Jul 26, 2012
Executives
Stephanie Krewson –Vice President, Investor Relations Roger Waesche – President and Chief Executive Officer Steve Riffee – Executive Vice President and Chief Financial Officer Steve Budorick – Executive Vice President and Chief Operating Officer Wayne Lingafelter – President, COPT Development & Construction Services
Analysts
Jamie C. Feldman – Bank of America/Merrill Lynch Brendan Maiorana – Wells Fargo Securities John W.
Guinee – Stifel Nicolaus & Co. George Auerbach – ISI Group
Operator
Welcome to the Corporate Office Properties Trust Seond Quarter 2012 Earnings Conference Call. As a reminder, today's call is being recorded.
At this time, I will turn the call over to Stephanie Krewson, COPT's Vice President of Investor Relations. Ms.
Krewson, please go ahead.
Stephanie M. Krewson
Thank you, [Janita]. Good morning and welcome to the COPT's conference call to discuss the Company's second quarter 2012 results.
With me today are Roger Waesche, President and CEO; Steve Riffee, Executive VP and CFO; Steve Budorick, Executive VP and COO; and Wayne Lingafelter, EVP of Development & Construction. As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release issued earlier this morning, and under the Investor Relations section of our website.
At the conclusion of management's remarks, the call will be opened up for your questions. Before turning the call over to management, let me remind all of you 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. 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 dispositions, acquisitions and development projects, changes in interest rates, and other risks associated with the commercial real estate business, as detailed in our filings with the SEC.
I would now like to turn the call over to Roger, for his formal remarks.
Roger A. Waesche, Jr.
Thank you, Stephanie, and good morning everyone. I'm happy to report that we continue to successfully execute our strategic initiatives, and as yesterday's press release indicate; we have now exceeded our 2012 goal in terms of selling assets in our strategic reallocation plan.
And we invested part of the proceeds into a highly strategic new property. Before we get into the specifics about the second quarter, I want to take a moment to frame up where we are with our broader strategic initiatives.
In 2011, management and the board decided to upgrade the overall quality of COPT's portfolio, focusing on the company's historical core competency with strategic tenants, and the government, and defense, IT industries, and strengthening our balance sheet. We have made significant progress on these initiatives.
Since that time and through the close of business yesterday, we have sold 58 buildings that contain 3.2 million square feet and adjacent land for $394 million. Equally important we reduce the number of leases.
We have to manage by approximately 30% and removed from our portfolio smaller, older buildings that require disproportionately more capital. We've completely exhibit Montgomery County in Maryland and Fort Ritchie.
We have reduced our percentage of annualized revenues derived from assets located in suburban Maryland and Greater Baltimore from a combined 19% at March 31, 2011 to 11% today, because of our strategic initiative is a reallocation plan, and not simply a disposition plan. We have recycled the proceeds into properties that we believable will strengthen as long term competitive position in our market and within strategic tenant niche.
Specifically, although we’ve prudently scaled back our development program, we continue to recycle proceeds in the strategic projects with visible demand, and where we believe we will see long term demand once the federal budget issues are resolved. These key locations are our park serving pool E in Annapolis Junction, Maryland.
Our Patriot Ridge project that supports Fortville Bar Northern Virginia and our Redstone Gateway project which will support the 15 agencies in command located at Western Arsenal in Huntsville, Alabama. Responding to this ongoing marketing driven demand, we started construction on two new buildings in the second quarter NBP 420 and the Flux building at Redstone Gateway.
We also recycled sale proceeds into one highly strategic acquisition. In July, we acquired McLaren Center a Class A office building that continues approximately 200,000 square feet, and is located in the Herndon submarket of Northern Virginia.
We paid $49.5 million or about $245 a square foot. The building is well located in a strategic market in close proximity to government demand drivers, and is 100% leased.
The property deep into our alignment with knowledge based Per Vance at a priorities from U.S. government and strengthens our relationship within existing strategic tenant.
As we execute our portfolio objectives we are also strengthening our balance sheet by reducing total debt, increasing liquidity solidifying coverage and extending our debt maturity. Executing the strategic reallocation plan is at the heart of these portfolio and balance sheet improvement.
We will continue to pursue the sale of non-strategic buildings and lands in Colorado Springs, and one off buildings in Greater Suburban Baltimore. We will remain disciplined as to how we reinvest sale proceeds into new properties, and selective developments.
