Earnings Call Transcript - CDP Q4 2021

Operator, Operator

Welcome to the Corporate Office Properties Trust Fourth Quarter and Year-End 2021 Results Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Stephanie Krewson-Kelly, COPT's Vice President of Investor Relations, Ms. Krewson-Kelly. Please go ahead.

Stephanie Krewson-Kelly, VP, Investor Relations

Thank you, Jonathan. And good afternoon and welcome to COPT's conference call to discuss fourth quarter and year-end 2021 results and guidance for 2022. With me today are Stephen Budorick, President and CEO; Todd Hartman, Executive Vice President and COO; and Anthony Mifsud, EVP 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 at length 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 Budorick, President & CEO

Good afternoon, and thank you for joining us. We finished 2021 with strength and outperformed in all aspects of our business, including leasing. The full-year FFO per share, as adjusted for comparability, was $2.29, up 8% over 2020, and stronger than our original guidance. Favorable leasing and operating activity in the portfolio drove solid gains in NOI and contributed about $0.03 of upside to 2021 results. The gains are widespread, with favorable results in renewal activity, R&M project costs, utility savings, and NOI from DC6. Despite challenges in the supply chain environment, we completed and delivered 766,000 square feet of developments with three projects completed earlier than planned. The 562,000 square feet of early commencements contributed roughly $0.02 to 2021 performance. We executed about 1.2 million square feet of development leasing during the year, outperforming our objective by 18%. Our 2021 activity included three major defense contractor developments, one data center, and our second fully leased office property for the U.S. government in the secured campus of Redstone Gateway. We had expected this government lease opportunity to occur in 2022, and we were favorably surprised by the early lease action last year. We outperformed in the debt capital markets as well. We saw the opportunity to lock in low interest rates and extend our debt maturity ladder by issuing $1.4 billion of new senior unsecured notes to retire higher-rate shorter-term debt. This highly successful debt finance activity contributed about $0.04 to our performance, and more importantly, protects the company from the risk of rising interest rates for years to come. We raised equity capital by completing the sale of DC6 last month, generating $222.5 million to further balance our leverage and support our development activity. Recycling DC6 has been a high priority for the company for several years, and we recognized that the capital market demand for data centers during 2021 created a long-awaited opportunity to sell the asset with a full and fair valuation. We were successful in identifying several bidders that possess data center operating capabilities and the capital to purchase a multi-tenant facility. This sale simplifies our capital allocation and increases the lease stability in our operating portfolio. We had expected the transaction to close during 2021, and the delay in closing added about $0.05 to 2021 out-performance. Turning our outlook to defense spending, which is summarized on Slide 5, Congress authorized the DoD's fiscal 2022 base budget at $665 billion, representing a 5.8% increase over the fiscal 2021 budget. The expected increase is significantly higher than last year's 0.8% increase, and we expect continued strength in defense leasing demand. Fiscal year 2022 began under a continuing resolution that we expect will be in effect until mid-March. Recall that these have become a normal occurrence, as the DoD has started its fiscal year operating under a continuing resolution for 13 of the past 15 years. We do not expect this continuing resolution to have a material impact on our business. Turning to 2022 guidance, we set our FFO range midpoint at $2.34, implying 2.2% growth over 2021's elevated results. The guidance absorbs two percentage points of dilution from the sale of DC6, as well as dilution from the Boeing and Transamerica non-renewals. Adjusted only for the dilution from the sale of DC6, 2022 pro forma growth would be 4.2% at the midpoint of guidance. As Slide 4 illustrates, our FFO per share, as adjusted for comparability, has compounded at 4.4% annually since 2018 when we finished our programmatic asset sales under our strategic reallocation plan. Our 2022 FFO guidance midpoint suggests that the compound growth will remain at roughly 4%, notwithstanding the dilution from the sale of DC6. We have 1.7 million square feet of active developments that are 96% leased today. As we place them into service, we expect these projects to fuel strong growth in 2023, further extending our compound growth achievement. Our guidance for development leasing in 2022 is 700,000 square feet. Recall that our 2021 success pulled forward 205,000 square feet of expected 2022 development leasing, and several data center development leases access critical power at those sites. As Slide 11 of our presentation shows, we've averaged about a million square feet of development leasing annually since 2012. During the past three years, we've achieved 4.4 million square feet of development leases, averaging just under 1.5 million square feet a year. Our current development leasing pipeline contains 1.8 million square feet of opportunities supporting our optimism that 2023 development leasing activity will return close to our long-term average. With that, I'll hand the call over to Todd.

