COPT Defense Properties (CDP) 2009 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust First Quarter 2009 Earnings Conference Call.

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

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

Ms.

Fowler, please go ahead.

Thank you and good morning, everyone.

Today, we will be discussing our first quarter 2009 results.

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

As they review our financial 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 GAAP measures to non-GAAP financial measures referenced throughout this call.

Also, under the Investor Relations section of our website, you'll find a reconciliation of our 2009 annual guidance.

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

First, I must remind all of you at the outset that certain statements made during this call regarding anticipated operating results and future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Action of 1995.

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

These factors that could cause actual results to differ materially include, without limitation, the ability to renew or release space under favorable terms, regulatory changes, changes in the economy, the successful and timely completion of acquisitions and development projects, changes in interest rates and other risks associated with the commercial real estate business as detailed in our filings from time to time with the Securities and Exchange Commission.

Now, I will turn the call over to Rand.

Thank you, Mary Ellen, and good morning, everyone.

I'm pleased to report we had a good quarter, generating FFO of $0.67 per share.

This is a 20% increase over first quarter 2008 FFO of $0.56 per share.

Renewal rates continued to be strong with 82% of expiring leases renewed and occupancy remained fairly steady at 92.9%.

With regard to FFO for the balance of the year, as you know, office is a lagging sector in the economy.

Rental rates and occupancy will begin to be under some pressure in the second half of 2009 and into 2010.

No company will be immune and COPT will be affected, as well.

However, we believe we are uniquely positioned to not only weather but also grow through the downturn, and there are a number of reasons for our confidence.

First, we are in good shape on our capital position.

We are executing on our debt strategy, as we outlined in previous calls.

In addition, we took advantage of our inclusion in the S&P 400 MidCap Index on April 1st to opportunistically issue equity, not as a defensive measure, but rather as an offensive move in order to be positioned for opportunities we are starting to see in the market.

As a result of the index inclusion, index funds rebalanced our portfolios, which created a natural demand for our stock.

Although our 2009 capital plan did not include an equity offering, we determined that we could take advantage of this demand and issue stock at a very low cost to the Company.

We also realized that we had additional demand coming from existing as well as new shareholders.

We issued 2.9 million shares at a low .2% discount to our closing price, raising $72 million.

We were restrained in our approach to the equity raise as the demand for shares was significantly above the number of shares sold in the offering.

The additional equity further solidified our balance sheet and provides more dry powder for acquisition opportunities.

With regard to our debt, very little is maturing during 2009 and 2010.

We continue to have sufficient capacity on our $600 million revolver to fund our maturing debt over the next two years.

As we mentioned last quarter, we continue to work on securing permanent debt in the $300 million range that will provide additional capacity under our revolver.

Steve will provide more detail.

Secondly, with our capital lined up, we will be in a position to take advantage of acquisition opportunities that we are now starting to see in the market.

These opportunities result from distressed sellers who will be forced to liquidate due to fund redemptions as well as from the stressed borrowers with loans on assets that they cannot refinance in this market.

We plan to take advantage of these situations, which will assist in the Company's growth through this difficult period.

Third, we have development that is still providing growth.

During the quarter, we started construction on four new buildings, three of which are for the government and the fourth related to BRAC.

We have a very tenant focused development pipeline with 100% of our planned 2009 construction starts being government or defense IT buildings.

We are uniquely positioned to have continuing demand for new buildings as a result of our government and defense contractor niche.

As we expected, the government has announced cutbacks in defense spending.

However, the overall defense budget has increased by 4%.

The cutbacks are primarily related to weapons systems.

At the same time, the areas that we focus on are seeing an increase in funding.

As an example of this is the cyber initiative that will be announced by President Obama shortly and will likely be located in one of three markets where we have a significant presence.

In summary, we are confident in our ability to take advantage of the opportunities that arise over the next several years, and at the same time, continue to grow FFO.

And with that, I will turn the call over to Steve to discuss our results and guidance in detail.

Thanks, Rand, and good morning, everyone.

Turning to our results, FFO for the first quarter of 2009 totaled $44.8 million or $0.67 per diluted share.

These results represent a 20% increase on a per share basis over the $0.56 per diluted share or $35.9 million of FFO for the first quarter of 2008.

