COPT Defense Properties (CDP) 2014 Q4 法說會逐字稿

Welcome to the Corporate Office Properties Trust fourth-quarter and year-end 2014 earnings 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, Shauntele. Good afternoon and welcome to COPT's conference call to discuss the Company's fourth-quarter and year-end 2014 results and our guidance for 2015, the details of which we released in a separate press release this morning. With me today are Roger Waesche, President and CEO; Steve Budorick, Executive Vice President and COO; Wayne Lingafelter, EVP of Development and Construction; and Anthony Mifsud, EVP and CFO.

As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release issued earlier this morning and on the investor section of our website. At the conclusion of management's remarks, the call will be opened up for your questions.

We remind you that statements made during this call may be forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and that actual results may differ materially due to a variety of risks, uncertainties, and other factors. Please refer to today's press release and our SEC filings for a detailed discussion of forward-looking statements.

Before turning the call over to management, let me highlight that the Company posted its inaugural sustainability report this morning to the investor section of its website, www.copt.com. We also launched our sustainability-related website, COPTgreen.com. With that, I'll turn the call over to Roger.

Thank you, Stephanie, and good afternoon, everyone. [2014] was a solid year for our Company and 2015 is looking even better. We continue to see strong demand for newly developed space that supports growing US defense installations involved in IT and cyber security. When combined with our same-office portfolio, NOI embedded in development projects is fueling our FFO and NAV per share growth.

Including the two full building leases we announced yesterday, projects under construction exceed 1.5 million square feet and are 75% leased. Additionally, we are constructing two projects intended for US government use. When these are signed, our development pipeline will be 98% leased. The defense budget headwinds are over and the outlook for defense spending is positive. On February 2nd, the President released his FY16 budget request to Congress. The DoD base budget request of $534 billion represents a 7.7% increase from the current fiscal year's budget of $496 billion.

Within the DoD base budget, the defense IT spending request is $37.3 billion, which would be a 2.9% increase from FY15 levels. For the DoD cyber program, the President has requested an 8% increase in next year's budget to $5.5 billion. Given the state of the world, we expect defense IT and cyber-security spending to support a healthy pace of contract awards from various agencies, and by extension, continue demand for our advantaged locations.

Due to the more favorable leasing environment, our revenue at risk for 2015, net of leases and negotiation, is only $6.1 million whereas this time last year it was $11.1 million. Additionally, the $2 midpoint of our 2015 guidance range assumes an NOI contribution of $15.5 million from developments, all of which is contractual.

We are confident in our occupancy forecast for the next 24 months. On January 1st, our 2015 same-office portfolio was 90.8% occupied, and we expect it to increase between now and the end of next year, meaning 2016, to approximately 92%.

There will be variability in some quarters, as the space rationalization begun by defense contractors in 2012 runs its course. However, we expect replacement leasing to occur at volumes that exceed contractions.

With that I will turn the call over to Steve.

Thanks, Roger. Fundamentals in our markets have been building towards more favorable leasing environment for several quarters. Supply remains in check in each of our markets and demand continues to firm along three lines.

Our US government customers and defense IT contractors continue to need modern, efficient, and strategically located properties to execute their missions. Office tenants in healthcare, education, and professional service industries are growing in and around the BW corridor, where over half of our properties are located.

In cyber-security companies, both large and small, continued to establish beachheads and expand operations in Maryland's Cyber Valley, of the center of which is US Cyber Command at Fort Meade. In 2014, for example, 461,000 square feet, or 31% of our new and development leasing was cyber-related. And since 2011 we have leased 1.8 million square feet, or 11% of our portfolio, directly to tenants engaged in cyber security.

The increased demand we are seeing is consistent with the economic data recently released by DTZ, a global leader of property services. According to their economists, several market indicators in the Metropolitan Washington, DC market bottomed and turned positive in 2014. DC Metro federal employment numbers bottomed in September and have steadily increased since then.

