Jul 30, 2010
Executives
Mary Ellen Fowler - SVP and Treasurer Rand Griffin - President and CEO Steve Riffee - EVP and CFO Roger Waesche - EVP and COO
Analysts
Dave Rodgers - RBC Capital Markets John Guinee - Stifel Nicolaus Brendan Maiorana - Wells Fargo Michael Knott - Green Street Advisors Bill Crow - Raymond James Craig Melman - KeyBanc Capital Markets Jordan Sadler - KeyBanc Capital Markets George Auerbach - ISI Group Sri Nagarajan - FBR Capital Markets Chris Lucas - Robert W. Baird
Operator
Welcome to the Corporate Office Properties Trust Second Quarter 2010 Earnings Conference Call. As a reminder, today's call is being recorded.
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.
Mary Ellen Fowler
Thank you and good morning everyone. Today we will be discussing our second 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.
Rand Griffin
Thank you, Mary Ellen, and good morning, everyone. We're reporting FFO excluding acquisition costs of $0.54 per diluted share for the quarter.
This is a 19% decline in FFO per diluted share, compared to the same quarter last year. The result for the quarter was in line with our expectations.
We tend to take a long term view, and as previously discussed, expected the first half of the year to be difficult. Turning to our operating portfolio, we continue to be in a difficult operating environment for a portion of our portfolio, similar to that reflected by number of other office REITs.
Although it varies by market, we are seeing a bottoming process. Corporate America in non-defense sectors continues to downsize with tenants requesting space reductions and leasing concessions.
Although we think the rate of decline has bottomed, we may not see much improvement for another year. As we said, last quarter occupancy and same office rents will be under pressure throughout 2010, and we are seeing a continuation of that trend.
Offsetting this trend during the second half of the year, will be positive impacts from development NOI for assets placed in the service, and acquisitions that have and will close in the last half of the year. In addition, we have built into our guidance a fairly large potential gain from an investment in one of our tenants KEYW.
This tenants specializes in cyber security and is considered a super core tenant. We believe this investment is a natural extension of our business model.
We are supporting a startup company, whose management team previously created a very successful defense contractor company that was one of our growth tenants. They executed a sale several years ago to a defense company.
This investment allows us to grow our tenant base and create future leasing demand, and through this type of investment we gain additional knowledge that helps us understand where our niche business is going, and where we can take advantage of opportunities to create value for our shareholders. Steve will provide more information regarding the effect of KEYW on our guidance.
We recognize that our guidance implies a significant ramp up in the second half of 2010, but we believe we have the pieces in place to accomplish this ramp-up, and therefore we still feel good about the year, although we slightly lowered the top-end of the guidance range. As we indicated last quarter, we are starting to see some acquisition opportunities in our markets.
We believe we have a window of opportunities to buy well leased super core product at attractive yields. We closed on the first acquisition of a super core property in the second quarter and we are under contract for a $120 million second super core property with an assumable loan that we expect to close in the third quarter.
Based on these transactions combined with other activity, we now expect to acquire over $300 million of properties by the end of the year. Due to the exchangeable note issuance and expansion of our revolver through the accordion, as well as low debt maturities for the balance of the year, we have the capacity to take advantage of these opportunities.
With regard to development, during the quarter we announced our expansion to a new BRAC location in Springfield, Virginia. We have control of a site known as Patriot Ridge, that can support up to 980,000 square feet of office space.
Patriot Ridge is located adjacent to the new 2.4 million square foot National Geospatial-Intelligence Agency headquarters at Fort Belvoir, now under construction. We are planning the first building to be under construction by year end, and this project will add revenue from our super core tended base overtime.
During the quarter development leasing of NBP has picked up and we have very strong activity. Demand from defense contractors that at our North Gate Park at Aberdeen Proving Ground has been steady.
Although we have not yet seen the surge of leasing that we expect to see, the C4ISRs relocation from Fort Monmouth is completed by March 2011. We are also seeing a pickup at Pax River in Southern Maryland, and with two build-to-suit opportunities expected to be signed in the third quarter.
We've received questions about the recent Washington Post articles, portraying the government as having a large number of potentially redundant intelligence agencies. And we thought it might be helpful to spend a few minutes sharing our perspective.
The country is facing an ever expanding threat and emerging threats are not conventional warfare, but cyber warfare and asymmetric warfare using unconventional weapons. Thus the funding for the intelligence community will not be cut, but instead increased.
Our view regarding the long term prospects for COPT, is that we are well positioned in the Fort Meade growth quarter for the components of this growth including defense IT with DISA, cyber security with the US Cyber Command, and for the ongoing expansion of the defense intelligence at Fort Meade. As we mentioned on previous calls, the impact of this growth is substantial, with BRAC bringing in 5600 new federal employees, with three agencies to the base, the largest of which is DISA, with 4300 employees.
This is in addition to a defense intelligence expansion of Fort Meade of 4000 employees over the next five years, and the creation of the US Cyber Command, initially estimated at 1000 employees. This totals over 10,000 direct federal employees moving to the base, and does not count two to three times multiplier impact of contractor demand, where we expect to have some leasing success.
Long-term we are comfortable that the growth related to these agencies will be substantial, and we are well positioned to capture a large portion of that growth. In addition, our strategy to locate adjacent to five BRAC locations is beginning to show results, as the Command moves occur and our buildings deliver.
