Earnings call transcript Q1 2023

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Operator

Welcome to the Corporate Office Properties Trust First Quarter 2023 Results Conference Call.

As a reminder today's conference is being recorded.

At this time, I will turn the call over to Venkat Kommineni, COPT's Vice President of Investor Relations. Mr. Kommineni please go ahead.

Venkat Kommineni

Michelle. you, Thank welcome quarter and conference to call Good to first results. discuss afternoon COPT's today President With Anthony Steve are me Budorick, Vice and Mifsud, and President CFO. Executive and CEO; discusses the results release and measures non-GAAP information Reconciliations our and press on package. of in that and GAAP management website our are in financial supplemental presentation available

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

Steve Budorick

Good afternoon, thank for joining us. and you

Before turning does for defense themes. start important The to to fundamentals spending. of the like outlook remained results as the I'd our highlighting strong, few quarter by a business for very

retaining for space or continue above And can't tenant of XXXX leasing XX% at is our our on resulting home lease see to as that We retention at XX-year as rate in locations, record our evidenced secured a XXXX. expect we and demand from working new in XX% tenants by our to Defense/IT high achieve that's programs tenants rate. Defense result, in a portfolio and portfolio. work renewals in our

our good visibility into and We have projects. demand current development for future

we And and We continue year the in growth X.X% increase based capacity Board a XXXX. per business, we raise the basis and in our our anticipated investment dividend strength FFO of our share self-fund development going forward. the to completed equity on February. And roughly lastly, to compound JV component the our project of approved have in XXXX X% on between a earlier now equity of

higher as quarter We the results from than which adjusted $X.XX midpoint discuss is per share let's quarter. reported our of comparability of $X.XX, guidance. for Now first the FFO

at represents basis Our well year-over-year. remained point core XXX increase which portfolio XX.X%, leased

began is in disclosing Our highest we since which level XXXX. the Defense/IT segment is segment the XX.X% leased,

were leading on strong. level NOI basis square increased of of right XX,XXX full metrics which with decade, feet. year-over-year, the year operating quarter which to midpoint. at points Same guidance executed year XXX cash We us full X.X% first is leasing, Our vacancy a highest track square feet is our raise over target the property in by XXX,XXX

retention overall our Our Defense/IT at XX%, rate locations was with XX%.

starting XXX,XXX of driven Total X.X%. spreads X.X%, renewals. feet in were volume rent Measuring starting three rent lease, leasing positive, of GAAP cash leases rent included the square of cash of weighted increases average new rate on rent of years. while achieved square the XXX,XXX annual Cash of with quarter rent the feet to annual the compound was were the term slightly lease spreads growth lease the renewal up tenants by expiring X.X% a these

the of influenced impact XX% by retention non-renewals portfolio. our First office regional was expected XX,XXX of feet square quarter in rate of

However, to based rate of the midpoint our we full XX% on to XX%. guidance our activity and retention XXX raised points discussions by with year customers,

XX,XXX addition, XXXX in square leases renewal a which rate square define as through which in this large feet that on X.X of total feet we a square of XX% we over expect through large feet of over Included leases million leases XXX% the In expect expire XXXX. we expiring million year-end retention is X.X rate.

nearly first XXXX square nearly period. available volumes feet weighted eight square during a square to space lower that have the of our leasing the Defense/IT portfolio due feet level XXXX, lease. In XXX,XXX lease less by X our has than diminished in inventory Recall, since is lowest leasing that that XX,XXX we despite average the which In we portfolio, with expected million quarter, available vacancy of are our feet completed to years. of term fact increased

XXX,XXX square prospects. of ratio remained activity leasing vacancy Our feet at a of pipeline strong with XX%

Northern X.X square nine projects of Huntsville $XXX of in are with total million, Maryland, cost XX% leased and million located consisting estimated of active Our Virginia feet developments a Alabama.