Similarly, the federal government's contribution to US GDP growth, which have been negative sense 2012, turned significantly positive in the third quarter of 2014. Important to our strategic tenant niche, the awarding of federal contracts has steadily increased each quarter since bottoming in FY13.

Lastly, as Roger discussed, the President supports increased DoD spending in FY16, including a proposed 8% increase in cyber security. We are confident in our occupancy projections for this year and next, and have provided a two-year tenant retention ratio in our 2015 guidance press release. At the end of 2016, defense contractors will have gone through a full cycle of leasing since the Budget Control Act of 2011.

As a result of this final turn, we project a renewal rate of 60% to 65% over the next two years. Anticipated non-renewals between now and the end of 2016 total 1.3 million square feet, which equates to an average of 650,000 square feet a year and is consistent with the leasing challenges we handled in 2014.

Last year our same-office portfolio had 659,000 square feet of non-renewals. We accomplished 663,000 square feet of new leasing and finished the year 30 basis points higher than the beginning of the year. Today's leasing environment is more favorable than it was a year ago, and underpins our optimistic outlook.

Once the defense contractors establish their new equilibrium, we expect to return to our historical renewal rate of 70%, which will support higher overall occupancy.

I will briefly touch on our fourth-quarter and full-year same-office and leasing highlights for 2014. At December 31st, our 2014 same-office portfolio was 91.3% occupied and 92.5% leased.

The 120-basis-point net decrease in occupancy relative to September 30th levels reflects the 200,000 square feet of move outs in the fourth quarter we discussed on prior earnings calls. Despite these move-outs, our tenant retention rate in the fourth quarter was 63%, and for the full year was 70%.

During 2014, we leased a total of 3 million square feet, including 1 million square feet in the fourth quarter. Total leasing included 900,000 square feet in developments, 400,000 square feet of which occurred in the fourth quarter.

Historically, 2014 development leasing volume matched 2013's volume and tied that year as the third best in our corporate history. When combined with 1.2 million square feet accomplished in 2012, we have averaged 1 million square feet of development leasing in each of the last three years.

Leasing economics continue to improve. Cash rents on renewals in the fourth quarter were flat relative to expiring rents, and increased 10% on a GAAP basis. For the full-year, cash rents on renewing leases rolled down 2% and improvement over the 3.6% roll down in 2013.

On a GAAP basis for the full year, rents increased 7% in 2014 versus 5.6% increase achieved in 2013. For 2014, the average lease term achieved on all leasing was 7.2 years, which was a market improvement from the average lease term of 6.0 years in 2013.

Now I will update the future cash NOI associated with developed leasing, which we have adjusted to exclude assets that have been transferred into the 2015 same-office portfolio. Including the two full building leases we announced yesterday, we have 22 development and redevelopment projects that are not in same office. Once stabilized, these projects are forecasted to generate annual cash NOI of $46 million, $34 million of which is contractual and $12 million of which is speculative.

When we leased two projects on our development schedule that are intended for government use, over 90% of this $46 million of NOI will become contractual. Based on executed leases, $15.5 million of cash NOI will benefit 2015; $29.5 million will be recognized in 2016 and virtually all of the $34 million will be in 2017's results.

With some additional leasing success in coming quarters, we expect to convert the $12 million of speculative development NOI into contractual NOI. The NOI embedded in our development projects demonstrates our ability to create value for shareholders.

Looking at our shadow development pipeline, we are tracking 700,000 square feet of potential new development projects, and we look forward to providing more color on the ones we execute in the coming quarters. On that note, I will turn things over to Anthony.

Thank you, Steve. FFO per share, as adjusted for comparability for the quarter with $0.49, and our AFFO payout ratio for the full year was 77%. Same-office cash NOI, excluding lease termination fees, increased 3.6% over the fourth quarter of 2013. For the full year, same-office cash NOI increased 1.3%.

