Welcome to the Corporate Office Properties Trust Third Quarter 2022 Results Conference Call. As a reminder, today's call is being recorded. At this time, I'll turn the call over to Michelle Layne, COPT's Manager of Investor Relations. Ms. Layne, please go ahead.

Thank you, Andrew. Good afternoon, and welcome to COPT's conference call to discuss third quarter results and updated guidance for the year. With me today are Steve Budorick, President and CEO; Todd Hartman, 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 those forward-looking statements, and the company does not undertake a duty to update them. Steve?

Good afternoon, and thank you for joining us. The markets have been highly dynamic since our second quarter call, but I'm happy to report that we delivered strong quarterly performance and achieved key financing and leasing milestones. In yesterday's press release, we announced that we completed a new line of credit and term loan, which extended those maturities until 2027 and 2028, virtually eliminating any borrowing risk for the company until 2026. We also announced record quarterly leasing. Our third quarter vacancy leasing was the highest quarterly volume in the last 12 years. Our retention rate was 92%, our highest in 21 years, and we fully leased 310 National Business Parkway to the U.S. government. Our total portfolio was now 94.9% leased and 92.7% occupied. Given the success in the quarter and our knowledge of large tenant renewal intentions, we expect our portfolio occupancy to increase over the next five quarters irrespective of the volume of future vacancy leasing. We expect the occupancy to increase 50 basis points in the pessimistic scenario with no further vacancy leasing and 200 basis points in the optimistic scenario. Our financial performance metrics were right down the middle of the fairway, and we're on track to meet our guidance for the full year. We delivered 4.4% compound annual FFO growth from 2018 to 2021. And this year, we expect to deliver 2.6% growth in FFO per share, absorbing the $0.04 of dilution from the sale of DC-6 in January. And given the substantial pre-leased development pipeline, we are positioned to deliver compound growth of 4% or better from 2023 to 2026 and to add valuable assets to our operating portfolio. Over the past decade, we've deeply concentrated investment in the property supporting priority U.S. defense missions and select mission-critical assets that we collectively refer to as Defense/IT locations. At the end of the quarter, these locations generated 90% of our core portfolio annualized rental revenue. Demand and the performance of our portfolio at these Defense/IT locations is driven by and correlated with national security spending and largely immune from conditions in the overall economy. This fact has been illustrated by the strength of our performance during the COVID-19 lockdowns and economic downturn and continues to be ratified by our strength in performance this quarter as the conditions in the financial markets deteriorated so quickly. Our concentration of leases to the U.S. government and high-credit contractors supporting national funds and cybersecurity missions is the foundation of our ability to generate resilient high-quality cash flow. The base Defense budget for fiscal year 2022 was passed in March of this year with a 5.8% increase, and we expect the demand from that increase to continue to materialize through late 2023. Given the pending election, it's too early to determine the budget increase for fiscal year 2023. But the range of outcomes appears to be an overall increase of 2.6% on the low end, representing the President's request to Congress, and 6.5% to 8% as approved by the Senate and House Armed Services Committees. Given the elevated risk in the global and national security conditions, we have high confidence that the Defense budget will continue to grow in coming years. Our external growth strategy continues to be driven by our successful pre-leased and low-risk development at these proven Defense/IT locations. We have an advantaged position in this unique market as the go-to public company landlord for secured specialized space satisfying government requirements. Today, we have 1.9 million square feet of active developments in Defense locations that are collectively 91% pre-leased. During 2020 and 2021, we wisely protected our balance sheet by refinancing our debt. And as a result, the current interest rate environment poses limited risk to our performance. The $1.8 billion of bond refinancing completed provided the solid foundation for us to deliver future growth from our operating and development portfolios. This week, we further de-risked our balance sheet with our new line of credit and term loan. Turning to inflation. The severe and rapid escalation in material prices over the first half of the year impacted our development costs, increasing the year-over-year hard costs for like-for-like development projects by approximately 18%. The inflationary pressure stabilized during the third quarter, still increasing but at a much lower rate. Fortunately, the demand in our Defense/IT portfolio is driven by national security needs and funded mission priorities, and we've been able to negotiate rents that maintain our development yield targets. So in summary, we're well positioned to continue to deliver FFO growth this year and over the next four years. We've absorbed significant interest rate increases and locked in our financing vehicles until 2026, eliminating refinancing risk during the period. Our leasing demand remains very strong, driven by national security needs. Our record leasing achievements this quarter provide clarity that we can drive our occupancy higher over the next five quarters. And with that, I'll hand the call over to Anthony.

