Q3 2022 Corporate Office Properties Trust Earnings Call
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
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Yeah.
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Welcome to the corporate office properties Trust third quarter 2022 results conference call.
As a reminder, today's call is being recorded.
At this time I'll turn the call over to Michel Alain Copt's manager of Investor Relations Ms. Li. Please go ahead.
Thank you Andrew.
Afternoon, and welcome to <unk> conference call to discuss third quarter results and updated guidance for the year with me today are Steve the Dor, President and CEO , Todd Hartmann Executive Vice President and C O O and Anthony Mifsud Executive Vice President 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 in our SEC filings actual events and results can differ materially from those forward looking statements and the company does not undertake a duty to update them Steve.
Good afternoon, and thank you for joining us.
The markets have been highly dynamics since our second quarter call.
But I am happy to report that we delivered strong quarterly performance.
It achieved key financings and leasing milestone.
In Yesterdays press release, we announced that we completed a new line of credit and term loan, which extended those maturities until 2027 and 2020.
Virtually eliminating any borrowing risks for the company.
So 2026.
We also announced record quarterly leasing.
Our third quarter vacancy leasing was the highest quarterly volume.
In the last 12 years.
Our retention rate was 92% our highest in 21 years.
And we fully leased 310 national business Parkway to the U S government.
Our total portfolio is now 94, 9% leased.
At 92, 7% occupied.
Given the success in the quarter.
And our knowledge of large tenant renewal intentions.
We expect our portfolio occupancy to increase over the next five quarters irrespective of the volume of future vacancy leasing.
We expect the occupancy to increase 50 basis points and the pessimistic scenario with no further vacancy leasing.
And 200 basis points in the optimistic scenario.
Our financial performance metrics, we're right down the middle of the fairway.
We're on track to meet our guidance for the full year.
We delivered four 4% compound annual <unk> growth from 2018 to 2021 and this year, we expect to deliver two 6% growth.
<unk> per share absorbing the <unk> <unk> dilution from the sale of PC six in January .
And given the substantial pre leased development pipeline.
We are positioned to deliver compound growth of 4% or better.
2023 to 2026.
And to add valuable assets to our operating portfolio.
Over the past decade.
<unk> has created an investment in the property supporting priority defense missions and select mission critical assets that we collectively referred to as.
Defense 80 locations.
At the end of the quarter. These locations generated 90% of our core portfolio annualized rental revenue.
Demand and the performance of our portfolio at these defense locations is driven by and correlated with National security spending.
Largely immune from conditions in the overall economy.
This fact has been illustrated by the strength of our performance.
During the COVID-19, lockdowns in economic downturn.
And continues to be ratified by our strength in performance this quarter.
The conditions in the financial markets deteriorated so quickly.
Our concentration of leases to the U S.
And high credit contractors supporting national firms and cyber security missions.
Is the foundation of our ability to generate resilient high quality cash flow.
The base defense budget for fiscal year 2022 was passed in March of this year with a five 8% increase and we expect the demand from that increase to continue to materialize through late 2023.
Given the pending election, it's too early to determine the budget increase for fiscal year 2023.
But the range of outcomes appears to be an overall increase of two 6% and low end.
Representing the President's request to Congress.
And six 5% to 8% is approved by the Senate and House Armed Services Committee.
Given the elevated risk in the global and National security conditions, we have high confidence that the defense budget will continue to grow in coming years.
Our external growth strategy continues to be driven by our successful pre leased and low risk development at these proven defense.
Locations.
We have an advantaged position and this unique market is to go to public company landlord for.
<unk> secured specialized space satisfying government requirements today.
Today, we have one 9 million square feet of active developments in defense locations that are collectively 91% pre leased.
During 2020 in 2021.
Wisely protected our balance sheet by refinancing our debt.
And as a result, the current interest rate environment poses limited risk to our performance the $1 $8 billion of bond refinancing completed provided a solid foundation for us to deliver future growth from our operating and development portfolios.
This week, we further derisked, our balance sheet with our new line of credit and term loan.
Turning to inflation, the severe and rapid escalation of material prices over the first half of the year impacted our development costs, increasing the year over year, our cost for like for like development projects by approximately 18%.
The in place inflationary pressures stabilized during the third quarter.
