Q3 2024 COPT Defense Properties Earnings Call
Speaker Change: Welcome to the Cops Defense Properties Third Quarter 2024 Results Conference Call. As a reminder today's call is being recorded. At this time I'll turn the call over to Vinkat Kommineni, Cops Defense Device President of Investor Relations, Mr. Komenani please go ahead.
Vinkat Kommineni: Thank you Kevin, good afternoon and welcome to COPS Defense Conference College to discuss third quarter results. With me today, our Steve Budorick, President CEO.
Vinkat Kommineni: Executive Vice President in COO and Anthony Mifsud, Executive Vice President in CFO.
Speaker Change: Reconciliations of GAAP and non-GAAP financial measures that management discusses are available.
Speaker Change: on our website in the results, press release, and presentation.
Speaker Change: 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 files. Actual events and results can differ materially from these forward-looking statements and the company does not undertake a duty to update them.
Speaker Change: See you.
Speaker Change: Good afternoon and thank you for joining us.
Speaker Change: We produced strong results in the third quarter and continue to outperform our projections.
Speaker Change: Importantly, we executed two strategic acquisitions, which I'll touch on shortly.
Speaker Change: FFO per share is adjusted for comparability with 65 cents, 1 cent above the midpoint of our quarterly guidance.
Speaker Change: Thank you for watching!
Speaker Change: We increased the midpoint of 2024 FFO per share annual guidance again by $0.01 to $2.57, which implies over 6% year-over-year growth.
Speaker Change: We continue to produce very strong operating results, which has led us to enhance our four-year outlook on three key guidance metrics, including same property cash NOI growth, tenant retention, and capital invested in development and acquisitions.
Speaker Change: Thank you.
Speaker Change: There are two key points I'd like to emphasize.
Speaker Change: The first is on internal growth.
Speaker Change: Our teams continue to do an outstanding job operating our portfolio and managing costs, and we've outperformed in terms of vacancy leasing with broad-based achievement across our segments, and we expect to exceed our full-year vacancy leasing target by a good margin.
Speaker Change: The second is on external growth.
Speaker Change: We executed two acquisitions during the quarter.
Speaker Change: The first significantly spans our data center shelf development opportunities to a new market and the second highlights the advantages of our unique franchise in the defense segment.
Speaker Change: The common thread is that they both center on one of our key competitive advantages, which is our longstanding, deep relationships within the defense IT sector.
Speaker Change: Thank you.
Speaker Change: In September, we acquired a 365-acre parcel near Des Moines, Iowa for $32 million.
Speaker Change: For some time now, we've been working in harmony with our cloud computing tenant to find the right market and land to support their growth.
Speaker Change: We identify advantages the Des Moines market has to offer and propose a development program to help them accelerate their capacity expansion objectives.
Speaker Change: We're in active dialogue with our tenant as we plan the site, and I can tell you they are just as excited about the opportunity as we are.
Speaker Change: Let me share some points about Des Moines. It is the fifth largest hyperscale market in the United States.
Speaker Change: It is ample power distribution and supply.
Speaker Change: The regional utility, MidAmerican Energy, generates 62% of their power from renewable sources.
Speaker Change: Des Moines has connectivity along all fiber lines, and it has a deeply, or highly skilled contractor community with deep expertise in data center construction.
Speaker Change: Moreover, the state and local governments are highly supportive and have welcomed the Hyperscale Data Center business with open arms, offering favorable tax incentives.
Speaker Change: Des Moines has been a location of choice for some of the largest hyperscalers, including Microsoft, Meta, and Apple.
Speaker Change: These three companies have roughly 850 megawatts of owned operational capacity, with another gigawatt of capacity planned or under construction, as shown on slide 13 of our flipbook.
Speaker Change: Their investment into data center campuses in Des Moines will total roughly ten billion dollars of full build-up.
Speaker Change: For context, the nearly 2 gigawatts of operational and planned utilization by just these three hyperscalers in Des Moines, Iowa, when added to our planned development, will exceed the electrical capacity generated by the Hoover Dam by 50%.
Speaker Change: Our 365-acre land parcel has zoning that allows for data-centered development and has a clear path to both power and fiber.
Speaker Change: Our initial plans contemplate 15 buildings, totaling 3.3 million square feet.
Speaker Change: supported by approximately one gigawatt of electrical capacity.
Speaker Change: We acquired the land for $90,000 an acre, which is a 20% discount to the most recent data center land assemblage just two miles south of our site.
Speaker Change: To put this in perspective, the acreage we acquired in Iowa for $32 million would cost in excess of $1 billion in Northern Virginia at today's asking price.
Speaker Change: The anticipated benefits of this investment are as follows.
Speaker Change: One, it increases our wholly owned data center shell program from 2 million square feet today to nearly 5.5 million square feet at full build up.
Speaker Change: Two, it capitalizes on the explosive growth in data center capacity driven by advancements in cloud computing and AI.