BRAC will be an impactful and meaningful growth drive for the company. In summary while first of the year has been challenging as expected, we are now ramping up for the second of the year with good momentum on development and acquisitions.
And with that I will turn the call over to Steve to discuss our results and guidance in detail.
Steve Riffee
Thanks Rand and good morning everyone. Turning to our results, FFO excluding acquisition costs for the second quarter of 2010, totaled $39.1 million or $0.54 per diluted share.
These results represent a 19% decrease on a per share basis, from the $0.67 per diluted share or $46.9 million of FFO for the second quarter of 2009. This decline was primarily a result of the $7 million increase in interest expense, and a $1.5 million in net construction fees.
NOI increased due to development placement service and acquisitions that occurred late in 2009, and then that was partially offset by a $2.3 million or $0.04 per share decrease in NOI attributable to vacancies and assets we expect to redevelop From Blue Bell, Pennsylvania, and the warehouse in Columbia, Maryland. As we noted in our prior guidance, interest expense also grew in the second quarter for 2010 by $0.04 per share, when we opportunistically raised $240 million of proceeds through the issuance of exchangeable notes at the beginning of the quarter, and paying down our line of credit.
As a result, we created additional line capacity to fund acquisitions and development, a quarter earlier than we had previously planned. We reported net income attributable to common shareholders for the second quarter of $4.4 million or $0.07 per diluted share, compared to $12.6 million or $0.22 per diluted share from the second quarter of 2009.
Turning to AFFO, our adjusted fund from operations of $26.7 million represents a decrease of 26% from $36.2 million in the second quarter of 2009. AFFO decreased primarily as the result of lower FFO and a $3 million increase in capital spendings.
Our year-to-date diluted FFO payout ratio was 75% and our diluted AFFO payout ratio was 96%. Looking at our same office cash NOI for the second quarter of 2010 for the 230 properties or 87% of the consolidated portfolio square footage, same office cash NOI, excluding lease termination fees decreased by 1%, as same office average occupancy decreased by 2.9% and rates for re-tenanted and renewed space declined by 3.8%.
These factors were partially offset by rental rate increases for in-place tenants, and reduced operating expenses, which declined by 3.3%. Including gross termination fees, same office property cash NOI was essentially flat.
Turning to the balance sheet, at June 30th, our weighted average cost-of-debt for the second quarter was 5.3%, compared to 4.7% a year ago, 81% of our debt was at fixed interest rates of June 30th. Our company's ratios remain strong, with a second quarter EBITDA to interest expense coverage ratio of 2.85 times and a fixed charge coverage ratio of 2.41 times.
Reviewing our 2010 capital plan, we've managed our near term debt maturity to low levels with only $52 million of debt maturing for the remainder of 2010. At the beginning of the second quarter, we closed a $240 million exchangeable note offering.
The notes have a 4.25% coupon rate and 20% conversion premium over our closing stock price, on the day of pricing, which equates to a $48.16 per share conversion price. The 20 year notes have a five year no-call provision, and put rights at the five year anniversary dates.
The proceeds were for general corporate purposes and initially used to pay down our line of credit, creating additional line capacity. We also expanded our $600 million revolving line of credit by $100 million, using the accordion feature of the line, and as of June 30th had approximately $450 million of available capacity after funding an acquisition of $40 million near quarter end.
The line capacity and amounts available under our $225 million construction revolver should be sufficient to fund acquisitions and developments for the balance of 2010. Turning to our diluted FFO per share guidance for 2010, we have lowered the top end of our guidance range by $0.03 per share and our current range for the full year 2010 is from $2.31 to $2.46 per diluted share.
As previously noted, this guidance excludes any initial property acquisition costs that would be required to be expenses incurred. Those acquisition costs would vary significantly by tax jurisdiction, and are no longer capitalized under accounting rules.
And here's a current update regarding the guidance assumptions that we're refining, at this point in the year. First, for our 2010 same office portfolio, we expect occupancy to remain relatively flat for the balance of 2010.
We are projecting our retention rate for 2010 to average 70%. Second, same office cash NOI, excluding term fees is projected to average between negative 2% to flat for the year, and may fluctuate by quarter.
Third, lease termination fees are expected to be approximately $3 million for the full year, with $1.4 million recognized today. Fourth, we estimated development projects opening during 2010 to contribute $4 million of NOI.
The 2010 deliveries are still scheduled to come online in the second half of the year. Fifth, we expect acquisitions to range from $300 million to $350 million in total for the year with a full year average new investment of approximately $120 million.
$40 million of acquisitions have been complete as of June 30th. Sixth, in other income, gains on opportunistic investment, such as our investment in KEYW, are expected to contribute between $5 million at the low end of the range and up to $13 million at the top end of the range for the full year.
Gains or non-operational out-parcel land sales are expected to contribute between $3 million and $3.5 million for the year. Finally, third party development fees are expected to average approximately $600,000 per quarter.
This is our updated look for 2010 and we expect to further refine the details throughout the year. And with that I will now turn the call over to Roger.
Roger Waesche
Thanks Steve. At quarter-end our wholly-owned portfolio consisted of 247 properties totaling 19.5 million square feet, that were 88.3% occupied and 89.3% leased.
