COPT Defense Properties (CDP) 2012 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust first-quarter 2012 earnings conference call.

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

At this time I will turn the call over to Michelle Layne, of COPT's Investor Relations.

Ms.

Layne, please go ahead.

Thank you, Stephanie.

Good morning and welcome to COPT's conference call to discuss the Company's first-quarter 2012 results.

With me today are Roger Waesche, President and CEO; Steve Riffee, Executive Vice President and CFO; Steve Budorick, Executive Vice President and COO; and Wayne Lingafelter, Executive Vice President 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 Roger for his formal remarks.

Thank you, Michelle, and good morning, everyone.

2012 is starting off well, as evidenced by our better than expected quarterly results.

Our FFO per share, as adjusted for comparability, for the first quarter was $0.53, which is $0.02 above our guidance range and $0.04 above the $0.49 we achieved in 2011.

The quarter's modest outperformance was primarily driven by lower than budgeted property operating expenses associated with the mild winter in the Mid-Atlantic states and higher than expected development fee income.

We are reaffirming our 2012 annual FFO guidance of $2.02 to $2.18 per share.

The fact that existing and potential strategic tenants in the government and defense IT industries have been operating this fiscal year with a budget rather than under a continuing resolution has modestly increased leasing activity.

We are tracking over 300,000 square feet of potential development leasing activity at the National Business Park area, Patriot Ridge, and Redstone Gateway that we expect to result in further leasing during 2012.

This is in addition to the 86,000 square feet of development space leased in the first quarter and 60,000 square feet already signed in this quarter that Steve Budorick will provide additional color.

That said, we believe the potential federal budget cut in fiscal year 2013 generated by the possible application of sequestration cuts to the Defense budget under the Budget Control Act is causing agencies and some contractors to be more deliberate about making long-term, large scale space commitment.

Compounding this uncertainty is the increasing likelihood that the fiscal 2013 Defense budget will not be passed before the November elections.

Ultimately we expect to see our markets benefit by continued growth in support of cyber and priority programs as well as the remaining contractor tail following the recent government-backed moves.

In the meantime, we'll keep working hard for every deal in each of our markets.

The good news is that everything we hear regarding potential budget cuts to Defense in fiscal 2013 indicates the primary affected areas will be large weapon systems and force structure.

Program cuts to intelligence activities are expected to be minimal by comparison and we believe cyber initiatives will grow.

We expect the agencies that have moved to locations near our parks as a result of BRAC create a tail of contractors that will follow them through 2014.

While the defense pie is likely to modestly shrink in 2013, our tenants' portion is likely to grow.

Additionally, a potential slowdown in DOD building acquisitions and construction, or MILCON, ultimately may lead to additional leasing demand by the government.

Our pace of dispositions through the Strategic Allocation Plan, or SRP, we launched in April 2011 is in line with our expectations.

First-quarter sales totaled $63 million gross and $61 million after closing costs.

These sales were comprised of 7 stabilized operating properties at a weighted average cap rate of 7.4%, for net proceeds of $23 million.

These buildings contain 63 leases and were 80% leased.

We also sold 2 non-revenue-producing buildings at Century Gateway in San Antonio and Candlewood in Hanover, Maryland, and some land in San Antonio, for net proceeds of $38 million.

Since announcing the $562 million SRP we have executed $139 million of property sales, which is approximately 25% of the overall plan.

The sales included $100 million of operating properties at an average exit cap rate of 7.8%, with the balance comprised of nonoperating property.

Net proceeds received on these sales totaled approximately $131 million.

Total assets sold to date aggregate one-point-million square feet of operational space, 500,000 of which was non-income-producing at the time of sale.

From a property management perspective, the operating properties sold contained 20% of total leases that were in place in March 2011, but represented only 5% of our consolidated square footage.

The shedding of these smaller, more management-intensive properties should translate into higher NOI margins as we move forward.

We have another $71 million of assets under contract and are marketing in excess of $100 million of additional assets.

We are pleased with the progress we have made to date and are on target for the year.

If we can sell assets more quickly and exceed our plan, we will.

