Q4 2019 Earnings Call
Welcome to the corporate office properties Trust fourth quarter.
In year end 2019 earnings Conference call I saw a reminder, today's call is being recorded at this time I will turn to coal over to Stephanie Krewson Kelly C O P.T. Vice President of Investor Relations Ms. Krewson Kelly. Please go ahead.
Thank you Carmen good afternoon, and welcome to cops conference call to.
Yes, fourth quarter and year end 2019 results as well as our guidance for 2020 with me today or Steve Budorick, President and CEO, Paul Atkins Executive Vice President and COO, and Anthony Mifsud, SVP and CFO.
Reconciliations of GAAP and non-GAAP financial measures management discussions on this call are available on our website <unk>.
The results press release supplemental information package and the results presentation posted on our website.
Before I turn the call over to Steve Quick reminder, that forward looking statements made during today's call are subject to risks and uncertainties.
Which are discussed it like that or FCC filings.
Actual events or results can differ materially from these forward looking.
These statements and the company does not undertake no duty to update them.
Steve.
Good afternoon, and thank you for joining us.
The company had a tremendous year in 2018 meeting or exceeding over business objectives, including operating leasing government leasing.
Renewal leasing in retention rate.
New development leasing at record levels capital recycling.
And levels and development investment.
Importantly, or treatments position the company to deliver wireless growth in 2020.
Gross.
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Yes.
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Yeah.
Yes.
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Yeah.
Through.
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Yeah.
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Place that suggest the 2021 defense budget.
Increase by another 2% to 3%.
[laughter] all five of the demand types, we had been discussing since the defense spending increases.
Since then 2018, they've recovered pretty solid achievements.
Benefit our shareholders.
Last year Redstone gateway emerged as our fastest growing defense like T location.
When we deliver the six properties under development.
The park will contain 1.4 million square.
Our feet of highly lease operating properties, we have great momentum in our leasing solid support from the defense space and law enforcement activities located on the Redstone Arsenal and have strong indications that additional opportunities may emerge in 2020 and 2021.
Now, let's discuss the details.
We capture demand across the portfolio with excellent leasing achievement.
4.9 million square feet of total leasing was the highest volume ever exceeding the 2000 ton record by 600000 square feet.
2.2 million square feet of development.
Leasing was 1 million square feet more than our prior record achieved in 2012.
And our 422000 square feet of development leasing with the government.
Our third highest in our history.
Our strong vacancy leasing was driven by defense industry expansion.
As defense.
He tenets committed to expansions to accommodate mission growth.
Rigorous was incremental in nature and widespread throughout the portfolio.
The 784000 square feet a vacancy leasing.
It was the highest volume since 2000 ton.
And consisted of 91 transactions.
With an average deal size of 8600 square feet.
The defense missions, we serve are now well funded and addressing pent up requirements.
In the past two years U.S. government is leased 417000 square feet and our operating properties.
We have two markets words.
Man is outpacing supply and where we have built on spec to create inventory.
Over the past few years, we've delivered three spec buildings in Huntsville, and one in College Park at the University of Maryland, well for 100% occupied.
We started to the fifth spec building in September in College Park, which is already.
45% lease and then November we started or six spec building 8000 read out road and Huntsville, and we're in discussions with multiple contractor prospects.
During the past two years defense contractor demand for new facilities is also recover.
And we've signed five build to suit.
Pre lease transactions totaling approximately 600000 square feet.
Adding nine data center shell build to suit projects containing 2 million square feet. Since 2018, we've completed 14 build to suit and large pre lease transactions totaling 2.6 million square feet.
Additionally, the government has returned to executing on long term plans for new facilities and our secure campuses.
In 2019, we executed 380000 square feet of government leases for anti terrorism force protected buildings in secure campus locations.
As soon as a 340000 square foot preleased for it over to see.
At a 40000 square foot lease at 100 secured gateway.
Since the beginning of 2018 and including the vacancy leasing we've completed over 800000 square feet of new government leasing.
We expect continued.
Continued strong leasing throughout our portfolio. Our initial development leasing goal for 2020 1 million square feet as level person higher than last year's initial goal is supported by the 2 million square feet of opportunities, we have and our shadow development pipeline.
Heavy next Q.
Transactions that more than doubled our initial development leasing grow.
We increased our capital raising commensurately to fund those opportunities.
Modest dilution from last year's asset sales will temper this year's the FFO growth to around 2.5%.
However, the incremental EBITDA from well leased.
Developments, we placed in service this year and next we will produce robust AFFO growth in 2021.
With that I'll hand, the call over to Paul Thanks, Steve.
We ended the year with strong leasing and operating momentum.
Fourth quarter total leasing of 659000 square feet included 160.