announced, leases to and Technology with build-to-suit data square our square KBR Technologies customer Since XX,XXX that feet Redstone an shell then, at at square previously computing a for feet with cloud bringing foot and lease foot As bringing Frontier Redstone headquarters we feet for new foot center signed XXXX two property leased. signed included Virginia property to a consisting in XX% XX,XXX we of Rideout XXX,XXX additional in which Northern that leases lease XX% leases their XX,XXX of lease build-to-suit square totaled Gateway. square development of square XXX,XXX XX,XXX Road for expansion X,XXX a Gateway Davidson development January that at

of square feet represents year In quarter XXX,XXX full of XX% XXX,XXX completed total, square about of leasing which feet. goal development during the we've our

pipeline development XX% two feet. we at within better or less define years stands Our to win which as XXX,XXX square projects we consider likely currently or

confidence million us gives we'll able feet the future maintain potential in X.X medium and healthy square pipeline Beyond opportunities that term. another to pipeline, of we're that development a near be tracking which

month, calls nearly year-over-year the to $XXX billion. increase roughly defense a year submitted XXXX fiscal Between for budget defense XX%. increased by budget. $XXX XXXX, Last billion the XXXX base budget X.X% the fiscal Turning the year administration to or request and which

from the our thereafter. while us growth benefit XXXX from the portfolio budget demand will budget in will increase starting materialize in XXXX XXXX, expect We

these and of our Defense new leasing a equates which cyber from which the months, cyber the of over have $X XXXX, budget year. are driven $XX in of The in to XX last increase XX% over Included the prior defensive cyber billion billion total programs. in has investments to Department square committed is activities achievement. further cyber assumptions offensive related programs DoD in portfolio million two leasing feet

threat imminent, threat represents US of be assets. operations country. they Intelligence Office cyber-espionage China assessment were US In and broadest February infrastructure highly against the if sovereign the likely XXXX, aggressive critical our that military of felt undertake the conflict revealed major with would cyber Director the probably China published the to a And National to

cybersecurity continued the represent threat from investment our significant environment need for tenants threat Clearly, continues The security investment demand remain cyber a in should cyber a must support in portfolio. and strong choice. to priority

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

Anthony Mifsud

Steve. higher of the you, of which first reported per timing the came expense. as from midpoint of comparability net upside than and of related $X.XX quarter from is FFO guidance. $X.XX, half remainder for share maintenance We seasonal the adjusted Thank repairs our the lower expenses and Over

by variances our result NOI a expense year-over-year. as these same-property while increased X.X% As year-over-year, results expectations, increased NOI of same-property X.X% GAAP cash exceeded

burn-off quarter. results benefit in tenants first of our same-property in the was the large cash Included NOI two free of rent

same year-over-year. cash X.X% increased property impact this NOI Excluding

We year. expect the growth remainder will same during property moderate of the

NOI we by by to XXX X%. driven quarter's However, points first outperformance, basis same-property X% cash the increasing of our to midpoint the guidance are

composition which development which the same data are three of pool The changed of were occupied ventured. shells the properties and removal the fully property nine joint with of XX% new addition leased

Same-property occupancy Gateway during includes ended and the to with and Martin new XXX,XXX XXXX the lease including year, quarter. in feet Redstone and in the square government XXX,XXX quarters, XXXX over of square executed second the Lockheed expected Business third foot space US National throughout XXX,XXX at leases quarter with XX.X% third commence, which Park is increase as square the at the feet at

quarter. XX,XXX foot at CareFirst gains office second regional square contraction segment Canton in These by in our be will previously a the partially Crossing reported offset by

Defense/IT The exceptional growing driven location which NOI. our of our into translates assets resilient results, has leasing and

our are San which Our Air Antonio annualized largest core consist Business Force three National for defense in of Lackland locations Huntsville and Redstone revenue. Base aggregate the account in Park, XX.X% concentrated of and Gateway XX% rental in roughly leased

our stability come. comes leased assets for XX% years and to of Adding shell rental that annualized rock-solid data from XX.X% core are fully have leased portfolio, center our revenue

balance current volatility well the positioned environment. to is Our the markets capital in sheet navigate

