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spk16: Welcome to the Corporate Office Properties Trust 3rd Quarter 2021 Results Conference Call. As a reminder, today's conference call is being recorded. At this time, I will turn the call over to Stephanie Krusen-Kelly, COPT's Vice President of Investor Relations. Ms. Krusen-Kelly, please go ahead.
spk09: Thank you, Blue. Good afternoon and welcome to COP's conference call to discuss 3rd Quarter 2021 results and updated guidance. With me today are Steve Bedorek, President and CEO, Todd Hartman, Executive Vice President and COO, and Anthony Mifsud, EVP 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 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?
spk08: Good afternoon, and thank you for joining us. The company delivered another fantastic quarter with better than expected results, another record-setting bond deal, and excellent achievement in all areas of leasing. Third quarter FFO is adjusted for comparability of 57 cents, outperformed the high end of guidance by one cent, and represented the sixth time in the past seven quarters that we outperformed expectations. We also exceeded our guidance for two of the last three quarters. For the third time this year, we're increasing the midpoint of our full year guidance for FFO per share as adjusted. The $2.27 midpoint of updated 2021 guidance is $0.08 above our original midpoint, and represents an increase of 7.1% over 2020 results. We completed another record bond financing in the quarter. In August, we issued $400 million of senior unsecured notes with a 2% coupon, which tied as the second lowest coupon ever issued among office rates. Our growth strategy targets owning and developing specialized offices and data center shelves in mission-critical defense IT locations. And this strategy continues to deliver excellent results. In the quarter, we achieved a total of 1 million square foot of leasing, which included extremely strong vacancy leasing of 215,000 square feet. This vacancy leasing volume represented the highest achievement in two years and was $67 million. above the trailing eight-quarter average volume. Vacancy leasing also included a 68,000-square-foot lease with the United States government for two floors at 310 NBP. In the quarter, we also completed 274,000 square feet of development leasing, all at Defense IT locations, including a full building lease with the U.S. government. Lastly, we renewed 553,000 square feet, delivering a 76% retention rate, at least economics that were consistent with our expectations. Leasing for the nine months indicates our fundamentals continue to strengthen, with customers making long-term commitments to new space. We completed 2.7 million square feet of total leasing, which included 420,000 square feet of vacancy leasing, at an average lease term of 8.6 years. We completed 1.4 million square feet of renewals, achieving a 75% retention rate, and we executed 915,000 square feet of development leasing with an average initial term of 14.1 years. After the quarter, we leased another 263,000 square feet, bringing our total development leasing for the year to just under 1.2 million square feet with an average lease term of 13.4 years. As a result of this transaction, our active developments total 1.8 million square feet that are 94% leased. Development leasing to date exceeds our 2021 goal by 18% and represents the fourth consecutive year we've achieved over 1 million square feet of development leasing. Our excellent leasing performance continues to translate into impressive operating results, including the impact of assets sold to fund development. For the nine-month period, NOI from real estate operations increased 7%, FFO per share as adjusted for comparability grew 10%, and AFFO is up 16% from one year ago. Our unique defense IT portfolio strong balance sheet, and reliable low-risk development program continue to generate high-quality FFO per share and cash flow growth that are extremely durable because demand is driven by defense spending and national security requirements rather than traditional office fundamentals. As important, demand at our defense IT locations is not impacted by work-from-home and other trends that may affect office demand in the future. We continue to have a strong set of leasing and development opportunities before us and the balance sheet to seize upon them. With that, I'll hand the call over to Todd. Thank you, Steve.