2000 square feet of vacancy leasing that increased our core portfolio, 95% leased at year end.
60 basis point gain over the started the year.
The largest increases occurred in the National business Park, which improved by 190 basis points and is now 91% leased and in our Navy support sub.
Segment, which improved by 210 basis points ending the year at 95% leased also.
During the quarter, we completed 158000 square feet of development leasing.
You list the aviation leased an additional 47000 square feet exercising its expansion option for the remainder of 8600.
Gateway and expanded the size of 7600 advanced gateway, increasing its fully leased Redstone campus to 366000 square feet.
We booked at 25000 square foot lease with the cyber security tenement tenant at 4600 River Road, our current spec building at the University of Maryland and.
Morrison Forrester leased an additional 20000 square feet at 2100 Dell.
Office component of which is now 57% pre leased.
For the year, our 2.2 million square feet of defense IP development leasing included 1.2 million square feet of data center shell build to suits 548000 square feet.
Redstone Gateway and 422000 square feet with U.S. government.
Our same property portfolio was 91.9% occupied at the end of the year, which was in line with updated guidance that incorporated portfolio composition changes equating to a 70 basis point decline.
The change in portfolio composition.
Vision during the year resulted from our decision to joint venture 1.3 million square feet of data center shells that were in our state same property portfolio and to dig decommission D C.
We continue to make long term strategic decisions regarding renewable economics to managed capital costs eliminate downtime.
And maintain occupancy.
During the year, we completed 1.9 million square feet of renewals locking in 2.4% annual rent escalations.
Last year for large renewals totaling 442000 square feet roll down a weighted average, 13.6% and drove our cash mark to market down 5.8%.
30 basis points below the low end of our updated guidance.
Each of these for renewals rolled off long term lease leases and renewed with an average term of eight years.
Excluding these four transactions the remaining 1.4 million square feet of renewals in the year roll down an average of 2.6%.
During the fourth quarter.
After one of these for renewables drove down cash rents 8.4%.
Hey, 140000 square foot tenant was rolling off at the 10 year lease.
Tenant recently won a new government contract and needed to more than double it space, we renewed them at the high end of market and capture their expansion, which more than doubled their footprint the tenant now at least.
Leases 310000 square feet for new term of 10 years.
Cash rents on the remaining 200000 square feet of renewals during the quarter rolled down 2.7%.
Renewal leasing in 2020 look strong the 1.5 million square feet scheduled to expire are significantly less than recent years volumes and we.
Another strong tenant retention rate of 70% to 75%.
In April we have one large nonrenewal at 60, 721, Columbia Gateway, which we built in 2009 for a single tenant user.
We already executed a lease with the defense contractor for one floor, leaving 100000 square feet the lease.
We are implementing.
On a proven amenity enrichment strategy as we convert the building to multi tenant use and expect demand for this class eight product to be robust.
As discussed on recent calls at DC six our wholesale data center Manassas, one tenant gave back half a megawatt last week last month, and we expect another tenant to give back three quarters of it.
Megawatt in July after which we expect no further contractions or terminations.
We are in negotiations with the 11 in a quarter megawatt user is lease expires August 1st and we anticipate a full renewal.
I'll conclude with an update on development activity.
In the fourth quarter, we placed 300.
35000 square feet of fully leased development projects into service, bringing the total for the year to 1.2 million square feet, all 100% leased.
We have 2.3 million square feet of active development projects, which are currently 79% leased and which will increase our core portfolio by 12%.
Among these 13.
Projects, we have 490000 square feet of availability and are currently negotiating leases for about half that half that volume.
Executing on this activity will bring the development proper pipeline to 88% leased.
During 2020, we expect to place 1.4 million fully leased square feet into service.
And to slow similarly leaves the remaining 900000 square feet under development before placing them into service in 2021, and 2022 with that ill turn the call over to Anthony Thanks, Paul.
Fourth quarter and full year FFO per share as adjusted for comparability of 50 cents and $2.03 met the.
Points of our updated guidance.
Our annual results were one cent lower than original guidance the guidance midpoint as a result of higher than budgeted dispositions to fund our expanding set of development opportunities.
Operations were strong as tenant retention of 77% for the year and 84% in the quarter combined.
And with higher operating margins to drive better than expected same property cash NOI growth of 3.9% for the year and 6.2% in the quarter.
During the year, we invested $417 million and development activity, one and a half time as the $275 million midpoint of our original guidance.
In addition to in issuing the final $46 million.
Of our 2017 forward equity facility, we raised $311 million, which was more than double our original disposition guidance of 125 $250 million by selling and 90% interest in nine of our datacenter shells to a joint venture with Blackstone.
Our datacenter shell dispositions, clearly demonstrate our ability to create value through development.
