COPT Defense Properties (CDP) 0 Q0 法說會逐字稿

Welcome to the Corporate Office Properties Trust year-end 2009 earnings conference call.

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

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

Please go ahead.

Thank you and good morning everyone.

Today we will be discussing our fourth quarter and 2009 annual 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 supplement package you will 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 will find a reconciliation of our 2010 annual guidance.

At the conclusion of this call -- 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 Act of 1995.

Although such statements and projections are based on 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 re-lease space under favorable terms, regulatory changes, changes in the economy, the successful and timely completion of acquisitions and development projects, changes in interest rates, and other risks associated with the commercial real estate business, as detailed in our filings from time to time with the Securities and Exchange Commission.

Now I will turn the call over to Rand.

Good morning everyone.

We are all happy to be here after digging out from the blizzard of 2010.

It was quite an epic struggle, believe me.

And we are pleased to report that 2009 was another successful year for COPT.

We generated FFO after adjustments of $2.49 per diluted share, a 5% increase over equivalent 2008 FFO of $2.38 per share.

Our 2009 results exclude acquisition costs for properties we acquired in 2009.

Results for 2008 exclude the gains recognized from repurchasing a portion of our exchangeable notes.

For 2009 we delivered a 25% total shareholder return.

For the past 10 years we were number-two among all equity REITs with total shareholder return of 693%.

As it was for most companies, 2009 was a challenging year for COPT.

During this difficult market environment we were still able to grow our as adjusted FFO per share, which is a tribute to our strategy and execution, as Roger will discuss.

We have a fairly safe NOI stream with 58% of our NOI derived from buildings primarily leased to government, defense IT and data tenants.

These sectors have continued to hold up quite well through this downturn.

And carefully planned our capital strategy by anticipating the severity of this downturn, and did not need to raise equity to fund our growth.

However, we did have the opportunity to raise a small amount of equity, $72 million, at a low cost during April 2009 in connection with our company being added to the S&P MidCap 400 Index.

In raising a limited amount of equity, we had only a 5% dilution for our shareholders, which will only minimally impact our FFO in the future.

We financed a low-level of debt that matured in 2009 and have very little debt maturing this year.

During 2009 we closed $325 million of permanent loans during one of the most difficult credit markets we have all experienced.

The quality of the tenants in our portfolio, the quality of the buildings and location, adjacent to demand drivers, along with our track record, allowed COPT to source primarily secured nonrecourse debt at a time that many others could not.

The proceeds from these financings provided additional capacity under our revolver.

With regard to our development pipeline, we remain very tenant-focused.

With all of our buildings under construction or under development being government or defense IT buildings, we believe this concentration is unique among office REIT's and positions us well for growth that helps offset somewhat the recession impact.

More importantly, we believe that it will provide us with an earlier recovery than most from this difficult recession.

One of the concerns expressed by some shareholders and analysts going into the year was the lagging percentage of lease of our development pipeline.

We are pleased to report that we are now 54% leased on this development pipeline.

Subsequent to year-end, as expected, we saw higher levels of activity in the development leasing, and recently signed full building leases for three buildings that totaled 375,000 square feet.

These are included in the leasing percentage I just mentioned.

We also signed a small lease for a DISA contractor for space at Columbia Gateway, which is the first evidence of DISA contractor demand outside of the NBP.

With regard to our core tenant base, we have received several calls from investors asking about a freeze in defense spending.

In fact, there is no freeze on defense spending.

The fiscal 2010 government IT budget increased a strong 10%, more than the President's initial 7% request.

There has been a logjam in awards, and strong activity is expected in the second half of this fiscal year.

The budget request for fiscal 2011 IT spending is a further increase of 3.9%, excluding the Department of Commerce, which will drop due to the completion of the census.

Within the government's IT budget request, the Department of Defense is up 6.6% for 2011.

This bodes well for our key super core tenets and our leasing activity.

One of the outcomes from the recession in 2009 was that a number of development opportunities became available from developers who are unable to secure financing for their projects, or in some instances have filed for bankruptcy.

We have been working to selectively pursue those opportunities that fit our super core strategy and would now expect that several of these opportunities will be finalized in the first half of 2010.

These major projects would represent both submarket and geographic expansion.

In 2009 over 75% of our REIT peers cut or suspended their dividend.

I believe this has long-term repercussions for our industry that we are very concerned about.

In contrast, COPT was able to raise our dividend by 5.4%.

This is the 12th year in a row that we have increased the dividend, with a total increase in quarterly dividend of 214% over that time period.

Importantly, we continue to pay dividends in cash.

Turning to our guidance, we have based our guidance and forward planning on the belief that the impact from this severe recession will last through 2010 and beyond.

Because real estate lags the economy, 2010 will be the most difficult year of this recessionary cycle.

