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Text: The company delivered another fantastic quarter, with better-than-expected results, another record-setting bond deal, an excellent achievement in all areas of leasing.
Third quarter FFO is adjusted for comparability of $0.57, outperformed the high end of guidance by $0.01, and represented the sixth time in the past seven quarters that we outperformed expectations.
We also exceeded our guidance for two of the last three quarters.
For the third time this year, we're increasing the midpoint of our full year guidance for FFO per share as adjusted.
The $2.27 midpoint of updated 2021 guidance is $0.08 above our original midpoint and represents an increase of 7.1% over 2020 results.
We completed another record bond financing in the quarter.
In August, we issued $400 million of senior unsecured notes with a 2% coupon, which tied as the second lowest coupon ever issued among office REITs.
Our growth strategy targets owning and developing specialized office and data center shells in mission-critical Defense/IT locations, and this strategy continues to deliver excellent results.
In the quarter, we achieved a total of one million square foot of leasing, which included extremely strong vacancy leasing of 215,000 square feet.
This vacancy leasing volume represented the highest achievement in two years, and was 67% above the trailing eight-quarter average volume.
Vacancy leasing also included a 68,000 square foot lease with the United States government for two floors at 310 NBP.
In the quarter, we also completed 274,000 square feet of development leasing, all at Defense/IT locations, including a full building lease with the US government.
Lastly, we renewed 553,000 square feet, delivering a 76% retention rate at lease economics that were consistent with our expectations.
Leasing for the nine months indicates our fundamentals continue to strengthen, with customers making long-term commitments to new space.
We completed 2.7 million square feet of total leasing, which included 420,000 square feet of vacancy leasing at an average lease term of 8.6 years.
We completed 1.4 million square feet of renewals, achieving a 75% retention rate.
And we executed 915,000 square feet of development leasing with an average initial term of 14.1 years.
After the quarter, we leased another 263,000 square feet, bringing our total development leasing for the year to just under 1.2 million square feet with an average lease term of 13.4 years.
As a result of this transaction, our active developments totaled 1.8 million square feet that are 94% leased.
Development leasing to date exceeds our 2021 goal by 18% and represents the fourth consecutive year we've achieved over one million square feet of development leasing.
Our excellent leasing performance continues to translate into impressive operating results.
Including the impact of assets sold to fund development, for the nine-month period, NOI from real estate operations increased 7%, FFO per share as adjusted for comparability grew 10%, and AFFO is up 16% from one year ago.
Our unique Defense/IT portfolio, strong balance sheet and reliable low-risk development program continue to generate high-quality FFO per share and cash flow growth that are extremely durable because demand is driven by defense spending and national security requirements rather than traditional office fundamentals.
As important, demand in our Defense/IT locations is not impacted by work from home and other trends that may affect office demand in the future.
We continue to have a strong set of leasing and development opportunities before us and the balance sheet to seize upon them.
With that, I'll hand the call over to Todd.
Continued strong demand in our markets has driven outstanding lease achievement this year.
Third quarter vacancy leasing was exceptionally strong at 215,000 square feet, representing 18% of our available space at the beginning of the quarter.
To put this achievement in perspective, since defense spending began rebounding in 2016, our quarterly vacancy leasing has averaged 132,000 square feet.
There were two major transactions from the quarter worth highlighting, the first of which was a 68,000 square foot lease with the US government at 310 NBP, leaving two floors to lease to bring that building to 100%.
The customer continues to indicate their intent to lease the remaining space, but because the government is operating under a continuing resolution, we now project lease execution during 2022.
The second major vacancy lease was for 63,000 square feet at 6740 Alexander Bell Drive in Columbia Gateway.
The new tenant is consolidating multiple offices, and executed a 16.5-year lease for the entire building with lease commencement expected in July 2022.
Although we had intended to redevelop this asset, we backfilled the full building in just four months and accordingly have moved it back into our same property pool.
For the nine months, our 420,000 square feet of vacancy leasing represented 114% of the trailing five-year average through nine months, and was the second highest nine-month volume in the past five years.
Our current leasing activity ratio is 101%, and since the start of the second quarter has averaged 90%, underpinning much of the third quarter's vacancy leasing success and our expectation for strong lease achievements continuing into the fourth quarter.
During the third quarter, we renewed 553,000 square feet, translating into a 76% tenant retention rate.
Cash rents on renewals rolled down 0.6%, and GAAP rents grew 1%.
Excluding an 89,000 square foot renewal where the tenant was rolling off a 10-year lease that had escalated above market, cash and GAAP rents increased 1% and 5%, respectively, in the quarter.
For the nine-month period, we completed 1.4 million square feet of renewals with a 75% retention rate, cash rents rolling down 0.3%, with annual escalations averaging 2.4% and average initial lease terms of 3.8 years.
Excluding the two Boeing buildings and Redstone Gateway that are still on one-year renewals, the lease term for the nine months averaged 4.7 years.
We continue to advance negotiations to renew the 11.25 megawatt user at DC-six.
The customer's process remains slow and methodical, and we are confident they will renew.
Given we cannot control their pace, we are not putting a time frame on its completion.
The tenant's original lease remains in effect and they continue to pay their escalated rent.
During the quarter, we executed 274,000 square feet of development leasing at Redstone Gateway.
The largest transaction was a 205,000 square foot full building lease with the U.S. government.
Lease commencement is scheduled for early 2024.
