Earnings Call Transcript - CDP Q4 2022

Operator, Operator

Welcome to the Corporate Office Properties Trust Fourth Quarter and Full-Year 2022 Results Conference Call. As a reminder, today's call is being recorded. At this time, I'll turn the call over to Venkat Kommineni, COPT's Vice President of Investor Relations. Ms. Kommineni, please go ahead.

Venkat Kommineni, Vice President, Investor Relations

Thank you. Good afternoon, and welcome to COPT's conference call to discuss fourth quarter and full-year results and 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 these forward-looking statements, and the company does not undertake a duty to update them. Steve?

Steve Budorick, President and CEO

Good afternoon, and thank you for joining us. Upon conclusion of our strategic reallocation program in 2018, which deeply concentrated our portfolio in defense and IT locations, we entered into what we describe as a new era of growth. Since 2019, we've placed over 5 million square feet of nearly fully leased development projects in service, creating the foundation for long-term growth. During this period, we raised over $1 billion in capital, mainly from our data center shell portfolio and reinvested into other highly accretive low-risk development projects. These activities, coupled with strong leasing in our operating portfolio and strategic debt refinancings, delivered 4% compound annual FFO growth from 2018 through 2022. Today, nearly three years after the onset of the COVID-19 pandemic, we feel the strength of our strategy has been fully ratified — delivering reliable growth through the pandemic era with visible growth for the next four years and progressing to a new era of internally funded development. Now, let's discuss our 2022 results. FFO per share as adjusted for comparability of $2.36 grew 3% over 2021's exceptional results and is $0.02 higher than the midpoint of our original guidance. We completed 801,000 square feet of vacancy leasing, which is the highest annual level in 12 years and 30% higher than 2021. Demand was broad-based across our Defense/IT locations, with particular success in the Fort Meade BW Corridor and Huntsville. The National Business Park and Redstone Gateway are both 98% leased, which represents a 300 basis point and a 600 basis point year-over-year increase, respectively. Our core portfolio is now 95.3% leased, the highest level we've achieved since 2006. Defense tenants continue to commit to and renew at our locations, executing their mission activities in office space. This leasing success stands in sharp contrast to the weakness in the broader office environment, which has been negatively impacted by current economic conditions and by space contractions stemming primarily from work-from-home. We achieved 476,000 square feet of development leasing. We had expected to sign a 225,000 square foot lease for a data center shell in summer, but the tenant's approval process dragged on, and the execution slipped a few weeks. We executed this lease in January, which represented the remainder of our 700,000 square foot target for 2022. So far in 2023, we're off to a great start on development leasing. As noted in our press release, we signed another 193,000 square foot build-to-suit with our cloud computing customer and a 46,000 square foot build-to-suit for a new headquarters building for a defense contractor in Huntsville. Including the delayed lease from 2022, development leases executed year-to-date total over 460,000 square feet. And with these leases, we now have 1.5 million square feet of active developments that are 89% leased. We placed into service 1.3 million square feet of development projects, which are 99% leased, over 900,000 square feet of which was delivered in the fourth quarter. Our 2022 deliveries included one build-to-suit with a defense contractor at the National Business Park, five projects at Redstone Gateway leased to defense contractors, including the new Northrop Grumman campus, and two data center shells in Northern Virginia. In mid-December and in the second week of January, we closed on two new 90/10 joint ventures with Blackstone on five single-tenant data center shells, raising $250 million of proceeds. We are very pleased with the valuations of these transactions, and the $190 million of proceeds from the January tranche fully funds the external equity component of our expected 2023 development investment. We now expect to fund future equity required for investment in our development pipeline from cash flow from operations without the need for further dispositions. Importantly, we can accomplish this self-funding while maintaining our strong balance sheet and conservative leverage metrics. Any future dispositions will be strategic sales with the goals of harvesting shareholder value and more deeply concentrating our portfolio in our Defense/IT locations. Turning to defense spending: the base defense budget for fiscal year 2023 was passed in December with a 7.5% year-over-year increase, which was 4.8% higher than the President's budget request. Recall, the fiscal year 2022 budget passed in March included a 5.8% increase followed by this 2023 budget passed in December, which added to 7.5%. In total, this is a $100 billion increase in defense spending, or 14.3% in the last 12 months. We expect demand from the 2023 budget will materialize starting in 2024 and drive leasing volume for both our operating and development portfolios. Moving on to guidance. We're establishing 2023 guidance for FFO per share as adjusted for comparability at a range of $2.34 to $2.42. At the midpoint, guidance implies 1% growth over 2022's results, which includes the dilutive impacts from the elevated interest rate environment and our capital recycling timing. Over the past three years, a period which encompasses the pandemic and a historic rise in interest rates, FFO per share as adjusted for comparability has compounded at 5.1% annually. Following 2023's modest growth, we continue to expect FFO per share as adjusted for comparability to grow at roughly 4% on a compounded basis between 2023 and 2026. With that, I'll hand the call over to Todd.

