COPT Defense Properties (CDP) 2017 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust First Quarter 2017 Earnings Conference Call.

As a reminder, today's call is being recorded.

At this time, I would like to turn the call over to Stephanie Krewson-Kelly, COPT's Vice President of Investor Relations.

Miss Krewson-Kelly, please go ahead.

Thank you, Nicole.

Good afternoon, and welcome to COPT's conference call to discuss our first quarter results for 2017.

With me today are Steve Budorick, President and CEO; Paul Adkins, Executive Vice President and COO; and Anthony Mifsud, EVP and CFO.

In addition to the supplemental package and press release related to our results, we have posted slides on the Investors section of our website to accompany management's remarks.

As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release and on our website.

At the conclusion of management's remarks, we will open up the call for your questions.

Statements made during this call may be forward-looking within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and 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.

I will now turn the call over to Steve.

Thank you, Stephanie, and good afternoon.

We're off to a solid start this year as highlighted on Slide 4. FFO per share of $0.47 in the first quarter exceeded the high end of our guidance by $0.01.

Same office cash NOI grew by 5% in the quarter, exceeding our expectations by 150 basis points.

Our 58,000 square feet of development leasing was consistent with our forecast, and we are encouraged by the number of discussions underway for development solutions with prospective tenants.

We sold $53 million of assets, which was also in line with expectations, and we now have about $50 million of planned dispositions remaining.

Our balance sheet metrics remain strong at 5.9x debt-to-EBITDA and 38.2% net debt to adjusted book.

We issued $20 million of common equity under our ATM to match fund pending build-to-suit development wins and continue to preserve our capital capacity for our growing possibilities of additional low-risk developments.

The combination of the timing of R&M expenses and lower-than-expected weather-related costs drove the outperformance in FFO and same office cash NOI.

Due to the timing component of the achievement and the dilutive impact of the unbudgeted ATM issuance, we are not increasing the midpoint of our full year FFO guidance.

Well, it's been an interesting and, we believe, promising first 100 days under the new administration and another nail-biting week in Congress as Congress works to pass a fiscal year 2017 budget.

Regarding sentiment and actions in these early months, we are encouraged by the administration's unquestionable resolve to restore and strengthen our defense elements and its commitment to international leadership focused on the most unsettling threats to our national security.

Longer term, we remain confident in the government's commitment to return to appropriate defense spending levels and sustain 5% to 6% annual increases to restore and strengthen our defense capabilities.

Regarding the outlook for defense spending.

In the past few days, it's become clear that before midnight tonight, Congress intends to pass and the President intends to sign a 1-week extension of the current Continuing Resolution in order to finalize budget negotiations.

We now expect the fiscal year 2007 (sic) [2017] budget will be approved, appropriated and signed into law on or before May 5. Irrespective of whether the fiscal '17 budget becomes law next week or a few weeks later, we expect to achieve our year-end forecast for same office occupancy and same office cash NOI and to meet or exceed our development leasing target of 700,000 square feet.

However, budget delays could start to place pressure on FFO per share if lease commencement dates associated with significant funding contingent projects are further delayed.

The fiscal '17 budget was authorized last December.

We established our 2017 plan, assuming it would be adapted into law in the first quarter, providing the DoD with the base budget of $524 billion.

The Slide 5 shows, such spending will essentially be flat with fiscal year 2016's budget, but would enable the government to execute new leases and to award new contracts.

We call it the 5% increase in defense spending funded by the fiscal '16 budget, manifested in strong leasing and same office performance in our 2016 results.

Our 2017 plan does not contemplate or rely upon any increased funding beyond the original $524 billion level.

We don't need a bigger budget.

We just need a budget, which we now expect to have next week.

For the record, this continuing resolution has lasted 210 days and is the longest of the 12 continuing resolutions that have occurred over the past 16 years.

Ultimately, Congress will fund the fiscal '17 budget, and we have very high confidence the base Defense budget will be funded at a minimum level of $524 billion.

We have an excess of 800,000 square feet of leasing prospect activity in our operating and active development portfolios, and fully 66% of that demand is either directly or indirectly dependent on having a 2017 budget signed into law.

In the meantime, our shadow development pipeline of new opportunities remain strong and continues to increase.