Thanks, Steve. Operating results and quarter-end metrics were all in line with our expectations. FFO per share as adjusted for comparability of $0.58 was at the midpoint of guidance and keeps us on track to achieve the midpoint of our expected annual results of $2.35 per share. During the fourth quarter, we expect to place over 900,000 square feet of development projects into service, which are over 98% leased, and the NOI from these projects supports the $0.60 FFO per share as adjusted for comparability midpoint for the fourth quarter. Our forecast continues to project the midpoint for year-end same office occupancy at 92.5% and annual retention of 75%. We are narrowing our guidance for the change in same-property cash NOI from flat to down 2% to down between 1% and 2% and the full-year change in cash rents on renewals to a new range of down between 1% and 2%. We have experienced the effect of sustained high inflation in the form of higher operating expenses, particularly energy costs. However, the structure of our leases continues to insulate us from the majority of these increases impacting our results. Earlier this week, we were able to close on a new 60-month revolving credit facility and 63-month term loan that refinanced our only significant debt maturities in 2022 and 2023. Including extension options, these facilities mature in 2027 and 2028. And as a result, we have no material debt maturing until 2026. At quarter end, only 7.5% of our $2.3 billion debt portfolio was subject to the impact of increasing interest rates. This included $200 million of LIBOR hedges with a fixed LIBOR of 1.9% that expire on December 1 of this year. As a result, at year-end and going into 2023, variable rate debt will increase to approximately 15% of our total debt. The interest rate environment continues to be extremely volatile, and the forward curve for short-term LIBOR and SOFR increased dramatically throughout 2022. To give some specifics. At the beginning of the year, the average forecast for one-month LIBOR for 2023 was 1.2%. At the time of our last call, the curve had increased by 2.2%. Currently, the increase from the beginning of the year totals 3.4%, up another 120 basis points since the end of July, bringing the average rate for 2023 to 4.6%. These increases in the forward curve for 2023 will result in higher year-over-year interest expense on our variable rate debt of approximately $15 million. This increase will be more than absorbed by the incremental NOI from new lease commencements and NOI from developments placed into service. However, the additional 120 basis point increase over the past three months has diminished expected growth in 2023. Despite these rate increases and the pressures it places on our 2023 through 2026 forecast, we continue to expect to generate 4% or more compound annual growth in FFO per share between 2023 and 2026. And now I'll hand the call over to Todd.

