COPT Defense Properties (CDP) 2019 Q4 法說會逐字稿

Welcome to the Corporate Office Properties Trust Fourth Quarter and Year-end 2019 Earnings Conference Call. As a reminder, today's conference call is being recorded.

At this time, I will turn the call over to Stephanie Krewson-Kelly, COPT, 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 fourth quarter and year-end 2019 results as well as our guidance for 2020. With me today are Steve Budorick, President and CEO; Paul Adkins, Executive Vice President and COO; and Anthony Mifsud, EVP and CFO.

Reconciliations of GAAP and non-GAAP financial measures management discusses on this call are available on our website and in the results press release, supplemental information package and the results presentation posted on our website. Before I turn the call over to Steve, a quick reminder that forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our SEC filings. Actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update them.

Steve?

Good afternoon, and thank you for joining us. The company had a tremendous year in 2019, meeting or exceeding all of our business objectives, including operating leasing, government leasing, renewal leasing and retention rate, new development leasing at record levels, capital recycling, year-end debt levels and development investment. Importantly, our achievements position the company to deliver modest growth in 2020

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place that suggests the 2021 defense budget will increase by another 2% to 3%. All 5 of the demand types we have been discussing since the defense spending increases commenced in 2018 have recovered and produced solid achievements to benefit our shareholders.

Last year, RedStone Gateway emerged as our fastest-growing Defense/IT location. When we deliver the 6 properties under development, the park will contain 1.4 million square feet of highly leased operating properties. We have great momentum in our leasing, solid support from the defense space and law enforcement activities located on the RedStone Arsenal, and have strong indications that additional opportunities may emerge in 2020 and 2021.

Now let's discuss the details. We captured demand across the portfolio with excellent leasing achievement. Our 4.9 million square feet of total leasing was the highest volume ever, exceeding the 2010 record by 600,000 square feet.

The 2.2 million square feet of development leasing was 1 million square feet more than our prior record achieved in 2012. And our 422,000 square feet of development leasing with the government was our third highest in our history. Our strong vacancy leasing was driven by defense industry expansion as Defense/IT tenants committed to expansions to accommodate mission growth. Progress was incremental in nature and widespread throughout the portfolio. The 784,000 square feet of vacancy leasing was the highest volume since 2010 and consisted of 91 transactions, with an average deal size of 8,600 square feet. The defense missions we serve are now well-funded and addressing pent-up requirements. In the past 2 years, the U.S. government has leased 417,000 square feet in our operating properties.

We have 2 markets where demand is outpacing supply and where we have built on spec to create inventory. Over the past few years, we've delivered 3 spec buildings in Huntsville and one in College Park at the University of Maryland, all 4 are 100% occupied. And we started the fifth spec building in September in College Park, which is already 25% leased; and in November, we started our 6 spec building 8000 Rideout Road in Huntsville, and we're in discussions with multiple contractor prospects.

During the past 2 years, defense contractor demand for new facilities has also recovered, and we've signed 5 build-to-suit large pre-lease transactions, totaling approximately 600,000 square feet, adding 9 data center shell build-to-suit projects containing 2 million square feet. Since 2018, we've completed 14 build-to-suit and large pre-lease transactions, totaling 2.6 million square feet.

Additionally, the government has returned to executing on long-term plans for new facilities at our secured campuses. In 2019, we executed 388,000 square feet of government leases for our anti-terrorism force protected buildings in secured campus locations, consisting of a 348,000 square foot pre-lease for NoVA C and a 40,000 square foot lease at 100 secured gateway.

Since the beginning of 2018 and including the vacancy leasing, we've completed over 800,000 square feet of new government leasing. We expect continued strong leasing throughout our portfolio. Our initial development leasing goal for 2020 of 1 million square feet is 11% higher than last year's initial goal and is supported by the 2 million square feet of opportunities we have in our shadow development pipeline.

Having executed on transactions that more than doubled our initial development leasing goal, we increased our capital raising commensurately to fund those opportunities. Modest dilution from last year's asset sales will temper this year's FFO growth to around 2.5%. However, the incremental EBITDA from well-leased developments we've placed in service this year and next will produce robust FFO growth in 2021.

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

Thanks, Steve. We ended the year with strong leasing and operating momentum. Fourth quarter total leasing of 659,000 square feet included 162,000 square feet of vacancy leasing that increased our core portfolio to 95% leased at year-end, a 60 basis point gain over the start of the year. The largest increases occurred in the National Business Park, which improved by 190 basis points and is now 91% leased. And in our Navy Support subsegment, which improved by 210 basis points, ending the year at 95% leased also.

