Welcome to the Corporate Office Properties Trust Third Quarter 2016 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 proceed.

Thank you, Shantale. Good afternoon and welcome to COPT’s conference call to discuss the company’s third quarter results for 2016. With me today are Steve Budorick, President and CEO; and Anthony Mifsud, Executive Vice President and CFO. In addition to the supplemental package and press release related to our results, we have posted a flipbook on our website to accompany management’s remarks. As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release and on the Investors section of our website. At the conclusion of management’s remarks, the call will be opened up for your questions. We remind you that statements made during this call maybe forward-looking 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 yesterday’s press release and our SEC filings for a detailed discussion of forward-looking statements. With that, I will turn the call over to Steve.

Thank you, Stephanie and good afternoon. As third-quarter results demonstrate, we continue to execute on all three fundamental aspects of our 2016 plan. Same office cash NOI remains on track to increase by at least 3.5%. We have raised $304 million from asset sales so far and have another $111 million under contract and based on the performance of our portfolio and deleveraging from asset sales, we will achieve our balance sheet goals. The recovery among our defense IT customers continues to drive gradual broad-based occupancy gains. As an example in our Navy support group, we accomplished 56,000 square feet of new leasing in the quarter and 89,000 square feet year-to-date. The progress at all our defense IT locations is encouraging with 89% of vacancy leasing achieved this year occurring in those segments. Based on the solid momentum in demand, we expect 2017 leasing progress to be delivered and steady. During the quarter we leased a total of 741,000 square feet comprised of 597,000 square feet of renewals, 118,000 square feet of new leases on vacant space and 26,000 square feet in development projects. For the nine-month period, we completed 2.3 million square feet of leasing, which included 1.4 million square feet of renewals, 367,000 square feet of vacancy lease up and 571,000 square feet of development leasing. In the third quarter, we completed three large early renewals with non-defense tenants that we discussed on our last call and which are summarized on Slide 5. These proactive transactions eliminate significant rollover exposure and 275,000 square feet or roughly 2% of our same office portfolio and ensure stability of same office growth. As a result and as detailed on Slide 7 we now have only 10% of annualized rents rolling in 2017 and 13% in 2018. Most of these leases are…

Thanks Steve. As summarized on Slide 4, third-quarter FFO per share of $0.51 was in line with the midpoint of our guidance and consistent with results from activity we previewed on our second quarter call. Same office cash NOI increased 1.1% in the quarter and 4.1% during the first nine months, also consistent with our guidance. During the quarter we paid off $163 million secured loan that bore interest at 7.25%. At September 30, approximately 96% of our debt is fixed rate and our total debt has a weighted average maturity of 6.1 years. Slide 12 depicts our debt maturity schedule at the end of the third quarter. Earlier this month, we used cash on hand from dispositions and capacity on our line of credit to retire our $120 million term loan, which was due in 2019. With that repayment we now have no debt maturities until 2020. At September 30 our debt-to-EBITDA and debt to adjusted book ratios improved to 6.3 times and 41.2% respectively. We expect to achieve debt-to-EBITDA of 6.1 times by year-end and debt-to-adjusted book ratio of 39% upon completion of our 2016 asset sales. Slide 14 of our presentation summarizes our updated guidance and a major assumption that supported. We are maintaining our previously provided guidance for the fourth quarter and tightening our full-year guidance range around the previously established midpoint of $2.01, which is flat versus 2015 results. Importantly, we now forecast that AFFO will increase at least 6% this year, modestly exceeding what has been the high end of our guidance range. We continue to forecast same office occupancy to increase at least 60 basis points in the fourth quarter to end the year between 92% and 93%. At September 30 our same office portfolio with 93.2% leased. So our guidance is based…

Thanks Anthony. Our primary corporate objective is to deliver competitive total returns to shareholders. We are doing this by managing risk in our portfolio and balance sheet to ensure stable, predictable growth throughout the economic cycle. As we complete our 2016 plan, our company is very different and far stronger than the one I joined five years ago. The three big takeaways from this call are as follows. First now that our programmatic asset sales are concluding, our growth story becomes even simpler. We will produce competitive NAV and FFO growth by combining attractive same office cash NOI growth from our stable pool of existing assets with robust new cash flows from low risk development projects. Second we have worked very hard to strengthen our balance sheet and we hold our investment grade rating as sacrosanct. We will continue to be vigilant about leverage and will look for ways to continue improving our metrics and our credit rating over time. Third and finally, we are no longer a suburban office REIT. 90% of our portfolio is at defense IT locations such as the National Business Park. These locations may appear to be Suburban on an aerial, but they are the central business districts of national security missions, a fact demonstrated by the increasing investments our government customers make in their on base facilities and also in the secure facilities they lease from us. Our Maryland defense locations serve important missions at Fort Meade including DOD Cyber. Our Northern Virginia defense locations support other intelligence and cyber missions. Both sides of the Potomac River our essential for keeping this country safe. The 10% of our portfolio that is non-defense, consists exclusively of seven Class A buildings in urban or urban-like markets that are mass transit served. So upon completing the 2016 asset sales, all of our buildings will either be mission centric or urban centric. On that note operator, please open up the call for questions. Question-and-Answer Session Thank you Mr. Budorick. [Operator Instructions] Your first question comes from the line of Jamie Feldman of Bank of America. Please proceed.

