Corporate Office Properties: REIT With Considerable Potential

| About: Corporate Office (OFC)

Corporate Office Properties Trust (NYSE:OFC) shares are being pushed lower today after pricing an equity offering of 4 million shares at $33 a share this morning. The funds raised will be used to pay down debt. As is true with MLPs, equity offerings in REITs are often opportunities to buy names at a discount, and with that in mind a closer look at Corporate Office Properties is in order.

OFC is a REIT focusing mainly in the Washington, D.C. area and on serving the US government and Defense IT contractors. 84% of OFC's square footage is in the greater D.C./Baltimore area, and core customers in the US government and related Defense IT Contractors accounted for 59% of revenue at the end of last year.

OFC recently announced its goal of increasing that percentage to 67% by the end of 2013 by increasing its focus on its core customers and data centers for those customers, and decreasing its position in suburban office properties. Corporate Office Properties is positioning itself to take advantage of the US government farming out data centers to outside companies, and of the need to relocated people affected by military base closures.

While there is lots of talk of US budget cuts in the news, OFC believes rents and office demand will remain firm in and around D.C., even as spending is pared back to pre-2001 levels. Asking rents in the greater D.C. area were $25.83 per square foot higher than the rest of the country in 2010, adding credence to the company's plan to focus on this market.

Diluted Funds From Operations Per Share (FFOPS) is set to be negatively impacted this year by developments at its Fort Ritchie property in Maryland, a property the company acquired; it has since been made aware of potential environmental issues regarding the testing and use of herbicides by the military on the site. Litigation is ongoing, and the non-cash charge OFC took earlier in the year looks worse for the company on a headline basis than it actually ends up being.

The Army is responsible for the cleanup of the site, meaning the real cost to Corporate Office Properties is in litigation and time, not in expensive liability or clean-up costs. While clearly a setback to the expansion plans of the company, the issues at Fort Ritchie are an anomaly. SInce events at Fort Ritchie do not negatively impact occupancy rates or rent prices, the problems there are not a major concern.

The company has increased dividends steadily since its 2006 IPO, and earlier this month announced another $0.4125 quarterly dividend, its fourtth consecutive dividend at this level. The firm has never cut the dividend, and shares now yield about 4.9%. As long as Defense spending remains a sacred cow, and the federal government continues to farm out operations to private companies, Corporate Office Properties Trust looks well positioned to benefit.

Shares of this REIT have found support in the $34 range several times in the last six months, providing a potential floor to limit downside risk. The company has a strong operating history, a very stable customer base, and likely some room to move higher. The weakness generated by the offering is an opportunity, and yield-hungry investors should consider adding Corporate Office Properties Trust to their holdings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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