Jul 28, 2015
Executives
Stephanie Krewson-Kelly - VP of IR Roger Waesche - President and CEO Steve Budorick - EVP and COO Wayne Lingafelter - EVP of Development & Construction Anthony Mifsud - EVP and CFO
Analysts
Gabriel Hilmoe - Evercore ISI Jamie Feldman - Bank of America Manny Korchman - Citi Craig Mailman - KeyBanc Michael Carroll - RBC Capital Markets Dave Rogers - Baird Brendan Maiorana - Wells Fargo John Bejjani - Green Street Advisors John Guinee - Stifel Tom Catherwood - Cowen and Company Tayo Okusanya - Jefferies Rich Anderson - Mizuho Securities Bill Crow - Raymond James Associates Christopher Lucas - Capital One Securities
Operator
Welcome to the Corporate Office Properties Trust Second Quarter 2015 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, Attlee. Good afternoon and welcome to COPT's conference call to discuss the company's second quarter 2015 results and our guidance for the remaining quarters of 2015.
With me today are Roger Waesche, President and CEO; Steve Budorick, Executive Vice President and COO; Wayne Lingafelter, EVP of Development & Construction; and Anthony Mifsud, EVP and CFO. In addition to our supplemental package and press release related to the second quarter results, please note we have posted three additional items to the Investors section of our website.
First, there is a flipbook that accompanies management’s remarks this morning, which you will need to download before management delivers their prepared remarks. Second, there is a flipbook and press release related to our intent to acquire 100 Light Street, a 549,000 square foot Class-A Office Tower in Baltimore’s Pratt Street Corridor submarket.
Third, we have posted a study on the Baltimore office market, just published by the SAGE Policy Group, an economic and policy consulting firm in Baltimore, Maryland founded by Anirban Basu. 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 website.
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. With that, I will now turn the call over to Roger.
Roger Waesche
Thank you, Stephanie. Good afternoon, everyone.
The company has generated solid results in the second quarter. As you can see on slide three, our FFO per share as adjusted for comparability of $0.52, was $0.03 above the mid-point of our expected range.
Favorable NOI growth and the later issuance of our senior notes supported the higher results. Most operating metrics were in line with our expectations, including the occupancy gains in our same-office and total portfolios, and solid economics when renewing leases.
The stronger-than-expected renewal rate and lowering recurring Capex also supported the quarter’s results. Based on these strong results, we are increasing our guidance for FFO per share as adjusted for comparability for the year by $0.01.
The revised mid-point of $2.02 implies 7.5% growth over 2014 results. Slide 4 provides the assumptions underlying our revised guidance.
Please turn to slide 6 for more color on our same-office cash NOI growth. If you exclude five assets that represent temporary leasing challenges, the remaining 96% of our same-office portfolio generated 4.4% growth in the second quarter.
Even though we expect total same-office cash NOI to grow modestly for the year. Excluding the five assets, the remaining same-office portfolio is on track to achieve 2.5% growth.
Slide 8 addresses our renewal forecast for the next few years. Now that we have sold the MITRE Building in Northern Virginia, Booz Allen’s 400,000 square foot lease in One Dulles Tower is the only large parking space we expect to get back between now and the end of 2017.
We are aggressively marketing One Dulles to perspective new tenants and also considering other alternatives. The lack of significant non-renewals in our portfolios is an improvement point, so let me review it in more detail.
Setting aside the Booz Allen non-renewal for the next two and a half years, our portfolio contains only eight lease maturities that are greater than 100,000 square feet. 48 leases are secured facilities leased to the government, which historically have 100% renewal rate and we expect the same for these four.
We have documents out to two tenants or two of the remaining leases, two of the four remaining leases and expect to have them executed this quarter. We expect the seventh lease to be renewed given the nature of the mission being supported in that building.
And finally on the eighth lease, which expires in [indiscernible], we expect the tenant to retain between 40% and 100% of their current space depending on what happens with their government contract. So as of January 1, and through the end of 2017, we do not anticipate any impactful non-renewals and as a result we expect our renewal rate to be 70% or better.
