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Welcome to the COPT Defense Properties First Quarter 2024 Results Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Venkat Kommineni, COPT Defense's Vice President of Investor Relations. Mr. Kommineni, please go ahead.

Thank you, Latif. Good afternoon, and welcome to COPT Defense's conference call to discuss first quarter results. With me today are Steve Budorick, President and CEO; Britt Snider, Executive Vice President and COO; and Anthony Mifsud, 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. We're off to a great start in 2024. We reported FFO per share of $0.62 for the first quarter, which was $0.02 above the midpoint of guidance. Same property cash NOI increased 6.1% year-over-year. The strong performance is driven by our high tenant retention, contractual rent escalations, revenue growth from vacancy leasing achieved last year, strong property operations and to a lesser extent, new properties added to the same property pool in January. The 2023 same property pool on a standalone basis generated 4.8% growth. We completed 721,000 square feet of total leasing volume, which consisted of 551,000 square feet of renewal leasings with a 78% retention rate, 160,000 square feet of vacancy leasing which amounts to 40% of our full year target and 10,000 square feet of development leasing. We committed $91 million of capital to new investments, which includes two development starts that will provide much needed inventory in our highest occupancy markets, The National Business Park and Redstone Gateway, where we literally have no comparable space left to lease. Our active development pipeline now totals roughly 960,000 square feet. It is 74% pre-leased with a total cost of $381 million, which is a nearly $60 million increase from last quarter. And excluding the three inventory buildings, the pipeline is 100% pre-leased. We placed 73,000 square feet of development space in the service that were 100% leased in Huntsville. In mid-March, we acquired a 202,000 square foot building in Columbia Gateway for $15 million, which I will discuss in more detail in a moment. Our business continues to generate increasing AFFO and our dividend payout ratio remain strong, coming in at 57% for the quarter. Finally, based on our performance and expectations for continued growth, in February our Board of Trustees approved a 3.5% increase to our dividend, which marks our second consecutive annual increase, following the 3.6% raise in 2023. We are the only REIT in our sector to raise the dividend year-to-date, which demonstrates the confidence we have in the strength and durability of our FFO and AFFO growth profile. Now turning to guidance. We increased the midpoint of 2024 FFO per share guidance by $0.03 to $2.54, which implies 5% year-over- year FFO growth. In contrast, over two-thirds of the Nareit defined office REITs are expected to see FFO per share decline in 2024. Between 2019 and the midpoint of our new 2024 guidance, we expect to generate 25% FFO per share growth, which amounts to a 4.6% compound annual growth rate. This is the second highest growth rate among our peer set, comparable to the median growth through the triple net sector and stronger the multi-family segment over the same period. Our differentiated strategy has and will continue to produce differentiated results. Turning to the worldview. Over the past few months, the conflicts between Iran, its proxies in Israel, as well as Russia and Ukraine continue to escalate, while China remains an ever present and growing threat. On March 20, the FY 2024 Defense Appropriations Act was signed in [Technical Difficulty] a $30 billion or 4% increase over last year. This is actually larger than the 3.3% increase in the approved NDAA submitted in December and $4 billion higher than the President's initial budget request. The FY 2024 budget and appropriations are separate from the $95 billion in supplemental funding for Ukraine, Israel and Taiwan, which passed the House and Center with bipartisan support and was signed into law on Wednesday. In a time where the global security environment is becoming increasingly complicated, we continue to have a high level of confidence that Congress will continue to work in a bipartisan manner, as they just did, to fund national security interests and support our allies around the world. I'll conclude my remarks by discussing our recent acquisition. In March, we acquired Franklin Center in Columbia Gateway for $15 million, which marks our first acquisition in nine years. Franklin Center is a 202,000 square foot Class A office building, which sits less than a mile from our headquarters and is 56% leased through a leading defense contractor. This building, constructed in 2008, is the second newest development in the park is LEED-Gold certified and well amenitized. We saw an opportunity to acquire an asset and [Technical Difficulty] over value. Before [Technical Difficulty] and the first is the mission. The property must be proximate to a priority knowledge based national defense mission that has permanence. The second, the market. The market must have fundamentals that attract defense IT tenants serving the mission. Third, the property. We look for attributes that would lead to high tenant retention, such as high efficiency in planning and operations and or significant tenant co-investment in specialized improvements such as SCIF. And fourth, the return. The initial cash yield needs to meet or exceed what we earn on our developments, and Franklin Center checked all four of these boxes. The strategic rationale behind the deal is quite simple. This value add opportunity with significant occupancy upside. We acquired at a substantial discount to replacement costs. It enhances our relationship with a top 10 U.S. defense contractor. It solidifies our position as the dominant owner in Columbia Gateway and it provides much needed inventory, as our Columbia Gateway portfolio is nearly 95% leased excluding this acquisition. We already have strong leasing pipeline, for the asset, with a leasing activity ratio of 200%, which means we have 180,000 square feet of demand for the 90,000 square feet of vacancy we acquired. Our entire 2.5 million square foot Columbia Gateway portfolio, the activity ratio is 190% with roughly 445,000 square feet of demand for the 235,000 square feet of vacancy. I am highly confident we can unlock value in this asset, as roughly 80% of the defense IT tenancy and the entire Columbia Gateway Park chooses COPT Defense as their landlord. So with that, I'll hand it over to Britt.

