Feb 10, 2015
Executives
Stephanie Krewson Kelly - VP, IR Roger Waesche - President and CEO Steve Budorick - EVP and COO Anthony Mifsud - EVP and CFO Wayne Lingafelter - EVP, Development and Construction
Analysts
John Bejjani - Green Street Advisors Brendan Maiorana - Wells Fargo Securities Michael Lewis - SunTrust Robinson Humphrey Chris Lucas - Capital One Securities Jamie Feldman - Bank of America Merrill Lynch Tom Catherwood - Cowan Craig Mailman - KeyBanc Capital Markets Dave Rogers - R.W Baird Emmanuel Korchman - Citi John Guinee - Stifel Anthony Paolone - JP Morgan
Operator
Welcome to the Corporate Office Properties Trust Fourth Quarter and Year End 2014 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. Ms.
Krewson Kelly, please go ahead.
Stephanie Krewson Kelly
Thank you, Santali. Good afternoon, and welcome to COPT’s conference call to discuss the Company’s fourth quarter and year-end 2014 results and our guidance for 2015, the details of which we released in a separate press release this morning.
With me today are Roger Waesche, President and CEO; Steve Budorick, Executive Vice President and COO; Wayne Lingafelter, EVP of Development and Construction; and Anthony Mifsud, EVP and CFO. As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release issued earlier this morning and on the Investors section of our Web site.
At the conclusion of management’s remarks, the call will be opened up for your questions. We remind you that statements made during this call may be forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and that actual results may differ materially due to a variety of risks, uncertainties and other factors.
Please refer to today’s press release and our SEC filings for a detailed discussion of forward-looking statements. Before turning the call over to management let me highlight that the Company posted its inaugural sustainability report this morning to the Investors section of its Web site www.copt.com.
We also launched our sustainability related Web site coptgreen.com. With that I will turn the call over to Roger.
Roger Waesche
Thank you, Stephanie and good afternoon everyone. 2014 was a solid year for our Company and 2015 is looking even better.
We continue to see strong demand for newly developed space that supports growing U.S. Defense installations involved in IT and Cyber Security.
When combined with their same office portfolio NOI embedded in development project is fueling our FFO and NAV per share growth. Including the two full building leases we announced yesterday, projects under construction exceed 1.5 million square feet and are 75% leased.
Additionally we are constructing two projects intended for U.S. government use.
When these are signed our development pipeline will be 98% leased. The Defense budget headwinds are over and the outlook for Defense spending is positive.
On February 2nd the President released his fiscal year 2016 budget request to Congress. The DOD base budget request of $534 billion represents a 7.7% increase from the current fiscal year’s budget of $496 billion.
Within the DOD base budget the Defense IT spending request is $37.3 billion which would be a 2.9% increase from fiscal ’13 levels. For the DOD cyber program the President has requested an 8% increase in next year’s budget to $5.5 billion.
Given the state of the world we expect Defense IT and Cyber Security spending to support a healthy pace of contract awards from various agencies and by extension continued demand for our advantaged locations. Due to the more favorable leasing environment our revenue at risk for 2015 net of leases in negotiation is only $6.1 million, whereas this time last year it was $11.1 million.
Additionally the $2 mid-point of our 2015 guidance range assumes an NOI contribution of $15.5 million from developments all of which is contractual. We’re confident in our occupancy forecast for the next 24 months on January 1st our 2015 same office portfolio was 90.8% occupied and we expect it to increase between now and the end of next year meaning 2016 to approximately 92%, there will be variability in some quarters as the space rationalization begun by Defense contractors in 2012 run its course.
However, we expect replacement leasing to occur at volumes that exceed contractions. With that I will turn the call over to Steve.
Steve Budorick
Thanks Roger. Fundamentals in our markets have been building towards more favorable leasing environment for several quarters.
Supply remains in check in each of our markets and demand continues to firm along three lines, our U.S. government customers and Defense IT contractors continue to need modern, efficient and strategically located properties to execute their missions.
Office tenants and healthcare, education and professional service industries are growing in and around the BW Corridor where over half of our properties are located. And Cyber Security companies both large and small continue to establish beachheads and expand operations in Maryland Cyber Valley, the center of which is U.S.
Cyber Command at Fort Meade. In 2014, for example, 461,000 square feet or 31% of our new and development leasing was cyber-related.
And since 2011, we’ve leased 1.8 million square feet or 11% of our portfolio directly to tenants engaged in Cyber Security. The increased demand we’re seeing is consistent with the economic data recently released by DTZ, a global leader in property services.
According to their economists, several market indicators in the metropolitan Washington DC market bottomed and turned positive in 2014, DC metro federal employment numbers bottomed in September and have steadily increased since then. Similarly, the federal government’s contribution to U.S.
