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 - Executive Vice President, Development and Construction

Sheila McGrath - Evercore Partners John Guinee - Stifel George Auerbach - ISI Group Brendan Maiorana - Wells Fargo Securities Dave Rodgers - Robert W. Baird Michael Knott - Green Street Advisors Rich Anderson - BMO Capital Markets Michael Carroll - RBC Capital Markets

Good morning, and welcome to the COPT's conference call to discuss the company's third quarter 2012 results. With me today are Roger Waesche, President and CEO; Steve Riffee, Executive Vice President and CFO; Steve Budorick, Executive Vice President and COO; and Wayne Lingafelter, Executive Vice President of Development and Construction.

As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such 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 you all 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.

Thank you, Stephanie, and good morning, everyone. I am pleased to report strong progress on the company's strategic objectives of leasing space, selling non-strategic assets, remaining disciplined with development start and improving our balance sheet.

Leasing activity has outpaced our expectations this year. Recall that we began the year tracking 400,000 square feet of demand for first generation space in three of our strategic markets, namely the Fort Meade area, the Fort Belvoir area and Redstone Gateway.

As of mid-October, we had leased a total 2.3 million square feet of office space, including over 1 million square feet of first generation space, the majority of which is our development pipeline. Said another way, the 1 million square feet of first generation space we've leased so far in 2012, represents over two times the initial 400,000 square feet of demand we were tracking.

The multiple leases we executed in early October were strategic tenants for three office buildings in Redstone Gateway. Our development project in Huntsville, Alabama, represented the combination of several months of intense competition for and negotiations with government contractors.

These leases, in particular prove that critical business decisions can and do get made, despite the broader budgetary challenges facing the federal government and Department of Defense. On that note, let me take a moment to summarize COPT's understanding as to the likely outcome surrounding sequestration.

Anecdotal evidence indicates one for a combination of three expectations: first, that the January 3 deadlines specified in the 2011 Budget Control Act will be extended; second, the less severe spending cuts will be implemented; and third, that sequestration cuts will not be implemented at all. Even as the January 3 deadline approaches, we have yet to see our defense related tenants or the DoD begin to take meaningful steps necessary to implement the deep cuts, currently outlined by the sequestration.

For example, the federal government and major contractors are by-law required to give employee a 60-day notice of scheduled reductions in force. Based on the sequestration deadline, this implies thousands of notifications would be issued to workers just before the November elections.

We expect the sequestration deadline to be extended a few months into the spring of 2013, to allow for a more comprehensive compromise to be reached after the election. We expect the compromise to include reductions to the DoD budget, but do not expect to see significant cuts for several reasons.

First, the global threats to the country are significant in real; second, the U.S. wants to maintain it superpower status; third, money spent on the overseas contingency operations, which largely represent the wars in Iraq and Afghanistan has dropped from $180 billion in fiscal year 2008 to an expected $89 billion in fiscal 2013, which started October 1, and is projected to drop further in the coming years; four, the governments basic defense priorities are not shifting and increasingly are focused on cyber security and technology solutions; fifth, the base DoD Budget has already leveled off, initial spending reductions under the 2011 Budget Control Act, included $468 billion of cuts over 10 years that brought the DoDs rate of spending growth below that of inflation.

In fact, defense spending in the fiscal year that just ended, decreased 2.9%. In contrast, the rate of growth on entitlement spending has not yet been curtailed.

For the fiscal year 2012, social security and Medicare spending increased to 5.9% and 3.2% respectively, and are both on track to increase by 6% annually. Said more concisely, defense spending is not the budget buster, then how will new spending levels affect our portfolio.

To the extent there are cuts, we anticipate only a modest impact on our business, because the government demand drivers with which our portfolio is aligned are knowledgebase defense installations, not weapons or troops oriented. Their missions or priority programs like cyber that are directly related to national defense, so we expect these agencies budgets to be largely maintained.

Recall, also we will be the beneficiary of longer-term demographic shifts of jobs to our strategic locations, as contractors move to be approximate to their government customers. Turning back to strategic accomplishments, in the third quarter we disposed the 24 buildings that contain 1.5 billion square feet for $178 million.

To date, we have sold $394 million of the $562 million of properties and land in the strategic reallocation program or SRP, and are well ahead of our initial timeline for property dispositions. Equally important, we reduced the number of leases we had to manage by approximately 30%, and removed from our portfolios, smaller, older buildings that required disproportion of any more capital.

