Welcome to the Corporate Office Properties Trust fourth quarter and year-end 2021 results conference call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Stephanie Krewson-Kelly, COPT's Vice President of Investor Relations. Ms. Krewson-Kelly, please go ahead.
Thank you, Jonathan. Good afternoon, and welcome to COPT's conference call to discuss fourth quarter and year-end 2021 results and guidance for 2022. With me today are Steve Budorick, President and CEO, Todd Hartman, Executive Vice President and COO, and Anthony Mifsud, EVP and CFO. Reconciliations of GAAP and non-GAAP financial measures that management discusses are available on our website in the results press release and presentation and in our supplemental information package. As a reminder, forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our SEC filings. Actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update them. Steve?
Good afternoon, and thank you for joining us. We finished 2021 with strength and outperformed in all aspects of our business, including leasing, operations, development, and capital markets. The full year FFO per share is adjusted for comparability of $2.29, 8% over 2020's strong results and is $0.10 higher than our original guidance. Favorable leasing and operating activity in the portfolio drove solid gains in NOI and contributed about $0.03 of upside to 2021 results. The gains were widespread with favorable results in renewal activity, R&M project costs, utility savings, and higher NOI from DC-6. Despite challenges in the supply chain environment, we completed and delivered 766,000 sq ft of developments with three projects completed earlier than planned.
The 562,000 sq ft of early commencements contributed roughly $0.02 to 2021 performance. We executed about 1.2 million sq ft of development leasing during the year, outperforming our objective by 18%. Our 2021 activity included three major defense contractor developments, one data shell build-to-suit, and our second fully leased office property for the U.S. government in the secure campus of Redstone Gateway.
We had expected this government lease opportunity to occur in 2022, and we're favorably surprised by the early lease action last year. We outperformed in the debt capital markets as well. We seized the opportunity to lock in low interest rates and extend our debt maturity ladder by issuing $1.4 billion of new senior unsecured notes to retire higher- rate, shorter-term debt. This highly successful debt finance activity contributed about $0.04 of outperformance and, more importantly, protects the company from the risk of rising interest rates for years to come. We raised equity capital by completing the sale of DC-6 last month, generating $222.5 million to further balance our leverage and support our development activity.
Recycling DC-6 has been a high priority for the company for several years, and we recognize that the capital market demand for data centers during 2021 created a long-awaited opportunity to sell the asset with a full and fair valuation. We were successful in identifying several bidders that possess data center operating capabilities and the capital to purchase a multi-tenant facility. This sale simplifies our capital allocation and increases the lease stability in our operating portfolio. We had expected the transaction to close during 2021, and the delay in closing added about $0.005 to 2021 outperformance.
Turning our outlook to defense spending, which is summarized on slide five. Congress authorized the DoD's fiscal 2022 base budget at $665 billion, representing a 5.8% increase over the fiscal 2021 budget. The expected increase is 5% higher than last year's 0.8% increase, and we expect continued strength in defense leasing demand. Fiscal year 2022 began under a continuing resolution that we expect will be in effect until mid-March. Recall that these have become a normal occurrence as the DoD has started its fiscal year operating under a continuing resolution for 13 of the past 15 years. We do not expect this continuing resolution to have a material impact on our business.
Turning to 2022 guidance, we set our FFO range midpoint at $2.34, implying 2.2% growth over 2021's strongly elevated results. The guidance absorbs 2 percentage points of dilution from the sale of DC-6, as well as the dilution from the Boeing and Transamerica non-renewals. Adjusted only for the dilution from the sale of DC-6, 2022 pro forma growth would be 4.2% at the midpoint of guidance. As slide four illustrates, our FFO per share, as adjusted for comparability, has compounded at 4.4% annually since 2018, when we finished our programmatic asset sales under our strategic reallocation plan.
Our 2022 FFO guidance midpoint suggests that the compound growth will remain at roughly 4%, notwithstanding the dilution from the sale of DC-6. We have 1.7 million sq ft of active developments that are 96% leased today. As we place them into service, we expect these projects to fuel strong growth in 2023, further extending our compound growth achievement. Our guidance for development leasing in 2022 is 700,000 sq ft. Recall that our 2021 success pulled forward 205,000 sq ft of expected 2022 development leasing and several data shell development leases await access to critical power at those sites.
