COPT Defense Properties (CDP) 2013 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust first quarter 2013 earnings conference call.

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

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

Ms. Krewson, please go ahead.

Thank you, Dominique.

Good afternoon and welcome to COPT's conference call to discuss the Company's first quarter 2013 results.

With me today are Roger Waesche, COPT's President and CEO; Steve Riffee, our Executive Vice President and CFO; Steve Budorick, our Executive Vice President 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 will now turn the call over to Roger.

Thank you, Stephanie, and good afternoon, everyone.

We had a solid first quarter and are on track to achieve our three primary objectives for 2013.

As a reminder, these objectives are, first, to improve our portfolio's occupancy.

In terms of demand for space, our first quarter leasing was solid.

We see the multi-year freeze on tenant decision-making beginning to thaw and some contractors are, once again, ready to make longer-term commitments.

Second, to finish the strategic reallocation plan; and third, to further improve our balance sheet flexibility.

As we announced on April 16, the Company received investment grade ratings from all three of the major credit ratings agencies.

This is an achievement we have been working toward for a couple of years and we view it as a very important step in the evolution of our Company.

The ultimate goal for 2013 is to position the Company for high-quality earnings growth.

Let me take a few minutes to update you on our understanding of the federal budget negotiations and the implications for the DOD budget.

Three different budget proposals are currently being debated in Washington.

The good news is that none of them contemplates cutting the fiscal '14 defense budget by the full sequestration amount of $55 billion.

We believe this evidences agreement across party lines on the importance of funding our national security efforts at appropriate levels.

The Senate's budget proposal calls for an annual $24 billion decrease to the DOD's 2014 base budget.

This would represent a 4.6% reduction from the fiscal 2013 spending authorization of $527 billion.

The House proposed a budget that would ignore the sequester and increase military spending modestly in fiscal '14.

Third and finally, the President's budget proposal calls for a DOD base budget in fiscal '14 that is virtually unchanged from fiscal '13 spending levels.

More good news is that our portfolio is well-aligned with the DOD spending priorities.

For example, cyber-security is a program that is supported by many of the knowledge-based defense installations served by our portfolio.

The DOD has designated cyber-security as a key investment area and according to the President's budget proposal, would receive a 20% increase in funding to $4.7 billion in fiscal '14.

Long term, the prioritization of cyber-related programs should translate into stronger demand for space at many of our locations.

Even though the White House and Congressional budget proposals each minimize the impact of sequestration and implicitly agree in the importance of funding national security, much negotiation needs to take place.

However, we are encouraged that none of the proposed budgets contemplate the 10% cuts of defense spending outlined by sequestration and we are even more encouraged of the priority being given to cyber-related programs.

On that note, I'll turn things over to Steve Riffee to discuss our first quarter results and our investment grade ratings.

Thanks, Roger, and good afternoon, everyone.

For the quarter ended March 31, 2013, diluted FFO per share, as adjusted for comparability, was $0.48.

First quarter 2013 FFO per share, as defined by NAREIT, was $0.45.

Our FFO, as defined by NAREIT, includes $0.06 of losses on debt extinguishment and $0.03 of gains on land sale that we exclude for comparability.

Our first quarter diluted FFO per share, as adjusted for comparability, exceeded the midpoint of our guidance range by $0.03.

We attribute this out-performance primarily to lower than expected operating expenses resulting from a mild winter.

At March 31, our same office portfolio represented 86% of total consolidated square feet.

First quarter 2013, same office cash NOI, excluding lease termination fees, increased by 3.5% over the first quarter of 2012, which was ahead of our expectations.

Including lease termination fees, same office cash NOI increased 4.5%.

Within the same office pool, strategic buildings, namely those that are adjacent to government demand drivers as well as those primarily leased to government and defense IT tenants, represented 77% of the total same office cash NOI.

During the first quarter of 2013, these strategic buildings were 94.1% occupied on average and ended the quarter at 94.5% leased.

For the strategic properties, same office cash NOI, including lease termination fees, increased 9.1% in the first quarter and excluding lease termination fees, increased 7%.

Turning to the balance sheet.

We've had a busy year so far.

We issued $118 million of common equity in March and this past Monday, redeemed our Series J Preferred stock with a portion of the proceeds.

