Q2 2021 Corporate Office Properties Trust Earnings Call
Welcome to the corporate office properties second quarter of 2021 results conference call. As a reminder, today's call is being recorded at this time I will turn the call over to Stephanie Krewson, Kelly Copt's, Vice President of Investor Relations Ms. Krewson Kelly. Please go ahead.
Thank you Jerry good afternoon of welcome to Cops conference call to discuss second quarter 2021 results and updated full year guidance.
With me today are Steve the door, President and CEO, Todd Hartmann Executive Vice President and COO, and Anthony Mifsud, EVP and CFO.
Reconciliations of GAAP and non-GAAP.
Measures that management discusses are available on our website in the results press release and presentation and in our supplemental information package. As a reminder, forward looking statements made during this call are subject to risks and uncertainties, which are discussed at length in our SEC filings actual events or results can differ materially from these forward looking statements.
And the company does not undertake the duty to update.
Steve.
Good afternoon, and thank you for joining us.
Our unique investment strategy of clustering assets around the U S defense installation supporting National security activities continues to generate strong high quality.
The earnings.
Second quarter flow per share as adjusted for comparability of <unk>.
<unk> exceeded the high end of guidance by a penny.
Driven primarily by the same property results the D.
Additionally, NOI from real estate I appreciate some of the quarter was up 8%.
Quality of <unk> increased 17% from a year ago.
Through the second quarter, we completed the total leasing of 1.7 million square feet.
Which included 815000 square feet of renewals.
205000 square feet of vacancy leasing in 641000 square.
Square feet the.
Development leasing.
So far in the third quarter, we've executed 53000 square feet of development leasing.
And we're in advanced negotiations on another 250000 square feet that should close this quarter.
Based on this activity.
We're highly confident we will achieve.
Millions of square foot growth for the year.
Regarding our large renewal of DC 6.
We have not finalized solutia.
We reached agreement on business terms of June and expect the documentation with trial quickly.
The tenant is controlling the pace of progress of the actual.
When lease document preparation and that process continues to labor.
On the deployment power usage and the nature of other activities, we are conducting with them.
Of every confidence they will remain in our building.
During the quarter, we placed the 197000 square feet of.
When projects in the service, including project E. L. The 107000 square foot specialized facility, we bill for a defense contractor and San Antonio.
We completed this project full quarter earlier than forecasted.
And we expect to deliver 2 additional projects.
The development schedule later in the year, thereby accelerating lease commencements.
We expect to deliver Nova C and 610 Guardian way earlier than planned.
Which combined with project El <unk> are adding nearly <unk> of this year's <unk> <unk> per share.
Stronger.
In property operations and accelerated development completions.
As to once again increase the midpoint of our full year guidance for <unk> per share as adjusted for comparability.
The $2.26, the midpoint of updated 2021 guidance is <unk> <unk> above our.
<unk> mid point.
6.6.
6% higher than 2020 results with the.
That I will turn the call over to Todd. Thank.
Thank you, Steve metrics and trends in our defense 19 locations exhibit strength and we continue to capture the strong demand as shown in our lease lease accomplishment to date in the second quarter, we leased 1.
The original of 1 million square feet, including 661000 square feet of renewals for a very strong retention rate of 89%.
Cash rents on renewals rolled up <unk>, 1% and annual Escalations averaged 2.6%.
For the 6 months period, we completed 815000 square feet of renewal leasing with the 70.
1% retention rate and average lease term of 4.3 years and cash rents rolling down 2%.
Late in the quarter, we learned that the tenant at Redstone Gateway did not win the recompete of a large contract and at the end of the year will vacate RG 1200, a 121000 square foot building.
Our first opportunity in 10.
98 years to demonstrate the strength of demand for second generation space at the park.
We already have strong interest from multiple defense contractors looking to move to Redstone gateway, including 2 that have 2022 occupancy requirements and want to gain control of the full building.
The strength of demand we continue to see demonstrates Redstone gateway is positioned in the market.
As the central location preserving government customers on Redstone Arsenal.
In terms of vacancy leasing we completed 111000 square feet in the quarter, representing 10% of our available space at the beginning of the period.
For the first half of the year, we completed 205000 square feet of vacancy leasing.
Our leasing activity ratio.