In addition, the mid-Atlantic region is in the midst of a record snowfall season that has negatively impacted our fourth quarter 2009 and our projected 2010 results, as Steve will discuss.

With that I'll turn the call over to Steve to discuss our results and guidance in detail.

Good morning everyone.

Turning to our results, our diluted FFO per share for the full year of 2009 increased 5% to $2.49 per share over $2.38 per share for 2008 when excluding $2 million of property acquisition cost expensed in 2009 and $8.1 million of gains recognized in 2008 related to the repurchase of $37.5 million in principal amount of our 3.5% exchangeable notes.

We reported $2.46 per diluted share of FFO for 2009 including the property acquisition expenses, which under accounting rules prior to 2009 would've been capitalized.

We reported $2.52 per diluted share of FFO for 2008, including the gains on extinguishment of debt.

For the fourth quarter of 2009 FFO per share was $0.55, a decline of 10% from the fourth quarter of 2008 when excluding the effect of the property acquisition expenses in 2009 and the gains on extinguishment of debt in 2008.

We reported net income attributable to common shareholders for 2009 of $40.2 million, and diluted earnings per share of $0.70, compared to $37.9 million and $0.76 per share for 2008.

For the fourth quarter of 2009, net income attributable to common shareholders was $5.1 million, and diluted earnings per share was $0.08, compared to $14.8 million and $0.28 per share for the fourth quarter of 2008.

Net income for the full year and the fourth quarter of 2009 includes the previously mentioned property acquisition costs.

Net income for the full year and the fourth quarter of 2008 includes the previously mentioned gains on the repurchase of the exchangeable notes.

Turning to AFFO, after adjusting primarily for capital expenditures and the straight-lining of rents, our adjusted funds from operations of $117.9 million in 2009 represents an increase of 18% from $100.1 million in 2008.

Our diluted FFO payout ratio was 63%, and our diluted AFFO payout ratio was 81% for 2009.

2009 full-year and fourth-quarter FFO results were negatively impacted by a record-breaking historic snowstorm in December that impacted our Maryland and Virginia properties.

We incurred $2.4 million of total snow removal costs, of which $1.2 million or $0.02 per share was the net of recoveries impact on FFO.

Looking at our same office cash NOI for 2009, for the 220 properties, or 83% of the consolidated portfolio square footage, same office cash NOI increased by $11.9 million or 5% over 2008, including gross lease termination fees.

Excluding gross lease termination fees, same office property cash NOI increased by $6.9 million or 3% over 2008.

For the year we renewed 73% of our expiring office leases, and our wholly-owned portfolio ended the year 90.7% occupied and 91.3% leased.

Turning to the balance sheet, at December 31 the company had a total market cap of $4.6 billion, $2.1 billion of debt outstanding, which equates to a debt to market cap ratio of 45%.

Our weighted average cost of debt for 2009 was 4.86%, down from 5.37% for 2008.

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

For the year our 2009 EBITDA to interest expense coverage ratio was 3.27 times, and the 2009 fixed charge coverage ratio was 2.69 times.

We've managed our near-term debt maturities to low levels, with only $52 million of debt maturing in 2010.

This is a very manageable amount to finance, particularly since the permanent loan market is deeper with more lenders looking to originate loans in 2010.

Also interest rates on permanent loans have decreased from the fall of 2009.

As part of our 2010 capital plan, we expect to access the market with two or three medium-term or long-term financings that will total in the $300 million to $375 million range.

We will use the proceeds to repay maturing debt and to create additional capacity under our $600 million revolving line of credit.

We would seek additional permanent financing to fund acquisitions as they become available.

With this capital plan and our current capacity under the revolving line of credit, as well as the availability under our $225 million construction revolver, we expect to have and continue to have ample liquidity to fund our development pipeline and for normal working capital and operating requirements.

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

Now turning to our diluted FFO per share guidance for 2010, we are lowering our guidance range by $0.04 per share, which is a very preliminary estimate of the impact of additional costs caused by the extraordinary snowstorms that we've experienced here in early 2010.

Our annual snowfall for the greater Washington area has averaged 16 inches per season.

To date we have 80 inches of snowfall this winter.

Considering the estimated additional snow removal costs, our new guidance is a range of $2.31 per diluted share to $2.49 per diluted share.

This guidance excludes any initial property acquisition costs that would be required to be expensed as incurred.

Those acquisition costs would vary significantly by tax jurisdictions and are no longer capitalized under accounting rules.

Here's a current update regarding the guidance assumptions that we are refining at this point in the year.

First, for our 2010 same office portfolio, we expect occupancy to be slightly lower in the first quarter and then to grow to approximately 92% by the end of 2010.

We are projecting our retention ratio for 2010 to average 70%.

Second, same office cash NOI is projected to range from negative 3% to flat and may fluctuate by quarter.

Third, based on strong leasing activity, we have increased our estimate of development projects opening during 2010 to contribute $4 million of NOI growth.