Still increasing but at a much lower rate.
Actually the demand in our defense portfolio was driven by National security needs and funded mission priorities and we've been able to negotiate rents it maintained maintain our development yield targets.
So in summary, we are well positioned to continue to deliver <unk> growth this year and over the next four years.
Absorbed significant interest rate increases and locked in our financing vehicles until 2026, eliminating refinancing risk during the period.
Our leasing demand remains very strong driven by national security needs are.
Our record leasing achievements this quarter provide clarity that we can drive occupancy higher over the next five quarters.
With that I'll hand, the call over to Anthony.
Thanks, Steve.
Operating results and quarter end metrics were all in line with our expectations <unk> <unk> per share as adjusted for comparability of <unk> 58 was.
It was at the midpoint of guidance and keeps us on track to achieve the midpoint of our expected annual results of $2 35 per share.
During the fourth quarter, we expect to place over 900000 square feet of development projects into service, which are over 98% leased and the NOI from these projects supports the <unk> <unk> per share adjusted for comparability midpoint for the fourth quarter.
Our forecast continues to project the midpoint for year end same office occupancy at 92, 5% and annual retention of 75%.
We are narrowing our guidance for the change in same property cash NOI from flat to down 2% to down between 1% and 2%.
And the full year change in cash rents on renewals to a new range of down between one and 2%.
We have experienced the effect of sustained high inflation in the form of higher operating expenses, particularly energy costs. However, the structure of our leases continues to insulate us from the majority of these increase increases impacting our results.
Earlier. This week, we were able to close on a new 60 months revolving credit facility and 63 month term loan that refinanced our only significant debt maturities in 2022 and 2023.
Including extension options. These facilities mature in 2027, and 28 and as a result, we have no material debt maturing until 2026.
At quarter end, only seven 5% of our $2 $3 billion debt portfolio was subject to the impact of increasing interest rates. This included $200 million of LIBOR hedges with a fixed LIBOR of one 9% that expire on December one of this year.
As a result at year end and going into 2023 variable rate debt will increase to approximately 15% of our total debt.
The interest rate environment continues to be extremely volatile and the forward curve for short term LIBOR and sofa increased dramatically throughout 2022.
To give some specifics at the beginning of the year. The average forecast for one month LIBOR for 2023 was one 2%.
At the time of our last call the curve had increased by two 2%.
Currently the increase from the beginning of the year totaled three 4% up another 120 basis points since the end of July bringing the average rate for 2023 to four 6%.
These increases in the forward curve for 2023 will result in higher year over year interest expense on our variable rate debt of approximately $15 million.
This increase will be more than absorbed by the incremental NOI from new lease Commencements and NOI from developments placed into service. However, the additional 120 basis point increase over the past three months has diminished expected growth in 2023.
Despite these rate increases and the pressures that place places on our 2023 through 2026 forecasts, we continue to expect to generate 4% or more compound annual growth in <unk> per share between 2023 and 2026.
Now I'll hand, the call over to Todd.
Anthony.
Leasing activity was outstanding during the quarter further demonstrating the strength of our differentiated strategy of developing and owning assets at advantaged locations supporting priority U S defense missions.
During the quarter, we completed 351000 square feet of vacancy leasing which is the highest quarterly total in 12 years, our leasing accomplishments through three quarters exceeds our annual target of more than 620000 square feet and with another quarter remaining is already 117% of our five year annual leasing.
No.
Demand remains strong and we anticipate further vacancy leasing in the fourth quarter.
Even after signing a record level of leases in the third quarter, our vacant space activity ratio remains high at 89% above our year to date average of 81%.
A record achievement during the quarter was accomplished without contribution from our regional office portfolio, where leasing demand is more impacted by macroeconomic conditions and deal velocity as slow and deliberate.
Importantly in the fourth quarter, 40% of our leased square footage was expansion space for existing tenants, indicating continued growth in mission work from healthy defense budgets are 121000 square foot new lease in Huntsville further expands our relationship with a leading defense contractor and were signed within nine months of the <unk>.
Higher lease exploration.
During the quarter, we signed two new leases with the U S government for a total of 127000 square feet, including a 68000 square foot lease for the final two floors at 310, MVP, which is not 100% leased to the U S government.