<unk>, 5% the highest level since well before the pandemic demonstrating continued growth in demand across our portfolio as such we expect to accomplish healthy volumes of vacancy leasing in the remainder of this year.
Regarding development leasing second quarter achievement was a robust 630000 square feet and consistent.
It was 165000 square foot data center shell in Northern Virginia for a cloud computing customer and 179000 square feet at Redstone Gateway in the form of 2 major pre leases with KBR Wiley.
We also executed a 183000 square foot build to suit at the National business Park. The tenant is a fortune 100 company.
It's important defense contractor that provides secure infrastructure artificial intelligence and cloud computing services to the U S defense and intelligence agencies their selection of the National business Park from their local headquarters further reinforces the dominance of our location for serving the missions at Fort Meade.
So far in the third quarter, we have executed a 53.
3000 square foot lease in 8000, Rideout road with III of defense contractor of the specializes in software engineering systems integration and it as.
As a result of that project is now 73% leased and we are in advanced negotiations on leases that will stabilize the building.
Lastly, we are in advanced negotiations with the DIFM.
And unattractive from a 2 building campus at Redstone Gateway for 250000 square feet. These leases would bring our total development leasing for the year to 950000 square feet.
Based on the $1.8 million square feet of opportunities in our development leasing pipeline. We are highly confident we will meet our 2021 development leasing goal.
With.
That I will turn the call over to Anthony Thanks, Todd second quarter of <unk> per share as adjusted for comparability of <unk> 58.
<unk> exceeded the high end of guidance by <unk>.
Driven primarily by stronger same property results lower operating costs due to effective expense management and the timing of R&M projects boosted second quarter of St.
Property cash NOI by nearly <unk> <unk> above our second quarter forecast.
We expect to complete these R&M projects in the third and fourth quarters, which will impact quarterly same property cash NOI and <unk> per share as shown on page 18 of the results deck.
That being said for the second consecutive quarter opera.
The rating savings and better than expected leasing outcomes are pushing our same property cash NOI forecast higher we now expect same property cash NOI for the year to either be flat or increase as much as 1%, which at the midpoint is 150 basis point increase relative to our original guidance.
We are maintaining our full year occupancy guidance of 90% to 92%, which continues to incorporate the negative impact of joint venturing fully occupied wholly owned data center shells to raise equity as well as the unexpected vacancy of the 121000 square foot contractor building at Redstone Gateway in December.
In early June we sold 2 data center shells to a new 90, 10 joint venture with Blackstone real estate, which generated proceeds of $107 million the.
The assets were valued at $119 million, which represented a 48% profit and demonstrated the value we create through development.
Including 3 properties under development, we wholly owned 10 data center shelves that we estimate represent more than $750 million of equity value. We can monetize to fund the equity component of future development.
Lastly, and for reasons already discussed we are increasing our full year guidance from our previously.
Elevated range of $2.19 to $2.25 2.
2 of new range of $2.24 to $2 and 28.
Our updated guidance range implies $5.7 to 7.5% growth over 2020 results and 6.6% at the midpoint.
It is important to note.
The early development deliveries are driving most of the increase the guidance and at the NOI from these developments expected in 2022 remains unchanged.
For the third and fourth quarters, we are establishing ranges for <unk> per share guidance as adjusted for comparability of <unk> 54 to 56, and <unk> 56 to 58.
The daily.
The 55 midpoint in the third quarter reflects a full quarter's dilution from the 2 data center shells, we joint ventured in June and executing additional R&M projects with that I'll turn the call back to Steve.
Thank you.
Yes.
The midyear <unk> achievement is.
Respect of armed our business plan significantly.
This quarters of <unk> result is the fifth time in the past 6 quarters that we exceeded our plan in the third time in which we elevated full year <unk> guidance.
The key performance metrics, such as vacancy leasing and development leasing.
Our truck.
Performed at or above plan.
Clearly our strategy of cost training investments the adjacent to priority Department of defense missions.
And creating value through low risk developments at these locations.
Delivering <unk> growth and lowering our cost of capital or.
Our strategy.
<unk> to provide over 1 million square feet of new development opportunities annually and by extension high value defense 80 assets the benefit our shareholders long term.
This year, our development capability excellence.
Not only delivering projects on budget non time.
