Corporate Office Properties Trust's Management Reviews 2012 FFO Per Share Guidance (Transcript)

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Corporate Office Properties Trust (NYSE:OFC)

Guidance Conference Call

January 12, 2012 11:00 am ET

Executives

Stephanie Krewson – Vice President, Investor Relations

Roger Waesche – President

Steve Riffee - Executive Vice President & Chief Financial Officer

Analysts

Craig Mailman – KeyBanc Capital Markets

Joshua Attie – Citigroup Inc.

George D. Auerbach – ISI Group Inc.

John Guinee – Stifel, Nicolaus & Company, Inc.

Sheila Mcgrath – Keefe, Bruyette & Woods, Inc.

Christopher Lucas – Robert W. Baird & Co., Inc.

Michael Knott – Green Street Advisors

Jun Koo – Wells Fargo

Erin Aslakson – Stifel, Nicolaus & Company, Inc.

Operator

Welcome to the Corporate Office Properties Trust 2012 Guidance for Funds from Operations Conference Call. As a reminder, today’s call is being recorded. At this time, I will turn the call over to Stephanie Krewson, the company’s Vice President of Investor Relations. Ms. Krewson, please go ahead.

Stephanie Krewson

Thank, you [Kathy]. Good morning and welcome to COPT conference call to discuss the company’s 2012 outlook and FFO guidance. With me today are Roger Waesche, our President and Steve Riffee our Executive Vice President and CFO.

As management discusses guidance for 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 of 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 up on what we believe to be reasonable assumptions, actual results may differ from those projected.

Factors that could cause actual results to differ materially, include, without limitation, the ability to renew or release space under favorable terms, regulatory changes in the economy, the successful and timely completion of acquisitions this divisions 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. Good morning, everyone. We’re happy to be joining you today to share plan for 2012 and some important steps, which will position the company for the future. First, I’m going to provide a brief update on the 2012 federal budget process as it relates to the Department of Defense or DoD, discuss the progress we’ve made on and the expansion of our strategic reallocation plan and walk through the thinking that went into the dividend reset we announced this morning. Then, Steve will provide our guidance and underlying assumptions for 2012.

Regarding the government’s 2012 fiscal year budget, here’s good news. The National Defense Authorization Act for fiscal year 2012, a necessary step in enacting the defense budget was passed by Congress and signed by the President in December.

In mid-December, the House and Senate also passed the defense budget bill for fiscal year 2012, known as the Consolidated Appropriations Act, which the President signed in the law on December 23. The passage of the bill eliminated the need for ongoing continuing resolutions for the DoD, which we’ve had the past two years and provided the DoD with a base defense budget of $518 billion, an increase of $5 billion or approximately 1% over the fiscal year of 2011 budget. The 2012 base budget achieved savings through reduction in weapons programs and military vehicles.

Importantly, for COPT, the DoD has indicated in it’s planning documents that programs that support intelligence functions and National Cyber Security will be protected and funded [not cut], because COPT has build its franchise around key locations that serve the intelligence communities office space needs, we believe demand for our space will not be directly affected by whatever budget cuts do occur elsewhere in the DoD budget.

Specifically, the President and the Defense Secretary outlined the following national defense priorities in their January 5 press conference as follows; Unmanned Aerial Vehicles and space missions, Cyber Security, all sources of intelligence programs and rapid mobilization. These programs are developed, tested, contracted for and refined at many of the military installations adjacent to COPT’s locations including Fort Meade, Redstone Arsenal, Aberdeen Proving Ground, Fort Belvoir, Peterson Air Force Base, and Lackland Air Force Base. So there is cause for measured optimism.

Recall that as recently as our last earnings call in October, management was praised for the uncertainty of the continuing resolution situation to affect the DoD, and inhibit related defense contractors from much of 2012. With the passage of the Consolidated Appropriations Act in December however, COPT’s existing and prospective DoD tenants now have a fiscal year 2012 budget and consign new leases.

Additionally, the office of management in budget has instructed the DoD to prepare its fiscal year 2013 budget without incorporating the automatic reductions outlined by the recent debt ceiling legislation. The guidance assumptions, Steve will give you during his remarks reflect our belief that our core business remains solid.

That being said, we anticipate the leasing environment in 2012 will continue to be challenging, owing to the toughest economic recovery and the expectation of some defense spending cuts in fiscal 2013. But we acknowledge now, we're in a stronger position to convert existing demand for office space at our key locations into signed leases.

