Welcome to the Corporate Office Properties Trust Fourth Quarter and Full Year 2020 Earnings Conference Call. As a reminder, today’s call is being recorded. At this time, I will turn the call over to Stephanie Krewson-Kelly, Corporate Office Properties Trust’s Vice President of Investor Relations. Ms. Krewson-Kelly, please go ahead.

Thank you, Carmen. Good afternoon and welcome to COPT’s conference call to discuss fourth quarter and full year 2020 results as well as our guidance for 2021. With me today are Steve Budorick, President and CEO; Todd Hartman, Executive Vice President and COO; and Anthony Mifsud, EVP and CFO.

Good afternoon and thank you for joining us. 2020 was a challenging but strong year for our company. We derive nearly 90% of our rents from locations that support the defense activities of the United States government and its contractors engaged in national security, defense information technology, cybersecurity activities, among others. These missions are not correlated with the general economy and the work executed in these buildings never shuts down. Our strategy of concentrating our buildings on U.S. defense installations executing priority missions is unique among REITs. Our performance during the economic uncertainty of 2020 and our outlook for this year demonstrates the strength of our unique investment strategy. From a leasing perspective, our ability to execute development leasing last year was unimpeded. In contrast, our vacancy leasing volumes were significantly reduced in the second and third quarters as a result of the strict shutdown restrictions. In terms of operations, our rent collections remained very high due to the exceptional credit of our tenants. In total we collected 99.7% of gross rents between April and year-end. We made accommodations with retail and amenity tenants to help them bridge the financial gap caused by the shutdowns. In aggregate, these reserves and concessions represented 1% of our annualized rental revenue, including $1.8 million of reserves against straight-line rents. Beyond rent and the accommodations, our parking revenues were $2.6 million lower than our original plan. Although these amounts were largely offset by operating expense savings. Our operations absorbed $4.6 million of pandemic-related impacts during the year. Notwithstanding these impacts we met or exceeded expectations on multiple fronts. Our initial guidance for FFO per share, adjusted for comparability, had a midpoint of $2.08. When the shutdowns began we moved the midpoint by $0.01 to $2.07 to create capacity to absorb unanticipated events. By the time we held our third quarter call we had absorbed the impacts from the COVID shutdowns and had good visibility on the remainder of the year.

Thank you, Steve. At the end of 2020, our core portfolio was 94.3% occupied and 95% leased representing gains of 120 basis points and 40 basis points respectively. These year-over-year gains were led by strong increases at the National Business Park and in our Northern Virginia Defense IT and Navy subsegments. Additionally, our Huntsville operating portfolio nearly doubled during 2020 to 1.5 million fully occupied square feet. During 2020 we achieved a very strong 81% renewal rate. Leasing CapEx and renewals remained among the lowest in the office sector, averaging only $2.03 per foot per year of term. Cash rents rolled down an average of 2.1% with annual escalations averaging 2.4%, both in line with expectations. First-year cash on expiring leases relative to first-year cash of the renewed lease compounded at 2.5% annually, demonstrating the internal growth embedded in our lease structures. We renewed six large office leases totaling 775,000 square feet including early renewals of four large office leases scheduled to expire in 2021. On slide 13 of our presentation, the two large 2021 expirations totaling 250,000 square feet are government leases that will be renewed shortly. As slide 11 shows, our quarterly vacancy leasing achievements started out the year with a healthy 143,000 square feet in the first quarter and were suppressed for two quarters and recovered in the fourth quarter to 142,000 square feet. Although 2020 vacancy leasing volume totaled 416,000 or roughly 75% of our five-year average volume, it was still 40% below our original 2020 plan. The million square feet of development leasing achieved during the year included five fully leased build-to-suit projects for defense contractors totaling 680,000 at four of our six defense IT subsegments; one at the National Business Park, one at Redstone Gateway, one in San Antonio and two data center shell build-to-suits in Northern Virginia. During the year we also completed 238,000 square feet of development leasing with the U.S. government including 210,000 square feet at Redstone Gateway in Huntsville which is now fully leased and occupied and an 18,000 square foot lease at a new development in the Pax River portion of our Navy group. Regarding our leasing outlook for 2021, we entered the year with solid momentum for new developments and recovering demand for operating properties. In our operating portfolio we have sound prospects for current availability and our activity ratio is 75%. For example, in Columbia Gateway we have six concentrations of vacancy representing 240,000 square feet. We're working with 22 prospects totaling 230,000 square feet or 96% of the available space. Although one of these prospects requires occupancy in 2021. With 80,000 square feet of availability, 6721 Gate—Columbia Gateway represents our largest block of vacant space in the park.

