COPT(US:CDP)2023-10-27 20:31Financial Data and Key Metrics Changes - The company reported third quarter FFO per share as adjusted for comparability of $0.60, which was at the midpoint of guidance [15] - Same-property cash NOI increased by 4.5% year-over-year and 6.2% for the first nine months of the year [7][15] - The total portfolio is 95.1% leased and 94.1% occupied, with same-property occupancy ending the quarter at 93.4%, up 60 basis points sequentially and 120 basis points year-over-year [7][16] Business Line Data and Key Metrics Changes - The Defense/IT portfolio is 97% leased, the highest level since 2015, representing a 70 basis point year-over-year increase [6] - The company executed 151,000 square feet of vacancy leasing with a weighted average lease term of over 8 years, bringing the total for the nine months to 337,000 square feet [8] - Cash rent spreads increased by 1.7%, while GAAP rent spreads were up 9.3%, driven by annual rent increases of 2.7% [9] Market Data and Key Metrics Changes - The company has 695,000 square feet of available inventory in the Defense/IT portfolio, with an activity ratio of 104% [8] - The National Business Park is 99.4% leased, with only 25,000 square feet of unleased space [13] - The operating portfolio at Redstone Gateway is 98% leased, indicating strong demand [13] Company Strategy and Development Direction - The company rebranded to COPT Defense Properties to better reflect its capital allocation strategy and portfolio quality [4][5] - The company aims for compound annual FFO per share growth of roughly 4% between 2023 and 2026 [14] - The development pipeline includes 1 million square feet of active developments, 90% pre-leased, with a total estimated cost of $337 million [10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the defense budget outlook, noting a recommended 3% increase in defense funding [29] - The company is optimistic about future opportunities with Space Command despite recent changes in location decisions [11] - Management highlighted the importance of a strong defense posture and the significance of intelligence and surveillance for national security [26] Other Important Information - The company raised $345 million in exchangeable notes to fund expected development investments through late 2026 [7][18] - An impairment loss of $253 million was recognized on certain properties due to current market conditions [20] - The balance sheet is well-positioned with no significant debt maturities until March 2026 and over $200 million in cash on hand [21] Q&A Session Summary Question: Confidence in DoD's funding plans for 2024 - Management indicated uncertainty but noted a recommended 3% increase in defense funding, with potential for a 1% reduction in a worst-case scenario [29] Question: Returns on new development - The targeted cash yield on new development is now 8.25% [31] Question: Impairment adjustments on regional assets - Management engaged investment sales teams to assess pricing, resulting in a $250 million mark-to-market adjustment [33] Question: Impact of defense budget uncertainty on negotiations - Current negotiations with defense contractors are not impacted by budget uncertainty [38] Question: Timing for asset sales - Each asset has a different story, with stabilization above 85% being a key factor for monetization [40] Question: Pricing power and rent spreads - Rent spreads are expected to remain range-bound, with compound growth embedded in lease structures [42] Question: Annual rent increases in new leases - Current escalators are targeted at 3%, compared to historical averages of 2.5% [45] Question: Development pipeline estimates for 2024 and 2025 - Management emphasized focusing on investment dollars rather than square footage, with confidence in substantial square footage numbers [68] Question: Breakdown of development leasing pipeline - Most opportunities are new business with defense contractors, with a small percentage related to data center shells [71] Question: Appetite for new markets for data centers - The company is open to following core customers to established data center markets but cautious about secondary or tertiary markets [73]