spk14: Continued strong demand in our markets has driven outstanding lease achievement this year. Third quarter vacancy leasing was exceptionally strong at 215,000 square feet, representing 18% of our available space at the beginning of the quarter. To put this achievement in perspective, since defense spending began rebounding in 2016, our quarterly vacancy leasing has averaged 132,000 square feet. There were two major transactions from the quarter worth highlighting, the first of which was a 68,000 square foot lease with the U.S. government at 310 NBP, leaving two floors to lease to bring that building to 100%. The customer continues to indicate their intent to lease the remaining space, BUT BECAUSE THE GOVERNMENT IS OPERATING UNDER A CONTINUING RESOLUTION, WE NOW PROJECT LEASE EXECUTION DURING 2022. THE SECOND MAJOR VACANCY LEASE WAS FOR 63,000 SQUARE FEET AT 6740 ALEXANDER BELL DRIVE AND COLUMBIA GATEWAY. THE NEW TENANT IS CONSOLIDATING MULTIPLE OFFICES AND EXECUTED A 16 AND A HALF YEAR LEASE FOR THE ENTIRE BUILDING WITH LEASE COMMENCEMENT EXPECTED IN JULY 2022. ALTHOUGH WE HAD INTENDED TO REDEVELOP THIS ASSET, WE BACKFILLED THE FULL BUILDING IN JUST FOUR MONTHS and accordingly have moved it back into our same property pool. For the nine months, our 420,000 square feet of vacancy leasing represented 114% of the trailing five-year average through nine months and was the second highest nine-month volume in the past five years. Our current leasing activity ratio is 101%, and since the start of the second quarter has averaged 90%, underpinning much of the third quarter's vacancy leasing success and our expectation for strong lease achievements continuing into the fourth quarter. During the third quarter, we renewed 553,000 square feet, translating into a 76% tenant retention rate. Cash rents and renewals rolled down 0.6% and gap rents grew 1%. Excluding an 89,000 square foot renewal where the tenant was rolling off a 10-year lease that had escalated above market, cash and gap rents increased 1% and 5% respectively in the quarter. For the nine-month period, we completed 1.4 million square feet of renewals with a 75% retention rate, cash rents rolling down three-tenths of a percent with annual escalations averaging 2.4%, and average initial lease terms of 3.8 years. Excluding the two Boeing buildings and Redstone Gateway that are still on one-year renewals, the lease term for the nine months averaged 4.7 years. We continue to advance negotiations to renew the 11.25 megawatt user at DC6. The customer's process remains slow and methodical, and we are confident they will renew. Given we cannot control their pace, we are not putting a timeframe on its completion. The tenant's original lease remains in effect, and they continue to pay their escalated rent. During the quarter, we executed 274,000 square feet of development leasing at Redstone Gateway. The largest transaction was a 205,000 square foot full building lease with the U.S. government. Lease commencement is scheduled for early 2024. This development represents our second building in the secured campus, which, upon completion of this project, will total 460,000 square feet. The remaining 69,000 square feet of development leasing was with two defense contractors who leased space at 8,000 Rideout Road. That development was started because of the contractor demand we are tracking and is now 88% leased. We are working to close a lease for the remaining 12,000 square feet. Earlier this month, we executed leases with Northrop Grumman for two build-to-suit office buildings along Rideout Road at Redstone Gateway. The two-building campus totals 263,000 square feet of highly visible Class A office space with one of the world's largest defense contractors just outside Redstone Arsenal's main gate. We are on track for lease commencement in the second half of next year. Once the active projects under development at Redstone Gateway are placed into service, the park will total 2.2 million square feet, making it our second largest concentration of defense IT assets and equal to slightly more than half the size of the National Business Park. The Northrop leases brought our year-to-date development leasing total to nearly 1.2 million square feet, making 2021 the 10th straight year we have exceeded our development leasing goal. Based on the 1.5 million square feet of opportunities we are tracking in our development leasing pipeline, we expect continued strong development leasing. Lastly, in the first nine months, we placed 709,000 square feet of developments into service that were 89% leased. We expect to place another 74,000 square feet into service in the fourth quarter, bringing our total for the year to roughly 800,000 square feet. With that, I'll turn the call over to Anthony.