Great, thank you. I guess going back Anthony, one of the comments as you were wrapping up your comments you said NOI will or NOI growth in development will offset dilution from asset sales in '17, can you give us a little more color, are you saying that you're looking at flat earnings year-over-year or like how do we think about those three pieces?

No, I think what we’re saying is as we were looking at 2017 we do see growth off of where we are in 2016, but the one component that needs to be taken into account is that if you average the sales that we've accomplished so far or this year with the ones that have been executed as well as the ones planned for the fourth quarter. The average in 2016 is $120 million versus that $440 million total disposition target. So, that increment is going to impact 2017 because we are selling at an average cap rate of around 8% and we’re reinvesting those dollars 50% in development call it 8% plus, but the other half we're using to pay down debt and that debt is low cost. So, the average debt that we paid off is just under 3%. So, it's really the full-year impact of the sales on 2017 will bring '17 down, but we believe that, that will be more than overcome by the growth in the same office NOI as well as the incremental NOI coming on from development projects.

Okay, that’s helpful. And then you said 3% plus same-store NOI after the fourth quarter. So that’s kind of what you’re looking at for next year and then as you think about the drag in the back half of this year, what are the big pieces that will give you a swing because I think you mentioned free rent burning off or new free rent is kind of what's holding you down?

That’s correct. That’s been holding us down back in the third and fourth quarter and that, that burns off after the end of the, after the end of this year.

So is 3% is what you are looking as a for next year, for the full-year?

Yes, we are.

And then can you talk about the COO surge is just where things stand today?

Sure, well I’m pleased to report that we made a selection. We're on boarding the candidate right now. We expect to make an announcement in the next two weeks and he will join us at the end of the month.

All right, great and then I guess Steve for you, just any other initiatives we should be thinking about for the company since you've taken on.

Well, we are heavily focused on driving leasing through 15 assets or groups of assets where we have vacancy and continuing to thrust through our development program.

Okay. Great thank.

Thank you.

Your next question comes from the line of Craig Mailman of KeyBanc Capital Market. Please proceed.

Thank guys. Good afternoon. Just Steve just curious, I know we've you talked in the past about your 12 builds that you have were about a million square feet of tougher vacancy, can you give us an update of where you guys stand with that and may be any trend you're seeing in velocity or anything on that front?

So let me speak to the velocity trend. It's been improving throughout 2016 so, as we said right now that million square feet we've got 24% that is either in advance negotiations or pipeline then other 43% where we have working deals with prospects. So, in total we have activity on 67% of that million square feet. So, I think that's significantly better than it was at the beginning of year and I think we’re going to have a good fourth quarter.

That’s helpful. Then just on the 310 NBP this one has been a little bit slower to lease up you guys got some traction here, have you gotten indications of interest for the balance of the building or is it just more of gut that feeling that, things seem to be ticking up with that tenant?

Good question. I have to be careful about what I say regarding the U.S. Government, but there is strong interest in activity in the property. They have processes they must file and we will patiently wait for them to proceed.

Okay, that’s helpful. Then just moving over dispositions, could you just give us a sense of cap rates you guys are getting on the sales and maybe just some kind of trends you're seeing in the disposition market? I know you guys had a go to small packages to get a lot of this done.

Sure, Craig. The average cap rate on the operating properties that we sold year-to-date is about 7.7% so, we’ve been, we’re going to achieving some good values on the stuff that we have in the market because and with the majority of that being suburban office assets. The you’re right that we had some transactions in the market earlier this year that we had to step back and break out into pieces. We had now gotten, all of that product backup either under contract renegotiations and with those deals the total operating property sales that we have in closed or in process sort of will average that 8.3% cap rate is still to see pretty good demand for that product from the regional investors who continued to see that as of a way to you, there’re looking at its capitalized different than we were there going to elaborate up and go for the highly leveraged yield on this product. So the market continues to be good for us with respect to getting those assets moved out the door.