We also bought back approximately $54 million of our senior exchangeable notes, which accounted for the $0.06 loss on the early extinguishment of debt this quarter.

All this activity further improved our balance sheet.

As of March 31, the Company's debt-to-adjusted EBITDA ratio was 6.9 times, which is significantly better than the 8.7 times ratio in the first quarter of 2012.

Our debt-to-adjusted book value also improved to 45.8% in the first quarter of this year versus 55.3% a year ago.

Our big news, however, is that earlier this month, we received a triple-B-minus rating from Fitch, a Baa3 rating from Moody's, and a triple-B-minus rating from Standard & Poor's.

Each firm also issued a stable outlook on our Company.

Obtaining an investment grade rating was an extremely important objective and one we've been working on for over two years.

Strategic initiatives like the SRP, deploying proceeds to reduce debt and refinancing secured debt with unsecured debt, enabled us to achieve this objective.

We still have longer-term goals to extend our debt maturities and they continue to lower our leverage, some of which can be achieved organically through asset sales and leasing of our portfolio.

Obtaining an investment grade rating is a very important step in transforming our balance sheet to an institutional level that's commensurate for the quality of our assets, tenants and franchise.

Before discussing guidance, I'd like to clarify one topic on which we've received several calls this past month.

In March, a $146.5 million CMBS loan, secured by 9 buildings at Airport Square, and 5 buildings in Colorado Springs was transferred to the special servicer.

The loan was transferred, not the properties.

The properties securing the loan are generating sufficient cash flow to fund debt service, but are likely worth less than the debt balance.

Accordingly, we requested the transfer of the loan from the master servicer to the special servicer in order to begin discussions about restructuring it.

We will update you on any restructuring once the process is complete.

Now turning to guidance.

In this morning's press release, we affirmed our previously issued guidance for 2013 diluted FFO per share, as adjusted for comparability, of between $1.83 and $1.93.

We are establishing second-quarter 2013 diluted FFO per share guidance, as adjusted for comparability, in a range of $0.46 to $0.48.

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

Thanks, Steve, and good afternoon, everyone.

Market conditions in the greater Washington DC and Baltimore region have not changed meaningfully in the last 90 days.

The leasing environment remains challenging due to market vacancies that remain in the mid-teens to sluggish economy and the lack of federal budget resolution that impedes overall demand.

Despite these macro conditions, our leasing in the first quarter was solid.

During the quarter, we leased over 750,000 square feet.

Our revenue at risk to achieve the midpoint of our 2013 guidance is now $11.6 million, down from $19.5 million at the beginning of the year.

We have transactions in progress for $7.7 million, leaving just under $4 million in unidentified revenue at risk.

We achieved the total level of renewals contemplated in our first quarter budget and we are squarely on plan in our renewal leasing.

Our 57% retention rate in the first quarter is below our historical average of 65% to 70% and can be attributed to one large lease in Colorado Springs.

During the quarter, we transferred a lease from a prime tenant to that tenant's subcontractor who is already conducting business in the premises.

So while this was a renewal in spirit, it technically had to be accounted for as a new lease.

Treating this lease as a renewal, our retention rate would have been 65%.

We are still projecting the 65% retention rate for the full year.

In the first quarter, GAAP rents and renewals increased by 3.5% and cash rents declined by 5.3%, both consistent with expectations.

In several sub-markets, we have cash rents rolling up and in others, we're still experiencing cash rent roll-downs.

During the quarter, 42% of the renewed square footage had positive cash roll-up.

Four large leases, representing 53% of the renewed area, drove our total cash rent roll-down during the quarter as the expiring leases were long term, had annual escalations, and rolled into softer market conditions.

Leasing costs on renewing leases were $8.70 per square foot in the quarter, or only $1.78 per square foot per year.

This is slightly favorable to our expectations and 7% favorable to the 2012 renewal activity for the full year.

Importantly, the average term on renewing leases approximated five years which is the highest result in the past 10 quarters.

89% of our renewal square footage was with strategic tenants who appear to be more willing to make long-term commitments even in the current sequestration environment.

The recent increase in tenant confidence translated into solid new leasing volume in the first quarter.

Our development leasing goal for the year is 400,000 square feet.