spk13: Thanks, Todd. Third quarter FFO per share, as adjusted for comparability, of 57 cents exceeded the midpoint of guidance by 2 cents, driven by 1 cent of deferred R&M projects and 1 cent of other outperformance. We expect to complete the deferred R&M projects in the fourth quarter, which will impact same property cash NOI and FFO per share. Incorporating this change, we are adjusting the midpoint of our fourth quarter guidance to a new range of 55 to 57 cents. The timing of RNM projects drove 165 basis points without performance in same property cash NOI, which increased 4.8% in the quarter. Given the year-to-date results, we are increasing our full year guidance for same property cash NOI growth again from a prior range that was flat to up 1% to a new range that is up 50 to 100 basis points. At the 75 basis point midpoint, Our revised full-year guidance for same-property cash NOI growth is 175 basis points above the midpoint of our original guidance. We are also narrowing our full-year guidance for same-property occupancy from the prior range of 90% to 92% to a new range of 90% to 91.5%. Our revised guidance continues to incorporate the 20 basis point negative impact of joint venturing fully occupied, wholly owned data center shells to raise equity in the fourth quarter, and has been adjusted to include the 40 basis point negative impact of placing 6740 Alexander Bell Drive back into service, back to the same property pool. In August, we issued $400 million of long, seven-year senior unsecured notes, priced at 2%, and used the proceeds to retire floating rate debt. Specifically, we prepaid $100 million of our 2022 term loan, retired the $89 million construction loan at 2100 L Street, and pay down amounts on our line of credit with the remainder. The August deal was more than five times oversubscribed and priced at 105 basis points over the seven-year treasury, which was 25 to 30 basis points below initial price talk. The 2% coupon ranks as the lowest among office REITs for seven-year paper and ties as the second lowest overall face rate of any duration among office REITs. Our credit spreads compare favorably to peers who are rated one notch higher by the rating agencies. Clearly, fixed-income investors appreciate the durability of our cash flow, the high-quality credit of our tenants, and their in-office work requirements. Also of note, since September of 2020, we have issued $1.4 billion of senior notes with an average term of over eight years and used the proceeds to retire debt carrying an average term of 1.8 years. Lastly, incorporating the items addressed earlier, we are increasing our full-year guidance from a previously elevated range of $2.24 to $2.28 to a new range of $2.26 to $2.28. At the midpoint, our updated guidance range implies 7.1% growth over 2020 results and is 8 cents higher than the midpoint of our original guidance. It is important to note that placing several development projects into service earlier than originally planned drove nearly two cents of this year's outperformance. And pulling that NOI forward into 2021 tempers 2022 growth by approximately 1%. With that, I'll hand the call back to Steve.
spk08: Thank you. I'll close the call with a recap of our key message points. Our company's investment strategy is supported by the defense economy. which is funded by the United States Defense Budget and aligned with priority national security needs of the United States. The U.S. Defense Budget has been well-funded since fiscal year 2016 and has bipartisan support for continued growth to address the increasingly risky global threat environment. Our portfolio office usage levels remains very high, as high security defense work cannot be performed from remote Our defense tenants are not experiencing diminished office usage, significant contractions, or seeking short-term lease extensions. Rather, they continue to require densely configured office space to accommodate mission growth, and as our results continue to evidence, they are making long-term commitments to our defense IT locations. The lengths of our development, vacancy, and renewal leases remain at or above pre-pandemic levels, demonstrating our tenants' commitment to working in their offices for the long term and their confidence in the outlook for the defense industry. Our company has exceeded its business plan throughout the pandemic era, and this year we're experiencing further strengthening of business fundamentals and achievement, suggesting continued strength and performance in coming years. Clearly, our strategy of investing in priority defense mission locations and creating value through new low-risk development at these locations is very different from other office companies and continues to deliver high-quality FFO per share and cash flow growth, regardless of the broader economic trends. Operator, with that, please open up the call for questions.
spk16: Thank you, Mr. Bedorek. At this time, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, just press the pound key. Your first question comes from the line of Manny Corchman from Citi. Your line is now open.
spk02: Hey, good afternoon, guys. Maybe it's a question for either Todd or Anthony, but you've got a pretty good leasing backlog that's built up. How should we think about that translating into an increase in physical occupancy, just from a timing perspective?
spk13: In terms of occupancy, it's probably a, based on the leasing that we've done this quarter, it's a second to third quarter occupancy for next year. Typically it's a five- to six-month period from execution to occupancy.
spk02: Does that hold for the NBP lease as well, Anthony?
spk13: It does.
spk02: Okay. And then just looking at the leasing stats, concessions continue to be pretty high, especially in the new leases. Is there any relief coming there? Is there anything specific that went into that that drove those numbers as high as they were?