Highlighting recent capital markets activity, and our balance sheet and credit metrics, we completed $150 million common stock offering in November. In December, we defeased $211 million of secured debt that bore interest at an average rate of 5.5%. We monetized $19 million of the non-strategic land in January.

Our debt to adjusted book ratio declined from 42.8% at the end of the third quarter to 39.7% at year end. Our adjusted debt to EBITDA ratio decreased from 6.7 times to 6.3 times.

We believe these improved levels are more appropriate for the long term, and while we intend to maintain these ratios and other balance sheet statistics, some metrics will exhibit variability from quarter to quarter. For example, adjusted debt to EBITDA will experience variability because the EBITDA from new development projects lags the debt incurred to construct them by several quarters.

I will finish my remarks by summarizing our 2015 guidance. For the full year, we expect FFO per share, as adjusted for comparability, of $1.97 to $2.03. We also established our first-quarter 2015 range of FFO per share, as adjusted for comparability, at $0.44 to $0.46. To get from our fourth-quarter 2014 diluted FFO per share as adjusted for comparability of $0.49 to the midpoint of our first-quarter 2015 range of $0.45, subtract $0.02 to reflect operating expense seasonality, $0.01 to reflect the full-quarter impact of the fourth-quarter non-renewals, and $0.01 to reflect lower forecasted developed fees.

Specific assumptions behind our 2015 guidance are detailed in our press release reissued separately this morning, but I'll add some color to our guidance point for same-office cash NOI. We forecast that our 2015 same-office portfolio's cash NOI will increase between 50 and 150 basis points.

However, if we exclude four buildings that experienced large non-renewals during 2014 and for which we are working to restabilize, the portfolio's cash NOI would increase 2.5% to 3%. So the majority of our portfolio is growing at a healthy rate.

On that note, I will turn the call back to Roger.

Thank you, Anthony. Let me leave you with three simple takeaways: first, the defense spending headwinds are over and budgetary increases are likely; second, our portfolio is a good shape, as evidenced by the fact that replacement leasing exceeds contractions. This is because demand in our markets and specifically for our unique and advantaged locations is strong. Third, the NOI and value creation embedded in our development pipeline combined with our well-leased existing portfolio will trump any leasing challenges we face in the coming quarters.

With that, operator, please open up the call for questions.

(Operator Instructions)

John Bejjani, Green Street Advisors.

Hey, guys. Steve, can you elaborate on the 650,000 square feet per year of expected non-renewals over the next couple of years? Where they might be [pros-ex] for back-filling and anything else you'd care to share?

Well, we have just gone across the portfolio and handicapped each and every tenant for the next three years. In total, reflecting the general trend towards rightsizing footprints and expiration of leases, we project out about 40% non-renewal. And it is really associated with all of our markets with defense contractors.

But, John, Northern Virginia has a higher incidence of nonrenewal than the rest of our markets probably.

Okay, and more broadly, how far would you say we are in the cycle of contractors downsizing and rationing their footprints?

We think we're -- we keep saying we are in the seventh inning. And for us, that means there are two more innings, which means 2015 and 2016.

As Steve mentioned in his prepared remarks, each of our contractors will have gone through a full renewal cycle at the end of 2016. We think at that point, we will have stability in the portfolio.

Okay. Thanks, and one last question related to Huntsville. So you seem to have been hit with a large downsizing in rent roll down there in the fourth quarter. Any color you can share on what happened there and just broader commentary on that market would be helpful.

Sure, that was the final expiration of CFC's full building lease at [three tundra] bridge. And that full building lease was relatively high compared to the market rates. With that, we've essentially marked that building back to market and we're releasing it right now.

All right. Thanks.

Brendan Maiorana, Wells Fargo.

Thanks, good afternoon. Either Roger were Steve, so, your comments sound more positive on the outlook than the budget outlook looks better. It sounds like you feel better about your core defense IT tenants.

And my recollection for 2015 is that there weren't a lot of large known vacates in the portfolio. And you did about 70% of renewal percentage for 2014, with some large known vacates in the portfolio.

