COPT Defense Properties (CDP) 2016 Q3 法說會逐字稿

Welcome to the Corporate Office Properties Trust third-quarter 2016 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, Chantelae. Good afternoon and welcome to COPT's conference call to discuss the Company's third quarter results for 2016. With me today are Steve Budorick, President and CEO; and Anthony Mifsud, Executive Vice President and CFO.

In addition to the supplemental package and press release related to our results, we have posted a flip-book to our website to accompany management's remarks. As management discusses GAAP to non-GAAP measures, you'll find a reconciliation of such financial measures in the press release 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 within the meaning of the Safe Harbor private securities litigation Reform Act of 1995 and the 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. With that I'll turn the call over to Steve.

Thank you Stephanie, and good afternoon. As third-quarter results demonstrate, we continue to execute on all three fundamental aspects of our 2016 plan. Same office cash NOI remains on track to increase by at least 3.5%. We have raised $304 million from asset sales so far and have another $111 million under contract. And based on the performance of our portfolio and deleveraging from asset sales, we will achieve our balance sheet goals.

The recovery among our defense IT customers continues to drive gradual broad-based [occupancy] gains. As an example, in our Navy support group, we accomplished 56,000 square feet of new leasing in the quarter and 89,000 square feet year to date. Progress at all our defense IT locations is encouraging with 89% of vacancy leasing achieved this year occurring in those segments. Based on the solid momentum and demand, we expect 2017 leasing progress to be delivered and steady.

During the quarter, we leased a total of 741,000 square feet comprised of 597,000 square feet of renewals, 118,000 square feet of new leases on vacant space, and 26,000 square feet in development projects. For the nine-month period, we completed 2.3 million square feet of leasing, which included 1.4 million square feet of renewals, 367,000 square feet of vacancy lease up, and 571,000 square feet of development leasing.

In the third quarter, we completed three large early renewals with non defense tenants that we discussed on our last call and which are summarized on slide five. These proactive transactions eliminate significant role over-exposure and 275,000 square feet or roughly 2% of our same office portfolio and ensure stability of same office growth. As a result and as detailed on slide seven, we now have only 10% of annualized rents rolling in 2017 and 13% in 2018.

Most of these leases are in our Fort Meade/BW corridor sub market where we expect very strong renewal rates. Consistent with our guidance, these three leases decreased cash rent spreads, which rolled down 11.9% in the third quarter and 5.7% for the nine months. Excluding these three early renewals, year-to-date cash rents rolled down less than 2%, consistent with our original guidance. The other short-term impact of executing these larger early renewals was a one quarter spike in our leasing costs.

In the third quarter we averaged $38 a foot on renewals and excluding the three large deals, we averaged $13.58. For the year, our capital commitments on renewals averaged $22.52 and excluding the three large leases, would have averaged only $11 a foot.

These three large early renewals eliminate significant risk in our 2017 and 2018 expirations & preserve asset value by locking in solid credit tenants at attractive market rents for an average of 11 years. When combined with the end of programmatic asset sales negotiating these three early renewals positions us to generate durable, predictable cash NOI growth for the foreseeable future.

Tenant retention rates and at leased terms were strong. We renewed 83% of the leases in the third quarter and 79% for the nine-months. So we're modestly ahead of our tenant retention guidance for the year of 70 to 75%.

Lease terms in the quarter continue to lengthen, averaging seven years of term on new and renewing leases and nine years on development leasing. Year-to-date, we averaged six years of term on new and renewing leases and 10 years of term on development leasing.

Third-quarter development leasing included a 15,000 square foot lease to the US government at 310 [NBP], the recently completed development built in anticipation of the US government demand. We expect the building to fully lease in 2017. In total, we have leased 571,000 square feet in development projects year to date.

Based on leases and final negotiation, we're on track to modestly exceed our 2016 goal of 700,000 square feet. Our confidence in continued growth from development is grounded in the strength of our shadow development pipeline, which now includes up to 1.2 million square feet of mostly built to suit projects. Typically our shadow development pipeline exceeds 1 million square feet and translates into between 750,000 and 1 million square feet of projects under construction each year.