Thank you, Anthony. Leasing activity was outstanding during the quarter, further demonstrating the strength of our differentiated strategy of developing and owning assets at advantaged locations supporting priority U.S. Defense missions. During the quarter, we completed 351,000 square feet of vacancy leasing, which is the highest quarterly total in 12 years. Our leasing accomplishments through three quarters exceeds our annual target of more than 620,000 square feet and with another quarter remaining is already 117% of our five-year annual leasing total. Demand remains strong, and we anticipate further vacancy leasing in the fourth quarter. Even after signing a record level of leases in the third quarter, our vacant space activity ratio remains high at 89%, above our year-to-date average of 81%. Our record achievement during the quarter was accomplished without contribution from our Regional Office portfolio; re-leasing demand is more impacted by macroeconomic conditions and deal velocity is slow and deliberate. Importantly, in the fourth quarter, 40% of our leased square footage was expansion space for existing tenants, indicating continued growth and mission work from healthy Defense budgets. Our 121,000 square foot new lease in Huntsville further expands our relationship with a leading defense contractor and was signed within nine months of the prior lease expiration. During the quarter, we signed two new leases with the U.S. government for a total of 127,000 square feet, including a 68,000 square foot lease for the final two floors at 310 NBP, which is now 100% leased to the U.S. government. Demand was once again broad-based this quarter with leases signed in each of our Defense/IT markets. The National Business Park was most active with 134,000 square feet of leases signed during the quarter. As a result of this activity, the NBP is now 97.2% leased, with only three suites larger than 10,000 square feet available. Similarly, in Huntsville, our 2.3 million square foot portfolio of completed and near-completed properties is 96.4% leased, with only three suites above 10,000 square feet available. We completed 506,000 square feet of renewal leasing during the quarter with a retention rate of 92.2%, our highest in over two decades. Year-to-date, we have completed nearly 1.2 million square feet of renewals with a retention rate of 72%. Cash rents for the quarter were in line with expectations and rolled down 1.1% with straight-line rents increasing 5%. We expect similar renewal volume in the fourth quarter and are maintaining the midpoint of our annual retention guidance at 75%. Looking ahead to our 2023 and 2024 lease expirations greater than 50,000 square feet, we continue to expect a retention rate of 95% or greater on these large leases. Our record vacancy leasing volume and retention rate were achieved with strong fundamentals. Lease rates, concessions and length of term were in line with expectations with average annual escalations during the quarter at a strong 2.8%. We did not complete any development leasing during the quarter, and our year-to-date volume remains at 476,000 square feet. Our development leasing pipeline remains strong at 1.2 million square feet, and we are confident we will achieve our development leasing objective of 700,000 square feet for 2022. With that, I'll hand the call back to Steve.

Thanks, Todd. So summarizing our key messages. We delivered another strong quarter, and we're on track to meet or exceed our 2022 business plan and guidance. We completed a new line of credit and term loan facilities, extending our nearest material debt maturity to 2026 insulating our balance sheet from refinancing risk. We broke a 12-year vacancy leasing record during the quarter, providing occupancy growth through 2023. Our leasing pipelines remain strong with an 89% activity ratio on vacancy and 1.2 million square feet of development pipelines. Our 1.9 million square feet of active developments are 91% leased, assuring incremental NOI from these properties that will drive FFO growth in coming years. The 5.8% Defense base budget increase in fiscal year 2022 creates a strong backdrop for leasing demand through 2023. Congressional activity suggests the fiscal year 2023 Defense budget will be further increased when passed after the election. We're on track to deliver 2.6% FFO per share growth in 2022, and we continue to expect compound annual FFO growth of 4% or greater from 2023 to 2026. With that, operator, please open the call for questions.

Thank you, Mr. Budorick. The operator provides instructions for participants on how to queue for questions. And our first question comes from the line of Camille Bonnel with Bank of America.

So it sounds like your tenant base is pretty defensible against the macro conditions and clearly reflected in the record leasing volume you achieved this quarter. From your perspective, what could be some fundamental headwinds that would impact your leasing and tenant pipeline?

So on our Defense/IT portfolio, a significant de-escalation in global conflicts would slow down our leasing. It's really for Defense tied to the spending coming out of the U.S. government. And as we said in our remarks, with the current global and national security view, we don't expect that to affect us in the near term. In our Regional Office segment, we are more tied to the overall economy. And more importantly, the markets we're in are quite a bit softer than our Defense markets. So the time period necessary to win lease deals is protracted, and it could take us several quarters to deliver some progress.

Okay. And given that you've addressed the near-term debt and leasing maturities, what would you say your key focus is for the next six to 12 months?

So for the next three months, we are planning to recycle some capital through a joint venture process. That's our highest priority. Thereafter, we're focused on continuing to drive growth opportunities through our development pipeline.

Okay. And just given the market conditions and higher capital costs, are you seeing any changes in underwriting assumptions for those developments?