Todd Hartman, EVP & COO

Thank you, Steve. We achieved strong leasing results in all categories last year and expect 2022 to be another strong year. Total leasing volume in 2021 was 3.9 million square feet, including 2.1 million square feet of renewals. Lease economics were in line with guidance and included a low-teens roll down in rent for CareFirst and Canton Crossing in our regional office portfolio. CareFirst is a high-credit healthcare tenant that leases nearly half the space in our Canton Crossing asset, and in December renewed 214,000 square feet for a new 15-year term. Their renewal represented 30% of the quarter's renewal volume and 10% of the year's volume, and consequently heavily influenced our metrics. To illustrate the impact of the CareFirst renewal, we completed 93 renewal transactions in 2021 and cash rents on renewals rolled down 5.8% in the quarter and 2.2% for the year. If we exclude the effect of the CareFirst transaction, cash rents rolled down 1.5% in the quarter and only 0.6% for the year. Vacancy leasing during the year was also strong, and the 196,000 square feet we completed in the quarter brought our full-year vacancy leasing volume to 616,000 square feet, exceeding our five-year average volume by 14% and 2020's volume by nearly 50%. In the second half of 2021, we completed 412,000 square feet of vacancy leasing, and our leasing activity ratio currently is a healthy 94%. We've entered 2022 with good momentum and prospects to retenant the largest vacancies in our operating portfolio. In Huntsville we are tracking over 300,000 square feet of demand to backfill the 121,000 square foot vacancy at 1200 Redstone Gateway, which was given back at the end of 2021. With demand far exceeding the available space, we expect to kick off another spec building this year to capture the excess demand. In Baltimore we are working with over 80,000 square feet of prospects to backfill the Transamerica space at 100 Light Street. Development leasing exceeded our 2021 objective. We executed 1.2 million square feet during the year, including a 183,000 square foot build-to-suit at the National Business Park for a Fortune 100 company supporting operational activities; a new campus for KBR at Redstone Gateway comprised of a 172,000 square foot office property and half of a 46,000 square foot R&D facility; a new campus for Northrop Grumman at Redstone Gateway comprised of two build-to-suit office properties with advanced infrastructure totaling 263,000 square feet; a 265,000 square foot data center shell build-to-suit in Loudoun County, Virginia, for our cloud computing customer; and our second development for the U.S. government in the secured campus of Redstone Gateway, a 205,000 square foot office property. When completed, we will increase the secured campus operational square footage to roughly 450,000 square feet. These development projects will fuel future FFO growth as we complete construction and place them in service. Our 1.8 million square feet development leasing pipeline supports our goal of executing 700,000 square feet in 2022. Within this goal, we expect about two-thirds of the volume to be office and R&D space for defense contractors, primarily at Redstone Gateway and the National Business Park, and the remaining one-third to be a data center shell build-to-suit with our cloud computing customer. In terms of placing developments into service, our 2022 guidance assumes we place over 800,000 square feet of fully leased developments into service. These new completions, combined with the 766,000 square feet placed into service during 2021, should contribute between $15 million and $17 million of cash NOI to 2022 results. At the $16 million midpoint, 100% of this development cash NOI is contractual. With that, I'll turn the call over to Anthony.

