COPT Defense Properties (CDP) 2008 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust First Quarter 2008 Earnings Conference Call.

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

At this time I will turn the call over to Mary Ellen Fowler, the Company's Vice President and Treasurer.

Ms.

Fowler, please go ahead.

Thank you and good morning, everyone.

Today, we will be discussing our first quarter 2008 results.

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

As they review the results of first quarter, the management team will be referring to our quarterly supplemental information package.

You can access our supplemental package as well as our press release on the Investor Relations section of our website at www.copt.com.

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

Also under the Investor Relations section of our website you'll find a reconciliation of our second quarter 2008 and annual 2008 guidance.

At the conclusion of this discussion the call will be opened up for your questions.

Before we begin I must remind all of you 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 the 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.

Please note the Company assumes no obligation to update any forward-looking statements.

Now I would like to turn the call over to Rand.

Thanks, Mary Ellen, and good morning, everyone.

We are pleased to report a solid first quarter for the Company, achieving FFO of $0.58 per diluted share which was at the top end of our guidance.

Total FFO for this quarter grew by 13.7% on a diluted per share basis over the first quarter of last year.

As Steve will discuss in a moment, our FFO growth this year is heavily weighted to the second half of the year.

We still expect to produce a strong 8 to 11% growth rate during a year where the peer group median FFO growth rate is 3.3%.

Despite concerns about the economy, our portfolio continued to hold steady for the quarter at close to 93% occupancy and 94% leased.

The office sector in general has held up well thus far, with reported occupancy rates at 92% or higher.

We do not have overbuilding in any of our markets other than Northern Virginia.

Although several new buildings developed by others have not leased in the Dulles South submarket in Northern Virginia, our portfolio there continues to be 99.6% occupied with no lease renewals until late 2009.

As we look ahead, we do believe our strong tenant base will help us through any potential downturn.

As an example, our top 20 tenants generate 54% of our annualized revenues of which the U.S.

government represents 16%.

The top two concerns for REITs this year are capital availability and leasing.

We have addressed our capital requirements through a new construction revolver that will fund a majority of our development pipeline for 2008 and 2009.

We are also working on several transactions to refinance the balance of debt maturing in 2008.

On the leasing side, we continue to see strong leasing on our renewals and are seeing good leasing activity for a majority of our buildings in our development pipeline which we believe is a direct result of our quality products and level of customer service.

When we compete with new development in our markets, we have a distinct advantage in today's environment.

In addition to our outstanding level of customer service, tenants appreciate our large and long-term ownership position in multiple locations where we have the capacity to accommodate their future growth.

As the economy continues to soften, the REITs in general and COPT in particular have a competitive advantage due to access to capital and strong tenant relationships.

We are starting to hear about opportunities where private developers do not have the access to capital nor the tenant relationships to move forward successfully on new development in this difficult environment.

With that in mind we are looking at opportunities to expand in additional locations, where our tenant-centric expansion strategy will be successful.

We're also starting to see a few scattered acquisition opportunities in our tenant-centric locations where we can expand our presence.

With regard to BRAC, we are starting to see some early indications of defense contractor demand at both Northgate Business Park in Aberdeen proving ground and at the National Business Park across from Fort Meade.

Both BRAC locations have now had groundbreaking ceremonies for their new facilities to house on-site government personnel.

Occupancy for the government personnel will start as early as September 2009 for Aberdeen Proving Ground and October 2010 for DISA at Fort Meade.

The remaining moves will occur gradually from these dates and will be completed by September 2011.

During 2008, we believe our investors are looking at safety of earnings and we will compare well within that analysis.

For the most recent quarter, assets containing our core tenants in the government, defense IT and data centers generated 56% of the Company's combined net operating income and we see these sectors continuing to grow.

For the balance of 2008, we will continue to work our plan and feel comfortable that our early-on thoughtful recession planning will allow us to deliver sector-leading FFO growth for 2008.

With that I will turn the call over to Roger.

Thanks, Rand.

Turning to our portfolio, at March 31st, our wholly-owned portfolio ended the quarter at close to 93% occupied and 94% leased.

In terms of overall leasing statistics we renewed 588,000 square feet equating to an 83% renewal rate at a low average capital cost of $3.77 per square foot.

For renewed space, total rent increased 12.3% on a GAAP basis and 6.4% on a cash basis.

For renewed and retenanted space of 719,000 square feet, total rent increased 9.9% on a GAAP basis and 3.9% on a cash basis.

For renewed and retenanted space for the quarter, the average capital cost was $6.48 per square foot.

Some of the larger renewals for the quarter included the U.S.

government in two locations for over 50,000 square feet each.

MedStar Health in two locations for over 45,000 square feet and General Dynamics for over 45,000 square feet.

Turning to lease expirations for 2008, we have 7.2% of our total annualized revenue expiring, down from 11.2% at the beginning of the year.

