of the staffing.

My contract runs out in 2010, and we will see how it goes from there as far as renewal.

You know, I enjoy working certainly, and hopefully, it's good for the Company but at some point, you also want to make room for the younger people to do the job they're capable of.

We will do that at the right time in the right order.

Okay, thank you very much.

Ian Weissman, Merrill Lynch.

Rand, maybe you can address the new White House budget for the Department of Homeland Security, which I think saw a bigger increase than most expected, up 8%, and really what it means for you guys in terms of your development pipeline and your ability to move more product from more land into development.

You know, it's hard, Ian.

It's always hard to have a direct correlation between that budget and there's another, more important component of the federal budget which is really what we look at, which is the IT component.

You know, it's not necessarily showing there; it's sort of buried.

That went up almost 12%, which is a very healthy increase.

So, generally, what tends to happen, it doesn't matter which administration is in power, what's really happening is there continues to be significant demand, that the Iraq war is draining a lot of the available funding, and so we see probably increasing pressure for leases coming our way rather than doing MILCON money where they would normally fund it themselves.

So there's just been no slowdown at all of demand and you see that through.

We are now up to 54% government and defense contractors, and that just continues to grow.

So I don't think there's necessarily a direct correlation to that, but certainly the trend is strong.

Well, have infrastructure demands slowed, then, from the Department?

The need for new office buildings is my question.

No, we haven't seen that at all.

In fact, you can see the number of leases that we did last year with the government and defense sector.

It continues to be very strong, and we've seen no slowdown.

Just some housekeeping questions--can you just address the goal of achieving better expense margins in '07?

I guess really how do you expect to achieve then I guess when most people are talking about or dealing with higher taxes and higher utility costs?

I mean, what line-item in the expense or operating expense do you hope to actually improve upon?

Well, I think, as I said, in some markets, we've now gotten size.

One of the historic issues in property management is always that people budget building by building and the property managers tend to think of it in terms of building by building.

As you get scale, like we have in our office parks, where you have millions of square feet in office parks, you tend to start to move away from that and go to using that size to where you can drive down costs through very large contracts.

We haven't done that in Colorado Springs.

You know, with the buildings we have under construction, we're going to be close to 1 million square feet, yet we still have the building-by-building approach.

So as we go through this cycle know, this is the first year we've had a chance to start to use that size.

The Nottingham portfolio, they approached it the same way, building-by-building.

We think there's a lot of operating efficiencies there now where we can start to put our expertise to work there.

On electric, we continue to buy electric.

We are in the hedging business I guess from that perspective, so we are always out in the market buying aggressively and using our expertise in that area.

In taxes, we are fortunate that, in our area, there's not been that much of the increases that we have seen in some of the other areas.

We aggressively look at taxes and have been pretty successful in trying to contest some of the increases.

So you know, we continue to work hard at that and that's one of Roger's real priorities with his team this year, is to try and be more efficient on those operating costs.

Okay, and just finally, just one last thing.

I'm sorry if I missed this.

But are there dispositions in your guidance for this year?

If so, what's (multiple speakers)?

No.

No dispositions whatsoever?

No.

All right, thank you.

Michael McGowan, Kensington Investments.

I have a question about Fort Ritchie.

I was wondering if the plan for what you're doing is similar to the--there was a slideshow to the Hagerstown Chamber of Commerce back in December '05.

Is that still like the current plan?

Michael, that is the approved plan.

We are well into it now, in terms of the demolition of sort of the old barracks, and some of those are just starting their leasing activity, or meeting with a number of the national house builders in terms of laying out the residential to sort of maybe look at refining that plan somewhat.

But no, that's the approved plan that we're operating under.

When you're doing the demo and them some of the other infrastructure work there, are those costs being capitalized towards the future land, or expensed or is that (multiple speakers)?

Yes.

Yes.

They are capitalized?

Yes.

Okay.

Great.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Chris Haley, Wachovia.

