Graaskamp on the Road Presentation Value Investing in Greater - - PowerPoint PPT Presentation
Graaskamp on the Road Presentation Value Investing in Greater Washington, D.C. Stephen E. Budorick President & CEO Corporate Office Properties Trust The Preferred Provider of Mission Critical Real Estate Solutions Table of Contents
The Preferred Provider of Mission Critical Real Estate Solutions
President & CEO Corporate Office Properties Trust
2
I. Overview of COPT II. Washington, D.C. Office Market
3
4
Goal
To deliver attractive total returns for shareholders
Objective
To generate high quality NOI that translates into NAV per share growth
Strategy
Allocate capital to focus primarily on Defense/IT locations and, secondarily, to urban/infill submarkets with durable Class-A
Tactics
and selective acquisitions
5
14% Regional Office Locations
urban/urban-like locations
»
Walkable amenities
»
Vibrant and growing residential
»
Transportation-advantaged 86% Defense/IT Locations
services to U.S. Government & Defense IT contractors
»
Parks & developable land adjacent/proximate to USG locations executing priority missions (hi-tech & cyber)
308 National Business Park Annapolis Junction, MD Redstone Gateway Huntsville, AL 100 Light Street Baltimore, MD Pinnacle Towers Tysons Corner, VA
* Percentages are based on core portfolio annualized rental revenue as of 6/30/2016.
6
Core Portfolio Segment Demand Driver COPT Asset Compelling Features
Defense/IT
14 Parks:
Campuses (2)
Campus
barriers to entry against new supply
and collaborative “ecosystem” with other contractors compel demand
Regional Office
submarkets with demonstrated ability to support strong class-A
advantaged, amenity-rich locations
centers with robust high- end residential & retail base
and/or transportation advantages
employment base
7
8
» 9.6 million population
ranks Washington, D.C.- Baltimore MSA as 4th largest*
» Approximate 345 million
SF market
» Historically, supply-
constrained within D.C.; however, expect 7% increase in supply
» Demand challenges of
recent years beginning to dissipate…
» …But persistently low
cap rates make investing difficult
Washington, D.C.-Baltimore Combined MSAs** Office Markets SF (millions) Direct % Vacant NoVA 130.9 21.6% Suburban MD 56.7 21.2% Washington, D.C. 108.6 11.9% Greater Wash., D.C. 296.2 17.7% Baltimore 49.8 13.6% Wash-Balt Combined Markets 345.7 17.4% Submarket Detail for the District** SF (millions) Direct % Vacant Capitol Hill / NOMA 13.6 12.9% East End 37.3 11.9% CBD 33.5 9.8% West End / Georgetown 5.1 11.1% Uptown 4.2 19.9% Southwest 10.9 13.2% Capitol Riverfront 4.1 14.5% 108.6 11.9%
* According to the July 1, 2015 U.S. Census Bureau ranking of the combined Washington-Baltimore MSAs. The Washington, D.C. MSA compromises Washington, D.C., and select counties in Northern Virginia and Maryland. Baltimore comprises Baltimore City, the BWI Airport submarket, and Howard County. ** Source: Cushman & Wakefield, as of September 30, 2016. (NoVA stats are as of June 30, 2016.)
9
» Residential neighborhoods cap expansion to the north; Federal & Educational
uses prohibit expansion to the south
» Height restrictions will remain a defining characteristic:
» 130’ max (about 12 stories) » Concrete instead of steel construction » Ceiling height at a premium 9’ clear is a “big deal”
10
» 2016-2019, a wave of redevelopment / development activity will deliver
nearly 8 million net new SF, or 2 million SF per year, into D.C.
» The 4-year supply represents a 7% increase to the existing base and a
33% increase versus annual supply
Source: Cushman & Wakefield.