The 2010 deliveries are expected to come online in the second half of the year.

Fourth, our acquisition assumptions have been adjusted slightly based on the current activity in the market and now assume a weighted average new investment level of approximately $135 million for the year.

Fifth, other income, primarily third-party development fees and gains on sales of nonoperating assets including opportunistic investments, are assumed to contribute between $3.5 million at the low end of the range and up to $15 million at the top end of the range.

And finally, we estimate that approximately 20% to 25% of our outstanding debt will be floating on average for the year, although it may fluctuate in certain quarters.

We are not providing quarterly guidance, however, these assumptions indicate that we expect lower first-quarter earnings due to high snow removal costs.

We are also anticipating revenue growth through development placed in service and acquisitions to increase quarterly results for FFO in the second half of 2010.

This is our updated look at 2010, and we expect to further refine the details throughout the year.

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

At year end our wholly owned portfolio consisted of 249 properties totaling 19.1 million square feet that were 90.7% occupied and 91.3% leased.

Our occupancy was down 0.2% quarter-over-quarter.

During the fourth quarter released 610,000 square feet, of which 408,000 square feet were renewals, 101,000 square feet was retenanting, 69,000 square feet was first-time lease-up of previously acquired space, and 32,000 square feet was development.

For all of 2009, we leased just under 2.6 million square feet, of which 1.76 million square feet were renewals, 441,000 square feet was retenanting, 247,000 square feet was first-time lease-up of previously acquired space, and 111,000 square feet was development space.

This compares to 3.2 million square feet of total leasing in 2008, our best year.

For the quarter we renewed 79% of expiring leases at an average capital cost of $13 per square foot.

Rental and renewals increased 5% on a straight-line basis and decreased 4% on a cash basis.

Total rent for renewed and retenanted space increased 3% on a straight-line basis and decreased 6% on a cash basis.

For all of renewed and retenanted space, the average capital cost was $14 per square foot.

This is higher than recent experience, although our average lease term was higher than normal.

For 2009 we renewed 73% of expiring leases with an average capital cost of $8 per square foot.

Total rent for renewed and retenanted space increased 2% on a GAAP basis and decreased 6% on a cash basis.

We averaged $9.17 per square foot in capital costs for renewed and retenanted space.

These tenanting costs are equal to what we spend in 2007 and 2008 in a more favorable market environment.

Looking at our lease expiration schedule across our portfolio for 2010, we have 15.8% of our revenues expiring, representing 3 million square feet.

We expect a 2010 renewal rate of approximately 70%, which is consistent with our 10-year historical average.

Our Maryland portfolio has 23 leases greater than 25,000 square feet maturing.

Based on today's knowledge, we expect 65% to renew, 21% to vacate, and 14% are uncertain.

In Northern Virginia we have eight leases greater than 25,000 square feet maturing, of which one for about 100,000 square feet is vacating in June, one for 30,000 square feet has been retenanted, one for 59,000 square feet has renewed, and five leases totaling a little over 400,000 square feet maturing in December have an uncertain outcome.

Our Colorado Springs portfolio only has 60,000 square feet maturing in 2010.

Our weakest market is Baltimore County, and White Marsh in particular, where we are just over 80% leased.

However, leasing activity has increased in this submarket.

As we have forecasted on recent calls, our leasing metrics on our in-place portfolio, with the exception of a few submarkets, have deteriorated, and we expect it to continue into 2010 with occupancy under pressure and renewal and retenanting rents rolling down somewhat.

To date or leasing capital costs have been low, but we would expect them to increase in 2010.

We are seeing significant top-down pressure from corporations to lower operating expenses, including occupancy costs by lowering cost per seat.

Many tenants are looking for flexibility and do not want to make long-term commitments for space given the overall economic backdrop.

Tenants are looking for landlords to fund all space improvements and moving costs.

We believe we have an operating advantage in this market with our ability to fund improvements and our customer relationship model.

As Rand mentioned, demand for our development projects has accelerated.

Since year-end we have signed leases exceeding 400,000 square feet in five different buildings in our Fort Meade, San Antonio and Colorado Springs markets.

We are seeing increasing BRAC-related leasing activity both at Fort Meade and Aberdeen.

The moves of C4ISR from Fort Monmouth, New Jersey to Aberdeen, and DISA from Northern Virginia to Fort Meade have moved up to March 2011.

The contractors that support the government are awakening to the need to be physically repositioned to serve their customers.

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.

President Obama has nominated National Security Director Lieutenant General Keith Alexander to be promoted to the rank of General and assigned as Commander of the new United States Cyber Command.

The Cyber Command will be in charge of cyber warfare and the security of military networks.

It will be based at Fort Meade, Maryland and it will be part of the US strategic command which should drive additional demand for space around Fort Meade beyond that resulting from BRAC.

