Oct 30, 2010
Executives
Mary Ellen Fowler - SVP & Treasurer Rand Griffin - CEO Roger Waesche - President & COO Steve Riffee - CFO Wayne Lingafelter - EVP, Development and Construction
Analysts
George Auerbach - ISI Group Craig Mailman - KeyBanc Capital Markets Sri Nagarajan - FBR Capital Markets John Guinee - Stifel Nicolaus Dave Rodgers - RBC Brendan Maiorana - Wells Fargo Michael Knott - Green Street Advisors Christopher Lucas - Robert W. Baird Josh Attie - Citi Steve Benyik - Jefferies Jordan Sadler - KeyBanc Capital Markets
Operator
Welcome to the Corporate Office Properties Trust third quarter 2010 earnings conference call. My name is Luanne and I will be your operator today.
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 third quarter 2010 results and annual 2010 and 2011 guidance.
With me today, are Rand Griffin, CEO; Roger Waesche, President and COO; Steve Riffee, CFO; and Wayne Lingafelter, Executive Vice President of Development and Construction. 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 and 2011 annual guidance. At the conclusion of this discussion, the call will be opened up for your questions.
First, I must remind all of you 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 release space under favorable terms, regulatory changes, changes in the economy, the successful and timely completion of acquisitions and development projects, changes in interest rates and other risks associated with the commercial real estate business, as detailed in our filings 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 cost $0.58 per diluted share for the quarter, a 3% decline compared to the same quarter last year.
Portions of our existing operating portfolio continue to be challenged where we have seen signs of bottoming and are experiencing heavy leasing volume. Also we have steady BRAC leasing demand for our construction pipeline and that give momentum on acquisitions.
As we indicated last quarter, we are starting to see some acquisition opportunities in our markets. We believe we will have a window of opportunity to buy a well leased, Super Core and core product as attractive yields.
As Roger will discuss in detail, during the quarter we closed on two wholly-owned acquisitions totaling $238 million. Still far this year we have closed on $275 million in acquisitions and expect to acquire over $300 million for the year.
We have the capacity on our line to fund the remaining acquisitions. With regard to dispositions during the quarter we sold the last two buildings and a contiguous land parcel in our New Jersey portfolio for $23.9 million and are now completely out of that market.
During the quarter we raised our dividend 5.1%, the 13th year in a row continuing our long history of increasing our dividend each year since being public and continuing to pay our dividend in cash. In fact we have averaged a 9.4% compounded annual dividend increase over that time period totaling 222%, the largest increase among public reach.
Also during the quarter as part of the company's ongoing personnel development and succession program the Board of Trustees appointed Roger to President, in addition to his current role as COO. We congratulate Roger on this significant promotion and look forward to his continuing leadership role in the success of the company.
We are also adding Wayne Lingafelter to our earnings calls as he is responsible for all of our development and construction activities, a very important part of our business. During recent meetings with investors we have received several questions regarding potential cuts in defense spending and their impact on the company.
This is a normal process as the Pentagon begins to look towards peacetime reprioritization of spending. There certainly will be cuts, but Secretary of Defense Gates has clearly indicated that he is trying to extract efficiencies from the budget in order to fund the new priorities, and these new priorities will be on cybersecurity, intelligence and data storage.
Some weapon systems and soft combat support will be at risk, but by and large our defense contractor tenants concentrated areas of priority that should provide future growth opportunities for us. Our strategy of locating adjacent to five expanding BRAC locations; Aberdeen Proving Ground, Fort Meade, Fort Belvoir, San.
Antonio and Redstone Arsenal allow the company to continue to grow as the command moves occur next year and our buildings deliver. BRAC will be a meaningful growth driver for the company.
In addition we have started to expand our data center strategy with our Power Loft acquisition. These six drivers will provide growth for the company over a number of years.
And finally we are tightening our 2010 FFO per diluted share guidance to a new range of 232 to 236. We are also providing initial 2011 FFO per diluted share guidance in a range of 235 to 257 representing growth of 1% at the low end and 9% at the high end as compared to our revised 2010 guidance range.
The office REITs reporting to-date that are provided 2011 guidance reflect industry wide that next year will continue to be a difficult year. The recovery is tepid at best, that continues to be pushed out into the future.
Most of the office REITs will report flat to slight FFO growth next year. Our 2011 guidance which represents a 5.1% increase at the mid point stands in contrast and reflects the impact of our development activity and acquisitions.
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 cost for the third quarter of 2010 totaled $41.7 million or $0.58 per diluted share.
These results represent a 3% decrease on a per share basis from the $0.60 per diluted share or $42.4 million of FFO for the third quarter of 2009. This decline was primarily a result of an increase in interest expense lower GAAP NOI from our same office portfolio and a decrease in net construction fees partially offset by NOI increases from development placed in service and acquisitions as well as gains from land sales.
The development placed in service and land sales were in line with our expectations in previous guidance. The acquisitions occurred later than we assumed in our prior guidance.