Our 2020 plan is summarized on slides 20, and 21 and our presentation and is straightforward and low risk.
The two dollar an eight cents midpoint implies 2.5% growth over last year's results includes the.
Tenant contractions and Nonrenewals, we've experienced and anticipate at DC, six which equates to approximately four and a half sense of dilution.
Since also includes 1.5 cents of dilution from upsizing, our 2019 dispositions.
We plan to invest between 325 and $375 million in development.
And have no acquisitions plant.
We will continue to conservatively fund our development investment to maintain our balance sheet strength.
To maintain leverage levels, our plan requires between 70 and $90 million that equity capital less than 25% of our expected investment.
As you know we have access to our 300 million.
The one dollar ATM to issue equity, which in light of the value creation inherent in our developments would be accretive to FFO and anybody.
Alternatively, we have more than adequate capacity and our remaining wholly owned datacenter shells to raise the equity from additional JV sales.
The incremental EBITDA from developments.
Waste and service, we'll maintain our debt to EBITDA ratio at approximately six times.
We forecast same property cash NOI growth for the year of one in a quarter to two in a quarter percent driven by moderate increases in same property occupancy modest rent roll downs of 1% to 3% and.
By 100 basis points from the non renewal at 60 721 Columbia Gateway.
Lastly, we are establishing first quarter 2000, 20-F AFFO per share guidance with the midpoint of 48 cents, which is two cents below fourth quarter 2019 results.
The differences due to one and a half sense of higher budgeted seasonal.
Yes for snow removal and utilities and half a sense scent of dilution from selling JV interest in two datacenter shells in December.
With that ill turn the call back to Steve.
Thank you Anthony.
We have two key takeaways from this call.
The first that we expect.
Both in defense spending sport higher occupancy and continued strong leasing across our portfolio.
Since bottoming in the fiscal year, 2015, and including the fiscal 2020 budget.
The duties base budget has increased by $137 billion representing compound.
Annual growth of 5% for five years.
There continues to be strong bipartisan support fund defense and intelligence missions.
Against this backdrop with solid defense growth, we expect to continue to see strong steady demand for new and existing space across our portfolio.
The.
The key point the 2009 teams achievements of laid the groundwork for us to deliver solid AFFO growth this year and robust AFFO growth in 2021.
Last year's development leasing and equity raise.
Created waves of future EBITDA as developed development minutes are.
Placed into service this incremental EBITDA will reduce our future equity requirements and most again AFFO traction, while maintaining a strong balance sheet.
That operator, please open the call for questions.
Thank you Mr. going Rick.
Ladies and gentlemen to ask a question just.
Star then one from keypad to withdraw your question. Please press the pound key please standby will we compiled that Ken a roster.
And our first question is from Jason Green with Evercore. Please go ahead.
Good morning, given the stock's trading at roughly $30.
And you need call it roughly $80 million for development and 20, I guess why not just total ATM down now and not have that something not have that'd be something that you have to deal with moving forward I guess, what's the thinking there.
Well until those calls over we've been lockout Jason.
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Uh huh.
So we we plan to maintain or Optionality.
We may use the ATM.
And we'll do it.
In a measured pace.
And we also have flexibility to either increase the JV or jvs other show.
Okay, and then just turning to the development tab I guess, if we assume that the office projects get an 8% yields and the Datacenters get a 6.5% yield on our math it looks like the currency happy bucket would deliver about call. It $50 million a mental why is that kind of the right ballpark in way to be thinking about this future growth.
That should come from the development pipeline.
Yeah, that's right out of the money.
Okay. Thank you very much.
Thank you.
Thank you.
Next question comes from Craig Mailman with Keybanc capital markets. Please go ahead.
On the margin on renewal.
In April what's the gross square footage on that and.
When does the.
The partial backfill commence.
So it's a 131000 total square feet.
Theres about 100 that won't.
That will come Bacon.
And the transplants immediate which is currently so.
Leasing the space no.
And then what do you what do you think downtime on that or would you guys budgeting is there any capital you need to spend on that.
So I think as Paul as Paul commented, we're going to do a little bit of capital on the ground floor.
Sure.
Produced some of the amenities.
Helped us be so successful with the redevelopment. So this park and its modest I don't have the budget number but a couple million.
The spaces in great shape.
So we expect to be reasonable then downtime.
Yes.
12 months weighted average well, yes nine to 12.
Okay.
And then you guys had good success down Huntsville last year.
And elsewhere.
NBP has been a little bit quiet.
Recently on the 2 million square foot Shadow pipeline how much.
To that to them BP.
Any.
None of the.
Shadow development.
Hi play as well.
The rest of 310 NBP is in that number.
And there's no new projects that NBP.