We continue to expect a high retention rate for the year although vacancy lease-up may be somewhat slower than normal due to slower economic growth.

We do expect tenant concessions via increased tenant improvements and free rent to modestly increase as we go forward over the next 12 months.

We are also realizing some cost pressure in operating expenses, particularly in the energy and labor markets.

Our operating margins were lower than normal in the first quarter.

Much of this is seasonal as the first quarter included snow costs and high-energy costs.

Also we do not process full operating recovery reconciliations during the first three quarters of the year.

The second quarter is usually our lowest cost quarter and we would expect our margins to bounce back this quarter.

With regard to our property management, we are pleased to report that we achieved for the fourth year in a row a Best in Industry ranking by CEL and Associates for our commitment to the highest level of quality and service to our tenants.

We were the winner of the 2007 National Commercial Real Estate Customer Service Award for Excellence for Category One Properties, also referred to as the A List Award.

Category One represents companies earning over 100 properties and is the largest of the categories.

CEL surveys over 2.5 million tenants a year to derive the ratings for each landlord.

We consistently stress good service as the key to satisfying retaining our tenants and it is the foundation of our tenant-centric expansion strategy.

We are very proud for the fourth year in a row to receive this recognition since it reflects our dedication to serving our tenants in an exceptional manner.

Turning to our markets with regard to the BWI submarket, as of March 31st within the total market of 6.4 million square feet, vacancy including subleases stood at 12.4%, up from 9.7% one year ago, levered down from 14.2% in the fourth quarter of 2007.

Our BWI portfolio, totaling 4.6 million square feet and representing 72% of the BWI submarket, was 93% leased at March 31st.

Turning next to the Columbia submarket in Howard County, at March 31st, vacancy with sublease was 12.7%, relatively flat from a year ago.

Our properties in the Columbia submarket total 3 million square feet and are currently 93.5% leased.

Our Suburban Ballroom [work] portfolio is 87% leased.

We continue to experience good leasing activity and interest in this market for moderate-sized users.

The market in Suburban Ballroom work has remained healthy due to the lack of new supply and healthy demand.

Within COPT's Northern Virginia submarkets, the direct vacancy rate was up to 13.9% versus 10.3% one year ago.

Quarterly absorption was a negative 198,000 square feet.

Approximately 2.4 million square feet was added over the past year.

Our portfolio of 2.5 million square feet is 99.3% leased at March 31st.

Looking just at the Dulles South submarket in Northern Virginia, the direct vacancy rate ended the first quarter at 18.7%.

Within the Dulles South submarket, there was approximately one million square feet added to the market as of March 31st, the majority built on spec.

Our operating portfolio of nine buildings totaling approximately 1.5 million square feet is 99.6% leased, and we have no major rollovers until the end of 2009.

We continue to believe that we are well protected from the impact of any potential overbuilding in this submarket.

Turning to acquisitions, our business plan for 2008 assumes no acquisitions.

We are starting to see some pricing movement to where the Company could make some selected strategic acquisitions that would enhance our customer expansion strategy.

With regard to dispositions during the quarter, we sold a 142,000 square foot building at Ridge Road to an existing tenant, and subsequent to quarter end we sold a 41,000 square foot building.

Both properties are located in New Jersey.

This leaves two 100% leased buildings, totaling 201,000 square feet to sell in New Jersey to complete our exit from this market.

We expect the tenant occupying these two buildings to acquire the buildings in 2009.

With that I will turn the call over to Steve.

Thanks Roger.

Turning to our results diluted FFO for the first quarter of 2008 totaled $32.4 million or $0.58 per diluted share.

In the first quarter of 2007 we reported diluted FFO of $28.3 million or $0.51 per diluted share representing a 13.7% increase on a per share basis.

First quarter results of $0.58 per diluted share was at the top end of our guidance, although FFO contributions from termination fees and service level income combined were lower than forecasted by $0.01 per diluted share.

Gains on sales of nonoperating assets including the Tower View condo units and other nonoperating assets were $800,000 for the first quarter, which is less than we had forecasted.

Contributions from development placed in service are on schedule as originally anticipated in our guidance.

We reported net income for the first quarter of $7.4 million or $0.15 per diluted share compared to $1.6 million or $0.03 per diluted share for the first quarter of 2007.

Turning to AFFO, after adjusting for capital expenditures and the straight-lining of rents, our Adjusted Funds From Operations of $24.5 million represents an increase of 11% from $22.1 million in the first quarter of 2007.

Our diluted FFO payout ratio was 58.5% for the first quarter as compared to 60.4% FFO payout ratio for the comparable 2007 quarter.

The diluted AFFO payout ratio was a strong 77.4% in both the first quarters of 2008 and in 2007.

