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Edited Transcript of OFC earnings conference call or presentation 1-May-20 4:00pm GMT

Q1 2020 Corporate Office Properties Trust Earnings Call

COLUMBIA May 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Corporate Office Properties Trust earnings conference call or presentation Friday, May 1, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Mifsud

Corporate Office Properties Trust - Executive VP & CFO

* Stephanie M. Krewson-Kelly

Corporate Office Properties Trust - VP of IR

* Stephen E. Budorick

Corporate Office Properties Trust - President, CEO & Trustee

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Conference Call Participants

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* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Christopher Ronald Lucas

Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Daniel Ismail

Green Street Advisors, LLC, Research Division - Analyst of Office

* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - Director and Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* Jason Daniel Green

Evercore ISI Institutional Equities, Research Division - Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Peter Dylan Abramowitz

Jefferies LLC, Research Division - Equity Associate

* Richard Charles Anderson

SMBC Nikko Securities America, Inc., Research Division - Research Analyst

* William Thomas Catherwood

BTIG, LLC, Research Division - Director & REIT Analyst

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Presentation

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Operator [1]

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Welcome to the Corporate Office Properties Trust First Quarter 2020 Earnings Conference Call. As a reminder, today's call is being recorded.

At this time, I will turn the call over to Stephanie Krewson-Kelly, COPT's Vice President of Investor Relations, Ms. Krewson-Kelly, please go ahead.

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Stephanie M. Krewson-Kelly, Corporate Office Properties Trust - VP of IR [2]

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Thank you, Joelle. Good afternoon, and welcome to COPT's conference call to discuss first quarter results. With me today are Steve Budorick, President and CEO; and Anthony Mifsud, EVP and CFO.

Reconciliations of GAAP and non-GAAP financial measures management discusses on this call are available on our website and in the results press release, supplemental information package and results presentation posted on our website.

Before I turn the call over to Steve, a quick reminder that forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our SEC filings. Actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update them. Steve?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [3]

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Good afternoon, and thank you for joining us. We hope that you and your families are healthy and safe during these challenging times for our country and the world. Today, I'll address our first quarter operating results, the business impacts we are experiencing from the pandemic shutdowns and lastly, our outlook for the rest of the year.

We had a strong start to 2020. First quarter results exceeded our guidance range primarily due to low weather-related costs, which also drove strong same-property cash NOI growth of 5%. Our core portfolio is 95.2% leased, and our occupancy increased by 90 basis points during the quarter to 94%, driven by last year's record leasing, our sector-leading retention rates and our continued ability to place highly leased developments into service.

Leasing volumes executed to date have been solid. We completed 631,000 square feet of leasing in the first quarter, including 488,000 square feet of renewals or roughly 1/3 of the scheduled annual expirations. We achieved a robust renewal rate of 89%, and our rents rolled up 11% on a GAAP basis and down a minus 1% on a cash basis. This volume includes full building renewal with the U.S. government at the National Business Park, and a full building renewal with a defense contractor in the BW Corridor.

First quarter vacancy leasing was strong as -- the 143,000 square feet we leased in the quarter exceeded last year's first quarter volume by 13%. In April, we executed a build-to-suit transaction at Redstone Gateway in Huntsville. As detailed in the press release we issued last night, we're developing a new headquarters building for Cummings Aerospace, a leading provider of engineering solutions for complex aerospace systems. Additionally, we await delivery of the executed lease with the U.S. government for a large block of space at 100 Secured Gateway. Both of these leases were expected to close during the first quarter and were delayed by process friction during the shutdowns.

We also made strong progress at DC-6. We recently executed a new 3.1-megawatt lease with a U.S. government contractor to bring a long-term supercomputing contract into the facility and backfilling the contractions we previously disclosed. The tenant is a Fortune 100 company with whom we have a very strong relationship. Additionally, the renewal negotiation for the 11.25-megawatt expiration this year is progressing well, and we expect to complete it this quarter.

