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Corporate Office Properties Trust (NYSE:OFC)

Business Update and 2013 Guidance

January 15, 2013 11:00 AM ET

Executives

Stephanie Krewson - Vice President, Investor Relations

Roger Waesche - President and Chief Executive Officer

Steve Riffee - Executive Vice President and Chief Financial Officer

Steve Budorick - Executive Vice President and Chief Operating Officer

Wayne Lingafelter - Executive Vice President, Development and Construction

Analysts

Craig Mailman – KeyBanc Capital Markets

Josh Attie – Citigroup

Rob Stevenson – Macquarie Resesarch

Brendan Maiorana – Wells Fargo Securities

Erin Aslakson – Stifel Nicolaus

Michael Knott – Green Street Advisors

Tayo Okusanya – Jefferies & Co.

George Auerbach – ISI Group

Sheila McGrath – Evercore Partners

John Bejjani – Green Street Advisors

Todd Lukasik – Morningstar

Operator

Good day ladies and gentlemen and welcome to the Corporate Office Properties Trust 2013 Guidance 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.

Stephanie Krewson

Thank you, Matin. Good morning, and welcome to COPT's conference call to discuss the company's 2013 outlook and FFO guidance. With me today are Roger Waesche, our President and CEO; Steve Riffee, the Executive VP and CFO; Steve Budorick, our Executive VP and COO; and Wayne Lingafelter, our Executive Vice President 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 up for your questions.

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 re-lease space under favorable terms, regulatory changes, changes in the economy, the successful and timely completion of acquisitions, dispositions and development projects, changes in interest rates, and other risks associated with the commercial real estate business as detailed in our filings with the SEC.

I would now like to turn the call over to Roger, for his formal remarks.

Roger Waesche

Thank you, Stephanie and good morning everyone. Despite the tepid economic growth and the continued federal budget debate, the specialized portion of our business that serves the government and defense information technology industries, continues to demonstrate strong performance, as evidenced by the fact that 675,000 of the 1.2 million square feet of development leasing we achieved in 2012 was to tenants in this strategic niche. In fact, our strategic properties adjacent to these demand drivers are projected to approach 95% occupancy by the end of 2013. In contract, occupancies of properties not proximate to government demand drivers and which are subject to general market conditions continue to be affected by the slow economic recovery. Occupancy in such generic locations is recovering as quickly and at some cases is expected to decline further.

The strategic reallocation plan we launched in April of 2011 has reduced our exposure to these more generic suburban office properties by 3.2 million square feet valued at nearly $400 million. As Steve Riffee will discuss in his remarks, we expect to execute on the remaining operating property sales related to the SRP in the second half of 2013. Doing so will enable us to complete the reset of our earnings and position the company for earnings growth in 2014.

Before turning the call over to Steve, let me give an update on our perspective on the issues of sequestration and the DOD budget. Although we outperformed our leasing goals in 2012, the broader budget issues that have persisted for the last few years continue to create a very uncertain operating environment for our existing and prospective tenants.

Tenant consolidations and densifications were a reaction to the need to reduce expenses and compounded the effects of the slow economy. While a few tenants are still consolidating intensifying in 2013, the good news is that most have already made their decision about right sizing their real estate needs. This sets up the next cycle of health demand for class A office space once the long term budget resolution is achieved.

Regarding the ongoing federal budget situation, we believe the most likely outcome is that the DOD will experience relatively modest additional budget cuts in aggregate when the negotiations are finished. The reasons behind our expectation are many fold.

First, the global threats to the country are significant are real. Because both political parties know this to be true, there’s no real political will in either party to gut the defense spending.

Second, money spend on the overseas contingency operations which largely represent the wars in Iraq and Afghanistan already has dropped by half from $180 billion in fiscal year 2008 to $89 billion in fiscal 2013 and is projected to drop further in the coming years. In fact, last week the president called for a faster drawdown of troops from Afghanistan.

Third, the government’s basic defense priorities have not changed and are increasingly focused on cyber security and technology solutions.

Fourth, defense spending is not the budget buster. Entitlement spending is. The Budget Control Act of 2011 set caps on discretionary spending, including defense. Included in the initial $1 trillion of spending reductions were $468 billion of cuts to the defense budget. These cuts already have lowered the DOD’s future rate of spending growth to below that of inflation. In fact, defense spending in fiscal year 2012 that ended September 30 decreased 2.9%.

In contrast, the rate of growth on entitlement spending has not yet been curtailed. For fiscal year 2012, social security and Medicare spending increased 5.9% and 3.2% respectively and both are on track to increase by at least mid-single digits going forward.

For the first three months of the government’s fiscal year 2013, defense outlays were down 5.1% while social security was up 6.7%, Medicaid was up 7.5% and Medicare was 5.3%. for these and other reasons, we expect that most likely ultimate outcome is for defense cuts to play a role in the debt ceiling and sequestration resolution, but not likely to approach the $50 billion of annual cuts currently outlined.

