COPT Defense Properties (CDP) 2011 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust First Quarter 2011 Earnings Conference Call.

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

At this time I will turn the call over to Stephanie Krewson, the company's Vice President of Investor Relations.

Ms.

Krewson, please go ahead.

Thank you, Laura.

Good morning and welcome to COPT's first quarter 2011 earnings conference call.

With me today are Rand Griffin, COPT's CEO; Roger Waesche, our President and COO; Steve Riffee, our Executive Vice President and CFO; and Wayne Lingafelter, Executive Vice President of Development and Construction.

As management reviews our financial results they will refer to our quarterly supplemental information package, associated press release, and a presentation that outlines the company's strategic reallocation plan, each of which can be found in the investor relations section of our website at www.copt.com.

Within the supplemental package you will find a reconcilation 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 2011 annual and quarterly guidance.

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

Before turning the call over to management let me remind all of you that certain statements made during this call regarding anticipated operating results and future events are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

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 with the SEC.

I will now turn the call over to Rand for his formal remarks.

Thank you, Stephanie, and good morning, everyone.

As is obvious from our earnings release and the Form 8-K that we filed this morning we've got a lot of items to discuss on this earnings call.

I'm going to cover a few highlights from the first quarter, update you on the status of the Defense budget and how it impacts COPT, and then go over the parameters of COPT's strategic reallocation plan which is outlined in the PowerPoint presentation posted with the earnings related documents on our website.

COPT delivered a solid quarter despite the ongoing challenges presented by the tepid economic recovery in the US as confirmed by today's news reports on the economy, and also by the budget stalemates in Congress and the protracted continuing resolution that resulted.

Our FFO per share of $0.52 was within our guidance range and met consensus.

Several important items impacted our first quarter, including acquisitions and leasing.

The acquisition environment remains highly competitive.

We remain focused on strategic super-core acquisitions and did not acquire any operating properties in the first quarter.

However, we remain confident that we can find strategic accretive acquisitions that meet COPT's standards during the balance of the year.

As Wayne will discuss, we initiated the construction of two buildings at two of our BRAC locations, our 115,000 square foot building in Huntsville, Alabama and our 240,000 square foot building in Patriot Ridge in Northern Virginia.

We are in advanced negotiations with multiple contractors for those buildings and expect leasing to accelerate.

The news on the Defense budget is that we finally have one.

On April 15, the federal government enacted fiscal year 2011 federal appropriations including Defense appropriations.

The Department of Defense, or DOD, received $513 billion, an increase of $5 billion over 2010 levels.

Importantly, the priorities that positively impact our company were all maintained in the approved budget.

So this passage of the budget was good news for COPT.

The priorities include cybersecurity, intelligence programs, and defense information technology programs required to support these efforts.

Furthermore we expect these programs to remain a top security priority and that their emphasis will only become stronger.

For example, cybersecurity currently is 15% of federal agency IT budgets and some researchers expect cybersecurity to grow by 9.1% per year over the next five years.

For fiscal year 2012 the president's proposed DOD base budget, that is without supplemental funds for supporting the war efforts, is approximately $553 billion, which represents a 3% increase over fiscal year 2011.

The House of Representatives, Republican controlled, 2012 budget bill maintains the DOD base budget at the same level proposed by the president.

We remind you that the nation's near-term defense strategy as laid out in the quadrennial defense review or QDR report ensures a continued emphasis on key missions that rely on intelligence, cybersecurity, mapping and imagery, surveillance and reconnaissance, rotary wing and unmanned aircraft, and space and missiles.

As we pointed out on our year-end 2010 call, our portfolio is adjacent to a number of key mission locations that support these critical priorities.

A quick update on BRAC.

With little exception, the government agencies have moved into their new headquarters or are in the process of completing those moves.

For example, on April 15 we attended the ribbon cutting ceremony for the new headquarters building at Fort Meade for the Defense Information Systems Agency, known as DISA.

They currently have 1,700 of the 4,300 government employees in place and move another 200 employees in every other week.

By law all BRAC related government agencies have to be in their new headquarters by September of this year.

All contractors serving those agencies will need to be moved to comply with their contracts.

The timing of the moves will vary, as we found out, according to the agency they are supporting, but must be totally completed in three years.

The 10 million square feet of contractor demand resulting from BRAC agency moves is coming to our four selected BRAC locations and we at COPT are ready to meet that demand.

In short, our existing portfolio and development pipeline position COPT to benefit both from the priorities within the DOD and the new demand related to BRAC agency moves.

Turning now to the strategic thinking that we have been working on, as always COPT's management and the entire employee base is committed to delivering the best possible returns to our shareholders.

Balancing our constant objective of improving the quality of our portfolio with our desire to achieve attractive earnings growth and our longer term objective of increasing our concentration of buildings that serve our super-core customers in the US government, Defense IT and data sectors, we have decided to accelerate the pace of our normal asset sale program.

With so much capital chasing so few quality assets and debt financing now more available to non-institutional buyers we believe the market opportunity to sell less strategic assets is compelling.

If you refer to page three of the PowerPoint presentation referenced earlier I'll walk you through the basic parameters of COPT's strategic reallocation plan.

Roger will discuss the plan in more detail and Steve will walk you through its financial impact.

As you can see on page three, between now and year end 2013 COPT plans to sell roughly $260 million of non-core office properties.

We will reinvest roughly $225 million of net proceeds into higher growth investments that fit our strategic niche.

The strategic reallocation plan will enable us to more quickly increase our percentage of revenues from buildings serving our super-core tenants from 59% today to 67% at the end of 2013.

By improving the quality of our portfolio our valuation should benefit from a higher NAV.

Turning to page four of the presentation, the plan will also reduce COPT's exposure to single story non-government office buildings, making us better able to weather the next economic downturn, which hopefully is a long way off.

Selling buildings that are no longer a strong strategic fit will also enable management to focus their time and the REIT's resources on properties with higher investment returns.

In short, after executing our plan COPT will be an even stronger, more focused company that can increase NAV and future FFO and AFFO growth, resulting in strong shareholder returns.

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

Thanks, Rand.

Before discussing the strategic reallocation plan in more detail I'm going to update you on the customary operating statistics for the quarter.

At quarter end our wholly owned portfolio of 252 buildings encompassed 20 million square feet that were 87% occupied and 89.2% leased.

As we forecasted, our occupancy dropped by 1.2 percentage points from year end 2010 levels owing to tenant move-outs.

The percentage leased, which is a leading indicator, dropped only 30 basis points in the quarter.

Leasing remained challenging as many prospective tenants were hamstrung by the protracted continuing resolution.

As Rand mentioned earlier, Congress passed a fiscal year 2011 budget in mid-April which, after all the discussions of cuts, ended up increasing base defense spending by $5 billion.

In terms of executing leases that were stalled by the continuing resolution, there will be some administrative delay in getting the money from the OMB to the Pentagon and then to applicable agencies.

We expect some contractor leasing will move forward fairly quickly, but other activity could take a quarter or two to materialize.

