Welcome to the Corporate Office Properties Trust first quarter 2010 earnings conference call. (Operator Instructions) At this time, I will turn the call over to Mary Ellen Fowler, the company's Senior Vice President and Treasurer. Miss Fowler, please go ahead.

Thank you and good morning, everyone. Today, we will be discussing our first quarter 2010 results and guidance for the full year. With me today are Rand Griffin, our President and CEO; Roger Waesche, our COO; and Steve Riffee, our CFO. As they review our financial results, the management team will be referring to our quarterly supplemental information package. You can access our supplemental package as well as our press release on the Investor Relations section of our website at www.copt.com. Within the supplemental package, you will find a reconciliation of GAAP measures to non-GAAP financial measures referenced throughout this call. Also, under the Investor Relations section of our website, you will find a reconciliation of our 2010 annual guidance. At the conclusion of this discussion, the call will be opened up for your questions. First, I must remind all of you at the outset 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. These factors that could cause actual results to differ materially include, without limitation, the ability to renew or re-lease 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 from time to time with the Securities and Exchange Commission. Now, I will turn the call over to Rand.

Thank you, Mary Ellen, and good morning, everyone. We're reporting FFO of $0.53 per diluted share for the quarter. This result reflects the impact of several items; first, snowstorms and the severe cold weather that significantly increased our net operating expenses; second, a large decrease in termination fees; and third, increased vacancy, specifically at our Blue Bell campus and at 1 Columbia Gateway property. All of these items together resulted in a 21% decline in FFO per diluted share compared to the same quarter last year. As we said one year ago, Office is a lagging sector in the economy. We indicated at that time that rental rates and occupancy would be under pressure throughout 2010, and we are seeing evidence of that this quarter. We expect to continue to see this pressure as we move through the second and third quarter of 2010. However, we are confident enough of the year that we are leaving guidance unchanged at this time. Steve will go through the details in a minute. While we continue to work hard on maintaining our operating portfolio metrics, we are now starting to see some acquisition opportunities in our markets. We are well-positioned to take advantage of these opportunities. Subsequent to quarter end, we executed a $240 million exchangeable note offering and paid down our revolver. We also increased the size of our revolver by $100 million to $700 million. As a result, we now have close to $500 million of line capacity. We have very little debt maturing this year, and therefore have ample capital available to quickly execute on acquisitions. With regard to development during the quarter, we announced our expansion to a new BRAC location at Redstone Arsenal in Huntsville, Alabama. Through our agreement with the U.S. army, we now control 468 acres…

Thanks Rand, and good morning, everyone. Turning to our results, FFO for the first quarter of 2010 totaled $38.2 million or $0.53 per diluted share. These results represent a 21% decrease on a per share basis from the $0.67 per diluted share, or $44.8 million of FFO for the first quarter of 2009. We incurred approximately $7.3 million for snow removal cost in the first quarter of 2010, approximately $5 million more than we incurred in the first quarter of 2009. Taking into account our estimates of the recoverability of these costs from tenants, the blizzards of 2010 reduced our FFO per share by approximately $0.07 or $0.04 more than the first quarter of 2009. The year-over-year comparative first quarter FFO results were also low as a result of a $3 million or $0.05 per share reduction in termination fees. First quarter 2010 net termination fees were approximately $900,000 or $0.015 per share less than we had expected when we last gave guidance. Also contributing to the year-over-year decrease in FFO per share was a $3 million or $0.05 per share decrease in NOI, attributable to recent vacancies and assets we expect to redevelop in Blue Bell, Pennsylvania, and a warehouse in Colombia and Maryland. We reported net income available to common shareholders for the first quarter of $5.9 million or $0.10 per diluted share, compared to $12.1 million or $0.23 per diluted share for the first quarter of 2009. Turning to AFFO, our Adjusted Funds from Operations of $25.2 million represents a decrease of 24% from the $33.4 million in the first quarter of 2009. Our diluted FFO payout ratio was 75%, and our diluted AFFO payout ratio was 99% for the first quarter. Looking at our same office cash NOI for the first quarter of 2010, for the…