2009 first quarter FFO results included $3.1 million of net termination fees.

We previously indicated that we expected termination fees of $4 million for the year and that they would be front end weighted.

We continue to expect full-year termination fees to be $4 million.

For the quarter, third party development fees net of cost slightly exceeded our forecast while NOI, G&A costs and interest expense were in line with our expectations when we last gave our 2009 annual guidance.

Our lease renewals remain strong at 82% for the quarter.

We reported net income available to common shareholders for the first quarter of $12.1 million or $0.23 per diluted share compared to $6.7 million or $0.14 per diluted share for the first quarter of 2008.

Turning to AFFO, our adjusted funds from operations of $33.4 million represents an increase of 38% from $24.2 million in the first quarter of 2008.

Our diluted AFFO payout ratio is 56% and our diluted AFFO payout ratio is 67% for the first quarter.

Looking at our same office cash NOI for the first quarter of 2009, for the 223 properties or 92% of the consolidated portfolio square footage, same office cash NOI increased by 9%.

Excluding the effect of the increase in termination fees, same office property cash NOI increased by 3% for the quarter.

Turning to the balance sheet, at March 31st, our weighted average cost of debt for the first quarter was 4.8%, down from 5.4% a year ago.

75% of our total debt was at fixed interest rates as of March 31st.

Our coverage ratios remain strong with a first quarter EBITDA interest expense coverage ratio of 3.5 times and a fixed charge coverage ratio of 2.9 times.

Reviewing our 2009 capital plan, we have managed our near term debt maturities to low levels with only $64 million of debt maturing for the remainder of 2009 and $65 million in 2010.

We are currently in the market to raise approximately $300 million in debt through several sources.

First, we have bids for a $100 million seven-year secured loan with a 7.25% interest rate from several lenders and expect to finalize the terms and close in the second quarter.

Second, since we received such strong interest on the first package, we went back to the market with a second permanent debt package with anticipated proceeds ranging from 100 to $110 million.

We believe we will agree on terms in the next few weeks, and if so, could anticipate a closing in the second quarter, as well.

Next, we've negotiated a $50 million five-year term loan with a member of our bank group that we expect to close within the next 60 days.

And finally, we are near closing on a loan in the 20 to $25 million range for one of our joint venture assets, and we will be pursuing over $30 million of construction financing for additional joint venture properties shortly.

The combined proceeds of these anticipated financing transactions far exceed the remaining $64 million of debt maturing this year, the $65 million of debt maturing in 2010 and will provide capacity on our $600 million revolver for expected acquisition opportunities.

As a reminder, we can extend both the $600 million revolving credit line and the construction revolver from 2011 to 2012 for minimal fees.

With regard to development funding, our $225 million construction revolver has sufficient capacity to fund the remaining cost for the buildings currently under construction.

We anticipate that we will move two well leased buildings off the construction revolver later in the year, after they're placed in service, which will restore sufficient capacity to fund the cost of all the buildings we plan to start in 2009.

Turning to our diluted FFO per share guidance for 2009, in early April, we updated our guidance as a result of the equity inclusion offering.

The dilution is $0.07 per share for 2009, which changed our guidance to a range of $2.41 to $2.51 of FFO per diluted share.

This represents FFO per diluted share growth of 1 to 5% positive over the comparable $2.38 per share results for 2008.

Those 2008 results exclude the gains on debt extinguishment and have been adjusted for the accounting change required for the exchangeable notes and the FSP for APB14-1.

And now, our updated assumptions for the 2009 guidance are as follows.

First, for our same office portfolio, plus the developments placed into service during 2009, we expect occupancy to end 2009 between 91.5% at the low end and 93% at the top end of our range of guidance.

We believe occupancy will be under more pressure in the second half of the year.

Although we achieved an 82% retention rate in the first quarter, given market uncertainties, we are conservatively projecting our retention rate for 2009 to trend towards 70% excluding the repositioning of the Blue Bell Pennsylvania assets in mid-2009 and the one warehouse space terminating at the end of 2009.

Second, we estimated that development projects opening during 2009 will contribute approximately $3 million of NOI.

99% of this contribution is currently under lease.

