Soft economy gives REITs 'competitive advantage,' COPT's Griffin says

While not insulated from the economic woes facing businesses across the nation, Columbia-based Corporate Office Properties Trust CEO Randall M. Griffin said he believes the company continues to hold an edge over private development firms as the credit crunch continues to play itself out.

"As the economy continues to soften, the REITs in general, and COPT in particular, have a competitive advantage due to access to capital and strong tenant relationships," Griffin said during a conference call with investors Wednesday discussing COPT's earnings. "We are starting to hear where private developers do not have the access to the capital, nor the tenant relationship, to move forward successfully on new development in this difficult environment."

For the quarter ended March 31, COPT (NYSE: OFC) reported diluted funds from operations of 58 cents per share, or $32.4 million, up 13.7 percent from the first quarter of 2007. Funds from operations is a standard measure for investment trust performance.

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Griffin said financing and leasing are the two biggest challenges facing investment trusts this year, and he noted private developers have already started to struggle with those issues and delay the launch of new building projects.

On Monday, COPT said it closed on a $225 million loan to fund the company's future construction costs. The measure, Griffin said, secures the financing of new projects through 2009.

On the leasing side, Griffin said defense contractors and government agencies account for the majority of COPT's tenants -- many of them among its list of top 20 office tenants -- and those firms are better positioned to weather the economic storm than other businesses.

While those factors will help, Chief Financial Officer Roger Waesche Jr. said vacancy rates have started to increase in many of the office markets where COPT operates, including Greater Baltimore and Northern Virginia.

"Vacancy lease-up may be somewhat slower than normal due to slower economic growth" Waesche told investors. "We do expect tenant concessions, via increased tenant improvements and free rent, to modestly increase as we go forward over the next 12 months.

Leasing activity in the Baltimore region and in Northern Virginia has started to sag, Waesche told investors during the conference call. In the Baltimore-Washington corridor, he said, vacancy rates have climbed from 9.7 percent last year to about 12.4 percent as of March 31, though the real estate investment trust's portfolio of about 4.6 million square feet is holding steady at 93 percent leased.

A vacancy rate of 10 percent or less is considered to be a sign of a strong office market. Rates above 10 percent indicate supply is outpacing demand for office space.

In Columbia, the vacancy rate has held steady at about 12.7 percent, and COPT's portfolio of about 3 million square feet is about 93.5 percent leased.