Q2 2020 Corporate Office Properties Trust Earnings Call
Today's call is being recorded that's just Tom I'll turn the call over to Stephanie Krewson, Kelly feel P.T. as Vice President Investor Relations Mr. Christian Kelly. Please go ahead.
Thank you Kevin Good afternoon, and welcome to cops conference call to discuss second quarter results.
With me today, or Steve Budorick, President and CEO, and Anthony Mifsud, SVP and CFO.
Reconciliations of GAAP and non-GAAP financial measures management discuss is on this call are available on our website and in the press and then the results press release supplemental information package a results presentation posted on our website. As a reminder forward looking statements made during today's call are subject to risks and uncertainties would you discuss it like that.
Our FCC filings.
Actual events or results can differ materially from these forward looking statements and the company does not undertake no duty to update them Steve.
Thank you.
We had another great quarter upper filming guidance retrofit for sure and same property cash and y grade.
And we're on track to achieved the highest tenant retention rate in 20 years.
Phone or existing 2020 guidance with a conservative posture and continue to expect healthy girls and 2021.
All right concentration of U.S. government, Hi, birdied, French tenants and the central Nondefense businesses.
Our for uniquely shrunk credit kishore damages that insulated or operations during the shutdown.
Regarding our operations each over 174 properties I refer to continually during the shutdown.
The company continues to execute our normal workflows seamlessly.
85% of our portfolio houses tenants, whose mission work cannot be performed remotely.
This includes 65% of our space that is either in a secure campus or has gift environments.
Another 20%.
There is other high security requirements.
Most of our tenants have their employees working in rotating weekly ships.
Larger workdays to create distancing so our building utilization is much higher than most other office suburb.
Across sort of 19.8 million square feet portfolio.
Our tenants employees, who have experienced only 41 confirmed cases of covert 19.
Which speaks to the quality of the management practices are operating teams and our tenants leadership.
Right collections remain relatively unaffected by pandemic shutdowns during the quarter reflected 99.9% of expected roads and 99.2% of rents before rent relief.
Joy recollections are extremely high as well.
Totaling 99.3% of expected buildings, 98.5% of rents before rent relief.
Thus far total <unk> combinations granted to address shut down inpex remain below 1% or they realize rotor revenues.
Roughly half the release granted went to retail an amenity tenants in exchange for lease extensions.
These tenants businesses are an important part of our tenant value proposition.
We moved aggressively to help them stay in business.
Total rent accommodations increased slightly in the past month.
Primarily driven by release granted the two fitness operators in Maryland.
Whose businesses earned during longer shutdown center food retailers.
During the quarter, we completed nearly 1 million square feet of total leasing.
And 1.6 million square feet during the first six months.
Our development leasing remains strong and virtually unaffected by pandemic related restrictions during the quarter, we executed 276000 square feet of development leasing.
Which included a large lease with U.S. government at 100 secured gateway.
A build to suit with the defense contractor for 7100, Redstone Gateway and 314000 square foot expansions within our cloud computing tenant at existing data center shows from Northern Virginia.
During the second quarter or development leasing pipeline increased to 2.1 million square feet.
Notwithstanding an early seem achievements during the quarter.
Our development leasing pipeline remains diversified with healthy concentrations of government defense contractor and data show opportunities and we remain on track to meet or exceed or 1 million square feet of development leasing this year.
Renewal leasing volumes and tenant retention rates are very strong as well.
We completed 613000 square feet of renewals in the quarter.
Equated to a strong renewal rate of 76%.
During the first six months, we completed a 1.1 million square feet of renewals, representing an extremely strong 81% renewal rate.
We're increasing our tenant retention rate guidance for the full year from the previously elevated range of 75% to 80%.
The new range of 80% to 85%.
This year's rule rate should exceed or a 20 year record of 80% retention set in 2017.
Lease economics on renewals were in line with guidance in the quarter and for the six months.
Cash rents rolled down 3.2, and 2% respectively.
And annual Escalations on renewing leases averaged 2.4%.
Vacancy leasing is the one area of activity there has been affected by the shutdowns.
During the second quarter, the brokered shut downs costar leasing activity ratio to decline by nearly a third from 75% in February to about 50% in early July.