In effect we have been delayed on six months of government and defense contractor leasing due to this budget morass.

Despite the budget impact we leased 1,186,000 square feet during the first quarter, which keeps us above pace to reach our leasing goal of 4 million square feet in 2011.

Recall we began the year with 1.9 million square feet of leases scheduled to expire.

Of the 1.2 million square feet leased in the first quarter 784,000 square feet were renewals, 577,000 square feet of which related to 2011 expirations, and 207,000 square feet relate to future lease -- year maturities.

We re-tenanted 217,000 square feet and executed 162,000 square feet in development or redevelopment projects.

Although government gridlock caused development leasing that benefits 2012 and beyond to be less than we anticipated for the quarter, we expect demand to pick up in the coming months.

The properties we are building anticipate this government and contractor demand and, as we learned in the decades it took to develop the National Business Park, the developer with the best available building in the right location usually wins the business.

For the quarter we had a renewal rate of 67% at an average capital cost of $10.69 per square foot.

Rents on renewals increased 5.5% on a straight line basis and were flat on a cash basis.

Total rent for renewed and re-tenanted space increased 4.3% on a straight line basis and were flat on a cash basis.

For all renewed and re-tenanted space the average capital cost was $16 per square foot.

While our renewal and re-tenanting rental rates were improved we continued to see pressure from tenants to lower operating expenses.

Additionally, on balance supply and demand is still modestly in favor of tenants.

Positive during the quarter and hopefully the beginning of a trend was that only two out of 40 renewal transactions were accompanied by downsizing.

Looking at our lease expiration schedule across the portfolio for the balance of 2011, we have 7.2% of our revenues expiring, representing 1.3 million square feet.

We still expect a 65% to 70% renewal rate for the year.

We continue to believe same office occupancy has now bottomed.

For the second quarter we have about 90,000 square feet of known move-outs which will be more than compensated for by 443,000 square feet of space that's leased and will become occupied in the second and third quarters.

We conservatively project that same office occupancy sequentially will improve modestly each quarter for the remainder of the year.

Modest employment growth and increased BRAC and cybersecurity activity should gradually translate into demand for space, especially now that the 2011 federal budget has been passed.

Turning to our strategic reallocation plan, as Rand said we are accelerating our normal disposition pace to more rapidly focus our portfolio around properties that serve our core customers in the US government, defense IT and data industries.

We believe the compression in cap rates combined with liquidity of the debt markets, particularly for non-institutional buyers provides a window of opportunity to improve the quality of our portfolio.

Frankly, from 2008 until recently it was a poor market for selling assets, so we're using the current environment to catch up on some rational pruning.

Turning to page five of the presentation, the buildings we've targeted for sale are good buildings.

In many cases they simply are too small.

For example, the 51 buildings we intend to sell represent 20% of our consolidated building count, but only 9% of our square footage and 6% of real estate revenues.

Additionally all but five of the properties are one and two story buildings.

In other cases the buildings cannot be economically retrofitted to serve the needs of our core customers or they may be in markets where the long term growth potential no longer aligns with our growth objective.

Some properties no longer fit into COPT's corporate strategy of locating properties adjacent to knowledge based defense installations.

As we detail on page six of the presentation, executing these asset sales will reduce our exposure to traditional suburban office buildings, bolster our internal growth and increase our percent of annualized revenues from buildings that serve our super-core tenants from 59% today to 67% by year end 2013.

For execution reasons we are not going to detail the properties, but the majority of the sales are in our suburban Baltimore and suburban Maryland regions.

We are currently in advanced stages of negotiation on 15% of the portfolio designated for sale.

Beyond this current plan you can expect COPT to be vigilant in pruning its portfolio to optimize asset quality, NAV, and growth.

Turning to page seven of the plan, from an earnings standpoint we expect these sales to dilute near-term FFO per share by $0.03.

Steve is going to walk you through a lot of detail, so I'll just highlight that we expect the plan to be accretive on an AFFO basis because we will not have to spend the heavier CapEx associated with the older buildings.

There is reinvestment risk associated with our plan and we are very aware of that, but we believe COPT's team will be able to reinvest the sales proceeds accretively, if not into strategic acquisitions, then by funding our attractive pipeline of development properties.

In summary, we are committed to delivering strong returns for our shareholders.

By accelerating our rational disposition plan and modestly diluting earnings in the near term we are improving NAV while accelerating COPT's ability to deliver higher sustainable earnings growth and attractive total returns to investors in the long term.

With that I'll turn things over to Steve.

Thanks, Roger, and good morning, everyone.

Before I go over the strategic reallocations plan's impact on our earnings, let me run you through the first quarter results.

For the first quarter of 2011, excluding a $28 million or $0.39 per share non-cash impairment charge related to our investment at Fort Ritchie, FFO totaled $42.3 million or $0.52 per diluted share.

These results are down a penny per share compared to the first quarter of 2010.

Including the non-cash impairment charge, FFO was $14.6 million or $0.13 per diluted share.

For the first quarter of 2011 net loss attributable to common shareholders was $21.8 million and diluted loss per share was $0.33 compared to net earnings attributable to common shareholders of $5.9 million and $0.10 per share for the first quarter 2010.

Our diluted FFO payout ratio as adjusted was 79% and our diluted AFFO payout ratio was 142%.

Tenant investment from our strong 2010 leasing carried over into the first quarter and we added value to assets slated for sale in order to maximize sales proceeds, the combination of which spiked our CapEx in the first quarter.

Our AFFO payout ratio, excluding capital expenditures at properties that are part of our disposition plan was 112%.

Given our normalized CapEx going forward plus additional leasing of our operating and development portfolio, we view our common dividend as sustainable.

Same office cash NOI decreased by $3.3 million or 5.3% compared to the first quarter of 2010.

Same office occupancy averaged 86.7% in the first quarter of 2011 versus 88.8% in the first quarter of 2010.

As of March 31 our same office portfolio consisted of 241 properties representing 91% of the wholly-owned portfolios square footage.

Turning to the balance sheet, at March 31 the company had a total market cap of $5.2 billion with $2.4 billion of debt outstanding which equates to a debt to market cap ratio of 46%.

Our weighted average cost of debt for the quarter was 4.9%, up from 4.8% for the first quarter of 2010 and 82% of our total debt was at fixed interest rates.

For the quarter our adjusted EBITDA to interest expense coverage ratio was 2.9 times and our fixed charge coverage ratio was 2.5 times.

Our debt to adjusted EBITDA ratio adjusted for construction in progress was 7.2 times at quarter end.

During the first quarter we extended the maturity of our $225 million construction revolver to May of 2012.

The remaining 2011 debt maturities include a $102 million loan which we expect to pay off in the second quarter and the first put date on $162.5 million of exchangeable notes in September.

We are evaluating options to refinance these obligations as well as fund acquisitions as they become available.

We have adequate capacity to continue to fund the development pipeline using the line of credit and construction revolver, but we are also seeking additional construction financing for specific projects.

