Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- FFO per share as adjusted for comparability was $0.64, exceeding the midpoint of guidance by $0.01.
- Same property cash NOI increased 10.9% year over year in the total portfolio and 11.2% in the Defense/IT Portfolio.
- Completed 985,000 square feet of total leasing with an 86% retention rate.
- Increased the midpoint of 2024 FFO per share guidance by $0.02 to $2.56, implying nearly 6% year-over-year growth.
- Strong balance sheet with no significant debt maturities until March 2026 and over 85% capacity on the $600 million line of credit available.
Negative Points
- Challenges in the capital market environment affecting the proper valuation for asset sales.
- High construction costs remain a challenge despite the rate of increase abating.
- Limited power availability in Northern Virginia affecting the expansion of the data center program.
- Potential significant vacancy challenges in downtown Baltimore due to T. Rowe Price's move.
- Occupancy growth may be limited as the portfolio is already approaching mid-90% range, making further incremental progress difficult.
Q & A Highlights
Q: On the same-store growth profile, what are the main factors driving the better-than-expected results?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: The primary drivers are better-than-expected renewal options, lower operating expenses, and a slight upside in occupancy in the back half of the year.
Q: How does vacancy leasing impact same-store NOI?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: Vacancy leasing typically requires six to eight months of tenant improvements before rent commencement, making it difficult to contribute to current year cash NOI.
Q: What is the expected internal growth rate for the company?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: A good run rate is 4% internal growth, with additional contributions from development.
Q: How does the defense budget increase translate into leasing activity?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: For the government, lease actions must be executed within the fiscal year, typically six to seven months post-appropriation. For defense contractors, the benefit is seen 12 to 18 months later due to the contract award process.
Q: Are there any new acquisition opportunities similar to Franklin Center?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: We are still looking for opportunities but have nothing specific to announce at this time.
Q: Can you elaborate on the increased development leasing pipeline?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: The pipeline increased to 700,000 square feet from 500,000 square feet, driven by expansions, consolidations, and new mission requirements. The potential opportunity set also increased to 1.6 million square feet from 1 million last quarter.
Q: What are the components driving the increase in same-store NOI guidance?
A: Anthony Mifsud, Chief Financial Officer, Executive Vice President: About 30% of the increase is expense-related, with the balance coming from stronger renewals, lower free rent on renewals, and better lease economics.
Q: Are there any additional data center opportunities, and how is power availability affecting expansion?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: The power situation remains unclear, making it difficult to move forward with new developments. We do not expect expansion of the data center program this calendar year.
Q: How are you thinking about leasing and disposition of non-core assets like those in downtown Baltimore?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: We are focused on leasing opportunities and competing well in the market. For dispositions, we need a capital market environment that supports proper valuation.
Q: Are you seeing any slowdown in tenant decision-making as we approach the elections?
A: Stephen Budorick, President, Chief Executive Officer, Trustee: We have no evidence that the election is influencing leasing decisions. Contractors' decisions are more focused on their business and contract awards.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