Speaker Change: 3. It expands our tenant relationship to a market with access to power, a supportive municipality, attractive land values, and long-term growth potential.
Speaker Change: And finally, and most importantly, it will result in significant value creation for our shareholders.
Speaker Change: This acquisition is an important milestone in a multi-year effort to expand our data center shell development opportunities, and we look forward to providing additional detail as we progress through the planning phase.
Speaker Change: Thank you.
Speaker Change: Also in September, we acquired 3900 Rogers Road in San Antonio for $17 million.
Speaker Change: The 80,000-square-foot Class A office building sits just five miles from our one-million-square-foot U.S. government campus. It was constructed in 2005 and it's in great condition.
Speaker Change: We've been expecting this opportunity because the mission growth on our U.S. government campus has pushed the limits of occupancy.
Speaker Change: We identified a suitable vacant property and negotiated purchase terms in advance of the RFP issuance.
Speaker Change: When the opportunity arose, we were perfectly positioned to compete for and win this award.
Speaker Change: Similar to our other full building leases with the U.S. government, this mission will fund investment in high security and operational redundancy improvements around and throughout the building.
Speaker Change: The Triple Net Lease has a nine and a half years of term with 3% annual escalation.
Speaker Change: We capitalized on this opportunity and acquired the building at roughly 50% discount to replacement costs and immediately executed two leases at rents that meet our investment yield target.
Speaker Change: This investment adds another strategic defense asset to our portfolio, which we expect to be leased for decades to come.
Speaker Change: And with that, I'll turn the call over to Britt. Thank you, Steve. Overall, the operating business remains extremely strong, with robust demand persisting throughout our portfolio.
Britt: Our Operations, Development, and Asset Management teams are achieving outstanding results, driving our sector-leading lease levels, occupancy, and retention.
Britt: We finished the quarter with strong occupancy levels at 93.1% in the overall portfolio and 95% in the Defense IT portfolio.
Britt: Occupancy ticked down 50 basis points from the end of the second quarter and 110 basis points from the end of 2023.
Britt: which is a short-term reduction resulting from new investment activities and will be substantially offset with completed and expected near-term leasing activity.
Britt: There was a 30-basis point impact from the 80,000 square feet of initial vacancy at Rogers Road that is fully leased but not yet occupied, and a 30-basis point impact from placing 75,000 square feet of development space into service at 8100 Rideout Road in Huntsville.
Britt: We were recently awarded a lease for 40,000 square feet at 8100 Rideout, which I'll discuss shortly. Excluding these two properties, occupancy increased 10 basis points over the quarter.
Britt: The year-to-date reduction also includes the impact from the acquisition of Franklin Center at the end of the first quarter, which added 90,000 square feet of inventory to the portfolio.
Britt: This is the expected outcome, as we are investing in vacant space to capture known demand at our highly leased parks in San Antonio, Redstone Gateway, and Columbia Gateway. These are temporary increases in vacancy that we expect will result in increased long-term shareholder value.
Britt: Regarding vacancy leasing, our buildings remain extremely well leased, with our total portfolio at 94.8% and our defense IT portfolio at 96.5%.
Britt: We executed 123,000 square feet during the quarter and 387,000 square feet during the first nine months of the year.
Britt: And, I'm happy to report that as of Friday, we have executed 431,000 square feet year-to-date, already exceeding our 400,000 square foot annual target, with two months remaining.
Britt: Our leasing pipeline remains strong with 122,000 square feet in advanced negotiations, some of which we expect to close before year end.
Britt: Given our achievement year-to-date, we have increased our vacancy leasing target to plus or minus 475,000 square feet, which is especially impressive given our extremely high leased and occupancy levels.
Britt: Vacancy leasing achieved year-to-date was 39% of our total available inventory at the beginning of the year, and 52% of availability within our Defense IT portfolio.
Britt: Our leasing activity ratio is 85% in our total portfolio and 92% in our defense IT portfolio, which equates to 730,000 square feet of prospects on 790,000 square feet of availability.
Britt: We have had broad-based leasing activity across our markets, but most encouraging is that over 40% of our vacancy leasing year-to-date has been executed in our Navy support and other markets where occupancy has been a bit softer in recent years.
Britt: One specific property I'd like to highlight is Maritime Plaza in D.C., which is immediately adjacent to the Navy Yard.
Britt: We signed a 33,000-square-foot lease with the U.S. Navy for a high-priority mission that requires SCIF enhancements on over 90% of that space. This deal is particularly important because this is the Navy's first direct lease at Maritime Plaza, as the complex has historically been home to contractors.
Britt: This Navy mission will support priority, long-term, shore-based naval infrastructure upgrades.
Britt: Following this lease execution, we signed another lease at Maritime Plaza with a contractor for 17,000 square feet, and we're working on a separate 12,000 square foot tenant expansion, both of which will support this specific mission for the Navy.