Todd Hartman, Executive Vice President and COO

Thank you, Steve. 2022 was a successful year for leasing, highlighted by our record vacancy and solid development achievements. We completed 801,000 square feet of vacancy leasing with a weighted average lease term of 7.3 years and contractual average annual rent escalations of 2.75%. This is the highest vacancy leasing achievement in 12 years, 30% higher than that of 2021, and 40% higher than our prior five-year average. In addition to the overall volume of leasing in 2022, our vacancy leasing strengthened our concentration in Defense/IT and was diversified among size requirements and locations. Our 68 leases for the year represent a 25% increase over 2021. Our largest lease was 121,000 square feet with Lockheed Martin at Redstone Gateway, and we also executed 53 leases under 10,000 square feet. We expanded our relationship with the U.S. government with 126,000 square feet of new leases, including 68,000 square feet for the last two floors at 310 NBP, which is now fully leased. Fifty percent of the leased square footage was to cyber tenants, further demonstrating the strength in that sector. Our core portfolio finished the year 95.3% leased. With limited inventory available, we are setting a target of 400,000 square feet of vacancy leasing in 2023. Demand remains strong with the current activity ratio of 78% and more than 70 active prospects, and we are confident we will reach our target. 2022 leasing activity also included 1.7 million square feet of renewals. We expected to execute 2 million square feet of renewals, but three large government leases totaling 316,000 square feet were delayed into the first quarter of 2023. We fully expect these leases will renew. Full-year retention was 72%, but that result includes a strategic relocation of a defense contractor for 58,000 square feet. Net of this relocation, the retention rate was 74%. Cash rents on renewals declined 2%. However, measuring the starting cash rent of the tenant's expiring lease to the starting cash rent of the new lease, the annual compound growth rate achieved in these maturing leases was 2.7%. Renewal leases signed in 2022 include 2.5% annual base rent increases on average, which translates into approximately 3.5% annual growth on net rent. For 2023, we expect cash rents to be flat with guidance ranging from down 1% to up 1%, and we expect tenant retention will be especially high at 75% to 85%. This retention expectation highlights the value of these locations to our tenants and our strategy of concentrating assets proximate to Defense/IT locations. Our 2023 same-property pool started the year at 92% occupied, and we expect to end the year between 93% and 94%. The primary components of activity within the same-property portfolio include contractions in our regional office portfolio totaling 75,000 square feet, including a 50,000 square foot contraction by CareFirst at Canton Crossing, which will occur in the first half of 2023 and was part of the long-term renewal executed in November 2021. These contractions are more than offset by the commencement of leasing executed during 2022, including the 121,000 square foot lease with Lockheed Martin at 1200 Redstone Gateway and over 160,000 square feet commencing at the National Business Park, which includes the 126,000 square feet of new space with the U.S. government. With respect to development leasing, the midpoint of our 2023 target is 700,000 square feet. We have executed 464,000 square feet to date, including two data center shells and a 46,000 square foot build-to-suit in Redstone Gateway for a new headquarters building for Davidson Technologies, a rapidly growing defense contractor. During 2022, we placed 1.3 million square feet of development projects into service, which are 99% leased. We expect these deliveries, along with the nearly 850,000 square feet we expect to place into service during 2023, to contribute $12 million of cash NOI this year, of which 99% is contractual. The 2022 and 2023 deliveries, when combined with contributions from the remaining development pipeline currently under construction, will contribute annualized cash NOI totaling $66 million, 94% of which is contractual. With that, I'll turn the call over to Anthony.