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 for the year excluding termination fees is projected to be flat with 2008 levels, although it was positive in the first quarter of 2009.

Fourth, lease termination fees are projected to be approximately $4 million for the year with $3 million realized in the first quarter of 2009.

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 do become available.

Sixth, gains from other than operating assets are unchanged and 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 service income, primarily development fees from our government business, is projected to be between 6 and $6.5 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.

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

And finally, our guidance assumes no additional equity issuance during 2009 other than the April 1, 2009 index inclusion offering that Rand just discussed.

Now, based upon the annual guidance assumptions that I just reviewed, most of the termination fees occurred in the first quarter leaving approximately $1 million expected for the remainder of the year.

Also, as a reminder, the impact of the equity inclusion offering is expected to dilute FFO per share by $0.07 over the remaining three quarters.

As a result of these two factors, we expect quarterly FFO per share to be lower than the first quarter for the rest of 2009.

This is our updated look at 2009 and we expect to further refine the details throughout the year.

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

Thanks, Steve.

At quarter-end, our wholly owned portfolio consisted of 240 properties totaling 18.5 million square feet that were 92.9% occupied and 93.9% leased.

Our occupancy was down .3% quarter-over-quarter, largely due to the lease buyout Steve mentioned that we executed in our Northern Virginia portfolio.

During the first quarter, we leased 548,000 square feet of which 323,000 square feet was renewals, 67,000 square feet was retenanting, 37,000 square feet was first time lease up of previously acquired space, and 121,000 square feet was development space.

For the quarter, we renewed 82% of expiring leases at an average capital cost of $3 per square foot.

Rents on renewals increased 6.2% on a straight line basis and 1.4% on a cash basis.

Total rent for renewed and retenanted space increased 3.9% on a straight line basis and decreased 1.5% on a cash basis.

For all renewed and retenanted space, the average capital cost was $5.35 per square foot.

As Steve mentioned, the Company executed the large lease termination in the first quarter, receiving $3.5 million in cash and recognizing $3 million of GAAP earnings after write off of straight line rent and FAS141 intangibles.

As a philosophy, the Company will terminate leases under one of two circumstances - either there is a replacement tenant identified or the buyout is economically compelling.

In this case, we received a fee equal to rent for three of the four remaining years on the lease, realizing a little over $100 per square foot.

The tenant also left its furniture behind, providing us with plug and play space of 35,000 square feet.

The termination increased overall vacancy by .2%, but we believe the downtime and retenanting costs will be much lower than the lease termination fee.

Looking at our lease expiration schedule across our portfolio for the balance of 2009, we have 11.9% of our revenues expiring, down from 13.6% at year-end, representing 2.4 million square feet.

We still expect a renewal rate of approximately 70%, excluding the Unisys non-renewal space and a warehouse space in Columbia that matures December 31st that we expect to take out of service and convert to another use.

As we discussed in our last call, we believe that in 2009 and continuing into 2010, we will experience a higher incidence of non-renewal, early renewals with space reductions and somewhat higher capital expenditures on leasing.

Since year-end, the pressure on occupancy, rental rates and concessions has heightened somewhat.

Our priority will be occupancy over rental rates for the next 12 months.

We continue to believe our concentration in the greater Washington region and our sizeable government and defense IT tenant base along with only 7% exposure to the financial services sector will limit our downside exposure.

As we mentioned on our last call, the industry we are most exposed to, federal information technology, is doing reasonably well.

The outlook for contractors well positioned with intelligence agencies is positive.

There is a continuing demand for intelligence, surveillance and reconnaissance products and services.

The industry we will benefit from -- the industry will benefit from the upcoming growth in the federal cyber security spending.

We are seeing modest moment from BRAC related tenants, but believe activity will pick up in the fourth quarter when contracts for the next fiscal year are validated.

At our Blue Bell Pennsylvania campus, we have begun renovating the Unisys renewal building with occupancy scheduled for the second quarter of 2010 with temporary occupancy in the original headquarters building until then.

We have activity for renovation build to suit in the Unisys giveback space.

We do not have any additional leasing projected until mid-2010.

The credit quality of our top 50 tenants who represent almost 70% of our revenues remains strong.

56% of our 2009 NOI run rate comes from buildings primarily leased to tenants in the government, defense IT and data sectors.

