Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Corporate Office Properties Trust (NYSE:OFC)

Q2 2014 Earnings Conference Call

July 25, 2014 12:00 ET

Executives

Stephanie Krewson Kelly - 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

Jamie Feldman - Bank of America

Brendan Maiorana – Wells Fargo

Michael Carroll - RBC Capital Markets

John Bejjani - Green Street Advisors

John Guinee - Stifel

Michael Bilerman - Citi

Manny Korchman - Citi

Operator

Welcome to the Corporate Office Properties Trust Second Quarter 2014 Earnings Conference Call. As a reminder, today’s call is being recorded. At this time, I will turn the call over to Stephanie Krewson Kelly, COPT’s Vice President of Investor Relations. Ms. Krewson Kelly, please go ahead.

Stephanie Krewson Kelly - Vice President, Investor Relations

Thank you, Whitley. Good afternoon, and welcome to COP’s conference call to discuss the company’s second quarter 2014 results and our outlook for the remainder of the year. With me today are Roger Waesche, President and CEO; Steve Riffee, Executive Vice President and CFO; Steve Budorick, EVP and COO; and Wayne Lingafelter, EVP of Development and Construction.

As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release issued earlier this morning and under the Investor Relations section of our website. At the conclusion of management’s remarks, the call will be opened up for your questions.

I will briefly highlight one disclosure item in the current supplement. As we have indicated on previous earnings calls, we expect to resolve a $150 million mortgage loan secured by two buildings in Northern Virginia by conveying those properties to the lender. Because the economics of both buildings now belong to the lender, we have removed them from our portfolio statistics.

Before turning the call over to management, let me remind you that certain statements made during this call regarding anticipated operating results and future events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although such statements and projections are based upon what we believe to be reasonable assumptions, actual results may differ from those projected. Factors that could cause actual results to differ materially include, without limitation, the ability to renew or re-lease space under favorable terms, regulatory changes, government actions and initiatives, changes in the economy, the successful and timely completion of dispositions, acquisitions and development projects, changes in interest rates and other risks associated with the commercial real estate business, as detailed in our filings with the SEC.

I will now turn the call over to Roger.

Roger Waesche - President and Chief Executive Officer

Thank you, Stephanie and good afternoon everyone. Property operations continued to perform well and are on pace with our expectations. Second quarter FFO per share as adjusted for comparability of $0.44 was at the high end of our guidance range and reflects modestly better NOI margins. We remain highly confident that our quarterly FFO per share has bottomed, and beginning with this third quarter, will now trend higher. Our conviction stems from the fact that we have completed several strategic initiatives and absorb the related earnings dilution. We have executed leases for development space. It will produce nearly $30 million of annual cash NOI. And we have increased our total portfolio spread between occupied and leased percentages to 210 basis points.

We see strong demand in our markets from three sources. In our strategic tenant niche, the more constructive defense spending environment that has resulted from the adoption of the Bipartisan Budget Act in January is fueling demand from new and existing customers. Moderate economic expansion in the B.W. Carter is driving demand for our regional office space and throughout most of our portfolio, but especially in and around Fort Meade, where U.S. Cyber Command is located. The cyber security industry’s rapid growth is generating demand for efficient, modern, well-located space.

As Steve Budorick will detail, we are on track to capture as much as 700,000 square feet of leasing for newly developed and redeveloped space this year, which would exceed our initial expectations. Our portfolio is over 90% leased in nearly every one of our markets. The B.W. Carter is 94% leased. Arborcrest in the Greater Philadelphia market is 97% leased. Century Gateway in San Antonio, Texas and Redstone Gateway in Huntsville, Alabama are both 100% leased. After disposing of eight WhiteMarsh buildings now held for sale, our remaining 750,000 square feet in that market will be 92% leased.

In the near-term, we faced a few challenges in Northern Virginia, a market that represents about 20% of our business. That portfolio is currently 91% leased. However, we know we are getting back 150,000 square foot from a tenant at the end of November, which all else being equal will lower our lease percentage for Northern Virginia to around 86%. Every landlord is in the business of getting back and releasing space and in most markets at some point you have to work few periods of weak demand which is the case in Northern Virginia.

