COPT Defense Properties (CDP) 2008 Q3 法說會逐字稿

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

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

At this time I'll 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 third 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 third quarter results, 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 GAAP measures referenced throughout this call.

Also, under the Investor Relations section of our Website, you'll find a reconciliation of our annual 2008 and 2009 annual 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 meanings of the Private Securities Litigation Reform Act of 1995.

Although such statements and projections are based on what we believe to be reasonable assumptions, actual results may differ from those protected.

Those factors that could cost 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; availability of financing; 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'll turn the call over to Rand.

Thanks, Mary Ellen, and good morning, everyone.

We are very pleased with our quarterly results, delivering FFO per diluted share of $0.03 above consensus.

As Steve and Roger go through the details of the quarter, you will note a pattern of strong fundamental performance in a number of operational areas.

Our ability to continue delivering strong consistent performance is a testament to our strategy of building on relationships, providing outstanding customer service to specialized tenants, and operating in strong submarkets.

However, today, investors are looking beyond current results and focusing on liquidity, risks, safety of operational fundamentals and lastly growth.

We are well positioned in each of these areas and let me take a moment to explain.

With regard to liquidity, we are in good shape.

We have planned and executed carefully on a series of capital events over the year.

As we mentioned on a previous call, we have taken a series of capital actions that have solved our construction funding requirements and expanded our line capacity.

We have paid off all debt maturing in 2008 and have very limited and manageable loan maturities for 2009 and 2010.

In addition, we raised approximately $140 million of equity during the quarter to be well positioned to execute on the opportunities presented by BRAC as well as provide capacity if the acquisition market returns.

This equity raised along with the equity we've raised through the Nottingham transaction at the beginning of 2007 has positioned the Company well for next year.

We do not need to raise equity through 2009.

With regard to risks, we have selected a strategy that does not depend upon transactional volume; does not count on promotes and sales fees or external asset management fees.

Our government defense IT and data core tendency is very resilient, still growing and relatively recession-proof.

There is safety in our numbers and as, a result, we are considered by many investors as the most [defensive] REIT in the sector.

With regard to operating fundamentals, for the quarter we had strong same-store growth, strong renewal rates and consistent occupancy heading toward 94% by year end.

In light of our continued strong operating performance, our Board approved a 10% increase in our common dividend based on our FFO and AFFO results and our growth expectations.

This is the 11th year in a row of increased dividends averaging a 10% per year increase.

Yet we remain at conservative FFO and AFFO payout ratios.

With regard to growth, we are providing our 2009 FFO guidance that Steve will cover in more detail.

As we approached our 2009 planning, we took into consideration our views on the economy and adopted a very conservative forecast.

We are hopeful that our assumptions are too conservative, but in our view it was important that we prepare for a potential downside scenario in our forecasting that projects a severe and extended recession, lasting well into 2010.

This view is reinforced by this morning's GDP release by the government which indicated a negative 0.3% annual rate for the third quarter and more importantly had a negative 3% on the consumer aspect of it.

Current GDP forecasts are a negative 2% for 2009.

We recognize that Office is a lagging economic indicator and that the impact of the recession has not yet been experienced.

However, we do expect that the recession will impact our industry starting in 2009, with reduced renewal rates; minimal rental rate growth; reduced occupancy; and slower development leasing.

All of these negative impacts have been taken into consideration in our 2009 guidance.

And despite this conservative and somewhat sobering view, we are pleased with our continued strong growth.

With these factors in mind, our initial 2009 annual FFO guidance range on a comparable basis is $2.58 to $2.66 per diluted share, which positions us for an FFO per-share growth in the 6 to 8% range for next year from our current 2008 range.

Although we are projecting our growth to be slightly lower than in the past years, we believe we will still be at or near the top of the sector for FFO growth in 2009.

And with that I will turn the call over to Steve.

Thanks, Rand, and good morning, everyone.

Turning to our results, diluted FFO for the third quarter of 2008 totaled $36.2 million or $0.64 per diluted share.

These results represent a 10.3% increase on a per-share basis over the $0.58 per diluted share or $32.4 million of diluted FFO for the comparable quarter in 2007.

Third quarter FFO results of $0.64 per diluted share included approximately $2 million of third party development fees, net of costs, slightly exceeding our forecast while lease termination fees were less than $200,000 for the quarter.

NOI contributions from development place and service, G&A costs and interest expense were in line with our expectations when we last gave our 2008 annual guidance.

Our lease renewals remain strong at 79.6% for the quarter, and 77.9% year-to-date.

We reported net income available to common shareholders for the third quarter of $8.9 million or $0.19 per diluted share compared to $7.4 million or $0.15 per diluted share for the third quarter of 2007.

Turning to AFFO.

After adjusting for capital expenditures and the straight lining of rents, our adjusted funds from operations of $25.8 million represent an increase of 8% from $23.9 million in the third quarter of 2007.

For the nine months, AFFO was $75.4 million, representing an increase of approximately 12% from $67.5 million in the first nine months of 2007.