We produced over 100,000 square feet of development leasing in the first quarter, putting us right on pace to achieve our annual goal.

We signed three leases for 68% of the activity in active developments listed on page 22 of the supplement, including 65,000 square feet at The National Business Park and 6,000 square feet at Redstone Gateway.

We also see demand forming in each of the four active developments listed on that page that are not yet fully leased.

Based on activity in progress, we are optimistic we will exceed our 400,000 square foot development leasing goal for the year.

In terms of other new leasing, we executed 29 new leases in the quarter, totaling 195,000 square feet of occupancy.

These new leases had a weighted average term of 6.3 years, including 58,000 square feet of first generation leases for space that was vacant upon acquisition and 137,000 square feet of re-tenanting leases.

Of note, 13 of the other new leases, representing 72,000 square feet, were secured for what we call stubborn vacancies, or suites that have been vacant for more than 18 months.

The weighted average downtime in these suites was 31 months, so we really are getting after our most challenging spaces.

The leasing costs associated with the stubborn vacancies average $5.08 per square foot per year, which is slightly higher than typical re-tenanting costs but this is to be expected, as these vacancies represent our most challenging inventory.

We achieved a weighted average lease term of 7.6 years in the stubborn vacancies so we have locked in above average lease terms as well.

These stubborn vacancy leases demonstrate that we are making good progress in our effort to drive our portfolio occupancy back to pre-recession levels.

Turning to COPT DC-6, our wholesale data center in Manassas, Virginia.

The data market tightened measurably in the fourth quarter of 2012 and we estimate the Northern Virginia market has approximately 11 megawatts of wholesale capacity in Tier 3 properties competitive to DC-6.

We are currently tracking sufficient demand to fill DC-6 remaining capacity and the users behind that demand continue to be methodical in their decision-making.

We expect the market supply will continue to tighten in the coming quarters.

The co-location program we initiated last year is progressing very well.

We continue to track potential demand from the defense and government contractor segment, both of whom view our high-density capability as a competitive advantage.

During the quarter, we signed leases with two commercial users with combined initial deployments of 300-kilowatts, scalable to 600-kilowatts at the tenant's option.

These new initial deployments are configured at high densities, exceeding 200 watts per square foot.

And we're working with additional prospects to provide deployment scale above 250 watts per square foot.

We continue to be optimistic regarding both the wholesale and co-location leasing opportunities as we progress in 2013.

With that, I'll turn the call over to Wayne.

Thanks, Steve.

I'll make just a few brief remarks today about the development and construction portfolio.

In the first quarter, we acquired 14 acres of additional land contiguous to the north section of The National Business Park.

This land will allow us to expand the future development of The Park by approximately 300,000 square feet, and respond to future demand from both our contractor and government customers.

There were two changes to the construction pipeline I'd like to highlight.

First, during the quarter, we transferred 7205 Riverwood to our operating portfolio.

Until the lease commencement, this 90,000 square foot property is listed on page 13 of our supplement as an unstabilized property, despite the fact that it is 100% leased to a strategic customer.

The second development building in this campus, 7175 Riverwood, is listed on our construction pipeline as the shell was recently completed.

This building is also fully leased to the same strategic tenant and both buildings' leases are scheduled to commence in the third quarter.

The second change in the construction pipeline is that 1000 Redstone Gateway was moved to our operating portfolio during the first quarter.

Last week, Boeing Corporation held a ribbon-cutting ceremony at the first of their three buildings.

The construction of their interior improvements was completed ahead of schedule and Boeing has now fully occupied the property.

The event was attended by a variety of federal, state and local officials as well as ranking officers of the Redstone Arsenal commands.

We are on schedule to deliver the two remaining buildings for the Boeing campus in December of 2013 and January of 2014, and with that, I'll turn the call back to Roger.

Thanks, Wayne.

In conclusion, we don't want to come off as being cavalier about future budget cuts and the potential impact on demand in our markets.

Any cuts to DOD spending will reverberate throughout the defense contractor community and result in a little more belt tightening.

I say a little more because the defense community has been tightening its belt for several years now and many firms have already rationalized their space requirements.

Therefore, we believe we are at the back end of the space contraction associated with the DOD budget cuts.

In the meantime, we'll continue to focus on what we can control.

