COPT Defense Properties (CDP) 2018 Q2 法說會逐字稿

Welcome to the Corporate Office Properties Trust second quarter earnings conference call.

As reminder, today's call is being recorded.

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

Ms. Krewson-Kelly, please go ahead.

Thank you, Carmen.

Good afternoon, and welcome to COPT's conference call to discuss results for the second quarter and first half of 2018.

With me today are Steve Budorick, our 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 in 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'll now hand the call over to Steve.

Thank you, Stephanie, and good afternoon.

Second quarter performance reflects strengthening demand throughout our portfolio and continued leasing progress.

We are on track to meet or exceed the leasing, operating and investment goals in our original 2018 plan.

During the quarter, we executed the full building lease with the government customer for NoVA B, a 159,000 square-foot antiterrorism force protected building in which the customer will invest significantly and, in all likelihood, occupy for decades.

Although execution took longer than anticipated, we will achieve the lease commencement date expected in our plan.

At 310 NBP, our remaining property held for government use, the lease process for the remaining 169,000 square feet is advancing.

Though similar to NoVA B, the government ultimately sets the pace.

We now expect lease execution in the fourth quarter of this year instead of in September.

More broadly, in the first half of the year, we completed over 2 million square feet of leasing, including 862,000 square feet of development and new leasing.

We're encouraged by the growing breadth and depth of low-risk build-to-suit development opportunities throughout our Defense/IT locations.

The fiscal '18 budget appropriated on March 23 and summarized on Slide 7 increased the base defense budget by 14% over fiscal year 2017, and quarterly Defense outlays were up 16% versus the second quarter of last year.

As we said before, new spending generally takes several quarters to materialize into new demand for space.

But clearly, the elevated spending levels bode well for future leasing opportunities.

We continue to see strong bipartisan support to increase defense spending.

The National Defense Authorization Act for fiscal year 2019 would increase the DoD's base budget by another $14 billion next year to $619 billion, and both houses of Congress support higher funding.

On May 24, the house passed it by a vote of 351 to 66.

And on June 18, the Senate passed it by a vote of 85 to 10.

The fiscal 2019 budget process is advancing so smoothly such that Congress may be in a position to pass an Omnibus budget before the end of the fiscal year.

However, for the past 21 years, since fiscal 1998, the government has begun every fiscal year [under a] Continuing Resolution.

Based on this history and because this is a midterm election year, we expect a short-term Continuing Resolution by October 1 and passage of the 2019 budget in November or December.

Any Continuing Resolution we put into effect would be at the current fiscal year $605 billion level.

Last quarter, we described the recovery in defense spending is driving 5 types of leasing opportunities in our portfolio as summarized on Slide 9. The first is defense contractor expansion within our operating portfolio; the second, the realization of pent-up government demand in our operating portfolio; the third is limited speculative development in select markets to capture emerging demand; the fourth is contractor demand for new build-to-suit projects and major preleases; and fifth, long-term planning for future growth at secure government locations.

In the past few months, we have executed leases representing 4 of these 5 demand opportunities.

First, of the 187,000 square feet of new leasing we achieved in the first 6 months, 169,000 or 90% was at Defense/IT locations, evidencing the incremental leasing many defense contractors require to accommodate mission expansion.

Included in those 169,000 square feet were 42,000 square feet in our 1.3 million square foot Navy Support portfolio, which ended the quarter at 91.6% leased.

Also, in Columbia Gateway, the 18,000 square-foot lease we completed in June with the Maryland Innovation and Security Institute was another example of mission growth.

Second, the full building lease we executed at NoVA B met a portion of the pent-up government demand in that market for efficient antiterrorism force protected compliance space.

Additionally, in the past 10 quarters, we've tripled the amount of space leased to the U.S. Navy at Pax River.

And as I've discussed, we expect to complete the lease action at 310 NBP later this year.

Third, we are successfully leasing our speculative development at Redstone Gateway that we will be delivering later this quarter.

