COPT Defense Properties (CDP) 2013 Q3 法說會逐字稿

Welcome to the Corporate Office Properties Trust third-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 third-quarter 2013 results.

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

As management discusses GAAP and non-GAAP measures you will find a reconciliation of such financial measures in a 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.

I'll quickly highlight three of the improvements we've made to our supplemental disclosure.

First, to be consistent with our practice of excluding assets targeted for disposition from same-office, the same-office pool in the third-quarter supplement excludes 16 properties that secure two CMBS loans we expect to extinguish; second, we streamlined and greatly improved our debt disclosure to be consistent with how other investment grade bond issuers in a REIT industry report; third, we have introduced the term core on a temporary basis to describe operating properties we intend to hold long term versus those slated for disposition.

The term core appears on page 12 of the supplement where we disclose NOI and occupancy by property grouping, and on pages 19 and 20, our lease expiration analysis.

The purpose of creating this temporary subcategory is to give investors a better line of sight in the performance and expected lease rollover within the majority of our portfolio that we view as strategic, whether that is determined by the type of tenant occupying the building or by submarket.

As we complete planned dispositions, we will no longer use the word core because all of our operating portfolio will either be part of our strategic tenant niche or office properties leased to traditional commercial tenants in strategic submarkets within the greater Washington, DC region.

Before turning the call over to management, let me remind 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.

The crux of today's call is, one, our same-office portfolio is well leased and stable; two, we are creating significant value with our development pipeline; and, three, we will continue to fund new construction through property dispositions.

We expect occupancy for our current, same-office pool to grow slightly in 2014.

Between now and the end of 2014, the non-renewals we expect are modestly higher than normal turnover in our portfolio.

Yet, our visibility into our strong leasing pipeline leads us to expect continued stable performance in our same-office and core portfolios.

Our development pipeline consists of 1.3 million square feet that are 88% leased.

In the short, medium and long term, we expect our development pipeline to add incremental value in three ways.

First, we have $18 million of annualized cash NOI from nine fully leased development projects that are not yet cash flowing.

About half of this $18 million will positively affect NOI in 2014.

Second, we have five recently completed buildings that have roughly 400,000 square feet of unleased space.

When stabilized, these buildings should provide an incremental $9 million of annualized NOI from today's levels.

Third, we will continue to capitalize on our reputation and unique land positions to capture the growing demand for new space that we see in several of our markets.

Our current shadow pipeline of development demand is approximately 750,000 square feet.

Assuming we win and successfully execute all of these opportunities, we would create about $16 million of annual cash NOI.

We will fund our development pipeline through property dispositions as follows.

The buyer of our 15 operating properties in Colorado Springs is in final diligence.

The sales should close before year end and generate approximately $130 million of net proceeds.

We will also free up debt capacity and improve our NAV when we convey properties securing two CMBS loans to the lenders, and extinguish the related debt.

These loans total approximately $300 million and are secured by 16 properties that we estimate have a combined fair value of roughly $200 million.

The $300 million of delevering translates into a $100 million increase in net asset value, or more than $1.00 per share.

Additionally, our portfolio occupancy will improve by over 100 basis points and based on 2014 forecasted cash NOI, our exit cap rate equivalent on these dispositions is below 5%.

Lastly, for 2.5 years we have been intensely focused on disposing of non-strategic properties as part of our strategic reallocation plan.

I'm pleased to say that when we sell the 15 building portfolio in Colorado Springs, we will have effectively completed the SRP.

And when we convey the property securing the first CMBS loan, we will have exited the Colorado Springs market.

With, that let me turn the call over to Steve Budorick to update you on our leasing and development activity

Thanks, Roger.

The demand for existing space in our markets is robust.

And we expect it to absorb the turnover from select tenants who are completing their space rationalization.

In fact, we expect our same-office portfolio occupancy to be nominally positive between now and the end of 2014.

We forecast the renewal rate of approximately 60% over the next five quarters, which is only moderately below the Company's historical renewal rate of between 65% and 70%.

Our same-office portfolio is 90.3% occupied.

If you look at page 19 of the supplement, you'll see we have 2.5 million square feet of space scheduled to expire in our core portfolio between now and the end of 2014.