We will finish the strategic initiatives we started back in 2011.

We will continue to lease up our portfolio, and we will further strengthen our balance sheet.

By doing these things, we will be in an even stronger position to take advantage of growth opportunities.

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

Thank you, Mr. Waesche.

(Operator Instructions)

Craig Mailman of KeyBanc Capital Markets.

Jordan Sadler is on the line with me as well.

Roger, maybe just to hit on your earlier comments about the multi-year freeze thawing here, is that -- are you seeing that more on stuff that you have done already or is that more on prospective activity?

And could you talk about is that more in the development pipeline versus the legacy portfolio and how big of requirements these guys are willing to take at this point?

Craig, this is Steve Budorick answering.

It's really broad-based; it represents, yes, some of the leasing that is in this quarter and some of the things that we're working on and not yet completed, and yes, it's representative of the development pipeline but also in our existing inventory.

So it's program specific, it's not all contractors, but there's definite improvement and increased confidence in segments.

Are the contractors still really waiting to make sure the contracts are signed before they take space or are they getting to the point where they're taking some anticipatory space?

They continue to be measured and careful.

The only caveat to that would be when it comes to cyber, there are a lot of contractors willing to set up cyber operations anticipating a significant ramp up in that area.

Okay, any -- I know it's early and it's been briefly discussed but are the contractors at all talking about potential BRAC in '15 or '17?

And have you guys actually looked into that to see if that would affect any of your locations?

Well, at this point, I think the defense community is still trying to digest what still isn't fully finalized in terms of where the base defense budget will ultimately stabilize and then grow from and so I think they are focused on that at this point.

I think future BRACs are -- although one was disclosed in the President's budget proposal, I do -- for 2015, I do think at this point, it's speculative as to how big it will be and whether it will be about consolidations or closings, et cetera.

But I would reiterate that every one of our knowledge-based defense installations has been invested in -- either in the 2005 BRAC, or the 1995 BRAC, so we do not -- we have not tied ourself to any installations that have not received significant monies in the last 15 years or so.

That's helpful and then one last one.

The 190,000-some-odd square foot of new leasing, is -- so just to be clear, about 80,000 of that was really renewals in Colorado Springs, so you guys were closer to 100,000 square feet?

No.

It wasn't 80,000, it was 60,000.

Apologies.

Great, thank you.

John Guinee of Stifel.

Wonderful job.

A clarification, Roger.

Did you say that the total cybersecurity budget is $4.7 billion, or was increased by $4.7 billion?

The cybersecurity budget embedded in the DOD budget currently is $3.9 billion, and is proposed to go up 20% to $4.7 billion.

Now, the budget overall has about $13 billion dedicated to cyber-related activities.

So in layman's terms, the cybersecurity budget is well less than 5% of the total defense budget for this country?

That's correct.

That's astounding.

Okay, second, land gains, what did you sell and why did you sell it?

John, it's Wayne.

The gain that we took was tied to a parcel in White Marsh and it was specifically a condemnation action that we've been working on for several years, so it was a smaller parcel, less than five acres.

Congratulations, great.

Okay and then third, I'm not sure who this is for, but the stubborn leases, how many square feet was that and then do you deduct that cost of long-term vacancy lease-up to get from FFO to AFFO?

Yes, John.

(multiple speakers) Well, let me answer the back part and then he can talk about stubborn vacancies.

In terms of the CapEx spend, we do deduct it at -- between the FFO and the AFFO line.

It was just over 70,000 square feet in this quarter, John.

Brendan Maiorana of Wells Fargo.

So the same-store number was better than guidance in the quarter, it looked like operating expenses went down.

Your underlying core FFO number was much better in the quarter as well.

Is that just a lower OpEx number in Q1 that might get made up as higher OpEx, lower margins, as we go throughout the rest of the year or was there something else going on in Q1?

Brendan, this is Steve Riffee.

The first quarter was lower operating expenses specifically related to lower snow removal costs and lower utility costs due to the mild winter.

We have not changed our expectations for the second, third or fourth quarter with regard to NOI, so they -- the rest of the year, we're hoping will be as originally forecasted, so the outperformance should carry through to the whole year.

Okay, so if I understand your comments correctly, it's early in the year.