Anthony Mifsud, EVP & CFO

Thanks, Todd. Fourth-quarter and full-year FFO per share, as adjusted for comparability, of $0.58 and $2.29, respectively, exceeded the high end of guidance, driven by the DC6 sale closing later than planned and another strong operating quarter. Same-property results were in line with previously elevated guidance. Same-property occupancy ended the year at 91.3% and reflects the Boeing non-renewal at 1200 Redstone Gateway. Cash NOI grew 1.2% during the year, driven by favorable renewal leasing outcomes and further advancement of operating efficiencies. We were very active in the senior debt markets last year, refinancing existing debt with new issuances in March, August, and November. During 2021, we issued $1.4 billion of new senior notes with an average interest rate of 2.6% and used those proceeds to redeem $900 million of senior notes that had an average interest rate of 4.5%, as well as other debt. The debt we refinanced in 2021 had an average maturity of 2.5 years, and the new notes we issued have an average maturity of 9.9 years. Moreover, since September of 2020, we have issued $1.8 billion of senior notes with an average term of 8.9 years and used the proceeds to retire debt carrying an average term of just 2.1 years. With respect to 2022 guidance, we are establishing a range for FFO per share of $2.30 to $2.38, which at the $2.34 midpoint implies 2.2% growth over 2021's strong results. Our guidance detail is available in the press release and on Slides 14 and 15 in the deck we issued last night. I'll touch on a few highlights now. We expect same-property occupancy to change during the year and for same-property cash NOI to be flat to down 2%. Our same-property guidance reflects the Boeing non-renewal at Redstone Gateway that occurred on the last day of last year, the Transamerica non-renewal at 100 Light Street in Baltimore that occurred on the first day of this year, the 45,000 square foot contraction from CareFirst on October 1, 2022, and their new cash rent that went into effect on December 1, 2021. The 2022 same-property pool started the year at 92.6% occupied. The impact of the 1.7% occupancy decline related to the three vacancies just discussed will be offset by occupancy gains elsewhere in the portfolio and we project to end the year between 91% and 93%. We expect to invest $275 million to $300 million into our existing 1.7 million square feet of active development projects and new starts. Development investment will be funded with free cash flow from operations, the proceeds from the sale of DC6, and by executing another asset sale or joint venture to manage our leverage later in the year. Lastly, for the first quarter, the $0.56 midpoint of our guidance range is $0.02 lower than our fourth quarter 2021 results. The decrease reflects $0.01 of higher weather-related expenses that we typically see in the first quarter and $0.01 of dilution related to the sale of DC6. And now, I'll turn the call back to Steve.

Stephen Budorick, President & CEO

Thanks. 2021 is in the books. We delivered our third consecutive year of growth that is compounding around 4% a year. We're projecting 2.2% growth for 2022, even while recycling DC6 and absorbing the dilution from the Boeing and Transamerica vacancies. Finally, our strategy of investing in priority defense mission locations and creating value through new, low-risk development will continue to generate FFO growth regardless of broader economic trends. A 1.7 million square foot pipeline of active developments that are 96% leased will have significant influence on 2023 growth, which we expect to be in the 4% to 6% range. The outlook for DoD funding is stable and strengthening, and we look forward to another strong leasing year that will further our growth. With that, Operator, please open up the call for questions.

Operator, Operator

Thank you, Mr. Budorick. Ladies and gentlemen, our first question comes from the line of Manny Korchman from Citi. Your question, please.

Manny Korchman, Analyst (Citi)

Hey, everyone. Thanks. Steve or maybe Anthony, in terms of what's left to sell in the portfolio you mentioned JVs and sales. I've seen the JVs are the data center shells, and what would the sales at this point or what could the sales at this point include?

Stephen Budorick, President & CEO

Well, we've discussed for about six months that sometime between now and 2024–2025 we'd start to look for the right opportunity to begin selling some of the regional office assets in Baltimore and Northern Virginia. If we were to hit an opportunity where that was a favorable move for shareholders, we would consider doing that.

Anthony Mifsud, EVP & CFO

And you're correct, Manny. An alternative would be to joint venture the two data center shells that we had planned to joint venture and initially planned to joint venture in the third or fourth quarter of last year, but we replaced that transaction with the sale of DC6.

Manny Korchman, Analyst (Citi)

And Steve on the regional office portfolio as you've been exploring that for some time, how has buyer interest and valuation there changed?