Our diluted FFO payout ratio is 58.5% year-to-date, and 61.4% for the third quarter.

The diluted AFFO payout ratio year-to-date is a strong 79.7%, although the third quarter ratio was 86.1% due to the uneven timing of capital expenditures.

Looking at our same office cash NOI for the third quarter of 2008, for the 218 properties or 89.9% of the consolidated portfolio square footage, same office cash NOI increased by 3.1% excluding the effect of a $431,000 reduction in lease termination fees.

Including the effect of lower lease termination fees, same office property cash NOI increased by 2.4% for the quarter.

Turning to the balance sheet, at September 30, the Company had a total market cap of $4.5 billion with $1.9 billion of debt outstanding, which equates to a debt to market cap ratio of 41.4%.

Our weighted average cost of debt for the third quarter was 5.11% down from 5.89% a year ago.

71% of our total debt was at fixed interest rates as of September 30th and subsequent to quarter end, we entered into a $100 million swap to bring our fixed-rate percentage up to approximately 75% of our debt.

Our coverage ratios remain strong with our third quarter EBITDA to interest expense coverage ratio of 3.0 times, and a fixed charge coverage ratio of 2.5 times.

Although we have forecasted that we did not need to raise equity in 2008, our view changed in September as we believe there was more risk of substantial and sustained disruption to both the credit and equity markets in the near term.

We decided to go to the equity market to preaddress our capital (technical difficulty) needs for 2009.

We issued 3.7 million shares at $39 per share through an overnight offering on September 23; and the proceeds were used initially to pay down our line and the remaining maturity on our debt for 2008.

We have no remaining debt maturities for the balance of 2008 and only $93 million of debt maturing in all of 2009 and $65 million in 2010.

Other actions that have positioned us well for 2009 include completing the renewal and expansion of our line of credit 12 months ago, and closing a $225 million construction facility earlier this year to fund our development pipeline.

During the quarter, we closed a $221 million four-year secured term loan requiring interest-only payments through maturity.

We have an option to extend the term by an additional year.

We believe the combination of all of these transactions and our latter debt maturity, all that combined, we are well capitalized and positioned to execute our 2009 business plan without having to issue any more equity.

And our debt maturities are very manageable.

With respect to our FFO per diluted share guidance for 2008, with one quarter of the year remaining, we are tightening the full year FFO per diluted share guidance to a range of $2.43 to $2.46.

This represents strong FFO per diluted share growth of 8.5% to 10% for 2008 over the $2.24 per-share that we reported for 2007.

As Rand mentioned, our initial FFO guidance for 2009 on a comparable basis or before the impact of the accounting change for exchangeable notes is $2.58 to $2.66 per diluted share, representing an increase in the 6% to 8% range for 2009 based on the comparable 2008 guidance range.

When the accounting change for the exchangeable notes is implemented in 2009, FFO per diluted share for 2008, which will then be restated, and 2009 is expected to be $0.06 per-share lower in each year as a result of the non-cash adjustment to interest expense.

The relative FFO growth after the accounting adjustment is still expected to be between 6% to 8% in 2009 over 2008.

The assumptions for our 2009 guidance are as follows.

First, for our same office portfolio, plus the developments placed into service during 2008, we expect occupancy to end 2008 at approximately 94% and then drop in early 2009 due to lease expirations and anticipated challenging market and economic conditions.

Throughout 2009, we believe that occupancy will build back up to end the year between 92% and 93%.

Given market uncertainties, we are conservatively projecting our retention rate for 2009 to average 60%.

And that is excluding the possible repositioning of the Blue Bell, Pennsylvania assets in mid 2009.

Second, we estimate development projects opening during 2009 to contribute $4 million of NOI growth for 2009.

With the exception of one building in our Columbia Gateway office park, the 2009 deliveries are expected to come online in the second half of the year.

Third, same office cash NOI is projected to grow an average by 2% for the full year.

However, the growth will be weaker in the first six months of 2009 and stronger in the second half of the year.

Fourth, lease termination fees are projected to be in the range of $3 million to $4 million.

Fifth, the range includes room for a modest level of acquisitions that would be weighted towards the second half of the year assuming some attractive opportunities become available.

Sixth, gains on sales of non-operating assets are assumed to contribute between $1 million at the low end of the range and up to $3 million at the top end of the range.

Seventh, net servicing comp, which is primarily third party development fees, is projected to be between $4 million and $5 million for the year.

Eighth, G&A is projected to average approximately $6 million per quarter at the middle of the range of our guidance.

Nine, we estimate that approximately 20 to 25% of our outstanding debt will be floating on average throughout the year.

Finally, we anticipate no new equity issuance during 2009.

We are not providing quarterly guidance.

However these assumptions indicate that we expect revenue growth through development placed in service, occupancy build-up throughout the year and a potential modest level of acquisitions to steadily increase quarterly results for FFO throughout 2009.

This is our initial look at 2009 and we expect to further refine the details at the end of the year on our next call, and throughout the year.

With that, I'll turn the call over to Roger.

