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

Thank you, Kevin. Good afternoon. And welcome to COPT Defense's conference call to discuss third 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 Web site, 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 the duty to update them. Steve?

Good afternoon. And thank you for joining us. We produced strong results in the third quarter and continue to outperform our projections. Importantly, we executed two strategic acquisitions, which I'll touch on shortly. FFO per share as adjusted for comparability was $0.65, $0.01 above the midpoint of our quarterly guidance. We increased the midpoint of 2024 FFO per share annual guidance again by $0.01 to $2.57, which implies over 6% year-over-year growth. We continued to produce very strong operating results, which has led us to enhance our full year outlook on three key guidance metrics, including same property cash NOI growth, tenant retention and capital investment and development and acquisitions. There are two key points I'd like to emphasize. The first is on internal growth. Our teams continue to do an outstanding job operating in our portfolio and managing costs. And we've outperformed in terms of vacancy leasing with broad based achievement across our segments, and we expect to exceed our full year vacancy leasing target by a good margin. The second is on external growth. We executed two acquisitions during the quarter. The first significantly expands our data center shell development opportunities to a new market and the second highlights the advantages of our unique franchise in the Defense segment. The common thread is that they both center on one of our key competitive advantages, which is our long standing deep relationships within the Defense/IT sector. In September, we acquired 365 acre parcel near Des Moines, Iowa for $32 million. For some time now, we've been working in harmony with our cloud computing tenant to find the right market and land to support their growth. We identified advantages the Des Moines market has to offer and proposed a development program to help them accelerate their capacity expansion objectives. We're in active dialog with our tenant as we plan the site and I can tell you they are just as excited about the opportunity as we are. Let me share some points about Des Moines. It is the fifth largest hyperscale market in the United States. It has ample power distribution and supply. The regional utility, Mid-American Energy, generates 62% of their power from renewable sources. Des Moines has connectivity to long haul fiber lines and has deeply or highly skilled contract community with deep expertise in data center construction. Moreover, the state and local governments are highly supportive and have welcomed the hyperscale data center business with open arms offering favorable tax incentives. Des Moines has been a location of choice for some of the largest hyperscalers, including Microsoft, Meta and Apple. These three companies have roughly 850 megawatts of owned operational capacity with another gigawatt of capacity planned or under construction, as shown on Slide 13 of our flip book. Their investment into data center campuses in Des Moines will total roughly $10 billion at full buildup. For context, the nearly two gigawatts of operational and planned utilization by just these three hyperscalers in Des Moines, Iowa when added to our planned development, will exceed the electrical capacity generated by the Hoover Dam by 50%. Our 365 acre land parcel had zoning that allows for data center development and has a clear path to both power and fiber. Our initial plans contemplate 15 buildings totaling 3.3 million square feet supported by approximately 1 gigawatt of electrical capacity. We acquired the land for $90,000 an acre, which is a 20% discount to the most recent data center land assemblage just 2 miles south of her site. To put this in perspective, the acreage we acquired in Iowa for $32 million would costs in excess of $1 billion in Northern Virginia at today's asking price. The anticipated benefits of this investment are as follows. One, it increases our wholly owned data center shell program from 2 million square feet today to nearly 5.5 million square feet of full build out. Two, it capitalizes on the explosive growth in data center capacity, driven by advancements in cloud computing and AI. Three, it expands our tenant relationship to a market with access to power, the support of municipality, attractive land values and long term growth potential. And finally and most importantly, it will result in significant value creation for our shareholders. This acquisition is an important milestone in a multiyear effort to expand our data center shell development opportunities, and we look forward to providing additional detail as we progress through the planning phase. Also in September, we acquired 3900 Rogers Road in San Antonio for $17 million. The 80,000 square foot Class A office building since just 5 miles from our 1 million square foot US government campus. It was constructed in 2005 and it's in great condition. We've been expecting this opportunity because submission growth on our US government campus has pushed the limits of occupancy. We identified a suitable vacant property and negotiated purchase terms in advance of the RFP issuance. When the opportunity arose, we are perfectly positioned to compete for and win this award. Similar to our other full building leases with the US government, this mission will fund investment in high security and operational redundancy improvements around and throughout the building. The triple net lease has the 9.5 years of term with 3% annual escalation. We capitalized on this opportunity and acquired the building at roughly 50% discount to replacement costs and immediately executed two leases at rents that meet our investment yield target. This investment adds another strategic Defense/IT asset to our portfolio, which we expect to be leased for decades to come. And with that, I'll turn the call over to Britt.