We have every confidence we will achieve significant leasing throughout this year and progress with strength into 2018.

It's important to note that not every transaction we are pursuing in this contract are budget-contingent, and we expect to announce several build-to-suit developments soon.

As Slide 10 shows, between 2010 and 2016, the DoD's budget was pressured, and in fiscal 2013, was actually cut by 6.6%.

During these same years, we averaged over 850,000 square feet of development leasing annually while weathering the continuing resolution each year.

Our ability to execute on new demand through the cycles of defense spending speaks to the essential nature of our Defense/IT locations, our expertise as one of the only turnkey developers and landlords for Defense and government tenants requiring specialized and secure facilities.

The slide 6 shows, 11 of our portfolio locations directly support 10 of the DoD's 14 stated spending priorities set forth in the fiscal year 2017 budget.

We have experienced and are tracking the increased demand this budget will drive and patiently await the ultimate budget resolution.

So in summary, we are executing well on our plan.

We are confident that Congress will approve the fiscal year '17 budget, hopefully in the next week.

And assuming we are correct, we may still incur modest pressure on our earnings but expect to finish the year at or near the midpoint of our guidance.

We will continue to manage and optimize what we can, and we are poised to take advantage of the opportunities we know are coming.

With that, I'll hand the call over to Paul.

Thank you, Steve.

I'll touch on a few leasing highlights from the quarter as well as our shadow development pipeline, which tracks development projects where we believe we have a 50% or better chance of winning the business.

At the end of the quarter, our core portfolio was 93.3% occupied, which represents a 40 basis point increase from year-end.

Demand throughout our Defense/IT locations remain strong.

The lease execution on 2/3 of the activity is fiscal '17 budget dependent.

As a result, execution on some leases has been delayed, but these leases are when, not if events.

Despite the protracted continuing resolution, we have had some encouraging successes at several Defense/IT locations in recent months.

At our Patriot Ridge project in Springfield, Virginia, we have signed 2 leases in the past 90 days for a combined 18,000 square feet and are fielding stronger interest than 12 months ago for the remaining space.

In Westfields, which is adjacent to the National Reconnaissance Office, we are negotiating with tenants to fill 120,000 square feet of our 201,000 square feet of vacancy.

And in our Navy support portfolio, we continue to make solid progress at all 3 locations.

Tenant retention remains on track with our forecast of renewing 70% to 75% of expiring leases.

Within our Defense/IT segment, we renewed 96% of expiring square footage in the quarter.

In the Regional Office segment, we anticipated the 134,000 square feet of nonrenewals in this quarter and have already backfilled 87,000 square feet with new and expanding tenants.

Referring to Slide 7, we forecast a 100% renewal rate for the large government leases that expire this year and next, and continue to forecast a 50% renewal on the one large contract or lease that expires at NBP in the fourth quarter.

As a reminder, if that tenant's government contract is renewed in the fall, then we expect them to renew 100% of their existing lease.

At the low end of our range, we conservatively forecast a 50% renewal rate with this tenant, and we would have a good opportunity to release any space we get back to the competitor.

This robust retention rate amongst large leases underpins our confidence in our full year guidance of renewing 70% to 75% of expiring leases.

Strong demand throughout our portfolio also supports the size and geographic diversification of our shadow development pipeline that includes up to 1.7 million square feet of mostly build-to-suit projects.

Typically, our shadow development pipeline exceeds 1 million square feet and translates into 750,000 to 1 million square feet of projects under construction each year.

The newly developed space we place into service each quarter tends to be significantly preleased.

On Slide 10, Steve highlighted our annual achievement in leasing new development projects.

I would add that between 2012 and 2016, we delivered 800,000 square feet of new projects each year that were 90% leased.

This high degree of pre-leasing translates into low-risk growth and future cash flows.

Slide 9 shows the $27 million of annualized cash NOI currently associated with executed leases.

In accordance with our guidance, we will recognize between $11 million and $12 million of this $27 million this year and the balance over 2018 and 2019.

By investing $200 million or more each year in low risk development projects with an average stabilized yield of 8%, we add $16 million of additional NOI to future results.

By continuously replenishing our pipeline of highly leased development projects, we increased the level of cash NOI that fuels NAV growth.

With that, I'll hand the call over to Anthony.