We placed the 230,000 square foot, 100% leased development into service during the quarter. Following that delivery, our active developments totaled 2.2 million square feet that are 78% leased currently and will be 86% leased upon delivery of the new lease with the U.S. government.

Now I'll turn the discussion to the impacts of the pandemic shutdown has had on our business, which I am pleased to report have been very minor. Our operating effectiveness remains unchanged. We implemented our long-established pandemic operating protocol and business continuity plan, the combination of which have allowed us to continue our operations seamlessly. No COPT employee has been confirmed with the virus, and our systems are supporting over 190 remote workers each day without failure. Our properties have remained fully operational throughout the crisis and the reported infections among our tenants' employees is very low.

New lease negotiations and discussions that commenced before the shutdowns continue to advance. Various processes necessary to complete leases take more time with remote working, so the timing has slowed, but the volume of demand for our locations has remained high during the pandemic shutdowns.

Since our February call, our shadow development pipeline of future development opportunities has increased by several hundred thousand square feet and now exceeds 2 million square feet. The one area of activity that has been affected by the shutdowns is showings for new vacancy leasing. The tenant broker shops shutdown their tours in response to the virus. And as a result, new space showings have been virtually nonexistent since late March, the only exception being the new space showings with the U.S. government with whom we negotiate directly. Accordingly, although we expect to see a flurry of activity once markets reopen, we expect to see some transaction volume get deferred into the third or fourth quarters.

Development activity in our 2.2 million square foot pipeline has continued to advance unimpeded by COVID-19 shutdowns or labor quarantines. We have experienced some minor delivery delays or disruptions, but we've either resolved them or substituted vendors to maintain our schedules. Our high concentration of U.S. government and defense contractor tenants has largely insulated our operations from COVID-19-related cash flow stress.

As a result, rent collections have remained very high during the shutdown period, and we collected 97.4% of total April billings. The resiliency of our revenues reflects the strength of our tenant base and the mission-critical locations. 88% of our revenue comes from locations supporting National Defense, which are designated as the central businesses. So the majority of our tenants are exempt from the shutdown restrictions. Furthermore, their cash flow is tied to long-term contract or U.S. government funding and that general commercial activity.

Regarding tenant rent relief, I'm pleased to report the impact on revenues is nominal. The largest set of tenants requesting relief are the local food service tenants in our portfolio. These tenants are an important component of the value proposition we offer, and we're working with them to ensure our properties have appropriate amenities after this crisis has passed. We're offering 1 quarter of free rent to these tenants in exchange for extended lease terms. To date, this set of concessions represents 0.13% of annual revenue.

We have a handful of tenants whose businesses are impacted by social distancing. For these tenants, we've granted timing flexibility to defer up to 3 months of cash rent and repay the amounts in full over relatively short periods of time. To date, this set of rent concessions represents 0.35% of annual rents, bringing total concessions granted to date to just under 0.5%.

We do have some additional tenant discussions that are currently unresolved. If we were to accommodate all of these requests and add them to the rent relief already granted, the impact on our annualized rents would approximate 0.75%.

With all the impacts we can see right now, we are well positioned to meet the midpoint of our original guidance. However, we believe it is prudent to adjust our guidance down by $0.01 to provide capacity to absorb unforeseen after effects of the shutdowns. Our revised guidance continues to assume that developments placed into service contribute between $20 million and $22 million of cash NOI to full year results, 92% of which is from executed leases. Upon delivery of the government lease in Huntsville, this number increases to 99%.

In addition to the 230,000 square feet placed in service this quarter, we remain on track to place another 1.2 million square feet of 98% lease space into service during the balance of the year. The incremental NOI from these projects will help drive this year's FFO growth and position our company to deliver robust growth in 2021, when we expect to place at least another 700,000 square feet of highly leased developments into service.

Lastly, our negotiations for new development leasing and discussions for new buildings have a steady momentum, giving us a high degree of confidence that we will meet our 1 million square foot objective.

With that, I'll hand the call over to Anthony.