We reported net income attributable to common shareholders for the third quarter of $4.8 million or $0.08 per diluted share compared to $10.4 million or $0.18 per diluted share for the third quarter of 2009. Turning to AFFO, our adjusted funds from operations up $29.5 million represents an increase of 6% from $27.8 million for the third quarter of 2009.
Our third quarter AFFO payout ratio was 89% and diluted FFO payout ratio was 71% excluding property acquisition costs. Our year-to-date AFFO payout ratio was 93% and our diluted FFO payout ratio was 73%.
Looking at our same office cash NOI for the third quarter of 2010, for the 230 properties or 85% of a consolidated portfolio rentable square footage, same office cash NOI excluding lease termination fees increased by $2 million or 3% compared to the third quarter of 2009. Same office cash NOI includes the prepayment of approximately $3 million of rent by a large tenant which also impacted the quarter's straight line rent adjustments.
Including gross termination fees, same office property cash NOI increased by $1.2 million or 2% for the quarter. For the nine months ended September 30, same office NOI excluding gross termination fees decreased by $1.3 million or 1%.
Turning to the balance sheet, at September our weighted average cost to debt for third quarter was 5.1% compared to 4.9% a year ago. 72% of our debt was at fixed interest rates as of September 30.
Our coverage ratios remain strong, with a third quarter EBITDA to interest expense coverage ratio of 2.85 times and a fixed charge coverage ratio of 2.42 times. We have repaid all 2010 debt maturities, our revolving line of credit and our construction revolver mature in September and May 2011 respectively and each can be extended for one year.
We are currently in the planning stages for 2011 and we are starting discussions with our banks regarding the extension and refinancing options. We have secured debt of $102 million maturing in 2011, which we plan to refinance.
The first five year put date for the $162.5 million of 3.5% exchangeable notes is September 2011 and we are making plans to ensure that we have adequate liquidity to fund the notes if investors choose to put them. The recently completed acquisitions were funded using our line of credit capacity and through the assumption of $70 million 5.35% fixed rate mortgage that matures in 2014.
As we have in the past we expect to replenish our line capacity by obtaining proceeds from secured borrowings and other capital sources paying down the line with the proceeds. Turning to our diluted FFO per share guidance for 2010, with one quarter remaining we are tightening the range for the full year 2010 to a range of $2.32 to $2.36 per diluted share.
As previously noted this guidance excludes any initial property acquisition cost that have been or would be expensed as incurred. Here is an update regarding the guidance assumptions that we are finding at this point in the year.
First, same office cash NOI excluding term fee is projected to be negative 2% to flat for the fourth quarter. Second, lease termination fees for the fourth quarter are expected to be approximately $1 million.
Third, we estimate development projects opening during 2010 to contribute approximately $4 million of NOI for the year, $1.4 million of this has been earned through September 30. We have now completed $275 million of acquisitions and could possibly close on additional acquisitions late in the fourth quarter of approximately $50 million.
Fifth in other income, the gain on our investment in KEYW as a result of its IPO that was completed in October is approximately $6 million and will be recognized in the fourth quarter. In addition for the fourth quarter, gains on non-operating assets are expected to contribute between 200 and $750,000.
And third-party development fees are expected to be approximately $300,000. That's our updated outlook for 2010.
Now turning to our initial 2011 FFO per share guidance. As Rand mentioned, our initial FFO guidance for 2011 is a range from $2.35 to $2.57 per diluted share which represents and increase of 1% at the low end to 9% at the top end of our range compared to the revised and updated guidance for 2010.
This guidance excludes any initial property acquisition cost that would be required to be expensed as incurred. And here are some of the initial assumptions for our 2011 guidance.
First for our 2011 same office portfolio, we expect occupancy to bottom by the first quarter of 2011 and then grow steadily during the second, third and fourth quarters and in 2011 up one to three percentage point from the beginning of the year levels. We are projecting our retention rate for 2011 to average 65%.
Second, same office cash NOI excluding term fees is projected to be between negative 2% to flat for the year, declining through much of the first three quarters, until the impact of leasing generates anticipated NOI growth for the fourth quarter. Third, lease termination fees for the year are expected to be approximately $3 million.
And then fourth, we estimate NOI from development placed in service during 2010 and 2011 excluding the Power Loft data center to contribute between 13 and $14 million of NOI for the year, most of which is in place. All of the 2011 deliveries are expected to open later in 2011 and contribute more in subsequent years.
Fifth, we assume that the development and lease up of the Power Loft data center will contribute NOI of approximately $8 million at the mid point of guidance. Most of this NOI is waited towards the later months of 2011.
We expect to finish the year slightly over 50% occupied at the center. Sixth, we assume no acquisitions at the bottom end of the range and up to $175 million at the top end of the range of guidance.
Seventh, in other income we are estimating a range of approximately 6 to $11.5 million coming from the combined gains on land sales and on our investments including our investment in KEYW during 2011. Eighth, fee income primarily for third-party development fees is expected to average approximately $600,000 for each of the first two quarters and then decline for the rest of the year.