During the quarter, we completed 158,000 square feet of development leasing. Yulista Aviation leased an additional 47,000 square feet, exercising its expansion option for the remainder of 8,600 advanced gateway and expanded the size of 7,600 advanced gateway increasing its fully leased RedStone campus to 366,000 square feet. We booked a 25,000 square foot lease with a cybersecurity tenant at 4600 River Road, our current spec building at the University of Maryland. And Morrison Foerster leased an additional 20,000 square feet at 2100 L, the office component of which is now 57% pre-leased.

For the year, our 2.2 million square feet of Defense/IT development leasing included 1.2 million square feet of data center shell build-to-suits, 548,000 square feet at RedStone Gateway and 422,000 square feet with the U.S. government. Our same-property portfolio was 91.9% occupied at the end of the year, which was in line with updated guidance that incorporated portfolio composition changes equating to a 70 basis point decline. The change in portfolio composition during the year resulted from our decision to joint venture 1.3 million square feet of data center shells that were in our same-property portfolio and to decommission DC-3.

We continue to make long-term strategic decisions regarding renewal economics to manage capital costs, eliminate downtime and maintain occupancy. During the year, we completed 1.9 million square feet of renewals, locking in 2.4% annual rent escalations. Last year, 4 large renewals, totaling 442,000 square feet rolled down a weighted average 13.6% and drove our cash mark-to-market down 5.8%, 30 basis points below the low end of our updated guidance. Each of these 4 renewals rolled off long-term leases and renewed with an average term of 8 years. Excluding these 4 transactions, the remaining 1.4 million square feet of renewals in the year rolled down an average of 2.6%.

During the fourth quarter, 1 of these 4 renewals drove down cash rents 8.4%. A 140,000 square foot tenant was rolling off a 10-year lease. The tenant recently won a new government contract and needed to more than double its space. We renewed them at the high end of market and captured their expansion, which more than doubled their footprint. The tenant now leases 310,000 square feet for a new term of 10 years. Cash rents on the remaining 200,000 square feet of renewals during the quarter rolled down 2.7%.

Renewal leasing in 2020 looks strong. The 1.5 million square feet scheduled to expire are significantly less than recent years' volumes, and we forecast another strong tenant retention rate of 70% to 75%. In April, we have one large nonrenewal at 6721 Columbia Gateway, which we built in 2009 for a single tenant user. We already executed a lease with a defense contractor for one floor, leaving 100,000 square feet to lease. We are implementing a proven amenity enrichment strategy as we convert the building to multi-tenant use and expect demand for this Class A product to be robust. As discussed on recent calls, at DC 6, our wholesale data center Manassas, one tenant gave back 0.5 megawatt last week -- last month, and we expect another tenant to give back 0.75 megawatt in July. After which, we expect no further contractions or terminations. We are in negotiations with the 11.25-megawatt user, whose lease expires August 1, and we anticipate a full renewal.

I'll conclude with an update on development activity. In the fourth quarter, we placed 375,000 square feet of fully leased development projects into service, bringing the total for the year to 1.2 million square feet, all 100% leased. We have 2.3 million square feet of active development projects, which are currently 79% leased and which will increase our core portfolio by 12%. Among these 13 projects, we have 490,000 square feet of availability and are currently negotiating leases for about half that volume. Executing on this activity will bring the development proper -- pipeline to 88% leased. During 2020, we expect to place 1.4 million fully leased square feet into service and to similarly lease the remaining 900,000 square feet under development before placing them into service in 2021 and 2022.

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

Thanks, Paul. Fourth quarter and full year FFO per share, as adjusted for comparability, of $0.50 and $2.03 met the midpoints of our updated guidance. Our annual results were $0.01 lower than original guidance -- the guidance midpoint as a result of higher-than-budgeted dispositions to fund our expanding set of development opportunities. Operations were strong as tenant retention of 77% for the year and 84% in the quarter combined with higher operating margins to drive better-than-expected same-property cash NOI growth of 3.9% for the year and 6.2% in the quarter.

During the year, we invested $417 million in development activity, 1.5x the $275 million midpoint of our original guidance. In addition to issuing the final $46 million of our 2017 forward equity facility, we raised $311 million, which was more than double our original disposition guidance of $125 million to $150 million by selling a 90% interest in 9 of our data center shells to a joint venture with Blackstone. Our data center shell dispositions clearly demonstrate our ability to create value through development.