We achieved 70000 square feet a vacancy leasing in the second quarter, which was 50, 50% of the volume achieved in the first quarter.
And in recent weeks, our leasing activity ratios improved as restrictions east.
Some 2020 activity could or whatever pushing the 2021.
Regarding actives developments, we remain on track with their original completion schedules.
We have 1.9 million square feet under development.
Representing 14 separate projects that are 84% pre lease.
During the quarter, we placed into service 412000 square feet, there were 97.5% lease.
And for the six months, we play 642000 square feet of development into service it was 99% lease.
Before year end, we expect to place an additional 820000 square feet into service that are 100% lease.
So, bringing our total for the year to approximately 1.5 million fully leased square feet.
And represents a total of investment of $344 million.
[noise] My final comment is an update on our wholesale data center DC six.
During the quarter, we completed a new 3.1 megawatt lease where the government contractor that will bring a long term supercomputing contract into our facility.
That transaction increase DC, 6% to 90.6% leased.
Additionally, the renewal process with the 11.25 megawatt user is progressing favorably and we expect to complete the renewal during this quarter.
So in summary, our current operations continued to be minimally impacted by pandemic related shut downs in restrictions or buildings are fully operational and I write collections remain exceptionally high.
Development demand continues to be robust.
And it 81% for the first six months or tenant retention is on track to set a new 20 year record.
Well the pace and volume of vacancy leasing was affected by shutdowns during second quarter that will not affect this year's results and we continue to expect healthy AFFO growth in 2021.
With that I'll hand, the call overlay Anthony Thanks, Steve.
Second quarter FFO per share of 51 cents exceeded the high end of guidance by one cents.
The outperformance resulted primarily from stronger than anticipated same property cash NOI growth of 1.7% driven by cost savings and deferred aren't m. expenses.
These savings more than offset the $1.6 million of reserves, we took on tenants affected by the shutdowns and half million dollars shortfall in transient parking revenues.
This was the second consecutive quarter in which stronger than expected same property cash NOI growth drove outperformance and FFO per share.
Well, we intend to spend a penny of deferred arent them in the third quarter the ongoing savings from building efficiencies will carry forward.
Accordingly, we are increasing our same property cash NOI guidance for the full year from the prior range of negative 1% to flat to a new range of one half a percent to 1%.
Did you at June Thirtyth, our core portfolio was 94.7% leased and our same property portfolio was 93.5% leased which respectively. Our 50 and 60 basis points lower than the end of March due to the anticipated 100000 square foot Nonrenewal in April by a tenant Inc.
Columbia Gateway.
Even with this nonrenewal the detect defense I T portfolio is 95% leased.
For this year, we remain on track to achieve the midpoint of our existing guidance for FFO per share of $2 in seven cents.
Slide 27 of our presentation details the major underlying assumptions, which include same property occupancy of 92.5% to 93.5% at year end and full year tenant retention of 80% to 85%.
Developments placed in service remain on track to add $20 million to $22 million of cash NOI to this year's results, including the seven and a half billion dollars. We delivered during the first half of the year.
We expect to invest $300 million to $350 million into elements for the year, which includes the $200 million invested during the first six months.
Combining cash on hand with availability under our line of credit and construction lines, we have $710 million of liquidity to fund the $233 million of existing development commitments and future opportunities.
We continue to evaluate multiple options to source the $70 million to $90 million an equity capital included in our 2020 guidance.
Last we are establishing third and fourth quarter guidance for FFO per share as adjusted for comparability with Midpoints of 52, and 53 cents respectively.
With flat to modestly negative same property cash NOI growth expected in these quarters increment incremental NOI from placing developments into service is driving the ramp up in FFO per share with that ill turn the call back to Steve.
Thank you.
Back in 2012.
We made the strategic decision to deeply concentrated our portfolio around high priority use defense and intelligence missions in order to generate durable cash flows independent of cyclical economic activity and thereby create value for shareholders.
The value proposition that strategy is being borne out in the strength of our performance this year.
The need for secure facility. So how's signals in human intelligence missile defense space exploration law enforcement and cyber activity are driven by national and global security needs and the workers executing these missions can that conduct their work from home.
In addition to the 1.9 million square feet of active development.