We have experienced and do expect some modest credit issues over the next 24 months coming outside of our top 50 tenants.

During the quarter, there were no acquisitions of operating properties.

We are still seeing resistance on the part of would-be sellers to meet market pricing, which has led to a high percentage of offered properties being pulled from the market or otherwise not trading.

However, we are beginning to see evidence of greater motivation on the part of some owners and we believe that the environment continues to evolve into one that is more favorable for new investment.

The financing activities that we have noted leave the Company well positioned to capitalize on these favorable investment opportunities and we believe that we will be able to selectively add core properties to the portfolio as we progress through 2009.

Turning to our markets, with regard to the BWI submarket as of March 31st, within the total market of 6.9 million square feet, vacancy stood at 16.9%, up from 15.8% in the fourth quarter 2008.

There is 538,000 square feet under construction, which is 60% pre-leased.

Our BWI portfolio totaling 4.6 million square feet and representing 67% of the BWI submarket was 92.2% leased at March 31st.

Turning next to the Columbia submarket in Howard County, at March 31st, vacancy was 13.5%, slightly down from 13.9% in the fourth quarter 2008.

There is only one building under construction, a COPT building, and it is 100% pre-leased.

Our properties in the Columbia submarket total 3 million square feet and are currently 96% leased.

Our suburban Baltimore portfolio is 84.4% leased, down from 85% at December 31st, and 83% occupied, which is flat with year-end.

Within the submarkets that we operate in, there is only 113,000 square feet under construction out of a total 14 million square feet, representing less than 1% of existing stock.

Within COPT's Northern Virginia submarket, direct vacancy remains the same at 15.6% as compared to the fourth quarter 2008.

Quarterly absorption was a negative 91,000 square feet.

Our portfolio of 2.6 million square feet is 98.4% leased at March 31st.

Looking just at the Dulles south submarket in Northern Virginia, the direct vacancy rate ended the first quarter at 19%, down from 19.7% in the fourth quarter 2008.

Within the Dulles south submarkets, there was approximately 171,000 square feet added to the market in the quarter.

Our operating portfolio of nine buildings totaling approximately 1.5 million square feet is 97.6% leased.

Our 2009 Northern Virginia expirations total 194,000 square feet or 7.4% of our Northern Virginia portfolio, of which 110,000 square feet expires on December 31st.

Within the Colorado Springs submarket, office vacancies were up in the first quarter at 13.3% compared to 12.3% in the fourth quarter 2008.

There is no new construction.

Our properties in the Colorado Springs submarket total 1.2 million square feet and are currently 95.4% leased.

Now, I will turn the call back to Rand.

Thanks, Roger.

Looking at our construction pipeline, at quarter-end, we had 13 buildings under construction for a total of 1.5 million square feet at a projected cost of $331 million.

We've added four buildings to the construction pipeline this quarter, all government or defense contractor buildings.

Our development pipeline has five buildings under development with close to 525,000 square feet and a projected total cost of $125 million.

We have added the next building in San Antonio and National Business Park to the list this quarter.

All the buildings in the development pipeline are for our government or defense IT tenants.

As we've stated previously, we are being cautious with our development starts in 2009 and are not starting any market demand buildings.

We do expect to see some acceleration in construction starts as we move into 2010.

With regard to leasing, our construction pipeline is 33% leased at quarter-end.

But, if we include the buildings positioned for the government, then 58% of the construction pipeline has identified tenants that will lease the space.

As you may recall, included in this leasing is the first BRAC related tenant at Aberdeen and the first BRAC related tenant at NBP.

In summary, we are strongly positioned for the future and deeply appreciate in these tough times the confidence you have shown in our focus strategy and execution.

We will not disappoint our shareholders.

And with that, we'd be happy to address any questions you may have.

Thank you, Mr.

Griffin.

(OPERATOR INSTRUCTIONS.)

And your first question comes from the line of Rich Anderson with BMO Capital Markets.

You may proceed.

Thanks and good morning, folks.

Hi, Rich.

How are you?

All right.

Just a couple of quick ones, and then maybe a little bit more detail - the guidance is entirely -- is reduced entirely due to the equity?

