Q3 2021 Corporate Office Properties Trust Earnings Call
Welcome to the corporate office properties Trust third quarter 2021 results conference call.
As a reminder, today's conference 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 Bill good afternoon, and welcome to Copts conference call to discuss third quarter 2021 results and updated guidance with me today are Steve the Dor, President and CEO.
Hartmann Executive Vice President and C O L and Anthony Mifsud, EVP and CFO.
Reconciliations of GAAP and non-GAAP financial 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 today's 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 a duty to update them Steve.
Good afternoon, and thank you for joining us.
The company delivered another fantastic quarter.
With better than expected results.
Another record setting bond deal.
An excellent achievement.
Areas of leasing.
Third quarter <unk> as adjusted for comparability of <unk> 57 cents outperformed the high end of guidance by one.
And represented the sixth time in the past seven quarters that we outperformed our expectations.
We're also exceeded our guidance for two of the last three quarters.
For the third time this year, we're increasing the midpoint of our.
Our full year guidance, we're first of all per share as adjusted.
The $2 27 midpoint of updated 2021 guidance is <unk> <unk> above our original midpoint and.
That represents an increase of seven 1% over 2020 results.
We completed another record bond financing in the quarter.
In August we issued $400 million of.
Senior unsecured notes with a 2% coupon.
Rich tied it's the second lowest coupon ever issued among office roots are.
ROE strategy targets owning and developing specialized office.
In data center shelves and mission critical defense a few locations.
This strategy continues to deliver excellent results.
In the quarter.
We achieved a total of 1 million square foot of leasing.
Which included extremely strong vacancy leasing of 215000 square feet.
This vacancy leasing volume represented the highest achievement in two years it was 67% above the trailing eight quarter average volume.
Vacancy leasing also included the 68000 square foot lease with the United States government for two floors at three ton MBP.
In the quarter, we also completed 274000 square feet of development leasing.
[noise] all at defense it locations, including a full building lease with the U S government.
Lastly, we renewed 553000 square feet.
Livery and a 76% retention rate at least economics that were consistent with our expectations.
Leasing for the nine months indicates our fundamentals continue to strengthen with customers, making long term commitments to new space.
We completed $2 7 million square feet of total leasing, which included 420000 square feet of vacancy leasing and an average lease term of 8.6 years.
We completed $1 4 million square feet of renewals achieved 75% retention rate.
And we executed 915000 square feet of development leasing with an average initial term of 14 one years.
After the quarter, we leased another 263000 square feet.
Our total development leasing for the year to just under $1 2 million square feet.
With an average lease term of 13 four years.
As a result of this transaction our active developments totaled one 8 million square feet that are 94% lease.
Development leasing to date exceeds our 2021 goal by 18% and represents the fourth consecutive year, we've achieved over 1 million square feet of development leasing.
Our excellent leasing performance continues to translate into impressive operating results, including the impact of vessels sold fund development.
For the nine months period.
From real estate operations increased 7%.
<unk> per share as adjusted for comparability grew 10% in <unk>.
<unk> is up 16% from one year ago.
The unique defense IP portfolio strong balance sheet and reliable low risk development program continues to generate high quality <unk> per share and cash flow growth. Good are extremely durable because demand is driven by defense spending and national security requirements rather than <unk>.
Additional office.
Fundamentals.
As important demand at our defense locations is not impacted by work from home and other trends that may affect office demand in the future. We continue to have a strong set of leasing and development opportunities before us and the balance sheet to seize upon them.
With that I'll hand, the call over to Todd. Thank you Steve continued strong demand in our markets as we have an outstanding lease achievement. This year third quarter vacancy leasing was exceptionally strong at 215000 square feet, representing 18% of our available space at the beginning of the quarter.
To put this achievement in perspective since defense spending began rebounding in 2016, our quarterly vacancy leasing has averaged 132000 square feet.
There were two major transactions from the quarter worth highlighting the first of which was a 68000 square foot lease with the U S government and 310, MBP, leaving to flourish the lease to bring that building to 100%.