A quick word on development leasing, leasing to strategic tenants remained own pace with their expectations. Recall that we began the year tracking 400,000 square feet of demand for new construction in three of our strategic markets namely, the Fort Meade area, Patriot Ridge and Red Stone Gateway.
In the first half of the year, we leased a 180,000 square feet. In July we signed another 47,000 square feet of space in NBP 316, recently developed, but not yet stabilized operating property, leaving approximately 175,000 square feet of that original 400,000 square feet, much of which we reserve to convert to signed leases during the second half of the year.
We are also encouraged by the emergence of new packets of potential demand for development space in our markets. Regarding capital markets activity we opportunistically accessed attractively priced long-term capital in the form of preferred shares, a pursuit of which we are used to pay down debt and to redeem a more expensive series of preferred stock.
As a result of outperforming our expectations for asset sales and our balance sheet initiatives, we are tightening our 2012 guidance of FFO per share. Steve Riffee will walk you through those revisions in a moment.
So we feel good about how 2012 is shaping up. While there is continued uncertainty related to future defense spending and federal budgets, we are prepared for the government to start a fourth consecutive year without a budget and to operate instead under a continuing resolution.
In terms of our inventory exposure, we have less than 100,000 square feet under construction that anticipates Federal agency demand. We are also encouraged by the fact that government demand drivers with which our portfolio is aligned are knowledge based defense installations, not weapons or troops oriented.
Their missions are priority programs related to national defense, so we expect these agencies budgets to be largely maintained and cyber should actually see increased funding. Leasing environment in fiscal 2013 will remain difficult, but we are confident we are in much better position to perform in the toughest economic environment.
To sum up our strategic thinking, the faster we are able to execute our strategic initiatives, the sooner our company will be positioned for growth. In the mean time, we continue to improve our net asset value and financial flexibility through the sale of non-strategic assets.
With that let me hand the call over to Steve Riffee to discuss our financial results, our guidance and also the progress we made related to our financing objectives. Steve?
Stephen E. Riffee
Thanks Roger and good morning everyone. FFO has adjusted for comparability and as defined by NAREIT was $0.54 per share for the second quarter.
Our second quarter 2012 FFO per share was $0.02 above the high end of our guidance range. The upside was driven primarily by the timing of spending on discretionary repair and maintenance in our same-office pool, which will start correcting the third quarter as these maintenance dollars are spend.
Diluted earnings per share was $0.09 for the quarter, as compared to a loss per share of $0.42 in the second quarter of 2011, including and excluding lease termination fees, by both calculations, same office cash NOI grew by $3.1 million or 5% from the second quarter of 2011. Our diluted FFO payout ratio for the second quarter as adjusted was 51%, and our diluted AFFO payout ratio, excluding capital expenditures invested at properties that are part of our disposition plan was 54%, and we expect our AFFO payout ratio to be in the mid 60% range for the full year.
Turning to the balance sheet, although leasing, vacancy and selling non-strategic assets remain our primary strategic objectives, we have also advanced our longer term objective, of deleveraging our balance sheet. At June 30, the company had a total market cap of $4.4 billion, with $2.2 billion of debt outstanding, for a debt-to-total market capitalization ratio of 50%.
One of our key metrics is debt-to-gross asset value, a ratio that is calculated according to our bank loan covenants. At June 30, this ratio was 45.1%, which is 4.1 percentage points lower than the 49.2% ratio at March 31, and approximately 9 percentage points lower, since we launched the SRP, last April.
Between the end of the first quarter in 2011, due to the second quarter this year, we reduced our outstanding debt by approximately $180 million and extended our debt maturities. Subsequent to the quarter end, the capital markets and property transactions we completed have reduced our indebtness by an additional 70% million, which brings our total debt repayment since the beginning of the SRP to $250 million and leaves approximately $160 million draw on our $1 billion revolving line of credit.
In addition, we have minimal near-term debt maturities and solid coverage ratios. We continue to monitor market conditions in order to access long-term capital opportunistically.
Late in the second quarter, we issued $172.5 million of Series L Preferred stock with a [7.3%] dividend. We used the proceeds to pay down our line of credit and subsequently announced our intent to redeem all $55 million of outstanding Series G preferred shares, which pay an 8% dividend.
We plan on taking advantage of the low rate interest environment by swapping our variable rate exposure to fix. Now turning to guidance, we are tightening our annual 2012 guidance for FFO per share as adjusted for comparability to a range of $2.02 to $2.08.