It seems to me that when I put the number in, I get something more like $0.04 or $0.05.

But, that's how you see it, $0.07, or is there anything else rolled into it?

No, that's it.

It's $0.07 and we literally just changed the prior range by that amount.

Okay.

(Inaudible.)

And, Steve, as long as I have you, is there -- has there been any timing change on these secured financings that you're looking to do?

Have they slowed down a little bit in this market or are you sort of -- I know your plan is the same in terms of dollars, but maybe, has it slowed down a bit?

Well, we had planned on it happening in the second quarter.

We think it will -- it definitely is maybe taking a couple of extra weeks to work through certain steps of the process.

But, I think we're going to get it done in the same quarter that we planned to, Rich, is what we just spoke about on the call.

Okay.

And then, when you look at the line balance, 400-and change -- can't remember the exact number -- are you looking at that to be pretty close to zero or at least in double digits by the end of the second quarter?

Well, what we talked about was -- well, first of all, we're around $200 million of line capacity today.

Right.

And I just summarized about $300 million of financing proceeds, most of which will be realized in the second quarter or obtained in the second quarter.

And we only have $64 million of debt maturities for the rest of the year, some of which happens in the second half of the year.

So, there's your math.

Okay.

Roger, do you -- or Rand, you mentioned Cap Ex pressures and renewal challenges for the remainder of the year.

Is that in your more market demand portfolio or your conventional portfolio or is that starting to trickle into your defense assets, as well?

I think it's in both, but it's obviously more pronounced in the non-government, non-government IT part of the portfolio.

But, I think it's just a general perspective out there from brokers that things are weak, and obviously, they're pushing on behalf of their customers.

And obviously, as a landlord, we're taking a balance between economics that we owe our self and our shareholders and our customers.

And so, I do think that there's going to be some pressure.

The good news, offsetting that though, is that construction prices are coming down significantly.

So, we used to do allowance transactions, and now we do transactions where we will price actual plans and deliver on those plans because we can do it cheaper than an allowance deal.

Okay.

But, I mean, is there any evidence that the defense side of the business is starting to get touched by everything or is has it sort of been status quo over the past several--?

--Modestly, but not significantly.

Okay.

Can you characterize the type of activity you're seeing at Blue Bell.

You mentioned you're not expecting any leasing on the giveback space until 2010 in your numbers.

But, who's looking at it?

My understanding is that Unisys is keeping one building, right, and then there'll be one completely vacant.

Is that the idea?

That's correct, and we will renovate that building and break it up into a couple of buildings.

And obviously, that market is characterized by financial services and healthcare tenants.

And so, they are the kind of tenants that we're talking about doing renovation build to suits for.

We have product that's ready to go and we have the financial capacity to execute quickly.

So, we think we will have an opportunity to release the space based on that basis.

So, before mid-2010 timeframe you're hoping.

Some of it, certainly.

Okay.

And finally, you mentioned that you're starting to see sellers or owners start to at least begin to have the body language to have a conversation.

How would you characterize those types of assets?

Are they again more of the market demand variety or are they in the defense area, as well?

I think it's both.

We are seeing sellers willing to sell product because they've got demands on their cash from pension funds to return money.

And in some cases, we see distressed sellers that have capital structure issues or otherwise wouldn't want to get the money back because they have other uses of their money.

Okay.

I think, Rich, our -- I mean, we see a lot of things out there now.

But, I think our focus is still on the core.

We could have spent a lot of money on other non-core things, but we're really focused on what we deem to be pretty much core properties.

Okay.

I have one real quick one.

The construction financing of 30 million, Steve, you talked about, how is that going in terms of negotiating?

I imagine that might be the toughest of the lot in terms of your capital plan.

Well, the truth of the matter is it's -- that's $30 million inside JVs.

We've already had some preliminary interest, but we're working really hard on the two permanent debts, the bank loan and the first joint venture financing.

So, it's just a matter -- it's next on our list and we've got to get a couple other things done before we firm up that.

Okay, great.

I'll yield the floor.

Thank you.

Thank you, Rich.

And your next question comes from the line of Brendan Maiorana with Wachovia.

You may proceed.

Good morning.

Thanks.