We're pursuing 2.1 million square feet of new opportunities in our development leasing pipeline.
We have it conservatively capitalized balance sheet and ample liquidity to fund our growth.
We are uniquely positioned to whether the current business environment.
Our company remains on track not only to achieve this year's guidance.
To deliver very LP AFFO growth in 2021.
With that operator, please open the call for questions.
Thank you Mr. dark ladies and gentlemen, if your question or comment at this time. Please press the star than the one key on your touched on telephone. If your question has been answered your question where yourself from the Q. Please press the balance sheet.
Our first question comes from Craig Melman with Keybanc capital markets.
Hey, guys.
Anthony you may be just starting on same store I. Appreciate you guys raised the guidance, but if you're looking at kind of a first half growth of 3.3% and the average growth in the back half of down 50, Bips, you're already kind of well ahead of your.
Midpoint of the the update the same sort rage my are the pools. The same is there something going on there that.
I'm thinking about incorrectly.
No that pools pools are the same there's no change in the pools at all.
Part of the impact as we mentioned in his prepared remarks was that we intend on spending roughly almost to a penny of there arent m. that was deferred in.
Second quarter in the third quarter.
And the results for the first six months of the year only have two months impact from non renewal at 67, 21, Columbia Gateway drive to the balance of the year is going to be impacted by.
By that Nonrenewal.
But shouldn't that be reflected in your kind of down 50, bips on average for the back half there.
It is so you're you're asking why.
The mid why we're not me a little bit higher yeah. It seems like you guys are kind of setting the bar.
And at a pretty easy place to jump over it for the rest of the year.
I don't.
I wouldn't characterize it that way I think are.
Forecast includes the impact of.
The activity, we have going on in the portfolio and.
That reflects the impact of what's happening in back half of the year.
Okay.
That's helpful. Then.
Steve You mentioned DC six the lease renewals kind of go in.
Is progressing nicely is is there any change in the kind of the probability way of not getting it done or is it you know where does that stand today.
Confidence is extremely high we're working on.
New form of agreement is very technical.
The particular customer is working remotely.
So the processes, taking some time because go or Kalfus remains very high.
And then.
Maybe semantics, but in the in the presentation deck last quarter, you guys had robust growth in 21 and this quarter. It's healthy is there any material change in kind of.
What you guys are expecting or any kind of puts and takes that that made you kinda update the language.
No we.
Prepared remarks, we use very healthy.
And I think the language change. This reflects the fact that leasing that we had expected occupy in the third and fourth quarter might be pushed into next year.
We will just be very open and forthright.
We believe our opportunities they're the same in the rent streams will be established just reflects uncertain timing due to the.
Change the way, we're working really.
The pandemic environment.
Okay, and then just one last one any update on Transamerica light Street on their exploration for next year.
One of the reports reported them as a non renewal.
So I'm glad you brought that up.
That issue is that determined by any means we're working with the tenant we've given them.
Couple of different scenarios to early renew.
Unlike oh large commercial tenants, they're evaluating market opportunities.
The activity slowed like a lot of.
Leasing activity during the last month or so.
But we remain confident in our value proposition.
The best located building with the best views and the best signage to the.
And the best amenities in the city and were so good choice.
Great. Thanks, guys.
Our next question comes from Jamie Feldman with Bank of America.
Thank you I was hoping to get your thoughts on the election, and when you think about the different potential scenarios whether its.
Split house.
And just how do you think the different scenarios could impact your business.
Defense spending in demand.
Well.
You know, but I'm not going to make call on who's going to win it.
But we like to point to is the house of Representatives since 2016.
Well they turned Democratic and since then the house Armed Services Committee voted in favor of increased spending has been extremely high.
In Moreover, the houses often recommended higher spending than the president of requested.
Given the.
Joe Biden been a long time participant in.
Congress, we believe he is well aware of the.
National threats and the need to reinvest in defense and we don't think it'll be a factor.
Okay, and then as you think about what's already been allocated.
Even if there was some sort of pull back in defense spending I mean, how long is.
Pipeline that you could still see pretty healthy demand for space, even if there is that changing.
In policy.
Sure so the fiscal year 20 budget.
Appropriated last fall late.
And we're still seeing demand for that we expect to continue through the end of the year in early 2021.