Anthony Mifsud, Executive Vice President and CFO

Thank you, Todd. Fourth quarter FFO per share as adjusted for comparability of $0.60 was at the midpoint of guidance and the full-year result of $2.36 was $0.02 higher than the midpoint of our original guidance. The same-property portfolio ended the year at 92.4% leased, and same-property cash NOI declined 90 basis points. Within this result, cash NOI from the Defense/IT portfolio increased 1.3%, offset by a decline in the regional office portfolio, driven by the large move-out of Transamerica at 100 Light Street and the rent reset on the 15-year renewal of CareFirst at Canton Crossing. In January, we announced two new 90/10 joint ventures with affiliates of Blackstone on five data center shells raising $250 million of equity proceeds. The transactions closed in two tranches, one in mid-December for $60 million and another in early January for $190 million. The transactions were valued at a mid-5% cap rate on forward cash NOI and a GAAP cap rate just below 6.25%. Given the market environment, we found this to be very strong pricing. The achieved cap rate was about 150 basis points over the 10-year treasury, the tightest spread to treasuries of any of the venture deals we have executed. Given the strength of pricing achieved and uncertainty in the capital markets environment, we accelerated the $190 million transaction from the fourth quarter to the first quarter. Although this change in timing reduces 2023 FFO per share by $0.01, we felt it was prudent to take any capital and pricing risk off the table related to development funding. Separately, our partner placed secured debt on two previously formed joint ventures. The weighted average spread on these loans is almost 200 basis points higher than our line of credit, and our share of interest expense on these loans also reduces 2023 FFO by about $0.01 a share. We expect this financing will be a short-term measure since the loans only have a two-year term. At year-end 2022, our floating rate debt exposure increased to 15% from 7.5% at the end of the third quarter as $200 million of hedges, which fixed LIBOR at 1.9%, expired on December 1. In mid-January, we entered into $200 million of new interest rate swaps, which fixed SOFR at 3.7% for three years, hedging a portion of our variable rate exposure. With this transaction, we expect our floating rate debt exposure will remain below 10% during 2023. With respect to guidance, we are establishing 2023 FFO per share at a range of $2.34 to $2.42, implying 1% growth over 2022's results. At the midpoint, this guidance takes into account positive contributions, which include $0.08 from same-property cash NOI growth of 3% and $0.10 from developments placed into service. These contributions are partially offset by $0.10 from higher interest expense based on the increased SOFR curve; a decline in capitalized interest resulting from the large volume of projects being placed into service, and the incremental interest from the venture financing; and a total of $0.06 from an increase in total G&A expenses from backfilling several open positions, market increases in wages and a reduction in capitalized labor; lower development fees, which accounts for $0.02 of this reduction as significant construction work on behalf of a tenant was completed in 2022; and accelerating the timing of the $190 million joint venture transaction. Our capital plan for 2023 is very straightforward. We expect to invest $250 million to $275 million to complete our existing 1.5 million square feet of active development projects and commence new starts. Development investment will be funded with the proceeds from the completed venture, cash flow from operations and our revolving credit facility. Lastly, for the first quarter, the $0.57 midpoint of our guidance range is $0.03 lower than our fourth quarter 2022 results. The decrease results primarily from the impact of higher net seasonal operating expenses, which we typically experience in the first quarter. With that, I'll hand the call back to Steve.

Steve Budorick, President and CEO

Thank you. Summarizing our key messages. We completed the highest level of vacancy leasing in 12 years during 2022. We're off to a terrific start to development leasing in 2023, having executed over 460,000 square feet thus far. Our 1.5 million square foot active developments are 89% leased, providing a strong foundation for continued FFO growth. We've raised the necessary capital to fully fund the equity component of our development needs in 2023. And going forward, we anticipate self-funding our equity requirements for development investments. The outlook for defense spending remains strong as the defense budget has increased roughly $100 billion over the last 12 months. We delivered our fourth consecutive year of FFO per share growth that has compounded at 4% per year since 2018. In 2023, we're projecting modest FFO per share growth, and we continue to expect compound annual FFO per share growth of roughly 4% from 2023 to 2026. With that, operator, please open the call for questions.