The majority of what is left in the SRP is about $50 million of land for development, and the majority of our operating properties in Colorado Springs about which we anticipate selling in the next 12 months. We have and will remain disciplined with starting new developments, as Page 24 of the supplemental shows.

In the fourth quarter, we will start construction on two new Class A office buildings at Redstone Gateway, both of which are 100% pre-leased. Having no more inventory available at the National Business Park to accommodate future government demands, we also stared construction on NBP 312.

Recall that NBP directly supports Fort Meade, which is the nexus of this country's cyber security efforts. Last but not least, we continue to make progress on deleveraging our balance sheet.

Since the beginning of 2012, with the net proceeds from asset sales, our Series L preferred issuance and our October common stock offering, we have reduced our debt by over $350 million and have improved our financial flexibility. Two things I would like to highlight about our balance sheet before handing the call over to Steve Riffee.

First, our long-term capital strategy is to maintain and ultimately reduce our leverage from the level achieved by paying down debt with the October equity offering. Second, the recent stock offering does not in any way lessen our sense of urgency about selling non-strategic assets.

We expect it will take more time to completely exit some markets, but we continue to view such asset sales, as cost effective sources of capital with which to fund future growth, including near-term development spend and if they present themselves strategic acquisitions. We will also continue to use dispositions and combination with improving cash flow from higher occupancies to further deleverage the balance sheet organically.

With that, let me hand the call over to Steve Riffee.

Thanks, Roger, and good morning, everyone. FFO as adjusted for comparability was $0.53 per share for the third quarter.

FFO as defined by NAREIT was $0.52 per diluted share. Third quarter 2012 FFO per share as adjusted for comparability was $0.03 above the high-end of our original third quarter guidance range, owing to lower than expected operating expenses and a penny of development fees.

Results were within the increased range we disclosed in the Form 8-K in early October. Diluted loss per share was $0.39 for the quarter as compared to earnings per share of $0.03 in the third quarter of 2011.

The loss in the third quarter included two significant impairment charges. One related to our Colorado Springs operating properties that were already in the SRP, and which we classified as held for sale during the quarter.

And the second impairment related to shortening our anticipated holding period on our buildings in the Greater Philadelphia market. Neither of these one-time losses affected FFO as defined by NAREIT or FFO as adjusted for comparability.

On a GAAP basis, same office NOI grew 2.5% from the third quarter of 2011. On a cash basis, same office NOI, excluding lease termination fees was flat on a sequential quarterly basis.

And our year-over-year same office cash NOI, excluding lease termination fees decline by 2.1% in the third quarter, which was less negative than we had projected. This decline was caused by a prepayment of rent in the third quarter of 2011, excluding the 2011 prepayment and lease termination fees, same office cash NOI increased 3.9%.

Our diluted AFFO payout ratio for the nine months ended September 30, as adjusted was 54.7% and we expect our AFFO payout ratio for the full year to approach 65%. Turning to the balance sheet, we've made meaningful progress on our objective of deleveraging.

At September 30, the company had $2.2 billion of debt outstanding and a debt-to-adjusted book ratio of 51.9%. Debt gross asset value is a ratio that is calculated according to our bank loan covenants.

At September 30, this ratio was 45.6% or about the same as it was at June 30. Since we launched the SRP in April 2011, this ratio is improved approximately 9 percentage points as of September 30, 2012.

Similarly, debt-to-recurring EBITDA was 9.1 times at March 31, 2011, and improved to 7.6 times as of September 30, 2012. Subsequent to the quarter end, we issued 8,625,000 shares of common stock, netting proceeds of $205 million.

We use the proceeds to reduce our indebtedness and currently have zero drawn on our $800 million line of credit. This equity raised about our total debt repayment for 2012 to over $350 million.

Adjusting September 30 ratios to reflect the October stock offering, our pro forma ratios are, debt-to-adjusted book of 48.3%, debt-to-gross asset value of 41.4% and debt-to-recurring EBITDA of 7.2 times. Now, turning to guidance.

We are narrowing our annual 2012 range for FFO per share as adjusted for comparability to a range of $2.05 to $2.08. This range implies fourth quarter FFO per diluted share of $0.45 to $0.48.

I'll briefly update the major assumptions behind our guidance. First is investments.

Our fourth quarter guidance range does not include any asset dispositions or purchases. Although, we have classified the operating properties in Colorado Springs that are in the SRP as held for sale, we anticipate selling them in 2013.