We maturities March XXXX. have no significant debt until

in During mortgage a the and with line XXXX paid million credit of matured Parkway. off unencumbered $XX Milestone our February quarter, we which

unencumbered Our XX% now from estate of portfolio total operations. real NOI, represents

variable end X% of of February Xst, into compared declined As debt we XXXX. end to quarter entered XX% exposure effective result a rate interest rate the at the our swaps at to

debt remain floating XX% the the increase as year. of year, development line our on slightly our remainder to expect below We we of throughout fund will but exposure rate over the credit

line previously in a for XX-XX proceeds end $XXX of the from our transaction this center on used we of shells, three of down early the line-of-credit. capacity proceeds. joint closed available. XX% Blackstone single-tenant raising venture the January, were with we pay the have affiliates data As of to million The announced, of quarter, at And equity

annual we assets fund to Following expected have million any venture the $XXX $XXX to sell JV development additional million in January, joint investment. no for to completed our in need

and sheet through operations, strong equity conservative forward, requirements Looking while from maintaining metrics. anticipate cash flow for investments our balance we our development leverage self-funding expected

dividend February, is raise in our roughly we growth. AFFO increase, and quarterly X.X% decade. we announced strong With a payout confidence year AFFO dividend first our dividend in XX%. full still a in over ratio dividend be this The which In FFO our increase expect increase illustrates will our

narrowing the we maintaining and the $X.XX FFO of by high-end midpoint per Turning low share. range are guidance, per at to the XXXX at and share $X.XX

to the Although our in portfolio first strong. fundamentals quarter results of be and the continue exceeded expectations very

being guidance. of this midpoint At not annual year share point conservative the FFO are and per we in the our changing

$X.XX as adjusted per a for $X.XX second are FFO we the of For establishing quarter, guidance range to comparability share. for

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

Steve Budorick

delivered we messages, strong with above share the a our FFO key $X.XX guidance. our quarter Summarizing you. midpoint Thank per of

started leased rate Our the highest which in we is segment reporting Defense/IT since XXXX. segment is XX.X% the

midpoint our by full great XXX midpoint cash raised year retention in We quarter. a property points XX.X% We renewal to of basis guidance, of points confidence NOI by by guidance rate driven year full leasing. our the our demonstrating basis raised same first XXX the

square vacancy achieve track on XX,XXX year our executed and leasing We full to target. of we feet are

strong, XXX,XXX feet. remains leasing leasing and vacancy and with pipeline development ratio XX% at pipeline leasing a Our at activity a square

the an request the increase $XX leased a over Our developments NOI budget fiscal active which or over a year additional nearly prior next year-over-year XX% years. for increase billion, few strong X.X% feet two of years. X.X trajectory million XXXX near growth are administration's proposed XX% follows provides The which square

pipeline track deliver our on raised XXXX development annual And dividend FFO are of XXXX. XXXX, per but we We forward. by equity in of compound and expect modest growth expect to and going component we growth the X.X% X% our self-fund roughly share to between FFO

contractor. million, So campus, -- a questions. sorry. Redstone ceremony a over before for the billion XXX,XXX $XXX of finish at building with total feet, quarter build-to-suit an defense for of cost Gateway, attended a top anecdote, Earlier we open developed the two for up The they this we in a delivered let and month, which me down $XXX fourth square ribbon-cutting they were totaled XXXX properties at line

our at our perform often While these to it to to over the the facilities of the be discuss work tenants defense our and importance we a auditorium. campus X,XXX our management nature laboratory, will employees watch expand missile center tenants reinforce and This buildings a security. of really The trips whose an mission-critical program work like capabilities. contain our skip nation's home and space that national mission data facilities, missile office is design space, integration, engineering XXX-person primary

a from a of This such to critical adjacent role supports home. facility, country. that in work vital a creation government cannot the is play that with be advance missions great that, mission-critical defense of proud and it driver incredibly example to our performed space supporting that is demand work requires a in secure We're specialized

contractor relationships with support tenants infrastructure, our appreciative government security our We defense missions. providing them national of and to critical and are their facilities greatly

operator, And the that, questions. for call please up with open

Operator

first JPMorgan. Anthony [Operator with comes from Paolone of line Our question Instructions] the

go Your Please line ahead. open. is

Anthony Paolone

you. Thank

expirations half the feet you different half with what being or you're trends and there over talked talk Can broadly seeing that XX,XXX there. the just that's about might of smaller And you more high square be just outlined we roughly that other about of things tenants? that your about So expirations? watch the retention should any than half