We anticipate timing in 18,000 square-foot lease in a few days that will increase the lease percentage of that development to approximately 50%, and we have multiple prospects for the balance.

Fourth, we increasingly see defense contractors exhibiting the confidence to commit to new build-to-suits in major preleases.

Last month, we completed a 15-year contract with a defense contractor to use a COPT-owned asset at a non-disclosed location in support of mission growth.

The economics of this confidential transaction are the equivalent of a preleased 115,000 square-foot contractor office development or a preleased 190,000 square-foot data center shell.

We continue to develop data center shells to meet strong demand from a cloud computing defense contractor.

Last fall, we anticipated winning 11 build-to-suit data center shell developments and entered into a $285 million forward equity raise to ensure sufficient capital is in place.

We've now executed 6 of those 11 leases and expect to complete the remaining 5 between now and mid-2019.

Beyond this immediate pipeline, demand is forming for additional data center shells that would likely be executed in 2020 and beyond.

New build-to-suit office opportunities are emerging and replenishing our shadow development pipeline, which currently tracks up to 2.5 million square feet of possible transactions.

The fifth type of demand, long-term planning for government expansion and secure parcels, is reemerging, albeit at the government's pace, and we're engaged in discussions with multiple users for several new facilities.

Given the government's multiyear process, we expect a significant portion of this demand to emerge over the next few years, and we'll provide appropriate updates as projects evolve.

So in summary, the combination of higher Defense funding and confidence that funding will continue has reestablished the business climate where defense contractors and government agencies are able to address their space planning requirements to accommodate mission growth, achieve operating efficiencies and comply with security mandates.

We are prepared to capitalize on these opportunities and expect to win new business in our proven Defense/IT locations.

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

Thank you, Steve.

During the first 6 months, we leased over 2 million square feet, including 1.2 million square feet of renewals, achieving a tenant retention rate of 77%.

Economics on renewals were in line with expectations.

We now have 800,000 square feet of expirations left to resolve this year, nearly all of which are located in the Fort Meade B/W Corridor and Navy Support subsegments, where demand has been strong.

Based on these results and our outlook, we are raising our full-year guidance for retention to a new range of 73% to 77%.

Average lease terms for second quarter renewals were impacted in 2 ways.

First, Boeing exercised the second of its five 1-year renewals after its original 5-year lease on 2 buildings at Redstone Gateway, totaling 242,000 square feet.

Secondly, 92,000 square feet of renewals were associated with tenant expansions.

These renewals were completed early to extend existing lease expirations to match the lease expirations of the [new expansions].

These transactions resulted in an average total lease term of almost 6 years.

Same property and core portfolio occupancies increased in the second quarter by 30 and 40 basis points, respectively, reflecting higher new leasing volumes.

The 187,000 square feet of new leasing achieved in the first half of the year is 30% higher than the volume achieved during the same period last year.

As a result of some occupancy dates slipping a few months, we are reducing our year-end same-property occupancy guidance by 100 basis points to a new range of 92% to 93%.

Demand to fill tenant needs continues to grow throughout our portfolio.

At June 30, we had approximately 1.1 million square feet of vacancy in our core portfolio, 2/3 of which is in our Fort Meade B/W Corridor subsegment.

Our pipeline of leasing prospects continues to modestly exceed our unleased space.

Excluding 310 NBP, we now have 985,000 square feet to lease, against which we are tracking 1.1 million square feet of active deals and prospects.

Our shadow development pipeline continues to reflect growing demand for modern efficient space and mission growth.

It contains 2 million to 2.5 million square feet of potential transactions.

Data center project square footage accounts for about 50% of the high end of the range.

Based on our leasing success to date and the volume of active opportunities, we are increasing our development leasing guidance for the year from the original 900,000 square feet to 1.1 million square feet.

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

Thanks, Paul.