Second, we expect fourth quarter same office cash NOI to be approximately $1.8 million relative to fourth quarter of 2011. The year-over-year expected decline is primarily attributable to a one-time prepayment of rent we receive from a tenant in the fourth quarter of 2011.

Additionally, due to the fact at 2011's exceptionally mild winner resulted in below average snow removal and utility cost, and that this year we are budgeting for more normalized cost, the year-over-year results are otherwise flat. In summary, if we exclude the prepayments in the third and fourth quarters of 2011, our 2012 forecast of same office cash NOI will be flat for the fourth quarter and would increase 4% for the full year versus 2011.

Third is occupancy. At the end of the third quarter, the occupancy of our same office port assets was 89.3% and our consolidated operating portfolio was 88.1%.

We expect same office occupancy to increase about 70 basis points in the fourth quarter, but because two unstabilized buildings were rolling off to development pipeline into the operating portfolio during the fourth quarter, we expect consolidated portfolio occupancy to decline 30 basis points. Fourth, we expect G&A to be between $5 million to $5.5 million and total new business cost to be between $900,000 and $1,250,000.

Fifth, we forecast capitalized interest at $3.1 million for the fourth quarter. And six, we expect straight line rent for the fourth quarter to approximate $3.8 million.

Finally, we will provide our 2013 earnings guidance on a separate conference call in January. The details of which will be provided in press release later this year.

And with that, I will now turn the call over to Steve Budorick.

Thanks, Steve, and good morning, everyone. I'm going to provide an overview of fundamentals in our markets, then discuss specifics and leasing volumes and economics, including average capital commitments.

In aggregate, the fundamentals in our major markets are not materially different than they were at the end of the second quarter. As the commercial office markets in Maryland, Washington DC and Northern Virginia continue to be challenged by the uncertainty around the 2013 federal budget, the upcoming federal election in November, and the restrain in GSA leasing.

Overall, vacancies remain in the mid-to-high teens and third quarter absorption was slightly negative in the quarter turning by market. In terms of COPT's properties, our consolidated operating portfolio was 88.1% occupied and 89.9% leased at quarter end, up 70 basis points and 60 basis points respectively from the end of the second quarter.

Our same office portfolio occupancy of 89.3% at the end of third quarter was down 30 points sequentially. Demand for our properties adjacent to government demand drivers has outpaced our initial expectations, despite the challenging market conditions, which reaffirms our investment strategy to concentrate on serving Department of Defense elements that conduct intelligence and cyber activities.

In terms of leasing volume, we leased a total of 612,000 square feet in the third quarter, of which 229,000 square feet related to development or redevelopment projects; 30,000 square feet represented other first generation space lease; 215,000 square feet were renewals; and 138,000 square feet were re-tenanted. For the nine months ending September 30, we leased 1.9 million square feet, of which 614,000 was first generation space and 1.3 million square feet were related to renewing and re-tenanting activity.

As Roger mentioned, we completed over 2.3 million square feet of leasing so far in 2012, of which 1 million square feet related to our development pipeline and are the first generation space. These 1 million square feet include 397,000 square feet in the Baltimore/Washington Corridor.

As a result of this leasing, NBP 316 and the Riverwood Campus are both 100% leased. We leased another 8,000 square feet in Springfield, Virginia, at Patriot Ridge.

That property is now 46% pre-leased and continues to get strong interest from perspective tenants attracted to our locations proximity to Fort Belvoir. In Colorado Springs, this year we've leased 120,000 square feet of new leases through mid-October, which increased our percentage leased in that market by 600 basis points to 83%.

Although, we are exiting Colorado Springs and have the majority of our building that are classified, as held for sale. The incremental leasing we accomplished to translate in higher values.

In Blue Bell, Pennsylvania, we leased 66,000 square feet so far in this year, because we've accomplished significant pre-leasing, we have started redevelopment on 755 Arbor Way, which we also refer to as Hillcrest II. The supplement shows, this property to be 28% pre-leased, but we also are in advanced negotiations with another large user.

Redeveloping Hillcrest II will substantially complete the initial campus setting we hope to establish at that project. Lastly, and as detail in a press release earlier this month, we lease 363,000 square feet at Redstone Gateway.

Strategic tenants have signed leases for 100% of three Class A office buildings there, including 1,000 Redstone Gateway, which was shell complete in the first quarter of this year. While leasing volume has exceeded our expectations, overall leasing statistics have been slightly negatively affected by more aggressive leasing in our SRP assets and soft market conditions in Northern Virginia.