We built our last bold and I think around 2000.
As in 16, which was 540 NBP.
We initially subleased or lead prelease half of the tenant contracted a bit and where we're making progress filling Matt.
Besides the building set aside for the government and a couple floors. Some 540 NBP.
Highly leased we have we have three parcels that are about 20000 square feet that are bacon.
Then.
10 that are below 10000 square feet. So excluding.
DP 310.
We're well if when we leased NBP 310.
We will be about 95% leased in the probably in the park.
Okay.
Just curious you know you've seen government spending pick back up contracts being put out.
I know things Roas fluid on where we're contracts go but just given how well leased. The park is are you guys surprised at all to not have a demand pipeline.
Therefore.
A new building.
No I'm not surprised currently when one of the.
Dynamics that is.
Occurred in moving around.
This region is been defense contractor mergers over the last three or four.
For years.
Generated some modest reductions and compelled us to.
Backfill those spaces.
So that's absorbing some of the growth that would otherwise drive the next building.
But I wouldn't be surprised at all to see us initiate a newbuilding.
In 2021.
We we call the Shadow development pipeline those projects over the next two years that we think are 50% or greater.
Likelihood of happening so I would I would say that the NBP is.
Has potential, but just doesn't rise to that threshold.
Right now.
That's fair I appreciate it thank you.
Thank you and our next question is from Manny Korchman with Citi. Please go ahead.
Hey, everyone.
Just I know, it's a little early to be thinking about 21, but.
You guys mentioned a couple of times.
And your presentation on the call that the strong growth going into that into 21.
If we just think about the pluses and minuses sort of whats left out there.
What negative should we be thinking about and on the flip side you point out leasing as we tend NBP.
What are the leasing could happen over the course in next few months that would actually.
Helped drive that 2021 growth.
So let me take the hard part first.
I think the one large risks that you should keep an eye on is the renewal at DC six over 11 megawatt of user.
We're in discussions preparing for their extended the term but.
But it's not signed yet and that's important deal for us So would represent a pretty big negative if we didn't get the renewal.
Size that leasing.
We did a lot of at least two last year obviously.
Thats going to those tenants.
Buildouts will occur during the year in Iraq.
We will increase.
And we we projected a nice gain in occupancy over the course of your widespread throughout all of our properties.
Yes, Matt Thanks.
Okay go ahead.
One of the keys is.
Commentary that we gave.
On the developments placed in service during this year and their contribution not just to this year, but on an annual basis next year and that really is what drives our confidence about the gross commentary that we've given on 2021.
Got it if we think.
Attention at that 70, 75%.
You've got the non renewal that we talked about it Colombia.
For the other nonrenewal sort of the non retains if you will how much of that is based on rate versus those tenants.
Not need not planning the contracts not meaning the space going elsewhere sort of.
Non rate sensitive reasons.
I don't think very much of the non renewal.
Portion that we're looking at has anything to do with rates. So it is it is just.
Tenets relocating.
We're contracting or.
Acting in the normal course of business I mean, it's.
We still think our tenant retention rate is.
Excellent and.
But none of it has to do with rental rate.
Sensitivities.
Thanks.
Thank you.
Our next question is.
From Tom Catherwood with BT I'd. Please go ahead.
Excellent. Thank you page nine of the presentation was really helpful. Visual it speaks to the driver behind a lot of 2018 23 in 2019 leasing.
But when I look at 20 220 guidance.
It suggests.
Maybe 1.3 million square feet of new and renewal leasing and maybe 250000 square feet, a vacancy leasing and the bulk being renewals that's down markedly from 18 and 19 is that a reflection of.
Slowing demand in the market or is that just a rough.
Collection of a lower year of expirations and kind of maybe some of your better spaces already filled.
Okay.
You driving that the new leasing or the renewal level.
So I'm not looking at development leasing I'm, just looking at new and renewal if I look at what's implied by getting to a 90.
3.5% lease on your same store.
Got it.
So from a renewal standpoint, we have a much lower volume of maturing leases next year than weve incurred for the last three.
So that's a component.
And then with our portfolio being as well leased.
As it is in many.
Locations, we just terrible less inventory available.
So it's not a matter of I guess asking at a different way are you continuing to see the same volume of demand that you had been for the past call. It 12 to 18 months or.
Or is there have been a shift there.
Absolutely we have similar levels.
We run a we have a process, where we manage all of our.
Potential opportunities every week and that.
Typically has 802 million square feet of.
Opportunities.
From names in tours to prospects.
This study very study as we speak.
Got it.
And then.
In November the FBI formally announced a 1 billion dollar buildout in Huntsville.
I think that even what so far as to refer to.
But as each Q2.
