Q1 2024 COPT Defense Properties Earnings Call

Participants

Venkat Kommineni; VP, IR; COPT Defense Properties

Stephen Budorick; President, Chief Executive Officer, Trustee; COPT Defense Properties

Britt Snider; Chief Operating Officer, Executive Vice President; COPT Defense Properties

Anthony Mifsud; Chief Financial Officer, Executive Vice President; COPT Defense Properties

Michael Griffin; Analyst; Citigroup Global Markets Inc.

Blaine Heck; Analyst; Wells Fargo Securities, LLC

Camille Bonnel; Analyst; BofA Global Research

Tom Catherwood; Analyst; BTIG LLC

Anthony Paolone; Analyst; J.P. Morgan Securities LLC

Peter Abramovitz; Analyst; Jefferies LLC

Richard Anderson; Analyst; Wedbush Securities, Inc

Dylan Burzinski; Analyst; Green Street Advisors, LLC

Presentation

Operator

Welcome to the COPT defense Properties First Quarter 2024 Results Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Vince to get common any cut defense is Vice President of Investor Relations. Mr. Comyn, any Please go ahead.

Venkat Kommineni

Thank you achieve. Good afternoon and welcome to the Compton Ventas conference call. To discuss first quarter results. With me today are Steve Budorick, President and CEO, Britt Sider, 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 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?

Stephen Budorick

Good afternoon, and thank you for joining us. We're off to a great start in 2024. We reported FFO per share of $0.62 for the first quarter, which was $0.02 above the midpoint of guidance. Same-property cash NOI increased 6.1% year over year. The strong performance is driven by our high tenant retention, contractual rent escalations, revenue growth from vacancy leasing achieved last year, strong property operations and to a lesser extent, new properties in the same property pool in January. The 2023 same-property pool on a stand-alone basis generated 4.8% growth.
We completed 721,000 square feet of total leasing volume, which consisted of 551,000 square feet of renewal leasing with a 78% retention rate, 160,000 square feet of vacancy leasing, which amounts to 40% of our full year target and 10,000 square feet of development leasing. We committed $91 million of capital to new investments, which includes two development starts that will provide much needed inventory in our highest occupancy markets, the National Business Park and Redstone Gateway, where we literally have no comparable space left to lease.
Our active development pipeline now totals roughly 960,000 square feet. It is 74% pre-leased. The total costs of $381 million, which is a nearly $60 million increase from last quarter. And excluding the three inventory buildings to pipelines, 100% pre-lease. We placed 73,000 square feet of development space into service that were 100% leased and onstream. In mid-March, we acquired a 202,000 square foot building in Columbia Gateway for $15 million, which I will discuss in more detail in a moment. Our business continues to generate increasing FFO and our dividend payout ratio remains strong, coming in at 57% for the quarter.
Finally, based on our performance and expectations for continued growth, in February, our Board of Trustees approved a 3.5% increase to our dividend, which marks our second consecutive annual increase following the 3.6% raised in 2023. We are the only [realtor] sector to raise the dividend year to date, which demonstrates the confidence we have in the strength and durability of our FFO and AFFO growth profile.
Now turning to guidance. We increased the midpoint of 2024 FFO per share guidance by $0.03 to $2.54, which implies 5% year-over-year FFO growth. In contrast, over two thirds of the nayreads defined office rents are expected to see FFO per share decline in 2024. Between 2019 and the midpoint of our new 2024 guidance, we expect to generate 25% FFO per share growth, which amounts to a 4.6% compound annual growth rate. This is second highest growth rate among our peers that comparable to the median growth through the triple nets sector and stronger than the multifamily segment over the same period. Our differentiated strategy has and will continue to produce differentiated results.
Turning to the world view, over the past few months, the conflicts between Iran, it's crises in Israel as well as Russia, Ukraine, continue to escalate while China remains an ever-present and growing threat. On March 20th, the FY 2024 Defense Appropriations Act was signed into (technical difficulty) of investments, a $30 billion or 4% increase over last year. This is actually larger than the 3.3% increase in the approved NDA submitted in December and $4 billion higher than the president's initial budget request. The FY 2024 budget and appropriations are separate from the $95 billion in supplemental funding for Ukraine, Israel and Taiwan, which passed the House and Senate with bipartisan support and was signed into on Wednesday.
In a time where the global security environment is becoming increasingly complicated. We continue to have a high level of confidence that Congress will continue to work in a bipartisan manner as they just did to fund national security interest and support our allies around the world.
I'll conclude my remarks by discussing our recent acquisition. In March, we acquired Franklin center in Columbia Gateway for $15 million, which marks our first acquisition in nine years. Franklin centers the 202,000 square foot Class A office building, which sits less than a mile from our headquarters and is 56% leased to a leading defense contractor.
This building constructed in 2008 the second newest development in the park is lead gold certified and well amenitized. We saw an opportunity to acquire an asset (technical difficulty) to create shareholder value. (technical difficulty) And the first is the mission. The property must be proximate to a priority knowledge base, national defense mission that has permanence. Second, the market in light of industry fundamentals and tracked defense IT tenants serving the measures.
Third, the property we looked for attributes that would lead to high tenant retention, such as high efficiency in planning and operations and or significant tenant co-investment specialized improvements such as Skip. And fourth, the return the initial cash yield needs to meet or exceed what we earn on our developments and Franklin center checked all four of these boxes.
The strategic rationale behind the deal is quite simple is value add opportunity with significant occupancy upside. We acquired it at a substantial discount to replacement grows. It enhances our relationship with a top 10 US defense contractor. It solidifies our position as the dominant owner in Columbia Gateway and it provides much needed inventory is our Columbia Gateway gateway portfolio was nearly 95% leased excluding this acquisition.
We already have strong leasing pipeline for the asset with the leasing activity ratio of 200%, which means we have 180,000 square feet of demand for the 90,000 square feet of vacancy we acquired. Our entire 2.5 million square foot Columbia Gateway portfolio. The activity ratio was 190% with roughly 445,000 square feet of demand for the 235,000 square feet of vacancy. I am highly confident we can unlock value in this asset as roughly 80% of the defense/IT tenancy in the entire Columbia Gateway Park chooses cap defense as their landlord.
So with that, I'll hand it over to Brett.

