COPT Defense Properties (CDP) 2018 Q1 法說會逐字稿

Welcome to the Corporate Office Properties Trust First Quarter 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.

Miss Krewson-Kelly, please go ahead.

Thank you, Liz.

Good afternoon, and welcome to COPT's conference call to discuss our first quarter 2018 results.

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

In the results press release we issued yesterday and on our website, you will find reconciliations of GAAP and non-GAAP financial measures management discusses.

At the conclusion of management's remarks, we will open the call for 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 yesterday'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 had a great start to the year with a solid first quarter.

Our FFO achievement was at the high end of guidance.

We had a strong leasing quarter with solid retention and new leasing.

And most importantly, both our operating and our development leasing pipelines continue to strengthen.

5 weeks ago, Congress appropriated the fiscal 2018 Department of Defense base budget at $605 billion.

This is a bellwether event for the Defense industry.

And to put this funding level into context, it's helpful to revisit recent defense spending.

As Slide 8 shows, defense spending was initially frozen in 2010 and subsequently reduced over the next 5 years, representing a 1% compound annual decline.

For fiscal year 2016, Congress added $24 billion to the DoD base to a total of $521 billion.

Even so, spending remained 1.3% below fiscal 2010 funding levels.

The fiscal '17 budget increased the DoD's base by another $11 billion, which was still just $4 billion more than 2010 funding.

Moreover, the federal budget didn't become law until May of 2017, which delayed the impact of the new spending.

Despite congressional delays and the fact that spending increases were modest, we achieved impressive levels of new leasing in both 2016 and 2017.

The fiscal '18 budget passed in March and increased the DoD's base budget by a massive $73 billion or 14%.

This is the first year the DoD's funding is meaningfully higher than 2010 levels, ending 7 years of defense austerity.

3 consecutive years of spending increases, including the corrective increase in 2018, have positioned the defense industry for sustained recovery.

The obvious question that arises is how will the recovery translate into opportunities for COPT?

We described the impacts on Slide 10.

These impacts are not necessarily sequential, and in some cases, are concurrent and unique to each submarket in which we operate.

The first count of incremental growth we've experienced throughout our portfolio for the past 9 years, where supplemental government contract awards drive incremental leasing.

Since 2016, we've leased 826,000 square feet at Defense/IT locations to defense contractors seeking modest expansions to support mission growth.

Supporting this point, we currently have 40 new leasing opportunities representing more than 500,000 square, feet with defense contractors specifically associated with new government work.

Secondly, government leasing resulting from pent-up demand is taking place in 3 of our Defense/IT locations.

In our Navy support portfolio, the U.S. government has grown its footprint by 67% over the last 7 quarters.

Their expansion has been a major factor in propelling this subsegment's percentage leased from the low 70s to 90% today.

Our NoVA B property and lease execution is pending, and we expect 310 NBP to be leased during the third quarter.

Third, when substantially all of the existing inventory has been consumed in a given market, new buildings are required to meet contractor demand.

We generally don't expect to see inventory depletion to occur until late 2019 or 2020.

One exception is at the Redstone Gateway, where we commenced a development of 80,000 square feet with a 20% pre-lease as we identify contractor demand for which we had no space.

The fourth impact occurs when defense contractors have confidence to commit to new build-to-suits in major pre-leases.

Our shadow development pipeline currently includes 4 build-to-suit office opportunities that could come to fruition in the next 4 to 8 quarters.

The explosive growth in cloud computing demand, generated in part by government outsourcing, is fueling build-to-suit activity in our data center shell subsegment, and we have 8 additional such opportunities in our shadow pipeline.

Fifth and finally is the long-term government growth.

We are engaged with the U.S. government in long-term planning at 4 of our locations.

This plan could translate into development starts in the 2019 to 2021 time frame.

In summary, evidence of the defense industry's recoveries at mission-critical locations is clear and widespread throughout our portfolio.

We are confident that market fundamentals will support reliable cash flow growth in our operating portfolio as well as from a wide variety of new development opportunities across our Defense/IT locations.