Overall contract awards have been slow in the past year due to changes in the administration and the late passage of the defense appropriation bill.

We believe this demand will now accelerate as evidenced by our leasing successes recently.

On another note, given the challenging leasing environment, we continue to pursue operating expense reductions, working with our staff and vendors.

This was reflected in our 2009 results and allowed us to maintain positive same store results in the face of occupancy declines.

We expect this trend to continue through the first half of 2010, with our budget goals including the full-year impact of these efforts.

Although some of the benefit will be lost from our outsized snow removal costs that Steve previously mentioned.

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

We have experienced and do expect some modest credit issues over the next 12 months coming from outside of our top 50 tenants.

As we have mentioned before, our overall portfolio and investment strategy consists of a super core component that is focused on the US government, defense contractor, and data center tenancy, and we have a 65% target weighting on this central strategy.

Secondly we are focused on core business parks located in growth corridors, which when combined with our super core will account for 85% weighting in our target core portfolio.

Third, we have a 15% target for opportunistic office investments that do not fit in either of the first two strategies but provide the opportunity for higher returns by taking on additional calculated leasing or market risk.

Our super core currently accounts for approximately 58% of our NOI.

We intend to grow this portion of the portfolio to our target level through our development at the National Business Park at North Gate in Aberdeen, and San Antonio, where demand is driven by the government and defense contractors.

We intend to acquire core properties that fit this strategy, as well.

Our targeted core portfolio currently accounts for approximately 81% of our NOI.

And in order to move toward our targeted portfolio composition, we will selectively dispose of noncore properties.

As we would proceed with our development and acquisition strategies, we intend to upgrade our portfolio in terms of overall quality, age, and tenancy.

During the fourth quarter the company made two acquisitions that were previously announced.

Both acquisitions are high quality assets that had weak capital structures.

The first is a 162,000 square foot newly constructed office building adjacent to the BWI Airport in Airport Square.

The building is 100% leased for 10 years to Northrop Grumman, our second largest tenant, and fits well within our super core strategy.

Secondly, we acquired a 474,000 square foot class A-plus office building, a parking lot, and four adjacent waterfront lots totaling approximately 10 acres, and a power plant that provides HVAC electric and backup generation to the existing building, and it can support additional development.

The land and building are known as Canton Crossing, a planned unit development in Baltimore.

The building is currently 91% leased to high-quality tenants with very little lease rollover prior to 2016.

The Canton Crossing transaction upgrades the quality of our assets included in the 15% opportunistic segment within our portfolio strategy.

Subsequent to quarter end we sold a 24,000 square-foot building acquired by the company in the 2005 Hunt Valley acquisitions.

Our goal is to continue to sell assets in the 15% opportunistic category that do not have growth prospects.

The current environment for acquisitions is marked by limited quality product for sale in the market and significant capital available, particularly for poor properties in sought after markets such as Metropolitan Washington DC.

Recent and pending sales indicate increasingly active investor interest and strong pricing relative to the expectations set during the market uncertainty seen throughout 2009.

Our approach will be to grow the portfolio by selectively acquiring properties that fit well with our super core and core strategies and those that enable us to expand our presence and improve our competitive position.

While the lending market has improved, challenges are still being faced by those whose offers are contingent on acquisition financing.

Thus, our ability to close all-cash will enable us to be competitive on the properties we choose to pursue.

Thus far we have seen few distressed sales of quality assets, as lenders have been given significant latitude to blend and extend or otherwise avoid taking losses.

We anticipate that as the year progresses and under-capitalized owners face the loss of tenants or other obstacles we will see more forced sales, and we will be creative in responding to situations that will enable COPT to recapitalize or reposition quality properties that will expand and upgrade our core portfolio.

Now I will turn the call back to Rand.

Thanks Roger.

Looking at our construction pipeline at year-end, we had nine buildings under construction for a total of 1.1 million square feet at a projected cost of $245 million that are 54% leased today.

Three of these buildings have full building users.

We are still projecting that our construction pipeline will generate slightly over a 10% cash on cash yield on stabilized NOI.

We expect these yields to trend upward this year for our buildings that will start in 2010.

As Roger mentioned, BRAC-related leasing activity has increased, which represents four of the six buildings that are not 100% leased.

In addition at year-end we had under development seven buildings with close to 756,000 square feet at a projected total cost of $158 million.

All of these buildings are expected to start during 2010, and all of the buildings are for our government or defense IT tenants as part of our super core strategy.

We do not expect to start any market demand buildings during 2010.

We do have other buildings in design that are not reflected in the development list, but we'll not move these onto the list until leasing demand accelerates on a project by project basis.

In addition, we do have starts anticipated on projects we are working on that have not yet been announced.

But while the development starts seems somewhat conservative at 756,000 square feet, we are still planning close to 1.5 million square feet of development starts for the year.