GDP growth, which have been negative since 2012 turned significantly positive in the third quarter of 2014. Important to our strategic tenant niche, the awarding of federal contracts has steadily increased each quarter since bottoming in fiscal 2013.
Last week as Roger discussed, the President supports increased DOD spending in the fiscal ’16 including a proposed 8% increase in Cyber Security. We are confident in our occupancy projections for this year and next and have provided a two year tenant retention ratio in our 2015 guidance press release.
At the end of 2016, Defense contractors will have gone through a full cycle of leasing since the Budget Control Act of 2011. As a result of this final turn, we project a renewal rate of 60% to 65% over the next two years anticipated non-renewals between now and the end of 2016 total 1.3 million square feet, which equates to an average of 650,000 square feet a year and is consistent with the leasing challenges we handled in 2014.
Last year, our same office portfolio had 659,000 square feet of non-renewals. And we accomplished 663,000 square feet of new leasing and finished the year 30 basis points higher than the beginning of the year.
Today’s leasing environment is more favorable than it was a year ago and underpins our optimistic outlook. Once the Defense contractors establish their new equilibrium we expect to return to our historical renewal rate of 70% which will support higher overall occupancy.
I’ll briefly touch on our fourth quarter and full year same office and leasing highlights for 2014. At December 31st, our 2014 same office portfolio was 91.3% occupied and 92.5% leased.
The 120 basis point net decrease in occupancy relative to September 30th levels reflects the 200,000 square feet of move-outs in the fourth quarter we discussed on prior earnings calls. Despite these move-outs our tenant retention rate in the fourth quarter was 63% and for the full year was 70%.
During 2014, we leased a total of 3 million square feet, including 1 million of square feet in the fourth quarter, total leasing including 900,000 square feet in developments, 400,000 square feet of which occurred in the fourth quarter. Historically, 2014 development leasing volume match 2013s volume and tied that year as the third best in our corporate history.
When combined with 1.2 million square feet accomplished in 2012, we’d average a million square feet of development leasing in each of the last three years. Leasing economics continue to improve cash rents and renewals in the fourth quarter were flat, relative to expiring rents and increased 10% on a GAAP basis.
For the full year, cash rents on renewing leases rolled down 2% an improvement over the 3.6% roll down in 2013. On a GAAP basis for the full year, rents increased 7% in 2014 versus 5.6% increases in 2013.
For 2014 the average lease term achieved on all leasing was 7.2 years which was the market improvement from the average lease term of 6.0 years in 2013. Now I'll update the future cash NOI associated with development leasing which we've adjusted to exclude assets that have been transferred into the 2015 same office portfolio.
Including the two full building leases we announced yesterday we have 22 developments, redevelopment projects that are not in same office. When stabilized these projects are forecasted to generate annual cash NOI of $46 million, 34 million of which is contractual and 12 million of which is speculative.
When we lease two projects on our development schedule that are intended for government use, over 90% of this $46 million of NOI will become contractual. Based on executed leases $15.5 billion of cash NOI will benefit 2015.
$29.5 million will be recognized in 2016 and virtually all of the 34 million will be in 2017’s results. With some additional leasing success in coming quarters we expect to convert the $12 million of speculative development NOI into contractual NOI.
The NOI embedded in our development projects demonstrates our ability to create value for shareholders. Looking at our shadow development pipeline we are tracking 700,000 square feet of potential new development projects and we look forward to providing more color on the ones we execute in the coming quarters.
On that note I'll turn things over to Anthony.
Anthony Mifsud
Thank you, Steve. FFO per share as adjusted for comparability for the quarter was $0.49 and our AFFO payout ratio for the full year was 77%.
Same office cash NOI, excluding lease termination fees, increased 3.6% over the fourth quarter of 2013. For the full year, same office cash NOI increased 1.3%.
Highlighting recent capital markets activity and our balance sheet and credit metrics we completed $150 million common stock offering in November. In December, we defeased $211.5 million of secured debt that bore interest at an average rate of 5.5%.
We monetized $19 million of non-strategic land in January. Our debt to adjusted book ratio declined from 42.8% at the end of the third quarter to 39.7% at year-end.
And our adjusted debt-to-EBITDA ratio decreased from 6.7 times to 6.3 times. We believe these improved levels are more appropriate for the long-term and while we intend to maintain these ratios and other balance sheet statistics some metrics will exhibit variability from quarter-to-quarter.
For example adjusted debt-to-EBITDA will experience variability because the EBITDA from new development projects lags the debt incurred to construct them by several quarters. I'll finish my remarks by summarizing our 2015 guidance.