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Anthony Mifsud, Corporate Office Properties Trust - Executive VP & CFO [4]

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Thanks, Steve. First quarter FFO per share as adjusted for comparability of $0.51 exceeded the high end of guidance by $0.02. Our results included a $0.01 charge related to adopting the new CECL accounting standard and the outperformance resulted primarily from cost savings related to the extremely mild winter and lack of snow. These cost savings also drove stronger-than-expected same-property cash NOI, which increased 5%.

Due to the stability and essential nature of our tenant base, the pandemic has minimally impacted our revenues. We collected 97.4% of April billings and excluding the tenant relief we are granting, we collected 98.7%. Tenant accommodations granted are less than 0.5% of our annualized rent -- cash rental revenues and would be less than 0.75% if we accommodate further known requests. We incorporated the impact of these accommodations plus reduced our new vacancy leasing expectations and added higher reserves from parking income and termination fees, and we were still firmly in line with our original guidance. Depending on the duration of the pandemic and the related business interruptions, however, other issues may emerge. In order to provide cushion to absorb such possibilities, we added additional reserves to our forecast, the effect of which lowers the midpoint of our full year guidance by $0.01 to $2.07.

We are establishing second quarter guidance for FFO per share as adjusted for comparability with a midpoint of $0.49. We are assuming we encountered some modest delays in lease commencements resulting from delayed executions, and as a result, are lowering our year-end forecast of same-property occupancy by 50 basis points, with a new midpoint of 93%. The majority of the rent relief accommodations are expected to impact the second quarter, which will cause same-property cash NOI to decline between 1.5% and 3% versus second quarter 2019 results. Due to these rent accommodations and additional reserves, we are also revising our same-property cash NOI for the full year downward by 125 basis points and forecast cash NOI to be flat to up 1% for the year.

Based on our outperformance to date and our projection for future activity, we are increasing our renewal rate for the year by 5% to a new range of 75% to 80%. We continue to expect cash rents to roll down between 1% and 3%. With regard to our capital plan, our development investment forecast for the year is down slightly to a midpoint of $325 million, approximately $100 million of which we invested in the first quarter.

During the first quarter, we raised nearly $175 million in new debt capital. In March, we expanded our 2020 term loan by $150 million to $400 million and lowered the overall interest spread on the entire amount by 25 basis points. Also in March, we placed a $23 million mortgage on 3 recently developed, fully leased properties in Redstone Gateway. The 5-year loan has an interest rate of 2.12%. Between cash on hand and the capacity on our line of credit, we have over $700 million of liquidity to fund the remaining $225 million of investment.

In summary, our operations have been minimally impacted by the COVID-19 virus and related shutdowns, and we are being conservative with capacity in our forecast to absorb additional negative surprises.

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

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [5]

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Thank you. Our Defense/IT locations are adjacent to high-priority U.S. defense and intelligence missions that support defense, information technology and advanced research in fields that include: signals intelligence; human intelligence; naval systems, both air and sea-based; missile defense; army aviation; law enforcement; cyber activity; and space exploration. These activities are essential businesses. Demand for our locations is not correlated with the general economic cycle but rather with defense spending, which continues to enjoy strong bipartisan support.

Accordingly, our results to date and our expected results for the year are minimally impacted by tenant issues caused by the virus shutdowns. We have strong rent collections and nominal request for rent relief. Our development in renewal leasing remains strong and on track to meet or exceed our original goals. Vacancy leasing may be deferred a quarter or 2, but demand remains healthy. Our development projects are on schedule and have been unimpeded by supply chain issues or labor quarantines.

In short, the resiliency of our operations and tenant base continue to position our company to deliver FFO per growth this year and robust growth in 2021.

With that, operator, please open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Emmanuel Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - Director and Senior Analyst [2]

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Steve, a question for you just in terms of the planning process, do -- while the government functions are essential, is this going to draw out the planning for new space could just take longer to land deals? Or do you think time lines will be pretty consistent to what they were precrisis?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [3]

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Well, we talked about new leasing being delayed a quarter or 2, and it speaks precisely to your question. The negotiating process with people working from home seems to take a little longer. One element that's critical to leasing is the space planning and approval process. And we have customers with people in remote look locations. So getting those approvals and consensus on plans takes a bit longer.