Britt: The leased rate for Navy support has increased 360 basis points since last quarter, and we expect the recent momentum to continue.
Britt: We continued to outperform in renewal leasing as well, as we executed 626,000 sq. ft. for the quarter and 2.1 million sq. ft. for the year, with tenant retention at 88% for the quarter and 84% for the year.
Britt: A couple of notable renewal deals in the corridor include Northrop Grumman for 156,000 square feet, CACI for 56,000 square feet, and Boeing Intelligence and Analysis for 33,000 square feet, all of which are located in the Fort Meade BW corridor.
Britt: Based on our performance year to date, we increased the midpoint of tenant retention guidance by 250 basis points to a new midpoint of 85 percent, which would be the highest retention rate we've achieved in over a decade.
Britt: Our sector-leading retention is driven by three key advantages. One, our buildings are in advantaged locations, approximate to the missions. Two, 80% of our defense IT portfolio contains high security improvements.
Britt: which requires a high level of tenant co-investment. And three, our operations team that manages these spaces are credentialed, possess a high level of technical proficiency, and are singularly focused on serving our customers.
Britt: We continue to work to drive down concessions, to boost net effective rents where we can, while balancing the relationships we have with our customers.
Britt: And this balance is extremely important and is reflected in our historically high retention rate of nearly 80% versus our peers at less than 40%. And this results in a roughly 6 to 1 cost advantage by renewing versus the time and higher cost associated with finding a new tenant.
Speaker Change: Thank you for watching!
Speaker Change: Cash rent spreads on renewals were up 4.1%, while straight-line rent spreads were up 17.2%, driven by annual rent increases of 2.6%, with a weighted average lease term of over four years.
Speaker Change: Our favorable cash rent spreads were influenced by our share of three data center shell renewals, which were executed at a weighted average cash rent spread of over 130 percent.
Speaker Change: Thank you for watching!
Speaker Change: Net of the data center shell renewals, cash rent spreads increased roughly 15 basis points, while straight line rent spreads increased 12.6%.
Speaker Change: Our outlook for retention over the next several years continues to remain very strong. Last quarter, we expanded our disclosure to include our view of large lease expirations for the next 30 months through year-end 2026, as shown on slide 33 of our flipbook.
Speaker Change: During the quarter, we renewed five of the 32 large leases, totaling 643,000 square feet with a 100% retention rate.
Speaker Change: consisting of the three data center shell leases totaling 431,000 square feet and the two defense contractor leases in the Fort Meade VW corridor that I referenced earlier totaling 212,000 square feet.
Speaker Change: We expect a retention rate of over 95% on the remaining 27 large leases totaling 3.3 million square feet expiring through 2026.
Speaker Change: For our three inventory buildings and our recently acquired Franklin Center, we have 510,000 square feet of prospects on 340,000 square feet of available space, which equates to an activity ratio of 150%.
Speaker Change: At 8100 Rideout Road, we were awarded a 40,000 square foot lease with the U.S. government, which we expect to execute this quarter. And once signed, we'll have less than 35,000 square feet remaining to lease in this building.
Speaker Change: At 9700 Advance Gateway, we have 130,000 square feet of prospects on 40,000 square feet of availability.
Speaker Change: At Franklin Center, we have 140,000 square feet of prospects on approximately 90,000 square feet of availability.
Speaker Change: And notably, we are in advanced negotiations on a 50,000 square foot lease with a top 20 defense contractor for Franklin Center.
Speaker Change: And finally, at MBP 400, we have 190,000 square feet of prospects on 138,000 square feet of available space.
Speaker Change: This building doesn't deliver until the end of the first quarter of 2025 and we have demand to lease space from several groups which are targeting occupancy in 2025 and 2026. So we don't expect lease executions until next year.
Speaker Change: Our development leasing pipeline, which we define as opportunities we consider 50% likely to win or better within two years or less, currently stands at about 1.3 million square feet.
Speaker Change: which only includes the first two data center shells of our Iowa development.
Speaker Change: Beyond that, we're tracking over 2.3 million square feet of potential development opportunities.
Speaker Change: which includes the other three data center shells in phase one of our Iowa development. This activity should allow us to maintain a solid development pipeline in the near and medium term. Again, these numbers only include the first phase of data center development in Iowa, as we have another two phases and 2.2 million square feet of capacity beyond this. And with that, I'll hand it over to Anthony.
Anthony Mifsud: Thank you, Britt. We reported another strong quarter with FFO per share as adjusted for comparability of 65 cents, exceeding the midpoint of our guidance by one cent.
Anthony Mifsud: Same property cash NOI increased 9.4% for the quarter and 8.8% year-to-date compared to 2023.
Anthony Mifsud: The 2023 same property pool on a stand-alone basis generated 5.3% growth during the quarter and 6.2% year-to-date.