For the three months ended September 30, 2012, rents and renewals, and re-tenanted leases signed was 2% on a GAAP basis and declined 8.3% on a cash basis. For the nine months ended September 30, rents and renewals and re-tenanted leases declined by 1.2% on a GAAP basis and 9.5% on a cash basis.

Recall, that in the second quarter we experienced our first decline in GAAP rental rates since late 2009. That quarter's GAAP rental rate declines were caused by aggressive leasing in SRP properties, short duration low TI deals and re-tenanted properties, and several large renewals on which we gave high concessions that help stabilize occupancy.

In the third quarter, we extended some leases prior to their contractual expiration, to position assets for sale. Now, I want to put some color around the quarterly renewal statistics and cash roll-down numbers.

First, regarding the renewal rate. About 33% of our expirations were negotiated to accommodate growth for those tenants or adjacent tenants.

These were actually positive events. The renewal rate after adjusting for these growth actions is 58%.

Secondly, regarding the cash roll down, two significant transactions skewed the data. A large early renewal completed to position an SRP asset for sale, generated about 17% of the roll down, it also was accompanied by a 33% expansion, re-renting of a long duration vacancy in Northern Virginia resulted in a comparison of 2001 rent structure to current economics.

Northern Virginia re-tenanting represented in three deals, generated 70% of the roll down. Basic renewal activity, excluding re-tenanting and early renewals, actually produced a positive 3.7% increase in cash rents.

Going forward, we expect leasing economics to produce mildly positive GAAP rent increases and less negative cash rent roll-downs. Average capital commitments for the third quarter were high, averaging $16.94 a square foot on renewing and re-tenanted space.

Third quarter leasing did, however, felt some stubborn vacancies that I mentioned in Northern Virginia. And I would note that in 2013, our lease rollover is heavily weighted to the Baltimore/Washington Corridor, where we have seen far more favorable economics and deals.

Also on pure renewals, weighted average TIs and leasing commissions in the third quarter were only $8.65, which when advertised over the average lease length of 4.7 years amounts to about $1.84 a square foot per year. Average capital commitments for the year stayed in line with our expectations.

Average TIs and leasing commissions for the nine months ended September 30 of $11.60 were comparable to our recent historical average of about $11 per square foot. And lastly, I am very pleased to report the execution of our first new lease of COPT DC-6, which many of you probably still call Power Loft.

A high growth co-location tenant signed a lease for an initial commitment of one megawatt, and we believe can expand well beyond that level. With that, I'll turn the call over to Wayne.

Thanks, Steve. I'll take a minute to go over four development projects, starting with the Blue Bell redevelopment in Greater Philadelphia market.

That office park, which we refer to as ArborCrest, has three buildings that are operational. Woodlands I, is a 219,000 square foot building, fully leased to a Fortune 100 firm, and is the only building apart not slated for redevelopment.

Lakeside I is a 215,000 square foot building that is 100 percent leased to three tenants, the largest of which is Unisys. Hillcrest I is listed on our redevelopment page in the supplement.

The 113,000 square foot building is shell complete and 51% leased. Responding to existing market demand for our project, we are moving forward with the redevelopment of Hillcrest II, 184,000 square foot building that currently is 28% pre-leased.

In total, we've now signed leases for approximately 324,000 square feet with high-quality tenants, whose commitments to our park validate our investment strategy. Finally, we had the first public presentation of our master plan for the long-term development of the park.

We anticipate this process will take six to 12 months to complete. The objective is to increase the value of the undeveloped land by securing entitlements to allow to ultimate encompass 1,365,000 square feet, including the 730,000 square feet we either have in operations or under redevelopment.

Moving to our strategic projects. We are in the early stages of pricing out tenant improvement work in our Riverwood building in Columbia, Maryland.

The supplement lists two Riverwood Road property addresses that were leased together by the strategic tenant. Because we completed the shell of the larger building in the fourth quarter of 2011, it will go into service about six months before the second smaller building.

The properties will begin contributing to FFO in the third quarter of 2013. At the National Business Part, we are on schedule and on budget to complete the sell of our next contract rebuilding NBP 420 in the second quarter of 2013.

As Roger mentioned in his opening remarks, we continue to be very disciplined with our new development starts. But once the remaining vacancy at NBP 316 was filled, we decided to commence construction on our next secured building in the NBP campus.