The good news is that our challenges in Northern Virginia are finite and fixable. More importantly our strong lease execution levels throughout the remaining 80% of our portfolio should more than offset the few challenges in Northern Virginia. Overall we have good leasing momentum and in select sub-markets have even regained some pricing power. Notably supply remains in check in each of our markets and in the BW corridor in particular large blocks of space are limited. As a result we are now filling up the leasing bucket more quickly than space leaks out and remain confident that we will increase occupancy to between 92% and 93% in aggregate by the end of 2016.

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

Steve Budorick - Executive Vice President and Chief Operating Officer

Thanks Roger. In the second quarter we leased a total of 680,000 square feet including 437,000 square feet of renewals. Our 74% renewal rate for the quarter was above our expectations and increased renewal rate for the year to 69%. Our cash rents on renewals rolled down 4.8% in the quarter, which included a 14% cash roll down and one 42,000 square foot early renewal we negotiated with an international financial services company. We believe securing this high quality tenant in their space through the end of this decade and taking some 2015 leasing risk off the table was a good value add. Excluding the impact of this one renewal cash rents on the remaining renewal activity in the quarter rolled down only 3.6%.

Looking at average lease term this was our second consecutive quarter where average lease term exceeded five years in length, continuing the positive momentum we observed since the Bipartisan Budget Act was enacted in January. Our revenue at risk which is the amount of revenue we need to achieve the midpoint of our 2014 full year guidance is now only $1.7 million. And we are actively negotiating leases that give us confidence, we will meet this number. Before discussing our development leasing I will provide some color on the occupancy changes in the quarter.

At June 30 our same our office portfolio of 161 buildings was 92.9% leased and 90.8% occupied. Same office occupancy dipped 30 basis points during the second quarter reflecting a 50000 square foot net reduction in occupied space. This was all transitional vacancy, however. As we re-let 85,000 square feet of the same office pool expirations to new tenants who will take occupancy in coming months. At June 30 our core office portfolio was 92.2% leased and 90% occupied. The 30 basis point increase in our occupancy level relative to March 31 reflects a net increase of 110 basis points caused by removing 9 buildings from our in-service portfolio during the quarter, offset by transitional vacancy in the same office portfolio and the impact of placing the reminder of NBP 420 into service.

Development we have seen in the quarter totaled 12,000 square feet bringing our total for the first half of the year to 188,000 square feet. Including the lease that we signed at Redstone Gateway this week we have executed 320,000 square feet of development leasing year-to-date. We are on track to achieve our initial goal of 500,000 square feet for the year. And we are likely to exceed that amount by another 200,000 square feet. We look forward to updating you as leases are executed.

Before turning the call over to Steve Riffee, I will update the incremental NOI we expect to recognize in the future from development and redevelopment leasing. Today we have 22 buildings in our active development and redevelopment pipeline that when stabilized are forecasted to generate $48 million of incremental cash NOI. Of this $48 million, $29 million of NOI is associated with executed leases. And therefore has no risk. These executed leases contributed $3.3 million to cash NOI in the first of the year and will contribute approximately $9 million to total cash NOI in 2014. We continue to actively work on transactions to generate the remaining $19 million.

The three development starts, listed on Page 23 of the supplement, that are 0% leased are intended for government users. They total approximately 500,000 square foot and once leased account for roughly 60% of the $19 million of the currently uncommitted future NOI. This $48 million of future NOI from the pipeline of projects demonstrates the strength of our development platform and our ability to generate attractive returns and earnings for our shareholders.

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

Steve Riffee - Executive Vice President and Chief Financial Officer

Thanks, Steve. Good afternoon, everyone. FFO per share as adjusted for comparability for the quarter was $0.44. Revenues were on pace for the quarter and we outperformed on operating expenses. Our AFFO payout ratio for the first half of the year was a conservative 79%. Our same office portfolio represented 91% of our core square footage and 94% of our core NOI. Although our same office portfolio benefited year-over-year from annual rent escalations of 2.2% and a 20 basis point increase in occupancy, same office cash NOI, excluding lease termination fees, declined 40 basis points from the second quarter of 2013. The modest decline in cash NOI was due to higher free rent and slightly lower recovery margins. We forecast same office cash NOI will increase both in the third and fourth quarters of this year.

Turning to our balance sheet, we took advantage of some market opportunities in the quarter to strengthen our ability to fund growth. In mid-May, we issued $300 million of 7-year 3.7% senior notes. With the proceeds, we retired $83 million of secured debt that bore interest at 7.25%. We also paid down $50 million of bank term debt with an interest rate of LIBOR plus 160 basis points. Anticipating asset sales in mid-June, we redeemed all $50 million of our 7.5% Series H preferred stock. As a result of the quarter’s activity and excluding the impact of properties we expect to convey, our debt to adjusted book ratio was 43.9%. Our debt to EBITDA was 7.1 times. And our fixed charge coverage was 2.5 times.

