COPT Defense Properties (CDP) 2010 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust first quarter 2010 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.

Ms.

Fowler, please go ahead.

Thank you and good morning, everyone.

Today we will be discussing our first-quarter 2010 results and guidance for the full year.

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 2010 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 Act 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.

We are reporting FFO of $0.53 per diluted share for the quarter.

This result reflects the impact of several items.

First, snow storms and the severe cold weather has significantly increased our net operating expenses.

Second, a large decrease in termination fees; and, third increased vacancies, specifically at our Blue Bell campus and at One Columbia Gateway property.

All of these items together resulted in a 21% decline in FFO per diluted share compared to the same quarter last year.

As we said one year ago, office is a lagging sector in the economy.

We indicated at that time that rental rates and occupancy will be under pressure throughout 2010 and we are seeing evidence of that this quarter.

We expect to continue to see this pressure as we move through the second and third quarter of 2010, however, we are confident enough of the year that we are leaving guidance unchanged at this time.

Steve will go through the details in a minute.

While we continue to work hard on maintaining our operating portfolio metrics, we are now starting to see some acquisition opportunities in our markets.

We are well-positioned to take advantage of these opportunities.

Subsequent to quarter end, we executed a $240 million exchangeable note offering and paid down our revolver.

We also increased the size of our revolver by $100 million to $700 million.

As a result, we now have close to $500 million of line capacity.

We have very little debt maturing this year and therefore have ample capital available to quickly execute on acquisitions.

With regard to development during the quarter, we announced our expansion to a new frac location at Redstone Arsenal in Huntsville, Alabama.

Through our agreement with the US Army, we now control 468 acres of land on which we can develop 4.4 million square feet of office space.

In addition, we expect to announce a second new frac submarket expansion by the end of the second quarter.

We are now well positioned to grow revenue from our super core tenant base over time.

With regard to development leasing, we continue to see strong demand from the government as evidenced by the three full building leases signed during the quarter.

We also see good demand from defense contractors at are Northgate Park at Aberdeen Proving Ground.

At MBP and Arundel Preserve, demand from defense contractor tenants has been a little slower than we anticipated it as appropriations have been hung up and stopping delays have caused contract awards to lag.

This has been slow to reaffirm contracts and therefore contractors have been slow to start planning their relocation from Northern Virginia.

An important component of this future growth is the cyber security announcement for Fort Meade.

As an update relating to cyber security, the nomination hearings for General Alexander as Cyber Czar are growing to a close and his confirmation is all but certain.

As a result, we are starting to see accelerated discussion on the magnitude and urgency of this program.

As Dennis Blair, the Director of National Intelligence, recently related in his 2010 annual threat assessment, and I quote, "The national security of the United States is dependent on a dynamic public and private information infrastructure which includes telecommunications, computer networks and systems and the information residing within.

The critical infrastructure is severely threatened." In addition, he added, "We are integrating cyber security with counterintelligence and improving our ability to understand, detect, attribute and counter the full range of threats."

This is a major program with a heavy dependence on defense contractors that will be good for the Fort Meade area and for (inaudible).

Long term we are comfortable that the growth related to these agencies will be substantial.

In summary, despite the challenging economy, we continue to work diligently this year to position the Company to take advantage of both acquisition and development opportunities that will provide future growth.

We now project that our super core revenue consisting of the US Government, Defense IT contractors and data will grow from our current 58% of our annualized revenue to 62% by year-end 2010 with this concentration continuing to grow significantly over the next two years.

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 2010 totaled $38.2 million or $0.53 per diluted share.

These results represent a 21% decrease on a per-share basis from the $0.67 per diluted share or $44.8 million of FFO for the first quarter of 2009.

We incurred approximately $7.3 million of snow removal costs in the first quarter of 2010, approximately $5 million more than we incurred in the first quarter of 2009.

Taking into account our estimates of the recoverability of these costs from tenants, the blizzards of 2010 reduced our FFO per share by approximately $0.07 or $0.04 more than the first quarter of 2009.

The year-over-year comparative first-quarter FFO results were also lower as a result of a $3 million or $0.05 per share reduction in termination fees.

First quarter 2010 net termination fees were approximately $900,000 or $0.015 per share less than we had expected when we last gave guidance.