Ninth, capitalized interest is assumed to average approximately $6 million per quarter with the year-over-year increase primarily due to the Power Loft and Patriot Ridge construction. Tenth, G&A cost are expected to average approximately $6.3 million per quarter with first quarter higher than the remaining quarters.
And then finally, our 2011 guidance assumes we maintain our balance sheet and capital to meet our coverage and leverage the target levels. This is our initial outlook at 2011 and we expect to refine it and update it after 2010 year end and then 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 249 properties totaling 19.9 million square feet that were 87.4% occupied and 88.7% leased.
We forecast occupancy to bottom at the end of this year to early in the first quarter 2011 with occupancy slowly building from that point. With minimal new supply in our modest employment growth is slowly translating to space demand and along with increased BRAC and cybersecurity activity should increase occupancy.
During the third quarter we leased 822,000 square feet of which 428,000 square feet were renewals; 96,000 square feet was re-tenanting; 45,000 square feet was first time lease up of previously acquired space and 253,000 square feet was development. For the quarter we had renewal rate of 54% at an average capital cost of $3.62 per square foot, rent from renewals increased 1% on a straight line basis and decreased 9% on a cash basis.
Total rent from renewed and re-tenanted space decreased 2% on a straight line basis and decreased 10% on a cash basis. For all renewed and re-tenanted space the average capital cost was $8 per square foot.
Year-to-date we have executed 2.7 million square feet of leasing with rents increasing on renewed and re-tenanted space by 1% on a GAAP basis and declining 7% on a cash basis. CapEx is averaged $9 from renewed and re-tenanted space.
Looking at our lease expiration schedule across the portfolio for the balance of 2010, we have 4.7% of our revenues expiring representing 887,000 square feet, we expect the mid 60% 2010 renewal rate which is down modestly from prior expectations but not far off from our 10 year historical average. Although this settlement has somewhat improved, we continue to see top down pressure from corporations to lower operating expenses including occupancy cost.
We continue to see many renewals of company with the space downsizing those pressure or occupancy. Leasing for vacant space that we expect to re-tenant has been slower to materialize.
Tenants are still being cautious about taking space, for example during the third quarter we had two leases out for signature totaling a 121,000 square feet that were declined at the last minute when presented for approval to the tenant's executive committees. Many tenants were looking for flexibility and do not want to make long-term commitments for space given the overall economic back drop.
However leasing activity has increased overall in our portfolio. We have either signed or have under-negotiation over 1 million square feet of leases in the fourth quarter.
We believe overall fundamentals have bottom but demand accepting our BRAC locations has not increased to the point where leasing metrics will improve measurably. To-date our leasing capital cost per square foot have been low during the down turn but we caution that they could increase as we build occupancy in 2011 and 2012.
During the downturn we have worked hard to maintain operating cash flow. We have foregone big CapEx deals and have generally were needed negotiated lower rent instead of giving away our cash.
Demand for our development projects is steady going to third quarter we executed over 250,000 square feet of development leasing. Since the beginning of the year we have signed development leases totaling 800,000 square feet and eight different buildings in our Fort Meade, San Antonio, Colorado Springs and Aberdeen markets.
We continue to see good BRAC in cybersecurity related leasing activity both at Fort Meade and Aberdeen. The moves of C4ISR from Fort Monmouth, New Jersey to Aberdeen and DISA from Northern Virginia to Fort Meade are on track for 2011.
Many contractors had support the government or active and physically repositioning themselves to serve their customers. We do see BRAC contractor relocations extending out as far as the beginning of 2014.
The company earns nearly 60% of its revenues from the government Defense IT and data sectors. The Defense budget has had an unabated 12 year up swing since 1999 and really accelerated after 9/11 which prompted Secretary Gates to issue his DoD efficiency initiatives on August 16.
We do believe the base defense budget will maintain its existing levels of funding but we will likely see some modest secondary effects with defense contractors from overall belt-tightening. However our positioning creates a greater likelihood from more positive opportunities on balance than negative issues for our company.
We expect that the defense budget priorities will be recast with cyber, intelligence and data protection growing. The company is well positioned to serve these priorities.
For example; U.S. Cyber Command is still ramping up at Fort Meade, soon the command will reach full operations and its staff level will be at a minimum 1,100 employees.
U.S. Cyber Command will be supported by its service commands from the Army, Navy, Air Force and Marine Corps.
These subordinate commands are expected to be headquartered in the Fort Meade area with the Air Force component, 24th Air Force headquartered in San Antonio. Cyber Command will leverage NSA cyber expertise and capabilities and receive support from DISA all located at Fort Meade.
Our BRAC decisions will benefit from new programs moving to these areas, C4ISR to Aberdeen, defense information services agency, DISA to Fort Meade; National Geospatial Intelligence Agency NGA to Fort Belvoir; and Army Material Command to Redstone Arsenal. We also believe that IT budgets should show more growth than overall defense spending over the next cycle similar to the last cycle as IT is used to reduce cost and improve efficiency.
While we will lose some user groups we believe our overall position still provides for significant future growth. Turning to acquisitions, we are seeing increased competition in more aggressive pricing for high quality well leased core properties from the growing number of active institutional investment groups, many of which are bidding cap rates down and taking advantage of historically low interest rates to boost their overall yields.