Looking at our same office results for the first quarter of 2008, for the 164 properties or 82.5% of the wholly-owned total square footage, same office cash NOI increased by 5% excluding the effect of a $1.1 million reduction in lease termination fees.

The same office results were positively impacted by retenanting space in our Northern Virginia portfolio and lease up in our suburban Maryland properties.

Including the effect of our leased termination fees, same office property cash NOI increased by 2.8% for the quarter.

Turning to the balance sheet, at March 31st, the Company had a total market cap of approximately $3.9 billion with $1.8 billion of debt outstanding, which equates to a debt to market cap ratio of 46.8%.

Our weighted average cost of debt for the first quarter was 5.42%, down from 5.83% a year ago, and 79% of our total debt was at a fixed rate.

Our first quarter EBITDA to interest expense coverage ratio was a strong 2.96 times and our first quarter fixed charge coverage ratio was a strong 2.45 times.

Subsequent to year end we closed a $225 million revolving construction facility that will be used to fund our wholly-owned development pipeline.

The facility provides for funding of 85% of the construction costs for each of our wholly-owned buildings.

The term of the facility is three years with a one-year extension option and the opportunity to increase the facility from $225 million to $325 million on a future date.

Repayment terms are interest-only and the interest spread starts at 160 basis points over LIBOR and is dependent on the Company's overall leverage.

For each building under construction, we have the land and the initial predevelopment costs as our equity.

Our initial draw of $35 million was utilized to pay down our revolver.

We found that strong banking relationships are very important in this challenging credit environment.

We appreciate our [Deep Bank] Group and their willingness to support the Company in the past and again this year.

With regard to payment of maturing debt for 2008, we have repaid $53 million so far this year.

We're currently in the market and close to finalizing terms on a $225 million nonrecourse term loan that will refinance $187 million of maturing debt; and we intend to extend the remaining $40 million of debt for one year under an extension option.

With these loan transactions, we will have addressed our major financing concerns for the year which is a key issue for most REITs in this credit environment.

Turning to our guidance, our guidance still does not anticipate any significant acquisitions although we are seeing some opportunities that are more attractive than in recent quarters.

Thus we are not forecasting a need to raise equity capital for the balance of 2008.

We believe we can continue to use the equity in our land inventory, coupled with the construction financing, to fund the development through 2008 and 2009.

In addition we delevered an early 2007 through the issuance of stock and units for both the Nottingham and InterQuest acquisitions at an average net stock per unit price of $49 per share.

With respect to our guidance for 2008, although there've been a few changes in our underlying assumptions, we are confirming our expectation of $2.41 to $2.49 of FFO per diluted share, which represents an 8 to 11% year-over-year FFO growth.

These changes and assumptions principally relate to the following -- a reduction in assumed termination fees from the initial annual expectation of $4 million to a new lower estimate of $2 million; second, a reduction of $1 million in anticipated net G&A expenses from an initial average of approximately $6 million per quarter or $24 million for the year to a new estimate of approximately $23 million for the year.

This change relates primarily to the reduction in some expected professional fees and compensation costs related to the timing of some new hires.

And, finally, a reduction of interest expense of approximately $1.1 million primarily attributed to a reduction in LIBOR.

In November of last year when we outlined our initial guidance for 2008, we acknowledged that our FFO growth would be weighted towards the last three to six months of 2008 when leasing efforts would be realized and the impact of the opening and lease up of several development projects would be achieved.

Our reforecast for 2008 continues to reconfirm that trend.

So as a result we feel it is important to give you some sense of our expectations for the second quarter's results.

We expect FFO per share for the second quarter to be between $0.58 and $0.60 per diluted share.

We expect the results for the third and fourth quarters to be very strong and, combined with the solid first and second quarter results and expectations, we feel very confident about our ability to meet the annual expectations that we've laid out.

Once again, our guidance for 2008 at this point does not quantify the impact of any anticipated accounting change for convertible securities via an additional non-cash interest expense increases.

We do not have the final standard yet.

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

Thank you, Steve.

Turning to our construction pipeline at March 31st we had 11 buildings under construction for $214 million located in four submarkets.

With regard to the leasing activity for the Colorado Springs buildings, ITT has now fully released Patriot Park Six with occupancy scheduled for July 2008.

We have signed a 44,000 square foot lease at our Hybrid Two building located at InterQuest Park for 81% of the space, and have good activity at the Hybrid One building.

For our underdevelopment pipeline in Colorado Springs since Patriot Park Six is fully leased we have started construction on Patriot Park Seven.

In addition, we have good leasing activity for 30% of the space at the Epic One building that will start construction at InterQuest Park this quarter.

Needless to say, we are very pleased with the leasing momentum at our Colorado Springs developments.

With regard to under construction within the BW quarter, we have good leasing activity at 6721 Columbia Gateway Drive, adjacent to our headquarters.