Thanks, Steve, and good morning, everyone.

Turning to our operating portfolio, at September 30, our wholly-owned portfolio consisted of 235 properties totaling 18.3 million square feet that were 93.2% occupied and 94.3% leased.

In terms of leasing statistics, we renewed 79.6% of expiring leases at an average capital cost of $8.24.

Rents on renewals increased 26.7% on a straight line basis and 13.1% on a cash basis.

We have renewed 77.9% of expiring leases for the nine months ended September 30.

Total rent for the renewed and retenanted space increased 23.1% on a straight line basis and increased 9.8% on a cash basis.

For all renewed and retenanted space, the average capital cost was $10.14.

With regard to the credit strength of our tenants from a portfolio standpoint, our top 50 tenants represent 70% of our revenues.

We have on average 5.5 leases with these tenants with an average space size of 42,000 square feet.

Our portfolio is characterized by strong credit with 55% of our combined net operating income in the government, defense IT and data sector.

Looking at our lease expirations scheduled across our portfolio for the remainder of this year, at September 30, we have 1.9% of revenues expiring, representing about 315,000 square feet.

For 2009, we have 14.5% of our revenues expiring.

As both Steve and Rand mentioned, we believe that 2009 lease renewals will be more challenging in each of our markets than usual.

Other than Northern Virginia, our markets do not face a severe overbuilding going into this down cycle.

Rather the challenge to our markets will come from a slightly contracting to flat employment scenario.

We do think that our concentration with the government and contractors will provide us with some mitigation.

As we mentioned on our last call, our leases to Unisys for the entire campus in Blue Bell, Pennsylvania expired June 30, 2009.

We have made good progress this quarter signing a direct lease with Merck, currently a subtenant, to continue occupancy of 219,000 square feet through June 2012 with an option to extend.

We achieved a 2% increase in rent and paid no tenant improvement allowance.

We also renewed Unisys for 114,000 square feet for 10 years.

We achieved a 66% increase in rental rate and will provide $35 of TI allowance and will be providing core and shell renovations.

We are actively marketing the 209,000 square foot building be on the campus and have delivered proposals to several prospects.

We are likely to redevelop the remaining single story 419,000 square foot building.

The NOI for the two buildings, not renewed or released, totals approximately $7.2 million on an annualized basis and we are projecting no retenanting until 2010 which was assumed in our 2009 guidance.

We'll keep you updated as we continue to make progress on these assets.

Turning to acquisitions for the quarter, we closed on a 31-acre land parcel in San Antonio that can support 500,000 square feet of office development.

The property is located adjacent to our existing holdings and we plan to start development on the parcel in 2009 to meet defense contractor demand.

We also acquired a 107-acre parcel in Frederick, Maryland near Fort Detrick that can support one million square feet of space and is designed to meet BRAC demand, resulting from contractors and agencies moving off the base.

With regard to the balance of the acquisition market for much of the year, there really had not been a lot on the market that met our investment criteria.

Pricing in our core markets has held up for the most part on the deals that have closed.

But we are now seeing evidence that even core pricing is moving and cap rates are rising.

We believe that we are still in the early stages of a repricing of properties in general, based on higher capital cost, and anticipate seeing more situations where owners are motivated to sell or recapitalize their assets.

We have remained ready to invest in opportunities where we can add core properties to our portfolio at favorable pricing.

We believe that better opportunities may lie ahead as we move into 2009, so we are being patient with our capital.

In order to prepare for these opportunities, we have brought John Norjen on board as Managing Director of Investments.

John will lead our acquisition and disposition efforts.

He has over 20 years of real estate capital markets experience, previously with CBRE and most recently with Eastdil, as well as extensive relationships with institutions and intermediaries that will better position the Company to take advantage of new investment opportunities, as well as bring a more proactive focus to our disposition efforts.

While we have been making progress with our disposition activity, lower levels of credit for private buyers and pricing inefficiencies have made the selling environment more difficult.

We will continue to pursue opportunities to selectively dispose of noncore properties.

Some of the disposition volume that we had anticipated for 2008 is likely to shift in the next year, which will provide us with additional capital with which to pursue acquisitions that are more in keeping with our core focus.

Turning to our markets with regards to the [BWI] submarket as of September 30 within the total market of 6.8 million square feet, vacancy including sublease stood at 17.5% up from 14.2% in the second quarter of 2008.

Absorption was a negative 20,000 square feet and 175,000 square feet is under construction.

Our BWI portfolios totaling 4.6 million square feet and representing 68% of the submarket was 91.8% leased at September 30.

Turning next to the Columbia submarket in Howard County, at September 30, vacancy with sublease was 15.1%.

There is 332,000 square feet under construction and 106,000 square feet was absorbed during the quarter.

Our properties in the Columbia submarket totaled 3.1 million square feet and are currently 95.3% leased.

Within [comps] Northern Virginia submarkets, the direct vacancy rate was 12.3% up from 11.6% in the second quarter.

