Corporate Office Properties Trust (NYSE:OFC) Q2 2019 Earnings Conference Call Transcript

Jul 30, 2019 • 12:00 pm ET

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Corporate Office Properties Trust (NYSE:OFC) Q2 2019 Earnings Conference Call Transcript

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Presentation
Executive
Steve Budorick

among government users and defense contractors to invest in growth, which includes facility planning.

As demonstrated by our record leasing results in the quarter and year-to-date, we continue to benefit from being the preferred provider of real estate solutions to government users and defense contractors engaged in national security defense and IT-related activities, including cybersecurity. Moreover, we see strong growth in all five of the categories of demand we've outlined on prior calls.

The first category is defense contractor incremental expansions, which continued to accelerate. In the second quarter, we completed 245,000 square feet of vacancy leasing, matching our best ever quarterly volume. The vacancy leasing at our Defense/IT locations was 76% of the quarter's volume and exceeded the entire amount of vacancy leasing executed in the second quarter of 2018.

The second category is deferred US government leasing. During the second quarter, 92,000 square feet of our vacancy leasing was with the US government in the Fort Meade area. For the first half of the year, we completed five leases with the US government, totaling 126,000 square feet, representing a third of our total vacancy leasing.

The third category is speculative development in markets where demand has absorbed the available inventory and supports modest speculative development. Redstone Gateway is one of the two markets where we see current speculative opportunity. The two spec buildings we started last year are both 100% leased. Every square foot of operating space in Redstone Gateway is leased, and the 440,000 square feet of contractor buildings under development are 95% leased. Since we have no uncommitted inventory, later this quarter, we expect to break ground on our next 100,000 square foot spec building to capture highly visible defense contractor demand.

The other market that supports speculative development is the Discovery District at the University of Maryland. Last quarter, we placed 5801 University Research Court, our most recent spec development in that business park, into service. That building is 100% leased, and given the strong demand we continue to see for this Metro-served location, we recently kicked off a 105,000 square foot spec development. Among the many prospects we are pursuing, there's a fast-growing provider of cybersecurity training that we expect will pre-lease 25% of the project.

The fourth category is build-to-suit and major pre-leases with defense contractors positioning for growth. Demand for pre-leases in full building build-to-suits emerged last year and continues. Excluding the data center shells, this year, we've completed more than 400,000 square feet of major pre-lease and build-to-suit leases with defense contractors for new facilities. This activity includes a multi-building campus for Yulista, whose Defense Systems and Solutions division recently won a 9-year, $4.7 billion contract from AMRDEC at Redstone Arsenal.

In our data center shell business, we've signed five leases this year. The first four completed the 11-facility pipeline we announced in 2017. In aggregate, that program encompassed 220,000 more square feet and committed $40 million more than originally planned, which roughly equals one extra data center shell. The fifth