In summary, we want to thank all of our employees for their continued hard work and pursuit of excellence, especially during this -- difficult snowfall times.

We saw time and time again that our dedication to outstanding service was a differentiating factor in our leasing and development success.

We see this differentiation accelerating in a recessionary environment, further separating us from our peers.

We are thankful for our 2009 performance in a difficult economy and are working hard to hold our own in 2010 and position us for accelerated growth in 2011 and beyond.

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

(Operator Instructions).

John Guinee, Stifel.

Nice job guys.

On the debt side of the equation, including your preferred equity, you've got a lot of moving pieces obviously.

Any thought to repaying the preferred equity out there, which is I think relatively expensive, most of it between 7.5% and 8.0%?

Steve, do you want to handle that?

Sure.

We look at it.

We are looking at various sources of capital.

Right now we are not planning on doing that, but we will continue to evaluate that as well as other things that we can do.

So it's something we actually are studying, and we are not at this point ready to commit to saying we are going to absolutely do that.

Roger, you've got about 500,000 square feet up in Blue Bell, Pennsylvania, which is in redevelopment right now per your list of assets.

But then when you shift over to the redevelopment, you've got about 209,000 square feet.

There's 293,000 square feet that's sort of in limbo.

What's going on with that?

That is space that Unisys is temporarily occupying until their permanent headquarters is ready, which should be May of 2010.

And at that point, that space can then be put under redevelopment, and we can move it towards a leasing situation.

And which one it is -- is any of the space or any of the buildings just going to be knocked down?

There is a relatively large single story building that I wouldn't say will be knocked down, but we may take some of it down just to reduce its floor plate in order to make it more leasable for the market.

And then in terms of TI leasing commission costs, you were able to run at $6 to $8 per square foot for a long time, and I think you said it's -- the last couple of quarters it was maybe $13 or $14 a square foot.

What should people underwrite going forward on a per square foot basis for capital costs?

Well, it's an interesting question because when we look back over our historical data, we averaged $9.17 a square foot this year.

Last year we were $9.70.

In 2007 we were $9.66.

In 2006 we were $10.28.

During calendar 2009 we had two quarters that were very high and two that were very low, and some of that has to do with renewals versus retenanting.

But I think we are projecting that $9 to go up, but it's not going to go up measurably.

It may go up by 20%.

Good.

And then last question, I guess Steve, guidance came down $0.04, which is about $2.5 million.

Whenever I think of the kind of leases you sign, I tend to think you can pass through everything above a certain expense stop.

Why the necessity to reduce guidance because of excess snow removal versus pass that cost through to the tenants?

Well, when you look at -- and it all depends on the time of year, based ops, rent, etc.

There is a portion, as you can see as we talked about the December impact of our gross costs, that we are not able to pass through.

And it's been pretty consistent over time, and the averages for the year are about what you see for the fourth quarter impact.

So we are going to have much higher expenses, we are estimating.

Quite frankly, it's too early to see all the bills, how much they will be, but there is a factor because of the complexity of dealing with this snow, you just can't push it, there's no place to put it, so it has -- some of it has to be hauled away, you've got more than just contractors, you have people working overtime.

So that is our estimate, which is obviously a multiple of what we dealt with in the 28 inches in December, with what we've dealt with so far.

So the bottom line is, there is a portion of it, just like there was in December, that we actually have to absorb.

We will try to make up for that with other operating expense savings throughout the year, as Roger talked about, but that's our estimate at this point.

Just to add a little more to that, I guess we've put things in three buckets.

The first is we are 10% vacant, so 10% of the cost obviously falls through to the bottom line.

Then we have some tenants who are in the first year of their lease, and so we're just setting the stop, and so we lose out in that case.

And then third, because we had driven down operating costs on a lot of our leases and buildings during 2009, we took them below the expense stops, and so now any costs we incur up to the expense stop also hits our bottom line.

And historically our ratio of recoveries to expenses is in the low 40%, so let's say a 42% to 45% range.

Okay, thank you.

Keep shoveling.

(laughter)

Brendan Maiorana, Wells Fargo.

Just to follow up on that, either Steve or Roger, if we think about the snow costs in the first quarter, would that have a -- would you be able to recapture some of the costs into the second quarter, so you might see a -- even more than that $0.04 impact in Q1 and then maybe pick some of that back up in Q2?

It's possible, if we end up for instance over accruing in the first quarter for those costs.

But we think by the time the quarter is over we will have all the bills in and so we'll know where we stand and we can give everybody a more complete picture of what actually happened in the first quarter at that point.

And then Roger, you mentioned that it sounds like the market is challenged out there.

There is a -- tenants are commanding a lot of CapEx dollars and moving expenses.

But you've got your guidance in terms of occupancy moving up throughout the year.

And then you also I think increased the retention ratio from 60% to 70%.

So if you could kind of just help me reconcile the comments that you made, your prepared remarks versus the guidance.