Our 2020 plan is summarized on Slides 20 and 21 in our presentation, and it's straightforward and low-risk. The $2.08 midpoint implies 2.5% growth over last year's results and includes the tenant contractions and nonrenewals we've experienced and anticipate at DC-6, which equates to approximately $0.045 of dilution. The guidance also includes $0.015 of dilution from upsizing our 2019 dispositions. We plan to invest between $325 million and $375 million in development and have no acquisitions planned.

We will continue to conservatively fund our development investment to maintain our balance sheet strength. To maintain leverage levels, our plan requires between $70 million and $90 million of equity capital, less than 25% of our expected investment. As you know, we have access to our $300 million ATM to issue equity, which in light of the value creation inherent in our developments, would be accretive to FFO and NAV.

Alternatively, we have more than adequate capacity in our remaining wholly-owned data center shells to raise the equity from additional JV sales. The incremental EBITDA from developments placed in service will maintain our debt-to-EBITDA ratio at approximately 6x. We forecast same-property cash NOI growth for the year of 1.25% to 2.25%, driven by moderate increases in same property occupancy, modest rent roll downs of 1% to 3% and impacted by 100 basis points from the nonrenewal at 6721 Columbia Gateway. Lastly, we are establishing first quarter 2020 FFO per share guidance with a midpoint of $0.48, which is $0.02 below fourth quarter 2019 results. The difference is due to $0.015 of higher budgeted seasonal costs for snow removal and utilities, and $0.005 of dilution from selling JV interest in 2 data center shells in December.

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

Thank you, Anthony. We have 2 key takeaways from this call. The first is that we expect growth in defense spending to support higher occupancies and continued strong leasing across our portfolio. Since bottoming in the fiscal year 2015 and including the fiscal 2020 budget, the DoD space budget has increased by $137 billion, representing compound annual growth of 5% for 5 years. There continues to be strong bipartisan support to fund defense and intelligence missions. Against this backdrop of solid defense growth, we expect to continue to see strong steady demand for new and existing space across our portfolio.

The second key point is that 2019's achievements have laid the groundwork for us to deliver solid FFO growth this year and robust FFO growth in 2021. Last year's development leasing and equity raise have created waves of future EBITDA as developments are placed into service. This incremental EBITDA will reduce our future equity requirements and allow us to gain FFO traction, while maintaining a strong balance sheet.

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

(Operator Instructions) And our first question is from Jason Green with Evercore.

Given the stock's trading at roughly $30, and you need, call it, roughly $80 million for development in '20, I guess, why not just pull the ATM down now and not have that something -- not have to be something that you have to deal with moving forward. I guess, what's the thinking there?

Well, until this call is over, we've been in a lockout, Jason. So we plan to maintain our optionality. We may use the ATM, and we'll do it in a measured pace. And we also have flexibility to either increase the JV or add JVs at our shells.

Okay. And then just turning to the development tab. I guess, if we assume the office projects get an 8% yield and the data centers get a 6.5% yield, on our math, it looks like the current [CDP] bucket would deliver about, call it, $50 million of NOI. Is that kind of the right ballpark and way to be thinking about this future growth that should come from the development pipeline?

Yes, that's right on the money.

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

On the large nonrenewal in April, what's the gross square footage on that? And when does the partial backfill commence?

So it's 131,000 total square feet. There's about [100,000] that won't -- that'll come vacant and the commencement is immediate, because the tenant is currently subleasing the space now.

And then what do you think downtime on that? Or do you guys budgeting as many capital you need to spend on that?

I think as Paul commented, we're going to do a little bit of capital on the ground floor to introduce some of the amenities to help us be so successful with our redevelopments in this part. And it's modest. I don't have the budget number, but a couple of million.

The space is in great shape. So we expect TIs to be reasonable and downtime up to 12 months.

Weighted average 9% to 12%.

Yes. 9% to 12%.

Helpful. And then you guys had good success down in Huntsville last year. And elsewhere, the NBP has been a little bit quiet recently. Of the 2 million square foot shadow pipeline, how much of that is NBP, if any?

