By Allison Landa

By the time Rand Griffin became president of Corporate Office Properties Trust (NYSE: OFC) in 1998, the Vietnam War veteran had already had a significant tour of the real estate industry as well as a stint as vice president of development at EuroDisney Development in France. During a recent conversation with Portfolio, Griffin, now CEO as well, characterized Corporate Office Properties Trust (COPT) as a client-focused top competitor within the suburban office sector. The company currently owns 183 office properties totaling 14.6 million rentable square feet, which includes 18 properties totaling 885,000 square feet held through joint ventures. The company’s holdings are concentrated largely in the greater Washington, D.C. submarkets.

CLOSE UP

Age: 61 Family: Married with two children. Education: B.A., Ohio Wesleyan University; M.B.A., Harvard Business School. Background: Born in Canada, but now an American citizen. Was drafted into the U.S. Army in 1966 and served in the Vietnam War. Hobbies: “There are lots. They tend to always be put on hold because we work very hard in this company, but I have a house in Maine on a lake and I enjoy boating, skiing, fishing, both water and snow skiing, kayaking, and have done lots of woodworking and photography in the past. Maybe someday I will have more time for it again.” Career: Began a career in real estate upon graduation from Harvard Business School in 1973. Gained experience in the residential, retail, hospitality and industrial sectors before moving to the office market. Worked as vice president of development for Euro Disney Development in France from 1990 to 1993, during which time he directed all non-theme park development. He was also previously executive vice president and COO for Linclay Corporation, a real estate firm in St. Louis. Management Philosophy: “I enjoy building teams. I’ve done it on a fairly large scale. I have built companies and large operations, and I’m at that point in life where I don’t need the personal recognition or accolades. I get the satisfaction from what our team accomplishes. I love development, love creating value. People who know me say I’m the one who creates strategy, focus and motivation for others.”

Portfolio: From 1990 to 1993, you served as vice president of development for EuroDisney. What did this experience entail and what did you take away from it?
Griffin: I was responsible for all non-theme park construction and development in the first phase, which totaled $1.5 billion and included 5,200 hotel rooms, a $280 million Frank Gehry entertainment center, 1,800 apartment units, a campground and a 27-hole golf course. I was also responsible for all Walt Disney space in Europe—locations in 42 cities—as well as development of the $1.2 billion second phase of EuroDisney.

This experience was quite unique. I managed internationally more than 10,000 workers on site, with more than 75 nationalities, combining to construct these complex projects on time and under budget and up to the high Disney standards.

Portfolio: COPT originally started as a supermarket REIT. How did it arrive at its current incarnation?
Griffin: The history of the company really came about from a series of mergers. It dates back to a small REIT traded on the NASDAQ called Royale Investments, Inc., which was formed in 1988. Royale owned a Midwest supermarket portfolio worth about $25 million. In 1997, our then-CEO, Clay Hamlin, and chairman, Jay Shidler, bought the REIT, moved it to Philadelphia, and changed the name to Corporate Office Properties Trust. His group, The Shidler Group, added the properties that they already had and changed the company’s focus to suburban office. The company went on the NYSE in April 1998.

In September 1998, the company merged with Constellation Real Estate Group, Inc., which was the real estate subsidiary located here in Columbia, Md. of a local utility. I was running Constellation at the time and we basically took COPT over. We brought in a team of 100 people, buildings and land control, and $100 million in equity. By the end of 1998, we had a total market value of $300 million. Today, we have a market value of $3 billion, and we own nearly 15 million square feet.

Portfolio: I understand much of that space is occupied by defense contractors that serve the U.S. government.
Griffin: Right. We have a high concentration in government and defense—more than half of our revenue comes from the U.S. government and from defense contractors who serve the government. We have long-term relationships with these tenants, and amongst our top 20 tenants there’s an average of seven leases each.

This is our niche, and it dates back to 1988 when Constellation and its predecessor owned a major office park right across the highway from Fort Meade. Fort Meade is the fourth-largest Army base in the country, strategically located exactly midway between the Washington and Baltimore Beltways, and between Annapolis and Columbia, Md. We developed three buildings there from 1988 to 1990, and the government ended up leasing one. That started the relationship, and we’ve built on that over time. We’ve tended to locate our holdings around government-demand drivers and that’s what has helped accelerate our growth.

In 2001, we purchased a 470,000 square foot building in the Westfields Corporate Center in northern Virginia. Westfields Corporate Center consists of 1,100 acres, which makes it the largest office park in the Washington, D.C. metropolitan area. We are currently under contract for the purchase of Fort Ritchie, a 600-acre Army base on the Maryland-Pennsylvania border that was closed by the Base Realignment and Closure Commission (BRAC) in 1995. That’s a very strategic location and we are hard on that contract; we are working through some final issues and hope to close on the purchase this year. We will develop the property over time—we’re planning 1.7 million square feet of office space and are entitled to build as many as 674 residential units. It’s really a complete community that we plan to create. It’s a learning experience for us, and we will continue to consider other BRAC-related opportunities elsewhere.