Fiscal 2021 budget, given the election will probably be appropriated under a continuing resolution.
It would have occurred in all likelihood in November December and then your another 12 to 24 months thereafter, we'd have.
Good demand from that budget.
Okay. Thank you and then I know you mentioned transamerica, but you've also got Boeing and Booz Allen.
Coming up.
Any thoughts on those leases yeah, we're working with Boeing right now so we expect to get one of three buildings.
A renewed and we are very high confidence so exercised one year on the remaining two.
The those.
Those three building support to very high priority national missions, they're really unaffected by.
Other matters that are influencing boeing's business.
Oh I'm.
Yeah, and we have very high conference in Brazil as well.
So you're saying of the three buildings, you know, though renew line and as to whether that will get extended free or is that what you said.
But the two others.
We basically did a 10 year package of opportunity for them or the from five.
Years. So then five consecutive one year renewals that predetermine rental rates.
So they've been renewing every year and they'll renew again.
Okay. So you don't see that is space I'll get back in the next.
Many four months.
Though.
Okay all right. Thank you.
Thanks, Jamie.
Our next question comes from Blaine Heck with Wells Fargo.
Great. Thanks, good afternoon.
So just following up on the more gradual recovery and leasing that you commented on in the presentation and your remarks Steve.
Is that statement, just a general one and kind of plans across the board or are there one or two spaces. You thought might have been signed this year that might have been pushed out and if that's the case any color on which those spaces as our would be helpful.
So it's just a general conversation.
We're getting things done we're getting things lease just these processes are taking longer.
With the need to plan space approved plans incorporate them into leased documents negotiated document get executed when people are not in their home offices, it's just taking longer so its a.
Conservative view this that were to continue some of the progress we would have otherwise expected to get done in the third and fourth might be push out of quarters.
Okay.
That's helpful and then.
You talked about pursuing a 2.1 million square feet of opportunities in the development leasing pipeline.
Just a little color on on that can you break it out in terms of geographical location of those those requirements and I'm kind of the mix of the type of tenant included in there.
Yeah, well is broad base, but it's roughly.
45% to 50%.
Data Center show, the remaining U.S. government or defense contractor.
And frankly, there's quite a few very large amount of conversations that we're having beyond what we've reported in the 2.1.
That leads us to be very confident our development business can be healthy for quite some time.
Alright, Great and then we'll ask one maybe for Anthony wanted to touch on the $70 million to $90 million of dispositions and or equity issuance in 2020.
If you guys to sign to go the disposition router you guys still leaning towards.
Datacenter shells into the JV or.
Are there any other properties you guys have teed up and how should we think about the timing there.
At this point, we continue to focus on raising that equity through additional joint ventures of the data center shells that we have we think they represent the best value proposition to raise that capital on it in a cost effective manner.
We've got a.
Significant amount of that of interest from both existing partners as well as unsolicited interest from.
Other investors in that product type because.
The fact that they see that as just an incredibly resilient cash flow stream based as they look at the current economic environment. So we're focused on that as a as the path to raise that capital and from a timing perspective.
We would probably be in a position too.
Raise that either by the end of this quarter early into the fourth quarter.
Great. Thanks, guys.
Our next question comes from Emmanuel Korchman with Citi.
Hi, everyone.
If we think that same pipeline the that you just a detailed.
We're getting the data centers for segment do you think about the more office users are there any conversations on changing the layout of the space the actual.
Per head utilization the number of people into space are they looking at large requirements. The space people out anything can share just from a a space usage perspective.
So so some of these conversations in the 2.1 million square feet.
Our little more preliminary where I'm not familiar with their usage.
Well, what's interesting is the the deals that we completed.
In the second quarter when this.
Well it.
Impacted the co good with Citi.
Those based plans really did not change the utilization was completed and our construction.
Specifications.
We are the same when we sign them as there were when we entered the negotiations before the virus.
Thanks, Matt in terms of the the retention in the second quarter.
I find there's just a little bit surprised that the retention wondering that much better considering you gave guidance a month into the quarter.
Is there anything specific there.
Now we should be.
Mindful of in terms of that retention rate or is it just you Gotta Panther surprise.
No there's no there's nothing specific there were.