Thanks, Steve. At quarter end, our wholly owned portfolio consisted of 248 properties totaling 18.9 million square feet that were 89.6% occupied and 90.2% leased. Our occupancy was down 1.1% quarter-over-quarter. Included in our vacancy is 215,000 square feet of warehouse space in two buildings, or 1.1% of our portfolio where leases have expired over the last couple of quarters. These two buildings represent 100% of our warehouse space. We expect our occupancy percentage will continue to decline as we move through the second quarter, as two Colorado Springs construction projects are placed in service with a lower occupancy than our portfolio. We expect to build occupancy from that point. During the first quarter, we leased 969,000 square feet, of which 359,000 square feet were renewals, 95,000 square feet was re-tenanting, 61,000 square feet was first time lease-up of previously acquired space, and 454,000 square feet was development. For the quarter, we had a renewal rate of 65% at an average capital cost of $7.63 per square foot. Rents from renewals increased 2% on a straight line basis, and decreased 7% on a cash basis. Total rent for renewed and re-tenanted space decreased 1% on a straight line basis, and decreased 9% on a cash basis. For renewed and re-tenanted space, the average capital cost was $9 per square foot. Looking at our lease expiration schedule across the portfolio for the balance of 2010, we have 11.4% of our revenues expiring, representing 2.1 million square feet. We continue to expect a 2010 renewal rate of approximately 70%, which is consistent with our 10-year historical average. Leasing activity has increased overall in our portfolio, but as we forecasted on recent calls, our leasing metrics on our in-place portfolio with the exception of a few submarkets continued to be challenged with occupancy…

Thanks, Roger. Looking at our construction pipeline at quarter end, we had 11 buildings under construction for a total of 1.3 million square feet at a projected cost of $289 million. We have added two buildings to the construction pipeline this quarter, one for the government and one for defense contractors. Our development pipeline has 11 buildings under development, with close to 1.2 million square feet at a projected total cost of $259 million. You will note, we have added six buildings to the pipeline, including the first two buildings that we plan to develop at Redstone Gateway in Huntsville, Alabama. In addition, we expect to add approximately 200,000 square feet of development starts with the submarket expansion project to be announced in the second quarter, and one other building which will bring the total to 1.5 million square feet of development as announced on the last call that we would expect to start under construction. With regard to leasing, our construction pipeline is 48% leased at quarter end after adding two buildings this quarter that are just starting under construction and that have no leasing yet. Without the addition of these buildings, we would be 58% leased as of the end of the first quarter, and 69% committed. So, leasing is progressing on schedule and at a brisk pace. And as a reminder, our construction stabilized yields are holding very close to 11% cash-on-cash on leveraged yields. We are particularly focused on serving the BRAC relocations due to the compressed demand expected from the defense contractor community as they move to service their customers. All the buildings in the development pipeline are for our government or defense IT tenants. In summary, we're working very hard to hold our own in this challenging economy and to position the company for accelerated growth. Capital is in good shape, acquisitions are becoming available, and we continue to expand our development platform to meet demand. While the leasing and operating metrics will be challenging this year, we believe we are very well positioned for a rapid rebound. As a reminder, we are holding our investor conference for our shareholders and analysts in New York. We will be holding a reception at the New York Stock Exchange on the evening of May 18, and a management presentation the morning of May 19, with a keynote speaker at lunch. We will be sending out more details on the event tomorrow. And with that, we would be happy to address any questions you may have.

Thank you, Mr. Griffin. (Operator Instructions) And our first question comes from the line of John Guinee of Stifel Nicolaus. Please proceed.

A couple of clarifications; first, if I look at your portfolio of wholly-owned assets, it looks like you went from 19.1 million square feet of total operational properties to 18.9, about a 182,000 decrease. And it looks like your redevelopment went down from 835 to 786, about a 50,000 square foot decrease. Any reason for that because I didn't see any assets sold?

John, two things happened in the first quarter. First, we sold a small building for 25,000 square feet, and then secondly we moved a 160,000 square foot warehouse component in our company gateway business part into underdevelopment categories. Not in our supplement yet, but we have taken it out of service because we have no intention of re-leasing it. We are going to tear it down to free up land for office buildings in our company gateway business part.

And then how about on the redevelopment side, the 835 down to 786?

I'm not sure of the specifics of that. We will have to get back to you on that.

This is kind of a glass half full, glass half empty; when you are giving your vacancy number, are you doing it off of a 18.9 million square feet, are you including your redevelopment assets?

We are doing it on the 18.9, so we have two assets, we have the Blue Bell assets which comprise about 500,000 sq. ft., and then we have got this one warehouse in Columbia, 460, that aren't counted in the denominator and neither is any of the obviously under construction projects.

And then, you're able to capitalize the carry and capitalize the OpEx I guess?

Well, we are not capitalizing carry or OpEx on the basis for the Unisys asset for the warehouse that I just mentioned in Columbia.

Just kind of a back of the envelope; for every occupancy point you gain, about 200,000 square feet at say $24 full service, does that flow straight to the bottom line to the tune of $0.06, $0.07, $0.08 per share in FFO?

