COPT Defense Properties (CDP) 2011 Q4 法說會逐字稿

Welcome to the Corporate Office Properties Trust fourth-quarter and year-end 2011 earnings conference call.

As a reminder, today's conference 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, and good morning.

Welcome to the COPT's conference call to discuss Company's fourth quarter and year-end 2011 results.

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

As management discusses guidance for GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release issued earlier this morning, and under the Investor Relations Section of our website.

At the conclusion of management's remarks, 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 release space under favorable terms, regulatory changes, changes in the economy, the successful and timely completion of dispositions, 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 would now like to turn the call over to Rand for his formal remarks.

Thank you, Stephanie, and good morning everyone.

As you are all aware, last September the board approved my retirement effective March 31 of this year.

So this is my final earnings call with COPT.

I have had a leadership role at COPT and its predecessor companies for over 18 years and will remain on the Board of Trustees.

While the past few years have been challenging, our record over the past 13 years as a publicly traded company places us close to the top of all office REITs in terms of total shareholder return.

During that timeframe I have enjoyed my interactions with all of you.

It has been my distinct honor to serve the board and our shareholders, and to build and lead such an exceptional team.

Together, we have devised a strategic niche unique among REITs that serves the specialized needs of the US government, focused on cyber security and intelligence, and the defense contractors serving those functions.

These tenants and the missions they carry out are critical to our nation's safety.

Although the Department of Defense is facing budgetary cuts, we are confident that agencies and contractors focused on the cyber security and intelligence aspects of national security will emerge relatively unscathed.

Furthermore, although COPT's unique tenant niche has recently been out of the favor due to the Washington DC morass, we remain confident that this strategic niche will provide outstanding growth opportunities for COPT over the long term.

During the past 12 months, our management team and the board have made a lot of tough strategic decisions.

We felt it was important as a team to get these decisions behind us so that COPT could move ahead in two 2012 with a clean slate and best opportunity for success.

I know that I am leaving the day-to-day management of COPT in the capable hands of Roger and the team that we have built.

I am confident that you'll see COPT continue to perform in the next few years, regain the confidence of investors as the best-of-class office REIT.

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

Thank you, Rand.

2011 was yet another year of challenges and a year of transition.

Owing to the weak economic recovery and a continuing resolution that lasted beyond many people's expectations, our 2011 FFO per share as adjusted for comparability was $2.17, or 8% below the $2.36 of FFO per share we achieved in 2010.

But 2011 was also year positioning for future success.

The difficult operating environment precipitated a reevaluation of the Company's strengths, and some difficult but necessary strategic choices were made.

The strategic repositioning included, first, we are resetting the portfolio through the commitment to sell $562 million of assets in our strategic reallocation plan, or SRP, in order to decrease our exposure to nonstrategic assets and markets.

Second, I have curtailed our development pipeline until such time as demand for new space at each project merits new construction.

In the meantime, our development team, headed by Wayne, is making sure that entitlements and permits remain intact so that we can be first to market when the time is right.

Lastly, we have cut the dividend by 33%, beginning with the first quarter of 2012.

Cutting the dividend was a capital allocation decision that enables COPT to retain over $40 million of free cash flow each year, which will improve the Company's financial flexibility.

As you have read in this morning's press release, we are reiterating our 2012 FFO per share guidance with a range of $2.02 to $2.18.

Before turning the call over to Steve Riffee to discuss results and guidance, let me give a quick update on our progress with the SRP asset sales and our major strategic initiatives.

As we detailed in our February 2 press release, so far in 2012 COPT has sold five properties in White Marsh at an exit cap rate of 7.6%, netting $18.5 million.

In aggregate, the buildings were 83.2% leased and contained 55 leases.

In that same press release, we also announced the opportunistic sale of a 95,000 square foot property in San Antonio Texas.

Century Gateway 100 was shell complete in late 2010 and was vacant at the time of sale.

In negotiating a lease with a perspective single tenant late last year, it became clear that the best solution for us and the customer was to sell the building and an adjacent four-acre land parcel.

This sale allowed us to cede the park with a long-term user without having to invest the $4 million of tenant improvements.

We will recognize a modest gain on the sale of the building in the first quarter.

What's important to take away from that transaction, however, is that we remain committed to San Antonio and our Century Gateway project.

Ultimately, we can develop over 1.1 million square feet there, and continue to view San Antonio as a strategic market for COPT.

The other takeaway is that while we are focused primarily on executing sales of assets in the SRP, we will not shy away from other asset sales if they make sense.

Since announcing the SRP in April 2011, Copt has executed $111 million of total asset sales, including opportunistic sales like San Antonio, at an average cap rate of just below 8%.

Net proceeds received on these sales total approximately $105 million.

Total assets sold so far aggregate 1.2 million square feet that were 76% occupied at the time of sale.

From a property management perspective, the properties sold contained 154 leases, representing 17% of the total leases that were in place at March 31, 2011, but only 6% of our consolidated square feet.

Combined with operating efficiencies rolled out by management during 2011 and early 2012, the shedding of these smaller, more management intensive properties should translate into higher NOI margins by year-end.

Looking at our disposition pipeline, we currently have another $57 million of assets under contract, and an additional $116 million of assets actively being marketed for sale.