Office Deliveries by Year
1.1 1.0 3.2 2.5 1.7 2.1 5.0 2.8
0.0 1.0 2.0 3.0 4.0 5.0 6.0
2016 2017 2018 2019 Square Feet (in millions)
Inventory Removed Net New Supply Gross New Supply Historical Annual Supply: 1.5 million SF
11
» Budget Reform Act of 2011
» Defense spending cuts
» D.C. Law firm contractions » GSA Reform Act
» Freeze- and (subsequently) shrink-the-footprint mandates to affect intermediate
supply fundamentals
12
» Froze defense spending / sequestration cuts » Changed contract award rules » Massively disturbed equilibrium in defense contracting » Triggered a 5-year massive consolidation of defense contractor demand » COPT:
» Top 20 defense contractors contracted by 42% » Next 10 defense contractors expanded by 110%
13
» Metro D.C. job growth at its strongest point in over a decade
» 82,000 jobs YOY in August 2016 versus 36,000 YOY average job growth, historically D.C. Metro Employment: % Growth YOY
Source: BLS.
14
» Federal employment back on the upswing, but share of overall Metro
D.C. office-occupying employment near all-time lows
Source: JLL Research, Bureau of Labor Statistics.
10% 15% 20% 25% 30% 35% 40% 250 270 290 310 330 350 370 390 410
Share of total employment (%) Federal employment (thousands) Federal employment (thousands) Share of office-using employment (%)
15
» Despite strong job creation, each new office job created in Metro D.C. is
generating minimal net absorption
Source: JLL Research, Bureau of Labor Statistics.
s.f. per job added
s.f. per job added
500 1,000 1,500 2,000 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Square Feet
Average = 267.9 SF
s.f. per job added
SF per job added SF per job added
SF per job added
16
» Washington, D.C. is a political town; legislation fuels net absorption
Source: JLL Research.
5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 100 200 300 400 500 600 700 800 public bills enacted into law Metro DC net absorption
Bills Enacted Into Law Net Absorption SF
17
» Tenant demand in Metro D.C. is highly
correlated with the alignment of Congress and the Presidency; the market historically thrives under single- party rule
» Over the past 12+ years, the Metro
D.C. office market has:
» Absorbed 37 million SF when
Congress and the Presidency have been in alignment (2003- 2006 and 2009-2010)
» Lost 5.1 million SF of occupancy
when there has been division (2001-2002; 2007-2008; and 2011-2016)
10,000,000 20,000,000 30,000,000 40,000,000 Divided Aligned
Aggregate net absorption (SF)
Source: JLL Research.
18
» 30 million SF of lease maturities in Greater Washington, D.C. market,
2017-2021
» Approximately half of which is in the District
» GSA mandate to shrink-the-footprint » Low likelihood of in-place renewal
19
» Push for efficiency in new GSA leases across Metro D.C. emphasizes
reduced square footage per employee
Source: JLL Research.
100 128 130 130 153 173 184 200 50 100 150 200 250 USAID (Crystal City, 2012) National Science Foundation (Alexandria, 2013) Department of Justice Civil Division (East End, 2016) U.S. Marshals Service (Crystal City, 2015) TSA (Alexandria, 2015) Department of Labor (Crystal City, 2014) Department of Justice (NoMa, 2015) Government (historical average)
Usable square feet per employee
Average space reduction
20
» Overall GSA leased space in Metro D.C. has declined 9.3% since 2012 » 86.4% increase in SF extended since 2006; further contraction likely
5.7 6.2 5.3 3.8 7.0 8.1 7.2 10.3 11.0 10.5 10.7
10 20 30 40 50 60 70 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Square feet (in millions) Old Lease-Unknown Renewal New deal Holdover Extension
Holdover data only available back to 2011
Source: JLL, GSA.gov, “Renewal” includes Superseding, Succeeding and Renewal actions affecting term as defined in GSA’s 2014 Lease Inventory
21
» We have no SF leased to the GSA in the Greater D.C. market
6.4% 7.3% 8.4% 8.5% 9.9% 10.1% 10.7% 10.9% 17.5% 17.9% 21.6% 28.2%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Rock Spring Park Alexandria Herndon Rockville Pike East End West End RB Corridor Springfield NoMa Baileys Crossroads Crystal City Southwest
GSA lease expirations as a % of overall market inventory (2016-2020) Source: JLL Research, data includes all GSA office leases over 20,000 s.f. expiring between 2016-2020 as a percentage of overall inventory
D.C. submarket exposure to GSA lease expirations (5 year horizon)
22
» Select COPT locations may benefit from GSA relocations to more
efficient space
1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GSA lease expirations (s.f.) Washington, DC Northern Virginia Suburban Maryland
Source: JLL Research, data includes all GSA office leases.