Well, I think first of all, what I am stating is what we are seeing in the overall market, and we do have a little bit of an advantage in this market where we have a concentrated position and we have a significant market presence and we have customer relationships.

But I think we're just trying to paint the picture that things still aren't easy out there, that we still have a lot of customers who are putting a lot of pressure on reducing operating costs, and that pressure is being felt by our leasing people.

And we are trying to do the best we can to balance our customers' needs and -- with our need for growth and profitability.

So I'm not -- we are not trying to say things are terrible, we're just trying to say that this isn't 2005 or 2006.

It still is a very challenging environment in which we operate in on a daily basis.

And I think on the move up in occupancy, one of the things that you see in a recession is, as you reach the bottom of the recession and people -- tenants sense that, there is a clear movement to quality.

And tenants try to then take advantage of the low -- what they see as lower pricing and a rapid move to quality.

So we think that that will be seen this year in our portfolio, particularly in our area, which has not gone down as much and will rebound more rapidly because of the government and defense contractors.

So that's why you start see us moving up towards the 92% level of occupancy by year-end, and you see that -- that's also the reason why we are moving up from the original 60% to 70% on the renewal.

Plus I think we've gotten some pretty -- as Roger went through in the details -- some pretty clear indications of renewal intentions that allow us to get to those numbers.

That's helpful.

And then it looked like the capital improvements on operating properties really jumped up in the quarter.

What was behind that move?

Well, obviously CapEx is lumpy, and there is a lag between when we incur -- or when we commit to leasing costs and when they are actually incurred.

So I think it's just a timing thing.

I think what you should do is look at 2009 as a whole, what we spent, and that's a good picture of our CapEx spending and requirements and commitments for the year.

So just kind the -- as you talked about earlier, maybe move up 15%, 20% on CapEx overall in terms of on a per square-foot basis (multiple speakers) the outlook.

Yes.

Okay.

And then the 31% of your pipeline that is leased today to defense and IT -- do you have a reasonable target where that may be at year end?

When you say 31 (multiple speakers)

I think for the defense and IT -- not the overall 54%, but there's just a 31% for defense IT related properties in the pipeline?

I think if I could look at your supplemental -- sorry, I don't have that (multiple speakers)

In terms of the pipeline, really every building we have in our pipeline, with the exception of one building out in Colorado Springs, is dedicated to government defense or data.

And so you should expect that that's the preponderance of tenants that will sign leases on that space.

As I said, all of the starts -- it's a hard thing to look at because, as we noted, we did take a building out of the development and construction right at year end, what we'd leased, placed it into service, so there will be other buildings being placed into service in the second half, and there will be other starts.

But everything we are starting and planning is all government and defense IT.

And (multiple speakers) we put working in percentage leased, and we think that we'll be progressing very well through those percentage leased.

Then just lastly, Rand, you mentioned kind of data centers as part of your core strategy.

How do you guys think about possibly acquiring a data center directly rather than having data centers within some of your multi-tenant buildings as maybe a possible diversification play in your overall strategy?

Is that something that's on the table?

I think we are always looking at that.

I think there's been more opportunities presented to us because of others not having financing capabilities or not having the capital to continue to grow some of their portfolios.

So yes, we are looking at that.

I think when Roger talked about his acquisition goals, I wouldn't be surprised if some of those goals include data, and we think that would be within our super core strategy and further strengthens our portfolio.

Thank you.

Dave Rodgers, RBC Capital Markets.

I wanted to follow up on an early comment you made in the call, and you've made it before, but I wanted to push on it because it sounds like it's coming more to fruition.

And that's expanding your submarket in new geographic exposures for the company.

Just given how the stock typically reacts when you do that, I wanted to push you a little bit in terms of any information you can provide in terms of that direction, and if you can't give specific details, talk about maybe gaining scale in these new markets, the cash flow that you might buy, or are you buying development or land parcels, and give a little more color on that if you would.

Well, I think I gave what I could give.

We have been -- as I said, we had a lot of opportunities thrown our way last year.

We spent most of the year sorting those out and are now moving forthright on those.

And the first half of this year we do expect to announce several of those.

They are fairly major opportunities.

They are development opportunities.

They have a very short cycle because of the demand and the location.

They will typically fit our strategy of being adjacent to government demand drivers, so they are super core, which further accelerates our key strategy.

And we would be expecting to start buildings at both of those this -- later this year, which does then start to positively impact in '11, late '11, not in '10 as far as cash flow.

That's about all I can say at this stage.

Then related back to guidance -- thank you for that -- are those projects in your development starts as it is today?

No.

Steve, what do you expect to spend in terms of cash on -- throughout 2010 for development spending?

I'm looking for the gross number here.

Roger, do you have that?

Yes.

We expect to spend on our construction portfolio this year minimally $250 million, and then, as Rand mentioned, if these other starts kick in, that could go up another $50 million to $75 million.