Our vacancy has increased 4.1% over the past year, of which 1.2% is un-leased construction deliveries, and 2.9% the same office, including 1% related to warehouse space in two projects. As forecasted our occupancy was down 1.3% quarter-over-quarter, a majority of the vacancy increase related to two newly constructed buildings delivered in our Colorado Springs submarket totaling 187,000 square feet that were not leased.
During the second quarter, we leased 937,000 square feet of which 588,000 square feet were renewals, 164,000 square feet was re-tenanting, 94,000 square feet was first time lease up of previously acquired space, and 90,000 square feet was development. For the quarter, we had a renewal rate of 71% at an average capital cost of $4.09 per square foot.
Rents on renewals increased 4% on a straight line basis and decreased 3% on a cash basis. Total rent for renewed and re-tenanted space increased 3% on a straight line basis, and decreased to 4% on a cash basis.
For all renewed and re-tenanted space, the average capital cost was $10 per square foot. Year-to-date, we have executed 1.9 million square feet of leasing, with rents on renewed and re-tenanted space increasing 2% on a GAAP basis, and declining 6% on a cash basis.
CapEx average $9.60 for renewed and re-tenanted space. Looking at our lease expiration schedule across the portfolio for the balance of 2010, we have 8.3% of our revenues expiring, representing 1.55 million square feet.
We continue to expect the 2010 renewal rate of approximately 70%, which is consistent with our 10 year historical average. Leasing activity has increased overall in our portfolio, with the exception of a few submarkets, our leasing metrics on our in-place portfolio continue to be somewhat challenged, with occupancy under pressure and renewal and re-tenanting rents rolling down modestly.
We believe overall fundamentals have bottomed, but demand, excepting our BRAC locations has not increased to the point where leasing metrics will improve measurably. To date, our leasing capital cost per square foot has been low, but we would expect them to increase somewhat for the balance of 2010.
Although business sentiment has improved, we continue to see top-down pressure from corporations to lower operating expenses, including occupancy costs by lowering the cost per seat. We continue to see many renewals accompanied with a space down-sizing that has pressured our occupancy.
Many tenants are looking for flexibility and do not want to make long term commitments for space, given the over all economic backdrop. We have an operating advantage in this market with our ability to fund improvements and with our emphasis on customer relationships and service that tend to attract and retain customers.
Demand for our development projects is consistent. Since the beginning of the year we have signed leases exceeding 545,000 square feet in six different buildings in our Fort Meade, San Antonio, Colorado Springs and Aberdeen markets.
We also have leases under negotiation of 241,000 square feet in five different buildings. We continue to see good BRAC related leasing activity, both in Fort Meade and Aberdeen.
The moves of C4ISR from Fort Monmouth, New Jersey to Aberdeen, and DISA from northern Virginia to Fort Meade have moved up to earlier in 2011. The contractors that support the government are starting to be active and physically repositioning themselves to serve their customers.
From a market standpoint, the BW corridor, which represents 46% of the company's revenues, was 15.2% vacant at quarter end, including 13.6% in the Columbia submarket. The market is stable with good leasing activity.
The northern Virginia market from which the company derives 19% of its revenues, was 14.2% vacant at quarter end, versus 14.4% a quarter ago and 13.9% a year ago. Although, the submarkets the company operates within at higher vacancies.
These include Tyson's Corner at 16.8% vacancy, Herndon at 15.7% and Route 28 South at 19%, which all are lower than a quarter ago. The greater Baltimore market which represents 15% of the company's revenues was 12.6% vacant at quarter end.
Three of the company's submarkets, I-83 corridor, Westside, home to Social Security and centers for Medicaid and Medicare, and Hartford Country, were Aberdeen project is located, are stable and improving. The company's fourth submarket, White Marsh continues to underperform, but it is gaining strength.
The credit quality of our top 50 tenants who represents approximately 70% of our revenues, remain strong. We have experience and do expect some modest credit issues over the next 12 months coming from outside of our top 50 tenants.
Turning to acquisitions, the investment market for office properties continues to show improvement, with deal volume up significantly year-over-year and greater investor interest and a wider array of opportunities. We are seeing increased competition for core assets from institutional investors, including public and private REITs and pension fund advisors, and cap rates for these assets has moved down accordingly.
Private sources of equity are beginning to show greater activity as well for non core value added opportunities. In the second quarter, we acquired a 152,000 square foot building in Tyson's Corner for $40 million.
The building was build in 2002, and is 100% leased to the MITRE Corporation. MITRE is a tenant of ours in our Fort Meade and Aberdeen markets.
This acquisition represents a strategic investment for the company of high quality real estate and allows us to expand the customer relationship. We are under contract for our second super core property that includes a loan assumption that we anticipate closing in August.
The property is fully leased, primarily to defense contractors, most of which are existing tenants in our portfolio. In this more competitive investment environment, we seek to generate enhanced returns by identifying situations where we can add value to our operational expertise, tenant relationships and market knowledge.
Our ability to acquire assets on an all cash basis remains an advantage in many situations and we remain focused on increasing our presence and market share in our existing markets. We are also starting execute a plan to sell assets that are non-core or are slow growers or pose future risk to company.
This will be implemented over a number of years, and will be done in context of realizing reasonable value, as the investment market improves. Now I will turn the call back to Rand.
Rand Griffin
Thanks Roger. Looking at our construction pipeline, at quarter end, we had 10 buildings under construction, for a total of 1.2 million square feet, at a projected cost of $265 million.