As slide 11 of our presentation shows, we've averaged about 1 million sq ft of development leasing annually since 2012. During the past three years, we've achieved 4.4 million sq ft of development leases, averaging just under 1.5 million sq ft a year. Our current development leasing pipeline contains 1.8 million sq ft of opportunities, supporting our optimism that 2023 development leasing activity will return close to our long-term average.
With that, I'll hand the call over to Todd.
Thank you, Steve. We achieved strong leasing results in all categories last year and expect 2022 to be another strong year. Total leasing volume in 2021 of 3.9 million sq ft included 2.1 million sq ft of renewals. Lease economics were in line with guidance and included a low-teens roll-down in rent for CareFirst at Canton Crossing in our Regional Office portfolio. CareFirst is a high-credit healthcare tenant that leases nearly half the space in our Canton Crossing asset, and in December, renewed 214,000 sq ft for a new 15-year term. The renewal represented 30% of the quarter's renewal volume and 10% of the year's volume, and consequently, heavily influenced our metrics.
To illustrate the impact of the CareFirst renewal, we completed 93 renewal transactions in 2021, and cash rents on renewals rolled down 5.8% in the quarter and 2.2% for the year. If we exclude the effect of the CareFirst transaction, cash rents rolled down 1.5% in the quarter and only 0.6% for the year. Vacancy leasing during the year was also strong, and the 196,000 sq ft we completed in the quarter brought our full year volume to 616,000 sq ft, exceeding our 5-year average volume by 14%, and 2020's volume by nearly 50%. In the second half of 2021, we completed 412,000 sq ft of vacancy leasing, and our leasing activity ratio currently is a healthy 94%.
We've entered 2022 with good momentum and prospects to retenant the largest vacancies in our operating portfolio. In Huntsville, we are tracking over 300,000 sq ft of demand to backfill the 121,000 sq ft vacancy at 1200 Redstone Gateway, which Boeing gave back at the end of 2021. With demand far exceeding the available space, we expect to kick off another spec building this year to capture the excess demand. In Baltimore, we are working with over 80,000 sq ft of prospects to backfill the Transamerica space in 100 Light Street.
Development leasing exceeded our 2021 objective. We executed 1.2 million sq ft during the year, including a 183,000 sq ft build-to-suit at the National Business Park for a Fortune 100 company supporting operational activities on Fort Meade, a new campus for KBR at Redstone Gateway, comprised of a 172,000 sq ft office property and 1/2 of a 46,000 sq ft R&D facility. A new campus for Northrop Grumman at Redstone Gateway, comprised of two build-to-suit office properties with advanced infrastructure, totaling 263,000 sq ft.
A 265,000 sq ft data center shell build-to-suit in Loudoun County, Virginia, for our cloud computing customer, and our second development for the U.S. government in the secure campus of Redstone Gateway, a 205,000 sq ft office property that, when completed, will increase the secure campus operational sq ftage to roughly 450,000 sq ft.
These development projects will fuel future FFO growth as we complete construction and place them into service. Our 1.8 million sq ft development leasing pipeline supports our goal of executing 700,000 sq ft in 2022. Within this goal, we expect about 2/3 of the volume to be office and R&D space for defense contractors, primarily at Redstone Gateway and the National Business Park, and the remaining 1/3 to be a data center shell build-to-suit with our cloud computing customer.
In terms of placing developments into service, our 2022 guidance assumes we place over 800,000 sq ft of fully leased developments into service. These new completions, combined with the 766,000 sq ft placed into service during 2021, should contribute between $15 million and $17 million of cash NOI to 2022 results. At the $16 million midpoint, 100% of this development cash NOI is contractual.
With that, I'll turn the call over to Anthony.
Thanks, Todd. Fourth quarter and full- year FFO per share, as adjusted for comparability, of $0.58 and $2.29 exceeded the high ends of guidance, driven by the DC-6 sale closing later than planned and another strong operating quarter.
