COPT Defense Properties

Welcome to the Corporate Office Properties Trust Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. As a reminder, today's call has been recorded. At this time, I'd like to turn the call over to Venkat Komineni, COPT's Vice President of Investor Relations. Mr. Komineni, please go ahead.

Thank you, Dylan. Good afternoon, and welcome to COP's conference call to discuss second quarter results. With me today are Steve Bedorek, President and CEO, 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, and thank you for joining us. Our investment strategy and differentiated portfolio continue to generate strong operating results and support our positive outlook for our business for the coming years. The $100 billion increases to the Department of Defense budget that have been appropriated since March 2022 and the roughly $25 billion increase that is expected to occur later this year has and will continue to drive strong demand throughout our defense IT portfolio. Our capital allocation decisions have deeply concentrated our assets in locations adjacent to or in some instances containing high priority missions. Defense contractors benefit greatly by locating offices proximate to these high priority missions. These missions require secure office environments and the mission work cannot be performed from home. The secure environments for these missions are difficult to get approval to construct, expensive to create, and requiring significant tenant co-investment, and are not transportable. These are the major factors that drive our industry leading retention rates. Accordingly, our competitive advantages of the best locations adjacent to these high priority defense missions A unique portfolio with significant security improvements, readily developable land sites to support mission growth, a 30-year track record of performance excellence, and our franchise of relationships and security credentials continues to provide strong results, including resilient cash flows and FFO growth. We reported second quarter FFO per share as adjusted for comparability, of 60 cents, two cents higher than the midpoint of our guidance. Our core portfolio is 95% lease, which represents 130 basis point increase year over year. Our defense IT segment is 96.8% lease, which is the highest level since we began disclosing the segment in 2015 and represents 190 basis point year over year increase. SAME PROPERTY CASH NOI INCREASED 5.8% OVER THE SECOND QUARTER OF LAST YEAR AND INCREASED 7% DURING THE FIRST HALF OF THE YEAR. WE EXECUTED 88,000 SQUARE FEET OF VACANCY LEASING WITH A WEIGHTED AVERAGE LEASE TERM OF NEARLY SEVEN YEARS, WHICH BROUGHT OUR TOTAL FOR THE SIX MONTHS ENDED TO 187,000 SQUARE FEET. ADDING THE FIRST FEW WEEKS OF JULY We've executed 218,000 square feet of vacancy leasing year-to-date, which puts us right on track to achieve our full-year target of 400,000 square feet. Recall, our expected vacancy leasing volumes in 2023 are lower than 2022 due to the diminished inventory available to lease on our defense locations. The National Business Park is now 99.3% leased. which represents a 550 basis point increase since the end of last June, with only 31,000 square feet of unleashed space in the 4.1 million square foot park. And the largest vacant space is only 7,800 square feet. In our defense IT portfolio, we have 670,000 square feet of inventory available, which is the lowest level since 2017. despite the fact that the portfolio has increased by nearly 6 million square feet during that period. Our overall portfolio leasing activity ratio remains strong at 75%, with a pipeline of 915,000 square feet of vacancy prospects. Total leasing volume of 891,000 square feet a quarter included 803,000 square feet of renewals. Our overall retention rate for the quarter was 89%, with our defense IT locations at 93%, and year-to-date, our overall retention rate is 83%. Cash rent spreads were up 1.3% for the quarter, while gap rent spreads were up 7.4%, driven by annual rent increases of 2.6%, with a weighted average lease term of five years. Year to date, rent spreads are up 1.1% on a cash basis and 6.9% on a gap basis with a weighted average lease term of four and a half years. Measuring the starting cash rent of the tenant's expiring lease to the starting cash rent of the renewal lease, the annual compound growth rate achieved on these leases was 3.4% for both the quarter and year to date. On page 22 of our flipbook, we expanded our large lease disclosure to include our view of renewals through 2025, and we continue to expect portfolio retention to be extremely strong. Looking forward, over the next 10 quarters, we have 7.1 million square feet of leases expiring, which includes 3.9 million square feet of large leases, defined as leases over 50,000 square feet. We expect a retention rate of roughly 95% on these large leases. For the balance of 2023, we expect to renew 100% of the large leases that are included in this total. Our 1.5 million square feet of active developments are 92% leased, with a total estimated cost of $480 million. and consisting of nine projects located in Maryland, Northern Virginia, and Huntsville, Alabama. We expect to place 800,000 square feet of developments into service over the remainder of 2023 that we expect to be 99% leased when delivered. During the first six months of the year, we executed 495,000 square feet of development leases, including full building build suits, and 30,000 square feet of development lease up. Our development pipeline, which we define as opportunities we consider 50% likely to win or better within two years or less, currently stands at a million square feet, up from 700,000 square feet last quarter. Beyond that, we're tracking another 1.2 million square feet of potential future opportunities, which should allow us to maintain a solid development pipeline in the near and medium term. With the National Business Park essentially full, we are in the planning stage for our next contractor and government buildings and have commenced pre-development and pre-leasing activities. We remain confident in achieving our 700,000 square foot development leasing goal for the year. The success we've achieved during the first six months of the year has compelled us to increase the projected midpoint for FFO per share, and we remain confident we can achieve our FFO per share growth expectations through 2026. And with that, I'll hand the call over to Anthony.