spk14: Well, on our new leasing for the quarter, we had one lease that was an outlier on the high side due to the fact that it was shell space. It was our 68,000-square-foot lease. And so the TI on that deal was a little higher than the rest. Overall, if that deal was removed, our quarterly number was $6.71, which tracks very nicely with our five-year average for the quarter.
spk08: Yeah, Manny, to be clear, that's a U.S. government lease at 310 MVP. And although it's a five-year lease term, that tenant will occupy that building for an extremely long period of time. Thanks, everyone.
spk16: Your next question comes from the line of Craig Mailman from KeyBank Capital Markets. The line is open. Hello, Craig. Hey, Craig. Craig?
spk01: Craig?
spk16: Craig, your line is open.
spk01: He's on a cell, officer. Sir, he might have fallen out of the cell. Can you go on to the next question, please? Thank you.
spk16: Yes, your next question comes from the line of Jamie Feldman from Bank of America. Your line is now open.
spk15: Thanks, and good morning. Maybe just to start, can you talk about some of the Baltimore explorations and where you stand on backfilling those in tenant interest?
spk08: Well, there's two large events. Transamerica vacates January 1, and we have marketing activity. Todd, do you want to talk about your volume?
spk14: Yeah, we have about 100,000 square feet of prospects that we're working with currently for the 140,000 square feet that we expect to get back, as Steve said, January 1. Progress is slow but methodical on those as well, and we're very encouraged by the response once the space was put on the market. You know, it is the top of the building. It's a unique space in downtown Baltimore, and I think the current level of interest indicates, you know, overall interest in that space. As far as the other large renewal, Care First over at 1501 Clinton, we continue to progress on the renewal and expect that to happen very soon.
spk15: Okay, great. Thank you. And then I guess just that, you know, DC6, I know you're, you know, it sounds like it's certainly not on your end. You know, as you guys look ahead to next year, do you think you'll still do the same thing, just kind of, you know, keep it in or assume late in the year for guidance? Just, you know, what's a realistic expectation is said here about when that could actually get done?
spk08: Well, I think our words said we're no longer in the business of projecting the finishing date. There's absolutely no reason why it can't get done quicker. You know, over the next quarter, it's just been amazingly frustrating, the change in personnel and the lack of progress. It's interesting to note we have, you know, a relationship on the renewal side. We also have regular activity on the operating side. Our activity from the operating side makes crystal clear they're going to stay in the building. I don't know why it's not a higher priority for them, but we continue to await a more affirmative schedule from them.
spk13: And with respect to guidance for next year, when we come out with that, we will be clear about what we've assumed in the in the low and the high end of our range and therefore the midpoint with respect to 2022 so that we can report off of that once the transaction is completed.
spk15: Okay, thank you. And then just thinking about data centers in general, I mean, do you think you could ramp up development here more? And if you look at the land bank, I think you've got room for maybe, what, three or four more on your current land. How should we be thinking about that as an avenue of growth?
spk08: Well, we have over a million square feet of capacity on the land we have, and I think you'll see some substantial leasing on that land next year.
spk15: And that's based on discussions today?
spk08: Yes.
spk15: Okay. And then on the development pipeline, can you talk about the College Park development, just how you're making progress there? I think you only have a couple of projects that are around 50% lease at this point. I'm just curious how that one's trending.
spk08: We have two tenants that are negotiating to close out that building and frankly might require additional space in the future, which could trigger the next building. One of those may get signed by the end of the year. The other meant the other one is a government funded cyber program. And because of the, funding process it may not get done by the end of the year but we've stopped marketing that space to anybody else do you see expanding a lot more in that sub market or this will be one or two buildings and that's it well we have significant capacity beyond what we're doing I would expect one building in the next couple years And then we'll see what happens. You know, we built to demand. So as demand arises, we have additional capacity to deliver.
spk15: Okay, but you're comfortable sitting on that land longer term?
spk13: Yeah, well, the land really has no cost to us because it's part of the joint venture with the University of Maryland. So when the land gets contributed into each of the individual building developments, that land value becomes part of their equity balance. So there's really no cost to the company of carrying that land. Oh, got it.
spk15: Okay.
spk13: Thank you.
spk16: Thank you. Your next question comes from the line of Steve Sakwa from Evercore ISI. Your line is now open. Yeah, thanks. Good afternoon.