Thanks, Paul.

FFO per share of $0.47 in the first quarter exceeded the high end of our guidance range by $0.01.

We attribute the $0.02 of upside from the midpoint of guidance to the mild winter and delayed timing of certain R&M costs.

These same factors drove our outperformance on same office NOI.

During the first quarter, we sold a suburban office property for $39 million and nonstrategic land for $14 million.

Our 2017 guidance includes selling the final $45 million to $50 million of assets during the second half of the year.

Recognizing our shadow development pipeline needs strengthening and wanting to assure that we have the dry powder to execute on such low risk, value-creating development opportunities, we issued $20 million of common equity under our ATM at an average gross price of $33.84.

This funding positions us well to take advantage of development projects while maintaining or slightly improving our balance sheet.

As shown on slides 11 and 12, our balance sheet metrics remain strong, and we are on track to lower our debt plus preferred equity to EBITDA to 6x by the end of the year.

We have no debt maturing until 2020, at which time, we have $300 million of unsecured bank term loans due.

These loans are prepayable without penalty and are swapped to a fixed rate of 3.1%.

With the continued low interest rate environment, we are evaluating when it makes sense to extend these maturities.

Slide 13 of our presentation summarizes our guidance and the major assumptions that support it.

Based on first quarter performance, including executing on dispositions as contemplated, we are narrowing our full year guidance from its initial range of $2 to $2.08 to a new range of $2.01 to $2.07.

The midpoint remains at $2.04 per share because the benefit of lower first quarter expenses is offset by timing variances and the impact of the ATM issuance to fund anticipated development activities.

We are also establishing guidance for FFO per share as adjusted for comparability for the second quarter of $0.47 to $0.49.

The $0.01 increase relative to first quarter results implied by the midpoint is driven by lower seasonal operating expenses and a stable outlook for same office occupancy.

Slide 13 summarizes our second quarter and full year guidance assumptions.

In addition, as noted in the guidance reconciliation provided in last night's press release, the noncash write-off of the original issuance cost associated with redeeming our Series L preferred shares is included in the second quarter.

We intend to redeem these securities at the first possible redemption date in late June, making that expense a second quarter event for forecasting earnings per share and funds from operations per share as calculated by NAREIT's guidelines.

With that, I'll turn the call back to Steve.

Thanks, Anthony.

Our ultimate objective is to deliver reliable, competitive total returns to shareholders, and our primary tactics for achieving this are to aggressively pursue Defense/IT business and to minimize risk in our portfolio and balance sheet.

By focusing on high quality Defense/IT assets and proven relevant missions, we will generate stable, predictable growth throughout future economic cycles.

Our 4 key strengths, our portfolio, our balance sheet, our organization and our industry outlook should combine and produce very attractive risk-adjusted returns for shareholders.

Our Defense/IT locations are uniquely aligned with U.S. government's spending priorities, and intelligence, surveillance, reconnaissance, missile defense, Navy force and cybersecurity.

We are optimistic and excited about our prospects for adding value for shareholders.

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

(Operator Instructions) Our first question comes from the line of Craig Mailman of KeyBanc Capital Markets.

Steve, I appreciate your commentary on kind of when you guys think the budget will ultimately be passed.

But just curious, how many weeks from now or at what point does FFO potentially become impacted at a point where you guys may need to revise the midpoint?

It's kind of tough to answer because it depends on the timing of when we get things done following the passage.

But I'd say a month from now, we start feeling the impact.

I mean, you guys are talking about the conversations that you're having and where the shadow development pipeline is.

Just curious, if the budget does get passed in a week or so, can you kind of walk through the timing lag you may see on when that ultimately flows through to these potential development starts?

And also maybe break out, of the 1.7 million square feet, how much is data center versus how much -- the shell data centers versus how much is your kind of traditional Defense/IT type tenants?

So I'll take the last one first.

Data centers, probably 30% to 35%, and the rest is Defense/IT.

With regard to timing, the government moves slow.

Let's assume we get a passage next week, I think you could see lease activity completed, and the major leases we're focused on September-ish.

So it's really going to be (inaudible) 4Q-weighted to get to the $700 million, just given the slow start?

Yes, I would expect that.

Having said that, I did mention that we are very confident we're going to announce 2 build-to-suits shortly.

