COPT Defense Properties (CDP) 2014 Q2 法說會逐字稿

Welcome to the Corporate Office Properties Trust second quarter 2014 earnings conference Call.

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

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

Miss Krewson Kelly, please go ahead.

Thank you, Whitley.

Good afternoon and welcome to COPT's conference call to discuss the Company's second quarter 2014 results and our outlook for the remainder of the year.

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 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 open up for your questions.

I will briefly highlight one disclosure item in the current supplement.

As we've indicated on previous earnings calls, we expect to resolve a $150 million mortgage loan secured by two buildings in northern Virginia by conveying those properties to the lender.

Because the economics of both buildings now belong to the lender, we have removed them from our portfolio statistics.

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, government actions and initiatives, 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.

Property Operations continued to perform well and are on pace with our expectations.

Second-quarter FFO per share as adjusted for comparability of $0.44 was at the high end of our guidance range and reflects modestly better NOI margins.

We remain highly confident that our quarterly FFO per share has bottomed and, beginning with this third quarter, will now trend higher.

Our conviction stems from the fact that we've completed several strategic initiatives and absorbed the related earnings dilution.

We have executed leases for development space that will produce nearly $30 million of annual cash NOI, and we have increased our total portfolio spread between occupied and leased percentages to 210 basis points.

We see strong demand in our markets from three sources.

In our strategic tenant niche, the more constructive defense spending environment that has resulted from the adoption of the Bipartisan Budget Act in January is fueling demand from new and existing customers.

Moderate economic expansion into B.W. Carter is driving demand for our regional office space.

And throughout most of our portfolio for the specialty in and around Fort Meade where US Cyber Command is located, the cyber security industry's rapid growth is generating demand for efficient, modern, well-located space.

As Steve Budorick will detail, we're on track to capture as much as 700,000 square feet of leasing for newly developed and redeveloped space this year which would exceed our initial expectations.

Our portfolio's over 90% leased in nearly every one of our markets.

The B.W. Carter is 94% leased.

Arborcrest in the greater Philadelphia market is 97% leased.

Century Gateway in San Antonio, Texas and Redstone Gateway in Huntsville, Alabama are both 100% leased.

After disposing of eight Whitemarsh buildings now held for sale, our remaining 750,000 square feet in that market will be 92% leased.

In the near-term, we face a few challenges in northern Virginia, a market that represents about 20% of our business.

That portfolio's currently 91% leased.

However we know we are getting back 150,000 square feet from a tenant at the end of November which all else being equal will lower our lease percentage for northern Virginia to around 86%.

Every landlord is in the business of getting back and releasing space, and most markets at some point have to work through periods of weak demand which is the case in northern Virginia.

The good news is that our challenges in northern Virginia are finite and fixable.

More importantly, our strong lease execution levels throughout the remaining 80% of our portfolio should more than offset the few challenges in northern Virginia.

Overall we have good leasing momentum and in select submarkets have even regained some pricing power.

Notably, supply remains in check in each of our markets, and in the B.W. Carter in particular, large blocks of space are limited.

As a result, we are now filling up the leasing bucket more quickly than space leaks out, and remain confident that we will increase occupancy to between 92% and 93% in aggregate by the end of 2016.

With that, I will turn the call over to Steve Budorick to update you on our leasing activity.

Thanks, Roger.

In the second quarter, we leased a total of 680,000 square feet including 437,000 square feet of renewals.

Our 74% renewal rate for the quarter was above our expectations and increased our renewal rate for the year to 69%.

Our cash rents on renewals rolled down 4.8% in the quarter, which included a 14% cash rolldown on one 42,000 square foot early renewal we negotiated with an International Financial Services company.

We believe securing this high-quality tenant in their space through the end of this decade and taking some 2015 leasing risks off the table was a good value add.

Excluding the impact of this one renewal, cash rents on the remaining renewal activity in the quarter rolled down only 3.6%.