Lately we have even seen increasing interest in value added opportunities in historically strong office markets such as Metropolitan, Washington. The company has made three operating asset purchases year-to-date totaling $275 million.
In second quarter we acquired 152,000 square foot building in Tysons Corner for $40 million. The building was built in 2002 and is a 100% lease to the MITRE Corporation.
MITRE is a tenant of ours in our Fort Meade and Aberdeen markets. This acquisition represented a strategic investment for the company of high quality real estate and allows us to expand the customer relationship.
In September we acquired for $115 million, a 100% ownership in a newly constructed 233,000 gross square foot data center property known as Power Loft at Innovation located in Manassas, Virginia. Separate from the asset we established of controlling interest in the joint venture with the original developer that will be responsible for the leasing management and development of the property.
The data center was 17% leased from the date of acquisition to two tenants who have a combined initial power commitment of 3 megawatts of power and expansion rates up to a combined 5 megawatts. We expect to complete development of the property to an initial stabilization critical load of 18 megawatts by late 2012 for additional development costs of up to $166 million.
The facility can be ramped up to 30 megawatts critical load based on tenant needs. Power Loft is located in Northern Virginia, our top-tier market in one of the strongest wholesale data center markets in the country.
Current demand for data center space relative to existing or near term supply creates a favorable imbalance expected to continue for the near term. We are currently tracking over 13 proposals totaling 64 megawatts of critical load demand.
As expected with our ownership we are seeing increased traffic from our Super Core tenants. We are forecasting fully by January 2013.
Power Loft design supports the current industry standard of 150 to 160 watts of power per square foot, but can be increased to 300 watts per square foot with minimal disruption to an operating tenant. Power Loft design without in-space coolers or cracks allows tenants a greater utilization of space in the higher density of racks on the raised four spaces than more traditional designs.
The design supports highly efficient UPS mechanical and distribution systems to minimize the cost of operation and Power Loft features in industry-leading power usage effectiveness rate in the Northern Virginia market. These efficiencies result in an expected 35% savings in operating cost over most other data centers which allow for higher base rents in the market.
The facility is LEED Silver certified. The site can support government users who require setbacks with a control secured perimeter.
Additionally in September we acquired leasehold interest in two office properties totaling 362,000 square feet at 1201 M Street Southeast and 1220 12th Street Southeast known as Maritime Plaza I and II in the capital river fund sub-market of Washington D.C. were $119 million.
The ground leases from Maritime Plaza I and II are with Washington Gas and expire in 2099 and 2100 respectively. The buildings have parking ratios of about 2.5 per thousand square feet which is high for the area.
The buildings were 100% leased with over 50% of the space lease to investment grade tenants of which most are Super Core tenants such as CSC, General Dynamics and SAIC. The buildings were adjacent to the Washington Navy Yard home to the Naval Sea Systems Command or NAVSEA, Washington Navy Yard was a major beneficiary of the 1995 BRAC and by 2001 NAVSEA relocated approximately 8,000 employees to the Navy Yard.
Mostly recently, the Navy announced its intent to hire close to another 1,000 employees by 2011 with an additional 2,400 employees by 2015 positioning Maritime Plaza well for future demand; NAVSEA's 2009 budget was $25 billion. The Capitol Riverfront submarket of DC is a unique submarket centered on defense contractor operations.
It totals 3.3 million square feet of office space. There has been no new product delivered to the submarkets since the second quarter of 2009.
At the end of the third quarter 2010, the total vacancy rate was 12.4% down significantly in the past year and asking rental rates of about $46 per square foot full service which are normally higher than our in-place average. On the disposition side in September we sold two officer properties in New Jersey totaling 201,000 square feet in a contiguous land parcel for $23.9 million.
This concludes our exit from the New Jersey market. We have a strategy of divesting older, smaller, less strategic assets over time.
And now with that I will turn the call over to Wayne.
Wayne Lingafelter
Thanks Roger. Looking in our construction pipeline, at quarter end we had eight buildings under construction for a total of 845,000 square feet at a projected cost of $180 million even after placing 751,000 square feet of construction into service this year.
The development pipeline has 10 buildings under development with close to 1.4 million square feet at a total projected cost of $340 million. Two buildings under development totaling 211,000 square feet are for our largest tenant and all ten buildings are either for government or defense contractors.
With regard to leasing our construction pipelines ended the quarter at 40% lease. As we mentioned last quarter and Roger has discussed leasing at the National Business Park has been strong.
300 NBP that was fully placed into service this quarter is now essentially 100% committed and 308 NBP is now 98% leased. As a result of this leasing activity we started construction last quarter on our next building or 30 NBP in the next phase of the park.
This represents a strategic decision to prioritize the development in this new phase of NBP ahead of the remaining building sites in the existing portion of the park. Majority of the infrastructure work will be funded by a $30 million TIP which was closed in early August.
During the quarter we also began construction on an 80,000 square foot build-to-suit at Pax River in St. Mary's County, that is 100% leased to SAIC.
