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COLUMBIA, MD-Corporate Office Properties Trust [COPT] reported higher funds from operations and a solid second quarter despite a sluggish economy that is taking its toll on other office REITs, seemingly proving the forecasts of industry observers who have said the company would do well in the economic downturn because of its concentration of government-oriented tenants. In particular, analysts at Milwaukee-based Robert W. Baird & Co. said the REIT’s latest results surpassed their expectations.

COPT’s management team July 29 reported a 7% increase in diluted FFO to $34.2 million and 61 cents in the quarter ending June30, up from $31.8 million and 57 cents per share in the same quarter last year. COPT’s results contrast with those of other office REITs, like Los Angeles-based Maguire Properties and Toronto-based Brookfield Properties Trust [see related story on this page of GlobeSt.com]. Maguire reported a loss of 110.6 million for the latest quarter, and Brookfield reported a sharp slide in FFO.

The story behind COPT’s numbers is the stability and reliability of government tenants, according to Baird analysts Christopher R. Lucas, Avi Lerner and David S. Nebinski. They say, in part, that COPT is prospering in these uncertain times because it is the “landlord of choice for the federal government and its contractors” for certain markets.

While occupancy is sliding and sublease space is growing in general in US office markets, the Baird analysts point out COPT’s occupancy rates for its 19.1-million-sf portfolio rose in the latest quarter, increasing about half a percentage point to 93.4%. The REIT’s two largest submarkets are the Baltimore/Washington Corridor and suburban Baltimore, where occupancies, respectively, grew more than half a percentage point and 1.7% for the latest quarter.

Despite the increased earnings and generally positive results that the REIT turned in for the quarter, the Baird analysts point out that leasing activity slowed to 275,147 sf in the second quarter from 719,436 sf in the first quarter throughout the REIT’s portfolio. But the REIT nonetheless managed solid preleasing on its development projects, signing 369,000 sf during the quarter and 61,600 sf soon after the second quarter’s end.

Commenting on the REIT’s development projects, the Baird analysts point out that, at a time when many developers are pulling back because of general softness in US office markets, COPT is going ahead with development. The REIT ended the quarter with 11 buildings under construction, estimated at $242 million. The Baird report calculates the REIT’s properties under construction are about 40.5% leased. One of the new projects is InterQuest Office Park along the Interstate 25 northeast submarket of Colorado Springs, where COPT recently preleased 73,000 sf.

In the report, the Baird analysts say that, in light of the US economic conditions, the credit crunch and all that is happening in real estate markets, COPT “remains our top pick” as an office REIT investment. “Our investment theme in the current economic climate is to focus on REITs with defensive characteristics. While we are less bullish on office companies generally, we believe that Corporate Office Properties Trust’s focus on the federal government and its contractors insulates it from typical landlord concerns such as credit and demand risk.”

COPT generates about 50% of its revenue from the government sector and its contractors. It expects to generate at least 70% of demand for development activity over the next 24 months from that core constituency, according to the Baird report.

“We fully anticipate that development activity will accelerate over the next five years” and that the federal government and its contractors “will increase their share of development demand,” the Baird team says in the report, noting it translates to a continued positive outlook for COPT.

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