Customer continues to indicate their intent to lease the remaining space, but because the government is operating under a continuing resolution we now project lease execution during 2022.
The second major vacancy lease was for 63000 square feet at $67 40, Alexander Bell drive in Columbia Gateway and.
New tenant is consolidating multiple offices and executed a 16 and a half year lease for the entire building with lease commencement expected in July 2022.
Although we had intended to redevelop this asset we backfill the full building in just four months and accordingly have moved it back into our same property pool.
For the nine months, our 420000 square feet of vacancy leasing represented 114% of the trailing five year average through nine months and was the second highest nine month volume in the past five years.
Current leasing activity ratio is 101% since the start of the second quarter has averaged 90% underpinning much of the third quarter's vacancy leasing success and our expectation for strong lease achievements continuing into the fourth quarter.
During the third quarter, we renewed 553000 square feet translating into a 76% tenant retention rate.
Cash rents on renewals rolled down six tenths of a percent and GAAP rents grew 1%.
Excluding an 89000 square foot renewal, where the tenant was rolling off a 10 year lease that had escalated above market cash and GAAP rents increased 1% and 5% respectively in the quarter.
For the nine months period, we completed $1 4 million square feet of renewals with a 775% retention rate cash rents rolling down three tenths of a percent with annual escalations, averaging two 4% in.
An average initial lease terms of three eight years, excluding the two Boeing buildings in Redstone Gateway that are still on one year renewals the lease term for the nine months averaged four seven years.
We continue to advanced negotiations to renew the 11 25 megawatt user at DC six customers process remains slow and methodical and we are confident they will renew given we cannot control their pace, we are not putting a timeframe on its completion.
Tenants original lease remains in effect and they continue to pay their escalated rent.
During the quarter, we executed 274000 square feet of development leasing at Redstone Gateway.
The largest transaction was a 205000 square foot full building lease with the U S government.
Lease commencement is scheduled for early 2024.
Development represents our second building in the secured campus, which upon completion of this project will total 460000 square feet.
The remaining 69000 square feet of development leasing was with two defense contractors, who leased space at 8000 Rideout Road.
That development was started because of the contracted demand we're tracking and is now 88% leased we are working to close a lease for the remaining 12000 square feet.
Earlier this month, we executed leases with Northrop Grumman for two build to suit office buildings, along right at road at Redstone Gateway.
The two building campus totals 263000 square feet of highly visible class a office space with one of the world's largest defense contractors just outside Redstone Arsenal as main gate.
We are on track for lease commencement in the second half of next year.
Once the active projects underdevelopment at Redstone Gateway are placed into service the powerful totaled $2 2 million square feet, making it our second largest concentration of defense it assets and equal to slightly more than half the size of the national business Park.
The Northrop leases brought our year to date development leasing total to nearly $1 2 million square feet, making 2021, the 10th straight year, we have exceeded our development leasing goal.
Based on the $1 5 million square feet of opportunities. We are tracking in our development leasing pipeline. We expect continued strong development leasing.
Lastly in the first nine months, we placed 709000 square feet of developments into service that were 89% leased.
We expect to place another 74000 square feet into service in the fourth quarter, bringing our total for the year to roughly 800000 square feet.
That I will turn the call over to Anthony Thanks, Todd.
Third quarter <unk> per share as adjusted for comparability of <unk> 57 exceeded the midpoint of guidance by <unk> <unk>.
Driven by one incentive deferred R&M projects and one of other outperformance.
We expect to complete the deferred R&M projects in the fourth quarter, which will impact same property cash NOI and <unk> per share.
Incorporating this change we are adjusting the midpoint of our fourth quarter guidance to a new range of 55 to 57.
The timing of R&M projects drove 165 basis points of outperformance in our same property and same property cash NOI, which increased four 8% in the quarter given.
Given the year to date results, we are increasing our full year guidance for same property cash NOI growth again from a prior range that was flat to up 1% to a new range that is up 50 to 100 basis points at.
At the 75 basis point midpoint, our revised full year guidance for same property cash NOI growth is 175 basis points above the midpoint of our original guidance.
