COPT Defense Properties (CDP) 2017 Q2 法說會逐字稿

Welcome to the Corporate Office Properties Trust Second Quarter 2017 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, Investor Relations.

Ms. Krewson-Kelly, please go ahead.

Thank you, Kevin.

Good afternoon, and welcome to COPT's conference call to discuss our second quarter results in 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 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, attendees.

We had a solid quarter, and we continue to execute according to our 2017 plan.

As highlighted on Slide 4, FFO per share of $0.49 in the second quarter was at the top end of our guidance range.

Same office cash NOI grew by 2.6% in the quarter, which exceeded our expectations.

Development leasing in the second quarter of 325,000 square feet brings our total for the first half of the year to 383,000 square feet.

Based on transactions under negotiation, we are highly confident we will exceed our full year development leasing goal of 700,000 square feet.

Regarding asset sales, later today, we expect to complete the sale of our remaining buildings and land in White Marsh for $47.5 million.

Since 2011, we have sold more than $1.5 billion of assets containing over 10.5 million square feet.

This final portfolio trade represents the last of our programmatic asset sales.

In the quarter, we paid down $200 million of term debt and redeemed our Series L preferred shares.

Our balance sheets metrics remained strong at 6.4x net debt plus preferred to EBITDA and 42.4% net debt-to-adjusted book.

We are on track to finish the year at total leverage to EBITDA of about 6x.

In terms of market sentiment, defense contractors remain optimistic about future defense spending.

And as illustrated on Slide 5, our planning for average annual increase is a 5% through 2021.

For the upcoming 2018 fiscal year, the President's budget request implies an 8% increase in the DoD's base budget relative to 2017 levels.

Comments made by Secretary of Defense Mattis also support the industry's expectation for 5% annual growth.

Mounting geopolitical tensions continue to bolster the bipartisan support for an increase to defense spending.

In May, the administration submitted next year's budget request, including a $575 billion base budget detailed in the 2018 National Defense Authorization Act.

Slide 7 summarizes the changes the Senate and House Armed Services Committees recommended in their markups, which were released a few weeks ago.

The House committee voted 60:1 to add another $18 billion to Defense, which would result in a base budget of $593 billion.

The Senate Committee unanimously approved the defense budget of $611 billion, an increase of $36 billion over the requested amount.

When Congress returns from recess in September, they will have less than a month to negotiate the federal budget.

Given this tight time frame, we expect fiscal year 2018 to begin under another Continuing Resolution, which would mark the ninth straight year the federal government starts the fiscal year without a budget.

Similar to what we reported on our last call, demand throughout our portfolio remained steady and deliberate.

The government contracting process that was frozen by the recent 216-day Continuing Resolution appears to be fine, albeit gradually.

As we anticipated on our first quarter call, some leasing will slip into next year, but we still expect to see a meaningful increase in lease executions this fall.

We expect leasing in the second half of this year to parallel last year's activity when demand picked up significantly approximately 6 to 9 months after the government appropriated the fiscal 2016 budget.

In the meantime, we are competing for demand to fill existing space as well as for new build-to-suit projects.

We have in excess of 550,000 square feet of new prospect activity in our operating portfolio, much of which is contract contingent.

Our shadow development pipeline of new opportunities remained strong, and most of these transactions are not contract contingent.

Having successfully executed on 300,000 square feet of build-to-suits that we announced in May, our shadow development pipeline now stands at 1.4 million square feet and is geographically dispersed throughout our portfolio.

Not wanting to overpromise, I'll just say that we expect to have a busy second half of 2017 and a very busy 2018.

On that note, I'll turn it over to Paul.

Thank you, Steve.

During the quarter, we leased a total of 696,000 square feet, including approximately 100,000 square feet to cybersecurity companies in the B/W Corridor.

As a result, our core portfolio was 93.8% occupied at the end of the quarter, a 50 basis point increase from March 31.

Excluding the 2 recent developments held for government users, we have just over 1 million square feet of vacancy.

As Steve mentioned, we have over 550,000 square feet of new prospect activities spread across the portfolio.

This number is down from the 800,000 we cited on our last call and reflects the fact that we converted 78,000 square feet into new leases, and that a 150,000 square foot prospect in the B/W Corridor is now contemplating a build-to-suit.

We have excluded this potential tenant's demand from our new prospect activity, but because the client is still early in the process, we have not added the opportunity to our shadow development pipeline.

We have also achieved new leasing at DC-6, our wholesale data center in Northern Virginia.