So the real question is how will the spending levels affect our portfolio? We believe our business is well positioned even in a flat to modestly down defense spending environment. This is because we have no exposure to troop deployment or to large weapon systems and instead, our portfolio is geographically aligned with government demand drivers that are knowledge phase defense installations.

The missions carried out by our demand drivers are priority programs like cyber and are directly related to national defense. So we expect these agencies budgets to be largely maintained. We will be the beneficiary of longer term demographic shifts jobs to our strategic locations, with contractors move to be proximate to the government customers. It was our geographic alignment, combined with our established franchise of serving the specialized needs of our tenant niche that enabled us to lease nearly 675,000 square feet of development space to them in 2012.

Therefore even though news related to defense is likely to be turbulent in the coming months while the budget issues are debated, we do not expect a fundamental decline in demand for our existing franchise and we expect continued demand for new construction, especially once our government and contractor related customers are operating in a more certain budgetary environment. In the meantime, we’re going to finish what we started and focus on what we can control so that 2013 is the final year of our repositioning.

The midpoint of our 2013 FFO per share guidance range is $1.88 which reflects the impact of strategic initiatives we have achieved since we started our repositioning in 2011. Specifically, we have sold nearly $400 million of non-strategic properties which improved our overall portfolio and earnings quality and our more measured approach to development investment has resulted in a reduced level of capitalized interest expense in our 2013 projection.

We also improved our balance sheet flexibility in 2012 by issuing $200 million of common equity and $117 million of preferred stock, net of redeeming a higher yielding charge.

Our 2013 forecast also assumes we complete operating property sales defined under the SRP and also some of the non-strategic land. We also plan to remain disciplined with regard to new investments, aggressively compete to capture the demand for space in our markets and to make further progress on improving the balance sheet. In short, 2013 is the final push to remove any impediments to growth.

On that note, let me turn things over to Steve who will go through the upward revision to our fourth quarter 2012 guidance and provide underlying assumptions for our 2013 guidance. Steve?

Steve Riffee

Thanks, Roger, and good morning, everyone. Before discussing 2013, I want to go through the upward revision we are making to our fourth quarter 2012 guidance. On October 25, we issued guidance for fourth quarter 2012 diluted FFO per share as adjusted for comparability of $0.45 to $0.48. in this morning’s press release, we increased that range to between $0.49 and $0.51, primarily to reflect a onetime recent gain on the sale of our remaining interest in a non-real estate investment called TractManager.

For 2013, we are issuing diluted FFO per share guidance of $1.83 to $1.93, implying a midpoint of $1.88. We also are establishing first quarter of 2013 guidance of $0.44 to $0.46. Now, when reconciling the midpoint of our revised fourth quarter 2012 guidance of $0.50, there’s a $0.45 midpoint of our first quarter 2013 assumption. You need to back out the non-recurring $0.03 gain in our fourth quarter that relates to TractManager. That adjustment brings you down to $0.47. the remaining difference relates to the fact that the first quarter 2013 number assumed normal snow removal costs or as the fourth quarter’s operating expenses were lower due to the lack of snow removal costs.

Turning to the major assumptions behind our full year range for diluted FFO per share, first is our same office expectations. Our 2013 same office portfolio includes properties that are fully operational in both 2012 and 2013 and excludes properties that are part of the strategic reallocation plan and our projects in Blue Bell, Pennsylvania. Let me further parse our same office portfolio between strategic properties, meaning those that are adjacent to government demand drivers as well as properties primarily leased to government and defense IT tenants in the greater Baltimore, Washington region in Northern Virginia. We’ll refer to remaining properties in our same office portfolio excluding those already designated for sale as other properties.

As Roger mentioned, the company is benefiting from the strength of its strategic properties which represents 74% of the projected 2013 cash NOI from the same office pool. The strategic same office properties on average were 92.5% leased in 2012 and are projected to be 93.8% leased during 2013. Excluding lease termination fees, we projected 3.3% year over year increase in strategic properties same office NOI over 2012.

For the entire same portfolio, we expect average occupancy to improve by 100 basis points in 2013. Excluding lease termination fees and assuming a tenant retention rate of between 65% and 70%, we expect aggregate same office NOI for 2013 to increase 1% over 2012 with a range of flat to up 2% for the year.

I would also note that our projected same office NOI growth in 2013 is negatively impacted by the provision for snow removal costs that were not experienced in 2012. So even with a higher expense provision, we still expect positive same office NOI growth in 2013.

From the revenue side, embedded in the plans for leases assumed to commence in 2013, we have approximately $19.5 million of revenue at risk, of which $14.5 million is in various stages of negotiation.

Moving on to the second assumption behind our 2013 FFO per share estimate. We forecast approximately $9.5 million of cash NOI from developments placed in service during 2011, 2012 and 2013, $6.2 million of which is already in place.