All of this expiring square footage is within our same-office portfolio.

We expect same-office occupancy to decline by less than 50 basis points by the end of this year, reflecting known tenant move outs, then recover back to the current level of 90.3% by midyear, and end 2014 between 25 and 50 basis points higher, or about 90.6%.

Contractual rent increases will more than offset the impact of the same-office NOI from the small, short-term dip in occupancy.

Let me provide some color about the demand for existing space that supports our same-office forecast.

We are encouraged to see three sources of demand in our markets.

First, the ongoing demand for new, efficient, specialized office space to house contractors supporting the standup of US Cyber Command.

Second, continued spending on other priority commands within the US government.

And, third, successful commercial businesses in the region, including healthcare, financial, and professional business services, that require new office or specialized facilities to position their companies to take advantage of an improving economy.

As shown on page 17 in the supplement, we leased 900,000 square feet during the third quarter, achieved a 72% renewal rate, and delivered economics that were in line with our expectations.

Third-quarter statistics also included leasing 70,000 square feet of stubborn vacancy.

Year to date our successful inventory management efforts have resulted in resolving 266,000 square feet of stubborn vacancy, with solid credit tenants and an average lease length of over six years.

So, generally speaking, we are optimistic about our rate of production in generating new and expansion leases within our operating portfolio, and across most of our submarkets.

We define the leasing pipeline for our operating portfolio as lease negotiations where we have a 50% or greater probability of success.

During the past month, we increased our operating portfolio leasing pipeline from 585,000 square feet to approximately 725,000 square feet.

In several locations we have multiple tenants seeking the same leasing opportunity, which is a dramatic improvement from conditions 12 months ago.

Before discussing the strong demand for new development space we continue to see in our markets, let me touch on leasing in Maryland and Northern Virginia.

In our Maryland regional submarkets, which account for nearly 60% of our business, leasing velocity is at much higher levels than 12 month ago.

And we are experiencing encouraging velocity in our commercial portfolios serving Columbia Gateway and White Marsh, and in our defense niche, serving Fort Meade and Pax River.

Northern Virginia accounts for roughly 20% of our portfolio.

Even as the market continues to feel the effects of reduced government spending and tenant consolidation, we are generating new and expansion leasing throughout de novo portfolio.

During the next two to three quarters we expect to increase our occupancy in that region, as leases we are negotiating commence.

Specifically our core stabilized Northern Virginia portfolio of 2.3 million square feet is 93% occupied today.

We project that our core stabilized portfolio occupancy in Northern Virginia will remain above 90% throughout 2014, even after absorbing 143,000 square foot move out by Aerospace Corporation in November of next year.

Turning to our development pipeline, we continue to see strong demand for new construction in many of our submarkets.

Since the 2011 Budget Control Act was passed in August of that year, we have leased 2.3 million square feet of new development space.

I refer back to the day that the Budget Control Act was passed, because it's important to remember that new development leasing opportunities have been and will continue to be identified and secured.

Priority defense-related missions like Cyber continue to receive funding and grow.

The government agencies and contractors executing such missions need new, efficient, command-proximate space.

Here's some details supporting the 2.3 million square feet of development leasing.

In 2012, we leased 1.2 million square feet of development space.

And, by the way, that's the highest annual development leasing volume in the Company's history.

In 2013, we have completed 700,000 square feet of development leasing, and could execute another 200,000 square feet before year end.

Further demonstrating the government's commitment to Cyber, since August, 2011, we have signed five full building leases and two partial building leases totaling approximately 650,000 square feet with customers supporting US Cyber Command.

If you include Cyber-related leasing in our operating portfolio, then this number doubles to 1.3 million square feet.

Looking at prospects for future development, in addition to the nine under-construction buildings on page 24 of the supplement, which are 88% leased, we are optimistic about our chances to secure leases in the next year with multiple tenants in five separate locations throughout our portfolio.

If we secure all this demand, these five new buildings will total 750,000 square feet, and would be 92% leased.

On that note I will turn things over to Steve Riffee.

Steve?

Thanks, Steve.

Good afternoon, everyone.