So we are on track to meet our goal of selling $205 million of operating properties this year.

In summary, COPT has four major strategic initiatives, leasing space, selling nonstrategic assets, making disciplined capital allocation decisions, and improving our financial flexibility.

I want to emphasize the prioritization of these objectives.

The number one consideration we currently are addressing is COPT's return on invested capital.

That is why our main objectives are to lease space and sell nonstrategic assets.

We are aware that our leverage levels are higher than those of the average office REIT, which was one of the reasons we made the tough capital allocation decisions to curtail development and acquisitions, and cut the dividend.

We will bring our ratios more in line with industry averages over time by improving our occupancy levels from recessionary lows, paying down debt with about half the anticipated proceeds from the SRP asset sales, and remaining disciplined on our development and infrastructure spend.

Now I will turn things over to Steve Riffee to discuss our 2011 results and provide guidance for the first quarter of 2012.

Steve?

Thanks Roger, and good morning everyone.

Before getting into more substantive matters, I would like to highlight some changes we have made to our supplemental disclosure, the first of which relates to how we present portfolio occupancy.

Beginning with our December 31, 2011 financials, we have changed our reporting method from just wholly owned to consolidated properties.

To help you maintain models on the Company and to bridge the difference in how we will be reporting portfolio occupancy, we will continue to include the information contained on page 4 of the supplemental package which reports both the wholly owned and the consolidated occupancy for our operating portfolio.

Consolidated occupancy for the fourth quarter of 2011 declined 120 basis points sequentially from the third quarter.

The decline in occupancy is not due to tenant move-outs, but rather to the inclusion of four unstabilized buildings being added to the operating portfolio during the fourth quarter that previously were accounted for as under construction and under redevelopment.

Detail on these unstabilized properties can be found on page 15 of the supplemental.

These unstabilized properties were only 15% occupied and 37% leased at December 31, 2011, resulting in lower overall percentage occupied and leased statistics.

Economically, there has been virtually no change since September 30, 2011.

The second major change in our disclosure that I would like to highlight is the additional information we now provide on our government and defense IT niche.

On page 9, we carve out major business parks, such as NBP, and provide you with percentage leased and occupied statistics, as well as a building count and total square footage.

On page 18, we now provide a lease expiration analysis for our government and defense IT niche, which at year-end accounted for 60% of our annualized rents in place, and at an average rent per square foot of $29.12.

Now, turning to our 2011 results, FFO as adjusted for comparability for the full year ended December 31, 2011 was $179.8 million, or $2.17 per diluted share, representing an 8% decrease on a per share basis from the $2.36 per diluted share, or $171.7 million of FFO for 2010.

The decrease in FFO per share versus 2010 was due to a modest decrease in same office NOI, a $0.09 decline an earnings related to our investment in KEYW, and a higher share count.

Including impairments on unappreciated real estate, derivative losses, losses on their early extinguishing of debt, and acquisition costs, 2011 FFO per share as defined by NAREIT was $0.76, as compared to $2.30 in 2010.

Our 2011 FFO per share included $0.97 of impairment losses on undepreciated real estate and $0.40 of derivative losses.

Note also that our full-year FFO per share for 2011 restates our second quarter 2011 results to $0.44 from a previously reported $0.02 to conform to NAREIT's revised standard of accounting for impairment losses on depreciated real estate.

For the full year, we reported a net loss attributable to common shareholders for 2011 of $133.8 million, and diluted loss per share of $1.94, compared to net earnings of $26.7 million and EPS of $0.43 for 2010.

In terms of same office results, cash NOI results were in line with our expectations.

Our same office portfolio excludes properties included in the strategic reallocation plan.

As of December 31, 2011, the same office pool of assets consisted of 160 properties and represented 72% of our consolidated square footage.

For the year, and excluding gross lease termination fees, same office cash NOI declined by $4.2 million or 1.9% from 2010.

Including gross lease termination fees, same office property cash NOI declined by $5.9 million or 2.6% from 2010.

Same office occupancy averaged 89.9% for all of 2011 compared to 91% for 2010, and ended 2011 at 89.9%.

Turning to the balance sheet, pages 29 through 31 of our supplement present debt ratios that measure financial flexibility.

At December 31, the Company had a total debt to market cap of $4.3 billion, with $2.4 billion of debt outstanding, for a debt to total market cap ratio of 57%.

As we think about leverage, one of our key metrics is debt to gross asset value, as calculated according to our bank loan covenants.

As of December 31, 2011, our debt to gross asset value ratio was 49.8%.

Additionally, at year-end 2011, 80% of our total debt was at fixed interest rates, and our weighted average cost of debt for 2011 was 4.5%, down from 4.75% for 2010.

For the fourth quarter ended December 31, 2011, adjusted EBITDA to interest expense coverage ratio was 3.3 times.

Adjusted EBITDA fixed charge coverage ratio was 2.8 times, and our adjusted debt to adjusted EBITDA ratio was 6.7 times.

Our debt maturities are very manageable, with only $66 million of debt maturing in 2012 and $163 million in 2013.

As I discussed on our 2012 guidance call on January 12, we expect to issue $200 million of five-year term debt in the first quarter of the year, the proceeds of which will be used to pay down our line of credit.