Third, our 2013 guidance range does not include the effect of any acquisitions and does not assume the sale of 16 operating properties – and does assume I should say, the sale of 16 operating properties in Colorado Springs in the third quarter as well as some of the land in the SRP for total proceeds of $160 million. These 16 properties are classified as held for sale and generate quarterly cash NOI of approximately $3 million.

Fourth is the consolidated portfolio occupancy. Recall when we gave our fourth quarter 2012 guidance on October 25, we disclosed that two un-stabilized buildings would roll off the development pipeline would be placed into service before yearend, resulting in yearend 2012 operating portfolio occupancy of 87.8%. From this level, we expect consolidated portfolio occupancy to steadily improve by approximately 100 basis points during the first three quarters of 2013.

Assuming we complete the Colorado Springs disposition in the third quarter, our consolidated operating portfolio occupancies should jump another 100 basis points in the fourth quarter to reflect those sales. The occupancy gains from leasing and from selling the lower vacancy Colorado Springs properties will result in average portfolio occupancy of 89% for the year.

The fifth component of our 2013 guidance relates to COPT DC-6, our wholesale data center that formerly was named Power Loft. In 2013, we have budgeted cash NOI only from existing lease agreements which totals $1.7 million. While we completed our first new wholesale lease in the fourth quarter of 2012, these leases tend to take considerable time to negotiate and additional time for tenants to install equipment and for free rent periods to burn off. So we conservatively have not placed additional cash rent assumptions in our guidance plan.

Finally, since the nature of government deals, either directly or through the contractors smaller in scale, we have initiated a co-location sales program that is just ramping up. Although we’re encouraged that it will be successful, we have not added any speculative leasing into the guidance.

Sixth, we expect G&A and new business costs, which includes the cost of carry associated with our land holdings to decline by $2 million to $3 million in 2013 versus 2012. The sum of assumptions relates to other income. We project other income of $2.5 million to $3 million primarily from development fees and $4 million of interest income on existing loans for total other income of 2013 of between $6.5 million and $7 million.

Eighth, let me mention a few line items required to estimate total FFO and AFFO. We budget lease termination fees of $4 million in 2013. This is higher than our 2012 numbers because one large tenant in our Northern Virginia market gave notice just before yearend, exercising a 2014 lease termination right.

Capitalized interest is projected to be approximately $9 million for the year, which compares to $14 million of capitalized interest in our 2012 forecast. We project our straight line rent adjustment to be roughly $11 million for the year. Then adding $2 million of other GAAP adjustments against that estimate results in total projected GAAP adjustments of approximately $9 million for the year.

We also project recurring CapEx of between $43 million and $45 million for the year. The estimate includes CapEx associated with the properties held for sale in Colorado Springs and our project in Blue Bell, Pennsylvania.

Finally, our 2013 plan assumes we’ve retained cash flow to generate an FFO payout ratio just under of 80%. Additionally, at yearend 2012, we had a zero balance on our $800 million line of credit and in 2013 we have less than $120 million of debt maturing. Our 2013 plan assumes we issue over $250 million of long term debt to refinance maturing debt and to extend our debt maturity ladder. To reiterate Roger’s earlier remarks, our plan assumes we do not increase our leverage level in 2013.

And with that, I’ll now turn the call back to Roger.

Roger Waesche

Thanks Steve. In summary, although Washington has not completely resolved its budget issues, we expect a highly energized and contested agreement to be reached on spending cuts sometime this year and for the DOD’s base budget not to be significantly cut from fiscal year 2012 levels. COPT’s portfolio is strategically aligned with government demand drivers where we expect the effects of any cuts to be minor since the missions being carried out at these locations are critical in nature.

So we expect 2013 to continue to present us with challenges, but also a fair amount of opportunity. We cannot control Washington D.C, but we can control our own actions. To this end, 2013 will also be the year in which our company finishes the strategic initiatives we started. We will complete the sale of the operating properties that are in the SRP. We will remain disciplined allocators or capital and we’ll endeavor to further strengthen our balance sheet.

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

Question-and-Answer Session

Operator

Thank you, Mr. Waesche. (Operator instructions). Your first question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed.

Craig Mailman – KeyBanc Capital Markets

Good morning. Jordan Sadler is on the line with me as well. Just a couple quick ones here. Steve, on the same-store NOI, were those cash or GAAP numbers that you are giving?

Steve Riffee

Cash.

Craig Mailman – KeyBanc Capital Markets

Okay. And what type of rent spreads are you guys expecting in '13?

Steve Riffee

We’re re-leasing rent spreads rolling down in the low single digits.

Craig Mailman – KeyBanc Capital Markets

Then just on occupancy, obviously the 100 basis points coming in the first three quarters seems to be a lot of it just from leasing. Just given the environment you guys have in your markets, is that stuff that you have in the bag or good visibility on? Or do you just anticipate some of this stuff in Washington starting to get wrapped up and contracts coming through and your base tendency really starting to pick up with their leasing activity?