The 2-megawatt long-term lease we signed in June increases DC-6 to 87.6% leased.

Same office cash NOI increased 2.6% in the quarter versus the second quarter of 2016.

By reporting segment, same office results in Defense/IT Locations increased 5% in the quarter, and the Regional Office declined 11.2%.

The decline in Regional Office was driven by nonrenewals discussed on our last call and by early renewals completed in the third quarter of last year.

We have re-leased over 1/3 of this vacancy and are seeing strong demand on the balance.

Within the Defense/IT segment, the 5% increase in same office NOI reflected strength across the board and with particularly strong year-over-year same office occupancy gains in our Navy support group, up 720 basis points to 81.9%, and good visibility on demand to achieve over 90% leased by year-end; a 620 basis point gain in our NoVA Defense/IT locations to 86.5%; a 110 basis point gain in Huntsville, Alabama, to 100%; and an 80 basis point gain in the B/W Corridor to 95.8%.

Tenant retention in the quarter was 85% overall and was 88% in Defense/IT locations.

Our renewal rate for the 6 months ended June 30 was 67%.

We are on track to exceed our original full year guidance of 70% to 75%, and accordingly, are increasing our tenant retention forecast for the year to between 75% and 80%.

Slide 8 summarizes forecasted retention for the 9 largest expiring leases this year and next, which supports our expectation.

We forecast a 100% renewal rate for the large government leases that expire in 2017 and '18.

Note in the table that one contractor lease for 152,000 square feet has moved into the 2008 (sic) [2018] expirations.

This is a full-building lease in the NBP where the tenant is competing for a large contract renewal with a government customer.

The government originally expected to award this contract next month but delayed a decision until the first quarter of 2018.

We are completing a 1-year renewal with this tenant.

And next year, if they win the contract, we expect them to renew in full and for a longer term.

Or if they don't win, we expect them to give back up to 50% of their space and renew for a longer term.

If the latter occurs, we would have a good opportunity to re-lease the non-renewing space to the winning contractor.

Steve touched on the 2 build-to-suits we announced in May.

Our second quarter development leasing also benefited from a pickup in leasing velocity and redevelopment projects.

We recently redeveloped 3 office buildings, 7134 Columbia Gateway Drive and 2 buildings in the Airport Square submarket near BWI.

The 3 buildings totaled 104,000 square feet and at June 30 were 82% leased.

2 of the 3 projects achieved 100% leased during the second quarter.

Demand for the redevelopments is predominantly from cybersecurity and IT users seeking proximity to Fort Meade.

We expect to achieve stabilized yields of 10% to 11% on our incremental investment in these 3 projects.

Growing demand for cloud computing, combined with improved clarity in the defense industry, underpins the ongoing strength in our shadow development pipeline, which tracks projects where we believe we have a 50% or better chance of winning.

On our last call, we were competing for 1.7 million square feet of projects.

Subtracting the build-to-suits announced in May, our shadow development pipeline now stands at 1.4 million square feet.

Given the depth of demand from commercial and government users for cloud computing, over the next 12 months, as much as 33% to 50% of our shadow development square footage could be in data center shells.

During any given quarter, we typically have 750,000 to 1 million square feet of projects under construction.

As Slide 11 shows, since 2010, we have leased an average of 850,000 square feet in development projects annually.

We normally begin construction with a sizable or full building lease in hand.

This high level of pre-leasing mitigates the vacancy risk that typically attends development and creates visibility into future cash flows for our company.

Slide 10 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 this year and the balance over 2018 and 2019.

For the second half of 2017, we expect to place into service over 600,000 square feet of developments and that this square footage will be 100% leased.

This will bring our total square feet placed into service for the year to nearly 1 million square feet that are virtually 100% leased.

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

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

Thanks, Paul.

FFO per share of $0.49 in the second quarter equaled the high end of our guidance range.

We outperformed our internal same office cash NOI due to the timing of R&M expenses.

Notwithstanding the timing events, the strength of our -- the performance to date translates into modestly more bullish forecast for same office cash NOI, which we now expect to increase between 3.3% and 3.6% for the year.

While we are increasing our same office NOI forecast, we are lowering our year-end same office occupancy forecast modestly to reflect the delay in certain lease start dates.

We discussed the possibility of potential leasing delays caused by the protracted Continuing Resolution on our last call.

Slide 14 shows our revised year-end same office occupancy forecast of 92% to 93%.

Our pipeline of leasing prospects remained strong, but the occupancy dates on some transactions will now occur in 2018.

