COPT Defense Properties (CDP) 2021 Q4 法說會逐字稿

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.

Thank you, Jonathan. Good afternoon, and welcome to COPT's conference call to discuss fourth quarter and year-end '21 results and guidance for 2022. With me today are Steve 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?

Good afternoon, and thank you for joining us. We finished 2021 with strength and outperformed in all aspects of our business, including leasing, operations, development and capital markets. The full year FFO per share as adjusted for comparability of $2.29 grew 8% over 2020's strong results and is $0.10 higher 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 were widespread with favorable results in renewal activity, R&M project costs, utility savings and higher NOI from DC-6.

Despite challenges in the supply chain environment, we completed and delivered 766,000 square feet of developments with 3 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 3 major defense contractor developments, one data shell build-to-suit and our second fully leased office property for the U.S. government and the secure campus of Redstone Gateway. We had expected this government lease opportunity to occur in 2022, and we're favorably surprised by the early lease action last year.

We outperformed in the debt capital markets as well. We seized 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 of outperformance 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 DC-6 last month, generating $222.5 million to further balance our leverage and support our development activity. Recycling DC-6 has been a high priority for the company for several years, and we recognize 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 $0.005 to 2021 outperformance.

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 5% 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 strongly elevated results. The guidance absorbs 2 percentage points of dilution from the sale of DC-6 as well as the dilution from the Boeing and Transamerica nonrenewals. Adjusted only for the dilution from the sale of DC-6, 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 DC-6.

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 shell development leases away to access critical power at those sites.

As Slide 11 of our presentation shows, we've averaged about 1 million square feet of development leasing annually since 2012. During the past 3 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.

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 of 3.9 million square feet included 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 at Canton Crossing in our regional office portfolio.

CareFirst is a high credit health care 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. The 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 transactions, 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 196,000 square feet we completed in the quarter brought our full year volume to 616,000 square feet, exceeding our 5-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 re-tenant 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 Boeing gave 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 in 100 Light Street.

Development leasing exceeded our 2021 objective. We executed 1.2 million square feet during the year, including the 183,000 square foot build-to-suit at the National Business Park for a Fortune 100 company supporting operational activities on Fort Meade; a new campus for KBR at Redstone Gateway comprised of a 172,000 square-foot office property and half of the 46,000 square foot R&D facility; a new campus for Northrop Grumman at Redstone Gateway comprised of 2 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 and the secure campus of Redstone Gateway, a 205,000 square-foot office property that when completed 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 into service.

Our 1.8 million square foot development leasing pipeline supports our goal of executing 700,000 square feet in 2022. Within this goal, we expect about 2/3 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 1/3 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.

Thanks, Todd. Fourth quarter and full year FFO per share as adjusted for comparability of $0.58 and $2.29 exceeded the high end of guidance, driven by the DC-6 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 nonrenewal at 1200 Redstone Gateway. Cash NOI grew 1.2% during the year driven by favorable renewing 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 at 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 extremely strong results. Our guidance detail is available in the press release and on Slides 14 and 15 in the deck we issued last night, and 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 nonrenewal at Redstone Gateway that occurred on the last day of last year, the Transamerica nonrenewal 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 3 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 DC-6 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 DC-6.

And now I'll turn the call back to Steve.

Thanks. With 2021 in the books, we've 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 DC-6 and absorbing the dilution from the recent Boeing and Transamerica vacancies. Clearly, our strategy of investing in priority defense mission locations and creating value through new low-risk development has and will continue to generate FFO growth regardless of the broader economic trends.

Our 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 Instructions) Our first question comes from the line of Manny Korchman from Citi.

Steve or maybe Anthony, in terms of what's left to sell in the portfolio, you mentioned JVs or sales. I assume the JVs are the data center shells. And what were the sales at this point? Or what could the sale at this point include?

Well, we have been conveying for about 6 months that sometime between now and '24, '25, we'd start to -- we look for the right opportunity to start selling off the regional office assets in Baltimore and Northern Virginia. And if we were to hit an opportunity where that was a favorable move for the shareholder, we'd consider doing that.

And you're correct, Manny, the alternative would be to venture the 2 data center shells that we had planned to venture and initially planned to venture in the third or fourth quarter of last year, but we had -- we replaced that transaction with the sale of DC-6.

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

Well, there's not a lot of buyer interest in office property right now in this region, where I would say a couple of years ago, there's pretty strong interest in Baltimore and some impressive cap rates. Coming out of the pandemic, we think it's going to take another at least 12 months to kind of normalize that capital market segment.

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

Well, certainly, we've had increasing costs as much as 10% to 15% over a year, and it puts pressure on us to achieve rents that will support the development, which we have done. So we've been able to hit our yield targets equally well this year and what we expect to do in 2022, but we have to achieve a higher rent to get it.