Same property results were in line with previously elevated guidance. Same- property occupancy ended the year at 91.3% and reflects the Boeing non-renewal at 1200 Redstone Gateway. Cash NOI grew 1.2% during the year, driven by favorable renewing leasing outcomes and further advancement of operating efficiencies. We were very active in the senior debt markets last year, refinancing existing debt with new issuances in March, August, and November. During 2021, we issued $1.4 billion of new senior notes with an average interest rate of 2.6% and used those proceeds to redeem $900 million of senior notes that had an average interest rate of 4.5%, as well as other debt.
The debt we refinanced in 2021 had an average maturity of 2.5 years, and the new notes we issued have an average maturity of 9.9 years. Moreover, since September 2020, we have issued $1.8 billion of senior notes with an average term of 8.9 years and used the proceeds to retire debt carrying an average term of just 2.1 years. With respect to 2022 guidance, we are establishing a range for FFO per share of $2.30-$2.38, which at the $2.34 midpoint implies 2.2% growth over 2021's extremely strong results. Our guidance detail is available in the press release and on slides 14 and 15 in the deck we issued last night.
I'll touch on a few highlights now. We expect same property occupancy to change during the year, and for same property cash NOI to be flat to down 2%. Our same- property guidance reflects the Boeing non-renewal at Redstone Gateway that occurred on the last day of last year, the Transamerica non-renewal at 100 Light Street in Baltimore that occurred on the first day of this year, the 45,000 sq ft contraction from CareFirst on October 1, 2022, and their new cash rent that went into effect on December 1, 2021.
The 2022 same- property pool started the year at 92.6% occupied. The impact of the 1.7% occupancy decline related to the three vacancies just discussed will be offset by occupancy gains elsewhere in the portfolio, and we project to end the year between 91% and 93%. We expect to invest $275 million-$300 million into our existing 1.7 million sq ft of active development projects and new starts. Development investment will be funded with free cash flow from operations, the proceeds from the sale of DC-6, and by executing another asset sale or joint venture to manage our leverage later in the year.
Lastly, for the first quarter, the $0.56 midpoint of our guidance range is $0.02 lower than our fourth quarter 2021 results. The decrease reflects $0.01 of higher weather- related expenses that we typically see in the first quarter and $0.01 of dilution related to the sale of DC-6.
Now I'll turn the call back to Steve.
Thanks. With 2021 in the books, we've delivered our third consecutive year of growth that is compounding around 4% a year. We're projecting 2.2% growth for 2022, even while recycling DC-6 and absorbing the dilution from the recent Boeing and Transamerica vacancies. Clearly, our strategy of investing in a priority defense mission locations and creating value through new low risk development has and will continue to generate FFO growth regardless of the broader economic trends. Our 1.7 million sq ft pipeline of active developments that are 96% leased will have significant influence on 2023 growth, which we expect to be in the 4%-6% range. The outlook for DoD funding is stable and strengthening, and we look forward to another strong leasing year that will further our growth.
With that, operator, please open up the call for questions.
Thank you, Mr. Budorick. Ladies and gentlemen, if you have a question at this time, please press star then one on your telephone. If you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Manny Korchman from Citi. Your question please.
Hey, everyone. Thanks. Steve or maybe Anthony, in terms of what's left to sell in the portfolio, you mentioned, you know, JVs or sales. I assume the JVs are the data center shells. What would the sales at this point or what could the sales at this point include?
Well, we have been conveying for about six months that sometime between now and 2024, 2025, we'd start to look for the right opportunity to start selling off the Regional Office assets in Baltimore and Northern Virginia. If we were to hit an opportunity where that was a favorable move for the shareholder, we'd consider doing that.
You're correct, Manny. The alternative would be to venture the two data center shells that we had initially planned to venture in the third or fourth quarter of last year, but we replaced that transaction with the sale of DC-6.
Steve, on the Regional Office portfolio, as you've been exploring that for some time, how has buyer interest and valuation there changed?
Well, there's not a lot of buyer interest in office property right now in this region. Where I would say a couple of years ago, there was pretty strong interest in Baltimore and some impressive cap rates. Coming out of the pandemic, we think it's gonna take another at least 12 months to kind of normalize that capital market segment.
Got it. On development value creation, are you seeing any pressure on yields from increasing costs?
Well, certainly we've had increasing costs as much as 10%-15% over a year. That puts pressure on us to achieve rents that will support the development which we have done. We've been able to hit our yield targets equally well this year and what we expect to do in 2022, but we have to achieve a higher rent to get it.