Anthony Mifsud: The year-over-year increase was driven by lower levels of free rent concessions on renewals and the burn-off of free rent at recent developments now in service.
Anthony Mifsud: As a result of our year-to-date achievement, we increased the midpoint of our same-property cash NOI growth guidance by 50 basis points.
Anthony Mifsud: We established initial 2024 guidance for same-property cash NOI growth at 6% and have increased it every quarter, with the expected midpoint of growth for the year now at 8.5%.
Anthony Mifsud: This increase is driven by lower net operating expenses resulting from real estate tax appeals, overall expense management, and reduced weather-related expenses.
Anthony Mifsud: Stronger Volume and Economics on Lease Renewals, and some accelerated lease commencements.
Anthony Mifsud: Same property occupancy end of the quarter at 93.6% which is a 10 basis point increase compared to last quarter.
Anthony Mifsud: We continue to expect same property occupancy to end the year between 93.5% and 94%.
Speaker Change: Thank you for watching!
Speaker Change: Our balance sheet continued to be strong and well-positioned to take advantage of opportunities and at quarter-end 100% of our debt was at fixed rates
Speaker Change: We have been funding, and expect to continue to fund, the equity component of investments in development and acquisitions with cash flow from operations after the dividend, and fund the debt component with cash on hand, and then draw on our line of credit.
Speaker Change: Our next significant debt maturity is a 400 million dollar bond maturing in the first quarter of 2026 and we plan on refinancing that bond in the public fixed income market.
Speaker Change: Bond investors continue to value the strength of our performance and quality of our cash flows.
Speaker Change: Our bonds are trading at the tightest spreads to treasuries of any equal or higher rated office peer.
Speaker Change: For example, our longest-dated maturity, a $400 million bond maturing in 2033, is trading 10 to 20 basis points tighter than the spreads of our two higher-rated peers with similar maturities.
Speaker Change: Our diluted AFFO dividend payout ratio was 58% during the first nine months of the year and we continue to expect the full year payout ratio will be roughly 60%.
Speaker Change: This strong payout ratio allows us to utilize the retained cash flows to fund the equity in new investments.
Speaker Change: With our first quarter dividend increase, we remain one of only two REITs in our sector to have raised the dividend during the first nine months of the year, which demonstrates the confidence we have in our ability to generate strong levels of pay FFO.
Speaker Change: Thank you for watching!
Speaker Change: With respect to guidance, we increased 2024 FFO per share for the year by one cent at the midpoint.
Speaker Change: This is our third increase this year, as the initial FFO per share guidance midpoint was $2.51 and now sits at $2.57, implying 6.2% growth over 2023's results.
Speaker Change: We acquired 3900, Rogers' road for $17 million, but including Ti and building capital, we expect a total capital commitment of $21 million.
Speaker Change: The acquisition will be half a penny accretive to <unk> in 2025, and a full penny accretive in 2026, as we forecast GAAP and cash rent will commence in the second quarter of 2025.
Speaker Change: We acquired the 365 acre land parcel near des Moines for $32 million.
Speaker Change: We plan to invest another $50 million and site work and infrastructure, primarily for phase, one and 2025 and 2026, bringing our initial total capital commitment to $83 million.
Speaker Change: This forecast of investment in the Iowa project will be roughly half a penny dilutive to <unk> in both 2025 and 2026.
Speaker Change: With that I'll turn the call back to Steve.
Steve Budorick: I'll close by summarizing our key accomplishments and messages.
Steve Budorick: We achieved very strong results during the first nine months of the year.
We increased the midpoint of 2024 <unk> per share guidance.
Steve Budorick: They're one sent to.
Steve Budorick: To $2 57.
Steve Budorick: Which implies over 6% year over year after a pro growth.
Steve Budorick: And we increased the midpoint of 22.
Steve Budorick: 2024 guidance for same property cash NOI growth tenant retention and capital invested in development and acquisitions.
We have already exceeded our full year rate to leasing target with two more months to go in the year.
Steve Budorick: Our liquidity remains very strong and we expect to continue to self fund the equity component of our planned capital investments going forward.
Steve Budorick: And we continue to anticipate compound annual <unk> per share growth.
<unk>, 4% between 2023 and 326.
During the quarter, we completed two important external growth investments so first.
Steve Budorick: The land acquisition.
Steve Budorick: <unk> expands our data center shell opportunity.
Steve Budorick: It increases our development capacity and owned defense 80 land by over 40% to 11 million square feet.
Steve Budorick: And second an opportunity that this stick investment that expands our relationship with our most important tenant the U S government.
Steve Budorick: We have a very disciplined and methodical approach to external growth opportunities grounded by our defense strategy.
Steve Budorick: Which create significant additional shareholder value.
Steve Budorick: <unk>, we had an incredible quarter.
Steve Budorick: We're demonstrating strength going into year end and our land investment opens up a long term runway for development into the explosives demand for AI and cloud computing capacity.