At Northgate Business Park adjacent Aberdeen Proving Grounds, the 209 Research Boulevard is 100% leased and 210 Research Boulevard is 35% leased. We therefore started construction on a 127,000 square foot building 206 Research Boulevard in the last quarter.
As shown on page 34 of the supplement buildings completed in 2009 and completed or anticipated to be completed in 2010 are 81% leased as of September 30. And development continues to generate strong returns at close to a 11% cash on leveraged yields which are very accretive to our overall business performance.
Construction material and labor pricing in each of our sub-markets has stabilized over the past several quarters and remains well below their historic high point reached in 2007 and 2008 which has played an important role in these results. We continue to aggressively pursue the development of our two most recently announced projects.
Earlier this month we closed on the purchase of a final parcel for the Patriot Ridge development which is located adjacent to Fort Belvoir in the new headquarters for the National Geospatial Intelligence Agency. We are finalizing the design in pursuing the building permit for the first 240,000 square foot office building in the Patriot Ridge complex that will ultimately contain approximately 1 million square feet of development.
We expect construction to begin later this year on this first office building that will be delivered in the first quarter of 2012 to meet the demand from the contractors serving us 2.4 million square foot facility. Leasing demand is very robust and exceeds the building size all from Super Core tenants.
We are also very active on several fronts in Huntsville, Alabama. Our infrastructure planning is well under way and we will begin bidding the first stage of the mass earthwork, roads and sewers shortly, with the work on the non-secured side target to begin prior to the end of this year.
Our development pipeline has two office buildings projected to start construction in late 2010 or early 2011 in Redstone Gateway. Now I will turn the call back to Rand.
Rand Griffin
Thanks Wayne. I hope it's evident from this call that despite a difficult economy the team is very working very hard on positioning the company for future growth.
The 2011 guidance provides realistic view of this growth which is primarily coming from development leasing, placed-in service and acquisitions both largely in place by year end 2010. The dividend increase reflects our confidence in this growth.
We truly appreciate your continued confidence and support of the company and with that we would be happy to address any questions you may have.
Operator
Thank you, Mr. Griffin.
(Operator Instructions) And your first question comes from the line of George Auerbach of ISI Group. Mr.
Auerbach, please proceed.
George Auerbach - ISI Group
I was wondering if you could just reconcile a couple of things. Roger, in your commentary you said the tenants are cautious of taking new space.
But at the same time the guidance for next year assumes a pretty healthy ramp up in occupancy. Are there tenants or conversations that you're having that are sort of outside the broader tenant groups that you are seeing better activity from?
Roger Waesche
George, some of that occupancy obviously will come over the extended period of a year. We are currently in the fourth quarter tracking 400,000 square feet of leases under negotiation or signed for vacant space in our portfolio now.
So that translates into 2% of our portfolio but I don't get 100% excited about that because we will not have a 100% renewal rate on next year. But it's on lot of an indication that there is reasonably good activity for space in some of our sub-markets that have been weak, like White Marsh and a little bit in Colorado Springs, but certainly in the BW corridor.
We are getting a little better. The other thing we should say that leases are just taking for ever to get done and so we had anticipated a lot more leasing to have gotten done in the third quarter that it slips from the fourth quarter.
So we are hopeful that we'll have a big fourth quarter in leasing and then get back on track.
Rand Griffin
I would add to that, that typically what happens in the recession and we're just about at that point is that tenants all of a sudden recognize that it is has bottomed out and they start to move very aggressively to take space at the lowest rates in the market and move up on the quality chain to the very best quality space. So that's what has happened in the last six recessions that I have been involved and we really expect to see that happening again here.
Operator
And your next question comes from the line of Jordan Saddler of KeyBanc Capital Markets. Mr.
Saddler, please proceed.
Craig Mailman - KeyBanc Capital Markets
It's Craig Mailman here with Jordan. Roger, in your comments you said there is about 120,000 square feet of leases that got killed by executives at certain tenants.
Can you maybe go into the characteristics of those tenants? Was that your Super Core or is that more of the traditional suburban guys?
Roger Waesche
One of them was the defense contractor and who just got nervous about pulling the trigger at that time hopefully they will pull it in the future. And the other was a commercial tenant that was about to lease part of a development building that we have placed-in service already, it's in our operational statistics but that lease did not go forward.
Craig Mailman - KeyBanc Capital Markets
And the defense contractor is that more in the development pipeline or in the existing?
Roger Waesche
Yes.
Craig Mailman - KeyBanc Capital Markets
It was development. Then just moving on to the data center in Northern Virginia, you guys expect to be 50% occupied, or at least that is what you are assuming in guidance.
Can you maybe talk about the activity level that you are seeing there, any big requirements?
Roger Waesche
Yes.
Rand Griffin
There are lots of proposals there. And actually the proposals exceed the total capacity of the data center.
But the revenue cycle and data centers as longer than it is for traditional office and so our expectation is that it will take a while longer for those proposals and demand to translate into lease and then into revenue. But we are feeling pretty good about that again.