Demand was once again broad based this quarter with leases signed in each of our defense markets. The National business Park was most active with 134000 square feet of leases signed during the quarter.
As a result of this activity. The MVP is now 97, 2% leased with only three suites larger than 10000 square feet available.
Similarly in Huntsville, our two 3 million square foot portfolio of completed and near completed properties is 96, 4% leased with only three suites above 10000 square feet available.
We completed 506000 square feet of renewal leasing during the quarter with a retention rate of 92, 2% our highest in over two decades.
Year to date, we have completed nearly one 2 million square feet of renewals with a retention rate of 72%.
Cash rents for the quarter were in line with expectations and rolled down one 1% with straight line rents increasing 5%.
We expect similar renewal volume in the fourth quarter and are maintaining the midpoint of our annual retention guidance at 75%.
Looking ahead to our 2023 and 2024 lease expirations greater than 50000 square feet.
<unk> to expect a retention rate of 95% or greater on these large leases.
Our record vacancy leasing volume and retention rate were achieved with strong fundamentals lease rate concessions and length of term were in line with expectations with average annual escalations during the quarter at a strong two 8%.
We did not complete any development leasing during the quarter and our year to date volume remains at 476000 square feet.
Our development pipe development leasing pipeline remains strong at $1 2 million square feet and we are confident we will achieve our development leasing objective of 700000 square feet for 2022.
With that I'll hand, the call back to Steve.
Thanks Ted.
The summary, summarizing our key messages.
We delivered another strong quarter and we're on track to meet or exceed our 2022 business plan and guidance.
We completed a new line of credit and term loan facilities.
Our nearest material debt maturity to 2026 insulating our balance sheet from refinancing risk.
We broke a 12 year vacancy leasing record during the quarter, providing active currency growth surety through 2023.
Our leasing pipeline remains strong with an 89% activity ratio on vacancy and one 2 million square feet of development Prestwick.
Our one 9 million square feet of active developments or 91% leased.
Assuring incremental NOI from these properties, there will drive <unk> growth in coming years.
The five 8% defense base budget increase in fiscal year 'twenty two.
The strong backdrop for leasing demand through 2023.
Congressional activity suggest the fiscal year 2023 defense budget will be further increase when pass after the election.
We're on track to deliver two 6% <unk> per share growth in 2022.
And we continue to expect compound annual <unk> growth of 4% or greater from 2023.
The 2026.
With that operator, please open the call for questions.
Thank you Mr. Byrd Dork.
Ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone.
Once again, if you have a question at this time. Please press star one one please standby, while we compile the Q&A roster.
Okay.
And our first question comes from the line of Camilo bottle with Bank of America.
Hi.
Sounds like your tenant base is pretty defensible against the macro conditions.
Clearly reflected in our record leasing volume you achieved this quarter.
From your perspective, what could be some fundamental headwinds that would impact your leasing and tenant pipeline.
So in our defense portfolio, there's so little glib, but world peace with the Florida slowdown on our leasing.
It's really for defense tied to the spending.
Coming out of the U S government and as we said in our remarks with the current global and National Security view.
We don't expect that to affect us in the near term.
In our regional office segment, we are more tied to the overall economy.
More importantly.
The markets were in are.
Quite a bit softer than our defense markets. So the time.
Period necessary to win lease deals is protracted and it could take us several quarters to deliver some progress.
Okay.
Let me address the near term.
And leasing maturity.
What would you say your key focus.
For the next six to 12 months.
So.
For the next three months.
We are planning to recycle some capital through.
The joint venture process.
Our highest priority thereafter, we're focused.
You continue to drive growth opportunities through our development pipeline.
Okay.
And just given the market conditions.
And higher capital costs are you seeing any changes in underwriting assumptions for those developments.
No.
We've been very fortunate to be able to increase our rents.
And lockstep with our increases in costs.
Yes.
Our prior call we provided some color on our recent development, we did at the National business Park full building build to suit.
Which is in essence, the twin overbuilt, a similar building, we signed a build to suit in 2021.
The increase in cost was 18% for an almost identical building and the increase Internet route was commensurate right at 18% generating the exact same development yield.
We expect that to continue.
Okay, and then final question for me.