You didn't change the guidance range but you were $0.03 ahead of the midpoint, all else equal, you still expect $0.03 up but it's -- you've got a $0.10 range so you just didn't change it?

That's right.

We've not tightened the total guidance yet because there's still potential variability there for timing of capital activities, asset sales, leasing.

We thought it would be best to go one more quarter and then we'll tighten our guidance for the whole year.

Sure and then if -- maybe this is more Steve Budorick, but the occupancy dropped 20 basis points and the net absorption was actually plus 10 basis points.

That seemed better than what my expectations were anyway, given that you had a large portion of the Ciena move-out, which happened in the first quarter.

It seemed like you were trending a little bit ahead.

Do you think that the 100 basis points gain in occupancy for 2013, that you can exceed that number at this point in the year as you look out?

Well, I really don't want to make forward-looking statements about exceeding the occupancy.

We did have a good quarter.

We've got a very motivated team and we're having good success.

I'll just leave it at that.

Brendan, there were three parts to the occupancy drop down in terms of a percentage in the quarter, the first was Ciena, as you mentioned.

The second was the one that Wayne mentioned where we put in place 7205 Riverwood, leased but not yet occupied; and the third is up in Philadelphia, we placed in service our Hillcrest 1 building, 114,000 square feet that was 51% leased.

So we did absorb those three things in the quarter and still were able to basically maintain occupancy.

Were you guys ahead of your internal budgets on Q1 as you look at where your occupied portfolio was?

Nominally, yes.

Nominally.

Okay, and then last one, the land at NBP, can you guys share what the pricing was on that 14 acres?

Well, I think we paid like [$2.-some] million for 14 acres of land.

It was another use that will be converted to commercial.

Okay, and it was, and you said it was 300,000 square feet?

300,000 square feet of density that we've got planned on the 14 acres, that's right.

And that's that back parcel where there's no infrastructure in place as of now, right?

It's contiguous to a parcel that we have not begun development on and it will be accessed through that using that same infrastructure.

Rich Anderson of BMO Capital Markets.

So getting back to this -- sorry about that -- getting back to this thawing of the market for you; you broke records last year.

I think it was 1.2 million square feet; you take out Power Loft or DC-6, it was 900,000 square feet, if I remember that correctly.

Do you think you can break another record?

You're referring to development leasing where last year we had --

Development leasing, excuse me, yes.

A record 1.2 million square feet if you separate out the two build-to-suits, we did approximately 900,000 square feet of which 675,000 square feet was tied to our niche.

I think that's going to be a tall bar to reach this year.

As Steve said, we have about 400,000 square feet in our forecast for the year.

We do think that maybe the stars are aligning that we will exceed the 400,000 square feet, but I don't think we can put a 1.2 million square foot number out there at this point.

Okay, and regarding the revenue at risk, the $19.4 -- or the $11.6 million and then you have some stuff under -- in progress.

What's in that?

Is that just stuff that you have identified that you need to get done to get to your guidance that could be both renewal and new leasing or is that just stuff that you know is coming to you this year?

It's tracking in the -- lease by lease, the progress we're making against the overall goal and the revenue at risk speaks to what we have not signed contractually.

Okay, so how much of that is -- represents a positive uptick to occupancy?

In other words, new leasing?

Well, the overall program contemplates a 1% gain for the year, and so that tracks against that target.

Okay, so of the $19.5 million to start the year, where it was three months ago, how much of that is considered new leasing and how much of that is renewal leasing?

I don't have the detail to break that out for you.

Okay, happened to be watching CNBC this morning, and I don't listen to all the defense contractors' earnings calls, but they pointed out that the Boeings, Lockheeds, Raytheons of the world are producing good numbers this quarter.

Are you seeing that in your tenancy?

Are you hearing -- you mentioned getting back to this thawing issue.

Are their numbers getting better and a lot of talks so far or are they still in a holding ground but are you -- the basic business, do you hear from them that it's getting better?

Consistent with what they reported on today?

I still think there is a lot of uncertainty and you got to remember, the big contractors have many different divisions which have many different product types.

And so I don't think you can necessarily take the big three or five defense contractors and take that across the board to what our business segment.

But our business segments -- Intelligence, Surveillance & Reconnaissance, Cyber, seems to have some strength.

