COPT Defense Properties (CDP) 2015 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust first-quarter 2015 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. Ms. Krewson-Kelly, please go ahead.

Thank you, Frances. Good afternoon and welcome to COPT's conference call to discuss the Company's first-quarter 2015 results and our guidance for the second quarter of 2015. With me today are Roger Waesche, President and CEO; Steve Budorick, Executive Vice President and COO; Wayne Lingafelter, EVP of Development & Construction; and Anthony Mifsud, EVP and CFO.

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 on the Investors section of our website. At the conclusion of management's remarks, the call will be opened up for your questions.

We remind you that statements made during this call may be forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and that actual results may differ materially due to a variety of risks, uncertainties, and other factors. Please refer to today's press release and our SEC filings for a detailed discussion of forward-looking statements.

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

Thank you, Stephanie. Good afternoon, everyone. Before discussing the quarter's results I'd like to comment on the events that took place in Baltimore yesterday. We are saddened and disappointed by last night's violence in neighborhoods that are roughly 3 miles north and west of the city's downtown. We are closely monitoring the situation and are supportive of the local and state governments' efforts to quickly reestablish an orderly environment that fosters the well-being of the city's citizens, communities, and businesses.

Unfortunately, what happened last night is part of an ongoing national dynamic whose latest local flash point is Baltimore. Nonetheless, the fundamentals of Baltimore's downtown renaissance remain firmly intact and support our long-term investment thesis for this market.

Baltimore's population ranks fourth among the top 25 MSAs for having graduate and professional degrees. The BW Corridor is still the best educated region in the country and ranks number one for the number of colleges and universities that are certified by the NSA and DHS as Centers of Academic Excellence in information assurance and cyber defense. Unsurprisingly, the area is among the top three for overall IT employment; and since 2000 Baltimore has the third fastest-growing Millennial population in the country.

Last night's events won't detract from these underlying trends that are propelling the city and region forward. In fact, this area will be healthier long-term for confronting and resolving its underlying problems.

With that said I'll address highlights for the quarter. The Company generated solid results in the first quarter despite the impact of the prolonged winter, which affected our total and same-office results. We do, however, expect to make that up through the balance of the year with disciplined expense management.

Otherwise, the cold didn't slow us down. We've had an exciting start to the year.

In the first quarter, we commenced construction on 300,000 square feet of new development that is 100% preleased. We also delivered 550,000 square feet of developments into operations, primarily to Strategic Tenant Niche customers. Each of these four developments delivered in the quarter was 100% occupied.

Shortly after our February 10 call we completed a lease with a strategic customer that stabilized DC-6 and restored nearly $1.00 per share of value. Additionally, we acquired two Class-A buildings at premier locations: 250 West Pratt in downtown Baltimore; and Metro Place II at the Dunn Loring-Merrifield Metro stop on the DC Beltway.

Both acquisitions represent an important strategic shift in our investment strategy, namely, to sell select suburban properties and recycle the proceeds into buildings in urban or supply-constrained, transportation-served, amenity-rich submarkets. We believe demand for the latter is accelerating with the growing ranks of Millennials in the workforce and will support long-term value and rent growth.

250 West Pratt in downtown Baltimore represents a major shift in the composition of our regional office portfolio. With this transaction we nearly doubled the percentage of urban square feet in our regional office portfolio from roughly 10% at the end of 2014 to over 17%.

Metro Place II represents a rare opportunity to increase our Strategic Tenant Niche through acquisition. Developing our strategic landholdings for the US government, federal agencies, and defense IT contractors at proven locations has been and will continue to be our primary method for growing our Niche.

What is perhaps most interesting is that Metro Place II checks both the Strategic Tenant Niche and Regional Office boxes. Although we have classified it as a Niche building, we could easily has classified it as one of our top Regional Office buildings.

Selling certain properties from our existing portfolio remains an essential component of improving our overall asset quality and growth potential. We are in the market with a couple of assets currently and will sell properties opportunistically to fund the equity portion of these two purchases. By doing so, we not only improve our portfolio quality but also maintain strong leverage and credit metrics.

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

Thank you, Roger. In the first quarter, we leased a total of 601,000 square feet, including over 300,000 square feet in development projects. Our forecast for the year calls for 700,000 square feet of development leasing. Based on the transactions we are tracking in our shadow development pipeline, we are confident we will exceed this goal.

Renewal leasing volume in the first quarter was light, but the retention and term were solid. We renewed 205,000 square feet or 60% of expirations for an average term of 4.7 years. Gap rents on renewals increased 2.7%, and cash rents declined 4.6%, both of which were modestly softer than we expected.