Maybe a few deals that just timing really is we're in a second quarter versus the third quarter in terms of the full year.
It's really some.
Activity that.
Relates to renewals expirations in next year that are going to get executed this year.
There were really were no surprises.
Okay. Thanks, everyone.
Thanks Manny.
Our next question comes from Steve Sakwa with Evercore ISI.
Hi, Thanks to all my questions have been asked at this time thanks.
Thanks Stacy.
Our next question comes from Chris Sorry, Chris Lucas from capital One Securities.
Okay.
Good afternoon everybody.
I guess just.
Just a cleanup question on the 11.25 megawatt tenet what was the lease expiration date for that.
Existing lease.
Today.
So I.
I guess, it's been a follow up is there are over.
Something that will kick in that will sort of accelerate their signature or.
After now.
No the.
I'm not expect you assess and then I wish it were.
No the terms of that lease our.
Such that the lease will continue.
With a rent escalation.
As.
Existed through the term.
Until such time is we reached a new lease agreement.
Okay, and then do you have any rights as it relates to sort of like I'm just saying.
And I know you're welcome in there, but it.
Like he wants and certainly as well.
Well, we have right to give them notice and terminate the lease than they ever right to give us notice and terminate leases.
We're well beyond that we're just working on getting the document to meet their new current standards. So Dave.
Introduce worldwide and it's a little more complicated.
Than our typical renewal.
Okay, and then I.
I guess, there's been some.
News related to one of the developers in northern Virginia that has been doing.
Bill data shells.
With the tenant that you work with I guess in I'm, just curious if you're hearing anything as it relates your relationship with that tenant as it relates to how they're thinking about their.
Going forward, how they've done.
So with the data smells using third party to construct.
No no conversation that we've had a with them involves.
That developer and those reports.
Okay, and then line of question.
Chris I, sorry, Chris I think the only thing I'd add to that is the the pipeline that Steve detailed earlier in terms of the allocation between shelves and.
[noise] government and contractor opportunities that we have.
Include continue include a healthy pipeline based on discussions that we've had we continue to have with that.
Okay, and then well I hadn't happened.
Hopefully Mrs. But just on the EPS guidance bump is that just related to.
Higher.
Likelihood of of.
Proceeds from that.
Asset sales.
I'd now I'd say, it's actually.
We take a relatively conservative bent on depreciation expense estimates at the beginning of the year. So it's really.
Getting that amount in line with what our actual amounts have been for the first six months of the year.
Okay, great. Thank you.
Our next question comes from Peter Abramowitz with Jefferies.
Yes, Thank you and apologies if I missed this and prepared comments, but just noticed some.
Changes in the development budgets and but some this quarter.
Is there anything in particular driving not that kind of due to change in scope of the projects or.
Yes, that's something that kind of will have an effect on the yields books buffer.
So good question good pickup.
As we.
Wrap up the tenant improvement work for the variety of tenants that were completing in Alabama.
There's a true up process between what's tenda the expense in woods landlord expense.
And overages above our tenant improvement are added to the development budget and they're either going to be repaid in lump sum cash from the tenant or amortized over the life of their leases.
In the rent stream.
And we're wrapping up all that and delivering those buildings right now so that's why it occurred.
In fact, though.
This last quarter, our ability to drive price reduction and.
You know construction work that we've been punchy, though has been very strong and we've actually been able to juice. The yields on several those buildings through cost reductions for the benefit of both us and or tenants.
I assume you might well you're able to increase its brick nope.
Yeah, Yeah, Okay got your.
And then just one other one.
On the development those.
Expansions in a your existing TV Center show assets, what sort of Oh, no incremental return or you are you expecting on its mention though.
Those returns are consistent with the developments.
That we do with a customer programmatically.
So so far.
Cashio two quarter Escalations.
<unk>.
Oh gosh, so those are.
Those are seeing trends for the existing come from.
Yes.
That's all from thinking.
Our next question comes from Rich Anderson with SMBC.
Hey, Thanks, good afternoon, everyone.
So I imagine you might have scheduled this call on July 31st thinking hoping to six went up and John.
No.
That's just I guess I don't know, but.
If.
Even if I'm wrong or right is there anything about the process of TC six that in the very recent past seemed like in the recently looking back in June or so that they have been kind of coming back and tweaking.