I will finish my remarks with an update on our guidance. For the full year, we are narrowing our guidance for FFO per share as adjusted for comparability from the prior range of $1.85 to $1.92 to a new range of $1.86 to $1.90. The reduction to the high end of our prior range is due to the anticipated building sales in WhiteMarsh and lower expected lease termination fee income. We expect year end same office occupancy to be between 91% and 91.5%, which on an apples-to-apples basis is consistent with our original occupancy growth forecast for the year. We also expect same office cash NOI growth of 1% to 1.5% for the full year. The midpoint of our revised range of $1.88 will result in a conservative AFFO payout ratio for the full year of approximately 80%.

Turning to quarterly guidance, occupancy gains in our operating portfolio and the own set of more NOI from past development leasing will generate higher quarterly results going forward. For the third quarter, we expect FFO per share as adjusted for comparability to be between $0.46 and $0.48 and for same office occupancy to increase between 60 basis points and 100 basis points from June 30 levels. In the fourth quarter, we expect FFO per share as adjusted for comparability to be between $0.48 to $0.50.

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

Wayne Lingafelter - Executive Vice President, Development and Construction

Thanks, Steve. I will make a few brief remarks about the development and redevelopment portfolio, which currently stands at 12 buildings encompassing 1.4 million square foot. Let me start by highlighting two buildings we placed into service during the quarter and which are no longer listed on Pages 23 and 24 of the supplement. (MBP 420) is a 139,000 square foot contractor building that was 68.3% leased at June 30. The second building was Hillcrest II, whose street address is 721 Arbor Way. At June 30, this 183,000 square foot redevelopment was 95% leased. In Northern Virginia, we have completed the base building construction on COT DC-9 at the end of this month and anticipate the lease commencement as of August 1. This building is 100% leased to a single tenant for 10 years.

Looking at new starts in May we commenced construction on 7880 Milestone Parkway, the next contractor building in Arundel Preserve. KEYW has leased 74% of the building for an advanced cyber research and training lab. We will also start construction on 7400 Redstone Gateway due to the full building lease we announced today. This single storey 69,000 square foot flex building will be joined to 7200 Redstone Gateway existing 62,000 square foot building. We anticipate the full property lease will commence early in the third quarter of 2015.

On the redevelopment page, we have added 921 Elkridge Landing also known as Airport Square 5. Our market analysis concluded that redeveloping that site with a retail component will enhance the value of our surrounding buildings. However, as you can see from the multiple data points that are still to be determined, we are exploring options with targeted users. And we will provide more specifics as our plans are finalized.

Allow me to offer a quick update on Woodlands at Arborcrest formally known as the Merck building. We are aggressively advancing our redevelopment program for the property and are engaging perspective pre-lease tenants and the local municipality in this vision. Our objective is to build on a positive leasing momentum achieved at our other Arborcrest redevelopments by delivering fully renovated efficient space in large contiguous blocks with compelling economics and a further complement of amenities.

I will conclude my remarks with a few words on redevelopment in general and how it fits into our capital allocation decision making discipline. In addition to the four projects totaling 276,000 square feet listed on Page 24 of the supplement, we have identified another 750,000 square feet of existing properties we could elect to redevelop for a total redevelopment pipeline of approximately 1 million square feet. These are properties where we like the location and the submarket dynamics, are confident the land values will continue to rise, but believe that in order to compete the buildings need to be updated creating modern efficient and in some cases secure office space that is differentiated from the competition is a value add discipline we are committed to applying across our portfolio to generate shareholder value. Broadly speaking, parks the contain assets with compelling redevelopment opportunities are Columbia Gateway and Airport Square in the BW Corridor, Pax River and of course Arborcrest in Plymouth Meeting. In every case, we expect to achieve low-double digit returns on our incremental investment and high-single digit returns on our total investment. We look forward to discussing some of these projects in greater detail at our Investor Day on September 29.