spk11: First, I was just wondering if you could provide a little bit more of a breakdown on the million-and-a-half-square-foot development pipeline that You know, how does that break out between sort of office and data centers and then maybe within the office component, you know, if there's any flavor for, you know, just where, you know, is that in Huntsville? Is that up in MVP, other parts of the portfolio?
spk08: Sure. It's about because we've just signed a bunch of defense IT leases. It's currently about 60% data center shelf. 40% defense IT, and that 40% is broken between MBP and Redstone Gateway.
spk11: Okay. And I guess when you look at your kind of occupied and least percentages, you know, most of your submarkets are, you know, kind of low to mid-90s. The only real two standouts are, you know, what you label as Howard County and kind of Northern Virginia. And I'm just wondering if you could sort of talk about, you talked about good, you know, vacancy leasing, but I'm just wondering if you or Todd could speak to what you're seeing in those two markets, which are, you know, certainly the laggards within the portfolio.
spk08: Well, I'll jump on Virginia. You had Howard County. We do have one asset with about 90,000 square feet of vacancy in in Northern Virginia, in Merrifield, and the velocity in that sub-market is fairly slow. We are on, we've signed one lease this quarter, and we have some opportunity in the front, but that's a market-driven velocity challenge. Columbia Gateway is pretty exciting. I'll let Todd talk about it.
spk14: Yeah, I would, you know, our activity in Columbia Gateway is very strong, as it is generally in the you know, Baltimore-Fort Meade Corridor. Recent activity in the market, several large transactions have occurred, and their activity ratio, you know, for the Columbia Gateway area is about 125% of the available space. So I would anticipate, you know, our Howard County numbers to increase very soon.
spk16: Great. Thanks. That's it for me. Your next question comes from the line of Blaine Heck from Wells Fargo. Your line is now open.
spk06: Thanks. Good afternoon. Todd, I think you mentioned in your prepared remarks that Redstone would be 2.2 million square feet by the time everything under construction is completed. Can you talk about how much additional capacity to build you have left there after those projects are done and whether there's any need or ability to acquire more land to build there?
spk14: Yeah, we have about 2.3 million square feet of additional capacity after these are completed. And we have the ability to expand down there and currently are considering our options. But right now we're about halfway done with the available capacity.
spk06: Great. That's helpful. And then, Anthony, your updated guidance calls for 50 BIPs to 100 BIPs of the same store NOI this year. And your date, you're sitting at roughly 1.5%, implying a dip in the fourth quarter. You know, can you just talk us through the drivers there? I'm assuming the Redstone move out might have something to do with that. But anything else we should be thinking about there? And then, you know, I know you guys aren't giving guidance for 22, but is there any color you can give on what the lower result in the fourth quarter means for same store going forward, and any levers you might be able to pull or have in place to increase that in the future?
spk13: Well, the fourth quarter is going to be less than pull down the year-to-date results because of two things. One is the timing of the R&M projects that we talked about. That was one-tenth of the current quarter's outperformance that will be executed in the fourth quarter. and there are some impact from some net, incremental net operating expenses in the fourth quarter compared to the fourth quarter of last year because of the increase in attendance at some of our regional office properties. So those are really the two drivers of the performance for the fourth quarter. You know, I think with respect to next year, I think we're, you know, we're, I think we will continue to put out information when when we're ready to. I think there's sort of anomalies like these in quarter by quarter that positive and negative that we'll talk about if we need to. But nothing that nothing right now for next year that would lead us to believe that we would be outside of what we historically talked about, about what our internal growth would be.
spk06: All right. Fair enough. Thanks, guys.
spk16: Your next question comes to the line of Tom Catherwood from BTIG, Alliance Now Open.
spk03: Thanks so much, and good afternoon, everyone. Steve, in the past you've mentioned that kind of office requirements and layouts have not materially shifted for your new developments, but what are you seeing in terms of specialized building features in these new projects, things like SCIF rooms, force protection, or physical setbacks? Are tenants' needs changing on that front? Do you find kind of additional development spend going to those specialized features?