Britt Snider

Thank you, Steve. Our business remained strong as the federal government and contractors rise to meet the current challenges that we're all witnessing around the world. The need for secure space continues to grow, and that demand is becoming more and more immediate. This strong demand has benefited us as we've been able to achieve stronger leasing economics by reducing concessions, principally by lowering or eliminating rent abatements in our Defense/IT portfolio for.
Our leasing activity ratio for available space strengthened over the quarter to 85% for the total portfolio, despite executing 160,000 square feet of vacancy leasing and adding 90,000 square feet of inventory during the quarter. The activity ratio was even higher in our Defense IT portfolio at 108% as we only have 770,000 square feet of inventory available out of 22 million square feet.
Looking into our markets and the MVP remains the strongest component of the portfolio with continued demand from our largest customers, while cyber-related businesses continue to both enter and grow within our Columbia Gateway submarket, missile defense related businesses and support for other missions at Redstone Arsenal continue to thrive at Redstone Gateway, where we're also seeing increased interest in R&D testing and lab space.
And lastly, with the completion of the fiscal year 2024, but we're pleased to see increased activity in all three of our Navy Support locations. In our other segment. We're making leasing progress in those competitive environments with success defined in the 5,000 to 15,000 square foot increments. At 100 L Street in DC, we actually signed a lease yesterday for 16,000 square feet which stabilizes that building a 92% leased (technical difficulty) in our other segment and expect to have additional good news on the leasing front in the coming months.
Our portfolio occupancy ended the quarter at 93.6% with our defense IT portfolio at 95.6%. The 60 basis point quarter-over-quarter decline for both figures was driven by one, the acquisition of Franklin center, which had 90,000 square feet of vacancy and two the known non-renewals we discussed last quarter. In terms of vacancy, leasing we executed 160,000 square feet during the quarter, and we are well positioned to meet our full year target of 400,000 square feet. Vacancy leasing as a percentage of available space at year end was over 14% in our total portfolio and over 18% in our Defense IT portfolio. Half of the leasing volume was signed in the Fort Meade BW Corridor segment with Columbia Gateway, a particular standout at 40,000 square feet or 25% of the total.
I'd like to share some key leasing stats with you, roughly 105,000 square feet of vacancy leasing was with defense contractor tenants. And importantly, we (technical difficulty) 50,000 square feet in our other segment half of which occurred at Pinnacle Towers in Northern Virginia, where we increased the leased rate by nearly 700 basis points sequentially. Roughly 60,000 square feet or nearly 40% of the total was tied to cyber activity. Nearly 70% of combined vacancy and development leasing was repeat business with existing tenants. Cash rent spreads on a 551,000 square feet of renewals were down 2.5%, while GAAP rent spreads were up 3.7%, driven by annual rent increases of 2.4% with a weighted average lease term of 4.1 years.
On page 26 of our flip book, we provide detail on two larger renewals that negatively impacted the change in cash rents. These renewals consisted of 110,000 square foot lease in our Defense/IT segment in Northern Virginia and a 30,000 square foot renewal in our other segment at 100 Light Street in Baltimore.
The Northern Virginia Renewal was the largest lease signed during that quarter in that market with starting cash rent on the above grade and space at $40 a foot, which despite the rent roll-down is actually still 8% above other deals executed in both the submarket and all of Northern Virginia, excluding the impact of these two renewals, cash rent spreads were flat, while GAAP rent spreads were up 8.1%. And we continue to expect cash rent spreads to be flat for the full year at the midpoint and retention in the 75% to 85% range.