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

Roger Waesche - President and Chief Executive Officer

Thank you, Wayne. Let me leave with you three observations. Our second quarter marked the inflection point for our quarterly results. Demand for space in our strategic tenant niche and in the BW Corridor where most of our regional office buildings are located continues to build resulting in strong leasing momentum throughout most of our portfolio. Occupancy gains from leases already executed will drive FFO higher as indicated by the midpoints for our quarterly guidance for FFO per share of $0.47 in the third quarter and $0.49 in the fourth quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Craig Mailman of KeyBanc Capital Markets. Please proceed.

Craig Mailman - KeyBanc Capital Markets

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

Steve Riffee

Well, what we have updated guidance for is really the top end of the range, we wanted to narrow it, but the WhiteMarsh sales that we are talking about have gotten stronger and more clear that we are moving forward with those, so that’s about half of it. And then quite frankly term fees, we outperformed our term fee exponent. We only had $70,000 of term fees in the quarter and still hit our numbers and as we were reforecasting have concluded that we are taking term fees, which at the top end used to be around $3 million for the year down to $2 million. So, those are the two reasons that we brought guidance down, which we weren’t totally clear on those at the time of the bond offering.

Craig Mailman - KeyBanc Capital Markets

Okay. And then just want to clarify I thought original guidance was 1% to 2% same-store NOI growth, so are you guys bringing it down 50 basis points here at the high end?

Steve Riffee

I think we started the year at 0% to 1%. And then we increased to 1% to 2%. What we are saying quite frankly is that it’s getting stronger the rest of the way. I am thinking it’s 2% in the third quarter and maybe as close as say 4% in the fourth quarter, which gets us between 1% and 1.5% for the year. So this being the low point, it grows from here.

Craig Mailman - KeyBanc Capital Markets

Okay. And then on same-store, the 91% and 90.5%, the base of that is still the 90.8% that we closed the second quarter on right? The pool doesn’t change from here.

Steve Riffee

The pool does not change from here. And that growth rate is consistent even before the pool change with what we had in our original guidance.

Craig Mailman - KeyBanc Capital Markets

Okay. Just wanted to shift to leasing here, get your insights on what you guys are seeing today versus the beginning of the year in terms of just overall activity and prospect activity, where you are seeing the best demand these days?

Roger Waesche

Well, I think in the last call, Craig, we reported that activity has picked up in many of the locations that had – where it had been slow last year during the budget impasse. And we continue to see that. We have a significant amount of activity in Pax River in Dahlgren and some around the Navy yard, where contractors are anticipating awards and have been trying to identify locations in advance to the word, so they can move quickly. I did a ratio on the vacant space we have available relative to the prospects and we have got 1.6 square feet of prospects for every square foot we have available in those Navy oriented markets. So, we are anticipating some good progress there. We have continued to have good demand in and around Fort Meade in a variety of parks. We did some additional cyber leasing in the quarter, probably 60,000 square feet. So that continues to be strong. We have had good activity in WhiteMarsh frankly and we have had improved activity in the Airport Square submarket. And then in Northern Virginia, we have had good luck with the good results with the vacancy that we have throughout our portfolio with one exception. And that’s 7770 Backlick Road. We have increased activity post Bipartisan Budget Act, but that contract flow seems slower. So, it’s not quite as heated up as we are seeing in few other locations. At 3120 Fairview Park, where we also have a big chunk of vacancy, reasonably confident we can put that way by the end of the year.

Craig Mailman - KeyBanc Capital Markets

Okay. Then one last quick one, the shadow development pipeline, what does it look like at this point? I know you guys started the Huntsville one, but what could be behind that assuming that you get the three government projects leased up here before year end?

Wayne Lingafelter

Craig, it’s Wayne. Let me take that one. Well, I guess, I would start by reminding you we do have $315 million in our construction and redevelopment pipeline. And that certainly exceeds what we have targeted to be our run rate of $200 million to $250 million on an annual basis. So, we are very pleased with that. You referenced the announcement we made this morning on another 131,000 square feet of leasing and that will generate 69,000 square feet of new construction. When we have talked about our shadow pipeline, we have always tried to do that on the basis of having a good line of sight on demand as we are balancing our pre-leasing opportunities with speculative development. So, if we follow that same program, I would say to you, it’s a day that we have early stages of demand forming for three or four new buildings over the next 6 to 9 months. That’s probably where we would start to handicap the shadow pipeline.

Craig Mailman - KeyBanc Capital Markets

Great. Thank you, guys.

Operator

Your next question comes from the line of Jamie Feldman with Bank of America. Please proceed.