Great. Thanks all.
Thank you. Our next question comes from the line of Rich Anderson from Corporate Office Properties . Your question, please.
Not yet.
When did you join the company?
Yeah, SMBC here. Steve, I don't know if this was ever mentioned along the lines, but what was the reasoning for the Boeing vacancy from their perspective?
They did not win a recompete of a major segment of an enormously important contract that's issued out of Redstone Arsenal, and they contracted to adjust their footprint for that.
Okay. When you think generally about when things like that happen, is it mostly what you just described or are there other? Or is it oftentimes they need more space that you can't provide them? You know, what's the general cadence of why you lose people? Is it mostly the former or the latter?
Well, it's rarely the latter, and often the former, in less extreme ways over time. M&A actually has a pretty significant impact in the defense industry as large contractors buy up smaller contractors. Usually, they wanna keep the SCIF and the secure mission part of a suite, but they might be able to shed some of the more administrative space. But rarely, people aren't leaving our locations because of space needs. We're in the development business after all. Those locations are really the primary place to be. An interesting sidebar with regard to the Boeing contraction is another contractor won that contract, and they signed a lease in Redstone Gateway.
Okay. When you think about what happened with Boeing, do you have a sort of, you know, a longer watch list that maybe extends a few years out that you know that are on your radar? I assume you're kind of doing that. Is there anything you can sort of add color to at this point?
There's nothing that we've seen that we'd be concerned about. All the new development we've achieved over the last three years, in each case, enormous new contracts were achieved, which really were the compelling reason for those contractors to get new efficient, you know, very well-located facilities to complete the contracts, and they tend to be very long-term. No, we don't really see any more of that.
Okay. Last question for me. You mentioned, you know, Regional Office between now and 2024. You know, obviously depends on a bunch of things, but what is the timeline right now to getting Regional Office sort of to the point where it's fully leased and, you know, you've checked off that box? Is that a this year event or is that a next- year event?
Well, there's four large assets in Regional Office. Each has its own set of opportunities or challenges, depending on how you look at it. For instance, 100 Light, we just got 140,000 sq ft or 150,000 sq ft back from Transamerica. It's fantastic space. It's not really been available to smaller tenants in the market. We definitely wanna restabilize that asset before we'd even consider selling it. Like we did with DC-6, we will be disciplined and patient to create the value our shareholders deserve before we move to a sale.
Is it more likely the Regional Office will be sold all at once or in pieces?
I think it's gotta be in pieces, particularly the Baltimore segment. That's just too big a bite for an investor in Baltimore.
Okay. You got it. Thanks.
Thank you, Rich.
Thank you. Our next question comes from the line of Steve Sakwa from Evercore ISI. Your question, please.
Yeah, thanks. Good afternoon. Steve or Todd, I was just wondering if you could spend a little more time speaking about the leasing trends, you know, kind of in particular on some of the larger vacancies. You guys had good success last year, and I'm just curious, you know, what the discussions are like and if that's an area that possibly could surprise to the upside again in 2022.
Let Todd handle that one.
Sure. Well, as I mentioned, we have good activity on the large vacancy down in Huntsville. It's hard to put a timeline exactly on when that activity would close and whether or not it would be an upside for this year. We do have very good activity, and I would expect the lease to get signed, you know, before the first half of the year is done, and, you know, potentially provide some, but it's hard to quantify. In terms of 100 Light, you know, 80,000 sq ft of prospects down there, that's just gonna take some time. As Steve was alluding to, the Baltimore market was affected like most major CBDs in the downturn and leasing velocity has not returned to its historical average.
We'll continue to work it, but I wouldn't anticipate any upside from 100 Light this year.
I guess, Steve, maybe on the development front, you know, you talked about some of the things shifting out of 2022 into 2021 and then a couple things, you know, shifting back. It sounds like you've got a large pipeline today at, you know, 1.8 million sq ft. I'm just trying to gauge sort of the 700,000 sq ft and the likelihood that some more of that could come in. I realize it might not have much of an earnings impact at all this year, but just what are the prospects for that 700,000 sq ft to drift higher?