Primarily due to better-than-forecasted NOI margins, third-quarter diluted FFO per share, as adjusted for comparability, was $0.49, the high end of our guidance range.

For the quarter, the same-office portfolio represented 76% of our total square footage, and 81% of total NOI.

Excluding lease termination fees, third-quarter same-office cash NOI grew by 2.4% over the third quarter of 2012.

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 76% of same-office cash NOI.

During the third quarter of 2013, these strategic buildings were 94.8% occupied on average and ended the quarter 94.9% leased.

For the third quarter, strategic properties same-office cash NOI, excluding lease termination fees, increased 3.3% over the third quarter of 2012.

We expect to improve NAV and enhance our borrowing capacity when we address the two CMBS loans that Roger mentioned.

An important point to remember is that neither loan is currently in default.

The first CMBS loan has a principal amount of $146.5 million, and bears interest at 5.4%.

It is secured by 14 buildings, 5 of which are in Colorado Springs and are not included in the 15 buildings we are selling.

The other 9 buildings are in Airport Square near BWI Airport.

The 14 buildings are 71% occupied, and are forecasted to produce $8.9 million of cash NOI in 2013.

As we disclosed in a Form 8-K filed early in September, we expect to convey these properties back to the lender, and could do so before the end of the year.

The second CMBS loan is for $150 million, bears interest at 5.7%, and is secured by two office buildings in Northern Virginia.

The two buildings are 91% occupied, and are forecasted to produce $10.6 million of cash NOI in 2013; however, we expect the two buildings occupancy and NOI to decline significantly in the second quarter 2014.

Because the loan amount greatly exceeds our estimate of the properties' fair values, it is likely that we will convey these properties back to the lender.

And assuming we are able to do so during 2014, and that the first CMBS loan is resolved, our borrowing capacity would further improve.

Now, in order to take advantage of the low interest-rate environment in September, we issued $250 million of 10-year unsecured bonds at a 5.4% yield.

At closing, we paid down $50 million of term loans and temporarily paid down our line of credit.

Longer-term we have pre-funded a repayment of a $66 million, 5.5% mortgage that is pre-payable in December of 2013 and an $84 million 7.25% mortgage that is pre-payable on May 1 of 2014.

Since receiving our investment grade ratings in April, we have now issued $600 million of 10-year senior unsecured bonds at an average yield of 4.36%, which has improved our average debt maturity to 4.9 years.

Now, turning to guidance, we are increasing our prior range of FFO per share, as adjusted for comparability, for the fourth quarter of 2013 from $0.45 to $0.48 to a revised range of $0.47 to $0.49.

To get from our third-quarter actual FFO per share of $0.49 to the midpoint of our fourth-quarter range of $0.48, subtract $0.01 to reflect an early December closing on the sale of our 15 properties in Colorado Springs, subtract another $0.02 dilution from our September notes offering, then add back $0.02 of one-time items that negatively affect the third quarter.

Our higher fourth quarter also increases full-year FFO per share guidance, as adjusted for comparability, to the range of $1.96 to $1.98.

Our new range assumes same-office cash NOI increases between 2.5% to 3% for the full year.

And even with heavier CapEx assumed in the fourth quarter, we forecast our AFFO payout ratio for the year to be below 75%.

And as a final note, the midpoint of our new full-year guidance for FFO per share, as adjusted for comparability, is $0.09, or 5% above the midpoint of the initial guidance that we set in January.

And only $0.02 of the $0.09 relates to the delay in selling Colorado Springs.

And almost all of the remaining $0.07 of upside is attributable to improved NOI.

And with that I will now turn the call back to Roger.

Thanks, Steve.

In summary, the long-term value we are creating for shareholders through our development pipeline dwarfs the near-term moderate churning in our portfolio.

Or same-office portfolio has a stable outlook, demand is strong for newly developed space in our strategic tenant niche end markets, and we will generate capital to fund development by disposing of older or less strategic assets.

We have a strong positive reputation as the go-to REIT for government defense and security buildings, and it serves us well.

Events like the establishment of US Cyber Command only happen once, and require millions of square feet of specialized space in multiple precise locations.