Second quarter FFO per share of $0.51 was $0.01 higher above the high end of guidance due to the timing of certain operating expenses and property level efficiencies realized through expense management.

During the quarter, we drew down $32 million of proceeds from our forward equity program to fund investments in our development pipeline and have approximately $167 million of issuance remaining.

We recently started construction on 2100 L Street in Washington, D.C. and expect to close on a $116 million construction loan next week.

The loan proceeds will fund the remaining development costs associated with this project.

In terms of guidance, as Slide 16 shows, we are increasing the midpoint of our full year guidance by $0.01 to $2.01 and tightening the bottom end of our range.

The midpoint of our new range reflects operational savings realized during the second quarter.

The $2.01 midpoint of our revised range represents a 4.7% increase over 2017 actual results adjusted for dispositions.

Additionally, we continue to forecast AFFO will increase between 4% and 6% this year.

We are establishing third and fourth quarter FFO per share guidance of $0.49 to $0.51 and $0.48 to $0.52, respectively.

The $0.50 midpoint of our third quarter range is $0.01 below second quarter results due to the timing of R&M expenses that were budgeted for the second quarter but were delayed by the rainy spring.

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

Thank you, Anthony.

The defense industry is in the early stages of a sustained recovery supported by recent budget increases and a rare but durable bipartisan willingness to fund Defense and intelligence activities going forward.

Summarizing our resulting demand opportunities.

First, the incremental contractor demand to accommodate mission expansion should continue to support higher occupancies in our operating portfolio.

Second, we expect to capture up to 200,000 square feet of new government leasing in the second half of this year.

Third, we are building spec in Huntsville to meet emerging demand in our prepared start measured levels of speculative development elsewhere in the future when excess demand emerges.

Fourth, we expect demand for data center shells to remain robust and for additional contractors to commit to major preleases and build-to-suit office projects.

And then fifth, we are in discussion with our government customers for multiple new facilities in several locations.

We continue to expect the volume of defense-related opportunities to grow and to advance at a measured and deliberate pace.

We're working patiently and steadily with current and potential customers on real estate solutions to support their growth, modernization and security requirements.

And we look forward to discussing our progress on future calls.

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

(Operator Instructions) And our first question is from Manny Korchman with Citi.

Steve, just given your comments on how good the environment is or is getting, are you surprised that there hasn't been a pickup and will be categorized as our spec development by, if not you, then others trying to capture sort of the same budget underpinnings that you're talking about?

Well, in most locations that our defense IT is at, we don't have a lot of competitive supply or land positions that compete directly.

So no, we're not willing to go wildly speculative.

We do it when we don't have space left to lease.

And I guess, I'm really not surprised because of the advantage positions of our land.

And then in terms of your guidance with occupancy coming down, could you give us more specifics as to what's changed that versus your -- I know you said there's a couple of leases that have been shifted, but give us more color as to what those were and why they were shifted.

I'll let Paul answer that one.

Manny, really, the fact of the matter is it's just there's a few deals that are slipping into 2019 that are on our radar screen in terms of their commencement dates.

But the amount of new leasing that we expect this year still should remain at a pace of that increase I referenced in my piece over last year.

So the pace of leasing is continuing just a few -- there's no -- it's a handful of deals that just now have 19 commencement dates.

But at the end of the year, I think our leasing percentage will be exactly where we want it, if not better.

And one last one from me, if we could.

Appreciate the color on why the lease terms and renewals were sort of shorter than what we would have expected.

Is there any change in the structure of leases going forward where maybe you can avoid that and get either longer contractual renewals or otherwise to sort of steady up that [expirations] pipeline?

Well, the Boeing situation is contractual and that's going to continue for 3 more years in that they have 2 buildings that had a fixed 5-year term and 5 consecutive 1-year renewals.

We're 7 years now committed to the potential 10.

We fully expect the next 3, and we're just can going to have to wait that one out.

With regard to the [92,000] square feet, I view that as very good news.