Our development pipeline is 12 buildings underdevelopment, with over 1.5 million square feet at a projected total cost of $371 million. You will note we have added the first building of 2,25,000 square feet that we plan to develop at Patriot Ridge in Springfield, Virginia.
With regard to leasing, our construction pipeline ended the quarter at 54% leased. Since the quarter end however, we have experienced increasing activity at NBP, with 308 NBP now fully committed.
As a result of this leasing activity, we have started construction on our next building for 30 NBP, Phase three of NBP. At Northgate, we opened 209 Research Boulevard in June, and are also now fully committed.
210 Research Boulevard has had modest leasing activity to date, but leasing activity is starting to pick up in anticipation of the building completion this fall. We expect to be fully leased by the end of the year.
As a result of this activity, we've now started the next building at Northgate 206 Research Boulevard. With regard to our newly announced Patriot Ridge project, we have excellent dialogue with a number of large super core tenants providing strong early indications for leasing activity.
In Colorado Springs, we continue to see slow leasing activity. To better understand the percentage of leasing on buildings completed in 2009 and completed or anticipated to be completed in 2010, we have included in the supplement on page 34, a new schedule which shows that these buildings are 71% leased as of June 30th.
If you add in the leasing commitment since quarter end, this percentage is increased to 81% leased. We think this is indicative of continued strong performance, which is very accretive to the company with close to 11% cash-on-cash on leveraged yields.
In summary, we continue to work through a challenging environment for a portion of our operating portfolio, while making strong progress on the development side of our business, and experiencing increased acquisition activity. We are well positioned for growth to return in 2011 and look forward to sharing our 2011 guidance on the next earnings call.
And with that we would be happy to address any questions that you may have.
Operator
Thank you, Mr. Griffin.
(Operator Instructions). And your first question comes from the line of Dave Rodgers from RBC Capital Markets.
Please proceed.
Dave Rodgers - RBC Capital Markets
Yeah thank you. Good morning Rand.
Could you please run through I guess the second half development plan? You've done quite a bit, you've got quite a bit in the development pipeline that's not yet under construction.
How much do you expect to move in there? What's your starts for the second half of the year?
And how do you see those assets completing next year to add to the run rate for FFO in 2011?
Rand Griffin
Hi Dave. Thanks.
We said previously at the beginning of the year and certainly that's now proving true that we anticipate starting this year, with 1.5 million square feet. So everything that you see on the development page is in fact anticipated to start this year now.
So what we've tended to do is, accelerate that or bring those online as the leasing activity justify. So if you look on the page 32 with underdevelopment, 312 Sentinel, we do expect to start that this year as where we would.
310 is the one that you know -- that one we may delay into next year just to try and force some more activity in to NBP phase 3. The 308 NBP leasing is interesting.
It exceeded by a number of floors, the size of the building. And so we anticipate that those floors will go to 430 NBP, and as that occurs we will also be starting 410 NBP, which will we anticipate now and within the fall of next year.
And all of these generally take a year to complete and then we try to project a year to lease up, but that we have been obviously doing quite better than that. The same thing happening up in Aberdeen, based on the success of the first building and the activity on the second.
We started 206, which is 127,000 square feet and would expect also, it's sister building, 202, to start this year. Patriot Ridge, we've started Sentry Gateway, as we watch the customer bring their major facility online, we expect that the second building, that might be just moved into the first quarter of next year versus end of this year.
It's really hard to determine until we get a better handle on some of that leasing activity. That first building will be completed this fall and then so on down the line.
We do have one in here and then a second one down in Pax River area that I mentioned, there were two design builds fully leased that we'll be starting in the third quarter. So I think that you can see part of our optimism for the second half of the year and certainly for '11 is this accelerated development activity.
Dave Rodgers - RBC Capital Markets
Then a follow-up to that, when you look at your acquisition returns and clearly there is some pressure downward on acquisition yields. But how do you look at those against your development returns, what types of acquisition returns can you get in the second half of this year, and what types of opportunities can you drive in these assets that you are acquiring, whether they are short-term lease renewals or explorations, I should say, or potential development rights that are attached to these.
Can you give us some color on that as well?
Rand Griffin
When you are getting close to '11 yields on your cash and cash unleveraged on your [stuff] you look very long and hard at your acquisition yields and opportunities. We tend to use acquisitions to increase market share or sometimes to enter into a new market or to increase as we done with the MITRE building, our tenant densities and further improve those relationships.
The yields are going to be less than -- we don't tend to give the yields, but they have been somewhat reported in the market from some of the analysts as being pretty attractive yields. Really it's a unique window, it's a fairly narrow window to truly buy strategic properties that accomplish our objectives and provide very strong yields, and that continued to accelerate the growth as a company with those objectives in place.
It goes through a cycle, this happens to be a cycle where you can potentially buy new locations that we like, and then that will close and we are fortunate that we have the development on a consistent basis to help offset some of what others will have difficulty in growing.
Operator
Your next comes from the line of John Guinee. Please proceed.
John Guinee - Stifel Nicolaus
Hi, John Guinee here.
Rand Griffin
Hi John.
John Guinee - Stifel Nicolaus
I think it's pretty easy for you guys to hit your guidance numbers this year and do very well next year. Assuming you continue to acquire the short-term lease duration product, north of 9, and to the extent you are doing that for 8, 9.5 caps and borrowing off of Steve Riffee's newly negotiated line at 3%.