Operator, Operator

Thank you, Mr. Budorick. Operator instructions: to ask a question, please press star then one. Our first question comes from the line of Jason Belcher of Wells Fargo. Please proceed.

Jason Belcher, Analyst, Wells Fargo

Thank you. Hoping you could give us an update on what you're seeing in terms of construction cost trends and also if you could just touch on how we should be thinking about development yields near- to midterm?

Todd Hartman, Executive Vice President and COO

Sure. In terms of construction cost trends, we actually have a very real-time example with the build-to-suit that we just talked about with Davidson Technologies — an identical building to another building that we built on the site immediately adjacent to it. Those buildings started almost exactly two years apart. The delta in cost is 16.4%, but our rent has increased commensurately to maintain our yield on those buildings. We're seeing, from a materials cost basis, that costs are obviously still elevated, but the increase has moderated a bit. Some of the materials, most notably steel, are actually decreasing. So, the good news is we're able to continue to develop yields that matter versus historical numbers.

Jason Belcher, Analyst, Wells Fargo

That's helpful. Thank you. And then secondly, can you give us an update on the evolving challenges you're seeing related to power supply cuts in Northern Virginia? And any potential delays that might cause in construction of new data center properties?

Steve Budorick, President and CEO

Well, there certainly is a shortage of power availability in Northern Virginia that delayed somewhat the execution of the leases that we just achieved. We expect to get one additional build-to-suit done sometime in the next 12 to 14 months, and the new power supplies that are anticipated will start to materialize later in 2023, 2024, and then 2025.

Jason Belcher, Analyst, Wells Fargo

Got it. Thanks very much.

Operator, Operator

One moment for our next question please. It comes from the line of Michael Griffin with Citi. Please go ahead.

Michael Griffin, Analyst, Citi

Great, thanks. Maybe we can just touch on leasing for a sec, mainly on retention. You're expecting a higher rate in 2023 relative to 2022. But I think, Todd, you mentioned in your prepared remarks some of that was driven by a delay in renewals from 2022 pushed to 2023. Is that mainly driving the year-over-year delta or are you seeing a stickier nature from some of your tenants on that?

Todd Hartman, Executive Vice President and COO

No, I don't think it's driving a delta year-over-year. I believe it's a stickier nature of our tenants. Certainly, some of that renewal that moved into this year will contribute to the overall retention rate. But really, it's more a function of our tenant base and where we're located than it is any sort of variations from year-to-year in terms of when leases are signed.

Michael Griffin, Analyst, Citi

Got you. And then, Steve, you also mentioned strategic sales. I was just wondering if we should read into that as the potential exit of some of the regional office assets, given maybe a softer bid or less demand for those relative to your core portfolio?

Steve Budorick, President and CEO

Yes. The message was intended to advise shareholders that we will consider recycling capital in the future. We just simply don't need to to fund our development, and the obvious candidates when the opportunities are accretive are the regional office assets in our portfolio.

Michael Griffin, Analyst, Citi

Alright. That's it from me. Thanks for the time.

Steve Budorick, President and CEO

Thanks, Griff.

Operator, Operator

One moment for our next question please. From Camille Bonnell with Bank of America. Please proceed.

Camille Bonnell, Analyst, Bank of America

Hi, good morning. Steve, you mentioned that the 7.5% year-over-year increase in the defense budget should fuel demand for space in the portfolio through 2024. Is there a way you can quantify or help us better understand the relationship between the increase in defense spending and what you've seen on how it translates to new leasing?

Steve Budorick, President and CEO

Well, I don't have algebra to help you estimate the volumes, but we have deep experience over a long period of time. The larger increases manifest themselves in higher levels of leasing, and the delay between funding and demand being recognized in our portfolio is 12 to 15 months. So, the comment was intended to suggest that the demand we will experience in 2023 will be fueled by the increases in the 2022 defense budget, and the recent 2023 passage will manifest itself in demand in 2024. We anticipate a strong demand environment for the next two years.

Camille Bonnell, Analyst, Bank of America

And just based on that demand outlook and opportunity here, are you seeing any change in the competitive landscape?