The high-end of our range have been adjusted for the impact of accelerating and increasing asset sales netted against accretion for the McLearen purchase. And $0.04 of dilution from paying down our line of credit with proceeds in the Series L Preferred offering net of the accretion associated with redeeming our Series G Preferred.
Considering the performance of the portfolio, the minimal revenue, we have at risk in the lack of forecasted properties transaction, we are confident in a tighter guidance range. Our guidance for FFO per diluted share as defined by NAREIT, in $0.02 below our FFO per share guidance as adjusted for comparability.
The difference is due to two items, first, a $0.03 laid of original issuance costs on the Series G Preferred share redemption. Second, a $0.01 net gain related to early extinguishments of debt.
For the third quarter, we are establishing guidance of FFO per share as adjusted for comparability in a range of $0.47 to $0.50. This implies fourth quarter FFO per share of $0.48 to $0.51.
And I will briefly discuss the major assumptions that differ from those given on our prior calls, and I’ll be happy to (inaudible) during the Q&A. First asset sales represent the most attractive source of capital for our company and we still have roughly $170 million of buildings and land we have to sell under the SRP.
And although we are actively marketing assets for sale our revised guidance does not anticipate additional closings during 2012. Second, we expect G&A to be between $5 million to $5.5 million in both the third and fourth quarters, which is $2 million less per quarter in the first half of the year.
This is because the first two quarters contained executive transition costs and non-recurring costs incurred to reduce overhead in anticipation of the SRP asset sales. Third, recall we forecasted same office cash NOI growth, excluding lease termination fees for the year of 0% to 2%.
Last year a tenant prepaid some rent in the third quarter. Because we do not expect similar prepayment this year, we forecast our third-quarter cash NOI will decline 6% versus the third quarter of 2011.
In the fourth quarter, we expect same office NOI to be flat versus the fourth quarter of 2011. These quarterly forecasts combined with the 7.3% and 5.2% increases we achieve in same office cash NOI in the first and second quarters respectively.
Hence developed the full year NOI growth of around 150 basis points, which is consistent with prior guidance. Fourth is occupancy.
At the end of the second quarter, our same office port assets was 89.7% occupied and our consolidated operating portfolio was 87.4% occupied. In both cases we forecast occupancy to be essentially flat for the remainder of the year.
Fifth, we forecast quarterly capitalized interest at $3.3 million in the second half of the year and six, the accelerated dispositions affected our outlook for straight-line rent for the second half of the year, which we forecasted approximately $2.7 million in the third and $2.1 million in the fourth quarter. If I can conclude my remarks with an observation about our AFFO, although we have lowered the tope end of our FFO guidance, we do not expect the commencement of decrease in our AFFO this year, owing to the fact that the assets sales we closed will decrease our straight-line rent adjustments, and our expected CapEx obligations on the remaining portfolio.
As such we expect our AFFO payout ratio for the year to be around 65%, which highlights the security of our dividend. And with that I will now turn the call over to Steve Budorick.
Steve Budorick
Thanks Steve. And good morning everyone, I'm going to provide an update on second quarter leasing, and share updates of our major markets, including detail on some of potential leasing requirements that Roger alluded to earlier.
Our overall consolidated portfolio is 87.4% occupied and 89.3% leased at quarter end, up 40 basis points in both cases from the end of the first quarter. Our same office portfolio occupancy for the 89.7% at the end of the second quarter was up 30 basis points sequentially.
In the second quarter, we leased a total of 726,000 square feet of which 400,000 square feet were renewals, 100,000 square feet were re-tenanted, 94,000 square feet related to development or re-development projects and 132,000 square feet represented other first generation space lease. Prints and renewals, re-tenanted leases in the second quarter declined 6% on a GAAP basis and 11.8% on a cash basis.
This is the first quarter since late 2009 that we experience a decline in GAAP rents. The reasons for the decline were three fold; first 20% of the GAAP roll down can be attributed to aggressive leasing we completed in SRP properties and in particular in the portfolio of dispositions announced in the yesterday’s press release, in order to maximize value priority sale.
Second re-tenant inactivity, which in many cases were short duration both the ideals represented about 50% of the GAAP roll down. And lastly, we completed several large renewals and returns that provided concession and impact the straight line rents that stabilized occupancy.
Year-to-date rents and renewals re-tenanted leases declined 2.5% on a GAAP basis and 10% on a cash basis. However looking forward to the third and fourth quarter activity, we expect VC metrics return to recent historical patterns, producing marginally positive GAAP rents and leases and marginally negative cash rent rolled outs.