We have tenants who need to expand who are committing to a longer term on their expansion and want to [cough] up the remaining term.

I think this quarter, it's just the mix of pure renewals and renewals with expansion kind of created that situation.

And the good news is one of the tenants that comprises that set that expanded, while slightly extending their term, is in growth mode in the asset that they're in.

And we expect them to take down more space as well.

Our next question comes from Craig Mailman with KeyBanc Capital.

Just want to follow up on kind of what you have left to lease for the balance of the year.

I think to hit the midpoint of your new range or somewhere in the range of 350,000 to 400,000 of new leases needed given what you have expiring.

Paul, I know you kind of hit on the 1.1 million square feet of active prospects for all of your vacancy, but just curious as we look in the back half of the year, kind of what's the pipeline of LOIs or real deals you guys have today that kind of goes against the 120 basis points of net absorption you need?

The pipeline is good.

We've made significant progress in the third quarter on signing a number of deals.

And as I said, we expect new leasing for the year, which we have a pretty good handle on to healthily exceed last year's number, which accounts for the absorption that we expect to achieve.

Any way you could put some numbers around what you guys have done in the third quarter?

Just because looking back...

Well, we've done 187,000 square feet year-to-date, right?

And we probably, I think, on balance, expect to lease 300,000 square feet additionally by year-end, give or take 50,000 feet, but probably hopefully take 50,000 feet.

But I guess, just of that 300,000, kind of how much is actually done?

We don't have that in front of us, Craig.

We can get that for you.

Ballpark, maybe?

Just to get it in the transcripts.

Maybe 150,000 square feet of it.

Okay, that's helpful.

And then, Steve, you had mentioned kind of building spec in Huntsville.

You guys have some space to lease up there already.

Kind of how big are you guys wanting to go on this next building?

So the project that we're currently developing has totaled about 85,000 square feet.

We'd like to ramp that up before we pursue anything further without a major prelease.

But we recognize as the recovery was kicking in, the cycle times of some of the smaller tenants are too fast for us to get a prelease in both products.

So we're pretty committed to make sure we have space to lease so we capture the demand that [wants to] be at our development.

Okay.

And I know a lot of the demand is coming from Cummings.

Just kind of what's the [expirations] look like there in the next year or 2 that gives you guys a lot of comfort that you're going to see a lot more activity there?

Well, I don't have that statistic handy, and we can follow up and get it for you.

But our confidence comes from the people we're in discussions with about potential occupancies on Redstone Gateway.

Yes.

And it's driven as much by new contract awards and real growth as opposed to just [expirations] at Cummings.

Most of the activity that we're seeing is new net growth, not just musical chairs from Cummings Research Park.

Okay, that's helpful.

Then just last one for Anthony.

The take down of the remaining forward equity, kind of what's the thought process there or just timing?

So based on our expectations for development investment for the balance of the year and into the first half of next year, we think that what remains funds the equity component of that capitalization through -- at least through the first quarter of next year.

I mean, is there -- with -- were the stocks been trading [kind of boost you?

You guys are] getting any thoughts of accelerating that to take advantage of it?

Or are you guys wanting to delay the time to take down?

The way the forward works is the price is already fixed.

So when we did the transaction back last October, the transaction was done at $31 net of -- and then fees were netted out -- out of that.

So there is no price variability to the shares we take down.

It was committed back in November and we're really not exposed to any change in the price as we take the forward down.

Our next question comes from John Guinee with Stifel.

A couple of questions.

First, defense contractors, they can either occupy space with the client, with the DoD, Department of Defense on base; or they can occupy in, say, third-party space, yours, contiguous; or they can office at their headquarters, typically Northern Virginia.

Do you have a sense for what sort of ratio you typically get with the defense contractors?

How much of the -- how many of their people, what percentage are, for example, on base or contiguous to the base versus at their headquarter location?

So I don't have a statistical number to share.