The 2.5% cash rent roll-down during the quarter equates to only $450,000 in annual rental revenue or only 0.1% of the total and which we anticipate making up over the course of the year. In addition, this impact is inconsequential when compared to the annualized revenue contribution from vacancy leasing achieved in the quarter of approximately $4.8 million. As shown on page 25 of the flip book, we continue to expect the retention on our large leases through year-end 2025 to be over 95%.
Now turning to development, as you recall, one key aspect of our development strategy is to always maintain some level of inventory at locations where we see strong demand. and we're nearing fully leased. We will commence new projects to create inventory Redstone Arsenal is 98.6% leased and 97.4% occupied across that 2.4 million square foot park. 20 of the 24 properties are 100% leased with less than 35,000 square feet of unleased space at quarter end of the operating portfolio. We have 8100 Rideout road under construction to create office inventory at Redstone Gateway. The project is 42% pre-leased with a leasing activity ratio of 135% with 100,000 square feet of demand on the 75,000 square feet of vacancy.
During the quarter, we also started 9,700 advanced gateway, a high day R&D and testing facility. This 50,000 square foot project has a total cost of $11 million and is 20% lease -- pre-leased to a defense IT firm headquartered in Huntsville. We have a leasing activity ratio of 150% with 60,000 square feet of demand on the 40,000 square feet of vacancy.
Similarly, the National Business Park is 99.1% leased and occupied across that 4.3 million square foot park. 29 of the 34 properties are 100% leased with only 37,000 square feet of unleased space at quarter end. accordingly, we started MVP 400 during the quarter, which is 138,000 square foot, $65 million office project we have a leasing activity of 150% with over 200,000 square feet of demand for that project.
Our development leasing pipeline, which we define as opportunities we consider 50% likely or better to win within two years or less currently stands at over 500,000 square feet. And beyond that, we're tracking over 1 million square feet of potential future development opportunities, which should allow us to maintain a solid development pipeline in the near and medium term.
I'll conclude my remarks by highlighting the increased importance of Columbia Gateway as a cyber defense and IT hub with a combination of government tenants and a rich concentration of cyber innovators that grow their businesses and space requirements with us. There are four factors that contribute to Columbia Gateway success.
First, in easily computable location located midway between Baltimore and Washington D.C. It provides tenants the ability to attract young educated workers from both cities. Second, it's only seven miles to Fort Meade, which is home to a large intelligence agency, US Cyber Command and over 100 federal agencies and military commands. Third growth in cyber funding. Cyber funding increased over $2 billion this year, which is over a 40% increase over the past four years. And the DoD has requested another $1 billion increase from 2025.
And finally, our lifecycle landlord proposition, we have a unique ability to attract early to mid-stage defense contractors given our expertise and ability to scale with them and mission critical locations. Our variety of product types, office suites have fosters growth among contractors as they mature wind contracts and expand their businesses. Columbia Gateway was 94.8% leased to 92.9% occupied at quarter end. Excluding our Franklin center acquisition.
After reserving inventory for our high probability prospects, we had only 40,000 square feet remaining to lease in the park with the largest remaining suite at 9,000 square feet. While we often discuss the strength of the MVP in Redstone markets, this acquisition of Franklin center provides a great opportunity to spotlight our Columbia Gateway portfolio and provides much needed inventory to allow us to continue to solidify our dominant market position and meet the needs of our Defense IT customers.
With that, I'll hand it over to Anthony.