Thanks, Steve. Fourth quarter and full-year FFO per share as adjusted for comparability of $0.56 and $2.12 exceeded the high ends of our elevated guidance by $0.02. Fourth quarter results benefited from higher revenues at DC-6 and gains on the sale of an alternative investment. Property operations were solid; lower free rent concessions and operating efficiencies, net of the COVID impacts, drove a 1.6% increase in same property cash NOI for the year and same property occupancy ended the year at 92.1%. During the fourth quarter, we formed a new joint venture with Blackstone. In two transactions, we raised $165 million of equity ending the year with a debt-to-adjusted EBITDA ratio of 6.2 times. We achieved strong pricing on both transactions demonstrating the value we create through development. Our 2021 plan is summarized on slides 25 and 26 of our presentation and continues to be straightforward and low risk in nature. NOI from development placed into service is the main driver of this year's growth. We placed a record 1.8 million square feet into service last year, two-thirds of which occurred in the second half of the year. The incremental revenues plus those properties we expect to place into service this year should contribute between $21 million and $23 million of cash NOI. At the midpoint 99% of this NOI is contractual. We plan to invest between $275 million and $300 million in development and have no acquisitions planned. We will continue to prudently fund our development investment and expect to sell additional joint venture interests and data center shells to maintain existing leverage levels. Based on our current portfolio of wholly owned data shells plus the 200 development pipeline, we can monetize approximately $650 million of equity value from this subsegment to fund future requirements. Lastly we forecast the same property occupancy pool end of the year between 90% and 92% occupied which is impacted by the deferred vacancy leasing in 2020 by approximately 2%. Based on these occupancy levels and assuming normal expense levels we forecast same property cash NOI will be flat to down 2% for the year. Same property cash NOI is impacted by the reduction in 2020 vacancy leasing as well by approximately 1.5% to 3%. Additionally we have built in some capacity for possible early renewal and contraction activity in some of our non-defense tenants which impacts our outlook for both same property statistics. Based on these assumptions we are establishing a range of FFO per share of $2.16 to $2.22, the midpoint of which is $0.01 higher than the midpoint implied by the gross guideposts we provided in October.

Thank you. Our strategy is built on three fundamental pillars: invest in assets with durable demand characteristics that are protected from broader economic cycles; create value for shareholders by managing our portfolio to high occupancies and low recurring capital expenditures; and develop new assets because well-below their market value and maintain a strong and durable balance sheet with flexibility to respond to disruptions in the capital markets and to seize opportunities quickly. For the last five years, we've implemented this strategy with great discipline, allocating our capital investments as follows: targeting markets and properties that support essential U.S. Government defense missions such as signals and human intelligence, missile defense, space exploration, law enforcement, cyber activity and hyperscale cloud computing; investing in advantaged land positions best located to serve the priority defense missions we target; and executing more risk-weighted value-creating new developments. Our performance in 2020 and our high visibility into 2021 demonstrate the high level of durability in our cash flows. Investor appetite for our data shells has demonstrated the impressive value creation our developments provide to our shareholders. Our bond offering during 2020 illustrated that the debt market recognized and rewarded us for the resilience of our portfolio and franchise, achieving the most attractive debt structure in our history. Over the past nine years, we've completed approximately 10 million square feet of development leasing, averaging 1.1 million square feet per year. During the past three years, we've executed 4.3 million square feet of development leasing and averaged over 1.4 million square feet per year. We completed our strategic asset reallocation plan in 2018 and since that time, our new developments and durable operating portfolio have produced growth in our FFO per share as adjusted. So in conclusion, COPT has entered an era of growth driven by a durable operating portfolio, a strong balance sheet and a reliable, low-risk development program that is producing incremental NOI annually. We look forward to seizing the impressive opportunity before us in 2021. And with that, operator please open up the call for questions.

Our first question is from Manny Korchman with Citi. Your question please.

Hey everyone. Anthony just looking at your guidance for DC-6, can you tell us what timing and rent roll down assumptions are based into the NOI range that you provided there?

Sure. So the range assumes that we have the current rent the tenant is paying for the first quarter and that the renewal is executed at the beginning of the second quarter at which point the rent roll down rolls down between 10% and 15%.