We've showcased this data center to all their key customers and we are getting pretty good response and we are comfortable that we will have good activity on this beginning in 2011.
Operator
And your next question comes from the line of Sri Nagarajan of FBR Capital Markets. Please proceed.
Sri Nagarajan - FBR Capital Markets
I had a question on margins, the expenses. Are there any one-time expenses in the quarter or was it just a matter of sequentially higher expenses?
Steve Riffee
Generally the third quarter is our highest quarter for operating expenses and it becomes about for two reasons. Number one, it's our cooling season.
And so our electric costs are higher and then secondly the third quarter because of the weather tends to be the quarter in which we do than most of the companies discretionary R&M. And so the second quarter tends to be our lightest quarter in terms of OpEx, the fourth quarter of the second, first quarter is a little tough because of the cold weather and snowing and the third quarter is generally our worst quarter again because of electric and discretionary R&M.
Sri Nagarajan - FBR Capital Markets
I just didn't see the same pattern in '09, which is what my question was. My second question has to do with your renewal or retention rate of 54%.
Just following up on the previous question, is the loss of the [mortgage] due to your Super Core tenants or what's the mix of tenants leaving your space? And could you also give us a flavor of what kind of space is it?
Is this some of the newer developments as in two, three years of development or these are older buildings?
Roger Waesche
The majority of the loss in the third quarter came about as a result of the tenant in Northern Virginia that was in the building with another one of our core tenants and both of them were growing in the building and one of them had to leave. So the one tenant did leave and go to another building.
So we lost over 100,000 square feet of occupancy, the result of us not being able to fulfill the space needs of this particular tenant. We had one other defense contractor leave that was modest.
But the balances of the tenants were commercial tenants. And in terms of renewal percentage we would expect the fourth quarter renewal percentage to be higher and again that's because of other renewal leasing that we had anticipated to be complete by the third quarter we'll get down and the fourth quarter.
Operator
And your next question comes from the line of John Guinee of Stifel Nicolaus.
John Guinee - Stifel Nicolaus
A quick question for you. I am looking at your development pipe.
You've got $180 million under construction, 845,000 square feet. That equates to about $212 a square foot.
If you get in the 11% cash yield on that, forgetting credit loss and vacancy, that translates to about $23 net. Are these tenants just not very price sensitive or is that the going rate in most of these submarkets?
Steve Riffee
I would say that your math is working to the average. We have a range of price sensitivities that your math is worked to the average and of course the National Business Park is where we have the strongest tenant demand that allows us to achieve the economics you've outlined.
Operator
And your next question comes from the line of Dave Rodgers of RBC. Mr.
Rodgers, please proceed.
Dave Rodgers - RBC
Could you address the development starts that you are planning in the fourth quarter and then maybe either by quarter or by half in 2011 and what the resulting capitals spend might be on those? I am essentially trying to get at what the acceleration in that pipeline might look like today.
Wayne Lingafelter
We have several projects and we expect to just go get started yet in 2010 including the Patriot Ridge project which is a fairly sizeable investment for us a 240,000 square feet. And in terms of 2011, we've got a range of properties that are scheduled there.
Those are actually back loaded a bit in the year. So we do accelerate as we go through that development pipeline and the projects are across the portfolio.
Operator
And your next question comes from the line of Brendan Maiorana of Wells Fargo. Please proceed.
Brendan Maiorana - Wells Fargo
I just wanted to ask a little bit more about the Power Loft deal, and I apologize if this was answered already; I had some difficulties. But it strikes me that a lot of the investment activity that you guys have done over the years has been tenant driven, whether it be some of the market expansions that you've done.
But is this deal being done? And the move to doing more of a data center for third parties, is that driven by your tenants asking you to do that or is this driven by your expectations that you see a market opportunity and this is a good investment in a market opportunity that may be underserved and where you can get outsized returns?
Rand Griffin
I think it's actually both. The tenants that are in our Super Core grouping have seen what we've done for the government and some of the select of the defense contractors and they appreciate our quality and the 24/7 operation of critical mission facilities.
So they know our capabilities. So increasingly they have looked at ours as sort of a standard that perhaps could be applied to the more typical wholesale data facilities.
At the same time I think we were not getting credit compared to some of our data competitors in the REIT space or having the amount of the data space that we do have and so we saw an opportunity to where to take advantage of our expertise and start to get these larger returns which we do think will be in 12 to 14% cash on cash on leverage levels as we complete the build out of the spaces. We've been in this business for six years.
We've been studying for the last several years on the best way to enter and we're very excited about the design that Power Loft represents as state of the art and significant operating efficiencies in one of the strongest markets as Roger mentioned. So, this is not a huge part of what we do certainly, but we think it's an important growth driver.
We saw that from the initial NOI coming out of that project next year which will significantly expand in 2012.
Operator
And your next question comes from the line of Michael Knott of Green Street Advisors. Mr.
Knott, please proceed.
Michael Knott - Green Street Advisors
Just to follow-up on your data center comment. It looked like there was a new page in the supplement on page 36.
I'm just curious, maybe you could give a little more detail on some of the other data centers, if you can and to the extent you think the market should give you more credit?