Although we have the right to extend our $800 million line of credit for another year we plan to negotiate a new line of credit prior to September and at that time increase the capacity to $1 billion.

After the new line is in place we will close out the separate construction revolver.

We expect the term will be three or four years with an extension option.

During the quarter we also had $175 million of 10 year debt with forward swaps in anticipation of issuing debt with a 10 year term later in the year.

These hedges support approximately $225 million of secured amortizing debt which will allow us to extend roughly 10% of our debt for 10 years.

Before going through our revised guidance for 2011 and our forecast for the second quarter, let me discuss the impairment charges we're taking.

As a result of the strategic reallocation plan we have shortened the assumed hold period for assets we intend to sell.

For some of the assets that results in impairment losses while for others we would expect gains when sold.

We are required to recognize the impairment losses at this time totaling $40 million or $0.56 per diluted share.

When the plan is complete we would expect the subsequent gains to substantially offset the impairment losses.

Now turning to our revised guidance, we are lowering our original FFO per share guidance for 2011 of $2.35 to $2.57 down to $2.20 to $2.40 excluding non-cash impairments of $0.39 and $0.56 respectively in the first and second quarters.

Setting aside these one-time charges, let me walk you through the fundamental changes affecting our 2011 outlook.

As Rand mentioned the duration of the continuing resolution surrounding the 2011 federal budget was a lot longer than anyone anticipated.

That, combined with a slower economic recovery has delayed leasing, both in our office properties and at Powerloft.

We attribute roughly two-thirds of our lower expectations to slower leasing at our operating office properties and Powerloft.

As Rand also mentioned we have evaluated acquisition opportunities in the quarter but have found -- not found transactions to close on yet.

We remain hopeful that we will be able to close and complete additional acquisitions this year but are clearly behind schedule.

As a result we now expect acquisitions to contribute approximately $0.03 less to the 2011 FFO per share.

Last, but not least, as Roger mentioned we anticipate $0.03 of dilution for the balance of 2011 from assets associated with the strategic reallocation plan.

This guidance assumes we sell $50 million of assets this year.

However, if market conditions permit we will accelerate the program.

Those are the big pieces that get us to our new guidance ranges from which we then subtract $0.39 for the impairment at Fort Ritchie and the $0.56 non-cash impairment for the assets we are preparing to sell.

I would also mention that this new guidance excludes any initial property acquisition costs which vary significantly by taxing jurisdiction and therefore are difficult to predict.

Turning to some other specific guidance assumptions, first, for same office portfolio we expect occupancy to hit bottom as of the first quarter and modestly improve the next three quarters to end the year 100 to 150 basis points higher.

In short, leasing delays we experienced because of the continuing resolution pushed out the ramp-up in occupancy we previously expected by approximately six months.

We are projecting our retention rate for 2011 to average between 65% and 70%.

Second, same office cash NOI excluding termination fees declined as expected during the first quarter as occupancy bottomed.

We project it to be between negative 3% to flat for the year, slightly less than our prior guidance, but still ending the year stronger in the fourth quarter.

Third, at the midpoint of the range lease termination fees for the year are expected to be approximately $2.5 million which is also slightly lower than previously guided.

Fourth, there is no change to our forecast for cash NOI from the development placed in service during 2010 and 2011.

Excluding the Powerloft data center we still expect $13 million to $14 million of cash NOI for the year from these properties.

Virtually all of this is already in place.

Fifth, as previously discussed, new leasing at the Powerloft data center has been delayed as well.

The forecasted Powerloft leasing is now assumed to occur in the second half of the year.

We've lowered the 2011 cash NOI contributions to approximately $1.2 million at the low end and up to $2 million at the high end of guidance due to the leasing delays.

Sixth, our guidance assumes no acquisitions at the bottom end of the range and up to $265 million at the top end.

The timing of closing acquisitions is now later in the year as we are behind the assumed timing in our previous guidance.

Seventh, now that we have a 10b5-1 plan in place to sell a portion of our KEYW shares and we executed $3.2 million of land sales in the first quarter we are increasing our range for other income.

We now expect other income to contribute between $11 million and $16 million in 2011 as a result of gains on land sales and the orderly sale of our investment in KEYW.

Finally, capitalized interest is assumed to average approximately $5.5 million per quarter for the rest of the year, which is slightly lower than previously guided, but more than the prior year due to the increased development spending at Powerloft and Patriot Ridge.

Moving on to the second quarter guidance, because of the uncertain leasing environment and the added volatility that asset dispositions may add, we will continue to provide quarterly guidance at least through this year.

For the second quarter of 2011 we are announcing a diluted FFO per share guidance range of $0.53 to $0.56 per share.

This range excludes the $40 million or $0.56 per share of non-cash impairments we will recognize in the second quarter associated with the strategic reallocation plan.

Second quarter range also excludes acquisition costs.

Our annual guidance indicates that we expect later quarters to be higher based upon the timing of occupancy increases, related leasing, acquisitions, anticipated gains, and other income.

So this is our updated look for 2011 and we expect to further refine the details throughout the year as we execute our strategic reallocation plan.

And with that I'll now turn the call over to Wayne.

Thanks, Steve.

Looking at our construction pipeline on page 22 of the supplement, at quarter end we had 11 buildings under construction, aggregating 1,244,000 square feet and a projected cost of $290 million.

During the quarter we started construction on 1000 Redstone Gateway in Huntsville and 7770 Backlick Road, our first office building at Patriot Ridge, which I'll discuss more fully in a moment.

During the quarter we placed 308 Sentinel Drive or 308 NBP as many of you know it, into service.

It is 98% leased to several of our key contractor customers.

The property was delivered in August of last year and achieved stabilization almost a full year ahead of budget.

Before highlighting our development pipeline I want to spend a minute making sure investors understand the overall changes in pre-leasing occupancy we have reported this quarter for our properties under construction.

At year end 2010 our construction pipeline was 32% leased and at the end of the first quarter is only 15% leased.

Two changes caused this drop in pre-leasing occupancy.

First, we transferred 308 NBP, which was 98% leased at the end of the quarter, to our operating properties portfolio.

Second, we added a total of 355,000 square feet of new core office product to the properties under construction in the Redstone Gateway and Patriot Ridge projects, neither of which have any signed leases.

The net result is a preleasing occupancy level that dropped from the last quarter but does not reflect the strong activity we have begun to see from potential tenants at these sites or the lead time remaining prior to construction delivery of these projects.

Next, when reviewing our redevelopment projects on page 23, I would like to point out that the first new lease in our 3120 Fairview Park property has been signed for approximately one-third of the building, and 801 Lakeview Drive in Bluebell, Pennsylvania is now 100% leased, up from 72% leased at the beginning of the year.

Our under development pipeline, detailed on page 23, lists seven buildings that will comprise approximately 991,000 square feet at a projected total cost of roughly $233 million.

As is the case with our 11 buildings under construction, each property under development targets either government or defense contractor customers.

In the interests of time, I'm just going to give updates on our BRAC locations that involve development, but will answer questions on any other development projects during Q and A.