We will continue leveraging our specialized operating platform, relationships and unique land positions throughout our portfolio to capture as much of this and related business as possible.

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

(Operator Instructions)

George Auerbach, ISI Group.

Great, thanks, guys.

Steve Budorick, could you maybe talk a bit about your occupancy outlook for 2014?

It seems a bit more optimistic than the message last quarter because of all the known moveouts.

Can you maybe walk us through the backfill potential for those known moveouts, and how that rolls through the year?

Sure, George.

One of the large potential moveouts we're hedging against was a renewal with CSC at Maritime Plaza.

And I'm pleased to now confirm that we've renewed 103,000 square feet for seven years.

And we agreed to take back about 50,000 square feet nine months early.

And that's largely what's driving the diminishment in our same-office occupancy in the fourth quarter.

The other large move out that I discussed during the call occurs at the end of November in Westfields where Aerospace is moving out of 143,000 square feet.

But, in addition to that, as I mentioned, our leasing pipeline is pretty strong and robust.

And we've been producing nice, new leasing throughout our portfolio, so we're feeling good about those numbers.

Great, thanks.

And then just one for Steve Riffee.

You talked a little bit about the two CMBS loans that you're going to convey back to the lenders.

Can you just help us understand, if you could snap your fingers today and give back those loans, what's the full-year impact on FFO?

And did I hear Roger right that it's a sub-5% cap rate?

You heard right on the sub-5% cap rate.

From an FFO standpoint, it's pretty much a push because the NOI and the interest savings pretty much offset, George, so there's no significant impact on FFO.

From a balance sheet standpoint, like on a pro forma basis, if they happened as of September 30, the 46.6% debt to adjusted book value would have been 42.4%.

That's great, thank you.

Josh Attie, Citi.

Hi, thanks.

Can you just talk about how much visibility you have into 2014?

Last quarter you disclosed some moveouts that seem like they're happening now in the fourth quarter.

So, when you look out over the next five quarters and think about the 2.5 million square feet of expirations you have, and you came to the conclusion that occupancy will be flat to modestly up, was that a lease-by-lease analysis?

And have you reached out to all the big tenants to make sure you know what's going on with that space?

Maybe just explain to us how you came to that conclusion and what your level of confidence is in it?

You hit it right on the nose, Josh.

It is lease by lease, tenant by tenant.

In the last call there were a few situations that were less clear to us.

We've now had favorable outcomes on many of them.

And we're feeling very confident about that number.

So, the remaining large expirations, you know with a high degree of certainty whether you're keeping them or not keeping them.

And then beyond the 60% retention rate, how much visibility do you have on the backfill?

I'm trying to get a sense for how much of the occupancy guidance is speculative versus what you feel is locked in.

Josh, to go through the simple math, a 60% renewal rate on 2.5 million square feet is 1.5 million square feet of renewals.

So that leaves 1 million square feet of non-renewals.

And, as Steve said, the current pipeline of highly likely tenancy is about over 700,000 square feet.

So we think we're well on the way to backfilling the million square feet that we could get back in the next five quarters.

And it's only October.

So I think our confidence level is much higher than it was 90 days ago

And the 60% retention number, is that a number that can move around a lot, or is that a number that you feel like you have locked down?

I think it's a fair number.

I think we could do a little better than that but I think 60% is a comfortable number for us at this point.

Again, going space by space, tenant by tenant.

Okay.

And then, separately, on Colorado Springs, just to help us think about the earnings impact next year, can you tell us what either the NOI or the cap rate was, adjusted for the sale price coming down, and also the lease-up that you've done?

Obviously, we're going to sell it for a little over a 10% cap rate.

Now, most of that, a lot of that, won't be embedded in our numbers in the fourth quarter because it's some NOI that gets into place in the first quarter.

So there's some free rent, etc..

So the new buyer will get the benefit of a higher than 10% cap rate.

I think, in terms of the NOI that we actually sell in place, it's probably right around a 10% cap rate or a little under.

Okay.

Thank you.

Craig Mailman, KeyBanc Capital Markets.

Hi, guys.

Jordan Sadler is on with me, as well.