Stephen Budorick, President & CEO

Buyer interest in office property right now in this region has softened. A couple of years ago there was pretty strong interest and attractive cap rates. Coming out of the pandemic, we think it's going to take at least another 12 months to normalize that capital market segment.

Manny Korchman, Analyst (Citi)

Got it. And then on development value creation, are you seeing any pressure on yields from increasing costs?

Stephen Budorick, President & CEO

We've certainly had increasing costs, as much as 10% to 15% over a year, and that puts pressure on us to achieve rents that will support the development. We have been able to hit our yield targets through 2021 and expect to do so in 2022, but we have to achieve the rents to get it.

Manny Korchman, Analyst (Citi)

Great, thanks all.

Operator, Operator

Thank you. Our next question comes from the line of Rich Anderson. Your question, please.

Rich Anderson, Analyst

Steve, I don't know if this was ever mentioned along the lines, but what was the reasoning for the Boeing vacancy in that perspective?

Stephen Budorick, President & CEO

They did not win a recompete of a major segment, an enormously important contract that's issued out of Redstone Arsenal, and they contracted and adjusted their footprint for that.

Rich Anderson, Analyst

Okay. So when you think generally about when things like that happen, is it mostly what you just described or are there other reasons, or is it often times they need more space that you can't provide them? What's the general cadence of why you lose people? Is it mostly the former or the latter?

Stephen Budorick, President & CEO

It's rarely the latter. Often it is the former. Over time, M&A has a pretty significant impact in the defense industry. Larger contractors often shed administrative space or reconfigure footprints, but they typically want to keep their presence in the secured mission part of the suite. We've also seen when a contractor wins a new large contract they often sign a lease in our locations for new efficient, well-located facilities to complete the contracts, and those tend to be long-term. So we don't see a wave of more of that right now.

Rich Anderson, Analyst

Okay. When you think about what happened with Boeing, do you have a longer watch list that maybe extends a few years out that are on your radar? I assume you're doing that, but is there anything you can add color to at this point?

Stephen Budorick, President & CEO

There's nothing that we've seen that we'd be concerned about. All the new development we've achieved over the last three years in each case was tied to enormous new contracts, which were compelling reasons for those contractors to get new, efficient, very well-located facilities to complete the contracts, and those leases tend to be very long term.

Rich Anderson, Analyst

Okay. Last question for me: you mentioned regional office sales between now and 2024. Obviously it depends on a bunch of things, but what is the timeline right now to getting regional office to the point where it's fully leased and you've checked off that box? Is that this year event or is that a next-year event?

Stephen Budorick, President & CEO

There are four large assets in regional office and each has its own set of opportunities or challenges. For instance, 100 Light Street: we just got 140–150,000 square feet back from Transamerica. It's fantastic space and really attractive to smaller tenants in the market. We definitely want to re-stabilize that asset before we even consider selling it. Like we did with DC6, we will be disciplined and patient to create the value our shareholders deserve before moving to a sale.

Rich Anderson, Analyst

Is it more likely the regional assets would be sold all at once or in pieces?

Stephen Budorick, President & CEO

I think it's likely to be in pieces, particularly appealing to investors focused on the Baltimore segment.

Rich Anderson, Analyst

Okay. Thanks.

Operator, Operator

Thank you. Our next question comes from the line of Steve Sakwa from Evercore ISI. Your question, please.

Steve Sakwa, Analyst (Evercore ISI)

Yes. Thanks. Good afternoon. Steve or Todd, I was just wondering if you could spend a little more time speaking about the leasing trends, in particular on some of the larger vacancies. You had good success last year, and I'm curious what the discussions are like and if that's an area that possibly could surprise to the upside again in '22?

Stephen Budorick, President & CEO

I'll let Todd handle that one.

Todd Hartman, EVP & COO

Sure. As I mentioned, we have good activity on the large vacancy down in Huntsville. It's hard to put an exact timeline on when that activity would close, and whether or not it would be an upside for this year. But we do have very good activity and I would expect the lease to get signed before the first half of the year is done and potentially provide some upside, though it's hard to quantify. In terms of 100 Light Street, we have about 80,000 square feet of prospects there. That's just going to take some time, as the Baltimore market has seen low leasing velocity and velocity has not returned to its historical average. So we will continue to work it, but I wouldn't anticipate any upside from 100 Light this year.