Thank you, Steve. Overall, the operating business remains extremely strong with robust demand persisting throughout our portfolio. Our operations, development and asset management teams are achieving outstanding results driving our sector leading lease levels, occupancy and retention. We finished the quarter with strong occupancy levels at 93.1% in the overall portfolio and 95% in the Defense/IT portfolio. Occupancy ticked down 50 basis points from the end of the second quarter and 110 basis points from the end of 2023, which is a short term reduction resulting from new investment activities and will be substantially offset with completed and expected near term leasing activity. There was a 30 basis point impact from the 80,000 square feet of initial vacancy at Rogers Road that is fully leased but not yet occupied and a 30 basis point impact from placing 75,000 square feet of development space into service at 8100 Rideout Road in Huntsville. We were recently awarded a lease for 40,000 square feet at 8100 Rideout, which I'll discuss shortly. Excluding these two properties, occupancy increased 10 basis points over the quarter. The year-to-date reduction also includes the impact from the acquisition of Franklin Center at the end of the first quarter, which added 90,000 square feet of inventory to the portfolio. This is the expected outcome as we are investing in vacant space to capture known demand at our highly leased parks in San Antonio, Redstone Gateway and Columbia Gateway. These are temporary increases in vacancy that we expect will result in increased long term shareholder value. Regarding vacancy leasing, our buildings remain extremely well leased with our total portfolio at 94.8% and our Defense/IT portfolio at 96.5%. We executed 123,000 square feet during the quarter and 387,000 square feet during the first nine months of the year. And I'm happy to report that as of Friday, we have executed 431,000 square feet year-to-date already exceeding our 400,000 square foot annual target with two months remaining. Our leasing pipeline remains strong with 122,000 square feet in advanced negotiations, some of which we expect to close before year end. Given our achievement year-to-date, we have increased our vacancy leasing target to plus or minus 475,000 square feet, which is especially impressive given our extremely high leased and occupancy levels. Vacancy leasing achieved year-to-date was 39% of our total available inventory at the beginning of the year and 52% of availability within our defense IT portfolio. Our leasing activity ratio is 85% in our total portfolio and 92% in our Defense/IT portfolio, which equates to 730,000 square feet of prospects on 790,000 square feet of availability. We have had broad based leasing activity across our markets. But most encouraging is that over 40% of our vacancy leasing year-to-date has been executed in our Navy Support and other markets where occupancy has been a bit softer in recent years. One specific property I'd like to highlight is Maritime Plaza in D.C., which is immediately adjacent to the Navy Yard. We signed a 33,000 square foot lease with the U.S. Navy for a high priority mission that requires skip enhancements on over 90% of that space. This deal is particularly important because this is the Navy's first direct lease at Maritime Plaza as the complex has historically been home to contractors. This Navy mission will support priority, long term shore based naval infrastructure upgrades. Following this lease execution, we signed another lease at Maritime Plaza with a contractor for 17,000 square feet and we're working on a separate 12,000 square foot tenant expansion, both of which will support this specific mission for the Navy. The lease rate for Navy Support has increased 360 basis points since last quarter and we expect the recent momentum to continue. We continue to outperform in renewal leasing as well as we executed 626,000 square feet for the quarter and 2.1 million square feet for the year with tenant retention at 88% for the quarter and 84% for the year. A couple of notable renewal deals in the quarter include Northrop Grumman for 156,000 square feet, CACI for 56,000 square feet and Boeing Intelligence and Analysis for 33,000 square feet, all of which are located in the Fort Meade/BW Corridor. Based on our performance year-to-date, we increased the midpoint of tenant retention guidance by 250 basis points to a new midpoint of 85%, which would be the highest retention rate we've achieved in over a decade. Our sector leading retention is driven by three key advantages: one, our buildings are in advantaged locations approximate to the missions; two, 80% of our Defense/IT portfolio contains high security improvements, which requires a high level of tenant co-investment; and three, our operations team that manages these spaces are credential possess a high level of technical proficiency and are singularly focused on serving our customers. We continue to work to drive down concessions to boost net effective rents where we can while balancing the relationships we have with our customers. And this balance is extremely important and is reflected in our historically high retention rate of nearly 80% versus our peers of less than 40%. And this results in a roughly 6:1 cost advantage by renewing versus the time and higher costs associated with finding a new tenant. Cash rent spreads on renewals were up 4.1%, while straight line rent spreads were up 17.2% and driven by annual rent increases of 2.6% with a weighted average lease term of over four years. Our favorable cash rent spreads were influenced by our share of three data center shell renewals, which were executed at a weighted average cash rent spread of over 130%. Net of the data center shell renewals, cash rent spreads increased roughly 15 basis points while straight line rent spreads increased 12.6%. Our outlook for retention over the next several years continues to remain very strong. Last quarter, we expanded our disclosure to include our view of large lease expirations for the next 30 months through year end 2026 as shown on Slide 33 of our flip book. During the quarter, we renewed five of the 32 large leases totaling 643,000 square feet with a 100% retention rate consisting of the three data center shell leases totaling 431,000 square feet and the two defense contractor leases in the Fort Meade/BW Corridor that I referenced earlier, totaling 212,000 square feet. We expect a retention rate of over 95% on the remaining 27 large leases totaling 3.3 million square feet expiring through 2026. For our three inventory buildings and our recently acquired Franklin Center, we have 510,000 square feet of prospects on 340,000 square feet of available space, which equates to an activity ratio of 150%. At 8100 Rideout Road, we were awarded a 40,000 square foot lease with the US government, which we expect to execute this quarter. And once signed, we'll have less than 35,000 square feet remaining to lease in this building. At 9700 Advanced Gateway, we have 130,000 square feet of prospects on 40,000 square feet of availability. At Franklin Center, we have 140,000 square feet of prospects on approximately 90,000 square feet of availability. And notably, we are in advanced negotiations on a 50,000 square foot lease with a top 20 defense contractor for Franklin Center. And finally, at MVP 400, we have 190,000 square feet of prospects on 138,000 square feet of available space. This building doesn't deliver until the end of the first quarter of 2025 and we have demand to lease space from several groups, which are targeting occupancy in ‘25 and ‘26, so we don't expect lease executions until next year. Our development leasing pipeline, which we define as opportunities we consider 50% likely to win or better within two years or less currently stands at about 1.3 million square feet which only includes the first two data center shells of our Iowa development. Beyond that, we're tracking over 2.3 million square feet of potential development opportunities, which includes the other three data center shells in Phase 1 of our Iowa development. This activity should allow us to maintain a solid development pipeline in the near and medium term. Again, these numbers only include the first phase of data center development in Iowa as we have another two phases and 2.2 million square feet of capacity beyond this. And with that, I'll hand it over to Anthony.