Thank you, Steve. Our business remains strong as the federal government and contractors rise to meet the current challenges that we're all witnessing around the world. The need for secure space continues to grow and that demand is becoming more and more immediate. This strong demand has benefited us as we've been able to achieve stronger leasing economics by reducing concessions, principally by lowering or eliminating rent abatements in our defense IT portfolio. Our leasing activity ratio for available space strengthened over the quarter to 85% for the total portfolio, despite executing 160,000 square feet of vacancy leasing and adding 90,000 square feet of inventory during the quarter. The activity ratio is even higher in our defense IT portfolio at 108% as we only have 770,000 square feet of inventory available out of 22 million square feet. Looking into our markets, the MVP remains the strongest component of the portfolio with continued demand from our largest customers, while cyber related businesses continue to both enter and grow within our Columbia Gateway submarket. Missile defense related businesses and support for other missions at Redstone Arsenal continue to thrive at Redstone Gateway, but we're also seeing increased interest in R&D testing and lab space. And lastly, with the completion of the fiscal year 2024 budget, we're pleased to see increased activity in all three of our Navy support locations. In our other segment, we're making leasing progress in those competitive environments to the success defined in the 5,000 square foot to 15,000 square foot increments. At 2100 L Street in DC, we actually signed a lease yesterday for 16,000 square feet, which stabilizes that building at 92% leased. We are currently -- in our other segment and expect to have additional good news on the leasing front in the coming months. Our portfolio occupancy ended the quarter at 93.6% with our defense IT portfolio at 95.6%. The 60 basis point quarter-over-quarter decline for both figures was driven by, one, the acquisition of Franklin Center, which had 90,000 square feet of vacancy; and two, the known non-renewals we discussed last quarter. In terms of vacancy leasing, we executed 160,000 square feet during the quarter and we are well positioned to meet our full year target of 400,000 square feet. Vacancy leasing as a percentage of available space at year end was over 14% in our total portfolio and over 18% in our defense IT portfolio. Half of the leasing volume was signed in the Fort Meade BW corridor segment with Columbia Gateway in particular standout at 40,000 square feet or 25% of the total. I'd like to share some key leasing stats with you. Roughly 105,000 square feet of vacancy leasing was with defense contractor tenants. And importantly, we [Technical Difficulty] nearly 50,000 square feet in our other segment, half of which occurred at Pinnacle Towers in Northern Virginia, where we increased the leased rate by nearly 700 basis points sequentially. Roughly 60,000 square feet or nearly 40% of the total was tied to cyber activity. Nearly 70% of combined vacancy and development leasing was repeat business with existing tenants. Cash rent spreads on the 551,000 square feet of renewals were down 2.5%, while GAAP rent spreads were up 3.7%, driven by annual rent increases of 2.4% with a weighted average lease term of 4.1 years. On Page 26 of our flip book, we provide detail on two larger renewals that negatively impacted the change in cash rent. These renewals consisted of 110,000 square foot lease in our Defense IT segment in Northern Virginia and a 30,000 square foot renewal in our Other segment at 100 Light Street in Baltimore. The Northern Virginia renewal was the largest lease signed during that quarter in that market with starting cash rent on the above grade space at $40 a foot, which despite the rent roll down, is actually still 8% above other deals executed in both the submarket and all of Northern Virginia. Excluding the impact of these two renewals, cash rent spreads were flat while GAAP rent spreads were up 8.1%. We continue to expect cash rent spreads to be flat for the full year at the midpoint and retention in the 75% to 85% range. The 2.5% cash rent roll down during the quarter equates to only $450,000 in annual rental revenue or only 0.1% of the total, and which we anticipate making up over the course of the year. In addition, this impact is inconsequential when compared to the annualized revenue contribution from vacancy leasing achieved in the quarter of approximately $4.8 million. As shown on Page 25 of the flip book, we continue to expect the retention on our large leases through year-end 2025 to be over 95% Now turning to development. As you recall, one key aspect of our development strategy is to always maintain some level of inventory at locations where we see strong demand. When nearing fully leased, we will commence a new project to create inventory. The Redstone Arsenal is 98.6% leased and 97.4% occupied across that 2.4 million square foot park. 20 of the 24 properties are 100% leased with less than 35,000 square feet of unleased space at quarter end in the operating portfolio. We have 8100 Rideout Road under construction to create office inventory at Redstone Gateway. The project is 42% pre-leased with a leasing activity ratio of 135% with 100,000 square feet of demand on the 75,000 square feet of vacancy. During the quarter, we also started 9700 Advanced Gateway, a high bay R&D and testing facility. This 50,000 square foot project has a total cost of $11 million and is 20% leased -- pre-leased to a defense IT firm headquartered in Huntsville. We have a leasing activity ratio of 150% with 60,000 square feet of demand on the 40,000 square feet of vacancy. Similarly, the National Business Park is 99.1% leased and occupied across that 4.3 million square foot park. 29 of the 34 properties are 100% leased with only 37,000 square feet of unleashed space at quarter end. Accordingly, we started MVP 400 during the quarter, which is 138,000 square foot $65 million office project. We have a leasing activity of 150% with over 200,000 square feet of demand for that project. Our development leasing pipeline, which we define as opportunities, we consider 50% likely or better to win within two years or less, currently stands at over 500,000 square feet. And beyond that we're tracking over 1 million square feet of potential future development opportunities, which should allow us to maintain a solid development pipeline in the near and medium term. I'll conclude my remarks by highlighting the increased importance of Columbia Gateway as a cyber defense and IT hub, with a combination of government tenants and a rich concentration of cyber innovators that grow their businesses and space requirements with us. There are four factors that contribute to Columbia Gateway's success. First, an easily commutable location, located midway between Baltimore and Washington DC. It provides tenants the ability to attract young, educated workers from both cities. Second, it's only 7 miles to Fort Meade, which is home to a large intelligence agency, U.S. cyber command and over 100 federal agencies and military commands. Third, growth in cyber funding. Cyber funding increased over $2 billion this year, which is over a 40% increase over the past four years and the DoD has requested another $1 billion increase for 2025. And finally, our life cycle landlord proposition. We have a unique ability to attract early to mid-stage defense contractors given our expertise and ability to scale with them at mission critical locations. Our variety of product types, office suites, fosters growth among contractors as they mature, win contracts and expand their businesses. Columbia Gateway was 94.8% leased and 92.9% occupied at quarter end, excluding our Franklin Center acquisition. After reserving inventory for our high probability prospects, we had only 40,000 square feet remaining to lease in the park with the largest remaining suite at 9,000 square feet. While we often discuss the strength of the MVP and Redstone markets, this acquisition of Franklin Center provides a great opportunity to spotlight our Columbia Gateway portfolio and provides much needed inventory to allow us to continue to solidify our dominant market position and meet the needs of our Defense/IT customers. With that, I'll hand it over to Anthony.