Roger Waesche

Well Craig, I think it’s a combination of things. First, our leased but not yet occupied square footage is a pretty significant number that will benefit us as we go into 2013. I do also think that we’ve had an awful lot of deals get ready to be signed and have been put on hold. So we do expect that there will be a resurrection of some of those deals as we go on.

Craig Mailman – KeyBanc Capital Markets

Okay. Then just on the sale of Colorado Springs, do you guys have any interested bidders in that, or is that just a place mark in the third quarter?

Roger Waesche

We’re in the early stages of marketing and we believe we know who – not who the buyer will be, but the type of buyer and we’ve got a good package ready to go and we’ve sent out a teaser and we’ve had a few showings at this point. So the process is still early on, but we’re feeling good the reason we deferred the process until now is because we were able to do a lot of leasing towards the end of 2012 that would benefit the sales cycle in 2013.

Craig Mailman – KeyBanc Capital Markets

Okay. And then just one last quick one and I’ll jump back in the queue. Timing on the $250 million of the longer-term? I’m assuming that’s just notes, or is that a term loan that you guys are expecting?

Steve Riffee

The $250 million – we have had $20 million of debt maturing at various points throughout the year. The $250 million is just also happening throughout the year to take advantage of lower rates and terming out more debts. So there’s some refinancing of shorter term assumed in there too.

Craig Mailman – KeyBanc Capital Markets

Okay, great. Thank you, guys.

Operator

Your next question comes from the line of Josh Attie with Citigroup. Please proceed.

Josh Attie – Citigroup

Thanks. Good morning. Has there been any incremental leasing in the development pipeline since the October call?

Roger Waesche

There has been some. What you’ll see on the development schedule at the end of the year is that we really have four buildings that don’t – that are still under development lease up that don’t have leasing – two buildings at the National Business Park, one designated for contractors and one designated for the government. We had started the small flex building in Huntsville, 61,000 during 2012. So that’s there and then our building at Patriot Ridge which is still partially leased. And so we have had some development leasing, but not significant since the last call.

Josh Attie – Citigroup

Thanks. On the balance sheet you mentioned wanting to keep leverage neutral in 2013and I know you have a $150 million ATM program that you put in place last November. Are there any assumptions for ATM issuance in the guidance?

Steve Riffee

No. At this point we’re not assuming that we’re issuing equity. It’s a program that we wanted to put in place, just give us the tool to make sure that we could continue to keep the balance sheet strong if we got additional development opportunities along the way beyond what we’ve planned in our base plan.

Josh Attie – Citigroup

And if you remind us what the deleveraging goals are, and also the strategy and time frame for getting there?

Steve Riffee

Well, we’re very happy with the progress that we made and I’ll let Roger comment as well in 2012. So we think we have really strengthened the balance sheet. We think what we need to do is continually to naturally delever organically through the rest of the asset sales and then really by starting to strengthen the portfolio occupancy. So this year we’ll continue to reset our goal with try to stay leverage neutral. Over time I think we would like to – as the development seasons, we would like to continue to improve the balance sheet and delever after this year.

Josh Attie – Citigroup

Listening to those comments, is it fair to say that you don't expect to do incremental equity just to reduce debt or to delever, that you expect to use the ATM program for growth? Is that a fair way to look at it?

Steve Riffee

At this point we’re not expecting further equity to delever in the assumptions that we’re putting forward.

Josh Attie – Citigroup

Okay, thank you.

Operator

Your next question comes from the line of Rob Stevenson with Macquarie. Please proceed.

Rob Stevenson – Macquarie Resesarch

Good morning, guys. Steve, what is the 2013 contribution from the leased but not commenced space in the portfolio that you and Roger were alluding to? How material is that?

Steve Riffee

I’m sorry, the leased?

Roger Waesche

Well, we have – generally speaking the difference between our occupancy and our leased but not yet occupied is 1.5% to 2%. So that represents 200,000 to 300,000 square feet of space and if you take whatever, a $20 run rate, that equates to $0.04 or $0.05 a share.

Rob Stevenson – Macquarie Resesarch

Okay. So that's -- I'm just trying to figure out what you guys are including in the guidance from the stuff that’s been leased but you are not getting any economics off of day one. So it's $0.04 to $0.05 or so?

Roger Waesche

Right.

Rob Stevenson – Macquarie Resesarch

Okay. And then are the lease -- you said that you have a big lease term, come big lease that's going to be terminated. Is that going to wind up being in any specific quarter or is that going to be spread? How is that going to fall?

Steve Riffee

Well, they gave notice right as we ended the year to vacate in March of ’14. So the accounting is to recognize ratably from the 1st of the year through March of ’14 the lease termination and that will be $3.5 million this year in ’13.

