Corporate Office Properties Trust

F:WX7

Earnings Call Transcript 2024-Q1

[Operator]

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.

[Venkat Kommineni, executive]

Thank you, [ Michele ]. Good afternoon, and welcome to the 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 their 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 E. Budorick, executive]

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 stand-alone basis generated 4.8% growth.

We completed 721,000 square feet of total leasing volume, which consisted of 551,000 square feet of renewal leasing 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 2 development starts that will provide much needed inventory in our highest occupancy markets. the National Business Park in 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 3 inventory buildings, the pipeline is 100% preleased.

We placed 73,000 square feet of development space into service that were 100% leased in Arsenal. 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 remains 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 2/3 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 for the triple net sector and stronger the multifamily segment over the same period. Our differentiated strategy has and will continue to produce differentiated results.

Turning to the world view. 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 in growing threat.

On March 20, the FY 2024 Defense Appropriations Act was signed [Technical Difficulty] $131 billion [indiscernible], a $30 billion or 4% increase over last year. This is actually larger than the 3.3% increase in the approved NDA 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 Senate 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 interest 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 9 years. Franklin Center is a 22,000 square foot Class A office building, which sits less than a mile from our headquarters and is 56% leased to a leading defense contractor.

This building constructed in 2008, is the second newest development in the park is lead gold certified and well-amenitized. We saw an opportunity to acquire an asset in [indiscernible] to create shareholder value. [indiscernible] opportunities. And the first is the mission. The property must be proximate to our priority knowledge base national transmission 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 and planning and operations and/or significant tenant co-investment and 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 4 of these boxes.

The strategic rationale in the deal is quite simple. This value-add opportunity with significant occupancy upside. We acquired it at a substantial discount to replacement cost. 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.o.

Our entire 2.5 million square foot Columbia Gateway portfolio, the activity ratio was 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 in the entire Columbia Gateway Park chooses COPT Defense as their landlord.

So with that, I'll hand it over to Britt.

[Britt Snider, executive]

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. Where 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 3 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 to 15,000 square foot increments. At 2100 L Street in D.C., we actually signed a lease yesterday for 16,000 square feet, which stabilizes that building at 92% leased.

[indiscernible] 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 nonrenewals 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 Ft. Meade/BW Corridor segment with Columbia Gateway in particular stand out at 40,000 square feet or 25% of the total.

And 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 [indiscernible] nearly 50,000 square feet in our other segment, half of which occurred at Pinnacle Towers in Northern Virginia, where we increased the lease 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 flipbook, we provide detail on 2 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 2 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 in 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 foot 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. And 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 8,100 right out 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 9,700 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% 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 unleased 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 2 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 4 factors that contribute to Columbia Gateway success. First, in easily commutable location, located midway between Baltimore and Washington, D.C., it provides tenants the ability to attract the uneducated workers from both cities. Second is 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 4 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.

A 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.

[Anthony Mifsud, executive]

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 lower net G&A and venture expenses.

During the quarter, [indiscernible] and 95.6% 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% and 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 2 downsizes totaling 72,000 square feet. First, a 100,000 square foot contractor downsized to 60,000 square feet. We are 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 that fixed SOFR at 3.75% for 3 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 1-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 a 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 a full $0.10 accretive to AFFO per share. The $15 million acquisition was funded with cash on hand, and there was 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.

[Stephen E. Budorick, executive]

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 on 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 the 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 our 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 midpoint of our initial 2023 guidance.

And with that, operator, please open up the call for questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Michael Griffin of Citi.

[Michael Griffin, analyst]

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?

[Stephen E. Budorick, executive]

Yes. So we gave the going in cap rate, that's 11.2%. Our flipbook 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 they're leasing languished. And eventually, I believe they are 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.

[Michael Griffin, analyst]

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?

[Stephen E. Budorick, executive]

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. They 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.

[Michael Griffin, analyst]

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?

[Stephen E. Budorick, executive]

I think our comments address it. We've been to [indiscernible] 3 quarters of leasing. You'll see the overall specific trend back [indiscernible] where we expected them to be in our guidance.

[Operator]

Our next question comes from the line of Blaine Heck of Wells Fargo.

[Blaine Heck, analyst]

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 the acquisition side. But just a few questions on that subject.

First, can you just talk about the decision to add those 2 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?

[Stephen E. Budorick, executive]

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 RG 8100 in Huntsville 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 year on the development side.

With regard to the decision to start. At the NBP, we are 99.1% leased and occupied. We have less than 30,000 square feet in the whole park. We expect no space to not renew in the near time -- near term. And we have a couple of hundred thousand 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 a 20% pre-lease to satisfy that demand, we expect to lease up pretty quickly. And we think that could be not huge, but an important additional product type that we might want to develop into going forward.

[Blaine Heck, analyst]

Great. Just to kind of follow up on that last part. So can you talk specifically about tenant prospects at 8100 right out? 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 on lease in the third quarter this year.

[Stephen E. Budorick, executive]

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'd need to build.

[Anthony Mifsud, executive]

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, at the -- in the third quarter, capitalized interest would stop.

[Blaine Heck, analyst]

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 was forward or maybe just some conservatism with respect to kind of changing that longer-term target?

[Stephen E. Budorick, executive]

We got to save some news for later, Blaine. No, we've put out that benchmark on the '23 to '26 almost 2 years ago. We want to see that fulfilled then we'll update our forward thinking. But it doesn't imply a meaningful change to what we think will happen next year.

[Operator]

Our next question comes from the line of Camille Bonnel of Bank of America.

[Jing Xian Tan, analyst]

Hi, everyone. I wanted to pick up on some of the drivers of the increase in 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?

