Q4 2022 Corporate Office Properties Trust Earnings Call
Okay.
Welcome to the corporate office properties Trust fourth quarter and full year 2022 results Conference call. As a reminder, today's call is being recorded at this time I will turn the call over to bank uncommon any copt's Vice president of Investor Relations.
We said coming any please go ahead.
Thank you Carmen.
Afternoon, and watch list cops conference call to discuss fourth quarter and full year results and guidance for the year with me today are Steve <unk>, President and CEO , Todd Hartmann Executive Vice President and COO, and Anthony Mifsud Executive Vice President and CFO reconciliations of GAAP and non-GAAP financial measures management discusses our avail.
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 these forward looking statements and the company does not undertake a duty to update them Steve.
Good afternoon, Thank you for joining us.
Upon conclusion of our strategic reallocation program.
In 2018.
Which deeply concentrated.
Portfolio in defense 80 locations.
We entered into what we describe as a new era of growth.
Since 2019.
We've placed over 5 million square feet of nearly fully leased development projects in service.
Creating the foundation for long term growth.
During this period, we raised over $1 billion in capital.
Really from our data center shell portfolio.
And reinvested into other highly accretive low risk development projects.
These activities coupled.
Coupled with the strong leasing in our operating portfolio.
And strategic debt refinancings.
<unk>, 4% compound annual growth for growth.
From 2018 through 2022.
Today, nearly three years after the onset of the COVID-19 pandemic.
We feel the strength of our strategy has been fully ratified deliver.
Delivering reliable growth due to the pandemic era with visible growth for the next four years.
Progressing to a new era of internally funded development.
Now, let's discuss our 2022 results.
<unk> per share as adjusted for comparability of $2.36 grew 3% over 2020 one's exceptional results and his two cents higher than the midpoint of our original guidance.
We completed 801000 square feet of vacancy leasing.
Which is the highest annual level in 12 years.
30% higher than 2021.
Demand was broad based across our defense IP locations with particular success in the Fort Meade BW corridor and Huntsville.
The National business Park at Redstone Gateway are both 98% leased which represents a 300 basis points.
And a 600 basis points year over year increase respectively.
Our core portfolio is now 95, 3% lease.
This level, we've achieved since 2006.
Defense tenants continue to commit to and renew at our locations.
Executing their mission activities in office space.
This leasing success stands in sharp contrast to the weakness in the broader office environment.
This has been negatively impacted by the current economic conditions.
Played very space contractions stemming primarily from work from home.
We achieved 700 476000 square feet of development leasing.
We had expected to sign a 225000 square foot lease for a data center shell in December .
But tenants approval process dragged on.
And the execution slipped a few weeks.
We executed this lease in January .
Represented the remainder of our 700000 square foot target for 2022.
So far in 2023, we're off to a great start on development and leasing.
As noted in our press release, we signed another 193000 square foot build to suit with our cloud computing customer.
At a 46000 square foot build to suit for a new headquarters building for a defense contractor and Huntsville.
Including the delayed lease through 2020 to.
Development leasing executed year to date totals over 460000 square feet.
And within these leases are with these leases.
We now have one 5 million square feet.
<unk> development center, 89% leased.
We placed into service, one 3 million square feet of development projects, which are 99% leased.
Over 900000 square feet of which was delivered in the fourth quarter.
Our 2022 deliveries included.
One build to suit with a defense contractor at the National business Park.
<unk> projects at Redstone Gateway leased the defense contractors, including the new Northrop Grumman campus.
Two data center shells in Northern Virginia.
Okay.
In mid December and then the second week of January <unk>.
We closed on two new 90, 10 joint ventures, with Blackstone and five single tenant data center shells, raising $250 million of proceeds.
We are very pleased with the valuations of these transactions.
And the $190 million of proceeds from the January tranche fully funds the external equity component of our expected 2023 development investment.
We now expect to fund future equity required for investment in our development pipeline from cash flow from operations without the need for further dispositions importantly.
Importantly, we can accomplish this self funding, while maintaining our strong balance sheet.
Conservative leverage metrics.
Any future dispositions will be strategic sales with the goals of harvesting shareholder value and more deeply concentrated in our portfolio.
Our defense it locations.
Turning to defense spending.