First is the National Business Park.

We have three buildings totaling 344,000 square feet under construction at NBP in support of the move of DISA from Northern Virginia to Fort Meade and the standup of Cyber Command at Fort Meade.

As Rand mentioned, DISA has now moved into its newly completed headquarters and is moving approximately 400 employees a month to the new facility.

As detailed in my discussion of NBP 308, we continue to see strong leasing activity at NBP.

This momentum is carrying into the north section of the park, including NBP 430 which is now fully subscribed.

With strong interest in NBP 410 we anticipate beginning construction on NBP 420 this summer.

Second is Patriot Ridge in Springfield, Virginia.

Our Patriot Ridge project is located south of Washington, D.C.

along the I-95 corridor adjacent to both Fort Belvoir and the new 2.4 million square foot headquarters for the National Geospatial Intelligence Agency, or NGA.

The NGA began to relocate personnel to the new headquarters in January and anticipates achieving full occupancy for 8,500 personnel by the BRAC deadline.

We are under construction on the first of up to five buildings and this 240,000 square foot office building should be ready for tenant occupancy in the second quarter of 2012.

Leasing demand from the contractors serving the NGA continues to be very robust and our construction activity onsite will typically advance leasing interest.

Third is our project in Aberdeen, Maryland.

We are building Northgate Business Park outside of Aberdeen Proving Ground to support the move of C4ISR from New Jersey.

There will be about 8,200 government jobs at the newly constructed campus.

Part of the move has already occurred and contractor demand may ultimately represent 2.5 million to 3 million square feet.

To date the entire market has seen rather modest leasing activity as the continuing resolutions delay the awards of contracts and therefore contractor's moves.

We have one building under construction and another under development at Northgate.

At this point while our development activities have us ready to start construction on the next building, we will wait until contractor demand becomes more robust across the entire Aberdeen submarket to start this building.

Redstone Gateway in Huntsville, Alabama is our fourth BRAC location.

The first phase of the park is master planned for approximately 2 million square feet and the site development work is well underway.

During the first quarter we started construction on a 115,000 square foot office building which is scheduled to be completed at year end.

We are also planning opportunities for research and development product, retail amenity space, and additional multistory office space, both for contractors and a secured phase of the park.

At this time we anticipate construction shall begin on a second building at Redstone Gateway later this summer.

With that, I'll turn the call back to Rand.

Thanks, Wayne, and thank you all for joining us today.

As always we appreciate your participation and support.

I know we've introduced a lot of new information today and I have to say we're very excited about transforming COPT into a stronger, more focused company, one that will be positioned to deliver higher, sustainable earnings growth and also to withstand future economic downturns.

We believe our strategic reallocation plan is a key element of our future growth and we look forward to updating you on our progress in the coming quarters.

And with that, Operator, if you would please open up the call now for questions.

Thank you, Mr.

Griffin.

(Operator instructions).

Your first question comes from the line of Jordan Sadler from KeyBanc Capital Markets.

Jordan, please proceed.

Hi, it's Craig Mailman here with Jordan.

Could you guys just give us or maybe put some goal posts around expected cap rates on the overall assets that you're going to sell, maybe a little bit of color on the 15% that you have some advance negotiations on?

Craig, I think we are looking right around the 8% cap rate for most of the product that we're talking about.

There will be some that will go a little lower and maybe some that will go a little higher, but I think 8% is a good number for benchmarking for going forward.

And just on -- could you give a little color on maybe how many buyers are looking at the stuff that you guys are in advance negotiations and whether maybe there's a little bit of cherry picking going on?

And the stuff that's sort of underway is the better of the bunch and does that make it a little bit tougher for you guys to sell the remainder of it?

I think every business park, every asset has a story, but we feel good about the assets we want to sell.

We think that they're located in submarkets where there will be demand.

We do think that the liquidity has opened up significantly in the markets that we play in.

And we think there actually will be pretty significant demand for the product, that it won't have to be sold to one or two people, that we will actually have a good auction process on most of the assets we want to sell.

So a lot of the transactions are going to be one or two assets to individual sellers rather than larger chunks to a few people?

It'll be both.

Again, it depends on the specific assets we're going to sell.

We will try to sell some in bulk and we will sell some on an asset by asset basis.

Okay.

And then just separately, moving to Powerloft, it sounds like you guys are maybe looking to really go after the government and contractor type tenants rather than the Internet tenancy that kind of dominates Northern Virginia?

Just given the amount of activity that we're seeing down there, we're just a little surprised that you guys haven't signed anything.

Yes, the prospective tenants that we've had the most activity with and had the most serious discussions are tenants that we have relationships with through our defense contractor focus and we do believe the continuing resolution has affected the timing of when they're going to be ready to sign their leases.

Great.

And just how does that maybe affect your return expectations on that asset?

Well, we think clearly we've had delay of a few months of leasing so that will have some of an impact, but we're still very confident that we'll ultimate lease it up economically along the lines of our original plan, just a little bit later now -- maybe six months delay here.

Great, thank you.

Thanks, Craig.

Your next question comes from the line of Brendan Maiorana from Wells Fargo.

Brendan, please proceed.

Thanks, good morning.

Roger or Rand, can you guys maybe just kind of frame up how this is a little bit different than what your prior plans were?

Because if I look back to the investor day that you guys had last year about a year ago and I look back at the NAREIT presentation from November, I think your targets were 65% kind of of the super-core by year end 2012.

Now it sounds like you're getting to 67% by year end 2013.

It doesn't seem like it's that much of a change, so I'm just -- are there a couple of ins and outs that are maybe causing it to be about the same as what the prior expectations were?

Brendan, it's Rand.

I think the key point is that we're really improving the quality of the portfolio.

And as we said, even though we're selling 20% of the number of buildings, really it's only 6% of the revenue.

So it's hard to, when we deal with 59% to 67%, that's revenue.

When you're selling only 6% of your revenue it's really hard to move the needle.

So I don't think you should take into it that there's any change, but we are continuing the acceleration and continuing to benefit from that focus.

And certainly, as I said, the leasing delay with the budget morass sort of delayed things for six months and that probably has a slight impact on the 67% not being slightly higher, just because you have to catch up and that has a ripple effect through that whole time frame.

But to us it's -- to sell 51 buildings, most of which, all but five of which are single story or two story, that's really the big message here.

Sure.

I know that makes sense.

And what would sort of drive kind of doing a lot more of it, say in 2011 or '12 or kind of pulling the $260 million of sales forward earlier versus only doing 50 this year?

And then as you think about the portfolio over a longer time frame, is this $260 sort of everything that you'd view as kind of non-core or do you think there's stuff after this that will kind of ultimately get sold?

Well, I think on the potential acceleration, as Steve said in his section, we're going to look at that and if the market conditions permit we will certainly do our best to accelerate that.

We would like to totally complete the $260 million of sales.

When you look at the -- are there more out there?

There are some that very certainly could be there, but we still need to do some other leasing and other value creation to position those for the future, but as Roger said in his section we're being very diligent about that and we'll just have to see how that unfolds at a later time.