As slide 8 details, since 2012 we have averaged 925,000 square feet of development leasing annually. The newly developed space we place into service each quarter tends to be significantly pre-leased. In 2015 we delivered 1 million square feet that were 97% leased. And as slide 9 shows, the 545,000 square feet we placed into service so far in 2016 were 87% leased.

As slide 10 shows, recently completed development projects are contributing $16 million to cash NOI this year. Based on executed leases, recent developments will contribute an incremental $7 million to next year's cash NOI for a total of 23 million. In total, we have $30 million of annualized cash NOI associated with executed leases that will contribute to future results.

Each year, we plan to invest about $200 million in low risk development projects that, on average, will yield 8% and therefore add another $16 million or so of annualized NOI. By continuously replenishing our pipeline of highly leased development projects, we increased the level of cash NOI that fuels NAV growth.

Furthermore, we know we will continue to grow through development because the missions our defense IT locations support are critical to the nation. Our franchise is uniquely positioned to provide real estate solutions for the government and their contractors. We offer defense IT tenants an unequaled combination of strategic land positions at the nation's leading high-tech defense installations, specialized development capabilities and a credentialed workforce that can operate secure facilities.

Our core competencies and the breadth of opportunities combine into a competitive advantage that no other publicly traded REIT can offer. So to summarize, we have sufficient assets either sold, under contract or in the market to achieve our disposition and balance sheet goals.

Third-quarter leasing was in line with expectations, including the execution of large early renewals that eliminate risks to our same office portfolio. As a result, we expect to grow same office cash NOI by at least 3% annually for the next several years. Importantly, the US government has begun leasing 310 NBP, which we expect to fully lease in coming quarters.

With that, I'm handing the call over to Anthony.

Thanks Steve. As summarized on slide 4, third quarter FFO per share $0.51 was in line with the midpoint of our guidance and consistent with results from activity we previewed on our second quarter call. Same office cash NOI increased 1.1% in the quarter and 4.1% during the first nine months, also consistent with our guidance.

During the quarter, we paid off $163 million secured loan that bore interest at 7.25%. At September 30, approximately 96% of our debt is fixed-rate and our total debt has a weighted average maturity of 6.1 years.

Slide 12 depicts our debt maturity schedule at the end of the third quarter. Earlier this month we used cash on hand from dispositions and capacity on our line of credit to retire our $120 million term loan, which was due in 2019. With that repayment, we now have no debt maturities until 2020.

At September 30, our debt to EBITDA and debt to adjusted book ratios improved to 6.3 times and 41.2% respectively. We expect to achieve debt to EBITDA of 6.1 times by year end and a debt to adjusted book ratio of 39% upon completion of our 2016 asset sales.

Slide 14 of our presentation summarizes our updated guidance and the major assumptions that support it. We are maintaining our previously provided guidance for the fourth quarter and tightening our full-year guidance range around the previously established midpoint of $2.01, which is flat versus 2015 results. Importantly, we now forecast that AFFO will increase at least 6% this year, modestly exceeding what had been the high-end of our guidance range.

We continue to forecast same office occupancy to increase at least 60 basis points in the fourth quarter to end the year between 92% and 93%. At September 30, our same office portfolio was 93.2% leased, so our guidance is based on executed lease commencements in the fourth quarter. Note that our forecasted 3.5% to 4% increase in same office cash NOI for the year implies slightly over 2% growth for the fourth quarter.

Free rent from renewal activities in 2016 suppressed same office cash NOI results in the third quarter, just as we forecasted to do in the fourth quarter. After the free rent burns off, our same office cash NOI growth will be 3% or higher, driven primarily by rent increases and modest occupancy gains.

In terms of dispositions, we're on track to achieve our goal and have completed $304 million of sales to date. We have $111 million under contract, of which $42 million are hard, with deposits at risk, and we have another $60 million in contract negotiations. Of this remaining $170 million, we expect $66 million to close this quarter and $105 million to close shortly after year end. Collectively, assets sold under contract or in negotiations totaled $475 million, or 108% of our disposition goal.