For the full year we expect FFO per share as adjusted for comparability of $1.97 to $2.3. We also established our first quarter 2015 range of FFO per share and adjusted for comparability at $0.44 to $0.46.
To get from our fourth quarter 2014 diluted FFO per share as adjusted for comparability of $0.49 to the midpoint of our first quarter 2015 range of $0.45 subtract $0.02 to reflect operating expense seasonality $0.01 to reflect the full quarter impact of the fourth quarter non-renewals and $0.1 to reflect lower forecasted development fees. Specific assumptions behind our 2015 guidance are detailed in our press release we issued separately this morning.
But I'll add some color to our guidance point for office cash NOI. We forecast that our 2015 same office portfolio’s cash NOI will increase between 50 and 150 basis points.
However if we exclude four buildings that experienced large non-renewals during 2014 and for which we are working to re-stabilize the portfolio’s cash NOI would increase 2.5% to 3%. So the majority of our portfolio is growing at a healthy rate.
On that note I'll turn the call back to Roger.
Roger Waesche
Thank you, Anthony. Let me leave you with three simple takeaways.
First, the Defense spending headwinds are over and budgetary increases are likely. Second, our portfolio is in good shape as evidenced by the fact that replacement leasing exceeds contractions.
This is because demand in our markets and specifically for our unique and advantaged locations strong. Third, the NOI and value creation embedded in our development pipeline combined with our well leased existing portfolio will trump any leasing challenges we face in the coming quarters.
With that operator please open up the call for questions.
Operator
[Operator Instructions] Your first question comes from the line John Bejjani of Green Street Advisors. Please proceed.
John Bejjani
Steve can you elaborate on the 650,000 square feet per year of expected non-renewals over the next couple of years? Where there might be prospects for backfilling and anything else you'd care to share?
Steve Budorick
Well we've just gone across the portfolio and handicapped each and every tenant for the next three years and in total reflecting the general trend towards rightsizing footprints and exploration of leases. We project out about 40% non-renewal and it's really associated with all of our markets with Defense contractors.
Roger Waesche
But John Northern Virginia has a higher incidence of non-renewal than the rest of our markets probably?
John Bejjani
And more broadly how far would you say we're in the cycle of contractors downsizing and rationing their footprints?
Roger Waesche
We think we're -- we keep saying we're in the seventh inning and for us that means there is two more innings which is 2015 and 2016. As Steve mentioned in his prepared remarks each of our contractors will have gone through a full renewal cycle at the end of 2016.
So we think at that point we will have stability in the portfolio.
John Bejjani
And one last question, related to Huntsville. So you've seem to have been hit with a large downsizing in rent roll down there in the fourth quarter?
Any color you can share on what happened there and just broader commentary on that market would be helpful? Thanks.
Steve Budorick
Sure, that was the final exploration of CFC’s full building lease at 3 Tamar Bridge and that full building lease was relatively high compared to the market rates. And with that we've essentially marked that building back to market where we are leasing it right now.
Operator
Your next question comes from the line of Brendan Maiorana of Wells Fargo. Please proceed.
Brendan Maiorana
Either Roger or Steve, your comments sound more positive on the outlook the budget outlook looks better. It sounds like you feel better about your core Defense IT tenants.
And my recollection for 2015 is that there weren't a lot of large known vacates in the portfolio. And you did about 70% of renewal percentage for 2014 with some large known vacates in the portfolio.
So trying to get a sense of what seems to be shaping up to be probably a better backdrop of a year for COPT for 2015 versus more conservative guidance assumptions on the renewal rate and maybe occupancy levels that you've laid out, I would have thought maybe renewal percentage would move higher in '15 as opposed to down.
Roger Waesche
Brendan we gave a two year rate of 60% to 65%, I would say 2015 looks like it will be on the higher end of that and 2016 potentially on the lower end. But we wanted to -- because we as Steve mentioned gone space-by-space, tenant-by-tenant, building-by-building and done an analysis of renewals versus non-renewals and we feel comfortable with that two year renewal rate.
And we wanted to give I guess visibility into where we are going to shake out for the balance of the portfolio in rightsizing.
Brendan Maiorana
Maybe can you guys give a little bit of color on the occupancy it looks like your average occupancy for the year is in line with kind of where we're starting the year, but there is an expected ramp by the end of 2015. So is that just something that is highly backend weighted or do you expect occupancy to dip a little bit further early part of '15 and then build back up in the later quarters?
Roger Waesche
I think things are pretty stable where they're now and we'll just have a build up as the year goes on to the 92% level.
Brendan Maiorana
Okay.
Anthony Mifsud
The one thing you just need to keep in mind is that we -- if you're looking at the same office pool we have reset the same office pool. So you may be looking at where we're starting from the 2014 same office pool versus where we've projected year-end occupancy to be which the '15 pool.