At the National Business Park we are starting the next building for defense contractors at 300 MBP and are starting to see some early indications of demand related to the BRAC with two potential tenants looking at taking a large portion of this building.

We are comfortable with our leasing activity for our building at the University of Maryland-Baltimore campus with potential tenants that are tied to the University.

This is the last building to be built at this location.

With regard to our building under construction at our Arundel Preserve, which will finish construction in July, we expect this building to be a little slower to start leasing as it is the first office building in a new mixed-use park.

Our first building under construction at the University of Maryland-College Park, M Square Project, is now 36% leased.

We expect to start construction on the second building in College Park within the next quarter and have tenant interest for the entire building.

Our expansion of 91,000 square feet at our San Antonio property is committed to our largest tenant and should be completed by the fourth quarter this year.

With regard to the remaining buildings under the development pipeline, we have interest from several defense contractor tenants related to the BRAC for a portion of the first two buildings at Northgate Business Park, adjacent to Aberdeen Proving Ground.

We also have good leasing activity for all of our first new building at Whitemarsh at 8130 Corporate Drive.

So at this point we feel very good about our leasing momentum on our development pipeline.

And as I mentioned earlier we are starting to see some interesting opportunities for our Company, where private developers are not able to move forward with development plans due to capital constraints.

With regard to our 202,000 square feet placed into service for the quarter, 75% leasing level is lower than our usual 95% levels achieved for the past four years.

This level reflects the square footage that we had been holding at 302 MBP in anticipation of the megacenter that we discussed on our previous call.

In summary, I think we are on track for another year of strong FFO and AFFO growth, despite a weakening economy.

Our core government, defense, IT and data sectors continue to grow and are somewhat recession resistant.

In addition we think outstanding customer service will give us a competitive edge as we compete for tenants to lease our development pipeline and retain leases that are rolling this year.

And with that, we will open of the call for your questions.

Thank you, Mr.

Griffin.

(OPERATOR INSTRUCTIONS) Chris Haley representing Wachovia.

This is Young Ku here with Chris.

I have a couple of questions for either Rand or Roger.

In your '08 guidance, could you tell us what the implied leasing volume is needed for the year, compared to total leasing '07 excluding development lease up, just looking at operating portfolio?

We leased 719,000 square feet in the first quarter and for the balance of the year we have 200,000 square feet in the second quarter that matures.

We have 794,000 square feet in the third quarter and 190,000 square feet in the fourth quarter.

So that totals 1.2 million square feet.

Our expectation is that we will renew about 80% of the balance of that square footage, and that will leave a hole of about another 150,000 square feet that isn't leasing.

And that we will do that much otherwise lease up in our portfolio to maintain our existing occupancy and coupled with what we have leased, but not occupied yet, coming into the lease cate -- or the occupancy category, we will get up close to 94% occupied by year-end.

So would you say that's in line with '07 leasing or 80 or 90% of leasing volume in '07?

That's higher in terms of renewal percentage.

In terms of overall leasing it will be about the same because we will retain more tenants and do less new leasing.

In regards to development leasing, can you tell us what your expectations are for lease on the development pipeline?

Where we should expect that prelease rate to be over the next six months?

I think -- we have several situations.

Typically we don't do high preleasing on development.

A lot of times we are anticipating demand or we are getting RFPs from multiple sources and that's a good indicator of demand for us.

It's a little of a unique environment that we are in with BRAC and that the early indications of demand that we see coming down the line, which really accelerates as you get into '09 and 2010, causes us to look pretty carefully at accelerated some of those development starts.

So as I said on the call we typically are 95% leased when we have delivered our development portfolio.

We had the one exception this past quarter.

So I would expect us to be in that range again this year, which would say if you did that you are leasing close to 1 million square feet of development activity in that combined with the development -- leasing activity that Roger talked about would put us pretty close to last year in overall performance.

Lastly one quick question for Steve.

Could you tell us what the assumptions for LIBOR was used for '08 guidance?

We have a range.

It gets to 3% for the second and third quarter and [3 and 1/8], I think, for the fourth quarter.

John Guinee representing Stifel Nicolaus.

Wonderful quarter.

Nice job.

Just something you haven't talked about in a while.

Can you update us on Fort Richie, Bluebell and Whitemarsh?

Okay.

I will take Fort Richie.

We -- a lot of the activity that we have planned this year relates to completing the demolition of the old barracks and the old houses, which we have done.

The site is very pristine now.

Starting the rehab of some of the existing office buildings, the leasing continues to ramp up a little bit.

We do have some fairly strong leasing indications which are not yet signed, but good activity.

We are, we have gotten the overall master plan which we readjusted.

That's been approved in the first quarter.

And we are starting in on utility designs that will be underway for a new substation, all of the new underground electric enhancing the plumbing and then starting in on the residential design and the infrastructure there.