None of the shadow development pipeline -- well, the rest of 310 NBP is in that number. And there's no new projects at NBP. We built our last building, I think, around 2016, which was 540 NBP. We initially subleased or pre-leased half of it, that tenant contracted a bit. And we're making progress filling that. Besides some building set aside for the government and a couple of floors in 540, NBP is highly leased, we have we have 3 parcels that are about 20,000 square feet that are vacant. And then 10 that are below 10,000 square feet.

So excluding NBP 310, we're -- well, when we leased and NBP 310, we'll be about 95% leased in the Park.

Okay. And I'm just curious, we've seen government spending tick back up, contracts being put out. And I know things are always fluid where contracts go. But just given how well leased the Park is, are you guys surprised at all to not have a demand pipeline there for a new building?

No, I'm not surprised currently. One of the dynamics that has occurred in and around this region has been defense contractor mergers over the last 3 or 4 years, and have generated some modest reductions and compelled us to backfill those spaces.

So that's absorbing some of the growth that would otherwise drive the next product. But I wouldn't be surprised at all to see us initiate a new building in 2021.

Yes. We call the shadow development pipeline, those projects over the next 2 years that we think are 50% or greater likelihood of happening. So I would say that the NBP is -- has potential, but just doesn't rise to that threshold right now.

And our next question is from Manny Korchman with Citi.

I know it's a little bit early to be thinking about '21, but you guys have mentioned a couple of times in your presentation on the call that the strong growth going into '21. If we just think about the pluses and minuses sort of what's left out there, what negative should we be thinking about? And on the flip side, you point out leasing at like 310 NBP, what are the leasing to happen over the course of the next few months that would actually help drive that 2021 growth?

So let me take the hard part first. I think the one large risk that you should keep an eye on is the renewal at DC 6 of the 11-megawatt user. We're in discussions, preparing for their extended term. But it's not signed yet, and it's an important deal for us that would represent a pretty big negative if we didn't get the renewal. So at leasing, we did a lot of leasing last year, obviously, that's going to -- those tenants build-outs will occur during the year, and occupancy will increase. And we project a nice gain in occupancy over the course of the year, widespread throughout all of our properties.

One of the keys is the commentary that we gave on the development placed in service during this year and their contribution, not just to this year, but on an annual basis next year. And that really is what drives our confidence about the growth commentary that we've given on 2021.

Got it. And if we think about retention at that 70%, 75%. You've got the nonrenewal that we've talked about at Columbia. For the other nonrenewals or the non-retains, if you will, how much of that is based on rate versus those tenants not landing the contract, not needing the space, going elsewhere, sort of non-rate-sensitive reasons?

I don't think very much of the nonrenewal portion that we're looking at has anything to do with rates. So it is just tenants relocating...

Or contracting.

Or contracting in the normal course of business. I mean, it's -- we still think our tenant retention rate is excellent. And -- but none of it has to do with rental rate sensitivities.

And our next question is from Tom Catherwood with BTIG.

Excellent. Page 9 of the presentation, I think it was really a helpful visual, and it speaks to the driver behind a lot of 2018, 2019 leasing. But when I look at 2020 guidance, it suggests maybe 1.3 million square feet of new and renewal leasing, maybe 250,000 square feet of vacancy leasing and the bulk being renewals. That's down markedly from '18 and '19. Is that a reflection of slowing demand in the market? Or is that just a reflection of a lower year of expirations and kind of maybe some of your better space is already filled?

Are you driving at the new leasing or the renewal level?

So I'm not looking at development leasing, I'm just looking at new and renewal. If I look at what's implied by getting to a 93.5% lease on your same store.

Got it. So from a renewal standpoint, we have a much lower volume of maturing leases next year than we've incurred for the last 3. So that's a component. And then with our portfolio being as well leased as it is in many locations, we just have less inventory available.

So it's not a matter of -- I guess, asking it a different way, are you continuing to see the same volume of demand that you had been for the past, call it, 12 to 18 months? Or has there been a shift there?

Yes. Absolutely. We have similar levels. We run a -- we have a process where we manage all of our potential opportunities every week. And that typically has 800,000 to 1 million square feet of opportunities from names and tours to prospects. And that's steady, very steady, as we speak.

Got it. And then in November, the FBI formally announced a $1 billion build-out in Huntsville. I think they even went so far as to refer to it as HQ2. It looks like the bulk of those jobs won't relocate until 2021. But have you started to see any ancillary demand related to that move?

And kind of what is your appetite for expanding your holdings down there? Or can the Gateway fully support the build-out that you're seeing?