During the first quarter we also sold all of our remaining shares of KYW for approximately $14 million, slightly above our year-end basis.

With that, let me hand the call over to Steve Riffee to discuss our first-quarter results and provide guidance for the second quarter of 2012.

Steve?

Thanks, Roger.

Good morning, everyone.

Before I discuss the quarter's results, I'd like to point out a couple of presentation changes we've made.

We've refined our segments to include development assets and land and the carrying expenses associated with land have been reclassified from property operating expenses to new business and land carrying costs.

Accordingly, our reported NOI now relates solely to our operating properties.

These changes are reflected in all periods presented.

We hope that this provides additional clarity into the operations of our properties and helps the analysts and investors more clearly understand our operating portfolio.

We've also refined our definition of FFO as adjusted for comparability.

Because we had previously included impairment losses on nondepreciable real estate, we are also excluding gains on these types of assets.

Now, turning to our results, FFO as adjusted for comparability for the quarter was $45.3 million, or $0.53 per share, representing an 8% increase on a per-share basis from the $0.49 per share or $39.6 million of FFO as adjusted for comparability for the first quarter of 2011.

FFO per share as defined by NAREIT was $0.54 for the quarter as compared to $0.13 in the first quarter of 2011.

Our 2012 FFO per share includes a $600,000 gain, net of tax, resulting from the sale of Candlewood, which was a nondepreciable asset held in the taxable REIT subsidiary.

Our 2011 FFO per share included a $28 million, or $0.39 per share, noncash impairment charge on undepreciated real estate at Port Richey and land sale gains of $2.7 million, or $0.04 per share.

Moving to same-office results, cash NOI was favorable to our expectations as a result of lower operating expenses related to mild winter in the Mid-Atlantic states.

Our same-office portfolio excludes property included in the Strategic Reallocation Plan, which represents 16% of consolidated square footage, or approximately 10% of NOI.

Each year we reset the same-office pool and report each period presented using the new same-office pool.

As of March 31, the same-office pool of assets consisted of 169 properties and represented 79% of our consolidated square footage and 84% of NOI.

Excluding gross lease termination fees, same-office cash NOI grew by $4.1 million, or 7%, from the first quarter of 2011.

Including gross lease termination fees, same-office NOI grew by $4.5 million, or 7.7%, from 2011.

The growth in same-office cash NOI compared to the first quarter of 2011 was due primarily to rent bumps in existing leases and lower seasonal operating expenses, partially offset by slightly lower occupancy.

Same-office cash NOI, excluding termination fees, declined $1.7 million compared to the fourth quarter of 2011, primarily because we received a $1.5 million prepayment of rent in the fourth quarter.

Same-office occupancy averaged 89.5% for the first quarter of 2012 compared to 91.1% for the first and fourth quarters of 2011.

Turning to the balance sheet, at March 31 the Company had a total market cap of $4.4 billion, with $2.4 billion of debt outstanding, for a debt-to-total-market-capitalization ratio of 55%.

One of our key credit metrics is debt-to-gross-asset value ratio as calculated according to our bank loan covenant.

As of March 31, this ratio was 49.2%.

Additionally, 80% of our total debt was at fixed interest rates and our weighted average cost of debt for the first quarter was 4.4%.

For the quarter ended March 31 adjusted EBITDA-to-interest-expense coverage ratio was 3.2x.

Adjusted EBITDA-fixed-charge-coverage ratio was 2.7x.

And our adjusted-debt-to-adjusted-EBITDA ratio was 6.7x.

Our debt maturities are very manageable, with only $63 million of debt maturing during the remainder of 2012 and $169 million maturing in 2013.

During the quarter we borrowed $250 million of 5-year term debt from our bank group, which is currently priced at 190 basis points over LIBOR, the proceeds of which were used to pay down our line of credit, leaving us with $590 million of capacity on our $1 billion line of credit.

Now turning to guidance, as Roger said, we are reaffirming our annual 2012 FFO per-share guidance range of $2.02 to $2.18 and we are initiating second-quarter FFO per-share guidance in a range of $0.48 to $0.52.