And we're working on a third that we have very high confidence that we can get it done over the next 30 days.

And those are all Defense/IT related?

Some data, some Defense.

Okay.

And then just lastly, on the data centers, 2 items: One, there is an article about a potential joint venture with GFH.

Just curious if you can comment on that.

And then also, it -- some news reports that you guys are in the process of entitling Paragon park.

Can you kind of talk about the timing there and when that land may be entitled for some build-to-suits?

So that land, we expect to be entitled in coming weeks.

And I would expect some activity immediately thereafter.

With regard to the article on the joint venture, that was a -- almost irresponsible disclosure of a discussion that's nowhere near a deal yet.

And it pertained to discussions on a potential joint venture on the Northrop Grumman data centers we have in Richmond in Western Virginia.

And then just one last quick one, if I can.

Page 10, if you pull out Shell data centers, is there more variability related to previous container resolution and sequestration?

There's no question that's been a pretty significant component of what we've been delivering.

Why don't we just run that for you and send you an e-mail, Craig.

And our next question comes from the line of Jamie Feldman of the Bank of America.

I mean, following up on Craig's question.

So I mean, how much of the FFO guidance is at risk if it slips versus how much is kind of in the bag?

Like, how should we think about the potential slippage here?

(inaudible)

Plus or -- $0.01 at most, $0.01.

Let's just say $0.01.

Okay.

I mean, I assume a lot of it is -- if it's leases, if it's development leases you're signing today, you're not going to see an impact for 18 months, 12 to 18 months?

Is that the right way to think about it?

Jimmy, none of it is development leasing.

It's all leasing of existing operating assets or development projects that have already been completed and are awaiting leases.

So it's not about getting a lease and then putting the capital in and having the NOI start.

It's really about executing on the leases that are in progress in order for them to have an impact from, really, from a GAAP standpoint by the end of the year.

That's the reason we didn't change our same office cash NOI guidance or our occupancy guidance.

But you're saying you're comfortable within $0.01 or $0.02 of your original guidance even if there's slippage?

Yes.

That's correct.

Okay.

And then, I mean, we've definitely seen a pickup in military activity with Syria, Afghanistan, North Korea.

I mean, can you just talk about how the tone has changed or if it's changed?

I assume it changed post election, but then has it changed even more over the last month or so among your tenants?

Well, I'll say this.

We're getting increasing anecdotes of a high degree of urgency in a lot of our locations and some in patients with senior officers in charge of missions that were attempting to sign leases to serve.

So that -- we didn't really have that kind of clarity on urgency and the frustration of administrative processes this time last year.

Okay.

And any shift in the agencies that are getting more prominence?

Or is that pretty consistent with what you've been talking about?

It's pretty consistent with what we've been talking about.

Okay.

And then finally, just in kind of Northern Virginia in general, I mean, it's definitely been slow there.

Can you maybe -- are you seeing any general improvement in the market?

I know you're expecting more leasing, but like concessions, rents, anything just to speak generally about the market that may have changed over the last quarter?

Sure.

So with our sales, we're really concentrated in 2 locations.

I'll let Paul talk about Tysons Corner, which is getting pretty exciting.

But in the Route 28 corridor near Dulles, larger blocks of vacancy are becoming more scarce.

There's upward pressure on rental rates.

We've been able to move our rate up in the largest vacancy we have there.

No progress on concessions yet, but we are seeing improvement.

Paul, you want to talk about that?

Yes, with Tysons Corner as a residual from our Wells Fargo renegotiation last year, we've had some vacant space, which we've had good luck in re-leasing.

We had a law firm vacancy later this year, which is the top 2 floors of 1751 Pinnacle Drive.

And our activity again, it's walkable to the Metro.

You have an increasing amenity base within a walkable distance.

And we have 4 prospects looking at those top 2 floors.

Rents are being slightly pushed up, so we're optimistic about the ability to raise rents modestly in our Tysons Corner assets.

Our next question comes from the line of David Rodgers of Baird.

I wanted to ask a little bit about the nonstrategic customer that moved out in the first quarter, the 134,000 square feet.

Was that in the same-store pool?

Did that hit the numbers?

What kind of impact did that have in the first quarter?

It sounds like you backfilled the decent portion of that.