I'm trying to get a sense of what seems to be shaping up to be probably a better backdrop of a year for COPT for 2015 versus more conservative guidance assumptions on the renewal rate and maybe occupancy levels that you've laid out. I would have thought maybe renewal percentage would move higher in 2015 as opposed to down.

Brendan, we gave a two-year rate of 60% to 65%. I would say that 2015 looks like it will be on the higher end of that, and 2016 potentially on the lower end.

But we wanted to, because we've -- as Steve mentioned, gone space by space, tenant by tenant, building by building and done an analysis of renewals versus non-renewals. And we feel comfortable with that two-year renewal rate, and we wanted to give, I guess, visibility into where we were going to shakeout for the balance of the portfolio rightsizing.

Okay. That is helpful, Roger. Maybe can you guys give a little bit of color on -- so the occupancy it looks like your average occupancy for the year is in line with where we are starting the year. But, there is an expected ramp by the end of 2015. Is that just something that is highly back-end weighted or do you expect occupancy to dip a little bit further early part of 2015 and then build back up in the latter quarters?

I think things are pretty stable where they are now, and we will just have a build up as the year goes on to the 92% level.

Okay.

The one thing you just need to keep in mind is that we -- if you're looking at the same-office pool, we have reset the same office [pool]. You may be looking at where we are starting from the 2014 same-office pool versus where we projected year-end occupancy to be, which is the 2015 pool. The difference between those is about 0.5%.

Okay, so Anthony, so we are starting the 2015 same occupancy pool at what, 90.5% or something like that?

90.8%.

90.8%, okay. Great. Last one, maybe this is, Steve Budorick. So it looks like there is a big ramp of NOI at DC-6. I think you guys were a little less than $1 million in the fourth quarter; you expect $10 million of cash NOI at DC-6 during the year. What is your average occupancy for DC-6 during 2015?

I don't have an average occupancy number to share with you, but I can say that $5 million of the $10 million is contractual. And for the last couple of quarters, we have been messaging increased confidence on landing some significant pieces of new business, and we are highly confident that we can meet those numbers.

So if you meet your budget, where would you end of the year in terms of an occupancy level there?

Highly occupied.

Alright, fair enough. Thanks guys.

Michael Lewis of SunTrust.

Hi, thank you. Your development spend becomes more self-funded as you get projects online. But I was wondering if you could talk about any capital markets activity assumptions in your guidance and how you think about funding the rest of the spend?

We have, in the guidance, we have $200 million to $250 million worth of development spend projected. And we have zero to $50 million in property sales that we are projecting, which would be one source of funding, as well as potentially $20 million worth of land sales, which are virtually all complete at this point. And then we look to be capitalizing the balance through a debt issuance, as well as any equity on our ATM.

Okay. And then this is a broad question, we've talked about this a little bit in the past. But when a company like Anthem has a huge data breach, does that, in the short- or long-term, lead to more activity and demand in your markets? Or do they take care of this problem either somewhere else or in-house? I'm just curious how that works.

I think it's a combination; I think obviously, corporations have to spend more money in-house defending their systems. I do think that the contractors' business development goes up, and some of that will probably be executed in our markets and some will be executed outside of our markets. It's not -- it's a net positive. We just can't quantify how big the positive is.

Fair enough. Thanks.

Chris Lucas, Capital One Securities.

Good afternoon, everyone. Just following up on the DC-6 question, Steve, will you have to make any additional investments of consequence in order to get to that cash NOI number you're talking about?

Chris, we will have to spend a little bit of money to get to $10 million. If we go beyond that, then we would have to start spending money.

Okay. And then on the development yield range -- Go ahead.

Let me just note that, so we anticipate that at some point we will have to spend an additional $50 million to fully build out DC-6.

Okay. And then on the development yield range, the 7.5 to 10, what -- is it the low end, what kind of projects? What are we looking at there?