I was hoping maybe we could drill into the 750,000 square feet of potential development opportunities, development leasing.

Maybe put into buckets of what's government related versus what's contractor related.

And how much of the contractor stuff has contracts in place versus their kicking the tires now just in case a contract comes through?

Hi, it's Wayne.

And I think I'll offer some perspective on that pipeline for you, Craig.

There's 750,000 square feet in five different projects.

We can tell you that all five of those projects that we have line of sight on are strategic or with strategic tenants.

It's a combination of both build-to-suits and well-informed demand.

The construction starts are spread throughout the year but the majority would be in the first half.

The volume's in the range of $200 million.

And I'll let Steve comment on some of the other questions you asked about the visibility to the demand.

Craig, we have visibility into all the demand.

And that includes either conversations or high levels of awareness of requirements that we would be building to meet

Okay that's helpful.

And then, just as we sit here, the government shutdown's obviously over.

But as we've looked back at similar dysfunction in DC and the impact it had on decision making, what are potential tenants telling you coming out of this issue, in terms of what you're hearing from your government contacts about the pace of contract grants?

Just curious, as we head into 2014, what the potential psychological impact to be on your tenants?

Let me address the last point.

The psychological impact -- I think they've been living in a world of uncertainty for the last three, four years.

So I don't know that the shutdown had that material an impact on their attitude.

I can tell you in our pipeline there are many tenants that are contractors expecting new contract awards that are working with us to plan for expanded operations as those awards are received.

So, business continues to be done.

In terms of the impact, I know many of our customers did have employees that were contract based or funded, that were affected temporarily by the shutdown.

But I believe they're all back to work.

It was not that big an event in our world as you might expect.

Great, thank you.

Rob Stevenson, Macquarie.

Good morning, guys.

As you're nearing the end or at the end of the strategic disposition program, what's the appetite to putting more dispositions out there and recycling the bottom part of the portfolio in addition to just funding development?

Is it just going to be to fund development?

Or can we see $100 million or $200 million in addition to that a year being recycled by you guys?

We will be a regular and continual recycler of capital.

And we will do it opportunistically.

So, there may be years where we sell $50 million and there may be years where we sell $200 million.

It will depend on the capital markets.

And it will depend on the circumstances surrounding individual buildings or groupings of buildings, where they are in terms of stability and of their acceptance into the core market for sale.

So I think it's tied to our development pipeline but it's also somewhat independent in that we will sell knowing that we can generate new investment opportunities.

But selling is certainly a big part of our capital allocation going forward.

Okay.

And then can you guys just talk a little bit about what if it was something in particular, or is it just the general mindset of the tenants, that drove the average lease term on renewals in the B-W corridor in Northern Virginia down to 1.4 and 2 years, respectively?

It seems awfully light on term there.

I think it had to do with a couple of specific tenants and their contracts.

In the case of the one Northern Virginia renewal, it was actually done early so the lease wasn't due to mature until the end of 2014.

And they wanted to add a little bit of term now, based on, I guess, a contract they had received.

And, similarly, around Fort Meade we had one or two customers that were tied to contracts that wanted earlier short-term extensions.

Thanks, guys.

Jamie Feldman, Bank of America.

Great, thank you.

Going back to the shutdown question, was there any impact on your NOI or your cash flow from the shutdown?

Any leases that couldn't get paid or won't get paid?

No.

And, actually, the way the government leases work, they pay in arrears.

So when the government shut down on October 1, we were paid for September's rent towards the end of the month of September.

And so we expect that we will receive October's rent in the next couple of days, if we haven't already received it.

Most of it's already been received.

Okay.

And then, had it persisted, how would that have worked out?

Theoretically, there was no funding to pay the rent.

So, theoretically, we could have gone a period of time beyond when the next rent payment was due and had to get paid further in arrears.

But that didn't happen and it has never happened to this Company in our history.

We've been dealing with the government for 20 years now and we've never had an incidence where we had an untimely payment.

Okay.

And then looking ahead to the January debates again, what do you think some brinkmanship in Washington would do to your leasing prospects, or at least pushing out some of these contracts getting signed?

How should we think about what to expect over the next couple of months?