Also, contributing to the year-over-year decrease in FFO per share was a $3 million or $0.05 per share decrease in NOI attributable to recent vacancies and assets we expect to redevelop in Blue Bell, Pennsylvania; and a warehouse in Columbia, Maryland.

We reported net income available to common shareholders for the first quarter of $5.9 million or $0.10 per diluted share compared to $12.1 million or $0.23 per diluted share for the first quarter of 2009.

Turning to AFFO, our adjusted funds from operations of $25.2 million represents a decrease of 24% from the $33.4 million in the first quarter of 2009.

Our diluted FFO payout ratio was 75% and our diluted AFFO payout ratio was 99% for the first quarter.

Looking at our same office cash NOI for the first quarter of 2010 for the 232 properties or 87% of the consolidated portfolio of square footage, same-office cash NOI excluding lease termination fees decreased by 4% and that's due primarily to the impact of the snow removal costs and a 2.4% decline in occupancy.

Including the gross termination fees, same-office property cash NOI decreased by 9% for the quarter.

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

73% of our debt was at fixed interest rates as of March 31.

Our coverage ratios remain strong with a first quarter EBITDA to interest expense coverage ratio of three times and a fixed charge coverage ratio of 2.5 times.

Reviewing our 2010 capital plan, we've managed our near-term debt maturities to lower levels, with only $52 million in debt maturing for the remainder of 2010.

Subsequent to March 31, we closed a $240 million exchangeable note offering.

The notes have a 4.25% coupon rate and a 20% conversion premium over our closing stock price on the day of pricing which equates to a $48.16 per share conversion price.

The notes have a five-year note call provision and put rights to the five-year anniversary dates.

The proceeds were for general corporate purposes and initially used to pay down our line of credit and create additional line capacity.

We also expanded our $600 million revolving line of credit by $100 million utilizing the accordion feature of the line and currently have almost $500 million of available capacity.

The current percentage of fixed versus floating rate debt after paying down the line is 82% fixed.

We've previously provided guidance that our expectation was to access the capital markets for 300 to $370 million of medium-term to long-term debt plus seek additional permanent financing to fund acquisitions as they become available.

Our exchangeable note offering and line expansion have now accounted for $340 million of that guidance.

We have accelerated the timing of those financings, thus interest expense in the second quarter is expected to be $0.04 per share higher than previously modeled and then, $0.02 lower in each of the third and fourth quarters.

The combined line capacity and amounts available under our $225 million construction revolver should be sufficient to fund the development for the balance of 2010.

Now turning to our diluted FFO per share guidance for 2010, our guidance range remains unchanged from $2.31 per diluted share to $2.49 per diluted share.

As previously noted, this guidance excludes any initial property acquisition costs that would be required to be expenses incurred and those acquisition costs would vary significantly by tax jurisdiction and they're no longer capitalized under the accounting rules.

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

First, as previously stated, our actual gross snow removal cost for the first quarter of 2010 were $7.3 million.

On a net basis, we estimate FFO was reduced by $0.07 per share.

Second, for our 2010 same-office portfolio, we expect occupancy to remain at the current level for the first three quarters and then to end 2010 slightly higher.

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

Third, same-office cash NOI excluding term fees is projected to average between negative 3% to flat for the year and it may fluctuate by quarter.

Fourth, we have lowered our lease termination fee expectations to approximately $3 million with the remaining $2.7 million to be earned evenly over the balance of the year.

Fifth, we estimate that all the projects opening during 2010 to contribute $4 million of NOI.

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

Sixth, for acquisitions, we assume a weighted average new investment level of approximately $130 million for the year.

Seven, other income primarily third-party development fees and gain from sales of non-operating assets including opportunistic investments are assumed to be weighted towards the second half of the year and are expected to contribute between $7 million at the low end of the range and up to $15 million at the top end of the range.

Eighth, our exchangeable notes will be accounted for in accordance with the FSP for APB 14-1 with an effective GAAP interest rate including the amortization of costs of approximately 6.5%.

And then finally, we estimate that approximately 20 to 25% of our outstanding debt will be floating on average for the second half of the year and as previously mentioned, the floating debt percentage will be lower in the second quarter.

We're not providing quarterly guidance, however, these assumptions indicate that we expect lower first-half of the year results with growth in the second half of the year coming from development placed in service, acquisitions, other income, and some fourth-quarter occupancy gains.

