OFC
#Thank you, Jasmine.
Good afternoon and welcome to COPT's conference call to discuss the Company's first-quarter results for 2016.
With me today are <UNK> <UNK>, President and CEO; <UNK> <UNK>, Executive Vice President and COO; and <UNK> <UNK>, EVP and CFO.
In addition to the supplemental package and press release related to first-quarter results, we have posted a flip book on our website that accompanies management's remarks.
As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release and on the investor section of our website.
At the conclusion of management's remarks, the call will be opened up for your questions.
We remind you that statements made during this call may be forward looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and that actual results may differ materially due to a variety of risks, uncertainties and other factors.
Please refer to today's press release and our SEC filings for a detailed discussion of forward-looking statements.
With that, I will turn the call over to <UNK>.
Thank you, <UNK>.
Good afternoon, everyone.
The positive momentum with which we ended 2015 carried into a solid first quarter, the results of which are summarized on slide 4.
FFO per share of $0.47 was in line with our expectations, and same-office cash NOI grew a very strong 6.4%.
Additionally, cash rent spreads on renewing leases turned positive, and GAAP rent spreads were in the low-double digits.
These and other aspects of our first-quarter results affirm that real estate fundamentals in our markets are rebounding.
Our dispositions are progressing, and we are pleased with the depth and quality of the potential buyer pools.
We have over $600 million of assets in the market to ensure we hit our disposition goal of $440 million this year, and also have optionality on what we sell.
Interest from all-cash and leverage buyers is strong, and we are confident that we will hit our target.
By extension, we have a high degree of confidence that we will achieve our year-end leverage targets with sufficient proceeds to also fund development, nearly all of which will be at Defense/IT locations that serve critical missions involving intelligence, surveillance, reconnaissance, and cyber security aspects of assuring national security.
With that, let me hand the call over to <UNK>.
Thank you, <UNK>.
I'll begin by providing more color on our same-office cash NOI results.
As slide 4 shows, same-office cash NOI grew 6.4%.
Now that space give-backs by defense contractors have abated, we expect same-office cash NOI results to continue benefiting from this stability.
Based on the strength of our results, and our confidence in our leasing forecast, we are increasing our guidance for same-office cash NOI growth for the year by 50 basis points to between 3.5% and 4%.
Leasing activity in our markets continues to rebound.
We see increased demand in our Defense/IT locations for new, efficient space from contractors who, in response to DoD budget clarity, now operate in a more normalized business environment.
Job growth in the mid-Atlantic, where 90% of our assets are located, led the country in March.
Based on data from the Bureau of Labor Statistics, the mid-Atlantic region produced over 91,000 office-using jobs last month, representing an annualized increase of 11.6%.
Among the 14 markets that compose the region, Baltimore ranked first, producing over 21,000 office-using jobs for an annualized increase of 18.6%.
The majority of the job gains were in the private sector, predominantly professional and business services.
Fundamentals in the BW corridor, where over 50% of our portfolio is located, continued to strengthen.
Within the corridor, our Class A vacancy in the Howard County stands at 6.6%, which is the lowest rate since 2000.
Big blocks of space command a premium because they are scarce.
These fundamentals support an increase in net effective rents, and we are also pursuing build-to-suit opportunities for cybertech companies that are quickly outgrowing their current space.
We leased 545,000 square feet in the quarter.
Rents on renewals grew in nearly every segment, averaging 2% on a cash basis and 11.4% on a GAAP basis.
Our original guidance for the year for cash rents to roll down between 3% and 2% ---+ based on first-quarter results, we now expect a more modest roll-down and are revising our guidance on cash rent spreads on renewals to between negative 2% and negative 1%.
Tenant retention in the quarter of 64% was in line with expectations.
Three-quarters of the non-renewing space was or is in the process of being backfilled by new tenants with expanding business opportunities.
For the year, we continue to forecast the retention rate of 65% to 70%, including 100% renewal rate on the large lease expirations this year, which are shown on slide 7.
Moving to slide 8, we completed 163,000 square feet of development leasing in the first quarter, and have great confidence that we will achieve, and in all likelihood exceed, the 700,000 square feet of development leasing in our 2016 plan.
This confidence in development leasing is based on the depth of our shadow development pipeline, shown on slide 10.
Most of the demand revolves around Redstone Gateway and our data center shell business.
We are also pursuing an opportunity to pre-lease the final redevelopment building at [Evercress], which will support a stronger disposition valuation.
The transactions summarized on this slide represent a solid runway of external growth from build-to-suit and highly pre-leased developments.
With that, I'll turn the call over to <UNK>.
Thanks, <UNK>.
First-quarter diluted FFO per share as adjusted for comparability of $0.47 was in line with the mid-point of our guidance.
Same-office cash NOI growth of 6.4% exceeded our internal forecast.
Nearly 200 basis points of that growth was due to cash rent commencements.
We also benefited from lower seasonal operating expenses versus the first quarter of 2015.
I'd like to highlight capital markets activities, and our balance sheet and credit metrics, which are addressed on slides 11 and 12.
In March, we sold $5.7 million of land in Colorado Springs.
In May, we expect to complete the refinancing of the secured loan at M Square.
This 10-year fixed-rate $45 million financing will be priced at approximately 3.75%.
At March 31, our debt to EBITDA was 6.9 times and our debt to adjusted book was 43.6%.
These ratios and other balance sheet statistics exhibit seasonality, with the first-quarter statistics typically exhibiting the highest levels.