Did you give a sense on kind of what the backflow was relative to the existing lease?

So there were really 3. One was the bank that we originally bought Canton Crossing from.

They've been phasing out.

We've got activity to backfill the bank.

One was a residential developer in our Pinnacle building in Tysons Corner, and 90% of that space has already been leased.

Third was a utility in White Marsh in one of the assets that we have under contract for sale, and that was 88% of the nonrenewal.

Okay.

And did that have an impact on same-store at all?

All 3 of those are in our same-store.

Still in there?

Okay, that's helpful.

Oh, I'm sorry.

White Marsh is out?

Yes, the White Marsh asset is not in the same office as in held for sale, but the other 2 had slight impact.

And the backfill tenants have -- not only have -- we not only leased that space, they're occupying here in the first quarter, too.

So it's a very short brief downtime between the vacancy and the occupancy of the following tenant.

Okay.

Yes, that's helpful.

And then down at Redstone, I didn't hear if you commented, I think some of the moves that you were waiting for anticipating there were less contract or budget-dependent.

Correct me if I'm wrong on that.

And then any update on what you're seeing at Redstone and the potential move?

I will let Paul handle that one.

Yes, I would say that the prospect that we have for build-to-suit down there is not contract-dependent and it represents a consolidation and new facility.

So we expect to -- we're progressing nicely on that transaction and hope to have it concluded in the not-too-distant future.

We also have pretty good demand from the non-full building users.

And so there's pretty high likelihood we're going to kick off a couple of single stories to handle tenants we've been talking to for several years but are now capturing additional business and need expansion in new facilities.

That's helpful.

Last question, maybe for me, is the build-to-suits you talked about, the demand and the development pipeline, Steve, is that greater than you had kind of initially anticipated coming into the year?

And maybe a partial question to that is would you contemplate just kind of selling more assets to fund that?

Or the ATM's sufficient?

Well, our plan is to finish the sales of the assets that we're engaged and have under contract now that completely gets us out of the suburban Baltimore market.

And then thereafter, try to match fund with ATM.

I think this fall -- I think it's fair to say that we would characterize it as being a slight uptick in the build-to-suit development pipeline from a quarter or 2 quarters ago.

Our next question comes from the line of Tom Catherwood of BTIG.

Paul, a quick question on the expiration at National Business Park that takes place at the end of 2017.

What is the timing on that contract award that the tenant is waiting for?

And is that budget-dependent?

That lease expires on December 31 of this year.

Right.

The contract is a little fluid.

We're hearing June, July, so it could be awarded.

For the award, yes.

And it's a big long-term contract so there's probably high likelihood of a contest over that contract after the award, which would add another 90 days.

Got it.

And there's more nuances to it other than -- and you may have heard in my remarks that there's only, I believe, 2 contractors competing for that award.

And our conservative but operating assumption is that we get half of that space back, but there's logic to the idea that the winning contractor might back fill the space should the existing tenant lose that contract.

And Tom, with respect to your question about the budget, that business is a contract that's already being serviced by the contractor that's in this building.

So it's currently being funded by the continuing resolution.

So it would -- even the new contract is really a replacement of the existing one so it wouldn't be held up if the budget got held up.

Got it.

So it sounds like this is more of a likely third quarter 2017 timing when we'll know a little bit more.

Is that an accurate statement?

Sure.

I think that's right.

Then switching over to the Regional Office portfolio.

Could you talk a little bit about the Baltimore market?

And specifically, when you guys purchased 100 Light and 250 West Pratt, there's a potential -- potentially, you can add some retail there.

Any progress on that front?

So we are in the process of having the exclusive development right for the retail finalized with the city.

We submitted a bid.

The bid was accepted.

We're negotiating agreements.

We have a team -- we have a development plan and a team working on pre-leasing that retail.

The nature and the identity of the pre-lease tenants are confidential, but we're pretty excited about the opportunity.

With regard to the overall market, it continues to be strong, probably about 8% vacant in the 15 waterfront properties that we compete with.

That vacancy ticked up when Exelon moved into their full building lease and gave back space in 2 buildings on Pratt Street.

Big chunks of that space that was returned are already backfilled or re-let.

There's still some additional vacancy.

And rates are stable so the market's performing well.