During the quarter, we sold 1 suburban office property for $2.3 million and today are completing the $47.5 million sale of our remaining assets in White Marsh.

This transaction will complete the programmatic asset sales that have been a continuous drag on earnings for the past several years.

Once the White Marsh portfolio went under contract, we repaid $200 million of our 2020 term loan, and in accordance with our 2017 plan, redeemed all of the outstanding 7 3/8% Series L preferred shares at the end of June.

This redemption improves our fixed charge coverage ratio by 50 basis points.

The only preferred equity outstanding is $9 million of 7.5% Series I preferred units, which are callable in September of 2019.

As shown on Slides 12 and 13, our balance sheet metrics remained strong, and we are on track to lower our debt plus preferred equity to EBITDA to approximately 6x by the end of the year.

Assuming we exercise the extension options on our line of credit, we have no debt maturing until 2020, at which time our $100 million term loan and line of credit mature.

Both loans are prepayable without penalty, and together, represent $294 million of borrowings.

Given a continued low interest rate environment, we're evaluating the timing to extend these maturities.

Slide 14 of our presentation summarizes the major assumptions behind our guidance for full year FFO per share as adjusted for comparability, which we are narrowing from a range of $2.01 to $2.07 to a new range of $2.02 to $2.06.

Note that the midpoint of our revised guidance remains at $2.04 per share.

We're establishing guidance for the third and fourth quarters of $0.51 to $0.53 and $0.54 to $0.56, respectively.

The $0.03 increase implied by the midpoint of our third quarter range reflects savings related to our Series L redemption and NOI from development placed into service, partially offset by the impact of our third quarter sales.

We expect additional NOI gains related to occupancy increases, particularly among development and redevelopment projects, to add another $0.03 to our fourth quarter results.

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

Thank you, Anthony.

The ramp-up in our shadow development pipeline from less than 1 million square feet for several years to 1.4 million square feet today is encouraging as is the breadth of that demand.

We're in final negotiations in several transactions and expect to have a busy second half of the year that should generate strong momentum heading into 2018.

By relentlessly pursuing every Defense/IT business opportunity in our proven locations and keeping a steady hand on our balance sheet, we will generate attractive predictable returns for shareholders.

Our growth should occur regardless of the broader economic cycles because our Defense/IT locations are aligned with priority defense missions that are enjoying renewed support from Congress and increased U.S. government spending on intelligence, surveillance, reconnaissance, missile defense, Navy force and cybersecurity.

The combination of our portfolio, our balance sheet, our organization, the positive outlook for defense spending and the increasing demand from our development segments should continue adding value for our shareholders.

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

(Operator Instructions) Our first question comes from Jamie Feldman with Bank of America Merrill Lynch.

I guess, Anthony, can you just walk through one more time the changes to the same store guidance?

The fact that you're taking occupancy down, but you're raising the cash growth outlook.

So we continue to experience growth in our same office cash NOI, not just in line with what we originally expected for the year, but slightly higher.

Where we're seeing the pressure is on some leases that we had expected to start not generating cash NOI for the third and the fourth quarter but generating GAAP NOI that are influencing occupancy.

So we're seeing some strength in our same office cash NOI portfolio, but that's not sort of 2 separate things.

The decline in occupancy is really driving an impact on GAAP NOI and not cash.

Okay.

And you're saying none of these leases have disappeared, it's just a matter of them taking longer to get done?

That's right.

Okay.

And then can you guys talk about rent growth and maybe what the expectation here for leasing spreads going forward, GAAP and cash?

So we guided on a cash basis to 0 to minus 2%, and this quarter was right in the middle of those goalposts.

On a GAAP basis, about 9%, slightly higher.

And as you look ahead to next year, what kind of mark to market are you looking at?

I would guess it's going to remain about where it is for at least another 12 months.

Okay.

And then, I mean, we've been reading articles that you guys may get started on some DC development or JV DC development.

Can you just talk about any plans in that market?

So we did commit to a JV with the Akridge company at 2100 L. We anticipate that starting next year, and I'll let Paul talk about our progress.

So it's a 190,000 square foot trophy office building at the corner of 21st and L streets.

Delivery, as Steve just said, we expect to start next year, midyear approximately.

We are in advanced negotiations with an anchor tenant for 45% to 55% of the office space that would begin upon delivery of the building.

So I'd expect that we will have some announcement in the third quarter.

Okay.

And then how do you think about the competitive landscape for new development in DC?

It seems like there's a bunch of similar projects that are less than fully leased getting started with half the building to -- have the rest of the building to backfill.