As higher portions of the activity are with strategic tenants and the SRP related leasing diminishes. Importantly, we continue to achieve our leasing volumes goals with below average capital commitments.
In the second quarter TIs and leasing commissions on renewing re-tenant space, averaged $9.11 per square foot and for the first half of the year, each cost averaged $9.65. These capital commitments compare favorably to our average capital costs of over $11 per square foot between 2009 and 2011.
Based on leasing today revenue at risk required to meet the mid point of our guidance has been reduced from $15 million at the beginning of the year, and that $9 million at the end of the first quarter to just over $3.7 million, we have pending leases that will reduce the (inaudible) risk to what $10 million. On a macro basis, the fundamentals on our major markets and that materially different than they were in the first quarter.
The commercial office market Maryland, Washington DC, and Northern Virginia continue to be challenged by the uncertainty around the 2013 Federal budget. The upcoming Federal elections in November and the restrain in GSA leasing.
Overall vacancy covering 15% to 16% range, and second quarter absorption was flat to negative 1% turning by market. Despite these challenging market conditions demand for our properties adjacent to government demand drivers appears to be picking up marginally, which reaffirms our investment strategy to concentrate on helping the Department of Defense element that conducts intelligence and cyber activities.
In addition to the 94,000 square feet of development (inaudible) lease during the second quarter. We are in various stages of discussions with strategic customers for several large that existent construction and redevelopment projects.
Let me walk you through some color on this demand, beginning with our projects that support the agencies located in (inaudible). We recently show the first signs that contract associated with the location of the defense information systems agency or DIT to (inaudible) is beginning to move.
In June this awarded nearly a $2 billion contract to a large government contractor which recently we (inaudible) space totaling 52,000 square feet, that’s a national business product. This tenant is a prime contractor with (inaudible) and we anticipate demand from the subcontractors, will began to occur in the early coming quarters.
Subsequent in the quarter, we signed 47,000 square feet at NBP 316, which is now 100% leased to a government customer. And the one who preserve, our development project is across the Baltimore-Washington Parkway to the north of NBP and Fort Meade.
We leased 61,000 square feet through a strategic tenant, the 7740 Milestone Parkway, which is now 100% leased. The tenant who is a defense IT contractor, will take occupancy of places in the second half of 2012.
We believe this leasing validates the Arundel Preserve project as the desirable location we're serving and its contractors at the Northwest Fort Meade, in much the same way that NBP serves the other agencies and their contractors at the Southwest gate. In Huntsville, Alabama, we are making good progress towards leasing our first Red Stone Gateway and at Patriot Ridge, which serves for (inaudible), we are in negotiations with the 50,000 square feet, user which would bring that building to pre-leasing to 70%.
We reassess our marketing efforts during the first quarter of 2012 and we launch a realigned marketing campaign in the second quarter. Broadly speaking, we are building out multiple marketing channel to gain a broader exposure locally and nationally.
We simplified our pricing structures and we’ve expanded our target market. All in an effort to create more leasing opportunities.
Additionally we have re-brand the entirety of the program under the cap umbrella to better convey the financial strength of our sponsorship. Although we have leases to report currently we are pleased with the increased activity generated by the new campaigns and we are confident we will have progress report in coming months.
Overall market conditions continue to be challenging and significant leasing in recent months being dominated by organic growth in our competitors’ facility. Nevertheless, we have active prospects for over 150% of our unused capacity, with 60% of those prospects requiring solutions in the next four quarters.
The actual prospects are highly diverse business model and sector and their capacity requirements range from less than a megawatt to high single digit megawatt capacity. We look forward to reporting our progress more specifically on our next earnings call, and with that I will turn the call back to Roger.
Roger Waesche
Thanks Steve. In summary, although the 2012 economic and operating environment remains challenging, we have been able to execute our plans.
Management and all the employees remain focused during this year of transition on executing along four major strategic lines, leasing space, executing the sale of our remaining non-strategic properties and land, allocating capital prudently and strengthening our balance sheet. With that operator please open up the call for questions.
Operator
Thank you Mr. Waesche.
(Operator Instructions) Your first question comes from the line off Jamie Feldman with Bank of America. Please proceed.
Jamie C. Feldman – Bank of America/Merrill Lynch
Great, thank you. I was hoping to talk a little bit more about the contracted values starting to see from (Inaudible) in terms of how would you think about the potential magnitude of that in terms of demand and then can you think about other similar agencies that have moved recently kind of what you view as the pipeline or how we can kind of paint the picture going forward?