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

Thank you, Steve.

We had a productive first quarter, leasing 854,000 square feet.

We executed 712,000 square feet of renewals, representing 73% of the expiring space.

We have only 1.2 million square feet rolling during the remainder of the year and are on track to achieve the 70% to 75% renewal rate we forecasted for the year.

Economics on renewals were in line with expectations, including modest leasing CapEx of $2.45 per square feet -- foot per year of term and a 4.4-year average lease term.

Additionally, cash rents on renewals increased 1.2%, and GAAP rents rolled up 11.1%.

Core portfolio occupancy decreased during the quarter from 94.5% at year-end to 91.1% at March 31.

As Slide 5 shows, slightly more than half of the decline in the first quarter occupancy is due to the addition of the 2 projects held for government use into the operating portfolio on January 1. As Slide 5 also shows, we experienced 318,000 square feet of transitional vacancy discussed on our last call and have re-leased approximately 1/3 of the space.

This net activity accounts for 36% of the decline in occupancy during the quarter.

We are in advanced negotiations on another 1/3 of the space and have prospects for the remainder.

Our leasing completed thus far, combined with our strong list of prospects, supports our guidance for higher same-property occupancy at year-end.

The greatest concentration of new vacancy in the quarter related to the departure of nondefense tenants located in the B/W Corridor subsegment, where market demand is such that we view vacancy as an opportunity.

Our leasing pipeline has increased by 21% in the past 6 months so that prospects now modestly exceed our unleased space.

In total, we have 1.4 million square feet of unleased space in our core portfolio.

If you subtract NoVA B and 310 NBP, we have 1 million square feet to lease, against which we are tracking 1.1 million square feet of active deals and prospects.

The rent resets and space give-backs on our Pinnacle buildings in Tysons and in our Canton Crossing building in Baltimore accounted for the bulk of the 1.5% decline in our first quarter same-property cash NOI.

In contrast, cash NOI in our same-property Defense/IT segment grew by 1.4%.

The shadow development pipeline remained strong.

It currently contains 2.2 million to 2.9 million square feet of potential transactions and reflects the addition of 300,000 square feet of defense contractor office demand that emerged since our last call.

Data center projects comprised 56% of the square feet at the high end of the range.

As the defense industry advances through a recovery, we anticipate seeing a greater number of traditional Defense/IT office transactions for contractors and the government.

I'll conclude my remarks with an update on our 2 buildings held for government use.

310 NBP is a 191,000-square-foot property that is 12% occupied by a government user.

The government is finishing the building's perimeter security, incorporating it into the secure campus at the NBP.

The government user's procurement process begins in June and should culminate in a lease for the remainder of the building during the third quarter.

At NoVA B, a 161,000-square-foot building which represents nearly half the vacancy in our NoVA Defense/IT subsegment, we are in advanced lease negotiations, and lease execution is imminent.

It's important to emphasize that the full building government leasing cycle is a long process, even in normal defense spending environments.

By the time we execute the final lease agreements, a full 12 to 15 months will have passed since that appropriation.

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

Thanks, Paul.

First quarter FFO per share of $0.50 was at the high end of guidance due to the earlier-than-expected recognition of lease termination payments and development service fees.

For the year, we are not changing our guidance on these items.

During the first quarter, we drew down $20 million of proceeds from our equity forward to fund investments in our development pipeline.

We have approximately $200 million of issuance remaining.

In terms of guidance, as Slide 17 shows, we are tightening our full year range by $0.01 on both sides to a new range of $1.96 to $2.04.

The $2 midpoint of our range represents 4.2% growth over 2017 actual results adjusted for dispositions.

Additionally, we continue to forecast a 4% to 6% increase in AFFO.

We established second quarter FFO per share guidance of $0.48 to $0.50.

The $0.49 midpoint is $0.01 below first quarter results as we expect lower lease termination and construction fees in the quarter.

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

Thank you.

Clearly, the defense industry has entered a period of sustained recovery and has moved beyond the 6-year contraction cycle.