Great, thanks guys.

Thanks Craig.

Your next question comes from the line of Manny Korchman of Citi. Please proceed.

Hi, Manny.

So if we just think about the asset sales again where do those come in pricing expectation wise versus when you first listed them I get there on the contract and you guys made quick work getting past that were evaluations for you versus very first its…

Some exceeded our expectations on so little short on average the right on target.

Okay and then in terms of lease renewals or start early renewals has anyone else approached you in and wanted to do an early renewal and if so where would pricing went one on those.

Those three renewals were all non-defense tenants and one in particular influence those, the big decline in our cash rent spreads that building was the Northern Virginia it's a major financial institution, markets around that building are about 20% vacant. We took a very risk-adverse approach and agreed to cut that deal early in and lock it up for another 12 years. We really don't expect any more of that activity fits out of the usual.

May be last one for me if you think about your ongoing development pipeline how much of that’s going to be sort of office space in your defense markets versus other types of assets including data centers.

In a shadow development pipeline about 50% is office about 40% could be data centers.

Office is that the defense IT locations.

Thank you.

Thank you, Manny.

Your next question comes from the line of John Guinee of Stifel. Please proceed.

Hi guys. John Guinee. Couple things, big picture first is, I think correct me if I'm wrong most of your vacancy is in the Navy support and I would improving ground and I don't know if there is a path to lease set up so, if you could discuss that let me know and then second you’ve got about I think you said million square feet of build the suite development, can you sort addressed to questions one Wenger felt is no longer there so, who's heading that up. And then two is it in Redstone San Antonio NVP, Northern Virginia APG where is it located?

So the first question Navy support, we expect that portfolio to be over 90% lease either at year-end or shortly thereafter got very strong demand throughout the all three locations. Then with regard to development in the shadow development pipeline it's really all of the above John there's quite a bit of activity were working on for Redstone Gateway in Huntsville, there is some Northern Virginia activity at multiple locations. There's activity in Colombia Gateway M Square our development associated with University of Maryland and potentially at the National Business Park.

Okay and have you hired development person or who is handling that.

So we are recruiting that, we have a very solid team that remains with the company Anthony and I are co-managing and coordinating their activities currently. Our new COO will be empowered to oversee that activity when he comes on board and after we onboard the COO we will finish recruiting for replacement.

And then I think you quoted AFFO up 6% which I’m assuming is 2015 over 2000 or 16 over 15 but correct me. My general question would be spending $38 a square foot on releasing cost with a 7% roll down how is that math work for that to be AFFO growth or it will AFFO slide in 17 because you're spending that money in 17 versus 16?

That you’re correct that the 6% relates to 2016 versus 2015 and the capital that we’ve committed on the tenant improvements for those larger early renewals. The vast majority of that capital will be spent next year so, will be seeing that flow through is a recurring capital item in our 2017 AFFO.

Okay and then looking at page 6, I just noticed continual impairment losses $70 million last quarter $28 million this quarter $100 million for the year, are we done with impairment losses and then the second is I'm looking at G&A leasing expenses didn't development which I think most people all included G&A, correct me if I'm wrong but if you add all those up, you're running at about a $10 million or quarter G&A run rate and correct me if that's, here the wrong way to look at it or not as high as I think it is.

With respect to impairment John, we believe we're done the additions that we had in the fourth quarter assuming in the third quarter related to taking to market primarily related to taking the market one building in Northern Virginia that we now have as held for sale that wasn't previously held for sale. As well as some adjustments to some of the transactions that we have in the market between this part of contract negotiations. With respect to G&A, the numbers that you're looking at in our on our income statement include the cost that the company has incurred in the current year for executive transitions and as we've gone through that process to reduce the overall G&A of the company those costs are flowing through not just related to folks at the CEO or at the head of development level but also at other Senior Vice President and Vice President levels where we have reduced overall, the overall cost of the company. If you look at that on a run rate basis, the third quarter really ran at about $8 million and that's where were targeting the fourth quarter to be.

And then lastly on your 310 lease 15,000 square feet is that building inside the fence now or outside the fence and that the use if it’s outside the fence now does the use required to go inside the fence.

It’s currently out, we will be expanding the fence line around it in the process of fitting out for the initial customer who is a member the U.S. government.

Got it, Thank you. Thank you. Nice job.

Thanks John.

Your next question comes from the line of Dave Rodgers of Baird. Please proceed.

Yes, good afternoon guys and Steve wanted to go back to your development comments you said about $200 million annually of development spend I guess with the programmatic asset sales going to be behind you by the end of this year, what’s the right level of sales between value creation the, the use of debt potentially ATM, what is the right level of an ongoing sales to keep leverage in check and move forward that development?