I think, to anticipate your next question then, we have remaining capacity under our construction revolver.

If our development starts start to exceed that, we have been in discussion with lending institutions to start to do additional sort of bulk construction loans that would go beyond the revolver.

And I think that's fairly easy to do with the quality of these projects.

So we are not -- we're -- the land obviously would be unencumbered and would be our equity.

So we don't really see any constraints on the ability to finance these projects as the development accelerates.

And into that $250 million I guess that, Roger, you gave, was that just the construction pipeline?

Or is that construction and what will move in, barring the -- aside from the acquisition?

Right.

That's both.

Thank you for that.

And then Steve, I guess to move -- keep moving down that path, you did some loans that you talked about in here.

Can you give us some additional details.

And I just don't remember if we had talked about this, but on some of the secured loans, 7.0% to 7.5% interest rate, where were you sourcing those loans?

And what was the loan to value that you were able to achieve on those?

Well, the loans that we did, if you recall, we locked those in early in 2009, probably back when the market was less favorable, but then we pushed them into the third quarter so that we could take advantage of not having to pay the higher interest rates.

But I think we locked them at a time at larger amounts than were typically getting done in the markets and to provide confidence and a surety that we still had access in the markets.

So we locked those in the first quarter, closed in the third quarter.

We were in the 60% to 65%.

Those were the loans that we had talked about on other calls where we went out to like 51 groups, had several groups take it, and we in essence were dealing with life insurance companies and pension funds.

And we closed them as we reported on the last call, one midway through the third quarter and one at the very end.

So that probably still holds true today then?

Yes.

And the rates were around this 7.25% at that time.

We do believe that the rates are -- that we -- on the next deals will be better than that.

But again, we locked those in I would say the end of the first quarter.

Okay.

Last question is, I think you talked about floating rate debt for the year.

What is your LIBOR assumption embedded in your guidance?

Well, we are not going to give that granular a detail.

But we do look at forward curve, and we try to factor that into what we project.

Fair enough, thanks.

Rich Anderson, BMO Capital Markets.

Just getting back to the loans, as long as we are on that topic, Steve, the 300 to 375, are they going to have sort of besides the rate, a similar form as the life loans that you did last year?

Well, I said they might be medium and long-term, so we probably won't have both loans be the same term.

I'm hoping that the rates will be better.

The color that we are getting is probably in similar loan to values, relationships, etc.

Mary Ellen, do you want to add anything to that?

No.

I think that's right.

I think the market's opened up a lot since last fall.

The pricing has come in, I think the lowest deals we've heard about are 6%.

Probably we're in the 6.5%, I'm thinking.

And I think even since the beginning of the year you're starting to see the loan to values are moving up.

So I think it's a question of, over the next couple of months, how high we can now push those to get -- I think we'll -- can get 60 and probably above 60 right now.

And the reason for entertaining these financings is driven by development; right?

Because you've actually lowered your acquisition target.

Is that a fair way to think about it?

Well, it's just part of the plan to keep recycling capital and to keep clearing the line.

And when you look at the capital plan, there is a slight decrease in the average acquisition target, and there is a development spend that we are talking about.

And there's potential upside, as Rand talked about, of additional starts once more of that demand is confirmed.

So it's just trying to work ahead of not only what the plan is but what -- how potentially it could change.

Now, the same store outlook for 2010 was also reduced.

Is that all snow removal costs?

Or is there something more to that?

That is largely snow removal, but we are also taking a little bit of a hedge on NOI in terms of lease-up of vacant space.

And do you still assume lease termination fees of $4 million to $5 million and G&A of about a $6.2 million per quarter rate?

Is that still the guidance?

We're -- on the term fees we haven't changed that, which is why I didn't update it, although it might be not evenly spread throughout the year.

Probably not as much in the first quarter.

And G&A?

In G&A, yes, you're correct.

G&A, same as previously guided.

A small question.

Where did Riverwood go?

It was in your development pipeline last quarter, and it kind of disappeared -- Columbia.

That particular development is dedicated to a specific tenant, and it's going to get deferred for probably a year, and then we will put it back on the development page when we think the timing is appropriate.

Did you have to take any costs on any kind of --?

No.

We have (multiple speakers) we -- the building is designed, and we have -- in a very low land basis.

So we don't have any accounting issues with that.

Last question is on White Marsh being your weakest submarket.

I guess when you did the Nottingham transaction, you probably weren't doing that with the hope it would be the worst performing submarket in 2009.

So I guess the question is, hindsight being 20/20, how do you feel about how that acquisition that -- is going, relative to your expectations probably?

Would you have potentially gone a different direction with that portfolio had you known where it was going today?

Well, I think you have to take the long view.

We did tie up a lot of nice, high-quality land sitting right on Interstate 95.