You have a nice occupancy question with the portfolio getting 95% leased.
Thank you for sharing your expectations for occupancy increases under a pessimistic or optimistic scenario.
Should we think about the timing of that translating into physical occupancy is it weighted towards the back half of 'twenty three.
So I don't know that off the top of my head I think it will be rather.
The third and fourth quarter, just considering the volume of leasing we did.
This quarter, it's going to take some time to build out their tenant base and it should start to occupy in the third and then again in the fourth.
Thank you for taking my questions.
Good question.
Thank you.
And our next question comes from the line of Anthony <unk> with JP Morgan.
Yes. Thanks.
So you've got a couple hundred thousand square feet left in the development leasing pipeline that it sounds like Youre confident about for the last couple of months of the year here.
Is that should.
Should we take that as maybe a build to suit that you plan to start or a data center shell or any more color on that.
Yes, we expect to do data center shell build to suit.
Okay, and then with regards to the data center shell business.
What's the ability to move yields on those given.
What's happening in the rate environment.
Well I think Thats, a better question for our next call.
Okay got it and then just last one then on the guidance just make sure I understand kind of the messaging here.
Still pretty confident about this 4% CAGR through 'twenty six but it sounds like thats going to be more backend loaded at this point as we think about our 'twenty three numbers.
So I wouldn't say backend.
That is front end.
Next year, it will be a little bit less than we had expected.
Thereafter, we expect to be pretty impressive.
And then continuing from there.
Okay, great. Thanks.
Okay.
Thank you and our next question comes from the line of Michael Griffin with Citi.
Hey, Thanks, maybe touching back on tenant retention and Todd I know you expanded on them a little bit but it seems like your expectation is for it to continue to be elevated I guess relative to historical averages.
Maybe another way of saying this are you noticing that tenants are stickier now.
Then they used to be.
Well I think our tenant base has always been sticky and we are.
Experiencing series of renewals now that are with that type of tenant that sticky tenants. So I don't know that.
It's a broad based phenomenon that theyre more sticky now than they used to be but.
We're still projecting very high renewal rate with our tenants looking ahead through the end of this year and into next year and thereafter.
Yes, I could add to that is.
It is substantially related to our defense 80 assets.
With considerably less activity or exposure to regional office and we've always had very strong retention in defense.
And there is a significant component of full building U S government leases.
Thanks.
Helpful. Maybe shifting gears to touch on your potential recessionary scenarios impacting your business, Steve I know you laid out sort of a sensitivity analysis around occupancy.
Is there any worry that the tenants are tracking in this leasing pipeline could end up taking less space or maybe backing away from their space needs as macroeconomic conditions continue to change.
So the pipeline is heavily dominated by defense assets.
At least to the extent of call it two thirds.
In the vacancy leasing.
So I'm really not concerned about those.
Needs getting smaller I think ted's comments.
41% of our volume in this quarter where expansion.
And I can't reveal the transactions we are discussing.
As the call started but we have some pretty fast breaking requirements.
That would suggest expansion is still a strong element in our defense portfolio.
Got you that's it from me thanks for the time.
Thank you and.
And our next question comes from the line of Steve <unk> with Evercore ISI.
Thanks, Good afternoon, Steve I was wondering if you could just provide a little bit more color on the development.
Kind of pipeline.
Only need one or two deals to get to over the finish line.
Just curious if those are kind of in your core defense markets like Huntsville, and National business Park or do they include some datacenter shells and kind of what is the outlook for data center shells, given the power situation in northern Virginia.
Alright, so take it in layers out of the $1 2 million square feet in the pipeline a little more than half is defense.
Represented by markets like Huntsville, and the National business Park.
The slightly less than half that as Dave.
Data Center shell.
As activity, we contemplate and land we already own.
With power infrastructure supplying adjacent campuses, we've already developed and so we're less subject to the.
Good.
Timing of installing new electrical infrastructure to supply new sites. So we expect over the next 12 months to fulfill all three of those developments.
Great and maybe Todd can you just comment on.
Some of the I guess non defense leasing activity thinking some of the vacancy that you've got in downtown Baltimore that you'd be trying to lease up at 100 light just sort of what are the discussions like today and has the pipeline sort of changed at all for that space in the last three to six months.