Thank you, Britt. We reported another strong quarter with FFO per share as adjusted for comparability of $0.65, exceeding the midpoint of our guidance by $0.01. Same property cash NOI increased 9.4% for the quarter and 8.8% year-to-date compared to 2023. The 2023 same property pool on a stand alone basis generated 5.3% growth during the quarter and 6.2% year-to-date. The year-over-year increase was driven by lower levels of free rent concessions on renewals and the burn off of free rent at recent developments now in service. As a result of our year-to-date achievement, we increased the midpoint of our same property cash NOI growth guidance by 50 basis points. We established initial 2024 guidance for same property cash NOI growth at 6% and have increased it every quarter with the expected midpoint of growth for the year now at 8.5%. This increase is driven by lower net operating expenses resulting from real estate tax appeals, overall expense management and reduced weather related expenses, stronger value and economics on lease renewals and some accelerated lease commencements. Same property occupancy ended the quarter at 93.6%, which is a 10 basis point increase compared to last quarter. We continue to expect same property occupancy to end the year between 93.5% and 94%. Our balance sheet continues to be strong and well positioned to take advantage of opportunities. And at quarter end, 100% of our debt was at fixed rates. We have been funding and expect to continue to fund the equity component of investments in development and acquisitions with cash flow from operations after the dividend and fund the debt component with cash on hand and then draw on our line of credit. Our next significant debt maturity is a $400 million bond maturing in the first quarter of 2026 and we plan on refinancing that bond in the public fixed income market. Bond investors continue to value the strength of our performance and quality of our cash flows. Our bonds are trading at the tightest spreads to treasuries of any equal or higher rated office peer. For example, our longest dated maturity, a $400 million bond maturing in 2033, is trading 10 to 20 basis points tighter than the spreads of our two higher rated peers with similar maturities. Our diluted AFFO dividend payout ratio was 58% during the first nine months of the year and we continue to expect the full year payout ratio will be roughly 60%. This strong payout ratio allows us to utilize the retained cash flows to fund the equity in new investments. With our first quarter dividend increase we remain one of only two REITs in our sector to have raised the dividend during the first nine months of the year, which demonstrates the confidence we have in our ability to generate strong levels of AFFO. With respect to guidance, we increased 2024 FFO per share for the year by $0.01 at the midpoint. This is our third increase this year as the initial FFO per share guidance midpoint was $2.51 and now sits at $2.57, implying 6.2% growth over 2023's results. The $0.06 guidance increase for the year is driven primarily by the increases in same property cash NOI less than $0.01 from the acquisition of Franklin Center and higher than expected interest income on cash balances and investment receivables. These items are partially offset by some GAAP NOI adjustments and slightly higher G&A expenses. We increased the full year guidance for capital invested in development and acquisitions by $20 million at the midpoint from $220 million to $240 million, driven in part by our recent acquisitions. The strength of our balance sheet, operating platform and tenant relationships have allowed us to commit capital to development projects and opportunistic transactions, which fit our stringent criteria to create shareholder value. We have been successful on this front with $212 million of capital committed to new investments year-to-date, as illustrated on Slide 26 of our flip book. We acquired 3900 Rogers Road for $17 million, but including TI and building capital, we expect a total capital commitment of $21 million. The acquisition will be half of penny accretive to FFO in 2025 and a full penny accretive in 2026 as we forecast GAAP and cash rent will commence in the second quarter of 2025. We acquired the 365 acre land parcel near Des Moines for $32 million. We plan to invest another $50 million in site work and infrastructure primarily for Phase 1 in 2025 and 2026, bringing our initial total capital commitment to $83 million. This forecasted investment in the Iowa project will be roughly half of penny dilutive to FFO in both 2025 and 2026. With that, I'll turn the call back to Steve.