We believe the corrective increase in defense spending this year will positively affect our business in several ways and over several years.

Recapping the positive impacts.

First, incremental contractor expansions.

We expect an expanded volume of opportunities with typical time frame of 6 to 12 months following appropriations.

Second, realizing deferred leasing opportunities with the government.

We expect to capture 330,000 to 360,000 square feet of government leasing in the next 2 quarters.

Third, demand-driven new construction where leasing success has depleted inventory.

We don't expect to increase inventory until late 2019 or 2020 in most locations, with the exception of Redstone Gateway, where we're constructing 80,000 square feet to create space for active demand.

Fourth, build-to-suit major pre-leases.

We have multiple active office project discussions that are likely to materialize as early as next year.

We expect data shell activity to remain robust.

Fifth, long-term expansion at government campuses to address growth and modernization needs.

Some of these opportunities could materialize in 2019, and we're confident several will materialize by 2021.

Again, we expect that our pace of progress will not materially change from a timing standpoint, but the volume of opportunities will increase over coming years.

Remember, ultimately, the vast majority of our Defense/IT segment demand is driven directly or indirectly by U.S. government actions, and the pace of progress is measured, thoughtful and deliberate.

Our company is well positioned to capitalize on various types of demand as the defense industry recovery advances and expect to deliver years of reliable mid-single-digit growth that is not correlated with broader economic trends and office fundamentals.

We look forward to reporting progress in future calls later this year.

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

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

This is Laura Dickson here with Craig.

I want to start off with the increased defense demand and the 330,000 to 360,000 square feet, your -- of government leasing over the next 2 quarters, get a sense of where you expect that to be and like how advanced those conversations are.

So 2 we specifically called out through the U.S. government buildings that we've -- been held for government lease.

And beyond that, there's several opportunities, further opportunities in Navy support for government expansion.

Okay.

And then regarding the shadow development pipeline, can you just elaborate on the 4 office opportunities and the data center shells, like the expected yields in those markets?

So data center shell yields are consistent with what we've guided, 7% initial cash yield.

With regard to office, we don't have negotiated deals, so I can't tell you exact numbers.

But I would expect them to be between 8% at the low end and 9% at the high end.

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

Steve, you talk about kind of this 9-month lag between DoD budget approval and when the money gets put to work.

But this quarter, you had a significant pickup in leasing, especially in the Fort Meade and B/W Corridor area.

Was this leasing in anticipation of the spending, do you think?

And how do you expect leasing to trend once budget allocations finally reach the agencies and the contractors?

So the new leasing that we generated this quarter in Fort Meade really was driven off 2017, so it would be later realization.

And remember, that didn't get passed until May.

So it's kind of roughly 9 months later.

We actually have very high confidence in a very strong new leasing in this second quarter and similarly believe that's driven off 2017 budget funding, not 2018.

I would expect impacts from '18 to start to occur in the fourth quarter and then similarly trickle into 2019.

Got it, got it.

And then for Paul, you mentioned that when you had expirations in the Fort Meade area, you almost view that as a positive now.

When we look out to 2019, you have a material jump in explorations, but they're mainly concentrated in Fort Meade.

Is there a potential as far as positive roll-up in that area?

And how are you kind of looking at 2019 as far as what it could add to the bottom line?

Well, the explorations are the nondefense tenants and in the B/W/Fort Meade corridor, which includes some nondefense tenants in Columbia Gateway.

And so there's been an increase in demand in -- within Columbia Gateway of cybersecurity and other defense-related tenants.

So that's what I was referring to as most of the backfill where we view it as an opportunity because just the overall increased demand and the nondefense tenants moving out.

But as far as rents are concerned, they should be slight upticks on the reletting of those leases -- expiring leases.

And that's for the 2019?

Yes.

Correct.

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

A couple of questions, and I don't remember if this was Steve or Paul that mentioned this.

But you talked about build-to-suit activity that's sort of percolating, and you mentioned that you have a good opportunity to land those.

If you don't, do those deals go elsewhere?

Or do they just not get done?