Steve Budorick

in and larger. get to block But factor have that No. going mind And year. we smaller performance The as high overall office retention target that we for on do of Defense/IT, XX of the at retention do as got suggests XX,XXX in the bear we back square XX.X% significant we're rate. tenants in year-to-date XX.X% the just office feet regional regional the or midpoint is later another expectation in with a

Anthony Paolone

is planning, or terms Okay. starts the this what's we take to in question, for it think seems rest Got of just need then year, start thinking your like, pipeline it. the should to other development Because that existing that? of pretty full. goal, about something in you And the how about

Steve Budorick

think build-to-suit I XXX,XXX scenarios additional over the over locations of Defense/IT We've the put square square center shell inventory. a got could one another feet, correct. most That's, multiple data available the XXX,XXX starts is alternative There's Arsenal. feet, Redstone little some which is in us our in and that likely

Anthony Paolone

Okay. Thank you.

Operator

and next our you Thank moment for question. one

comes question Blaine Heck Wells the next Our from of with Fargo. line

Your line is open. Please go ahead.

Blaine Heck

Good Thanks. afternoon. Great.

seems guidance. it's I kind retention It if move FFO guidance just the same-store that Just any But guess, starting NOI I'm early than there like movement you point? room on year. guys at the this wondering was other interest up in guess expectations. rates I other factors in and conservative there were given kept that of to

Anthony Mifsud

weren't. There

of portfolio, in make retention first well that we the the quarter, expiring I with trying what in same in the strength office think as performance a we did changes our the the were of to was leases. communicate as as result the

the one really think component of that variable control have rate I interest. no we is, forecast the over

at almost the XX the the projected for Every of through the interest balance from SOFR at will additional points down expense. -- year if basis to in about impact end the go it's beginning interest change of is look that our the doesn't an occur the of May where is, expense. points, XX $XXX,XXX you that interest year, projecting beginning be basis would of in expense, it When at change of

the point point rate year, will can where later not confident those this of -- at So happen. that actually at that that are the assumed be in we reductions a we're year

Steve Budorick

numbers. conservative general, we out put to like In

quarters interest And two and adjust so left still results that the quarter flow rates first remain to expectation, stable. through if there's

Blaine Heck

at think more kind opportunities to repurchases. you even maybe reward of in share these and how Okay. risk you investment was hoping I acquisitions environment, a profile, decisions Do That's broadly investments evaluate bit you're from fair. volatile little a of Steve, about could much any attractive talk different point? you capital thinking this as about, provide approaching development more allocation this

Steve Budorick

locations, we'll value through somewhat interesting continue value could Well, our at over deliver took continue is capital that that There last acquisitions remain development I an few years, acquisition CEO. can incremental as new believe it have look development in we been since been the the looking allocation has at opportunities and we a defense placed priority our to in some, the to best for seven marketplace. to to the through to to of But is very development, do creation, superior through shareholders we shareholder what and process. disciplined, high maximize

Blaine Heck

future? us And side to center Steve. give to can latest of in guess helpful, and data be very could I whether That's on the that to maybe point, that your availability develop that continue and issues around you costs, impede ability the power development thoughts your business land more

Steve Budorick

and Northern more William center Prince So, the which the we so unquestionably data the limit land, grow going availability but power the Virginia serve the of of is that availability market opportunity capacity is to to in overall County.

of years progress continue continue secure customers But than identify five we're opportunities in ago. will be the pretty to we if with So, harmony find book rate see and solutions our we will it our for we we're was and I lower say to that work have for confident going development and shareholders. developing additional think to them can to continuing

Blaine Heck

Great. Thanks everyone.

Steve Budorick

Thank you.

Operator

you. Thank

Citi. comes from Griffin the Our line Michael with question of next

ahead. go please open, is line Your

Michael Griffin

reach defense they go in filling budget. Great. of clip? that talking you're Steve negotiations, an could sense adversely that with Thanks. the about if around prepared that kind of growth Do impact can't debt I any the the to XXXX? agreement I fiscal the remarks back impact want to have mean budget the Congress, you

Steve Budorick

defense and to coaster we're to is unquestionably. be ride roller fencing the exactly And a and increase. consensus broad that like crystal to or in September project that position to clear So, to going no through one getting it's House to to it's but of Senate between look predict has -- going what is the area the President, continue spending the