The base defense budget for fiscal year 2023 was passed in December with a seven 5% year over year increase which was four 8% higher than the President's budget request.
Recall the fiscal year 2022 budget passed in March included a five 8% increase in followed by this 2023 budget passed in December .
Which added the seven 5%.
In total this is a 100 billion dollar increase in defense spending or 14, 3% in the last 12 months.
We expect demand for the 2020 through budget will materialize, starting in 2024 and drive leasing volume for both our operating and development portfolios.
Moving on to guidance.
We're establishing 2023 guidance for <unk> per share as adjusted for comparability at a range of $2 31 to.
<unk> to $2 42.
At the midpoint of guidance implies 1% growth over 2020 two's results.
This includes the dilutive impacts from the elevated interest rate environment.
And our capital recycling timing.
Over the past three years.
<unk>, which is <unk> encompasses the pandemic.
Historic rise in interest rates.
<unk> per share as adjusted for comparability is compounded at a five 1% annually.
Following 2020 threes modest growth.
We continue to expect <unk> per share as adjusted for comparability to grow at roughly 4% on a compounded basis.
Between 2023 and 2026.
With that I'll hand, the call over to Todd.
Thank you Steve 2022 was a successful year for leasing highlighted by a record vacancy and solid development achievements.
We completed 801000 square feet of vacancy leasing with a weighted average lease term of seven three years and contractual average annual rent escalations of 275%. This is the highest vacancy leasing achievement in 12 years, 30% higher than that of 2021 and 40% higher than our prior five year <unk>.
Average in.
In addition to the overall volume leased in 2022, our vacancy leasing strengthened our concentration in defense.
And was diversified amongst size requirement and location.
Our 68 leases for the year represented 25% increase over 2021.
Our largest lease was 121000 square feet with Lockheed Martin in Redstone Gateway and we also executed 53 leases under 10000 square feet.
We expanded our relationship with the U S government with 126000 square feet of new leases, including 68000 square feet for the last two floors at 310, MVP, which is now fully leased.
50% of the leased square footage was the cyber tenants further demonstrating the strength in that sector.
Our core portfolio finished the year 95, 3% leased with limited inventory available we are setting a target of 400000 square feet of vacancy leasing in 2023 <unk>.
Demand remains strong with the current activity ratio of 78% and more than 70 active prospects and we are confident we will reach our target.
2022 leasing activity also included $1 7 million square feet of renewals.
We expected to execute 2 million square feet of renewals, but three large government leases totaling 316000 square feet were delayed into the first quarter of 2023, we fully expect these leases will renew.
Full year retention was 72%, but that result includes a strategic relocation of a defense contractor for 58000 square feet.
Net of this relocation the retention rate was 74%.
Cash rents on renewals declined 2%, however, measuring the starting cash rent of the tenants expiring lease to the starting cash rent of the new lease the annual compound growth rate achieved in the maturing leases was two 7%.
Renewal leases signed in 2022 include two 5% annual base rent increases on average, which translates into approximately three 5% annual growth in net rent.
For 2023, we expect cash rents to be flat with guidance ranging from down 1% to up 1% and we expect tenant retention will be especially high at 75% to 85%.
This retention expectation highlights the value of these locations to our tenants and of our strategy of concentrating assets proximate to defense it locations.
Our 2023 same property pool started the year at 92% occupied and we expect to end the year between 93% 94%.
Primary components of activity within the same property portfolio includes contractions in our regional office portfolio totaling 75000 square feet, including a 50000 square foot contraction by Carefirst at Canton crossing which will occur in the first half of 2023 and was part of the long term renewals executed in November 2021.
These contractions are more than offset by the commencement of leasing executed during 2022, including the 121000 square foot lease with Lockheed Martin at 1200, Redstone Gateway and over 160000 square feet commencing at the National Business Park, which includes the 126000 square feet of new space with the U S government.
With respect to development leasing the midpoint of our 2023 target of 700000 square feet. We have executed 464000 square feet to date, including two data center shells in a 46000 square foot build to suit in Redstone Gateway for a new headquarters building for Davidson technologies are rapidly growing defense.
<unk>.
During 2022, we placed one 3 million square feet of development projects into service, which are 99% leased.
We expect these deliveries along with the nearly 850000 square feet, we expect to place into service during 2023 to contribute $12 million of cash NOI this year of which 99% is contractual.