Thank you, Britt. We reported first quarter FFO per share as adjusted for comparability of $0.62, which was $0.02 above the midpoint of our guidance. The quarter benefited from lower net operating expenses, primarily due to favorable weather conditions, increased interest income on our cash balances and slightly lowered net G&A and venture expenses. During the quarter, [Technical Difficulty] and 7.6% for our Defense/IT Portfolio. This strong performance was a combination of the 2023 same property pool increasing 4.8% with the Defense/IT portion of that portfolio increasing 6.3%, plus the impact of properties that were added to the 2024 pool. We increased the midpoint of our same property cash NOI guidance by 50 basis points to 6.5%, driven by lower than expected free rent concessions on renewals and better operating margins. Same property occupancy ended the quarter at 93.5%, which is down 30 basis points sequentially from last quarter, but up 90 basis points year-over-year. As previously discussed, the decline was driven primarily by two downsizes, totaling 72,000 square feet. First, a 100,000 square foot contractor downsized to 60,000 square feet. We're tracking a great opportunity to backfill the majority of that space with a government tenant. And second, the downsize of a law firm in our Other segment. We expect same property occupancy to remain relatively stable throughout the remainder of the year. Our balance sheet continues to be strong and well positioned to navigate the higher for much longer interest rate environment the market is currently anticipating. We have no significant debt maturities until March 2026. Our unencumbered portfolio represents 95% of total NOI from real estate operations. And at the end of the quarter, we had over 85% of the capacity on our line of credit available and over $120 million of cash on hand. We currently have no variable rate debt exposure. In February 2023, we entered into interest rate swaps at fixed SOFR at 3.75% for three years on our $125 million term loan and $75 million of the line of credit. The swap rate is over 150 basis points lower than the current one-month term SOFR and has and will continue to provide significant protection in this prolonged elevated rate environment. Thus far, these swaps have generated over $3 million of interest expense savings. And based on the current SOFR curve, they are expected to remain in the money through the maturity in 2026. We expect 100% of our debt will be at fixed rates late into 2024 as the equity component of our capital investments will be funded from cash from operations after the dividend and the debt component, from our existing cash balance and subsequently from our line of credit. Turning to our recent acquisition, the initial cash yield on Franklin Center is 11.2%. In 2024, the transaction is roughly $0.05 accretive to FFO per share and $0.10 accretive to AFFO per share. The $15 million acquisition was funded with cash on hand and there is no impact to leverage. With respect to guidance, we increased 2024 FFO per share guidance by $0.03 at the midpoint, implying 5% growth over 2023's results. The guidance increase is driven by the first quarter's strong performance, the acceleration of commencement dates on some executed leases and the acquisition of Franklin Center. In addition, given the higher for longer rate environment, we expect slightly higher interest income on cash balances, but are protected against higher variable interest expense because of the previously discussed swaps. Finally, we are establishing second quarter guidance for FFO per share as adjusted for comparability in a range of $0.62 to $0.64. With that, I'll turn the call back to Steve.