So, fairly, we don't count on a lot of income this year coming out of Fort Richie; but we are doing all of the necessary elements to get it well-positioned for some ramp up that we see, starting next year.

And then I will let Roger talk about Bluebell and Whitemarsh.

With respect to Bluebell we have three buildings there, that are 100% leased to Unisys Corporation.

Their leases mature June 30 of 2009.

Our anticipation is that -- and one of those three buildings has been sublet to Merck.

Our anticipation is that Merck will stay doing a direct lease with COPT going forward, and that Unisys will renew some but not all of its space, and that we will be in a retenanting and redevelopment situation on probably 400,000 or 500,000 square feet of the 960,000 square feet beginning in the summer of 2009.

With respect to Whitemarsh, when we acquired that portfolio it was 1.6 million square feet and it was 84.5% leased.

Today we have sold one building, bringing that down to 1.54 million square feet and we are 85.1% leased.

So we've increased the occupancy just less than 1%.

We do have good activity for Whitemarsh and, as Rand mentioned, we do have one building that we are hoping to pull the trigger on in terms of construction relatively soon, because the multi tenanted -- the multistory buildings we have in Whitemarsh are now full.

And so we have no product and we do have demand.

So we are going to be moving forward with a multistory building and hopefully in the next quarter.

The single story product is still relatively well leased and we have good activity and think we can maintain our occupancy and build it over the next year.

Rich Anderson representing BMO Capital Markets.

In terms of the outperformance that you -- or the top end of the guidance you achieved for the quarter, was that basically just sort of same store-related when you sort of boil it all down, leasing and same store?

I'd say same store was strong and I would say we probably outperformed our forecast in NOI by about $0.01 a share.

We also had an interest benefit.

And then I talked about some of the things that actually went the other way.

You know we had less term fees and less gains and that sort of thing.

I just wanted to sort of dumb it down for myself there.

Rand, you mentioned in some circumstances where developers are having some capital problems.

Are there, if you could just sort of paint a picture for me how that looks?

Are there buildings that are sort of partially developed that you could come in and take over?

Is that what you see or is it something sort of not that far along in the game?

I think it runs the full gamut.

I mean, the more typical and you -- almost every day now in one of our submarkets, we are seeing some announcement where somebody who was planning to go on an office development has frozen it, and due to their view of the market, but more importantly their inability to get financing.

And so in some instances these are entitled sites -- you know, which they've gone through all that work and in some of our markets that takes a while.

You know a year, year and a half.

And so they are out looking for solutions and we are a logical solution for some of these circumstances.

So we don't see any -- once a building is started, I'm not seeing any situations where somebody is in any difficulty.

I mean once you've done that, you've gotten your financing.

You are going to go through to that point.

So these are the predevelopment, are getting ready to make that big decision of starting and you know it is a tough financing environment out there which is favorable for REITs in general.

We are not alone in this.

I've heard through other institutional investors calling us that there are really almost through most of the product types people doing the same thing elsewhere.

So I think this is a good indication of the strength of the financial strength of REITs.

And you could see -- are you more inclined to pursue these types of opportunities in markets outside of your DC core?

Or would it be again a mix?

Both.

It's really both.

And what about new markets outside of San Antonio and Colorado Springs?

Well, I do say -- as I said on the call I do start to see some opportunities where people put a lot of work into getting themselves positioned and there are markets that we have been studying for quite a while.

And now, all of a sudden, they have some issues and have contacted us and so we will see how that unfolds.

I see.

So they sort of have done the initial legwork for you in a way and now sort of maybe is the straw that breaks the camel's back for you to get going on a new market?

Is that a fair (multiple speakers) --?

I don't know that I would call it strong that breaks the camel's back, but I think you know as I said on the call we have some unique skill sets and besides the capital strength that we have we also have some very strong tenant relationships that have unique capabilities and sometimes those come to the forefront.

When people start looking around this country at could do they want to align themselves for that with that expertise, we go to the top of that list.

So we do see these things starting to unfold and we will just see what happens.

Lastly you mentioned acquisitions.

Can you make these exact same comments about acquisition opportunities as you do about development opportunities?

(multiple speakers) other market?

(multiple speakers)

You know there's a couple of comments on that.

The first is that there's just not a lot in the marketplace.

I know I've written or seen some of the write ups from analysts and others, saying that there's been an increase in the cap rates and we just haven't seen it in the Greater Washington region.

You know that's held steady and this is of course outside the Beltway.

There's been very good pricing inside the Beltway and DC proper.

So there is not a lot on the market.

Where we are starting to see, someone in the market is on the fringes of the greater Washington region or in our tenant-centric cities and, again, those are situations where people have built buildings and had anticipated selling them as part of pre selling or selling when completed.

And their IRR clock is clicking and they need to solve it.