Although we are not providing 2017 guidance until later this year, we expect dilution from the full-year impact of 2016 dispositions to be more than offset by same office cash NOI growth of at least 3% from the growing NOI in contractual development leasing primarily at defense IT locations. With that, I'll turn the call back to Steve.

Thanks Anthony. Our primary corporate objective is to deliver competitive total returns to shareholders. We are doing this by managing risk in our portfolio and balance sheet to ensure stable predictable growth throughout the economic cycle. As we complete our 2016 plan, our company is very different and far stronger than the one I joined five years ago.

The three big takeaways from this call are as follows. First, now that our programmatic asset sales are concluding, our growth story becomes even simpler. We will produce competitive NAV and FFO growth by combining attractive same office cash NOI growth from our stable full of existing assets with robust new cash flows low-risk development projects.

Second, we have worked very hard to strengthen our balance sheet and we hold our investment-grade rating as sacrosanct. We will continue to be vigilant about leverage and will look for ways to continue improving our metrics and our credit rating over time.

Third and finally, we're no longer a suburban office REIT. 90% of our portfolio is at defense IT locations such as the National Business Park. These locations may appear to be suburban on an aerial, but they are the central business districts of national security missions, a fact demonstrated by the increasing investments our government customers make in their on-base facilities and also in the secure facilities that lease from us.

Our Maryland defense locations serve important missions at Fort Meade, including DOD cyber. Our Northern Virginia defense locations support other intelligence in cyber missions. Both sides of the Potomac River are essential for keeping this country safe.

The 10% of our portfolio that is non defense consists exclusively of seven Class-A buildings in urban or urban like markets that are of mass transit served. So upon completing the 2016 asset sales, all of our buildings will either be mission centric or urban centric.

On that note operator, please open up the call for questions.

Thank you, Mr. Budorick.

(Operator Instructions)

Jamie Feldman, BofA Merrill Lynch.

Great, thank you.

Going back, Anthony, one of the comments -- as you were wrapping up your comments you said NOI growth and development will offset dilution from asset sales in 2017. Can you give us a little more color? Are you saying you're looking at flat earnings year over year? Or how do we think about those three pieces?

I think what we're saying is, as we're looking at 2017, we do see growth off of where we are in 2016. But the one component that needs to be taken into account is that, if you average the sales that we've accomplished so far this year with the ones that have been executed as well as the ones planned for the fourth quarter, the average in 2016 is $120 million versus that $440 million total disposition target. So, that increment is going to impact 2017, because we're selling at an average cap rate of around 8% and we're reinvesting those dollars, 50% in development, call it 8% push; but the other half we're using to pay down debt and that debt is low-cost. So the average debt that we've paid off is just under 3%.

So, it's really the full-year impact of that, those sales on 2017 will bring 2017 down, but we believe that, that will be more than overcome by the growth in same office NOI as well as the incremental NOI coming on from development projects.

Okay. That's helpful.

And then you said 3%-plus same-store NOI after the fourth quarter, so that's what you are looking at for next year?

That's correct.

And as you think about the drag in the back half of this year, what are the big pieces that will give you a swing? I think you mentioned free rent burning off -- or new free rent is what is holding you down?

That's correct. That's been holding us down, back in the third and fourth quarter and that burns off after the end of this year.

So is 3%-ish what you're looking at for next year, for the full year?

Yes, we are.

And then -- can you talk about the COO search, just where things stand today?

Sure. I'm pleased to report that we've made a selection. We're onboarding the candidate right now. We expect to make an announcement in the next two weeks and he will join us at the end of the month.

All right, great. And then, Steve, for you: just any other initiatives we should be thinking about for the company that you've taken on?

Well, we're heavily focused on driving leasing through 15 assets or groups of assets where we have vacancy, and continuing to thrust success through our development program.

Okay great. Thank you.