Thank you. I'll close by summarizing our key messages. We're off to a great start in 2024 with first quarter FFO per share $0.02 above the midpoint of guidance. Our Defense/IT segment is 96.8% leased, which is well ahead of our peers. We reported same property cash NOI growth of 6.1% in our total portfolio and 7.6% in our Defense/IT Portfolio. We increased the midpoint of 2024 same property cash NOI growth by 50 basis points to 6.5% at the midpoint. We executed 160,000 square feet of vacancy leasing, which puts us in a good position to achieve our full year target of 400,000 square feet. Our $381 million of active developments, which are 74% pre-leased, provide a solid trajectory for our external NOI growth over the next few years. We purchased Franklin Center, a modern LEED-Gold certified office building in Columbia Gateway for $15 million at a double-digit initial cash yield. Our liquidity is very strong and we continue to expect to self-fund the equity component of our expected capital investment going forward. We raised our dividend 3.5% in February, which marks our second consecutive annual increase. We increased the midpoint of that 2024 FFO per share guidance by $0.03 to $2.54, which implies 5% year-over-year FFO growth. And finally, looking forward, we continue to expect compound annual FFO per share growth of roughly 4% between 2023 and 2026 based on the midpoint of our initial 2023 guidance. And with that, operator, please open up the call for questions.