In terms of guidance, we are reiterating our recently announced annual 2012 FFO per share guidance range of $2.02 to $2.18, and we are initiating first-quarter FFO per share guidance in the range of $0.49 to $0.51.

Our first-quarter 2012 guidance assumes no acquisitions, and approximately $90 million of asset sales, including the White Marsh and San Antonio sales that closed in January.

We assume a tenant retention rate of between 65% and 70%, and project same office occupancy will be approximately 90% for the quarter.

For the quarter, we also assume no incremental leasing at Power Loft.

G&A in the first quarter is expected to be between $7 million and $7.5 million, and new business costs are expected to be approximately $1 million.

This is consistent with the guidance we gave you back on January 12.

In general, our first quarter G&A is usually higher due to the front end timing of payroll taxes.

Additionally, in the first quarter of 2012, we eliminated a number of positions resulting in severance costs.

There were also executive transition costs in the first quarter that are not expected to recur.

Our final assumption for the quarter is that we expect approximately $1.5 million of other income, which will be generated by development fees and interest income on existing loans.

Note that other income excludes any gain or loss from our remaining 1.8 million share investment in KEYW.

With that, I will now turn the call over to Steve Budorick.

Thank you, Steve.

Our same office portfolio occupancy of 89.9% at year-end 2011 was down very modestly from 90.1% at the end of the third quarter.

During the fourth quarter, we leased a total of 729,000 square feet, of which 402,000 square feet were renewals, 66,000 square feet were retenanted, 192,000 square feet related to development or redevelopment projects, and 70,000 feet represented other first generation space leased at properties we acquired with existing vacancies.

Our economics on leasing continue to improve and provide evidence that we are rebounding, albeit slowly, up from bottom.

For the fourth quarter, we had a renewal rate of 64% and average capital cost of $5 to $0.64 per square foot.

Rents on renewals increased 8.1% on a straight line basis and were flat on a cash basis.

For renewed and re-tenanted spaces, total rent increased 7.5% on a straight line basis and decreased 1.4% on a cash basis.

Our average capital commitment on second-generation leases was a low $6.88 per square foot.

For the full year, we signed 3.850 million square feet of leases.

2.530 million square feet were renewals, equating to a 75% renewal rate.

505,000 square feet was re-tenanting previously occupied space, 544,000 square feet related to leasing, development, and redevelopment properties, and 267,000 square feet was leasing of other first-generation space.

For 2011, rental rates for all second-generation space increased 5.2% on a GAAP basis and decreased 3.2% on a cash basis, and leasing costs average $11.85.

By comparison, in 2010 second-generation rental rates increased by 2.3% on a GAAP basis, declined 5.6% on a cash basis, and leasing costs averaged $11.72 per square foot.

Moving onto an update of our major markets, broadly speaking all of our markets continued to experience uneven demand from the dual impact of uncertainty regarding the Federal budget and concerns relating to the financial markets and lagging economic recovery.

Some tenants remain cautious and price sensitive, seeking to minimize financial exposures.

Most markets are dominated by renewal transactions, and frequently for shorter terms.

Northern Virginia in particular is experiencing continued declined as BRAC-related move-outs drove negative net absorption of 1.9 million square feet in 2011.

The looming possibility of defense cuts has caused large defense contractors to become highly cautious, consolidating offices and exercising early termination.

That being said, we are experiencing pockets of demand in the smaller defense contractor segment at Patriot Ridge in Springfield and select other locations.

The Baltimore-Washington corridor continues to experience modest pressure on rental rates and concessions, with a 15.2% overall vacancy.

However, unemployment rates continue to improve modestly, and we are starting to see some tenants expanding in the quarter.

So we are optimistic that we have turned the corner and are moving into a better leasing environment.

Activity surrounding Fort Meade is robust, with strong demand in the National Business Park and Arundel Preserve, and improved activity in Colombia generally related to cyber and intel contracts, but also in healthcare and business services.

At North Dade Business Park in Aberdeen, vacancy remains very high due to the delayed contractor BRAC relocations from the Fort Monmouth area.

Contracts are being awarded at Aberdeen Proving Ground, and local groups are prepared to make some leasing commitments.

Longer-term, we expect improved demand from future contract awards.

Improved market activity, resulting from recent contracts at Huntsville, including those by the Missile Defense Agency, continue to make us optimistic about our prospects at Redstone Gateway.

Finally at Power Loft, which is our wholesale data center in Manassas, Virginia, market conditions continue to be challenging.

Data center operations represent significant capital investments for federal and commercial data tenants, and they are deferring major decisions until they have better visibility in their businesses.

Accordingly, current activity is dominated by smaller users, below 1 megawatt, and we are aggressively pursuing them.

We continue to cultivate opportunities in the Federal space.

With that, I'll turn things over to Wayne.

Thanks Steve.

Before discussing developments at our major projects, I would like to highlight some of the changes we have made to our supplemental disclosure, all of which I would categorized as streamlining.

Beginning on Page 21, we have recategorized what used to be pre-construction projects as land, once again emphasizing the more disciplined approach we are taking before starting future developments.

Pages 22 through 24 provide detail on projects under construction, redevelopment, and Power Loft.

Page 25 presents a summary of land held for future development or sale, grouped by major market and by business park.