I'm not sure that there's much change, as Steve said.

The contractors have been operating with continuing resolutions for a long period of time now.

And I think it's important to note that we do house tenants who perform critical functions.

I think one of the misunderstandings about our Company is that, first of all, our Company is tied -- it seems to be correlated 1 for 1 with DC.

In reality, we certainly aren't tied 0 to DC but we also aren't tied 1 to 1. We're tied somewhat, probably, below 0.5.

And then, secondly, to the extent that there has been dislocation in the defense budget, we are not proportionately impacted there because of how we're tied in the specific budget, the piece that we're tied to and it's important to national security.

Okay.

And then turning to the development and redevelopment pipeline, can you just talk about the projects that are not 100% leased in your leasing prospects, the 420 NBP and Redstone?

Yes.

AT 420 we have four floors to lease.

We have good deal flow on that, and we expect to be announcing some leases in the coming quarter or two.

And at Redstone Gateway we have 60,000 square feet where we actually had signed a lease that we're going to move to a different building to create room for larger opportunities that we're working with that would require a full building.

And so we see demand down there.

It may take a few more quarters for that to finalize but we continue to feel optimistic.

And these are contractor defense tenants?

Generally, yes.

Okay.

And then what about on the redevelopment pipeline?

There's only two buildings in the redevelopment pipeline.

One is up in Blue Bell.

And, there, we're 60% leased on the next building we are developing there.

And then we've added a new project this quarter here in Columbia Gateway.

We liked the [dirt] long time.

We had a long-term -- we had a building that was part of a five-building complex that was 40,000 square feet.

We're going to expand it to 50,000 square feet and modernize it.

And we do have a lease sale for that entire newly-sized building

Great.

All right, thank you.

Brendan Maiorana, Wells Fargo.

Thanks.

Good afternoon.

Probably a question for Steve Riffee.

So, the CMBS giveback, I think if I did the math correctly, it's the NOI relative to the $300 million of loans on the two CMBSs is around 6.5 NOI yield relative to that?

And I guess you guys are planning on giving it back at a 5 yield, so that suggests maybe there's $5 million of annual NOI decline to go on those two pools of assets?

Is that right?

Yes.

Okay.

So there's some NOI decline there that's not in the same-store pool, and then there's the giveback, or the sale, rather, of Colorado Springs.

And I gather that, based on your comments, that's about an $0.08 impact as we think about it for 2014?

Is that right?

$0.08 or $0.09.

Probably $0.09, is how we calculate it.

Okay, great.

So, what are the likely uses of the proceeds from the $130 million from Colorado Springs?

To fund development.

Okay.

So there's not any immediate debt pay off that can be used, because it doesn't look like you have a whole lot rolling between now and early or mid 2014?

As I said before, we basically in our last bond offering pre-funded our debt maturities that are coming up that we can prepay in December and May.

Okay.

And then, for Steve Budorick, as we think about the 1 million square feet of new leasing for next year to get back to occupancy levels that are in line with where you are today, is it fair to think of the capital costs associated with that in that $30 to $40 a square foot range, which is, I think, where you were in the third quarter?

Yes, that's a good target.

Okay, great.

Thank you.

Rich Anderson, BMO Capital Markets.

Thank you.

Can you just remind me on Westfields, you have Northrup coming out in the first quarter of the year, is that right?

That's correct.

That tenant is in the two buildings that are tied to the CMBS loan in Northern Virginia, so --

Okay, I understand.

So, the 10% cap on the Colorado Springs sale, do I have this right that originally you were looking at an 8% or 8.5% cap on that deal?

8.5%, 9% cap rate.

Okay.

Did they just basically -- higher interest rates just come back and renegotiate the transaction?

Is it simple as that?

That's correct.

Okay.

How do you feel about -- you talk a lot about development, obviously, but how do you feel about the longer term in terms of replenishing your development pipeline?

You have a lot of activity going on, but looking further out do you think that the development effort will be bigger or smaller, say, three or four years from now?

We spent the summer analyzing the portfolio and our development opportunities over a five-year period.