It looks like the bulk of those jobs won't relocate until 2021, but have you started to see any sense ancillary demand related to that move and kind of what is your appetite for expanding their holdings down there or can the gateway fully support the build out that you're seeing.
So we we actually have two leases.
We.
Achieved related to that pivot.
Those businesses are that component to the agency.
To Fort Meade.
We have over 3 million square feet of.
Additional development capacity on our development, there and about 1 million of that is in the secure campus. So we're extremely well positioned to.
To capture any.
Relocating demand should that up to the occur.
Okay.
Understood and.
And then maybe last one from me Paul you mentioned.
The expansion with Morrison Foster over a 2100 L Street.
Can you update us just on the pump progress on the balance of the building a does more some foster has any expansion options, we are holding floors off the market for.
While and then remind us how how your rents.
Kind of comparative projects that started coming out of the ground. After you guys.
Sure.
Well as as I mentioned, we did sign another 20000 square feet with Morrison Forrester.
And that was that a rent that was actually higher than pro.
Up so we're excited about that that leaves 76000 square feet of vacancy.
Of office vacancy left in the building and their expansion options.
Our actually run Theres nothing else being held off the market. They have a relatively limited five your expansion and that after that there is no other encumbrance.
Isn't for 15 years, which we think is a great positioning for leasing the balance of the building.
We are still holding excited and believe in the rents that weve underwritten for the project and have.
Pretty solid activity for the balance of the building so.
Yeah.
You may have noticed that we did move the delivery from Q1 to Q2, which is really just a two week delay from the end of March to mid April but it will have zero impact on Morrison Forresters lease commencement dates both for the original space they leased as well as the additional floor that they took.
Got it and then the balance the space that's left is that.
Got it towards the bottom of the building or or is it disbursed throughout the building.
Five.
So they're taking 10 through six.
For three into are unencumbered half of five is 15 year space.
And have a five its five year.
I have to six year space of which we are going to we have a prospect for that but we're also going to move forward with the specs a spec suites program up or two suites, which has been as you probably know enormously successful.
In DC for the last bunch years.
Got it thanks, everyone short.
Thanks.
Thank you Sir our next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Thanks, Good afternoon to just a follow up on Huntsville can you guys speak to the economics on those developments in the magnitude of the difference between the yields are margins that you.
And can can achieve on those projects versus the other opportunities that's kind of making you guys much more active in Huntsville going elsewhere.
So all of the developments, we've completed has cash yields north debate.
In Huntsville, so they're very solid.
Agents, a typical floor, where office development programs, we're achieving north debate at College Park.
We have been more aggressive on data center shows I think we disclose their yields in the past.
Good typically about 675, but those.
As are valuing that are five kit.
Okay. That's helpful. And then sorry, if I missed this but can you talk about the interest and honored secured gateway and 8000 right out road, which I think is where most of the only spaces and your developments there at this point.
So were.
Turning to lease for the major component of 100 secure vacant.
Secured gateway vacancy.
In recent supplements, we've increased the spend in the size of that building to accommodate.
Identified additional need.
But we expect probably in the quarter, we should be.
The 80 ish percent leased building.
And then secondly lease by year end right.
Oh Im at 8000 will probably go we have we have a lease out forward and so thats, a 100000 square foot spec building delivering in November of this year.
We have our.
First lease out with a well known tenant and we have more contractor prospects.
Then we have space. So were we expect to be very successful.
During the course of this year and stabilizing that asset what we're doing with 8000.
Gateway is.
[noise], we've improved the spend to build this building them then immediately before the foundation for the next building cutter delivery time.
So as we.
As we finish this lease up will be in a position come right out of the ground very quickly through the next month.
Okay, Great and then you guys touched on the four large renewals that drags the average cash rent spreads down in the second half are there any similar kind of specific situations, where you have large renewals that you expect just the.
Big drags in 2020.
No if you look at our.
Change in rent guidance, it's minus one to.
The industry, which is really the way the balance of the portfolio.
Performed excluding those four deals.
And they were all.
Strategic tenants that we wanted to keep coming in a very long leases one of those tenants had been in their space for 20 years.
Got it thanks guys.
Thanks, Brian.
Thank you.
Our next question comes from Dave Rodgers with Baird.
Yes, good afternoon, Paul I guess, you've answered that maybe a couple of different ways, but on the 2 million square feet of development demand that you're seeing.
As opposed to maybe asking about.
Market can you tell us how much is government how much is data how much is defense and then maybe how much might the regional or any.
About half of half of that demand is data center shells and this has over the next two years.
So that's a pipeline of that.
Another large component.
To have it is additional demand that where you see in the pipeline at doubted Redstone gateway and the rest of it is scattered amongst.
The Fort Meade BW corridor and.