No. We've been very fortunate to be able to increase our rents in lockstep with our increases in costs. On our prior call, we provided some color on a recent development we did at the National Business Park full building build-to-suit, which is, in essence, the twin of a similar building we signed to build-to-suit in 2021. The increase in cost was 18% for an almost identical building and the increase in our net rent was commensurate right at 18%, generating the exact same development yield. We expect that to continue.

Okay. And then final question for me. You have a nice occupancy cushion with the portfolio being 95% leased. And thank you for sharing your expectations on occupancy increases under a pessimistic or optimistic scenario. How should we think about the timing of that translating into physical occupancy? Is it weighted towards the back half of 2023?

So I don't know that off the top of my head. I think it will be rather the third and fourth quarter, just considering the volume of leasing we did this quarter. It's going to take some time to build out that tenant base and it should start to occupy in the third and then again in the fourth.

Thank you for taking my questions.

Good questions.

Thank you. And our next question comes from the line of Anthony Paolone with JPMorgan.

Yes, thanks. So you've got a couple of hundred thousand square feet left in the development leasing pipeline that it sounds like you're confident about for the last couple of months of the year here. Should we take that as maybe a build-to-suit that you plan to start or a data center shell or any more color on that?

Yes. We expect to do a data center shell build-to-suit.

Okay. And then with regards to the data center shell business, what's the ability to move yields on those given what's happening in the rate environment?

Well, I think that's a better question for our next call.

Okay. Got it. And then just last one then on the guidance, just to make sure I understand the messaging here. Still pretty confident about this 4% CAGR through 2026, but it sounds like that's going to be more front-end impacted at this point as we think about 2023 numbers?

So I wouldn't say back-end, but the next year will be a little bit less than we had expected. The year after, we expect to be pretty impressive and then continuing from there.

Okay, great. Thanks.

Thank you. And our next question comes from the line of Michael Griffin with Citi.

Hey, thanks. Maybe touching back on tenant retention. Todd, I know you expanded on them a little bit, but it seems like your expectation is for it to continue to be elevated relative to historical averages. Maybe another way of saying this, are you noticing that tenants are stickier now than they used to be?

Well, I think our tenant base has always been sticky, and we are just experiencing a series of renewals now that are with that type of tenant, sticky tenants. So I don't know that it's a broad-based phenomenon that they're more sticky now than they used to be, but we're still projecting very high renewal rates with our tenants looking ahead through the end of this year and into next year and the year after.

And if I could add to that, it's substantially weighted to our Defense/IT assets with considerably less activity or exposure to Regional Office. And we've always had very strong retention in Defense/IT, and there's a significant component of full building U.S. government leases.

Thanks. That's helpful. Maybe shifting gears to touch on potential recessionary scenarios impacting your business. Steve, I know you laid out sort of a sensitivity analysis around occupancy. Is there any worry that the tenants you're tracking in this leasing pipeline could end up taking less space or maybe backing away from their space needs as macroeconomic conditions continue to change?

So the pipeline is heavily dominated by Defense/IT assets, at least to the extent of, call it, two-thirds in the vacancy leasing. And so I'm really not concerned about those needs getting smaller. I think Todd's comments that 41% of our volume in this quarter were expansions. And I can't reveal the transactions we were discussing as the call started, but we have some pretty fast-breaking requirements that would suggest expansion is still a strong element in our defense portfolio.

Got it. Well, that’s it from me. Thanks for the time.

Thank you. Your next question comes from the line of Steve Sakwa with Evercore ISI.

Thanks. Good afternoon. Steve, I was wondering if you could just provide a little bit more color on the development pipeline. You only need one or two deals to get you over the finish line. I'm just curious if those are kind of in your core Defense/IT markets like Huntsville and National Business Park? Or do they include some data center shells? And what is the outlook for data center shells given the power situation in Northern Virginia?

