On the most recent earnings call, Steve Budorick, the company's chief operating officer, said uncertainty about the 2012 and 2013 federal budgets has affected the commercial office market in and around Washington, D.C. He added that overall vacancies hover in the 15% to 16% range.

The company's CEO, Roger Waesche, said the company was "thinking in terms of 92% to 93%" for its target occupancy, adding it would take until 2013 and early 2014 to see occupancy stabilize in that range.

Geographic Diversity

As Corporate Office Properties Trust is government focused, 83% of its square footage is located in the Baltimore Washington area:

Although normally this would be too concentrated, the company is located where their preferred client is located. When focusing on the government and defense industries, it is reasonable to expect a focused geographic concentration.


Corporate Office Properties Trust has a significant development pipeline that is absorbing its cash and partly accounts for the dividend cut.

Due to market conditions, however, much of that development has been curtailed and the company has an active development pipeline of seven buildings, which represents approximately $80 million in future capital commitments.

Construction projects are 31% leased, and the company is talking to strategic customers for another 45% of the rentable area that has been constructed.

Debt Data and Metrics

Corporate Office Properties Trust is currently overleveraged. It is really that simple. The company has realized this and has the stated goal of increasing balance sheet flexibility (i.e., reducing debt) in order to continue its expansion in a more conservative manner.

The REIT has brought down its percentage of secured debt, which is a positive as more properties are unencumbered and available to stakeholders.

Unfortunately, at the same time, the company has increased its debt-to-capitalization ratio to approximately 55%, which is high for a company this size.

Debt-to-EBITDA (at 8.8) and debt-to-gross properties (74%) are also high and need to be brought down for the company to proceed in a financially prudent manner and for investors to get more comfortable with the company.

Fortunately, the company's upcoming debt maturities are somewhat low and afford the company with the time necessary to delever.

Bottom Line: Corporate Office Properties Trust has some work to do in order to create a sustainable business model.

The company has refocused on its circle of competency, which should help improve metrics across the board, and it has the breathing room to make it happen.

The business model is solid and the company has some strategic advantages within its sector: It's one of the only REITs with a meaningful number of "credentialed" employees, strong relationships with defense departments and contractors and a strong penetration into "intelligence" aspects of national defense.

This bodes well for longer-term growth and stability. Unfortunately, it will take some time for all the pieces to fall into place, making the equity a longer-term investment.

The newest preferred stock (OFC-L), however, is attractive relative to peers and due to the call protection has value relative to the REIT's previous preferred stock.

Research conducted by Rubicon Associates. Mr. Michael M. Terry, CFA is the Founder/Principal of Rubicon Associates LLC and has nearly 20 years of experience in the investment management industry focused on the analysis, investment and management of fixed income and preferred stock portfolios.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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