Quarterly absorption was 179,000 square feet and year-to-date absorption was 1.6 million square feet versus 756,000 square feet for the comparable period in 2007.

Our portfolio of 2.5 million square feet is 99.3% leased at September 30.

Looking just at the Route 28 [Della South] submarket in Northern Virginia, the direct vacancy rate ended the third quarter at 18.5%, consistent with the previous quarter.

During the quarter 194,000 square feet of new construction space was added to the market; and 686,000 square feet of construction was completed that is 44% committed.

Absorption was a negative 68,000 square feet for the quarter, but a positive 468,000 square feet for the nine months of 2008.

Our operating portfolio of nine buildings totaling approximately 1.5 million square feet is 99.6% leased.

Within the Colorado Springs submarket, there is demand for space.

Leasing activity continues to increase and is ahead of last year.

Office vacancies were up in the third quarter at 10.6% compared to 8.2% at 12/31/07.

Our properties in the Colorado Springs submarket totaled 1.2 million square feet and are currently 95.3% leased.

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

Thank you, Roger.

Turning to our development activity at September 30, we had 12 buildings with 1.3 million square feet under construction for a total cost of $266 million.

Our construction pipeline is 41% leased as of September 30, up from 27% at the end of the previous quarter.

As you will note in the supplement, the two buildings located at Potranco Road in San Antonio that we previously showed as committed now have signed leases.

Subsequent to quarter end, we signed a small leased at our [Orundo] Preserve building and one leased at our first M Square building and we expect to execute a lease shortly for 73,000 square feet at 300 NBP.

With these leases, we believe our construction leasing is on track and approaching 50% leased, which is consistent with our beginning of the year projections.

Also during the quarter, we signed a 39,000 square foot lease at 302 NBP which is now in-service, bringing the total leasing at this building to 79%.

Our development pipeline includes buildings that are permitted, designed and ready to start construction.

We have re-examined this pipeline in detail reducing it to the buildings that demand dictates we start relatively soon despite a weakening economy.

We've also delayed several building starts by a quarter primarily due to permitting challenges.

This development pipeline includes nine buildings totally 980,000 square feet at a cost of $204 million.

Importantly, 87% of the square footage in the development pipeline is for the government and defense sector, underlying the strength of our strategy.

Looking at our land inventory with the addition of two parcels this quarter, we now control a total of 1900 acres that can support approximately 16 million square feet of entitled office space.

In summary, we are making good progress with our development pipeline despite a difficult economic environment.

We are laying the groundwork to be well-positioned to take advantage of the upcoming BRAC opportunities.

And we have addressed our capital requirements to enable us to execute on our plans.

At the same time, we have planned for a challenging 2009 with regard to our operating portfolio and have laid out a conservative 2009 plan that we are confident of achieving.

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

(Operator Instructions).

John Guinee from Stifel Nicolaus.

Actually most of these questions are for Steve.

One quick question for you, Rand.

On the land acquisition did you pay 2007 prices or 2010?

Probably in each case, we did get a reduction from what was originally discussed.

A fairly significant reduction in the case of the property up by Fort Detrick.

So it's unusual to buy ground, but we have the demand there.

And I think we took advantage of some weakness in the potential market by getting the price reduced.

Thanks.

Steve, net service income $0.08 to $0.10 projected for 2009.

What was it in -- what will it be in 2008 and what, specifically, is going on, on the construction service line item of the financial statements?

It's about $4 million for 2008 is what we are projecting.

So we have a big contract for one of our primary tenants, a couple of them going on that are really ramping up in this quarter.

And so that's -- the fees are a small percentage of the total spend of the construction spend and so that is what you are seeing.

There was, as we footnoted in the supplement, there was one small contract that we had a very tiny net (inaudible) that we went and grossed up the first and second quarter by like a (multiple speakers) a quarter and $7 million in the other, but the fee had been recorded net.

And now that we have the contracts grossed up, we see that that is what you're seeing in the third quarter.

A lot of activity in the third quarter.

And it's that kind of business that's representing the money that I -- for next year, throughout the year.

Last question for, I guess, Steve or Rand.

What is the pricing now on your yield to put on your $200 million of exchangeable notes or your preferred shares outstanding?

And are you in the market to buy back any of that paper?

We're looking at it.

The actual economic advantage to us is actually very small.

We do analyze it.

We think about it.

We've been also making sure that we preserve the capital for everything that Rand and Roger talked about.

We look at it regularly.

We would consider it.

But the economic return to us is really not that big at this point in time.

But we are relative to the cost of our capital.

It's roughly $0.71 on $1.00 today.

That should be a midteens yield to put?

Right.

And that's not good enough?

It has to do with your assumption of what you are replacing.

You know the 3.5% with your cost and the spread there.

You don't really get much of an accounting benefit for that.

That obviously changes next year as you have to move that to your projected expense, more like 6.

Then you are comparing a different analysis at that point.

It's primarily replacing 3.5% that, with more permanent benefits -- that's at a higher rate when you look at the long-term modeling of it.

But we are looking at it.