Looking at average lease terms, this was our second consecutive quarter where average lease term exceeded five years in length, continuing the positive momentum we observed since the Bipartisan Budget Act was enacted in January.

Our revenue at risk which was the amount of revenue we need to achieve the midpoint of our 2014 full-year guidance is now only $1.7 million, and we are actively negotiating leases that give us confidence we will meet this number.

Before discussing our development leases, I will provide some color on the occupancy changes in the quarter.

At June 30, our same office portfolio of 161 buildings was 92.9% leased and 90.8% occupied.

Same office occupancy dipped 30 basis points during the second quarter, reflecting a 50,000 square foot net reduction in occupied space.

This was all transitional vacancy, however, as we re-let 85,000 square feet of the same office pool expirations to new tenants who will take occupancy in coming months.

At June 30, our core office portfolio was 92.2% leased and 90% occupied.

The 30 basis points increase on occupancy level relative to March 31 reflects a net increase of 110 basis points caused by removing nine buildings from our in-service portfolio during the quarter, offset by transitional vacancy in the same office portfolio, and the impact of placing the remainder of [MVP 420] in the service.

Development leasing in the quarter totaled 12,000 square feet, bringing our total for the first half of the year to 188,000 square feet.

Including the lease that we signed at Redstone Gateway this week, we've executed 320,000 square feet of development leasing year-to-date.

We are on track to achieve our initial goal of 500,000 square feet for the year, and we are likely to exceed that amount by another 200,000 square feet.

We look forward to updating you as leases are executed.

Before turning the call over to Steve Riffee, I will update the incremental NOI we expect to recognize in the future from development and redevelopment leasing.

Today, we have 22 buildings in our active development and redevelopment pipeline that, when stabilized, are forecasted to generate $48 million of incremental cash NOI.

Of this $48 million, $29 million of NOI is associated with executed leases and therefore has no risk.

These executed leases contributed $3.3 million to cash NOI in the first half of the year, and will contribute approximately $9 million to total cash NOI in 2014.

We continue to actively work on transactions to generate the remaining $19 million.

The three development starts listed on page 23 of the supplement that are 0% leased are intended for government users.

They total approximately 500,000 square feet and once leased, account for roughly 60% of the $19 million of the currently uncommitted future NOI.

This $48 million of future NOI from the pipeline of projects demonstrates the strength of our development platform and our ability to generate attractive returns, and earnings for our shareholders.

And on that note, I will turn things over to Steve Riffee.

Thanks, Steve.

Good afternoon, everyone.

FFO per share as adjusted for comparability for the quarter was $0.44.

Revenues were on pace for the quarter, and we outperformed on operating expenses.

Our AFFO payout ratio for the first half of the year was a conservative 79%.

Our same office portfolio represented 91% of our core square footage and 94% of our core NOI.

Although our same office portfolio benefited year over year from annual rent escalations of 2.2%, and a 20 basis point increase in occupancy, same office cash NOI excluding lease termination fees declined 40 basis points from the second quarter of 2013.

The modest decline in cash NOI was due to higher free rent and slightly lower recovery margins.

We forecast same office cash NOI will increase both in the third and fourth quarters of this year.

Turning to our balance sheet, we took advantage of some market opportunities in the quarter to strengthen our ability to fund growth.

In mid-May, we issued $300 million of seven-year, 3.7% senior notes.

With the proceeds, we retired $83 million of secured debt that bore interest at 7.25%.

We also paid down $50 million of bank term debt with an interest rate of LIBOR plus 160 basis points.

Anticipating asset sales in mid-June, we redeemed all $50 million of our 7.5% series H preferred stock.

As a result of the quarter's activity and excluding the impact of properties we expect to convey, our debt to adjusted book ratio was 43.9%.

Our debt to EBITDA was 7.1 times, and our fixed charge coverage was 2.5 times.

I will finish my remarks with an update on our guidance.

For the full year, we are narrowing our guidance for FFO per share as adjusted for comparability from the prior range of $1.85 to $1.92 to a new range of $1.86 to $1.90.