I'm to we Ukraine global say today. that anything I to face spending, referring meet defense environment when not the pertaining And to threat

budget, can't be you things that on interesting So, the I consensus tell it in has is defense what But will be will to broad there in. place. be invested

Michael Griffin

may I then Maybe there? is How Redstone. I fence? And space opportunity turning helpful. you've to been That's know go you. [indiscernible]. big this the there. some business winning be from we as noticed on behind you've got Got build set? some to just demand as Any update coming entitlements well this

Steve Budorick

square a million development that additional is over we feet outside about inside defense have characterize overall, capacity of of would of the inside I third So, X fence. and

facilities of see Timing significant enhanced or new those in marketplace. meet clear the to to continue of opportunities in is some missions for crystal size capabilities We new respects.

Space Air times ago. choice. to Arsell and and that's decision and a very probably decision With we of prefer of are as decision going really senior a think what point states of And challenge the would challenged basin from out been it's years comes the regard the matter number one review multiple I in It's that there The hands But commander to at three this each the there. go made Force Redstone Command, and four on every it's for the understand. political was time.

timing. predict can't I So

that for a bit Alabama, -- I market and it's a in think finalized will overall big be it if there. company be a it of there'll be benefit our I think will opportunity to quite

Michael Griffin

XX% the mortgages unencumbered. you. assets think, hand you your portfolio. Anthony, lastly on back with regional of then office being Are about you if keys encumbered I it just talked like of the office regional and Got And properties on the potential? as any

Anthony Mifsud

the regional office portfolio in assets the All of unencumbered. are

any no those mortgages of properties. there's on So

Michael Griffin

Thank it you right. for me. from your time. All That’s

Anthony Mifsud

Michael. Thanks,

Operator

our for moment And question. next you. Thank

with Camille Bank from America. next question comes the line of Our Bonnel of

ahead. open. is line Please Your go

Camille Bonnel

Hi.

you around what the to earlier the change by FFO this driving on question change? driven variability, the an upper interest on following was To Just clarify guidance. can driver up rate range was or of speak

Anthony Mifsud

we – interest really got rates don't were penny end higher driven of quarter would there. expect the books would The which the to be us if that get one end the to top even interest that that that the rates in of was reduction drivers we've a us get range -- dramatically would that by decline the that the at fact we to

Camille Bonnel

my questions it. Thank of Okay. you asked. clarifying for have been Most

for that's So it me.

Anthony Mifsud

Thanks.

Operator

Thank you. Tom from our BTIG. Catherwood of next And question. line And one with moment for our the comes question next

Your go open. Please line is ahead.

Tom Catherwood

Thanks everyone. there past now you've components carving with off and out build other good Redstone, afternoon, in the some Maybe campus that is sticking complementary any to thought of for Steve uses. continues accelerate, to mixed-use parcels the across the small whole added kind some

did of the in either added hotel I back some think XXXX. I was XXXX think you or was this that it with

Steve Budorick

Good question.

development. government It beyond ultimately have in. the more value our customers around of So employees -- we'll the our land any But we daycare lease. contractor is to anything use and hotel development of support on land deliver beyond did year the to We that had rest second retail we to development. invested plans we're some with for that relevant should -- -- convenience of enrich service And customers. defense land facility U.S. that we do lease hotel no leasing but retail-oriented our will base. end, also a to under did I good for support be the a which do That the a had think of

Tom Catherwood

I into appreciate of the And those do then that re-leasing some Steve. higher coming up it. second-generation roll? And first leases soon. your guidance? think factor same-store When is the leasing did center expectations I to of round shells those maybe pivot Got over NOI data

Steve Budorick

And just our same it don't on renewals. -- I'll NOI. ongoing well tuned, into office negotiations factor we our say did the change in first stay not I but have

Anthony Mifsud

end The year. first the lease on that matures of is at this

is So one XXXX. one that any be ventures. renewal NOI Blackstone in would of standpoint, the is until impact an -- of our property be from that wouldn't And

in and impact rent So the only would XX%. that the of change for our us be

Tom Catherwood

Got it. Understood.

doesn't and on for And you it comes talks and then guys about but distressed is lots impact when this last obviously, probably will office. of opportunities to distress follow-up We that. me, one

in office is I and to kind the additional some that that distress portfolios, to your different DoD items in very opportunities contractors. se there may or year Now add to than opportunistic leased be acquisitions expect But or very, your are whether or some any or per wouldn't within you're markets, so? land of think you it's be tuck-in next that there tracking

Steve Budorick

Great question.

such for So we are keeping our an eyes peeled opportunity.

requirements. have when find to our fits yet We that

Tom Catherwood

Got it. That’s it for Appreciate me. it, guys.