Our next question comes from the line of Manny Korchman of Citi.

If we think about sort of the commentary at the end of the call about just on a budget is necessary to get these deals done, how much does a -- I'll call it a beneficial budget, or a budget that's sort of larger than the minimum expectations, help you whether to land new deals or get these deals signed versus just signing at the minimum levels?

Candidly, there's no real way to know until they pass it, and appropriate the money.

And so we just are guiding our investors to a baseline of $524 billion, which gave us good progress last year.

It'll continue that progress into 2018.

And I really think the fiscal '18 budget will tell us more about how much upside there could be in the future.

And then, Anthony, if we look at the pipeline of upcoming -- whether it be development deals or move-ins, help us think about how that flows into income from both a GAAP and cash perspective?

So backfilling this space, obviously, it'll be quicker in the build-to-suit going and quicker than sort of a spec or a new build.

But if everything were to happen the way you expect it to now, when do you start seeing the positive cash impacts of these leases?

Well, for buildings that are already built and in our pipeline, that's the NOI that we're showing in our guidance for this year as well as for the $41 million for the projects that are underway.

With respect to projects in the pipeline, it really varies by the type of project that would be commenced.

I mean, a data center Shell lease from lease to rent commencement has -- the team has that down to 5 to 6 months.

With respect to the government leases for the 2 buildings that we're continuing to wait for the leasing on, once they lease those assets, it's going to be a good 12 months for the design and fit-out to take place for those leases to start cash rent flowing.

So it's really dependent on the type of investment that we're really making.

That's helpful.

And then in terms of the ATM issuance, how did you decide on the amount, the $20 million, especially since the ATM, why not truly match fund and as you get the developments underway, just issue the equity as you go?

We really tied it to the equity component of development projects that we see in sort of foreseeable future that we expect to announce in the next 30 to 60 days.

So we really matched it around that combined with the capital that we are raising from the dispositions.

So it was really focused on the assets on, excuse me, on the leases that we're seeing sort of imminent from the demand that we have.

(Operator Instructions) Our next question comes from the line of Jed Reagan of Green Street.

Sorry, if I missed this, but can you provide the aggregate square footage of the 3 potential build-to-suits you mentioned that are on the front burner?

It's under 450,000.

I'd say 420,000 to 450,000.

Okay, that's helpful.

And then sort of split up between data centers and office?

2/3, 1/3 data.

2/3 data?

Okay.

And just looking at the Northern Virginia asset you sold last quarter, curious how representative you would say that building is for kind of the rest of what you own out there in terms of quality and rent profile?

And then can you provide a cap rate for that sale?

I'll leave the cap rate to Anthony.

So that's -- that was 3120 Fairview Park.

It's a very good building that the company bought slightly before I joined the company.

But we had a real struggle leasing it.

And the submarket it was in had, at one time, been a dominant Defense submarket.

But increasingly, defense contractors are vacating there.

But most importantly, it's not Metro-served.

So it really -- from a submarket location perspective, we viewed it as disadvantaged and not a long-term hold.

The Route 28 corridor has permanent priority demand drivers in it.

So it's much different than the submarket that 3120 was in.

And, Jed, from a cap rate perspective on a -- in place cash cap rate was about a 6%, 7%.

Stabilized a little bit over 7%.

And that asset was about 87% occupied when we sold it.

Jed, this is Paul.

Just to contrast Fairview Park from our other Northern Virginia assets.

Our Merrifield assets are within a 5-minute walk of Metro and plenty of restaurants and amenities.

Fairview Park has -- is suffering, not only just a lot of vacations by firms who have no places to eat within close proximity.

Our Tysons Corner assets obviously are a 5-minute walk to the Metro as well as our Sunrise Valley so -- and have places to eat.

So it's a classic business park, but obviously, time has been damaging to it because of the lack of amenities and lack of Metro service as compared to our other assets.

Okay, appreciate that.

And then just kind of looking ahead to the 2018 budget, when do you think that gets debated and potentially passed?

And what's your level of confidence that what ultimately gets passed resembles the President's initial proposal?

That's a zinger, Jed.

So the skinny budget's out.

I've flipped through that.

They're setting forth an expectation that defense spending will be increased from the cap level by $54 billion, which would put it another $25 billion above of what we're expecting this year.