Okay, and then just last one for me and I'll get back in.

Just for Wayne, if we look at the 15% of the under construction that's leased as of 3/31, what do you think is a good benchmark as we would think about the same store portfolio leased rate as you get towards the end of this year?

Are you trying to get to the margin?

We're still running pretty close to 11% cash on cash.

No, I'm sorry.

Not the margin, just the leased rate.

If your under construction portfolio preleased today is 15%, if we look at that same pool of properties by the end of the year, just trying to understand where you think you'll get to on a leased rate as you look out at 12/31?

As you know, Brendan, we phase properties into operation based on, A, either being leased, or B, within one year of us getting a certificate of occupancy.

So I think the goal would be to have our portfolio at least 50% -- that portfolio 50% leased by year end.

Okay, that one 50% by year end.

Okay, great.

Thank you.

Thanks, Brendan.

Your next question comes from the line of Jamie Feldman.

Jamie, please proceed.

Thank you.

So I was just hoping you could give a little bit more color on the kind of conversations you're having with potential tenants that are hung up by the continuing resolution?

I mean what exactly are they saying and what do they think the timing will be and what signposts should we be watching to get more comfortable that it's really going to play out as you guys are saying?

Well, I think if you listen to the four of us the gist of activity that related both to government and defense contractors was a little bit frustrating in that there's an awful lot of interest.

There's a lot of -- take 430.

430's totally subscribed, committed, but the leases haven't been signed.

They weren't signed because the budget authority wasn't there that would allow them to sign those leases.

Now that that's done, it takes, as Roger said, about 60 days or so to filter down to where the money's there at the appropriate agencies to allow that money to flow.

And so we would expect that leasing to start to accelerate very nicely kind of in that time frame.

And you can go kind of project by project if you look at the activity that we've got at Patriot Ridge, there's more activity there than we have square footage for in the first building.

So that would presume that as that gets accomplished, roughly half the building we would immediately be starting a second building.

And same thing down in Huntsville.

We've got full building users looking at future buildings and so, as Wayne said, we'll need to accelerate the start of the second building there.

So I think it varies a little bit, but overall it's a lot of robust activity just was sitting there waiting to go -- very frustrating with the whole budget situation.

But now that that's resolved and -- you know, there are some people in government talking about that this will be very robust activity prior to October 1 because they'd like to make sure the money's spent before you get into the next potential continuing resolution that could occur for next year's budget.

We'll just have to wait and see.

I mean that's forecasting that we're not able to do, so we're just going to go out and do the best we can with what we have in front of us.

Okay, thanks.

And then also how are you handling the sales?

Are you -- are there books out on the whole portfolio or is this one-off that you guys are handling yourself?

Just what's the process for you trying to sell the assets?

Generally speaking we're going to run an auction on most of the projects we want to sell and again they'll either be one-off or they'll be done in pools of assets that relate to each other.

And we're starting that process now.

I think that'll continue to move forward as the year progresses.

Okay, thank you.

Thanks, Jamie.

I'm on, right?

Who's next?

Operator?

I apologize.

Your next question comes from the line of Michael Bilerman.

Michael, please proceed.

Thanks.

Josh Attie and David Shamis are on the phone with me as well.

Rand, I guess if you think back to the last few years and you think to the Nottingham acquisition back in early '07, which I suspect a lot of these assets are coming out of and then you think about the delay in Powerloft and the delayed leasing environment that you're seeing here and continued development that you had put forth that has taken a little while to lease up, I guess what confidence should investors have about executing the strategic plan and hitting on the numbers that you've now set forth?

I think they should have absolute confidence.

We tend to do what we say we're going to do.

I think as relates to the portfolios that some of these properties were in, there was the general growth portfolio purchase the end of '05 and the Nottingham at the beginning of '07 and then some other miscellaneous portfolios.

At the time that we bought those some of those properties we indicated we wanted to prune out and in some instances it took a little longer to get the capital done or the leasing done.

In other instances we got caught as did the whole market with the 2008 to 2010 difficulties in the marketplace.

So as we said, this is the time to move.

There are other REITs doing similar strategies and you'll see, I think, a lot of activity.

And we're very committed to making this move and improving the quality of the company and positioning it for the long term.

I think on the development, if you look at it, we are clearly one of the most robust developers, I think, in the country.

There is certainly talk of others that are starting to talk about development finally, starting to make sense, whereas we've been consistently doing that.

And we don't have to ramp things up.

We've already got that going and have been clicking away very nicely on that.

And so I think you'll see that accelerate with the budget situation resolved and with this 10 million square feet of demand coming.

And yes, it took a little longer than some of us thought, maybe, to get there in place because it's sort of new territory for all of us, but it hasn't gone away.

It's still there and we're still the one most active for those four locations and we'll capture an awful lot of that 10 million square feet of demand.

So just let us get out there and perform.

And then how are you, in terms of your accretion and dilution numbers, on the 200 that you're going to sell, or the 225 you're going to sell, what's your effective exit cap versus your entry cap into new assets?

I think, as Roger said, we're roughly in the 8%.

I mean some will be a little higher.

Some will be a little bit lower, but it seems to be where we are, roughly.

The 8% cap is for exiting.

Acquisitions, I think that's tough to say.

I mean last year we bought a lot better than that and it's gotten more competitive and the properties that we're chasing are larger and higher quality and more strategic, but we're certainly probably 100 basis points, the maximum, differential.

But I think IRRs is what we focus on rather than cap rates and IRRs will be substantially higher, we think, over time on what we're buying than what we're selling.

And I guess, as you I guess had a more detailed -- this was an acceleration of the plan that you wanted to do previously communicated but a little bit more granular in terms of the assets.

Did you take a look at, obviously now the dividend with -- is going to be much more strained from a cash flow perspective, given the delayed leasing and the development and the dilutive effect of selling these assets, at least in the short term.

Did you take a look at the dividend level?

Did you take a look at the value of the land on your books?

I mean was this a more holistic, detailed approach to -- let's clean the slate, let's reset the bar and get everything out, or do you feel like there's a potential other things that still could come down the road if we don't accelerate to the point where if occupancy doesn't increase the next quarter, as you think it will (multiple speakers)?

I mean I think it is holistic.

We looked at everything on the land.

There is a small land parcel included in addition to the 51, but I would say a large percentage of our land is strategic.

Always, though, there are -- and I know people vary on it.

They give you credit for it, but as you have 1 million plus square foot office parks within your land holdings is land that needs to be turned into assets that support that for hotels and banks and restaurants and so on like that.

And so there's a time that is really right now for the next several years where you'll see a lot of that activity which helps our overall value, we believe.

I think we looked at -- we look at it and say that we're very committed to this program.

I don't think the dividend is at risk.

As Roger pointed out, this actually helps our AFFO because we save some of the CapEx that we would have invested, roughly $25 million into these older properties and so we actually gain on AFFO and the first quarter was an anomaly, as Steve mentioned, and I think we're in good shape, so.