And that's what we're seeing from the people on the ground.

Okay.

And then lastly to Steve Riffee, would you say that you were surprised by the simultaneous nature by which you got your ratings or was that part of the big plan here?

That was part of the plan.

We've been working on it for quite some time and we went to all the rating agencies at the right time when we felt we had executed the steps that we had planned to execute.

So that was the culmination of something we've been working on and there were many steps to execute over the time.

Could you quantify what you think you're saving in terms -- if you just look at, I don't know, a 10-year unsecured -- how much you save if you were to do something below investment grade?

It depends on when you issue and what kind of debt you issue, but I would say at least 50 basis points on long-term unsecured but you have access to the stronger, deeper markets.

Josh Attie of Citi.

Just going back to Brendan's question about the guidance, it seems like you beat the first quarter and that you really haven't changed your outlook for the rest of the year, but you didn't change the guidance.

And when you think about some of the -- you mentioned some items of variability that could impact the results, maybe you can quantify what some of those are.

For asset sales, I thought that it was pretty clear that Colorado Springs would probably be sold around mid-year.

So explain to us, what are some of the question marks that could put you at the higher or lower end of the guidance, from a transaction perspective?

Well, we've just -- we've said before that Colorado Springs, we've assumed the third quarter sale.

So -- and I think we've said it's about a $0.01 a month in terms of timing, in terms of if it moves up or if it moves back.

We've had an assumption out there that we would do $250 million of long-term debt to extend our debt maturities and we haven't decided on the exact timing so we're allowing ourselves to figure that out and update that the next time we give guidance.

And there's always the possibility this early in the year that some of the leasing assumptions, start dates, timings could change a little bit, so we feel good about the first quarter.

We're saying that the margin was a first-quarter event only but we feel strong about -- still about our forecast for the rest of the year.

And we just thought it was more appropriate to wait until we get a few months further along before we tighten the whole-year guidance.

Could you remind us where you stand on the ATM that you put in place last November, how much of it has been used and how much is left?

We put $150 million in place that's available to us.

We have not used any of it at all at this point; it's been put in place as a way to make sure that we are able to manage our leverage.

It's a tool that's available to us and how much or when we use it depends on the timing of lots of things, like the extent of asset sales, the timing of that or if we had additional development or growth opportunities.

And just with respect to the guidance, the wholesale data center asset, the guidance doesn't assume any lease-up or earnings contribution from that asset because it's breakeven today; is that correct?

That's right.

And just finally, a number of companies over the last week have noted stronger investor demand for office assets and a lot of them are increasing their -- or could potentially increase what they sell this year.

Are you guys seeing that in your markets?

And do you see the potential to increase or accelerate dispositions beyond Colorado Springs this year?

I agree.

I do think that there's plenty of capital there, both on the debt side and the equity side, that now is willing to invest in suburban office because of the relative going-in yields and the price per square foot.

So our focus right now is on Colorado Springs.

We do have a few other assets that may sell this year but it's nothing that we have in our forecast.

Have you actually put things out to test the market at all?

A few things, yes.

A few buildings.

Tayo Okusanya of Jefferies.

Just a couple of questions.

I think you may have taken out the Power Loft or data center statistics you used to put in the supplemental.

Just curious about leasing of that asset I've seen on the market at this point.

Sure, Tayo.

We took out the DC-6 page specifically because we're treating that asset as part of our operating portfolio now, so the same information is presented and dispersed throughout the supplemental, consistent with how we present the office portfolio information.

So for example, the megawatts that are leased are on page 4 of the supplemental.

And similarly, the lease expiration schedule is now integrated into the leasing expiration schedule; it follows the office statistics that we provide, I believe, on page 18.

Perfect.

That's very helpful, thank you.

And then secondly, in regards to Colorado Springs, and the move-out that occurred, does that tend to impact your ability to sell the asset?

Is it something that was expected?

There was no move out.

I thought there was one.

It was a renewal.

It was a renewal.

But the name on the lease changed; a prime tenant had signed a lease and had their contractor working in the space for years.

When it matured, the subcontractor leased it directly.

The occupancy is still there, and that building is not part of the sale portfolio.

Okay, that's helpful.

And then just to confirm, the assets that moved over to special servicing, you're trying to restructure the loans but you do intend to hold on to the assets?