So we had one that we expected to get done in the fourth quarter that got deferred, and it was -- it basically didn't get done.

Of the remaining discussions, I think it's a question of success or deferral, not so much loss.

Great.

And then you have a comment in this presentation that 2019 same-store NOI would be 100 basis points lower should you not get the 2 leases that we discussed leased.

Maybe could you talk about your timing assumptions on other leases commencing and other backfill that drive that 2% to 3% same store in '19?

Manny, most of that is a combination of the sort of 2.5% rent bumps that we have embedded in our leases, along with the expectation that we're going to get the benefits of the leasing that's going to be done late in 2018, along with leasing done in 2019.

That's sort of partially offset to the extent that sort of rents are flat on, let's call it, end of 12% of the portfolio that's rolling next year.

So that's sort of where the 2% to 3% comes from.

And then maybe just sticking to that, I'm just surprised that it's not a little bit higher given the vacancy in '18 and the 2% to 3% being sort of your long-term run rate.

So why wouldn't '19 be at least a little bit higher than sort of the long-term rate?

If what you're asking me for is '19 guidance, we're not going to sort of go there yet.

But there's clearly the possibility that it could be.

But in terms of the way sort of we look at the math from a sort of -- the pieces of the math standpoint, we think that sort of 2% to 3% is the target we're looking for right now.

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

Great, great, great.

Okay.

Steve, et cetera, looks like 60% of your office NOI comes from the BWI corridor.

That's roughly a 10.4 million square foot market, 17% vacancy.

NBP is 11% vacant.

I think 2 new buildings are coming onstream in Fort Meade in the next 12, 24 months.

Fort Meade is telling the world that they're bringing 7,200 people on post.

How does that all equate to long-term demand off post?

Well, first of all, let's deal with the Fort Meade component.

We've agreed to disagree on the facts of the matters and the sources that you're using.

The activities at Fort Meade to create new facilities we don't believe will impact our portfolio at all.

With regard to new development, we've always had the dominant location at the National Business Park, and increasingly, Columbia Gateway.

Much of the vacancy you referred to in the BWI corridor is obsolete and really not under consideration for these tenants, so we feel like we're in pretty strong shape.

But with regard to the NBP, that vacancy site includes 310 NBP, which is reserved for government use.

You strip that out, and the occupancy in the park is around 94.5%.

Our next question comes from the line of Dave Rodgers with Baird.

Yes.

Either Steve or Paul, again I think somebody mentioned the build-to-suit activity.

What causes those deferrals, those delays?

I mean, it sounds like you guys are much more bullish on the contracts.

Are these not contract-related or not specific appropriations-related?

Or is there other -- some other component to moving people into the region that might be causing these deferrals?

So it's really confidence in the long-term viewpoint of individual businesses.

The one that I specifically referred to, the company hired a new executive and he wanted to get his arms around the business before he made a longer-term commitment.

That may or may not come back around at the end of this year.

But it's -- on the build-to-suits, it's a long-term vision of confidence in the business, investing for efficiency, and in some cases, investing for better quality of life for the employee.

So incidentally, those -- that component is less contract or appropriations dependent in the [long-term]?

That's right.

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

Just a question on the typical lead time between appropriations and when that demand filters through.

You guys talked about 6 to 12 or 9 months.

I guess what's the rationale for calling that "typical"?

Is it versus the previous cycle of increasing defense spending?

And is there any reason for -- in this cycle for that to lengthen or shorten in your guys' view?

So we use that time frame because that's what we've experienced over several years.

It's kind of the facts that occur and no specific process, if you will, that drives it.

We have no reason to believe it will change going forward, but there is a routine pattern.

Companies are competing for a contract.

They source the resources they would need if they win it.

When they win it, they move forward to procure those resources, and that typically takes 6 to 12 months.

Got it.

Okay.

And then on the data center shell side, I know you guys have addressed this in the past.

But can you, to the extent you're able, talk about whether or not you guys are looking at any other potential tenants on the cloud computing side?

And if there are any like limitations or restrictions against you guys doing that?