Roger Waesche
Jamie, I think we've been obviously talking to investors for a long time about the uncertainty that the prime contractors in small or medium size contractors have over their future and their own unwillingness to move in close proximity to their government customers without certainty about their future contracts. So this is the first definitive activity that we’ve seen around, just aware a prime contractor or actually in this case a contractor who want to recompete from another contractor.
And they have now taken a couple of force at NDP. And there’s a pretty big some contractor following with this prime contractors.
So we’re optimistic that this would be the impetus for people who now have real contracts and certainty about their future to move and be close to the governments. But it was a big contract, it was one of the biggest that [DISA] has and so we’re feeling good about that particular location and that particular agency, and the movement can start to happen.
Jamie C. Feldman – Bank of America/Merrill Lynch
So what do you think, so that was a big contract, and what do you, what are the contract that kind of the next couple of contracts look like, for both DISA and then when you think about the other agencies, are there any kind of in the pipeline that could give you similar confidence.
Unidentified Company Representative
There are, I mean there’s a lot of contracts up for grabs, up in averaging for C4 ISR and with [NGA], but at this point, things aren’t signed and so until they are, we probably won’t see the activity level that we had hoped for.
Jamie C. Feldman – Bank of America/Merrill Lynch
And then what was the lag this time? And how is it changing this cycle in terms of the allocation, do you actually think people in the market are looking for space?
Unidentified Company Representative
Well, obviously the prime contractor was confident that they were going to win, because they leased space in advance of the announcement, and then there is a handful of sub-contractors behind them, and we’re not exactly – we’re trying to sort out where exactly they are now, and try to get in front of them in order to encourage them to get close to their prime contractor and the government.
Unidentified Analyst
Okay. And then secondly, can you just talk a little bit more about demand to your assets, kind of who are the buyers these days and what are their objectives?
Roger Waesche
Well, overall demand for our building system and across the board, we have sold buildings to users, we sold buildings to private owners in markets who can towards bank financing, we have sold them to institution who did need capital, and we have sold it to private equity, the large sale that we had in July was to private equity backed by institutional capital. So it’s really been across the board, and the financing has not been an issue and there is good demand, given capital market’s availability and low interest rates.
Unidentified Analyst
All right. Thank you.
Operator
Your next question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.
Brendan Maiorana – Wells Fargo Securities
Thanks, good morning. And I just want to apologize I had a – I know this morning it sounds like that’s just a busy morning, but rather wanted to kind of get your thoughts on the contract there, the increase in demand, it sounds like that you are starting to see for your first generation today.
How do you think that kind of compares to the second generation space, and with the Baltimore/Washington Corridor and Northern Virginia where it seem like the leasing volume this quarter was little bit softer relative to what happened?
Unidentified Company Representative
Right. So what I would say is that, overall I would say leasing is a little soft right now, little slow and I think there is a couple of parts to that.
Part one is that we’re in the normal summer slowdown. The second is, as we talked, Steve and I talked on the call about the overall cautiousness of our government defense tenants around sequestration in future budgets.
However, putting that aside we have seen several large one-off leasing possibilities where we have very meaningful proposal dialog going on. It’s just hard for us to handicap that activity because those as to a) will it happen because of still the uncertainty going on, and then secondly the timing of it.
But we have picked up and what I’ll call the trailing demand around TriCare in Northern Virginia around our assets there, around the NGA, around DISA and C4-ISR. I think the issue right now is just that the –there is an uncertain vision of the future for the contractors and so they’re just being very cautious in terms of making decisions.
I would say that we feel like over the last couple of years we have already felt some of the consolidation of the contractors. There maybe more to happen.
So we are not naïve to that, but I do feel like we’ve already seen a lot of that and in terms of our business model we feel like we need to press on with our allocations and be willing to divest those locations that would be considered not the allocations around the government demand drivers to make sure that we’re well positioned even if the budgets are tight for a number of years.
Unidentified Analyst
Unidentified Company Representative
Nothing in particular, I mean our overall retention was 63, and it was actually slightly lower first quarter. The third quarter and fourth quarter can be dominated by a large core transactions and that’s where we begin a lot of ground on the overall rate.