In downtown DC.
About 20% of its government projects.
20% government. Thank you and when you say demand in DC or you just talking to 2100 al.
Or is that more there okay.
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Steve I guess going back in the dispositions versus equity I think in one of the for the press release your comment with no need to really do equity it sounded like maybe just in your comments earlier that that.
Maybe more at the top of mind, I guess, how do you away that versus the remaining datacenter shells first and kind of saving equity for maybe a higher price in the future.
Well as Anthony pointed out we're trading today.
Issuing equity on me, Tim will be accretive to both FFO and then a b.
So I think it's a good it's.
Hey, good choice for us.
Well, we will look at the value in those data center shows kind of like to think of them as long term capital reserve that we can tap in the future when we don't have access the equity.
So I would or would that be surprised if you.
As you start to draw on some capital would be ATM.
Okay fair. Thanks for that and then I guess, maybe going back to the 21 guidance you used the term robust quite a bit and the development pipeline explained a lot of that maybe deeper Anthony as you look at 20.
It looks like maybe your guidance implies that.
And then ramp between the first quarter in the fourth quarter or something to that effect.
Much of that ramp do you start to the second half of the year, how does that kind of play out in 2020 in your mind as the development comes online.
Yes, the ramp is really backend weighted so you'll see some of it into third quarter, but the majority of it that will.
Get to a point where.
It will represent a fair.
Representation of what we do in 21 in the fourth quarter.
Okay. Thank you.
Thank you.
Our next question comes from Rich Anderson with S. M B C.
Hi, Thanks, first I want to say I think the disclosure I haven't said this before is like one of the most user friendly for my taste and I just wanted to.
I mentioned that I think you do good job with disclosure.
Quarterly.
Tough on my tone or cartridge, but that's another thing [laughter].
But now an out of my questions.
First one is.
You've kind of that seem the defense.
Spending rightsized sell a few years of back and now it's it's growing based basically at 2% per year I'm wondering when you think about the long term prognosis of your company.
How do you and once you kind of get through all this development you know.
EBITDA coming online next year in hereafter is the same store growth profile, you know going to be anything better than sort of whatever the defense budget is or is there some way to stay at an at or above 3% when your key demand driver.
Or is only growing at one or 2%.
Well, our our rental levels are not per se related to the defense budget.
Percentage increase or really driven by the market in which those buildings operate.
I would buy.
For Kate to sort of growth and budget from growth in rent.
Rental local local issue driven by supply and demand.
We.
Last several years, we've typically rolled down 1% to 3% and the cash rent.
Basis, what we have to remind people as we have embedded growth in our lease structures that over a long period of time.
Can exceed the growth in the market rent and that's what really drives that 1% to 3% reset.
Average escalators or 2.4 to.
2.5%. So on average we take one year stepped back and then we progress forward with growth through the portfolio, but I think our portfolio on our rent structures burning spiked.
Condition, where we can spike rents, it's a 2.5% growth portfolio.
Yeah, Okay I mean.
Thats fair.
Get yacht, it's a market driven phenomenon, but thing and the other day.
Certainly the defense spending influences the market one way or another.
In terms of.
Same store.
I should know that DC six is not in the same store pool correct correct, yes.
What if it was like.
I know, it's a lot going on there, but what would what would be the impact.
On same store if it was included.
Well, yes, right and then what the percentage impact would be but if you look at the disclosure that.
We put out last night DC six.
Generate a little over $15 million worth of cash NOI in 2019.
Our guidance for that property that we also disclosed last nine just between nine to 10 million for 2020, so that asset alone is.
You know forecasted to go down call it five and a half million dollars.
The midpoint.
In cash NOI, so off of a base of.
$250 million were the same office cash NOI, you're probably talking 2% okay.
And so it'd be a 2% down this year, but then again, you're going to get a reversal of that when we re establish income in the vacancy we.
Back.
Right and Steve I appreciate the.
The candor on the you know the the core tenant there.
Is the guidance, assuming sort of a flat.
Renewal or do you have something baked in where you have debt downward movement on the on the rent at DC six well we've.
Adjusted conservatively I'll leave it up I don't really want to negotiate that at least in public.
[laughter].
All right.
Last question for me is more of modeling question, you have kind of a funky straight line rent cadence to what would sometimes up sometimes down.
I'm curious what should we be modeling for straight line rent in 2020 and beyond.
For 2020 Oh.
Model about.
Two and a half to $3 million in the first three quarters and slightly higher in the fourth quarter as some of though.
Leases.
Since from the new leasing from 2019 as well as one of the developments coming online.
So that total of about.
Call it.
$10 million to $12 million is probably a good run right.
Our cadence this year was impacted a little bit by some.
The one of the.