Thank you, Mr. Budorick. [Operator Instructions] Our first question comes from the line of Michael Griffin of Citi. Your question, please, Michael.

Great. Thanks. Yeah. Great. Thanks. Maybe you could give a little more color or context about the Franklin Center acquisition. I mean, are we going to see other assets like this trade in Columbia Gateway? Was this sort of a one-off special to this building? And can you give us any sense on kind of the going in and stabilized cap rate?

Yeah. So we gave you the going in cap rate, that's 11.2. Our flip book reports a conservative 12% cash yield after we stabilize. I guess that's a better way to look at it than cap rate. The acquisition -- I don't consider this indicative of the value of property in Columbia Gateway. This particular building was bought as a 100% leased asset years ago by a triple net investor. And when the current tenant contracted several years back, I don't think they really had the platform to compete against our franchise in our backyard. And I think their leasing languished and eventually, I believe, they're redeploying capital to more strategic assets, which created a great opportunity for us to step in and add this building to our franchise, which is a double win for our shareholders.

Maybe just to follow up on that. With the lease expiring in 2026, would you say the probability is high of the tenant renewing or would you expect that space to be re-leased?

I would say, it's exceptionally high they will renew. Remember, we know the tenant, we know the mission they conduct in that building. They have significant tenant co-investment, have some very valuable improvements in that building. It would have to be an extraordinary loss of business for that tenant to depart the building.

Got you. That's helpful. And then maybe lastly, just on renewal leasing for the quarter, I saw cash rents declined about 2.5%, mainly driven by one large tenant in Nova. Would you consider that more a one-off or would you expect we could see cash rents decline continuing throughout the year?

I think our comment address that. We expect to [Technical Difficulty]. You'll see the overall statistics trend back where we expect them -- we expected them to be in our guidance.

Great. That's it for me. Thanks for the time.

Thanks, Michael.

Thank you. Our next question comes from the line of Blaine Heck of Wells Fargo. Please go ahead, Blaine.

Great. Thanks. Good afternoon. There were some audio issues on my side, so I'm sorry if I missed anything related to my questions. But first one, great to see the new investment on both the development and acquisition sides, but just a few questions on that subject. First, can you just talk about the decision to add those two new development projects and what you're seeing that kind of makes you comfortable with the additional speculative leasing just given that overall development leasing was relatively soft this quarter?

Well, development leasing kind of ebbs and flows, it can be lumpy. Several of the prospects for the projects we started and the one we are under construction on [indiscernible] 8100 in Huntsville. We are awaiting the approval of the NDA to proceed, which just happened in the last couple of weeks. So we expect that leasing activity to pick up through the air on the development side. With regard to the decision to start, at the MVP, we are 99.1% leased and occupied. We have less than 30,000 square feet in the whole park. We expect no space to non-renew in the near time -- near term. And we have couple 100,000 square feet of demand that we're working with tenants on now. It's absolutely a no brainer and a smart defensive move on our part to create inventory to support the ecosystem that we enjoy supporting Fort Meade. We have every expectation that will be very successful. And then similarly, in Redstone Gateway, we have quite a bit of demand developing for High Bay R&D and testing. And we decided to build a building with 20% pre-lease to satisfy that demand. We expect to lease up pretty quickly. And we think that could be a not huge, but an important additional product type that we might want to develop into going forward.

Great. Thanks, Steve. Just to kind of follow up on that last part. So can you talk specifically about tenant prospects at 8100 Rideout? It's 42% leased. You completed it last year. Operational date is third quarter this year. I guess, just talk about more about your prospects there, whether you think you can have that stabilized by the third quarter? And then just maybe for Anthony, just remind us of your capitalized interest policies and, I guess, confirm that you'd stop capitalizing on anything unleased in the third quarter this year?

So I'll deal with the easy part. Our activity ratio is over 100% on the vacancy. Whether we get it completely full by the third quarter, I hate to predict timing. Our industry moves pretty methodically, but we are working with tenants and anticipate some pretty high value leasing opportunities that will get done this year. We're so confident we're going to fill the building, we're in advanced planning and the next one we need to build.