Yes. The marginal cost of putting a tenant in a space is probably about $2.00 a square foot, the electricity for $3, and cleaning for $1, the balance would fall to the bottom line.

And our next question comes from the line of Michael Bilerman of Citibank.

Good morning guys. This is David Shamas here with Michael. Rand, you talked a bit about the cyber security initiative. Just wondering if you can give us a sense of timing and potential scope, how much actual space that relates to?

The timing, when Secretary of Defense Gates gave the announcement of the whole establishment of the cyber security agency, he said it needed to be fully operational by October 2010, which is very, very rapid. I would suspect that that's probably slightly delayed because of the confirmation hearings taking so long at the Senate. It's now progressing well. We don't know the size. I mean, we have heard of the $15-$30 billion of initial investment in the first five years. We are hearing discussions from defense contractors who are starting to be positioned for fairly quick awards. We do think that a lot of the expertise will be external and we do think that there are a number of the other agencies; each of the armed services has an intelligence agency included within it that will be relocating to Fort Meade. The first one that's been announced was the 10th fleet of the Navy which is strange to hear, the Navy relocating to Fort Meade which is an army base, but that is the intelligence center, not the intelligence fleet. So they have announced that they will be relocating there. So we expect to see that occurring over time and as we said substantial contractor awards being given that would be off for offsite demand.

And in your guidance, you guys assume a 70% renewal rate. How much of this is known at this point versus spec?

What we do is, we go tenant by tenant, and we are obviously in discussions with each of those. And it's really a best estimate based on ongoing discussions with them. But based on where we are with negotiations and proposals and lease documents going back and forth we feel pretty good about the 70%.

Roger, I think you mentioned cap rates falling significantly in top-tier markets. Do you have any estimate as to how much they've fallen exactly?

Well, I think they've probably fallen 100 basis points since last fall.

And our next question comes from the line of George Arbash of IXI.

Steve, with regards to the snow removal charges, how much of the cost is potentially recoverable throughout the year, and how much of the related recoverables were already accrued in the first quarter?

We've estimated the full recoveries for the year in the net numbers I've given you, George. In other words, we'd incurred them in that quarter, and based upon going through the contracts and all of the analysis that you do. So, what we said is that the gross was $7.3 million, and that was around $4.2 million, the per share around $0.07 per share and that reflects the recoveries for the whole year.

We've estimated the full recoveries for the year in the net numbers I've given you, George. In other words, we'd incurred them in that quarter, and based upon going through the contracts and all of the analysis that you do. So, what we said is that the gross was $7.3 million, and that was around $4.2 million, the per share around $0.07 per share and that reflects the recoveries for the whole year.

Rand, when you think about the defense and non-defense tenants in your portfolio for that 2010 and 2011 expirations, what percentage would you say are in need of more space, and what percentage do you think will downsize when the lease expires?

Well, I think on the defense side, you will see continued growth based upon both the BRAC relocation as tenants come in, as well as those tenants that are existing already, winning awards and needing space. And then, Roger, if you want to comment on the non-defense.

Yes, I think on the non-defense what we're seeing is, for an average, a contraction of about 10% to 15% in space. So, that is, some tenants renew as is some vacate and some downsize, but if we took the average of all that it's probably a 15% downsizing.

That's great. And I guess, Steve, just one more question on the guidance that does not include any allocation for acquisition costs. I know it's hard to generalize, but do you have a sort of rule of thumb for a percentage of the acquisition costs that you would model for the acquisition costs?

We haven't. And what we've seen is and obviously haven't identified the specific acquisitions of the jurisdiction. But we've seen, we're at significant to almost immaterial depending upon which state you buy them, or which counties. So that's why we're guiding that way. Since we've not identified, we don't know what the relative percentages would be.

And our next question comes from the line of (Jordan Sandler of KeyBanc).

It's (Craig Melman) here with Jordan. Just on the potential investment activity, one of your peers was just actually discussing the heating up of bidding in Northern Virginia/DC area. And you guys had mentioned that you're more interested in core. And just trying to get to what you're underwriting in terms of rent growth, how you think you might be competitive against some of the other bidders and then especially on the value add which it seems like some of your public REIT peers are more trending to?

I think what we're doing is, obviously it's an asset-by-asset submarket-by-submarket analysis, and it all depends on, is the asset stable with no near-term lease maturity, or are you buying vacancy that you hope to fill. We're still I think underwriting very conservatively in terms of time to re-lease, and we have a venture going for the next couple of years in the Northern Virginia kind of market, simply because there still is pretty significant supply overhang overall. But again, it depends on the submarket and the particular building.

And then just on the difference between core and value add, sort of what's your return hurdle discrepancy between the two where you feel comfortable?