Well, for it to get bigger, we have three projects that are planned on land we own, and we await the critical power delivery from the utilities in Northern Virginia. The current information we have is that power will not be available this year, and it's a threshold to making that build to suit commitment with our tenant. If that power were to come earlier, hypothetically, we could beat 700,000 sq ft. But we're only planning to get one of the four leases this year because of that timing. Just one other thing to point out.
For the Boeing non-renewal, we would be building two buildings at Redstone Gateway this year. We're staying very disciplined. We want to backfill, you know, 1200 Redstone Gateway before we start our next development. That kind of costs us $120,000 that would otherwise have been development had we not got the major non-renewal.
Got it. Then just last question, 2100 L Street, I know is sort of another kind of non-core asset. Just kind of remind us on the leasing status there, and is there a chance that that D.C. market is picking up a little bit more steam, and could that be on the sale block this year, or is that more likely a 2023 event?
Well, I'll take the last part of it. As soon as we get leases to stabilize, it will be on our sale block, or we'll start to investigate the best way to monetize it. With regard to timing, I'll let Todd answer that hot question.
I would not characterize the D.C. market as emerging, returning to normal. You know, it's still affected by the pandemic and the negative absorption that's occurred over the past few years. With that said, we're still tracking more prospects than we have space in the building, and we continue to work those prospects. Everybody's taking their time making decisions. It's hard to place a timeline on a lease resolution there.
Just a bit of color, Steve. I mean, we're 30 mi outside of D.C., and when I talk to business colleagues that office in the district, it's like we're in two different worlds. They can't go to a restaurant without vaccine documentation, and they're still wearing masks. You know, the counties in and around Baltimore, we've been back to normal for quite a long time.
Yeah. No, look, I can appreciate that. I guess what we've seen in other markets is the flight to quality and new buildings, whether it's in New York or, you know, parts of California or other cities, definitely seem to be leasing up and older stock is struggling. Given your new building, I guess I would have thought even if the market's not great, that you might capture market share of what's going on, just given the new product.
Yeah. I think when share comes back, we expect to do well. It's just the, you know, the transaction velocity is really, you know, dropped off the table during the pandemic.
Okay. Thanks very much.
Thank you. Our next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your question, please.
Hey, guys. Steve, I just wanna clarify. Did I hear you correctly that DC-6 is just $0.02 dilutive this year versus kind of the talk previously about being $0.04 dilutive?
Well, the $0.02 is net of an alternative recycle.
It was 2%.
Okay.
Craig, the comment in the script was that the impact to growth was 2%, not $0.02 .
Right.
Which is—
Oh, 2%.
Which equates to 2%.
Gotcha . Great. Okay. That's helpful. Thanks for the clarification there. Then just can you go through I know in the supplemental kind of Regional Offices is 2 million sq ft, eight assets. You kind of mentioned 100 Light Street. I'm sure Canton Crossing is on there. What are the —in 2100 L Street , j ust kind of what are the other big chunks of that Regional Office? Would anything like Columbia Gateway ever be on the block, or is that you know I know it's in the Defense/ IT location, but it's you know mainly suburban. Would anything like that ever be up for sale?
Not in the near term. The other components of Regional Office are two sets, two buildings in Northern Virginia. One of those sets we have considered and probably will likely just pull into defense because it's become increasingly more occupied by defense contractors and cyber contractors. That one's way out by Dulles. We have Wells Fargo in Pinnacle Towers in Tysons, and that would be an asset we'd like to recycle. With regard to Columbia Gateway, yes, you could say it's suburban. It's within the competitive and the operating radius of Fort Meade. O ur business in this park is defense business.
Okay. All right. Great. That's all for me. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Jamie Feldman from Bank of America. Your question, please.
Great. Thank you. I guess just thinking about the development pipeline, sounds like you know you could be more aggressive, but you wanna get Redstone leased up. You think at this time next year, do you think your development pipeline is larger or smaller than it stands today?
I would guess it to be about the same.
Okay.
You know, we've been in that, you know, 1.5 milliong sq ft to sometimes as much as 2.5 million sq ft range for years now. What our guidance suggests is we'll pull in 700,000 sq ft this year based on what is currently classified in the pipeline. That leaves over a million. I can tell you, we have almost 1.4 million sq ft of development discussions that we have not yet classified as 50% likely to win within two years or less. I'm very confident we'll be in the same range a year from now.