Rand Griffin
I appreciate that Michael but unfortunately the nature of the other data centers that we have kind of precludes us from going in to this sort of detail. Really they don't want it to identify by location or load or so on.
So what we try to do on page 36 of the supplement as you noted, we start to identify what will be kind of a future emphasis in this part of the data business, the wholesale data center. And this will provide the updates both in terms of the square footage and the critical load percentages and then the other details and as we add others in the future this will become kind of a page as you can go through and looking at that part of the business.
Operator
Your next question comes from the line of Christopher Lucas of Robert W. Baird.
Mr. Lucas.
Please go ahead.
Christopher Lucas - Robert W. Baird
Just one more follow-up on the data center. What sort of return expectations do you have for that, and how do you get to that range based on the power density?
Rand Griffin
It's a 12 to 14% on leverage and I think that's up for the 18 megawatt and as you go beyond 18 towards the 30 of those returns can tend to be at the high end and even beyond the 14%. Then I will let Roger go over some details with that.
Roger Waesche
Obviously with expandability data centers become cheaper. So adding the next megawatt of power is at a lot lower cost than the first one, because you paid for so much of the elements of the data center.
So I think that is all we are trying to say that there is some price reduction economies as you expand the data center.
Operator
And your next question comes from the line of Michael Bilerman of Citi. Mr.
Bilerman, please proceed.
Josh Attie - Citi
It is Josh Attie with Michael. For the 2011 guidance can you talk more specifically about the refinancing assumptions to turn out the line of credit?
And also from a leverage perspective do you feel that should be termed out with permanent debt or with equity?
Steve Riffee
We have the option on the lines. We will try to take your questions in part.
To extend for one extra year for 12.5 basis points in the case of one line and like 15 on the other, we may do that but we are also in discussion with our bank group about what the longer time frame would look like for the lines and have it made a decision at this point which option will choose. With regard to the capital in the line, we will make sure that as we continue to grow, because we have confidence in our growth plans that we can access all the types of capital that we've traditionally used and invested accretively and that we'll maintain our capital stack according to the targets that we've managed to and as I've said on prior calls we really watch our coverage and our leverage and we feel good about our fixed charge coverage ratio.
We have always tried to keep it above to, we've performed above that and we watch our leverage as well and we did that on a debt to gross assets basis and we probably get to be around 50% or below and we've been in the high 40s recently for that. So we will access as we get growth opportunities, all types of capital at that appropriate times because fortunately we have growth invested in.
Operator
And your next question comes from Steve Benyik of Jefferies. Mr.
Benyik, please proceed.
Steve Benyik - Jefferies
Regarding the 3Q same-store cash NOI, I know it turned positive. Obviously, occupancy a bit lower, negative mark-to-markets on leasing; I know you mentioned the $3 million prepayment of rent in the quarter.
I was hoping you can give a little more color on that and whether you'd expect anything similar in 2011?
Roger Waesche
That had to do with a customer who wanted to for budgeting reasons to pay some of their future rent in advance. We've recognized obviously more cap rent than we had cash rent on a particular tenant and so by paying that amounting cash that had a reversal of straight line rent that we have recognized in the past and we will have also the impact of reducing the cash rent for that particular lease going forward.
It's possible that we could have a little bit of that in 2011 but it's not something that we see from rest of our tenants expected to be a regular occurrence.
Operator
And your next question is from Brendan Maiorana of Wells Fargo. Please proceed.
Brendan Maiorana - Wells Fargo
Steve, can you just give us an update what you think your capacity for additional mortgage debt is? And then just as it relates to guidance, I think you mentioned that your guidance assumes keeping the capital ratios in check.
But I wasn't sure whether or not that may have included a potential equity raise if you have acquisitions towards the top end of your guidance range.
Steve Riffee
We won't comment specifically on any capital assumptions that we haven't finalized or planned. But our plan does assume that we maintain those capital target ratios that we shoot for.
And if we get more growth opportunities than last that means we'll proportionately have to raise more different types of capital. With regard to capacity within those ratios we are not necessarily finished with all of our development.
So as development stabilizes and comes down and increases our unencumbered asset pull from time-to-time that increases our capacity to debt on our asset. So as you can see we are delivering more and more lease that moves up over time.
And that's basically the guidance that we are giving at this point in time.
Operator
And your next question is from Michael Knott from Green Street Advisors. Mr.
Knott, please proceed.
Michael Knott - Green Street Advisors
Roger, I guess this question is probably for you. Looking on page 25 of your supplemental, and I apologize if someone asked about this earlier, or if you talked about it.
But it looked like the Virginia occupancy or percentage leased book fell a fair bit sequentially. And I was just curious if you can remind us what that was attributable to, and if any of that was a surprise or not?
Roger Waesche
That was tenant in a building in Northern Virginia who had as a co-tenant to another defense contractor and they both had that building a 100% leased. And so they were both still growing and one of them had to leave the building unfortunately and so they left our building and it was over in excess of 100,000 square feet who went to another building and so it's unfortunate.