NBP 312, which will be 1,000 square feet office building. We also are under construction with the final phase of the Northern extension of the National Business Parkway, which will be completed next spring.

It will provide connectivity to around 175 and therefore improve the access to the northern gate of Fort Meade and the amenity base surrounding the Arundel Mills mall. Last, but certainly not least, some details about our Redstone Gateway project.

The infrastructure work for phase one is essentially complete, and can now support up to 1.5 million square feet of office space. Single storied flex building, we have under construction, will be shell completed next month, and we are seeing good prospect activity.

In terms of the three fully leased Class A office buildings we have under construction, RG 1000 it shell complete. And improvement work starts in November, and is scheduled to be completed in March of 2013.

We are scheduled to start construction on RG 1200 next month. It will be completed in December of 2013.

RG 1100 will start this January and is scheduled for shell completion in the first quarter of 2014. This activity will establish an appealing front door for the Business Park and affirms its viability as a desirable location from which contractors can serve the multiple missions at Redstone Arsenal.

With that, I'll turn the call back over to Roger.

In conclusion, we feel good about how 2012 was shaping up and the results we have achieved, and remain committed to staying focused on fully executing the company's objectives of leasing space, selling non-strategic assets, remaining disciplined allocators of capital and deleveraging the balance sheet. With that operator, please open up the call for questions.

Roger, you mentioned the leasing of 1 million square feet and your development was well ahead of the 400,000 square feet of demand that you were tracking. I was wondering if you could tell us what was driving that additional demand.

I think it had to do with pent-up demand for needs of mission providers to various government defense installations. And we have been teeing up a lot of deals for an extended period of time, and finally we were able to get many of them across the finish line in the quarter.

So I think it was really a cleaning up a backlog that had arisen over an extended period of time, because of the uncertainty of what's going on in the defense industry, and the uncertainty over the future budgets. But fortunately, the missions that we deal with are very strategic and had to move forward, and so people made decisions and allow their space needs to be taken care of.

One last question, could you give us your insights on post direction. Do you think that some of the tenants that have been (audio gap) more activity at your projects?

Yes, we do expect that. Exactly how it plays out the stuff to predict, but eventually our congressman and our leadership will address the problem.

We have many, many customers, who have made plans to commit additional money in term to leases that we have that have called those actions until they get by the election. So I would expect somewhere around March, that activity will start making news again.

It's sort of a big picture question, Roger. As you know right after 9/11, you saw a lot of rapidly take down the space within the defense industry at pretty slow rents, whether it's the Department of Defense or the defense contractors?

And what's going on right now is there is contraction and a rationalization of their space needs, both in terms of square footage and rental rates. When do you think that actually finishes happening?

And the big defense contractors, that sort of drive your business, say, we're done, we've rationalized our space and we've rationalized a pricing.

What we have been experiencing for an extended period of time, the rationalization in the business, and so we have suffered some contractions over the last several years. Fortunately, we've been able to backfill most of that space with people who were winners under the new contracting paradigm and are focused on missions that have more importance going forward.

And I do think that that will continue on. Fortunately, around the agencies that support Fort Meade are on the leading edge of contracting when it comes to contracting with mid-size and small-size contractors.

Many of the agencies, you got to go through one of the (inaudible) that deal with an agency. Fortunately, at Fort Meade everybody have a leadership structure that allows for contracting to mid-size and smaller contractors, and as they are Gazelle's they are the groups that are winning a lot of business and are providing the solutions that the government needs.

So we think that although as you suggest the (inaudible) some of their legacy weapons programs that will get curtailed or deferred will shrink somewhat, although we're not that exposed to the legacy weapon systems. We do think that the Gazelles will continue to power forward, and then of course we have the forced demographic shifts of Black coming to Maryland and to Huntsville over an extended period of time.

Roger, just to get back to Sheila's question about pent-up demand, and John's question about supply demand. Can you kind of quantify for us what the demand allocator is from those relocations?

Do you expect it to come to your portfolio over the next few years? I understand that there is going to be winners and losers, but to what extent is the continued move a net beneficiary to your portfolio?

George, first of all when we step back and try to analyze the demand versus what we expected the demand to be back in 2005 and 2006. Realistically because of deficiencies we think we're looking at a number that's about 80% of what used to exist.

And we think we have realized that one-third of the ultimate moves in the various locations. It varies a little bit depending on the location but we still think there is another two-thirds of an 80% number with the original number was in terms of job growth to be realized.