At the bottom of page 25, we have also included COPT's current book value of our land holdings, which consist of what we originally paid for the land, any improvements, and soft costs, such as master planning, design and engineering, and entitling the land, less any impairment charges.

At year-end 2011, our total basis in land was $361.7 million.

As demand merits new construction in the future, we will transfer projects off of the land schedule and onto the construction schedule.

Now I will provide a brief update of activities at our major development projects, beginning with the National Business Park.

We completed shell construction of NBP 410 in the fourth quarter.

This is a second property served by the NBP Parkway Extension, and is adjacent to the previously delivered NBP 430.

We are in final lease negotiations with a tenant who would lease approximately 50% of the property, and have made proposals to prospective tenants for the remaining space in the building.

At NBP 430, executed leases increased from 73% at year-end 2011 to 89% as of the end of January.

The continued strong interest at NBP from our contractor base positions us well to consider starting construction this year on the next building in the 400 neighborhood.

We also placed NBP 316, a building in our secured campus, into service with 63% of the property leased, but not yet occupied by a government tenant.

We are responding to additional interest from another secured customer who would lease the balance of this building.

Similar to our state of readiness in the 400 neighborhood of NBP, we have NBP 312 designed, permitted, and have the steel purchased so we can begin construction in an expedited manner once the leasing on the balance of NBP 316 is finalized.

Second, at Patriot Ridge in Springfield, our construction activity on the first building and associated parking garage continues as planned, with shell construction completion targeted for late in the second quarter.

During the fourth quarter we announced the execution of a lease with a defense contractor for 44% of the building.

Third, at Century Gateway in San Antonio, and as Roger described, we sold the first building we constructed in the contractor park, as well as an adjacent land parcel, to a well-established San Antonio corporation.

We remain committed to this business park and will begin pre-construction work associated with the next parcel.

We will closely monitor we see activity in the submarket, and anticipate being positioned to commence construction as constructor demand warrants.

Fourth and finally, in Huntsville, Alabama, our Redstone Gateway project continues to advance well.

Our first building's construction completion was delayed by about 30 days, and therefore is now a first-quarter 2012 completion.

The large infrastructure work to support the Park is progressing well, and the Park is very much taking shape and able to be presented to our prospective tenants.

With that, I will turn the call back to Roger.

Thanks Wayne.

In summary, we expect 2012 to be a challenging year, but also a year in which we execute along four major strategic lines, leasing space, executing our strategic reallocation plan, allocating capital prudently, and strengthening our balance sheet.

Before opening up the call for questions, on behalf of senior management and the employees at COPT, I want to thank you, Rand, for your many years of service and the strong leadership you have provided us all.

We look forward to your continued stewardship at the board level.

With that operator, please open up the call now for questions.

(Operator Instructions)

Craig Mailman, KeyBanc Capital Markets.

I'm here with Jordan Sadler as well.

I guess I would just like to start by echoing Roger's sentiment, Rand, that you will be missed.

Turning now just to the disposition front.

Roger, on the $205 million, I know you are kind of expecting an 8% cap rate for the sales this year.

Just curious on the $57 million that is under contract, where cap rates might be, and just relative to all of the activity you are planning this year.

The 8% is a range, so there are going to be some above and some below.

Just trying to get a better sense of if you think the sales that are going to come earlier in the year could be trending well below that 8%, and maybe the assets that are a little bit tougher are going to be above the 8%.

Just trying to get a better run rate for the sales.

You're very astute, because that is how the portfolio bifurcates and trifurcates when we think about selling it.

The asset sales that we have in the first quarter are at pretty low cap rates because the biggest one we are selling is an asset that is very stabilized and has long-term leases.

But as some of the assets we are selling for the balance of the year have lower occupancy and are not quite the quality of what we are selling in the first quarter.

So I do expect that some of the cap rates later in the year could be at higher yields.

We still, I think, look favorably as we go down asset by asset and analyze that we will be able to be at the 8% range, in the 8% range.

But maybe the spectrum is low 7%s to high 8%s, is probably a good way to think about it?

Yes, or even could be 9%.

Could be 7% to 9%.

That is helpful.

Just the comments surrounding Power Loft, is it safe to say that you guys are really looking to multi-tenant it now, bringing some of the more predominant tenancy in northern Virginia, just given the continued pace of what you guys are seeing on the demand side from the super core tenants?

I think we will lease it to commercial or government and defense niche tenants, wherever we can make a deal, but we still are trying to focus the attention of our marketing on our niche tenants, the government and defense contractors.

That is challenging because of where the defense budget is and the cautiousness of all of their core customers at this point, but I still think the asset positions itself well for that niche.

But we will not preclude leasing it to traditional commercial tenants.

Great, and then just one last one.

On the balance sheet, I know, Steve, you talked about debt to GAV, just curious as you guys think longer-term, do you guys have any goal post of where you want to bring the leverage to, and maybe a debt to GAV and debt to EBITDA?

Maybe not by the end of this year, but as you think of a five-year type plan.

Absolutely.

Our long-term goal, to maybe put it in terms of what you would typically compare it to all REITs who do not necessarily have the covenant package would be to get our debt to undepreciated book value down to the mid-40s.

So that would be down from where we are today.

As we do that, we are going to also be de-levering, and our typical measures of debt to GAV will improve.