spk08: Well, with regard to development spend, we negotiate a market TI allowance. We meet the market. How the tenant uses it, it's kind of up to them. With regard to, but we don't fully fund the SCIF, I guess is my point. The demand for SCIF, is extremely high right now. There's a pent-up set of contractors seeking SCIF in and around the NBB that can't be fulfilled with existing inventory, so we expect it will drive continued demand in the future. With regard to the way space is being used in new development, I can tell you the recently executed two-building build-the-suit is very interesting because as part of the development costs, we're going to have to actually go to partial structured parking to accommodate the density that Northrop Grumman is going to put in those buildings. And the delivery of space is somewhat slower than we could have normally done because of the extreme technology they're adding to the buildings, including SCIF and other high computing kind of environments in that space. So I think I addressed your question. Is there something I missed?
spk03: No, no, that was perfect, Steve. And kind of along those same lines then, and you may not have a sense of this, but any idea then how much more tenants are putting into their space on average over and above those TIs you're allocating, you know, maybe for these new projects?
spk08: So this is a guess and no more than a guess, but my guess is almost 50% of the TI we give them. I appreciate that.
spk03: And then one more from me, specifically looking at your land bank. It looks like this quarter – There's a delta of about 24 acres in NBP between prior quarter and this quarter, but you didn't start anything this quarter in that area. Are you accounting for the land differently there, or did you sell something off? What was driving that roll down in land?
spk13: You get a cookie for that one, Tom. That is just an adjustment for the assumed density on land. one of the parcels as we look at laying that parcel out for the different kinds of uses that we believe tenants are going to need in MBP South.
spk03: Got it. So future requirement adjustment is what that was.
spk13: Yeah, it's just really about how the space will get used. It wasn't about putting anything into service or using any land for any development. It was about how the team is looking at how that space is going to be laid out and used in the future.
spk03: Got it. It makes total sense.
spk16: Thanks, everyone. Your next question comes to the line of Dave Rogers from Baird. Your line is now open.
spk07: Yeah, good afternoon. Steve wanted to ask about the long lease durations on some of the developments that you had announced, I think, during the quarter and subsequent to that. kind of like 13 to 16 years. Can you talk about kind of how the development returns came out on those longer duration leases? And do the tenants have outs or termination options? That's a pretty long lease, it seems like, from what we're used to seeing.
spk08: No, they don't have outs. And development returns, you know, our threshold return on defense IT assets is an 8% cash yield. They've all been in that neighborhood, and some slightly better.
spk07: And so these aren't necessarily tied to a specific contract, and so the capital that you answered in the last question is likely the reason they would want to kind of lock in for that long. Is that the right way to think about it?
spk08: That's correct. And remember, a bunch of the leases that we've done at Headstone are new headquarters locations, and so they're investing in those assets heavily because That's where they're going to center their business operation in service to the redstone arsenal in the future. Gotcha, that's helpful.
spk07: Anthony, maybe update us on the disposition plan. You mentioned it, I think, in your comments for fourth quarter and continued dispositions. As you think about amount timing for the quarter and then maybe looking into next year, any thoughts about that?
spk13: So for the fourth quarter, we have... two data center shells that we're focusing on that would raise about a little over $70 million worth of equity capital using our 90-10 structure that we've done in the past. And, you know, as we look into next year, as we've sort of been consistently saying, if our stock price is at a point where we believe we're getting fair value and we can issue equity of fair value, our first choice would always be to issue under the ATM to match fund the development investment that we're making. To the extent that that isn't an option, after the transaction we're contemplating for the fourth quarter, we would still have over $700 million worth of gross value of data center shells that are either operating or currently under development that we could tap into to fund the equity requirements for continuing to invest in the development pipeline?
spk08: 700 million.
spk00: Million, excuse me. Okay, 700. Great. Thanks for the answers. I appreciate it.
spk16: Your next question comes to the line of Rich Anderson from SMBC. Thanks.
spk04: Good afternoon, everyone. So I have a theory that your occupancy is sort of capped at 93%. And this is the reason why I say that is, um, if you have call it 2 million square feet a year expiring and your retention is 75%, well then 25% is about 500,000 square feet of new vacancy coming at you. And if you're doing about that much vacancy leasing in any given year, you're, it's kind of a treadmill, um, you know, is that a reasonable way of looking at, you know, the future for the company?