Thanks Jamie.

Craig Mailman, KeyBanc Capital Markets.

Thanks, guys. Good afternoon.

Steve, just curious: I know we've talked in the past about 12 buildings you have with about 1 million square feet of tougher vacancy. Can you just give us an update of where you guys stand with that? And maybe any trends you are seeing in velocity or anything on that front?

So let me speak to the velocity trend. It's been improving throughout 2016. So as we sit right now, that 1 million square feet, I've got 24% that is either in advanced negotiations or pipeline, and another 43% where we have working deals with prospects. So in total we have activity on 67% of that million square feet. I think that's significantly better than it was at the beginning of the year, and I think we're going to have a good fourth quarter.

That's helpful.

Then just on 310 NBP; this one's been a little bit slower to lease up. You guys have some traction here. Have you gotten indications of interest for the balance of the building? Or is it just more of a gut feeling that things seem to be picking up with that tenant?

Good question. I have to be careful about what I say regarding the US government, but there is strong interest and activity in the property. The have processes they must follow and we will patiently wait for them to proceed.

Okay, that's helpful.

Then, just moving over to dispositions, can you just give us a sense of cap rates you guys are getting on these sales? And maybe just some kind of trends you are seeing in the disposition market? I know you guys had to go to smaller packages to get a lot of this done.

Sure, Craig.

The average cap rate on the operating properties that we've sold year to date is about 7.7% so we've been achieving some good values on the stuff that we have in the market because -- and with the majority of that being suburban office assets. You're right that we had some transactions in the market earlier this year that we had to step back and break out into pieces. We have now gotten all of that product back either under contract or in negotiations. And with those deals, the total operating property sales that we have closed or in process will average that 8.3% cap rate. We still can seize pretty good demand for that product from the regional investors who continue to see that as a way to -- they're looking at it to capitalize it different that we would; they're going to lever it up and go for the highly levered yield on those products. So the market continues to be good for us with respect to getting those assets moved out the door.

Great, thanks guys.

Thanks, Craig.

Manny Korchman, Citigroup

Hello, Manny.

If we just think about the asset sales again, where did those come in pricing expectation-wise versus when you first looked at them? I get they're under contract and you guys are making quick work of getting them passed, but where are evaluations versus where you first expected?

You know, some exceeded our expectations; some fell a little short; on average, they're right on target.

Okay; and then in terms of lease renewals or especially early renewals, has anyone else approached you and wanted to do an early renewal? And if so, where would pricing land on those?

You know, those three renewals were all non-defense tenants and one in particular influenced those -- the big decline in our cash rent spreads. That building was in Northern Virginia; it is a major financial institution. Markets around that building are about 20% vacant. We took a very risk-averse approach and agreed to cut that deal early and lock it up for another 12 years. We really don't expect any more of that activity that's out of the usual.

Maybe last one for me: if we think about your ongoing development pipeline, how much of that is going to be office space in your defense markets versus other types of assets including data centers?

In our shadow development pipeline, about 60% is office; about 40% could be data centers.

And the vast majority of that office is at the defense IT locations.

Thank you.

Thank you, Manny.

John Guinee, Stifel Nicolaus.

Hello guys, John Guinee. A couple of things.

The big picture first is, I think, correct me if I'm wrong, most of your vacancy is at the Navy Support and Aberdeen Proving Ground and I don't know if there's a path to lease that up, so if you could discuss that, let me know. And then second, got about, I think you said about 1 million square feet of build-to-suit development, can you sort of address two questions? One, Wayne Lingafelter is no longer there, so who is heading that up? And then, two, is it in Redstone, San Antonio, NBP, Northern Virginia, APG, where is it located?

So, the first question, Navy Support, we expect that portfolio to be over 90% leased either at year end or shortly thereafter. We have very strong demand throughout all three locations. Then, with regard to development, in the shadow development pipeline, it's really all of the above, John. There's quite a bit of activity that we are working on for Redstone Gateway in Huntsville; there's some Northern Virginia activity at multiple locations. There's activity in Colombia Gateway; M Square, our development associated with the University of Maryland, and potentially at the National Business Park.