This is our updated look for 2010.

We expect to further refine the details throughout the year and with that, I will now turn the call over to Roger.

Thanks, Steve.

At quarter end, our wholly-owned portfolio consisted of 248 properties totaling 18.9 million square feet that were 89.6% occupied and 90.2% leased.

Our occupancy was down 1.1% quarter over quarter.

Included in our vacancy is 215,000 square feet of warehouse space in two buildings where 1.1% of our portfolio where leases have expired over the last couple of quarters.

These two buildings represent 100% of our warehouse space.

We expect our occupancy percentage will continue to decline as we move through the second quarter as two Colorado Springs construction projects are placed in service with a lower occupancy than our portfolio.

We expect to build occupancy from that point.

During the first quarter, we leased 969,000 square feet, of which 359 square feet were renewals, 95,000 square feet was retenanting, 61,000 square feet was first-time lease-up of previously acquired space and 454,000 square feet was development.

For the quarter, we had a renewal rate of 65% at an average capital cost of $7.63 per square foot.

Rental renewals increased 2% on a straight line basis and decreased 7% on a cash basis.

Total rents for renewed and retenanted space decreased 1% on a straight line basis and decreased 9% on a cash basis.

For all of renewed and retenanted space, the average capital cost was $9 per square foot.

Looking at our lease expiration schedule across the portfolio for the balance of 2010, we have 11.4% of our revenues expiring, representing 2.1 million square feet.

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

Leasing activity has increased overall in our portfolio but as we forecasted on recent calls, our leasing metrics on our in-place portfolio with the exception of a few submarkets continued to be challenged with occupancy under pressure and renewal and retenanting rents rolling down somewhat.

To date, our leasing capital cost per square foot has been low but we would expect them to increase for the balance of 2010.

While the business sentiment has improved, we continue to see top-down pressure from corporations to lower operating expenses, including occupancy costs, by lowering costs [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 have an operating advantage in this market with our ability to fund improvements and with our emphasis on customer relationships that tend to attract and retain customers.

Demand for our development projects has accelerated since the beginning of the year.

We have signed leases exceeding 454,000 square feet in six different buildings in our Fort Meade, San Antonio, Colorado Springs and Aberdeen markets.

We also have leases under negotiation for 166,000 square feet in four different buildings.

We continue to see BRAC related leasing activity both at Fort Meade and Aberdeen.

The moves of C-4 ISR from Fort Monmouth, New Jersey to Aberdeen and DISA from Northern Virginia to Fort Meade has moved up to earlier in 2011.

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

From a market standpoint, the VW Carter which represents 46% of the Company's revenues was 15.6% vacant at quarter end, including 13% in the Columbia submarket.

The market is stable with good leasing activity.

The Northern Virginia market from which the Company derives 17% of its revenues was 14.4% vacant at quarter end, although the submarkets the Company operates within had higher vacancies.

These include Tyson's Corner at 16.4% vacancy, Herndon at 15.9% and Ruth 28 South at 20.9%.

The market vacancy has increased slightly quarter over quarter and 1% in the past year with rental rates up slightly on the quarter and down slightly year over year.

The the greater Baltimore market which represents 15.8% of the Company's revenues was 12.8% vacant at quarter end.

Three of The company's submarkets, (inaudible) North Carter, Westside, home to Social Security and the Center for Medicare and Medicaid in Harford County where our Aberdeen project is located are stable and improving.

The Company's fourth submarket, Whitemarsh, continues to underperform but is gaining strength.

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

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

On another note, we are pleased to have been awarded for the sixth straight year the top ranking for customer service from CEL Associates, the JD Power of the commercial real estate industry, for the largest owner category with over 100 buildings.

This prestigious award is a reflection of the hard work and customer service attitude that our team reflects on a daily basis.

We have successfully created the leadership culture and customer service that supports our customers' strategy.

Turning to acquisitions, the current investment environment is fueled by growing optimism that from a capital markets perspective, the worst is behind us.

There is greater availability of debt at favorable rates which is bringing more investors back to the market particularly for high quality stable properties.

Cap rates for core assets in top-tier markets such as Metropolitan Washington, DC have improved markedly since last fall and we are seeing larger deals including portfolio offerings in favor among active buyers that include pension funds, equity funds and private REITs.