The second-quarter midpoint is lower than the first quarter actual results due to lower expected development fees and the impact of completed and contracted dispositions.

We expect G&A costs to decline after the second quarter as executive transition costs will be complete.

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

Thank you, Steve.

Our office portfolio was 87% occupied and 89% leased at quarter end, up 80 and 70 basis points, respectively, from the prior quarter.

Our same-office portfolio occupancy was 89.5% at the end of the first quarter 2012, down very modestly from 89.6% at the end of 2011.

During the first quarter we leased a total of 570,000 square feet, of which 320,000 square feet were renewals, 120,000 square feet were retenanted, 86,000 square feet related to development and redevelopment projects, and 43,000 square feet represented other first-generation space leased at properties we acquired with existing vacancy.

Based on leasing to date, revenue at risk required to meet our midpoint of guidance has been reduced from approximately $15 million to just under $9 million.

We have leasing in progress which would reduce this revenue at risk to under $3 million.

For the first quarter we had a renewal rate of 59% at an average capital cost of $7.52 per square foot.

Rents on renewals increased 2% on a straight-line basis and decreased 8% on a cash basis.

For renewed and retenanted space, total rent increased 1% on a straight-line basis and decreased 9% on a cash basis.

Our average capital commitment on second-generation leases was $10.17 a square foot.

We expect releasing spreads to tighten because our leasing plans for the rest of the year include a higher percentage of renewals and are more concentrated at our strategic properties.

The commercial office markets in Maryland, Washington, DC, and Northern Virginia continue to be challenged by the uncertainty around the 2012 and 2013 federal budgets, the upcoming election and the restraint in GSA leasing.

Overall vacancies hover in the 15% to 16% range and first-quarter absorption was flat to negative 1% in the quarter, varying by market and submarket.

Job growth in Northern Virginia and Baltimore region of 26,000 jobs on a year-over-year basis have not yet produced positive movement in the office market statistics.

Large defense contractors continue to trim budgets, right-size programs, and increase efficiencies by consolidating offices and new GSA leasing has all but disappeared, both of which have contributed to the increased vacancies in these markets.

But despite these overall market conditions in the region, we are experiencing moderate to healthy demand in our properties adjacent to government demand drivers.

Reaffirming our investment strategy to concentrate on serving the Department of Defense elements that conduct intelligence and cyber activities.

Our construction projects are 31% leased and we are in various stages of discussion with strategic customers for another 45% of the rentable area being constructed.

Near Fort Meade in the heart of the Baltimore-Washington corridor, we are pleased to report some significant leasing at 7740 Milestone Parkway and Arundel Preserve.

Subsequent to quarter end we leased 61,000 square feet in this building to a defense IT contractor who will take occupancy in phases in the second half of 2012.

With this transaction the building is now 100% leased.

We are encouraged that this leasing validates our belief that the Arundel Preserve project will serve DISA and its contractors at the northwest gate of Fort Meade in much the same way that NBP serves other agencies and their contractors at the southwest gate.

We also have negotiations in progress for virtually all available inventory in the National Business Park and we are contemplating new development starts for government and contractor buildings later in 2012.

Our Columbia Gateway properties have experienced stronger demand from both defense and commercial segments and we are making good progress leasing stubborn vacancies in this portfolio.

We continue to be optimistic about the improving activity in the park and we are observing an increase in the number of tenants expanding relative to contractions.

In Huntsville, Alabama we completed our first building, 1000 Redstone Gateway, during the quarter and we have good market activity on the asset.

We are in various levels of discussions with users collectively representing about 150% of the space in the property.

Similarly, in Springfield, Virginia we have already preleased 44% of Patriot Ridge 1 and our current activity in leasing represents another 40% of the property.

We are confident we will complete additional preleasing during the year.

Turning to Colorado Springs, activity across our portfolio has improved with organic growth from existing tenants emerging, as well as new users entering the market.

We currently have good visibility on prospect to meet 100% of our leasing objective for 2012.

Our more challenging projects are North Gate Business Park in Aberdeen, Maryland and our Power Loft wholesale data center in Manassas, Virginia.

