COPT Defense Properties

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

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

Good afternoon, everyone, and thank you for joining us. I'm going to start my remarks by focusing on the big picture. Between 2012 and 2017, we executed our strategic relocation plan with the objective of creating a franchise that would generate durable cash flow growth regardless of the broader economic environment. We methodically recycled capital away from traditional commodity suburban office properties and into developing assets at strategic defense IT locations. We also delivered to create access to public investment, create bond market, and enhance our financial flexibility. Before the SRP, we derived only half our annualized rents from defense IT locations. Today, We drive 88% of our rents from locations that support defense activities of the United States government and its contractors engaged in national security, defense information technology, and cybersecurity activities, among others. These activities are driven by long-term contracts in U.S. government funding and are not correlated with the general economic activity. The missions executed in our buildings include never shut down. Our performance during the pandemic shutdowns in this period of economic uncertainty affirms the strength of the franchise and our differentiated investment strategy. Our portfolio locations and tenant concentrations position us to continue executing our straightforward discipline plan of growing cash flow through low-risk developments at our defense IT locations, and solid property operations. The fixed income market validated the strength of our franchise in September when we issued $400 million of senior unsecured notes at an extremely attractive rate. We also received overwhelmingly positive feedback from investors regarding our portfolio quality, the strength of our balance sheet, and the durability of our cash flows. In this context, I'll highlight our major achievements for the quarter and for the first nine months. Our third quarter FFO per share of 54 cents exceeded the high end of guidance by a penny and represented our third consecutive quarter of outperformance. Leasing has remained solid. We completed over 1.1 million square feet of total leasing during the quarter and 2.7 million square feet during the first nine months. These totals include 244,000 square feet of development leasing in the quarter and 520,000 square feet during the first nine months. Today, we have completed build pursuits at three different defense IT locations, evidencing not only the depth, but the breadth of demand. These build pursuits include 46,000 square foot facility with an aerospace defense contractor at Redstone Gateway, and two roughly 100,000-square-foot high-security buildings for defense contractors, one at the National Business Park and the other at our San Antonio campus. We also completed an approximate 170,000-square-foot lease with the U.S. government at our first secure campus building in Redstone Gateway. Notwithstanding the 244,000 square feet of development leasing achieved during the quarter, our development leasing pipeline increased by 200,000 square feet to 2.4 million square feet, approximately half for the U.S. government and defense contractors and half for data center shelves. Our development leasing pipeline remains robust and diversified, and we expect to meet or exceed 1 million square feet of development leasing for the year. Renewal leasing volumes and tenant retention rates remain very strong. We're on track to exceed our 20-year record of 80% retention set in 2017. We completed 841,000 square feet of renewals in the quarter and 1.9 million square feet during the first nine months, resulting in renewal rates of 89% and 84% respectively. Lease economics were in line with our expectations. In the quarter and for the nine months, cash rent rolled down 2% and annual escalations and renewing leases averaged 2.4%. CapEx on renewals was only $1.45 per square foot per year of term in the quarter and $2.05 for the nine months. Average lease terms on renewals were 3.2 years in the quarter. and 4.2 years for the nine months, excluding the two one-year annual renewals with Boeing at Redstone Gateway, totaling 242,000 square feet. Lease terms average four years in the quarter and nearly five years for the nine months. We also completed an early renewal with Booz Allen Hamilton for 130,000 square feet at the National Business Park. As a result, and as shown on slide 14, we have no leases of 100,000 square feet or more expiring in 2021, and only 7.7% of our annualized office rents expire next year. Regarding the 11.25 megawatt renewal at DC6, the lease converted to a rolling six-month lease in August, so the tenant is under no pressure to conclude a transaction quickly. and we continue to work in harmony with them towards a longer-term lease. We are confident that the customer will remain in our property. The deployment is a high priority. Its power utilization is very high, and among the matters under negotiation are enrichments to the facility's resilience. By way of example, since our last call, the tenant has requested an additional enhancement to our security system that is in excess of market norms, and we're working to provide that enhancement. Notwithstanding the outcome or the timing of the renewal, given the rolling lease structure, we are confident we will deliver healthy FFO growth in 2021. In terms of vacancy leasing, results in the quarter were in line with our revised expectations. 61,000 square feet leased in the quarter brought our total for the nine months to 274,000 square feet. Although vacancy leasing volumes trended lower during the shutdowns than our original forecast, impacting year-end occupancy expectations, based on our leasing activity ratio, we expect solid volume in the fourth quarter and should enter 2021 with strong leasing momentum. Regarding our active development pipeline, At the end of the quarter, we had 12 buildings comprising 1.6 million square feet under development that are 84% leased. We placed into service 600,000 fully leased square feet in the quarter and 1.2 million fully leased square feet in the nine months. Before year end, we expect to place over half a million square feet in service that are 100% leased. bringing our total for the year to nearly 1.8 million square feet that are fully leased and increasing the size of our core portfolio by nearly 10% during the year. Our ability to place large volumes of stabilized development projects into service generates highly visible low-risk EBITDA that maintains our strong balance sheet and drives cash flow growth. Now for an update. and the impacts of the pandemic shutdowns have had on our operations, which are minimal. Operationally, none of our office and data center properties were subject to pandemic shutdowns, and the preponderance of our tenants required employees to work in our properties, allowing only a small portion to work from home. Recall that the vast majority of our buildings either are in secure campuses contain high-security SCIF environments or operate pursuant to other high-security standards. In each case, the missions at these locations absolutely cannot be performed remotely. In terms of utilization rates, half of our portfolio is back to normal pre-pandemic levels. Another 40% is running at or above 50% utilization. with a current weighted average estimate of 63%. And only 10% of our portfolio is lightly utilized, with daily attendance of roughly 20%. Lastly, as shown on slide 20, rent accommodations remain below 1% of annualized rental revenues and our rent collection rates in the second and third quarters without adjusting for rent relief granted. were above 99.5%. Finally, on our first quarter call, we reluctantly lowered guidance by a penny to create capacity for potential impacts from the pandemic. Today, we have more than offset $4 million of straight-line rent, parking income, and other losses by outperforming at the property level, generating higher development fees, and managing interest expense. As a result, we are elevating the midpoint of our 2020 guidance by two cents to $2.09, which implies 3% FFO per share growth over 2019 results. Even with a higher than expected midpoint for 2020, we are confident we can grow FFO per share between 3% and 6% in 2021. With that, I'll hand the call over to Anthony.