And we think that's going to be realized to over the next three or plus years as contracts mature and people have certainty and are willing to move to their new locations to support the government customer.

I guess, the 2012 guidance shows occupancy ticking up on the same-store basis, by about 70 basis points. I guess, given the outlook today and assuming Congress doesn't do anything crazy, how do you see that occupancy number trending through 2013?

We think we're going to continue to keep chipping away at our vacancy. And there will be setbacks in the future.

But we think we'll continue to clip along and some are in the half to four point over the next year.

And finally, Roger, it seems like better demand for the development product. I guess, how do you see development starts on an annual basis, kind of going forward for the company?

I don't know that we can for sure put a number on it. I think it's reasonable to expect that we could be around 500,000 square feet per year and that's assuming a building a year down and on sell of building or two up at MVP and a building down in Fort Belvoir.

And then of course, we are pursuing other locations in terms of needs from contractors and the government. But again, they are going to be uneven.

And I think the message I should leave you with is that I don't think we can put a number every year, I think. The business is going to be a little bit uneven going forward and we'll have fits and starts where we'll have more than 500,000 square feet in year and then there will a year where we'll have less than that.

The economics on the development pipeline leasing, is that inline with your forecast or are economics getting better or there a little bit more challenged which has allowed you to increase that leasing activity.

No, they're generally inline. In Huntsville, we build one building, very high-quality and the overall yield maybe a little less than our target for that market, because of the cost on the first building.

But the second two buildings were right inline, and in NBP we're right inline as well. And then again in Fort Belvoir area, we're very pleased with the rates we're achieved in that building.

Steve I think when you had given guidance for Q3 originally, there was I think operating expenses were likely to be a little bit higher sequentially in the quarter. It's part of and when I look at the guidance for Q4 relative to what you guys did in Q3.

It's seems like maybe are there some operating expenses that are getting pushed into Q4 that you originally thought are going to be in Q3?

Some of the savings in Q3 is timing related to the scheduling of maintenance projects that have leasing over heavier in the fourth quarter than we thought. Some of the ramp up in expenses in the fourth quarter relative to the third quarter is we're providing for the possibility of slowing in higher utility cost in that month we had pretty mild quarter during the third quarter.

I guess if I just think about it mathematically, the offering was $0.03 diluted on a sequential basis, is that right?

Yes, quarter-to-quarter.

Quarter-to-quarter, right, so 53 would be down to 50 and you guys are saying it's similar like 47, so there is an additional $0.03 of cost in the fourth quarter.

Correct, additional.

And if the fourth quarter, I mean, do you expect that those cost the operating margin is likely to improve as you go into '13 or it is the fourth quarter a good run rate in terms of where your margins are likely to be as you look out for more annualized basis.

The fourth quarter is probably a bad to look at because there is a lot of repair work. Major projects that got pushed deep into the year.

As say, we've had a very busy year. If you think about some of the actions that we took earlier in the year and we've reorganized our teams and refocus them and we get a little behind schedule on those repairs.

The margin should improve as we go into the first quarter.

We're talking a couple of weeks ago about the balance sheet, the outlook. Given that you've got Blue Bell now which eventually will be sold, you've got the SRP, which is winding up or you still have sales to go in this most recent equity offering?

If you guys lease-up to where you expect to get to, you do the dispositions that you expect and you complete the development pipeline, Does that kind of put your leverage metrics where you think they should be from either a debt to gross asset value basis, debt to EBITDA or do you think there is some additional de-leveraging that would need to happen.

We're really happy with the amount of progress we've made from de-leveraging, if you think about it from the beginning of the SRP and we made great progress on the equity offering. I think that the thing that's going to have the biggest impact on leverage in the near term is going to be continuing the SRP assets sale and leasing up our portfolio towards stabilization.

I think that's going to make progress and that near that intermediate term and then longer term, we may have opportunities to deleverage further. But that's not our immediate focus.

So as long as things keep on plan with lease-up and with the SRP you guys feel pretty good about?

And as Roger said, we want to maintain leverage at the levels that they are and overtime further improve the leverage ratios on the balance sheet.

Maybe first question for Roger or if you want to pass it off on an apple-to-apple basis, is it getting easier or harder to sell some of the SRP assets, just kind of given some of the volatility in the market.

I think it's still relatively easy, because I do think capital is very cheap and I do think a lot of money has been raised. And I think people think that they can spread invest and maybe take a little bit of residual value risk on the back end, but they feel like they can make enough margin on spread investing that they're are willing to go forward.