And then Blaine, on capitalized interest, you're correct. We -- so, we placed the first tenant into service in the first quarter. So capitalized interest on that portion of the building stopped in the first quarter. And then on any unleased component of the building or unoccupied portion of the building in the third quarter, capitalized interest would stop.

Perfect. Thanks. Last one for me. You guys bumped your expectation for FFO growth here in 2024, but I believe you kept the same expectation for 4% CAGR from '23 to '26 unchanged. Does that imply some growth was pulled forward or maybe just some conservatism with respect to kind of changing that longer term charge target?

We got to save some news for later, Blaine. No, we put out that benchmark on the '23, '26, almost two years ago. We want to see that fulfilled. And then we'll update our forward thinking, but it doesn't imply a meaningful change to what we think will happen next year.

Great. Thanks, guys.

Thank you. Our next question -- please stand by. Our next question comes from the line of Camille Bonnel of Bank of America. Your question, please, Camille.

Hi, everyone. I wanted to pick up on some of the drivers of the increasing guidance, particularly the comment of accelerating lease commencement dates. Can you help us understand how much of that was driven by the efforts of your operations team being able to deliver the space ahead of schedule, budget outcomes that Steve highlighted in his opening remarks or just simply, is it the tenants requesting to move in sooner?

It's really the second item that you mentioned. So our team has been able to execute our portion of the required investment in the space, sooner than we had anticipated, which allows the tenant to take control of the space and for our leases to commence.

Okay, I'll have to go back through the transcript. There's -- the sounds cutting out a bit. But just a follow up, for the last few quarters, your same store NOI has benefited from lower than expected free rent concessions. Would you call this a trend and what's driving this when we're hearing in other sectors that concessions continue to arise?

Yeah. This is Britt. Yeah, I mean, it is something that it's obviously a helpful trend that we're seeing and something we're pushing our asset managers and leasing folks are pushing for the lower abatement because the demand is -- especially near-term demand is just incredibly strong and that's how tenants are prioritizing what their space needs are. It's hard for them. It actually relates to the development leasing a little bit because they're looking at what they need now, the demands that are coming out for secure space are incredibly high. And so we feel like we have a very strong position in that regard given that we can provide that kind of space and drive some of those concessions, in particular, free rent down. So it's something we're actively pushing.

Could you quantify that in terms of like percent abatement that you're giving per lease term and what that compares to pre-pandemic, for example?

I don't have that offhand, but we can certainly go through our data and get that for you. I mean, I'll say it's definitely something that we've seen, I would say, over the past couple of quarters. It's a trend that we're pushing on, but we can work to quantify that and get that to you.

Okay. Thanks.

Thank you. Our next question comes from the line of Tom Catherwood of BTIG. Please go ahead, Tom.

Thank you and good afternoon, everybody. Maybe, Britt, if I'm not mistaken, I think a lot of your activity in the Columbia Gateway market in the last maybe 12 months to 18 months has been small to mid-sized tenants. A lot of overflow coming from NBP. But with this now 90,000 square foot contiguous blog of -- block of space, does this allow you to target a different set of tenants? Can you be more selective kind of given the activity you already have on the space? What's the kind of leasing strategy as you think of that space?

Yeah. I mean, it's a good question. I mean, [Technical Difficulty] we are seeing a steady increased demand here from cyber tenants. And yes, they are generally smaller in size, but we're also seeing tenants that come in at 5,000 feet and have turned into 70,000 feet because of the cyber hub and the ecosystem that we've created here. So we see that as something that has a very nice trajectory for Columbia Gateway. And, yeah, it's becoming a much more of a cyber/IT hub.

Got it. And then also following up on something else you mentioned in your prepared remarks, Britt, you talked about the defense budget approval benefiting the Navy support portfolio. Can you provide more detail on that comment and maybe what you're seeing in terms of tenant activity in that grouping?

