COPT Defense Properties

Welcome to the Corporate Office Properties Trust second quarter 2022 results conference call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Michelle Lane, COPT's Manager of Investment Relations. Ms. Lane, please go ahead.

Thank you, Catherine. Good afternoon and welcome to COP's conference call to discuss second quarter results and updated guidance for the year. With me today are Steve Bedorek, President and CEO. Todd Hartman, Executive Vice President and COO, and Anthony Mifsud, Executive Vice President and CFO. Reconciliations of GAAP and non-GAAP financial measures that management discusses are available on our website, in the results press release and presentation, and in our supplemental information package. As a reminder, forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed in our SEC filing. Actual events and results can differ materially from those forward-looking statements, and the company does not undertake a duty to update them. Steve?

Good afternoon, and thank you for joining us. We achieved another strong quarter with continued progress on our 2022 business plan. The successful performance and execution of our growth strategy since 2018 have positioned our company to deliver reliable annual FFO growth and long-term shareholder value. Over the past decade, we've deeply concentrated investment in the property supporting priority U.S. defense missions and select mission critical assets in regions that we collectively refer to as defense IT locations. At the end of the quarter, These locations generated 90% of our annualized rental revenue. Demand at these locations is driven by and correlated with national security spending and largely immune from conditions in the overall economy. Our concentration of leases to the U.S. government and high credit contractors supporting national defense and cybersecurity missions is the foundation of our ability to generate resilient, high-quality cash flow. Our external growth strategy continues to be driven by successful pre-lease and low-risk development at these proven defense IT locations. We have an advantage position in this unique market as the go-to landlord for specialized space satisfying government security requirements. We wisely protected our balance sheet, and as a result, the current interest rate environment poses limited risk to our performance. The $1.8 billion of refinancing completed in 2020 and 2021 provide the solid foundation for us to deliver future growth from our operating and development portfolios. Our second quarter results show the strength of our strategy and execution. FFO per share of 59 cents met the high end of guidance, making this the ninth quarter out of the past 10 that we met or exceeded the midpoint of guidance. As a result, we're increasing the midpoint of our full-year guidance and narrowing the range. Leasing remains strong in our operating and development portfolios. As of June 30th, our portfolio was 93.6% leased and 91.6% occupied. We completed 558,000 square feet of total leasing during the quarter. We achieved the solid vacancy leasing volumes with 120,000 square feet we executed equally in our five-year average for the second quarter. Additionally, we have a large volume of leases pending execution that suggests our third quarter volume will be exceptional. The total volume included 211,000 square feet of development leasing, primarily from 186,000 square foot full building pre-lease. This activity brings our year-to-date achievement to 68% of our 700,000 square foot objective. Following this quarter's development leasing success, our active development pipeline now contains 1.9 million square feet of projects, all of which are at FUNS IT locations. These projects are 91% leased with a high level of demand on the unleased space. The projects will deliver between 2022 and 2024, and when placed in the service, will produce $47 million of incremental annualized NOI that will drive further growth in FFO per share. The fiscal year 2022 National Defense Authorization Act passed with a base budget increase of 5.8%, representing the largest increase since 2018. We expect demand from this budget to manifest in our leasing pipeline in mid to late 2023. Recall that following the 14% increase in the defense budget that occurred in 2018, we achieved record leasing levels in new development and vacancy leasing in 2019. Moreover, current actions in the defense committees of the House and Senate suggest another healthy increase in the 2023 NDAA. These events give us confidence leasing demand will remain strong through at least 2024. Turning to inflation, The severe and rapid escalation of material prices over the first half of the year impacted development costs, increasing the year-over-year hard costs for like-for-like development projects by approximately 18%. The demand in our defense IT portfolio is driven by national security needs and funded mission priorities, and we have been able to negotiate rents that maintain our historical development yields. Our defense IT portfolio benefits from strong demand for new space and industry-leading tenant retention, and the current economic conditions have not impacted our demand or achievement, positioning our portfolio to continue to generate consistent, steady financial growth. Between 2018 and 2021, our FFO per share compounded at 4.4%. Coming off the strong 8% growth in 2021, our revised guidance suggests 2.6% growth in 2022 after absorbing the dilutive effect of the sale of DC6. Beginning in 2023, we continue to expect growth to compound at 4% or more through 2026. So in summary, we had another solid quarter and our strong pipeline of activity and our fortified balance sheet reinforce our confidence for continued growth. With that, I'll hand the call over to Anthony.