Well the pipeline is constantly changing as our deal flow ebbs and flows over the course of a quarter.
As you see in our deck, our number for 100 light.
Is down but that's a snapshot in time at the end of this quarter, we had discussions with a number of tenants over the course of the quarter that ended up.
Lower cost space at 100 light choosing lower cost space in the market and going elsewhere.
Overall decision, making is extended and.
The current prospects that we have 100 light and in 2100 <unk>. For example are ones that we've been engaged with for the better part of this year.
We anticipate decisions in the coming months, but it's hard to say exactly when.
They will actually resolve their lease issues. So I think as we look ahead.
There is.
Tenants that will be coming into the marketplace would be prospects for those buildings, but our leasing progress is going to be slow and deliberate and it's hard to time when when we will have some completed deals.
Great that's it for me thanks.
Thank you.
Our next question comes from the line of Blaine Heck with Wells Fargo.
Great. Thanks, Good afternoon, just to follow up on Steve's question on the regional portfolio and leasing there.
Can you just talk about how the slower leasing effects the decision and ultimate timing around dispositions out of that that bucket.
Yes, so the buckets got several assets.
And as we have said before all of them are potential candidates for recycling.
But we're going to recycle.
Into opportunity in the market.
Currently there is so little debt available for buyer of office is.
It's just not an opportune time.
To try to take any of them to market.
And our decision will be based on maximizing shareholder value.
So the assets that we did.
Decide to ultimately recycle and the timing will be driven by the occupancy and value positioning of those assets.
Okay. Thanks, that's helpful.
A similar question on kind of the data center shells, you guys are looking to JV. Some of those in the fourth quarter can you talk about whether you've seen any change in pricing for those assets and if so where do you think those cap rates might shake out.
Sort of echoing what Steve said earlier, that's probably.
Better question for our next call we're in the process and the process of negotiating or our transaction right now and we're not going to do that on our call.
Alright fair enough thanks, guys.
Okay.
Thank you and.
And our next question comes from the line of Tom Catherwood with BTG.
Excellent. Thank you and good afternoon, everyone.
Maybe I missed it.
With the sources and uses.
Obviously, followed up on recycling capital and the developments.
How much cash flow can you shield.
Then used to fund developments.
This year in 2022.
About 30% of our development needs are being funded by cash from operations after our dividend and cap and building capital.
That number increases.
Through 2023, and our plan continues to assume that by 2024.
Development.
Equity is funded with completely with cash.
Cash from operations after our dividend.
So we're.
We're still on track to achieve that sort of self funding.
Hurdle by 2000 in 2024.
Okay.
Sure Anthony.
Just.
Stick with that for a second so.
When you say the self funding would the thought be there no more sales youre, taking in that as more EBITDA rolls on to keep yourself leveraged neutral and then it's just your free cash flow or is that just assuming the data center shells that you could continue to sell into the joint ventures is that what you mean, when you are saying is self funding.
I know what you mean by self funding is that we have no transaction risk.
Meaning no sale requirements are venture requirements in order to.
Fund $250 million to $300 million worth of development investments each year.
And with the EBITDA coming online from those development assets, maintaining if not incrementally reducing leverage through that period.
Got it. Thank you. Thank you for thank you for clarifying that.
And then Todd kind of looping back on.
Questions on the regional office leasing.
Your commentary around 100 light on some tenants either remaining in place or choosing lower cost space. When it comes to 'twenty 100 now.
That activity rate there has come down over time is that tenants pulling the requirements from the market is that tenants taking space at other buildings and other buildings is it similar to 100 light is it really cost driven or is it something else as people look elsewhere.
Our principal reduction this quarter was a tenant that chose to take their requirement in New York rather than go into into the district. So.
No it's not it's not really losing tenants to lower cost providers.
In the market.
Got it got it and then Steve kind of last one for me taken a bit of a broader look.
Your commentary around potential 2023 defense spending increases was good but I assume that that's not an even increase across the board.
How are the defense missions in your specific clusters connected to these funding increases maybe said a different way are they getting more than their share of that funding increase or are they getting a less than their share of that funding increase.
So with regard to next year.
We can honestly tell you theres not enough clarity in the documents that are published.