Steve, you talked about all the capital activities that you've got going on, and I understand that from your near term kind of sources and uses estimate that you're in good shape, especially for the next couple of years.

But, when you think about the capital outlook of the Company over the long term and all of the development activities that you've got and then trying to be opportunistic in the market with some new acquisitions, where should we think about how you guys are positioning yourself over the long term in terms of your capital ratios?

Well, first of all, we're in good shape through '09 and '10.

And in 2011, our debt maturities are manageable, too.

And I outlined, which I think you said in your piece today, Brendan, that for a very modest fee, we'll push out all of our liquidity vehicles, our lines into '12.

Obviously, we're a growing company and growing companies need capital to keep growing.

But, we're not projecting any new equity raise.

We obviously did an opportunistic raise as of April 1st.

And the way we tend to look at how do we want to monitor, we want to keep our coverage ratio, our fixed charge coverage ratio above 2.

We're well above that.

And we tend to look at our debt to gross assets as defined in our line in all that.

And the covenant's 65%, but we try to manage that below 50% and we're at 42% as of March 31st.

And we stress test that and that'll be one of our guiding ways of looking at it through 2012.

Okay.

So, below 50%.

And, I mean, in terms of -- you guys have spoken previously about the Unisys camp as a possibility of where some capital recycling might occur.

Are there other -- how should we think about the potential for capital recycling dispositions over the next couple of years?

Brendan, we have two assets in New Jersey that are under contract to the tenant that occupies them.

That will close in 2010.

Our Unisys campus long term is non-core.

As soon as we can stabilize it, we will sell it and redeploy those funds into our core business.

And then, inside of even this region, the greater Baltimore/Washington region, we have certain pockets of non-core assets that don't advance the franchise or don't have a customer constituency attached to them.

So, we're willing to sell those assets.

And so, you will see some one-off sales of individual assets.

We're obviously mindful of what's going on in the market, so we're not in a position where we have to sell today.

But, over a few years, you should see us move non-core assets.

Okay.

So, the preference -- just to kind of clarify or just make sure I understand it properly, I mean, over the long term, your preference would be to sort of sell those assets first if pricing's reasonable and then would issue equity as kind of the stack in terms of sources of capital?

That's correct.

Okay.

Thanks.

And then, just looking at the core metrics, I know that, Roger, you said you would expect a higher level of non-renewals, higher Cap Ex and pressure on rents as it relates to kind of historical norms.

But, when we look in the quarter, all those metrics were above average.

Is that -- is your outlook just based on looking at the overall economic conditions and understanding that real estate is a lagging sector or is that based on kind of current environment as you see it now with the conversations that you're having?

I think it's both.

I think we're realistic about the macro environment.

You've heard what GDP came out with today, and so we're sensitive to that.

And then, I'm in daily contact with our asset managers and all of their transactions.

And so, I can feel some of the pressure that they're getting.

And so, when we add those two things together, we're just trying to give the investors a conservative forecast of what may happen over the next 12 months or so.

But, just given that your overall kind of guidance metrics, the 10 things that Steve laid out didn't really change that, is it fair to say that your assessment hasn't changed dramatically since you gave us the last update kind of beginning of the year?

That's correct.

Okay.

All right.

Thank you.

And your next question comes from the line of John Guinee with Stifel Nicolaus.

You may proceed.

Thank you.

Hey, Steve, just under -- out of curiosity, how do you think the life companies and the term loan lenders are underwriting on an LTV?

Do you have a sense for that?

And if you answered that already, just correct me.

I'd say 55 to 60% is where they seem to be, John.

And where are they capping and all that sort of thing?

I'm sorry.

What did you say?

Are they capping a stabilized income at 8, 9, 10?

John, I -- this is Rand.

I was at Urban Land Institute last week and we had a lot of in depth panels with lenders.

And I think the metrics nowadays has totally gone away from cap rates and gone away from loan to values?

They're using a debt cost, which is really the NOI for that specific property divided by the amount of the loan.

And they've said they want to be in the 12 to 15% range.

They went down example after example of things that fall into that range.

I think the best we heard was about a 10% and the worst we heard was 18%.

But, their guidelines are pretty much in that 12 to 15.

And when you run through the math on ours, it's falling right on the lower end of that part of it.