We understand that there is a discount from an opportunity standpoint.

Where are your preferred shares trading right now?

And is that -- the same question on that.

I think the preferreds if you look at the current last night at the current coupon it's in the mid 12s.

So we are in $15, $16 versus a $25 par.

I don't think we would be looking at buying those in, based on those kinds of returns.

One last question I guess for Roger, or whomever.

Are you -- on the 419,000 square foot, single story business building up in Blue Bell, are you just going to tear that down and start afresh?

I think what we will probably do is divide the building up into a couple of smaller buildings and create parking around smaller masses of building, and redo the [facia] of the building a little bit.

I think that is the current thinking, but we are still working through that with architects.

Michael Bilerman from Citi.

[Irving Guzman] here for Michael.

Good morning.

Just two quick questions.

The first of which is the four leases with Wachovia -- do any of those come up for renewal any time soon?

We do have a small 2500 square foot lease with one of their mortgage subsidiaries that matures in 2009.

But the big lease we have with them at Pinnacle Tower in Northern Virginia in Tysons Corner does not mature until 2018.

I believe there is an option to terminate out in 2012, but it is with about a two-year writ penalty.

So I think at this point, we are looking at a situation where we think we have a credit upgrade and we don't have any near-term risk of getting space back.

One other question, Rand, on next year's guidance.

You mentioned you were more conservative on your lease up assumptions.

At the same time you mentioned that you are expecting tenant retention to fall to about 60% and at the same time the lease role is approximately 50% of the portfolio.

So I'm just trying to reconcile that with the expectation that occupancy will actually grow from the beginning of the year through to the end.

It would imply that there is going to be some significant retenanting of space.

Can you just talk about that a little bit?

I'll let Roger do it.

Sure.

With respect to our lease maturities for 2009, 25% of our maturities relate to two specific assets.

One is the Unisys maturity that we talked about, which is 467,000 square feet not taken care of yet and the second is in Columbia.

Two years ago, we acquired a facility in our Columbia Gateway Business Park.

There was a combination office and warehouse building.

The warehouse part of that building -- 245,000 square feet -- matures on 12/31/09.

That tenant will not renewed.

It is the goal of COPT to retenant or -- I'm sorry to redevelop that property into office.

And the question is will we do it right away?

Or will we go through one more round of leasing for that building and then redevelop it at that point.

So 28% -- I'm sorry, 25% of our maturities relate to those two tenants.

If you look at our maturities other than that, we are really projecting a pretty standard year in terms of renewal percentage of about 70%.

But those two really kick the percentages down significantly.

So that [asset] is going to be redeveloped that's going to be taken out of the occupancy statistics of 92% to 93%?

We will.

And just to let you know, the NOI is very small on that.

The NOI is -- I'm sorry $4.20 per square foot net rent on 245,000 square feet.

So it is a little over $1 million with NOI.

One last question on the market demand portion of the development pipeline that is coming online.

All of it in the third quarter of '09.

What is your best guess on leasing when they deliver in the third quarter of next year?

We have, as you note in the description now in the supplement, we have the government which we assume may stay committed, but will be usually full upon delivery.

The similar situation for the defense IT buildings.

So the market demand which is, really, only the buildings that are being built in the large office parks, we have conservatively -- and you see that on the stabilization dates -- allowed a 12-month lease-up time frame for those.

And we think that as we deliver those, we will be in roughly the 25% to 40% range going into delivery, and then work our way up from there to stabilization within the year.

Chris Haley from Phillies.

Yay, Phillies.

Congratulations.

Couple of questions if I can on the development for 2008, 2009.

Steve, do you know, can you give us what has been or what will be the impact of your '07, '08 deliveries?

Or the '08 year?

First I would like to be able to check what you actually --?

I have the -- I don't -- what I do have in front of me is the '08 deliveries on the '08 year.

And I have the '09 deliveries on the '09 year.

Everything else is blended in my numbers for '09.

(multiple speakers) I'm sorry the '08 (inaudible) full year '08 impact on '08 -- from the '08 development is what?

The '08 is $4 million in terms of buildings opening in '08 and the impact on NOI, NOA in '08.

It is now in my numbers blended in with the rest of the portfolio for '09.

The same number for '09, for the '09 openings are contributing $4 million to '09.

$4 million in '09.

Dollar amount can committed in each of those years approximately?

Dollar amount of development?

Could I -- do you have -- ?

I don't have that in front of me.

We will have to get it for you.

I don't have that in front of

I would be interested in that in terms of what the future contributions would be, in light of Rand's preamble which was obviously -- the commentary was arguably a little bit more bearish than we've heard and maybe more realistic than what we've heard from some of your peers.

And we would agree with it in terms of the occupancy assumptions you've built in.

But conversely the development side, you remain arguably more bullish.

Maybe that's just the segments you are focusing on.

When you look at 2010, now you are starting projects that will impact 2010 and 2011.

Be interested in your -- if you could expand upon your comments, saying that you delayed certain projects by a quarter to reflect permitting challenges.