We are also narrowing our full year guidance for same property occupancy from the prior range of 90% to 92% to a new range of 90 to 91, 5%.
Our revised guidance continues to incorporate the 20 basis point negative impact of joint venturing fully occupied wholly owned data center shells to raise equity in the fourth quarter and has been adjusted to include the 40 basis point negative impact of placing $67 40, Alexander Bell drive back into service back to the same property pool.
In August we issued $400 million of long seven year senior unsecured notes priced at 2% and used the proceeds to retire floating rate debt, specifically, we prepaid $100 million of our 2022 term loan.
Retire the $89 million construction loan at 'twenty 100, L Street, and pay down amounts on our line of credit with the remainder.
The August deal was more than five times oversubscribed and priced at 105 basis points over the seven year Treasury, which was 25% to 30 basis points below initial price talk.
The 2% coupon ranks as the lowest among office Reits were seven year paper and ties into the second lowest overall face rate of any duration among office Reits.
Our credit spreads.
Per fair favorably to peers, who are rated one notch higher by the rating agencies.
Clearly fixed income investors appreciate the durability of our cash flow the high quality credit of our tenants and they are in office work requirements.
Also of note since September of 2020, we issued one 4 billion of senior notes with an average term of over eight years and used the proceeds to retire debt carrying an average term of one eight years.
Lastly, incorporating the items addressed earlier, we are increasing our full year guidance.
From a previously elevated range of $2 24 to $2 28.
To a new range of $2 26 to $2 28.
At the midpoint, our updated guidance range implies a seven 1% growth over 2020 results and is <unk> <unk> higher than the midpoint of our original guidance.
It is important to note that placing several development projects into service earlier than originally planned drove nearly <unk> of this year's outperformance and pulling that NOI forward into 2021 temporary 2022 growth by approximately 1% with that I'll hand, the call back to Steve. Thank you.
Close to call with a recap of our key message points.
Our company's investment strategy is supported by the defense economy.
Which is funded by the United States Defense budget aligned with priority National security needs of the United States.
The U S defense budget has been well funded since fiscal year 2016.
It has bipartisan support for continued growth to address the increasingly risky global threat environment.
Our portfolio office user usage levels remains very high.
It has high security defense work cannot be performed from remote locations.
Our defense tenants are not experiencing diminished office usage significant contractions or seeking short term lease extensions.
Other they continue to require densely configured office space to accommodate mission growth and as our results continue to evidence theyre, making long term commitments to our defense it locations.
So all of our development vacancy in renewal leases.
At or above pre pandemic levels, demonstrating that our tenants commitment to working in their offices for the long term and their confidence in the outlook for the defense industry.
Our company has exceeded its business plan throughout the pandemic here in this year were experiencing further strengthening business fundamentals and achievement, suggesting continued strength and performance in coming years clearer.
Clearly our strategy of investing in their priority defense missions locations and creating value through new low risk development at these locations.
Very different from other office companies and continues to deliver high quality <unk> per share.
Cash flow growth, regardless of the broader economic trends.
Operator with that please open up the call for questions.
Thank you Mr <unk>.
At this time to ask a question you will need to press Ironwoman your telephone.
Good Joel your question just press the pound key.
The first question comes from the line of Manny Korchman from Citi. Your line is now open.
Hey, good afternoon guys.
Maybe just a question for other Potter Anthony but you've got a pretty good leasing.
Backlog, that's built up how should we think about that translating into an increase in physical occupancy just from a timing perspective.
In terms of occupancy it's probably a.
Based on the leasing that we've done this quarter, it's a second or third quarter or Aki.
Occupancy for next year.
Typically it's a five to six month period from execution to.
Two oxy to occupancy.
Does that hold for the MVP lease as well.
It does.
Okay and then.
Just looking at the leasing stats concessions continue to be pretty high, especially on the new leases.
Is there any relief coming there isn't anything specific.
That went into that that drove those numbers as high as they were.
Well, our new leasing for the quarter, we had one lease that was an outlier on the high side due to the fact that it was shelf space. It was our 68000 square foot lease and so.