This development represents our second building in the secured campus, which, upon completion of this project, will total 460,000 square feet.
The remaining 69,000 square feet of development leasing was with two defense contractors who leased space at 8,000 Ride Out Road.
That development was started because of the contractor demand we are tracking, and is now 88% leased.
We are working to close a lease for the remaining 12,000 square feet.
Earlier this month, we executed leases with Northrop Grumman for two build-to-suit office buildings along right out road at Redstone Gateway.
The 2-building campus totals 263,000 square feet of highly visible Class A office space with one of the world's largest defense contractors, just outside Redstone Arsenal's main gate.
We are on track for lease commencement in the second half of next year.
Once the active projects under development at Redstone Gateway are placed into service, the park will total 2.2 million square feet, making it our second largest concentration of Defense/IT assets, and equal to slightly more than half the size of the National Business Park.
The Northrop leases brought our year-to-date development leasing total to nearly 1.2 million square feet, making 2021 the tenth straight year we have exceeded our development leasing goal.
Based on the 1.5 million square feet of opportunities we are tracking in our development leasing pipeline, we expect continued strong development leasing.
Lastly, in the first nine months, we placed 709,000 square feet of developments into service that were 89% leased.
We expect to place another 74,000 square feet into service in the fourth quarter bringing our total for the year to roughly 800,000 square feet.
Third quarter FFO per share as adjusted for comparability of $0.57 exceeded the midpoint of guidance by $0.02 driven by $0.01 of deferred R&M projects and $0.01 of other outperformance.
We expect to complete the deferred R&M projects in the fourth quarter, which will impact same-property cash NOI and FFO per share.
Incorporating this change, we are adjusting the midpoint of our fourth quarter guidance to a new range of $0.55 to $0.57.
The timing of R&M projects drove 165 basis points of outperformance in same-property cash NOI, which increased 4.8% in the quarter.
Given the year-to-date results, we are increasing our full year guidance for same-property cash NOI growth again from a prior range that was flat to up 1% to a new range that is up 50 to 100 basis points.
At the 75 basis point midpoint, our revised full year guidance for same-property cash NOI growth is 175 basis points above the midpoint of our original guidance.
We are also narrowing our full year guidance for same-property occupancy from the prior range of 90% to 92% to a new range of 90% to 91.5%.
Our revised guidance continues to incorporate the 20 basis point negative impact of joint venturing fully occupied, wholly owned data center shells to raise equity in the fourth quarter, and has been adjusted to include the 40 basis point negative impact of placing 6740 Alexander Bell Drive back into service, back to the same property pool.
In August, we issued $400 million of long 7-year senior unsecured notes priced at 2% and used the proceeds to retire floating rate debt.
Specifically, we prepaid $100 million of our 2022 term loan, retired the $89 million construction loan at 2100 L Street and paid down amounts on our line of credit with the remainder.
The August deal was more than five times oversubscribed and priced at 105 basis points over the seven-year treasury, which was 25 to 30 basis points below initial price talk.
The 2% coupon ranks as the lowest among office REITs for seven-year paper and ties as the second lowest overall face rate of any duration among office REITs.
Our credit spreads compare favorably to peers who are rated one notch higher by the rating agencies.
Clearly, fixed income investors appreciate the durability of our cash flow, the high quality credit of our tenants and their in-office work requirements.
Also of note, since September of 2020, we have issued $1.4 billion of senior notes with an average term of over eight years, and use the proceeds to retire debt carrying an average term of 1.8 years.
Lastly, incorporating the items addressed earlier, we are increasing our full year guidance from a previously elevated range of $2.24 to $2.28 to a new range of $2.26 to $2.28.
At the midpoint, our updated guidance range implies 7.1% growth over 2020 results and is $0.08 higher than the midpoint of our original guidance.
It is important to note that placing several development projects into service earlier than originally planned, drove nearly $0.02 of this year's outperformance, and pulling that NOI forward into 2021 tempers 2022 growth by approximately 1%.
With that, I'll hand the call back to Steve.
I'll close the call with a recap of our key message points.
Our company's investment strategy is supported by the defense economy, which is funded by the United States defense budget and aligned with priority national security needs of the United States.
The US defense budget has been well funded since fiscal year 2016 and has bipartisan support for continued growth to address the increasingly risky global threat environment.
Our portfolio office usage levels remains very high as high security defense work cannot be performed from remote locations.
Our defense tenants are not experiencing diminished office usage, significant contractions or seeking short-term lease extensions.
Rather, they continue to require densely configured office space to accommodate mission growth.
And as our results continued evidence, they are making long-term commitments to our Defense/IT locations.
The likes of our development, vacancy and renewal leases remain at or above pre-pandemic levels, demonstrating our tenants' commitment to working in their offices for the long term, and their confidence in the outlook for the defense industry.
Our company has exceeded its business plan throughout the pandemic era.
And this year, we're experiencing further strengthening of business fundamentals and achievement suggesting continued strength and performance in coming years.
Clearly, our strategy of investing in a priority defense, mission locations and creating value through new low-risk development at these locations is very different from other office companies and continues to deliver high-quality FFO per share and cash flow growth regardless of the broader economic trends.

user
q3 adjusted ffo per share $0.57.
same-property cash noi increase of 4.8% in quarter.
increasing midpoint of same-property cash noi guidance for year.
sees q4 ffops, nareit definition of $0.55-$0.57.

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