The 2022, 2022, and 2023 deliveries when combined with contributions from the remaining development pipeline currently under construction will contribute annualized cash NOI totaling $66 million, 94% of which is contractual.
That I will turn the call over to Anthony Thank you Todd.
Fourth quarter <unk> per share as adjusted for comparability of <unk> 60 was at the midpoint of guidance and our full year result of $2 36.
Was <unk> higher than the midpoint of our original guidance.
The same property portfolio ended the year at 92, 4% leased and same property cash NOI declined 90 basis points. Within this result cash NOI from the defense portfolio increased one 3% offset by a decline in our regional office portfolio driven by the large move out of Transamerica at 100 Light Street.
And the rent reset on a 15 year renewal of Carefirst at Canton crossing.
In January we announced two new 90, 10 joint ventures with affiliates of Blackstone on five data center shells, raising $250 million of equity proceeds.
The transactions closed in two tranches one in mid December for $60 million and another in early January for $190 million.
The transactions were valued at a mid 5% cap rate on forward cash NOI and a GAAP cap rate just below 6.25%.
Given the market environment, we found this to be very strong pricing.
They achieved cap rate was about 150 basis points over the 10 year treasury, the tightest spread to treasuries or any of the venture deals we have executed.
Given the strength of pricing achieved and uncertainty in the capital markets environment, we accelerated to $190 million transaction for the fourth quarter to the first quarter.
Although this change in timing reduces 2023 <unk> per share by a penny we felt it was prudent to take any capital and pricing risk off the table related to development funding.
Separately, our partner placed secured debt on two previously formed joint ventures.
Weighted average spread on these loans is almost 200 basis points higher than our line of credit and our share of interest expense on these loans also reduces 2023 <unk> by about a penny a share.
We expect this financing will be short term measure since the loans only have a two year term.
At year end 2022, our floating rate debt exposure increased to 15% from seven 5% at the end of the third quarter as $200 million of hedges, which fixed LIBOR at one 9% expired on December one.
In mid January we entered into $200 million of new interest rate swaps, which fixed so far at three 7% for three years hedging a portion of our variable rate exposure.
With this transaction, we expect our floating rate debt exposure will remain below 10% during 2023.
With respect to guidance, we are establishing 2023 <unk> per share at a range of $2 34 to $2 42.
Implying 1% growth over 2020 two's results.
At the midpoint. This guidance takes into account positive contributions which include <unk> <unk> from same property cash NOI growth of 3% and 10 from development good elements placed into service.
These contributions were partially offset by <unk> <unk> from higher interest expense based on the increased sofa curve.
Decline in capitalized interest, resulting from the large volume of projects being placed into service and the incremental interest from the venture financing.
And a total of <unk> <unk> from an increase in total G&A expenses from back filling several open positions market increases in wages and a reduction in capitalized labor.
Lower development fees, which accounts for <unk> of this reduction a significant construction work on behalf of a tenant was completed in 2022 and accelerating the timing of the $190 million joint venture transaction.
Our capital plan for 2023 is very straightforward.
We expect to invest $250 million to $275 million to complete our existing $1 5 million square feet of active development projects and commence new starts.
Development investment will be funded with the proceeds from the complete adventure cash flow from operations and our revolving credit facility.
Lastly for the first quarter to 57 midpoint of our guidance range is <unk> <unk> lower than our fourth quarter 2022 results the.
The decrease results primarily from the impact of higher net seasonal operating expenses, which we typically we typically experience in the first quarter.
With that I'll hand, the call back to Steve. Thank you.
Summarizing our key messages.
We completed the highest level of vacancy leasing in 12 years territory 22.
We're off to a terrific start to drove in leasing in 2023.
We have executed over 460000 square feet, thus far.
Our one 5 million square foot active developments are 89% leased providing a strong foundation for continued <unk> growth.
We've raised the necessary capital to fully fund the equity component of our development needs in 2023 and going forward, we anticipate self funding our equity requirements for development investments.
Look for defense spending remains strong.
Defense budget has increased roughly 100 billion.
Over the last 12 months.
We delivered our fourth consecutive year <unk> per share growth that has compounded at a 4% per year since 2018.
In 2023, we're projecting minus <unk> <unk> per share growth.