Moving on to an update of our Strategic Reallocation Plan or SRP, since announcing the initial plan in April last year, we have sold $77 million of assets in an average cap rate of approximately 8%. Additionally, on December 21, the company's Board of Trustees approved the plan by management to increase the scope of the SRP to $562 million by including an additional $262 million of operating properties and $50 million of land. We expect to sell all of the operating properties by the end of 2013 and to realize approximately $430 million of net proceeds, $17 million of which we’ve already received.

The properties added to the SRP in December consist primarily of office properties and our land holdings in Colorado Springs, office properties in Frederick and Montgomery counties in Maryland, select office properties in the Baltimore/Washington Corridor, and certain other land holdings in non-strategic sub markets.

As with the initial assets being sold pursuant to the SRP, we are selling properties and land that are in sub markets we no longer consider to be strategic for achieving COPT’s longer-term objective of producing high quality NOI from strategically located office properties that serve the more security conscious needs of our tenants in the government and defense IT industries.

To summarize, the total SRP now encompasses $512 million of our operating properties containing roughly 4.7 million square feet and $50 million of land for a total of $562 million. So far, we have sold $77 million of these properties that contained 894,000 square feet, 99 leases and we’re on average 85% leased.

After executing all SRP sales and completing our properties already under construction or redevelopment, we project 65% of COPT’s annualized office revenues will be derived from properties primarily leased the tenants in the government and defense IT industries.

The third and final topic I’d like to discuss is the reset of COPT’s common dividend. This morning, we announced that our Board of Trustees declared the first quarter dividend of $0.275 per share, which represents a 33% decrease from the fourth quarter 2011 dividend. On an annualized basis, the new dividend equates to $1.10 per share.

There were multiple factors influencing our decision to cut the dividend at this time and to this level, chief among them was capital allocation. By reducing our annual dividend by to $1.10, the company will retain over $40 million a year and can allocate that capital instead to increasing our balance sheet flexibility by paying down debt or funding existing development projects.

Second is the strategic reason for the timing of the dividend cut. The purpose of COPT’s strategic reallocation plan is to focus air resources on the most productive locations that serve our specialized tenant niche. We are in the process of selling over $560 million of buildings and land in order to allocate our resources to the highest growth markets we have. It is strategically consistent to also reset our dividend accordingly.

Third, the new dividend represents a pay out level that is compliant with REIT rules and we believe sustainable even if macro economic events transpire that are not anticipated by our guidance. Once the SRP is executed, we will be generating more predictable, high quality NOI growth. In the mean time, the importance of offering a secure, reliable dividend is critical to investors who seek value in a safer yield from their REIT investments.

With that, I will turn the call over to Steve.

Steve Riffee

Thanks, Roger and good morning, everyone. We are issuing 2012 guidance for FFO per diluted share with a range of $2.02 to $2.18 implying a mid point of $2.10. Let me walk you through the fundamental assumptions behind our outlook. First, the same office expectations.

Our 2012 same office portfolio includes all properties that are fully operational in both 2011 and 2012 and excludes all properties that are part of the strategic reallocation plan. We expect same office occupancy to be relatively flat for the year at about 90%, but the increase in the fourth quarter and in the year around 91%. We assume a tenant retention rate of between 65% and 70%. Based on the leasing plan, total same office revenue embedded in the plan and not under contract as of December 31, 2011 was $14 million or only 3% of the total same office revenues projected for the year. Excluding lease termination fees we project same office cash NOI growth will be between 0% and 2% for the year. So as Roger mentioned our core business remained solid. Second, we forecast $10 million of cash NOI for development place and service during 2011 and 2012, $8.5 million of which is already in place.

Third, our guidance assumes $2.7 million of cash NOI from acquisitions that were made in 2011 and assumes we make no acquisitions in 2012. Fourth, we expect cash NOI from Power Loft to be between $2 million and $5 million for the year. At the low end of this guidance, we assume no additional leasing beyond the 3 megawatts already in place. The high end of the range implies an additional 4 megawatts of lease during the second half of the year. The infrastructure is in place to accommodate 6 megawatts of additional leasing, so we did not anticipate material cash out lease for Power Loft in 2012 beyond leasing costs.