There's a few others that they are testing the market to see whether purchasers can get in the range of their thoughts on pricing; and everybody is worried about the financing side of things.

So if you have financing capabilities like we have, it could work to our advantage.

We are just starting to see the first inklings of that, but nothing of any kind of volume yet in our markets.

Sounds good.

Thank you.

Michael Bilerman representing Citi.

Irwin Guzman is on the phone today as well.

Roger, can you just expand a little bit on the leasing in the quarter?

You look at suburban Baltimore and Northern Virginia your average lease term was on the renewed space 1.4 and 2.1 years and total was 1.7 and 2.1.

So it seemed a little bit short.

Maybe you can expand on what is driving those deals?

In the case of Whitemarsh which is Baltimore County, it has to do with a tenant that wants to expand and grow into another building with us.

And so we are moving their occupancy along a while until we can sort that out and the rest of it is simply some tenants don't want to make long-term commitments on space at this point.

So, one, we did have a few of those situations in this quarter where tenants wanted to renew, but for shorter terms and normal.

Our average renewal is about five years so we came up a little bit short of that this quarter.

Does that give you any sort of pause when you say tenants don't want to renew for a long time and some of the leasing at least in the development pipeline is a little bit more delayed, you talked about increasing concessions overall.

Just I am just trying to handicap (multiple speakers) --.

Well, I don't think we were trying to scare anybody.

We are just being realistic that the market isn't as strong as it was 18 months ago and so we are acknowledging that, both to ourselves and to the investor communities so that they can expect the fact that leasing could be a little bit slower and that our concession packages could be a little higher than they have been.

But in terms of we are not panicked, we are not -- I would say in terms of are we going for occupancy versus rate, we are in neutral category right now.

We are not in push rates real hard and we are not in accept any rate to get occupancy.

We are about neutral in our markets on average.

I would add, Michael, that if you look at past recessions, this is fairly typical.

I mean, I think the markets are stronger going into a potential recession if we are in one or entering one.

But when people start into that on the typical tenants -- now these are the nongovernment, nondefense, nondata tenants -- they go into two kind of modes.

One is really, "Gee, I want to wait and see a little bit on how my company is doing before I commit to the longer-term," so they can get a short-term extension or sometimes they're saying, "Well if the market is going to really deteriorate, then, maybe I can get a better leasing deal in a year and a half and so I will just do a year and a half lease and see what happens."

A lot of times those are the people that get surprised because the market can turn positive very quickly.

What happens is nobody starts buildings except for people like ourselves who have the capacity and cheap ground and all of a sudden then there the economy picks back up.

There is a lag time for the new development starts in those people that signed 18-month leases finding themselves in a significantly accelerated lease rate environment.

On the government and defense side, that's steady and we see continued demand and long-term lease extensions and very healthy from that side.

But given the ramp that you have at least it gets to the full year in terms of leasing and the development, you don't feel that what's sort of occurring, what you're hearing from the tenants would give you some pause that you are not going to be able to get the ramp in earnings that you are sort of forecasting?

I',m just trying to recognize (multiple speakers).

I think we are very comfortable there.

We see if there's some very minor tenants.

You know it's typically what you see it in is smaller tenants who struggle and I've seen that on some of the other REIT reports where they've talked about some defaults and some of the smaller tenants trying to come for early renewals, but wanting to downsize.

Our tenant base, our average lease size is 20,000 feet versus an average of 5,000 feet at other office REITs.

And so we don't tend to have that kind of pressure and the larger tenants, you know they are looking long-term.

They also recognize the costs that it takes if they wanted to relocate or --.

And so you tend get more companies renewing in a recessionary environment.

Can you -- should we be baking in slightly lower development yields for for the next couple of years for some [decent sessions] that you had mentioned?

What do you have in your numbers now?

I think you spoke in the past about a 10% going in cash on cash.

What order of magnitude do you expect those bigger concessions to have in their costs?

I don't think the concessions are really impacting that very significantly at all.

If you have people looking, generally what happens is and this hasn't been anything tied to now.

It's just been a trend over the last two years where spaces are getting increasingly sophisticated -- more wiring, more HVCs requirements, and some of the TI allowances have gone up.

But positive offsetting that is we in our members have a year lease up and a lot of these are leasing earlier than that.

So that offsets any potential increase in TI.

So I think when we've looked at it, we are still very close to the 10%.

You might have a few of them that are below the 10% cash on cash, and you have others that are above it.

And I think the average is still very close to that 10%.

And can you talk a little bit about that data center initiative that you've alluded to in the past?

Are there any specific projects that you are planning on starting any time soon?

And what sort of dollar volume starts of data centers should we expect over the next couple of years?

I think the data center you know we have about 1.5 million square feet of data space.

We are continuing to study that business.

We are learning from it.