And we continue to expect compound annual <unk> per share growth of <unk>.
Roughly 4% from 2023 to 2026.
With that operator, please open the call for questions.
Thank you Mr. Roderick with a reminder to ask a question simply press Star one one on your telephone to withdraw your question. Please press star one again, one moment for our first question. Please.
Yeah.
Okay.
And it comes from the line of Jason Belcher with Wells Fargo. Please proceed.
Thank you.
Hoping you could give us an update on what youre seeing in terms of construction cost trends.
And also if you could just touch on how we should be thinking about.
Development.
<unk> near to midterm.
Sure.
In terms of construction cost trends, we actually have a very real time example.
Build to suit that we just talked about with David sentences.
<unk> building to another building that we built.
On the site immediately adjacent.
Adjacent to it.
And those buildings are started almost exactly two years apart the delta in cost is 16, 4%.
But our rent has increased commensurately to maintain our yield on those buildings were seeing from a materials.
Materials cost basis, the costs are obviously still elevated but the increase is moderated a bit.
Some of the materials, most notably steel are actually decreasing so the good news is we're able to continue to develop at yields that met our historical numbers.
Okay.
That's helpful. Thank you and then.
Secondly, can you give us an update on the evolving challenges you're seeing related to power supply cuts in northern Virginia, and any potential delays that might cause.
Construction of new data set of properties.
Well, there certainly is a shortage of.
Power availability in northern Virginia.
Delayed somewhat the execution of the leases that we just achieved.
We expect to get one additional build to suit done.
Sometime in the next 12 14 months.
And the new power supplies that are anticipated will start to materialize later in 2023 2024, and then 2025.
Right.
Got it thanks very much.
Thank you one moment for our next question. Please.
It comes from the line of Michael Griffin with Citi. Please go ahead.
Great. Thanks, maybe we can just touch on leasing for a SEC mainly on retention you are expecting a higher rate in 2023 relative to 'twenty. Two I think Todd you mentioned in your prepared remarks, some of that was driven by a delay in renewals from 'twenty two pushed to 'twenty three.
So is that mainly driving the sort of delta year over year are you seeing a stickier in nature from some of your comments on that.
No I don't think its driving a delta year over year I believe it's a stickier nature of our tenants.
Certainly some of that renewal that moved into this year will contribute.
To the overall retention rate, but.
Really it's more a function of our tenant base and where we're located than it is.
Any sort of variations from year to year in terms of when leases are signed.
Sure.
Gotcha.
And then Steve you also mentioned about strategic sales I was just wondering if we should read into that obviously, you don't need any any equity funding.
To fund the development pipeline this year, but could we read into that as the potential exit of some of the regional office assets, just given maybe a softer better or less demand for those relative to your core portfolio.
The message was intended.
To advise shareholders that.
We will consider recycling capital in the future.
Just simply don't need to fund our development and the <unk>.
Obvious candidates when the opportunities are accretive or the regional office assets in our portfolio.
Alright Thats it for me thanks for the time.
Thanks, Chris.
Thank you one moment for our next question. Please.
From Ken <unk> with Bank of America. Please proceed.
Hi, good morning.
Steve you mentioned that the seven 5% year over year increase in the defense budget should kill demand for space in the portfolio through 2024 is there a way you can quantify or help us better understand the relationship between the increase in defense spending and what you've seen on <unk>.
Plates to new leasing.
Well I don't have algebra.
Hope you estimate.
Estimate the volumes.
We have deep experience over a long period of time, the larger increases manifest themselves in higher levels of leasing and.
The delay between funding.
Demand.
Being recognized in our portfolio is 12 to 15 months. So the comment was intended to suggest that our demand that we're going to experience in 2023 will be funded will be fueled by the increases 22 defense budget and the recent 20.
Three passage will manifest itself in demand in 2024.
Intending to suggest.
We anticipate a strong demand environment for the next two years.
And just based on that demand outlook.
The opportunity here are you seeing any change in the competitive landscape.
No we really haven't seen.
Any change.
We have advantaged land positions in most of our regions and we tend to.
That have much demand from new development.
Sure.
Competition is inferior property or locations.
Advantage positioning continues today.
Sure.
Thank you and just a final question.
You mentioned earnings growing at a compounded rate of 4% or higher throughout 2026.
