COPT Defense Properties - Q3 2024

Transcript

Operator (participant)

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 Vice President of Investor Relations. Mr. Kommineni, please go ahead.

Venkat Kommineni (VP of Investor Relations)

Thank you, Kevin. Good afternoon, and welcome to COPT Defense Properties' 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 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?

Stephen Budorick (President and CEO)

Good afternoon, and thank you for joining us. We produced strong results in the third quarter and continued to outperform our projections. Importantly, we executed two strategic acquisitions, which I'll touch on shortly. FFO per share is adjusted for comparability with $0.65, one cent above the midpoint of our quarterly guidance. We increased the midpoint of 2024 FFO per share annual guidance again by one cent 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 invested in 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 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 a 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 identify advantages the Des Moines market has to offer and propose a development program to help them accelerate their capacity expansion objectives. We're in active dialogue 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, MidAmerican Energy, generates 62% of their power from renewable sources. Des Moines has connectivity to long-haul fiber lines, and it has a deeply or highly skilled contractor 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 flipbook. Their investment into data center campuses in Des Moines will total roughly $10 billion at full build-up. 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 has 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 sq ft, supported by approximately one 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 two miles south of our site. To put this in perspective, the acreage we acquired in Iowa for $32 million would cost an 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 sq ft today to nearly 5.5 million sq ft at full build-up. 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, a supportive 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 multi-year 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 sq ft Class A office building sits just five miles from our 1 million sq ft U.S. government campus. It was constructed in 2005, and it's in great condition. We've been expecting this opportunity because the mission growth on our U.S. 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 were perfectly positioned to compete for and win this award. Similar to our other full building leases with the U.S.

government, this mission will fund investment in high security and operational redundancy improvements around and throughout the building. The triple net lease has a nine and a half 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 that runs 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.

Britt Snider (EVP and COO)

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 sq ft of initial vacancy at Rogers Road that is fully leased but not yet occupied, and a 30 basis point impact from placing 75,000 sq ft of development space into service at 8100 Rideout Road in Huntsville.

We were recently awarded a lease for 40,000 sq ft 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 sq ft 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 sq ft during the quarter and 387,000 sq ft during the first nine months of the year.

I'm happy to report that as of Friday, we have executed 431,000 sq ft year-to-date, already exceeding our 400,000 sq ft annual target with two months remaining. Our leasing pipeline remains strong with 122,000 sq ft 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 sq ft, which is especially impressive given our extremely high lease 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 sq ft of prospects on 790,000 sq ft 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 DC, which is immediately adjacent to the Navy Yard. We signed a 33,000 sq ft lease with the U.S. Navy for a high-priority mission that requires SCIF 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 sq ft, and we're working on a separate 12,000 sq ft 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 sq ft for the quarter and 2.1 million sq ft 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 sq ft, CACI for 56,000 sq ft, and Boeing Intelligence and Analysis for 33,000 sq ft, 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 proximate 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 credentialed, 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.

This balance is extremely important and is reflected in our historically high retention rate of nearly 80% versus our peers at less than 40%. This results in a roughly 6 to 1 cost advantage by renewing versus the time and higher cost associated with finding a new tenant. Cash rent spreads on renewals were up 4.1%, while straight-line rent spreads were up 17.2%, 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 flipbook. During the quarter, we renewed five of the 32 large leases totaling 643,000 sq ft with a 100% retention rate, consisting of the three data center shell leases totaling 431,000 sq ft and the two defense contractor leases in the Fort Meade BW corridor that I referenced earlier, totaling 212,000 sq ft. We expect a retention rate of over 95% on the remaining 27 large leases totaling 3.3 million sq ft expiring through 2026. For our three inventory buildings and our recently acquired Franklin Center, we have 510,000 sq ft of prospects on 340,000 sq ft of available space, which equates to an activity ratio of 150%.

At 8100 Rideout Road, we were awarded a 40,000 sq ft lease with the U.S. government, which we expect to execute this quarter, and once signed, we'll have less than 35,000 sq ft remaining to lease in this building. At 9700 Columbia Gateway, we have 130,000 sq ft of prospects on 40,000 sq ft of availability. At Franklin Center, we have 140,000 sq ft of prospects on approximately 90,000 sq ft of availability, and notably, we are in advanced negotiations on a 50,000 sq ft lease with a top 20 defense contractor for Franklin Center, and finally, at 400 NBP, we have 190,000 sq ft of prospects on 138,000 sq ft 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 2025 and 2026, so we don't have to 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 sq ft, which only includes the first two data center shells of our Iowa development. Beyond that, we're tracking over 2.3 million sq ft of potential development opportunities, which includes the other three data center shells in phase one 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 sq ft of capacity beyond this, and with that, I'll hand it over to Anthony.