Unidentified Analyst
Unidentified Company Representative
Yeah I think, as I mentioned on the call, I think we had a bit of a timing issue in terms of some of the repair and maintenance expenses, some projects they’ve got started, but that doesn’t give us far underway in the second quarter that we think are still under the, but I think drives most of that Brandy.
Unidentified Analyst
Okay. All right, thank you.
Operator
Your next question comes from the line of Craig Mailman with Key. Please proceed.
Unidentified Analyst
Hi, guys Jordan Sadler (inaudible). Roger, maybe you just provide a little bit more color on the acquisition tenant profile, the defense contractor or government and maybe with the capital it was.
Roger Waesche
Sure well, I think first of all. There may be a little bit of surprise that we made an acquisitions, but I think to be successful in this business you need to be opportunistic.
In this case, we were able to seize an opportunity, foreign assets, that was both strategic, if this new high-quality building. We got good economics to yield and replacement costs were all very favorable.
And the location is in the part of the nexus of government demand drivers. And for COPT's the investments as the value greater than the land building and the lease, because of it well source enhanced our customer relationship and open up other business with that customer of the groups that are in the building.
In terms of the cap rate, the cap rate was rated down in 8% yield.
Unidentified Analyst
And so it sounds like maybe the tenants more a government agency, is it fair?
Unidentified Company Representative
Contractor.
Unidentified Analyst
Okay, well then, you guys have the $170 million you guys are well ahead the 205 million on the sales. But where do you guys shake out on the caprate versus that you were expecting for the year.
n the (inaudible) Okay, within you guys have the 170 million strategic assets base real estate to sell, but it sounds like you guys are going to gearing up for an another continuing resolution. Maybe sequestration and I'm just looking the vacancies you guys have left the development pipeline, just trying to get a sense of how much of those proceeds in ’13 kind of go towards more of these strategic acquisitions versus just planning back into the development pipeline or kind of a sense there?
Unidentified Company Representative
Well we do have dollars available to you to just complete the shelves on the buildings that we’ve already started and then we’ll need towers on (inaudible) and for kind of improvement. But I think the large amount of towers from the strategic reallocation plan will be spent on development next year, we’re not really a natural buyer today, and we’re an opportunistic buyer of something really strategic, comes along but our focuses on development pipeline and one leasing up hour unstable existing development.
Unidentified Analyst
Okay, so there is not a bunch more of these strategic acquisitions in the pipeline – they just – if they come up, you guys will pull the trigger, if not they will keep going is the way to look at. Okay, and then just lastly on power (inaudible) the new marketing strategy is at least attracting a little bit more interest, but just curious kind of the two year anniversaries coming up, and when you guys acquire this and actually it’s basically still flat from there.
At what point do you guys make the decision of whether to hold on to it or get rid of it, I’m just trying to see the asset yielding about 1%, you could basically redeploy that onto almost any investment and it could be accretive on a number of different metrics. So just your thoughts on that?
Unidentified Company Representative
Well, first of all we think we’re very comfortable that we have a very high quality asset to a superior facility. Long term the market is strong, outstrip supply.
If you think we made some missteps in our initial marketing of the asset both in terms of not going after multiple channels in the way we price the asset, so we’re confident that we put the right resources in place today, to execute successfully on that asset, we need some time, but we are confident we are going to get a good outcome.
Unidentified Analyst
Great thanks guys.
Operator
Your next question comes from the line of John Guinee with Stifel. Please proceed.
John W. Guinee – Stifel Nicolaus & Co.
Hi, congratulations on a lot of success. Good question for you, Wayne when did you guys first announce the land ground leased down in Huntsville western?
Wayne Lingafelter
We announced it in March of 2010.
John W. Guinee – Stifel Nicolaus & Co.
Right before investor day I recall. And have you signed any lease.
Roger Waesche
No we’ve not.
John W. Guinee – Stifel Nicolaus & Co.
But you’re starting a third building I think…
Roger Waesche
No it’s the second building John, it’s a flex building.
John W. Guinee – Stifel Nicolaus & Co.
Got you
Roger Waesche
It’s about 62,000 square feet.
John W. Guinee – Stifel Nicolaus & Co.
Perfect okay, then next question is, did some move and the same story is true for average improvement grounds, but just to relocate it out of (inaudible) Skyline Tower facility a year or two ago and they had great employee retention and the reason they had great employee retention according to their facilities people, is they gave their employees extensive flex time ability to work at home, that sort of thing, so the end result was a typical this employee only had to be at for meet three out of ten days in a typical two week cycle. And then if you look at go over to the average improving grounds, you’ll see those parking lots are full of cars with New Jersey license plates and so the question is, in this go around unlike 2002 to 2005 how important is it for the prime and the secondary contractors that tail to actually be adjacent to the government contractor, while the government contractors, employees tend and have to be at that location.