Our requirements that have caused this delay or is it truly all has to work from home now kind of situation, but its work from home and it's.
Yeah right.
My analogy is translating French and English they've set of specifications that they want incorporated into documents that we used to that.
Facility document our lease terms on our operating.
Offerings restrictions.
In words, it's just complicated so we're working through that.
And we're working to schedule availability, we can get with their people.
But the conversations harmonious and we're confident.
Okay.
I just wonder if they're using this data is sort of though.
Rich or something anyway.
Moving on.
So in terms of markets.
Quietly awesome and San Antonio Huntsville is probably exceeding your expectations prior to.
The company moving there.
You had some unforced errors and other.
Batch markets, Colorado Springs, perhaps averaging.
And that's a fair rich I wouldn't even here, but [laughter].
Well, you said something about 2012 earlier conversation so.
Uh huh.
And I'm wondering if theres anything on the on that on the radar screen in terms of expanding horizons outside of the Yeah, Maryland, Virginia, DC court or a into some of these other alternative markets if theres anything interesting out there.
I will tell me.
In the market, but if you please state your radar up.
Well, we always have our radar up and you.
We.
We aim to serve the customers in the priority mission. So we have.
To the extent that they had needs we could fulfill elsewhere or we'd follow it we don't expect that to happen over the next few years, but.
We're being very disciplined.
The types of missions we serve.
And.
And just sticking to our game plan we've got.
Just if you think about what we said on or.
Discussion, we got almost 2 million square feet under development right now.
2.1 million that we disclosed in our development pipeline and theirs.
Almost two more million square feet of conversations we have so we are not lacking opportunity to create great value and moderate growth for shareholders.
There is there a schedule based realignment coming.
I don't know as it really.
That really is not a there's nothing scheduled and there hasn't been further conversations that got anywhere about further brackets.
Okay and then the last question I have is.
I think you guys have greater physical occupancy in your buildings because the.
Secure nature. If this was brought up earlier right now I missed the very beginning of the call, but what is the physical occupancy today is there hasn't been any issues with spread and maybe you know the all in alternative for that is if there has been it's creating some level of confidence.
It might be okay to be going back to work I'm just I'm. Just curious if you can just give some color on that.
So we don't have a number didn't tell you occupancy from day to day, who live in feeling it ranges from an or regional office very low.
To some parts of our defense 80 very high.
And as I said the.
Common.
As you know called the average working condition is rotating weeks.
Hey, and be schedule, rather blue blecker drove whatever that customer uses.
In working longer hours.
So you know all the customers are being respectful of the need to create this and seeing them they're doing it with.
Partial rotations.
So you think.
And then and then in terms of.
Virus.
We think we've only had a couple of building said had more than one.
And generally it's one pops up you know every so often.
But the predominant those cases or single occurrences in a single building.
Okay, Great and do you can you envision and a greater need for your products in the future. So social distancing becomes a reality within there are four walls or or is that perhaps.
Too much to ask for.
Well it could be an outcome there is.
Undoubtedly there's discussions that are talking that are occurring that weve participated in about.
What we could do to help various customers respond.
The decrease the densities of usage at various.
Sites I can't tell you that's going to happen.
But.
It could be a possibility.
Great. Thanks very much.
Thank you rich.
Again, ladies and gentlemen, if you have question or comment at this time. Please press star them, a one key on your touched on telephone.
Our next question comes from Tayo Okusanya with Mizuho.
Hi, yes, good afternoon, so heading into 2021, focusing on vacancy leasing development leasing.
Renewal of the 11.25 megawatt.
So for the sooner rather than later anything else, we should just be thinking about <unk> is kind of switching off will both in the back half of 2020 and 2021.
So those are the three primary factors.
All right good to know.
Thank you.
Thank you too.
And I'm not showing any further questions at this time, let's turn the call back over Mr per door.
[noise]. Thank you all for joining our call today, we are interested as this afternoon.
If you'd like to talk to US please coordinate to Stephanie.
A follow up call. Thank you.
Thank you for your participation in todays corporate office properties Trust second quarter 20 to 20 conference call. This includes the presentation. You may now disconnect good day.
[noise].