Great. And then maybe this is looking too far forward but I'll ask anyway: you've now presented your large maturities coming up in 2022 with retention ratios that are obviously lower than what you had last year at least for the commercial users and how are those discussions with those corporate users going if at all?

So with both of those customers we’ve had fairly advanced negotiations to extend and contract before the pandemic shutdowns occurred. And since that time the active discussions have been stalled. We expect them to heat up this year and since we were negotiating contraction before the pandemic we continue to expect them to contract and they're both in Downtown Baltimore.

And then one last quick one from me Anthony you mentioned some alternative investment sales gains in 4Q. What else is on the books that we might expect to drive gains or losses in the future?

So we have a pretty limited amount of those investments left. It's about $3 million to $3.5 million remaining. They're in a fund that the company invested in and they manage the liquidation of that fund. So the timing of that is very difficult to predict. It sort of comes and goes as the fund is sold off.

The fund is a private equity fund that creates, brings new defense technology to market with startup companies. We invest in it to create opportunities to be the landlord for those tenants that they successfully create.

Thank you.

Thank you. Our next question comes from Craig Mailman with KeyBanc Capital Markets. Your question please.

Hi everyone. I'm just curious; it sounds like vacancy leasing could be picking up a little bit here. I'm just curious what you guys think was a trigger for that? Is it just the ability to actually tour space or if the vaccine rollout has people feeling a little bit better about making long-term decisions? Also just curious if you guys are seeing discernible differences in types of space usage or floor plan layouts as we get to the hopefully back end of the pandemic?

So, I'll take that in layers. Certainly, during the second and third quarter, there was very little activity, which creates a void in the natural deal flow and that had a component to it. Activity picked up in the fourth quarter and remains strong now. I would estimate that 60% to 70% is defense contractors and much of that activity is either in anticipation of, or contingent on, contract awards that continue to flow at a pretty healthy rate out of defense installations around their properties. In terms of space planning, we really have not seen a material change in the densities for the tenants that we've planned. It's a bit surprising, but even the leases that we executed in March and April went on to fulfill their interior buildouts as had been planned before the pandemic.

Okay. That's helpful. Any kind of changes in dynamics on rents? Is it face rent or TI discussions? What's the conversation like as people come back and want to take space?

But for Downtown DC, economics are stable in all of our markets if not strengthening in some areas like Alabama where we have a lot of activity right now. In essence, each new lease that we execute sets a new kind of high watermark for market rent. National Business Park and Columbia Gateway are very stable. We'll find out soon what the impact is in downtown DC, but I would expect concessions to go up and rates to remain stable.

Any pickup in Huntsville? I know Space Force I think that was the location that they picked for that. Is it way too early for that to be a demand generator?

Yeah, it's way too early, Craig. It's very exciting, but early. Certainly the award has been announced. Other states are contesting the award. It'll be challenged for some time, but there is activity evaluating space requirements down there both short and long term. It could potentially create opportunity with the government and unquestionably will create opportunity with contractors.

And then just one last one: 310 MBP, sounds like you guys are feeling better about that. But with the administration change is there going to be any changes at the top of that tenant organization that will require another review of this space like you guys have had as there's been turnover there that could delay it?

I don't expect that to be true. I think it's a matter at a much lower level than the new cabinet positions are going to be evaluated.

Thank you. Our next question comes from Blaine Heck with Wells Fargo. Your question please.

Great, thanks. Good afternoon. I feel like we ask this every quarter a bit just to get an update. Can you talk about the likelihood of you guys expanding your DC shell program to cater to some other tenants given that cloud computing and all that goes with it has become increasingly competitive?

So we routinely have exploratory discussions with other potential tenants. Heretofore, the development or procurement model hasn’t aligned well with our strategy in that the bulk of those customers want to lease fully developed data centers with landlords bearing all the capital risk. The customer we have a great relationship with now is an ideal model for us because we're putting in a few hundred dollars a square foot and they're taking measurably more capital risk by taking our shell and developing it to a Tier 3 data center. To the extent we had a customer interested in a similar program we would welcome the opportunity.

All right. Thanks Steve. And then just one for Anthony: can you give us a little bit more detail on your equity needs for this year? Maybe a little bit on a potential size and timing on an expected DC shell JV?