Some of the construction starts, I won't be specific about it, but some of the construction starts that are in our development and our construction list are data, but we are not disclosing those separately at this time.

And we have other starts that we see coming up, some other leases happening that are, in fact, data.

So we are continuing to see the data side of our business grow.

I would say that it's a slightly different model from some of the other companies that specialize in data.

Ours tend to be single tenants, full building, very -- and these are secured buildings as well.

Tends to be the tenant putting in the bulk of the tenants finishing, heavy requirements and not ourselves (multiple speakers) --.

How do your yields on those developments compare to the 10% on traditional office?

They are a little higher, but we are not doing the return on and return of gain that some of the other people are doing.

So what happens is you spend a little bit more money than normal.

You are getting a little higher return on that, but -- so you are getting more return and a little higher margins, and then you are getting some fees on the work that you are doing for the significant dollars that are being spent on those spaces, again, paid by the tenants.

Michael Knott representing Green Street Advisors.

Rand, can you just give a little more color on the acquisition opportunities that you guys talked about?

Would those be potentially -- it sounded like looking at deals within your existing markets and deals in new markets?

I would break it down slightly differently, Michael.

If you look at what I would call acquisition opportunities, they are pretty much going to be within our existing markets and, again, we are not seeing a lot.

It's just the early, early signs of it.

It is not a lot of volume, but for us it is encouraging.

And, again, I think when we had started the year, we thought that the acquisition market would really be something that we would see in the second half of the year, picking up, and now we probably think a lot of it is going to flow into '09 more than '08.

The other aspects outside of our existing markets really relates, I would say, more to development opportunities where people have controlled some ground, gotten entitlements and now are finding themselves unable to finance.

Those are markets that we have been studying for a while so this could present an opportunity and we just have to see how that unfolds.

And as far as acquisitions within your existing markets, are you seeing just a better selection of properties that you are interested in or has pricing come back more closer to what you would like to see?

I believe you guys had been previously a little bearish on pricing in some of the deals you were seeing in the marketplace?

I think the problem has been in the past couple of years is that the pricing was well above replacement cost.

We just won't do that.

We won't buy above the replacement cost.

So we had been out of the market and I think that could be somewhat true of REITs in general.

And we were just outnegotiated in terms of people were doing very cheap; and 95% financing levels were higher and that just isn't our game.

So those people are now buying large out of the market and so we haven't really seem the pricing levels move, I would say, that significantly yet.

But I think that we are starting to get to the point where it gets interesting as far as the replacement cost benchmark and the difference really is just there are probably are not as many people out in the marketplace who have the financing and are able to compete.

So you are not getting that quick ramp up on bidding that you saw the last several years.

If I can just have one more question on this topic, would you consider issuing op units at this point in time or how do you view the value of your currency?

I think when we think about op units, we putting in the context of what are we getting in exchange for the op units, so what is the purchase price of the asset that we are getting?

What's the yield, what's the value versus replacement cost?

What's the strategic value to the company, so would we normally want to issue stock at $38 or $39 a share?

No.

Only if we got tremendous value for the Company that we could be pushed forward when we considered doing that.

Then, my last question, Steve, could you just clarify comments on the landfills?

It sounded like maybe you were going to consider landfills to fund some of your funding needs.

I know you had mentioned it in prior calls.

Can you just provide a little more color there?

Not so much from a funding standpoint.

When I gave guidance at the beginning of the year, we said that at the top end of our range of got us that maybe gain of nonoperating assets in that kind of income could contribute up to $4 million for the whole year.

We also said that we expected things like the condo sales to be $1.1 million for the quarter.

It was only $800,000.

So it's not a major funding source and it was just a -- and I don't really have an update on that.

I'm not saying we are going to get to the top $4 million level.

I'm just leaving that out there from the original guidance, but it wasn't so much a funding source as much as just trying to give good clarity to the guidance that we were given.

(OPERATOR INSTRUCTIONS).

Chris Lucas representing Robert W.

Baird.

Steve, just two follow-ups on the condo sale issue, was the shortfall related to pricing or was it related to not completing the sale of the condos during the quarter?

I had two things.

One, we didn't sell all of the units and then secondly we did get what we felt we would get in terms of the yield on those condo sales after we took into consideration the minority interest and the tax impact, the after-tax impact of the benefit of that.

Because it is a merchant gain situation.

We have to pay taxes and so between our partner share and the taxes we ended up receiving what we thought we would get.

And we had just left room for other potential gains in our original guidance that we just didn't sell.

Or get those.

Okay but you still have about 4300 square feet of space there that you could potentially generate gains from as well (inaudible)?

Right.

Correct.

Then, Steve, just a more question about the guidance, on in terms of the service revenue expected for the year, is that number still in line even with the relatively light first quarter?

Yes, we haven't changed it yet for the year.

