COPT Defense Properties

Welcome to the COPS Defense Properties fourth quarter and full year 2023 results conference call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Venkat Komaneni, COPS Defense's Vice President of Investor Relations. Mr. Komaneni, please go ahead.

Thank you, Abigail. Good afternoon and welcome to COPS Defense's conference call to discuss fourth quarter and full year results. With me today are Steve Petorek, President and CEO, Britt Snyder, Executive Vice President and COO, and Anthony Missad, 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 strategy, concentrating investments in assets that support priority U.S. national defense missions, once again in 2023 generated exceptionally strong results, driven by strong vacancy and new development in leasing, superior tenant retention, a highly pre-lease development pipeline, and significant value creation from delivering fully leased new properties, all of which is supported by our prudent balance sheet management. Since 2019, we've generated compound annual FFO per share growth of 4.5% due to these attributes. Our total portfolio is 95.3% leased. Our defense IT portfolio is an even higher 97.2%, which is over 800 basis points higher than the traditional office REIT average and is on par with the industrial apartment and retail sectors. We've been able to grow our occupancy up to strength in defense spending in missions supported at our defense IT locations and have not been impacted by trends plaguing conventional office products. We placed nearly $1.4 billion of defense IT developments into service since 2019, totaling 4.5 million square feet that were 99% leased at the end of 2023. On an annualized run rate basis, these developments, none of the properties we've joint ventured, generate over $80 million of contractual cash NOI, which is roughly a 30% increase to the 2019 cash NOI level, driving both FFO and NAV per share growth. We've also strengthened our balance sheet with our refinancing activities in 2020 and 2021, and then again with our exchangeable note offering in September. So to sum this up, our business was strong in 2019 and has only strengthened over the past four years. Our portfolio rental rates and occupancy are well above 2019's level. We've expanded our relationships with top defense contractors in the country. We continue to demonstrate the ability to place highly leased development into service and strong initial cash yields. And we've defended and enhanced our balance sheet, all of which serves to create further shareholder value. In 2023, simply put, we had another great year. We delivered strong results with FFO per share, increasing 2.5% over last year's results, exceeding our expectations by roughly 1.5 percentage points. Full year same property cash NOI increased 5.7%, which is the highest level since we started reporting the full year metric back in 2008. WE COMPLETED 2.9 MILLION SQUARE FEET OF TOTAL LEASING VALUES, WHICH CONSISTED OF 1.7 MILLION SQUARE FEET OF RENEWAL LEASING WITH AN 80% RETENTION RATE, 747,000 SQUARE FEET OF DEVELOPMENT LEASING, EXCEEDING OUR ANNUAL GOAL, AND 452,000 SQUARE FEET OF VACANCY LEASING, AGAIN, EXCEEDING OUR ANNUAL GOAL. RENT SPREADS ON RENEWALS INCREASED 1.5% ON A CASH BASIS AND 9.3% ON A GAP BASIS, ACHIEVING THE HIGHEST LEVELS SINCE 2008. WE PLACED $275 MILLION OF DEVELOPMENT PROJECTS INTO SERVICE THAT WERE 98% LEASED AT YEAR END, TOTALING ROUGHLY 850,000 SQUARE FEET ALL IN OUR DEFENSE IT PORTFOLIO. WE COMMITTED $280 MILLION OF CAPITAL TO NEW DEVELOPMENT STARTS which are 100% pre-release, totaling 690,000 square feet, all in our defense IT portfolio. Our active development pipeline has a total cost of roughly $325 million, is 91% pre-release, and totals roughly 820,000 square feet. We also raised our dividend in 2023 for the first time in over a decade. We are one of only two REITs in our sector to have raised a dividend during the year. And we maintain a rock-solid AFFO payout ratio, which has been at or below 70% for the past five years. Turning to the world view, the global threats to national security of the United States continue to escalate with increased conflict in both the physical and cyber domains. The war in Ukraine and the aggressive posture of Russia poses a significant risk of escalation throughout Eastern Europe. Combat activities in Ukraine are revealing capability strengths and weaknesses in weapons systems and introducing new innovative applications that pose opportunities for and threats to our defense systems. The terrorist attack in Israel demonstrated the need for increased intelligence in the Middle East. The Israeli combat response in Gaza demonstrated triggered escalated terrorists and militia attacks on us troops deployed in the region. And it's now advanced to us combat responses. Similarly, who T rebels actions are threatening international trade routes through the red sea and the Suez canal triggering, triggering combat responses from both the United States and the United Kingdom. And meanwhile, China continues to posture an intent to invade Taiwan and And North Korea has amplified its missile testing activity and its aggressive rhetoric. All of these situations demand elevated intelligence, surveillance, reconnaissance, and technology advancements. Moreover, the Center for Strategic and International Studies published a report which revealed that cyber attacks in the United States remained elevated in 2023 with 118 major cyber events, more than double the number of attacks that occurred just six years ago. Clearly, the threat environment to our national defense continues to escalate, suggesting U.S. defense spending has and must remain elevated to maintain parity and elevate deterrence in the physical, cyber, and intelligence domains. Over the past three fiscal years, the U.S. defense budget increased by roughly $100 billion, or 15%. Since we typically experience a 12- to 18-month lag between defense budget funding and contractor demand, we expect that this budget growth will continue to support strong tenant demand into 2025. Congress passed the fiscal year 2024 National Defense Authorization Act in December 2021, which calls for a further 3.3% growth year-over-year in line with expectations and is now awaiting appropriation. Clearly, in this red environment, funding for priority missions tied to national security must continue. Turning to guidance, we established 2024 FFO per share guidance of $2.51 at the midpoint, which implies 3.7% year-over-year growth. In contrast, two-thirds of the NAEA refined office REITs are expected to see FFO per share decline in 2024. The execution of our differentiated strategy has and will continue to produce differentiated results. Now, I'd like to turn it over to our new Chief Operating Officer, Britt Snyder, who joined the company in December. Britt is a highly experienced leader with nearly 20 years of real estate experience, spanning asset management, development, and investment banking. We welcome Britt to the team, and we are glad to have him join us.