Do you see limited risk of this changing for the foreseeable future or what could change this outlook either higher or lower.
Your exact words I use was roughly 4%.
And.
I can tell you that 12 months ago.
4% or higher was very comfortable number for us to put in because we had significant cushion in that.
Currently our model suggests 4%.
Better, but as we start to apply scenario stress.
And even higher so for rates or.
More material.
The decline in demand in regional office that could move a bit but.
The key point is the developments we've already achieved.
In the future NOI that we can deliver will generate approximately 4% compound growth in a variety of stress scenarios.
Okay.
Yes.
Thank you.
Thank you.
Thanks, one moment for our next question please.
And it comes from the line of Anthony <unk> with JP Morgan. Please proceed.
Thank you.
I guess first question is on the data center shells that you just announced the new starts can you give us the yields on those so I think you said last quarter you'd have a better indication as to at <unk>.
How they've changed.
I don't want to be too specific but.
They're north of 7%.
Okay got it and then I don't know, maybe just struck me, but the timeline to get those done out into 'twenty five seemed a bit more extended was there anything there driving that or it's just reading it wrong.
Some of it has to do with expected power delivery.
Tend to plan our development schedules to meet.
Expectations of our customer.
And they tend to overestimate the time.
The assets and then ask us to compress so it wouldn't surprise me at all if the.
The delivery dates get moved up pretty.
Pretty significantly.
Delivery date smear the request of our customer.
Okay, I understand and then just last one.
I think you mentioned there is one other data center shell build to suit in the offing for the next year. Just wondering if you can peel back a little bit more of how youre thinking about development leasing this year on what else might be on tap in the pipeline.
Well, we put out what we believe is comfortable guidance.
The scenarios include some lease up.
Additional.
Leasing from.
8100, Redstone Gateway, which is.
100000 square foot building, we've commenced soon is actively developing.
New starts.
Redstone gateway from additional build to suit or pre leases potentially the data center show I had referred to.
In total we have with the Cigna.
Significant harvesting from our development pipeline and we still have over 700000.
<unk> square feet of.
Developments, we consider 50% likely to win or better in two years or less.
Okay, great. Thank you.
Thank you one moment for our next question. Please.
Is from the line of Tom Catherwood with BT Iga. Please proceed.
Hey, John .
Okay.
Tom.
Tom Tom Catherwood. Your line is open please.
You might want to try the next color, which is also a time Catherine.
Alright, one moment please.
Alright, Tom from BTG. Your line is now open please can.
Can you hear me now, yes, we can area.
Excellent. Thank you sorry about that.
I guess I was logged in twice.
So I wanted to take a kind of bigger picture look for a second one when we're thinking about risks, obviously theres a lot of debate around debt ceilings and Washington.
I don't want to get into necessarily.
A discussion around how does that could could play out, but if we think back to when we have had other.
Ceiling debates.
In the past this kind of drove sequestration, if im not mistaken back in the early 2000, tens and Steve we've talked about in the past and if my memory serves me. Thank.
Thank you said that the kind of that type of limit on defense spending or pull back on it couldn't happen again in the same way this time.
My memory, correct on that and kind of what's the risk that we could see some impact too.
Two more cuts or restrictions on defense spending should the debt ceiling debate really get heated.
Well, let me clarify but presented in the past.
So view that kind of budget cutting measure would be unlikely Matt.
Yes.
The current environment merely because of the elevated.
Technological capacity and aggressive threads.
F series today as compared to the way we fell back in 2011, and there would be a logical.
For Congress to enact.
Across the board see question sequestration.
Having said that Congress will do will do and Thats just my opinion.
One of the points, we were trying to point out with the magnitude of the compound increases in defense spending.
The current budget is $100 billion higher than it was 12 months ago.
In fiscal year 2021.
It is our belief within the.
Capacity, that's been created with that increase our business to succeed.
Quite some time.
Recall was sequestration imposed mandatory cuts across the board.
Defense spending went down materially even if we were to flat line at this year's level or last year's level I think there's absolutely needs that will emerge and opportunities that we'll be able to flow.
Within the defense budget.
The line item that.
<unk> rental of.
Lease spaces, that's called the O&M operations and maintenance budget and this year's increased net budget was actually closer to nine it increased eight 7%.
