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» Corporate Office Properties Trust Q2 2010 Earnings Call Transcript
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 and release space under favorable terms, regulatory changes, changes in the economy, the successful and timely completion of 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. With that, I will turn the call over to Rand. Rand Griffin Thank you, Stephanie. Good morning everyone. Weak economic growth in the U.S. including the possibility of a double-dip recession along with concerns over financial markets and federal grid law continued to present significant leasing challenges for the Office sector in the third quarter. Even so COPT’s operations modestly outperformed our expectations, which had anticipated such an environment. Our FFO per share of $0.52 after adjustments was $0.01 above the high end of our revised third quarter guidance range. Even before adjustments, our FFO per share of $0.49 was $0.01 above the low end of that range. Unadjusted third quarter results were driven by lower-than-anticipated operating expenses partially offset by a (inaudible) loss on the early extinguishment of debt. The remainder of my comments focus on the status of defense spending and how we expect the current environment to impact demand for COPT space. Congress failed to pass the fiscal year 2012 budget by September 30 th. So, the country is once again operating in a continuing resolution environment. What this means for COPT is that government agencies can renew and expand existing leases, but they cannot execute new leases until fiscal year 2012 appropriations bills are passed. As expected, we saw an increase in government tenant activity before the fiscal year-end.
In the third quarter, COPT signed 147,000 square feet of new government leases at NBP and other locations and also executed contracts for meaningful government bid-outs in multiple COPT buildings. Even though we are in another continuing resolution, the completion of government agency relocations associated with the 2005 BRAC has spurred new contractor demand. Contractors who need to move to be proximate to the new government locations and who have existing affirmed contracts are in some cases now looking for space.COPT currently is in various stages of discussions for about 400,000 square feet of new leases with defense contractors at multiple locations. Overall, however, the threat of budgetary cuts especially as they may relate to the Department of Defense or DoD continue to weigh upon the collective psychology in our markets. The feedback we hear from government agencies is that they are anticipating budget cuts beginning in 2013. The specter of those cuts is making most government and defense contractors more cautious about spending money. When it comes to office space procurement, they continue to be very conscious of maximizing the use of existing facilities and actually receiving contract awards before expanding or signing up for new space. These concerns are heightened by the looming deadline for the Congressional Super Committee. As most of you know, the Super Committee must come to an agreement by November 23 rd on $1.2 trillion of budgetary cuts over 10 years, and then the Congress has to pass that agreement by December 23 rd to avoid triggering the automatic cuts mandated by the 2011 Budget Control Act. It’s important to keep perspective on a couple of things. First is timing. Whether the Super Committee budget comes to agreement or not, any cuts would not occur until the 2013 budget. And secondly, future Congresses can nullify these cuts or modify them as they see fit. Now, the obvious question is what effect could such cuts have on COPT’s existing portfolio. Assuming the mast draconian scenario that the Super Committee does not come to agreement on a deficit reduction package and that the automatic $1.2 trillion of cuts is triggered, then the impact to the DoD’s base budget would be a reduction of about 10% or $55 billion per year that would have a declining impact over the nine-year period. Read the rest of this transcript for free on seekingalpha.com