Unidentified Company Representative
Well, John, we still think by and large the business is about collocation and it’s about collaboration and then that to be successful you need to be working together in a common environment, but you are right with DISA. There are – because some of the work that they are doing allows them to work from home, but that hasn't necessarily impacted the contractor tail that would locate around Fort Meade in support of them, but we have experienced what you have expressed, which is that this employees can work from home, so in an unclassified environment on some of their work.
Unidentified Analyst
Great, thank you.
Operator
Your next question comes from the line of Michael Knott with Green Street Advisors. Please proceed.
Michael Knott – Green Street Advisors, Inc.
Hey Roger, just wondering if you can help me put together some of the pieces to just think about your sort of bottom line outlook for leasing and tenant demand and tenant decision making, you obviously have the elections coming up, you have the new budget or lack of one that would take place I guess on October 1, you have the possibility of the automatic 10%, the French cuts which are sensible, wouldn’t hurt you guys directly too much, but we are just seeing the way on confidence among those types of tenants. Just can you help and then obviously you talked about the positives of this contractor sales.
Can you kind of put all that in a goal and mix it altogether for me?
Roger Waesche
Sure. I think we are challenged – I think and the challenge has to do with the concept of uncertainty, I think if we can get pass the election and get a President in Congress in alignment that will find out where the floor is on defense spending, which will then allow decision making, even if the defense budget were to be cut 5%, that wouldn’t be the worst outcome.
And the continual uncertainty that is hampering the people from making decision in their business. So we are optimistic, but we are realistic first of all, that it’s probably going to be in ‘13 before anything get reserve up viable, but we are optimistic that there won’t be need be major cuts to the defense budget and certainly not major cuts to the parts of the budget that we are tied to.
But I think just getting certainty will allow people to make decisions. I think in the short run, we’re going to limp along I did mention a few months ago that you are seeing some larger one off opportunities, which had to do with news.
And if they were to hit, we would have a very successful conclusion to 2012 and filling into 2013. But I am very avail putting a high percentage of realization on that simply because we’ve been for the last 18 months experiencing the slowness and the cautiousness on behalf of their customers.
So I think I would say that the core table we are not looking to lose what we have, the question is how much improvement can we make in our 87% occupancy and how much progress can we make in our development pipeline.
Unidentified Analyst
Okay, that’s helpful. And then for the acquisition, is that a new customer for you?
Roger Waesche
Not a good tenant, but it’s too good tenant – is engaged where it is potentially a new customer.
Unidentified Analyst
Okay. And then why do you think that you can sell some of those lower quality assets and buy relatively new building in Northern Virginia or native, is it because Northern Virginia still foresee it is so weak or just seems like an interesting contracts for some more yield.
Roger Waesche
Right, we were buying the building with a defense contractor in it and so obviously prospective buyers were cautious about that. And we were able to underwrite the particular building and user et cetera, et cetera differently than most people were, which gave us an edge in this case.
And – but it also allowed us to get a much higher yield than we would have gotten a year earlier because of the nervousness around Northern Virginia currently.
Unidentified Analyst
Right, and how long is that Eastern.
Roger Waesche
I think 17.
Unidentified Analyst
Okay. And then just with respect to the disposition program, there is no spot to increase it beyond the stated size of 560, but you just reached, anyway about to reach the finish line sooner or at least gotten through a lot of it sooner than you thought.
Roger Waesche
Okay, I think we’re not prepared to announce anything. At this point we are obviously studying what we want to do with capital allocation beyond the current SRT, but I think we’re probably three months away from doing anything else.
Unidentified Analyst
Thank you.
Operator
Your next question comes from the line of George Auerbach with ISI Group.
George Auerbach – ISI Group
Great, thanks. Hi, guys.
Steve, your commentary for guidance was a little bit cautious, is that because there was a couple of large leases’ rolling off of that part of the year, or is that just more in general with obviously you see (inaudible) and tenants being a bit more cautious that just willing to kind of bank on further occupancy this year?
Steve Budorick
I think it’s just the overall caution and the fact that we’ve handicapped what we have in our pipeline right now and then we think that will develop – can’t really underwrite we make it by the end of the year, it’s kind of a slow sales cycles, things are cautious. So there could be some better results, but that we are going to guide to.