And the difference between those is about 0.5%.
Brendan Maiorana
So Anthony we are starting the '15 same occupancy pool at what 90.5 or something like that?
Anthony Mifsud
90.8.
Brendan Maiorana
Last one maybe this is Steve Budorick. So it looks like there is a big ramp of NOI at DC-6, I think you guys were a little less than million.
In the fourth quarter you expect 10 million of cash NOI at DC-6 during the year. What's your kind of average occupancy for DC-6 during ’15?
Anthony Mifsud
I don’t have an average occupancy number to share with you but I can say that 5 million of the 10 million is contractual, and for the last couple of quarters we’ve been messaging increased confidence on landing some significant pieces of new business and we are highly confident that we can meet those numbers.
Brendan Maiorana
So if you meet you budget where would you end the year in terms of an occupancy level there?
Anthony Mifsud
Highly occupied.
Operator
Your next question comes from the line of Michael Lewis of SunTrust. Please proceed.
Michael Lewis
So your development spend becomes kind of more self funded as you get projects online but I was wondering if you could talk about any kind of capital markets activity assumptions in your guidance and how you think about funding the rest of the spend?
Roger Waesche
Well in the guidance we have $200 million to $250 million worth of development spend projected and we have 0 to 50 in property sales that we’re projecting which would be a one source of funding those as well as essentially $20 million worth of land sales which are virtually all complete at point and then we would look to be capitalizing the balance through a debt insurance as well as any equity on our ATM.
Michael Lewis
And then this is kind of a broad question we’ve talked about this little in the past but when a company like Anthem has a huge data breach does that in the short or long-term be some more activity and demand kind of in your markets or do they take care of this problem either somewhere else or in-house or I am just kind of curious how does that works?
Roger Waesche
I think it’s a combination so I think you see corporations have to spend more money in-house defending their systems. I do think that the contractors’ business development goes up and some of that will probably be executed in their markets and some will be executed outside of our market, so it’s a net positive we just can’t quantify how big the positive is.
Operator
Your next question comes from the line of Chris Lucas of Capital One Securities. Please proceed.
Chris Lucas
Just following up on the DC-6 question, Steve, will you have to make any additional investments of consequence in order to get to that cash NOI number you’re talking about?
Steve Budorick
Chris, we’ll have to spend a little bit of money to get to $10 million if we go beyond that then we would have to start spending money.
Chris Lucas
And then on the development yield range, yes go ahead.
Steve Budorick
Yes, let me just note that so we anticipate that at some point we will have to spend an additional $50 million to fully build out DC-6.
Chris Lucas
And then on the development yield range, the 7.5 to 10 what sort of visible low-end what kind of projects what are we looking there?
Wayne Lingafelter
Chris, it’s Wayne, you’re right, we lowered the lower end of that range to 7.5 really to reflect the increase in the recognition at certain build to suit customers we have high quality chance with long-term leases are going to look for slightly different pricing that we forecast in the past.
Chris Lucas
And then Roger, just I want clarify something on the occupancy guidance you’ve mentioned I think that 2016 you expect to end the year around 92%?
Roger Waesche
That’s right.
Chris Lucas
So it will ramp-up and then dip back down over the next two years is sort of the view?
Roger Waesche
That’s right.
Operator
Your next question comes from the line of Jamie Feldman of Bank of America Merrill Lynch. Please proceed.
Jamie Feldman
So speaking to brokers and consultants in the field it sounds like after the Sony breach or hack, there has been a bit of a seachange in the approach of corporations to cyber and cyber defense, can you guys talk about what do you have seen since then and what that might mean for business prospects?
Roger Waesche
Well from our view we’ve seen a steady increase or continuing accumulation of growth in new offices in cyber and I don’t think that there is any activity I can tie to the Sony hack in particular, but I think the increased frequencies of these events just bodes for a more rapid expansion of the cyber industry and much of that is located here in the Maryland.
Jamie Feldman
And then going back to your comments on just seeing a general pick up from not necessarily defense related but just general office tenants around DWI, can you talk a little bit more about what you’re seeing and what should we think pipeline looks like there?
Roger Waesche
I don’t have the pipeline broken out by submarket memorized anyway, but we have pretty strong activity in and around the airport, my recollection is average occupancy for DC-6 during 15?
Anthony Mifsud
I don’t have an average occupancy number to share with you but I can tell you that 5 million of the 10 million is contractual, and for the last couple of quarters we’ve been messaging increased confidence on landing some significant pieces of new business and we are highly confident that we can meet those numbers.
Brendan Maiorana
So if you meet your budget where would you end the year in terms at occupancy level there?
Anthony Mifsud
Highly occupied.