Steve Budorick, President and CEO

No, we really haven't seen any change. We have advantaged land positions in most of our regions, and we tend to not face much competition from new development — our competition is inferior property or locations. That advantaged position continues today.

Camille Bonnell, Analyst, Bank of America

Thank you. And just a final question: you mentioned earnings growing at a compounded rate of roughly 4% through 2026. Do you see limited risk of this changing for the foreseeable future or what could change this outlook, either higher or lower?

Steve Budorick, President and CEO

Well, the exact words I used were "roughly 4%." Twelve months ago, 4% or higher was a very comfortable number for us to put in because we had significant cushion in that. Currently, our model suggests 4% or better, but as we start to apply scenario stress — even higher SOFR rates or a more material decline in demand in regional office — that could move a bit. But the key point is the developments we've already achieved and the future NOI that we can deliver will generate approximately 4% compound growth in a variety of stress scenarios.

Camille Bonnell, Analyst, Bank of America

Thank you.

Steve Budorick, President and CEO

Thank you.

Operator, Operator

One moment for our next question please. It comes from the line of Anthony Paolone with JPMorgan. Please proceed.

Anthony Paolone, Analyst, JPMorgan

Thank you. I guess first question is on the data center shells that you just announced the new starts. Can you give us the yields on those? Because I think you said last quarter you'd have a better indication as to how they've changed.

Steve Budorick, President and CEO

I don't want to be too specific, but they are north of 7%.

Anthony Paolone, Analyst, JPMorgan

Okay. Got it. And then I don't know, maybe it just struck me, but the timeline to get those done out into 2025 seemed a bit more extended. Was there anything there driving that or just reading it wrong?

Steve Budorick, President and CEO

Some of that has to do with expected power delivery. We tend to plan our development schedules to meet expectations of our customer, and they tend to overestimate the time that they want the assets and then ask us to compress. So, it wouldn't surprise me at all if the delivery dates get moved up pretty significantly, but those delivery dates mirror the request of our customer.

Anthony Paolone, Analyst, JPMorgan

Okay. I understand. And then just last one. I think you mentioned there's one other data center shell build-to-suit in the offing for the next year. Just wondering if you can peel back a little bit more on how you're thinking about development leasing this year and what else might be on tap in the pipeline.

Steve Budorick, President and CEO

Well, we put out what we believe is comfortable guidance. Scenarios include some lease-up of additional space from 8100 Redstone Gateway, which is a 100,000 square-foot building we've commenced and are actively developing. New starts at Redstone Gateway from additional build-to-suit or pre-leases, potentially the data center shell I had referred to. In total, we have — with the significant harvesting from our development pipeline — over 700,000 square feet of developments we consider 50% likely to win or better in two years or less.

Anthony Paolone, Analyst, JPMorgan

Okay. Great. Thank you.

Operator, Operator

One moment for our next question please. It's from the line of Tom Catherwood with BTIG. Please proceed.

Tom Catherwood, Analyst, BTIG

Can you hear me now?

Steve Budorick, President and CEO

Yes. We can hear you, Tom.

Tom Catherwood, Analyst, BTIG

Excellent. Sorry about that. I guess I want to take a bigger-picture look for a second when we're thinking about risks. There's a lot of debate around debt ceilings in Washington, and when we've had other debt ceiling debates in the past, this kind of drove sequestration back in the early 2010s. Steve, I think you've said that that type of limit on defense spending or pullback couldn't happen again in the same way this time. Is my memory correct on that? And what's the risk that we could see some impact to or cuts in defense spending should the debt ceiling debate get heated?

Steve Budorick, President and CEO

Let me clarify the thoughts I've presented in the past. As I view it, that kind of budget-cutting measure would be unlikely, not impossible, merely because of the elevated technological capacity and aggressive threats of adversaries today as compared to 2011. That would be illogical for Congress to enact across-the-board sequestration. Having said that, Congress will do what it will do, and that's just my opinion. One of the points we were trying to point out with the magnitude of the compound increases in defense spending is the current budget is $100 billion higher than it was 12 months ago in fiscal year 2021. It's our belief that within the capacity created by that increase, our business can succeed for quite some time. Recall the sequestration imposed mandatory cuts across the board and defense spending went down materially. Even if we are in a flat line at this year's level or last year's level, I think there are absolute needs that will emerge and opportunities that we'll be able to fill. Within the defense budget, the line item that funds rental of leased spaces is called the O&M — operations and maintenance — budget, and this year's increase in the net budget was actually closer to 9%; it increased 8.7%. So, certainly there's going to be some cutting coming, and it's going to be interesting, but I think we're pretty comfortable with the magnitudes that have accumulated that our demand will continue because of the priority missions that we serve.