That's the plan right now, yes.

All right.

Anything in regards, any update from the special services about the ability to work with you to restructure the loan?

We're just starting the discussions on restructuring and the outcome isn't known yet.

And we said we would give an update after the process is over.

Michael Knott of Green Street Advisors.

Can you give an update on what you might be seeing on the acquisition side?

Any opportunities that seem appealing?

I think all of a sudden, we are starting to see more investment opportunities in the market, and so we're pursuing some of those.

We clearly would like them to be value-add.

We'd like them to enhance the franchise and obviously, they need to make sense from an economic standpoint.

I think the pricing is still pretty aggressive though, because of the capital markets environment.

So I'm not optimistic that you'll see COPT making a lot of acquisitions this year.

Okay, and then in terms of -- there would be no new market expansion there, right?

You're not really contemplating new markets beyond what you've already -- what's currently laid out?

That's correct.

In hindsight, or with 20/20 hindsight, why do you think Colorado Springs hasn't played out the way you hoped when you first entered that market?

Well, I think a couple of things.

First, Colorado Springs will always be integral to the nation's defense so there's a lot of significant infrastructure there and where it's located in the hemisphere is important for the country.

I just think that we want to focus the Company along high-tech defense.

And we see Colorado Springs as being more of a stable demand in terms of what's going on at Peterson and what's going on otherwise in the market.

And I think secondly, as you recall, we took, in addition, because we tried to create a critical mass in Colorado Springs, we ended up taking exposure to generic suburban office and so that made our issue worse in Colorado Springs.

Okay, thanks.

And then I think last question for me is on this NBP land acquisition.

Can you talk a little bit more about the economics of that or maybe the entitlement status, et cetera?

Because if I do the math right there, I think that's about $7 per buildable foot and I know that you've said before that you think the land values there are much higher than that.

Can you just help me understand why that's $7 a foot?

Well, the -- first of all, Michael, we're still in the formative stages of the planning, but as to the pricing, we really were able to acquire a distressed property that's adjacent to our existing NBP North plan.

And we were able to combine that at a relative --- at a very effective price from an infrastructure and planning standpoint, both.

And then the second parcel was we were the very logical buyer there and we were able to also garner an attractive acquisition price.

I think it's important to note that because of the adjacent land, we were able to create more FAR.

If an individual buyer had bought that land without our adjacent land, they wouldn't have been able to create 300,000 square feet of FAR.

And why is that, Roger?

Well, again, when we're able, Michael, to combine what we have planned on the ground that we own, and take advantage of access and the other density issues around planning, it allows us to increase then -- increase the overall coverage as opposed to a freestanding 14 acre parcel that has to deal with a separate set of constraints on setbacks and access points and storm water management and some of those issues that drive your densities down.

So it's an example of the OFC franchise at work?

That's right.

Steve Sakwa of ISI Group.

It's actually George here.

Just two quick questions.

First on the DC-6.

I saw the NOI fell off pretty considerably in the first quarter from the run rate from the back part of last year.

I assume that's just a timing issue and we should get back to a $500,000 plus or minus NOI per quarter?

That's correct.

And then second, any general comments, Steve, about the lease terms for defense contractors?

I know last year, the emphasis was on maximizing flexibility and staying short.

Any change in that preference?

Well, there's still flexibility in most contractor requests but interestingly, we just signed in this quarter's leasing a nice lease with a contractor for a firm term 10 years, so I see them loosening up depending on the requirement and the company.

Certain companies have -- are clinging to more flexibility but look at our lease term.

It's the highest it's been for 10 quarters and that's 85% contractors in our renewal leasing.

Were there more BRACs being written into the leases?

Well, there's usually a right to downsize or terminate -- termination opportunity somewhere in the longer term.

(Operator Instructions)

John Guinee of Stifel.

Just a follow-up question.

When you transfer this loan to CMBS, does it change your accounting and reporting in any way, shape, or form?

No.

This concludes today's question-and-answer session.

I will now turn the call back 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 office and available to speak with you later.

Thank you very much for your participation.

Thank you for your participation today in the Corporate Office Properties Trust first quarter 2013 earnings conference call.

This concludes the presentation.

You may now disconnect.

Good day.