I can say that there are rare occasions when people are invited to do business in the government space.

But generally, a contractor can't lease space from the U.S. government on a base.

So I would hypothesize that, that fraction is pretty low.

Well, I think it's a little bit like a accounting firm just going to their offices.

And the way the defense contractor world works, when they're bidding, it's either accommodated or unaccommodated, and one of them relates to the defense contractor as personnel just occupying NSA or DoD space.

Not leasing it, but just occupying it as they execute on their defense contract.

Does that help at all?

Well, I can tell you this, John.

You referenced things in Maryland and we have very healthy inventory of occupied space.

With defense contractors growing, the nature of their business is a question you need to talk to them about.

Okay.

Well -- and the reason I'm asking is I did talk to one of them last week and they said 70% of their people fit in NSA or DoD's space, not third-party leased space.

So I'm just trying to get a sense for that little nuance of your business.

John, I can neither confirm that contractor's facts nor deny them.

I can talk about our business.

I can talk about growth in lease space permission acceleration in a variety of locations.

Our next question comes from Tom Catherwood with BTIG.

Steve, just wanted to talk about the data center shells.

So you mentioned that there is the 5 remaining from the initial list of 11.

As far as the sense of timing on those, has anything shifted from when you first put out that list?

And do you need to take down any more land in order to get those started?

So we're under contract on every chunk of land we need.

We have a couple of closing dates later in the year.

The timing has been fairly fluid, depending on zoning and other approvals.

But generally, it's on track maybe a month or 2 on average later.

But as I said, we expect to get the final 5 before midyear next year.

Okay.

And then you mentioned kind of the next wave of potential data center shell developments, and you said 2020.

Were you referencing 2020 completions or 2020 executions?

Or could we kind of not see a new wave of starts until then?

Well, first of all, I was referencing executions.

And secondly, some healthy conservativism (sic) [conservatism] in that answer.

Got it.

And one more for me.

You guys took 6950 Columbia Gateway Drive offline this quarter.

What are the redevelopment plans there?

And are you targeting the design to a particular type of company or industry?

Sure.

So that building -- it was the first building that COPT actually built in this park.

Functionally, a great building.

But what we found was some of the redevelopments we've done is introducing kind of some new architectural treatments.

We've been able to attract some of the really fast growing cyber and Defense/IT techy tenants, primarily cyber.

So we're kind of repositioning the look and feel for that cyber tenant.

Got it.

And can you remind me of what yields you typically target when you do these types of redevelopments?

So minimum, 8. And on incremental, it's north of 10 routinely.

And activity is good.

Yes.

As long as we're talking about that, we've got a bunch of pretty exciting tenants interested in that building.

We just started some repositioning of the landscape and then our construction commences in earnest next month.

But we expect to be preleased pretty quickly or significantly.

Our next question comes from Blaine Heck with Wells Fargo.

It looks like development spending is set to ramp up pretty significantly from first half levels.

Is that all due to a 2100 L Street?

And I guess, should we look at that Q3 and Q4 spend guidance as a fair run rate as we think about 2019?

Blaine, the third and fourth quarter have a few sort of unique transactions in them.

Not only do they include, as you said, the commencement of the construction at 2100 L, but we also have the closing on some of those land parcels that Steve just referred to for the balance of the data center leases that we're doing.

So that's sort of some of the anomalies running through Q3 and Q4.

With respect to run rate, I think for 2019, it's a development spend that's probably in that $300 million to $325 million in total.

It's probably consistent with what we've done this year or what we plan on doing this year.

Okay.

So related to that, you guys have the $167 million remaining on your forward equity commitment.

The second half of development spend is higher and somewhat continues into 2019.

So how are you guys thinking about sources of funding to cover that development spend as we look forward?

So for a portion of our development spend for -- that's 2100 L Street, all of our equity is in today and we're in the midst of closing our construction loan that's going to fund the balance of that development project.

That's in the ground, they're starting to go in the ground now through the end of 2020, when the building is complete.