And we have a history of increasing the dividends and lead the -- lead the industry in that over the 13 years that we've been public and are second over the last 10 years.

So we're very comfortable that that's a sustainable level and that we're a very healthy company.

Hey, guys.

It's David Shamis here.

Just one quick question.

The federal government said earlier this week that they would shut down 137 data centers by the end of the year, with a total of 500 projected to close by 2015.

So just wondering if you have a sense of how that's going to impact your data center business.

Well, it's -- we've been saying that for quite a while on the calls that it's a consolidation.

It's not a shutting down.

It's a shutting down of the old ones, but a reconsolidation into very large regional facilities similar to what we've done at the TCC in San Antonio.

So we think that it's perfectly in line with our strategy.

It's clearly an acceleration of the government.

They do want more efficient facilities.

They want secure facilities.

That plays exactly into our expertise and so it's been part of our strategy and we think we're very well positioned to capture some of these large regional facilities that will be announced as part of their consolidation.

Okay, thanks.

Sure, Dave.

Your next question comes from the line of Rich Anderson from BMO Capital.

Please proceed.

Thank you and good morning.

The guidance is down $0.15 to $0.17 if I'm doing my math correctly.

I don't -- can't quite get there.

Can you go -- is it the lower acquisition strategic plan impact and it's $0.06 from the lower Powerloft NOI expectation for 2011.

Do I have that mostly captured in those three items or is there something more?

I think you have most of it captured, Rich.

I mean if you go from where the consensus is, starting the call at 242 and you go to the midpoint of our guidance I think you've got the acquisitions, the dispositions.

I think we captured Powerloft.

There's a little bit of pickup in the KEYW.

G&A got a little bit lighter.

The balance is the leasing as a result of the continuing resolution and the delays in leasing and (multiple speakers).

So (multiple speakers).

That ought to walk you right to it.

So slightly worse same-store and maybe a little bit less in terms of lease termination fees?

That's right.

Okay.

All right.

I just wanted to make sure I had it all.

The question was on the dividend or one of the questions.

It was alluded to already in one of the questions, but I just want to follow up on that.

You guys are known to be a dividend growth machine, so to speak, and sounds like that's going -- you're going to be on a hiatus.

Is that a fair way to look at it, in terms of dividend growth?

You've historically generated above average dividend growth every year.

Do you expect that to be kind of put on the shelf for the time being as you go through this?

No, I don't think so.

Certainly it's up to the board and we look at that, as you know, in September.

We'll have a pretty clear picture in September of what's going on, but we don't see this as affecting those decisions.

Okay.

Does Powerloft belong in the 67% or the 20%?

It's in the 20% currently; however, most of the leasing interest and the showings we've had really would move it, if those are accomplished, would move it into the 67%.

All right, so for now the 67% assumes no Powerloft, but --

Right.

The number -- well, I don't know how much it would impact the 67%, but you would then have a larger target because the Powerloft shift would be a sort of a tangential impact to the strategic plan, is that right?

Right.

Yes, I think if that -- if you carried that out and -- which is not in our 67%, so if that did go in that direction that is an element that would further accelerate us beyond the 67%.

That's a logical conclusion of your observation.

Okay.

And then lastly, you mentioned that most of the sales are targeted in the Maryland or suburban Maryland, suburban Baltimore area.

But what about -- can you comment, I guess you -- about other markets, like for instance Colorado Springs or someplace further out, or is this really going to be in your kind of home area around the Maryland and Baltimore and D.C.

area?

I think as we said, Rich, the initial is suburban Maryland, suburban Baltimore.

It's not to say that in the future we wouldn't look at some of those other areas.

Colorado Springs we're comfortable with.

We were slightly ahead of where we probably should have been on some of the development starts, but we are expecting and we're seeing it now with the cybersecurity announcements that Colorado Springs will pick up some of that activity related to Cyber Command and because of their activity at Peterson Air Force base and so we're still long range comfortable with our activity there.

Okay, great.

Thank you.

Thanks, Rich.

Your next question comes from the line of John Guinee.

John, please proceed.

Great.

Okay, thanks, guys.

A couple quick questions.

Roger, you're basically selling all the dogs and cats -- 43,000 square foot average building size, 65% leases.

My guess is that these are really -- average lease term on this portfolio might also be two or three years.

Is it safe to say that a lot of this stuff's just going to sell by the pound vacant and the stuff that's full may sell at a 10 cap, but is sort of bifurcated in that manner?

I think what's leasable, in this market anyway, sell for an 8 cap rate.

At least that's the indication we're getting for the things that we're actively progressing with.

And in terms of -- we could sell some vacancy on the per pound, but we could also do some leasing and that's why we've hedged ourself a little bit on the three years to try to add a little bit of value to some of these assets before they get sold, but some of them could be sold.

We could sell the vacancy as opposed to leasing them up.

Okay.

Overall this is 5% of your -- 5% of your NOI, 9% of your square footage over a three year period.

That's, I guess on one hand commendable, on the other hand somewhat insignificant.

If you really wanted to try your hardest and sell as much non-core as you can what would the number be?

I think, John, we need to see how the market moves these and there are some things that we're not ready to talk about because we still need to finish up a little bit of a value creation there.

So I think that should be a discussion to have at a later date, but certainly we have our eye on the fall and we commend you for pushing us in the past to get on with this and we listened, you know?

Don't blame me.

Boy.

Okay, Steve, $2.30 at the midpoint for 2011 -- how much of that is land and KEYW at the midpoint?

At the midpoint, say $10 million.

Say how much?

$11 million to $16 million.

I'm sorry, $11 million to $16 million

$11 million to $16 million.

So take halfway through $11 million to $16 million.

So it's at about $0.18 a share?

Yes.

Okay, so you get down to 212 this quarter was $0.49, I guess, taking out the land, roughly.

So you've got to run a core $0.55 run rate for quarters two, three, and four, excluding land and KEYW, is that accurate?

Yes.

Okay, and then the $0.53 to $0.56 cents in 2Q, how much of that is land and KEYW?

Hold on.

I'm looking.

I think it's more heavily weighted -- while they're looking at that, John -- to, as we said, to the third and the fourth quarter and you start to see some pretty good activity in overall leasing and occupancy and so on like that.

If you're looking at --

What I'm trying to get to is if you're $0.50 -- if you're $0.49 in the first quarter and you're $0.50, $0.51 in the second quarter excluding KEYW and land, one-time items, you're still kind of running a $0.56, $0.57 run rate for the third and fourth quarter excluding land and KEYW, I think.

I'm just trying to get a sense if that's an accurate assessment.

That's about right and we would say in the second quarter that we've given our range of guidance.

It's around, we would project around $0.03 in the second quarter.

Got you.

Okay, thank you very much.

Thanks, John.

Your next question comes from the line of Michael Knott from Green Street Advisors.

Michael, please proceed.

Hey, everybody.

Obviously the budget mess has been at least a short term negative, maybe more.