Operator
Your next question comes from the line of Michael Lewis of SunTrust. Please proceed.
Michael Lewis
So your development spend becomes kind of more self-funded as you get projects online, but I was wondering if you could talk about any kind of capital markets activity assumptions in your guidance and how you think about funding the rest of the spend?
Anthony Mifsud
In the guidance we have $200 million to $250 million worth of development spend projected and we have 0 to 50 in property sales that we’re projecting which would be one source of funding there is as well as potentially $20 million worth of land sales which are virtually all completed at this point and then we would look at the capitalizing the balance through a debt issuance as well as any equity on our ATM.
Michael Lewis
And then this is kind of a broad question, we’ve talked about this little in the past but when a company like Anthem has a huge data breach, does that in the short or long term beat some more activity and demand kind of in your markets or do they take care of this problem either somewhere else or in-house, I am just kind of curious how does it work?
Anthony Mifsud
I think it’s a combination so I think you see corporations have to spend more money in-house defending their systems. I do think that the contractors -- business development goes up and some of that will probably be executed in their markets and some will be executed out of our markets, so it’s not -- it’s a net positive we just can’t quantify how big deposit is this.
Operator
Your next question comes from the line of Chris Lucas of Capital One Security. Please proceed.
Chris Lucas
Just following up on the DC-6 question, Steve, will you have to make any additional investments of consequence in order to get to that cash NOI number you’re talking about?
Steve Budorick
Chris, we’ll have to spend a little bit of money to get to $10 million if we go beyond that then we would have to start spending money.
Chris Lucas
Okay and then on the development yield range. Go ahead
Steve Budorick
Let me just note that so we anticipate that at some point we will have to spend an additional $50 million to fully build out DC-6.
Chris Lucas
Okay and then on the development yield range, the 7.5 to 10 what sort of visible low end what kind of projects what do we looking there?
Wayne Lingafelter
Chris, it’s Wayne, you’re right, we lowered the low end of that range to 7.5 really to reflect the increase in the recognition at certain builder suit customers we have high quality chance with long term leases are going to look for slightly different pricing that we forecasted in the past.
Chris Lucas
And then Roger, I just want clarify something on the occupancy guidance you’ve mentioned I think that 2016 you expect to end the year around 92%?
Roger Waesche
That’s right.
Chris Lucas
Okay so it will ramp up and then dip back down over the next two years or sort of view?
Roger Waesche
That’s right.
Operator
Your next question comes from the line of Jamie Feldman of Bank of America Merrill Lynch. Please proceed.
Jamie Feldman
So speaking of brokers and consultants in the field it’s down slight after the Sony breach or hack, there has been a bit of key change in the approach the corporation to cyber, cyber defense; can you guys talk about what you’ve seen since then and what that might mean for business prospect?
Roger Waesche
Well from our view we’ve seen a steady increase or continuing accumulation of growth in new offices in cyber and I don’t think that there is any activity I can tie to the Sony hack in particular, but I think the increase frequencies of these events just bodes for that more rapid expansion of the cyber industry and much of that is located here in the Maryland.
Jamie Feldman
Okay and then going back to your comments on just seeing a general pick up in -- not necessarily defense related, but just general office around DWI, can you talk a little bit more about what you’re seeing and what should we think how pipeline looks like there?
Roger Waesche
I don’t have the pipeline broken out by submarket memorized anyway, but we have pretty strong activity in and around airport. My recollection is 60,000 to 65,000 square feet in the pipeline there and with greater Baltimore portfolio White Marsh with good activity and what vacancy we have left for 90% in that submarket.
And then of course from the Columbia Gateway has enjoyed good demand for a year and there are very few large blank space in our submarket so conditions are improving.
Jamie Feldman
Okay. And then in Northern Virginia we heard very good feedbacks from other REIT that involve and even brokers getting into the quarter, in terms of contracted demand like how much better I think than last quarter and two quarters ago in terms of the conversations you’re having?
Roger Waesche
Let me just say this, the bulk of our properties are 96% and 97% least. We have three buildings now that have some significant vacancy two of which are raw conditions -- new construction and our pipeline of prospects for those two buildings is higher than I’ve seen it since I joined COPT.
So there is no question there is a much higher level of tours and prospect activity and essentially enough to expect some real progress in 2015 in those two buildings where contractors are now in a position to consider making long enough commitment that would justify constructing new tenant improvements in a shell building. And then our third building we just got back vacant from aerospace in Westfields it’s about a 150,000 square foot building and we’ve got good demand building already, that building was difficult to show because of the high security nature of the tenant that was in it.
But we are working with prospects in pipeline activity that’s about 85,000 square feet little over half of the building. So, yes, indeed I would agree that contract activity has improved and it’s been measurable since August.