I'll close by summarizing our key accomplishments and messages. We achieved very strong results during the first nine months of the year. We increased the midpoint of 2024 FFO per share guidance by another $0.01 to $2.57, which implies over 6% year-over-year FFO growth. And we increased the midpoint of 2024 guidance for same property cash NOI growth, tenant retention and capital investment in development and acquisitions. We have already exceeded our full year vacancy leasing target with two more months to go in the year. Our liquidity remains very strong and we expect to continue to self fund the equity component of our planned capital investments going forward. And we continue to anticipate compound annual FFO per share growth of at least 4% between 2023 and 2026. During the quarter, we completed two important external growth investments. The first, the land acquisition significantly expands our data center shell opportunity and increases our development capacity on owned Defense/IT land by over 40% to 11 million square feet. And second, an opportunistic investment that expands our relationship with our most important tenant, the US government. We have a very disciplined and methodical approach to external growth opportunities grounded by our Defense/IT strategy, which create significant additional shareholder value. Overall, we had an incredible quarter. We're demonstrating strength going into year end. And our land investment opens up a long term runway for development into the explosive demand for AI and cloud computing capacity. And with that, operator, please open the call for questions.

[Operator Instructions] Our first question comes from Steve Sakwa with Evercore ISI.

Maybe just a couple of questions around the Des Moines land acquisition. Just maybe help us think through the timing of getting, I guess, all the infrastructure in place in order to kind of start construction? And then what does that mean from a delivery perspective and then maybe touch on how kind of the leasing for that asset is going to work with your major customer?