Fifth, we budget lease termination fees of $250,000 per quarter. Six, our 2012 guidance assume we felt $205 million of operating properties under the SRP at an average cap rate of 8%, in terms of timing the midpoint of our guidance range assumes an average sales volume of $95 million of assets in the year.

As Roger mentioned we anticipate selling all operating properties associated with the SRP by year-end 2013, which implies $230 million of operating properties sales in 2013. We anticipate realizing an average exit cap of 8.5% on the 2013 asset sales.

Our seventh guidance point, relates to G&A in new business costs. The matter of which includes our dispositions team. In terms of costs, we are reducing structural overhead commence shortly with the reduction of our portfolio, which will reduce costs at the property level and G&A. So embedded in the same office NOI growth are modestly better margins. We also expect to realize G&A savings in 2012. So they will be partially offset this year by expenses associated with the executive transitions.

With that said we project G&A to be approximately $7.5 million in the first quarter and then to average between $5.5 million and $6 million in the remaining quarters. We project new business costs of approximately $3.5 million for the entire year and if you add these two lines together, the annual total is roughly $28 million.

Eighth is other income. We project other income of $2 million to $2.5 million primarily from development fees and then $4 million of interest income on existing loans for total other income in 2012 between $6 million and $6.5 million. Our guidance excludes any gain or loss from our remaining 1.8 million share investments in KEYW.

Ninth, capitalized interest is projected to be $80 million for the year. And tenth, the straight-line rent and other GAAP adjustments, which we project to be between $10 million and $11 million for the year.

And then finally, this capital market activity, our 2012 guidance assume we issue $175 million to $200 million of medium term debt in the first half of the year, proceeds of which will be used to pay down the line of credit.

In 2012, we only have $38 million of debt maturities of which $17 million has a one-year extension option.

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

Roger Waesche

Thanks, Steve. In summary, although the broader economy and the environment emanating from Washington D.C. continue to make leasing challenging for us and other landlords, we believe it is critical in 2012 to execute on the aspects of our business we can control. Our priorities for 2012 are simple and clear, lease space execute our strategic reallocation plan, strengthen our balance sheet and allocate capital prudently, which entails resetting the dividend as we have and taking a disciplined approach to any new development start.

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

Question-and-Answer Session

Operator

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

Craig Mailman – KeyBanc Capital Markets

Roger, just your comments are seemed a lot more optimistic, I know now the budget is passed. I am just curious how much of that optimism actually kind of seeped into your leasing assumptions or if you guys are staying overly conservative?

Roger Waesche

I think we’re taking in middle of the road approach, we’re not being overly conservative, but we’re also not being aggressive. we do assume about 470,000 square feet of development leasing in 2012 now most of that is back-end loaded and with back of the year 2013. and as Steve mentioned, we are assuming that our same office portfolio grows nominally between the first quarter and the fourth quarter of the year.

Craig Mailman – KeyBanc Capital Markets

And then, have you guys seen a pick up in interest following the signing of the budget or are people still waiting till the contracts won, call two or three months?

Roger Waesche

We have seen some increased interest in certain locations and working with tenants one development opportunity leasing in multiple locations.

Craig Mailman – KeyBanc Capital Markets

Okay, that’s helpful. Then just turning to Power Loft, it seems like you guys are whole amount to this not putting in the strategically positioning. Just curious, how much time you want to give this investment to see if you can get a leased up before you guys consider either selling it or do something else with it? And then in the same context, do you think that you will try and keep it a government focused vehicle and property, or do you think you won’t be in tenant with may be some other private sector industries?

Roger Waesche

In terms of timing, we are – we don’t have an absolute job that date on maintaining the asset or kind of selling and put it into the strategic reallocation plan, I would say that we have doubled and tripled down our efforts to lease the facility and we are largely focused on leasing it to those tenants where we have a relationships of the government and government contractors and that’s where separate from using outside brokers to help us lease to other tenants. We are putting a full chord press on all those tenants we have embedded in our portfolio and we are working through that now and I would say that we are cautiously optimistic that we can lease it to our tenants if timing is the issue.

Craig Mailman – KeyBanc Capital Markets

Great, thank you.

Operator

Our next question comes from the line of Josh Attie from Citi. Please proceed.

Joshua Attie – Citigroup Inc.

Good morning, thank you. It sounds like you have a little more visibility on the construction pipeline lease up and based on the pent up demand you mentioned in your prepared remarks, can you talk a little bit about the rents and returns you think you’ll get on the pipeline versus the original expectation of around 11%?