The reduction to the high end of our prior range is due to anticipated building sales in Whitemarsh and lower expected lease termination fee income.

We expect year end same office occupancy to be between 91% and 91.5%, which on an apples-to-apples basis is consistent with our original occupancy growth forecast for the year.

We also expect same office cash NOI growth of 1% to 1.5% for the full year.

The midpoint of our revised range of $1.88 will result in a conservative AFFO payout ratio for the full year of approximately 80%.

Turning to quarterly guidance, occupancy gains in our operating portfolio and the onset of more NOI from past development leasing will generate higher quarterly results going forward.

For the third quarter, we expect FFO per share as adjusted for comparability to be between $0.46 and $0.48 and for same office occupancy to increase between 60 and 100 basis points from June 30 levels.

In the fourth quarter, we expect FFO per share as adjusted for comparability to be between $0.48 to $0.50.

And with that, I will now turn the call to Wayne.

Thanks, Steve.

I will make a few brief remarks about the development and redevelopment portfolio which currently stands at 12 buildings encompassing 1.4 million square feet.

Let me start by highlighting two buildings we placed into service during the quarter and which are no longer listed on pages 23 and 24 of the supplement.

MVP 420 is a 139,000 square foot contractor building that was 68.3% leased at June 30.

The second building was Hillcrest II, whose street address is 721 Arbor Way.

At June 30, this 183,000 square foot redevelopment was 95% leased.

In northern Virginia, we have completed the base building construction on COPT DC-9 at the end of this month and anticipate the lease commencement as of August 1. This building is 100% leased to a single tenant for 10 years.

Looking at new starts, in May we commenced construction on 7880 Milestone Parkway, the next contractor building in a rental preserve.

KEYW has leased 74% of the building for an advanced cyber research and training lab.

We will also start construction on 7400 Redstone Gateway, due to the full building lease we announced today.

This single-story, 69,000 square foot flex building will be joined to 7200 Redstone Gateway, the existing 62,000 square foot building.

We anticipate the full property lease will commence early in the third quarter of 2015.

On the redevelopment page, we've added 921 Elkridge Landing also known as Airport Square V. Our markets analysis concluded that redeveloping that site with a retail component will enhance the value of our surrounding buildings.

However, as you can see from the multiple data points that are still to be determined, we are exploring options with targeted users, and we will provide more specifics as our plans are finalized.

Allow me to offer a quick update on Woodlands at Arborcrest, formerly known as the Merck building.

We are aggressively advancing our redevelopment program for the property and are engaging prospective pre-leased tenants and the local municipality in this vision.

Our objective is to build on the positive leasing momentum achieved at our other Arborcrest redevelopments by delivering fully renovated, efficient space in large, contiguous blocks with compelling economics and a further complement of amenities.

I will conclude my remarks with a few words on redevelopment in general and how it fits into our capital allocation decision-making discipline.

In addition to the four projects totaling 276,000 square feet listed on page 24 of the supplement, we have identified another 750,000 square feet of existing properties we could elect to redevelop for a total redevelopment pipeline of approximately 1 million square feet.

These are properties where we like the location and the submarkets dynamics, are confident the land values will continue to rise but believe that in order to compete the buildings need to be updated.

Creating modern, efficient and in some cases secure office space that is differentiated from the competition is a value added discipline we are committed to applying across our portfolio to generate shareholder value.

Broadly speaking, parks that contain assets with compelling redevelopment opportunities are Columbia Gateway and Airport Square in the B.W. corridor, Pax River, and of course Arborcrest in Plymouth meeting.

In every case we expect to achieve low double-digit returns on our incremental investment and high single-digit returns on our total investment.

We look forward to discussing some of these projects in greater detail at our investor day on September 29.

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

Thank you, Wayne.

Let me leave you with three observations.

Our second quarter marked the inflection point for our quarterly results.

Demand for space in our strategic tenant niche and in the B.W. corridor where most of our regional office buildings are located continues to build, resulting in strong leasing momentum throughout most of our portfolio.