Rob Stevenson – Macquarie Resesarch

Okay. And then lastly, the announcement that you guys made on the data center leasing for Amazon out in Ashburn, et cetera. Shell construction there, powered shell, is that the way that you are going or did this deal just fall in that manner for the specs rather than doing a more turnkey type of data center going forward?

Roger Waesche

Right. So this deal is consistent with all the other data centers we have in our portfolio, except for COPT DC-6. So it’s really a real estate build-to-suit.

Rob Stevenson – Macquarie Resesarch

Okay. And that's from a data center perspective, if you guys continue to pursue these deals going forward, this is the sort of strategy and what most of the future deals you think will look like, rather than doing the sort of powered, the turnkey style?

Roger Waesche

I think that's accurate. The only other data centers that we would entertain would be those that are for instance at the National Business Park or at Redstone Gateway that have absolute demand driver that we’re connected to.

Rob Stevenson – Macquarie Resesarch

Okay. Thanks guys.

Operator

Your next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Brendan Maiorana – Wells Fargo Securities

Thanks. Good morning. Roger, since I guess you are just on the data center topic, maybe I will just start with that. What’s the rationale for doing build-to-suit? It seemed like it was not on land that you guys owned. It doesn’t appear that it’s a strategic tenant. And then you made a lot of progress over the past couple of years focusing on your core competencies and your strategic tenants and your strategic locations and it doesn’t seem like this is within that framework. So I’m just interested in why you guys chose to proceed with this build-to-suit deal?

Roger Waesche

Sure. Well, I guess generally speaking we’re in the business of serving large customers and satisfying their real estate needs. In this case, again this is a real estate build-to-suit, not a data center build-to-suit. It was done in our strategic market for the company Northern Virginia. It was also done in a strong submarket, Ashburn where there are many demand drivers and we did it with a strong intention (inaudible) great company that’s growing and who’s going to significant dollars in our real estate to enhance its value. And we did it at a yield and an IOR that’s greater than our cost of capital. And we did it in a very low risk way by not taking on the technology risk. So we think we’ve created value for the shareholders, enhanced the franchise and recall that not 100% of our business is government and defense. There is another element and we believe that this is a judicious way to allocate capital on that side of the business that isn’t government and defense.

Brendan Maiorana – Wells Fargo Securities

In the past, I think we’ve discussed the outlook for DC-6, which I think you indicated was – if you didn't get government or defense-related tenants in that data center, that it could be a candidate for disposition. Has that outlook changed with the decision to do this build-to-suit for a non-defense related tenant?

Roger Waesche

No, it hasn’t. We still have the same perspective on COPT DC-6. So as the lease is up we’ll determine its strategic nature to the company.

Brendan Maiorana – Wells Fargo Securities

And how would the yield compare on a build-to-suit project relative to the returns that you’re getting or your projected returns on the rest of your development pipeline, your speculative development pipeline?

Roger Waesche

Well, I think this is a little lower. It’s higher single digits, but it comes with very low risk because it’s leased upfront and the construction risk that we have is very low and also the fact that our customer is enhancing the value of our real estate to their investment. So we’ve had to consider all those factors as we determine an appropriate return requirement.

Brendan Maiorana – Wells Fargo Securities

Sure. Okay, that's helpful. The occupancy, I think I heard your comments and then also Steve Riffee, your comments. So, Roger, if I heard you correctly in the beginning, I think you mentioned that your buildings that are adjacent to demand drivers or are with your core tenants, you expect to be 95% leased or occupied by the end of 2013. I think that’s up from 92.5% at the beginning of the year. Yet if your overall occupancy number is, I think, 90% by the end of the year, it suggests that the remainder of the portfolio would have pretty low occupancy. Am I missing something in there and is that an accurate outlook for your non-core part of the portfolio?

Roger Waesche

What we’re assuming is that the strategic part of our portfolio will have average occupancy for the year, 93.8% and that the non-strategic part of the portfolio will average around 80%. So the total of all that blends to 89% because the majority of our portfolio is now strategic and recall, included in the overall occupancy statistics is Colorado Springs which is 76% leased. So when that goes away that will bump up the balance of the occupancy in the non-strategic part.

Brendan Maiorana – Wells Fargo Securities

What do you think – because I would gather that 95% by the end of the year would be a full occupancy number for the strategic part of the portfolio, what do you think it takes to get that non-strategic part of the portfolio up in the forward years as you look out?

Roger Waesche

I think it just takes time. I think as the economy heals and job growth is realized it will create space demand and we’ll lease up. There’s very little new construction going on and I think it’s going to probably take several more years, but I do think the real estate that we’re going to be remained with after our sales are done will be real estate that we want to earn and we believe will have longer term favorable supply and demand characteristics.

Brendan Maiorana – Wells Fargo Securities

Okay. And hen I think just probably two quick ones for Steve Riffee. The first one is, what’s the – what do you expect the spread between occupancy and lease rate to be by the end of 2013? And second one is, what is your expectation for development starts in 2013?

