COPT Defense Properties (CDP) 2022 Q4 法說會逐字稿

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 will turn the call over to Venkat Kommineni, COPT's Vice President of Investor Relations. Mr. Kommineni, please go ahead.

Thank you, Carmen. 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; and 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?

Good afternoon. Thank you for joining us. Upon conclusion of our strategic reallocation program in 2018, which deeply concentrated in our portfolio and Defense/IT locations, we entered into what we described 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 the strong leasing in our operating portfolio and strategic debt refinancings, delivered 4% compound annual growth -- FFO growth from 2018 through 2022. Today, nearly 3 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 4 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 the current economic conditions and played by space contractions stemming primarily from work for 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 lease and executed year-to-date totals over 460,000 square feet. And within these leases -- 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 1 build-to-suit with a defense contractor at the National Business Park, 5 projects at Redstone Gateway leased to defense contractors including the new Northrop Grumman campus and 2 data center shells in Northern Virginia.

In mid-December and in the second week of January, we closed on 2 new 90% - 10% joint ventures with Blackstone on 5 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 and 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 3 years, a period which is -- 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.

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 5-year average.

In addition to the overall volume lease in 2022, our vacancy leasing strengthened our concentration in Defense/IT and was diversified among size requirement and location. Our 68 leases for the year represent a 25% increase over 2021. Our largest lease was 121,000 square feet with Lockheed Martin and 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 2 floors at 310 NBP, which is now fully leased. 50% 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 3 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 and 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 of our strategy of concentrating assets approximate 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 includes 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 2 data center shells and a 46,000 square foot build-to-suit in Redstone Gateway or 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.

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 2 new 90% - 10% joint ventures with affiliates of Blackstone on 5 data center shells raising $250 million of equity proceeds. The transactions closed in 2 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 2 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 short-term measure since the loans only have a 2-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 3 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 development -- 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 commenced 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.

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 in our equity requirements for development investments.

The outlook for defense spending remains strong as 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 Instructions) And it comes from the line of Jason Belcher of Wells Fargo.

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?

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 David Jacobstein's identical building to another building that we built on the site immediately adjacent to it. And those buildings have started almost exactly 2 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, the 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 historical numbers.

That's helpful. 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?

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.

It comes from the line of Michael Griffin with Citi.

Maybe we can just touch on leasing for a sec, mainly on retention. You're expecting a higher rate in 2023 relative to '22. But I think, Todd, you mentioned in your prepared remarks, some of that was driven by a delay in renewals from '22 push to '23. I guess is that mainly driving the sort of delta year-over-year? Or are you seeing a stickier nature from some of your tenants on that?

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 -- in any sort of variations from year-to-year in terms of when leases are signed.

Got you. And then, Steve, you also mentioned about strategic sales. I was just wondering if we should read into that. Obviously, you don't need any equity funding to fund the development pipeline this year. But could we read into that as the potential exit of some of the regional office assets, just given maybe a softer bid or less demand for those relative to your core portfolio?

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 at the regional office assets in our portfolio.

From Camille Bonnel with Bank of America.

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?

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 our demand that we're going to experience in 2023 will be funded -- will be fueled by the increases in the '22 defense budget, and the recent '23 passage will manifest itself in demand in 2024, intending to suggest we anticipate a strong demand environment for the next 2 years.

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

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

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

Well, the exact words I used was roughly 4%. And I can tell you that 12 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 and even higher SOFR rates or a more material decline in demand in regional office, that could move a bit. But the -- 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.

And it comes from the line of Anthony Paolone with JPMorgan.

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.

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

Okay. Got it. And then I don't know, maybe it just struck me, but the time line to get those done out into '25 seemed a bit more extended. Was there anything there driving that? Or just reading it wrong?

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 that at all if the delivery dates get moved up pretty significantly, but those delivery dates mirror the request of our customer.

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 of how you're thinking about development leasing this year on what else might be on tap in the pipeline.

Well, we put out what we believe is comfortable guidance. Scenarios include some lease-up of additional leasing from 8100 Redstone Gateway, which is 100,000 square-foot building we commenced and is 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, we still have over 700,000 square feet of developments we consider, 50% likely to win or better in 2 years or less.

It's from the line of Tom Catherwood with BTIG.

Tom? You might want to try the next caller, which is also Tom Catherwood?

Can you hear me now?

Yes. We can hear you, Tom.

Excellent. Sorry about that. I guess it was logged in twice. So I want to take a kind of bigger picture look for a second when we're thinking about risks. Obviously, there's a lot of debate around debt ceilings in Washington, and maybe I don't want to get into necessarily a discussion around how that could play out? But if we think back to when we've had other debt ceiling debates, in the past, this kind of drove sequestration, if I'm not mistaken, back in the early 2010s. And Steve, we've talked about in the past, and if my memory serves me, I think you've said that kind of that type of limit on defense spending or pullback on it couldn't happen again in the same way this time. Is my memory correct on that? And kind of what's the risk that we could see some impact to work with more cuts or restrictions on defense spending, should the debt ceiling debate really get heated?

Let me clarify thoughts I've presented in the past. As I view, that kind of a budget-cutting measure would be unlikely, not impossible in the current environment merely because of the elevated technological capacity and aggressive threats of adversaries today as compared to the way we felt back in 2011. That would be illogical for Congress to enact across the board sensequestration. 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 -- is the current budget is $100 billion higher than it was 12 months ago in fiscal year 2021. And it's our belief within the capacity that's been created with 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's absolutely needs that will emerge and opportunities that we'll be able to fill.