Maybe $50 million.

Okay. The rest of the handle with value creation et cetera.

Correct.

Okay. I guess the second on the guidance page that you had and maybe just refresh my memory, there were two major changes, one was the development spend declined from the initial and then there was a drop in the same-store occupancy guidance, just wanted to kind of recap what was driving those two and the development spend in particular, was that just a function of kind of when the capital is going out the door or just a slower ramp et cetera.

It's really a function of when the capital is going out, so we had some delayed starts both in terms of starts that were delayed versus in 2016, so projects that we thought we're going to start earlier in this year that have now started that impacted that as well as starts that now have been pushed into 2017. There is a component of that reduction that relates to the one redevelopment project, we sold at Arbor Crest that we originally had as redevelopment project at the beginning of the year that we no longer own and there was – there's a funding structure that the government asked us to do for the build-out of Building D that caused temporary reduction again, a timing change between 2016, 2017. I'm sorry repeat that question.

Okay, that is helpful. On the same-store occupancy guidance was lower as well but you retained a lot of the tenants as far as securities...

Yes that is the change that we made with the second quarter guidance that was a function of the change in the pool as a result of some of the changes in the assets that were in the disposition improvement.

Okay that is all. And then I guess the last one in the supplement, I think your differential between leased and occupied about 150 basis points, these are little bit larger than it has been, so I guess just curious on kind of when the uptick in occupancy is for that and the second part of that is does that include development which I guess might answer some of the first part of the question?

It doesn't include development because it is same office, you'll see occupancies improve as we finished the fourth quarter and I would expect to continue to accrete in the first and second quarter next year based on the activity we have, the leases we have signed and as you've noted our spread between leased and occupied is higher than it typically is.

Okay, thanks.

Your next question comes from the line of Tom Catherwood of BTIG. Please proceed.

Thanks, good afternoon guys.

Hi Tom.

Welcome back, Tom.

Thank you so much, Steve. Steve you're talking about the leasing spreads and you said it's not for the early renewals the cash leasing spreads would've been down roughly 2%, what have been on a GAAP basis ex-early renewals?

Go ahead.

Yes without the early renewals, it probably would been around 7% to 8%.

7% to 8% positive for GAAP?

Positive yes.

Got it, on Slide 6 of the presentation today for 2017 there is 150,000 square foot contractor, where the renewals with the size of renewals we predicated upon contract renewal and got me thinking how often or and how many times in your leases with contractors is that duration of the lease is tied to the duration of the government's contract and does that kind of an impact your negotiating variables because the duration is fixed and you can't push that out any longer?

It tends to be more aligned with contract length with the smaller entrepreneurial contractors, the larger call it institutional quality of except normal terms and risks.

Got it, so as the market improves is that something that you are continually able to push or is it I'm trying to get a sense of as your portfolio cleared and it continues to fill up, where do we see that pushes it on concessions, is it on rent, is it on duration or could it be a mix of all three?

It's a mix of all three unquestionably.

Okay. And then last one from me Cybersecurity anything, anything new this quarter, any new tenants to the market and in general how does the velocity look in that sector?

Good, we signed several smaller cyber tenants between three and call it 8000 square feet in the Fort Meade area in the last quarter, couple months and we've pretty good pipeline behind them. In total we're over 2.1 million square feet of just cyber tenancies since 2011.

If I may Tom, we launched a modest beginning of the research platform and there is a Cybersecurity piece on there that will enable you and others to track our concentration of direct cyber leasing in our portfolio through that simple two page.

That is great, thanks guys.

Thanks Tom.

Your next question comes from the line of Jed Reagan of Green Street Advisors. Please proceed.

Good morning guys. Lot of my questions have been asked but just going back to the dispositions, so can buyers get financing for the type of non-core stuff you're looking to sell especially if it does have some vacancy and is that CMBS they're looking to or there are other sources of that capital behind that?

Yes none of our buyers have really had an issue obtaining debt and virtually all of them have put debt on the portfolio, portfolios that they're buying. The majority of that is coming from banks, it's not coming from the CMBS market, some of it's coming from some smaller life companies but none of them have had an issue obtaining that debt.

Okay, that is helpful in and have you seen bidding transfers some of the stuff trending over the course of the year, is that thinned a bit or any comments there?

It was little thin in the first quarter because of some of the unrest in the financial markets, it firmed up nicely in the second and it has maintained reasonably strong through the third and we have identified buyers for everything that we're looking to sell. So we're in good shape.

Okay, great. Thank you.