Yeah. I mean, we are seeing -- I mean, the Navy support demand driver is something that ebbs and flows a little bit, but it is something that we are seeing of late where more contract dollars are coming out. And whether it's the Navy directly or through their contractors, I certainly can't speak to exactly what's driving it except for what we see in the defense budget. But we're definitely seeing an increased activity level there and a lot of phone calls coming in and asking [Technical Difficulty] achieve additional space and, in particular, secure space. So we're very pleased to see that that demand increasing.

Got it. And then final one from me, maybe Steve. Again, great to see the acquisition of Franklin Center. And I know acquisitions can be opportunistic. It can be kind of one-offs, but what are you seeing as far as product potentially coming to market? I know there had been some talk of maybe in the, like, Route 28 South corridor in Northern Virginia with some buildings potentially coming up that might fit into your portfolio. Do you have a sense of -- could there be other opportunities out for COPT this year in the market?

There have been a couple, three opportunities in Northern Virginia. Some of them have been deferred and a couple resolved where another investor was willing to pay more than we would. Like I said, we painfully went through our criteria and we're extremely disciplined if we can't beat our development yield on an acquisition that we're not going to buy.

Got it. That's it for me. Thanks, everyone.

Thank you. Our next question comes from the line of Ray

Hi. Thanks for taking my question. My first question is on Franklin Center. You guys sounds like there's no more dollar to be put into the asset itself. It's just a matter of leasing up. Is that the right way to think about that?

Yeah. We -- well, generally, yes. The building was very well cared for and it's one of the, like we said, second newest building in the park. It's really quite prominent. We budget a couple million dollars for some, public combination enhancement, punching up [Technical Difficulty] and kind of the initial arrival experience [Technical Difficulty]

Got you. And then the second part of Franklin Center is you guys provided going in cash yield and stabilized cash yield. And also mentioned, most likely it's a renewal for the existing tenant, but there's still some vacancy. Just curious to know within that stabilized yield that you provided, is that under the assumption of just current tenant renewing or assuming it's going to lease up to more like a 90% or so? So just trying to think about upside and downside on that yield?

Yeah. There's much more upside than downside. That 12% stabilized cash yield was established to cover absolutely every bad thing that could ever possibly happen concurrently. I think we're going to blow that away.

Got it. And then any mark to market you can give on that? Because I noticed on GAAP basis, I think the rent is a little lower than cash basis. Just curious on the mark to market there?

The value of the mark to market over the remaining lease term was just under $1.5 million. It was, I think, $4 per foot.

Higher than market?

Correct.

Got you. And then I have a quick -- yeah, and then my second question is on data center. I noticed there's another expiration later this year. Any color you can provide on mark to market, notice that the rent is a little bit on a higher side versus the one that just got renewed. Just want to get a sense on market there?

The negotiations with the tenant are being finalized now. We expect us -- we expect a strong mark to market on that lease despite the fact that its current rent is a bit higher than where our renewal last year ended. So wouldn't want to put a percentage out there right now since we're still in discussions with our tenant.

Got you. That's it for me. Thank you.

Thank you. Our next question comes from the line of Peter Abramowitz of Jefferies. Your line is open, Peter.

Hi. Yes. Thank you. So just another one on the yield at Franklin Center. So I think, Steve, you just mentioned you would expect some upside to that. Just looking -- assuming you get to say kind of 90% stabilized occupancy if you're at 11%, which is 56% occupancy today, just trying to quantify that upside. Is it fair to say it could get kind of into the mid to high teens if you're getting to 90% stabilized occupancy?

Yes.

Got you. That's helpful. And then just another one on the development side. Could you just kind of touch on -- you talked about the two new projects that you have and are looking to lease up in Redstone. Could you just talk about the depth of pipeline for demand on the build to suit side and just kind of what you're seeing there, what you expect for the rest of the year?

Yes. Our overall development leasing pipeline is at a little over 0.5 million square feet right now. And that includes several possibilities for build suits and then leasing up what we've started and were under construction on.

Got you. I guess, is that something…

I won't tell you, who we work (ph).

That's all right. We'll wait to hear. Is that something you think could pick up just on the back of some of the strong growth in the defense budget? I would imagine that '23 demand is kind of coming through right now.