I see that in the low-40s to mid-40s.

We have a very strong fixed charge coverage ratio, well above the bottom goalpost that we have expressed before.

I think it will continue to strengthen as we de-lever.

I think we will probably be covering slightly higher interest rates because it is our goal over the next couple of years to continue to term-out our debt ladder when we get opportunities to do that.

That's how we think about our balance sheet long-term.

Michael Knott from Green Street Advisors.

I guess my first question would be, I read recently in one of the real estate rags that you guys were marketing properties in the St.

Mary's/King George County, and I had previously understood that was not going to be part of the sales.

My understanding is that is mostly government tenants.

Can you just comment on the thought to include some of those in the SRP, or maybe those outside the SRP?

Michael, in St.

Mary's County, our portfolio breaks down that the largest part of it is right outside of the main gate to Pax River Naval Air Station, but we do have six smaller properties that are north of the main gate a couple of miles.

And what we are trying to do is keep the highest quality assets and sell off the lower quality assets.

So it just falls into that category.

Those buildings are strategic from the standpoint of the tenancy, but in terms of making sure that we have the A assets in locations, it's really about that in this case.

Is that part of what you are talking about?

I think you mentioned maybe willing to be able sell some assets outside of the SRP, if I heard that right.

That is right.

That would fit into that category?

Is there much else beyond, I guess it would be similar situations, or maybe is there any magnitude of sales, in addition to the 560, I think, for SRP that would be outside the SRP that you would think about over the next couple of years?

Yes.

Again, back to the context of wanting to have A assets and A locations adjacent to our government demand drivers, we would sell assets that are further away from the mothership, if you will.

Should we presume the same-store pool is different now that you have recharacterized it in terms of it is a smaller group of properties going forward?

It is down to the 160 properties.

What has been excluded are the assets that we have specifically identified as part of the SRP, Michael.

Okay, but that change is effective January 1?

That's not part of the 2011 same-store reporting, right?

Every year you redefine same-store so that it is assets that you have owned since the beginning of 2011, all the way through to the end of 2012 in the '12 pool.

The prior-year was comparing the '10 and '11 years.

You happen to have to have a sense for how the same store in 2011 would have looked under this new pool, compared to what your reported same-store was?

I do not have that number of front of me, but I do not think we are seeing any core business significant shifts, just because we change the pool, Michael.

Joshua Adie, Citi.

Just to follow up on Craig's question on Power Loft, it sounds like there is a small strategy shift.

Can you talk about what the impact is on the yield and if you're still targeting high single digits?

Josh I think yes.

On the earnings guidance call a month ago, we mentioned that we thought we could realize a yield in the high single digits to maybe double-digit if we are very fortunate.

And I think that when we were speaking at that time we were acknowledging that the rents that we were going to realize were going to be lower, whether they are to our government and defense constituency, or to commercial tenants, and so nothing has changed since that call.

I think that we are hoping to stabilize in the high single digits.

You added some new information in your sup on the assets you have dedicated to government and defense IT.

Can you remind us what the long-term target is for those assets as a percentage of total NOI, and has that changed at all recently?

I think the near-term goal is to get it to two-thirds of our business, and then as we execute our SRP plan, we will see what evolves out of that over the next 18 months.

Dave Rodgers, RBC Capital Markets.

Steve Budorick, a question.

You had referenced some terminations, perhaps, in the government contract side, and I think we have talked about those for some time, but it brought a thought to me that perhaps with the purgatory that we have seen with some of these defense contracts, that might allow them to be able to increasingly terminate or consolidate.

And I was interested in your view on that, or maybe Roger, yours as well, and what risk you see to the 2012 occupancy numbers based upon that, if in fact it can occur.

Those comments were really made with respect to the broader Virginia market, which is 170-plus million square feet.

It was not really pertaining to our portfolio.

We have not experienced that in the last quarter.

Any risk that you could see some of that in 2012 with some of these contracts, as we are getting more and more clarity on them?

No.

It really pertains to different niches within the defense.

We are not seeing that with our kind of customers.

And there is a big distinction in the way they are behaving, because the cyber-oriented world is well-funded and continuing to grow, where other parts have less clarity in their future.

So it is really different customer base.

With regard to the data center, I think you had talked about some smaller, 1-megawatt deals.

Do you think as a company COPT is in a position today to be a more active manager of that space, going down into the 1-megawatt size, or sub-one meg?

Are you prepared to do that today from a structural perspective, or would that add some potential added costs, or would you consider using a third-party manager at the facility to do that?

We have already developed a plan to accommodate smaller users, and it will not represent a material change in our cost structure.

Rand, I recently saw a presentation by Roger Staubach, and he had said that since the merger with JLL he has the title of executive chairman and he spends a lot of time with his lab, but he always looked forward to the fourth quarter.

I think with that, I think you have certainly deserved it.

I wish you a strong fourth quarter as well.

Thanks for all your help and guidance over the years.

I am still in the first half, not the fourth quarter, Dave.

I did not want to be dire about it, but good luck to you.

John Guinee, Stifel Nicolaus.

I guess this is for Wayne.

I'm looking at the land on page 21 and page 25.