On a net effective basis, rents were positive and because leasing CapEx on renewals in the first quarter of this year averaged only $9.25 a square foot, versus averaging $15.36 a square foot in the prior year. As I mentioned, lease expiration volume in the first quarter was light. So one 12,000 square foot transaction at Maritime Plaza pushed our overall cash rental rates for the quarter outside the expected range.

Our original guidance assumed a 12,000 square foot tenant would vacate at the end of their lease. Instead they renewed for a five-year term.

All things considered, we believe taking the rent rolldown and locking in this lease was the right decision. The remaining renewals rolled down between 2% and 3%, which was within our guidance.

At March 31 our same-office portfolio was 90.7% occupied and 91.9% leased. We originally forecasted same-office occupancy would end the first quarter at about 90%, so we are modestly ahead of our initial same-office occupancy forecast.

Total occupancy increased 40 basis points in the quarter to 91.3%. We attribute most of the increase to placing four development projects into service during the quarter.

The projects were 100% occupied and are part of the 22 development and redevelopment projects that are not in same-office. Once stabilized, the 22 projects are forecasted to generate annual cash NOI of $46 million, approximately 85% of which will be from Strategic Tenant customers.

Today, $34 million of this total is contractual. As a reminder, $15.5 million of the $34 million of contractual cash NOI benefits 2015 results, including $3.3 million that benefited the first quarter.

As Roger mentioned, we executed an 11.25 megawatt lease with a strategic customer at our COPT DC-6 wholesale data center in Manassas, Virginia. On April 1, the customer took occupancy of the first 3 megawatts. That customer is scheduled to take down another 1.5 megawatts this Friday, and the remaining 6.75 megawatts between July and September.

Accordingly, we expect DC-6 to generate $19 million of cash NOI in 2016. We still have capacity available at DC-6 to add at least another 2 megawatts of new leasing; and when that is achieved, our stabilized cash yield on costs for DC-6 would be north of 8%.

I'll wrap up my remarks with an update to our revenue at risk number, which is revenue on which we need to execute to achieve the midpoint of our guidance. On our February 10 call, we reported revenue at risk of $6.1 million. Currently, our revenue at risk is down to $3.6 million.

So in summary, we have visibility on demand that would allow us to exceed our development leasing goal for the year. We are modestly ahead of our expected leasing volume for existing space. DC-6 is on track to produce $10 million of cash NOI this year and $19 million next year.

And we only need to execute on $3.6 million of new leasing revenue to achieve the midpoint of our increased guidance, which Anthony will discuss in greater detail. With that I'll turn the call over to Anthony.

Thank you, Steve. FFO per share as adjusted for comparability for the quarter was $0.45, which equaled the midpoint of our guidance range and was achieved despite tough winter. Higher snow and utility costs net of recoveries lowered FFO per share by over $0.01 and same-office cash NOI by 2.2%.

We expect to reverse this impact over the next three quarters through disciplined expense management. Accordingly, for the full year we still expect same-office cash NOI to increase between 50 and 150 basis points. Our AFFO payout ratio for the quarter was 72%, and we continue to forecast a payout ratio of between 75% and 80% for the full year.

Highlighting recent capital markets activities and our balance sheet and credit metrics, in January, we sold $18 million of land in White Marsh. During the quarter, we raised $27 million by issuing 890,000 shares from our ATM at an average price of $30.29. Our debt to adjusted book ratio in the first quarter was 40.3%; and our adjusted debt to in place adjusted EBITDA ratio was 7 times.

On our February 10 call we discussed that these ratios and other balance sheet statistics would exhibit variability from quarter to quarter, with the first-quarter statistics exhibiting the highest levels. EBITDA from development projects and from the ramp-up of occupancy at DC-6 will improve these metrics so that they will be slightly better at the end of this year than they were at the end of 2014.

I'll finish my remarks by updating our 2015 guidance. For the full year, we are raising the low end of our prior guidance by $0.02 and now expect FFO per share as adjusted for comparability of $1.99 to $2.03. The increase reflects accretion from the acquisition of Metro Place II, which was not in our original guidance, tempered by accelerating asset sales to fund the equity portion of both acquisitions and the issuance of long-term debt.

For the second quarter of 2015, we are establishing guidance for FFO per share as adjusted for comparability at $0.48 to $0.50. The $0.04 increase from our first quarter of $0.45 to the midpoint of our second-quarter range of $0.49 reflects the initial ramp-up at DC-6 and FFO from the two acquisition properties and from development properties placed in service.