In several instances, where completing projects ahead of schedule and accelerating our bottom line results.
Our property operations excellence is ringing out additional performance from our portfolio and improving our same property results.
Our highly durable operating portfolio strong balance sheet.
<unk> and reliable low risk development program combined to create the very visible growth we are delivering.
We have a strong set of development and leasing opportunities before us and the balance sheet and access to capital to seize upon them.
With that operator, please open up the call for questions.
I would like to ask a question. Please press star 1 of your telephone keypad again, thus far of 1 of your telephone keypad.
Your first question.
<unk> comes from the line of Manny Korchman from Citi. Your line is open.
Hey, everyone. Good afternoon.
You guys spoke about the day.
And at Red Zone.
Gateway, especially from <unk>.
Back filling the spaces can be vacated.
Do you think that that excess of man is going to lead to new developments there.
As well or are you just more confident in refilling the space that you didn't expect to get back the narrower.
Well as Todd mentioned, we have 2 contractors.
<unk> to replace that tenant NRG 1200.
Only 1 of them is going to fit so by extension, yes with the.
We take.
Take the other 1 to a new development.
I guess the question is more where you already in development conversations with them and now 1 of those is kind of get satisfied by the existing building backfill.
Or are you just are you of new conversations with them since the tenant vacated.
They're pretty fast breaking opportunities.
<unk>, So we had not planned to development for them.
It may have occurred had this not happened.
But certainly with the inventory.
They see the attractive opportunity to make the move quicker.
And then back to our favorite topic DC 6.
It sounds like Youre frustrated.
And with the process of investors are certainly frustrated with the process is there anything else here that may change from what's in your conversations or is it literally just waiting for somebody to pick up the pen and finalize the deal.
Its really waiting for the point of contact to put some time and effort and finalizing the documents.
Are you offering a new boscastle someone that gets the honor of you can stay away from that.
Out of that business I've been wrong.
Many times that of ROE.
Yeah.
Manny in June we're pretty excited that we thought wed wrap it up.
Literally nothing.
And through July so we continue the way.
Are they are they being responsive Steve are they is it literally just silence.
Hum.
[laughter].
How would I say, they pretend to be responsive, but then they failed to deliver.
Thanks very much.
Your next question comes from the line of Craig Mailman from Keybanc. Your line is open.
Hello, Craig.
Oh yeah.
I guess, we'll continue to beat the dead horse of D. C..6 for a second.
Have.
You guys had said down 10% to 15 on rent is that still kind of the expectation and also of these guys try to get any like early outs from you guys are any of.
That could potentially kind of impact scalability. If you guys go to bring us the market eventually.
So we've reached.
I believe we've reached business terms back in June.
And I don't want to reveal all of the elements of their lease, but I would say of the structure is almost identical to the original lease we had.
Okay and is that mark to market still pretty much in the ballpark.
Yes.
<unk>.
Okay.
I didn't have any early out from the first lease right.
Well the hand of right to terminate early but there are significant penalty associated with it.
Okay.
And then just on I guess development in General you guys are signing.
Signing a lot of leases are you guys, having any trouble getting materials given kind of of the shortages of different building products going on or do you guys feel like you can maintain.
Maintain the similar pace of deliveries that you guys have historically done well.
As our chairman has pointed out we're finishing the couple of these spreads.
<unk> earlier than we thought.
We have had no problem.
Getting the materials and the labor we needed to deliver.
2 of those projects were just signed last year. So the bulk of the development.
The progress through the period of time, when Theres lot of narrative of both shortages we've had.
No issue.
Okay and then just last 1 from me update on 310, MVP I think you guys had said part of it would be leased by <unk> and the rest of end of the year kind of what's the updated timing on that 1.
I think your comments a little of we said 2 floors would be.
The leased by the end of the government fiscal year, which is named <unk> and.
And we expect the remaining 2 by the end of the calendar year, which is 12.31.
Is that still the expected timing.
As.
Okay, great. Thank you guys.
Thanks, Craig.
Your next question comes from the line of seed <unk> of Evercore ISI. Your line is open.
Thanks.
Anthony I was wondering if you could just help us think through the the same store occupancy target of 90 to 92 I appreciate the the RG <unk> project.
Project debt.