So we haven't seen any shortage of capital or capital has not been an impediment to our availability to sell in the past and we don't view that currently as we are talking to people about further self.

So pricing on the asset going forward should be fairly similar at least on the market-by-market basis?

On the market-by-market, I would say the Colorado Springs, the cap rate that we're going to sell is going to be higher than what we've sold up until now, but if we were to sell more in this region, we think we can still achieve eighth or below on those sales.

Maybe for Steve Budorick, the leased versus occupied percentage, I think implies 330,000 square feet to 340,000 square feet of leasing going forward. Is that timing in the near term or is that protracted at all?

And then I guess it's as high-end to that 4Q roles look like they are fairly heavy, and I didn't hear if you said kind of what your end occupancy target was, if you kind to run through those, that would be great?

Dave, fortunately the 4Q roles are all pretty large tenants that we're very confident are going to extent some of that documentation, that may actually not occur until the first quarter of 2013, but we think we're already suffered the majority of our occupancy issues for 2012. And then going into 2013, we only have one significant tenant near term in 2013, that we know is going to roll out, that's about a 100,000 square feet.

Going back to the question on the development yields, what are you are seeing I guess in terms of the construction side of the equation. Clearly market rents are under pressure, but are seeing any upward pressure on construction prices that would concern you about maybe the future of development starts and the ability to hold deals?

I would tell you that as we look across the markets, obviously we're active in several right now that we have seen very modest increases in cost. They are probably ticked up off the bottom that we saw a year or two ago but nothing that indicates rates of increase that would be concern to us as we look out at the development pipeline.

Last question Steve Riffee I don't know if this is something you've given before, but as you go from 4Q this year into first quarter next year. Can you talk about what the impact from a gap accounting perspective will be for the data center property?

Well, we are not ready to give our guidance yet for 2013. Clearly, we've got subleasing that we just did in this quarter, and that took down the cash NOI to leasing activity this quarter.

So we'll update you with our 2013 lease assumptions on the January call.

I think after assets held programs complete the portfolio would be about two-thirds core attendants and one-third traditional sub urban office. And there is big difference in the fundamental outlook probably for those assets.

And you also may want to further de-lever your balance sheet over time. So I guess in that context, are you considering an additional assets' held program for 2013 or 2014, beyond what might be in the current SRP?

Well, first of all we have ArborCrest project up in Blue Bell that as we realize the value creation program that we're currently in the midst of we think we will sell. Beyond that in terms of this region, what we think we'll be doing going forward is just being a regular asset recycle or so.

We will on an ongoing basis be selling whatever $50 million, $100 million year of assets in order to keep our portfolio young and well located and strategic in nature.

So as we think about 2013 earnings and potential dilution from sales we shouldn't expect the much beyond $170 million or so that's currently in the SRP, is that the right way?

That's correct.

And then separate question on the development pipeline, I know you've mentioned that you're not seeing much change in your returns and in the rental rates you're getting, but is there any elasticity into rental rates. So I know there is an element of that people just aren't signing leases, but if you were to lower your rental rates, is that at all in douche demand in the pipeline?

As you know, generally it doesn't meaning you can kick people out of other buildings. You don't create new demand but the nature of business with price reductions.

So we couldn't place some current tenants out of other buildings because we have the new building at a fair rental rates. But I don't think we're going to be able to create new demand from reducing our rental rates.

Plus the demand for our new development is really associated with the demand driver. And people lease on those buildings for very specific reasons and business purposes.

You're really not going to attract somebody with the cheap rate who wouldn't otherwise be associated with that demand driver.

Just a question on sort of the investment sales market, just curious if there is still sort of a dislocation especially with the contractor tenanted buildings? And if you're seeing any more opportunities to acquire buildings like the Virginia property that you acquired in the recent past?

But we aren't giving a big focus on acquisitions right now. I mean we are softly in the market at all times in order our understand the market and see if there are great opportunities.

But I would say that we're not competing in any auctions and we would only buy something if we felt like it was highly strategic and we could take advantage of you as greatly put the uncertainty that exists in the greater Washington region right now. The building we brought in July we were able to underwrite it differently than other people because we were able to dissect to what exactly was going on into building.

So to the extent that we have knowledge advantage over someone in terms of underwriting we couldn't make an acquisition but I don't think we're betting our 2013 business plan on that.