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

Thank you, Anthony. Let me highlight two themes you should take away from this call, the first of which is that we are continuing to upgrade. The acquisitions of 250 West Pratt Street and Metro Place II mark our next important push to upgrade the composition of our portfolio.

We will do this by opportunistically investing in buildings that are positioned to serve the growing demand for office space in highly amenitized, transportation-rich locations. We are in the process of recycling appropriate buildings and nonstrategic land to fund the equity portion of these investments.

The second concept I want to highlight is adding value. We were able to use our unique market knowledge as a local sharpshooter in our strategic markets and differentiated underwriting skills within our Strategic Tenant Niche to add considerable value for shareholders with both acquisitions. By locking in initial yields of over 8% on both buildings we added immediate value, and we expect to add further value when renewing leases in the years to come.

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

(Operator Instructions) Craig Mailman, KeyBanc.

Hey, guys. Just on same-store, how far ahead were expenses versus internal budgeting this quarter?

Operating expenses were about $2.2 million higher than we had originally forecasted for the quarter, for the nongovernment portion of the portfolio.

Okay. Are you going to get any of that back later in the year in the true-up? Or is that just going to drag on the balance of the year?

You guys talked about expense savings through the balance of the year to make it up on the same-store side of things. Can you just run through what you guys have in mind? Is it just going to be deferred maintenance and other things, or are there actual operating efficiencies you guys are looking at getting?

Well, we have been performing very well on our energy management program, Craig; so I expect about half of that to just be organic through energy savings. We've invested a lot in new equipment and technology, and we've been realizing very strong benefits from those investments.

Then the other half we will pick up with driving very hard to get best pricing on the things that we do do, and then using discretion to defer if we need to a little bit here or there.

Okay. Then you guys were active on the acquisition front this quarter, more active then you guys had been in a while. Can you just talk about how you guys -- you are ahead of the zero to $100 million. Can you guys just talk about what the pipeline looks like, and if we should assume that there's additional deals in the pipeline that you guys may go after this year?

We continue to look at acquisitions. There is nothing firm at this point.

We also are looking at a lot of different developments. Clearly development is our first push, because of our unique position with respect to tenants and land control, etc., etc. So we would hope that we would have some more development announcements this year.

Then just lastly, Steve, maybe you could give us a breakdown of how the data center NOI is going to flow. I know you guys had about $720,000 in the quarter; but to get to the $10 million, how does that hit per quarter?

Well, just break it down this way. 3 megawatts commenced on April 1, and that increases to 4.5 megawatts on May 1; there are 6.7 megawatts that will ramp up thereafter. Its commencement is dependent on our completion of the additional capital required to service it.

We've put the guidance in between the end of July and September. And when we complete that work and deliver it, it will commence. So we've been fairly conservative in our estimate of timing.

Craig, the other way to look at it is, we said that $19 million is going to be the NOI for 2016. So if you take a quarter of that for the fourth quarter, when we expect the new lease to be totally operational, you can extrapolate that.

Okay, great. Thank you.

Jamie Feldman, Bank of America.

Hi, I'm sorry if I missed it, and definitely I can read the transcript if you already addressed it; but did you talk about -- I missed Craig's first question. But did you talk about your capital sources going forward for acquisition and development?

We did not.

Okay. Can you just walk us through how to think about your capital needs over the next year and as the development pipeline grows?

Sure. Our total development pipeline and our acquisitions that we've announced for the year totaled $385 million. Our current plan is assuming that we fund about $145 million of that in equity and $240 million of that in debt.

The equity component is a couple of pieces. It's made up of the $27 million worth of stock that we issued in the first quarter; the $18 million worth of land sales that were accomplished in the first quarter; which leaves $100 million in additional asset sales we are assuming. And the debt we assume we will place in the unsecured market at some point later this year.

Are you saying you don't expect any more equity raises?

Not at our current stock price. We will just sell assets.

Okay. Then can you talk about the disposition market? How much more do you think you could do? We are definitely seeing increased demand in secondary markets.

Well, a goal, as Anthony said, would be to try to do at least $100 million for the balance of the year. And I think that is an achievable goal.

What kind of yields?

I think we can do yields inside of our acquisition yields. So we bought for a little over 8%; I think we can sell for 7.5% or so.

Okay. Then when you think about the portfolio overall, beyond your 2015 guidance, what do you consider non-core if you were to ramp up dispositions even more?

