OFC CEO Roger Waesche on Q3 2014 Results

Welcome to the Corporate Office Properties Trust Third 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.

Thank you, Sarah. Good afternoon, and welcome to COP’s conference call to discuss the company’s third 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; Wayne Lingafelter, EVP of Development and Construction; and Anthony Mifsud, SVP of Finance and Treasurer.

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

I will now turn the call over to Roger.

Thank you, Stephanie, and good afternoon everyone. Third quarter FFO per share as adjusted for comparability of $0.48 was at the high end of our guidance range. Importantly, third quarter results were 9% higher than the $0.44 we reported in the second quarter evidencing that our quarterly FFO per share did indeed bottom in the second quarter and is now rebuilding.

As Steve Budorick will detail, our overall portfolio is 91.5% occupied and 93% leased. Supply remains in check in each of our markets and demand continues to form along three lines. Government customers and defense IT contractors continue to need modern, efficient, strategically located properties to execute their missions.

Traditional office senates [ph] and the healthcare, converse cipő olx education and professional services industries are growing in and around the BW Corridor where over half of our properties are located. Cyber Command at Fort Meade. In the third quarter, for example, 213,000 square feet or 45% of our new and development leasing was cyber related.

Market fundamentals have been building towards a more favorable leasing environment for several quarters. Supply has been limited in our submarkets and demand has been building consistently.

Beginning in 2015, occupancy gains and improving leasing economics in the majority of markets will combine with new EBITDA from value added development to drive annual FFO and NAV per share gains.

With that, I’ll turn the call over to Steve Budorick.

Thanks, Roger. I’ll start by providing some color on occupancy gains in the quarter. At September 30th, our total office portfolio was 93% leased and 91.5% occupied. The 220 basis point increase in occupancy relative to the June 30th levels reflects 130 basis point increase related to new tenants taking occupancy, a 15 basis point increase related to placing NBP 312 and DC 9 in the service and a decline in vacancy from the sale of eight buildings during the quarter.

At September 30th, our same office portfolio of 151 buildings was 93.3% leased and 92.1% occupied. Same office occupancy increased 130 basis points during the third quarter reflecting occupancy gains that were broad based throughout our portfolio.

The positive leasing momentum we’ve experienced since the passage of the Bipartisan Budget Act continued in the third quarter as evidenced by our solid leasing volume and economics. In the third quarter, we executed a total of 857,00 square feet of new and renewal leasing and an average of term of almost seven years. This was our third consecutive quarter of longer lease terms bringing our nine month average term to 6.8 years.

Total leasing included 384,000 square feet of renewals. The associated 82% renewal rate for the quarter was in line with our expectation and increased our renewal rate for the year to 74% back to full year renewal rate to be about 65% reflecting non renewals we identified in our initial 2014 guidance. The largest of these non renewals is the 153,000 square foot aerospace lease which expires at the end of November.

We’re working with several prospective tenants interested in backfilling the space because of its proximity to the nearby demand drivers.

Cash rents on renewals in the quarter were essentially flat. One quarter is not a trend make. But our general feeling is that we should have better pricing power in several submarkets in few quarters.

New leasing volume in the quarter was also strong. We retenanted 174,000 square feet in the operating portfolio and completed 300,000 square feet of development leasing. In the first nine months of the year, we executed just under 0.5 million square feet of development leasing.

This met our full year goal. Based on discussion with our tenants in our prospect activity, we expect solid leasing in our operating portfolio in 2015.

Before turning the call over to Steve Riffee, I’ll briefly summarize the incremental NOI we expect to recognize in the future from development and redevelopment leasing. Today, we have 22 recently concluded and active development and redevelopment projects that when stabilized are forecasted to generate annual cash NOI of $48 million.

Of the $48 million, $33 million of NOI is associated with executed leases and therefore has no risk. These executed leases contributed $5 million to cash NOI in the nine months ended September 30th.

Of the remaining $15 million of potential cash NOI, more than half will accounted for when we lease the two projects that are under construction and intended for government users. We believe the execution of these leases is likely to occur in the first half 2015.

The $48 million of NOI from the pipeline of projects demonstrates the strength of our development platform and our ability to generate attractive returns for our shareholders. Looking ahead, the potential new starts, our shadow development pipeline now exceeds 1 million square feet.

We are discussing real estate solutions with existing and potential new customers for eight projects throughout our portfolio. We may or may not capture all of this demand but we do look forward to providing more color on the ones we capture in coming quarters.

On that note, I’ll turn things over to Steve Riffee.

Thanks, Steve, and good afternoon everyone. FFO per share as adjusted for comparability for the quarter was $0.48. Modestly higher NOI and other fees and income enabled us to come in at the high end of our guidance range. Our AFFO payout ratio for the nine months ended September 30th was 81%. For the full year, we project an AFFO payout ratio of 80%.

Our same office portfolio represented 89% of total square footage and 90% of our total cash NOI. And cash NOI from the pool grew by 90 basis points over the third quarter of last year.

Turning to our balance sheet in the quarter, we monetized nearly $60 million of low and non yielding assets from the WhiteMarsh portfolio.