So we actually have 2 leases that we achieved related to that pivot of those businesses or that component of the agency to Fort Meade.

We have over 3 million square feet of additional development capacity on our development there and about 1 million of that is in the secured campus. So we're extremely well positioned to capture any relocating demand should that opportunity occur.

Understood. And then maybe a last one for me. Paul, you mentioned the expansion with Morrison & Foerster over a 2100 L Street. Can you update us just on the progress on the balance of the building?

Does Morrison & Foerster have any expansion options where you're holding floors off the market for a while? And then remind us how your rents kind of compared to projects that started coming out of the ground after you guys?

Sure. Well, as I mentioned, we did sign another 20,000 square feet with Morrison & Foerster and that was at a rent that was actually higher than pro forma. So we're excited about that. That leaves 76,000 square feet of vacancy -- of office vacancy left in the building and their expansion options are actually -- there's nothing else being held off the market. They have a relatively limited 5-year expansion. And then after that, there's no other encumbrances for 15 years, which we think is great positioning for leasing the balance of the building. We're still excited and believe in the rents that we've underwritten for the project and have pretty solid activity for the balance of the building. So you may have noticed that we did move the delivery from Q1 to Q2, which is really just a 2-week delay from the end of March to mid-April. But it will have 0 impact on Morrison Foerster's lease commencement dates, both for the original space they leased as well as the additional floor that they took.

Got it. And then the balance of the space that's left, is that kind of towards the bottom of the building? Or is it dispersed throughout the building?

Yes. It's 5. So they're taking 10 through 6; 4, 3 and 2 are unencumbered. Half of 5 is 15-year space, and half of 5 is 5-year -- 5- to 6-year space, of which we are going to -- we have a prospect for that, but we're also going to move forward with the spec suites program, per 2 suites, which has been, as you probably know, enormously successful in D.C. for the last bunch of years.

Our next question comes from Blaine Heck with Wells Fargo.

So just a follow-up on Huntsville. Can you guys speak to the economics on those developments and the magnitude of the difference between the yields or margins that you guys can achieve on those projects versus the other opportunities that's kind of making you guys much more active in Huntsville than elsewhere?

So all of the developments we've completed have cash yields north of 8% in Huntsville. So they're very solid. It's a typical floor for our office development programs, and we're achieving north of 8% at College Park. We have been more aggressive on data center shells. I think we disclosed our yields in the past typically about 6.75%, but those are valuing at a 5% cap.

Okay. That's helpful. And then sorry if I missed this, but can you talk about the interest in 100 Secured Gateway and 8000 Rideout Road, which I think is where most of the unleased spaces and your developments there at this point?

So we're negotiating the lease for the major component of 100 Secured Gateway vacancy. In recent supplements, we've increased the spend and the size of that building to accommodate unidentified additional need, but we expect by the end of the quarter, we should be 80-ish percent leased on that building. And then secondly...

Fully leased by year-end?

Right. And then 8000. Well, Paul, you've had...

We have a lease-out for -- so that's 100,000 square foot spec building delivering in November of this year. We have our first lease out with a well-known tenant, and we have more contractor prospects than we have space. So we're -- we expect to be very successful during the course of this year in stabilizing that asset.

What we're doing with 8000 gateway is we've approved the spend to build this building and then immediately pour the foundation for the next building, cut our delivery time. So as we finish this lease-up, we'll be in a position to come right out of the ground very quickly for the next one.

Okay. Great. And then you guys touched on the 4 large renewals that dragged the average cash rent spreads down in the second half. Are there any similar kind of specific situations where you have large renewals that you expect to be big drags in 2020?

No. If you look at our change in rent guidance, it's minus 1% to minus 3%, which is really the way the balance of the portfolio performed, excluding those 4 deals, and they were all strategic tenants that we wanted to keep coming up very long leases. One of those tenants has been in their space for 20 years.

Our next question comes from Dave Rodgers with Baird.

Paul, I guess, you've answered this, maybe in a couple of different ways, but on the 2 million square feet of development demand that you're seeing as opposed to maybe asking by market, can you tell us how much is government? How much is data? How much is defense? And then maybe how much might be regional or if any?

About half of that demand is data center shells. And this is over the next 2 years. So that's the pipeline of that. Another large component of it is additional demand that we see in the pipeline at down in Redstone Gateway. And the rest of it is scattered amongst the Fort Meade/BW Corridor and in Downtown D.C.