Sure. So the data center shell equity that we need is between $200 million and $225 million. We have a group of those assets that we have available to monetize throughout the year; as you know some of them have been placed in service for longer than two years which is sort of our benchmark for tax purposes. Our plan is that that would most likely be marketed beginning in the second quarter and transactions closing in the second, third and fourth quarters.

Got it. All right. Thanks guys.

Thank you. Our next question comes from Steve Sakwa with Evercore ISI. Your question please.

Thanks. Most of my questions have been asked but can you just remind us what the size of the land bank is to further the data center shell business and are you actively looking for more land in Northern Virginia?

We have three acres, Steve, and all of that land is adjacent to current or recently completed developments. We have a notional schedule of when they'll be developed. Right now the long pole in the tent is getting power; with the extreme level of development activity over the last two years both of the power suppliers are strained to get additional critical power to these sites. From a company program standpoint, we've got two to maybe two and a half years of runway before we need more land.

Sorry just to convert that, that three acres would equate to what kind of developable square footage? It's a little more than 1.3 million square feet.

Got it. Okay, that's it for now. Thanks.

Our next question comes from Tom Catherwood with BTIG. Your question please.

Thank you and good afternoon, everyone. Following up actually on Steve's question: one thing that did jump out, it looks like the data center shells you started in the fourth quarter are on land that had been in the defense IT bucket. There wasn't a decrease in the data center shell land. Are we reading that right and is there kind of some more potential to repurpose land elsewhere in your portfolio for data center shells?

Well you get a cookie Tom, that was very good analysis. Yeah, those parcels in Fairfax County that we have held for office development had some customer-specific needs that allowed us to make that available to our data center shell tenant and we executed leases on that. I don't think there's much more of that in Northern Virginia.

Got it and then Steve you alluded to the challenges with getting power at these data center shells and the two that you started in the quarter seem to have longer development timelines than other ones you've done. Is that because of the constraints on getting the power in or are these developments a little different from what you've done before?

So yes and no. They are in a different county; they are in Fairfax County, which is notoriously bureaucratic. So, we've got a very long development schedule to allow us sufficient time to get through rezoning and all the approvals we need to develop the asset. Additionally, we need time to get the critical power as well.

Got it. Understood.

To the extent we can accelerate the approvals and the access to power, we will deliver those early.

Got it. Thank you for that Steve. And then, one last one: you had mentioned expectations for 1% Defense Department budget increases going forward. One of the things that’s been in the news recently was the cyber hack on government and defense agencies. Given that cyber is a growing portion of your portfolio, are you seeing a reallocation of either dollars or attention to that space? Could that be an upside for Columbia Gateway and BP? What are you guys seeing so far?

I think it's early. We see impacts of those kinds of exogenous events when contracts flow out of government agencies into tenants and then we will experience that demand. I would expect significant increases in funding to address the issue, but that demand would likely materialize maybe another 12 months down the road.

Understood. Thanks, everyone.

Our next question comes from Jamie Feldman with Bank of America. Your question please?

Great. Thank you. So along the same lines: you mentioned 1% growth in the defense budget expected over the next few years. But if you were to look at the more relevant piece of the budget tied to your business like defense IT and cyber what do you think the growth rate looks like for that segment over the next several years?

So it's a little early; they've passed the budget but we don't have the program-level details from the Green Book yet. Certainly I think cyber will probably grow north of 5% for the next several years if not higher and then other programs I just can't speak to.

You’re saying 5% per year?

Yeah.

Okay. And you mentioned for 2022 the two large leases in question are both downtown Baltimore. Does that make you rethink your Baltimore exposure or consider selling those assets and moving on?

We've always considered those assets that we would recycle at the right point in time. One reason we hold on to them is that we wanted to enter the era of growth we talked about in our discussions. Certainly selling them before we get the renewals established would be a consideration, but I would say that one or two of those assets could be considered for selling in the next 24 months.

Okay. But you don't want to market them until you figure out these two leases?

Well absolutely not. I mean we saw them at the worst possible time.

Okay. And then I know you provide guidance in terms of cash NOI growth, same store growth and leasing spreads. Can you give us a sense of what those look like on a GAAP basis?

Our leasing spreads on a GAAP basis are between roughly 5% to 7% in terms of converting the cash roll downs into GAAP spreads given the increases that we have embedded in those assumed renewals.

Positive 5% to 7%?

Yeah.

Okay. And what about same store NOI?