Well, we still have 1 million square feet of space in Baltimore County in two different locations: 750,000 in White Marsh; 250,000 square feet in Timonium. We also have select assets here and there in Northern Virginia and the BW corridor.

And we've got a few other things here and there in other submarkets, even in our Niche, that we would be willing to sell if we could get the right price.

Okay, and do you -- is there a dollar amount on that?

Well, it's several hundred million dollars. It's probably $300 million, $400 million.

Okay. Then, obviously, the news overnight in Baltimore is pretty sad and disappointing. You guys are making a big investment there. Can you just give people some comfort on where your buildings are situated versus what we are seeing on the news, and any ways you may need to protect your assets? Just talk through entering that market now, given what is going on.

Well, as I said in our opening remarks, we are a believer in Baltimore and its renaissance. The demographics are very strong. The institutions are very strong.

Again, we have the number four out of the top 25 MSAs in population with advanced degrees or professional degrees. Number eight overall with bachelor's degrees or higher. Top four -- actually number four in median household income, and great Millennial strength, and there is a lot of building going on in downtown Baltimore in terms of residential.

So we feel very strong that this is a blip. Yes, it's going to take a little while to get resolved, but that Baltimore is and will continue to be one of the top 25 MSAs in the country. And the activities that took place last year were approximately 3 miles from down --

Last night.

-- last night were approximately 3 miles from downtown.

Okay. I mean, do you have special plans at your buildings for any --?

Well, we have security in downtown in both our 250 West Pratt and Canton buildings. And we did enhance that a little bit the last couple days to make sure.

Okay. All right. Thank you.

Manny Korchman, Citi.

Roger, if we can just stick to acquisitions and dispositions, what is the buyer base for the buildings in the suburbs if they are paying 7.5% cap rates? Maybe if we can talk about the acquisitions you did at 8% caps, were those off-market deals, or is that the right market for those types of assets in those markets?

Well, in terms of buyers, there is a strong pool of buyers out there, combination of individual buyers, and also buyers using institutional capital, and also just institutions themselves. So we think we can sell into a pretty strong market, particularly where you can borrow today and where interest rates are.

In terms of the acquisitions we made, each of those had a specific circumstance to it. The one in Northern Virginia had government tenants, government contractor tenants.

With what's been going on with the defense budget over the last couple years, there was not a lot of aggressiveness in pricing; and we were able to underwrite the tenants in the building because we knew the tenants and were able to sit down with them and understand what was going on in the building, and what their missions were, and what their contractual situations were, and felt very comfortable that the tenants would be sticky in that particular case.

And in the case of the Baltimore asset, we were not the highest bidder; we were actually number three. The first buyer didn't go forward, and at that point to the seller wanted to get it done and came to number three because of our certainty of execution.

Got it. If we look at DC-6, the incremental leasing, is there any chance that this large user takes the rest of that space? Or is that going to go another user?

Yes, there is a good possibility that this large user expands in the future.

So when would they make that go/no-go decision then? Or is that just based on when you get another lease lined up?

It's going to take them some time. They are very, very busy deploying the network and equipment that they are installing, so I wouldn't expect that to happen anytime soon.

Great. Thanks, guys.

Dave Rodgers, Baird.

Yes, good afternoon, guys. Steve Budorick, question for you with regard to the development leasing you talked about in your prepared comments. I think you said 700,000 square feet of development leasing; and I just wanted to get a better sense of where that came from.

I think you've only got about 300,000 or 350,000 left in the development; less than that in the redevelopment pipeline. So are we thinking that another 300,000 or 400,000 of starts is what's in that number? Walk me through how you get to that 700,000-plus?

Sure. Well, we expect some of the space that's not leased on our development schedule to lease this year. We have two buildings that are being constructed for the government, and at least one of those we expect to lease this year. That's about 200,000 square feet.

We expect to pick up some leasing in our redevelopment portfolio. And then beyond all that, when we talk about our shadow development pipeline, that refers to developments we have not yet started but where we have provided solutions to customers that we believe we have a high probability of closing.

That shadow development pipeline -- it's a coincidental number -- is about 700,000 square feet right now. So we think some of it will be new starts and some of it will be mop-up operations. But we think we can beat our annual goal of 700,000.

Okay. That's helpful. Anthony, with regard to the debt maturities we have in 2015, I think those are extendable term loans. Do you just plan on extending them? Should we refinance those? Any plan for those for the rest of the year?