Steve Budorick: And with that operator, please open the call for questions.
Speaker Change: Thank you Mr Bedard, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.
Speaker Change: Our first question comes from Steve <unk> with Evercore ISI. Your line is open.
Speaker Change: Hi, Thanks, Good afternoon, maybe just a couple of questions around the des Moines land acquisition.
Speaker Change: Just maybe help us think through the timing of getting I guess, all the infrastructure in place in order to kind of start construction and then what does that mean.
From a delivery perspective, and then maybe touch on how kind of the leasing for that asset is going to work with your major customer.
Speaker Change: Well I'll take it in phases, there is still some timing.
Variability, we have to work out.
Speaker Change: Sure.
Speaker Change: The waiting the response of our formal request for a phase.
Speaker Change: Power delivery of one gigawatt we.
Speaker Change: We will get that timing in November and then we can react to.
Speaker Change: Midamerican.
Speaker Change: The response to our request.
Speaker Change: With the notion being that if it takes too long, we might be able to self perform.
Speaker Change: Some of the development necessary to bring that power to the site.
Speaker Change: So our thoughts are.
Speaker Change: 25, and part of 'twenty six we will complete the infrastructure.
Speaker Change: We expect.
Speaker Change: All likelihood same leases in that time period at least the initial leases.
Speaker Change: When delivery hopefully in 'twenty seven.
Speaker Change: But could possibly slipped 28.
Speaker Change: With regard to the leasing.
Speaker Change: We anticipate this will be.
Speaker Change: This project will be consistent with our long term program that we will execute pre leases for data center shells in series of one two or maybe even three at a time.
Speaker Change: We will execute those developments deliver the space.
Speaker Change: Fully leased with rent commencing in them today of delivery and.
Speaker Change: It will progress from there.
Speaker Change: Okay and not to get ahead of things since you haven't built one yet or at least it but as you think about the long term ownership I know on some of the prior.
Speaker Change: Projects that you did you were.
Speaker Change: Willing to sell large chunks of those into different vehicles and pull money out would you think about that similarly, or do you have a different kind of long term ownership structure for this project.
Speaker Change: It's our intent and desire to retain 100% ownership of that portfolio as we develop it.
Speaker Change: Inc. As well as the 2 million square feet that will have that we continue to fully owned when we did harvest the value of some of these assets through joint ventures.
Speaker Change: Did it as a financing mechanism.
Speaker Change: We're not in a position to self fund their development.
Speaker Change: Easy to recycle capital to continue our development program. So to the extent, we can manage the pace of this development.
Speaker Change: Within our self funding capacity, we will continue to own them.
Speaker Change: Should the pace of development exceeded them, we certainly have the option.
Speaker Change: To bring those to market, we have a tremendous joint venture partners expressed interest in expanding that relationship and we can do that very predictably and profitably.
Speaker Change: Okay. Thanks, and then last question just on the Rogers' Road. This is kind of your second opportunistic deal.
And you've had pretty good success acquiring these and making inroads on the leasing front I'm just curious how big do you think that that pool as the deals or would you say both of those were just very unique one off opportunities.
You know.
Speaker Change: Well you might be able to get a couple more.
Speaker Change: We have our eyes on a few things.
Speaker Change: But were in this great position, where we have capital.
Speaker Change: We are uniquely well funded there are a lot of opportunities to step in some situations where owners don't have back capital.
Speaker Change: We can get pricing with an asset that meets our strategic.
Speaker Change: Criteria that make sense for our shareholders shareholders, we can do it.
Speaker Change: Not going to force growth through acquisition unless it strictly meets our strategy.
Speaker Change: Okay, and sorry, just just a follow up on the yields or just how do you think about the acquisition yields of like a 3900 Rogers' road against the development yields in des Moines, I realize the timeframes are a little different but.
Speaker Change: How different are those.
Speaker Change: So we basically benchmark at the same target.
Speaker Change: Are we going to put.
Speaker Change: Capital to work in an acquisition.
Speaker Change: Were largely pre leased development.
Speaker Change: Kevin same threshold Rogers' road, we exceeded our threshold level.
Speaker Change: Impressively.
Speaker Change: But we're not going to disclose that number.
Speaker Change: Okay, great. Thanks.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Blaine Heck with Wells Fargo. Your line is open.
Speaker Change: Great. Thanks, good afternoon.
Blaine Heck: Follow up on des Moines, as you stand here today do you have any ballpark figure as you can give us on total spend on the project and then.
Blaine Heck: Funding options Anthony I think I heard you say youre looking to fund everything through retained cash and debt, but I guess given the size of this do you think this will require any equity or at least property sales to fund.
Speaker Change: Well it depends on timing.
Speaker Change: We anticipate this will be.
Speaker Change: Longer term development.
Speaker Change: And we think we can self fund it with our own threshold.
Speaker Change: In the.
