Graaskamp on the Road Presentation Value Investing in Greater - PowerPoint PPT Presentation

Graaskamp on the Road Presentation Value Investing in Greater Washington, D.C. Stephen E. Budorick President & CEO Corporate Office Properties Trust The Preferred Provider of Mission Critical Real Estate Solutions

Table of Contents I. Overview of COPT II. Washington, D.C. Office Market III. Where COPT has Created Value IV. Conclusion V. Questions? 2

3 Overview of COPT I.

Strategic Framework Goal To deliver attractive total returns for shareholders To generate high quality NOI that translates into NAV per share Objective growth Allocate capital to focus primarily on Defense/IT locations and, Strategy secondarily, to urban/infill submarkets with durable Class-A office fundamentals  Execute low-risk development & redevelopment opportunities and selective acquisitions Tactics  Recycle low growth assets to improve our portfolio composition  Maintain a strong, investment grade rated balance sheet 4

Capital Allocation: Mission & Metro 86% Defense/IT Locations  We are the preeminent provider of real estate & services to U.S. Government & Defense IT contractors Parks & developable land adjacent/proximate » to USG locations executing priority missions (hi-tech & cyber) 308 National Business Park Redstone Gateway Annapolis Junction, MD Huntsville, AL 14% Regional Office Locations  We own Class-A office buildings in mixed-use, urban/urban-like locations Walkable amenities » Vibrant and growing residential » Transportation-advantaged » 100 Light Street Pinnacle Towers Baltimore, MD Tysons Corner, VA * Percentages are based on core portfolio annualized rental revenue as of 6/30/2016. 5

Demand Drivers Core Portfolio Demand Driver COPT Asset Compelling Features Segment Defense/IT  Ft. Meade 14 Parks:  Our land holdings create  Agencies in NoVA  NBP barriers to entry against  Redstone Arsenal  Arundel Preserve new supply  Lackland Air Force Base  Columbia Gateway  Customer adjacency  U.S. Navy  Airport Square and collaborative  Maryland Secured “ecosystem” with other Campuses (2) contractors compel  Westfields demand  Patriot Ridge  NoVA Secured Campus  Redstone Gateway  San Antonio Secured Campus  Naval Support Locations (3)  MAE – East  COPT Data Center Shells  Cloud Computing  Network Access Point Regional Office  Urban/urban-like  Select transportation-  Supply-constrained  Mixed-use, lifestyle submarkets with advantaged, amenity-rich demonstrated ability to locations centers with robust high-  Baltimore Inner Harbor support strong class-A end residential & retail  Tysons Corner office fundamentals base  Mass-transit options and/or transportation advantages  Educated labor force  Growing & diversified employment base 6

7 Washington-Baltimore Office Market II.

4 th Largest Office Market in U.S. Washington, D.C.-Baltimore Combined MSAs** » 9.6 million population Office Markets SF (millions) Direct % Vacant ranks Washington, D.C.- NoVA 130.9 21.6% Baltimore MSA as 4 th Suburban MD 56.7 21.2% largest* Washington, D.C. 108.6 11.9% » Approximate 345 million Greater Wash., D.C. 296.2 17.7% SF market Baltimore 49.8 13.6% » Historically, supply- Wash-Balt Combined 345.7 17.4% Markets constrained within D.C.; however, expect 7% Submarket Detail for the District** increase in supply SF (millions) Direct % Vacant » Demand challenges of Capitol Hill / NOMA 13.6 12.9% East End 37.3 11.9% recent years beginning to dissipate… CBD 33.5 9.8% West End / Georgetown 5.1 11.1% » …But persistently low Uptown 4.2 19.9% cap rates make Southwest 10.9 13.2% investing difficult Capitol Riverfront 4.1 14.5% 108.6 11.9% * According to the July 1, 2015 U.S. Census Bureau ranking of the combined Washington-Baltimore MSAs. The Washington, D.C. MSA compromises Washington, D.C., and select counties in Northern Virginia and Maryland. Baltimore comprises 8 Baltimore City, the BWI Airport submarket, and Howard County. ** Source: Cushman & Wakefield, as of September 30, 2016. (NoVA stats are as of June 30, 2016.)