Steve Sakwa, Analyst (Evercore ISI)

And I guess, Steve, maybe on the development plan: you talked about some things shifting out of '22 into '21 and vice versa, but it sounds like you've got a large pipeline today at 1.8 million square feet. I'm just trying to gauge the 700,000 square feet likelihood — could some more of that come in? I realize that might not have as much earnings impact this year, but what are the prospects for that 700 drifting higher?

Stephen Budorick, President & CEO

For it to get bigger, we have three projects planned on land we own, and we await critical power delivery from utilities in Northern Virginia. The current information we have is that power will not be available this year, and that is a threshold to make a build-to-suit commitment with a tenant. If that power were to come earlier, hypothetically, we could beat 700. We were planning to build two buildings at Redstone Gateway this year but, but for the Boeing non-renewal, we would be building two buildings. We are being disciplined — we want to backfill 1200 Redstone Gateway before we start our next development, and that costs us 120,000 square feet that would otherwise have been development.

Steve Sakwa, Analyst (Evercore ISI)

Got it. And just last question: 2100 L Street was another non-core asset. Remind us on the leasing status there, and is there a chance the D.C. market starts to pick up a little more steam and could that be on the sale block this year or is that more likely in 2023?

Stephen Budorick, President & CEO

As soon as we get leases to stabilize, it will be on our sale block and we'll investigate the best way to monetize it. With regard to timing, I'll let Todd answer that.

Todd Hartman, EVP & COO

I would not characterize the D.C. market as having returned to normal. It's still affected by the pandemic and the negative absorption that's occurred over the past few years. With that said, we're still tracking more prospects than we have space in the building and we continue to work those prospects. Everybody is taking their time making decisions so it's hard to place a firm timeline on lease resolution there.

Stephen Budorick, President & CEO

Just a bit of color: we're 30 miles outside of D.C. When I talk to business colleagues in the district, it's like we're in two different worlds. They still have stricter protocols. The economies in and around Baltimore have been back to normal for quite a long time.

Steve Sakwa, Analyst (Evercore ISI)

I can appreciate that. We've seen in other markets a flight to quality, where new buildings are leasing up and older stock is struggling. Given your new product, I would have thought you might capture market share even if the market's not great.

Stephen Budorick, President & CEO

Yeah, when velocity comes back, we expect to do well. Transaction velocity really dropped off during the pandemic.

Operator, Operator

Thank you. Our next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your question, please.

Craig Mailman, Analyst (KeyBanc)

Hey, guys. Steve, I just want to clarify: did I hear you correctly that DC6 is just 2% dilutive this year versus the talk previously about being 4% dilutive?

Stephen Budorick, President & CEO

Well, the 2% is net of an alternative recycle. It's two percentage points.

Craig Mailman, Analyst (KeyBanc)

That’s helpful. Thanks for the clarification. And then just, I know in the supplemental regional offices are 2 million square feet across eight assets. You mentioned 100 Light Street and Canton Crossing and 2100 L. What are the other big chunks of that regional office portfolio? And would anything like Columbia Gateway ever be up for sale?

Stephen Budorick, President & CEO

Not in the near term. The other components include two buildings in Northern Virginia; one of those has become increasingly occupied by defense and cyber contractors and we have considered recycling that asset, because it fits a defense investor profile. We also have Wells Fargo in clinical towers in Tysons which would be an asset we'd consider recycling. With regard to Columbia Gateway, while suburban, it's within the competitive operating radius of Fort Meade and our business in that park is defense-focused.

Craig Mailman, Analyst (KeyBanc)

All right, great. That's all for me. Thanks, guys.

Operator, Operator

Thank you. Our next question comes from the line of Jamie Feldman from Bank of America. Your question, please.

Jamie Feldman, Analyst (Bank of America)

Great. Thank you. I guess just thinking about the development pipeline, it sounds like you could be more aggressive, but you want to get Redstone leased up. Do you think at this time next year your development pipeline is larger or smaller than it stands today?