These are back of the envelope, there is much more detail to it, but Baltimore-Washington corridor, 26 per FAR, northern Virginia 30 per FAR, San Antonio, 20 per FAR, greater Philadelphia 34 per FAR.

These are pretty big numbers.

How should we look at the real value of the land on page 25?

John, I think we feel like they are fairly priced.

Keep in mind that in many cases we have invested in the land.

So it is beyond just your raw acquisition costs, whether it be an allocation of infrastructure, architectural work, and the like, those costs are inclusive of some development worked that has already been done.

When you consider that, we think they are fairly positioned.

The reason I asked the question is because there was a significant amount of soft cost loaded into the land that you wrote off at Fort Richie a while ago.

Are you still capitalizing interest on this page 25?

John, the only asset that we are capitalizing interest on is the NBP where we are extending it into the phase two and up the route 175.

There is some capitalization on the NBP north plan going on.

Then on the same vein, also for Wayne.

I am looking at total project cost for Aberdeen, about $201 a square foot, Huntsville about $184.

I think that's on a ground lease, which is maybe the reason they are different.

$200 a square for these sort of product in these kind of locations seems like a big number.

Is there a big TI component, or a lot of carry in there, or how should we look at that kind of number?

I think they have got what we think is market-based tenant improvement allowances, John.

I think we are comfortable with both of those bases.

If you look across the portfolio, there are properties that have a bit higher bases.

We know we want to be targeted at a lower point in both of the markets you have mentioned, but I think we are comfortable with the bases.

Keep up the good work on the dispositions.

All the local brokers are very happy with your plans.

I'll bet.

Jamie Feldman, Bank of America Merrill Lynch.

In terms of the disposition market, can you talk about maybe any changes in sentiment from buyers or maybe just the buyer pool and pricing, now that we have started a new year and you have had some optimism in the stock market?

I think overall sentiment is very positive.

I think when the feds said that they would keep short-term interest rates low through 2014, that gave a little buoyancy to the market.

We are seeing more active buyers who now are willing to buy just to spread invest for a couple of years, and as long as they feel like they are getting a pretty good price per pound.

So I think it actually does interject some positive energy into our sales momentum, and I think we are experiencing that now.

Where were these buyers before?

Were they on the sideline or they were focusing more on core?

I think they were there.

I just think they have gotten more confidence with the ability to borrow money and the fact that, again they can borrow money extremely cheaply, and they know they can do it for a pretty extended period of time and lock in a good yield, a good spread, for a reasonable period of time.

They focus more on fully leased, not really value-add at this point?

No, it is both.

There are different character of buyers.

Some like to buy core stable without taking risk, and others like the value-add where they can lease up a building to stabilization and make a profit that way.

Where are you seeing a spread in their pricing?

What kind of yields they want?

I think for highly stabilized properties, we are in the 7%, going in yield and for those things that have a perception of maybe some structural vacancy, that is where the yields are in the 8.5% to 9% area.

Turning to operations.

In terms of where you said there are pockets of demand.

Can you give a little color on is that a change that you have seen so far this year, or is that the same pockets of demand you have see throughout the downturn, and if it is a change, what does it mean for the future?

No, it does not really represent a change, but certain of our properties have activity on them that is encouraging, very encouraging, relative to the overall market.

So you are not really seeing any shift in dynamic of who actually needs space within the government and the contractor sectors, in terms of their type of business?

No, we are not.

Then finally, if you look at your cash leasing spreads, they are still negative.

If you look at your gap they are pretty sharply positive.

Can you talk about the dynamic to your contracts that are letting you do that.

Is it something with where the old leases were priced, or is it just your ability to get bumps?

How should we think that and whether that is sustainable?

I think it is the concept that, again, 60% of our business is our government and contractor business that has more stability because the tenants have invested more money in their particular locations and have a need to stay where they are.

In those cases we have been able to get positive cash rent growth and gap growth.

Where that is being offset is in our portfolio that is subject to the anomalies of the market demand up and down.

So the two have been offsetting each other, largely speaking, and our spreads are better than the traditional suburban office player out there but still not where we would like them.

That is why we are attacking the portfolio with our strategic reallocation plan.

I guess I am thinking just in terms of your gap leasing spreads.

What kind of bumps are you able to build into leases?

Does it depend on the tenant or it depends on the market, or are you getting it across the board?

In the markets we operate in, we are able to get, generally speaking, 3% bumps on rents once they have been reset to the market rate, per year.

Across the entire portfolio?

Yes.

Brendan Maiorana, Wells Fargo.

The first question I had is the 192,000 square feet of leasing that you guys did in the quarter.

You referenced on the last call, I think, 470,000 square feet of prospects that you were chasing on the development pipeline.

Is the 192,000 part of the 470,000, and can you give us an update of what the prospect list looks like today?

When we had the call in January, a little over 100,000 square feet of that had already been signed.

So there is a little bit of overlap there, but I would still say we have prospects for 400,000 square feet of space that is in a specific Colombia building that we have under construction, at NBP, down in Huntsville, and also a little bit up in Aberdeen, and also some modest specific known demand down in Fort Belvoir.

I think there are designated tenants for 400,000 square feet of space.

It is going a lot slower than we would like it to go, but we are confident we will get to the finish line, but I cannot tell you exactly what quarter that is going to be.