Certainly theres going to be some cutting coming and it's going to be awfully interesting.
I think we're pretty comfortable with the magnitude salary cumulated.
Our demand will continue because of the priority missions that we serve.
Really helpful. Appreciate I appreciate all those thoughts Steve.
Then maybe pivoting over to your comments around self funding of development, but just do some quick back of the envelope it seems like.
Depending on where your yields fall for every $100 million that you deliver you open up another maybe $40 million to $50 million worth of debt capacity, you still stay leveraged neutral and then you'd have to solve for that call it $50 million to $60 million of equity through.
Through your cash flow.
So the question.
Questions that are kind of one.
Is.
That kind of back of the envelope.
Roughly correct and then two.
Are there certain potential impacts to your retained cash flow that could up and that for example, if a leasing costs continue to escalate across the board. If there are additional costs within the regional office portfolio, where you have to put more capital into some of these buildings are there any kind of things on your radar that.
Up and that cash flow for you and cause you to have to look elsewhere for some of the development funding.
So Tom.
When you look at the math I think your math is.
Roughly accurate I think the one piece too to add into that equation.
The the ongoing increase in EBITDA.
The operating portfolio that helps.
That's the leverage metric that we're that we're really managing to as debt to EBITDA.
So as we look at the the benefit of the EBITDA that comes in from the development projects, which is the math that you articulated plus the continued increase in EBITDA from the the operating portfolio, it's really the balance of those things those two things that.
Allow us to fund the equity component of development projects on a leverage neutral basis.
With respect to up ending that math.
Surely there is.
AD.
Incremental capital that could be required for the items that you mentioned, but to give you some context.
In order for a debt to EBITDA to increase.
One <unk> one times.
That's about $35 million to $40 million and incremental debt.
All other things being equal so it would need to be a significant increase in the capital requirements to lease up either parts of the portfolio or building capital that we're not anticipating that's not already built into our model.
So.
We think that the plan as it exists right now has.
Is <unk>.
Demonstrating that we can self fund the development pipeline after this year.
And it has.
A modest amount of.
Cushion built into that given just how we put that math together and then one last comment about risk from the regional office portfolio.
We have been.
<unk> been actively investing capital already.
In those assets.
<unk> been very current.
So that capital in any kind of repositioning of risks we've already spent it.
The incremental capital will need as tenant improvements, where we have vacancy and.
And that's built into our model.
Sure.
Got it that's very very helpful. And then kind of last one for me, maybe sticking with that regional office thoughts and comments.
It looks like there was some recent activity on 100 light Street.
Todd can you maybe update on the status of that in 'twenty 100, L Street as well.
Sure. So in the quarter, we did sign a total of 47000 square feet of leases in our regional office portfolio 35 of that was at 250 West Pratt.
It was a 12 year lease with a law firm, which solve part of the Pandora sublease.
So two floors of that are now on.
On a long term lease and at 100 light we signed a 12.
<unk> 11 year lease for 12000 square feet.
So we're happy.
To put some hand, the bar and there obviously, we've said that that was going to be a.
A number of singles and doubles to get that building leased up and glad to see the activity.
Looking ahead.
We foresee about a 100.
40000 square feet or so of the prospects that will be coming to market in the next 90 days in Baltimore.
So we hope to have some additional activity at the building soon but deal cycles, obviously, a very extended the leasing that we accomplished this year. It was more than nine months from first contact to lease signature from those tenants. So as we've been saying our deal cycles remain extended.
As it relates to 2100 al.
We're at about 150000 square feet of prospects there.
On the short list for over 100000 square feet of prospects.
But to give some context to that.
One of those started out with 22 options and has narrowed the short list down to five so there again I think our deal cycle time is going to be extended.
But we are encouraged by where we sit with some of these prospects but tied to.
Forecast any sort of timing of conclusion on leasing there but.
Encouraged by where we are today.
Yeah.
Got it I appreciate the answers thanks, everyone.
Thanks Pat.
Thank you and as a reminder to ask a question simply press Star one one on your telephone to withdraw the question. Please press star one again, one moment for our next question.
Okay.
It comes from the line of Steve <unk> with Evercore ISI. Please proceed.
Yeah. Thanks, Tom went through a bunch of my questions, but I just wanted to circle back I think the one that maybe Tony asked about.