All right. So I'll take it in layers. Out of the 1.2 million square feet in the pipeline, a little more than half is Defense/IT represented by markets like Huntsville and the National Business Park. The slightly less than half that is data center shell is activity we contemplate on land we already own with power infrastructure, supplying adjacent campuses we've already developed. And so we're less subject to the timing of installing new electrical infrastructure to supply new sites. So we expect over the next 12 months to fulfill all three of those developments.

Great. And maybe Todd could just comment on some of the non-Defense/IT leasing activity. I'm thinking some of the vacancy that you've got in Downtown Baltimore that you've been trying to lease up at 100 Light. Just sort of what are the discussions like today? And has the pipeline sort of changed for that space in the last three to six months?

Well, the pipeline is constantly changing as our deal flow ebbs and flows over the course of a quarter. As you see in our deck, our number for 100 Light is down, but that's a snapshot in time at the end of this quarter. We had discussions with a number of tenants over the course of the quarter that ended up choosing lower cost space in the market and going elsewhere. Overall decision-making is extended. And the current prospects that we have for 100 Light and the 2100 L, for example, are ones that we've been engaged with for the better part of this year. We anticipate decisions in the coming months, but it's hard to say exactly when they will actually resolve their lease issues. So I think as we look ahead, there are tenants that will be coming into the market that would be prospects for those buildings. But our leasing progress is going to be slow and deliberate, and it's hard to time when we'll have some completed deals.

Great. That’s it from me. Thanks.

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

Great, thanks. Good afternoon. Just a follow-up on Steve's question on the Regional portfolio and leasing there. Can you just talk about how the slower leasing affects the decision and ultimate timing around dispositions out of that bucket?

Yes. So the bucket has several assets in it. And as we have said before, all of them are potential candidates for recycling. But we're going to recycle into opportunity in the market. Currently, there's so little debt available for a buyer of office. It's just not an opportune time to try to take any of them to market. And our decision will be based on maximizing shareholder value. So the assets that we decide to ultimately recycle and the timing will be driven by the occupancy and value position of those assets.

Okay. That's helpful. A similar question on the data center shells. You guys are looking to JV some of those in the fourth quarter. Can you talk about whether you've seen any change in pricing for those assets? And if so, where you think those cap rates might shake out?

So echoing what Steve said earlier, that's probably a better question for our next call. We're in the process of negotiating our transaction right now and we're not going to do that on our call.

Alright. Fair enough. Thanks guys.

Thank you. And our next question comes from the line of Tom Catherwood with BTIG.

Excellent. Thank you. And good afternoon, everyone. Maybe sticking with the sources and uses, obviously, following up on recycling capital into developments, how much cash flow can you shield and then use to fund developments?

Well, this year, in 2022, about 30% of our development needs are being funded by cash from operations after our dividend and building capital. That number increases through 2023. And our plan continues to assume that by 2024, the development equity is funded completely with cash from operations after our dividend. So we're still on track to achieve that sort of self-funding hurdle by 2024.

Anthony, let me just stick with that for a second. So when you say self-funding, would the thought be there, no more sales, you're taking on debt as more EBITDA rolls on to keep yourself leverage neutral and then it's just your free cash flow? Or is that just assuming the data center shells that you could continue to sell into the joint ventures, is that what you mean when you're saying self-funding?

No. We mean by self-funding that we have no transaction risk, meaning no sale requirements or venture requirements in order to fund $250 million to $300 million worth of development investment each year and with the EBITDA coming online from those development assets maintaining, if not incrementally reducing leverage through that period.

Got it. Thank you for clarifying that. And then, Todd, looping back on the Regional Office leasing, you get your commentary around 100 Light on some tenants either remaining in place or choosing lower cost space. When it comes to 2100 L, that activity rate there has come down over time. Are tenants pulling the requirements from the market? Are tenants taking space at other buildings? If it's other buildings, is it similar to 100 Light? Is it really cost driven? Or is it something else as people look elsewhere?

No. Our principal reduction this quarter was a tenant that chose to take the requirement in New York rather than go into the district. So no, it's not really losing tenants to lower-cost providers in the market.