On the same-store, I think Michael Knott was asking about the change in the pool.

The guidance for the year is 0% to 2%.

Is that on the new pool, and if so what do think the same-store numbers are for the SRP properties that is about $500 million to start the year.

I do not think it is that much different because they were the properties that were lower occupied, and we have taken a little bit of dollars out of our cost structure.

I think that even if those properties were included, because they are in lease up along the way, that our same-store would be in the same range.

In the same range?

As we think about the sale of those assets over time and the cap rates that you guys have provided, because I think it is around 8% for this year, 8.5% for next year.

There is not a same-store leakage into '13?

So that 8.5% is still on today's level of NOI?

It is not going to go down?

Right, and one of the reasons that we have excluded it is so that you can see the assets that we intend to hold long-term and see where they were down negative 1.9% in '11, we are saying flat to positive 2%.

So we are saying that the buildings that are core that we are going to hold onto are relatively stronger in '12 than they were in '11.

The other thing to note, Brendan, is that the assets in the SRP only relate to about 11% of our revenues.

So it is not like it is a significant part of our portfolio.

Our same-store portfolio is 76%, and then a lot of the assets we have put into service from our construction pipeline were acquisitions we made that have not yet had the same-store represent the difference.

The assets that I guess are less strategic but not part of the SRP, I think some of the ones that you referenced in King George and St.

Mary's County, why are those not part of the SRP?

Is that just the magnitude of assets that you plan to dispose of over the next couple of years?

It would just be too large, and maybe if there is SRP Two, that would be sometime thereafter?

The assets down in Pax River near Pax River Naval Air Station, those six small buildings, are part of the SRP, but you are right.

There are other assets that are not in, I will call it the existing SRP plan that we probably will continue to sell.

So I think the Company going forward will be much more churning its portfolio more then we have in the past, even beyond the SRP plan.

Is it 5% a year type of number or you think it is something larger?

I think that is probably a good number.

Sheila McGrath, KBW.

Sheila?

Operator?

Sheila, your line is open.

Must have stepped away.

Can you take the next caller?

Rich Anderson, BMO Capital Markets.

Just a couple of quick ones pretty far into the call here.

Can you quantify, we all know you are curtailing your development effort at this point.

Maybe this is written someplace and I have not seen it, but what would you say as a percentage or in dollars that you have decided to walk away from, or at least postpone working on at this point, that you would have otherwise had it not been for all the things that are going on around you?

I think first of all you have to step back and put it in broad context.

We spent 2010 and 2011 seeding all of the business parks related to BRAC, and also those other government campuses that are BRAC-like.

By the middle of 2010, we had already started all the buildings we needed to make sure we had a position in each of those locations.

Our peak speculative development, if you will, had already evolved naturally from wanting to be where we were with the product that we developed.

Now, beyond that, it is really a matter of leasings before we start other buildings.

I think the point we have been making the last couple of calls is that we are going to have a higher standard of analyzing revenue and risk of revenue before we do new starts going forward.

You think it could have been, I do not know, $200 million of new starts that you would have done, that you are not doing now?

I am just trying to get a sense of how much you are putting the brakes on in dollar terms.

I guess to just put broad framework around it, if you say that we have six locations that are BRAC or BRAC-like, and each building is 100,000 to 120,000 square feet.

So if you wanted to have one building at all times, that is 700,000 square feet, and if our average cost is $200 a foot, that's $140 million would be probably the most we would have, and that is if we had all of our buildings without any leasing.

I think that exposure will come down.

On Power Loft, in the interest of simplifying, and de-leveraging, and getting back to your core strengths, have you thought about, maybe this is an asset that you would eventually sell and not go down the path of running Power Loft?

Certainly that is one of the options, and we are trying to lease it up to our strategic tenants.

Secondarily, we will lease it to commercial tenants, and if we do not make the asset a strategic asset with our customer constituency, we would likely sell this asset.

Bill Crow, Raymond James.

My question is bigger picture.

Has the number of prospective tenants associated with the movement of BRAC and the private sector contractors, has that changed materially over the past year or two years, and has the housing market and the inability to relocate impacted that as well?

I do think the housing downturn has impacted the relocation of companies and their employees to BRAC locations, and I think that is why they went to the government and got relief from having to comply with their [circumference] of obligation under the contracts they have with the government.

I do think that has been an impact.

I think the number of tenants is probably still the same as it was before, it is just that they are slower to move.

I do think some smaller tenants in some of the locations, maybe up in New Jersey, will find other work and never move to, for instance, Aberdeen Proving Ground, but I think others will supplant them as new contracts are issued.

I think in general we will get to the same spot.

It is just going to take longer than we thought.

I remember years and years ago after the BRAC that really made St.

Mary's County, Pax River Naval Air Station what it is, and it started off very slow, and a lot of us were very circumspect about whether or not it would ever materialize, but it did.

It's just that it took five or six years to materialize, but when it did, it really was a robust amount of growth for that area.

I think that is what we are going to see at Aberdeen, that is what we are going to see at Belvoir, and around Fort Meade, and also down in San Antonio.

Bill, what you are also seeing, interestingly, are people that are selling their houses and moving to apartments or condos, sort of as a downsizing for a while.

Then, of course, the government people that move tend also to hit apartments.