Speaker Change: Capacity, we've created and we expect to expand as our.
Speaker Change: Business.
Speaker Change: Situation improves further.
Speaker Change: But as I said.
That pace exceeds our ability to self fund, we're really well positioned.
Speaker Change: Bringing in a joint venture partner someplace recycled Kathryn.
Okay, and then anything you can say on total spend or spend.
Speaker Change: Over the life of the drove it.
Speaker Change: $1 $2 billion or more.
Speaker Change: Okay that makes sense and then Steve we've been talking about your potential expansion into additional markets with with this tenant for a year or two now so it's great to see this investment and I almost hesitate to ask this given that this is such a big project, but I guess given the size of your tenants.
Speaker Change: They have ambitions to go to any other market and what's your appetite and ability to do that with them on a go forward basis.
Speaker Change: Well.
Speaker Change: And I would like to show my cards, very often but look we've got.
Steve Budorick: 12 year history of developing for this customer.
Steve Budorick: We've been able to bring great value to them and by doing that.
Steve Budorick: Serve our shareholders well.
And to the extent, we can find another opportunity.
Steve Budorick: So we're definitely interested.
Steve Budorick: And we'll keep you posted.
Speaker Change: Great I appreciate that.
Speaker Change: One moment for our next question.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Michael Griffin with Citi. Your line is open.
Michael Griffin: Great. Thanks, I wanted to first ask about leasing and wondering if you can give us a sense on kind of if you have a greater ability to push rental rates for your private sector tenants just given the more limited availability and a lot of your markets and then do you have a sense. If there is more pricing power on the vacancy leasing side because tenants might be expanding.
Michael Griffin: You might be adding newer tenants portfolio and how might that compare to pricing power on renewals.
Michael Griffin: Okay, Hey, Michael This is Brett yes.
Speaker Change: I would say probably in terms of where the pricing power that is probably more on the renewal side.
Brett: But certainly seeing opportunities on vacancy as well, but again as I mentioned in my remarks, it's all about balancing the relationship.
Brett: Of what we have with the customers and tenants that we have versus.
Brett: Overly aggressive trying to to Jack brand, So I think it's.
Brett: We just have to look at every case and see where the opportunities are and as we've said on past calls looking at opportunities to push down those concessions is really the first opportunity to do that.
Brett: And then if we can move to phase III, we can we will but it's all about the relationship if we are.
Are too aggressive in.
Brett: Stick a sharp stick in someone's eye then they may agree to this lease but then we won't have them for 10 or 20 years. So it's just something we need to balance with our customers.
Brett: And to answer your last question. It really is more on the renewal side I would say at this point because the amount of impact on the amount of investment. They have made in those spaces is significant and it's really hard for them to leave.
No.
Speaker Change: That's what I would say that pricing power is.
Speaker Change: Thanks, Brett I appreciate the color there and then I know we've.
Speaker Change: Got the uncertainty with the election coming up but kind of as you think about your business are there any scenarios within government that you think might be more beneficial whether its a republican sweep of the white house and Congress or if it's a more divided government anything we should just kind of keep in mind for maybe a political.
Speaker Change: Standpoint, there related to what might be better for your business in terms of the administration.
Speaker Change: Well so.
Speaker Change: The one bipartisan.
Speaker Change: <unk> that exist in DC.
Speaker Change: As for the last eight years.
Speaker Change: His support for defense spending increases in the recognition of the.
Speaker Change: Escalating challenges to our defense program.
Speaker Change: With some of the adversarial countries in the world.
Speaker Change: So irrespective of who wins is selection, we expect support for defense spending to remain strong.
Speaker Change: And it really is independent of who controls to set it for the last four years, so its being controlled by the Democrats we've had great.
Speaker Change: Support for increased spending I think that were to flip the Republicans it would be no different.
Speaker Change: So I think we're pretty well hedged from an outcome standpoint.
Speaker Change: Margin base say communications from candidates when.
Speaker Change: When you're talking about.
Speaker Change: Strength through piece or piece through strength.
Speaker Change: That contemplates such strong defense.
Speaker Change: <unk> capability.
Speaker Change: Goes unchallenged.
Speaker Change: And I would anticipate we'd need.
Speaker Change: More spending as a country as a percent of GDP to achieve that objective. So my gut would tell me if trump wins would be marginally better, but it will be good either way.
Speaker Change: Great. That's it for me thanks for the time.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Tom Catherwood with <unk>. Your line is open.
Tom Catherwood: Thank you and good afternoon, everybody, maybe Anthony starting at just looping back on a prior question on your self funding strategy can you remind us how much development can you fund the year between retained earnings and the additional leverage capacity as projects stabilize.
Tom Catherwood: On a gross basis.
Speaker Change: $250 million to $275 million.
Anthony Mifsud: So we can fund the equity component of that $250 to $2 75, and essentially maintain.
Anthony Mifsud: Our current leverage levels of plus or minus six times.