Chris, it's Wayne. We did, you're right, we lowered the lower end of that range to 7.5, really to reflect the increase in the recognition. In certain build-to-suit customers, we have high-quality tenants with long-term leases are going to look for slightly different pricing that we forecast in the past.

Okay, and then Roger, I want to clarify something on the occupancy guidance. You had mentioned, I think, that 2016 you expect to end the year around 92%?

That's right.

So it will wrap up and then dip back down over the next two years is the view.

That's right.

Okay, that's all I got. Thank you.

Thank you.

Jamie Feldman, Bank of America Merrill Lynch.

Thank you and good afternoon. Speaking to brokers and consultants in the field, it sounds like after the Sony breach or hack, there's been a bit of a [fee] change in the approach to corporations with cyber and cyber defense. Can you guys talk about what you have seen since then and what that might mean for business prospects?

Well, from our view, we've seen a steady increase or continuing accumulation of growth in new offices in cyber. I don't think there's any activity I can tie to the Sony hack, in particular. I think the increased frequencies of these events, both for more rapid expansion in the cyber industry, and much of that is located here in Maryland.

Okay. And then going back to your comment on just seeing a general pickup from not necessarily defense-related, but just general office tenants around DWI, can you talk a little bit more about what you're seeing and what the leasing pipeline looks like there?

I don't have the pipeline broken out by submarket memorized anyway, but we have pretty strong activity in and around the airport. My recollection is 60,000 to 65,000 square feet in the pipeline there. With our greater Baltimore portfolio, White Marsh we have good activity; and what vacancy we have left, we are over [90%] in that submarket.

And then, of course Columbia Gateway has enjoyed good demand for a year, and there are very few large blocks of space in our submarkets, so conditions are improving.

Okay. And then just generally, Northern Virginia, we have heard very good feedback from other REITs on their calls and even brokers heading into the quarter. In terms of contractor demand, like how much better are things than last quarter than two quarters ago, in terms of the conversations you are having?

Well, let me just say this, the bulk of our properties are 96% to 97% leased. We have three buildings now that have some significant vacancy, two of which are raw conditions, new construction. Our pipeline of prospects for those two buildings is higher than I have seen it since I joined COPT.

There is no question there's a much higher level of tours and prospect activity, and essentially, enough to expect some real progress in 2015, in those two buildings where contractors are now in a position to consider making long enough commitments that would justify constructing new tenant improvements in a shell building.

And then, our third building we just got back taken from aerospace in Westfield, it's about 150,000 square foot building. We've got good demand building already. That building was difficult to show because of the high-security nature of the tenant that was in it. But we're working with prospects and pipeline activities that's about 85,000 square feet, a little over half of the building.

So yes, indeed, I would agree that the contractor activity has improved and it has been measurable since, say, August.

Great, and then just a follow-up. What's in your guidance for the aerospace space? The large year-end expirations you guys had?

I think we have some modest lease-up this year, probably no more than one-third of the building.

Okay. All right. Great, thank you.

Thank you, Jamie.

Tom Catherwood, Cowen.

Yes, thank you very much. If we look at page 16 and we look at the full-year same-store revenues, if we back out these termination fees, it looks like the cash revenues grew something in the neighborhood of 3%, which makes sense given lease-up and contractual rent bumps. But then it looks like the expenses grew around 6%. What was driving that expense growth this year, and could we expect to see some of that continue in 2015?

Are you talking about the quarter or the year?

It looks like for the year; for the quarter, it looks like things improved a little bit actually. It looks like expenses were down year over year for the quarter. But for the year overall is where we saw 6% expense growth. I want to get a sense of what was really driving that.

Right, so if you remember, we had a very challenging winter in our region last year. Our snow removal costs were $6 million, plus we had a very cold winter, and we incurred $1.5 million of extra utilities costs. So we incurred $7.5 million of costs versus the prior year, which was a much smaller number, probably half of that in terms of being over budget.