Anthony Mifsud

Thank you, Britt. We reported first quarter FFO per share as adjusted for comparability of $0.62, which was $0.02 above the midpoint of our guidance. The quarter benefited from lower net operating expenses, primarily due to favorable weather conditions, increased interest income on our cash balances and slightly lower net G&A and venture expenses. During the quarter, (technical difficulty) for our Defense IT portfolio. This strong performance was a combination of the 2023 same-property pool increasing 4.8% with the defense IT portion of that portfolio, increasing 6.3% plus the impact of properties that were added to the 2024 pool.
We increased the midpoint of our same-property cash NOI guidance by 50 basis points to 6.5%, driven by lower than expected free rent concessions on renewals and better operating margins. Same-property occupancy ended the quarter at 93.5%, which is down 30 basis points sequentially from last quarter, but up 90 basis points year over year. As previously discussed, the decline was driven primarily by two downsizes totaling 72,000 square feet.
First, a 100,000 square foot contract or downsized to 60,000 square feet. We are tracking a great opportunity to backfill the majority of that space with a government tenant. And second, the downsize of a law firm in our other segments. We expect same-property occupancy to remain relatively stable throughout the remainder of the year.
Our balance sheet continues to be strong and well positioned to navigate the higher much longer interest rate environment the market is currently anticipating. We have no significant debt maturities until March 2026. Our unencumbered portfolio represents 95% of total NOI from real estate operations. And at the end of the quarter, we had over 85% of the capacity on our line of credit available and over $120 million of cash on hand.
We currently have no variable rate debt exposure. In February 2023, we entered into interest rate swaps that fixed so far at 3.75% for three years on our $125 million term loan and $75 million of a line of credit. The swap rate is over 150 basis points lower than the current one-month term so far and has and will continue to provide significant protection in this prolonged elevated rate environment. Thus far these swaps have generated over $3 million of interest expense savings and based on the current super curve, they are expected to remain in the money through the maturity in 2026.
We expect 100% of our debt will be at fixed rates late into 2024 as the equity component of our capital investments will be funded from cash from operations after the dividend and the debt component from our existing cash balance and subsequently from our line of credit.
Turning to our recent acquisition, the initial cash yield on Franklin center is 11.2%. In 2024 the transaction is roughly half a penny accretive to FFO per share and a full penny accretive to AFFO per share. The $15 million acquisition was funded with cash on hand and there was no impact to leverage.
With respect to guidance, we increased 2024 FFO per share guidance by $0.03 at the midpoint, implying 5% growth over 2020 three's results. The guidance increase is driven by the first quarter strong performance, the acceleration of commencement dates on some executed leases, and the acquisition of Franklin center. In addition, given the higher for longer rate environment, we expect slightly higher interest income on cash balances, but are protected against higher variable interest expense because of the previously discussed swaps.
Finally, we are establishing second quarter guidance for FFO per share as adjusted for comparability in a range of $0.62 to $0.64 with that, I'll turn the call back to Steve.

Stephen Budorick

Thank you. I'll close by summarizing our key messages. We're off to a great start in 2024 with first quarter FFO per share $0.02 above the midpoint of guidance. Our defense IT segment is 96.8% leased, which is well ahead of our peers. We reported same-property cash NOI growth of 6.1% in our total port portfolio and 7.6% in our Defense/IT portfolio. We increased the midpoint of 2020 for same-property cash NOI growth by 50 basis points to 6.5% at the midpoint.
We executed 160,000 square feet of vacancy leasing, which puts us in a good position to achieve our full year target of 400,000 square feet. Our $381 million of active developments, which are 74% pre-leased, provide a solid trajectory for our external NOI growth over the next few years. we purchased Franklin Center, a modern lead Gold Certified office building in Columbia Gateway for $15 million at a double digit initial cash yield.
Our liquidity is very strong, and we continue to expect to self-fund the equity component of our expected capital investment going forward. We raised our dividend 3.5% in February, which marks our second consecutive annual increase. We increased the midpoint of 2024 FFO per share guidance by $0.03 to $2.54 which implies 5% year-over-year FFO growth.
And finally, looking forward, we continue to expect compound annual FFO per share growth of roughly 4% between 2023 and 2026 based on midpoint of our initial 2023 guidance.
And with that, operator, please open up the call for questions.