With regard to the developments we've been working on, all that planning has been in process. So most of the development won't be affected. It's that new leasing that's taking a little bit longer.

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Emmanuel Korchman, Citigroup Inc, Research Division - Director and Senior Analyst [4]

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Right. And then in terms of the data centers, are you still thinking about those as a source of equity? And has the buyer pool or appetite there changed at all?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [5]

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Yes and yes -- yes and no, actually. We started the year off with an intent to raise about $80 million in capital to support our development investment. We disclosed that we are contemplating either ATM later in the year or using those joint venture structures that we've used in the past. We continue to maintain the optionality, and we're going to move later in the year towards resolving our desire to raise that equity. And yes, there is continued strength in folks interested in joint venture in our data center shells.

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Operator [6]

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Our next question comes from Jamie Feldman with Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [7]

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Great. You had used the term robust for 2021 growth on this call. I think you first used it on the last call. I'm just curious, as you look at -- you've signed the data center lease, you signed the new Alabama lease. Can you just talk about -- has your growth rate actually gone up for '21 now? And just how do we think about the building blocks for next year? And what might actually be at risk with the pandemic?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [8]

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So I wouldn't say our anticipated growth has gone up, but I think we're a little more confident in it. A key element is getting the renewal done at DC-6. So we don't want to put any kind of guidepost around what that growth looks like till we get it done. But we spoke to the highly leased developments that we are placing into service this year through next year. That's 1.2 million this year and 700,000 at a minimum next year. That will add $20 million to $22 million to this year's annualized income and another $20 million to next year.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [9]

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Okay. And then in terms of the renewal, can you just give more color on how those conversations are going?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [10]

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They're going very well. We're working on the document now.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [11]

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Okay. And then can you just talk about the rest of the development pipeline, the buildings that are not 100% leased, how those conversations are going?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [12]

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Sure. So at 8000 Redstone gateway, we have 5 tenants that, in total, need 125,000 square feet, the building is 100,000. At 6000 Redstone Gateway, we have about 10,000 square feet vacant, and we won a U.S. government lease award that's not yet executed, but that should be 100% leased in the next month or so. And we anticipate delivery of the large lease at 100 Secured Gateway either today or early next week. We're disappointed that we didn't have it for the call. And then at 4600 River Road, we have 75,000 square feet vacant. We have 2 tenants in advance negotiations for 2/3 of that amount. So a little over 50,000 feet. The one development where activity has been very sluggish due to the pandemic is 2100 L. We do have 3 prospects, but there's not a lot going on during the pandemic, and I can speak to the opportunities on the next call when activity returns to normal.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [13]

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Okay. And then along those lines, can you maybe just talk about your Baltimore tenants, kind of traditional office and how those tenants were with -- in terms of April rent and concerns you might have as you move into May and June?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [14]

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Well, our collections were very high. We're not going to talk about any individual tenants in the context of rent relief, out of respect for their businesses, but we have market-leading anchored tenants in all those buildings, and we expect them all to pay their rent and do extremely well. They're in healthcare, strong legal firms, insurance, jewelry and then several functions that are government or university related.

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Operator [15]

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Our next question comes from Jason Green with Evercore.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [16]

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Just on the disposition front and specifically the potential data center JV sales, maybe not enough information yet in the marketplace, but has pricing changed at all on those deals?

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Anthony Mifsud, Corporate Office Properties Trust - Executive VP & CFO [17]

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Yes. I don't think there's enough information in the market. We wouldn't expect it to change. I mean the -- if investors are looking for any kind of product with a stability of cash flow and be it -- and a business that isn't impacted by the environment we're in right now. The data center shells are -- have to be near the top, if not at the top of the list. So we would think value would be pretty strongly held up as compared to the values we achieved last year.