You're right; the $150 million term loan that matures in September has two one-year extension options. We don't plan to do anything with that. We are currently working with our bank group on extending the $250 million term loan that matures two years from now as well as our line of credit.

Okay. Thank you, guys.

Brendan Maiorana, Wells Fargo.

Thanks; food afternoon. Steve Budorick, so the leasing plan and leasing for the year on the operating portfolio, I think you mentioned last quarter that retention for your two-year plan for both 2015 and 2016 was expected to be around 60% overall for those two years, but probably a little bit higher in 2015, because I don't think you had a lot of large known vacates.

So does that suggest that retention for the remainder 2015 is likely to be 65%, 70% for the remaining three quarters?

That's right, Brendan; that's my expectation.

Okay, great. That probably means there is -- out of the 1.6 million square feet of expirations, I gather maybe it's 550,000, 600,000 -- or 550,000 square feet of nonrenewals.

The new leasing on the operating portfolio was a little bit lower this quarter than it had been in the past. I think it was a little under 100,000 square feet. Do you expect that to pick up as we go through the balance of the year?

Yes, I actually do. We've got some really good activity in Northern Virginia in the building we just took back from Aerospace. We are working solutions now for more than half of that building. I've got a lease on my desk that needs to be signed before I go home today, as a matter of fact.

So, yes, indeed; we've got some pretty good activity where we have vacancy and we expect those numbers to look a lot better after the first quarter.

Okay, great. Then for next year, I think it's the Mitre space that that is expected to come back to you early in the year. Any movement on that block of space or activity level with tenants?

No, it's actually later in the year. It's October 31.

We are internally handicapping that at 50-50 or maybe 60-40, because they are building a new headquarters. We've had some information that the headquarters is filling up quickly, and there is some potential that we could extend it or retain it.

It's a highly secure building, just like the Aerospace building was, where we can't really get in and show it. So I don't expect to have much pipeline on that building until we get well into 2016, get more clarity on their ability to vacate or willingness to vacate the building; and then we can start marketing it.

Okay, thanks. I think I must have -- I think I mixed that one up with the Booz space. Then could you maybe just give us a little update on that one as well?

Sure, we've had a variety of groups interested in the building. Again, because of the security measures in place, it's going to be tough for us to show that until we get to about August. We are working with the tenant on a plan to get access to the building.

But I can say it is a top-quality building on the Tollway with unquestionably the best visibility on your route out to and from Dulles. We have every confidence that we are going to have a good experience releasing it.

Okay. Then just finally, either for Anthony or Roger, I understand the capital plan and the mechanics: $385 million of spend; $245 million of debt. I guess if I think about what you guys have done over the past couple of years, has really worked hard to bring leverage down, I think into a level where you want it.

And not to split hairs, but $140 million of equity getting funded, when I think about asset sales funding a large portion of that, that technically is more at the asset level, not equity, and would bring leverage up a little bit. How do you think about managing the balance sheet and trying to keep leverage reasonable and in line with where you've gotten it to, with the acquisitions that you are doing, the development, and with where the share price is? Do you think about maybe accelerating the asset sales to keep leverage around that 40% level?

Well, the number-one metric that we focus on is debt-to-EBITDA. And because we are getting the benefit of the DC-6 EBITDA coming online towards the end of this year and into next year, and we've got a lot of development NOI that's coming online this year, we don't have to issue a lot of equity to actually stay the same in debt-to-EBITDA and potentially even improve it -- go lower than where we ended last year, which was 6.5 times.

So the goal is to maintain the 6.5 times or better. That is our number-one focus metric.

Okay. Okay, all right. Thanks for the time.

Michael Carroll, RBC Capital Markets.

Thanks. Hey, Roger, can you give us some additional color on the development opportunities that you alluded to, that you are working on? Can you highlight any specific campuses that you are seeing some of the better opportunities in?

Well, we have some activity down in Huntsville; and then we've got some activity on some land that we don't yet control; and then we've got some activity on data shell opportunities. And we've got other activity on some of the other land that we own, like in Northern Virginia. So it's really spread out.

Okay, great. Then my last question. Can you really talk about the conveyance process of the properties that are to be conveyed? What is delaying that transaction, and when should we expect that to be completed?

Sure. The process is really being controlled by LNR, the special servicer. They went through, I think as we might have said last quarter, they went through a protracted period from September to March where they were negotiating with an investor who was going to come in and restructure the loan and acquire the assets. That fell through in March.

So now, last we heard from them they are seeking internal approval to go forward with the foreclosure. We are not quite sure why they need internal approval to do that, but that's the process with the special servicer. We're not driving that process, so we're really waiting for them to act.