Our next question comes from the line of Rich Anderson from Corporate Office Properties (sic) [SMBC].

When did you join the company?

So yes, SMBC here. So Steve, I don't know if this was ever mentioned along the lines, but what was the reasoning for the Boeing vacancy, from their prospective?

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

Okay. So -- well, you think generally about when things like that happen, is it mostly what you just described? Or are there other -- or is it oftentimes 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?

Well, it's rarely the latter and often the former in less extreme ways over time. M&A actually has a pretty significant impact in the defense industry as large contractors buy up smaller contractors, usually they want to keep the SCIF and the secure mission part of a suite, but they might be able to shed some of the more administrative space. But rarely, people aren't leaving our locations because of space needs. We're in the development business after all, and those locations are really the primary place to be.

An interesting sidebar with regard to the Boeing contraction is another contractor won that contract and they signed a lease in Redstone Gateway.

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

There's nothing that we've seen that we'd be concerned about. All the new development we've achieved over the last 3 years, in each case, enormous new contracts were achieved, which really were the compelling reason for those contractors to get new efficient, very well-located facilities to complete the contracts, and they tend to be very long term. So no, we don't really see any more of that.

Okay. Last question for me. You mentioned regional office between now and 2024. So obviously, it depends on a bunch of things. But what is the time line right now to getting regional office sort of to the point where it's fully leased and you've checked off that box? Is that a this-year event? Or is that a next-year event?

Well, there's 4 large assets in regional office. Each has its own set of opportunities or challenges depending on how you look at it. But for instance, 100 Light, we just got 140,000 or 50,000 square feet back from Transamerica. It's a fantastic space. It's not really been available to smaller tenants in the market.

We definitely want to restabilize that asset before we'd even consider selling it. Like we did with DC-6, we will be disciplined and patient to create the value our shareholders deserve before we move to a sale.

Is it more likely that regional also will be sold all at once or in pieces?

I think it's got to be in pieces, particularly the Baltimore segment. It's just too big a bite for an investor in Baltimore.

Our next question comes from the line of Steve Sakwa from Evercore ISI.

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

I'll let Todd handle that one.

Sure. Well, as I mentioned, we have good activity on the large vacancy down in Huntsville. It's hard to put a time line exactly 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, but it's hard to quantify.

In terms of 100 Light, 80,000 square foot of prospects down there. That's just going to take some time. As Steve was alluding to, the Baltimore market is -- was affected like most major CBDs in the downturn, and leasing velocity has not returned to its historical average. So we'll continue to work it, but I wouldn't anticipate any upside from 100 Light this year.

And I guess, Steve, maybe on the development front, you talked about some of the things shifting out of '22 into '21 and then a couple of things shifting back, but it sounds like you've got a large pipeline today at 1.8 million feet. So I'm just trying to gauge sort of the 700,000 feet and the likelihood that some more of that could come in. I realize that might not have much of an earnings impact at all this year. But just what are the prospects for that 700,000 to drift higher?

Well, for it to get bigger, we have 3 projects that are planned on land we own, and we await the critical power delivery from the utilities in Northern Virginia. The current information we have is that power will not be available this year, and it's a threshold to making that build-to-suit commitment with our tenant. If that power were to come earlier, hypothetically, we could beat 700,000, but we're only planning to get one of the 4 leases this year because of that timing.

And just one other thing to point out, but for the Boeing nonrenewal, we would be building 2 buildings at Redstone Gateway this year, but we're staying very disciplined. We want to backfill 1200 Redstone Gateway before we start our next development, and that kind of cost us that 120,000 that would otherwise would have been development had we not got the major non-renewal.

Got it. And then just last question. 2100 L Street, I know it was sort of another kind of noncore assets. Just kind of remind us on the leasing status there. And is there a chance that, that D.C. market is picking up a little bit more steam? And could that be on the sale block this year? Or is that more likely a '23 event?

Well, I'll take the last part of it. As soon as we get leases to stabilize, it will be on our sale block, or we'll start to investigate the best way to monetize it. With regard to timing, I'll let Todd answer that hard question.

I would not characterize the D.C. market as emerging, returning 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. It's hard to place a time line on a lease resolution there.

Just a bit of color, Steve. We're 30 miles outside of D.C. And when I talk to business colleagues that office in the district, it's like we're in 2 different worlds. They can't go to a restaurant without vaccine documentation, and they're still wearing masks. The counties in and around Baltimore, we've been back to normal for quite a long time.

Yes -- no, look, I can appreciate that. I guess, what we've seen in other markets is the flight to quality in new buildings, whether it's in New York or parts of California or other cities, definitely seem to be leasing up, and older stock is struggling. And given your new building. I guess I would have thought, even if the market is not great that you might capture market share of what's going on, just given the new product.

Yes. I think when share comes back, we expect to do well. It's just the transaction velocity has really dropped off the table during the pandemic.