Jamie Feldman - Bank of America

Great, thank you. I guess Roger, if we could talk a little bit more about some of the pockets of increasing demand you are seeing, can you talk more about BWI and what you are seeing going on there and is that more just general office recovery or is that still more defense related?

Roger Waesche

It’s a little bit of both. We have had some increased demand in the BWI Corridor for contractors serving frankly CMS, Medicaid and Medicare. But we also have growth in cyber contractors. As I mentioned, we signed about 60,000 square feet of cyber related leasing in the quarter. We are working with other prospects to find them locations and that magnitude exceeds 100,000 square feet. And then just general, commercial and healthcare businesses in our portfolio are seeking growth as well.

Jamie Feldman - Bank of America

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

Roger Waesche

I would say it’s as expected or maybe slightly more so in some of the locations, I talked about when I was answering Craig.

Jamie Feldman - Bank of America

Okay. And then recently we have certainly seen our share of geopolitical issues and what have you guys seen as a result like should we expect to see more of a pickup or everything is kind of planned out well ahead assuming this kind of still happens?

Roger Waesche

Well, I think the point is that the – there will be no gutting of the defense budget that the need for a high-tech defense for information, communications, intelligence, surveillance, reconnaissance and certainly cyber security is robust. And I think that Secretary Hagel has largely put a wrapper around those things that are priorities in the budget. And based on the – activities in the world today, I think it further enhances his priorities in the budget. So we think that we are well positioned in the defense budget.

Jamie Feldman - Bank of America

Okay. And then talking to brokers, it sounds like you are seeing or we are seeing more demand for secondary type markets, more capital flowing to these markets looking for higher yields, do you guys have any interest in increasing your disposition activity or changing your plan at all?

Wayne Lingafelter

Though at the beginning of the year, we – other than the CMBS resolution, we really didn’t have a lot of sales projected because of the – as you suggested, the heightened demand for suburban office we have decided to sell into that market. One is our – one settlement has already occurred and hopefully the other two will happen in the next couple of weeks. And we are putting some other building up for sales also we do see there is a good opportunity to continue to upgrade the quality of the portfolio and use those proceeds to fund our robust development pipeline.

Jamie Feldman - Bank of America

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

Wayne Lingafelter

No, well, yes, for this year. So anything we would do for the rest of the year would impact 2015 and would not impact 2014.

Jamie Feldman - Bank of America

Okay, alright. Thank you.

Operator

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

Brendan Maiorana - Wells Fargo

Thanks. Good afternoon. Steve Riffee, so just the balance sheet now debt to EBITDA is a little bit over seven times you’ve got $76 million of cash on the balance sheet, it seems like the development pipeline maybe accelerating, how should we sort of think about the view of where you feel that you are leveraged down with the outlook of some additional asset sales that are likely to happen but probably some capital spend on the development pipeline over the next several quarters?

Steve Riffee

Well, we are not guiding for ‘15 yet, but we are certainly maintaining our balance sheet and our ratio is important to us. Looking at the balance of the year, we are comfortable that the cash that we have on our balance sheet plus the asset sales that we are now projecting to have are going to cover our development expenses for the rest of the year. I think we will be putting together our source and use for ‘15 when we give that guidance. But it’s likely to include some more land sales and possibly some recycling among other sources, but we are not ready to give guidance on 15 yet.

Brendan Maiorana - Wells Fargo

Is there anything that we should sort of think about as coverage levels where whether it’s fixed charge or debt to EBITDA that you kind of bump up against those levels might make you a little bit uncomfortable from a balance sheet perspective and asset sales, what your – the non-core assets that you are selling, they probably don’t help those ratios that much, so where you might think about tapping the equity markets if that made sense?

Steve Riffee

Well, Brendan, let me first say that we do have about $50 million of land under contract that there is no guarantee that it will close, but that would certainly positively impact our funding situation. Secondly, we do have $76 million in cash. And then remember, we have a lot, $30 million of development NOI signed up that is going to roll into the income statement in the next couple of quarters, plus we are expecting another $20 million over time. So, debt to EBITDA will improve just by the NOI hitting the income statement.

Brendan Maiorana - Wells Fargo

Okay, I know that’s helpful. Maybe I just wanted a clarification on occupancy. So, the occupancy target of 91% to 91.5% by the end of the year, I think that compares to the same-store of 90.8%. If we look at the overall core portfolio at 90% today, where is the occupancy likely to be for that by year end?