About 20% is government projects.

20% government. And when you say demand in D.C., are you just talking to 2100 L. Or is there more there?

Yes.

Steve, I guess, going back to the dispositions versus equity, I think, in one of the press releases, your comment was, "no need to really do equity." It sounded like maybe just in your comments earlier that, that was maybe more at the top of mind. I guess, how do you weigh that versus the remaining data center shells first and kind of saving equity for maybe a higher price in the future?

Well, as Anthony pointed out, where we're trading today, issuing equity on the ATM will be accretive to both FFO and NAV. So I think it's good choice for us. And when we look at the value in those data center shells, I kind of like to think of them as a long-term capital reserve that we could tap in the future. Well, we don't have access to equity. So I would not be surprised if you see us start to draw in some capital with the ATM.

Okay. Fair. And then I guess, maybe going back to the '21 guidance, you used the term robust quite a bit and the development pipeline explains a lot of that. But maybe Steve or Anthony, as you look at '20, it looks like maybe your guidance implies a $0.05 ramp between the first quarter and the fourth quarter or something to that effect. But how much of that ramp do you start to see in the second half of the year? How does that kind of play out in 2020 in your mind as the development comes online?

Yes. The ramp is really back-end weighted. So you'll see some of it in the third quarter, but the majority of it, that will get to a point where it will represent a fair representation of what we do in '21 in the fourth quarter.

Our next question comes from Rich Anderson with SMBC.

First, I want to say, I think the disclosure -- I haven't said this before, is like one of the most user-friendly for my taste. And I just wanted to mention that I think you do a good job with the disclosure quarterly. Tough on my toner cartridge, but that's another thing. But now to my questions. First one is, you've kind of seen the defense spending rightsize itself a few years back. And now it's growing basically at a 2% per year. I'm wondering, when you think about the long-term prognosis of your company, how do you -- and once you kind of get through all this development, EBITDA coming online next year and the year after. Is the same-store growth profile going to be anything better than sort of whatever the defense budget is?

Or is there some way to stay at or above 3% when your key demand driver is only growing at 1% or 2%?

Well, our rental levels are not, per se, related to the defense budget percentage of increase. They're really driven by the market in which those buildings operate. So I would bifurcate this out of growth and budget from growth and rent -- rent to local -- the local issue driven by supply and demand.

We've -- the last several years, we've typically rolled down 1% to 3% on a cash rent basis. What we have to remind people is we have embedded growth in our lease structures, that over a long period of time, can exceed the growth in the market rent, and that's what really drives that 1% to 3% reset.

Our average escalators are 2.4% to 2.5%. So on average, we take a 1-year step back and then we progress forward with growth in the portfolio. But I think our portfolio and our rent structure, barring spiked -- a condition where we can spike rents, it's a 2.5% growth portfolio.

Yes. Okay. I mean, that's fair. I get you. It's a market-driven phenomenon. But any other day, it's certainly the defense spending influences the market one way or another?

Correct.

In terms of same-store -- I should know that DC-6 is not in the same-store pool, correct?

Correct.

Yes. What if it was? Like what -- I know there's a lot going on there, but what would be the impact on same store, if it was included?

So -- yes, go ahead.

I don't know what the percentage impact would be, but if you look at the disclosure that we put out last night, DC-6 generated a little over $15 million worth of cash NOI in 2019. Our guidance for that property that we also disclosed last night, it was between $9 million to $10 million for 2020. So that asset alone is forecasted to go down. Call it, $5.5 million at the midpoint in cash NOI. So off of a base of $260 million worth of same office cash NOI, you're probably talking 2% there.

And so that -- it'd be 2% down this year, but then again, you're going to get a reversal of that when we reestablish income in the vacancy we get back.

Right. And Steve, I appreciate the candor on the core tenant there. Is the guidance assuming sort of a flat renewal? Or do you have something baked in, where you have a downward move on the rent at DC-6?

Well, we've budgeted conservatively. I'll leave it at that. But I don't really want to negotiate that, at least in public.

All right. Last question for me is more of a modeling question. You have kind of a funky straight-line rent cadence to you. What would -- sometimes up, sometimes down. I'm curious, what should we be modeling for straight-line rent in 2020 and beyond?

For 2020, I would model about $2.5 million to $3 million in the first 3 quarters and slightly higher in the fourth quarter as some of the leases commenced from the new leasing from 2019 as well as some of the developments coming online.