In Aberdeen the contractor tail associated with the C4ISR relocation has not been robust thus far.

We continue to monitor contractor activity and we are not planning any new development until significant off-base contractor demand materializes.

Regarding Power Loft, we are confident that it is a high-quality facility.

There has been a demand lull in the marketplace for high-density, high-capacity turnkey users.

Our view is that demand will outstrip supply over time.

We are carefully working multiple market channels to attract high-density and high-capacity users from both our existing customer base and other enterprise users.

The demand has improved modestly over the past quarter and we're tracking leasing opportunities for roughly 50% of our available built-out capacity.

These opportunities do have late 2012 or early 2013 commencement, so we expect our 2012 progress to continue to be slow.

We are pleased to learn that one of our tenants successfully procured a significant federal colocation contract during the quarter, ratifying Power Loft's appeal to federal secured data users.

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

Thanks, Steve.

In summary, the 2012 economic and operating environment will continue to be challenging.

The Company is performing well, as indicated by our first-quarter results, and remains focused during this year of transition on executing along four major strategic lines -- leasing space; executing the sale of nonstrategic properties and land; allocating capital prudently; and strengthening our balance sheet.

With that, Operator, please open up the call for questions.

Thank you.

(Operator Instructions) Craig Mailman; KeyBanc Capital Markets.

Jordan Sadler's on with me as well.

Maybe you could just start on Power Loft, where you guys kind of ended your comments.

I know you have gotten the question in the past a lot whether you are opening it up to more traditional internet-type tenants.

Just curious what the marketing strategy has been there, particularly in light of the activity that one of your competitors, the focused datacenter guys, just announced last night.

Yes, currently we're marketing the property over multiple channels.

We have a pretty intense marketing effort directed at our core customer base, which is directly linked to the federal government.

And much of the difficulty in making progress with that group really is associated with the budget situation in Washington.

But, similarly, we have expanded our marketing team and our marketing channels and we're focused on large enterprise users from the commercial segment, as well as the smaller deals that kind of predominate the market currently.

What has it been about the asset that's been hard for you to get traction with more traditional tenants?

Is it just because it's in Manassas and not closer to Ashburn?

Or is it just that you guys have really been holding back that space?

Well, there's a couple of factors.

One factor is that, remember, we built it partially constructed.

And so through parts of 2011 some of the demand that was actually in the market exceeded our built-out capacity.

But as we moved into the fourth quarter of 2011 we now have a significant amount of capacity immediately available.

And there is certainly a segment of the market that prefers to be in Ashburn for reasons that help their business.

Our asset's really set up for large, high-density enterprise users that value the kind of Tier 3 characteristics we have and the unique security elements that we can provide.

That's helpful.

Then just sort of on your more traditional tenant base, sounds like you are starting to see a pretty good pickup in demand from the contractor base and some of your intelligence tenants.

Can you maybe just give us some more color on the 300,000 square foot pipelines, sort of how much of that is the private contractors versus your intelligence agencies that you lease to, and if there's been any shift in sentiment among the contractors?

Are they solely waiting until a contract is signed to take space or have they been taking space ahead of contracts that they think are sort of really in the bag for them?

Regarding the composition I would say the contractor element is probably three parts to one part core government customer.

With regard to the viewpoint of the contractors, it's really very specific on contract elements of their business and it varies across park and region.

So it's very much associated with the business activity of the ultimate core customer and what they're [re-leasing.]

The one place we have seen speculative space is on cyber.

A lot of people are opening up cyber operations in close proximity to Fort Meade because of the standup of US Cyber Command there in the fall of 2010.

Beyond that, people are being more deliberate about taking space.

Okay.

Then just one last quick one.

It looks like you reversed some earlier impairments on assets that you sold.

Do you think that's just the function of these assets that were on sort of the first or earlier rounds you got better pricing on?

And do you see that trend sort of abating or are we going to see more and more of these impairments reverse just given the better sales environment?

Well, the big reversal was related to the Candlewood property that we sold.

And that is a property that was converted industrial into office condos.

And so we did realize ultimately a little bit better value than what we assumed at the time we put it into our SRP plan.