Long-Term Supply Constraints Within Downtown D.C.: » Residential neighborhoods cap expansion to the north; Federal & Educational uses prohibit expansion to the south » Height restrictions will remain a defining characteristic: » 130’ max (about 12 stories) » Concrete instead of steel construction » Ceiling height at a premium 9’ clear is a “big deal” 9

District Net Supply » 2016-2019, a wave of redevelopment / development activity will deliver nearly 8 million net new SF, or 2 million SF per year, into D.C. » The 4-year supply represents a 7% increase to the existing base and a 33% increase versus annual supply Office Deliveries by Year 6.0 5.0 5.0 4.0 Historical Annual Square Feet (in millions) 3.2 Supply: 2.8 3.0 1.5 million SF 2.5 2.1 1.7 2.0 1.1 1.0 1.0 0.0 -0.3 -0.6 -1.0 -1.1 -2.0 -1.8 -3.0 2016 2017 2018 2019 Inventory Removed Net New Supply Gross New Supply Source: Cushman & Wakefield. 10

Major Trends Impacting Demand The Greater Washington-Baltimore region has weathered large space contractions by two of its largest industries, and is bracing for a third » Budget Reform Act of 2011 » Defense spending cuts » D.C. Law firm contractions » GSA Reform Act » Freeze- and (subsequently) shrink-the-footprint mandates to affect intermediate supply fundamentals 11

Budget Control Act of 2011 » Froze defense spending / sequestration cuts » Changed contract award rules » Massively disturbed equilibrium in defense contracting » Triggered a 5-year massive consolidation of defense contractor demand » COPT: » Top 20 defense contractors contracted by 42% » Next 10 defense contractors expanded by 110% 12

Demand Challenges » Metro D.C. job growth at its strongest point in over a decade » 82,000 jobs YOY in August 2016 versus 36,000 YOY average job growth, historically D.C. Metro Employment: % Growth YOY Source: BLS. 13

Demand Challenges » Federal employment back on the upswing, but share of overall Metro D.C. office-occupying employment near all-time lows Federal employment (thousands) Share of office-using employment (%) 410 40% 390 35% 370 Federal employment (thousands) Share of total employment (%) 30% 350 330 25% 310 20% 290 15% 270 250 10% Source: JLL Research, Bureau of Labor Statistics. 14

Demand Challenges » Despite strong job creation, each new office job created in Metro D.C. is generating minimal net absorption 2,000 1,500 514.7 514.7 203.9 203.9 SF per job added s.f. per job added 203.9 1,000 Square Feet s.f. per job added s.f. per job added 0 SF per job added 500 SF per job added Average = 267.9 SF 0 -500 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: JLL Research, Bureau of Labor Statistics. 15

Politics & Demand » Washington, D.C. is a political town; legislation fuels net absorption Bills Enacted Into Law Net Absorption SF 800 30,000,000 public bills enacted into law Metro DC net absorption 700 25,000,000 600 20,000,000 500 15,000,000 400 10,000,000 300 5,000,000 200 0 100 -5,000,000 0 -10,000,000 Source: JLL Research. 16

Politics & Demand Political alignment (not party affiliation) is a powerful predictor of office market performance in the District » Tenant demand in Metro D.C. is highly correlated with the alignment of Aggregate net absorption (SF) Congress and the Presidency; the market historically thrives under single- 40,000,000 party rule » Over the past 12+ years, the Metro 30,000,000 D.C. office market has: » Absorbed 37 million SF when 20,000,000 Congress and the Presidency have been in alignment (2003- 10,000,000 2006 and 2009-2010) » Lost 5.1 million SF of occupancy when there has been division 0 (2001-2002; 2007-2008; and 2011-2016) -10,000,000 Divided Aligned Source: JLL Research. 17

Impact of GSA Contraction Pending » 30 million SF of lease maturities in Greater Washington, D.C. market, 2017-2021 » Approximately half of which is in the District » GSA mandate to shrink-the-footprint » Low likelihood of in-place renewal 18

Supply “Shock” from GSA Imminent » Push for efficiency in new GSA leases across Metro D.C. emphasizes reduced square footage per employee Government (historical average) 200 Department of Justice (NoMa, 2015) 184 Department of Labor (Crystal City, 2014) 173 TSA (Alexandria, 2015) 153 -28% U.S. Marshals Service (Crystal City, 2015) 130 Average space reduction Department of Justice Civil Division (East End, 2016) 130 National Science Foundation (Alexandria, 2013) 128 USAID (Crystal City, 2012) 100 0 50 100 150 200 250 Usable square feet per employee Source: JLL Research. 19

GSA Supply Shock » Overall GSA leased space in Metro D.C. has declined 9.3% since 2012 » 86.4% increase in SF extended since 2006; further contraction likely 70 Old Lease-Unknown Renewal New deal Holdover Extension Holdover data only available back to 2011 Square feet (in millions) 60 50 40 30 20 10 11.0 10.7 10.3 10.5 8.1 7.0 7.2 6.2 5.7 5.3 3.8 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL, GSA.gov, “Renewal” includes Superseding, Succeeding and Renewal actions affecting term as defined in GSA’s 2014 Lease Inventory term. database; “New” includes New and New/Replacing actions affecting 20