With respect to the equity component of the remainder -- of the development pipeline for next year, we continue to -- we'll monitor our stock price.

We have been consistent about saying we would match fund the development investment with ATM draws if we believe it's the right price.

If not, we have access to venture capital for some of our data center shells or office buildings to raise that equity capital to continue to fund the development pipeline.

Okay.

And since we mentioned 2100 L a couple of times, can you guys just talk about the demand trends you're seeing in the broader DC office market, and specifically at any incremental interest in 2100 L?

I prefer to speak to just directly 2100 L as opposed to the broader demand trends because we just -- this is our one project under construction.

As Anthony just said, we started construction last week.

And I'm happy to say that we have 3 prospects that account for 80,000 feet, which is the amount of office space we have left in the building that are active LOIs that we're negotiating.

So 2 are 20,000 square-foot deals and a 40,000 square-foot deal.

So frankly, I'm very pleased with where we stand right now on those transactions.

And so that's the update on 2100 L.

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

A couple -- or just a quick follow-up, first, on the Columbia Gateway asset that was put in redevelopment.

Was that contemplated in previous aims to our occupancy guidance for the year?

It was.

Okay, great.

And the development leasing guidance that was increased by 200,000 square feet, can you break that out between how much of the incremental leasing is data centers versus office leasing?

So it's primarily office.

The data center plan is tracking to what we expected, so it's other development beyond that.

Okay, that's helpful.

On Page 11 of the presentation, you guys laid out a pretty high renewal rate on larger leases expiring in 2018, 2019.

Can you give a sense of the expected renewal rate on the remaining, call it, 1.8 million square feet of smaller leases through the end of next year?

Yes.

I think with respect to overall retention for 2019, our expectation is that, on average, we're going to continue to be in that sort of mid-75 -- mid-70% range of overall portfolio renewal.

Okay, okay.

That's helpful.

And then sort of a similar number for the back half of '18?

Yes.

Okay.

And then just last one for me.

We recently saw the Army choose Austin as a location for its Futures Command center.

I think it was driven partly by the kind of tapping into the highly skilled labor and being close to private sector innovation.

Do you think that could start a trend where Defense tenants increasingly choose to be in more urban settings and kind of further away from the bases to sort of attract and retain the talented workforce?

I don't.

If you read the government documents pertaining to the objectives for Futures Command, it's really to gain access to innovation that's outside of the defense contractor industry.

And it's to accelerate the identification and the implementation of technologies from other sectors.

So I don't anticipate it's going to have a material change in the way defense contractors operate.

And my understanding is the Futures Command is going to be somewhere in that 30,000 to 50,000 square feet.

Okay.

I mean, do you hear from your defense contractor tenants at all that, jeez, it's hard to attract the talent we need in kind of suburban Maryland versus maybe [infill] DC or whatnot?

Is that a comment you've heard from people?

No, it really isn't.

One of the things we like to point out about our success at Columbia Gateway is it's really the first high-quality development you can access from outside Baltimore, and the commute is very quick.

It's a 15-minute drive.

So -- and other parts in the area had the same kind of travel.

So no, that's not a statement we've heard.

Our next question is from Rich Anderson with Mizuho Securities.

So a question on forward leasing, last question, '19 and perhaps even 2020, 17% and 14% of your portfolio expiring.

It sounds like you feel kind of confident about that and you're kind of high or above 70% retention.

But can you talk about where that's happening?

And the risks that there might be that maybe you won't be able to keep up with the retention pace that you're talking about this year?

So I don't have that breakdown in front of me.

But for the last few years, significant portions are in the Fort Meade.

It's 65%.

65% in the Fort Meade corridor adjacent to central missions.

We expect that to be very high.

The retention challenge that we had earlier in the year was early renewals on some nondefense leases that we had cut in 2016.

We have good activity on backfilling that, but by and large, our Defense/IT retentions have been extremely high.