Steve Riffee

What I have is an estimated development investment spend for you. I don’t have the number of starts in the room with me. So we’re assuming that we would spend 200 to 225. But Wayne is sitting here. He may have the number of starts and I’m not projecting what will be leased, percentage, at the end of the year. What we model is what’s guiding what’s occupied.

Brendan Maiorana – Wells Fargo Securities

Okay. All right, thanks. Fair enough.

Operator

Your next question comes from the line of Erin Aslakson with Stifel. Please proceed.

Erin Aslakson – Stifel Nicolaus

Good morning. Thanks for taking my question. Are there any cancellation rights associated with the Amazon leases?

Roger Waesche

There are not.

Erin Aslakson – Stifel Nicolaus

Okay, thank you. How about purchase options for those assets for Amazon down the road?

Roger Waesche

They have a ROFO. Not a ROFR, but a ROFO.

Erin Aslakson – Stifel Nicolaus

Okay. What do you think made Amazon choose I guess OFC over other competitors in Ashburn? Maybe like Digital or CoreSite.

Roger Waesche

We’re not sure of the name of the tenant, but because we do have a non-disclosure agreement, but I think it had to do with the ability to execute very quickly because they were – the customer was in a hurry to have space delivered to them in ’13. And so we had the ability to execute in a really short timeframe both the upfront elements of structuring a deal and negotiating a deal and getting it to the finish line and then the ability to execute on the construction.

Erin Aslakson – Stifel Nicolaus

So it was more like speed to delivery as opposed to location of the asset?

Roger Waesche

Well, the customer loved the location and then it was all about execution.

Erin Aslakson – Stifel Nicolaus

Okay. I guess over the long or maybe through the next three or four years, how much NOI do you think the data center business is going to be producing for OFC?

Roger Waesche

We’re not sure and it gets challenging as to how to count it because we do have a couple of million square feet of raised floor in our portfolio, but the majority of that is embedded in our government defense IT sector. So we count it in that basket as opposed to as a separate data center basket. And we also have other leases with non-government customers in that niche also that are data center oriented. So we really don’t break it out like that. I would just say that all the data centers that we’ve done have been build-to-suit or where the customer has invested money in the space with the exception of COPT DC-6.

Erin Aslakson – Stifel Nicolaus

Yeah. Okay. Who’s the -- have you named the tenant, or is the information out there about who is the tenant that's leaving Northern Virginia?

Roger Waesche

It’s in our Washington Tech Park building. It’s one of our top ten tenants.

Erin Aslakson – Stifel Nicolaus

And finally, what are your current plans for the Ciena space next to BWI?

Roger Waesche

I think we have some interest from parties who need back office space and we’re making some progress with that. I think we’ll have to spend a little bit of money on one of the two buildings and we plan to do that in 2013 and then move forward with leasing.

Erin Aslakson – Stifel Nicolaus

You put some money into one of the assets. Was a user sale still in the – as part of the same thing?

Roger Waesche

Right. We’re still working that opportunity. I’m not certain whether that will happen or not.

Erin Aslakson – Stifel Nicolaus

Okay, great. And then just to clarify, the TIs and LC spend that was quoted earlier by I guess Steve, was that excluding any TIs and LCs to be spent in 2013 at Blue Bell and in Colorado Springs?

Roger Waesche

That’s right.

Erin Aslakson – Stifel Nicolaus

Okay. Thank you very much.

Operator

Your next question comes from the line of Michael Knott with Green Street Advisors. Please proceed sir.

Michael Knott – Green Street Advisors

Hey guys. If we think about defense cuts or on the other hand the possibility of a temporary government shutdown over the debt ceiling, which one of those would be worse for OFC? And in the scenario of a shutdown, can you just maybe quickly tell us what the impact would be in terms of cash flow and financial statements?

Roger Waesche

Sure. Well, I guess you’re really speaking about a shutdown of the government because we do have leases in place and we have people in the space and they are carrying out and in most cases mission items. And so we would expect that business would continue. I don’t have a handicap catastrophic nature where the government really shut down for an extended period of time, it didn’t pay its bills. But certainly the company has – if that were to happen and we were to have a temporary blip in cash flow, we do have zero outstanding on our $800 million line of credit to shield us from financial damage while that got worked through.

So I think at the end of the day that won’t happen, but what will happen is that there will be some spending cuts as we said and that we will be impacted, but we believe that we’ll be impacted less than a lot of other contractors because of the nature of who our tenants are. And we also have cyber growing going the opposite way. It’s a priority both at the mission level and also in the budget and then we’ve got the BRAC relocations where people are spending money with rent in other locations and will be moving to their new locations over time.

Michael Knott – Green Street Advisors

And just in terms of timing, what's your political crystal ball tell you in terms of when you might get the certainty that you seek? Do you think it will be sooner rather than later over the debt ceiling fight or do you think it’s going to be that can is going to continue to be kicked like it was at December 31?