The <unk> deal was a little higher than the rest overall if that deal was removed army.
Quarterly number was $6 71.
Which tracks very nicely with our five year average for the quarter, yes to be clear that the U S government leased 310 MBP.
And although it's a five year lease term that tenant will add private building for extremely long period of time.
Thanks, everyone.
Yeah.
Your next question comes from the line of Craig Mailman from Keybanc capital markets.
Is open.
Both Greg and Greg.
Okay.
Craig Your line is open.
He's going to sell officer, Sir you might have fallen out of the cell can you just go on to the next question. Please. Thank you. Yes. Your next question comes from the line of Jamie Feldman from Bank of America. Your line is now open.
Hi, Thanks, and good morning, maybe.
Maybe just to start can you talk about some of the Baltimore explorations and where you stand on that selling us.
And tenant interest.
Well there is there.
There is two large events.
Transamerican Vacates January one.
And we have marketing activity tied to what I'm talking about Youre Ryan, Yes, we have about 100000 square feet of prospects that we're working with currently for the 140000 square feet that we expect to get back.
As Steve said January one.
Yeah.
Progress is slow, but methodical on those as well and we're very encouraged by the response.
Once the space was put on the market.
As the top of the building, it's unique space in downtown Baltimore, and I think the current level of interest indicates.
Overall interest in that space.
As far as the other large animal care first over at $15. One Clinton, we continue to progress on the renewal and expect that.
Happen very soon.
Okay, great. Thank you and then I guess just at DC six I.
I know you're.
It sounds like its certainly not on year end.
You guys look ahead to next year.
Thank you will still do the same thing just kind of.
Keep it in I assume late in the year for guidance.
What's a realistic expectation is set here about when that could actually get done.
Well I think our words said, we're no longer in the business of projecting the fifth.
Finishing date.
There is absolutely no reason why it can't get done quicker.
Over the next quarter, it's just been amazingly frustrating in the change in personnel.
And the lack of progress.
Interesting to note.
Our relationship on the renewal side, we also have.
Regular activity on the operating side.
Our activity from the operating side makes it crystal clear theyre going to stay in the building.
No, it's not a higher priority for them, but.
We continue to await.
Sure.
Or more.
But.
Affirmative.
Schedule from them.
With respect to guidance for next year, when we come out with that we will be clear about what we've assumed in the.
And the low and the high end of our range.
Therefore, the midpoint with respect to 2022, so that we can report off of that once the.
Actions completed.
Okay. Thank you.
Just thinking about data centers in general I mean, do you think you could ramp up development here more in.
If you look at the land Bank I think you've got room for maybe what three or four more on your current land.
Should we be thinking about that as a as a avenue of growth.
We have over 1 million square feet of capacity on the land we have.
I think youll see some substantial leasing them at land next year.
And that's based on discussions today.
Yes.
Okay.
And then.
On the development pipeline can you talk about the College Park development, how you're making progress there you're only a couple.
A couple of projects that are around 50% leased at this point I'm just curious how that one churning.
Two tenants that are negotiating the closeout that building.
And frankly, you might require additional space in the future, which could trigger the next building.
One of those May get signed by the end of the year.
The other one is.
Government funded cyber program.
And because of the.
<unk> process. It may not get done by the end of the year, but we stopped marketing that space to anybody else.
Do you see expanding a lot more in that sub market of.
Of the one or two buildings and that's it.
Well, we have significant capacity beyond.
What we're doing.
I would expect one building in the next couple of years.
And then we'll see what happens we built the demand so as demand rises we have additional capacity to deliver.
Okay, but you are comfortable sitting on that land.
Longer term.
The land really has no cost to us because it's part of the joint venture with the University of Maryland. So when the land gets contributed into each of the individual building developments that land value becomes part of their equity.
<unk>.
So there's really no cost to the company of carrying that land.
Got it okay.
Thank you.
Thank you.
Your next question comes from the line of Steve <unk> from Evercore ISI. Your line is now open.
Yes, thanks, good afternoon.