Roger Waesche

It should uptick in correct proportion with same office.

Steve Riffee

Well, by year end our core portfolio and our total portfolio will be one and the same, because we will sold off the WhiteMarsh assets and the CMBS resolution will have taken place. So, our anticipation is that will be pretty close to our same office occupancy.

Brendan Maiorana - Wells Fargo

Sorry. So, I was just confused here a little bit. So, is it 90.8% today going to 91% to 91.5% or is it 90.0% going to 91% to 91.5%?

Roger Waesche

We don’t have same office. So same office is going to go up from 90.8%, up 60 basis points to 100 basis points in the third quarter, it will decline about 30 basis points in the fourth quarter, because we are going to absorb the aerospace, but it’s still going to end up. So, for the year, if you look at the beginning occupancy to the ending occupancy, that’s going to be up 50 basis points to 100 basis points, which is consistent with what we have been guiding all year for same office.

Brendan Maiorana - Wells Fargo

Okay, that makes sense. And then the other portion is the not excluding the stuff that’s in the, as you guys call it, I guess the non-core pool, but what’s in the core pool is that other portion is that un-stabilized pool of assets, right, which is today I think 50% leased or so? And I gather that number, which includes 3120 Fairview and some others that pool of assets, the occupancy ought to be higher as we go throughout the remaining six months of the year, is that right?

Roger Waesche

I think occupancy will improve modestly in those un-stabilized. We do have some leasing that we have realized, but I think the occupancy dates for the visibility we have will be early 2015.

Brendan Maiorana - Wells Fargo

Okay, that’s helpful. And then just last one for Steve Budorick, you mentioned the leasing pipeline, 500,000 square feet kind of potential development leasing sort of that include the deal this morning. And then I think you said you could exceed your original guidance by roughly 200,000 square feet. How much of that is leasing that would be on the current development assets that are in the pipeline versus future development, future assets that might get added to the pipeline?

Roger Waesche

Most of it is leasing up what’s currently on there. There is one that we are anticipating is a new development.

Brendan Maiorana - Wells Fargo

Okay, alright. Thank you.

Operator

Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed.

Michael Carroll - RBC Capital Markets

Thanks. Do you guys still expect to start about five development projects in the year given the activity you are indicating on this call, it sounds like you could start a lot more than that?

Wayne Lingafelter

Michael, it’s Wayne. I think we are still would guide you to the same range that we have talked about that $200 million to $250 million range, which is puts you in that five building.

Michael Carroll - RBC Capital Markets

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

Wayne Lingafelter

Selectively, we would. The BWI Corridor is very tight at this point for big box space that’s the one market that we would consider specing a building. We are getting permits on a few buildings. So we will be in a position to do that. But at this time we are not absolutely suggesting that we are going to that, but were something that we are looking at.

Roger Waesche

Michael I would say the other markets now that we have completed the lease up that we announced this morning of the flex building in Huntsville, I think Steve and his team are looking closely at the way to be responsive to some of the demand we are seeing build in that market as well.

Michael Carroll - RBC Capital Markets

Okay. And then Wayne with regard to the 750,000 square feet of potential redevelopment projects, can you give us some color behind that, how big are those projects, are they minor jobs, are they going to be kind of completely gutting those buildings and redeveloping them?

Wayne Lingafelter

Sure, its if you breakdown the 750,000 square feet Michael, there are two larger projects that probably would fall into the category that you described to be pretty aggressive redevelopment. So to Roger’s point about BW Corridor, we have a project in Columbia Gateway that we are aggressively pursuing to be able to deliver larger blocks of space to the market, that is something that would require us to take what amounts to a warehouse building down to kind of the structure and the slab. We have talked a little bit about our Woodlands project up in Philadelphia and that kind of falls into the same category. Those two buildings on a combined basis are 0.5 million square feet. So of the 750,000 square feet you can see a concentration there. The balance of the redevelopment pipeline that I referred to is in smaller buildings and the nature of that redevelopment is a little bit all over the board from upgrade to mechanical systems and some aesthetics to a more aggressive program. It just gets to be a little bit more of market dependent at that point.

Michael Carroll - RBC Capital Markets

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

Wayne Lingafelter

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

Michael Carroll - RBC Capital Markets

Alright. Thank you.

Operator

Your next question comes from the line of John Bejjani with Green Street Advisors. Please proceed.

