COPT Defense Properties

Welcome to the Corporate Office Properties Trust First Quarter 2020 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Stephanie Kusin-Kelly, COPT's Vice President of Investor Relations. Ms. Kusin-Kelly, please go ahead.

Thank you, Joelle. Good afternoon, and welcome to COP's conference call to discuss first quarter results. With me today are Steve Bedorek, President and CEO, and Anthony Mifsud, EVP and CFO. Reconciliations of GAAP and non-GAAP financial measures management discusses on this call are available on our website and in the results press release, supplemental information package, and results presentation posted on our website. Before I turn the call over to Steve, a quick reminder that forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our SEC filings. Actual events and results can differ materially from these forward-looking statements and the company does not undertake a duty to update them. Steve?

Good afternoon, and thank you for joining us. We hope that you and your families are healthy and safe during these challenging times for our country and the world. Today, I'll address our first quarter operating results, the business impacts we are experiencing from the pandemic shutdowns, and lastly, our outlook for the rest of the year. We had a strong start to 2020. First quarter results exceeded our guidance range, primarily due to low weather-related costs, which also drove strong same property cash NOI growth of 5%. Our core portfolio is 95.2% lease, and our occupancy increased by 90 basis points during the quarter to 94%. Driven by last year's record leasing, our sector-leading retention rates and our continued ability to place highly leased developments into service. Leasing volumes executed to date have been solid. We completed 631,000 square feet of leasing in the first quarter, including 488,000 square feet of renewals, or roughly one-third of the scheduled annual expirations. We achieved a robust renewal rate of 89%, and our rents rolled up 11% on a gap basis and down a modest 1% on a cash basis. This volume includes a full building renewal with the U.S. government at the National Business Park and a full building renewal with a defense contractor in the BW corridor. First quarter vacancy leasing was strong as the 143,000 square feet we leased in the quarter exceeded last year's first quarter volume by 13%. In April, we executed a build-to-suit transaction at Redstone Gateway in Huntsville. As detailed in the press release we issued last night, we're developing a new headquarters building for Cummings Aerospace, a leading provider of engineering solutions for complex aerospace systems. Additionally, we await delivery of the executed lease with the U.S. government for a large block of space at 100 Skird Gateway. Both of these leases were expected to close during the first quarter and were delayed by process friction during the shutdowns. We also made strong progress at DC6. We recently executed a new 3.1 megawatt lease with a U.S. government contractor to bring a long-term supercomputing contract into the facility and backfilling the contractions we previously disclosed. The tenant is a Fortune 100 company with whom we have a very strong relationship. Additionally, the renewal negotiation for the 11.25 megawatt expiration this year is progressing well, and we expect to complete it this quarter. We placed the 230,000 square foot 100% lease development into service during the quarter. Following that delivery, our active developments total 2.2 million square feet that are 78% leased currently and will be 86% leased upon delivery of the new lease with the U.S. government. Now I'll turn the discussion to the impacts of the pandemic shutdown it's had on our business, which I am pleased to report have been very minor. Our operating effectiveness remains unchanged. We implemented our long-established pandemic operating protocol and business continuity plan, the combination of which have allowed us to continue our operations seamlessly. No COPD employee has been confirmed with the virus, and our systems are supporting over 190 remote workers each day without failure. Our properties have remained fully operational throughout the crisis and the reported infections among our tenants' employees is very low. New lease negotiations and discussions that commence before the shutdowns continue to advance. Various processes necessary to complete leases take more time with remote working, so the timing has slowed, but the volume of demand for our locations has remained high during the pandemic shutdowns. Since our February call, our shadow development pipeline of future development opportunities has increased by several hundred thousand square feet and now exceeds two million square feet. The one area of activity that has been affected by the shutdowns is showings for new vacancy leasing. The tenant broker shops shut down their tours in response to the virus, and as a result, new space showings have been virtually nonexistent since late March. the only exception being new space showings with the U.S. government, with whom we negotiate directly. Accordingly, although we expect to see a flurry of activity once markets reopen, we expect to see some transaction volume get deferred into the third or fourth quarters. Development activity on our 2.2 million square foot pipeline has continued to advance unimpeded by COVID-19 shutdowns or labor quarantines. We have experienced some minor delivery delays or disruptions, but we've either resolved them or substituted vendors to maintain our schedules. Our high concentration of U.S. government and defense contractor tenants has largely insulated our operations from COVID-19-related cash flow stress. As a result, rent collections have remained very high during the shutdown period, and we collected 97.4%. of total April billings. The resiliency of our revenues reflects the strength of our tenant base and the mission-critical locations. Eighty-eight percent of our revenue comes from locations supporting national defense, which are designated as essential businesses. So the majority of our tenants are exempt from the shutdown restrictions. Furthermore, their cash flow is tied to long-term contracts or U.S. government funding, and not general commercial activity. Regarding tenant rent relief, I'm pleased to report the impact on revenues is nominal. The largest set of tenants requesting relief are the local food service tenants in our portfolio. These tenants are an important component of the value proposition we offer, and we're working with them to ensure our properties have appropriate amenities after this crisis has passed. We're offering one quarter of free rent to these tenants in exchange for extended lease terms. To date, this set of concessions represents 0.13% of annual revenue. We have a handful of tenants whose businesses are impacted by social distancing. For these tenants, we've granted timing flexibility to defer up to three months of cash rent and repay the amounts in full. over relatively short periods of time. To date, this set of rent concessions represents 0.35% of annual rents, bringing total concessions granted to date to just under 0.5%. We do have some additional tenant discussions that are currently unresolved. If we were to accommodate all of these requests, and add them to the rent relief already granted, the impact on our annualized rents would approximate 0.75%. With all the impacts we can see right now, we are well positioned to meet the midpoint of our original guidance. However, we believe it is prudent to adjust our guidance down by a penny to provide capacity to absorb unforeseen after effects of the shutdowns. Our revised guidance continues to assume that developments placed in the service contribute between $20 and $22 million of cash NOI to full year results, 92% of which is from executed leases. Upon delivery of the government lease in Huntsville, this number increases to 99%. In addition to the 230,000 square feet placed in the service this quarter, We remain on track to place another 1.2 million square feet of 98% lease space in the service during the balance of the year. The incremental NOI from these projects will help drive this year's FFO growth and position our company to deliver robust growth in 2021 when we expect to place at least another 700,000 square feet of highly leased developments in the service. Lastly, our negotiations for new development leasing and discussions for new buildings have steady momentum, giving us a high degree of confidence that we will meet our 1 million square foot objective. With that, I'll hand the call over to Anthony.