Well, it's my belief that or feeling that all companies are feeling the pressure of the cost of capital right now. And I think even our customers with good business opportunity and growth are being very prudent, about major investment decisions. So I think we get the must -- the must have developments. And I think there's a wait and see on the want to haves. So I actually believe over the next few years, if the rates are improved, that our development opportunities will increase from where they are today, but we still see good opportunity to meet our financial objectives in this environment.

Got it. Thank you.

Thank you. Our next question comes from the line of Richard Anderson of Wedbush Securities. Please go ahead, Richard.

I think you said me. Rich Anderson here. Yeah. It's been a little in and out interference, so if I missed anything, I apologize. Might want to check your Wi-Fi account, make sure it's up to speed. Just kidding. Franklin Center, did you -- does the yield projection assume, and again I think I might have missed this, a roll down on the existing tenant in '26?

So, Rich, we put out a very conservative future cash yield, which kind of embody [Technical Difficulty] could go wrong, going wrong concurrently. So, [Technical Difficulty] would absorb a rent roll down. It would absorb more investment in the common area and the structure of the building than we plan to spend. And it would absorb higher TIs than we typically give. It's just a very conservative number in a forward-looking, publicly disclosed environment where we never want to be overstating our opportunity. As I said to an earlier caller, you might have missed, I expect to beat that target and potentially very handily.

Okay. You described the building as very well cared for, but yet still unable to compete with the engine of CDP in the vicinity. What would have stopped a tenant to move over to a very well cared for building in the proximity of everything else? It just seems odd to me that if it's a nice building, it looks nice, the pictures look nice, why wouldn't it have been more competitive versus your 97% occupancy vicinity?

It's a hard thing for me to answer that with specificity, but to kind of get you comfortable with it, 80% of the defense contractor business in Columbia Gateway is with us. And we've been a defense/IT landlord in this market for over 25 years that we've been public. We've got great relationships and we have relationships with most of the tenants that are in the market somewhere else. So we just tend to dominate in this business part.

And I would just add to that, I mean, we have an additional 200,000 square feet of demand that we're seeing since we took over. So again that just shows what Steve is saying, which is the relationships that we have do draw tenants to our assets here.

And one last comment. The prior owner from another part of the country, different structure, a triple net lease investor, no particular operating presence on the east coast, and they have to rely on the fee management crowd. And hypothetically that service component of the business doesn't bring the relationships that we have where we do that primarily directly.

Okay. Made progress on L Street, I think you said fully stabilized now. I know there was some leasing in Baltimore. How are you closing in on some of these "other asset sales?" Could it be this year event or is that not a likely outcome at this point?

I don't see it this year, Rich. What transactions that have happened in DC are very opportunistic from the buyer's standpoint. They don't represent cap rates that we would accept with an asset that valuable for the sense of timing. And then outside of that, in Tysons Corner in Baltimore, I just don't think you have the depth of capital to make a market on those assets. It's going to take some time.

Okay. And last question from me. You've heard the 4% CAGR through 2026 on FFO. What does that assume on a same store cash NOI growth? I know you're doing 6.5 this year. That's probably not sustainable at that level, I'm guessing. What's the right way to sort of set expectations from an internal growth perspective for people like us?

I'm not sure I can answer that question. We haven't really run math on it in that way. And do recall, we put that target out several years ago. And we're going to continue to report against that target till we hit it and then we'll consider our new benchmark that we put forward. The intent is to convey our confidence of continuing to produce growth in a challenging financial environment and to convey the strength of our business that we continue to prove quarter-in and quarter-out.

Okay. Fair enough. Thanks very much.

Thank you. Our next question comes from the line of Dylan Burzinski of Green Street. Your question please, Dylan?

I actually don't have any more questions. Sorry. Thanks, guys.

Good to talk to you though, Dylan.

Good talking to you guys too.

We'll see you soon.

Thank you. I will now turn the call back to Mr. Budorick for closing remarks.

Well, thank you all for joining our call today and the enriching questions that we got to discuss. We are in our offices all afternoon, so please coordinate through Venkat, if you like follow up call or talk about something we mentioned in more detail. Thank you.