So the trend that you saw in 4Q, which being a better comp, as opposed to the full-year trend is a more realistic perspective then?

That is correct.

Okay. And then, Roger, you also mentioned the budget that came out and the new suggested appropriations toward cyber security. There was a bunch of talk about creating a cyber -- I guess you would call it a civilian cyber security cluster in Washington DC. How realistic is that possibility, and what, if any, impact could that have on Fort Meade, do you think?

I think it is potentially realistic, but over time, I think the GSA has softly gone out of the market to see where there are opportunities in the market to handle something like that. There is no authority to do it yet. There is no mandate and there is no money to do it.

I don't think it's anything that will hit the market for a number of years. It probably will be located in the national capital region, which bodes well for this overall region.

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

Craig Mailman, KeyBanc Capital Markets.

Hi guys, just a quick follow-up on cyber. I know we have all been talking about the corporate hacks and such, but just curious, you guys hit on the government side of things. What are you seeing on the private side in demand from companies serving the commercial industries? And are you seeing any broadening of geography of where these guys are located outside of Maryland?

Craig, we've had steady commercial, if you will, or contractor cyber growth. And it has largely been located in the NBP Columbia Gateway, and to some extent in our Airport Square properties, and then some minor portfolios we have in the area. But they continue to both -- we have continued to capture new tenancy and provide expansion space to contractors that are already here that are starting to win contracts and expand.

So, in our experience, it is largely focused in Maryland, but we have landed a couple of deals in Northern Virginia out by Dulles Airport that are also cyber-related. And Northern Virginia has a pretty healthy cyber community as well.

Are those tenants mostly contracting for the government or are you starting to see also guys that are just wanting for a corporate security outside of government uses?

There are several tenants that do cyber work in our portfolio who initially were serving only the government and have business plans to take those solutions and convert them to commercial solutions to service corporate America, so I expect that trend to grow as the demand from corporate America increases.

All right. Thanks. And then just a quick follow-up. It's just Booz and Mitre are the two big expirations or chunky ones you guys have. Is that still the case? Can you remind me of the timing of those?

Sure. Booz expires at the first day of 2016 and Mitre's lease matures 10/31/2016.

Okay. Are those still really the two largest ones that you guys are worried about? Or even Roger's commentary on continued rationalizations, are there other ones that are now creeping ones or those just going to be smaller guys?

Those are the two large ones.

Okay. And then just lastly, you guys have clearly had success on the announced developments at the end of December and yesterday. A couple of those looked more to be shell data center. How are you guys looking at that 700,000 shadow? Is that more of your traditional office-type product or are there more shell data center deals in that as well?

Craig, it's about maybe 35%, 40% for shells and the balance is office product.

Okay. And then one last one. The answer I think Wayne gave on the 7.5 with the credit tenants, is that more of the shell deals that you guys are getting driven down on yields, or is that just a separate comment?

Yes, that is a fair observation, Craig. We quote a range, and so it is not an attempt to spot a particular average. If you look at some of the development that we're doing in our business parks for our traditional tenants or projects that may have a speculative component to it, maybe redevelopment in nature are going to be towards the higher end of that range.

As you know, we didn't change the top end of our development yield guidance; that's still remained at 10%. We just didn't look at the 8% that was previously the low end of that and dropped it to reflect some of the good quality long-term build-to-suit business that we think is in the market.

Great. Thank you.

Dave Rodgers, R. W. Baird

Roger, maybe talk a little bit more, it looks like your acquisition and your disposition guidance this year are pretty modest, at best. But what could you guys do more on the disposition side or the acquisition side, or are you pretty happy with where the portfolio is and are you really solely focused on development at this point?

Well, we are currently focused more on selective development and the related yield spread and value creation, we think is a better use of our capital. We're confident that there is demand for new buildings in the range that we have been executing on over the last couple of years. We think, of course, that that is our strength.