Jamie Feldman
Okay, great. And then just a follow up, what’s in your guidance for the aerospace, the large integration you guys have.
Roger Waesche
I think we have some modest lease up this year in probably no more than third of the building.
Operator
Your next question comes from the line of Tom Catherwood of Cowan. Please proceed.
Tom Catherwood
Thank you very much. I want to say, if you look at page 16 and when you look at the full year same-store revenues we back out these termination fees, it looks like the cash revenues grew something in the neighborhood of 3% which make sense given lease up and contractual end bumps.
But then also the expenses grew around 6%, what was driving that expense growth this year and can we expect to see some of that continue in 2015.
Roger Waesche
You talk about the quarter or the year?
Tom Catherwood
It looks like for the year, for the quarter it looks like things is improved a little bit actually it looks like expenses were down year-over-year for the quarter. But for the year overall we saw 6% expense growth so I want to get a sense of what was driving that?
Roger Waesche
So if you remember we had a very challenging winter in [indiscernible] during last year and so our snow removal cost were $6 million. Plus we had a very cold winter and so we incurred $1.5 million of extra utilities cost.
So we incurred $7.5 million of cost versus the prior year which was much smaller number probably half of that in terms of being over budget.
Tom Catherwood
So the trend as you saw in 4Q which being a better comp as oppose of the full year trend is kind of the more realistic perspective there.
Roger Waesche
Yes, that is correct.
Tom Catherwood
Okay. And then Roger, you also mentioned the budget that came out and you suggested the preparations towards cyber security, there was bunch of talk about creating cyber -- I guess you can call it a civilian cyber security cluster in Washington DC, how realistic is that possibility and what if any impact could that have on Fort Meade do you think?
Roger Waesche
I think it’s potentially realistic, but overtime I think the GSA is softly going after the market to see where there are opportunities in the market to handle something like that, but there is no authority to do it yet there is no mandate and there is money to do it. So I don’t think it’s anything that will hit the market for a number of years but it probably will be located in national capital region which bodes well for this overall reach.
Tom Catherwood
Got it. That’s it from me.
Operator
Your next question comes from the line of Craig Mailman of KeyBanc Capital Markets. Please proceed.
Craig Mailman
Hi guys. Just a quick follow up on cyber, I know you all have been talking about the corporate hacks and such but just curious you guys hit on the government side of things, what are you seeing on the private side in demand from company serving the commercial industries and are you seeing any kind of broadening of geography, what if these guys are located outside of Maryland?
Roger Waesche
Craig, we’ve had steady commercial if you are a contractor, cyber growth and it's largely been located in the MVP Columbia Gateway and to some extent in our Airport Square properties and then some minor portfolios we have in the area. It continued to both -- we’ve continue to captured new tenancy and provide expansion space to contractors that are already here, that are starting to win contracts and expand and so in our experience it’s largely focused in Maryland, but we have landed a couple of deals in Northern Virginia up by Dallas Airport they are also cyber related and Northern Virginia has a pretty healthy cyber community as well.
Craig Mailman
Are those tenants or I guess mostly contracting for the government or are you starting to see also guys that are just wanting for a corporate security outside of coming government uses?
Roger Waesche
Well there are several tenants that do cyber work and our portfolio who initially we’re serving only the government and have business plans to take those solutions to convert them to commercial solutions to service corporate Americas. So I expected they’re trying to grow as the demand from corporate America increases.
Craig Mailman
And then just a quick follow-up, just [Both and Mider] are the two big expirations or chunky ones you guys have is that still the case and can you kind of remind as a timing of those?
Anthony Mifsud
[Both’s] expires at the first day of 2016 and [Mider’s] lease materials 10/31/16.
Craig Mailman
And are those still really the two largest ones that you guys are worried about or you and Roger’s kind of commentary on continue rationalization to the other ones that are now creeping in those of it’s just going to be smaller guys?
Anthony Mifsud
Yes, those are the two large ones.
Craig Mailman
And then just lastly you guys clearly had success on the announced developments at the end of December and yesterday, a couple of those with more to be sort of shelves data center kind of -- how are you guys looking at that 700,000 shadows, is that more of your traditional office type product or are there more shelve data center deals in that as well?
Roger Waesche
Craig, it's about maybe 35%, 40% for shelves and the balances office product.
Craig Mailman
And then just one last one, the answer I think Wayne gave on a 7.5 with the credit tense is that more of the shelve deals that you guys are getting driven down on yield or is that this is separate contract?