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [18]

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Then lastly just one quick comment. If we did nothing, our leverage would tick up about 0.15%. So we don't -- we're not in a position where we need to do that JV or issue ATM this year. We'd like to. But if we can't find pricing, we don't need to proceed.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [19]

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Got it. And then just on the equity financing side, I realize you haven't done anything yet, year-to-date. Has the level at which you would feel comfortable using equity financing changed at all just given the market volatility?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [20]

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No. I think we've been clear in the past. We can be near our NAV and still create significant value issuing equity, but we don't want to do it where we're trading today.

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Operator [21]

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Our next question comes from Craig Mailman with KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [22]

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Steve, I understand the nature of your tenancy may be a little bit sticky and -- but your commentary relative to others that we've heard this earnings season seems a lot more conviction in just the performance here, going forward and not having a lot of impact from COVID. I mean I'm just trying to understand why not just be a little bit more conservative with the guidance, bake in maybe a little bit more downside. It may or may not happen, but you guys were down just $0.01. I get it with a $0.02 beat, maybe you guys viewed it as down $0.03. But why not just take a little bit more of a conservative tack here versus kind of sticking to your guns a little bit?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [23]

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Well, I guess you're asking about judgment there. I think Anthony spoke to this in his comments. We put some pretty heavy contingencies on all of the things that we could see being affected. And we are still coming out at our guidance. So that extra level of conservatism is the $0.01 that we brought it down to create a cushion. So we're reacting to what we see. And trust me, with regard to these rent discussions, Anthony and I look at our progress report every day. So we are on top of this situation in a significant way.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [24]

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That's fair then. Anthony, same store came down a little bit more than it would have looked like, given kind of the more muted occupancy drop, the retention and kind of unchanged rent spreads, and you guys had a pretty good first quarter with some weather-related savings. Could you just kind of bridge the gap there on that reduction versus kind of the inputs?

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Anthony Mifsud, Corporate Office Properties Trust - Executive VP & CFO [25]

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Sure. The other inputs that are part of that change include the reserves that Steve just mentioned and I had mentioned earlier that we've put into our guidance for some nontenant-related rents around our parking revenue. And then they also include the impact of the rent relief that we are granting. That is going to have an impact on -- anybody who is granting rent relief is going to have an impact on cash NOI. And for us, it's going to primarily be in the second quarter. So that's really the components that offset the -- or in addition to some of the changes that you mentioned with respect to the change in occupancy and the slightly higher retention rate.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [26]

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That's helpful. Then just one more quick one. You guys, a lot of your external growth is based on development here. There may be a little bit less investor appetite for spec depending on how long the disruption lasts from COVID. I mean how do you guys look at your informed demand? Or however you guys go about choosing to build the next project versus maybe a little bit more risk-averse viewpoint from the market?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [27]

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Well, currently, we don't have a lot of spec under construction. We have 2 100,000 square foot buildings. In both cases, we had demand in front of us when we made the decision to build them. And those are the only 2 locations where we're truly building spec, Redstone Gateway and the University of Maryland. So we would not proceed with another spec building unless we had tenants to fill it. With regard to informed demand, we expect to get our lease done at the Secured Campus at Redstone Gateway, 100 Secured Gateway. We do have some additional discussions, quite a few of them with future government users for that. And we would proceed with the government building if we saw the demand that was there.

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Operator [28]

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Our next question comes from Dave Rodgers with Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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Steve, I wanted to ask about -- you talked about the essential nature of your business, and we all know that. I guess if you take the regional business and the data center business out, are you guys able to track utilization of the facilities in terms of kind of the amount of people in those spaces, whether through utilities or other means? Are they still fully functioning from that perspective, the tenants?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [30]

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So yes, our teams look at that every week. We have about 25% of our buildings where there's been no change in attendance at all. They're operating with the same level of parking consumption as before the virus. We have another 50% where the attendance is down a bit and some element of remote working, but still heavy attendance. And we have 25% where on-site attendance is off significantly, where people are remote working where they can. But we kind of track that every week.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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And was that specifically for the contractor government business, excluding the other 2 segments? Or was that including regional?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [32]