But none of the projects or at least, there wasn't as much commentary regarding more cautious on starts due to market demand or customer demand.

Could you expand upon that?

I think the reason that we're -- I mean, and as you can tell from my comments, we are very cautious in looking at the markets and feel that the next 18 months or so are pretty difficult from a recessionary standpoint.

But then we go and we look at the demand from the particular tenants that we cater to and we still see strong demand, particularly related to BRAC.

And we didn't spend a lot of time on this call because there's really not been a lot of new news.

BRAC is on track.

The buildings are under construction on-site at the various locations.

And the contractors have yet to start to step forward with the leasing.

But there are discussions on a number of fronts going on.

So that is why when we look out into the starts that come late in '09.

And then, as we start to look at forecasting for 2010, which we think that that development volume will actually increase a fair amount, it is directly related to the anticipated BRAC volume that's coming on.

We did have on several of the permitting delays that really related to some adjustments on the buildings.

The one that is requiring the longer one is really tied into some permit adjustments up at Thomas Johnson Drive -- 110 Thomas Johnson Drive up by Fort Detrick.

And so that one will start in late spring next year.

The rest of them are just reflections of some minor adjustments on permitting time frame shifting by about a quarter.

So I think the other thing that sort of goes unsaid is on the development yields, we do feel that we will still be in the -- roughly, the 10% cash on cash yields.

While you might expect some of the rate to moderate slightly on run rate increases, we are seeing construction costs reductions.

We anticipate more of those.

So we think those margins will stay intact right through that time frame.

Appreciate that.

With relation to the incremental NOI brought in here, you are providing a numerator into the NOI impact.

But obviously the permanent financing costs will dilute some of that impact.

What type of permanent financing costs have you assumed when these projects are complete?

6.5 to 7% is what we are thinking in terms of that permanent cost of debt right now.

And where would that have been a year ago?

In your guidance?

Maybe 100 basis points under that.

And you are finding continued interest from parties of various sorts to offer permanent financing at a -- under 7% rate?

(multiple speakers)

Actually we don't have to do a lot, but we do believe in our conversations and all, that we can execute the permanent financing that we have planned for next year and maybe $50 million increments.

And we think we are going to be able to get that done.

My last question is if I look at the remainder of '08, 2009, 2010 if you care, what are the capital needs excluding acquisitions that you currently are modeling?

Or how should we look at your financial package regarding maturities of debt and financial obligation regarding development?

And how do you look at liquidity?

If you could give us the sources and uses look that would be very helpful.

I will do debt and I'll let Roger tackle the rest of your question.

I think our debt maturities are $92 million for '09 and they are $65 million for 2010.

And you are not coming through very loudly so I didn't hear the rest of your question.

Roger is sitting, I'll get closer to the phone.

In terms of development that we have budgeted for 2009, we currently have $200 million forecasted to spend, of which we have spent $20 million of that so far.

So that would be $180 million of net spend.

And then we will have some spend doing the Unisys redevelopment probably in the $30 million range, but that probably won't happen until 2010.

And then with respect to 2010 development, I think we are still uncertain as to what the starts will be in 2010.

But the last couple of years, starts have been in the $200 plus million range for development.

So I've got 160-ish, 170-ish in debt plus $180 million.

So $340 million whatever that is plus Unisys, plus some additional starts in 2010, based upon -- as you mentioned -- BRAC activity.

So in terms of capital requirements in the neighborhood of just round numbers up to $400 million -- $400 million to $500 million and the sources for that?

We have around $200 million available on our primary line right now.

We also have an accordion feature that we are exploring expanding.

We have $170 million available on our construction line and we've got some new permanent debt in probably $50 million increments that we are pretty confident we can execute over the time frame that we are talking about.

So I would say that those were our sources.

Bill Crow from Raymond James.

Good morning.

Couple of questions.

You talked about cap rates creeping up for the quarter, sort of assets you are looking for.

What is the magnitude of that?

Are we up 25, 50 basis points higher?

We're thinking that in the markets in which we operate that cap rates will go into the 8% to 8.5% range.

Or similar properties that you are interested in?

Correct.

And then do you have an estimate of what you have invested per square foot basis on the data center space?

We only have two data centers where we invested significant amounts of money and they are two Northrop Grumman data centers.

And in each case we invested about $280 a square foot total.

That is the data center and the office portion.

The balance of the data center is that we have in our portfolio, the tenant has funded the cost for those.

So our investment is equal to what a standard office investment would be.

Rand, I think you touched on this on BRAC, but there have been no surprises relative to your expectations thus far.

Is that fair?

I think that's fair.

There's been some articles on paper that have come out that probably are dampering somewhat of the expectations which we thought was appropriate.

And the real difficulty is just that the contractors in the process that they go through with the Department of Defense don't get notified of their contract renewals until fairly late in the process.

So you have sort of pent-up demand that you don't hear much about, and then all this rush to delivery, but the -- so that's something that all those will have to deal with and we are positioning for that in our 2010 starts.

A little bit in '09 as well.