Who knows on timing?

We're focused on 2017.

It would be nice to see government function in a way that the budget could be passed as we enter into the fiscal year, but following 7 straight years of continuing resolution, I wouldn't say I'm confident that can happen.

Our next question comes from the line of Rich Anderson of Mizuho Securities.

So on the same-store outlook, I understand the 5% was impacted by a mild winter and timing and so on and so forth.

But do you think, just putting that aside, you might have been more inclined to get more constructive on the same-store outlook had it not been for this kind of dysfunction of the government?

Are you kind of leaving -- do you know what I mean?

Like, did the broader landscape play a role in you keeping your same-store where it was for now?

I would say that landscape probably played out a slight role in the decision to keep it where it is.

If we incur delays in revenue and lead starts and, therefore, revenue because of the situation we're in, the vast majority of that was GAAP-related revenue as opposed to cash.

So from a same office cash NOI growth, the impact on that metric isn't really being felt by what we're going through in terms of the lease commencements.

Right, right.

Okay.

And so if I can then talk a little bit more bigger picture.

Can you just kind of provide a range of possible outcomes, which might be a tough thing to do in this administration, but if there's a thousand of them, we can go through all of them if you like.

But is it simply continuing resolution, if we get that for a week or some period of time?

And then followed by one or the other, a binary, either government shutdown or appropriation of the $524 billion?

Or is there some derivative outcome that's even more likely than one of those 2?

Well, we've been on the phone with advisers we have inside the Beltway all week.

The 3 outcomes are continuing resolution for some period, and the worst case would be through the end of the fiscal year.

Shutdowns bring a sense of urgency.

The longest in history was 16 days.

The average is about 4.5 days.

The good news about a shutdown is it brings a deal in order to end it.

And then the third is what we've been guided to expect, that progress is really being made on a bipartisan basis, and that by the end of next week, we should have it wrapped up.

Okay.

So when I look at your chart on Page 5 and you have $522 billion for fiscal '16 going to $524 billion, so not a very large increase as you went through.

But is it more about just behavioral issues and people feeling confident?

Because the dollars don't seem to matter much.

Is it more about confidence?

Is that the way to think about the situation as it relates to your tenants?

Yes, certainly.

The $522 billion and the $524 billion were agreed upon in December of '15 for the fiscal year '16 and '17 budget.

So since this administration won the election, they've been seeking to top up the $524 billion, and there's a lot of discussion around that.

And that's why the continuing resolution was pushed out until today.

And so we've -- but we've been guiding people to remember, the impact of the increase from the $497 billion to $522 billion had very significant positive effects on our leasing.

And we expect to just continue at that funding level, but giving the customers the ability to allocate money to new contracts and new leases will generate a lot of progress.

Everything beyond that is upside.

Okay.

Looking forward to tomorrow night, I guess.

Yes, we were just advised that the House passed the continuing resolution this morning and it's progressing to the Senate.

Our next question comes from the line of John Guinee of Stifel.

A question, I guess, probably for Anthony.

It looks to me like your guidance midpoint for 2017 applies a nice ramp-up to maybe $0.54 or $0.55 a share in 3Q and 4Q '17.

Is that accurate?

One.

And then if it is, what drives it?

That is accurate.

And what drives that is the continued contribution from the development projects that are placed in service.

NOI as well as the first half of the year has or is dampened a bit because we've prefunded the equity to redeem the preferred shares at the end of June.

So the benefit of using that capital to redeem those preferred shares at the end of June will really impact the third and fourth quarter.

So the 2 data centers, the North Virginia office D, and then the 50% occupancy at 540 NBP was the big driver that all happens here very recently in the immediate future?

Yes.

The only one in that list that wouldn't impact 2017 was any significance is 310 to the extent that, that incrementally leases up throughout the year, it's going to be small.

When the government takes the whole building, that will really impact 2018 much more.

But the other projects you mentioned are correct.

Okay.

And then on Page 7, if I look at -- you've got a -- what appeared to be very favorable renewal rates on the 125,000 square feet in January of this year.

You've got another 1.2 million.

Do you expect these to be rent roll-offs or rent roll-downs?

And are these heavy in concessions or light in concessions?