He had nothing to do, not needing the space ahead to do with our inability to grow them in that particular building.
Operator
And your next question comes from Christopher Lucas of Robert W. Baird.
Mr. Lucas, please proceed.
Christopher Lucas - Robert W. Baird
Just a quick question on the disposition side. There is nothing in guidance, and given capital issues, where do you see dispositions over the next year?
Roger Waesche
We have as a general guiding principal to try to fill some of our portfolio. Again, those assets that are older or smaller or strategic and those assets that we acquired, maybe when our strategy was a little different as a company.
But there is something we are going to do over time and it's something we are going to do whereas the market allows us to execute data and get fair value for those assets. Over the year we will probably firm up some more plans and get out to the investors our intent with respect to that particular program.
Operator
Your next question comes from Jordan Saddler of KeyBanc Capital Markets. Mr.
Saddler. Please proceed.
Jordan Sadler - KeyBanc Capital Markets
Given the delay and the need for some of these contractors to move down for BRAC, is the 1.5 million square feet of development starts per year still a good run rate, or is maybe that going to be scaled back a bit? Then the other one, just on the Power Loft, how much speculative risk are you guys willing to take on building out pods to have it ready for any potential leasing?
Rand Griffin
It's not necessarily that the defense contractors are delaying. I think that the demand varies by location and then matches up to the specific customer.
So the Aberdeen, there the customer is ahead of schedule. The tenants are generally small, 140 companies moving from Fort Monmouth and generally they are smaller and if not had experienced in relocations and so their decision in making process is slightly behind.
It's not been the case with certainly the cybersecurity which is ahead of what we would have expected at Fort Meade but there DISA specifically said because of the proximity of Northern Virginia where lot of these tenants are located at, they will give them a little more time to relocate and so we are in discussions with the fair amount of tenants but they have a little bit more time and need to finish that up by the end of 2013. Very strong demand and hence the need for really pushing product that Fort Belvoir and then we are in the same kind of discussions down at the time frame and BRAC addressed on Arsenal.
So I think that we are in pretty good shape there. We are not building buildings just to build them; we are building them in anticipation of the demand that is there.
And sometimes I might be slightly slower or will accelerate on it. So we have to try to pre-judge the time frame for that demand just because of the lead time on building those buildings.
But the good news is that, very strong demand collectively and it's just the question of matching the time frame. On the speculative risk for building out, as soon as we purchased the Power Loft facility we did go ahead and authorized the next three megawatts of ordering equipment and kind of pre-build and we are going to try and stay ahead of that demand where ever possible.
The big numbers that we are cautious about it, but we do want to take advantage of that 64 megawatts of demand that's there with the proposals that we have out in front of us. So we are pre-ordering equipment to take advantage of that and try to be first to the market on delivery.
We think we are first in that space now in Northern Virginia based on any other starts there. So that should be good for leasing.
Operator
And your next question comes from the line of Steve Benyik of Jefferies. Mr.
Benyik, please proceed.
Steve Benyik - Jefferies
Regarding the 2011 guidance when you look at what's underpinning the same-store NOI growth assumption, can you talk a little bit about cash mark-to-market expectations on signed leases in 2011, as well as regarding the development NOI, how much square footage needs to be leased to get to that 13 to $14 million number?
Roger Waesche
The 13 to 14 million refers to development leasing for buildings that we placed-in service in 2010 and the majority of that leasing has been done. In terms of the same-store NOI we are assuming that our events on average are nominally negative to positive for 2011.
Operator
And your next question comes from the line of Dave Rodgers of RBC. Mr.
Rodgers, please proceed.
Dave Rodgers - RBC
If you didn't address it already, if you could please, on the acquisitions for the fourth quarter and in the 2011 guidance, could you talk about whether that land or buildings, core or opportunistic, contiguous geographies, and whether that's targeted tenant demand or more market-driven, and what the thought is on the outlook there?
Rand Griffin
As I said in my comments we do see a window there Dave for trying to find core and Super Core properties in our existing locations. So we've been pursuing those, although I must say that pricing is changing pretty rapidly on us.
We are starting to look at some building of market share in some of the other locations and so we are trying to move aggressively in that front. It does not include land, but we think we are in pretty good shape with almost 22 million square feet of land capacity in the company that's entitled and ready to go.
It's a difficult thing to look at next year and see whether if interest rates stay where they are, the pricing continues to be pretty aggressive and I think I will knock a lot of people out of the market from the acquisition stand point. There are discussions that we've had earlier in the year that are kind of taking the advantage of those different rates and we'll just have to see if those materially can get closed or not.
Operator
There are no further questions. I will now turn the call back to Mr.
Griffin for closing remarks. Mr.
Griffin, please.
Rand Griffin
Well thank you for joining us today. I am sorry it went a little bit longer with lots of questions and I appreciate your participation and support and certainly are available to answer any other questions that you might have.
Thanks and have a great day.
Operator
Ladies and gentlemen thank you for your participation today in the Corporate Office Properties Trust third quarter 2010 earnings conference call. This concludes the presentation.
You may now disconnect.