Our next question comes from the line of Craig Mailman from KeyBanc Capital Markets.

Steve, I just want to clarify. Did I hear you correctly that DC-6 is just $0.02 dilutive this year versus kind of the talk previously about being $0.04 dilutive?

Well, the $0.02 is net of an alternative recycle.

It's 2%. Craig, it was -- the comment in the script was that the impact to growth was 2%, not $0.02.

Right. Right.

Which is -- which equates to the [2%] you're talking about.

Okay. Okay. That's helpful. And then just, can you go through -- I know in the supplemental kind of regional offices, it's 2 million square feet aid assets. You kind of mentioned 100 Light Street for Canton Crossing is down there. What are the -- and 2100 also. Just kind of what are the other big chunks of that regional office?

And would anything like Columbia Gateway ever beyond the block? Or is that -- I know it's in the Defense/IT location, but it's mainly suburban. Would anything like that ever be up for sale?

Not in the near term. The other components of regional office are 2 sets, 2 buildings in Northern Virginia. One of those sets, we have considered and probably will likely just pull into defense because it's become increasingly more occupied by defense contractors and cyber contractors, and that one's way out by Dulles. And then we have Wells Fargo in Pinnacle Towers in Tysons, and that would be an asset we'd like to recycle.

With regard to Columbia Gateway, yes, you could say it's suburban, but it's within the competitive and the operating radius of Fort Meade. And it's -- our business in this park is defense business.

Our next question comes from the line of Jamie Feldman from Bank of America.

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

I would guess it to be about the same. We've been in that 1.5 million to sometimes as much as 2.5 million square foot range for years now. What our guidance suggests is we'll pull in 700,000 this year. Based on what is currently classified in the pipeline, that leaves over 1 million. But I can tell you, we have almost 1.4 million square feet of development discussions that we have not yet classified as 50% likely to win within 2 years or less. So I'm very confident we'll be in the same range a year from now.

Okay. Great. And then going back to Manny's question on development cost. You had said costs are up 10% to 15%. Are you saying you can push rents to keep your yield? I don't know if that came across that clearly.

Yes, we have. We have all through 2021. And with the activities that we're working on now that should be signed before our next call. We'll be able to demonstrate we did.

So what are you targeting for yield?

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

Okay. Great. And then you had given kind of an outlook for 4% to 6% FFO growth in '23. What does that assume for any of these asset sales? Or kind of what are the -- maybe a better way to ask it is, just what are the key building blocks to get to that 4% to 6%?

Well, the key building blocks are to the same office cash NOI, the growth that we expect. It's the continued benefit of the developments placed in service that if you -- that partially get placed in service this year, it will be fully placed in service next year as well as those projects that we'll place into service next year.

On the capital market side, I don't think we want to get into what transactions or what equity capital we're raising to finance that. We're -- there's enough equity capital cost in that math to maintain or slightly improve our leverage ratios. And we think that the cost of that capital will -- may ebb and flow, but within that range.

Okay. And then I don't think you guys talked about the demand for the CareFirst space that they're giving back. I know it's not until later this year. Is there any interest in that? Or do you think that fits for a while?

No, no. We think that will lease up awfully quickly, frankly. That building only has like one 11,000 square foot space.

It's effectively 100% leased here today.

Oh, really? You got that leased?

Yes. Yes.

So it just has a really strong demand profile. We don't get the space until September, the end of September. So I'd give it 6 months, but we'll be chipping away at that right away.

Okay. And then last for me, just any thoughts on the latest from the GSA in terms of plans to reduce space and how you think that might impact your portfolio, your markets overall, just kind of what the latest buzz is from them?

So we don't really follow the GSA that much because we don't do any GSA leasing. The bulk of their contraction activities would affect the B class or maybe older A in downtown D.C., a market we're not really exposed to or -- besides 2100 L, our only D.C. asset is adjacent to the Navy area. It's a defense contractor location. It's not really a GSA area.

But to remind people, we have less than 100,000 square feet of GSA leases throughout the company. And 45,000 of that is a court system in Downtown Baltimore, where our building is located immediately next to the courthouse.

(Operator Instructions) Our next question comes from the line of Tom Catherwood from BTIG.

Maybe Todd, the renewal guidance implies roughly 400,000 to maybe just under 500,000 square feet of expected move-outs this year, kind of what you talked about with CareFirst and 100 Light Street and I think a few others in the regional office portfolio. It seems like roughly half of that is regional office.

So that would kind of, by our math, imply that this is a pretty light year on the move-outs in the Defense/IT portfolio. Just said another way, it seems like you're going to be well above average on the renewals there. Is that a fair statement?

Yes, I would consider that a fair statement. We're tracking good activity on the renewals outside of the ones that you've already identified as Transamerica and CareFirst.