That's just a very, very accretive transaction. But at some point prudency would indicate that you go to the equity market.
Can you kind of walk through your thoughts on that, Rand?
Rand Griffin
I'll start and then Steve can finish up. I think first, on the comment on the shorter term.
As Roger said in statement, tend to be able to take advantage of tenant relationships and maybe get some good buys, but also minimize that risk through those relationships. So we don't think we are taking much risk there.
I think that on the equity side, as both I said and Steve said, we've got the capacity. We've been fairly nimble previously on doing equity in the end of '08 and then with the S&P 400 MidCap Index inclusion offering in April 1st of last year.
So we think we are fine for a while. Obviously long range, you will have to raise some equity.
But that isn't something that's necessarily required short term, and we will be prudent about it, and we will be opportunistic, and at the same time we will watch our leverage levels very closely as we do, and so far you have seen us perform very well in those areas. Steve if you?
Steve Riffee
No, I just couldn't say it better, Rand. Obviously, if we are a growth company and our growth is accretive like our pipeline tells us it is, then you going to have to raise overtime, all forms of capital and we've been able to do that, and it should been a problem, as long as it is accretive growth.
So I think that's all I would say.
John Guinee - Stifel Nicolaus
And then the second question. This product that your building in Huntsville is costing you about $200 a foot.
Aberdeen, about $200 a foot. As I recall, Huntsville is a ground lease, I don't know if you are capitalizing the land component, and to get that, or it's really costing 200 a foot down there to build.
But then in National Business Park, you're up around $250, $260 a square, and then at Patriot Ridge you are at about $330 a square. Can you sort of walk through the different physical products you are building in those various markets, whether it'd be structured parking, better base building or excessive [skiff-related] tenant improvements?
Rand Griffin
Sure. I think it varies, John, by market.
First, Huntsville is probably more like a 180, a 200, and we will tend to keep those rental rates a little lower and we will tend to gear the product to the market rental rate. As you move into NBP, you are starting to see some structured parking that's in those numbers, and clearly these tenants that are paying very good market rental rates.
Partially its got some heavy TIs in your numbers, just because of the sophistication and these are [skip] buildings and although they pay for the majority of that, some portion of it ends up in our TI allowances. As you move to Patriot, Patriot is almost an urban situation.
It's a totally structured parking, those are eight storied buildings. So once you pass the five storey, you are into mid rise code, which is a different kind of requirement.
So that has some fairly heavy site costs and just doing business in Springfield and in Northern Virginia area is a little bit more expensive. So that is the progression there.
Those rental rates will be in mid 40's, whereas your rental rates in NBP are in mid 30's, net of electric and your rental rates at Huntsville will be in high 20's. Just to give you a kind of a perspective on the progression.
Operator
Your next question comes from the line of Brendan Maiorana from Wells Fargo.
Brendan Maiorana - Wells Fargo
Question on guidance, for Steve, I guess. If I'm looking at the other income, I guess the income from the KEYW transaction and then on some of the land sales?
Is that expected to be about 10 million in the back half of the year, or around $0.15 a share? And if that's the correct math, then would that suggest that kind of the back half FFO quarterly run rate is, call it $0.58, or maybe $0.57 a share?
Steve Riffee
Brendan we didn't give a point estimate, we gave you a low and the high on the gain. So 5 million on the investments at the low, 13 at the top on the land sales.
3 and 3.5. So that's really your gaining component of the income.
Then the rest of the reason that we are comfortable with our second half run-rate implied by our guidance is the NOI coming online from both acquisitions and development placement service. That's how I would answer the question.
Brendan Maiorana - Wells Fargo
Okay. Just for clarification, the gains on land and other income to date have been, I think around $1.5 million in the first half; is that right?
Steve Riffee
Not that high, actually. No.
There has been no land sale gains. There was one small land sale gain.
And then on the KEYW investment, we have been practicing equity accounting, so we have been picking up our share of income since the third quarter of '08 and to a cumulative of over two years income recognized, and it wasn't material in any one quarter, like $1 million in the aggregate today.
Brendan Maiorana - Wells Fargo
Right. And where is that investment on the balance sheet?
Steve Riffee
It is in prepaid and other assets, and then if you look at the footnotes in the Q, where we break out the line items, you'll see the equity method investment there.
Brendan Maiorana - Wells Fargo
Okay. That's helpful.
Then just as it relates to the acquisitions. So I guess you've got, what sounds like $120 million pretty well teed up.
So there's another, call it roughly $150 million that you are expecting of additional investments. Can you give us a little bit of sense of color as how far along and it sounds like you are pretty confident that those are going to get over the finish line by year end?
Steve Riffee
Yes Brendan. We have a couple of acquisitions that are pretty far along in terms of negotiations, and we think we will have under contract and to be able to get close in the second half of the year.
So we are comfortable at this point with that dollar amount.
Brendan Maiorana - Wells Fargo
Then just lastly, I know this was done three months ago. But on the convert, why is that sort of an appropriate source of capital for your company, given that you've got high growth expectations over the next five years?
It's got a cash settlement, and the interest rate is only about 100 basis points below kind of the average. How did you come to the decision that doing a convert is right, appropriate source of capital relative to maybe just doing straight debt or something like that?
Steve Riffee
Well we though that it was a good piece of our capital stack. We obviously have a tendency to be primarily secured borrowers.