I had that; I'll get back to you on that, Jamie.

Okay. Thank you. All right I think I'm all set. Thank you.

Thank you. And our next question comes from Jay Kornreich with SMBC. Your line is open.

Just looking at your portfolio as it leans more heavily to the D.C. metro area which makes sense considering the business you are in. How do you guys think about stretching beyond that as you entered San Antonio and Huntsville? How do you expand in those markets and potentially other markets as well?

We have pursued missions that are knowledge-based, not troop or weapons production. We have scoured the country for good opportunities periodically for the last decade. The locations we serve are places where the missions have very high priority, so they will have high levels of consistent funding and our knowledge base suggests they need office property in those markets. We're pretty committed to the locations we have.

Okay. I appreciate that high-level color and that's it for me. Thank you.

Thank you. Our next question comes from Dave Rodgers with Baird. Your line is open.

You guys have addressed a lot but two questions. One: would you consider selling that asset before any kind of two-year hold period or is that still going to be subject to that same thinking? I'm trying to consider when that could potentially be monetized. Second: Todd mentioned the occupancy loss in 2021 obviously is the lower backfill that’s showing up there. When you see the lower retention this year is there any semantic to that either geographic component of the portfolio or program that negatively impacted the lower retention?

So I’ll take the first one, Dave. In order to create the flexibility to monetize certain assets, a structure has been created to allow an asset to be owned within a REIT subsidiary. We have a structure that would allow us to sell that asset before the 24-month period and that is not a common structure within the district.

Regarding the renewals, we've built into our assumptions some pretty conservative numbers on commercial office contractions during the year and capacity to absorb an early renewal with a contraction if the opportunity is presented, specifically regarding those two tenants in downtown Baltimore.

So those are the 2022 expirations, but there's room to absorb in this year?

Yeah. We've put some capacity for one or the other and then, when we look at commercial tenants renewing, we've handicapped some contraction generally and specifically.

Okay. That's helpful. Thanks, everyone.

Thank you. And our next question is from Omotayo Okusanya with Mizuho. Your line is open.

A quick question about forecasting for next year: the occupancy guidance of 90% to 92%, you were at 92% for 2020. What could push you to the lower end of that range? And even if you were at the higher end, which is the same number you are at in 2020, you still forecast about flat NOI growth. Can you walk us through that a little bit?

So the lower end would be represented by less leasing than contemplated in our plan earlier over the year. We have a manageable revenue-at-risk number, but to the extent we weren't able to hit that target that will be reflected in fewer square feet at year-end and lower achievement. The higher end is the converse: we generate more leasing than the midpoint of our plan.

The corollary on same property cash NOI growth is that occupancy is a point in time at the end of year. Based on how those leases commence throughout the year and contribute to cash, that's why we end up with flat at the high end.

So the average is probably lower than the actual end-of-year point.

Thank you. Our next question comes from Chris Lucas with Capital One Securities. Please go ahead.

Hey, guys. Good afternoon. Just a couple quick ones for me. 2,100-L was placed into service in the fourth quarter. Did that contribute any GAAP revenue in the fourth quarter?

It was very small. It was like a week.

Okay. And that doesn't change the expected cash rent start date for that lease?

It does not.

And Anthony just as it relates to the alternative investment sale that is included in your FFO adjusted, is that alternative investment sale included in your FFO adjusted for comparability?

It is and we had a small point in…

Thanks. And our next question is from Jamie Feldman with Bank of America. Your question please?

Hi. Thanks, just a quick follow-up: I want to understand your thought process on saying April 1 for the DC-6 renewal. How did you guys choose that date?

Fairly randomly, based on the kind of progress that we've had since the holiday break we’re checking off the open issues with the tenant.

Okay. What still needs to get done? Are you able to discuss that?

I really don't want to go in any further detail on the points. On the last call I conveyed that we have a bundle of open issues and positions we're willing to accept and we're challenging the tenant to narrow the gap. We're making good progress but ultimately it has to be good for our shareholders or we won't agree to it.

Thank you. And I'm not showing any further questions in the queue. I will now turn the call back to Mr. Budorick for his closing remarks.

So thank you all for joining our call today. We are in our offices this afternoon. Please coordinate with Stephanie if you’d like a follow-up call. Thank you.

And thank you for your participation today in the Corporate Office Properties Trust fourth quarter and full year 2020 conference call. This concludes the presentation. You may now disconnect. Good day.