Well, I'll take that in phases. There's still some timing variability we have to work out. We are awaiting the response of our formal request for a phase power delivery of 1 gigawatt. We'll get that timing in November and then we can react to a Mid-American response to our request with the notion being that if that takes too long, we might be able to self perform some of the development necessary to bring that power to the site. So our thoughts are '25 and part of '26, we'll complete the infrastructure. We expect in all likelihood signed leases in that time period at least the initial leases and then delivery, hopefully in '27, but could possibly slip to '28. With regard to the leasing, we anticipate this will be -- this project will be consistent with our long term program that we will execute pre-leases for data ccenter shells in series of one, two or maybe even three at a time. We'll execute those developments, deliver the space fully leased with rent commencing on the day of delivery and will progress from there.

And not to get sort of ahead of things since you haven't -- don't want yet or leased it, but as you think about the long term ownership, I know on some of the prior projects that you did, you were willing to sell large chunks of those into different vehicles and pull money out. Would you think about that similarly, or do you have a different kind of long term ownership structure for this project?

Well, it's our intent and desire to retain 100% ownership of that portfolio as we develop it, as well as the 2 million square feet that we'll have that we continue to fully own. When we did harvest the value of some of these assets through joint ventures, we did it as a financing mechanism when we are not in a position to self fund our development and needed to recycle capital to continue our development program. So to the extent we can manage the pace of this development within our self funding capacity, we will continue to own them. Should the pace of development exceed it then we certainly have the option to bring those to market. We have a tremendous joint venture partner who's expressed interest in expanding that relationship, and we could do that very predictably and profitably.

And then last question, just on the Rogers Road. This is kind of your second opportunistic deal and you've had pretty good success acquiring these and making inroads on the leasing front. I'm just curious, how big do you think that, that pool is of deals or would you say both of those were just very unique one-off opportunities?

We might be able to get a couple more. We have our eyes on a few things. But we're in this great position where we have capital, we're uniquely well funded. There are a lot of opportunities to step in some situations where owners don't have that capital. And if we can get pricing with an asset that meets our strategic criteria that makes sense for our shareholders, we can do it. But we're not going to force growth through acquisition unless it strictly meets our strategy.

And just a follow-up on the yields or just -- how do you think about the acquisition yields of like a 3900 Rogers road against the development yields in Des Moines? I realize the time frames are a little different, but how different are those?

So we basically benchmark it same target, are we going to put capital to work in an acquisition or largely preleased development, kind of the same threshold. Rogers Road, we exceeded our threshold level pretty impressively but we're not going to disclose that number.

Our next question comes from Blaine Heck with Wells Fargo.

Just to follow up on Des Moines. As you stand here today, do you have any ballpark figures you can give us on total spend on the project? And then on funding options, Anthony, I think I heard you say you're looking to fund everything through retained cash and debt. But I guess, given the size of this, do you think this will require any equity or at least property sales to fund?

Well, it depends on timing. We anticipate this will be a longer term development and we think we can self fund it with our own threshold. We would spend the capacity we've created and we expect to expand as our business situation improves further. But as I said, if that pace exceeds our ability to self fund we're really well positioned to bring in a joint venture partner someplace and recycle capital.

And anything you can say on total spend or too early for that?

On total spend, over the life of the development, probably $1.2 billion or more.

And then, Steve, we've been talking about your potential expansion into additional markets with this tenant for a year or two now. So it's great to see this investment. And I almost hesitate to ask this, given that this is such a big project. But I guess, given the size of your tenants, do you feel like they have ambitions to go to any other markets? And what's your appetite and ability to do that with them on a go forward basis?

Well, I don't like to show my cards very often. But look, we've got a 12 year history of developing for this customer. We've been able to bring great value to them and by doing that serve our shareholders well. And to the extent we can find another opportunity, we're interested. We're definitely interested and we'll keep you posted.

Our next question comes from Michael Griffin with Citi.

I wanted to first ask about leasing and wondering if you can give us a sense on kind of if you have a greater ability to push rental rates for your private sector tenants, just given the more limited availability in a lot of your markets. And then do you have a sense if there is more pricing power on the vacancy leasing side, because tenants might be expanding or you might be adding newer tenants to the portfolio? And how might that compare to pricing power on renewals?