First I was just wondering if you could provide a little bit more of a breakdown on the million square foot development pipeline.
How does that break out between sort of office and data centers and then maybe within the office component if theres any flavor for.
Just wear.
Is that in Huntsville is setup and MBP other parts of the portfolio.
Sure. It's about because we've just signed a bunch of defense 80 leases currently about 60% data center shell.
40% defense.
And then 40% is broken between.
MVP in Redstone Gateway.
Okay.
And.
Yes, when you look at your kind of occupied and leased percentages. Most of your submarkets are kind of niche.
Low to mid nineties.
Only <unk>, two standouts or what your label as Howard County, and Northern Virginia, and I'm. Just wondering if you could sort of talk about you talked about good vacancy leasing, but I'm just wondering if you or Todd could speak to what youre seeing in those two markets, which are certainly the laggards within the portfolio.
I'll jump on.
Virginia in Howard County.
You have one answer with about 90000 square feet of vacancy.
Northern Virginia in Mero field.
And the velocity in that.
Sub market is fairly slow.
Our.
We signed one lease this quarter and we have some opportunity in the front.
That's a market driven velocity challenge Columbia Gateway is pretty excited even though as Todd talked about it yes.
Our activity in Columbia Gateway is very strong as it is.
Generally in the Baltimore Fort <unk> corridor.
Recent activity in the market some several large transactions that have occurred.
And the activity ratio.
Columbia Gateway area is about 125 presented available space. So.
I would anticipate our Howard county numbers to increase very.
Very soon.
Great. Thanks, that's it for me.
Yes.
Your next question comes from the line of Blaine Heck from Wells Fargo. Your line is now open.
Thanks, Good afternoon, Todd I think you mentioned in your prepared remarks that Redstone would be $2 2 million square feet by the time everything under construction is completed.
Can you talk about how much additional capacity to build <unk> had left their after those projects are done and whether there is any need or ability to acquire more land to build there.
Yes, we have about two 3 million square feet of additional capacity. After these are completed.
And we have the ability to expand down there and currently are.
Considering our options but.
Right now we're about halfway done with the available capacity.
Okay.
Great that's helpful.
Anthony your updated guidance calls for 50 bps to 100 bps of same store NOI. This year year to date, you're sitting at roughly one 5%.
<unk> a dip in the fourth quarter can you just talk us through the drivers there I'm, assuming the redstone moves out might have something to do with that but anything else. We should be thinking about there and then I know you guys arent, giving guidance for 'twenty two but is there any color you can give on what the.
Lower results in the fourth quarter means for same store going forward and any levers you might be able to pull or have in place to increase that in the future.
But the the.
Fourth quarter is going to be less than drive pull down the year to date results because of two things one is the.
The timing of the R&M projects that we talked about that was once I know the current quarter's outperformance that will be executed in the fourth quarter.
And there are some impact from some.
Net.
Incremental net operating expenses in the fourth quarter compared to the fourth quarter of last year.
Because of the increase in attendance at some of our regional office properties.
So those are really the two drivers of the performance for the fourth quarter.
With respect to next year I think we're.
Sure.
I think we will continue to put out information when when we're ready to I think theirs.
Sort of anomalies like these in quarter by quarter that <unk>.
Positive and negative that will talk about if we need to but.
Nothing that nothing right now for next year that would lead us to believe that we would be outside of what we've historically.
We talked about about what our internal growth would be.
Alright fair enough thanks, guys.
Your next question comes from the line of.
Tom Catherwood from <unk> Alliance Melbourne.
Thanks, so much.
Good afternoon, everyone. Steve in the past, you've mentioned that kind of office requirements and layouts have not materially shifted for your new developments.
What are you seeing in terms of specialized building features and these new projects things like skiff rooms force protection or physical setbacks, our tenants' needs changing on that front do you find kind of additional development spend going to those specialized features.
Well with regard to development spend we.
We negotiated a market Ti allowance, we meet the market.
I would kind of use is kind of up to them with regard to but we don't fully from skip it I guess my point.
The demand for skiff.