So, I think people are struggling generally with what are cap rates, and cap rates aren't indicative of value necessarily.

It's indicative of when we look at buying things of distressed sellers as opposed to distressed properties.

And they're sort of struggling with those whole metrics.

So, that seems to be the flavor of the day.

How about a sort of an NOI to debt constant?

Are they looking at that, also?

What kind of coverage are they looking at there, Rand?

Not really.

They're really not looking at that.

Perfect.

All right.

Thank you.

(OPERATOR INSTRUCTIONS.)

And your next question comes from the line of Nick Pirsos with Macquarie.

You may proceed.

Good morning.

Thank you, but all my questions have been asked and answered.

Okay.

Thank you, Nick.

(OPERATOR INSTRUCTIONS.)

It looked like, operator, there were a couple on the screen there, but I don't know.

Okay.

And we do have a follow up question from Brendan with Wachovia.

You may proceed.

Hey.

Thanks.

Roger -- or Rand -- sorry.

Just a follow up on that, on your point in terms of debt to EBITDA level or debt cost, if I take that mid point of the 12 to 15%, assume 13.5%, that implies a debt to EBITDA level of I think around 7.5% if I'm just doing the back of the envelope math quickly.

If I look at the level that you -- annualized level that you guys did in Q1, it seems like it's around 8.5%.

And maybe I'm not really giving you enough credit for the development NOI that you're going to have coming online, but that would, I guess, suggest to me that maybe you need to think about additional capital sources to lower to get to that 7.5 target over time.

Is that -- I mean, does that kind of factor into your growth asset, loan to growth asset value below 50%.

No, I don't think so.

I mean, I think we're very comfortable with where we are.

And as we went out, one thing that was very evident as you go out to talk to lenders, the very first thing they're looking at is the quality of sponsorship first.

And then, secondly, they're looking at markets.

And then, finally, they start delving into the specifics of the property.

So, I think we -- the fact that we have excellent credit and growth and kind of a long history of excellent performance allows us to operate in a different band probably than others.

Okay.

So, you guys feel -- okay.

So, you're more comfortable at the lower end.

Okay.

All right.

Thank you.

And your next question comes from the line of Dave Rogers with RBC Capital Markets.

You may proceed.

Hi, Dave.

Hey, Rand.

Could you talk about development starts for this year?

I didn't hear you put a number.

I did hear you say we've started 100 million roughly this year.

You're going to accelerate in the back half of the year.

I don't know if you could put a band around that, and then also kind of talk about a couple of the hinging points that might drive that earlier or later and change the size, as well.

Well, I think we've got -- now that we've started the four and we have, as I said in my section at the end, we have another five buildings that are under development that we would anticipate starting before year-end.

It really is somewhat of a function of leasing activity.

For example, 300 NBP is still under construction, leased to MITRE, a lot of activity.

As we see those leases get buttoned up, then we would start 308 NBP to just make sure there's a continuant product in the pipeline.

So, that's really how we're looking at it.

The second building at North Gate is ready to go.

We've started the first one.

It's primarily released to MITRE.

Good activity, leasing activity in the second building and we think that that will follow on in a couple months and start.

And again, that park's got 800,000 square feet of capacity and we think we will move through that very, very quickly to meet the BRAC demand.

So, I think it's really just a function of that.

We did add a building in what is the next phase of NBP that we would expect to start within that 12-month period as the road gets in and utilities.

And so, that's positioned to really start to meet the acceleration of BRAC at Fort Mead.

And then, in San Antonio, we did start two government buildings.

We have not yet met the demand at all for the defense contractors.

That's starting to heat up.

We bought last year some of the property across the highway that we can do about 750,000 square feet and we anticipate starting the defense contractor building there before year-end.

So, it's really a function of get them designed, have them positioned, meet the market demand and be ready to go.

But, 525,000 is what we anticipate starting in the remainder of this year.

Thank you.

Sure.

And your next question comes from the line of Chris Lucas with Robert W.

Baird.

You may proceed.

Good morning, everyone.

Most of my questions have been asked and answered.

I do have sort of a broader question, Rand.

Just, earlier in the month, Secretary Gates laid out sort of a change in priorities for the new Administration as it relates to defense spending.