Roger Waesche

To be frank with you, I really don’t know. I would think that people would be logical and like at the end of the day that there’ll be a long of high strung negotiations and it will be really turbulent, but I’ve got to believe at the end of the day it will get worked out.

Michael Knott – Green Street Advisors

And just a couple more quick ones. How do you guys think about or underwrite the residual risk on the new data center shell that you just announced and would you consider monetizing the value that you created with that lease?

Roger Waesche

We would consider – the second question is yes, we would consider that and maybe in conjunction with some other data centers that we have in our portfolio. And in terms of residual risk, we’re going to be in for a little over $110 a square foot. So we believe in that location with the building improved that it would find another rent seeker at a very favorable ramp of probably much higher than where we are today.

Michael Knott – Green Street Advisors

Okay, fair enough. And then two quick ones for Steve. Steve, what is the G&A reduction attributable to?

Steve Riffee

It’s just – we had taken some costs out of the structure last year and we’ll get the full annual impact, plus we had some transition costs in the first quarter of last year when we were changing the CEF.

Michael Knott – Green Street Advisors

Okay. And then last one for me is, Steve, you mentioned tougher comps for snow removal costs. I’d like to ask what the ballpark is on overall expense growth in the same-store pool, because this quick math that I’m looking at, if you have 100 bps in occupancy gains, only a slight roll-down in rents, and I know you talked about before 2.5% type rent bumps that you get on leases that are not rolling over, that to me suggests a decent size expense figure to only get to 1% NOI growth midpoint.

Steve Riffee

Michael, we don’t have that number in front of us. We probably should. And so we will get you the expense growth offline.

Michael Knott – Green Street Advisors

Okay. Thank you. That's all for me..

Operator

Your next question comes from the line of Tayo Okusanya with Jefferies. Please proceed.

Tayo Okusanya – Jefferies & Co.

Yes. Good morning. Just two quick questions. First one, the cap rate on the expected asset dispositions in second half of 2013, did you give that number?

Roger Waesche

Well, we’re not certain, but what we’ve sold our assets for so far when they’ve been occupied is an 8% on average cap rate and for those on a blended basis, we sold everything in 2011 and 2012 for about 7.5%. So we do think that in the case of Colorado Springs that cap rate will be higher. So I would say that it would be a higher single digit cap rate to sell those assets.

Tayo Okusanya – Jefferies & Co.

Okay. That's good. And then the major tenant that’s moving out in March 2014, is there a key reason why they decided not to renew that lease? Are they moving…

Roger Waesche

It just had to do with consolidation. It had nothing to do with the location. The location is very strong. It’s an amenity-rich building and we feel very good about our ability to re-lease that space.

Tayo Okusanya – Jefferies & Co.

Great. Okay, thank you.

Operator

Next question comes from the line of George Auerbach with the ISI Group. Please proceed sir.

George Auerbach – ISI Group

Great, thank you. Guys, just one quick question. In 2013 you have a couple of known move-outs. Can you maybe just walk through what those are and when they hit in the year?

Roger Waesche

Right. We have two leases with Ciena. One is 96,000 square feet and that matures in February 28. We also have a lease with them for 68,000 square feet that matures in August. And beyond that, we’ve got a bunch of just smaller leases. So today as we sit we have 23 lease maturities greater than 25,000 square feet and we’re certain we only know – in terms of scale, size, they’re the two biggest potential move-outs. The rest are in the 25,000 to 30,000 square foot range. We do have six tenants or so that we think we have a reasonable chance of losing and they are all right around 25,000 or 30,000 square feet.

George Auerbach – ISI Group

Thanks. Also, Steve, I think you mentioned that of the $19 million of revenue at risk you have $14.5 million under discussion today. How does that ratio compare to maybe last year? Do you feel better about the prospects for re-leasing the revenue at risk today as you did maybe 12 months ago?

Steve Riffee

It’s about the same as a year ago and Steve Budorick is sitting here. He can maybe give you a little color on the pipeline.

Steve Budorick

Yeah. We feel good about our ability to execute on the overall number. Revenue at risk implies that we’re not in a contract negotiation or expecting a renewal of the government tenant. And we have pretty good visibility and demand in several of our locations currently. I think Steve intimated that what we experienced in the fourth quarter of 2012 were many transactions that were simply tepid or delayed to see what would happen in the January budget discussion and sequestration deadline. Many of those are starting to move forward now. So we expect pretty good activity.

George Auerbach – ISI Group

Thank you.

Operator

Your next question comes from the line of Sheila McGrath with Evercore. Please proceed.

Sheila McGrath – Evercore Partners

Yes. Good morning. Could you talk a little bit more about the zero leasing assumption at DC-6 in your guidance and the level of activity that you’re seeing at that project now? I’m just wondering if that zero leasing assumption is overly conservative.