By year end, we expect to improve our debt to EBITDA to 6.1 times and our debt-to-adjusted-book ratio to 39%, as pre-lease development projects come online and as we pay down debt with asset sale proceeds.
Slide 12 depicts our debt maturity schedule.
Approximately 88% of our debt is fixed rate, and our total debt has a weighted average maturity of nearly six years.
Additionally, we have no unfunded balloon maturities until 2019.
Slide 13 provides our sources and uses of capital for the year.
As <UNK> highlighted, we are marketing over $600 million of transactions in order to ensure we complete the $440 million of sales in our 2016 plan.
Because negotiations are in progress, we are not going to comment on specifics today, and instead we will press release and discuss transactions as we complete them in the coming months.
Slide 14 summarizes our second-quarter and full-year 2016 guidance.
Diluted FFO per share as adjusted for comparability for the second quarter is expected to be between $0.48 and $0.50.
For the full year, we are reiterating our prior guidance of $1.95 to $2.05.
I would remind listeners that while the mid-point of our full-year guidance for FFO per share is essentially flat versus 2015 results, we continue to forecast AFFO growth in excess of 4%.
To get from the $0.47 in our first quarter to the $0.49 mid-point of our second-quarter guidance, add $0.03 for NOI resulting from higher occupancy and lower seasonal operating expenses, and subtract $0.01 to account for the sale of a portfolio of assets in May.
With that, I'll turn the call back to <UNK>.
Thank you, <UNK>.
So, those of you who know me would never accuse me of having the gift for gab, so I'd just like to thank everyone, <UNK>, <UNK> and all the COPT employees, and the investment community for making these last 30 years both challenging and wonderful.
I'm grateful for and humbled by the journey I've had with COPT.
With that, operator, please open up the call for questions.
It's really the mix of leasing, <UNK>.
We had a significant amount of leasing in the BW corridor where are conditions are stronger.
Later in the year we're going to have some leasing renewal activity in our Navy support group that won't be quite as strong.
There are two separate situations, <UNK>.
With regard to 310, it was just a longer procurement cycle.
That activity is in process and we expect it to be resolved this summer or third quarter.
With regard to NOVA B, there was a change in the ultimate user of NOVA A, which really propelled us to win NOVA D, on a build-to-suit, but we had already built B and now we are working with that customer to put a related entity into NOVA B.
So it was a delay, but a good news delay.
<UNK>, this is <UNK>.
We have not had any buyers have any difficulty in the financing markets in the transactions that we have in the market.
We have some transactions that are all cash buyers for those who are looking to put their capital stack together, debt and equity.
We have not had any issues with those buyers accumulating those stacks as they have gone through the process.
And we continue to be encouraged by that depth of the market that we see and the number of buyers looking at each of the individual assets that we have in the market.
With respect to timing, we have for the $440 million, I would still expect sort of an average number for the year, so you can average that over the balance of the nine months for planning an impact to FFO for the year.
For gap leasing spreads we would expect them to be in the 7 to 8% range for the entire year.
Positive.
Yes.
Sure.
There's actually three buildings.
Two are US government buildings, one at the NBP, one in Howard County.
It's just early in the cycle for them to be processed.
They'll be funded with 2017 money and will be renewed.
The last building listed ---+ the 152,000 square foot building labeled TBD is a large contractor at the National Business Park who's competing on a major contract.
If they win it, we anticipate them keeping the building.
If they lose it we would expect to get about half of that space back, but I would point out that there's only one other competitor and that competitor would need the space.
So we are pretty confident we are going to be in good shape there.
We really do believe that we can maintain the pace that we have currently listed on our development schedule through next year.
We have significantly more development opportunity in conversations, or early discussions, than we list on our shadow development pipeline.
So we have high confidence we will continue to be able to develop successfully.
Thank you.
First of all, I'm not acknowledging those three letters.
The US government is in Air Square 10 and 20.
We use some of those buildings, <UNK>, and we understood before I joined the Company that long-term those buildings would not support the users that were in them and they are being relocated to other secure campuses that the government leases.
They're moving to more efficient campuses like we have at NBP where they can put multiple buildings in a campus and achieve economies of scale from their security.
With regard to Boston Properties building, I'm not sure I really want to touch that, but that building is developed with a different kind of occupancy model.
That contemplated renting space by the seat, and having the landlord, in essence, provide all of the tenant improvement and systems for a secure operating environment.
And I believe that the government customer is just weaning themselves off of that rental model.
Thanks, <UNK>.
Well, unquestionably.
If you look at the magnitude that we have listed down at Redstone Gateway, there's quite a bit of discussions and activity in play, even exceeding the amount that we listed.
And that's driven by the improved spending environment in the DoD and the need for new efficient space.
And having both government and contractors confident that they'll get the funding they need to address their mission needs in new buildings.
But additionally, at the National business Park, we preleased half of 540.
We have tenant demand for the balance of it and also in our northern Virginia locations, both from the data shell standpoint and our government customers, we continue to have discussions about further demand.
Our leverage targets that we've outlined will really be accomplished by the end of the year with the proceeds from the asset sales, so our targets of where we want to operate the Company long-term are debt to EBITDA of 6 times, and debt to adjusted book in the 38 % to 39% range.
By year-end, we expect to be down to those levels.
Which, again, will be achieved with additional proceeds from the asset sales above and beyond what we need to fund the development pipeline.
Thank you all for joining us today.
If your question did not get answered, most of us are here in the office and available to speak with you later today.
Good day.