And because we had taken an impairment while it was in held for sale, the gain had to be recorded as a recovery of the prior impairment.

I don't think that's going to be necessarily typical of the broader sale.

Right.

So to the extent that we have gains otherwise, they would just run through the gain on sale line in the income statement.

Okay, great.

Thanks, guys.

Michael Knott; Green Street Advisors.

Just curious if the rent roll-down number I think was a blended minus 9 on a cash basis for the quarter, just curious if that was a little worse than you expected or kind of as expected and if it has any sort of signal for the market or how you thought about that.

Michael, a couple of things.

First, we did have one tenant that skewed the numbers a little bit.

We had one renewal that had quite a substantial rollback for particular circumstances on that tenanted building.

Beyond that, the characteristic of the tenants that we renewed or retenanted in the first quarter were largely in locations that were not as strategic as our other locations.

So we would expect as the year goes on and the renewals are retenanting which we expect to be located near our demand drivers that pricing would be much more favorable than the first quarter.

Okay that's helpful.

And then, Roger, let's say if we look forward to when you're done with the SRP, do you feel like the remaining portfolio that you'll generally garner lease terms that are longer than kind of 3 to 4 years, which you've been signing in a lot of the last several quarters, as I recall.

I think so.

We're going to have a little bit of a transition period with some contractors who are going to want to -- some of which will want to go shorter term to have some flexibility while the budget uncertainties get worked through.

But longer term we should get back to a higher average year life on our leases.

Okay.

And then I guess this one would be for Steve Riffee.

Same-store NOI for the year, I think guidance was plus 1% to 2%.

That's unchanged, I take it, given the FFO guidance?

Correct.

Okay.

And then, what kind of expense number is baked in for the year?

It looked like you were kind of minus 5% for 1Q.

So I'm just curious; if given that you were much better than you expected, or a little better than you expected for 1Q because of the expense side, that move -- seems like it would move the year number a little bit, but maybe not enough to change the range.

We're not ready to change the range.

We'll probably update the range after we get a better feel for how we're doing at the midyear point, Michael.

Okay.

But any color on what kind of expense number for the year you had in there compared to the, I think, minus 5% decline for 1Q?

We clearly benefited in the first quarter due to lower heating costs and lower snow removal costs, et cetera, but we've also adjusted our CAM recoveries and all.

So we have more seasonal R&M and those kinds of expenses in the next couple of quarters.

So -- and then we'll see how hot the summer is in terms of utilities.

But we'll give an updated guidance range as we get just a little bit more feel for how the expenses will play out for the year.

Okay.

And then, just on the dispositions, how are you feeling about the buyer pool and their ability to finance these acquisitions?

I presume and I think you said before that most of the buyers for these are smaller buyers reliant on local bank financing potentially?

Well, our sales in the second quarter were, one, to a user; two, to an institution; and, three, to a private equity firm, all of which obviously had great access to capital.

And I would say everybody that we're currently dealing with in the pipeline has access to capital.

That wouldn't be a consideration for our deals not moving forward so far.

Okay.

Thanks a lot.

Rob Stevenson; Macquarie.

Just to follow up on the last question, did I miss it or did you talk about what the cap rate was on the first-quarter sales and what you thought you were going to be able to achieve on the stuff that you have under contract?

Well, there were two parts to the first-quarter sales.

There was $38 million that were assets that really did not have tenancy and so obviously the cap rate was probably a minus number because we were incurring operating expenses.

On the assets that were in service and were 80% occupied we had a 7.9% cap rate.

And we expect -- and looking out what's under contract and other deals that we're working on, we're still comfortable with the 8% range for the balance of the program.

Okay.

And then one other question -- can you talk about how conversations have been going with CSE, which I believe is your fourth largest tenant, given that you're inside two years now on their lease term on renewal?

Well, we have CSE in four different locations and varying groups.

We have them in Huntsville.

We have them around Fort Meade.

We have them in Northern Virginia.

And we have them in DC.

And it's different groups, different programs.

And I think we're in pretty good shape on the majority of the CSE space.

We'll see; we're due to meet with them in the next couple of weeks and get more clarity on their specific locations.