Steve Budorick

It may be. We want to put guidance on the street that we’re highly confident we could deliver. The demand on the wholesale level can be characterized as significant. We’re tracking 16 to 20 megawatts of demand in the marketplace seeking a home. But it can also be characterized as tepid or slow moving. People are being very cautious and analytical in their decisions. So we’re expecting progress on the wholesale side, but not necessarily cash NOI during the year. There’s $1 million in straight line income that we elected to not put in the guidance, but we do expect to get. And then lastly as Roger mentioned, in the latter half of the year we’ve developed a marketing program on the co-location level to better target the activity that exists for strategic contracts and we feel pretty good about that. We have a pipeline and I expect to give you some good news soon and a significant in building opportunity set in our prospect list.

Sheila McGrath – Evercore Partners

So you feel better about the demand than you did like a few months ago at DC-6, would you say?

Steve Budorick

Yeah, generally we do. Yes, no question about it, particularly on the co-location side.

Sheila McGrath – Evercore Partners

Okay. And one last question for Steve. The $250 million notes that you said you will have to do, if you were in the market today, what do you think you could execute on a 10-year basis?

Steve Riffee

Well, we’re not quite ready because the timing isn’t right today. We’re going to look at all forms of debt, secured and unsecured. I would say if it’s a 10-year secure debt it’s in the low to mid 4% range. If it’s unsecured it depends how we would go to market and we currently have had bank debt that’s under 2.5% that are term loans. So we’ll be making those decisions as we go throughout the year and give you an update on future calls.

Sheila McGrath – Evercore Partners

Okay. Thank you.

Operator

(Operator instructions). We have a follow-up question from Michael Knott with Green Street Advisors. Please proceed sir.

John Bejjani – Green Street Advisors

Hey guys, John Bejjani here with Michael Knott. How much is the uncertainty factor playing into the comment that you haven't seen much leasing on the development side since the October call? If we get some political resolution, do you see there being pent-up demand?

Roger Waesche

I think the answer is yes, but remember we started 2012 thinking about 400,000 square feet of development and we ended up with a 1.2 million and now admittedly 300,000 square feet of that relates to the build-to-suits we just announced in Northern Virginia. But still we ended up with almost 900,000 square feet of development leasing. So I think it’s lumpy. I think it’s uneven and so it comes in spurts. So it’s hard for us to predict it quarter to quarter, but there has been some pent up demand that just will not sign until the uncertainty goes away. So we could see an unleashing of demand in the first half of the year and certainly into the second half of the year.

John Bejjani – Green Street Advisors

Thanks, guys.

Operator

Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed sir.

Craig Mailman – KeyBanc Capital Markets

Hey, guys. Just one quick follow-up. What is the TractManager investment you guys have? How many more of these type of investments are on the balance sheet?

Steve Riffee

Well, what TractManager was, was an investment made back in the year 2000 I guess and that’s where the company invested $1.6 million in a company that provided computer-based software systems for real estate healthcare to view and track contractual obligations. In 2007, there were two separate merger transactions, one in 2007 where we’ve got some of our investment back and took the investment down to $100,000. And then here in late 2012 we were notified that they were going to do another transaction and we basically got a $0.03 gain on top of our $100,000 investment at end of the year. In general, from prior year investments we have less than $4 million of various investments on the balance sheet.

Craig Mailman – KeyBanc Capital Markets

Okay, great. Thank you.

Operator

Thank you. Your next question comes from the line of Todd Lukasik. Please proceed sir.

Todd Lukasik – Morningstar

Hi. Thanks for taking my questions. It looks like the average expiring rent on a square-foot basis for the leases expiring in 2013 goes up quite a bit from where it was this year. Is that just a matter of mix and that those leases are expiring in higher-rent buildings?

Roger Waesche

It is. A lot of our buildings operate 24/7, 365 so they have higher operating expenses. And so the gross rents were higher than normal, the net rents are comparable to market. And so sometimes our rent maturity schedule looks a little skewed this year. Coming up, we have a pretty high level of maturities in those buildings that operate 24/7, 365. And so the rents look higher.

Todd Lukasik – Morningstar

Okay. And then you talked about an expectation for some light roll-downs I guess in 2013 when the leases are renewed. Do you have anything that you can comment on with regards to 2014 and 2015? Do those mark-to-markets look better than 2013 today, or worse, or about the same?

Roger Waesche

Well, I guess if we were doing those leases today we would still be in the low single digits in terms of roll downs, but we expect the market to tighten up a little bit before ’14 ad ’15 and hopefully we will have rent growth or certainly no rent roll downs beginning in ’14 or ’15.

Todd Lukasik – Morningstar

Okay, great. Thanks a lot.

Operator

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

Roger Waesche

Thank you all again for joining us today. If your question did not get answered on this call, the Steves, Wayne, Stephanie and I are in the office and available to speak with you later. Thank you and good day.

Operator

Thank you for your participation today in the Corporate Office Properties Trust 2013 Guidance Conference Call. This concludes the presentation. You may now disconnect and have a good day.

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