Put some additional vacancy into the portfolio and I can kind of see maybe where the high end of mid point could come into play, but can you help us think through how the low end would come into play at this point given that we're kind of sitting here in August or just about August.
All of that the low end is.
Is.
Contemplates the impact of.
1 to 2.
The transactions or additional data center shells.
Sales that are in our results for 630 as the 100% lease transactions.
We.
If each of those transactions has about a 20 basis point impact on.
Same office year end same office occupancy of results. So.
So to the extent, we execute both of those were sort of managing each based on the timing of our development in the development capital needs.
So it's really the.
Question as to whether we execute the second of those data shown at the center shell sales.
And I realize you don't provide kind of overall kind of occupancy trends.
But if you were sort of just think about where your overall occupancy.
He is today any sense for kind of maybe where that bottoms and when do you think the missed.
The bottom kind of put in after transamerica's out or how do you sort of think about overall occupancy.
At the bottom of the bottom on a total occupancy basis is probably the the.
End of the first quarter.
Last year, when Transamerica will have moved out and we will have the the.
The impact of the non renewal at <unk>.
Redstone.
The total occupancy just the total occupancy numbers just so you're just you're aware for.
The second quarter versus the first quarter were impacted by us, placing the balance of 'twenty 100 into service.
That was.
Formerly not part of the denominator. So now that it was 12 months from its placed in service date that 81000 square feet was placed into service during the quarter second quarter.
Got it and then maybe just last question since you mentioned the 'twenty 100 al any just kind of update on the leasing and sort of what are your thoughts around monetizing that asset.
Maybe once you lease it up.
Ooh.
Todd 1 of your handle the leasing sure.
D C was hit particularly hard during.
And then can it's the number it's emerging slowly.
But we have seen an increase in activity and tours and have about 100000 square feet for the eighth of active prospects for the 80000 square feet of vacancy several of those are in proposal stage and several of those are the.
The proposals are being drafted so increase in activity we.
Dependent.
We're seeing more people and expect some leasing.
The emerge rigor.
Regarding our thoughts.
Fully intend.
<unk> delivered the value we expect it to the.
To take the assets.
The market recycling.
We feel good thanks.
Your next question comes from the line of Jaime Feldman of Bank of America. Your line is open.
Great. Thank you very much.
I'm just curious if you of a sense of any kind of price discovery on where cap rates are.
Got it for your different products.
The market for your product in different market.
So we are of a whole research piece Matt.
And I would recommend rather than.
I'm trying to remember exactly what's in the piece of the call.
We follow up with you and we.
For the.
Sure.
We gave you some support and those cap rates.
Okay sounds good and the.
Then can you talk about the Baltimore.
Office market.
Thoughts are on the back filling.
In the space of getting back early next year, and just what that pipeline.
Line looks like.
Sure.
Well many of you handle this for sure.
Since the market became aware of the impending vacancy at 100 light. The response has been very favorable.
We have about 120000 feet of active prospects for that vacancy with about 80000 of it needing of 2000.
The year the occupancy so we've been pretty encouraged by the market's reception to that space, it's pretty unique space being the highest in the market. So.
We feel encouraged by the activity so far.
Okay.
Great. Thank you.
Thank you.
1 of <unk>.
Our next question is from the line of Anthony per loan from Jpmorgan. Your line is now open.
Okay. Thank you.
Yeah, maybe for Anthony.
Do you have guidance out there with like a it looks like a year ending run rate of about 57 cents at the midpoint.
You talked about.
Got it.
No.
Chris.
Yes.
Okay.
Yeah.
Hello, everybody there.
It's Tony plant on here, if you can hear me.
We lost you right. After you got started.
Why don't you take it from the top.
Yeah sure. Thanks.
The total SRAM.
Okay.
The question surrounds just run rate going into 'twenty..2 of you spoke of your fourth quarter looks like about a 57% midpoint in terms of ending the year, but you've got more visibility now on.
Some leases that are occurring or not the rollouts going into next year, just any way to bottom.
Bottom line kind of like what the step down may be starting Jan 1 and given what you know to that run rate.
Yes, I think the.
Well the impact for the 2 large non renewals in the first quarter.
Their annual revenue total is about.
About $8 million.
So on a quarterly basis that would be about.
<unk> per share.