With respect to acquisitions, acquisitions continue to be very competitive, so I think special situations work our Company; that is things where we understand a perceived risk, not (inaudible) risk. Or we can mitigate a problem or a risk, because for instance, we have a customer, that sort of thing.

We are constantly looking at things, but with the competitive nature, we haven't been able to acquire anything. But we haven't had to, because we've got enough growth from our (multiple speakers).

And then, in terms of dispositions, we do have a couple of buildings in the market. We would anticipate sales this year, but we wanted to be conservative and list zero to $50 million. But we have an internal goal to try to do more than that.

Okay. That's helpful. And it sounds like that might be weighted a little bit more toward the latter portion of the year?

Yes.

Okay. Anthony, I guess looking at guidance for the first quarter, I think you guys did a great job of laying out the guidance this year. It looks like there's a $0.04 sequential drop in FFO, adjusted for comparability between the fourth quarter and the first quarter. And I didn't hear if you addressed all of that. It seems like $0.01 to $0.015 probably related to aerospace and CFC in Huntsville.

What's the rest of that drop? Do you have a pretty early debt offering embedded in there that you are able to deploy the proceeds later? Can you give a little more color on that?

It's almost all operational; there's $0.02, so the difference that is really quarter to quarter for the net operating expenses for seasonality, so weather- related expenses, mostly snow expense; $0.01 for the full-quarter impact of the non-renewals we had in the fourth quarter that you referred to; and then another $0.01 for lower development fees than we had in the fourth quarter.

Okay. And then on the debt side of the equation, it does sound like you might go back to the market. Would you sense doing that fairly early in the year or how you play that?

Our guidance assumes that that is later in the year, in the third-quarter timeframe.

Okay. Great. Thank you.

Emmanuel Korchman, Citi

If we can turn back to the disposition question for second, when you think about the dispositions beyond where you have guided, would those be a source of match funding? And do think of those in contract to more equity on the ATM, or are you looking to capitalize on market pricing, or somewhere in between? Just trying to figure out where your heads are at?

I think it's both. We're trying to observe that some assets may find a buyer today in a very excitable market for acquisitions. At the same time, we've got a lot of development spend for this year, the $200 million to $250 million, so we would like to fund some of that with dispositions. It is really being opportunistic and also trying to match funds.

Great. If we look at your -- the guidance portion where you talk about leases under negotiation, how much confidence do you have in those? Are those at 100% or 95%, or are they just sealed and we can forget about them?

We have a high degree of confidence or we wouldn't have laid them out separately. We can't guarantee that we will be at 100%, but I think we are highly confident that most of that will get done.

Great. Thank you.

John Guinee, Stifel.

Great, thank you very much. Two quick questions. One, do you have a material equity increase in your share count in your guidance, Anthony? Second, is there any occupancy left in the CDC building down in Huntsville?

John, the answer to your first question is no.

The answer to the second question, John, we renewed 29,000 square feet with CSC. And then we are having good success leasing it up, in essence, with the deals that we are recently signed, currently negotiating, and expect to move to lease on, we would be about 85% reestablished with a small chunk on the first floor left to go.

Was that the building that was about a $240 square-foot purchase price four years ago?

That is correct.

Thank you. Perfect. And just so I understand this, Anthony, the basic guidance is about $200 million to $250 million of development or acquisitions exceeding dispositions, but no equity raised or no change in the denominator or the share count?

No. I think your question was whether there was a material issuance, and the answer to that is no. Our guidance assumes that we are going to maintain the credit metrics that we have -- that we had at the end of the year. So, embedded in our guidance is maintaining those ratios.

Perfect. Okay. Great. Thank you.

Anthony Paolone, JPMorgan.

Thanks, just following up on the discussion around Ashbourne and Manassas and the projects you guys have announced there, you have good credit in term and it seems a bit outside of your core niche. What is the thought process on whether those are keepers or what a profit spread would look like on those yields right now?