DO you expect that to be done by year end?

I expect it to be done by year end.

Okay, great. Thank you.

Aaron Aslakson, Stifel.

Oh, great. John Guinee here. Quick question for you; I think a little detail. But you had mentioned, maybe Anthony or Steve, that $2.2 million of higher OpEx than expected from nongovernment buildings. Caused me to look it up, and I guess you've got about 28% of your NOI from government buildings.

Are those all gross lease buildings with a flat level gross rent where you're taking the OpEx risk and the OpEx benefit? Is that why you differentiated between the two?

No. I differentiated between the two because the government component that was over budget is 100% recovered from the government. So those are triple-net leases with the government; so it really didn't impact the net results of the Company.

So it's 100% government or 100% triple-net, but the nongovernment are more gross leases where you have to absorb that higher OpEx?

There is an expense stop in each of those leases. We don't have gross leases per se, but we do have expense stops.

We were over budget for the first quarter about $3.3 million. $1.1 million of that was to net lease property, so we recovered 100% on that.

The other $2.2 million was to those properties in our portfolio that are not triple-net. We have a recovery rate over a stop for all those particular buildings. We accrued at the budgeted rate recoveries for the first quarter, under the theory that we could recover those expenses over the balance of the year through good expense management.

Okay, great. Okay. Then second, you bought a couple buildings, one around the corner here and then one down in Dunn Loring Metro. But what is going on throughout the country, as I understand it, is that there is a lot of municipalities, a lot of cities that are chasing cyber security jobs. There might be eight, 10, 12 different markets that are really growing those sort of jobs.

Why did you decide to invest incrementally so close to home, versus establishing a foothold in a different market?

Well, from time to time, we've looked at other markets, but first of all, the timing is very bad, generally speaking. The capital markets cycle has peaked in most markets and pricing is very, very aggressive. So we have not pursued investments in other markets.

In Baltimore, we are not -- or even in Northern Virginia we are not at a peak in terms of the capital market cycle, where there is aggressive cap rate compression and high prices and over-replacement-cost investments. So that is where we allocated our time to try to make some investments.

Great. Thank you.

John Bejjani, Green Street Advisors.

Hi, guys. Thanks for taking the question. In light of the existing vacancy and high volume of expected nonrenewals the next couple years in Northern Virginia, can you talk about how you approached the Merrifield acquisition, given the somewhat near-term lease roll?

Well, we approached it very carefully. Pricing was attractive; it was a relatively small buyer pool. I think other buyers were more fearful of the overall, call it, macro trend in the defense industry.

The largest tenant is a major tenant of ours. We have a good relationship with them.

The second-largest tenant is a current tenant of ours. We have a very strong relationship with them.

We met with them in a variety of contexts and got comfortable with what they do, for who they do it, who their customers are in that building, that this is a priority installation for them. And we are very comfortable with the fact that they would stay at the end of their 3-plus-year terms.

So we felt it was just an ideal acquisition where we could get a great cap rate on a great piece of real estate that has lasting value because of the amenities and the public transportation, and we understand what is going on inside. So we were very comfortable with that as well. It was just really a fantastic opportunity.

Okay, great. You mentioned your desire to recycle out of suburban properties into more urban Regional Office. Where do your Columbia portfolio and redevelopment properties fit into this picture?

Well, we like Columbia long term. It's in between two major cities, two top 25 MSAs, that are contiguous to each other, right off of 95.

Again, we've got the number one-ranked educated workforce in that particular region. And then we've got long-term stable institutions, with the three big ones at Fort Meade and some others that are in the region. So I don't see us selling out of Columbia, with the exception of a one-off building here or there where we just think we've maximized the price or for some reason see an investment risk.

Okay. And I guess, the redevelopment properties?

Well, the redevelopment properties are existing buildings where we like -- they are long-term but the buildings need a refresh. In the case of Airport Square, we bought the buildings back in the 1990s at under $100 a square foot and have had a really good ride with them, and well into double-digit cash returns.

And now we need to invest some money in a few of those, and that's what we plan to do. We have one of those in Columbia also.

Okay. Just lastly, I just wanted to confirm. On page 16 of your supplemental, core office leasing for the quarter, you've got 300,000 square feet of development and redevelopment space in northern Virginia. Are those the Manassas data centers that you recently started?

That's correct.

Okay. All right. That's it for me. Thanks, guys.

Tom Catherwood, Cowen.