Assuming that Theres no yeah because of this happened at the beginning of the year, we're not assuming any backfill for for those spaces. But then we also get the benefit of a full quarters.
1 of placed in service from the fourth quarter, so it might be.
Many are 2 lower than the run rate at the end of the the number at the end of the fourth quarter.
Okay got it thanks and then.
Just can you talk about the data center shell pipeline as we start towards the out to the next 18 months roughly.
Sure we of land position, so the terminate roughly another million square feet.
We do expect leasing next year.
The timing of the leasing has really been driven.
But the availability of critical power.
The market.
Really.
The availability of the Mercury cash consumed over the last couple of years robust development.
But in total it's about a $1 million in what we own today in cash.
More of thereafter.
And do you think there's any sensitivity on yields.
Those types of projects, just given where cap rates seem to have gone.
And also just materials costs and so forth.
Well, it's more of the cap rate than the material of cross the structure of the deals.
The yield on cost so when costs go up.
The rent will go up with them.
It's more pressure on the.
And the.
<unk> negotiated yield.
Even the cap rates have continued.
Compress.
Okay, and then just last 1 from me.
Just you've been able to raise guidance and then you put up growth any thoughts on the dividend and when maybe we could see a change there at some point.
Some of it.
Yeah, we we continue to view the dividend as a capital allocation decision.
Since our development opportunities continue to remain very robust.
And we have no sort of tax structure need to increase the dividend right now.
We're using that.
Additional net operating cash flow to just manage the amount of equity that we need to raise each year for <unk>.
Capitalizing the development pipeline so at this point.
Our dividend our payout ratio is incredibly strong and we have room to move it up when.
Either need to.
From a tax standpoint or.
We believe that there is.
We don't have the development development opportunities to investing.
Got it okay. Thank you.
Next question is from the line of Dave Rodgers from Baird. Your line is now up from.
Yeah, Hey, good morning, or good afternoon, you guys of.
The answered a lot already but maybe Steve can you talk about the more recent Jedi announcement and the impact of the reaction in the defense community and whether that opens or closes any doors for you guys in the near term that you had previously planned on.
Well.
Clearly.
The there's not great visibility into the space.
Yes.
But.
All along.
Really did that the leaf the Jedi was going to be of material boost.
To our company.
Because.
Our data center shells.
The customer and not really talked about the impact of it.
It's our belief that with the multi vendor opportunity.
Our potential opportunity set.
Would be higher.
Just on some of the great locations. So we have.
But it's pretty early.
To see a clear path.
Okay.
That's helpful. Steve I appreciate that and then maybe 1 for Anthony if you had addressed this earlier and I missed the just let me know the impact of the lease in Baltimore that you'll you'll get back in the space in the third quarter of 'twenty, 2 but it looks like youll reset the GAAP.
Rent in the third quarter of 21 any meaningful impact from that that we should think about.
That rents rolling down about 10% from the current rent.
That would start the month after we execute the.
The renewal with the tenant so right now our forecast our current forecast and guidance has.
Effective as of September 1.
Okay. Thanks, everyone.
Okay.
Next is bill Crow from Raymond James Your line is now open.
Hey, good afternoon. Thanks, Steve.
And maybe it's just my perception, but.
But my thought was the that you viewed a million square feet of the development leasing this is.
You know readily achievable and maybe even the low bar.
And I'm, just wondering whether and again, maybe that's just misperception on my part but.
Your confidence level and you know maybe doing much better.
Better than a million square feet this year.
It's the timing issue Bill there are several projects.
We expect to win the.
Could occur by the end of the year, which would push us above materially above.
But the timing is.
And I have less confidence of the timing of the put that into.
A forward looking statement.
All right understood appreciate that and then 1 quick question and I apologize on D. C sets, but what sort of market rents doing over the past year and competitive products.
<unk>.
So our renewal rate is.
In line with other large deployment renewals that have occurred in the last call. It 6 to 12 months.
Hum.
The new leasing.
Those rates are materially lower.
There may be as much as $15 per kilowatt of month.
But the renewals.
We're right in the the range of the market.
And the the reason for the the new lease.
The roll downs on pricing.
It's just too much space not enough demand.
Part of Bill with the.
The competitive nature whats driving.
And the rents down.
Well I think it's the.
Speculative development that needs the.
Put some income into those assets.