Tom Catherwood, Analyst, BTIG

Really helpful. Appreciate all those thoughts, Steve. And then maybe pivoting over to your comments around the self-funding of development. Doing some quick back-of-the-envelope math, it seems like depending on where your yields fall for every $100 million that you deliver, you open up another maybe $40 million to $50 million worth of debt capacity and still stay leverage neutral. Then you'd have to solve for that $50 million to $60 million of equity through your cash flow. The questions then are: one, is that kind of back-of-the-envelope roughly correct? And two, are there certain potential impacts to your retained cash flow that could upend that? For example, if leasing costs continue to escalate across the board, or if there are additional capital needs within the regional office portfolio, where you have to put more capital into some of these buildings. Are there any things on your radar that could upend that cash flow for you and cause you to have to look elsewhere for development funding?

Anthony Mifsud, Executive Vice President and CFO

So Tom, when you look at the math, I think your math is roughly accurate. I think the one piece to add into that equation is the ongoing increase in EBITDA of the operating portfolio that helps — that's the leverage metric that we're really managing to, debt-to-EBITDA. As we look at the benefit of the EBITDA that comes in from the development projects, which is the math you articulated, plus the continued increase in EBITDA from the operating portfolio, it's really the balance of those two things that allow us to fund the equity component of the development project on a leverage-neutral basis. With respect to upending that math, surely there's incremental capital that could be required for the items you mentioned. But to give you some context, in order for debt-to-EBITDA to increase 0.1x, that's about $35 million to $40 million in incremental debt, all other things being equal. So, it would need to be a significant increase in capital requirements to lease up parts of the portfolio or building capital that we're not anticipating — that's not already built into our model. So, we think the plan as it exists right now demonstrates that we can self-fund the development pipeline after this year, and it has a modest amount of cushion built into it given how we put that math together.

Steve Budorick, President and CEO

And one last comment about risk from the regional office portfolio: we have been actively investing capital already in those assets to make them very current and reposition them where we have need for leasing. So that capital on any repositioning risk, we've already spent it. The incremental capital they'll need is tenant improvements where we have vacancy, and that's built into our model.

Tom Catherwood, Analyst, BTIG

Got it. That's very helpful. And then, kind of last one for me, maybe sticking with that regional office thought and recent activity: it looks like there was some recent activity at 100 Light Street. Todd, can you maybe update on the status of that and at 2100 L Street as well?

Todd Hartman, Executive Vice President and COO

Sure. In the quarter, we did sign a total of 47,000 square feet of leases in our regional office portfolio. Thirty-five thousand of that was at 250 West Pratt. It was a 12-year lease with a law firm that took part of the Pandora sublease. So two floors of that are now on a long-term lease. And at 100 Light, we signed an 11-year lease for 12,000 square feet. So, we're happy to put some hay in the barn there. Obviously, we've said that would be a number of singles and doubles to get that building leased up and we're glad to see the activity. Looking ahead, we foresee about 140,000 square feet or so of prospects coming to market in the next 90 days in Baltimore. So we hope to have some additional activity at the building soon. But deal cycles are obviously very extended. The leasing that we accomplished this year was more than nine months from first contact to lease signature from those tenants. As it relates to 2100 L, we're at about 150,000 square feet of prospects there. We are on the shortlist for over 100,000 square feet of prospects. But to give some context to that, one of those started out with 22 options and has narrowed the shortlist down to five. So there again, our deal cycle time is going to be extended, but we are encouraged by where we sit with some of these prospects. It's hard to forecast any timing for conclusion on leasing there, but we're encouraged by where we are today.

Tom Catherwood, Analyst, BTIG

Got it. Appreciate the answers. Thanks everyone.

Operator, Operator

One moment for our next question. It comes from the line of Steve Sakwa with Evercore ISI. Please proceed.