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So that was everything, including regional. And I would say the regional office is a big component of that last 25% where there's remote working.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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Okay. Yes, that makes sense. You talked about the nondevelopment leasing pipeline or the vacancy leasing pipeline. Can you kind of talk about where that was coming into the crisis? And where those conversations are today outside of the development?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [34]

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That's a good question. I benchmarked off of our last report in February before the crisis started to occur. And our overall vacancy pipeline is at the same level. When you adjust for the leases we won in the 6 weeks that occurred, the activity level -- I use a term called the activity ratio. The amount of tenants we have seeking space represents 75% of all the vacancy in our portfolio, which we consider high. But we've got over 60 deals that we're continuing to work or try to compete to win, and they range from as small as a few thousand feet to as big as 70,000 square feet.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35]

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Great. Maybe 2 cleanups for Anthony or you Steve. But 1 on the DC-6 lease, the 3.1 megawatts, is that backfilling space has already been vacated or will be vacated this year?

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Anthony Mifsud, Corporate Office Properties Trust - Executive VP & CFO [36]

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So all but 0.75 megawatts has been already vacated. So we get that back in July 1. So the balance has already been vacated through the end of the first quarter.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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Great. And then the last one on the park. You guys mentioned parking income. You don't strike me as a high parking income company, but can you talk about what that total risk is of that dollar amount?

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Anthony Mifsud, Corporate Office Properties Trust - Executive VP & CFO [38]

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Our total parking revenue for any -- for a year is about $5.5 million, and it's mostly in the Baltimore urban locations. And Backlick Road down your -- in Springfield and Maritime Plaza in D.C. So we're seeing some drop off. Some of those are monthly charges that come along with rent, some of them are transient. So we're really putting reserves against the transient component of that income.

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Operator [39]

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Our next question comes from Rich Anderson with SMBC.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [40]

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So Steve, you went through sort of the breakdown of how full your buildings are in terms of attendance and 25% being sort of no change and 50% being a bit down. Does that leave you feeling a little vulnerable? I mean these people, assuming they're not injecting Clorox, are just as vulnerable as anybody else to get the virus. And I'm just wondering if you worry about -- sorry, about that terrible joke, by the way. If you worry about the vulnerability of your -- the people working in your buildings to the virus, which you've described as being minimal at this point.

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [41]

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No. Honestly, Rich, I don't. Remember that secured work in the government contracts has to be done in the office. You can't take that work home. We know that both the government and some of the defense contractors are making adjustments. They're rotating people, like an A group and a B group. One of the things that we observed is that where we have partially occupied buildings, the length of the business day is longer because they're all trying to get their hours in by working a longer day, fewer days a week. And I think that will return to normal.

And then with regard to the sample set we have in our own company, our people are dying to get back to the office. The idea of working from home, the romance wears out pretty quick. In this last week, we've had quite a few surprise visitors that just had to get out of their house and come into the office for a while.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [42]

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Yes. That's a true test of a marriage I guess. So second question is, a lot of military activity to combat COVID. Are you seeing any of your tenants being involved in that in any degree in taking up some of their time fighting the virus?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [43]

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I have no information along those lines, Rich.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [44]

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Okay. And last...

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Anthony Mifsud, Corporate Office Properties Trust - Executive VP & CFO [45]

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Yes. I think Rich, the only thing we can -- the only thing I can add is the one thing you should note is, it was about $10.5 billion of the CARE Act that was allocated to the DoD to really pay for and fund the work that they were being asked to do. So none of the -- none of that work is being funded out of the defense budget that our tenants or the government rely on to do their activities. That was sort of allocated above and beyond the base budget.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [46]

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Okay, great, Anthony. And then lastly. I don't -- I might have missed this at the beginning of the call, but are you entertaining the process now of replacing Paul or are you inclined to sort of double duty for the time being and wait this out?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [47]

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Well, I'm enumerating some candidates working in a variety of different ways. It's pretty tough to interview people when they can't travel. So we're going to push the need of that activity later into the summer.