The development leasing Steve I mean with the delay in the the one data center shell.
I guess I would've thought that maybe your goals for 2003 would have been a little more elevated so I'm just trying to really gauge kind of your level of I guess conservatism. There just given all the positive commentary that you've kind of laid out about the defense budget the demand potentially another data center shell that that in and of itself would probably.
Yeah to the goal without doing any defense leasing so I guess what are we missing here.
No I think you are.
Correctly interpreted.
Our goal is relatively cautious.
There could be opportunity to exceed that goal.
But the one thing we have experienced.
Since costs have gone up decision times take longer.
We're projecting over an 11 year 11 month period so.
The timing is an issue.
I can tell you that we're bullish on development.
700000 square feet that we characterize as 50% likely.
To win in two years or less we've got another million seven and opportunities that we're <unk>.
Evaluating.
But it's more of a timing risk concern for this year.
Okay, and maybe going back to Tom's question on the.
Some of the.
Non defense leasing I know Todd.
Towards the Hunter late treat many times talked about prospects that have kind of come and gone.
I guess what are the risks that.
Some of the newest prospects find space elsewhere, how much price sensitivity are they kind of where else are they looking in both Baltimore and digest down in Washington.
Well.
Let me take a swing into Washington, before I'll, let Todd finish.
The one good dynamic.
You can see in downtown DC.
Is that the available inventory in the trophy class.
<unk> come down and there is.
Not a lot of choices for larger tenants and.
And given there were a trophy building.
Kind of feel like our opportunity set is.
I mean broadly rather than tightening.
Todd you can do with Baltimore Thanks, Steve.
Well, it's hard to answer.
The where everybody is going to look we've got some prospects that are yet to come to the market I would just say that the overall vacancy rate in Baltimore is over 20%.
And I would anticipate our prospects to cast a wide net and take their time choosing a location.
As Steve said earlier, we've invested in 100 light, we're very happy with the way. The building is showing I expect us to be very competitive.
There's going to be a lot of options for the tenants.
Great that's it for me thanks.
Thank you and our next question one moment please.
It comes from Dave Rodgers with R. W. Baird. Please go ahead.
Hey, Steve Good afternoon.
When you look at your two core kind of parcels MVP in Huntsville, I think youre, 98% leased your development pipeline is 89% leased.
And youre pretty confident or at least cautiously optimistic about the growth of the business over the next couple of years. So can you talk about kind of spec development and whether you would consider that and two I guess, if you would or wouldn't is that a function of maybe the types of buildings that are needed or they are just becoming more specialized do you think you would benefit from putting more space into these.
Core locations and I guess, how do you kind of handicap that or think about that over the next couple of years given your overall tone today.
Yes, so youre at Huntsville.
Our completely one building we built on spec.
Our plan is to constantly be ready to add the next building.
So we're advancing.
Work too.
Get ready to build the next building.
We started to sign leases for this one.
The MVP demand this year really was.
Very strong.
<unk>.
Drove us to a level I think a little quicker than we thought we're going to get there.
So we're actually working.
Start scenarios for three different.
Buildings.
To be in a position to move quickly.
Capture demand.
Two of those would be contractor and we're starting to advance our readiness to do another government protein if we see that demand.
Materialise.
We're cautious in this environment to put out capital, where we don't have demand.
Because we all know how expensive short term.
Our fixed debt rates are.
So we'll be very prudent, but we also want to be extremely well prepared to seize the opportunities when they come.
In terms of the demand for those types of buildings is that a demand that you see you kind of mentioned the 600000 in the $1 seven behind it is that something of demand, where you could see potentially more lease signing this year does that still feel like it's probably at 24 type of event.
Well, we expect some we expect solid progress at Redstone Gateway.
<unk>.
That surprised me at all if we go to Q&A.
Allowed us to start a building at the MVP this year.
Okay.
Alright, alright, thanks, Steve.
Okay.
Thank you and I will now turn the call back to Mr. Patrick for closing remarks.
Thank you for joining our call today, we are in our offices. So please coordinate through Venkat, if you would like follow up call.
Good day.
Thank you for your participation today in the corporate office properties Trust fourth quarter and full year 2022 results Conference call. This concludes the presentation. You may now disconnect good day.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Okay.
Yes.