Okay, great. Going back to Manny's question on development costs. You know, you had said costs are up 10%-15%. Are you saying you can push rents to keep your yield?
We have.
I don't know if I came across that clearly.
Yes, we have. We have all through 2021. With the activities that we're working on now, that should be signed before our next call, we'll be able to demonstrate we did.
What are you targeting for yield?
Our target yield on a defense contractor building is 8% cash yield on, you know, a typical seven- to 10-year lease.
Okay, great. You know, you had given kinda an outlook for 4%-6% FFO growth in 2023. What does that assume for any of these asset sales? Maybe a better way to ask it is just what are the key building blocks to get to that 4%-6%?
Well, the key building blocks are to you know the same office cash NOI growth that we expect. It's the continued benefit of the developments placed in service that it'll partially get placed in service this year. It will be fully placed in service next year, as well as those projects that we'll place into service next year. On the capital market side, I don't think we wanna get into what transactions or what equity capital we're raising to finance that. There, there's enough equity capital costs in that math to maintain or slightly improve our leverage ratios. You know, we think that the cost of that capital will may ebb and flow, but within that range.
Okay. I don't think you guys talked about the demand for the CareFirst space that they're giving back. I know it's not till later this year. Is there any interest in that, or do you think that sits for a while?
Oh, no, we think that'll lease up awfully quickly, frankly. That building only has, like, 111,000 sq ft space.
It's effectively 100% leased as of—
Oh, really? You got that leased.
Yep.
It just has a really strong demand profile. We don't get the space till September, the end of September. You know, I'd give it six months, but we'll be chipping away at that right away.
Okay. Last from me, just any thoughts on the latest from the GSA in terms of plans to reduce space and how you think that might impact your portfolio, your markets overall, or just kind of w hat the latest buzz is from them.
We don't really follow the GSA that much because we don't do any GSA leasing. The bulk of their contraction activities would affect the B class or maybe older A in Downtown D.C., a market we're not really exposed to. Besides 2100 L, our only D.C. asset is adjacent to the Navy Yard. It's a defense contractor location. It's not really a GSA area. To remind people, we have less than 100,000 sq ft of GSA leases throughout the company, and 45,000 sq ft of that is a court system in downtown Baltimore, where our building is located immediately next to the courthouse.
All right, great. Thank you.
Thank you, Jamie.
Thank you. Once again, as a reminder, if you have a question, please press star then one. Our next question comes from the line of Tom Catherwood from BTIG. Your question, please.
Excellent. Thanks, everyone. Maybe Todd, the renewal and guidance implies roughly 400,000 sq ft, maybe just under 500,000 sq ft of expected move-outs this year, kind of what you talked about with CareFirst and 100 Light Street, and I think a few others in the Regional Office portfolio. It seems like roughly half of that is Regional Office. That would kind of, by our math, imply that this is a pretty light year on the move-outs in the Defense/ IT portfolio. To say it another way, it seems like you're gonna be well above average on the renewals there. Is that a fair statement?
Yes, I would consider that a fair statement. We're tracking a good activity on the renewals outside of the ones that you've already identified as Transamerica and CareFirst.
Got it. That kind of ties into the next part, which is to get up to your, you know, let's call it midpoint of same-store occupancy, the 92%. It looks like by our math, you'd be kind of slightly below the vacancy leasing that you did this year. You know, so you'd be something in the, you know, 550,00 sq ft-600,000 sq ft of vacancy leasing. From where your pipeline is sitting right now, is it kind of on par with where you were to start last year, or is it kind of moderated somewhat, which is kind of leading you to be a little more conservative on that guidance?
I would say our vacancy leasing is on par with last year at this point.
Yeah. In terms of how that impacts, Tom, our year-end same- office occupancy guidance, it's not that linear. You know, the 2021 same- office pool at the end of the year was 93.4% leased, and 91.3% occupied. It's really part of the 2021 transactions that were leased in 2021 that will occupy during 2022, offset by the non-renewals that you mentioned earlier, plus the benefit of any leases that get executed in 2022 and commence in 2022. It's not as linear as that.