Got it, got it. And Steve, kind of last one for me. Taking a broader look at your commentary around potential 2023 Defense spending increases, I assume that's not an even increase across the board. How are the Defense missions in your specific clusters connected to these funding increases? Are they getting more than their share of that funding increase? Or are they getting less than their share?

So with regard to next year, we can't honestly tell you. There's not enough clarity in the documents that are published. With regard to this year, fiscal year 2022, the operations and maintenance budget actually, which is where rent is paid from, increased 10% and got a higher proportionate amount of funding than the overall base Defense budget. But we don't have access to the forward-looking data until such time as it's appropriated and a green book is published that we can see how that shakes out.

Understood. That’s it from me. Thanks everyone.

And our next question comes from the line of Dave Rodgers with R.W. Baird.

Yes, good afternoon. Maybe Steve or Todd, I just wanted to ask about lease economics overall. It sounds like you're holding economics on your development projects, which I guess is expected and good. On a lot of the second-generation leasing, it looks like those economics continue to slide. I was just curious in terms of that being location, product type, lease term, anything more color that you could add on that would be helpful?

Sure. So when you look at our leasing stats, I think you're primarily looking at the mark-to-market or change in cash rent. Those can be somewhat misleading because of the length of term and the compound escalation of prior leases. At times, longer-term leases can look like a disproportionate drop in the like-for-like rent. But let me just throw out a fact. Year-to-date at the National Business Park, our renewals rental rates were at 96.5% or better than new development rent costs. So although there were two large leases that rolled down, they roll down to rents that we could drive a new development off of. So statistically, that's not the best metric for us. We've messaged that for a long time. Our embedded growth over the longer term might outpace the growth in the market, but we still have strong effective rents. There has been some pressure on tenant improvement costs; everything costs a little more. This quarter, in our new vacancy leasing, one of the large leases we did was 310 NBP. And that is, in essence, a development tenant improvement instead of a tenant improvement on a second generation. And so that kind of skewed our average a little bit to the high side. But I would suggest we believe we're getting rate increases, and we're maintaining the strength of the economics of our leases.

Thanks. I think you hit on it there with the concessions and some of that first-generation TI probably showing up in the stats. So I appreciate the color. Thanks.

Your next question comes from the line of Rich Anderson with SMBC.

Hey, thanks. Good afternoon. Anthony, on the refinancing activity, you kind of trade at elevated reduced refinancing risk for present elevated variable rate debt. I assume I have that right. And I'm curious as to if you're — I don't quite understand the trade — I mean, I understand it, but isn't it sort of like deck chair shuffling as it relates to variable rate debt? I mean, you don't know exactly where your variable rate debt exposure is going to be next year; it could go higher, it could go lower. But you're definitely going to get it now because your variable rate debt went up because of the deal you did. So can you just kind of talk me through the strategy there?

Sure. The variable rate debt didn't go up because of our transaction. If we did nothing with our line of credit and we just kept the existing line through its term through March of 2024, our variable rate still would have gone up by $200 million on December 1 because $200 million worth of LIBOR hedges expire that had been in place for almost seven years. So the transaction really was separate and apart from the variable rate debt exposure increasing. So that was something that was going to happen regardless of the transactions we executed.

Okay, thanks. I missed that. I'll get there. And then the second question, perhaps for Steve. I think it was a quarter or two where you kind of laid out the cadence of when the process of getting a contract and how long it takes to ultimately turn into a lease for you. I'm wondering if the very questionable and concerning environment that we're in today, if there could be more of a fast-track mentality on the part of the DoD to move things along given some of the threats that are coming out of Russia and so on. And if that could materially move the DoD budget process quicker to an actual lease for you guys, is that a stretch? Or is that a possibility?

Well, it's nothing that I could reliably say we expect to happen. The government is extraordinarily procedural. And this year with an election, we're going to have a continuing resolution at least until December. Depending on the outcome of the election, if the composition of the House and Senate changes materially, the new party that leads might want more time to increase that budget like they did in 2016 when that composition switched, and that would delay the process several months again. I'd love to see a more nimble DoD, but I just don't expect it to happen.