Anthony Mifsud
Yes, that’s a fair observation Craig, I mean we quarter range and so it's not an to spot a particular average, so if you look at some of the developments that we’re doing in our business parts for our traditional tenants or project that may have a speculative component to it maybe a redevelopment in nature, are going to be towards the higher end of that range. As you know, we didn’t change the top end of our development yield guidance that still remain to 10%, we just did look at the 8% that was previously the low end of that and dropped it to reflect some of the good quality long-term builder suit business that we think is in the market.
Operator
Your next question comes from the line of Dave Rogers of R.W Baird. Please proceed.
Dave Rogers
Good afternoon. Roger, maybe talk a little bit more, looks like your acquisition and your disposition guidance this year pretty modest at best, but what could you give to do more on the disposition side or the acquisition side are you pretty happy with kind of where the portfolio is and I know you're really solely focused on development at this point?
Roger Waesche
Well, we’re currently focused more on selective development and the related yield spread and their equation you know we think there a better use of our capital and we’re confident that there is demand for new buildings in the range that we’ve been executing on over the last couple of years and we think of course that that’s our strength. With respect to acquisitions, acquisitions continue to be very competitive, so I think special situations work for our company that’s things where we understand perceive risk not that you risk or we can mitigate a problem or risk because for instance we have a customer that sort of thing.
So, we’re constantly looking at things, but with the competitive nature we haven’t been able to acquire anything, but we haven’t had to because we’ve got enough growth from our development. And then in terms of dispositions, we do have a couple of buildings in the market, we would anticipate sales for this year, but we want it to be conservative and less zero to $50 million, but we have an internal goal to try to do more than that.
Dave Rogers
Okay, that’s helpful and it sounds like that might be wait little bit more towards the latter portion of the year?
Roger Waesche
Yes.
Dave Rogers
And I guess looking at the guidance for the first quarter, I think you guys did a great job laying out the guidance this year looking at $0.04 sequential drop in FFO adjusted for comparability between fourth quarter and the first quarter and I didn’t hear if you address all of that it seems like a $0.01 to a $0.015 probably related to aerospace and CFC in Huntsville. What's the rest of that drop I mean they were pretty early debt offering embedded in there that you're able to put the proceeds later can you give a little more color on that?
Anthony Mifsud
It's almost all operational there is $0.02 for the difference that it's really quarter to quarter for the net operating expenses for seasonality. So whether related expenses and actually no expense, $0.1 for the full quarter impact of the non-renewals we had in the fourth quarter that you refer too.
And then another $0.01for lower development fees then we had in the fourth quarter.
Dave Rogers
Okay and then on the debt size of the equation, does sound like you may go back to the market, you seems doing that fairly early in the year or how you play that?
Anthony Mifsud
No our guidance assumes that later in the year and third quarter time frame.
Operator
You next question comes from the line of Emmanuel Korchman of Citi. Please proceed.
Emmanuel Korchman
Hey guys if we could just come back to the disposition question for a second. When you think about those dispositions beyond sort of where you've guided would those be a source of sort of match funding and you think of those in contrast to more equity on ATM.
Or are you looking to capitalize on sort of just market pricing or somewhere between just trying to figure it out where your heads are at.
Anthony Mifsud
I think it's both we're trying to observe that some assets may assign buyer today in a very excitable market for acquisitions. And at the same time we've got a lot of development spends for this year 200 million to 250 million.
So we would like to fund some of that with dispositions and so it's really being opportunistic and also trying to match funds on.
Emmanuel Korchman
And if you look at the guidance portion what you talk about leases under negotiation. How much confidence do you have in those are those sort of add a 100% or 95% or they sort of just sealed and we can forget about them.
Anthony Mifsud
We have a high degree of confident or we wouldn’t have laid them out separately. We can't guarantee that we'll be at 100%.
But I think we're highly confident most of that will get done.
Operator
Your next question comes from the line of John Guinee of Stifel. Please proceed.
John Guinee
Two quick questions do you materially equity increasing your share account and your guidance [indiscernible] and then second are there any occupancy left in the CDC building down in Huntsville?
Anthony Mifsud
The answer to your first question is no.
Roger Waesche
Answer to your second question John we renewed 29,000 square feet with CFC. And then we're haven’t going successfully seen that up and that since with the deals we are recently signed currently negotiating an expect to move to lease on we would be about 85% re-established to the small chunk on the first floor are left to go.
John Guinee
When that’s the building that was around $248 square foot purchase price four years ago?
Roger Waesche
That’s correct.
John Guinee
And then so just I understand this Anthony the basic guidance was about 200 million to 250 million of developmental acquisitions exceeding disposition. But no equity raised or no change in the denominate or the share account.
Anthony Mifsud
I think your question was whether there was a material issue and the answer to that is no. Our guidance assumes that we are going to maintain the credit metrics that we had at the end of the year.
So embedded in our guidance is maintaining those ratios.
John Guinee
Perfect. Okay great.