Good afternoon, everybody. Roger, following up on your comments about the redevelopment portfolio a minute ago, at the Investor Day in September Wayne laid out a pretty robust repositioning and repurposing program. Are you seeing that generating incremental interest with tenants?

We are. We have a nice opportunity here in Columbia, in our Columbia Gateway Business Park, with a warehouse that will get redeveloped. And then we've got an opportunity up in Blue Bell with our fifth redevelopment building. So I think each of those particular submarkets are highly leased, and there is need for new product in both of those submarkets.

Is that -- sorry, go ahead, Steve.

With respect to the five that are on there, you see that Hillcrest III and Blue Bell, that is 100% leased. Two of those buildings, the Pecan Court and Airport Square V and 921 Elkridge Landing, those are intended for government use. So they are going to take a little bit longer to have lease materialize because it's the government. But we have every confidence we will get those leased.

6708 in Columbia is going to be very successful. We held it off for a current tenant who was considering taking the whole building. They have since changed their mind, but we have good demand behind that. We expect in the next two quarters you will see that get leased up.

And then Airport Square 13, we are just advancing on our renovation. As the visual transformation occurs we already have proposals out, but we think its marketability will increase as the extent of the work is more visible. And we are very bullish on that as well.

I guess if you are more bullish and if you see more incremental demand, is there any thought then of expanding that program, or adding more assets into the pool?

As we find opportunities we certainly will. Heretofore we've only taken that -- made that decision when we get a full building empty, and then it's a great opportunity to do it. We are not evaluating emptying a building to do that.

(laughter) Completely fair point. Steve, sticking on -- you made mention about the leasing at the previous Aerospace building. During the same Investor Day you laid out a series of assets that had been leasing challenged. The thought was that you could raise occupancy over the next 18 to 24 months.

This was Patriot Ridge, Maritime Plaza. How has the leasing progress been in those assets? And do you still see that as a one- to two-year stabilization process?

Well, at 3120 Fairview Park, we had about 67,000 square feet to lease. We signed a full floor lease in that building and we have another full floor tenant coming behind it; so that is about 46,000 of the 67,000. And we have a few other smaller users behind it, so we expect to make good progress and stabilize that asset this year.

Our pipeline at Maritime Plaza has improved. So we expect to put some reasonably good numbers on the board in the next three quarters.

Patriot Ridge is interesting. There have been a lot of contracts awarded out of the defense community in and around the area. We've done a lot of planning. I think we are still a quarter off before the preliminary planning translates to leases, but ultimately I have confidence we will do well there.

And then there is just a very high need for skip space in Westfields where we have the vacant building. We had a little bit of turnover in the building next to it. We've got all that space spoken for already, and we are planning in excess of 50,000 square feet with users for the full building that is vacant, so feeling pretty good.

Got it, got it. And one more final cleanup item. Business development expense and land carry costs jumped up this quarter. Was that the result of the acquisitions or is there something else driving this?

Correct. We incurred $1 million of acquisition costs on the 250 West Pratt Street acquisition, and that's embedded in that line.

Got it. Appreciate the time.

Rich Anderson, Mizuho Securities.

Hey, good afternoon. Sorry I got late on the call here; well, not too bad, actually. I only have one question. It's on kind of the revised strategy for your conventional office business. How would you respond to the argument that maybe you are about a year or two late on executing a CBD type of move? What would be your response to that comment?

Well, I think we are in most markets, but not in Baltimore's, because Baltimore did not recover as fast as other parts of the country did. So I agree with you generally that now is not a good time to be buying real estate with exceptions, and so we think we've found some exceptions.

Okay, and do you have a comment about just the depth of the opportunities that are still out there? If you said this, I apologize, but just curious what the potential pipeline of this kind of -- this strategic shift might be for you over the next few years?

There's really not a pipeline. It will be opportunistic. We will try to sell assets and we will try to buy opportunists to match those up and improve the overall quality of the regional portfolio.

Would you say you've got a few arrows in your quiver right now on additional deals?

There's some things that we are looking at, but nothing that we've signed up for.

Okay. Anything that you think that could cross the finish line in a relatively short period of time?

Not right now.

Okay, I'm trying. Thanks.

(laughter)

Dave Rodgers, Baird.

Yes, sorry, guys. Just a quick follow-up. Anthony, I guess a question for you with regard to kind of published financial results, both fourth quarter and first quarter, so I was trying to tie these out. Expenses were up I think about $7.5 million sequentially, and I realize that is a total Company pool. But revenue is kind of only up about $400,000 over the same period, and I get that about half of the expense increase was due to the expenses you talked about in weather, and you can kind of see in the reimbursements that you picked up the reimbursements from the government side that you talked about.