They're not making any more of that.

And we are in the process of getting that loan -- that land entitled for its highest and best use.

In terms of the buildings themselves, you've got to remember, the whole Nottingham acquisition was $138 a square foot, and we paid for half of it with stock at $49 net to the company.

So it is underperforming, but I think we have confidence in that location and in the buildings over time that it will perform like we had anticipated it to.

Do you see some land gains coming out of it though in the future?

Over time, yes.

Thank you.

Chris Lucas, [Robert Baird].

A couple of quick questions.

Steve, on the detailed sections of the P&L you have a business development line.

Is that where acquisition related costs are showing up?

Or what is exactly that line?

Yes, that's what that is, and that's what the big spike in the quarter is, so all the costs related to acquisitions that you have to expense, or even costs that if you were to pursue an acquisition and didn't win and incurred some expenses, that's the line item that they appear in.

So you provided information for prior quarters as well that gives a sense of it.

So for deals that are in progress, would that also show up in that line?

Yes, if you were incurring -- if you've incurred acquisition related expenses, that's where they will show up.

We've been reporting it that way I think all year.

It's in the year and in the quarter number in our supplement.

And then on the acquisition guidance, is that a function of more of the timing of the acquisitions rather than the actual expected volume?

Correct.

And then on the data center business, just a quick follow-up on that.

Is your willingness to go into more standard commercial multi-tenant data centers?

Is there a kind of product you're looking for?

How would you extend your data center business I guess (multiple speakers)

Well, I think it's a wholesale co-location.

We are not too interested in the retail, high tenant density kind of business.

But if you look at our 1.5 million square feet of raised floor and the data business we have, it's typically secured buildings, single tenants, very high power consumption, and wholesale per se.

So we have an expertise in that area, and we've had a lot of opportunities, both development and existing acquisitions, thrown our way, and we are trying to prudently sort those out and choose the things that are most within our super core strategy and the most opportunistic and try and move forwards.

One other last question, just Roger, can you give us an update on the tenant situation at Washington Tech Center in terms of where the expiring leases are and what your expectations are.

Well, there are two main tenants in that building.

The one tenant is leaving, that's the one I mentioned on the call, 100,000 square feet in June.

Then the second tenant, we've renewed some of their space, and we are trying to renew the rest of that over the next couple of months.

Thanks guys.

(Operator Instructions).

Michael Knott, Green Street Advisors.

Lukas Hartwich in for Michael Knott.

Rand, I was hoping you could comment on what you're hearing from your tenants these days.

Well, maybe Roger, because I think Roger could deal with that one more on the kind of the flavor of tenants and so on.

I think it's a balance.

On the one hand, I -- to the extent that we have general commercial tenants, I think there's still a little bit of trepidation there to make significant commitments in their space because of -- their business models are still a little flat.

And -- but in terms of the government, defense IT and data, those tenants -- I don't want to say they are treating it is business as usual, but they don't have the fear that the general commercial tenants are, and so they in some cases are an expansion mode and feel like they have a forward-looking business model such that they can make commitments to space on a longer-term basis and invest money in space.

I would say -- and again, that represents about 60% of our business.

The other 40 is commercial, and that's where we are feeling some of the strain that a lot of people are feeling, generally speaking, in the market.

That's helpful.

I guess just one more big picture question.

I'm curious, once the economy starts picking up and presumably the government starts focusing more on the budget deficit, are you guys at all concerned about the potential impact on your tenant base and your niche focus here?

I don't think so.

I think that's -- we tried to address that in my comments and in Rogers, and when we look forward and you listen to the rhetoric from Washington and discussions with Congress, clearly they need to address the budget deficit and need to do it promptly.

But at the same time they are not going to do anything that would affect defense or intelligence in the areas that we deal in.

And so we think that we are fairly well-positioned for that.

And then the cyber initiative that Roger talked about is a very major -- initially $15 billion -- commitment with a very rapid expansion.

So we look out over the next three to five years and see very strong growth.

And of course people forget that in addition to that you have the BRAC, which is already funded and nearing completion here for most of our locations in March of '11.

And so that has its own kind of engine that will continue off with the contractors moving in over the next several years.

So we think we are uniquely positioned to be pretty safe under that scenario.

Very helpful.

That's it for me, thanks.

There are no other questions at this time.

I will now turn the call back to Mr.

Griffin for closing remarks.

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

I know some of you had to dig out to be in the office, or some of you are still at home.

As a note, we are holding an investor day this year.

I know we haven't done that for several years.

A lot of you have asked for that.

It is anticipated to be in New York City on May 19.

If you could note that on your calendars, we will be sending out a "hold the date" announcement relatively quickly here.

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

And thank you and have a great day everyone.

Thank you for your participation today in the Corporate Office Properties Trust year-end 2009 earnings conference call.

This concludes the presentation.

You may now disconnect.

Good day.