Contractions at DC, six Oh, Okay add a termination payment that showed up as a termination payment.
But then it had a straight line rent write off as a result of the the contraction on that half on that one full megawatt so.
It had some.
Odd things running through it this year.
Okay perfect. Thanks very much.
Thank you.
Our next question comes from John Canny with Stifel.
Great. So this is a very actually very impressive guidance, because what you're saying I think is that it's going to ramp in the second half.
About the same time DC six falls off is that fair to say.
Probably not exactly time that way.
It will ramp slightly in the third quarter.
But by the fourth quarter will have the full impact of the decline in DC six as well as the ramp from that.
Relevant placed in service.
Okay.
Sort of all along the same lines, Steve what's is there any lease term fees, our land sales and 2020 and whats the big picture on land you still got about 290 million of land, which is.
Very big number relative to.
Most people this day in age.
Okay.
Oh, well the land that we own John is.
Associated with the priority defense missions.
And we like.
Long term holding the Atlanta crude.
Up to the two weeks.
And as needed sports submissions were aligned with.
We cleaned up a lot of a smaller parcels that the company had accumulated.
Over the last couple of years really don't have much left cleanup.
And with respect to termination fees in 2020 were sort of budgeting art.
Typical $1 million to $2 million.
But no more land sales.
Not in a forecast for 2020, when we think about what we have left to sell in terms of non strategic land.
Gets us small parcel offer Dorsey road, and our land up at North Gate.
But.
That's.
Really it because we sold the the farm in Frederick in the fourth quarter last year.
Okay, and then looking at that 2020, you're right.
By the way great disclosure Stephanie Youre.
You are in place rents are $35, then 40 cents, including $47 in late.
Glenn in San Antonio and about 34, and a half at Fort Meade BW corridor.
Those are pretty big numbers.
Thank you can renew these things that.
Pretty much flat on a cash basis.
Yes, absolutely.
Okay.
Good afternoon.
Thank you John just so you know out of the San Antonio rents those are two of the building.
In our campus there that leases expire this year, each or 125000 square feet.
And the rents that we disclose our that the full base rent plus recoveries from the government.
So there is.
That's the reason there at such high rents and Thats.
<unk> expenses that the government asks to operate the facility down there so.
So we expect that those leases to continue to increase.
Yes.
Nicole increase in our government leases across the portfolio.
If you pull those those two buildings out the the average rent on renewing space is about 33 Bucks a foot which is in line with.
Accomplished in the fourth quarter this year.
They don't have call center in that building do that.
I'm not and no not at least [laughter].
[laughter].
All right. Thanks, a lot yes. Thank you.
Thank you Sir our next question comes from almost tile Okusanya with Mizuho.
Hi, yes. Good afternoon. So during the quarter, then both strong renewal rate, but again negative cash.
Spreads.
Just talk a little bit more around you know the strategy of you know and trying to renewals, but kind of ticking.
Little bit less Rand.
Yeah, exactly kind of buys I get the long term MPV of that but why we continue to kind of have that situation just given.
The market seem to be very strong.
Sure. So, let's just start growth fourth quarter release.
The 140000 square foot kind of rolling off for 10 year lease where that rented grown a two and a half 3% for decades.
We renewed that tenant at.
Market and at the higher end market.
But the rent growth in the lease structure exceeded the market growth.
Moreover, the tenant also needed more than 100% expansion.
So, yes, we took a little bit of a hit on the rent for sure, but we doubled their.
These capacity.
And importantly, there reconfiguring their existing space and their expansion.
To serve a very high priority mission that.
We have great confidence, we'll be in that building for a very long time so.
And then one last point if you look at.
At our full year mark to market.
The change in actual rent is about three and a half million dollars that we lost.
And if you look at the average rent that we put in place there's about $33 a foot equates about a 115000.
Square feet of non renewal.
So.
Getting the renewal is far more important from an AFFO standpoint.
Then, losing the tenant having no rent through downtime and then pony in the pony being up big tenant improvements to replace.
Uh huh.
And long and as that lease matures the rent will again growth the same kind of structure.
All right. Thank you.
Thank you.
Our next question comes from Jamie Feldman with Bank of America.
Okay.
Great. Thank you.
I mean, I know, we've seen that Jed I in the press and then.
Cloud contracts can you talk about.
You're expecting to see in terms of demand a in different submarkets from that and then other any other major initiatives that have been announced that have yet to kind of flow through based demand.
Well no both of those issues Theres a lot of clarity so jeopardize all tied up in federal Court and the government accounting office Bill.
And.
There's no tone when that will get resolved and there with regard to space coming and there's just been knowing now.
Element of.
And affirmed selection for the command.
And the supporting elements that could be a multiple basis for space command.