Anthony Mifsud (EVP and CFO)

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 standalone 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 volume 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 10-20 basis points tighter than the spreads of our two higher-rated peers with similar maturity. 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-$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 flipbook. 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 $0.005 accretive to FFO in 2025 and $0.01 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 one in 2025 and 2026, bringing our initial total capital commitment to $83 million. This forecasted investment in the Iowa project will be roughly $0.005 diluted to FFO in both 2025 and 2026. With that, I'll turn the call back to Steve.

Stephen Budorick (President and CEO)

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 one cent 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 invested in development and acquisitions. We have already exceeded our full-year vacancy lease and 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 sq ft. And the second, an opportunistic investment that expands our relationship with our most important tenant, the U.S. government. We have a very disciplined and methodical approach to external growth opportunities, grounded by our defense IT strategy, which creates 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 (participant)

Thank you, Mr. Budorick. Ladies and gentlemen, if you have a question or a comment at this time, please press Star one one on your telephone. If your question has been answered and you wish to move yourself from the queue, please press Star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Steve Sakwa with Evercore ISI. Your line is open.

Steve Sakwa (Analyst)

Thanks. Good afternoon. 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.

Stephen Budorick (President and CEO)

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 phased power delivery of one gigawatt. We'll get that timing in November, and then we can react to what MidAmerican responds 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 2025 and part of 2026, we'll complete the infrastructure. We expect, in all likelihood, sign leases in that time period, at least the initial leases, and then delivery hopefully in 2027, but could possibly slip to 2028.

With regard to the leasing, we anticipate this project will be consistent with our long-term program, that we will execute pre-leases for data center 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 we'll progress from there.

Steve Sakwa (Analyst)

Okay. And not to get sort of ahead of things since you haven't built one 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?

Stephen Budorick (President and CEO)

It's our intent and desire to retain 100% ownership of that portfolio as we develop it, as well as the 2 million sq ft 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 were 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.

Steve Sakwa (Analyst)

Okay. Thanks, 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?

Stephen Budorick (President and CEO)

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.

Steve Sakwa (Analyst)

Okay. And sorry, just to 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?

Stephen Budorick (President and CEO)

So we basically benchmark it, same target. Are we going to put capital to work in an acquisition or a largely pre-lease development? Kind of the same threshold. Rogers Road, we exceeded our threshold level pretty impressively, but we're not going to disclose that number.

Steve Sakwa (Analyst)

Okay. Great. Thanks.

Operator (participant)

One moment for our next question. Our next question comes from Blaine Heck with Wells Fargo. Your line is open.

Blaine Heck (Analyst)

Great. Thanks. Good afternoon. 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 debts, but I guess given the size of this, do you think this will require any equity or at least property sales to fund?

Stephen Budorick (President and CEO)

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 within 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.

Blaine Heck (Analyst)

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

Stephen Budorick (President and CEO)

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

Blaine Heck (Analyst)

Okay. That makes sense. And then, Stephen, 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?

Stephen Budorick (President and CEO)

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. To the extent we can find another opportunity, we're interested. We're definitely interested, and we'll keep you posted.

Blaine Heck (Analyst)

Great. Appreciate that.

Operator (participant)

One moment for our next question. Our next question comes from Michael Griffin with Citi. Your line is open.

Michael Griffin (Analyst)

Great. Thanks. 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?

Britt Snider (EVP and COO)

Okay. Hey, Michael, this is Britt. Yeah. I mean, I would say probably in terms of where the pricing power is, it's 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 rents. So I think we just have to look at every case and see where the opportunities are. And as we 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 the pace right, we will. But it's all about the relationship.

If we are too aggressive and stick a 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 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.

Michael Griffin (Analyst)

Thanks, Britt. Appreciate the color there. 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 from maybe a political standpoint there related to what might be better for your business in terms of the administration?

Stephen Budorick (President and CEO)

The one bipartisan theme that exists in DC 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. Irrespective of who wins this election, we expect support for defense spending to remain strong. It really is independent of who controls the Senate. For the last four years, the Senate's 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. I think we're pretty well hedged from an outcome standpoint. On the margin, based on communications from candidates, when you talk about strength through peace or peace through strength, that contemplates such strong defense capability that it goes unchallenged.