But here was an opportunity, although we aren't speaking to the bond market with an investment grade rating to continue to participate to some degree in the unsecured market. So we thought it was a very good piece of capital in our capital of stack.
But for the most part, I think you can continue to expect our long term financing to be of bit secured nature going forward.
Operator
Your next question comes from a line of Michael Knott from Green Street Advisors.
Michael Knott - Green Street Advisors
Hey Rand. I'm just wondering if you can give us any more color on the acquisition, maybe geographic?
Perhaps I missed some of this, but geography or yield or price per pound type of ballpark ranges?
Rand Griffin
The second acquisitions super core, that we are mentioning?
Michael Knott - Green Street Advisors
Yeah, the 120 million.
Rand Griffin
I think all we would say, it's strategic and it's in one of our existing submarkets. That's all I'd really say.
Michael Knott - Green Street Advisors
Okay. That's obviously a large dollar size, so I think one other fair question would be, is it a single building or is a portfolio of a couple of other buildings or?
Rand Griffin
More portfolio of fully leased.
Michael Knott - Green Street Advisors
Roger, can you just comment on your -- I know you commented on 2010 remaining lease expirations. But when I look at your '11 and '12 expirations, there's a fair bit of leases that come due.
Can you just give some color on how you think that will play out as it pertains to your outlook?
Roger Waesche
I think we are getting a little more cautiously optimistic about -- the issue we've had to date is that we've had a consistent renewal rate of 70%. But what's happened is with the 30% of the leases that aren't renewing, we've had difficulty backfilling, which I am sure is systemic and you know, with all office companies into.
So I think that's where we are starting to see more traction in terms of level of interest and new deals. So, we would expect that with very little building in our submarkets and demand starting to slowly ramp up that we would have a higher percentage.
Maybe the renewal rate will stay the same, but our re-tenanting leasing would increase over the couple of years, that will allow us to get back up to a more normal 92 or 93% in occupancy. We are at 88 today which is you know 4 or 5% below our normal occupancy over an extended period of time.
The lease maturity schedule in those two years is pretty consistent with our overall portfolios, so it's not weighted anywhere,. We do think we will see probably evolve our submarkets at this point.
Northern Virginia will lose some occupancy there over the next 12 months, we should be able to gain it in our other submarkets, and then slowly be able to rebuild on Northern Virginia backup.
Michael Knott - Green Street Advisors
Okay. That's helpful.
And then one other question, just on the KEYW investment. I guess two things, one, can you just confirm that you guys do not trade equity for space, that this was an investment of OFC dollars, not trading for space?
And then, B, do you expect this to be kind of something that you continue to do on occasion, invest in tenants like this? Just what's sort of your strategy in terms of investing capital in that type of products?
Rand Griffin
Sure yeah, this was not a trade per equity. I mean, we did a trade equity investment.
The lease was totally separate from that and they do pay full market rent on that. And these are people that we knew from the previous company that was a very high growth, pretty successful, probably the most successful sale from a multiple standpoint, in the defense sector, and we have a lot of confidence in that management team.
So the niche that we see is that particularly in the cyber space where you have a lot of small tenants that are going to grow very rapidly, that will be coming into this region, as a result of the cyber demand shifting to Fort Meade, as well as continued growth in the intelligence sector of the defense. These are companies that we know their tenants.
We see their growth occurring, and we think that there is an opportunity on a very small and selective basis, invest in those and do help them out and participate in their growth at the same time, have some excellent shareholder value created. So we do it on a very small scale I think we are 14.6 million invested in KEYW and maybe at the max, where we get to around 20 million sort of invested, the collection of things.
But they can also be extremely impactful and successful as what's happened with the KEYW
Operator
Your next question comes from the line of Bill Crow from Raymond James. Please proceed.
Bill Crow - Raymond James
Good morning guys. Not to beat a dead horse, but on KEYW, is the gain dependent upon a successful IPO?
Steve Riffee
Bill, the gain is a result that any time KEYW issues additional shares while we are on the equity method of accounting for them. So what that means is, our investment, we have to account for that investment as if a piece of it was partially sold.
And that's only to extent that our ownership position diluted down. So that means that the gain occurs when they issue shares, not necessarily, and if not triggered by when we would sell our shares.
So we would continue a hold on our investment for instance, perhaps and they issue shares and we would still do the gain recognition. That's how the accounting works.
Bill Crow - Raymond James
All right. And then how much of this gain was in prior guidance?
Steve Riffee
It was in the other income that was (inaudible).
Bill Crow - Raymond James
Always in there. Okay.
Great. And then --
Steve Riffee
You look at the other income guidances, KEYW was a part that.
Bill Crow - Raymond James
And how do we think about its impact on 2011?
Rand Griffin
Well I think, I think what happens Bill is that assuming that they -- if they for example are, [are using] equity through acquisitions if they did that or then we would get a potential step up. At some point you go from an equity to a mark-to-market depending on our overall share size and influence in their business.
But I think we don't know yet well as we talk about 2011 guidance, we will try and address that on the next call as he always does, and we will give excellent detail on the components of our '11 guidance.
Bill Crow - Raymond James
Then finally, I know your guidance excludes acquisition related costs. But if you go back historically, do you have any sort of guideposts for us for what that cost has been, say as a percentage of the acquisition volume?
Is that kind of a 1% item? Or I know it's all over the board, but just some sort of guidepost would be helpful?