You commented a little bit about those.

I guess one of the ones that has raised a little bit of concern relates to sort of bringing on back into the Defense Department employees as opposed to using contractors for a lot of the services.

What are your thoughts on that and what's your overall thought about how the political process might impact some of the decision making that ultimately gets resolved here on the new priorities?

I think, Chris, that's an admirable goal.

I think he mentioned bringing 13,000 people in that they maybe have relied particularly on their procurement side through contractors and to bring that on within the government.

I think the practical matter of that is it's extremely difficult to do.

If you look in the greater DC area, the number of actual government employees has continued to go down, yet the federal expenditures has gone up, obviously significantly.

And the gap has been made up by the contractors.

So, I think that's frankly a little bit more rhetoric than reality.

I do think that when you looked at the sort of decreasing of spending that they mentioned in some areas, it was really weapons systems, moving things around.

It's kind of a standard Washington game.

So, they cancelled some of the remaining F22s, know that they'll get some political heat on that, ramped up significantly the F35s, which are tested down at Pax River, so that's good for us.

And then, also they'll spread out some of that.

So, in the upcoming short term years, it looks like they're spending less on defense.

They did increase the -- immediately the intelligence budget by $2 billion for Afghanistan.

And we do expect forthcoming shortly that 15 to $30 billion of additional spending being in as a separate request for the cyber initiative that the President's getting ready to announce shortly.

So, it's sort of -- it's what you would expect, Chris, on a change Administration - a lot of rhetoric, but as you get into the reality and look at it, the world's a very dangerous place and we're continuing to see an acceleration of activities.

We had -- Monday was a building dedication for IARPA, which was announced if you saw that on TV and in the paper, which is the second building at M-Square.

And the Director of National Intelligence, Dennis Blair, got up and spoke quite eloquently about the issues facing the intelligence community and how active they are and how much additional funding needs to be there to actively support their efforts.

So, we really see our sector of it continuing pretty well, Chris.

Thanks a lot.

Appreciate the comments.

And your next question comes from the line of Rich Anderson with BMO Capital Markets.

You may proceed.

Hey, thanks.

Just a quick follow up - Rand, I thought it was interesting how you said you still haven't met the demand in San Antonio that you expect to see.

How -- could you make a similar characterization and maybe even quantify what your -- the amount of demand that you see coming that has yet to have been met by you guys in terms of the BRAC and all the rest?

Is there a way to quantify that?

I don't -- it's really hard, Rich, to do that.

It's probably, of all the areas, it's the easiest at Aberdeen Proving Ground where there's 140 companies that are currently doing business with C4ISR in Fort Monmouth, New Jersey.

They're shutting Fort Monmouth down.

The moves are scheduled.

There's 8,500 people moving on site.

And the range is anywhere from 12 to 16,000 jobs offsite.

And so, we think that's 2 to 2.5 million square feet of demand and we can only accommodate 800,000 of it.

So, we know we'll do that and we'll blow through it.

And the early discussions from the tenants is you can see the demand heating up because they're facing the moves.

I think, as Roger said on Fort Mead, the validation of the contracts that relate to (DISA), which is the larger of the agencies moving, hasn't yet occurred.

And that will occur in fiscal year 2010 after October 1st of this year.

So, our -- kind of the early indications we're getting from a lot of the BRAC firms is that once the government validates it for fiscal year 2010, then you'll start to see the lease commitments and they'll proceed accordingly.

So, lots of discussions, some of the early ones signing, but nothing really there yet.

What is of more significance is really the cyber initiative and the expectations of very quick space requirements and a lot of tenants sort of hovering around talking about those requirements and trying to line up space there.

So, I think it's just early to be able to tell that.

We'll get a very good picture by year-end as to what that demand looks like, Rich.

Okay, great.

Thank you.

I will now turn the call back over to Mr.

Griffin for any closing remarks.

You may proceed, sir.

Well, thanks for joining us today and, as always, we appreciate your participation and support.

And all of us are available to answer any questions you might have, so thank you and have a great day, everyone.

Thank you for your participation in today's conference with the Corporate Office Properties Trust First Quarter 2009 Earnings Conference Call.

This concludes the presentation and you may now disconnect.

Good day.