What gives you comfort?

Well, we're going to deliver at least a year after many of the buildings, I think, you're referring to in the competitive landscape.

So sequence timing is an important variable.

We're not delivering until mid to late 2020.

We have somewhat satisfying that we're only 190,000 square foot building.

We have an anchor tenant to lease, as I said, half of it.

And it's a corner building with windows all the way around, which much of our competition does not have.

And frankly, there's other activity for additional leasing that is -- we're exchanging paper with some of those prospects.

So this is 3 years from where we're sitting today from delivery.

And so there is reason to -- I am fully aware of all the competition, but each building has its own story.

I'm sanguine about the way our development is going to perform.

Our next question comes from Rob Simone with Evercore ISI.

Forgive me if you guys covered this already.

But just wondering if you could update that figure that I think you discussed at NAREIT against the, call it, outside of your development pipeline against the 1.2 million square feet of vacancy.

I think you had about 1.1 million square feet in the form of a pipeline, and there was about 800,000 that was associated with a specific contract.

So I was just wondering if you could update that figure, if there's any change there.

Sure.

It's about the same level, 1.1 million square feet overall.

A big chunk of that is pre-prospect categorization, so what we call names and tours, and we're not yet negotiating with it.

That 1.1 million related to about 800,000 of prospects.

We just reported on this call that, that number is down to about 550,000.

We signed almost 80, and then we moved 1 of the larger prospects into shadow development -- well, not yet shadow development pipeline, but we're working with them on a build-to-suit because their space needs exceeded what we had in our inventory.

But it's about static, Rob.

Our next question comes from Manny Korchman with Citi.

Just -- if we think about the budget from -- specifically from a tenant perspective, how much confidence do they have to start discussions now versus waiting for something to actually get tasked or as we get further down that road?

So the -- we mentioned in our speaking points the significant amount of the leasing demand that we're working with is contract contingent.

And that's -- all those contract contingent deals that we're currently working on pertain to contracts that will come out of the fiscal year '17 budget.

The discussion of which is now past in mid-May.

The activity that would ensue from a higher 2018, it's a little preliminary to see what the confidence level will be on that.

And just to add a little color to that, the activity that Steve's referring to generally refers to, I think, the larger contractors that occupy National Business Park.

One item of note is that within Columbia Gateway, we're seeing a burst of activity from, I would call it, the smaller and medium-sized cybersecurity and tech companies that have led to some recent successful leases within Columbia Gateway.

So it's a different species as compared to the large contractors, but there is continuing new demand growth and activity within that segment.

Got it.

And then if think about your comments on data center growth, is that going to be leaning towards the Defense/IT sector?

Is it going to be just more generally data centers?

Are you going to stick to sort of the same geography?

How should we think about your growth in that space?

So it speaks to our expectations that the demand from the customers we have will either be preserved or accelerate.

In terms of geographies, we're going to maintain where we're at currently.

And it's just a very fast-growing business that we think will lead to increased opportunity on a fractional level through our overall development opportunities.

Our next question comes from Craig Mailman with KeyBanc Capital Markets.

Anthony, just wanted to follow up on the same store question from earlier.

I get that from the GAAP perspective, occupancy, the difference there.

But as we look at it, I mean, is it -- with leases kind of being pushed into next year, I know first half has been okay, but is it mostly expenses being deferred that's driving the upside in guidance?

Well, it's a combination of some expense savings, and it's not really a deferral.

Some of it's operating savings on a net basis.

And there are -- even though we do have some leasing activity that's being pushed into 2018, there is some benefit from some leasing that is starting earlier than we expected.

So it's a combination of the 2 that's really generating the movement in guidance.

Got you.

Would you call it like half-and-half expenses versus federal leasing timing?

Probably 75-25 expenses and leasing time.

Okay.

That's helpful.

And then, Steve, I get your comments here about the expected ramp in the back half of the year.

I'm just curious, just your fourth largest tenant on their recent call was kind of venting a little about the delays and appointments to The Pentagon and the delay in contracts as a result of that.

And as we look at last year, what happened in the back half of leasing versus this year, I mean, the difference is the change over the administration.

I mean, as you kind of can stick with guidance and put your views out there, I mean, is the base case feeling a little bit better about the same type of ramp or maybe a little bit less with some things needing to fall in place to get you as good or better than last year?

My base case is as good or better than last year, but potentially, a little later.

So last year, we started showing results, and third quarter and fourth quarter was high.

This year, it could be fourth quarter and a bigger ramp in the first quarter of next year.