We have been asked to provide material on how we can service other cloud computing companies, nothing material that I would talk about today.

And we have no restriction from serving other people in that segment.

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

I think to a prior question, you talked about when build-to-suits don't hit, it's more a case that they're getting deferred or just kind of go by the boards rather than getting lost.

I guess curious, I mean, when you're pursuing one of these opportunities, I mean, how many other kind of credible alternatives do these tenants have?

I mean, how many calls to other developers are being made that are -- you're competing with for these types of opportunities?

Well, we have multiple locations, so it's tough to give you a single answer to that question.

But there's generally an alternative or 2. That's the way almost all real estate is procured.

We've had discussions about consolidations that are specific to the locations we're at for the obvious benefits they have, but it varies from tenant to tenant.

Okay, that's helpful.

In terms of NoVA B, I think you said -- you guys said last time that you had an LOI for that project.

Is that still the case?

And then when do you expect those 2 held-for-government leases to commence on a cash basis?

Sure.

I'll take the first half of the question.

Yes.

We do have a letter of intent.

The important factor there is an indemnification for us to get rolling on planning for the building.

We're a little less than halfway planned and proceeding towards a firm occupancy date in 2019.

Anthony will address the rents.

Jed, from a standpoint of cash rents, we would -- for NoVA B, we would expect cash rents to start in October of 2019.

And then for 310 NBP, we would expect that to be the beginning of 2020.

Okay, that's helpful.

And I guess sort of related to that, you guys had about, what, 70,000 square feet of development leasing in the first quarter.

You've got a goal still around 900,000 for the year.

Can you just remind us the mix of kind of what's left in that goal in terms of how much would be defense versus data shell leasing and maybe just sort of the timing of how that -- you expect that to play out over the year?

So I would say probably 2/3 data shell, 1/3 defense towards our target of 900,000.

I think you'll see some activity in each of the next 3 quarters.

Okay.

That's super.

And then maybe just last one from me.

On Page 9, the DoD priorities.

That's helpful to kind of lay that out.

Can you give a sense of just sort of order of magnitude for some of the bigger ticket items there?

I mean, is Cyber Command 60% of those kind of priorities in terms of a dollar basis?

Or is it kind of pretty evenly spread across some of those bigger items?

Just trying to get a feel for how much benefit you get from some of these various areas.

So I prefer to take that one offline and let us give you some real kind of data that we don't have in front of us now.

So could we just handle that -- I don't want to wing it on educated guesses.

Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

You had mentioned in an earlier response to an earlier question about a CEO looking for quality of life for his employees or his or her employees.

I just wanted to get your thoughts on what's changed this cycle?

I mean, we keep hearing in office overall that there is this demand.

Everyone's trying to attract and retain talent.

There's high competition for highly skilled labor, especially technology based, which it sounds like a lot of your tenants are growing in that area.

Just has anything changed in the types of buildings people need or the locations or the transit access as we think about where the opportunities are going to be going forward in this sector?

Not from a location standpoint.

I would -- and from a building structure standpoint, not really.

Certainly, the way that space is designed for the employee experience, I think that's evolved quite a bit in the last 3 or 4 years to create exciting places where technology workers can be attracted and retained.

If you come on down and let us give you a tour on some of the things we've done, specifically in support of cyber, that have been very successful.

It's really more of the tenant improvement approach than the structure of the asset.

And in terms of locations, transit access?

Not so much in our business.

Certainly, with regard to nondefense demand in Northern Virginia, defense -- transportation access is an important factor.

It's an important factor in the value proposition of our 4 nondefense buildings in Northern Virginia.

Not so much in the segment we serve because of the need for security and proximity to the mission.

Okay.

And then could you talk about your thoughts on demand for the remaining space to lease at 2100 L in the D.C. market?

Sure.

This is Paul.

We're actually very encouraged by the amount of demand or prospects we're talking to actively.

Again, we're not even launching, breaking ground until next quarter or later this quarter and delivering in third quarter of 2020.

But the -- we actually are doing test fits for 3 different tenants that total more square footage than we have left in the building.