Occupancy gains from leases already executed will drive FFO higher as indicated by the midpoint of our quarterly guidance for FFO per share of $0.47 in the third quarter and $0.49 in the fourth quarter.

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

(Operator Instructions)

Craig Mailman, KeyBanc Capital Markets.

Maybe just start off on guidance, curious Steve, why you guys waited till now and didn't just update it when you put the release out following the bond deal.

Well, what we've updated guidance for is really the top end of the range.

We wanted to narrow it, but the Whitemarsh sales that we're talking about have gotten stronger and more clear that we're moving forward with those.

So that's about half of it.

And then quite frankly, term fees -- we outperformed our term fee -- we only had $70,000 of term fees in the quarter and still hit our numbers and as we were reforecasting have concluded that we're taking term fees, which at the top end used to be around $3 million for the year down to $2 million.

So those are the two reasons that we brought guidance down, which we weren't totally clear on those at the time of the bond offering.

Okay.

And then just wanted to clarify, I thought original guidance was 1% to 2% same-store NOI growth.

So are you guys bringing it down 50 basis points here at the high-end?

I think we started the year at zero to 1%, and then we increased it 1% to 2%.

What we're saying quite frankly is that it's getting stronger the rest of the way.

I'm thinking it's 2% in the third quarter and maybe as close to say, 4% in the fourth quarter, which gets us between 1% and 1.5% for the year.

So this being the low point, it grows from here.

Okay.

And then on same-store, the 91% to 90.5%, the base of that is still the 90.8% we closed the second quarter on, right?

The pool doesn't change from here?

The pool does not change from here.

And that growth rate is consistent even before the pool change with what we had in our original guidance.

Okay.

Just wanted to shift to leasing here.

Get your insights on what you guys are seeing today versus the beginning of the year in terms of just overall activity and prospect activity, where you're seeing the best demand these days.

Well, I think in the last call, Craig, we reported that activity picked up in many of the locations that had -- where it had been slow last year during the budget impasse.

And we continue to see that.

We have a significant amount of activity in Pax River in the [Dogran]and some around the Navy yard where contractors are anticipating awards and have been trying to identify locations in advance of the work so that they can move quickly.

And I did a ratio on the vacant space we have available relative to the prospects.

We've got 1.6 square feet of prospects for every square foot we have available in those Navy oriented markets.

So we're anticipating some good progress there.

We've continued to have good demand in and around Fort Meade in a variety of parks.

We did some additional cyber leasing in the quarter, probably 60,000 square feet.

So that continues to be strong.

We've had good activity in Whitemarsh, frankly, and we've had improved activity in the Airport Square submarket.

And then in northern Virginia, we've had good luck with -- good results with the vacancy that we have throughout our portfolio with one exception.

And that's 7770 Backlick Road.

We have increased activity post Bipartisan Budget Act, but that contract flow seems slower.

So it's not quite as heated up as we're seeing in a few other locations.

At 3120 Fairview Park where we also have a big chunk of vacancy, reasonably confident we can put that away by the end of the year.

Okay.

Then one last quick one.

The shadow development pipeline, what does it look like at this point?

I know you guys started the Huntsville one, but what could be behind that assuming that you get the three government projects leased up here before year end?

Craig, it's Wayne.

Let me take that one.

Well, I guess I'd start by reminding you we do have $315 million in our construction and redevelopment pipeline.

And that certainly exceeds what we've targeted to be our run rate of $200 million to $250 million on an annual basis, so we're very pleased with that.

You referenced the announcement we made this morning on another 131,000 square feet of leasing, and that will generate 69,000 square feet of new construction.

When we've talked about our shadow pipeline, we've always tried to do that on the basis of having a good line of sight on demand as we are balancing our pre-leasing opportunities with speculative development.

So if we follow that same program, I would say to you today that we have early stages of demand forming for three or four new buildings over the next six to nine months.

That's probably where we'd start to handicap the shadow pipeline.

Great.

Thank you, guys.

Jamie Feldman, Bank of America.