Okay.
I think that will play out over the next 12 months.
Okay, and then what about the there was there another government.
Contract.
Before I guess Theres Big Theres Big one.
Yeah go ahead, Paul Yes, theres another almost almost the same size, if not slightly larger than Jed I.
That's been out there, but it has not been awarded yet and.
Again, we have very little insight as to its impact on.
On the market.
And I don't think in any way, it's affecting the continuation of our data center shell.
Relationship and pipeline with our customer.
Okay.
Then thinking with data centers can you just talk more about the the two tenants that are giving back space.
Where are they going in is there risk you start to see that more in the portfolio.
So we only had one tenant move out of the building that was a gaming platform that.
Was that that successful the rest of just.
Reduced the load that there.
Leasing.
And their footprint. So the good news is if there is good news.
Yes.
We were occupied to level, where we had very little floor space raised floor space.
To Lisa will now have a nice contiguous block.
To compete for the larger.
Demands that have been in the market, where we just that had enough capacity to fulfill them in the past.
Do you think there's other tenants have excess capacity as well or every space no being pretty fully utilized. This is it all beliefs is that.
Rolled from the original leasing.
Okay.
We do have an exciting prospect that were not can sell out about we.
We hope to have some news in the next quarter too.
Okay.
And then from this pickup in demand and what kind of rank growth have you seen in some of these submarkets I guess, northern Virginia, Virginia, specifically, but.
And you could talk about some of your.
Others.
Yeah actually northern Virginia is.
Picture is pretty solid.
Theres been our assets and Tysons corner has seen roughly a 10% increase in rents over the last 12 months. So it has to do it the location aware that those assets are walkable.
Metro and basically right at the foot of the borough the new multi million square foot mixed use so there's definitely a rising rents both and.
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Tysons as well as Herndon along the Silverline.
Just the amount of tech demand that's emerging on.
The toll road and in route 28, South corridor. So the outlook of our assets in Chantilly in the vacancies is also improving and has significantly improved over the last three to four quarters, So where we have some vacancy.
Out in Chantilly that we're repositioning.
70.
I wasn't square feet software.
Optimal cautiously optimistic about leasing.
And so that northern Virginia, and Tyson turned and in particular is definitely.
Rapidly strengthening corridor.
And then what about something or other submarkets.
I would say.
I mentioned Pax River, as strengthening where a 95% leased.
And getting tight so we are raising rents slightly down it Pax River Columbia Gateway is steady we continued to be.
94% leased and we do have the nonrenewal coming up here.
So I went each lease we sign in Huntsville is literally as the obviously with a new market high.
Yes, So you say I'm, sorry like year over year.
So it's very cheap to operate those buildings, where we're getting rents in the.
27.
$28 range right and couple of years ago, They were 22.
Expenses and taxes are down only $3.
As it grows 27.
Yes.
Alright, great. Thank you.
Thank you.
Thank you as a reminder, ladies and gentlemen to ask a question just press Star then one.
And our next question is from Chris Lucas with capital one.
Hi, Chris Good Hey, good afternoon.
Steve just can you give us an update on the land position you have for the datacenter shells. It looked like it ticked up just kind of.
Curious as to what sort of volume of.
Data Centre square footage you have you know sort of.
In inventory that is not currently under construction.
Yes, so we picked up one additional parcel to create capacity at one of our site.
In the last quarter so.
And we have.
Plant capacity for about a million square feet in three different campus locations.
Some of which we expect to get this year in the remaining next year.
So is as the customer changed at all there sort of pace of demand.
No.
From here for you from for the data center sell sales.
I think overall the pace is study, but remember.
We had a really lumpy year last year, which contributed 2 million square feet development achievement, we completed five leases.
But over a longer period of time I think the average it's going to be right, where it's been.
And then just on DC six I guess the question always comes back to sort of from why are you in the business of owning that kind of an asset.
Given its multi tenanted and it has.
Not sort of core tenancy.
To at least not historically.
Is there a view that at some point here, maybe you get lucky and get.
Funnel leased on that this thing is something that would be monetized or is this is this has become a longer term hold for you.
Well, we certainly don't want to so we don't have maximum value and we.
We have capacities lease we've got a major lease to renew.
So we're going to operate through the next few years maintain optionality thereafter.
Okay, great. Thank you.
Thank you and I'm not showing any further questions from the Q.
I would like to turn the call.
Mr., Paul it's Rick for his final remarks.
Thank you all for joining our call today, we will be in our offices. This afternoon. So please coordinate do Stephanie if you'd like follow up call. Thank you very much.
Thank you for your participation today's corporate office property Trust's fourth.
Quarter, EMEA and 2019 conference call. This concludes the presentation you may now disconnect the call.
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