Steve Riffee
Well if you see this make an acquisition in Maryland, it will be probably 1.5%. If you see us make an acquisition in Northern Virginia or Colorado Springs, it will be much lower because of recordation and transfer taxes being low to non-existent in those states, the same with San Antonio, Texas.
Maryland has the highest transaction cost for us.
Operator
Your next question comes from the line of Jordan Sadler from KeyBanc Capital Markets.
Craig Melman - KeyBanc Capital Markets
Hi, it's Craig Melman here with Jordan. I know you guys don't give quarterly guidance, but can you maybe walk us through the expected ramp in the back half of the year?
I think to get to midpoint, you guys needed to have $1.33. But maybe just give us a little bit more color on the timing of the remaining acquisitions you have yet to book, if they're going to be a contribution at all, and also maybe the timing on the gains related to KEYW?
Steve Riffee
From the $4 million of NOI from development coming online, just assume that that's even over the last two quarters. On the acquisitions, we are trying to help you by not only giving you a range of acquisitions, but a weighted average.
So that you can sort of get a sense of when the acquisitions would be completed. So my guess is in terms of timing, because we are not really specifically providing it, because it is much more heavily weighted to the fourth quarter than the third quarter,.
maybe one third of the acquisition NOI in the third quarter and two thirds in the fourth quarter. With regard, to the gains we are not in control of when, for instance, KEYW would issue the shares and that's what triggers the gain recognition.
We know and its public that they've enlisted for potential IPOs. I don't know if they would issue shares in the third and the fourth quarter, but we have given you a guidance assumption that tells you that guidance range depends upon their issuing of shares.
So, I am not in control or know exactly when that would happen.
Craig Melman - KeyBanc Capital Markets
Okay. And of the other income, how much is the KEYW of the range you guys gave, the $5 million to $13 million?
Rand Griffin
We said the gains on KEYW at the low end of our range are estimated to be $5 million, and of the very top end of the range are estimated to be $13 million.
Craig Melman - KeyBanc Capital Markets
And then what was the initial investment you guys laid out for them?
Rand Griffin
We made an investment in KEYW at two stages the initial investment in the third quarter of 2008 was approximately $9 million, and then we had an opportunity to exercise some warrants and invest again. I believe it was the very beginning of this year or the end of last year for another $4.5 million.
Our investment today is $14.6 million.
Jordan Sadler - KeyBanc Capital Markets
And, this is Jordan here. Just another piece of clarity on the overall fees.
So the guidance was last quarter I think 7 to 15. I think you are aggregating them.
So now overall fees in gains including third-party dev fees are like 8.5 to 17, is that fair?
Steve Riffee
That's fair. That's our revised estimate at this point in time.
That's right.
Jordan Sadler - KeyBanc Capital Markets
And your same store, did you give it excluding lease term fees for the year?
Steve Riffee
Yes.
Jordan Sadler - KeyBanc Capital Markets
So it's now expected to be zero to negative two, excluding lease term fees?
Steve Riffee
Yes.
Jordan Sadler - KeyBanc Capital Markets
Okay. Just wanted to clarify.
Okay. And the yield on the acquisitions, it didn't sound like -- I didn't really hear, but is that sort of 7% and 9% range?
Fair?
Steve Riffee
Yes, on a higher end, but yes.
Operator
Your next question comes from a line of George Auerbach from ISI Group.
George Auerbach - ISI Group
Roger, what are your expectations from leasing spreads over the next 18 months?
Roger Waesche
For the last couple of quarter we've been saying that we would roll down low single digits, and I think that's what still our expectation is. Hopefully that gets better that times goes on, but I think for the next couple of quarters you should still assume on a cash basis that we will roll down modestly and then hopefully in 2011, that will turn to breakeven and then turn positive.
George Auerbach - ISI Group
Okay. And can you just talk about what drove the occupancy loss in suburban Maryland and in Colorado Springs and what the prospects are for re-leasing that space?
Roger Waesche
Sure. In the case of Colorado Springs, we had no loss of existing tenants.
We delivered 187,000 square feet of construction space. Then it went into the denominator without any leasing and therefore that drove our vacancy up.
And in the case of suburban Maryland, we lost probably one tenant, only one tenant, but that tenant was a 108,000 square feet. The tenant just shut their operations down in the state of Maryland and moved what was remaining out to California.
And so we have an empty building in Rockville.
George Auerbach - ISI Group
Okay. And a couple of questions for Steve.
Are the expense margins in the second quarter of 44%, a good run rate to use going forward?
Steve Riffee
I think we tried to give you some sense of the same store NOI for the full year. They were certainly -- probably year-to-date would have been more indicative, had we had not the snow event in the first quarter of the year.
Some of the expenses are seasonal in nature, so for instance, in summer, we will get more the repair/maintenance and with the heat, your utilities spike a little bit in the summer, George. So, we tried to give sort of a same store NOI guidance for the whole year, to even out maybe the seasonality from quarters.
And obviously expense savings overall for the year are part of our numbers.
George Auerbach - ISI Group
Okay. And just to clarify the investment and other income line, excluding all gains, what do you expect for the back half of the year?
Steve Riffee
To go to what is -- are you asking a timing like question among quarters? Could you clarify the question?
George Auerbach - ISI Group
Yes, sure. You've done around $1.5 million in that line so far this year.