Portfolio: COPT is an active developer, but how do acquisitions fit into your growth strategy?
Griffin: We’re a company that’s pretty balanced in terms of growth. Some years you buy, other years you build, depending on the market. Currently, we have $200 million worth of projects under construction, consisting of 1.1 million square feet. From an acquisition standpoint, we look for purchases that fit our strategic plan, either through adding density to our market positions or expanding into new markets. In 2005, our goal was to purchase $200 million and sell $50 million. We ended up purchasing $362 million (of which $46 million was land and $31 million was joint ventures) for a net of $285 million. We sold approximately $100 million of properties in 2005. For 2006, we expect to acquire $300 million and sell $100 million.

When it comes to our current development pipeline, that million-plus square footage is almost entirely leased. Each of our office parks has available ground that we purchased, which means we’re able to continue to develop to meet the growth needs of our tenants. We own enough entitled land today to build almost 8 million square feet and would expect that to increase to more than 10 million square feet by mid-year 2006. We have constant demand and very good returns, averaging 11 percent to 12 percent cash-on-cash kinds of yields, which is very high in the industry. There are only three markets in the country where you’re seeing that kind of demand: greater Washington, D.C., New York City and Southern California.

Portfolio: Given that 80 percent of your company’s portfolio is located in the greater Washington area outside the Beltway, that must make you happy. Where are your other properties located, and is that geographic concentration changing over time?
Griffin: One of the initiatives we started in 2005 was actively recognizing that the square footage we had outside the greater Washington region really wasn’t core to us. We had properties in Harrisburg and Bluebell outside of Philadelphia and owned close to 1 million square feet in central New Jersey, and it wasn’t producing any growth. We didn’t have core tenancy, we weren’t building or buying any more, and we didn’t have a competitive advantage.

We made the decision to exit those three markets over the next three years and already left Harrisburg in 2005—we got all our money out through a joint venture sale. We started our exit in New Jersey by selling three buildings. Total sales were $100 million. We’ll have another $200 million to $250 million in sales in these markets in the next couple of years as we continue our exit strategy.

At the same time, our top 20 tenants have been saying to us that we do things so uniquely and so well that they would like to see us in other locations. This year we started a strategic expansion, taking more than $60 million from Harrisburg and deploying it in core Washington markets and partially in others. This year we went to San Antonio, buying a 470,000 square foot campus formerly belonging to Sony Corporation. The National Security Agency announced its intention to locate in this major facility and contractors will need to be adjacent to it, so this will end up being a 1 million square feet project, the largest office park in San Antonio.

We have also opened a divisional office located directly outside the entrance to Peterson Air Force Base in Colorado Springs, which is the third-most strategic base in the country based on the 2005 BRAC evaluation surveying the 344 bases in the U.S. It’s a very important base and most of our top 20 tenants are there. They are winning contracts and need more space. We now own or control 191 acres there, and that will allow us to do 1.6 million square feet of development. We’ll be a very major owner in Colorado Springs in two of the submarkets, and will continue to expand.

There are other cities that we are studying, all of which are government and defense-oriented, and as appropriate we will continue to expand in other markets over the next few years.

Portfolio: How do you finance all of this development and acquisition activity?
Griffin: We’re not a rated company, and that’s on purpose. We’re not trying to get an investment-grade rating, though we certainly could based on the quality of our tenants. We believe non-rated gives us more flexibility.

We use equity as appropriate, a mix of both common and preferred stock, though common has been most cost-effective lately. We also use long-term debt, and for our construction projects the rest of our funding comes from construction loans. When we’ve completed construction and lease up, we then do conventional non-recourse debt. We’re at a 41 percent debt-to-equity level, which makes us quite conservative.

Portfolio: Your company prides itself on its customer-centric approach. What characterizes your relationships with your tenants?
Griffin: We have worked very hard as a company to be tenant-centric rather than a commodity. We work very hard on tenant relationships and on repeat relationships. We focus on customer service. In March 2005, we were ranked “Best In The Industry” for 2004 by CEL & Associates, which is like a JD Power equivalent that does a survey of office tenants nationally and ranks companies on customer service. It’s the nation’s largest surveyor of tenant satisfaction within the real estate industry, and the fact that we’re ranked number one tells you that our service orientation is working.

Our success is part luck and part strategy. We’ve got a good team, we’ve worked hard at what we do, and we’ve stayed very focused. If you look at shareholder return, we’re actually the number one REIT of all 157 equity REITs for the 10-year total return and we are the number one office REIT based on three, five, seven and 10-year total returns. The combination of all these aspects has produced very consistent, very strong returns at the top of the office sector.