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Operator [48]

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Our next question comes from Peter Abramowitz with Jefferies.

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Peter Dylan Abramowitz, Jefferies LLC, Research Division - Equity Associate [49]

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Yes. Apologies if I missed this before, but just wanted to get kind of your high level thoughts, looking further out, given kind of the shifting priorities for federal spending needs. What's kind of your further outlook for the defense budget? And how might the pandemic (inaudible)?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [50]

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Well, we can only see 1 year at a time because that's the way government works, but the discussions around the 2021 fiscal budget contemplate another 2% or 3% increase. That's got to play out over the summer. And certainly, the shutdown at Congress has slowed that process down a bit. But I guess, I asked rhetorically, at the end of the day, are we more comfortable with the world threats that we deal with or less when this virus is over? I don't see where we're going to be materially cutting defense.

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Operator [51]

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Our next question comes from Daniel Ismail with Green Street Advisors.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [52]

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Great. Just a quick one for me. Can you provide updated thoughts on construction costs and land values in this environment?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [53]

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Well, I know most of what we have rolling right now, Danny, is under contract already. I think when we come out the other side of this, I think it's reasonable to expect that some of the development activity generally across the region could fall off. And I think that my gut would tell me we'd be -- it would be more of a buyer's market, but it's a little early to really make that claim.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [54]

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And just as a refresher, the majority of your deals are done on a return on cost basis. So little impact to your overall profitability on the development pipeline regarding change in cost in terms of land or overall development?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [55]

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That's correct. Quite a few of them are. Well we -- even at 2100 L joint venture effort in DC, we had that -- those contract prices locked down almost years ago. So we're not feeling heavy cost pressure on our developments.

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Operator [56]

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Our next question comes from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [57]

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Great. Nice job, guys, particularly Stephanie. $2.07 at the midpoint seems a high degree of confidence, and basic math says that you're in the mid-$0.50s, $0.54, $0.55 a share by the fourth quarter. And you've got $1.10 dividend for 6 or 7 years now. Any thoughts on the dividend these days?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [58]

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No. We've -- well, yes, we have thoughts all the time. No new thoughts. We continue to like the level our dividend is at, will be a lot happier if the yield were a little lower. But we -- with the value we've been able to create with our steady stream of developments, John, we think it's best to preserve excess capital and plow it back into value creation for our shareholders.

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Operator [59]

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Our next question comes from Tom Catherwood with BTIG.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director & REIT Analyst [60]

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So Steve, you partially answered this when -- in response to one of Rich's questions, but I wanted to take it a different angle as far as how your tenants are using their space, the ones that are obviously still utilizing it. And you mentioned going to longer hours, fewer days or going to some sort of a pod or a rotation system. But when you are looking at your buildings and you're building operations outside of just what the tenants are doing, what kind of thoughts do you have as far as making any changes, whether it's to mechanical systems, vertical transportation, touchless technology, any kind of investment you guys need to make? And then are you incorporating those thoughts into future developments as well?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [61]

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Well, the honest answer is we've looked at all of it. We think we're in really good shape. The biggest adjustment we're going to make and have made is just a heavier focus on the frequency of cleaning of touch points at door entries, washrooms, horizontal services in common areas and elevators and elevator buttons. So when our activity ramps back up in those buildings where it's been more remote working, I would say we're going to expect to have a show of force with the cleaning crew to make sure we can get tenants comfortable.