Question and Answer Session

Operator

Michael Griffin of Citi.
Question, please, Michael.

Michael Griffin

Yes, great. Thanks. Tom, maybe you could give a little more color or context about the Franklin center acquisition. I mean, or are we going to see other assets like this trade and Columbia Gateway? Was this sort of a one-off special to this building? And can you give us any sense on kind of going in and stabilized cap rates?

Stephen Budorick

Yes. So we gave you the going in cap rate that's 11.2% our flip book reports a conservative 12% cash yield after we stabilize. This is a better way to look at the cap rate. The acquisition, I don't consider this indicative of the value of property in Columbia Gateway. This particular building was bought is a 100% leased asset years ago by a triple-net investor and one of the current tenant contracted several years back. I don't think they really have the platform to compete against our franchise in our backyard. And I think their leasing languished eventually that I believe they're redeploying capital to more strategic assets, which created a great opportunity for us to step in and add this building to our franchise, which is double win for our shareholders.

Michael Griffin

Maybe just to follow up on that with the lease expiring in 2026, would you say the probability is high the tenant renewing or would you expect that space to be re-leased?

Stephen Budorick

It was exceptionally high. They will renew wherever we know the tenant. We know the vision they conduct in that building. They have significant tenant co-investment has some very valuable improvements in that building would have to be an extraordinary loss of business for that tenant to depart the building.

Michael Griffin

Got you. That's helpful. And then maybe lastly, just on renewal leasing for the quarter, I saw cash rents declined about 2.5%, mainly driven by one large tenant in Nova. Would you consider that more a one-off or would you expect we could see cash rents decline continuing throughout the year.

Stephen Budorick

(Technical difficulty) overall trend trend back to where we had back, then we expected that to be very good.

Michael Griffin

Great. That's it for me. Thanks for the time.

Stephen Budorick

Thank you.

Operator

Blaine Heck of Wells Fargo.

Blaine Heck

Great, thanks. Good afternoon. There were some audio issues on my side, so I'm sorry if I missed anything related to my questions. But the first one, I agree to see the new investment on both the development and acquisition sides. But just a few questions on that subject. First, can you just talk about the decision to add those two new development projects and what you're seeing that kind of makes you comfortable with the additional speculative leasing just given that overall development leasing was relatively soft this quarter?

Stephen Budorick

Well,the relevant leasing kind of ebbs and flows that can be lumpy. Several of the prospects for the projects we started and the one. We are under construction on [ARG 100] and Huntsville. We are awaiting the approval of the NDA to proceed, which just happened in the last couple of weeks so we expect that leasing activity will pick up through the year and drove insight with regard to the decision to start at the NBP, we are 99.1% leased and occupied. We have less than 30,000 square feet in the whole park. We expect no space to not renew in the near term, and we have a couple of hundred thousand square feet of demand that we're working with tenants on now, it's absolutely a no-brainer and a smart defensive move on our part to create inventory to support the ecosystem that we enjoy supporting for me, we have every expectation that will be very successful. And then similarly, in Redstone Gateway, we have quite a bit of demand developing for High Bay, our R&D and testing, and we decided to build the building with the 20% pre-lease to satisfy that demand. We expect to lease up pretty quickly and we think that could be a not huge, but an important additional product type that we may win as develop into going forward.

Blaine Heck

Great. Thanks, Steve. Just to kind of follow up on that last part. So can you talk specifically about tenant prospects that 8100 Rideout, it's 42% leased. You completed it last year, operational data, third quarter this year. I guess just talk about more about your prospects there, whether you think you can have that stabilized by the third quarter? And then just maybe for Anthony and just remind us of your capitalized interest policies that I guess confirm that you'd stop capitalizing on anything at least in the third quarter this year?

Stephen Budorick

So I'll deal with the easy part our activity ratios over 100% on the vacancy, whether we get it completely full by the third quarter, I hate to predict timing. Our industry moves pretty methodically, but we are working with tenants in interest, create some pretty high value leasing opportunities that will get done this year. we're so confident we're going to build the building. We're in advanced planning and the next one we need to build.