Anthony Mifsud: Perfect.
Speaker Change: Thank you for that Anthony and then Britt.
On the one 3 million square foot development leasing pipeline, if I back out the two Iowa data center shells.
Speaker Change: You mentioned are in there it looks like the pipeline is still increased 115000 square feet or so compared to Q2 is that directionally correct and if so what types of opportunities drove that increase.
Speaker Change: Yeah, I mean directionally it is correct.
Speaker Change: It is spread out though.
Speaker Change: Across our across the portfolio, it's not in one specific area I will say that as I mentioned in our Navy support we are seeing.
Speaker Change: <unk> activity, there quite a bit a lot of it relating to the navy lease that we signed in maritime.
Speaker Change: There is additional activity there, which we're very encouraged by even beyond what I just mentioned so.
Speaker Change: We are seeing some additional.
Speaker Change: Activity and tours down in Huntsville, as well related to missile offense and defense.
Speaker Change: The cyber activity here in Columbia Gateway continues to be very very strong so it's kind of spread out but directionally correct.
Speaker Change: Got it and Thats actually just following up on that Brett.
Speaker Change: The Navy leasing at Maritime Plaza.
Speaker Change: Especially given that it had traditionally been a contractor building.
Speaker Change: Does that mean that there are kind of full up on space. When it comes to the Navy yard and then kind of as a follow up to that.
Speaker Change: I recall vaguely that there had been.
Speaker Change: Previous plans to add more capacity or more developments to the maritime Plaza site, but I Couldnt remember if that was on top land or on the adjacent parcel to you.
Speaker Change: So is that kind of still an option out there.
Speaker Change: I think on your first question, it's really I mean, there is not that much space left on the Navy yard for them to do something like this but it really is a speed to execution and occupancy that they look to the private sector to to assist them and it was just a really unique opportunity to work directly with the navy build out highly secure.
Based on 90% of the.
Speaker Change: The space that they're leasing.
Speaker Change: And we saw the.
Speaker Change: Yes.
Speaker Change: Follow on leasing that was going to come from it as well so it was a great.
Speaker Change: It was a great opportunity there.
Speaker Change: You are correct.
Speaker Change: If you recall, we leased the land down in Maritime Plaza from Washington gas and the land that we lease includes a parcel of land. It does have development expansion opportunities.
Speaker Change: But none of that is in our development pipeline right now correct.
Speaker Change: Got it I appreciate the answers thanks, everyone.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Richard Anderson with <unk>.
Speaker Change: Wedbush Securities Your line is open.
Richard Anderson: Thanks, Good afternoon.
Richard Anderson: On Rogers Road.
Richard Anderson: Is there a skiff element to that asset.
Speaker Change: Yes, it will be fully gift.
Speaker Change: Okay, and I guess I asked the same question that I asked about Franklin Center.
Speaker Change: Why was it vacant if its a nice building given its proximity is it similar to in terms of like.
Speaker Change: You happen to have this.
Speaker Change: This local.
Speaker Change: Our relationships that that maybe the prior owner Didnt I just I'm just curious as to what caused to be weakened and now suddenly fully leased.
Speaker Change: In the dark of night type of thing.
Speaker Change: [laughter] trade secrets claim man.
Speaker Change: It had been a call center building.
Speaker Change: Yes.
Speaker Change: Very heavily.
Speaker Change: <unk> been very densely occupied.
Speaker Change: Good proteins in great shape.
Speaker Change: This was a defense need and.
Speaker Change: I can't speak for the Kate.
Speaker Change: Objectives or capabilities of the people we bought it for them.
Speaker Change: We identified an opportunity we moved in we.
Speaker Change: Kind of deal it was good for our shareholders.
Yes.
Speaker Change: Given the success there.
Speaker Change: Pretty immediate and also the success that Youre seeing at Franklin Center.
Speaker Change: Does that give you any confidence to start moving the needle on regional office sales I know 2100 is close you've described the capital markets is not there yet, but do you start to get.
Speaker Change: At least a little bit more confident to move the needle on that and take those.
Speaker Change: Last remaining sort of issues off the table or at least start to do it because of some of the successes elsewhere.
Speaker Change: Actually no.
Good morning.
Speaker Change: And the issue is we're going out and buying assets basically off cash we finance it internally.
Speaker Change: Sure.
Speaker Change: The market to support good value on those sales is going to have to be.
Speaker Change: Fairly cost effective debt capacity to invest in office buildings, and that's not there today, so I don't want to mislead shareholders.
Speaker Change: Great Magic, because we bought a couple of buildings.
Speaker Change: Financial markets are going to have to support office investment with that to get good value out of those assets. So we're not there yet.
Speaker Change: Okay and last one for me, it's a bit away des Moines will take some time to evolve, but if you were getting 7% returns in Manassas is it is it similar despite the lower land cost relatively speaking is in that range can you talk about that.