Roger Waesche

Hi, Josh. I think probably our yields will fall back verse a little bit to 10% or really high 9s to 10 and that it is really location specific, there are certain locations where we’ve got more pricing power than others obviously we have more pricing power, but there are few others where like up and averaging, where I think our yields will fall somewhat given that we do have a higher degree of competition in that location, but I would say that still 9.5% to 10% is a good going in yield for our development portfolio.

Joshua Attie – Citigroup Inc.

And how about Power Loft?

Roger Waesche

Well, we had originally projected Power Loft to be in the 10% to 12% range and I would say now that we’ll probably be in the high single digit range when we lease up Power Loft?

Joshua Attie – Citigroup Inc.

Thanks and can you talk a little about the land bank, the $15 million that is included in the sale number and you took an impairment charge on, does that represent all of the non-strategic land that you own or is there still land included on the balance sheet that you would consider non-strategic?

Roger Waesche

What we did is we took our land portfolio and we carved it into two categories, category one, was that land that we felt very confident that overtime we will put it into production to build buildings and we took the balance of the land and put it into a separate category. It’s that separate category, which probably represented about a third land that we then took a harder look at the value we had it on the books versus what we thought we could sell it for at a reasonable price. Not an aggressive price, but not just giving the land away, and so we wrote down the value of those partials to an amount where we thought we could sell the land over a several year period as demand for land comes back.

Joshua Attie – Citigroup Inc.

So you wrote down all of the second category?

Steve Riffee

As best we could. Obviously land is a non-linear business, when it’s hard; it’s hard, and when it’s not its soft. We’ve tried to go back and look at where prices traded historically and discounted all for those. But I can tell you absolutely that we’ve captured every dollar we should capture, but I think we did a pretty good job there.

Joshua Attie – Citigroup Inc.

Okay. Thank you very much.

Operator

Our next question comes from the line of George Auerbach of ISI Group. Please proceed.

George D. Auerbach – ISI Group Inc.

Great, thanks. Good morning, guys.

Roger Waesche

Hi, George.

Steve Riffee

Hi, George.

George D. Auerbach – ISI Group Inc.

I guess, just thoughts on fixing at $200 million of the medium term debt, considering you have almost $700 million on the line of credit. Why not fix more of that line out given that you have the development spending this year or next?

Steve Riffee

George, we think that’s going to give us plenty of capacity as we look at our source in use on our line. So we’re going to pay it down by that much that is something that we think we can get done right now with our bank group, and we just think that’s the most attractive next step in terms of financing and that’s really all we need to do, because we have the asset sales projected for this year. But we’ll continue to look at other options for the long-term for turning out even more debt. So that’s it our plan for this year.

George D. Auerbach – ISI Group Inc.

So, I guess these will be bank term loans?

Steve Riffee

Yeah.

George D. Auerbach – ISI Group Inc.

Okay. And I guess just on the $5.5 million to $6 million of G&A run rate in the back half of the year, should we think of that as a pretty good run rate into the future? Or do you expect that will decline with the asset sales in 2013?

Steve Riffee

I think that’s a good run rate going forward. in the year, we have a little bit of transition cost in totals, a lot of it’s in the first quarter, a little bit over the rest of the year for the transitions may be a million to million, say a [$1.5 million], and I think we start to reach our normal rate as we progress into the later quarters of the year.

George D. Auerbach – ISI Group Inc.

Okay. Thank you.

Operator

Our next question comes from the line of John Guinee of Stifel Nicolaus. Please proceed.

John Guinee – Stifel, Nicolaus & Company, Inc.

Thank you very much. Roger, a very nice job. I think it’s pretty easy to understand that Cyber Security is going to do well in the next two or three years for the obvious reasons. But you all have a tremendous amount of product out on the Dulles Corridor, Tysons Corner down on the – with (inaudible), talk about your projections in that part of the world for the next few years?

Roger Waesche

See, our Northern Virginia assets are not currently in our strategic reallocation plan. I think we are reasonably cautious, but somewhat optimistic about the outcome of what might happen to the government entities/entities that hold themselves and in Westfield and think that our portfolio there could be well positioned long-term both the buildings in the land and our product there is relatively new product. In terms of the (inaudible) road itself, we have one major asset that’s at least a 100% (inaudible) and feel good about that particular building and then, we’ve got a couple of smaller buildings that are multi-tenanted that could be a source of funds for the future. In terms of Tysons Corner, I think we feel good about our situation. In Tysons, we’ve got term, won the leases and our cost basis is relatively low compared to what it’s going to cost to build something new in Tysons with structured parking et cetera.