Anthony Mifsud

And then Blaine, on capitalized interest, you're correct. We so we placed the first tenant into service in the first quarter. So capitalized interest on that portion of the building stopped in the first quarter and then some on any unleased component of the building or unoccupied portion of the building at the in the third quarter capitalized interest, which would stop.

Blaine Heck

Perfect. Thanks. Last one for me. You guys bumped your expectation for FFO growth here in 2024, but I believe you kept the same expectation for 4% CAGR from '23 to '26 unchanged. Does that imply some growth was pulled forward or maybe just some conservatism with respect to kind of changing that longer-term charge target.

Stephen Budorick

We got to save some news for later line. Now we've put out that benchmark on the '23 to '26, almost two years ago. We want to see that fulfilled and that will we'll update our forward thinking. But it doesn't imply a meaningful change to what we think lap next year.

Blaine Heck

Great. Thanks, guys.

Operator

Camille Bonanno of Bank of America.

Camille Bonnel

Hi, everyone. I wanted to pick up on some of the drivers of the increase in guidance, particularly the comment of accelerating lease commencement dates. Can you help us understand how much of that was driven by the efforts of your operations team being able to deliver the space ahead of schedule budget outcomes that Steve highlighted in his opening remarks are just simply the tenants requesting to move in sooner.

Anthony Mifsud

It's really the second item that you mentioned. So our team has been able to execute our portion of the required investment in the space sooner than we had anticipated and which allows the tenant to take control of the space and are for our leases to commence.

Camille Bonnel

Okay. I'll have to go back through the transcript. There is a sound is cutting out a bit, but just a follow-up for the last few quarters. Your same store NOI has benefited from lower than expected free rent concessions. Would you call this a trend? And what's driving this one we're hearing in other sectors that concessions continue to rise.

Britt Snider

And this is Brett. Yes, I mean, it's it is something that it's obviously a helpful trend that we're seeing and something we're pushing our asset managers and leasing folks are pushing for the lower abatement because the demand is sort of the near term. Demand is just incredibly strong. And that's how tenants are prioritizing what their space needs are, that it's hard for them. It actually relates to the development leasing a little bit because they're looking at what they need now. The demands that are coming out for secure space are are incredibly high. And so we feel like we have a very strong position in that regard, given that we can provide that kind of space and drive some of those of those concessions, in particular free rent down. So it's something we're actively questions.

Camille Bonnel

Could you quantify that in terms of like percent abatement that you're giving per lease term and what that compares to pre-pandemic, for example.

Britt Snider

I don't have that offhand, but we can certainly go through our data and get that for you and I mean, I'll say it's definitely something that we've seen, I would say over the past couple of quarters, it's a trend that we're pushing on time, but we can work to quantify that. Get that to you.

Camille Bonnel

Okay. Thanks.

Operator

Tom Catherwood of BTIG.

Tom Catherwood

Thank you and good afternoon, everybody. From maybe Britt, if I'm not mistaken, I think a lot of your activity in the Columbia Gateway market in the last maybe 12, 18 months has been small to midsize tenants, a lot of overflow coming from NBP, but with this now 90,000 square foot contiguous block of block of space, does this allow you to target a different sort of tenants. Can you be more selective kind of given the the activity you already have on the space? What's the kind of leasing strategy as you think of that space?

Britt Snider

(Technical difficulty) we are seeing a steady increase demand here from cyber tenants. And yes, they are generally smaller in size, but we're also seeing tenants that come in at 5,000 feet and have turned into 70,000 feet because of the cyber hub and the ecosystem that we've created here. And so we see that as something that has a very nice trajectory for Columbia Gateway and time yes, it's becoming a much more of a cyber IT hub.

Tom Catherwood

Got it.
And then also following up on something else. You mentioned in your prepared remarks, Britt, you talked about the defense budget approval, benefiting the Navy Support portfolio. Can you provide more detail on that comment and maybe what you're seeing in terms of tenant activity in that in that grouping?

Britt Snider

Yes, I mean, we are seeing I mean, the the Navy Support demand driver is something that ebbs and flows a little bit. But it is something that we are seeing of late where some more more contracts are coming out and whether it's the Navy directly or through their contractors?
I certainly can't speak to exactly what's or what's driving it, except for what we see in the defense budget, but we're definitely seeing an increased activity level there and a lot of phone calls coming in, I'm saying, geez, additional space and in particular, secure space so on, we're very pleased to see that demand increasing.