So our investors in general underwriting, so is that underwriting back to normal with respect to defense tenants or is it still somewhat discombobulated a little bit.

Yes, I think we have a stand off between the buyers and the sellers. The buyers are concerned that where rents are going to go in occupancy and the sellers are just willing to sit out the selling period until there is more certainty with the election and the ultimate outcome of the budget resolution.

So that dynamic that was there when you bought that building over the summer is still there but you just aren't seeing specific opportunities that would sort of set your overall strategic needs?

That's correct.

I just wanted to make sure I understood this correctly. Did you say that your cash NOI would have been up 3.7% if not for the Northern Virginia and the SRP aggressive leasing influence?

No, that statistic was the change in cash (audio gap) transactions, excluding re-tenanting and early renewals, it was positive 3.7.

The remaining $168 million of SRP sales being mostly land in Colorado Springs, does that represent an exit of Colorado Springs?

Largely speaking, there are few assets in Colorado Springs that are tied to a loan that are in a CMBS portfolio. So we're not going to be able to unwind it.

We have five of the buildings in Colorado Springs with the rest of the buildings are unencumbered, and we have the ability to sell them into the market.

So you would be seller of those if not for the CBMS tie-up, is that correct?

That's correct.

And eventual seller at some point down the road out of Colorado Springs?

That's correct.

I guess, Blue Bell being a $100 million or so eventual sale. And you said $50 million to $100 million on an ongoing basis, so once you're beyond sort of that bulk of SRP.

You got a dividend payout of 65%. Things just started to feel a little bit better.

Can you comment at all that dividend policy, and what your target dividend payout ratio might be once you're beyond all these noise?

Historically the company's had an AFFO payout ratio of around 80%. And it obviously, as we increase the dividend during the 2009-2010 period we outstrip that percentage.

I think the company's goal would be to be around 75% or a little below going forward. I think in this environment you wanted to have financial flexibility and run the company conservatively.

So that's kind of on hold for now as you go through this, but you've reunited yourself with maybe at growing dividend model, maybe a year or two out, is that a fair way to think about it?

That's right. We don't feel like we've done a full reset of the company yet.

We're still in the midst of doing that. As soon as we do a full reset then will evaluate growing the dividend.

And then finally, just so I understand Huntsville play, isn't that more of our defense cost type of initiatives as opposed to the cyber and defense intelligence that permeates most of your portfolio. Is that a correct characterization of Huntsville?

Somewhat, certainly it's not as core in cyber as the Fort Meade area, but there is intelligence agency activity on that base. When you think about Huntsville, I recommend you pay a visit.

It's a research development testing and evaluation center for many weapon systems. So it's really knowledge based, and it's very exciting place to go understand what they're doing there.

And then in the context of constrained budgetary environment that you could foresee in the next few years, that means that the army needs to expand the useful life of the weapon systems they have, and update the technology and implement that because it's more cost effective then new systems. And that place right into the hands of the highly engineering oriented nature of the people on the Red Stone Gateway.

The leasing success that you had recently there cause you think differently about overall portfolio, or is that kind of consistent with what you're trying to do overall with defense intelligence, in cyber and all of the rest.

So I think our goal again is to locate adjacent to defense installations that are on the cutting edge of solving the nations promise as we go forward. So those things, as Steve mentioned that are research and development in nature, high-tech in nature and cyber in nature and so Red Stone Arsenal happens to have a lot those elements that are consistent with Fort Meade and Fort Belvoir.

With regards to recent datacenter lease, can you quantify or give us a timeframe of the expansion possibilities. I mean, is that a something near term or not?

Well, it's hard to handicap somebody else's business, but in our conversations with the CEO of the organization, the one megawatt ramps up at a minimum over three years. It looks like their initial deployment will exceed their minimum by almost 50%.

And he is represented to us that relatively, quickly, he thinks it can make a substantially bigger commitment, if this business plan materializes the way he is expecting it to.

Is this for government tenant?

It is not.

And then finally, you're still generating about 10% cash and cash returns from your development, correct? That's still your goal?

Well, I think that's a goal. What we're experiencing right now is high single-digits.

We do have some projects that are above 10, but we have lot that are below 10, like in the three deals that we just did in Huntsville, because again as Steve and Wayne mentioned we build a very high-quality buildings for the first building, and we wanted to see the park and create the ecosystem that would allow us to grow that location going forward.

Thank you all again for joining us today. If your questions did not get answered on this call, we are in our offices and available to speak with your later.

Thank you very much.