But as far as the actual funding in each of the BRACs, it is under construction that delivery dates are set.

What is going on that will determine somewhat of the off-site demand is just how many of the government employees actually move versus retire, or choose not to relocate.

And that will potentially increase the amount of off-site demand for the contractors and that is yet to be determined at this point.

Steve, what was the capitalized interest for the quarter?

Let me see if I can find that.

Hold on a second.

A little over $4 million.

Thank you.

Rich Anderson from BMO Capital Markets.

Good morning, everybody.

Most of my questions have been asked and answered.

Just wanted to get back to the conservative scenario on 2009.

It's clear how that will impact your market -- office market rate business, I guess.

But in the government area, are you seeing noticeable signs that the government sort of pulling back on their real estate needs in a slowing economy?

Are is it just something that you are not seeing, but you think could happen?

No, I don't.

I think it is the opposite.

The demand is there.

I think the various economic stimulus that have been thrust into the government's budget here will probably affect available dollars, but our anticipation is that actually helps on the leasing.

That the government where they might have done some military construction, [MilCon] they call it, would instead go towards leasing in order to be able to [stem] their demand in various sectors.

Depending on which candidate wins, you may find yourself in a situation where government expenditures actually step up, which has occurred in most previous recessions as a way to help economic stimulus.

Some of the candidates have mentioned that.

And so we sort of anticipate that that will in fact occur.

And then, finally, if the expenditures in Iraq to slow down, we think that our sector of the government that we deal with will get an increase, a very sizable increase on their expenditures.

So my comments don't deal with, really, the government or the defense IT or even the data sectors.

It's really dealing with kind of an overview of the economy.

And that of course affects jobs; and that will affect our nongovernment and defense IT sector.

That's very helpful.

I don't think Steve mentioned anything about dispositions in your assumptions for 2009 or did I miss it?

We have an assumption in here that we might dispose of.

It depends on what point of the range you are in -- up to possibly $40 million.

And that would be out of Harrisburg, New Jersey.

Is that right?

It would be non-core, nonstrategic assets.

Michael Knott from Green Street Advisors.

Good morning.

My question is regarding the development pipeline.

When you think about starts for '09 and '10, do you now require higher yields to compensate for the fact that returned expectations everywhere are going up and probably cap rates are moving up and so that may squeeze the value you are creating?

How do you think about that?

I don't think we have tried to forecast that into our projections for '09, Michael.

I think that we have had a lot of internal dialogue that several factors are going on.

One is an expectation is that some of the people had asked earlier that your permanent to financing costs may go up.

So accordingly some of your development yields should go up somewhat parallel to that.

I think that the positive is that, frankly, no one can get construction financing, so we are just not seeing new construction come along in our markets.

And that should give us -- firms like ours that have access to capital a competitive advantage.

We typically have not gone out and historically tried to become greedy, but just maintained a fairly consistent.

And I think in our past 10 years it has ranged from 10 to 12 may be of a 200 basis point spread on our cash and cash development yields.

So what we will put some pressure on that as I said would be just that your ability to increase the leasing rates will be someone dampened by the economy.

On the other hand, I think that's more than offset by the reduction in construction costs that we are seeing.

And so I think that our margins can be at that level in '09 and probably be moving up a little in 2010 would be our guess.

And then is there any inferences you can draw from your land purchases in terms of where land values are today generally versus a year ago?

I don't think really because what's interesting if you look at what you can afford to pay for land, it really comes back to what's your rental rate and land is a component of rental rate and that hasn't changed.

So I think in our markets, land has stayed at the levels.

There's not been the reductions, what we've done is simply take advantage of some individual situations where we had a contract.

We are looking at it under header -- under option and then contract and could have laid closing quite a long time, accelerated that for a substantial reduction in the FAR cost and we just took advantage of that situation.

And in the other case it's our land continues to be dominated by the government in San Antonio.

And we did need to get some land for the defense contractors who have indicated needs to have product delivered by mid 2010.

And so we moved accordingly and pretty much paid a slight discount to market there.

And my last question is on the underdevelopment, the 204 million?

You talked about the under construction being probably closer to 50% leased after some leases in the works are finished.

What's -- what would be your census to the level of commitment or discussions on the $204 million today?

I think it varies, according to the tenants.

If it's government, we may start all of these on the list on page 32 of the supplement speculatively.

But we do anticipate that by the time of completion, the government would have signed those leases.

On the defense IT sector those related to the National Business Park.

It has pretty much been our experience that by the time we finish buildings we've got good leasing activity.

And certainly in less than a year, we are fully leased on those.

And we are on that park other than the [302] where we held out some square footage for the government commitment.

We are basically full on that entire park.

So 308 we would expect that that would come on fairly well leased as we developed it.

Really, Northgate, which is our first building, Northgate A in Aberdeen we would expect some fairly significant preleasing to occur as we start that building and followed by some early on leasing in C as we get going on that building.

Those are both responding to specifically to BRAC demand related to the Aberdeen [proving] ground portion of BRAC.