John Guinee – Stifel, Nicolaus & Company, Inc.

Okay, thank you.

Operator

Our next question comes from the line of Sheila McGrath of KBW. Please proceed.

Sheila Mcgrath – Keefe, Bruyette & Woods, Inc.

Yes. Good morning. Roger, OFC has a long history of bumping the dividend. So I’m sure this was a difficult one. I was wondering if you could highlight in hindsight, what you think went it right to get the company in this position, was it the development pipeline getting too big or change in demand from your tenants, and any insights or lesson learned for OFC going forward?

Roger Waesche

Well, I think, as we were out talking to investors over the last several years, we were talking about our BRAC pipeline and we thought up until the last year or so, we felt very good about the timing of the realization of that BRAC pipeline and what ended up happening is that the government gave contractors the ability to defer moving to our new locations and so, embedded in our forward projections was leased up of our development pipeline, which didn’t happen and then probably we also got hit a little harder in our base portfolio in terms of going backwards on NOI, so I think the combination of those two things is where we got out in front of our dividend ahead of our business model.

Sheila Mcgrath – Keefe, Bruyette & Woods, Inc.

And then, would you say on size of the development pipeline that you have a target to have that as a lower percentage of this company’s market cap?

Steve Riffee

We will. I think the development pipeline maxed out a quarter or so ago. And we’re doing leasing now and the goal would be to do more leasing than we put in to new starts and so that hopefully the 1.3 million square feet is the highest that will ever be unless we of course we have build the suites pre-leasing and then it could go back to the accounted level. But on a speculative basis, it peaked in the third quarter of 2011.

Sheila Mcgrath – Keefe, Bruyette & Woods, Inc.

Okay. And last question, how does the new dividend level compared to your expectation for net taxable income in 2012?

Roger Waesche

We thought (inaudible) assuming lots of different levels of gains and deductions from the sales program that we don’t see any pressure on having to increase the dividend and meet the requirements. So we think it’s very well with our taxable income projections.

Sheila Mcgrath – Keefe, Bruyette & Woods, Inc.

Okay. Thank you.

Operator

Our next question comes from the line of Chris Lucas of Robert W. Baird. Please proceed.

Christopher Lucas – Robert W. Baird & Co., Inc.

Good morning, everyone.

Roger Waesche

Hi, Chris.

Christopher Lucas – Robert W. Baird & Co., Inc.

Steve, just to follow-up on that point. I guess trying to understand that the – is this reflect sort of that what your expectations are for a taxable run rate going forward?

Steve Riffee

Chris, said the amount of capital gains could change depending upon the timing of when you sell certain assets that’s ever a down the road. But our structural tax run rate as we project that will fit very close to the inside of the dividend level and we believe there are other deductions. And also I would say the sustainable from a weak structure standpoint for the futures we projected than (inaudible) level. I mean fairly sustainable from a cash flow standpoint and coverage and stress test and all that, but also fitting with the requirements.

Christopher Lucas – Robert W. Baird & Co., Inc.

Okay. I guess I’m just trying to understand whether or not. so you had your projected gains and you have the tax swap loss, how did that factor into this to this dividend?

Steve Riffee

Well, we have a structural run rate that fits inside the dividend. we look at from a stress, from a tax stress standpoint, what if we sold all the properties that could have gains and sold none of the ones have had losses and how would that fit and I’m wonder your tax deduction ranges, and in the current year, because we took the derivative loss that provides a little bit of cushion for the current year gains from the SRP program and as we look at the structural run rate going forward we think, it still fits really well in the different level.

Christopher Lucas – Robert W. Baird & Co., Inc.

Okay. And then bigger picture on the balance sheet for Steve or Roger and how are you guys thinking about your current leverage levels and how your, how the capital structure is set up and what are your sort of, what are your longer sort of three to five year goals in terms of that? Are you comfortable with the current leverage levels?

Steve Riffee

Our goals are to take leverage from lower levels and that continued to be more and more conservative on the balance sheet, which again factored into the capital allocation decision to take $40 million and give ourselves more flexibility. If you look at the – just as Roger said, we’d hit the peak of our development pipeline we got some leasing to go, we need to finish the pipeline that was underway. and if you look at the expanded SRP program as we move through that program late – a little bit in 2012, a lot in 2013, there is excess cash flow to delever and that’s the plan.