Just thinking about the income, excluding the gains on KEYW (inaudible).
Steve Riffee
The fee income year-to-date has been that -- we have said that about $600,000 a quarter each of the last two quarters is what you should expect from the fee income. And I think I just on the call, the other question kind of laid out the timing of acquisitions and development of the NOI and I think I -- trying to get some guidance from the other gains.
Operator
(Operator Instructions). And you next question comes from the line Sri Nagarajan from FBR Capital Markets.
Please proceed.
Sri Nagarajan - FBR Capital Markets
Hi. Thanks for taking my question.
Rand, could you remind us of the upcoming BRAC deadlines. And also from the perspective of tenants, are you seeing a flurry of activity around the BRAC deadline or is it looking beyond that in terms of a long-term growth?
Rand Griffin
The BRAC by law they need to be completed with their moves by September 2011. So, if you take -- and typically they don't do that all, at that time they do phase that and a lot of them have started already.
So, if you go through Aberdeen, Aberdeen has actually moved about 1,000 people on to base out of Fort Monmouth. So far they expect to be two-thirds complete by the end of this year and have accelerated their completion of their move to March of next year.
So, what happens when those occur, the contractors supporting customers start to move, or think about moving, and a lot of them have a requirement that once our customer is relocated, they within a certain timeframe need to relocate. So, that's why I said, the first new wave of moves that we saw were the larger companies that had real estate departments and have been through other moves.
The smaller people who haven't been used to this, haven't really serviced yet. But as their customer moves, we will start to see an acceleration of that.
At Fort Meade it's a slightly different situation because it's a little bit closer with Northern Virginia there. Timeframe is also to be complete by now April of 2011.
So they are ahead of schedule. And the first big wave of the move actually occurs in December of this year.
So, we expect the (inaudible) -- we haven't seen a lot of the BRAC leasing. We expect to start to see that towards the end of this year.
But what has been occurring is the acceleration on the cyber demands, cyber space demand. As a result of the relocation or creation of US Cyber Command at Fort Meade.
The relocation of the NGA, National GeoSpatial, will be at the September timeframe. They are under construction and well along, but their move will be -- the data component has already moved.
And then in BRAC, Huntsville, will be completed in the September 2011 timeframe. So it varies a little by constituency.
The one thing we've been learning out of history is that, this isn't something that all of tenants are going to be in place by the September timeframe. Spread out a little bit longer, as well as the contractors moving.
And so we are going to see pretty healthy demand in 2011 and '12 and even to the degree with DISA part and well into 2013 before the contractors have all relocated.
Operator
(Operator Instructions). Your next question comes from the line Chris Lucas from Robert Baird.
Please proceed.
Chris Lucas - Robert W. Baird
Just a couple of quick questions. On the Computer Sciences lease out at Westfield, it looks like in your aggregate, lease top tenants that for Computer Sciences that is now longer than it was in the prior quarter.
Did you guys sign an extension there, or what's the status on that lease?
Roger Waesche
Yes we did a short term extension and still talking to them about a longer term transaction.
Chris Lucas - Robert W. Baird
So the original date was the end of this year, what's the new lease expiration?
Roger Waesche
End of '11.
Chris Lucas - Robert W. Baird
Okay I see. So you bought a year there.
And then on the acquisition, the $120 million deal that you talked about, are you waiting for lender consents at this point? Is that the holdup here?
Roger Waesche
Correct
Chris Lucas - Robert W. Baird
So you're through everything. You're just waiting for the consents?
Roger Waesche
Correct
Chris Lucas - Robert W. Baird
And then Rand, just generally on the leasing that you've done related to the BRAC, how are the size of the leases comparing to what you normally do, say at NBP? And what are your expectations going forward in terms of this actual size of the leases?
It's my impression that these tend to be smaller leases than we are used to seeing there.
Rand Griffin
Well, it varies a little bit. Chris.
I think that in some instances as the cyber demand starts to happen, firms are increasing the size and putting the cyber and the BRAC demand together and these are fairly sizeable leases. We haven't yet seen at really any of the locations, the smaller tenants, they tend to be on this practice on the moving and they will be very late in the process.
So we have to anticipate there demand by building this space. We will have two and three floor kind of tenants occurring at NBP which is pretty typical of certainly what we have seen over the history of that part.
They will be smaller, certainly up at Aberdeen, they will be very large. We are in discussions on full buildings type tenants down at Patriot Ridge and the Huntsville rig don't quite have a feel for those size of demands.
So I think it varies a lot.
Chris Lucas - Robert W. Baird
Okay. And then the last question for Steve on the KEYW transaction.
Just to be clear, the gains that you're booking now are accounting gains, they are not cash gains; correct?
Steve Riffee
Well if they issue shares and that creates gain. Those are accounting gains and then they only turn into cash gains if you subsequently sell the shares.
Operator
There are no further questions on the line. I'll now turn the call back to Mr.
Griffin for closing remarks. Please proceed.
Rand Griffin
Thank you very much everyone, and I am sorry it took so long on questions, but obviously there is a lot of detailing on what we provided. So, thanks for joining us and we really do appreciate your participation and support, and we look forward to any other questions you might have.
We are certainly available to answer those. So thank you and have a great day.
Operator
Thank you for your participation today in the Corporate Office Properties Trust second quarter 2010 earnings conference call. This concludes the presentation.
You may now disconnect. Good day.