Your next question comes from the line of Bill Crow of Raymond James. Please proceed.

Hi good afternoon. Steve two questions in the government side of things and understand you're limited to what you can say but the first question one of your peers this morning talked about government contraction kind of stalling the Greater DC office recovery in the third quarter, the markets are different, your properties are different and really your tenants are different but I was wondering if you could give us a picture of the kind of the net demand from the government up in the kind of Mid-Atlantic region?

Well I'm not sure what period you listen to but surely they are referring to the GSA leasing which is largest single tenant in the Washington DC area, the GSA has slowed or short-term expanded a lot of their leasing over the last few years in an effort to get to create opportunities to significantly shrink the amount of square footage per person that they are leasing. And so unquestionably in the GSA heavy submarkets there will be contraction it will probably occur over the next three to four years because of amount of it and the challenge of consolidating those large leases. With regard to our portfolio, we have very little GSA leases in our portfolio about 89,000 square feet and we're not markets that tend to be GSA oriented, so we don't see that impact with regard to our portfolio.

And those tenants again probably wouldn't benefit you either just rotation of there – there wouldn't be a consolidation opportunity right?

We have one development where we think is well-positioned to compete for some consolidate – consolidating GSA users and we are actively seeking those opportunities.

All right, the second part of the question is if I go back 10, 12 years ago there was a lot of discussion that that you would have spec developments but they were essentially in response to wink and a nod and maybe a handshake with potentially government tenant, that said if you build something they would come, is that happening today? Is that and if so how much of the million-square foot of build to suit, I don’t know it would go into build to suit category but how much of that is maybe represented by that kind of non-negotiation to negotiation?

As we stand today none of it, we have a building in the National Business Park that we built anticipating demand, it took an extra year for us to start generating activity, we did a lease this quarter and we expect more activity next year, completely leasing. It is very little, most of the development we've done is heavily preleased or build to suit.

Okay. That is it, thank you.

Thanks Bill.

Your next question comes from the line of John Guinee of Stifel. Please proceed.

Great, hi this is a follow-up question. Somebody earlier asked about [page] and space renewal and defense contractors and I think you said that the smaller defense contractors like need lease termination, fee options but the larger defense contractor are able to or willing to take normal business risk, that is very, very different from what I hear from the JLL and the CBRE tenant rep brokers who seem to say that the defense contractors are incredibly difficult tenants and want continual lease termination clauses, can you expand on that?

Generally, we don't give continual lease termination clauses. We have a few instances where there is a conditional termination tied to a very specific contract but it's pretty rare. So they might be asking for those things, but we don't really have, we've not granted that continuous right to terminate.

I meant they wanted rights to terminate to coincide with their contract ending?

It happens occasionally but it's not the common event.

Okay, thank you.

[Operator Instructions] Your next question comes from the line of Chris Lucas of Capital One. Please proceed.

Good afternoon everyone. Hey Steve, I appreciate the summary on Slide 6 of the renewal forecast for the larger leases, but I was wondering if you guys have visibility at this point on retention rate overall for next year given particularly the strength that you've had the last couple of quarters, curious as to what you see heading into next year?

We're really working that retention effort or handicap estimation out three years right now and I can tell you that we're very pleased with our expectations for 2017 and 2018 and we're kind of working our way through 2019 but I think it's safe to say, we expect it to be 70% at minimum.

Okay. And then on the recognizing that you're coming to the end of the programmatic sales process hopefully this year and hopefully doesn’t slide but can you just give us a sense as to what you have left after this process is over with that you would consider non-core to ultimately sell and monetize it at your discretion?

There will really be nothing left that's non-core.

Chris as we look at the way that we classify the assets in our supplement, we have that other category and embed it in other, it is other.

Is that one?

The step child we always forget and we like to forget about is the three assets up in North Gate. Those were assets that we have been and will continue to attempt to sell. They are non-core, they do not meet our long-term strategic objectives. That's with respect to the operating portfolio. With respect to the non-core land, there's still a few parts of the land that were acquired by the company in previous administrations that we want to get rid of because again they're not projects that we will develop on as part of our long-term strategy.

Okay, great. Thank you.

At this time, there are no additional questions in the queue. And I will now turn the call back over to Mr. Budorick for closing remarks. Please proceed.

Thank you all for joining our call today. And we look forward to seeing many of you at NAREIT in Phoenix in a few weeks. If you have further questions, we will be in our offices this afternoon. Feel free to call us. Thank you.

Thank you for your participation today in the Corporate Office Properties Trust third quarter 2016 earnings conference call. This concludes the presentation. You may now disconnect. Good day.