Steve Budorick

Thanks, Tom.

Anthony Mifsud

Tom. Thanks,

Operator

[Operator ISI. comes line you. Evercore with Steve next of Instructions] the Thank from And question our Sakwa

is open. go Please line Your ahead.

Steve Sakwa

Thanks. Yes. Good afternoon.

of pointed lot the only a sector, on defense well, leased. obviously Unfortunately, out Steve, XX.X% very regional doing So lease. focus you assets XX% as IT the is almost which six are

get sold, the guys hoping talk and that that maybe you catalyst I not of a the try office. the So, do, regional ultimately assets. but about these that's to And easiest to seeing which environment you're I little you're speak the thing demand in seeing kind the was just exactly could on is know what demand regional in bit today's the side of

Steve Budorick

We for when did our XX.X%. built. leases office two pipeline regional about square Believe added office the quarter or at is regional is in not the the it occupancy that space XX,XXX feet in of sign Sure.

that final decision the think So too tenant out with them. to there a there that opportunity good some effectively we uses we $X,XXX. a compete can but It's to lease. considering tenant. there's the some for, optimistic, in and anxiously down now compete are land buildings competing their that have to overly we'd decision larger been be marketplace that that sign. await that's for love which We We're We is early for we're canvasing can

Steve Sakwa

is up that Washington sense D.C. on any stronger little in in the price of or thoughts or Baltimore you or tenant. would a And demand that

Steve Budorick

a availability there's the pretty profile demand trophy competes a activity volume quite office we segment. From But is right I it's that office our of to those interesting. very supply, move I in expect a favorably are asset below And with opportunities prospect the perspective, D.C.'s XX% segment, quickly. believe we ugly now. for we've Baltimore. trophy except very segment. So don't diminishing that think in to of deals got couple have bit larger availability other And

Steve Sakwa

you And yields with your extent I on you've But extent on of you costs. kind know move of the data can the at some development that looking to shells just then of forward Okay. data center with IT, maybe the float cost happening remind side? IT. shell that us are development kind the least another at historically to and center on some what is side, might defense What today said yields or you on development with costs the

Steve Budorick

have costs our our quarters we drive reporting pretty change call target that were over rents up maintain on XX%, year-over-year been materially range in buildings development office was that stabilized to two have XX% we last and So our able to Two the about it cost. with quarters. yields ago in

with to months cost returns with center than our to yield are We XX achieve say we've capital. of lens to our And bps year-to-date. a that higher cost say trying of we increased better discuss return it that opportunity look want But the I our really to shells, did cash increased achieve yields. don't I Data commensurate with same cash targets XX capital. one at build-to-suit was would our And and is try ago. elevated Defense/IT commensurately

Steve Sakwa

guess data the see I Virginia given your to other And ability in Loudoun I of sort trip find do talked D.C., I needs centers? just you but today, power larger your County locations question. to the about last issues know for customers' this supplement help area guess we in Northern the in during maybe

Steve Budorick

we're see It's but going parcels don't on working availabilities. talk We're preliminary couple right about we you're now. creativity because contract working going little land on think more to moderate-sized be several. – are to moderate a under a a I but require them It's not more large little that

Steve Sakwa

for Thanks. it That’s Great. me.

Steve Budorick

you. Thank

Operator

you. back to I Budorick like would the over Mr. to Thank turn for remarks. closing now conference

Steve Budorick

you, our call Thank for all today. joining

We are in our offices.

us. for you through Thank very a joining coordinate please if like follow-up would much call. Venkat, So you

Operator

Thank participating call. quarter XXXX today's you first Properties results Office for the Corporate in This Trust presentation. concludes conference

day. disconnect. now You may Have good a

COPT Defense Properties (CDP) 28 Apr 232023 Q1 Earnings call transcript