And I think the conclusion we came to is that we thought we could deliver about $200 million worth of development based on land holdings that we have to date, not counting periodic deals like the one we did in Northern Virginia late last year, where we did a build-to-suit down in that market.

So, I think $200 million is a good number annually.

On an annualized basis.

Okay, right.

And then turning to asset sales, you mentioned basically being virtually done with the SRP once Colorado Springs is done.

And then I think it was Rob who mentioned other asset sales beyond that.

Among them, how do you feel about DC-6?

How do you feel about Blue Bell long term?

Are they on the hit list for you?

I'm going to let Wayne talk about Blue Bell and then Steve will talk about COPT DC-6.

With respect to Blue Bell, as I think you know, Rich, we're actively in the middle of a repositioning for that development.

Our view there is that we're investing there to create value for our exit.

We've redeveloped three of the five existing assets there, and think that we've got an orderly exit over the course of the next several years.

I was asking for timing on that one, knowing it was a sale candidate.

So, that's the timing for -- several years, over the next -- ?

It's not likely to be 2014 because we're still going to be finalizing the leasing and development.

And then timing on DC-6?

We don't consider that a sale asset.

We just finished a year where we leased 3.3 megawatts of space.

And we reoriented our marketing and deployment of marketing efforts towards making that a business that's aligned with our underlying tenant community.

And we're having good traction in that effort.

So we don't consider that as a potential source of recycling at this time.

Last question is the whole CMBS givebacks, do you think that there's any issue there with you in terms of reputation with lenders or the market or other participants by giving back property?

Rich, this is Steve.

We took this whole process quite seriously.

It wasn't really the first option that we considered.

So, we have negotiated the best we could.

It's very hard to find someone that isn't restricted by process and rules, that can negotiate with you on economic terms.

But we proposed several different alternatives that we thought were fair to the lenders.

But we couldn't come to any agreement on any value that was fair to our shareholders or our bondholders.

So, that's where we ended up and this is what we think the right conclusion is.

So, I think we clearly tried to see if we could structure something that would work for everybody and just couldn't get anyone to negotiate with us on that basis.

Okay, understood.

Thank you very much

Tayo Okusanya, Jefferies.

Good afternoon, everyone.

Just another quick question just in regards to the uplift in guidance, just trying to understand all the moving parts.

Is that really from Colorado Springs being sold later than you were expecting?

How much of it is from better-than-expected fundamentals?

Just trying to understand all the moving parts that got guidance up.

Okay.

This is Steve.

I'll go through the math that I covered on the call.

If you look at -- we referred to the new, full-year guidance range relative to the initial guidance range.

The midpoint of the initial guidance made back in January was $1.88.

And the midpoint of the current guidance range for the full year is $1.97.

So that's a $0.09 increase.

Only $0.02 of those $0.09 is because of the change in timing of our Colorado Springs sale two months later than what we assumed in our initial guidance.

The rest of it is improved NOI.

Got it.

That's very helpful.

And then the second thing, any update on the Merck moveout?

They're still scheduled to move out February 15, at which point we will go in and clean up the building and start to analyze our options with respect to that particular building.

Great.

That's helpful.

And then lastly just DC-6, and just if you could give some commentary about what you guys are seeing in the Northern Virginia data center market and what pricing looks like, what demand looks like, that would be helpful.

Demand has existed at a pretty stable level for the last three or four quarters.

I wouldn't call it overly high demand, but it's steady.

Right now we're tracking about 11.5 megawatts of users that we've proposed or are in advanced proposals with.

And that's pretty consistent to what I've reported over the last few quarters.

And that demand really comes in a couple of different forms.

Some is the very targeted government-oriented collocation business, and some is larger wholesale requirement.

Got it.

All very helpful.

Thank you.

Michael Knott, Green Street Advisors.

Hi guys.

Roger, curious -- or Steve -- on the balance sheet.

Obviously you guys have focused quite a bit on that -- Roger, since you became CEO.

And you've made quite a bit of progress.

On our numbers you're still higher than average leverage by a decent amount, including preferreds.

So, just curious how you think about balance sheet over the next few years, if you're going to be maybe developing -- a couple hundred million dollars a year is what it sounded like.