Got it. And that kind of ties into the next part, which is to get up to your, let's call the midpoint of same-store occupancy, the 92%, it looks like, by our math, you'd be kind of slightly below the vacancy leasing that you did this year, something in the 550,000 to 600,000 square feet of vacancy leasing.

From where your pipeline is sitting right now, is it kind of on par with where you were to start last year? Or is it kind of moderated somewhat, which is kind of leading you to be a little more conservative on that guidance?

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

Yes. But in term -- Tom, in terms of how that impacts our year-end same office occupancy guidance, it's not that linear. If you -- the 2021 same-office pool at the end of the year was 93.4% leased and 91.3% occupied. So it's really the ebb and the -- it's really part of the 2021 transactions that were leased in '21 that will occupy during 2022, offset by the nonrenewals that you mentioned earlier, plus the benefit of any leases that get executed in 2022 and commenced in '22. So it's not as linear as that.

That makes total sense. So kind of said another way, it would be more a timing of getting the lease done and then commenced less than -- as opposed to running slower than last year.

That's correct.

Got it. And then last one for me. Kind of something jumped out in the presentation. It might have been in other ones, and if I missed it, I apologize. But on Page 10, you guys touched on expected cap rates for your assets if they were sold. And a lot of them lined up with what we would expect, but the one that was kind of eye-opening for us was the sub-4% on U.S. government leased secure facilities.

Can you provide kind of a little bit more color on that? Is that -- would that just be assets kind of considered behind the fence in most of your locations? And has that -- it seems like that has compressed over this past year, and any thoughts you have on that would be helpful.

Well, we have compressed that estimate. Well, we've compressed it based on market comps for high-value assets in other segments. So for instance, the data center shell sales market last year had comps below 4%. And if you're willing to buy a data center shell below 4, you'd be very willing to buy the U.S. government assets that we have below 4. But there are also some comps around the country with great credit tenants like Microsoft on full building leases that are being marketed or expect to close below 4%. So we think it's a pretty fair statement.

Our next question comes from the line of Dave Rodgers from Baird.

Steve, just wanted to follow up on that last point, Page 10, sub-4% cap rates for data center shells. Obviously, you're going to sell some more of those this year, it sounds like. How do you think about just kind of selling more, getting leverage down kind of in line with your kind of high-quality secondary office peers if that's the peer group we want to use versus kind of the trickling it out and then kind of waiting for some of these bigger chunkier transactions like 2100 L and the regional office sales?

So maybe the question is why not maybe rip some of the band-aids off and kind of get the range-bound issues around the stock and move those away.

Well, Dave, we've been talking for years about establishing the company. That can grow and replenish and recycle capital to fuel our development. And if we rip our band-aid off, we're going to rip our earnings off as well, and that's not the way we want to run the company.

Moreover, those assets, I don't consider them a problem. I consider them a long-term tremendous investment for our shareholders. And to the extent opportunities in the future would allow me to keep those and sell other things, I prefer to keep them. So we'll face the decision to recycle when we need to, but it's not in our base plan.

And Dave, with respect to the balance sheet and with respect to leverage, each one of the 4 debt transactions that we've executed over the past 18 months have priced either equal to or better than BBB flat or Baa2 pricing, and the fixed income investors recognize the strength of the company's cash flows and their stability regardless of where the agencies have us pegged.

And I think we're -- they are focused on -- our fixed income investors are focused on that portion of the portfolio. They see our continued increase of interest and fixed charge coverage as -- because of the stability of -- combined with the stability of the cash flows is a huge positive for us. So if we were to do that and reduce leverage, we don't think there'd be an incremental interest reduction for our shareholders.

Yes, I agree with that. I guess just from the equity side, I think there could be a meaningful change. But we can always take that off-line, but I appreciate the answers and the added color.

Our next question comes from the line of Chris Lucas from Capital One Securities.

Anthony, just a quick one. Just wanted to understand, the sale of DC-6, does that -- do the proceeds from that provide all of the equity you need to meet your development spend for 2022?

It doesn't meet all of it. So if we -- in order to -- based on what we're expecting to spend, we -- our plan includes the assumption that we either sell an asset or a venture, a data center shell to generate the incremental capital, which is in the sort of in the sort of...

In the fourth quarter.

In the fourth quarter. So the combination of -- the combination of free cash flow throughout the year plus the proceeds from DC-6 fund a portion of it. You have to remember the fact that it's sold after the end of the year, part of that is really funding a portion of what we invested last year to reduce our leverage that we had reported as of 12/31.

So what's that delta in terms of the equity gap that you have at fourth quarter sale?

It's about $75 million.

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

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 a follow-up.

Thank you for your participation today in the Corporate Office Properties Trust Fourth Quarter and Year-End 2021 Results Conference Call. This concludes the program. You may now disconnect. Good day.