In this climate, we continue to look for opportunities to grow our portfolio by acquiring core strategic properties in our existing markets.

We are also focused on situations where our market and operational expertise can add value and enhance returns.

Now I will turn the call back to Rand.

Thanks, Roger.

Looking at our construction pipeline at quarter end, we had 11 buildings under construction for a total of 1.3 million square feet at a projected cost of $289 million.

We've added two buildings to the construction pipeline this quarter, one for the government and one for defense contractors.

Our development pipeline has 11 buildings under development with close to 1.2 million square feet at a projected total cost of $259 million.

You will note we have added six buildings to the pipeline including the first two buildings that we plan to develop at Redstone Gateway in Huntsville, Alabama.

In addition, we expect to add approximately 200,000 square feet of development starts with the submarket expansion project to be announced in the second quarter and one other building which will bring the total to 1.5 million square feet of development as announced on the last call that we would expect to start under construction.

With regards to leasing, our construction pipeline is 48% leased at quarter end after adding two buildings this quarter that are just starting under construction and have no leasing yet.

Without the addition of these buildings, we would be 58% leased as of the end of the first quarter and 69% committed.

So leasing is progressing on schedule and at a brisk pace.

As a reminder, our construction stabilized yields are holding very close to 11% cash on cash on leveraged yields.

We're particularly focused on serving the BRAC relocations due to the compressed demand expected from the Defense contractor community as they move to service their customers.

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

In summary, we're working very hard to hold our own in this challenging economy and to position the Company for accelerated growth.

Capital is in good shape, acquisitions are becoming available and we continue to expand our development platform to meet demand.

While the leasing and operating metrics will be challenging this year, we believe we are very well positioned for a rapid rebound.

As a reminder, we are holding our investor conference for our shareholders and analysts in New York.

We will be holding a reception at the New York Stock Exchange on the evening of May 18 and a management presentation the morning of May 19 with a keynote speaker at lunch.

We will be sending out more details on the event tomorrow.

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

(Operator Instructions) John Guinee, Stifel Nicolaus.

A couple just clarifications.

First, if I look at your portfolio of wholly-owned assets, it looks like you went from 19.1 million square feet of total operational properties to 18.9, about 182,000 decrease and it looks like your redevelopment went down from 835 to 786, about a 50,000 square foot decrease.

Any reason for that because I didn't see any assets sold?

Two things happened in the first quarter.

First we sold a small building for 25,000 square feet and then secondly, we moved a 160,000 square foot warehouse component in our Columbia Gateway business park into under development category.

It's not in our supplement yet, but we have taken it out of service because we have no intention of releasing it.

We are going to tear it down to free up land for office buildings in our Columbia Gateway business park.

And then how about on the redevelopment side, the 835 down to 786.

I'm not sure of the specifics on that.

We will have to get back to you on that.

Okay and then the -- this is kind of a glass half full, glass half empty.

When you're giving your vacancy number, are you doing it off of 18.9 square feet or are you including your redevelopment assets?

We are doing it on the 18.9.

So the -- we have two assets that are -- we have the Blue Bell assets which comprise about 500,000 square feet and then we've got this one warehouse in Columbia for 160 that aren't counted in the denominator and neither is any of the obviously under construction projects.

Okay and then you're able to capitalize the carry and capitalize the OpEx I guess?

We are not capitalizing carry or OpEx on the basis for the Unisys asset or for the warehouse that I just mentioned in Columbia.

Just kind of a back of the envelope, for every occupancy point you gain, about 200,000 square feet at say $24 full service, does that flow straight to the bottom line to the tune of $0.06, $0.07, $0.08 per share in FFO?

Yes, the marginal cost of putting a tenant in a space is probably about $4 per square foot, electricity for $3 and cleaning for $1.

The balance would fall to the bottom line.

Michael Bilerman, Citibank.

This is David Shamas here with Michael.

Rand, you talked a bit about the cyber security initiative.

Just wondering if you can give us a sense of timing and potential scope, how much actual space that relates to?

The timing when Secretary of Defense Gates gave the announcement of the whole establishment of the Cyber Security Agency, he said it needed to be fully operational by October of 2010 which is very, very rapid.

I would suspect that that is probably slightly delayed because of the confirmation hearings taking so long at the Senate.