Are you seeing that contracts are coming up slower than you would've thought because of what's going on with just putting people in place?

I can't tie it to putting people in place.

I know that there is transition going on in the administration and I think new leadership on various levels.

But I would tie it more to the delay.

216-day Continuing Resolution creating a big backlog of activity that needs to get executed by the same size staff it was before the big backlog.

And it's just friction, friction in the system.

And I don't have these numbers in my fingertips, maybe you do or don't.

But just curious, for the last kind of 9 consecutive Continuing Resolutions, obviously last year's was pretty long.

I mean, what's the longest that we've seen?

I'm just curious because this budget maybe is in '18 kind of setting up for a more contentious fight.

And I'm just kind of curious how long it's been.

And in that year, kind of how that affected leasing.

So 2017 was the longest in the last 14 years.

And the second longest which occurred in fiscal year 2011.

So 2017 was 216 days.

2011 was about 196.

They've averaged in the 75- to 80-day range.

Our next question comes from Tom Catherwood with BTIG.

Following up on Craig's question, so I think it's important.

So let me try to put all the pieces together here.

So Steve, you had referenced that in 2016, leasing picked up about 6 to 9 months after the DoD budget went through, which, given the May budget approval, pushes things as you can talk about to the end of this year or early 2017.

So it's not a matter of deals taking longer.

It's a deal of -- it's just the fact that the budget itself was delayed.

That's kind of the gist of what's pushing things out.

Correct?

Correct.

So if we look to 2018 with the DoD budget, what's the time line?

Or what are the kind of hurdle points we should be looking out for as that budget is kind of put together and it's debated as far as if there could be a delay, or if we should have some sort of concern that could kind of push out 2018 expectations?

So first, let's just deal with the '17 funding.

So we expect the leasing lift to occur fourth quarter and first quarter of '18, so think '18 starts on a pretty good pace.

The commensurate activity that comes out of the '18 budget, I would expect the same kind of timing.

It all depends on when it can get passed and then flow through the system and translate into real contract awards that require leases.

So I think the benchmark to look for is how quickly we can get that budget passed.

Got you.

That's helpful.

Rotating over to development.

Paul, you talked about the progress that you guys have made on the redevelopments.

I think you referenced 10% to 11% yield on the incremental spend, which is strong.

Now that you guys are kind of taking care of most of the redevelopments that you had, what's the kind of next step in the redevelopment process?

Do you have more buildings that you're looking at?

Do you have more teed up?

And how do you think that plays out over the next few years?

Thanks, Tom.

We actually, with the success that we experienced with the CIRQL product, which is an innovative investment in single-story buildings here in Columbia Gateway, we are commencing, you may know and see in the supplemental, one of the projects is the next phase.

Essentially, we are taking the same idea, which is the innovative rehabilitation of this one-story project, and it's 22,000 square feet.

We're starting in October, but we're already about 40% strong advanced interest, frankly, overflow from tenants that couldn't fit into the first phase.

So that's -- it is successful what I think is repositioning of some of our product, and I think it's the beginning of the ability to look at advantaged repositionings of other product in our portfolio, especially in Columbia Gateway.

And Tom, almost all of that demand through the innovative, kind of techy rehab of good but over single-story buildings is coming from cyber companies.

Got it, got it.

Appreciate that.

And then finally, partial development, partial Regional Office.

But the development site used to be called M2.

I think the name may have changed.

But it's a lot of development going on kind of around that site and College Park, both apartments and hotels and retail.

How do you view that M2 site kind of -- as far as an opportunity set for Corporate Office?

Yes.

What's going on in College Park is pretty transformational all around.

It's kind of cool as a Maryland fan.

But our 5801 University Research Court is the name of the 71,000 square foot 3-story building that's under construction and delivering at the beginning of 2018.

We expect to announce a third quarter lease for about 70% of that building, and that there's interest from that same tenant to potentially take more of the space.

So that spec development is meeting with good demand.

There's other interest in some of the other land and build-to-suit opportunities that we have within that park.

We've added other amenities to that park, too, that are adding -- even adding to the attractiveness of that development grouping.

So 5801, we're hoping that we'll have -- we're expecting to have an announcement in the third quarter of this year.

Our next question comes from Jed Reagan with Green Street Advisors.

It's Chris Belosic here with Jed.

So one from me.

You guys have pretty heavy lease roll coming up in '18 and '19 with the bulk of that coming from your primary Fort Meade markets.

And I've seen your investor presentation.

You lay out some pretty strong retention rates for the large block heads, which probably captures some of that.