Stephen Budorick, President & CEO

I would guess it to be about the same. We've been in the 1.5 to 2.5 million square foot range for years. Our guidance suggests we're pulling 700,000 this year based on what's currently classified in the pipeline, which leaves over a million square feet. We also have almost 1.4 million square feet of development discussions that we have not yet classified as at least 50% likely to win within two years, so I'm confident we'll be in the same range a year from now.

Jamie Feldman, Analyst (Bank of America)

Okay. And then on development costs you said costs are up 10% to 15% — are you saying you can push rents to keep your yields?

Stephen Budorick, President & CEO

Yes, we have. Throughout 2021 and with the activities we're working on now, which should be signed before our next call, we will be able to demonstrate that we have been able to achieve the rents required to meet yield targets.

Jamie Feldman, Analyst (Bank of America)

So what are you targeting for yield?

Stephen Budorick, President & CEO

Target yield on a defense contractor building is an 8% cash yield on a typical 7- to 10-year lease.

Jamie Feldman, Analyst (Bank of America)

Okay, great. And then you had given an outlook for 4% to 6% FFO growth in '23. What does that assume for any of these asset sales or what's the key building blocks to get to that range?

Anthony Mifsud, EVP & CFO

Key building blocks are same-property cash NOI growth that we expect, the continued benefit of developments placed in service — projects that are partially placed in service this year will be fully placed in service next year — and projects that will place into service in 2023. On the capital markets side, we do not want to specify particular transactions, but there is equity capital embedded in the plan to maintain or slightly improve leverage ratios, and we believe the cost of that capital will be accretive to growth.

Jamie Feldman, Analyst (Bank of America)

Okay. And you didn't talk about demand for the CareFirst space they're giving back. Is there any interest in that or do you think that will take a while?

Stephen Budorick, President & CEO

We think that will lease up fairly quickly. The building only has about 111,000 square feet available when that space is returned. We don't get the space until the end of September, so give it six months, but we will be actively working prospects.

Jamie Feldman, Analyst (Bank of America)

And last, any thoughts on the latest from the GSA in terms of plans to reduce space and how you think that might impact your portfolio or your markets overall?

Stephen Budorick, President & CEO

We don't have much exposure to GSA leasing — less than 100,000 square feet company-wide, and 45,000 of that is the court system in downtown Baltimore where our building is located next to the courthouse. The bulk of GSA contraction would affect B-class or older A downtown D.C. assets, a market we're not really exposed to. Our portfolio is primarily defense and contractor-focused.

Jamie Feldman, Analyst (Bank of America)

All right, great. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Tom Catherwood from BTIG. Your question, please.

Tom Catherwood, Analyst (BTIG)

Excellent. Thanks, everyone. Todd, the renewal guidance implies roughly 400,000 to just under 500,000 square feet of expected move-outs this year. What you talked about with CareFirst, 100 Light Street, a few others and the regional office portfolio — it seems like roughly half of that is regional office. That would imply this is a pretty light year on move-outs in the defense IT portfolio. To say another way, it seems like you're going to be well above average on renewals there. Is that a fair statement?

Anthony Mifsud, EVP & CFO

Yes, I would consider that a fair statement. We're tracking little move-out activity in the defense IT portfolio outside of the ones you've already identified in Transamerica and CareFirst.

Tom Catherwood, Analyst (BTIG)

Got it. And that ties into the next part: to get up to your midpoint same-store occupancy of 92%, by our math you'd be slightly below with vacancy leasing in the 550–600,000 square foot range where your pipeline is sitting. Is your pipeline on par with where it was to start last year or has it moderated somewhat, leading you to be more conservative on guidance?

Todd Hartman, EVP & COO

I would say our vacancy leasing is on par with last year at this point.

Anthony Mifsud, EVP & CFO

But in terms of how that impacts year-end same-office occupancy guidance, it's not linear. The 2021 same-office pool at year-end was 93.4% leased and 91.3% occupied. So it's really the timing of transactions: moves out in 2021 that will occupy in 2022 offset by the non-renewals you mentioned earlier, plus the benefit of any leases that get executed and commence in 2022. So it's not as linear as the simple math suggests.