With regard to this year fiscal year 2022.
The operations and maintenance budget.
<unk>, which is where rent is paid.
From.
Increased 10%.
<unk> got a higher <unk>.
A portion of that amount of funding than you.
Overall base defense budget.
But we.
Don't have access to the forward looking data.
Till such time as its.
Past appropriated and agreeing book is published that we can pick through and see how that shakes out.
Understood. That's it for me thanks, everyone.
Thank you and our next question comes from the line of Dave Rodgers with R. W. Baird.
Yes, good afternoon, maybe Steve or Tom just wanted to ask about lease economics overall, it sounds like Youre holding economics on your development projects, which I guess is expected in good.
On a lot of the second generation leasing it looks like those economics continue to slides I was just curious in terms of that being location product type lease term anything more color that you could add on that would be helpful.
Sure so.
When you look at our leasing sets.
I think youre, primarily looking at Mark the mark to market or change in cash or those can be somewhat misleading.
Because the length of term and the compound escalation of prior leases.
At times and longer term leases.
Can be look like a disproportionate drop in the.
Like for like rent, but.
Let me just throw out effect.
Year to date at the National Business Park.
Our renewals.
Rental rates were there.
96, 5% or better than new development rent costs.
So although there were two large leases that rolled down.
They were all down to rents that we could drive a new development off of.
So statistically if not the best metric for us.
Message there for a long time, our embedded growth the longer the term might outpace the growth in the market, but we still have.
<unk>.
Effective rents there has been some pressure kind of.
Improved with cost is there anything cost a little more.
This quarter in our new vacancy leasing.
One of the large leases, we did with 310 BP.
That is in essence, a development tenant improvement.
Set of a tenant improvement on building that second generation and so that kind of skewed our average a little bit to the high side.
But I would.
Suggest we believe we are getting rate increases that were maintaining the strength of the economics of our leases.
Thanks, I think you hit on it there with the concessions and some of that first generation Ti probably showing up in the stats. So I appreciate the color. Thanks.
Thank you.
Our next question comes from the line of Rich Anderson with SM BC.
Hey, Thanks, good afternoon.
Anthony on the.
On the refinancing activity.
You kind of treated elevated reduced refinancing risk for present tense elevated variable rate debt.
I assume I have that right and I'm curious as to.
If you are.
I don't quite understand the trade I mean, I understand it but isn't it sort of like deck chair shuffling as it relates to variable rate debt. I mean, you don't know exactly where you are out of the rate debt exposure is going to be next year could go higher could go lower but youre definitely going to get hit now because your variable rate debt.
Because of the deal you did so could you just kind of talk me through the strategy there.
Sure.
The variable rate debt didn't go up because of our transaction.
The variable rate if.
If we did nothing with our line of credit and we just we just kept the existing line through its term and through March of 2020 for our variable rate still would've gone up by $200 million on December one because.
$200 million worth of LIBOR hedges expire that had been in place for almost seven years.
So.
The transaction really was separate and apart from.
The variable variable.
Variable rate debt exposure, increasing and.
So that was that was something that was going to happen regardless of the transactions. We executed okay. Thanks, Gregg for <unk> Nugget, there and then.
Second question, perhaps for Steve.
I think it was a quarter or two where you kind of laid out the cadence of.
When.
The process of getting a contract and how long it takes to ultimately turn into a lease for you.
I'm wondering if.
The very questionable in concerning environment that we're in today, if there could be a more of a fast track mentality on the part of the Dod.
To move things along.
Some of the threats that are coming out of Russia, and so on and if that could materially move.
The Dod budget process quicker to our actual lease for you guys.
Is that a stretch or is that a possibility.
Well.
It's nothing that I could reliably say, we expect to happen.
The government is extra Shirley procedural.
And.
<unk>.
This year with an election.
We're going to have a continuing resolution at least until December .
Depending on the outcome of the election.
If the.
The.
Composition of the house and Senate changes materially.
The new priority that leads might want more time to increase that.
Budget like they did in 2016 when that composition switch.
That would delay the process several months again.
I'd love to see a more nimble Vod.
Just don't expect it to happen.
It's kind of like your houses on.
On fire, but you need approval to use a fire extinguisher hertz.