Speaker Change: Well, we don't have final agreement in February it will be in the same basic framework.
Speaker Change: Okay. That's all I've got thanks.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Peter Abramowitz with Jefferies. Your line is open.
Peter Abramowitz: Yes. Thank you.
Peter Abramowitz: So you had pretty strong leasing spreads, particularly in the.
Peter Abramowitz: The data center shell segment this quarter.
Peter Abramowitz: But also just noticed that.
Peter Abramowitz: In Fort Meade, BW corridor, particularly on straight line basis was pretty strong as well.
Speaker Change: So could you just comment on any sort of one time resulted in there that drove that up.
Speaker Change: And then is that an indication of how we should think about pricing power in a straight line basis going forward in that.
Speaker Change: Sub market.
Speaker Change: I think youre fine.
Speaker Change: Let me address that first I think yes, you can think about that as well.
Speaker Change: Are you expecting that sub market clearly.
Speaker Change: It's our strongest.
Speaker Change: <unk>.
Speaker Change: Sub segment with the MVP.
Speaker Change: Representing the biggest component of it and our conditions or our occupancy or.
Speaker Change: Our vacancy is so limited there that we've got great power pricing power.
Speaker Change: That's helpful. Steve and then.
Speaker Change: One of your competitors in the public space has been out buying some.
Speaker Change: What I guess, we would characterize as assets that are similar to your strategy.
Speaker Change: I think cap rates in the low eights now there are some the market differences there.
Speaker Change: For a potential differences in pricing, but just curious.
Speaker Change: In sort of your core markets for defense contractor assets.
Speaker Change: If you have a sense for like where stabilized cap rates are today.
Speaker Change: Well.
So really trade very often I can tell you our estimates.
Speaker Change: Has to be valued much better for us ever even consider selling them.
Speaker Change: Im familiar with one of those.
Speaker Change: Building.
Speaker Change: That competitor bought.
Speaker Change: Very different market Jerry different buildings.
Speaker Change: We are cognizant of that opportunity and elected to pass.
Speaker Change: So as we've said before.
The mission that we serve.
Speaker Change: And we use in the building.
Speaker Change: Our.
Speaker Change: The highest priority when we decide to invest.
Speaker Change: <unk> developed.
Speaker Change: I don't believe those assets are comparable to ours, even though the name of the tenant is similar.
Speaker Change: Alright sulfur many thanks.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Delta and Brzezinski with Green Street. Your line is open.
Speaker Change: Good afternoon, guys. Thanks for taking the question.
Speaker Change: Just going back to <unk>.
Speaker Change: As alluded to some of the data center renewals that you guys signed had a total of 130 basis of 130% Mark to market spread on that I mean are you guys seeing the ability to be able to push rent bumps that you come up on some of those renewals.
Speaker Change: Well those.
Speaker Change: We are the rent bumps on those renewals were 3% each year.
Speaker Change: I think that compares to two.
Speaker Change: Two of our leases, 2.25% rent bumps on 125%.
Speaker Change: So there are higher increases.
Speaker Change: And then I think you guys have an investor day, you guys sort of called out call. It dissipate in the 4% <unk> CAGR over the near term I mean.
Speaker Change: Given what's going on in the operating portfolio of things continuing to be strong and you talked about a 95% retention rate for 3.3 million square feet of large leases through the next few years I mean, you guys sort of feel like that that's.
Speaker Change: Now too low given what's going on what's happened since then or how should we be sort of thinking about that asset, though earnings target that you guys called out.
Speaker Change: The one unknown in the one item mix in 2026.
Speaker Change: Math for us as the refinancing rate for our $400 million bond that comes due in the first quarter of 2026.
Speaker Change: That bond is currently at 2.25%.
Speaker Change #100: We know that is not replaceable at that rate so.
Speaker Change #100: The ability for that to increase.
Speaker Change #100: Is really geared gauged off of the interest the refinancing interest rate on that bond.
Speaker Change #100: And lastly, we put that.
Speaker Change #100: Benchmark.
Speaker Change #100: I think at the end of 'twenty two.
Speaker Change #100: We're going to report on.
Speaker Change #100: Benchmark, we gave our investors until we get there.
Speaker Change #100: So it could possibly be better but we.
Speaker Change #100: We said, we're going to generate at least 4% we're going to report it that way can we give you the final result.
Great. Thanks.
Speaker Change #101: And I'm not showing any further questions at this time I would like to turn the call back over to Mr. <unk> for any closing remarks.
Speaker Change #102: Well, thank you for joining our call today.
Speaker Change #102: Our inner offices serve please coordinate through venkat, if you'd like to follow up call. Thank you again.
Speaker Change #103: Thank you for your participation today and the cops defense properties third quarter 2024 results Conference call. This concludes the presentation. You may now disconnect good day.
Speaker Change #103: Okay.
Speaker Change #103: Okay.