John Bejjani - Green Street Advisors

Steve I think you mentioned these three un-leased developments are currently sorted for government users, would you expect to see any acceleration of new contractor demand when this property is leased or has it a contractor demand already materialized.

Steve Budorick

I think they are fairly independent John as those leases up, I don’t anticipate a correlated change in contractor demand honestly.

John Bejjani - Green Street Advisors

Okay. In Huntsville, how many more tenants or what do you feel you need to accomplish there to achieve critical mass or create an ecosystem there?

Steve Budorick

Well, I think we are getting pretty close to the second major headquarters, I mean that’s a big announcement we made today. We are evaluating our next move because we have several prospects that would like to be in the park. We currently have no properties to lease them and we have a land lease on a hotel which one built out will create some synergy. And then we’re planning our retail strategy to bring some amenity to the park. And then lastly we are working with a variety of contractors on long-term planning to show them how the park can serve their long-term needs in Huntsville. So we feel like we are gaining momentum significantly.

John Bejjani - Green Street Advisors

Okay, great. Would you say the leases you are signing are trying to sign there now are still at somewhat lower yield than you are normally looking for?

Steve Budorick

I think we’re pretty happy with the yields that we just achieved on lease that we announced today. I think you are right in line with the expectations that we have been achieving elsewhere and what our expectation is for that market.

John Bejjani - Green Street Advisors

So high single-digits, 9% range.

Roger Waesche

Yes, you’re right.

John Bejjani - Green Street Advisors

Okay, great, thanks.

Operator

The next question comes from the line of John Guinee with Stifel. Please proceed.

John Guinee – Stifel

Just, thank you, just a few clean-up questions. Who’s the headquarters second headquarters at Redstone Gateway?

Roger Waesche

The company’s name is DRS, John. They’re a defense technology firm that’s got – this is as an example, frankly of a flight to quality. They were in an older set of buildings elsewhere in the city and this is a consolidation and a significant upgrade for them as they expand their research and development functions and server support for the Arsenal.

John Guinee – Stifel

Okay, great. And then I think you mentioned, Steve, that you had a 150,000 square feet coming back in North of Virginia. Is that Aerospace or is that Mitre?

Steve Riffee

It’s Aerospace.

John Guinee – Stifel

Okay, what’s happening in the Mitre building in Tysons? They have their new headquarters under construction just across the highway.

Steve Riffee

Yes, we’ve got couple of years left on that lease, John. I think it’s too early to really tell, but from what we’re hearing is that new headquarters is filing up fast.

John Guinee – Stifel

Okay, good. And then Roger, you’d mentioned – you have $30 million of NOI hitting the books in the next couple of quarters and I’m looking at – I’m looking to page 23 and I see total development cost of $272 million. Is that mean, this is yielding on the 11 yield on cost or what it – how do I translate $30 million of NOI to $272 million of total cost?

Roger Waesche

We’ve already spent some of the construction dollars that are no longer on the under construction or under redevelopment pages because we put some of those buildings in the service. So, the blended yield across all that we’ve been working on has been about 9% yield.

John Guinee – Stifel

Okay, okay. And then I guess last question I was looking at page 21, I don’t know why, but I look at the top 20 tenants and it’s kind of interesting as your top 20 tenants have an average in place round about $31.5 and then the multitude is smaller tenants have about a $25 in place rent. Is that because the top 20 tenants have big TI packages? Are they in primarily in the national business park? Is there sort of a rhyme or reason why these rents are so much higher than the generic run of the mill tenants?

Roger Waesche

I think it’s a combination. Certainly MVP as you know 25% of the company’s NOI so, that means and even more of your bigger tenants are in that particular part. We also have the government revenues which are gross stuff because they require a higher level of service than normal tenants do. But a lot of it is just location driven.

John Guinee – Stifel

Got it, okay. And then Wayne, I’m looking at page 24 and just a kind of just drilled down a little bit on some of these redevelopments, for example on (Pecan) core which I guess is Pax River or Alexander Bell or Arbor Way, are you increasing this square footage or just gutting – I know you’re gutting these down to the steel frame or all the way down to the pad or how far are you taking them down?