Roger, if we could talk a little bit more about some of the pockets of increasing demand you're seeing, can you talk more about B.W.I.

and what you're seeing going on there?

And is that more just general office recovery, or is it still more defense-related?

It's a little bit of both.

We've had some increased demand in the B.W.I corridor for contractors serving, frankly, CMS, Medicaid Medicare.

But we also have growth in cyber contractors.

As I mentioned, we signed about 60,000 square feet of cyber related leasing in the quarter.

We're working with other prospects to find them locations, and that magnitude exceeds 100,000 square feet.

And then just general commercial and healthcare business businesses on our portfolio, are seeking growth as well.

Okay.

And then as it pertains to the defense uptick from the budget, related to the budget, is it as you expected, or are there certain pockets that are maybe getting a little bit more better or worse than as you had expected when you figured there'd be some resolution?

I'd say it's as expected or maybe slightly more so in some locations I talked about when I was answering Craig.

Okay.

And then recently we've certainly seen our share of geopolitical issues.

What have you guys seen as a result?

Like, should we expect to see more of a pickup or everything's planned out well ahead assuming this stuff happens?

Well, I think the point is that there will be no gutting of the defense budget that the need for high-tech defense for information, communications, intelligence, surveillance, reconnaissance and certainly cyber security is robust.

And I think that Secretary Hagel is largely put a wrapper around those things that are priorities in the budget, and based on the acute activities in the world today, I think it further enhances his priorities in the budget.

So we think that we're well-positioned in the defense budget.

Okay.

And then talking to brokers, it sounds like we're seeing more demand for secondary type markets, more capital flowing to these markets looking for higher yields.

Do you guys have any interest in increasing your disposition activity or changing your plan at all?

At the beginning of the year, other than the CMBS resolution, we really didn't have a lot of sales projected.

But because of, as you suggested, the heightened demand for suburban office, we had decided to sell into that market.

And so we have eight buildings under contract in Whitemarsh that hopefully -- one settlement has already occurred and hopefully the other two will happen in the next couple of weeks.

And we're putting some other buildings up for sale also, so we do see it as a good opportunity to continue to upgrade the quality of the portfolio and use those proceeds to fund our robust development pipeline.

And are those assets all in guidance, the dispositions only guidance?

No.

Well, yes for this year.

So anything we would do for the rest of the year would impact 2015 and would not impact 2014.

Okay.

All right.

Thank you.

Brendan Maiorana, Wells Fargo.

Steve Riffee, so just the balance sheet now, debt to EBITDA is a little bit over 7 times.

You've got $76 million in cash on the balance sheet.

Seems like the development pipeline may be accelerating.

How should we think about the view of where you feel your leverage stands with the outlook of some additional asset sales that are likely to happen but probably some capital spend on the development pipeline over the next several quarters?

Well, we're not guiding for 2015 yet, but we certainly -- maintaining our balance sheet and our ratio is important to us.

Looking at the balance of the year, we're comfortable that the caps that we have on our balance sheet plus the asset sales that we are now projecting to have are going to cover development expenses for the rest of the year.

I think we will be putting together our source and use for 2015 when we give that guidance, but it's likely to include some more land sales and possibly some recycling among other sources, but we're not ready to give guidance on 2015 yet.

Is there anything that we should think about as coverage levels, whether it's fixed charge or debt to EBITDA that as you bump up against those levels might make you a little bit uncomfortable from a balance sheet perspective?

And asset sales, the noncore assets that you're selling, they probably don't help those ratios that much.

So where you might think about tapping the equity market if that made sense?

Well, Brendan let me first say that we do have about $50 million of land under contract that there's no guarantee that it will close, but that would certainly positively impact our funding situation.

Secondly, we do have $76 million in cash.

And then remember, we have a lot, $30 million, of development NOI signed up that is going to roll into the income statement in the next couple of quarters, plus we're expecting another $20 million over time.

So debt to EBITDA will improve just by the NOI hitting the income statement.

Okay.