George Auerbach – ISI Group
Okay. And just one more on the balance sheet the debt is still around 23% of the total debt.
Any plans to take that percentage down over time? Or should we expect kind of the 20% to 25% you’d be running kind of be a good long-term number?
Unidentified Company Representative
I think you’ll see it go down like that for quarter-end as we take in some of these proceeds. I think for the near-term, we’re comfortable operating 20% or below.
What we have also done, I think we’ve put in other than our supplemental we’ve expanded out some of our variable to floating rate, fixed rate swaps for a longer period of time. So I think we will try to operate under 20%, and we put a little bit further term on our swaps.
Unidentified Analyst
Great, thanks.
Operator
(Operator Instruction) Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed.
Michael Carroll – RBC Capital Markets
Hey, guys. Kind of – off of John’s question earlier, can you give us some color on what you’re seeing in NBP and Huntsville that you agreed to start two new projects?
It sounds like (inaudible) was a driver in NBP, what about Huntsville?
Steve Budorick
In the case of Huntsville, one of the big contractors in Huntsville won two very significant contracts in 2011. And we thought that would extend term out for quite some time where we thought that they and some of their subcontractors would be more comfortable making commitments in the near-term.
So it’s really based on the activity level in the one hand and then secondly the flux building really goes with a different market segment it goes to, there’s a lot of testing and R&D. In Huntsville, there’s pretty significant R&D building, market in Huntsville and product is over today.
So we think we can benefit from people moving in closer to the customer and into newer product.
Unidentified Analyst
Okay. And then can you describe on what you’re seeing entire office making you a little bit more confident?
And then also it look’s like that you completed a few pads during the quarter. How many pads do you have available to be leased right now?
Steve Budorick
We have six pads constructed to be – that are available for leasing and six may go out and it’s completely available. And then what brings rise to our optimism is really a prospectus and active negotiations and things a little further off that we’re tracking and have a good visibility on.
As we mentioned we realigned our marketing team we added some new resources we’re getting better works nationally and locally and we continue to develop those marketing channels and we’re fairly pretty strong about it success possibilities
Unidentified Analyst
Do you think you’ll be able to announce some leases signed by next quarter.
Steve Budorick
Sure helps.
Unidentified Analyst
All right. Thanks guys.
Operator: Your next question comes from the line of Michael Bilerman with Citigroup. Please proceed.
Michael Bilerman – Citigroup Global Markets
Good morning, thanks (inaudible) can you remind us what your target is for construction pipelines in for this year?
Roger Waesche
It was a square footage number of 100,000 square feet, which would have taken us up to about 70%, now since then we’ve added two new buildings to the – denominator so on that – 70 is still a good number I quite frankly haven’t can’t figure that out in the next minute, but we can let you know what that is, but we are on target to achieve 400,000 square feet of leasing in our development pipeline for the year and with a little bit of luck could actually maybe do better than that.
Unidentified Analyst
And is – did you expect that to be backend loaded, when I looked at the numbers, it seems like on a same property basis excluding what was added, the same properties were about 30% leased at the end of the first quarter and maybe 31%, 32% leased at the end of this quarter, so it didn’t seem like very much leasing was done on a same property basis, did you expect most of the activity to come in the third and fourth quarter?
Roger Waesche
I think the answer is yes to that we think it’s a backend loaded obviously it is now – Steve talked about the long lease of 47,000 square feet and then we are hopeful on some other activities that we have.
Unidentified Analyst
And if I guess – there is one more question on the pipeline, I thought you’d mentioned on the last call that NBP 410 you had leased it up after the quarter to a 100% occupancy and when I look at the supplemental looks like it was still at 48%
Steve Riffee
There is a one who preserve.
Unidentified Analyst
Okay, so was there a lease set, you talked that didn’t happen or did I just have that information wrong?
Steve Riffee
No, you just confused the two properties.
Unidentified Analyst
Okay thank you very much.
Operator
And at this time we have no further questions. I will now turn the call back to Mr.
Waesche for any closing remarks.
Roger Waesche
Thank you all again for joining us today. If you have any questions that we have answered on this call, we are in their offices and available to speak with your later.
Thank you, good day.
Operator
Thank you for your participation today in the Corporate Office Properties Trust second quarter 2012 earnings conference call. This concludes the presentation, you may now disconnect.
Have a good day.