These will all be neutral to positive roll up and moderate in concessions.

And will they be -- what sort of term?

We noticed that your renewals this quarter were light on term.

Yes, the government renewal is a 10-year term.

Interestingly, this quarter, probably 85% of the renewal activity that we did do were with nondefense tenants.

And a couple of those went very short term.

One was an insurance company.

One was a law firm and one small tech tenant.

And the quantity of square footage was very light, too.

So the short term was heavily influenced.

The 1.6 years does not include the 10-year renewal at the NBP to 1.22.

But the expectation is that the government leases are longer term.

Yes.

And one further comment, John.

We worked very hard last year to get a bunch of early renewals done and take the rollover risk out of the equation for '17.

And that has a lot to do with why our volume is so light in the first quarter.

Our next question comes from the line of Rob Simone of Evercore ISI.

Kind of a 2-parter from me.

A lot of my questions have been answered.

But the 1.7 million square feet that's in your shadow pipeline, I was just -- I know you guys define that as space that's -- has a 50% likelihood of you guys winning.

I was just wondering if you can talk philosophically about how you kind of come to that determination?

Does that mean you're 1 of 2 developers?

And then secondarily, just looking back historically versus that like 50% assumption, what's been your actual win rate on that?

I'm pretty sure it's been well in excess of 50%.

But I -- candidly, we haven't measured that.

And we handicap it deal by deal by the discussions we're having with the potential customers.

Often, we don't have competition.

And it's a question of whether projects push forward.

And when there is competition, if it's one-on-one, then we'll call that 50% and handicap it.

And some of the nongovernment deals, though, I think it is fair to say that we would -- we do apply of -- a finalist or 1 of 2 as some of these other deals -- on some of these other deals that are outside the government envelope or the data center envelope.

So that's -- it is a methodology of being a finalist in the competition.

And Rob, we just got word that Senate passed a continuing resolution so it looks like it's on the way to the President's desk.

Our next question comes from the line of Chris Lucas of Capital One Securities.

Most of my questions have been answered as well.

Just a couple of clean-up questions.

On Redstone, what's the progress on the gate move there?

Has that been completed?

And what can you tell me about sort of the impact that's having on interest in the park?

It's not moved yet.

I think the scheduled date is July 1.

July 5.

July 5. Okay, I was -- shoot me for 4 days.

And I think that will have a strong impact.

Interest is strong at the park.

We opened our restaurant amenities in October.

Their activity is really ramping up.

It's been a big hit in the local community, the quality of the food that we have offered there.

And our hotel opened in February.

So that's driving traffic into the park as well.

And we're seeking another hotel operator to progress with the second there.

Okay, great.

And then on the first quarter call, you had, I think it was $39 million to $49 million of assets under contract.

You closed on the $39 million.

Is there still $10 million out there that's under contract?

Or did that fall out?

Or where do you stand with sort of the rest of the stuff that's for sale right now?

Currently, we have about $50 million under contract, and those buyers are going through the diligence process with expiration on their diligence within the next 30 to 45 days.

So we're making good progress most of the -- there's really no issues with the buyers through the diligence process.

So we feel pretty confident about executing on those transactions later in the second half of the year.

Okay, great.

And then last question.

Going to Pinnacle, there's obviously a lot of activity in that area, Tysons.

Have you guys explored?

Or is there much to do there at some point down the road as it relates to taking a hard look at that footprint?

It's a big footprint.

Which footprint are you referring to?

Our building footprint?

Yes, the parking garage, the amount of space, the land of that.

Those 2 things are just massive.

You're talking from a land standpoint?

Yes.

Our redevelopment.

Well, we committed to a 12-year term with Wells Fargo.

So we can't really even consider that for a while.

Longer term, I think it is a very valuable piece of land as Tysons becomes more residential and retail-driven, along with a heavy concentration office.

It should be a very attractive location, and I think the entire value of the asset will appreciate.

(Operator Instructions)

Thank you all for joining our call today.

We're in the office all afternoon, so please coordinate through Stephanie if you'd like to follow-up call later.

Thank you, all.

Ladies and gentlemen, thank you for your participation today in the Corporate Office Properties Trust's First Quarter 2017 Earnings Conference Call.

This concludes the presentation.

You may now disconnect.

Have a good day.