That's helpful.

I just wanted a clarification on occupancy.

So the occupancy target, 91% to 91.5% by the end of the year, I think that compares to the same store of 90.8%.

If we look at the overall core portfolio of 90% today, where's the occupancy likely to be for that by year-end?

It should uptick in direct proportion with the same office.

By year-end, our core portfolio and our total portfolio will be one in the same because we will have sold off the Whitemarsh assets, and the CMBS resolution will have taken place.

So our anticipation is that we will be pretty close to our same office occupancy.

Wait.

Sorry.

So I was just confused here a little bit.

So is it 90.8% today going to 91% to 91.5% or is it 90.0% going to 91% to 91.5%?

Same office?

Same office is going to go up from 90.8%, up 60 to 100 basis points in the third quarter.

It will decline about 30 basis points in the fourth quarter because we're going to absorb the Aerospace, but it's still going to end up.

So for the year, if you look at the beginning occupancy, to the ending occupancy, that's going to be up 50 to 100 basis points, which is consistent with what we've been guiding all year for same office.

That makes sense.

The other portion is not excluding the stuff that's in -- as you guys call it the noncore pool, but what's in the core pool is -- the other portion is that unstabilized pool of assets, right, which is today I think 50% leased or so.

And I gather that number which includes 3120 Fairview and some others, that pool of assets, the occupancy ought to be higher as we go throughout the remaining six months of the year.

Is that right?

I think occupancy will improve modestly in those unstabilized.

We do have some leasing that we've realized, but I think the occupancy dates for the visibility we have will be early 2015.

Okay.

That's helpful.

Then just last one for Steve Budorick, you mentioned the leasing pipeline, 500,000 square feet of potential development leasing, that includes the deal this morning.

And then I think you said you could exceed your original guidance by roughly 200,000 square feet.

How much of that is leasing that would be on the current development assets that are in the pipeline versus future development -- future assets that might get added to the pipeline?

Most of it is leasing upwards currently on there.

There is one that we're anticipating is a new development.

Okay.

All right.

Thank you.

Michael Carroll, RBC Capital Markets.

Do you guys still expect to start about five development projects in the year?

Given the activity you're indicating on this call, it sounds like you could start a lot more than that.

Michael, it's Wayne.

I think we're still would guide you to the same range that we've talked about, that $200 million to $250 million range, which is -- puts you in that five building.

Okay.

And are you willing to start any spec buildings in any of your markets right now?

Selectively, we would.

The B.W. Carter is very tight at this point for big box space.

That's the one market that we would consider specking a building.

We are getting permits on a few buildings so we will be in position to do that.

But at this time, we're not absolutely suggesting that we're going to do that, but something that we are looking at.

Michael, I'd say the other market that now that we've completed the lease up that we announced us morning of the flex building in Huntsville, I think Steve and his team are looking closely at the way to be responsive to some of the demand we're seeing built in that market as well.

Okay.

And then Wayne, with regard to the 750,000 square feet of potential redevelopment projects, can you give us some color behind that?

How big are those projects?

Are there minor jobs, or are they going to be completely gutting those buildings and redeveloping them?

Sure.

If you break down the 750,000 square feet, Michael, there's two larger projects that probably would fall into the category that you described to be pretty aggressive redevelopment.

So to Roger's point about the B.W. corridor, we have a project here in Columbia Gateway that we're aggressively pursuing to be able to deliver larger blocks of space to the market.

That is something that would require us to take what amounts to a warehouse building down to the structure and the slab.

We've talked a little bit about our woodlands project up in Philadelphia.

And that falls into the same category.

Those two buildings on a combined basis are half a million square feet.

So of the 750,000, you can see a concentration there.

The balance of the redevelopment pipeline that I referred to is in smaller buildings, and the nature of that redevelopment is a little bit all over the board from upgrade to mechanical systems and some aesthetics to a more aggressive program.

It just gets to be a little bit more market dependent at that point.

And would these be in addition to the $200 million to $250 million of development expenditures?