Okay. And have you hired a development person, or who is handling that?

So we are recruiting that. We have a very solid team that remains with the Company. Anthony and I are co-managing and coordinating their activities currently. Our new COO will be empowered to oversee that activity when he comes on board. And after we on-board the COO, we will finish recruiting for a replacement.

And then, I think you quoted AFFO up 6%, which I'm assuming is 2016 over 2015, but correct me. My general question would be, spending $38 a square foot on re-leasing costs with a 7% roll down, how does the math work for that to be AFFO growth? Or will AFFO slide in 2017 because you are spending that money in 2017 versus 2016?

You're correct that the 6% relates to 2016 versus 2015. And the capital that we've committed on -- the tenant improvements for those large early renewals, the vast majority of that capital will be spent next year. So we'll be seeing that flow through as a recurring capital item in our 2017 AFFO.

Okay; and then looking at page 6, I just noticed a continual impairment losses, $70 million last quarter, $28 million this quarter, $100 million for the year. Are we done with impairment losses? And then the second is, I'm looking at G&A leasing expenses business development, which I think most people all include as G&A, correct me if I'm wrong, but if you add all those up, you're running at about a $10 million a quarter G&A run rate. And correct me if that's either the wrong way to look at it or not as high as I think it is.

With respect to impairments John, we believe we're done. The additions that we had in the fourth quarter, excuse me, in the third quarter, related to taking to market, primarily related to taking to market one building in Northern Virginia that we now have as held for sell that wasn't previously held for sale, as well as adjustments to some of the transactions that we had in the market as part of contract negotiations.

With respect to G&A, the numbers that you are looking at on our income statement include the cost that the Company has incurred in the current year for executive transitions. And as we've gone through that process to reduce the overall G&A of the Company, those costs are flowing through not just related to folks at the CEO or at the head of development level, but also at other Senior Vice President and Vice President levels where we have reduced the overall cost of the Company. If you look at that on a run rate basis, the third quarter really ran at about $8 million and that's where we are targeting the fourth quarter to be.

Okay; and then lastly on your 310 Sentinel lease, 15,000 square feet, is that building inside the fence now? Or outside the fence? And if it's outside the fence now, does the use require it to go inside the fence?

It's currently out, we will be extending the fence line around it in the process of fitting out for the initial customer who is a member of the US government.

Got you. Thank you, thank you. Nice job.

Thanks, John.

Dave Rodgers, Baird.

Good afternoon guys.

Steve, wanted to go back to your development comments: you said about $200 million annually of development spend. I guess with the programmatic asset sales going to be behind you by the end of this year, what's the right level of sales between value creation, the use of debt, potentially ATM, what's the right level of ongoing sales to keep leverage in check and move forward with that development?

Maybe $50 million.

Okay; the rest will be handled with value creation etc?

Correct.

Okay. I guess the second, on the guidance page that you had, and maybe just refresh my memory: there were two major changes, one was the development spend declined from the initial, and then there was the was the drop in the same-store occupancy guidance. Just wanted to recap, what was driving those two? And the development spend in particular, was that just a function of when the capital is going out the door, or just a slower ramp, et cetera?

It's really a function of when the capital is going out. So we had some delayed starts both in terms of starts that were delayed in 2016, so projects that we thought were going to start earlier in this year that have now started that impacted that, as well as starts that now have been pushed into 2017. There's a component of that reduction that relates to the one redevelopment project we sold at Arbor Crest, that we originally had as a redevelopment project at the beginning of the year that would no longer own. And there is a funding structure that the government asked us to do for the buildout of Building D that caused a temporary reduction again, a timing change between 2016, 2017. (multiple speakers)

I guess it was on the same-store occupancy guidance was lower as well, but you've retained a lot of the tenants, so I was just curious why that was down

That's a change that we made with the second-quarter guidance. It was a function of the change in the pool as a result of some the changes in the assets that were in the disposition program.