But can you kind of refresh me again on what's your expectations are for overall Fort Meade '18 and '19 retention rates?

Is that kind of still in the same 80% to 100% range?

And then what renewals spreads are you guys expecting in that market?

So I would fully expect it to be 80% or better.

And our cash rent spreads in that market tend to be about 3% positive.

It's Jed here with Chris.

On the DC development, the one in the district, that anchor tenant you mentioned, is that an existing customer and/or a defense-related tenant?

No.

It's not an existing tenant, and it's a major top 25 law firm.

Okay.

That's helpful.

And then one of your peers REITs mentioned that defense tenant leasing activity seems to have abated a bit over the past quarter.

I mean, is that consistent with what you've seen?

Or is that -- or not so much?

Well, yes, and that's what we've been kind of talking about with the timing.

It's not that demand has faded, it's just been delayed.

So there's not been as robust the close rate as we would have or could have had have the Continuing Resolution been resolved earlier.

And contradicting that is our success down at the Navy support group, where I mentioned we were up nearly 800 basis points since last year.

And active deals with contractors and the government should take us to about 90% plus by the end of this year.

So it's episodic as opposed to -- we have strength -- some strength in other parts of the portfolio.

Our next question comes from Dave Rodgers with Baird.

Steve, appreciate the time.

Maybe just talk a little bit about Baltimore and just kind of what you're seeing, regional activity there.

I think you really only have 1 space that might come due here in the next 12 to 18 months.

But just kind of curious if you're seeing more kind of transactions in that market, ability to replace some tenants, drive rents, et cetera?

So we got a floor back last quarter from a bank at Canton Crossing, and we did an early renewal that will give us a floor of availability at the end of this year.

And we have prospects for both.

So we're pretty optimistic we're going to backfill those in a very timely manner

(inaudible)

Right.

And then we have one floor at 100 Light that's available, and we're in advanced negotiations with the law firm for that.

And rents on that space is consistent or better than where you were?

It's consistent with the last year we did, which is pretty significantly above our underwriting.

Okay.

That's helpful.

And then I know your development leasing target, I think, you said is 700,000 square feet for the year.

I missed the early part of the call.

Where do you consider yourselves against that target as of midyear?

So we're at 383,000 as we speak, so slightly above half.

And what we said in the earlier part of the call was active negotiations that we're currently engaged in give us very high confidence we'll exceed that number.

Okay.

That's helpful.

And then maybe a last question.

I don't know if you addressed this or not.

The $14 million difference between kind of what you've already leased and what the net potential is of the development NOI, how much of that might be driven by budget versus just kind of programmatic timing?

Any thoughts on that?

That'd be helpful.

You're talking about future NOI from development that is noncontractual?

Correct.

So that -- the biggest chunk of that pertains to buildings we built for the United States government that got delayed -- leasing got delayed, and those processes are starting to begin.

Our next question comes from Erin Aslakson with Stifel.

So maybe this dovetails off that last question, actually.

So could you actually discuss the RFP process that's going on with the 310 Sentinel and the NoVA office, the assets that have been delayed?

And assuming kind of the continuing -- of the continuation of the Continuing Resolution into 2018, how does that affect the potential occupancy of those buildings?

So I would not consider 2018 as a critical element to either one of them.

With regard to one of the buildings, I think there is planning and programming activities where the customer is trying to evaluate its strategic needs.

In the other, the process has commenced, and it will -- the acquisition process, and it will take some months to work its way through.

But we see progress on both fronts.

Okay.

But -- so for one of the assets, it's pretty certain.

And for the other asset, it's still up in the air?

I think it's a when, not if.

And I can't tell you what the when is yet.

Okay.

But '18 in general?

Yes.

One I would expect to get done in '17, and one could drift to '18.

(Operator Instructions) Our next question comes from Bill Crow with Raymond James.

I think in the past, your company has kind of followed tenant demand into some new markets, and I'm just curious whether there's any pattern emerging that might tempt you into establishing a beachhead in some other markets?

No.

We currently aren't considering any other markets.

We see good opportunity at priority defense missions that we serve, and we're focused on generating development at those locations.

I hope that was the answer, but you've answered the rest of my questions.

And I'm not showing any further questions at this time.

I'd like to turn the call back over to Mr. Budorick for closing comments.

Thank you all for joining our call today.

We are in our offices this afternoon, so please coordinate any questions through Stephanie Krewson-Kelly.

If you would like to follow-up, call later today.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect, and have a wonderful day.