Rand, I guess this is a fallowing up on an earlier question.

Recently, there was a resolution cutting in half the money the Pentagon needed for its BRAC.

This is particularly impacting the Army.

I think it was somewhere in the neighborhood of 3 billion out of 6 billion.

I'm wondering how this could not impact the flow of additional facility requirements.

Maybe it's an early resolution and it could be reversed, but I would be interested in terms of where budget constraints are and this specific resolution that was recently released, how that could not impact.

I think what will happen, and clearly, if you take Aberdeen, the base commander there, Aberdeen proving grounds has said publicly that reduction in funds will force them to be leasing facilities for a long, long time.

They still are driven to meet their requirement of relocation.

The same thing with DISA.

DISA has got the funding necessary to do their relocation, but what tends to happen is, as those funds get cut, the programs that are funded by MILCON money, hence the BRAC, that are going to go on the bases tend to get cut.

That forces more program off the bases in leased facilities, and so (multiple speakers).

So is that the difference between a capital budget versus an operating budget?

Correct.

It's actually--we believe it's actually positive for us.

When they are constrained in that manner, their programs aren't going to change.

They will shift into a lease situation.

Okay.

On your Nottingham conference call, I was interested in the recent win by the Trammell Crow Group for the redevelopment of the Fort Meade project.

I wanted to--I think you had asked me to hold this comment or question until your earnings call.

I wanted to see if you could provide a little color around this redevelopment proposal and who you might have competed with if you were involved in this process with the Fort Meade redevelopment, and what kind of goes into these redevelopment opportunities.

There were three parties that we thought we were competing with, and Trammell Crow ended up being the fourth party.

Generally, these are fairly complicated and you put teams together.

We, I think, originally, in the discussions, were under the understanding that the realignment of the two golf courses, which this BRAC this--I mean, this particular UL at Fort Meade dealt with relocating two old golf courses onto a landfill, and in exchange for that, originally, you were going to get the old golf course's site, which were prime sites for redevelopment.

At the last second, that changed, and what they chose was a site north of 175 on the outer edge of Fort Meade as opposed to being right in the center of Fort Meade.

It's a site that has no road frontage and is scattered with wetlands and it surrounded by residential.

We just felt that area was going to be very difficult to develop.

In the meantime, we control about 4 million square feet of development capacity right on the Baltimore-Washington corridor, which is prime location for defense contractors.

Unfortunately, the UL process, you're not allowed to leased space to government tenants, so you are relying on (multiple speakers) yes, ancillary.

So we think we had the better location.

But we did--because they had asked us to, we did participate in the process.

The investment to relocate the golf courses ironically we think will end up at about $30 million for a 1 million square foot capacity on that site, if you did office surface park.

So just off of raw land before development, they are in at a much higher cost if they were to proceed on a FAR per square foot basis then we are on any of our prime sites along the corridor.

So you know, they selected that group, for whatever reasons; they don't really tell you.

And we welcome the competition.

We certainly like to compete and we think we are in a great position, but you know, they now have to get a lease agreement signed and the one with Opus up at Aberdeen took almost two years to sign and they still haven't done anything.

So, we will see what happens.

So your bias appears to be more on the fringe or the ancillary locations than it is on-site for these Fort redevelopment?

It varies by location.

The one that was down in Huntsville was a great site right at the front door of the base.

This one, unfortunately, is really an ancillary, almost tertiary site.

Okay, great.

Thank you.

Thanks, Chris.

I think we will wrap it up.

Is there any other questions?

No, sir.

Go right ahead.

Okay, thanks for joining us today.

As always, we do appreciate your participation and support.

Roger, Steve, Mary Ellen and I are available to answer any of your other questions you might have, and we will be holding our first-quarter conference call on Thursday, April 26.

Thanks and have a good day, everyone.

That does conclude today's conference call.

Thank you very much for your participation and have a wonderful day.

Thank you.