So we've issued a number of proposals, doing test fitting, and we just really like where we're positioned relative to our timing and the quality of the products we're delivering.

So we're hopeful to sign another deal later, sometime later this year.

And what -- that's very helpful.

What do you -- what's like the edge of that building?

What is that -- why would someone go there versus -- it sounds like there's a lot of comparable space or competitive space in the market?

Frankly, in the downtown D.C. market, there has been quite a few law firms that have moved from the East end market to the Western part of CBD.

And if you know the downtown market, there's a cluster of buildings sort of west of 18th Street to 21st Street that are under development or redevelopment.

We are ground-up, brand-new construction, not a redevelopment of 8-story shell with 4 stories on top.

So we're a corner building that's windowed all the way around at 21st and L kind of ticks a lot of the boxes that -- and with only 20,000 square-foot floor plates, it gives a lot of firms that are the average size law firm, whether you're 20,000, 40,000 or 60,000 feet, really efficient layouts compared to some of the 35,000 square-foot floor plates that are out there.

Okay.

And then going back to Page 9, the different priorities.

Are you able to tell us which of these have been awarded and which haven't?

Is it possible to think about it that way?

Well, I'll speak to one in particular, missile defense.

There's been just tons of big multibillion dollar awards that have been generated out of Redstone Arsenal to strengthen that missile defense.

That one's really moving.

The rest -- again, let's go offline and let us throw some data together to be specific.

Okay.

And then my last question is we keep reading about this JEDI project or award.

I mean, is that -- if that happens, when that happens, would that be -- would that flow into your portfolio also or not necessarily?

I'm just not going to answer that question.

Too hard to tell.

But I think whoever wins that award, right, is going to have need for some significant resources.

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

Okay.

First and maybe a stupid question.

On Slide 18, you talk about the government leases potentially as a risk to the same-store growth profile, but the cash impact is a 2020 event.

So I'm just curious why it would have a [100] substantial impact on same store if you're only kind of thinking about at this point as a 2020 event, not a 2019 event?

There -- the cash impact for NoVA B actually starts in the early -- in the fourth quarter of 2019.

So if that gets pushed, there would be an impact to 2019.

Okay.

So even fourth quarter '19 would be enough for that type of movement?

Yes.

Okay, okay.

Second question...

Richard, it's a combination of the rent that we get as well as them starting to pay operating expenses because right now, the operating expenses are dragging down total same-office cash NOI because we're absorbing those.

Totally get that.

Okay, great.

Next question, maybe for Steve.

I know you don't like to waste words in your responses, so I think you'll get right to the point on this one.

But when you came out of the whole strategic repositioning program, the narrative was 3%-plus same-store growth.

And people were getting excited, us included.

And then -- and now the kind of the run rate optics are more like 2.5%, call it, 2% to 3% as it says on your slide here.

I'm curious why we're not like -- it's hard to imagine such a specific lightning rod of demand that's out there for other office REITs and you guys really have it.

So I get the 9-month lag and all that sort of stuff.

But once that happens, it seems like it should be more game on.

And 2% to 3% doesn't seem like it tells the same story as what's going on with $605 billion of defense spending.

So I'm just curious why has the narrative actually kind of gone down a little bit in terms of the growth profile of the company given all of those inputs.

Well, to my recollection, Rich, we've always guided 2.5% to 3%.

And now we're 2% to 3%.

Okay, my bad.

Okay, yes.

It's our firm commitment to be -- to provide reasonable estimates to have clarity with -- and conservative projections that we can meet and not to try to get -- caught up in hype.

At some point in time, we talked about the different -- 5 different levels of opportunity.

There could be some incremental growth as we reoccupy space above that kind of 2% to 3% that we've guided, depending on the rate in the year that it occurs.

But eventually, when we stabilize, the growth will be external.

It's not going to be in same store.

Right.

Because a lot of those 5 factors all -- are kind of a development sort of derivative.

And so they don't -- you don't necessarily feel that right here and now, but -- and I appreciate conservatism, and I think that's not a problem at all.