Okay, but nothing as of yet would suggest that they're going to be giving back significant space over time here?

That's correct.

Okay.

Thanks, guys.

Joshua Attie; Citi.

It's David Shamis here with Josh.

For the rest of your planned asset sales for the year, what portion of those are land holdings or other nonoperating assets?

Everything else that's in the queue to sell for the balance of the year is an operating asset.

We are slowly working on some land transactions but it's nothing that we're willing to put an absolute timeframe on at this point.

So everything else should sell, be a cap rate sale, and sell, again, in the 8% range.

Okay.

And I know you talked a little bit about development leasing subsequent to quarter end.

I don't know if you have a specific target in mind for leasing for the end of the year?

Well back one and two quarters ago we talked about 400,000 square feet of development leasing for the year.

We've done 86,000 in the first quarter.

Steve mentioned we did 60,000 square feet so far this quarter.

So that brings us right around to 150,000 square feet, which then suggests another 250,000 square feet for the balance of the year.

Right now we have deals in the works that, if executed, would allow us to get to that number.

Okay.

And I know about a year ago there was a lot of talk about government consolidating their datacenters and how that would benefit you guys.

I don't know what the status is on those consolidations.

Have you seen any impact from that?

I think there's still a lot of discussion and a lot of analysis going on, but I don't think it's anything that's going to happen in the next 6 to 12 months.

It is a project that the government's working on at various different agencies and, depending on who the agency is, the timing will either be quicker or slower.

But I don't think it's anything that we can count on in terms of our business plan for the next 12 months.

Okay, thanks.

And just one more -- for your G&A it was a little bit higher than usual this quarter.

I don't know if there were any one-time items in there and what we should sort of expect going forward?

We had guided before that we would have some executive transition costs and that made it a little bit higher.

I'd expect it in the second quarter, as we complete those costs, to be in the $6.5 million to $7 million range and then I think our run rate for the third and fourth quarter will be around $5.5 million now.

So the timing's a little different than perhaps you (inaudible).

Great.

Thanks a lot, guys.

Rich Anderson; BMO Capital Markets.

Hey, Roger, you mentioned when you were talking about the SRP, if you can do more faster you will, if possible.

How much more is more?

Well, for this year we had projected $206 million in our guidance.

And so year to date we've done the $63 million and, as we mentioned, we have another $71 million under contract.

And then we're working on other deals and to the extent that we could do a big deal to accelerate the plan we would consider doing that.

So I think at max we could be another $50 million to $100 million over the plan for the year.

Okay.

But that's not relative to the $562 million.

The $562 million is identified and you don't think it'll be more than that in terms of the overall plan?

Right.

We have a plan that's $562 million.

I do think that we'll be a continual recycler of capital going forward.

But, right, that plan is supposed to end at the end of 2013.

Okay.

When you talk about contractors being deliberate and all the rest, what about some of those waivers that are out there that have the clock ticking and then they have to move eventually?

I mean, how does that play into your expectations in terms of leasing in the contractor tail?

I think it does.

It's just we can't exactly frame up the exact timing of when it's going to happen.

So there is a proximity requirement to solve for response time in most contracts.

And then beyond that our customers collaborate as part of their business solutions.

So our customers by their nature want to be close to their customers.

So the prime contractors want to be close to the government and the subcontractors want to be close to the prime contractors.

And all that will fall in place; it's just that it's going to take time to happen.

We've experienced this before with BRAC and we've experienced it in other locations where the government gets ramped up.

And it's obviously frustrating for us that it's not going faster.

But we do believe that the combination of the contract requirements and just the co-location that's important for their business model will get us to where we want to get over time.

Thank you for that.

Is the term "revenue at risk" a new one for you guys?

Well, I -- we weren't sure --

I like it.

I like it; don't get me wrong.

Internally it's never been -- it's been something we've always focused on.

We just thought we would communicate that to the public so people could get comfortable with our guidance for the balance of the year.

Yes, I think it's good.

So if you were to get -- is that the main swing factor?

Or, I know there's other factors to get to your guidance for the year, but how substantial is capturing that $9 million of remaining revenue risk relative to other factors in getting to your guidance?