Yes, I mean, I would say probably in terms of where the pricing power is, is probably more on the renewal side but certainly seeing opportunities on vacancy as well. But again, as I mentioned in my remarks, it's all about balancing the relationship of what we have with the customers and tenants that we have versus being overly aggressive trying to jack rent. So I think it's -- we just have to look at every case and see where the opportunities are. And as we've said on past calls, looking at opportunities to push down those concessions is really the first opportunity to do that. And then if we can move to Phase III, we can, we will. But it's all about the relationship. If we are too aggressive and stick -- sharp stick in someone's eye then they may agree to this lease but then we won't have them for 10 or 20 years. So it's just something we need to balance with our customers. But to answer your last question it really is more on the renewal side, I would say, at this point because the amount of impact -- the amount of investment they've made in those spaces is significant and it's really hard for them to leave. So that's where I would say the pricing power is.

And then I know we've got the uncertainty with the election coming up, but kind of as you think about your business. Are there any scenarios within government that you think might be more beneficial, whether it's a Republican sweep of the White House and Congress or if it's a more divided government? Anything we should just kind of keep in mind for maybe a political standpoint there related to what might be better for your business in terms of the administration?

So the one bipartisan theme that exists in D.C. and has for the last eight years is support for defense spending increases and the recognition of the escalating challenges to our defense program with some of the adversarial countries of the world. So irrespective of who wins this election, we expect support for defense spending to remain strong. And it really is independent of who controls the Senate. For the last four years, Senate has been controlled by the Democrats and we've had great support for increased spending. I think if that were to flip the Republicans, it would be no different. So I think we're pretty well hedged from an outcome standpoint. On the margin base side communications from candidates, when you talk about strength through peace or peace through strength that contemplates such strong defense capability that goes unchallenged. And I would anticipate we need more spending as a country as a percent of GDP to achieve that objective. So my gut would tell me if Trump wins, it would be marginally better, but it will be good either way.

Our next question comes from Tom Catherwood with BTIG.

Maybe Anthony, starting just looping back on a prior question. On your self funding strategy, can you remind us how much development can you fund the year between retained earnings and the additional leverage capacity as projects stabilize?

On a gross basis, it's $250 million to $275 million. So we can fund the equity component of that $250 million to $275 million and essentially maintain our current leverage levels of plus or minus 6 times.

And then, Britt, on the 1.3 million square foot development leasing pipeline, if I back out the two Iowa data center shells that you mentioned are in there, it looks like the pipeline still increased 115,000 square feet or so compared to Q2. Is that directionally correct? And if so, what types of opportunities drove that increase?

I mean, directionally, it is correct. It is spread out, though across the portfolio. It's not in one specific area. I will say that, as I mentioned, our Navy Support, we have seen the increased activity there quite a bit, a lot of it relating to the Navy lease that we signed at Maritime. There's additional activity there, which we're very encouraged by even beyond what I just mentioned. So we are seeing some additional activity and tours down in Huntsville as well related to missile offense and defense and the cyber activity here in Columbia Gateway continues to be very, very strong. So it's kind of spread out but directionally correct.

And then actually, just following up on that, Britt. The Navy leasing at Maritime Plaza, especially given that it had traditionally been a contractor building. Does that mean that they're kind of full up on space when it comes to the Navy Yard? And then kind of as a follow-up to that, I recall vaguely that there had been previous plans to add more capacity or more developments to the Maritime Plaza site, but I couldn't remember if that was on top land or on the adjacent parcel to you. So is that kind of still an option out there?

I think on your first question, it's really -- I mean there is not that much space left on the Navy Yard for them to do something like this, but it really is a speed to execution and occupancy that they look to the private sector to assist them. And it was just a really unique opportunity to work directly with the Navy, build out highly secure space on 90% of the space that they're leasing. And we saw the follow-on leasing that was going to come from it as well. So it was a great opportunity there.

And Tom, you are correct. If you recall, we leased the land down in Maritime Plaza from Washington Gas and the land that we lease includes a parcel of land that does have development expansion opportunities. But none of that is in our development pipeline right now.

Our next question comes from Richard Anderson with Wedbush Securities.

On Rogers Road, is there a SCIF element to that asset?

Yes, it will be fully SCIF'd.

And I guess I asked the same question that I asked about Franklin Centers. Like why was it vacant, if it's a nice building given its proximity? Is it similar to, in terms of like, you happen to have this local relationship set that maybe the prior owner didn't. I just -- I'm just curious as to what caused to be vacant and now suddenly fully leased in the dark of night type of thing?