It's kind of like your house has gotten on fire, but you need approval to use a fire extinguisher. It doesn't make a whole lot of sense, but that's the world you're in. Anyway, good quarter and thanks for the time.

Thanks. Patience is our middle name.

Thank you. And our next question comes from the line of Bill Crow with Raymond James.

Thanks. Good afternoon, guys. Quick clarification, the 4% compound annual growth in FFO that you expect through 2026, is there any assumption that interest rates come back down? Is there any assumption about change in overall leverage levels? And anything built into your longer-term model that would reflect the resolution of the Baltimore CBD assets?

So I'll take them in sequence. Our comments on this call rely on a forward LIBOR and SOFR curve with a contingency added on. So it's very conservative from our viewpoint. In essence, we're projecting elevated interest rates with some capacity to increase further over the four years. With regard to the specifics of recycling, we run a variety of scenarios off of our base model, and there is capacity in those comments to accomplish Regional Office recycling or other sources of capital recycling and still hit that 4% threshold.

And Bill, the plan does not assume that we're running leverage up to generate those returns. Actually over that period of time, by the end of 2026, leverage is lower than where we start.

Perfect. That was it from me. Thank you.

And our next question comes from the line of Chris Lucas with Capital One.

Hey, good afternoon, everybody. Just a couple of quick ones. Anthony, on the burn off of the hedge. Any thoughts about adding additional hedging on the floating rate debt at some point? Or do you feel like it's not a worthy effort at this point?

We've looked at it and you really have to go pretty far out on the curve in order for that to give you any sort of short-term benefit and we've been rolling the dice on the longer end of those swaps. We've done them in the past. We've never been a net receiver of cash over those terms. The banks have always prevailed. So I think we're comfortable with that sort of mid-teen kind of level of variable rate debt over this period of time.

Okay. And then I guess, Steve, just a bigger picture question, the hyperscalers reported this week showed decelerating growth in their cloud businesses. What are your conversations like with your clients in terms of their demand? Any change to their outlook?

No. Their outlook continues to be very aggressive. They have need for more capacity that they're having a hard time fulfilling and there's a high sense of urgency.

Okay. And then the last question for me is more about education. As it relates to the Defense Department budget, where does the weaponry and other assistance to Ukraine fall in or out of that budget number?

Well, they can put it in a variety of different places. Under the current administration, that kind of funding in prior years would have gone into an overseas contingency operations account. Some of it has been folded back into the base budget for next year. It won't be in the operations and maintenance line necessarily. Where exactly they're going to put it, we'll have to wait and see.

Okay. Thank you. Appreciate it.

Thank you. And our next question comes from the line of Steve Sakwa with Evercore ISI.

Yes, thanks. Just one quick follow-up, Steve, on new development projects that you would start going forward, how much have you changed your development yields? I assume they've gone up. I'm just trying to get a sense for maybe how much.

Well, we've had a very strong development profit margin embedded in our development yields historically. Our cost of capital has clearly increased with cost of debt going up. So I would say, currently, we're targeting development yields maybe 50 to 75 basis points higher than we had been. But ultimately, the market will drive the rent and the market will drive the cost. The question is, do we see enough value in there to price at the market.

Okay. Thanks.

Thank you. Your next question comes from the line of Tom Catherwood with BTIG.

Thanks. Just a quick follow-up. Steve, you mentioned the vacancy leasing at 310 NBP. Does that resolve all the space there now?

Yes, it is 100% leased to the United States government for a very long time.

Excellent. Congratulations. That’s it.

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

So thank you all for joining our call today. We're in our offices so please coordinate through Michelle if you would like a follow-up call, and thank you very much.

Ladies and gentlemen, thank you for participating in today's Corporate Office Properties Trust Third Quarter 2022 Results Conference Call. This concludes the presentation, and you may now disconnect. Good day.