Okay I appreciate it thank you.
Sure Bill.
The next is Tom Catherwood.
Kathy.
The <unk> your line is now open.
Excellent. Thank you and good afternoon, everyone.
Todd in your prepared remarks, you mentioned leasing activity ratio of 105%.
I think you said was was the high for the company how does the compare to prior.
Maybe last quarter or a year ago, and then do you also track the time it takes for the leases to go from kind of initial activity and interest through documentation and then to execution because the period seems like it's been taking the longer and longer over over recent years.
Well.
The ratio is obviously affected during the pandemic we're at levels now the approximate.
Pre pandemic levels.
But throughout the pandemic it dropped and has been steadily increasing since late last year and now post pandemic.
It's you know I don't know that it's at an all time high but at the.
The high that we haven't seen in at least the 18 months of I'll say.
The as far as of the time of leasing we don't track that officially but in conversations with their leasing teams and our asset managers, it's clear that the.
The deal cycles of extended something that might have been a 4 month cycle before is now 5 or 6.
6.6 months might be 8.
The function of tenants, having a lot of opportunity where they're looking at a lot of different spaces.
<unk> been taking their time to make their decision so.
The good news is people are moving through the pipeline just seems to be taking a little bit longer than it used to.
Understood and then it was good to see the.
So obviously the leasing across the board this quarter, but just if it had all of a pickup in in northern Virginia, and that's a market that's.
It seemed like it's been a little slower over recent years can you kind of comment on recent activity. There and is there an expectation that you get some more vacancy leasing there in the near term.
Well it.
Pick up of the markets, where we have seen the recent uptick in activity.
Activity ratio was very strong and it's been coming on strong over the last 3 months.
Again, we would anticipate closing some of that activity, but can't really comment on when that would happen.
Got it thanks, Todd and then last 1.
It is 1 of them for me maybe for Steve you'd mentioned, finishing the the project early in San Antonio.
You have a handful of assets there around lackland, obviously, they've all been.
Fully leased.
For years.
What kind of opportunity do you have to maybe.
Expand your portfolio down there and anything else in the near term.
I wouldn't expect anything in the near term.
We've now consumed all of the land that we've held on our balance sheet.
And ultimately we do expect the mission.
Continue to grow and.
You know we have capacity inside the fence.
To accommodate the government.
And as opportunity presents with contractors.
I have sort of some new land, but I wouldn't expect anything in the next 12 to 18 months.
Got it that's it from me thanks, everyone.
Next question.
On the capital 1 Securities. Your line is now open.
Good.
Oh, good afternoon, everybody Hey, Steve just wanted to follow up on your comment about the perspective development leasing deals and Redstone I'm, just curious as to whether those deals would be part.
Of the exterior outside the fence land or inside the fence or is it some combination of drought.
So the things we're working the close now.
In the.
The start that we contemplate we might add.
The are all outside the fence.
There's a longer term opportunity.
Inside the fence.
Okay and then.
Anthony I guess on the.
So the cell.
The capital raises I think you had.
I think earlier in the year and suggested.
The a series of the.
Deals done second quarter third quarter fourth quarter, it doesn't sound like the respondent.
Or maybe that the all of all of the deals that you had previously guided to necessarily have to close this year can you give us sort of.
Your latest thinking on the dataset show.
J D.
The process.
Sure.
The current our current forecast assumes that.
We executed another joint venture.
By the end of the third quarter.
And based on our current thinking and really driven by the fact that we have.
Sort of incremental EBITDA from the operations of the portfolio.
To maintain our overall leverage levels.
At this point, we don't think we need that.
Additional transaction in the fourth quarter.
So right now we would contemplate a JV on potentially to datacenter sales by the end of the third quarter and that would be the balance that would be the.
That would be off of the balance of the year.
Okay. Thank you that's all I had.
Thanks, Chris.
Once again, if you would like to ask a question. Please press star 1 on your telephone.
Yeah.
No further questions I will now turn the call back to Mr. The Derrick.
For closing remarks.
Thank you all for joining our call today.
He will be in our offices. This afternoon. So please coordinate through Stephanie if you'd like the follow up call.
Yes.
Thank you for your participation today in the corporate office properties Trust second quarter 2021 results Conference call. This concludes the presentation. You may now disconnect good day.
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