I'd think the return discrepancy on an IRR basis would be about 200 basis points for the (stable) assets.

And then just on the disposition side, as you guys move to increase the revenue to the more super core source, would you guys be looking to dispose of some of your slower growth traditional suburban assets and maybe which markets would be most appealing to pare down?

We're in the midst of a comprehensive study of all of our non-super core assets to try to put together a program to start divesting those assets where we either see risk out in the future or do not believe that there's significant growth ahead for those particular assets. And so, I think what you'll see over the next couple of years is us starting to sell assets as we continue to add core assets to the company.

And our next question comes from the line of Chris Lucas of Robert Baird.

Steve, just a couple of follow-up questions related to the guidance and the snow removal costs. The $4.2 million net cost estimated for the snow removals, how did that compare to what you originally guided at the fourth quarter earnings call?

Very close; at maybe a couple of 100,000 more than what we had estimated at the call.

And then on point seven of your guidance review, how has that varied relative to again the prior guidance, like the development fees and stuff?

Yes, we've just tried to frame the top and the bottom of the guidance, and it didn't necessarily change what our estimate is, but we have raised the bottom range piece of that. And so, again, it includes snow and sales, it includes the fee income, and it includes earnings on opportunistic investments.

So if you raise the bottom, what sort of has come in a little bit better than you were expecting on that bottom end?

Well, I think that we've identified another couple of potential land sales quite frankly since then and in our one of our opportunistic investments we've been able to recognize some income in the first quarter and believe that that'll continue.

And our next question comes from the line of Dave Rodgers of RBC Capital Markets.

Rand, question for you on the new submarket expansion you talked about. I'm assuming that maybe similar to what you announced with Redstone that there wouldn't be a big capital commitment upfront but that the development costs would be your investment. Is that true and is that not in your acquisition? That's not part of your acquisition guidance?

That's correct. It's a development opportunity rather than existing buildings. We do anticipate as I said that the first building would start later this year, but that's available from our revolver and would not be a big outlay.

And historically, I know you haven't really liked the idea of joint venturing as you have more and more opportunities coming. Do you think even on the sell side to look at some disposing of some assets into joint ventures as opposed to straight off the balance sheet, or at least taking advantage of other capital to pursue the large amount of growth you have?

Well, we look at all of the capital stack and alternatives and what's the most cost efficient certainly. We've tended to avoid joint ventures because of the potential conflicts of interest or that didn't really need to manufacture earnings like a lot of the earlier joint ventures that others did. And we're just not in that position. And eventually you always find that sometimes those because they are very large, they get announced as large and then they become transactional in nature and the velocity gets to be an issue. And so you've seen some of our REIT peers falter a little on those large joint ventures. So we've been fairly cautious about, and we'll just have to see how they unfold. If people have great opportunities for us, like what happened in Alabama then certainly joint ventures are a practical way to proceed.

Fair enough. And Roger, a couple of questions on the portfolio. You talked about credit issues over the next year. I guess I took your comment to mean maybe credit issues are still rising. Perhaps that's not the case. Can you just clarify that, if that was the case or not?

For the first quarter, our credit issues were about $400,000 and that's down from the last couple of quarters. So they're not rising, I think we're just pointing out that we're still going to have some lingering amounts that we're going to suffer over the next year while the whole economy gets back in balance.

And then I guess the last question on your leasing activity in the quarter. The average lease term seem to be down fairly dramatically. Is that more just market demand? Is that just a function of the renewals or is that more an OFC-driven strategy related to your view on market rents?

I think it's a combination of all. Obviously it's circumstantial based on the particular building and the tenant in it. It's also a sense for us in some cases that our rents will go up appreciably in some of our submarkets over the next couple of years with BRAC-induced demand and so we don't want to lock in rents at a low for long periods of time if we can help it.

That's a trend likely to continue here in the next couple quarters?

We're clearly balancing that with our overall portfolio maturity schedule, so you can't bet the whole company doing something like that. But I think on a one-off basis we do look at it and try to determine where we think there'll be strong demand and where we think rents would go up when we take a little bit of risk on doing shorter term of renewals.

(Operator Instructions) Our next question is a follow-up question from the line of John Guinee.

It was answered, thank you.

(Operator Instructions) Ladies and gentlemen, this does conclude the question and answer portion of today's conference call. I would turn the call back to Mr. Griffin for closing remarks.

Thank you for joining us today, and as always, we do appreciate your participation and support. Roger, Steve, Mary Ellen and I are available to answer any of the questions you might have. We look forward to seeing all of you if you can make it up to our Investor Day next month up in New York City. So thank you, and have a good day everyone.