Tom Catherwood, Analyst (BTIG)

Makes total sense. So said another way, it would be more timing of lease commencement rather than running slower than last year.

Anthony Mifsud, EVP & CFO

That's correct.

Tom Catherwood, Analyst (BTIG)

Got it. And last one: on page 10 you touched on expected cap rates for assets if they were sold. The one that stood out was sub-4% on U.S. government-leased secure facilities. Can you provide more color? Are those behind-the-fence assets in most locations? Has that compressed over the past year?

Stephen Budorick, President & CEO

We compressed that estimate based on market comps for high-value assets in other segments. For instance, datacenter shell sales last year had comps below 4%. If you're willing to buy a data center shell below 4%, you'd likely be willing to buy U.S. government assets that we have below 4%. There are also comps around the country for full-building leases to strong-credit tenants that are trading below 4%. So we think it's a fair statement.

Tom Catherwood, Analyst (BTIG)

Appreciate the color, Steve. That's it for me. Thanks, everyone.

Operator, Operator

Thank you. Our next question comes from the line of Dave Rodgers from Baird. Your question, please.

Dave Rodgers, Analyst (Baird)

Hey, Steve. Just wanted to follow up on that last point, page 10, sub-4% cap rates for datacenter shells. You're going to sell some more of those this year it sounds like. How do you think about selling more to get leverage down in line with high-quality secondary office peers versus waiting for bigger transactions like 2100 L and regional office sales? Why not move more of these assets now to address stock valuation and leverage issues?

Stephen Budorick, President & CEO

Dave, we've been establishing the company so it can grow and recycle capital to fuel development. If we 'rip the Band-Aid off' we'd also reduce earnings and that's not how we want to run the company. Moreover, many of those assets are long-term, high-quality investments for shareholders. To the extent future opportunities allow us to sell selectively while maintaining value, we'd consider that, but it's not in our base plan to broadly liquidate those assets now.

Anthony Mifsud, EVP & CFO

And Dave, with respect to the balance sheet and leverage, each of the debt transactions we've executed over the past 18 months have priced equal to or better than triple-B and B-plus pricing, and fixed-income investors recognize the strength and stability of the company's cash flows. You also see our continued increase in interest and fixed-charge coverage because of the stability of cash flows. So if we were to reduce leverage incrementally, we don't think there would be a meaningful incremental interest-rate benefit for shareholders.

Dave Rodgers, Analyst (Baird)

Yeah, I agree with that. From the equity side I think there could be a meaningful change but we can take that offline. I appreciate the answers and the added color. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Chris Lucas from Capital One Securities. Your question, please.

Chris Lucas, Analyst (Capital One Securities)

Hey. Good afternoon, everybody. Anthony, just a quick one: does the sale of DC6 provide all of the equity you need to meet your development spend for 2022?

Anthony Mifsud, EVP & CFO

It doesn't meet all of it. Based on what we're expecting to spend, our plan includes the assumption that we either sell an asset or joint-venture a datacenter shell to generate incremental capital. The proceeds from DC6 fund a portion, combined with free cash flow throughout the year, but our plan assumes one more sale or joint venture to fully fund the year.

Chris Lucas, Analyst (Capital One Securities)

So what's the delta in terms of the equity gap?

Anthony Mifsud, EVP & CFO

About $75 million.

Chris Lucas, Analyst (Capital One Securities)

Okay. Great. Thank you.

Operator, Operator

Thank you. This concludes the question-and-answer session of today's program. I'd like to hand the program back to Mr. Budorick for any further remarks.

Stephen Budorick, President & CEO

Thank you all for joining the call today. It was really a great call. We're in our offices, so please coordinate through Stephanie if you'd like follow-ups.

Operator, Operator

Thank you for your participation today for the Corporate Office Properties Trust fourth quarter and year-end 2021 results conference call. This concludes the program. You may now disconnect. Good day.