Within the defense budget, the line item that funds rental of lease spaces is called the O&M operations and maintenance budget, and this year's increase in 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 awfully 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.

Really helpful. Appreciate all those thoughts, Steve. And then maybe pivoting over to your comments around the self-funding of development. But just do some quick back of the envelope, 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 still stay leverage neutral. And then you'd have to solve for that, call it, $50 million to $60 million of equity through your cash flow. The questions then are kind of, one, is that kind of back the envelope roughly correct? And then 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, if there are additional cost within the regional office portfolio, where you have to put more capital into some of these buildings. Are there any kind of things on your radar that could upend that cash flow for you and cause you to have to look elsewhere for some of that developments funding?

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 -- sort of that's the leverage metric that we're really managing to, is debt to EBITDA. So as we look at the benefit of the EBITDA that comes in from the development projects, which is the math that you articulated, plus the continued increase in EBITDA from the operating portfolio, it's really the balance of those things -- those 2 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 that you mentioned. But to give you some context, in order for debt to EBITDA to increase 1 tick, so 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 the capital requirements to lease up either 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 has -- is -- demonstrates that we can self-fund the development pipeline after this year, and it has a modest amount of cushion built into that given just how we put that math together.

And then 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 to be leased. So that capital on any kind of 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.

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

Sure. So in the quarter, we did sign a total of 47,000 square feet of leases in our regional office portfolio. 35 of that was at 250 West Pratt. It was a 12-year lease with a law firm, which saw a part of the Pandora sublease. So 2 floors of that are now on a long-term lease. And at 100 Light, we signed a 12 -- excuse me, 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, that was going to be a number of singles and doubles to get that building leased up and glad to see the activity.

Looking ahead, we foresee about 140,000 square feet or so of the prospects that will be 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, obviously, are very extended. The leasing that we accomplished this year, it was more than 9 months from first contact to lease signature from those tenants. So as we've been saying, our deal cycles remain extended.

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 5. So there again, I think our deal cycle time is going to be extended, but we are encouraged by where we sit with some of these prospects. But it's hard to forecast any sort of timing of conclusion on leasing there, but encouraged by where we are today.

(Operator Instructions) It comes from the line of Steve Sakwa with Evercore ISI.

Tom went through a bunch of my questions. But I just want to circle back, I think, to one that maybe Tony asked about the development leasing. Steve, I mean with the delay in the -- the one data center shell, I guess I would have thought that maybe your goals for '23 would have been a little more elevated. So I'm just trying to really gauge kind of your level of, I guess, conservatism there, just given all the positive commentary that you kind of laid out about the defense budget, demand, potentially another data center shell. That in and of itself would probably get you to the goal without doing any defense leasing. So I guess what are we missing here?

No, I think you correctly interpreted that our goal is relatively cautious. There could be opportunity to exceed that goal. But the one thing we have experienced, since 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 2 years or less, we've got another $1.7 million in opportunities that we're evaluating, but it's more of a timing risk concern for this year.

Okay. And maybe going back to Tom's question on the -- some of the, I guess, nondefense leasing. I know, Todd, we've toured the 100 Light Street many times, talked about prospects that have kind of come and gone. I guess what are the risks that some of the newest prospects find space elsewhere? How much price sensitivity are they? Kind of where else are they looking in both Baltimore and, I guess, down in Washington?

Well, let me take a swing in 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. And given there were a trophy building, I kind of feel like our opportunity set is tightening -- I mean broadening rather than tightening. Todd, you can deal with Baltimore.

Thanks, Steve. Well, it's hard to answer the -- where everybody is going to look. We've got some prospects that are yet to come to the market. I would just say that the overall vacancy rate in Baltimore is over 20%, and I would anticipate all prospects to cast a wide net and take their time choosing a location. As Steve said earlier, we've invested in 100 Light. We're very happy with the way the building is showing. I expect us to be very competitive, but there's going to be a lot of options for the tenants.

It comes from Dave Rodgers with R.W. Baird.

Steve, when you look at your 2 core kind of parcels NBP and Huntsville, I think you're 98% leased. Your development pipeline is 89% leased. And you're pretty confident or at least cautiously optimistic about the growth of the business over the next couple of years. So can you talk about kind of spec development and whether you would consider that? And two, I guess if you would or wouldn't, is that a function of maybe types of buildings that are needed? Are they just becoming more specialized? Do you think you would benefit from putting more space into these kind of core locations? And I guess how do you kind of handicap that or think about that over the next couple of years given your overall tone today?

Yes. So at Huntsville, we are completing one building we built on spec, and we -- our plan is to constantly be ready to add the next building inventory. So we're advancing work to get pet ready to build the next building as we start to sign leases for this one. The NBP demand this year really was very strong. And drove us to a level, I think, a little quicker than we thought we were going to get there. So we're actually working on start scenarios for 3 different buildings to be in a position to move quickly to capture demand. Two of those would be contractor, 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 we all know how expensive short-term unfixed debt rates are. So it will be very prudent, but we also want to be extremely well prepared to seize the opportunities when they come.

In terms of the demand for those types of buildings, is that a demand that you see? You kind of mentioned the 600,000 and then the $1.7 million behind it. Is that something a demand where you could see potentially more lease signings this year? Or does that still feel like it's probably a '24-type event? .

Well, we expect some -- 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 NBP this year.

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

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.

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.