GSA lease expirations across Greater Washington, D.C.
20 mm 30 mm
23
4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% Cap rate prior to Global Financial Crisis: 5.2% Current cap rate: 5.0% Budget Control Act of 2011
» Despite weak
fundamentals in recent years, demand for core real estate investments has pushed office cap rates to record-lows
» Global macro factors,
including direct investment and low interest rates, have pushed cap rates to new lows
Source: Real Capital Analytics, Q3 2016 preliminary data; COPT Investments & IR Departments
Cap Rates for CBD Office Properties in Washington, D.C.
24
Office Cap Rates
Washington, D.C. Metro Area, all classes
Source: Cushman & Wakefield.
25
Office Investment Sales Volume
Washington, D.C. Metro
Source: Cushman & Wakefield
$41 Billion
26
Source: Cushman & Wakefield, RCA.
27
28
» Mission critical facility in NoVA
» On-metro, amenity-rich location
»
2600 Park Tower Drive Merrifield, VA 13857 McLearen Road Herndon, VA
29
» Local perspective on impact of urbanization » Exogenous changes to Supply & Demand
100 Light Street Baltimore, MD 250 W. Pratt Street Baltimore, MD
30
» Leverage evolving trends in office design
Greater Philadelphia
pricing
Airport Square near BWI
Drive
Drive Columbia Gateway
* Based on in-place cash NOI.
31
Campuses Redstone Gateway - Huntsville, AL
Secured Various – MD, VA, TX
MD / VA NBP Arundel Preserve Columbia Gateway
Washington, D.C.
32
» Cybersecurity sending is up 58% since 2011 » Procurement contracts for tanks, ships and drones are down 37%
Source: JLL Research, Bloomberg Government.
33
»New Development
1.0 million SF
»Cyber Contractors
1.1 million SF
1.8 million SF
34
» We are the only publicly
traded REIT, and one of the only landlords that can solve the U.S. Government’s pent-up need for modern, ATFP compliant space in precise locations
» Our advantaged land
positions, specialized development expertise & credentialed personnel combine to create a unique competitive advantage for value creation
NoVA Office Park – 2013-Present
160,000 SF
240,000 SF
160,000 SF Existing 560,000 SF
Potential 1,360,000 SF
“Luck is when preparation meets
Seneca, Roman philosopher
35
36
» Greater Washington, D.C. market fundamentals remain tough
» GSA supply shock will hurt existing GSA landlords » Federal elections in November will be key in determining future demand within the
region
» Low interest rates and foreign investment continue to keep cap rates low for the
foreseeable future
» We have & will create value through:
» Opportunistic acquisitions » Low-risk development for special situations » U.S. Government DOD historically; GSA potentially in the future » Data Center Shell Development
37
38
Stephen E. Budorick is President and Chief Executive Officer of Corporate Office Properties Trust (COPT). Mr. Budorick was elected Trustee in May 2016. Mr. Budorick was COPT’s Executive Vice President and Chief Operating Officer from September 2011 through May 2016. Prior to joining COPT, Steve served as Executive Vice President of asset management at Callahan Capital Partners, LLC since 2006. Before his tenure at Callahan Capital Partners, he was Executive Vice President in charge of Trizec Properties, Inc.’s Central Region from 1997-2006, and Executive Vice President in charge of third-party management and leasing at Miglin Beitler Management Company from 1991-1997. Steve also worked in asset management at LaSalle Partners, Inc. from 1988-1991 and in facilities management and planning at American Hospital Association from 1983-1988. Steve earned a B.S. in Industrial Engineering from the University of Illinois and an MBA in Finance from the University of Chicago in 1982 and 1988, respectively.
6711 Columbia Gateway Drive, Suite 300, Columbia, Maryland 21046 443.285.5400 / www.copt.com / NYSE: OFC