[Anthony Mifsud, executive]

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 up for our leases to commence.

[Jing Xian Tan, analyst]

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 rise?

[Britt Snider, executive]

This is Britt. Yes, I mean, it's -- it is something that is 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 a secure space are incredibly high.

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.

[Jing Xian Tan, analyst]

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

[Britt Snider, executive]

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 back to you.

[Operator]

Our next question comes from the line of Tom Catherwood of BTIG.

[William Catherwood, analyst]

Maybe, Britt, if I'm not mistaken, a lot of your activity in the Columbia Gateway market in the last maybe 12 to 18 months has been small to midsize tenants, a lot of overflow coming from NBP. But with this now 90,000 square foot contiguous 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?

[Britt Snider, executive]

Yes. I mean [indiscernible] it's a good question. I mean we had [indiscernible] the remarks. 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 yes, it's becoming a much more of a cyber IT hub.

[William Catherwood, analyst]

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?

[Britt Snider, executive]

Yes. 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 -- 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 asking [indiscernible] achieve additional space and in particular, secure space. So we're very pleased to see that demand increasing.

[William Catherwood, analyst]

Got it. And then final one for 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? And do you have a sense of -- could there be other opportunities out for COPT this year in the market?

[Stephen E. Budorick, executive]

There have been a couple -- 3 opportunities in Northern Virginia. Some of them have been deferred in a couple of results 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 then we're not going to buy.

[Operator]

Our next question comes from the line of Ray Zhong of JPMorgan. .

[Zhuorui Zhong, analyst]

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?

[Stephen E. Budorick, executive]

Yes. 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 budgeted a couple of million dollars for some public combination enhancement [indiscernible] up vendors and kind of the initial arrival experience. [indiscernible]

[Zhuorui Zhong, analyst]

Got you. And then the second part of Franklin Center is you guys provide a going in cash yield and stabilized cash yield and also mentioned, most likely, it's a renewal for the existing tenants, but there's still some vacancy. Just curious to know with index 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.

[Stephen E. Budorick, executive]

Yes, 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.

[Zhuorui Zhong, analyst]

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

[Anthony Mifsud, executive]

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.

[Zhuorui Zhong, analyst]

Higher than market?

[Anthony Mifsud, executive]

Correct.

[Zhuorui Zhong, analyst]

Got it. 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 noticed that the rent is a little bit on the higher side versus the one that just got renewed? Just want to get a sense on the market there.

[Anthony Mifsud, executive]

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

[Operator]

Our next question comes from the line of Peter Abramowitz of Jefferies.

[Peter Abramowitz, analyst]

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%, with just 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?

[Stephen E. Budorick, executive]

Yes.

[Peter Abramowitz, analyst]

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 2 new projects that you have and you're looking to lease up, in Redstone. Can 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?

[Stephen E. Budorick, executive]

Yes. So our overall development and 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 we're under construction.

[Peter Abramowitz, analyst]

Got you. I guess is that something -- is that something...

[Stephen E. Budorick, executive]

We won't tell you who or where.

[Peter Abramowitz, analyst]

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

[Stephen E. Budorick, executive]

Well, it's my belief that we're feeling 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-have developments, and I think there's a wait and see on the wanna haves.

So I actually believe over the next few years, if the rates are being proved 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.

[Operator]

Our next question comes from the line of Richard Anderson of Wedbush Securities.

[Richard Anderson, analyst]

Yes, it's been a lot of in and out. Interference. So if I missed anything, I apologize I want to check your WiFi account, make sure it's up to speed. Just kidding.

Franklin Center, did you -- does it -- does the yield projection assume -- and again, I think I might have missed this a roll down on the existing tenant in 2026?

[Stephen E. Budorick, executive]

So Rich, we put out a very conservative future cash yield, which has [indiscernible] By the same working on concurrently. So [Technical Difficulty] with observer rent roll down, it would absorb more investment in the common area and the structure of the building that we plan to spend and it would absorb higher TIs than we typically give. This is a very conservative number in the forward-looking publicly disclosed environment where we never want to be overstating our opportunity.

As I said during an earlier caller, you might have missed -- I expect to beat that target and potentially very handily.

[Richard Anderson, analyst]

You described the building is very well cared for, but yet it's 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, pictures look nice. Why wouldn't it be more competitive versus your 97% occupancy vicinity?

[Stephen E. Budorick, executive]

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.

[Britt Snider, executive]

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 due, draw tenants to our assets here.

[Stephen E. Budorick, executive]

And one last comment. The prior owner for another part of the country, different structure, triple -- 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. Where we have where we do that primarily directly.

[Richard Anderson, analyst]

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 a this year event? Or is that not a likely outcome at this point?

[Stephen E. Budorick, executive]

I don't see it this year, Rich. What transactions that have happened in D.C. are very opportunistic from the buyer 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.

[Richard Anderson, analyst]

Okay. And last question for 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, it'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?

[Stephen E. Budorick, executive]

I'm not sure I can answer that question. We haven't really run math on it in that way. And you recall, we put that target out several years ago. and we're going to continue to report against that target until 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 to convey the strength of our business that we continue to prove quarter in and quarter out. .

[Operator]

Our next question comes from the line of Dylan Burzinski, of Green Street.

[Dylan Burzinski, analyst]

I actually don't have any more questions. sorry.

[Stephen E. Budorick, executive]

Good talking to you, Dylan. We'll see you soon.

[Operator]

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

[Stephen E. Budorick, executive]

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 a follow-up call or talk about something we mentioned in more detail. Thank you.

[Operator]

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