I think that the redevelopment pushes to the higher end of that range.

Which is --

Okay.

Great.

Thank you.

John Bejjani, Green Street Advisors.

Steve, I think you mentioned the three unleased developments are currently slotted for government users.

Would you expect to see any acceleration of new contractor demand when these properties lease?

Or has that contractor demand already materialized?

I think they're fairly independent, John.

As those lease up, I don't anticipate a correlated change in contractor demand, honestly.

Okay.

And in Huntsville?

How many more tenants or what do you feel you need to accomplish there to achieve critical mass or create an ecosystem there?

Well, I think we're getting pretty close with the second major headquarters.

That's a big announcement we made today.

We're evaluating our next move because we have several prospects that would like to be in the park.

We currently have no properties to lease them.

And we have a land lease on a hotel which when built out will create some synergy, and then we're planning our retail strategy to bring some amenities to the park.

And then lastly we're working with a variety of contractors on long-term planning to show them how the park can serve their long-term needs in Huntsville.

So we feel like we're gaining momentum significantly.

Okay.

Great.

Would you say the leases you're signing or trying to sign there now are still at somewhat lower yields than you're normally looking for?

I think we're pretty happy with the yields that we just achieved on the lease that we announced today.

I think they are right in line with the expectations that we've been achieving elsewhere and what our expectation is for that market.

So high single digits, 9% range?

Exactly right.

Okay.

All right.

Great.

Thanks.

John Guinee, Stifel.

Just a few clean up questions.

Who's the headquarters -- second headquarters at Redstone Gateway?

The company's name is DRS, John.

They're a defense technology firm that's got a strong presence in the market.

This is an example frankly of a flight to quality.

They were in an older set of buildings elsewhere in the city, and this is a consolidation and a significant upgrade for them as they expand their research and development functions and serve as support for the Arsenal.

Okay.

Great.

And then I think you mentioned, Steve, that you had 150,000 square feet coming back in northern Virginia.

Is that Aerospace, or is that Mitre?

That's Aerospace.

Okay.

What's happening in the Mitre building in Tyson's?

They have their new headquarters under construction just across the highway.

Yes.

We've got a couple years left on that lease, John.

I think it's too early to really tell, but from what we're hearing is that new headquarters is filling up fast.

Okay.

Good.

And then Roger, you had mentioned you have $30 million of NOI hitting the books in the next couple quarters.

And I'm looking at page 23, and I see total development costs of $272 million.

Does that mean this is yielding on the 2011 yield on cost or how do I translate $30 million of NOI to $272 million of total costs?

Well, we've already spent some of the construction dollars that are no longer on the under construction or under redevelopment pages because we've put some of those buildings into service.

So the blended yield across all that we've been working on has been about a 9% yield.

Okay.

And then I guess last question, I was looking at page 21, I don't know why, but I looked at the top 20 tenants, and it's interesting as your top 20 tenants have an average in place rent of about $31.50.

And then the multitude of smaller tenants have about a $25 in place rent.

Is that because the top 20 tenants have big TI packages?

Are they in -- primarily in the national business park?

Is this a rhyme or reason why these rents are so much higher than the generic run-of-the-mill tenants?

I think it's a combination.

Certainly MVP is as you know, 25% the Company's NOI, so that means even more of the bigger tenants are in that particular park.

We also have the government revenues which are grossed up because they require a higher level of service than normal tenants do.

But a lot of it is just location driven.

Got you.

Okay.

And then Wayne, I'm looking at page 24.

Just drill down a little bit on some of these redevelopment, for example on [Econ Port] which I guess is Pax River or Alexander Bell or Arbor Way, are you increasing the square footage or just -- I know you're getting these down to the steel frame or all the way down to the pad or how far are you taking them down?

Well, the answer, John, is a little different in each case in terms of what our scope of work is, so it's a little hard to say.

Arbor Way is really taking the building down to the steel structure at roof and slab and then rebuilding from there.