Okay. That's what thought.

That I guess last one: in the supplement, I think your differential between leased and occupied is about 150 basis points. Seems a little bit larger than it has been, so I guess just curious on when the uptake and occupancy is for that? And the second part of that is, does that include development, which I guess might answer some of the first part of that question?

It doesn't include development because it's same-office. You will see occupancies improve as we finish fourth quarter and I would expect it to continue to accrete in the first and second quarter of next year. Based on activity we have, the leases we've signed, and as you've noted, our spread between leased and occupied is higher than it typically is.

Okay. Thanks, guys.

Tom Catherwood, BTIG

Thanks, good afternoon guys.

Hey, Tom

Welcome back, Tom.

Thank you so much, Steve.

Steve, you were talking about the leasing spreads and you said that if not for the early renewals, the cash leasing spreads would've been down roughly 2%. What would that have been on a GAAP basis, ex the early renewals?

Go ahead.

Without the early renewals, it probably would've been around 7% to 8%.

7% to 8% positive for GAAP?

Positive, yes.

On slide 6 of the presentation today, for 2017 there has 150,000 square-foot contractor, where the size of the renewal is made predicated upon contract renewal. And it got me thinking, how often or how many times in your leases with contractors is the duration of the lease tied to the duration of the government's contract? And does that then impact your negotiating variables because the duration is fixed and you can't push that out any longer?

It tends to be more aligned with contract lengths with the smaller entrepreneurial contractors. The larger, call it institutional, quality accept normal terms and risks.

Got you. So as the market improves, is that something that you are continually able to push? Or is it, I'm trying to get a sense of, as your portfolio cleared and continues to fill up, where do we see you guys push? Is it on concessions, is it on rent, is it on duration, or could it be a mix of all three?

Is the mix of all three. Unquestionably.

Okay; and then last one for me, cybersecurity: anything new this quarter? Any new tenants to the market? And in general how does the velocity look in that sector?

Good. We've signed several smaller cyber tenants, between 3,000 and, call it, 8,000 square feet in the Fort Meade area in the last quarter, couple of months. And we have pretty good pipeline behind them. In total, we're over 2.1 million square feet of just cyber tenancy since 2011.

If I may, Tom, we launched a modest -- the beginnings of a research platform, and there is a cybersecurity piece on there that will enable you and others to track our concentration of direct sub re-leasing in our portfolio through that simple two-page flyer.

That's great. Thanks, guys.

Thanks, Tom.

Jed Reagan, Green Street Advisors.

Hi, morning, guys.

A lot of my questions have been asked, but just going back to the dispositions, can buyers get financing for the type of non-core stuff you're looking to sell, especially if it does have some vacancy? And is that CMBS debt that they are looking to? Or are there other sources of debt capital behind that?

None of our buyers have really had an issue obtaining debt and virtually all of them have put that on the portfolios that they are buying. The majority of that is coming from banks; it's not coming from the CMBS market. Some of it's coming from some smaller life companies, but none of them have had an issue obtaining that debt.

Okay that's helpful.

And how have you seen bidding [tens] for some of the stuff trending over the course of the year? Has that [thin to bed], or any comments there?

It was little thin in the first quarter because of some of the unrest in the financial markets. It firmed up nicely in the second and has maintained reasonably strong through the third. And we have identified buyers for everything that we're looking to sell, so we're in good shape.

Okay. Great. Thank you.

Bill Crow, Raymond James.

Hey, good afternoon.

Steve, two questions on the government side of things, and I understand you're limited to what you can say. But the first question, one of your peers this morning talked about government contraction stalling the greater DC office recovery in the third quarter, and your markets are different, your properties are different, and really your tenants are different, but I was wondering if you could give us a picture of the net demand from the government up in the mid-Atlantic region.