spk13: I think with respect to the operating portfolio, maybe the one thing that may impact, that will impact that in the future is how well leased the development pipeline is going to be adding to the overall portfolio as those projects are placed into service, right? So right now we've got almost 2 million square feet that are under development, that's roughly 10% of the existing portfolio. They're 94% leased today. We expect by the time they're fully placed into service, they'll be 100% leased. So we think on the margin, the continued low-risk, highly leased development will help drive that off of that number that you're referring to.
spk04: Okay, good enough. What is the – the difference in the retention rate of regional office versus your core defense IT business?
spk08: Well, next year it's not going to look very good because we're going to get back 150,000 square feet from Transamerica.
spk04: Right. More at a typical run rate, I guess.
spk08: Historically, it's been pretty consistent, but it's going to look pretty ugly next year.
spk04: Yeah, okay. Last question, you know, DC6, sorry. But, you know, this is obviously an area of frustration, building every day perhaps. But is this a tenant that you would hesitate to do business with in the future? I mean, is the relationship – still okay, or I'm just wondering how you feel about them as a potential business partner in the future.
spk08: Our relationship is great, and we work with them, like I said, in multiple levels, operating and leasing. It's a tenant every data center owner would love to have, and we're grateful to have them. Just this renewal has been A little bit frustrating. There's been a lot of change in personnel and fits and starts. We'll get through it, but it's a great tenant. We're thrilled to have him in our building.
spk04: Okay. That's all I have. Thanks.
spk16: Your next question comes from the line of Rob Simone from Edge Eye Risk Management.
spk12: Hey, guys. How's it going? Thanks for taking the question. You're up. Hey, Anthony. So super high-level question, more of like a long-term strategic question for OFC. So I guess one of the things that came up on this call, right, like the thought of tapping or the strategy of tapping the ATM to match fund development. But I guess is there a case, like a long-term case to be made that with the, you know, the nature of your tenants and longer-term leases, that there's a case to be made to maybe potentially, like, consider taking your leverage up a turn or so or whatever that number is and effectively terming out some longer-dated debt, pulling that capital forward to fund that development as opposed to – I mean, I know – and the reason why I say that, is because obviously, like, the portfolio is a lot cleaner than it was four or five years ago. So theoretically, at least, you have, like, these long-term contracts plus a better tenant mix to be able to support that. So I don't know. I just wanted to gauge your thoughts around that. And then I have one quick follow-up question related to it.
spk08: Well, reasonable people could make that argument. Certainly, the performance, the credit quality we have, you could argue for higher debt, but we – have run the company in a highly risk-averse manner. We prefer having less debt than higher debt. Over time, we hope to develop our way to a lower debt to EBITDA number. And, you know, we continue to create meaningful shareholder value at the debt level we're at and we're comfortable.
spk12: Sure. Okay. Makes sense. And then specifically related to that, so you guys have the, I think it's the $300 million term loans. come and do late next year. What's the plan for that? Is that like an unsecured bond refinance, or what are you guys going to do with that?
spk13: I think we have a few options. We could go back to the public unsecured market to refinance that. The bank term loan market is sort of wide open again, so we believe we have the opportunity to just refinance that with our bank group. That particular loan is fully funded by – we have a bank group of 12. That loan is actually funded by the six folks within the – six banks within the bank group that are sort of the not – the lower-tier banks. And so we have clearly capacity to – to take out that term loan with our bank group or to even increase it if we wanted to. And we think the market is there to do that. Got it.
spk12: Okay, well, thanks, Steve. Thanks, Anthony. Thanks, Steph. Be well. Appreciate it.
spk09: Yep.
spk16: Thank you. As a reminder, to ask a question, please press star 1. Your next question comes from the line of Manny Korschman from Citi. Your line is now open.
spk02: Hey, Steve, I wanted to follow up on the last answer that you gave me to my last question. You said the TIs were high because of leasing at NDP. Was that the 310 Sentinel lease? Because I thought that was in October, not in the 3Q numbers. Or are the 3Q numbers inclusive of that lease?
spk08: No, it's in the 3Q numbers, Manny. We just announced it with the earnings call. It wasn't quite significant enough to put out individually. So that number is in there. It's a $60 TI on a five-year deal, which drives up your earnings. cost per year of committed term, but if you know our business well, that tenant will be in that building for more than 20 years. Thanks for the clarification.