But things are now progressing well.

We don't know the size.

We've heard of the 15 to $30 billion of initial investment in the first five years.

We are hearing discussions from defense contractors who are starting to be positioned for fairly quick awards.

We do think that a lot of the expertise will be external and we do think that there are a number of the other agencies -- each of the armed services has an intelligent agency included within it that will be relocating to Fort Meade.

The first one that's been announced was the Tenth Fleet of the Navy which is strange to hear the Navy relocating to Fort Meade which is an army base.

But that is the intelligence center and that's the intelligence fleet.

So they have announced that they'll be relocating there.

So we expect to see that occurring over time.

And as we said, substantial contractor awards being given; that would be for off-site demand.

And in your guidance, you guys assume a 70% renewal rate.

How much of this is known at this point versus spec?

What we do is we go tenant by tenant and we are obviously in discussions with each of those and it's really a best estimate based on our ongoing discussions with them.

But based on where we are with negotiations and proposals and lease documents going back and forth, we feel pretty good about the 70%.

Roger, I think you mentioned cap rates falling significantly in top-tier markets.

Do you have any estimate as to how much they've fallen exactly?

Well I think they have probably fallen 100 basis points since last fall.

[George Arbash], [IXI].

Steve, with regards to the snow removal charges, how much of the cost is potentially recoverable throughout the year and how much of the related recoverables were already accrued in the first quarter?

We have estimated the full recoveries for the year in the net numbers I've given you, George.

In other words, we incurred them in that quarter and based upon going through the contracts and all of the analysis that you do.

So what we have said is that the gross was $7.3 million and that was around 4.2, the per share is around $0.07 per share and that reflects the recoveries for the whole year.

Okay and I guess, Rand, when you think about the defense and non-defense tenants in your portfolio for that 2010 and 2011 expirations, what percentage would you say are in need of more space and what percentage do you think will downsize when the lease expires?

Well I think on the defense side, you will see continued growth based upon both the BRAC relocation as tenants come in as well as those tenants that are existing, already winning awards and needing space.

And then, Roger, if you want to comment on the non-defense.

I think on the non-defense, what we're seeing is one average contraction of about 10 to 15% in space.

So that is some tenants renew as some vacate and some downsize.

But if you took the average of all that, it's probably 15% downsizing.

That's great.

And I guess, Steve, just one more question on the guidance.

That does not include any allocation for acquisition costs.

I know it's hard to generalize, but do you have a sort of rule of thumb for a percentage of the acquisition costs that you would model for the acquisition costs?

We actually aren't -- we haven't and what we have seen is -- and obviously we haven't identified the specific acquisitions or the jurisdiction.

But we have seen where it's significant to almost immaterial depending upon which state you buy it or which County.

So that's why we're guiding that way, is to not -- since they're not identified, we don't know what the relative percentages will be.

Jordan Sandler, KeyBanc Capital.

It's [Craig Melman] here with Jordan.

Just on the investment or potential investment activity, one of your peers was just actually discussing the heating up of bidding in Northern Virginia/DC area.

And you guys had mentioned that you're more interested in core and just trying to get to what you're underwriting in terms of rent growth, how you think you might be competitive against some of the other bidders and especially on the value add which it seems like some of your public REIT peers are more tending to.

I think what we are doing is -- obviously it's an asset by asset, submarket by submarket analysis and it all depends on is the asset stable with no near-term lease maturity or are you buying vacancy that you hope to fill.

We are still I think underwriting very conservatively in terms of time to release and where rents are going for the next couple of years in the Northern Virginia kind of market simply because there still is pretty significant supply overhang overall.

But again, it depends on the submarket and the particular building.

And then just on the difference between core and value add, sort of what's your return hurdle discrepancy between the two or where you feel comfortable?

I think the return discrepancy on an IRR basis would be about 200 basis points for the unstable assets.

And then just on the disposition side, as you guys move to increase the revenue to the more super core source, would you guys be looking to dispose of some of your slower growth, traditional suburban assets and maybe which markets would be most appealing to pare down?

We are in the midst of a comprehensive study of all of our non-super core assets to try to put together a program to start divesting those assets where we either see risk out in the future or believe that there's significant growth ahead for those particular assets.

So I think what you'll see over the next couple of years is us starting to sell assets as we continue to add core assets to the Company.