So that total of about, call it, $10 million to $12 million is probably a good run rate. Our cadence this year was impacted a little bit by some -- one of the tenant contractions at DC-6 had a termination payment that showed up as a termination payment but then it had a straight-line rent write-off as a result of the contraction on that 1 full megawatts. It had some odd things running through it this year.

Our next question comes from John Guinee with Stifel.

Great. This is a very -- actually very impressive guidance because what you're saying, I think, is that it's going to ramp in the second half about the same time DC-6 falls off. Is that fair to say?

Probably not exactly timed that way. It will ramp slightly in the third quarter. But by the fourth quarter, we'll have the full impact of the decline in DC-6 as well as the ramp from the development placed in service.

Got you. Okay. Sort of along the same lines. Steve, what's -- is there any lease term fees or land sales in 2020? And what's the big picture on land? You still got about $290 million of land, which is a very big number relative to most people this day and age.

Well, the land that we own, John, is associated with priority defense missions and we like long-term holding that land to create the opportunity to expand as needed to support the missions we're aligned with. We cleaned up a lot of the smaller parcels that the company had accumulated over the last couple of years, we really don't have much left to clean up.

And with respect to termination fees in 2020, we're sort of budgeting our typical $1 million to $2 million.

But no more land sales?

Not in the forecast for 2020. When we think about what we have left to sell in terms of nonstrategic land, it gets a small parcel off of Dorsey Road and our land up at Northgate. But that's really it because we sold the bar in Frederick in the fourth quarter of last year.

Okay. And then looking at 2020, you're -- by the way, great disclosure, Stephen. Your in-place rents are $35.40, including $47 in Lincoln in Lake Lent and San Antonio and about 34.5% at Fort Meade/BW Corridor. Those are pretty big numbers. Do you think you can renew these things at pretty much flat on a cash basis?

Yes. Absolutely.

Listen, John. Just so you know, a lot of it -- the San Antonio rents, those are 2 of the buildings in our campus there that leases expire this year, each are 125,000 square feet. And the rents that we disclose are the full base rent plus recoveries from the government. So there is -- that's the reason they're at such higher rents, and that's expenses that the government asks to operate the facility down there. So we expect those leases to continue to increase, typical increase in our government leases across the portfolio. If you pull those 2 buildings out, the average rent on the renewing space is about $33 a foot, which is in line with what we accomplished in the fourth quarter of this year.

They don't have a call center in that building, do they?

Not that I know. Not in there buildings.

Our next question comes from Omotayo Okusanya with Mizuho.

Yes. Well, during the quarter, the very strong renewal rates, but again, negative cash rent spreads. I guess, could you just talk a little bit more around the strategy of ensuring the renewals, but kind of taking a little bit less rent? Exactly kind of why -- I get the long-term NPV of that, but why we continue to kind of have that situation just given your market seem to be very strong?

Sure. So let's just talk about the fourth quarter release. It was the 140,000 square foot tenant rolling off a 10-year lease, where that rent had grown at 2.5%, 3% for a decade. We renewed that tenant at market and at the higher end of the market, but the rent growth in the lease structure exceeded the market growth. Moreover, that tenant also needed more than 100% expansion. So yes, we took a little bit of a hit on that rent for sure, but we doubled their lease capacity. And importantly, they are reconfiguring their existing space and their expansion to serve a very high priority mission that we have great confidence we'll be in that building for a very long time.

So -- and then one last point. If you look at our full year mark-to-market, the change in actual rent is about $3.5 million that we lost. And if you look at the average rent that we've put in place, it's about $33 a foot. It equates to about 115,000 square feet of nonrenewal. So getting the renewal is far more important from an AFFO standpoint than losing the tenant, having no rent through downtime. And then [Pony] being up, big tenant improvements to replace them. And as that lease matures, the rent will again grow at the same kind of structure.

Our next question comes from Jamie Feldman with Bank of America.

Great. I mean, I know we've seen the JEDI in the press and then other cloud contracts. Can you talk about what you're expecting to see in terms of demand in different submarkets from that? And then are there any other major initiatives that have been announced that have yet to kind of flow through space demand?

Well, no. Both of those issues, there's not a lot of clarity. So JEDI is all tied up in Federal Court and the government accounting office appeal. And there's no telling when that will get resolved. And then with regard to space command, there's just been no announcement of an affirmed selection for the command and the supporting elements that could be at multiple basis for space command. I think that will play out over the next 12 months.