So you see very robust activities in our area with apartments and record-setting rates, record absorption, a lot under construction.

That is one of the positives that I think is offsetting the other part of the housing crisis.

Chris Lucas, Baird.

Question, follow-up on Bill's question.

On the proximity requirements, are those, the laxness on those, is that broad, or is that specific to certain BRAC locations?

I think it is broad, but I think it is also depends on if you are a prime contractor or a secondary contractor, and what level of work you are doing for either your prime or for the government.

I think it has to do with contract by contract, and depends on what the mission is, and the criticality and need for those customers to be really near the government customer.

Again, another broad question, just as it relates to the sentiment within the contracting business.

We have seen, obviously, we have got a budget, there are appropriations.

So that is the positive.

The negatives, you are seeing a fair amount of high profile layoffs and some real downsizing that is going on.

What is your sense about their commitment level or their confidence about their business for the next couple of years?

I think, Chris, what is happening is the contractors are cycling to where the contracts are.

So they see the weapons part of their business going down.

They see, if they have been supporting like Khaki and some of those, supporting the actual combat operations, they see that being curtailed.

So they are making the appropriate downsize moves, which is not unusual in that part of the business, in both, in the current conditions and in anticipation of where the cuts will come from.

Conversely, what is interesting is they are seeing where they have won contracts and where they are continuing to win in the cyber and intelligence areas and so on.

They are both taking space there, and also you are seeing an increased M&A activity, where the larger firms are starting to move to increase their revenues through buying other people.

So we see that as a continuing trend.

Even if a contractor says we are going to downsize somewhat, we are backfilling that instantly with the kind of locations that we have.

We cannot get this across to the analysts very well, it seems like, in terms of this is something that, and even to a degree the investors.

You cannot generalize on the Department of Defense.

You have got to understand the specifics of it related to the niches that they are in.

Hence, we are still doing development leases, still seeing nice demand.

Steve Riffee, just a couple of specific questions.

On Power Loft, are you capitalizing interest and carrying expenses on that asset at this point, and if so, for how much longer is that possible?

We own a small piece, Chris.

We have substantially built the 9-megawatt.

Our capital spending for this year is primarily just for the TI [foundation] and there is just a little bit of time that is still left on the spend that we spent last at Power Loft.

So it is not a big number.

But as far as the interest expense and operating expense carries, is that being capitalized or is that just been expensed?

A portion of it is been capitalized.

Then just trying to understand on, again, a pretty specific question.

On AFFO adjustments, added back to the derivative loss for fourth quarter, but my understanding, that is a cash expense?

Is that correct?

Yes, it is.

It is one that was settled in 2012 also.

So the add-back occurs for fourth quarter.

Will be a deduct against the AFFO in first-quarter, or how are you thinking about that?

No.

I think we just look at the financing-type derivative items.

It will not be an add-back.

It will not be an add-back in the first quarter?

You added it back to get to the AFFO number that you reported in your results for this quarter.

And that is it.

That is the year we accounted for it in FFO and AFFO.

It won't be an item, an adjustment, in '12.

I'm just trying to understand why that was a cash expense, why was it added back?

I am just trying to understand that.

We are just excluding derivatives gains and losses from AFFO.

Michael Knott from Green Street Advisors.

Just a couple of questions on the new disclosure.

We're still digesting it.

Thank you for trying to improve some of that.

I think some of the development disclosure was a little confusing before.

I think it seems a little more streamlined now, but one question I have.

It seems like there is no longer any specific or dedicated pages to measuring the performance of properties that were recently placed in service.

I guess there is the one line on page 10.

Is that where we should look now, where you have the line, properties placed in service?

That is where we should look to see how properties that were recently developed, or recently completed I guess, are performing?

Then I was going to ask what the cost basis is for that 1.5 million square feet that is shown on that page.

We will get you that number, Michael.

The other place you could look is also on page 15, where we have a schedule of unstabilized office properties.

That's all development that we have placed in service that has less than 90% occupancy.

So in that case, we have nine assets totaling 1 million square feet that we have placed into service that are in our occupancy count, that at year-end were 23% occupied and they were 40% leased.

Just a follow-up on that, in terms of your comment.

What would be the difference between that million square feet versus the 1.5 million that is on page 10?

In that case, it is assets that are stable, that are greater than 90% leased, but having gone into the same-store portfolio.

Then the other disclosure question would be, if I could lob in a request for consideration for the future, might be helpful to have a same-store income and expense page like most other companies provide.

One reason I ask is just curious.

When you look on the income statement for 2011, it looks like total operating expenses were, call it 10% higher.

Obviously that is not same-store.

I am just curious how you are thinking about operating expenses for 2012 as part of your 0% to 2% same-store guidance.

I think operating expenses will be up nominally.

Now, I should mention that 10% is skewed because we have certain customers that escalate the amount of service they want at certain locations, and so the expenses go up but then there is a reimbursement of those expenses.

I will now turn the call back over to Mr.

Waesche for closing remarks.

Thank you all again for joining us today.

If your questions did not get answered on this call, we are in our offices and available to speak with you.

Thank you.

Thank you for your participation in the Corporate Office Properties Trust fourth-quarter and year-end 2011 earnings conference call.

This concludes the presentation.

You may now disconnect.