Is that like the biggest one?

It is.

If you take the $9 million and divide by our 76 million shares outstanding that's $0.12 a share.

Steve Budorick mentioned in his comments that we think -- we're working on deals of $6 million, so two thirds of the $9 million are active deals that we think will have a high likelihood of getting done.

The other wild card, which is something you touched on earlier, is accelerated sales and what impact that would have on lost NOI and with the proceeds going to pay down debt if we were to accelerate sales.

Okay, great.

Appreciate it.

Thank you.

(Operator Instructions) Young Ku; Wells Fargo.

Couple just quick questions from me -- in terms of your occupancy level, it's around 87% now, but it was as high as close to 95%.

How high do you think that occupancy can get?

And how long do you think it will take to materialize?

I think for long-term modeling we're thinking in terms of 92%, 93%.

I think when your portfolio gets to a certain size and you have lots of moving parts -- when you're dealing with 1 or 2 buildings or even a portfolio of 20, 30 buildings, the 95% sort of convention for stabilized occupancy I think is a factor, or maybe if you're in a really high barrier market.

But I think the nature of our business is that if we could get to 92%, 93% we would be happy with that.

We would consider that structural occupancy or structural vacancy, depending on how you want to look at it.

And I think in terms of timing that we are looking at '13 and into early '14 to get to that kind of stabilization.

Okay, and thank you for that.

And you sold a couple of vacant assets in the quarter, but just wondering how many other vacant assets in terms of rough dollar amounts or square footage is still in your portfolio today and how much of that is included in your SRP?

Right now we don't have -- well, we have one vacant building that is in the SRP that may lease before we sell it.

But generally speaking, the majority of the assets are in the -- again, all the assets, really, in the SRP except that one building are what we would call cap rate sales.

Got it.

Thank you.

George Auerbach; ISI Group.

Just a quick question on leverage -- the supplemental shows net debt to EBITDA, or adjusted EBITDA, at 6.7x.

I think our numbers may be a little bit higher than that.

But maybe just thinking through longer-term balance sheet, that 6.7x, first, does that assume full lease-up of all the development assets and/or further asset sales?

And, two, where would you want to see that number over the sort of medium to long term?

Well, the way we actually compute it, rather than estimate and project lease-ups and timing is we adjust the debt and exclude the construction in progress and say that it's worth dollar for dollar.

That's how we do it.

I think long term as we lease up the portfolio to the 92%, 93% levels that Roger talked about and development is likely not to be quite as a high a percentage of the overall portfolio as it may have been at its peak, we think that we'll start to get better than the 8 and start to approach what we're saying the adjusted debt to EBITDA is.

We, again, use our debt-to-gross-assets as our key metric.

We reported it at 49.2.

I think we said our longer-term vision, knowing that our best source of capital today are the SRP assets are to take that ratio down to the low to mid 40s.

Okay.

Sorry if I missed it, but could you talk a bit about capital costs for lease transactions?

We were just down in DC and it sounded like in the metro DC market leasing costs had really moved to the upside over the past 6 months.

Maybe you could talk about what you're seeing, both in the sort of more commodity market as well as your defense market?

George, I think it's sub market to sub market and obviously the higher your percentage of renewals to retenanting the better -- or the lower your CapEx costs are.

We experienced for the last two years now about $11 per square foot for renewals and retenanting.

This quarter we were a little over $10 going.

And I think that's sort of a number that we're focused on for the balance of the year.

I don't think we've seen where CapEx pushing by tenants or brokers is that extreme in most of the markets that we're in.

I think we'll see a little bit of that in Northern Virginia, depending on how much leasing we do there this year.

But up in the B-W corridor where things are a little more in balance we're not seeing that push.

Okay.

Thank you.

With no further questions in queue I will now turn the call back to Mr.

Waesche for closing remarks.

Thank you all again for joining us today.

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

Thank you.

Thank you for your participation today in the Corporate Office Properties Trust first-quarter 2012 earnings conference call.

This concludes the presentation.

You may now disconnect.

Have a great day.