Christopher Lucas – Robert W. Baird & Co., Inc.

Are there particular bogies you’re looking at, I mean historically two times cash are – excuse me, fixed charge was sort of the minimum level you guys had geared towards and you are above that level, if that number likely to head up in terms of what your targets are or how are you thinking about?

Roger Waesche

Overtime, we will try to reach more conservative levels of coverage and leverage and et cetera. We certainly don’t want to go backwards since while we are executing the sales programs, we will try to at least maintain or outperform what we’ve done historically. And we are going to become more and more conservative overtime with regard to the balance sheet.

Christopher Lucas – Robert W. Baird & Co., Inc.

And then, how about the mix between secured and unsecured, how are you thinking about that, is that part of the process here, is that going to the mix changes...

Roger Waesche

Well, we have reduced our secured debt levels because we’ve had the opportunity to do attractive unsecured financing and so considering our plan for the year; we won’t be increasing the secured debt levels for this year.

Christopher Lucas – Robert W. Baird & Co., Inc.

Okay. And then just on Power Loft I mean, are you, what sort of traction or activity do you have out there. It’s January getting leasing done, does takes some time. That the fact that you are – have some leasing built in suggest that may be you’ve got some prospects, what those that activity look like?

Roger Waesche

We have a resold [level of] activity, but as you said it’s a lumpy business and it takes a long time to get from a deal to occupancy and then rent paying. So we don’t really have a very aggressive Power Loft leased percentage in our forecast for this year. As Steve said it at the bottom end, we have zero and even if we do lease that the four megawatts, we are suggesting that that’s back end loaded and would benefit 2013 more than 2012.

Christopher Lucas – Robert W. Baird & Co., Inc.

Okay, thanks a lot guys.

Operator

Our next question comes from the line of Michael Knott of Green Street Advisors. Please proceed.

Michael Knott – Green Street Advisors

Hey guys. Roger, we’re big fans of the go the run more conservative balance sheet. But it sounds like the answers of the last question you guys are unknowing to kind of quantify your target? Is that what we should take away or is there something that you guys can sort of guide us to?

Roger Waesche

Well, may be we have our priorities back Rich, but I think the way we’re thinking about the company, right now the number one problem with the company is return on invested capital. So we are focusing largest part of the company’s effort in selling lower quality assets, selling assets where we aren’t earning a return whether it would be vacant structural space or land.

And then late sizing the dividend and so the company’s focus hasn’t been on absolute leverage levels. Because again we think the – number one priority to get our multiple hires to solve the asset quality situation and then focus on leverage.

But we do plan on taking the leverage down over time. We’re obviously not willing to issue stock in 2012, given where our stock is. And the proceeds from the sales in 2012 will largely go to fund the remaining development pipeline. The goal would be in 2013 for good proportion of those proceeds from asset sales to go to pay down debt.

Michael Knott – Green Street Advisors

Okay. So just bigger picture, when we get to the end of ’13 and you’ve reallocated and gotten through the dispositions; at that point, you think they’re still be some balance sheet work to do, which you will go about over time. But that will be sort of the secondary priority for now?

Roger Waesche

That’s correct.

Michael Knott – Green Street Advisors

Okay. And then just a question on the 65% from government and defense, IT at the end of ’13. Is that the right final number, we’ll go higher after that as you continue to do some development. How should we think about that and sort of just related to that, will there still be that, I think in the past or is it 10% to 15% bucket for opportunistic? Is that no longer consistent with how you’re thinking about the portfolio?

Roger Waesche

Yeah. We’re bullish to get the portfolio, so that it is 100% strategic. Now 100% of our tenants will be government or defense, I would think that the 65% will grow over time as we sell assets and we complete our development cycle, but I don’t have an exact number for you.

Michael Knott – Green Street Advisors

Okay. And then just last question from me, can you just talk about investor demand in terms of the products you’re selling and sort of their financing conditions?

Roger Waesche

So far it’s been pretty good. we’ve had some pleasant surprises and some negative surprises, meaning there are some assets that we thought that would sell easier that didn’t sell and other assets that we thought would be more challenging to dispose or bit of sold quicker at higher prices. so, I would say that, we have $90 some million under contract and so far financing has not been a problem with the buyers.