Okay. And what about the -- there was another government cloud contract before?

Yes, there is a big one. Yes, go ahead, Paul.

Yes. There's another -- almost the same size, if not slightly larger than JEDI that's been out there, but it has not been awarded yet. And again, we have very little insight as to its impact on the market. And don't think in any way it's affecting the continuation of our data center shell relationship and pipeline with our customer.

Okay. And then sticking with data centers, can you just talk more about the 2 tenants that are giving back space? Where are they going? And is there a risk if you start to see that more in the portfolio?

So we only had one tenant move out of the building. That was a gaming platform that was not that successful. The rest have just reduced the load that they're leasing and their footprint. So the good news is, if there is good news, we -- we're occupied to a level where we had very little floor space -- raised floor space to lease. So we'll now have a nice contiguous block to compete for the larger demands that have been in the market where we've just not had enough capacity to fulfill them in the past.

Do you think there's other tenants that have excess capacity as well or is space is being fully utilized?

This is it. All the lease is rolled from the original leasing. We do have an exciting prospect that we're not going to say a lot about. We hope to have some news in the next quarter or 2.

Okay. And then from the pickup in demand, I mean, what kind of rent growth have you seen in some of these submarkets, I guess, Northern Virginia specifically. But seeing if you can at least talk about some of your others?

Yes. Actually, Northern Virginia is -- picture is pretty solid. There's been -- our assets in Tysons Corner has seen roughly a 10% increase in rents over the last 12 months. So it has to do with the location of where those assets are walkable to metro and basically right at the foot of the Borough, the new multimillion square foot mixed use. So there is definitely rising rents, both in Tysons as well as Herndon along the Silverline. Just the amount of tech demand that that's emerging on the Toll Road and in Route 28 South Corridor.

So the outlook of our assets in Chantilly and the vacancies is also improving and has significantly improved over the last 3 to 4 quarters.

So we're -- we have some vacancy in Chantilly that we're repositioning 70,000 square feet. So we're cautiously optimistic about leasing.

And so the Northern Virginia and Tyson turned, in particular, is definitely rapidly strengthening corridor.

And then what about some of your other submarkets?

I would say, I mentioned Pax River is strengthening. We're 95% leased and getting tight, so we're raising rents slightly down in Pax River. Columbia Gateway is steady. We continue to be 94% leased. We do have the nonrenewal coming up here. So...

And each lease we sign in Huntsville is literally establishing a new market high.

Yes. So...

So if you say Huntsville, rents are like year-over-year?

So it's very cheap to operate those buildings. But we're getting rents in the $27, $28 range.

Right. And a couple of years ago, they were $22.

Expenses and taxes are down, like $3.

Is your gross rent $27?

Yes.

(Operator Instructions) And our next question is from Chris Lucas with Capital One.

Steve, just -- can you give us an update on the land position you have for the data center shells? It looked like it ticked up. Just kind of curious as to what sort of volume of data center square footage you have -- sort of an inventory that is not currently under construction?

Yes. So we've picked up one additional parcel to create capacity at one of our sites in the last quarter or so. And we have land capacity for about 1 million square feet in 3 different campus locations, some of which we expect to get this year and the remaining next year.

So has the customer changed at all their sort of pace of demand from you -- for you from -- for the data center shells?

No. I think, overall, the pace is steady. But remember, we had a really lumpy year last year, which contributed to 2 million square feet development achievement. We completed 5 leases. But over a longer period of time, I think the average is going to be right where it's been.

And then just on DC-6, I guess, the question always comes back as sort of why are you in the business of owning that kind of an asset given it's multi-tenanted, and it has not sort of core tenancy to it, at least not historically. Is there a view that at some point here, maybe you get lucky and get an additional lease on that this thing is something that would be monetized? Or has this become a longer-term hold for you?

Well, we certainly don't want to sell it when we don't have maximum value and we have capacity to lease. We've got a major lease to renew. So we're going to operate through the next few years, maintain optionality thereafter.

And I'm not showing any further questions in the queue. I would like to turn the call to Mr. Budorick for his final remarks.

Thank you all for joining our call today. We will be in our offices this afternoon, so please coordinate through Stephanie if you'd like a follow-up call. Thank you very much.

Thank you for your participation in today's Corporate Office Properties Trust fourth quarter and year-end 2019 conference call. This concludes the presentation. You may now disconnect. Good day.