So I think generally we are going to be in pretty good shape.

Dave Rodgers from RBC Capital Markets.

Good afternoon.

My remaining question that I had left on the list for Steve -- you addressed earlier your ability to access the bank markets in smaller chunks over the course of the next year or two.

How have those discussions with the lenders changed just over the last 30 or 60 days?

Can you give any color on that?

I'll have Mary Ellen who has had more of the direct conversations in the last week or so answer that one.

I think, Dave, probably the biggest change has been the value of size of deals that can get done today.

I mean, I think we were looking back pretty fortunate in terms of our timing of the $220 million deal that we did earlier this summer.

I think, going forward, I think there's capital available, but I think it might be in smaller pieces.

We can break down our debt by individual building and refinance and through the 50 to -- $30 million to $50 million range.

So I think that's a workable plan for us.

It is probably the biggest change.

And then I guess one more.

Rand, I think you've adjusted in a couple of different forums, but I guess it's active in a different way.

The development pipeline or the pace of the starts at this point seems to I guess I would say put you behind the relative demand curve that you've laid out over the course of the last year or two potentially.

If that's the case at what point would you feel comfortable getting back into maybe ramping that development pipeline a little more specifically with respect to projects in and around Rundle and BP, etc.?

As I said, the interesting part of the BRAC, we still do anticipate that specifically on the contract or demand that would be outside of Fort [Mead] that's a 4.5 to 5 million square foot number.

I think that's lagging to the extent of when those leases start to be signed.

And at the same time those that have square footage there clearly are going to take advantage of that we think one that potentially occurs.

So I think what we've simply tried to do is make sure that we have got product available at each of those locations we are in design and will go through permitting; just haven't put it in here yet.

Significant step up and ramp up on development so that we are ready to go and ready to go with what could be fairly significant demand.

But we just haven't put it in here for terms of any '09 impact.

So the key is to be ready.

And as we see that unfolding, we will move very very quickly to have square footage available, really earlier than any other competitors in the marketplace.

Thanks for the color.

Chris Lucas from Robert W.

Baird.

Good afternoon, everyone.

Just a couple of quick questions.

Rand, just an update on any change to activities at Fort Richie?

Not really.

We did open in the quarter the Community Center as we had promised.

And we paid a certain amount and [Penmarr] paid for roughly half of that.

That was a commitment to the community.

That's gone over very, very well.

Discussions with several large tenants continue.

We pretty well are finished with our demolition activities.

And we are right now into the infrastructure portion of the activities, which requires the upgrading of substation and new phone lines and improving the water system and so on like that.

So that is all ongoing.

And in the meantime, we are in the final stages of design for the residential component where we will start to market that to land acquirers next year fairly aggressively, and are starting to see some signs of interest in that area.

We did not, for conservativism in 2009, we did not put any land sales or activity into our forecast for Fort Ritchie in 2009.

So just that we remained conservative.

And then, Steve, a couple of questions just on the net service income.

For the quarter, was there a catch-up or a ramp up issue with the amount for this quarter?

It's just -- it was just the timing of when certain work got done and when we could recognize it.

It just really ramped up in this quarter, but it's going to be at a pretty high level for a while now.

And that's LIBOR projecting $4 million to $5 million for all next year.

Is it safe for us to think about that as a consistent number quarter to quarter?

Or is it going to be pretty lumpy?

For 2009, I think you can think of that as a pretty consistent number from quarter to quarter.

Just a follow-up on the disposition question from earlier.

Just refresh my memory as it relates to the assets in New Jersey.

I thought there was some expectation for sale in '09.

Chris, we have two remaining assets in New Jersey.

They are both leased to a tenant who has an obligation to buy them from us.

They can do that in September of '09 or they can extend it for one year until September of 2010.

Our most recent conversations with them are that they will extend it until 2010.

But they are a high-grade credit tenant that we are not concerned about performing on the contract.

Thanks.

Chris Haley.

Phillies.

Based upon your occupancy assumption, Steve, you are not including the lost occupancy from Unisys in your year end or second half assumptions.

Is that correct?

We are -- Chris, the occupancy percentage that we are quoting assumes that we take some of the Unisys out of service.

So, for instance the 419,000 square foot building won't be operational at the end of '09.

And it is possible that the other 200,000 square foot building could likewise be out of service.

We are not sure about that one yet.

So, therefore, you will be capitalizing 400,000 to 600,000 square feet?

Can you associate expenses?

Not -- we won't be capitalizing interest on the existing asset base.

We may be capitalizing property taxes and some minor operating expenses.

Thank you.

At this time, there are no questions in queue.

I will now turn the call back to Mr.

Griffin for closing remarks.

Thank you for this extended call and thanks for joining us today.

As always, we do appreciate your participation and support, particularly in these difficult times.

So we are available to answer any other questions you might have.

And have a great day.

Thank you for your participation today in the Corporate Office Properties Trust Third Quarter 2008 Earnings Conference Call.

This concludes the presentation.

You may now disconnect.

Good day.