It doesn't make a whole lot of sense, but.
The World you are in.
Anyway, good quarter end.
For the time.
Thanks for patience is our middle name.
Thank you and our next question comes from the line of Bill Crow with Raymond James.
Hey, good afternoon, guys real quick clarification, the 4% compound annual.
Growth in <unk>, you expect through 2026 is there any assumption that interest rates come back down is there any assumption about change in overall leverage levels.
And anything built into your longer term model that would reflect the resolution of the Baltimore CBD.
Yes.
Assets.
So.
Okay I'll take them in sequence.
Our comments on this call.
Rely on our forward.
Forward LIBOR and so forth curve.
With.
Our contingency added on.
So it's a very safe from our viewpoint.
In essence, we are projecting the elevated interest rates with some capacity to increase further over the four years.
In regard to the specifics of recycling, we run a variety of scenarios off of our base model.
And there is capacity.
In the in those comments to accomplish.
Regional office recycling or other.
Sources of capital recycling and still hit that 4% threshold.
And Bill the plan does not assume that we're sort of running leverage up to us to generate those returns actually over that period of time.
By the end of 'twenty, six leverage is actually lower than where we start.
Perfect.
Thank you.
Okay.
Thank you and our next question comes from the line of Chris Lucas with capital one.
Okay.
Hey, good afternoon, everybody just a couple of quick ones.
Anthony just on that.
Sure.
Burnt off of the hedge.
Thoughts about adding additional hedging on the floating rate debt.
At some point or do you feel like you're sort of.
Not worthy effort at this point.
And we've looked at it and you really have to go pretty far out onto the curve in order for that to give you any any sort of short term benefit in Europe than rolling the dice on the on the longer end of those of those swaps.
We've done them in the past we've never been a net receiver of cash over there over those terms we've always.
Banks are always one.
So we're.
We're comfortable with that sort of mid teen kind of level.
<unk> right that over this period of time.
Okay and then.
I guess, Steve just a bigger picture question the Hyperscale as reported this week showed decelerating.
Growth in the cloud businesses.
What are your conversations like.
With your clients in terms of their demand any change to the outlook.
No.
The outlook is.
Continues to be very aggressive.
Need for more capacity.
Time.
Fulfilling and there's a high sense of urgency.
And then the last question for me is more of an education for me which is.
As it relates to the defense Department budget, where does.
Weaponry and other assistance to the Ukraine fall in or out of that.
Budget.
Number.
Well.
They can put it in a variety of different places and then there is the current administration.
Money is.
For eight years prior to this current budget.
That kind of money would have gone into something called overseas contingency operations.
Yes.
<unk>.
They've kind of folded that back into the base budget.
For next year, it won't be in the operations and maintenance line.
And where exactly they are going to put it we'll have to wait and see.
Okay. Thank you pretty simple.
Thank you.
Our next question comes from the line of Steve <unk> with Evercore ISI.
Yes. Thanks, just one quick follow up Steve on sort of new development projects that you would start here forward.
How much have you changed your development yields I assume they've gone up I'm, just trying to get a sense for maybe how much.
Well, we've had a very strong development profit margin embedded.
In our development.
Yields historically.
Our cost careful has clearly increased.
With costs that.
Going up.
So I would say currently we are in the kind of 50 <unk>.
75 basis point target higher than we had been.
But ultimately the market will drive the rent.
Yeah.
The different market will drive the cost and the <unk>.
Question is do we see enough value in there to price at the market.
Okay. That's good thanks.
Okay.
Thank you.
Our next question comes from the line of Tom Catherwood with BTG.
Thanks, just a quick follow up Steve you mentioned the vacancy leasing at 310 BP does that resolve all the space. They are now.
Oh, thank you so much.
Yes.
Yes, it is 100% leased to the United States government for a very long time.
Excellent congratulations.
This year at DC, six and <unk>.
Thank you I will now turn the call back to Mr. <unk> for closing remarks.
So thank you all for joining our call today.
We're in our offices. So please coordinate through a show.
You'd like a follow up call.
Thank you very much.
Yes.
Ladies and gentlemen, thank you for participating in today's corporate office properties Trust third quarter 2022 results Conference call. This concludes the presentation and you may now disconnect good day.
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