Michael Knott – Green Street Advisors

Thank you.

Operator

Our next question comes from the line of Jun Koo from Wells Fargo. Please proceed

Jun Koo – Wells Fargo

Yes, thank you. Just a question on your landholdings. (inaudible) $50 million, how long would it take for you guys to monetize the remainder of the land?

Roger Waesche

It’s really based on the market condition, when demand for land resurrects itself, and obviously a lot of again, two thirds of the land, the goal is to maintain it to ultimately have a development bank to expand our strategic initiatives around Fort Meade and Huntsville and San Antonio and Fort Belvoir and Aberdeen Proving Ground, but the rest of the land is for sale as soon as we can get reasonable prices worth. It’s hard for us to put a date on that because again land is a very non-linear business and we need conditions to improve a little bit on some of that. We’re working hard in all of pieces of non-core land to make sure we are fully entitled and trying to, in some cases, convert users to apartments, because they are (inaudible) right now and doing everything we can to move non-performing assets off the balance sheet.

Jun Koo – Wells Fargo

So, just a follow-up on the previous question about land. So the $50 million is once it’s sold, all the reminder will be part of your core and that core land?

Roger Waesche

There is still a few pieces beyond the $50 million that are non-core that we will try to sell every time, not a lot but a little bit.

Jun Koo – Wells Fargo

Okay. And of the $205 million in sales in 2012, how much of that portion of land component?

Roger Waesche

Zero. It’s all operating properties.

Jun Koo – Wells Fargo

Okay, got you. And then just final question about the $200 million term loans that you guys are looking to get, what kind of rates are you guys looking at?

Steve Riffee

We are in the middle of working with our bank group. So I’m not going to comment on the pricing and all, but I think it will be, if you look at what we did in terms of term loans last year, our expectations are that we will be similar to that.

Jun Koo – Wells Fargo

Great, thank you.

Operator

Our next question comes from the line of Erin Aslakson from Stifel Nicolaus. Please proceed.

Erin Aslakson – Stifel, Nicolaus & Company, Inc.

Hey, good morning.

Roger Waesche

Hi Erin.

Erin Aslakson – Stifel, Nicolaus & Company, Inc.

Good morning. Hi. Just wanted to ask, if you had mentioned if I have just missed it, what where the net proceeds you guys were thinking, you are going to get from the assets, the operating assets remaining in the SRP that you haven’t sold.

Stephanie Krewson

435

Roger Waesche

435

Erin Aslakson – Stifel, Nicolaus & Company, Inc.

So that's net of debt?

Roger Waesche

Yes.

Erin Aslakson – Stifel, Nicolaus & Company, Inc.

Okay. That’s excluding the land?

Roger Waesche

Yes.

Erin Aslakson – Stifel, Nicolaus & Company, Inc.

Okay. All right. Thank you very much.

Operator

(Operator Instructions) We have a follow-up question from the line of Joshua Attie from Citi. Please proceed.

Joshua Attie – Citigroup Inc.

Hi, thanks. Roger, just a quick clarification, you mentioned 400,000 square feet of pipeline leasing this year, do that include or exclude power lost?

Roger Waesche

It excludes.

Joshua Attie – Citigroup Inc.

And so if the pipeline is about 30% leased today, your expectation will be by the end of the year, it should be around 65% leased?

Roger Waesche

Yes. That is hopefully a little bit here.

Joshua Attie – Citigroup Inc.

Okay. And is most of that 400,000 square feet demand that you know about, but they haven't been able to sign, because there hasn't been a budget?

Steve Riffee

That's right. In other words, we have specific transactions for all of the 470,000 square feet. We can’t guarantee that it all get signed up, but we do have a tenant in line for each of the 470,000 square feet.

Joshua Attie – Citigroup Inc.

Okay. thank you very much.

Operator

We have another follow-up question from the line of John Guinee of Stifel Nicolaus. Please proceed. Proceed with your question at this time, sir.

Roger Waesche

John?

Operator

We’ve no other further questions at this time, I will now like to turn the call back over 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, Steve, Stephanie and I are in the office and available to speak with you later. We look forward to communicating with you on our year-end 2011 earnings call on February 9. Good day.

Operator

Thank you for your participation today in the Corporate Office Properties Trust 2012 guidance for Funds From Operations conference call. This concludes the presentation. You now disconnect. Good day.

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