But do you think once you really start churning the wheel here, that 2% to 3% might be 3% to 4% as things really start to move?

I sure hope so, and I'll give you a viewpoint closer to the end of this year when we see the impact of the spending.

Okay.

And then last question from me.

I'm always trying to get 2019 guidance.

Sorry about that.

So on the Page, I think, 6, where you kind of show the trend of government spending or defense spending -- not 6. What was it?

8.

8, okay.

And so the out-years of 2020 and 2021, you just assumed a 3% growth rate.

To what degree do you think those years are playing or in the head of potential tenants, contractors, the government?

Or is it all just what's kind of in the bag right now through 2019?

Do they worry about post president election and all that sort of stuff?

I have no evidence to suggest that they're worried.

And if you look at their earnings, they're strong.

They're talking about increased bookings, long-term projects.

The communication in the fiscal year '17 budget kind of had strong projections that were actually -- we pulled back a little bit from what '17 budget called for.

So it feels -- and frankly, with regard to the bipartisan nature of the question, if you go back and look at how the defense budget progressed through the Senate and House Armed Services Committee, they were virtually unanimous votes, very little dissension.

Congress seems to unite on one thing, that we need to reinvest in defense to address tough conditions around the world.

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

Just a couple of quick follow-ups.

Anthony, on the -- you mentioned about when the cash rent would be expected for 310 and NoVA B. When's the GAAP rent expected?

Is that basically a year in front of that?

It's essentially -- approximately, it's a year in front of that for NoVA B. So it's the fourth quarter of this year for NoVA B, and it's the beginning of the second quarter for 310 NBP, next year.

Right.

And then as it relates to the expenses, the uncovered expenses, you get this -- when does that -- when do you start getting coverage for that?

Is that when cash rent starts?

Or do you start to actually get payment for that when the cash rent starts?

Coverage for that typically starts when the cash base rent starts.

Okay.

And then last question for you, and it's my last question, which is on your -- on the drawdown of the forward equity, it was $20 million this quarter.

How should we be thinking about the ratability of that going forward?

So if you -- we've been -- I think if you take our quarterly forecast of development investment, which is in our guidance for the quarter, and also to then take the annual component and sort of get a run rate for our development investment, it's approximately sort of 60% to 65% of that quarterly development investment we intend on drawing down each quarter.

So based on those projections, we would have capacity through the first quarter of next year.

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

A quick follow-up.

If we think about the potential M&A activity in the contractor space, how big of a positive or negative do you think that would be for your business?

Well, we just had one with GD and CSRA.

And as we handicap that particular merger against our portfolio, it appears to be about a net neutral.

One of those 2 tenants had thought about contracting a little bit at the NBP a year ago, and we probably expect a small contraction, but unrelated to the merger.

Beyond that, you really have to look at who's buying who and map it against our portfolio to give you a true answer.

And our next question comes from the line of Jon Petersen with Jefferies.

Just one quick follow-up.

Jamie had asked about the JEDI contract out there, the big Pentagon, I guess, $10 billion cloud contract.

I'm curious how involved COPT is at this point in the process with something like that.

Do you guys have a seat at the table?

Does your involvement kind of make a difference when the Pentagon is trying to make a decision?

Obviously, you guys have strong relationships there.

So I just wasn't sure if COPT being the real estate developer behind it kind of makes any difference or whether you -- whether the cloud contract has to be awarded first and then you guys come in.

We virtually have no role in that.

We stand ready to support anyone who would win it.

We have strong capabilities to offer, but we're not involved.

And by the way, there's another big contract coming out of Fort Meade through DISA that's almost as big as JEDI.

So there should be quite a bit of cloud opportunity in the next 12, 24 months.

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

I will now turn the call back to Mr. Budorick for closing remarks.

Thank you all for joining our call today.

We are in our offices this afternoon, so please coordinate through Stephanie if you'd like a follow-up call.

Thank you.

Thank you for your participation today in the Corporate Office Properties Trust first quarter earnings conference call.

This concludes the presentation.

You may now disconnect.

Good day.