I'm not sure what peer you listened to, but surely they're referring to the GSA leasing, which is the largest single tenant in the Washington DC area. The GSA has slowed or short-term extended a lot of their leasing over the last few years in an effort to create opportunities to significantly shrink the amount of square footage per person that they are leasing. And so unquestionably, in the GSA-heavy submarkets, there will be contraction; it will probably occur over the next three to four years because of the amount of it and the challenge of consolidating those large leases. With regard to our portfolio, we have very little GSA leases in our portfolio, about 89,000 square feet. And we're not in markets that tend to be GSA-oriented, so we don't see that impact with regard to our portfolio.

And those tenants, again, probably wouldn't benefit you either. Just rotation if -- there wouldn't be a consolidation opportunity right?

We have one development where we think it's well-positioned to compete for some consolidating GSA users, and we are actively seeking those opportunities.

All right. The second part of the question is, if I go back 10, 12 years ago, there was a lot of discussion that you would have spec developments, but they were essentially in response to a wink and a nod and maybe a handshake with potentially a government tenant, that said, if you build something, they would come. Is that happening today? And if so, how much of the 1 million square foot of build-to-suit, I don't know if it would go in the build to suit category, but how much of that is maybe represented by that kind of non-negotiation, negotiation?

As we stand today, none of it. We have a building in the National Business Park that we built anticipating demand. It took an extra year for us to start generating activity. We did a lease this quarter and we expect more activity next year, to completely lease it. With very little, most of the development we have done is heavily pre-leased or build-to-suit.

Okay. That's it. Thank you.

Thanks, Bill.

John Guinee, Stifel Nicolaus.

Great. This is a follow-up question.

Somebody earlier asked about page 6 and the space renewal and defense contractors, and I think you said that the smaller defense contractors need lease termination fee options, but the larger defense contractors are able to or willing to take normal business risks. That is very different from what I hear from the JLL and the CBRE tenant rep brokers, who seem to say that the defense contractors are incredibly difficult tenants and want continual lease termination clauses. Can you expand on that?

Generally, we don't give continual lease termination clauses. We have a few instances where there is a conditional termination tied to a very specific contract, but it's pretty rare. So they might be asking for those things, but we don't really -- we've not granted that continuous right to terminate.

I meant they wanted rights to terminate that coincide with their contract ending.

It happens occasionally, but it's not the common event.

Okay. Thank you.

(Operator Instructions)

Chris Lucas, Capital One.

Good afternoon, everyone.

Steve, appreciate the summary on slide 6 of the renewal forecast for the larger leases, but I was wondering if you got visibility at this point on retention rate overall for next year? Given particularly the strength that you've had the last couple of quarters, curious as to what you see heading into next year?

Were really working that retention effort or handicap estimation out three years right now. And I can tell you that we're very pleased with our expectations for 2017 and 2018 and we're working our way through 2019. But I think it's safe to say we expect it to be 70% at a minimum.

Okay; and then on the -- recognizing that you're coming to the end of the programmatic sales process hopefully this year, hopefully it doesn't slide. But can you just give us a sense as to what you have left after this process is over with, that you would consider non-core, to ultimately sell and monetize at your discretion?

There'll really be nothing left that's non-core.

Chris, as we look at the way we classify the assets in our supplement, we have that other category and embedded in other -- (laughter)

Oh, it's that one. (laughter)

The stepchild we always like to forget about is the three assets up in Northgate. Those are assets that we have been and will continue to attempt to sell. They are non-core; they do not meet our long-term strategic objectives. That's with respect to the operating portfolio. With respect to the non-core land, there are still a few parcels of land that were acquired by the Company in previous administrations that we want to get rid of because, again, they're not projects that we will develop on as part of our long-term strategy.

Okay, great. Thank you.

At this time there are no additional questions in the queue, and I will now turn the call back over to Mr. Budorick for closing remarks. Please proceed.

Thank you all for joining our call today, and we look forward to seeing you many of you at NAREIT in Phoenix in a few weeks. If you have further questions, we'll be in our offices this afternoon; feel free to call us. Thank you.

Thank you for your participation today in the Corporate Office Properties Trust third-quarter 2016 earnings conference call. This concludes the presentation. You may now disconnect. Good day.