But what drove the other $3.5 million to $4 million of OpEx increases? If you addressed that, I didn't really catch it. And I guess how do we think about that additional increase in OpEx going forward?

Off the top of my head, I would think that a portion of that is the result of the projects coming online from the development portfolio, but I can dig into that and get back to you.

Okay, thank you.

Christopher Lucas, Capital One Securities.

Good morning, everyone. Roger or Steve, I guess now that you have stabilized DC-6, how are you thinking about the long-term ownership of that asset and COPT's involvement in the multitenant data center facility business?

Well, we weighed a few things. The first is the tenancy; who is in the building and what the strategic nature of the tenants are and how -- what we are trying to do with them to try to grow and what impact selling that asset would have on that.

The second is, can we add more value either through additional leasing? We also think about where are runs compared to market and future expectations. So we've leased the facility up on the lower end of rent, so there is probably upside from there.

We think about the impact on the franchise and we certainly think about the need for capital for value-creating opportunities. And then where in the queue would this particular asset be versus other assets we would sell if we need capital to fund value-creating opportunities.

So where would you see this asset in the current queue?

So where we think of it currently is we think there is still an opportunity to add some more value, and we want to give it the next 12 months to see if we can add some more leasing and push through some more megawatts in that particular facility.

If I have it correct, what is the availability of additional power or leasing to that building at this point? What do you have left to do?

We have 2 megawatts of capacity that is already built that we can continue to lease up, and we have customers we are working with for solutions on that capacity. We have the potential to further densify it, depending on customers' needs. And that densification could add as much -- or could easily add 2.25 to 2.5 megawatts to the building, if not more.

Okay. And then just, again, a bigger picture question. Related to just the contractor environment, where do you guys -- what's happening with their confidence at this point and their willingness to make decisions? Has there been any change, any improvement over the last -- compared to a year ago, or has it been pretty steady since then?

Well, it improved gradually all the way through 2014, Chris. So as we were on this call a year ago, there were still high levels of indecision. The budget deal that was cut in Congress was just being worked out, and the implications of it on the contract flow had yet to be seen.

And I think if you were listening to some of the activity I talked about to Tom a call or two ago, it's markedly better than it was a year ago in many of our locations. So we've had better confidence and I think it continues to build.

Now that being said, we still -- because of our guidance on our renewals, we still recognize that the community as a whole is continuing to refine their space needs as leases roll. So we still think we are going to average about a 50% renewal rate in 2015 and 2016, but new leasing is emerging at a more -- with more confidence than it was a year ago.

Okay, and then the last question for me going back to DC-6. Is there a -- and this is more of a detailed question -- does the gap in cash NOI ramp each other, or is there a free rent period at the front end here for them to sort of get set up?

There is no free rent on that deal.

So it mirrors -- the gap in the cash should mirror but for the straight-line effect?

That's right.

On the bumps. Okay, great. Thank you, guys.

Tayo Okusanya, Jefferies.

Yes, good afternoon. So just a quick question about the updated 2015 guidance. Again, when I think about the acquisitions that were made during the quarter, the lease-up of DC-6, and then the numbers kind of end up at 201 in the midpoint. Just when I throw those numbers into my model, though, it seems like you guys should be coming out about $0.02 or $0.03 higher than that number.

And I am just wondering, is there anything potentially I am missing on the rest of the year that could be an offset to what I am thinking about?

Probably the biggest item is the timing of when we would go to the market to issue debt. So the longer we wait, the higher the earnings for the year would be. It works out to be about $0.005 per month. So if we waited until September, earnings could be higher. If we went earlier, earnings would be less. That's probably the biggest variable, and also maybe the timing of asset sales.

And with regard to DC-6, we had a healthy NOI increase in our guidance and budget. We've exceeded it a bit, but with timing it's not clear we are being conservative. But there was a budgeted significant NOI increase in our guidance, so it's not all upside in 2015. The $10 million to $19 million jump would be upside.

Got it. That's very helpful. Thank you.

At this time, we have no other questions in the queue. I'd like to turn the call back over to Mr. Waesche for closing remarks.

Thank you all again for joining us today. If your question did not get answered, we are available to speak with you later. Good day.

Thank you for your participation in today's Corporate Office Properties Trust first-quarter 2015 earnings conference call. This concludes the presentation. You may now disconnect, and good day.