Chris Lucas, Robert Baird.

Steve, just a couple of follow-up questions related to the guidance and the snow removal costs.

The $4.2 million net cost estimated for the snow removals, how did that compare to what you originally guided at the fourth quarter earnings call?

Very close with maybe a couple hundred thousand more than what we had estimated at the call.

Okay and then on I think it's point seven of your guidance review, how has that varied relative to again the prior guidance, like development fees and stuff?

We have just tried to give you -- let me find it here.

We just tried to frame the top and the bottom of the guidance and it didn't necessarily change what our estimate is.

But we have reached the bottom range piece of that.

So again, it includes land sales and it includes the fee income and it includes earnings on opportunistic investments.

So if you raise the bottom, what sort of has come in a little bit better than you were expecting on the bottom end?

I think we've identified another couple potential land sales, quite frankly, since then and we have in one of our opportunistic investments, we have been able to recognize some income in the first quarter and believe that that will continue.

Dave Rodgers, RBC Capital Markets.

Rand, question for you on the new submarket expansion you talked about.

I'm assuming that maybe similar to what you announced with Redstone that there wouldn't be a big capital commitment up front but that the development costs would be your investment.

Is that true and is that not in your acquisition?

That's not part of your acquisition guidance?

That's correct.

It's a development opportunity rather than existing buildings.

So that we do anticipate that as I said, that the first building would start later this year but that's available from our revolver and would not be a big outlay.

And historically, I know you haven't really liked the idea of joint venturing as you have more and more opportunities coming.

Do you think even on the sell side to look at disposing of some assets into joint ventures as opposed to straight off the balance sheet or at least taking advantage of other capital to pursue the large amount of growth you have?

Well we look at all of the capital stack and alternatives and what's the most cost efficient certainly.

We've tended to avoid the joint ventures because of the potential conflicts of interest or we didn't really need to manufacture earnings like a lot of the earlier joint ventures that others did.

And we're just not in that position.

And eventually, you always find that sometimes those become -- they're very large.

They get announced as large and then they become transactional in nature.

The velocity gets to be an issue.

So you've seen some of our REIT peers falter a little on those large joint ventures.

So we have been fairly cautious of that.

And we'll just have to see how they unfold.

If people have great opportunities for us like what happened in Alabama, then certainly joint ventures are a practical way to proceed.

Fair enough.

And, Roger, a couple of questions just on the portfolio.

You talked about credit issues over the next year.

I guess I took your comment to mean maybe credit issues are still rising.

Perhaps that's not the case.

Could you just clarify that, if that was the case or not?

For the first quarter, our credit issues were about $400,000 and that's down from the last couple of quarters.

So they're not rising.

I think we're just pointing out that we're still going to have some lingering amounts that we are going to suffer over the next year while the whole economy gets back in balance.

Okay, that's fair.

And then I guess the last question on your leasing activity in the quarter.

The average lease term seemed to be down fairly dramatically.

Is that more just market demand?

Is that just a function of the renewals or is that more an OFC driven strategy related to your view on market rents?

I think it's a combination of all.

Obviously it's circumstantial based on the particular building and the tenant in it.

It's also a sense for us in some cases that rents will go up appreciably in some of our submarkets over the next couple of years with BRAC induced demand.

So we don't want to lock in rents that are low for long periods of time if we can help it.

That's a trend likely to continue here in the next couple quarters?

We're clearly balancing that with our overall portfolio maturity schedule.

So you can't bet the whole company doing something like that.

But I think on a one-off basis, we do look at it and try to determine where we think there will be strong demand and where we think rents go up.

We're willing to take a little bit of risk doing shorter-term renewals.

(Operator Instructions) John Guinee, Stifel Nicolaus.

It was answered.

Thank you.

(Operator Instructions) Ladies and gentlemen, this does conclude the question-and-answer portion of today's conference call.

I will turn the call back to Mr.

Griffin for closing remarks.

Thank you for joining us today.

As always, we do appreciate your participation and support.

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

And we look forward to seeing all of you if you can make it up to our investor day next month up in New York City.

So thank you and have a good day, everyone.

Thank you for your participation today in the Corporate Office Properties Trust first quarter 2010 earnings conference call.

This concludes the presentation.

You may now disconnect.

Good day.