There's nothing in the dispersion of our expirations that should change our general feeling that we'll be in the mid-70s as a retention rate.

Okay.

And then on NoVA B and the work you're putting together on 310 NBP, I'm curious, Steve, you said that it takes time for some of these defense budget increases to make their way through the bottom line leasing for you.

But would you be able to say if any of these 2 situations are tied to that?

I mean, in your conversations with the incoming tenants or potential incoming tenants, are they saying kind of explicitly that it's about -- or it is about the contract awards that are coming through from the development increase -- the development budget increases?

Or is it sort of separate issue at that point for them?

So all procurement by the government needs to have the budget approval.

So in a sense, yes.

I mean, everything's tied to approval of the defense budget in one way, shape or form.

The current environment that we're experiencing is more timing and process.

And it's not awaiting incremental growth and spending.

(Operator Instructions) Our next question is from Rob Simone with Evercore ISI.

I'm running out of questions here, but just wondering if, Steve, I think you may have touched on this on a prior call, but with -- and this was leading up to the NoVA B lease being signed.

But now that NoVA B is dealt with, what are -- are there any updates on the next kind phase of that park?

Anything you can share with us at this point?

Other than we have customers planned for future occupancies in that park, it's master planned for a consolidation of the central mission.

Nothing beyond that, but our confidence level is very high that we'll fulfill the entirety of the capacity of that site, which is 1.37 million square feet.

Okay, great.

Understood.

And just a quick follow-up.

We've kind of been canvassing all of our -- all the office names that we cover.

But have you guys internally taken a look at, just in terms of earnings or an FFO per share impact and what the change in lease accounting could mean for you next year?

Or is it too early?

So some companies have given like a preliminary view.

I'm just wondering if you guys are thinking about that internally at this point.

Sure, Rob.

The impact for us for next year is going to be slightly over $0.01.

And in terms of the -- it's $0.01 down in terms of the amount of incremental leasing expense, leasing cost that we will be required to expense versus capitalizing the current year.

And our next question is from Chris Lucas with Capital One Securities.

Anthony, just a quick question on the forward equity.

Can you remind us when the date is that you're supposed to have the issuance wrapped up?

So the total period we had was 18 months.

So we have until the second of April to fund -- April 2019 to fund all of the proceeds that we raised.

And then while the forward is outstanding, is it possible for you to issue additional equity outside of that?

Yes, it is.

There's no restriction.

We had a 30-day lockout, I think it was, after the initial transaction was done.

But there's no prohibition to issue equity until -- to wait to have to fund all of the forward proceeds.

And our next question is from Jamie Feldman with Bank of America Merrill Lynch.

Steve, at the end of your comments, you kind of wrapped up listing a bunch of things to focus on.

One of them, you said, was multiple new facilities in several locations.

Should we assume -- are you thinking about additional markets for some of these new facilities?

Or this is still within your footprint?

Within our footprint on land that we already own.

On land you already own.

All right.

Great.

And then, Anthony, can you talk more about the operational savings in the quarter and how sustainable that better margin is going to be?

Or is it something maybe that comes back in the back half of the year?

So about half of the operational savings will come back in the second half of the year that really were deferrals of R&M projects that we had planned for the second quarter that got pushed into the third quarter.

And another half or $0.01 is really operational efficiencies we've gained as compared to our original budget for the year.

So that was really the reason for the moving up of the midpoint of our guidance range.

Okay.

So the efficiency -- were there new programs put in place to drive margins down?

Or maybe a little bit more color?

So it's a lot of different sources.

It's effective tax appeal, it's great energy management, it's squeezing cost out of R&M.

We've got a fantastic operating team that looks at every spend as an opportunity to be more efficient for the shareholder.

Is that the last question?

So 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.

And thank you for your participation today in the Corporate Office Properties Trust second quarter earnings conference call.

This concludes the presentation.

You may now disconnect.

Good day.