Thank you.
Operator
Your next question comes from the line of Anthony Paolone of JP Morgan. Please proceed.
Anthony Paolone
Just following up on the discussion around Ashburn and [indiscernible] from the project you guys have announced there. You have good credit in term and it seems a bit outside your core niche.
So what’s the thought process on whether those are keepers or what it profit spread would look like on those yields right now.
Roger Waesche
Well those kind of assets are selling in around of 6% of cap rate and we're developing 7.5 let's say. So this is pretty good margin there the credit is good and the tenant is investing a lot of money in those particular assets.
So they could be a potential source of funds overtime. We are running with a couple of customers now and we'd like to continue that relationship for a while and try to drive as much value creation while things are hot as we can.
Anthony Paolone
And then my other question is on the 650,000 square feet a year over the next few years of non-renewals. What does re-tenanting cost look like or what do you think to new lease economics that’s bases like?
Roger Waesche
Well it depends on where it is, if it's in Maryland, we're getting new tenants in for $25 a square foot, if it's in Northern Virginia it's going to be another story, it’s really subject to market conditions and market conditions there will spend $60, $65 on TI in that particular market now.
Anthony Mifsud
And similar volume in 2014, the weighted average replacement was about $40 a square foot all in, little under it was almost seven years of term to give an idea.
Anthony Paolone
The stuff you outlined in that 650 over next year, so that seems much different than what we experienced was in 2014?
Anthony Mifsud
No.
Operator
Your next question comes from the line of Jamie Feldman of Bank of America Merrill Lynch. Please proceed.
Jamie Feldman
Just a quick follow up. I think you gave cash leasing spread guidance for renewals in your release, what's your view of where GAAP leasing spreads will be next year?
Roger Waesche
They should be about what they were this year, so last year we were 2% negative on cash but positive 7 on GAAP, so we’re projecting minus 2 to 3 on cash and so I think GAAP will be in the 6% to 7% range.
Jamie Feldman
And then what would you say the largest chunks of what can move upside to your guidance.
Roger Waesche
I think it's simply leasing faster than we expect to lease would be the -- and getting maybe some of our development tenant in the space a little faster than we expect to.
Jamie Feldman
And then finally for Tony. Just the quarterly ramp for earnings to get the year-end number.
Is it pretty constant each quarter up a couple of pennies or is there any big chunks?
Tony Mifsud
No it is pretty constant quarter-to-quarter to get to the $2 overall. Some of the NOI from the development projects place and service does lean towards the later part of the third and fourth quarter as well as some of the NOI ramp up for DC-6.
Operator
Your next question comes from the line of Tayo Okusanya of Jefferies. Please proceed.
Unidentified Analyst
This is [Charles Kirsten] standing in for Tayo. My question really surrounds the same-store NOI guidance for 2015.
Just trying to make sure I understand all the components here. So we have a number of 0.5% to 1.5%.
It looks like occupancy is increasing about 100 basis points. That seems back end loaded because of the 200,000 square foot of move outs you had in 4Q.
But cash spreads are similar for 2015 to 2014. Yet had the same-store NOI figure is slightly lower at the midpoint compared to this year by about 30 bps.
So I am just trying to make sure I am not missing some other component in there such as maybe higher same-store NOI expenses, but it doesn’t sound like that's at least given high snow removal cost last year. So if you could just kind of clarify that would be really helpful.
Roger Waesche
I think it's simply that getting the tenants in place and paying rent is backend loaded and the forecast for the -- to replace the space that we lost in 2014. Not that we’re going to replace space by space but just overall to get the same office occupancy back up, it's back end loaded and that's what's driving the 0.5% to 1.5% same office growth.
Unidentified Analyst
Do you have a sense on that aerospace, I am sorry if I missed this, the rental spreads you might get on that a 150,000 square feet.
Roger Waesche
I think it will be down a little bit, we ended up with a lease it was close to $30 a square foot and rents in that market now are probably in the mid to upper $20 per square foot.
Unidentified Analyst
And then I just have one last question. The three $0.10 NoVa office B.
I understand that these aren't delta suit projects but they've remained 0% lease for several quarters now. I am just trying to get a sense of what activity you're seeing there and when you expect to get some preleasing if at all.
Roger Waesche
The government has very methodical ways when it procures space. So we expect the activity on those buildings to commence in the second quarter and ultimately result in transactions in late third quarter, possibly early fourth.
Operator
At this time I would like to turn the conference back over to Mr. Waesche for closing remarks.
Please proceed sir. Thank you all again for joining us today.
If your question did not get answered we're available to speak with you later. Good day.
Operator
Thank you for your participation in today’s conference call. This concludes the presentation.
You may now disconnect. Have a wonderful day.