Is extremely high right now.
There is a.
<unk>.
Set of contractors seeking skiff in and around the MBP.
Can't be fulfilled with existing inventory. So we expect it'll drove continued demand in the future.
With regard to the way space is being used in new development.
I can tell you the recently executed two building build to suit.
<unk> is very interesting because as part of the development costs, we're going to have to actually go to.
Partial structured parking too.
Accommodate the density the Northrop Grumman is going to put in those buildings.
<unk>.
The delivery of space.
Is somewhat slower than we could have normally done because of the extreme technology, they're adding to the buildings, including skiff.
Other.
There are high computing.
Kind of environments.
That space.
So I think I addressed your questions or something I missed.
No that was that was perfect Stephen and kind of along those same lines. Then you may not have a sense of this but any idea then how much more tenants are putting into their space on average over and above those ti as youre allocating maybe for these new projects.
So this is a guess and no more than a guess, but my guess is almost 50% of the TRA, we give them.
Mhm.
<unk>.
I appreciate that and then one more for me.
Specifically looking at your land bank.
It looks like this quarter.
Theres, a delta of about 24 acres and MBP between prior quarter and this quarter, but you didn't start anything.
This quarter in that area is are you accounting for the land differently there or did you just sell something off what was what was driving that.
We rolled out in land.
Cookie for that one time Pat is just.
Just an adjustment for.
The assumed density on the one of the parcels as we look at laying that parcel out.
Four.
The different kinds of uses that we believe tenants are going to need.
In MBP Sal.
Got it so so future requirement adjustments what that was yes. So it's really about how the space will get used it wasn't about putting anything into service or out of using any land for any development. It was about how the team is looking at how that space is going to be laid out and used in the future.
Got it it makes total sense thanks, everyone.
Your next question comes from the line of Dave Rogers from Baird. Your line is now open.
Yes, good afternoon.
Wanted to ask about the long lease durations on some of the developments that you had announced I think during the quarter and subsequent to that sounded like 13% to 16 years can you talk about kind of how the development returns came out on those longer duration leases and to the tenants have out termination options. That's a pretty long lease it seems like from what we're used to seeing.
No they don't have <unk>.
And development returns.
Our threshold return.
And defense Ats is an 8% cash yield they've all been in that neighborhood.
And some slightly better.
And so these arent necessarily tied to a specific contract and so the capital that you answered in the last question is likely the reason they would want to kind of Bakken for that long is that the right way to think about it.
That's correct remember a bunch of the.
Leases we've done it has shown in our new headquarters locations until they are investing in those days is totally because that's where they're going to send it to their business operation in service to the Redstone Arsenal in the future.
Got you that's helpful. Anthony maybe update us on the disposition plan you mentioned I think in your comments for fourth quarter and continued dispositions as you think about it.
Amount of timing for the quarter and then maybe looking into next year.
Any thoughts about that.
So for the fourth quarter, we have.
Two data center shells that were focusing on that would raise about little over $70 million worth of equity capital using our 90 10 structure that we've done in the past.
And as we look into next year as we can.
<unk> been consistently saying.
If our stock price is at a point, where we believe we're getting fair value and we can issue equity at fair value of our first choice would always be to issue under the ATM to match fund the development investment that we're making to the extent that that is an option.
Sure.
After the transaction, we're contemplating for the fourth quarter.
We would still have.
Over $700 million worth of gross value of.
Data center shells.
We could that are either operating or currently under development that we could tap into to fund the equity requirements for continuing to invest in the development pipeline.
Excuse me.
Okay 700.
Great. Thanks for the answers I appreciate it.
Yeah.
Your next question comes from the line of Rich Anderson from F&B C Alliance. Thanks, Good afternoon, everyone.
I have a theory that your occupancy is sort of capped at 93% and is the reason why I say that is.
If you have call it 2 million square feet of your expiring in your retention is 75% will then 25% is about 500000 square feet of new vacancy coming at you and if youre doing about that much vacancy leasing in any given year.
A treadmill.
Is that a is that a region reasonable way of looking at the future for the company.