Can you talk about kind of the longer term ramifications to you guys of the next fight over how to rectify kind of the budget deficit in terms of what it may mean for your business and kind of the political winds and how they're blowing?

Every indication we have, Michael, is that where we have chosen to concentrate on the knowledge based defense side of it, of the business, is going to be positively impacted.

So interestingly, there was no discussion from the Republican side of the Congress on cutting and you saw that with the 2011 and the 2012, they fully support what the president has in there.

Within that budget, however there are cuts and changes going on and what the emphasis is, is a further acceleration of monies into the areas that we work on with the cyber and intelligence and so on like that.

So we think that just on that part of it long term it's very positive for us.

The other part that we've concentrated on since BRAC was announced is that when they do those strategic moves they by definition are supporting those agencies moving and those are the winners.

And so you see that across the board.

The amount of money that's going into those budgets and the acceleration and supporting of those will be very significant and we're well-positioned to take advantage of that.

'

So if I look out, which is what we've done, over a five year period, we have very significant growth and strength coming from that strategy.

And so the six months of delay, it's not a six month of loss.

It's just shifting it partially to the balance of the year and a little bit into next year, but the overall message is a lot of strength.

Okay, and then is there any possibility in your mind of another delay of some period over the fight over the debt ceiling and any concessions that may try to be wrought out of that process?

I don't pretend to play in politics, certainly, although we're so close to it we get affected by it, but I think that the country's going through some very trying sort of philosophical discussions and we'll just have to see what unfolds there.

I mean if the Republicans end up prevailing that's probably even more credibility for our programs because they clearly have favored that and have favored the defense side of it.

At the same time we've been in a Democratic regime there and there's been a lot of money flowing in this prioritization.

So I don't think, frankly, the administration, whether it's Republican or Democratic, changes that slant for us and it has not over time.

Some of our best years have been both in Democratic and Republican eras of growth.

And so we'll just have to see how that unfolds.

The biggest thing that I -- that we fear, probably would be if you get hung up on the 2012 budget again and they do another continuing resolution and all of the Senators and Congressmen that I've talked to over the last several months are working very hard to not have that happen because I don't think they want to go into an election cycle with a budget not approved.

That could be very difficult for everybody.

Okay, and then just with respect to the development pipeline, it sounded like you said earlier the yields are still tracking around 11% so it doesn't sound like there's been any diminuition there, but lease up time and kind of what you guys had underwritten individually for each asset, is that kind of being impacted in terms of kind of your IRRs that you are targeting or that you're expecting?

Yes, it's Wayne.

I would say that our experience in the development pipeline is comparable to what we've had in the typical portfolio, so it's had an impact on the continuing -- the continuing resolution has had an impact on it, but as Roger said, I think we expect good activity in the second half of the year.

I don't think it's affected overall the IRRs that much.

I mean it's, except for Aberdeen, the rest of the activity is very robust and as we said on 3/08, we were a year ahead of schedule on totally leasing that property.

And so sometimes people forget.

When a building's under construction, particularly if it's the first one in a park, you have a little bit longer lease up time that you budget in there and just have to see if we don't -- we end up accelerating those buildings in the lease up then that will be an improvement in IRR, an improvement on our overall budgeting.

Okay, just one more question if I can.

Speaking of development how do you guys think about the required yields for say Huntsville versus Springfield or NBP, kind of lower barrier market?

Curious how you think about whether the 11 is homogenous or whether the 11 is a blend of different yields, higher or lower in certain locations?

I think -- I think we look at it in a total perspective, so I think where you have a Huntsville where it's your first project it's probably not going to achieve that differential that you might expect over a longer period of time.

So as that project gets really rolling and we're doing a lot of buildings, we'll see those margins go up and I would expect that that should be certainly higher than some of our other ones, but we still view those as comparable from a strategic importance to the company.

We don't view those as sort of second tier or secondary markets.

And those, again, we look at it on a blended basis for our portfolio.

Okay, thanks.

Thank.

Your next question comes from the line of George Auerbach from ISI.

George, please proceed.

Great, thanks.

Just a couple of follow-ups, first on Michael's question.

Rand, leaving aside the impact of the federal budget cuts or prospective cuts on BRAC and defense tenants, what are your thoughts on the other 30% of your portfolio and how the pullback of federal spending might impact greater D.C.

metro?

I think, George, that it varies a little bit to the extent that you have the talk of the federal budget being -- impacting the area, the other are a little bit more cautious and that does impact the region a little bit, but if you look over time, the federal budget, even if it's curtailed you still see a lot of jobs outsourced and you see -- D.C.

still has the most robust job growth in the country.

We don't see that slowing down at all.

And so I think that things will continue to be very good for the area.

So the non-government, non-supercore part of the portfolio, sure it's affected like everywhere else in the country with the slow recovery of the economy, but it's affected less than elsewhere.

So we would expect a faster recovery on that part of the portfolio than what you see elsewhere in the country.

I guess just going back to Brendan's question about the similarities or differences between the May of 2010 strategic plan and this current plan, what was the amount of sales that were envisioned in the last plan to get you from, call it the mid-50s to the mid-60s % super-core?

I think we have very little, $50 million, maybe.

So we've clearly accelerated it in this plan.

So is it fair to say that the differential is more unshrinking the portfolio and getting rid of noncore assets as opposed to growing the portfolio with more supercore, which seems to be more the focus last time?

I think it's both.

I think we're shrinking it with the non-core and at the same time we have the other component of the growth proceeding.

And again, we tried to be I think conservative on the 67%.

We're not -- if the BRAC 10 million square feet hits, then you're going to see that 67% go up significantly as we correspond to that.

We're looking at 67% as sort of a you can count on it and it's very secure kind of number.

So we're very growth oriented and see those opportunities there and at the same time are doing the 20% of our building pruning, but it's only 6% of our revenue.

Okay, thank you.

Thank you.

Your next question comes from the line of Rob Stevenson from Macquirre.

Rob, please proceed.

Thanks.

Most of my questions have been answered, but a couple for Steven.

If I look at the recurrent CapEx in the first quarter and the fourth quarter of somewhere between $14 million and $16 million, was there anything strange in that or is that a decent run rate for the portfolio as constituted as of those dates?

The fourth quarter we did have one sizable retenanting where we spent $50 or actually it was $60 a square foot with commissions.

So that one was impacted by that.

In the first quarter, as Steve said in his prepared remarks, we did invest money in a couple of buildings that we think we're going to sell and so there was a little bit of impact there and then we had two other specific transactions that cost us a little bit in the first quarter.

The rest of the portfolio, the 50 or so deals we did would be traditional in terms of per square foot cost.

Okay, so if I'm thinking about the company for a year, if the current portfolio is in place you would be running it somewhere in the neighborhood of $55 million, $56 million, $57 million of recurring CapEx, of which, according to the presentation, $25 million of that is the assets that you're looking to sell?

I think in the -- in terms of a run rate on the portfolio that's in place I think we're looking at about $45 million a year, a little bit over $11 million a quarter.