Alexander Bell is close to that although we're taking advantage of more of the skin there than we are at Arbor Way, and we're adding square footage.

That's the only one of the four that are listed on that page where we are able to find a logical expansion and helps us really make the footprint a much more leasable program for the team.

And then Pecan Court's somewhere in the middle.

We actually are upgrading that to an ATFP standard for a government customer, so we did do some work on the structure but tried to work in large part inside of the envelope that's there.

Okay.

And then when you're quoting the return on total [eight to nine] redevelopment return, are you working off a historical net basis, depreciated basis which is Pecan Court $53 a foot, Alexander Bell $53 a foot, Arbor Way $20 a foot, or are you trying to look at a prior value valuation when the building was occupied?

We're looking at the current basis.

So the depreciated book?

Correct.

Great.

Thank you very much.

(Operator Instructions)

Michael Bilerman, Citi.

Manny Korchman is on with me as well.

Roger, just curious, you have your investor day coming up in late September, what do you want to accomplish, what are your goals for the day?

And the tour, what do you want investors to leave with?

What are you trying to hit home with it?

Thanks, Michael.

I think a few things.

One, we want to convey to investors that we haven't forgotten that from a strategic standpoint that we still have some fixing to do in our existing portfolio.

We need to get our occupancy up from around 90% to 93% which we think is a structural, stabilized number.

We need to lease our data center up to stabilization.

We need to sell non-strategic land.

We've got $80 million so we need to sell that.

So point one to the investors is that we haven't forgotten that the most important thing we can do is take our existing assets and improve them and earn the most return we can on them.

The second thing is to walk through our markets and to demonstrate to investors that our markets are stable.

Northern Virginia probably being the one market that where supply and demand and equilibrium isn't necessarily in our favor but the other 80% of our portfolio we think it is.

The third is to demonstrate the value add portfolio that the Company has, both with the 13 million square feet of land that the Company owns and controls that we can develop on in very strategic locations with strategic customers, and then the opportunity inside of our portfolio to redevelop our existing assets.

So I think the points we want to make are that we can grow the Company and NAV just working with the assets and customer relationships that the customer currently has and that we can grow from this point with those particular assets.

That's helpful.

Manny had a couple as well.

Thanks.

If we were to look at your same-store NOI growth as well as your same-store occupancy, what would those have been had you not altered the pool for the add back assets and assets that you're selling?

It would have been about the same, because the assets that we put into or that we pulled aside, really were stable for the quarter and for the last six months.

They haven't increased in terms of occupancy and they haven't the haven't really gone down either.

So they've been stable assets.

The only thing that did improve was the occupancy percentage, but the NOI itself did not really change.

Is that true looking at them on a year-over-year basis as well?

Yes.

It is.

And then are there any other early renewals that you're looking at in the portfolio?

And on the same topic, the early renewal you did, was that you guys approaching the customer or did they approach you wanting to take advantage of the market right now?

In that particular case, they approached us.

And we do have probably three more early renewals that we could get done by the end of the year.

And in all three of those cases, we initiated the conversation.

Thank you, guys.

John Guinee, Stifel.

I noticed you had assets held for sale about $22.8 million on the balance sheet.

And you took a little impairment charge, maybe $1.3 million.

Does this translate that the eight assets, 303,000 square feet, are going to sell for roughly $22 million, $23 million and $75 a foot, or is there more to do it?

There will be more to it, John.

We're not going to give the exact price till we finish negotiating and all, but you have to take impairments before you would recognize gains.

I will put it that way.

It's a building --

Thank you.

There are no further questions in queue.

I would now like to turn the call back to Mr. Waesche for closing remarks.

Please proceed.

Thank you, all again for joining us today.

If your question did not get answered, we are available to speak with you later.

Lastly we hope all of you will be able to join us for investor day on September 29.

Please contact Stephanie if you have any questions about that event.

Thank you, and good day.

Thank you for your participation today in the Corporate Office Properties Trust second quarter 2014 earnings conference call.

This concludes the presentation.

You may now disconnect.

Good day.