We did have a light first quarter peers so at this point it could be a little less, but I'm leaving it out there which means more of it will happen a little later in the year at this point in time in our current forecast.

I guess just in terms of thinking about the guidance, what needs to happen for you to get to the low end of the guidance range?

What are the issues that really impact that?

I think we are pretty confident that we are going to get there.

I mean we -- Roger gave pretty good color on the leasing and we feel very good about the development contribution to.

We did say that things would kick in, in the second half of the year that wouldn't keep get in the first half of the year so we will have more fee income in the second half of the year.

We are pretty confident about our leasing assumptions even though we have to work hard to achieve it; and if you go back to our original guidance, we said that just in our NOI growth, year-over-year, we had $11 million of growth from development placement service in 2007 and that's right on pace and we are forecasting that is going to make that contribution.

And we only had $4 million of NOI in our guidance for development placed in 2008 and we are still feeling pretty confident about that.

So I think we've updated G&A interest, we've brought down our term fees and kept our guidance where it is.

So I guess that's it in terms of color.

In terms of the hires that you are not doing, what responsibilities were they going to have?

It's just timing.

It's just timing we were conservative in terms of start dates on a couple of things.

And then, Roger, can you just give me a sense as to what the -- in terms of the remaining lease expirations for the year sort of what sub markets they are concentrated in?

Most of them are in the B.

W.

Carter and a little bit in Baltimore County.

We only have I think in the beginning of the year, we mentioned we had 26 leases exceeding 20,000 square feet.

We only knew of one nonrenewal.

We are now down to 13 leases that exceed 20,000 square feet.

And we are still believing that there will only the one nonrenewal for the year in that segment of breaking down our maturing leases.

Then, can you give me a sense as to what the mark-to-market would be, say, in the BWI quarter?

Yes.

We are hoping that we will continue to see high single digit growth on a GAAP basis going forward.

And I know it's a little far out, but if you were to mark-to-market the leases in the Northern Virginia portfolio that are expiring at the end of '09, what sort of spread are you seeing there?

We only have one significant leases.

Its 99,000 square feet that matures December of '09 and that lease is I would say a little bit below market.

[David Rogers] representing RBC Capital.

Rand, first question.

How much of the land inventory do you feel comfortable given from your comments on the call maybe moving into that development pipeline throughout the course of 2008 realizing that it wouldn't likely complete the loan (inaudible) (technical difficulties) --?

I think we are -- what we're seeing is probably another one million square feet of that starting this year.

So, again, we have 15.6 million square feet.

I think that you will see some of that about one million and then I think you start to see it accelerating because of BRAC and some other activities the next couple of years.

So we look very carefully at that land inventory and we like the fact that it's spread out over some of our markets.

Some have different velocity.

Colorado Springs has got very good velocity right now.

The BRAC locations will have strong velocity, you know the velocity in Northern Virginia is frozen for now.

But we still look at that as kind of an eight to ten-year sort of build-out on 15 million square feet.

combination question for Rand and Steve.

The opportunity that you talked about, Rand, in other markets are potentially your own markets with respect to developments that just aren't fundable from other competitors.

Those seem to be that you are focused on more immediate opportunities as opposed to the longer-term.

If that is in fact correct do you feel comfortable changing your capital plan?

And do you think you would need to change the capital plan to execute upon those new offerings?

First of all, nothing specifically is in the works.

We are looking at alternatives in terms of going along.

If it is development it takes a little bit longer, it doesn't take a totally initial cash outlay.

But we do model all the time.

If we had an opportunity to deploy, as Rogers said, to deploy capital at great value, what alternative capital plan could we have?

So we felt like we've done a lot of contingency planning, but at this point we don't see a big capital outlay in 2008.

If it were a development opportunity, that means some of the funding would happen after 2008.

Michael Knott representing Green Street Advisors.

I was just wondering if you could comment a little bit on the '09 lease rollover schedule.

It looks like about 15% of your portfolio and it sounded like just a small part of it is in Northern Virginia.

Can you comment on the outlook for the rest of it and where it is located?

960,000 square feet is up in Blue Bell, which is the Unisys campus, and the rest of it is spread pretty evenly.

We have not a lot in Northern Virginia and so the majority of it is in the B.

W.

Carter.

Gentlemen, there are no further questions at this time.

I would now like to turn the call back to Mr.

Griffin for closing remarks.

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

Roger, Steve, Mary Ellen and I are available to answer any other questions you might have and for those of you who are interested, we are holding our annual meeting at our corporate headquarters on May 22nd at 9:30 and would love to have any of you there who are close or who would enjoy meeting the Board and some of our other shareholders.

So thank you and have a great day, everyone.

Ladies and gentlemen, thank you for your participation in the Corporate Office Properties Trust First Quarter 2008 Earnings Conference Call.

This concludes your presentation.

You may now disconnect.

Good day.