And I would anticipate we'd need more spending as a country, as a % of GDP, to achieve that objective. So my gut would tell me if Trump wins, it'd be marginally better, but it'll be good either way.

Michael Griffin (Analyst)

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

Tom Catherwood (Analyst)

One moment for our next question. Our next question comes from Tom Catherwood with BTIG. Your line is open.

Thank you. And good afternoon, everybody. Maybe Anthony, starting to loop back on a prior question. On your self-funding strategy, can you remind us how much development can you fund a year between retained earnings and the additional leverage capacity as projects stabilize?

Anthony Mifsud (EVP and CFO)

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

Tom Catherwood (Analyst)

Perfect. Thank you for that, Anthony. And then Britt, on the 1.3 million sq ft 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 sq ft or so compared to Q2. Is that directionally correct? And if so, what types of opportunities drove that increase?

Britt Snider (EVP and COO)

Yeah. 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 just kind of spread out, but directionally correct.

Tom Catherwood (Analyst)

Got it. And 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 COPT land or on the adjacent parcel to you. So is that kind of still an option out there?

Britt Snider (EVP and COO)

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. Correct.

Tom Catherwood (Analyst)

Got it. Appreciate the answers. Thanks, everyone.

Operator (participant)

One moment for our next question. Our next question comes from Richard Anderson with Wedbush Securities. Your line is open.

Richard Anderson (Analyst)

Hey, thanks. Good afternoon. On Rogers Road, is there a SCIF element to that asset?

Stephen Budorick (President and CEO)

Yeah. It'll be fully SCIFed.

Richard Anderson (Analyst)

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

Stephen Budorick (President and CEO)

Trade secrets, my man. It had been a call center building, very heavily occupied, I mean, very densely occupied. But the building's 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 got a deal that was good for our shareholders.

Richard Anderson (Analyst)

Okay. 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 close. You've described the capital markets as 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?

Stephen Budorick (President and CEO)

Actually, no. It doesn't make me more excited. 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, there's going to have to be a fairly cost-effective debt capacity to invest in office buildings, and that's not there today. 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 debt to get good value out of those assets, and we're not there yet.

Richard Anderson (Analyst)

Okay. And last one for me, it's a bit away. Des Moines will 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 it in that range? Can you talk about that?

Stephen Budorick (President and CEO)

Yeah. Well, we don't have final agreement, but it'll be in the same basic framework.

Richard Anderson (Analyst)

Okay. That's all I got. Thanks.

Operator (participant)

One moment for our next question. Our next question comes from Peter Abramowitz with Jefferies. Your line is open.

Peter Abramowitz (Analyst)

Yes. Thank you. 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 straight-line basis, was pretty strong as well. So could you just comment? Any sort of one-time 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 submarket?

Stephen Budorick (President and CEO)

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 subsegment with the NBP representing the biggest component of it. And our occupancy is so, or vacancy is so limited there that we've got great pricing power.

Peter Abramowitz (Analyst)

That's helpful, Steve. 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 eights. 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 where stabilized cap rates are today?

Stephen Budorick (President and CEO)

Assets don't really trade very often. I can tell you our assets would have to be valued much better in an 8% for us to ever even consider selling them. I'm familiar with one of those buildings that competitor bought. Very different market, very different buildings. We were 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.

Peter Abramowitz (Analyst)

All right. It's all from me. Thanks.

Operator (participant)

One moment for our next question. Our next question comes from Dylan Burzzinski with Green Street. Your line is open.

Dylan Burzinski (Analyst)

Good afternoon, guys. Thanks for taking the question. Just going back, I think you guys alluded to some of the data center renewals that you guys signed had a, call it, 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?

Anthony Mifsud (EVP and CFO)

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.

Dylan Burzinski (Analyst)

And then I think in you guys' investor day, you guys sort of called out, call it, anticipating the 4% as a base year 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 sq ft 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 think about that FFO earnings target that you guys called out?

Anthony Mifsud (EVP and CFO)

I think the one unknown and 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 gauged off of the refinancing interest rate on that bond.

Stephen Budorick (President and CEO)

Lastly, we put that benchmark out, I think, at the end of 2022. We're going to report on the benchmark we gave our investors until we get there. It could possibly be better, but we said we're going to generate at least 4%. We're going to report it that way until we give you the final result.

Dylan Burzinski (Analyst)

Great. Thanks.

Operator (participant)

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.

Stephen Budorick (President and CEO)

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.

Operator (participant)

Thank you for your participation today in the COPT Defense Properties Third Quarter 2024 Results Conference Call. This concludes the presentation. You may now disconnect. Good day.