Steve Sakwa, Analyst, Evercore ISI

Yes, thanks. Tom went through a bunch of my questions. But I just want to circle back to one that maybe Tony asked about the development leasing, Steve. With the delay in the one data center shell, I guess I would have thought that maybe your goals for 2023 would have been a little more elevated. I'm trying to gauge your level of conservatism here, given all the positive commentary about the defense budget and demand. That in and of itself would probably get you to the goal without doing any defense leasing. So what are we missing here?

Steve Budorick, President and CEO

No, I think you correctly interpreted that our goal is relatively cautious. There could be opportunity to exceed that goal. But one thing we've experienced is that as costs have gone up, decision times take longer. We're projecting over an 11-month period, so timing is an issue. I can tell you we're bullish on development. Beyond that 700,000 square feet that we characterize as 50% likely to win in two years or less, we've got another 1.7 million square feet in opportunities that we're evaluating, but it's more of a timing risk concern for this year.

Steve Sakwa, Analyst, Evercore ISI

Okay. And maybe going back to Tom's question on some of the non-defense leasing. Todd, we've toured 100 Light Street many times and talked about prospects that have come and gone. What are the risks that some of the newer prospects find space elsewhere? How much price sensitivity are they showing? Where else are they looking in both Baltimore and Washington?

Steve Budorick, President and CEO

Let me take a swing at Washington before I let Todd finish. The one good dynamic you can see in Downtown D.C. is that the available inventory in the trophy class has come down, and there's not a lot of choices for larger tenants. Given we're a trophy building, our opportunity set is broadening rather than tightening. Todd, you can address Baltimore.

Todd Hartman, Executive Vice President and COO

Thanks, Steve. It's hard to answer where everybody will look. Overall vacancy in Baltimore is over 20%, and I would anticipate prospects will cast a wide net and take their time choosing a location. As Steve said earlier, we've invested in 100 Light and we're very happy with how the building is showing. I expect us to be very competitive, but there will be a lot of options for tenants.

Steve Sakwa, Analyst, Evercore ISI

Great. That's it from me. Thanks.

Operator, Operator

Thank you. And our next question comes from Dave Rodgers with R.W. Baird. Please go ahead.

Dave Rodgers, Analyst, R.W. Baird

Hi Steve, good afternoon. When you look at your two core parcels — NBP and Huntsville — both are 98% leased. Your development pipeline is 89% leased. You're cautiously optimistic about growth over the next couple of years. Can you talk about spec development and whether you would consider that? If you would or wouldn't, is that a function of the types of buildings needed — are they becoming more specialized — and do you think you would benefit from putting more space into these core locations? How do you handicap that over the next couple of years given your overall tone today?

Steve Budorick, President and CEO

Yes. At Huntsville, we are completing one building we built on spec, and our plan is to constantly be ready to add the next building. We're advancing work to get ready to build the next building as we start to sign leases for this one. At the National Business Park, demand was very strong this year and drove us to a level a little quicker than we thought. So we're actually working on start scenarios for three different buildings to be in a position to move quickly to capture demand. Two of those would be contractor buildings, and we're starting to advance our readiness to do another government building if we see that demand materialize. We're cautious in this environment to put out capital where we don't have demand because short-term unfixed debt rates are expensive. So we will be prudent, but we want to be extremely well prepared to seize opportunities when they come.

Dave Rodgers, Analyst, R.W. Baird

In terms of the demand for those types of buildings, you mentioned the 700,000 and then the 1.7 million behind it. Is that demand something where you could see more lease signings this year or does that still feel like a 2024 event?

Steve Budorick, President and CEO

We expect solid progress at Redstone Gateway, and it would not surprise me at all if we got a commitment that allowed us to start a building at the National Business Park this year.

Dave Rodgers, Analyst, R.W. Baird

Great. Thanks Steve.

Operator, Operator

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

Steve Budorick, President and CEO

Thank you for joining our call today. We are in our offices, so please coordinate through Venkat if you would like a follow-up call. Have a great day.

Operator, Operator

Thank you for your participation today in the Corporate Office Properties Trust fourth quarter and full-year 2022 results conference call. This concludes the presentation. You may now disconnect. Good day.