Tom Catherwood

Got it. And then final one for me. Maybe, Steve, you can Great to see the the acquisition of Franklin center and I know acquisitions can be opportunistic. It can be kind of one-offs, but what are you seeing as far as product potentially coming to market? I know there's been some talk of maybe in the like Route 28 South Corridor in Northern Virginia with some buildings potentially coming up that might fit into your portfolio in a deeper sense of could there be other opportunities out for comp this year in the market.

Stephen Budorick

There have been a couple three opportunities in Northern Virginia, a Some have been deferred and a couple of resolved or another investor was willing to pay more than we would like it. So we're paying We painfully one through our criteria and we're extremely disciplined if we can't meet our development yield a acquisition there. We're not going to buy.

Tom Catherwood

Got it. That's it for me. Thanks, everyone.

Operator

Anthony Paolone of JPMorgan. Please go ahead, Ray.

Anthony Paolone

Hi. Thanks for taking my question. My first question is on Franklin center on you guys. It sounds like there's no more dollar to be put into the asset itself. It's just a matter of leasing up, if that's the right way to think about that?

Stephen Budorick

Yes, we generally, yes, the buildings very well cared for and thrown up. Like we said, second newest building in Park, it's really quite prominent. We budgeted a couple of million dollars for some time public combination enhancement, bunching up of operators and kind of the initial arrival experience, (technical difficulty).

Anthony Paolone

Got you. And then a second part of Franklin center is you guys provide a going in cash yield and stabilized cash yield and also mention that most likely is the renewal of existing tenants, but there are still some vacancy. Just curious to know with Endesa stabilize you that you've provided under the assumption of just sure and tenant renewing or, you know, assuming it's going to lease up to more like a 90% or so. So I'm just trying to think about upside and downside on that yeild.

Stephen Budorick

Yeah, there's much more upside to go. So the 12% stabilized cash yield was established to cover absolutely every bad thing that could ever possibly happen concurrently, I think we're going to blow that away.

Anthony Paolone

Got it. And then any mark-to-market you can give on that? Because I noticed on GAAP basis, I think your rent is a little lower than cash basis. just curious on the mark to market there?

Anthony Mifsud

I'm , the value of the mark to market over the remaining lease term was just under $1.5 million, I think $4 per annum per foot.

Anthony Paolone

Higher than market?

Anthony Mifsud

Correct.

Anthony Paolone

Got it. And then I have a quick.
Yes.
And then my second question is on the data center. I know there is another exploration later this year. Any color you can provide on mark-to-market noticed that the rent is a little bit on a higher side versus the one that just got renewed. I just want to get a sense on market there

Anthony Mifsud

And the negotiations with the tenant are being finalized now, we expect us expect a strong mark-to-market on that lease, despite the fact that it's up current rent is a bit higher than where our renewal last year ended. So I wouldn't want to put a percentage out there right now since we're still in discussions with that with our tenants.

Anthony Paolone

Got it. That's it for me. Thank you.

Operator

Peter Abramovitz of Jefferies. Your line is open, Peter?

Peter Abramovitz

Yes, thank you. Suggest another one on the yield at Franklin center. So I think, Steve, you just mentioned you would expect some upside to that just looking assuming you get to say and kind of 90% stabilized occupancy, if you're at 11% with just 56% occupancy today, just trying to quantify that upside is it fair to say could get kind of into the mid to high-teens if you're getting to 90% stabilized occupancy?

Stephen Budorick

Yes.

Peter Abramovitz

Got it. That's helpful. And then just just another one on the development side. Could you just kind of touch on you talked about the two new projects that you have and are looking to lease up in Redstone. Could you just talk about the depth of pipeline for demand on the build-to-suit side and just kind of what you're seeing there, what you expect for the rest of the year?

Stephen Budorick

Yes. So our overall development leasing pipeline is a little over half a million square feet right now. And that includes several possibilities for build-to-suits and then leasing up what we've started in they are under construction.

Peter Abramovitz

Catcher.

Stephen Budorick

Aware

Peter Abramovitz

I guess is that something what you are aware at this point as our I always hear, is that something you think could pick up just on the back of on some of the strong growth in the defense budget. I would imagine that 23 demand is kind of coming through right now.