Anthony, it makes total sense. Kind of said another way, it would be more a timing of getting the lease done and then commenced less than, y ou know, as opposed to, you know, running slower than last year.
That's correct.
Got it. Then last one for me. Kind of something jumped out in the presentation. It might have been in other ones, and if I missed it, I apologize. On page 10, you guys touched on expected cap rates for your assets if they were sold, and you know, a lot of them lined up with what we would expect. The one that was kind of eye-opening for us was the sub- 4% on U.S. government-leased secure facilities. Can you provide kind of a little bit more color on that? Is that? Would that just be assets kind of considered behind the fence in most of your locations? Has that. It seems like that has compressed over this past year. Any thoughts you have, that would be helpful.
Well, we have compressed that estimate, but we've compressed it based on market comps for high-value assets in other segments. For instance, the data center shell sales market last year had comps below 4%. If you're willing to buy a data center shell below 4%, you'd be very willing to buy the U.S. government assets that we have below 4%. There are also some comps around the country with great credit tenants like Microsoft on full building leases that are being marketed or expect to close below 4%. We think it's a pretty fair statement.
Appreciate that color, Steve. That's it for me. Thanks, everyone.
Thank you. Our next question comes from the line of Dave Rodgers from Baird. Your question, please.
Hey, Steve. Just wanted to follow up on that last point, page 10, sub-4% cap rates for data center shells. Obviously, you're gonna sell some more of those this year, it sounds like. How do you think about just kind of selling more, getting leverage down kind of in line with your kind of high-quality secondary office peers, if that's the peer group we wanna use, versus kind of the trickling it out and then kind of waiting for some of these bigger, you know, chunkier transactions like 2100 L and the Regional Office sales. Maybe the question is, you know, why not maybe rip some of the Band-Aids off and kind of get the range-bound issues around the stock and move those away?
Well, Dave, we've been talking for years about establishing a company that can grow and replenish and recycle capital to fuel our development. If we rip our Band-Aid off, we're gonna rip our earnings off as well. That's not the way we wanna run the company.
Moreover, those assets, I don't consider them a problem. I consider them, you know, a long-term, tremendous investment for our shareholders. To the extent opportunities in the future would allow me to keep those and sell other things, I prefer to keep them. We'll face the decision to recycle when we need to, but it's not in our base plan.
Dave, with respect to the balance sheet and with respect to leverage, each one of the four debt transactions that we've executed over the past 18 months have priced either equal to or better than BBB or Baa2 pricing. The fixed income investors recognize the strength of the company's cash flows and their stability, regardless of where the agencies have us pegged. Our fixed income investors are focused on that portion of the portfolio. They see our continued increase of interest in fixed charge coverage combined with the stability of the cash flows as a huge positive for us.
You know, if we were to do that and reduce leverage, we don't think there'd be an incremental interest reduction for our shareholders.
Yeah, I agree with that. I guess just from the equity side, I think there could be a meaningful change. We can always take that offline, but I appreciate the answers and the added color. Thank you.
Thank you. Our next question comes from the line of Chris Lucas from Capital One Securities. Your question please.
Hey, good afternoon, everybody. Anthony, just a quick one. Just wanted to understand the sale of DC-6 . Do the proceeds from that provide all of the equity you need to meet your development spend for 2022?
It doesn't meet all of it. In order to, based on what we're expecting to spend, our plan includes the assumption that we either sell an asset or venture a data center shell to generate the incremental capital, which is in the sort of—
In the fourth quarter.
In the fourth quarter.
The combination of free cash flow throughout the year plus the proceeds from DC-6 fund portion of it. You have to remember the fact that it's sold after the end of the year, you know, part of that is really funding a portion of what we invested last year to reduce our leverage that we had reported as of 12/31.
What's that delta in terms of the equity gap that you know you have in the fourth quarter sale?
$75 million.
Okay, great. Thank you.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Budorick for any further remarks.
Thank you all for joining the call today. It was really a great call. We're in our offices, so please, coordinate through Stephanie if you'd like follow-up.
Thank you for your participation today in the Corporate Office Properties Trust fourth quarter and year-end 2021 results conference call. This concludes the program. You may now disconnect. Good day.