Wayne Lingafelter

Well, the answer, John, is a little different in each case, I mean, in terms of what our scope of work is so – it’s a little hard to say, Arbor Way really taking the building down to the steel structure at roof and slab and then rebuilding from there. Alexander Bell is closed to that although, we are taking advantage of more of the skin there then we are at Arbor Way and we’re adding square footage, that’s the only one of the four that are listed on that page where we are able to find a logical expansion and helps this really make the footprint a much more lease of all program for the team. And then Pecan Court is somewhere in the middle. We actually are upgrading that to an ATFP standard for a government customer so, we did do some work on the structure, but try to work in large part inside of the envelope that’s there.

John Guinee – Stifel

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

Wayne Lingafelter

We are looking at the current basis.

John Guinee - Stifel

So, the depreciated book?

Wayne Lingafelter

Correct.

John Guinee - Stifel

Okay, great. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Michael Bilerman with Citi. Please proceed.

Michael Bilerman - Citi

Yes, good afternoon. Manny Korchman is on with me as well. Roger, I am just curious, you have your Investor Day coming up in late September, what do you want to accomplish, what are your sort of goals for the day? And the tour, what do you want investors to leave with? What are you trying to hit home with it?

Roger Waesche

Thanks, Michael. I think a few things. One, we want to convey to investors that we haven’t forgotten that from a strategic standpoint that we still have some fixing to do in our existing portfolio. We need to get our occupancy up from around 90% to 93%, which we think is a structural stabilized number. We need to lease our datacenter up to stabilization. We need to sell non-strategic land. We have got $80 million. So, we need to sell out. So, point one to the investors is we haven’t forgotten it. The most important thing we can do is to take our existing assets and improve them and earn the most return we can on them.

The second thing is to walk through our markets and to demonstrate to investors that our markets are stable. Northern Virginia probably being the one market that where supply and demand and equilibrium isn’t necessarily in our favor, but the other 80% of our portfolio, we think it is. The third is to demonstrate the value add portfolio that the company has both with the 13 million square feet of land that the company owns and controls that we can develop on in very strategic locations with strategic customers and then the opportunity inside of our portfolio to redevelop our existing assets. So, I think the points we want to make are that we can grow the company at NAV just working with the assets and customer relationships that the customer currently has and that we can grow from this point with those particular assets.

Michael Bilerman - Citi

That’s helpful. Manny had a couple as well.

Manny Korchman - Citi

Hey, guys. Thanks. If we were to look at your same-store NOI growth as well as your same-store occupancy, what would those have been had you not altered the pool for the add-back assets and I guess the assets that you are selling?

Roger Waesche

It would have been about the same, because the assets that we put into or that we pulled aside really were stable for the quarter and for the last six months. They haven’t increased in terms of occupancy and they haven’t really gone down either. So, they have been stable assets. The only thing that did improve is the occupancy percentage, but the NOI itself did not really change.

Manny Korchman - Citi

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

Roger Waesche

Yes. Yes it is.

Manny Korchman - Citi

And then are there any other early renewals that you are looking at in the portfolio? And on that same topic, the early renewal you did, was that you guys sort of approaching the customer or did they approach you wanting to take advantage of the market, right now?

Roger Waesche

In that particular case, they approached us. And we do have probably three more early renewals that we could get done by the end of the year. And in all three of those cases, we initiated the conversation.

Manny Korchman - Citi

Thank you, guys.

Operator

Our next question is follow-up from John Guinee with Stifel. Please proceed.

Roger Waesche

John.

John Guinee - Stifel

I am sorry I noticed you had assets held for sale about $22.8 million on the balance sheet and you took a little impairment charge maybe $1.3 million. Does this translate that the eight assets, 303,000 square feet are going to sell for roughly $22 million, $23 million and $75 a foot or is there more to it?

Roger Waesche

There will be more to it, John and we are not going to give the exact price till we finish negotiating it all, but we had to take, you have to take impairments, before you would recognize gains. I will just put it that way.

Operator

There are no further questions in queue. I would now like to turn the call back to Mr. Waesche for closing remarks. Please proceed.

Roger Waesche - President and Chief Executive Officer

Thank you all again for joining us today. If your question did not get answered, we are available to speak with you later. Lastly, we hope all of you will be able to join us for our Investor Day on September 29. Please contact Stephanie if you have any questions about that event. Thank you and good day.

Operator

Thank you for your participation today in the Corporate Office Properties Trust’s second quarter 2014 earnings conference call. This concludes the presentation. You may now disconnect. Good Day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Corporate Office Properties Trust's (OFC) CEO Roger Waesche on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts