COPT Defense Properties

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 Venkan Komineni, COPT's Vice President of Investor Relations. Mr. Komineni, please go ahead.

Thank you, Carmen. Good afternoon and welcome to this conference call to discuss fourth quarter and full year results and guidance for the year. With me today are Steve Bedorek, President and CEO, Todd Hartman, Executive Vice President and COO, and Anthony Misfud, 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 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 in our portfolio and defense IT 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 a billion dollars in capital, mainly from our data center shell portfolio, and reinvested into other highly accretive, low-risk development projects. These activities, coupled with a strong leasing in our operating portfolio and strategic debt refinancings delivered 4% compound annual growth, FFO 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, delivering reliable growth through the pandemic era with visible growth for the next four years and progressing to a new era of internally funded development. Now let's discuss our 2022 results. FFO per share is adjusted for comparability of $2.36 grew 3% over 2021's exceptional results and is 2 cents higher than the midpoint of our original guidance. We completed 801,000 square feet of vacancy leasing, which is the highest annual level in 12 years, and 30% higher than 2021. Demand was broad-based across our defense IT locations, with particular success in the Fort Meade BW corridor and Huntsville. The National Business Park and Redstone Gateway are both 98% leased, which represents a 300 basis point and a 600 basis point year-over-year increase, respectively. Our core portfolio is now a 95.3% lease, the highest 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, which has been negatively impacted by the current economic conditions and plagued by space contractions stemming primarily from work from home. We achieved 476,000 square feet of development leasing. We had expected to sign a 225,000 square foot lease for a data center shell in December, but the tenant's approval process dragged on and the execution slipped a few weeks. We executed this lease in January, which represented the remainder of our 700,000 square foot target for 2022. So far in 2023, we're off to a great start on development leasing. As noted in our press release, we signed another 193,000 square foot, filled the suit with our cloud computing customer, and a 46,000-square-foot build-to-suit for a new headquarters building for a defense contractor in Huntsville, including the delayed lease from 2022. Development leasing executed year-to-date totals over 460,000 square feet, and with these leases, we now have 1.5 million square feet of active developments that are 89% leased. We placed into service 1.3 million square feet of development projects, which are 99% leased, over 900,000 square feet of which was delivered in the fourth quarter. Our 2022 deliveries included one build suit with a defense contractor at the National Business Park, five projects at Redstone Gateway leased to defense contractors, including the new Northrop Grumman campus and two data center shelves in Northern Virginia. In mid-December and in the second week of January, we closed on two new 9010 joint ventures with Blackstone on five single-tenant data center shelves, 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, we can accomplish this self-funding while maintaining our strong balance sheet and conservative leverage metrics. Any future dispositions will be strategic sales with the goals of harvesting shareholder value and more deeply concentrating our portfolio in our defense IT locations. Turning to defense spending, the base defense budget for fiscal year 2023 was passed in December with a 7.5% year-over-year increase, which was 4.8% higher than the President's budget request. RECALL, THE FISCAL YEAR 2022 BUDGET PASSED IN MARCH INCLUDED A 5.8% INCREASE AND FOLLOWED BY THIS 2023 BUDGET PASSED IN DECEMBER, WHICH ADDED THE 7.5%. IN TOTAL, THIS IS $100 BILLION INCREASE IN DEFENSE SPENDING, OR 14.3% IN THE LAST 12 MONTHS. WE EXPECT DEMAND FROM THE 2023 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 FFO per share as adjusted for comparability at a range of $2.34 to $2.42. At the midpoint, guidance implies 1% growth over 2022's which includes the dilutive impacts from the elevated interest rate environment and our capital recycling timing. Over the past three years, a period which encompasses the pandemic and a historic rise in interest rates, FFO per share as adjusted for comparability has compounded at 5.1% annually. Following 2023's modest growth, We continue to expect FFO per share is 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.