Trade secrets, my man. It had been a call center building very heavily occupied. I mean, very densely occupied. The building is in great shape. This was a defense need. And I can't speak for the objectives or capabilities of the people we bought it from. But we identified an opportunity, we moved in, we -- kind of deal that was good for our shareholders.

Given the success there, pretty immediate and also the success that you're seeing at Franklin Center. Does that give you any confidence to start moving the needle on regional office sales? I know 2100 is closed. You've described the capital markets is not there yet. But do you start to get at least a little bit more confident to move the needle on that and take those last remaining sort of issues off the table or at least start to do it, because of some of the successes elsewhere?

Well, actually, no. It doesn't make me more excited. And the issue is we're going out and buying assets basically all cash. We finance it internally. For the market to support good value on those sales is going to have to be fairly cost effective, debt capacity to invest in office buildings, and that's not there today. So I don't want to mislead shareholders to think we can create magic because we bought a couple of buildings. The financial markets are going to have to support office investment with that to get good value out of those assets, and we're not there yet.

And last one from me, it's a bit away Des Moines with take some time to evolve. But if you were getting 7% returns in Manassas, is it similar despite the lower land costs, relatively speaking, is in that range? Can you talk about that?

We don't have final agreement but it will be in the same basic framework.

Our next question comes from Peter Abramowitz with Jefferies.

So you had pretty strong leasing spreads, particularly in the data center shell segment this quarter. But also just noticed that in Fort Meade and BW corridor, particularly on trade line basis was pretty strong as well. So could you just comment any sort of onetime results in there that drove that up? And then is that an indication of how we should think about pricing power on a straight line basis going forward in that sub market?

I think your final comment is -- let me address that first. I think, yes, you could think about that as what you can expect in that submarket. Clearly, it's our strongest sub-segment with the MVP representing the biggest component of it and our conditions or our accuracy is so -- our vacancy is so limited there that we've got great power, pricing power.

And then one of your competitors in the public space has been out buying some what, I guess, would characterize as assets that are similar to your strategy. I think at cap rates in the low 8s. Now there's some market differences there that account for potential differences in pricing. But just curious in sort of your core markets for defense contractor assets, if you have a sense for like where stabilized cap rates are today?

Well, assets don’t really trade very often. I can tell you our assets would have to be valued much better than 8 for us to ever even consider selling them. I'm familiar with one of those buildings at that competitor bought, very different market, very different buildings. We are cognizant of that opportunity and elected to pass. So as we've said before, the mission that we serve and the use in the building are the highest priority when we decide to invest, acquire or develop, I don't believe those assets are comparable to ours even though the name of the tenant is similar.

Our next question comes from Dylan Burzinski with Green Street.

Just going back to -- I think, you guys alluded to some of the data center renewals that you guys signed had a, call it, 30 basis -- 130% mark-to-market spread on that. I mean are you guys seeing the ability to be able to push rent bumps as you come up on some of those renewals?

Well, those -- we are -- the rent bumps on those renewals were 3% each year. I think that compares to -- on two of the leases 2.25% rent bumps and on one 2.5%. So there are higher increases.

And then I think in your guys’ in Investor Day, you guys sort of called out, call it, anticipating the 4% FFO over the near term. I mean, given what's going on in the operating portfolio, things continue to be strong. You talked about a 95% retention rate for 3.3 million square feet of large leases through the next few years. I mean do you guys sort of feel like that's now too low given what's happened since then or how should we sort of thinking about that FFO earnings target that you guys called out?

I think the one unknown in -- the one item that's in the 2026 math for us is the refinancing rate for our $400 million bond that comes due in the first quarter of 2026, that bond is currently at 2.25%. We know that's not replaceable at that rate. So I think the ability for that to increase is really geared -- gauged off of interest -- the refinancing interest rate on that bond.

And lastly, we put that benchmark of, I think, at the end of ‘22 and we're going to report on the benchmark we gave our investors until we get there. So it could possibly be better. But we said we're going to generate at least 4% and we're going to report it that way until we give you the final result.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Budorick for any closing remarks.

Well, thank you for joining our call today. We are in our offices so please coordinate through Venkat, if you'd like a follow-up call. Thank you again.