I think with respect to the operating portfolio.
It may be the one thing that may impact that will impact in that in the future is.
How well leased to the development pipeline is going to be adding to the overall portfolio as those projects are placed into service right. So right now we've got almost 2 million square feet that are underdevelopment, that's roughly 10% of the existing portfolio. There are 94% leased today and we expect by the time they are fully placed into service.
100% leased so we think on the margin continued low risk highly leased development will help drive that off of that.
Number that youre, referring to okay. Good enough.
The difference in the retention rate.
Regional office versus your core defense business.
Well I'm not sure if I can look very good because we're going to get.
150.
Transamerica.
Two.
More than a typical run rate I guess.
Certainly it's been pretty consistent.
But it is going to look pretty good going into next year.
Yeah Okay.
Last question.
D C six sorry, but.
This is this is this.
Obviously, an area of frustration building every day, perhaps but.
Is this a tenant.
That you would.
Is it state to do business with in the future.
As the.
The relationship.
Still okay or I'm, just I'm, just wondering how you feel about them as a potential.
Potential business partner in the future.
Alright relationship is great.
We work with them and like I said in multiple levels operating leasing.
Yes.
Its tenant every data center owner would love to have.
And we're grateful to have them.
This renewal has been.
A little bit frustrating theres been a lot of change in personnel in fits and starts.
We will get through it but it's great tenant we're thrilled to have him and are building.
Okay.
Thanks.
Your next question comes from the line of Rob Simone from <unk> risk management.
Hey, guys How's it going thanks for taking the question.
So.
Hey, Anthony So Super high level question more of like a long term strategic question for OFC. So.
I guess one of the things that.
It came up on this call right like the thought of tapping or the strategy of tapping the ATM to match fund development, but I guess is there a case like a long term case to be made.
That with the.
The nature of your tenants and longer term leases.
Theres a case to be made to maybe potentially like consider taking leverage up a turn or so or whatever that number is.
Actively terming out some longer dated debt pulling that capital forward to fund that development as opposed to <unk>.
The reason why I say that is because obviously like the portfolios a lot cleaner than it was four or five years ago. So theoretically at least you have like these long term contracts plus the plus a better tenant mix to be able to support that so I don't know I just wanted to gauge your thoughts around that and then I have one quick follow up question related to it.
Reasonable people could make that argument.
Certainly.
Performance the credit quality, we have you could argue for a higher debt.
<unk>.
Have run the company in a highly risk averse manner, we prefer having less debt and higher debt.
Over time, we hope to develop our way to a lower.
Debt to EBITDA number.
Sure.
We continue to create meaningful shareholder value.
Level, we're at and we're comfortable.
Sure. Okay that makes sense and then specifically related to that so you guys have I think it's a $300 million term loan.
Coming due late next year whats the plan for that is that like.
And unsecured bonds and refinance or what are you guys going to do with that.
I think we have a few options we could go back to the to the public unsecured market to refinance that.
<unk>.
The bank term loan market is sort of wide open again.
So we believe we have the opportunity to just refinance that with our with our bank group.
That particular loan is.
Fully funded by.
Do we have a bank group of 12 that that loan is actually funded by.
The six folks within the six banks within the bank group that are.
Sort of the.
That's not.
Lower tier banks.
And so we have clearly capacity too.
To take out that term loan with our bank group or to even increase it if we wanted to and we think the market is there to do that.
Got it okay, well thanks, Steve Thanks, Anthony Thanks, <unk> appreciate it.
Yep. Thank you as a reminder to ask a question. Please press Star One. Your next question comes from the line of Manny Korchman from Citi. Your line is now open.
Hey, Steve wanted to follow up on the last answer that you gave me.
My last question.
You said the Tis were high because the leasing at MBP was that the <unk> panel.
Because I thought that was in October not in the <unk> numbers or are the three key numbers are inclusive of that lease.
It's in the three two numbers Miami we.
Just announced with the earnings call.
Quite significant enough to put out individually. So that number is in there it's a $60 ti on a five year deal which drives up.