So, just curious how you think about funding that activity, particularly in years where maybe you're only selling $50 million of properties.

Right.

So, first of all, for the next 12 months or so we're in good shape between the Colorado Springs sales and the $300 million of CMBS.

That gets us $430 million, so that gets us a good running start on the next year or two of development.

Beyond that, we still do have a goal of reducing the Company's leverage over time.

And that will be done by the NOI that we'll be putting in place from all of our development.

It'll be done by leasing up our core portfolio from 88% to 92% to 93%.

It will be done by leasing up COPT DC-6.

And then we will continue to look at recycling assets as they mature.

So, the Company does have a goal, because it is a developer, of reducing its leverage over time, and I think we have a plan to do that.

Would that $200 million annual pace of development entail going out a little more on the risk spectrum?

Or you just feel like demand for new builds will continue to increase?

Generally speaking, it's demand where we can sign the tenant up ahead of time, or it's what we call informed demand where we have a clear understanding that certain tenants need buildings in certain time frames.

Okay.

Thanks.

The point is we're going to be a lower risk developer going forward.

Okay.

And that does not contemplate any new development markets at this time?

That's correct.

Thank you.

Dave Rodgers, Robert W. Baird.

Yes, good afternoon, guys.

Maybe going back to the data comment.

With the whole government data center mess out in Utah -- and maybe we've talked about it before -- but is that bringing any interest back into the platform that was originally thought about when you undertook the data center business?

Are you getting any more traction through the government channels with that, or has that ship largely sailed?

It's not my position to talk about that program.

But that data center in Utah is unrelated to activities we ever contemplated or currently contemplate for DC-6.

Okay.

And then maybe either Steve or Wayne, I didn't hear you make any specific comments about San Antonio.

And if you did maybe can you echo those in terms of the demand levels down there, and any incremental increases related to leasing and/or development?

We're fully leased in San Antonio, I'll remind you, except for one commercial building that doesn't really serve the defense industry.

We have one space to lease.

And we anticipate that we will have an opportunity to develop into demand in the next year or so in San Antonio.

Okay.

And then maybe last question on land sales.

A good source of capital for you.

Maybe some color on how quickly you think you can monetize some of that, either through land to homebuilding sales, etc.

And is that something that's on the plan for the next 6 to 12 months?

Dave, it's Wayne.

The answer is it is in the plan for the next 6 to 12 months.

We've been actually working quite hard at it for the balance of the year.

We have a particular focus in White Marsh.

We've got 128 of our non-strategic acreage are located there.

We've got several what we think are very well located land positions but positions that don't fit our long-term strategic plans.

We do have one of those positions under contract now, although it's not hard.

It's under contract and scheduled to close towards the middle of next year.

So we're encouraged by that.

We've other activity on portions of that portfolio.

That's where we're most active in terms of reaching our target on the $50 million SRP program.

But we do have a line of sight on several other land sales throughout the non-strategic portion of the portfolio.

Great, thank you.

(Operator Instructions)

Michael Carroll, RBC Capital Markets.

Thanks.

Have the majority of the defense contractors already right sized their operations given the current DoD budget outlook?

Or, should we expect additional cuts going forward?

We believe we're on the tail end of the right sizing.

It's been going on for several years.

A tenant that we mentioned earlier, we just took some space back and we think that's near the end of the rightsizing.

There will be one more next year that we anticipate for that same tenant in another market.

But getting near the end of it.

Okay, good.

And then with regard to the potential development starts that you mentioned on the call, Steve, where should we expect those to occur, have you said?

They include opportunities in five separate locations.

And we really don't want to be more specific than that.

Okay.

And then, Steve, how much of that stubborn vacancy is still left to lease up?

It's about 1 million square feet.

The interesting thing about that stat is each quarter you knock off a chunk you get another chunk that's maturing.

So, it will take us another four quarters before we start really getting it on the run.

But there's still just slightly over 1 million square feet in our operating portfolio.

Okay, great.

Thanks.

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 question did not get answered on this call we are all in the office and available to speak with you later.

Thanks very much and have a good day.

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

This concludes the presentation.

You may now disconnect.

Good day.