With regard to the mechanical upgrades. If you really look at the data and the size of the virus particles, you could spend a lot of money and achieve nothing with upgrading your filters. We upgrade filters systems now, and we don't consider that a risk.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director & REIT Analyst [62]

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Understood. And then last one for me. We saw a portfolio trade down in Huntsville, Alabama, some assets in Cummings Research Park and then an asset in Downtown Huntsville. Kind of 2 parts. First, did you take a look at that? Was that something you guys considered? And then second, how would those assets that trade compare to your portfolio down there?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [63]

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So I saw the offering memorandum. It's not kind of answers that we are interested. Most of them are the older product relative to our new development, and we really had no interest in being in Downtown Huntsville, if you will. But we're very satisfied with the opportunities we have to create value in new modern facilities at the location we have. So I didn't study it that closely.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director & REIT Analyst [64]

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Got you. So I guess, then just one follow-up on that. Is it -- is the difference then between those assets and yours, just the -- are your buildings are newer, you're obviously in modern technology? Or is it location? Or is it a combination of those 2?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [65]

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It's all of the above. So location is one factor. Ours dominates. The second factor is access to the amenities that we've created. Our development is really very walkable. We've got multiple food service operations. We've got a hotel. We've got a coffee shop coming. We're working on a daycare center. Those other locations don't have anything near that. You got to get the car and you got to drive. And then those buildings, I think the newest of which were maybe '90s, but more like '80s product.

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Operator [66]

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(Operator Instructions) Our next question comes from Chris Lucas with Capital One Securities.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [67]

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Just a couple of quick ones, Steve. You talked about the space utilization changes and month-to-date changes and cleaning protocol changes. I guess just in aggregate, do you have a sense as to how that might impact operating expenses over the next few months, quarters?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [68]

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I wouldn't think that the cleaning costs would be material. It might have some impact, but nothing that we'd be talking on -- about on an earnings call. With regard to space density. I think -- since I've been with the company, we operated through that defense spending contraction period, and all our defense customers got very efficient using fewer square feet for more people. One potential outcome of this event is that companies are less willing to get that high concentration of humans in their space, so they might lease more space to spread out. Time will tell. It's completely speculative. But we've had some discussions about -- and things we're planning, spreading the people out more to create a less vulnerable environment to transmit sickness.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [69]

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If -- yes. If you were to handicap that between sort of the contractors and the government itself, is there a likelihood that one might adopt a less dense environment than the other? Or how do you see that playing out?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [70]

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I think it's a little early to make a call on that one, Chris. But I invite you to challenge me again in the next 2 quarters.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [71]

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I will do that. And then one last one for you. Just as it relates to your other major tenant. Are there any changes in the conversations you're having as it relates to the data shell tenant in terms of the impact of the pandemic on their business or on the space demands that they have?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [72]

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No. Not really. None that I'm aware of. We've been working on a long-term development plan for them. We have additional capacity on land that we have. We're constantly in discussions, making sure that we can meet their time frames and deliver product when they need it. They've been a regular consumer of space for upwards of 7 years with us now. And we've had no discussions that would lead me to believe otherwise.

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Operator [73]

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Our next question comes from Blaine Heck with Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [74]

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Great. Just a quick one for me, and apologies if you guys touched on this already. But you guys had the expected move out had Colombia Gateway come through recently. And I think you have one those floors leased. Can you just touch on any interest that you guys may have had on the balance of that space? And maybe how much of a delay you're expecting there in that backfill?

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [75]

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So from -- let me hit the delay first. I would expect that delay might be 1 to 2 quarters from what we would have expected before the pandemic. It's just because there's no new activity that's occurring in the current shutdown of touring. We have had several tenants, many of them in the park already that are in growth mode. Many of them are cyber or technology-driven. None of them large, 25,000 square feet or less. But we're highly occupied in this park. We have internal growth, and it's a great asset. So as we come into June, July, I think we'll be fine.

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Operator [76]

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Thank you. I'm not showing any further questions at this time. I will now turn the call back to Mr. Budorick for closing remarks.

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Stephen E. Budorick, Corporate Office Properties Trust - President, CEO & Trustee [77]

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Thank you all for joining our call today. We will be in our offices this afternoon, so please coordinate with Stephanie if you'd like a follow-up call or any other communications. Thank you very much.

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Operator [78]

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Thank you for your participation today in the Corporate Office Properties Trust First Quarter 2020 Conference Call. This concludes the presentation. You may now disconnect. Good day.