Those assets are selling in the -- around the 6% cap rate and we are developing 7.5%, let's say, so there is a pretty good margin there. The credit is good and the tenant is investing a lot of money in those particular assets. They could be a potential source of funds over time.

We are running with a couple of customers now, and we would like to continue that relationship for a while and try to drive as much value creation, while things are hot, as we can.

Okay. And then my other question is on the 650,000 square feet a year over the next few years of non-renewals, what is the retenanting cost look like, or what do you think the new lease economics for that space looks like?

It depends on where it is; if it's in Maryland, we are getting tenant -- new tenants in for $25 a square foot. If it's in Northern Virginia, it is going to be another story. It's really subject to market conditions, and there market conditions there, we will spend $60, $65 a foot on TI in that particular market now.

And similar volume in 2014, the weight average replacement all in, a little under, and it was almost seven years at term. To give you an idea.

Does the stuff you outlined in that 650,000 over the next few years, does that seem much different than what the experience was in 2014?

No.

Thank you.

Jamie Feldman, Bank of America Merrill Lynch

Great, thank you. Just a quick follow-up. I think you gave cash leasing spread guidance for renewals in your release. What is your view of where GAAP leasing spreads will be next year?

Well, they should be about what they were this year, so last year we were 2% negative on cash but positive 7% on GAAP. We are projecting minus 2% to 3% on cash, and so I think GAAP will be in the 6% to 7% range.

Okay, and then what would you say are the largest chunks of what could be upside to your guidance?

I think it's simply leasing faster than we expect to lease would be the -- and getting maybe some of our development tenants in the space a little faster than we expect to.

Okay. And then finally, for Tony, just a quarterly ramp for earnings to get to your year-end number. Is it pretty constant each quarter, up $0.02 or is there any big jumps?

It is pretty constant quarter to quarter to get to the $2 overall. Some of the NOI from the development projects placed in service does leans towards the latter part of the third and fourth quarter, as well as some of the NOI ramp up for DC-6.

Okay, great. Thank you.

Tayo Okusanya, Jefferies

This is Charles Crossing standing in for Tayo. My question really surrounds the same-store NOI guidance for 2015. Just trying to make sure I understand all of the components here. We have a number of 0.5% to 1.5%, and it looks like occupancy is increasing about 100 basis points. That seems back-end loaded, because of the 200,000 square feet of move outs you had in 4Q, but cash spreads are similar for 2015 to 2014. Yet the same-store NOI figure is slightly lower at the midpoint compared to this year by about 30 BPs.

I'm trying to make sure I'm not missing some other component in there, such as maybe higher same-store NOI expenses. But it doesn't sound like that is the piece, given the high snow removal cost last year. If you could just clarify that, that would be really helpful. Thank you.

I think it's simply that getting the tenants in place and paying rent is back-end loaded in the forecast for the -- to replace the space that we lost in 2014. Not that we are going to replace space by space, but just overall to get the same-office occupancy back up; it is back-end loaded, and that is what is driving the 0.5% to 1.5% same-office growth.

Okay. That's makes sense. Do you have a sense on that aerospace, I'm sorry if I missed this, the rental spread you might get on the 150,000 square feet?

I think it will be down a little bit. We ended up with a lease that was close to $30 a square foot, and rents in that market now are probably in the mid- to upper $20 per square foot.

Okay. That's helpful. And I just one last question. The 310 Sentinel and NoVa Office B, I understand that there aren't built to suit projects, but they have remained 0% leased for several quarters now. I'm just trying to get a sense of what activity you're seeing there and when you expect to get some pre-leasing, if at all. Thank you.

The government has very methodical ways when they procure space, so we expect the activity in those buildings to commence in the second quarter and ultimately result in transactions in late third quarter, possibly early forth.

Okay. That's very helpful. Thanks for taking my questions.

At this time, I would like to turn the conference back over to Mr. Waesche for closing remarks. Please proceed, sir.

Thank you all again for joining us today. If your question did not get answered, we are available to speak with you later. Good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.