Sure.
Cost per year of committed term, but.
Our business will that tenant will be and there probably for more than 20 years.
Thanks for the clarification.
Yep.
Yeah.
Your next question comes from the line of Chris Lucas from capital One Securities. Your line is now open.
Hi, Good afternoon, everybody, Hey, Steve just a couple of follow ups, just on the and again I hate to bring it up on the renewal at DC six what is the term for that just trying to understand sort of how long you've been dealing with it versus what the actual.
Duration hearings on that deal.
That's a very good question, we've been negotiated for two years and it's a three year term.
Okay.
And then just going back to the commercial vacancy issues.
What level of interest is there in terms of space available are you.
Seeing space interest across the board for all of the spaces are some space and has more promising competitive nature to it I'm just trying to understand sort of what the.
With respect to just recognize the other portion of the business is pretty well buttoned up.
Are you talking about the regional office.
Yes.
Yes.
Largest concentration vacancy being downtown Baltimore.
And it's the kind of demand you would expect.
Financial services law.
Okay.
Business services and high quality tenants. So you get a premier building great views.
Okay.
Okay.
Question.
Yes, well sort of.
Let me just go back to the Mary field.
Office building you mentioned in the prior question.
That space was taken by a defense contractor that defense contractor space or is that general space.
It was defense contractor space it was given back because of an M&A event.
A big chunk of it another chunk with some contraction.
The contracting tenant recently expanded again.
But that space.
Building fits needs of defense contractors.
Need access to basically the Pentagon.
Connected by a metro rail it makes it very convenient to the Pentagon.
Okay, great. Thank you that's all in.
Sure.
Thank you. Your last question comes from the line of Bill Crow from Raymond James Your line is now open.
Hey, good morning, Thanks for taking the questions.
I've got three but hopefully they are very quick.
How much how much new supply not being driven by OFC.
Is under construction in your markets your Submarkets.
Well very little yes.
Really none.
At the MVP there is rather development that's active.
American even against Us.
Service radius.
At Alabama, Theres certainly other development that's occurred in the city.
But it's really servicing inbound corporate relocation activity a lot of it industrial manufacturing.
Their business is relocating the Alabama Theres no development that we're competing with.
Active.
The defense I T.
All right.
So there's not that much drove into northern Virginia, the market conditions across.
No you've got 18% to 20% vacancy in most submarkets, except where we're located in the route 28 quarter, which slows.
Both were strong strongest work and some noga.
Yeah, that's kind of what I figured so that that kind of leads me to the second question, which is the tenant retention.
You've got 20% to 25% of them.
Expiring.
Defense and leases that don't get renewed so is it M&A is it program funding, but what is the primary reason that they are sticking around.
So.
There is always.
End of a season.
That happens with contract awards and re competes.
And.
It's fairly routine we're going to.
Lived through one in Redstone right now where Boeing was a major component of our contract and they're going to give us back some space.
In another defense contractor one of it and we've leased the space.
To take take its place. So there is some turn like.
Yes.
I would say over the long term truly a third over the last four or five years has been M&A driven.
Yeah.
There is consolidation in the industry.
Typically keep the skiffs in the mission space any sports space comes back and it just creates some turnover.
Alright, and then I'll speak to that and with the DC six question, which is which is simply what's going on with market rents there.
They had had been going down rent stabilized for I think the more product.
They have definitely stabilized.
Pressure that occurred.
In 2019, and 20 was really developer driven there is so much spec development data centers that they are bidding down.
The power rate.
I would characterize the stabilized now there is a huge amount of demand.
Inventory, we got absorbed in those years, so prices really our discussion on the renewal we've been subtle in that for quite some time.
Great. Thank you.
Good.
Thank you there are no further questions at this time I will now turn the conference back to Mr. <unk> for closing remarks.
Thank you all for joining our call today, we are in our offices. So please coordinate any follow up questions through Stephanie.
Thank you for attending.
Thank you for your participation today in the corporate office properties Trust third quarter 2021 results Conference call. This concludes the presentation. You may now disconnect good day.
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