spk16: Yep. Your next question comes from the line of Chris Lucas from Capital One Securities. Your line is now open.
spk05: Hi, good afternoon, everybody. Hey, Steve, just a couple of follow-ups. Just on the, and again, I hate to bring it up, but on the renewal at DC6, what is the term for that? Just trying to understand sort of, you know, how long you've been dealing with it versus what the actual duration here is on that deal.
spk08: That's a very good question. We've been negotiating it for two years, and it's a three-year term.
spk05: Okay. And then just going back to the commercial vacancy issues, what level of interest is there in terms of space available? Are you seeing space interest across the board for all the spaces or some space that has more promising competitive nature to it? I'm just trying to understand sort of what the perspective is there, recognizing the other portion of business is pretty well buttoned up.
spk08: Are you talking about the regional offices?
spk05: Yes, I am.
spk08: Yeah, so our largest concentration of vacancy would be in downtown Baltimore, and it's the kind of demand you would expect. Financial services, law, business services, high-quality tenants, seeking a premier building with great views. Did I get to that?
spk05: Yeah, I mean, I guess, well, sort of, but then let me just go back to the Merrifield office building you mentioned in the prior question. That space was vacated by a defense contractor. Is that defense contractor space or is that general space?
spk08: It was defense contractor space. It was given back because of an M&A event. A big chunk of it, another chunk was some contractions. The contracting tenant recently expanded again, but that space, that building, fits needs of defense contractors that need access to basically the Pentagon. It's connected by a metro rail. It makes it very convenient to the Pentagon. Okay, great. Thank you. That's all I had. Sure.
spk16: Thank you. Your last question comes from the line of Bill Crow from Raymond James. Your line is now open.
spk10: Good morning. Thanks for taking the questions. I've got three, but hopefully they're very quick. How much new supply not being driven by OFC is under construction in your sub-markets?
spk08: Very little is Really none. At the MVP, there is no other development that's active marketing against us within a service radius. In Alabama, there's certainly other development that's occurred in the city, but it's really servicing inbound corporate relocation activity, a lot of it industrial manufacturing. There are businesses relocating to Alabama today. There's no development that we're competing with that's active on the defense IT side. And there's not that much development in Northern Virginia. The market conditions, you know, across NOVA, you know, you've got 18 to 20% vacancy in most submarkets, except where we're located in the Route 28 corridor, which is one of the south, which is one of the strongest markets in NOVA.
spk10: Yeah, that's kind of what I figured. So that kind of leads me to the second question, which is the tenant retention. You know, you've got 20% to 25% of expiring defense and IT leases that don't get renewed. So is it M&A? Is it program funding? What is the primary reason that they aren't sticking around?
spk08: So there's always kind of a seesaw that happens with contracts awards and re-competes and it's fairly routine. We're going to live through one in Redstone right now where Boeing lost a major component of a contract and they're going to give us back some space. And another defense contractor won it and we've leased them the space to take its place. So there's some turn like that. And then, you know, I would say Over the long term, fully a third over the last four or five years has been M&A driven, where there's consolidation in the industry. They typically keep the skiff in the mission space. Any support space comes back, and it creates some turnover.
spk10: All right. And then I figured I'd end with the DC6 question, which is simply what's going on with market rents there? You know, they had been going down. Have rents stabilized?
spk08: I think they've definitely stabilized. The compression that occurred in 2019 and 20 was really developer-driven. There's so much spec development in data centers that they're bidding down the power rate. I would characterize that as stabilized now. There's a huge amount of demand or inventory that got absorbed in those years. So price isn't really our discussion on the renewals. We've been settled on that for quite some time.
spk16: Great.
spk08: Thank you. Good.
spk16: Thank you. There are no further questions at this time. I'll now turn the conference back to Mr. Budorek for closing remarks.
spk08: Thank you all for joining our call today. We're in our offices, so please coordinate any follow-up questions through Stephanie. And thank you for attending.
spk16: Thank you for your participation today in the Corporate Office Properties Trust third quarter 2021 results conference call. This concludes the presentation. You may now disconnect. Good day.
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