Stephen Budorick

Well, it is my belief that we are feeling that all companies are feeling the pressure of the cost of capital right now. And I think even our customers are good business opportunity and growth are being very prudent about major investment decisions. So I think we get the must must have developments, and I think there's a wait and see and want to have so actually believed over the next few years if the rates on being prove that our development opportunities will increase from where they are today, but we still see good opportunity there meet our financial objectives in this environment.

Peter Abramovitz

Got it. Thank you.

Operator

Richard Anderson, Wedbush Securities. Please go ahead.

Richard Anderson

Richard, think you said May Rich Anderson here?
Yes, it's been a lot of in and out interference. So if I missed anything, I apologize. I might want to check your WiFi account, make sure it's up to speed just king of Franklin center, did you does it yield projection assume again, I think I might have missed this a roll down on the existing tenant in 2026.

Stephen Budorick

So Rich, (technical difficulty) it would reserve it would absorb more investment in the common area and the structure of the building than we planned to spend and it would absorb higher TI.'s than we typically give. This is a very conservative number and a forward-looking publicly disclose environment where we never want to be overstating our opportunity, as I said, to an earlier caller, you mindedness, I expect to beat that target and potentially very handily.

Richard Anderson

Okay. You describe the building is very well cared for, but yet still unable to compete with the engine of CDP in the vicinity of what we would have stopped the tenant to over to a very well cared for building and the proximity of everything else. It's just it just seems odd to me that if it's a nice building, it looks nice mixers look nice. Why wouldn't it have been more competitive versus your 97% occupancy?

Stephen Budorick

It's a hard thing for me to answer that with specificity, but to Canada, get comfortable with the 80% of the defense contractor business in Columbia Gateway is with us, and we've been the defense IT landlord in this market for over 25 years. So we've been public. We've got great relationships and we have relationships with most of the tenants that are in the market somewhere else. So we just tend to dominate in this business park.

Britt Snider

And I would just add to that if we have an additional 200,000 square feet of demand that we're seeing since we took over. So again, that just shows what Steve was saying, which is the relationships that we have do, our autonomous store, our assets here.

Stephen Budorick

In Windows him that the prior owner for another part of the country, different structure, triple A triple net lease investor, no particular operating presence on the East Coast, and they have to rely on the fee management crowd. In theory, hypothetically debt service component of the business doesn't bring through relationships that we have, where we do that primarily directly.

Richard Anderson

Progress on L Street, I think you said fully stabilized now. I know there was some leasing in Baltimore. How are you closing in on some of these other, quote-unquote, other asset sales? Could it be a this year event or is that not not a likely outcome at this point?

Stephen Budorick

I didn't see it this year, Rich. What were transactions that have happened in D.C. are very opportunistic from the buyer's standpoint. They don't represent cap rates that we would accept with the asset that valuable for the sense of timing. And then outside of that, in Tysons Corner in Baltimore. I just don't think you have the depth of capital to make a market on those assets, communication 10.

Richard Anderson

Okay. And last question for me. I have heard the 4% CAGR through 2026 on FFO, what does that and what does that assume on a same-store cash NOI growth? I know you're doing [6.5] this year, it's probably not sustainable at that level. I'm guessing what's the right way to sort of that expectations from from an internal growth perspective for well like us, I'm not sure I can answer that question.

Stephen Budorick

We really run math on it in that way. And you recall we put the target out several years ago and we're going to continue to report against that target till we hit it. And then we'll consider our new benchmark that we put forward. The intent is to convey our confidence of continuing to produce growth in a challenging financial environment and to convey the strength to our business that we continue to improve quarter-in and quarter-out.

Richard Anderson

Okay, fair enough. Thanks very much.

Operator

Thank you.
Dylan Burzinski, Green Street.

Dylan Burzinski

I actually don't have any more questions, so thanks.

Stephen Budorick

Good time to Virgil's.

Dylan Burzinski

You're talking to you guys too.

Stephen Budorick

I have to say soon.

Operator

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

Stephen Budorick

Yes. Thank you all for joining our call today and the enriching questions that we got to discuss. We are in our offices all afternoon. So please coordinate through Ben cap, if you like, follow-up call or talk about something we mentioned in more detail Thank you.

Operator

Thank you for your participation today in the COPT defense Properties First Quarter 2024 Results Conference Call. This concludes the presentation. You may now disconnect. Good day.