We did have the anomaly in the first quarter again investing money in an asset that we wanted to sell.

Okay, so the $44 million or the $11 million a quarter would include the $25 million from the 51 assets that you're looking to sell?

That's over three years.

That's over time, yes.

Okay, so the $25 is actually, call I $8 million or $9 million a year?

Right.

Okay, so you're actual -- basically on the current portfolio the actual run rate for CapEx going forward is somewhere in the neighborhood of $35 million or so?

That's true, but remember at some point our percentage occupied is going to go up and so we're going to have a couple of years where we're going to spend extra money to get the portfolio back from the 87% percent we are today up to the 93, 94 kind of percentage range.

So there is going to be a ramp up at some point, not having to do with per square foot, but just having to do with volume of leasing.

Okay.

Thanks, guys.

Thank you, Ron.

Your next question comes from the line of Steve Benyik from Jeffries and Company.

Steve, please proceed.

Thanks very much.

Just a question related to the guidance when you're looking at your other income line item.

Obviously it's up pretty big this time around relative to the prior guidance.

Just hoping to better understand the breakdown between the KEYW gains and the [landfills] and then also just on a run rate basis when you look at $9.5 million for that line item in '10, a little over r$5 million in 2009, how much of that is really sustainable going into 2012 and beyond?

Well, I think we kind of went through the detail on one of the questions here in terms of the other income.

We most -- we had not KEYW sales in the first quarter so all of the other income in the first quarter was the $3.2 million of land sales.

Most of the other income at the midpoint is assumed to be the KEYW sales for the rest of the year.

If you look at our 10Qs, 10Ks have been filed and there'll be a 10Q filed by tomorrow, you'll see that our -- we have 3.1 million shares and our investment is around $23 million in KEYW.

So we're certainly in our 10(b)51 plan that we've put out we're not selling it all this year.

This is going to be an orderly exit, so that's likely to continue to some degree in the future out beyond this year.

Okay, and then I guess just on the construction financing you guys are seeking, can you talk a little bit about the discussions you're having with lenders?

What expectations might be for total proceeds, terms, timing, and what's currently embedded in guidance?

Well, we're in construction financing.

We have $80 million committed from one lender for one of our projects, but we haven't finished making that a final document.

We'll talk more about it on the next call in terms of the specific terms.

And we're in advanced discussions about financing and other projects that are in the pipeline that we haven't done a lot of spending on yet.

And we'll also give more color on that after we've finished negotiations.

I think we're in good shape on that.

We, when lenders look at our track record and they look at the quality of the parks and the business that we're doing with this we have no problem at all getting very attractive constructive financing for these projects.

Okay, thank you.

Thank you.

Your next question comes from the line of Dave Rodgers from RBC.

Dave, please proceed.

Yes, good afternoon.

Thanks, guys.

On the Powerloft data center (inaudible) did you give any color as to whether you still expected stabilization by the end of 2012 or has the leasing slowdown impacted that?

And I guess maybe in correlation to the last question and maybe you tried to answer it in a way, is doing away with the construction facility will you be looking to put in any specific data center financing and isolate that business?

We will, as the data center stabilizes we'll have probably more color in terms of our permanent capital and financing, but we're still under construction right now and not ready to give the longer term guidance.

We clearly had a delay of about six months affecting where we thought we would be at the end of 2011.

The activity seems to be there that we think we're going to catch up a little bit.

Whether or not we'll have all 18 megawatts done by the end of 2012, probably be able to give you more color as we -- as we start clarifying our 2012 forecasts and guidance, but I think we'll make up some of the momentum.

I don't know if we'll catch up the entire six months worth of leasing delay by the end of 2012 yet or not.

Okay.

And then I guess to tie some other questions together and perhaps I just didn't pick up the number, did you commit to a number for development starts this year?

Has that number changed, the construction spending actually for this year and how variable will that be with regard to a pending budget for next year?

Are you giving yourselves some leeway for that and will you just hold off starts if you have to in the second half of the year without a budget in place?

Quantify it, if you could.

That's one thing I just -- I didn't pick up.

Again, we do starts according to demand and the demand varies a little bit by location, but if you look at what we've started and what we anticipate we're still probably in that track for $1 million to $1.3 million, somewhere in that range of starts for the year, which is pretty much on plan.

Some of it may be slower in one location and accelerated on another, so we just have to see, there.

But not trying (inaudible) if you accelerate Patriot Ridge those buildings are more expensive with a lot higher rental rates than if you're accelerating something like Aberdeen that has cheaper, but on average we're going to be in the $260 million or so tied into that for starts.

And I think we're -- are pretty well positioned I think for next year.

Last year we spent a lot of time creating projects, which is always difficult and now we're in the execution mode on those and so we have the ability to move very quickly on these.

We tend to spend some money on drawings and permits and have them well positioned.

So we can turn, if the demand cranks up, which it has the potential to do, we can turn these projects to a start mode very quickly.

I know some people have commented on separate write-ups in terms of we didn't add anything into the development list, but I think we just try to not scare anybody there and certainly if we needed to do that we can do that very quickly based upon the future capacity of those development sites.

Okay, great.

Thank you for the color.

Thanks, Dave.

Your next question comes from the line of Christopher Lucas from Robert Baird.

Please proceed.

Good afternoon, guys.

Just a quick question just on the proceeds from the sales.

I guess I'm just trying to figure out why you would look at acquisitions relative to the capital needs you have on the development side.

Effectively you're -- you can sell at 8, reinvest in developments that are yielding 10-plus.

What would make an investment on an acquisition -- what kind of characteristics would you look for on that, given that you're talking about essentially dilution on the near term on that use of proceeds?

I think, Chris, it's last, but not least, by the way, so thanks for hanging in there.

I think it's really more we tend to use acquisitions for increasing market share or for increasing our relationship with specific tenants or sometimes entering a new submarket that we like a lot and then from there we'll either add development opportunities or other acquisitions keyed around that.

So I don't think you can generalize it.

I think you're numbers are correct, but I think sometimes we can, like we did last year at 3120 Fairview Park, picked up a great asset that had some leasing challenges and we've moved that very well now.

Then you look at the IRR resulting from that and the opportunity of potentially obtaining a further presence in that park and we think that those are great strategic kind of moves.

So we'll be opportunistic where we can be in that regards, but we're also staying very focused, so if we're delayed a little in a quarter not buying something it may say that we, in discussions on a lot of things, but we're still holding to make sure that those are strategic properties for us.

Okay, great.

I'll -- if I'm the last one I'll beg off any questions.

We appreciate it.

We appreciate you hanging in there.

Operator, I think we're pretty well done here.

there are no more questions at this time.

I will now turn the call back over to Mr.

Griffin for closing remarks.

Thanks, everyone for hanging in there for a record length call and we appreciate you going through the diligence of our various announcements on this call and we look forward to being available for any questions offline that you may have.

Thanks very much.

Thank you for your participation today in the Corporate Office Properties Trust first quarter 2011 earnings conference call.

This concludes the presentation.

You may now disconnect and have a great day.