While we are encouraged by the growing momentum in our existing portfolio, we are excited about the external growth opportunities in our markets. Development is in this Company’s DNA and we’ll remain the primary driver of external growth.
Slide 10 summarizes the future cash NOI embedded in 22 development and redevelopment projects that are not in same-office. When stabilized, these projects are forecasted to generate as much as $50 million of annual cash NOI.
Today, 15 projects are scheduled to contribute $35 million of annual cash NOI to future results, $15.5 million of which is in our 2015 guidance. Slide 11 illustrates the demand we are experiencing for new construction, particularly from customers in our strategic tenant niche continues to grow.
Our shadow development pipeline now exceeds 1 million square feet and demonstrates the capacity our development platform has for future growth. Please turn to slide 12 that lists our 2015 acquisition properties namely Metro Place II which is a transit served strategic tenant niche building and Class-A High Rise buildings in the Pratt Street Corridor submarket, downtown Baltimore that increased the percentage of urban square footage in our regional office portfolio.
From a capital allocation perspective, we chose to acquire these buildings while also funding development in our strategic tenant niche because the two investment choices are not mutually exclusive. Our development returns remain very attractive, which means an acquisition has to be extremely compelling, it has to be a high-quality building, generally needs to be urban, mass transit-served and in an amenity-rich location.
And acquisition also needs to be value creating, enhance the durability of the Company’s cash flow and simplify our operating profile. 30 and 100 Light Street closes next month as planned; each of these acquisitions checks all of these strategic options.
Together, the properties represent the $270 million investment for the combined stabilized cash yield of 7.8% plus 2.5% to 3% annual expected growth for many years. These acquisitions generate immediate cash flow and no execution risk for high quality assets with compelling long-term growth prospects and therefore represent attractive risk-adjusted investments.
Another capital allocation point I would highlight is that we are very intentional about investing outside of our strategic tenant niche. We are highly confident that our niche will continue to generate steady growth.
However, we don’t want to tie 100% of our business to any single source of demand regardless of how attractive. The 25% of our business represented by our regional office portfolio serves two purposes.
First, it allows us to leverage our local sharpshooter expertise into another office platform. Second, it complements our strategic tenant niche because it is not correlated to government demand drivers.
Please turn to slide 13 and 14, which summarize why we are confident in Downtown Baltimore’s growth prospects. We are aware that our view is contrarian but also certain it is correct.
Baltimore has been experiencing a renaissance to this durable and has been transforming in two ways. First, Baltimore’s economy has evolved from one that relied on manufacturing and heavy industry to one that is driven by industries of the future, namely healthcare, education, technology, research and biotech.
This economic transformation is supported by the market data that shows Baltimore ranks fourth among the Top 15 markets in the combined employment concentrations of healthcare, education, government and technology. The Top 3 cities are Washington, Boston and San Francisco.
Additionally, CBRE ranks Baltimore as being in the Top 10 markets for the tech industry and in recent years ranks Baltimore second behind San Francisco for growth in tech talent. Also, in the second quarter of this year, Baltimore led the country in job growth.
Baltimore’s second transformation has occurred in its demographics. The national trend toward urban living that has been playing out in Baltimore has rapidly [indiscernible].
The proliferation of high-end residential, mixed-use and retail development and redevelopment has been in response to the demand from new generally young and affluent workers who want to live and work downtown in a vibrant urban core. Resulting from the influx of new residence, Baltimore’s current demographics now compare to cities like Boston, Seattle, Portland and Minneapolis.
For example, the Baltimore MSA ranks in the Top 10 in the country in terms of Millennial population growth, median household income and educational attainment. The residential conversion of former office spacing ground-up residential development in Baltimore’s Downtown have dramatically improved office market fundamentals by reducing supply.
Based on projects in planning this activity shows no signs of slowing down. Approximately 2 million square feet of older office products has been -- or is being converted to residential use, contracting the supply of office space.
High profile mixed-use developments are close to commencing on three of the most valuable available landslides on Light and Pratt Streets. Each will be primarily residential in nature, add to the market’s growing affluence and create further barriers to new office supply.
Additionally, replacement cost trends for Class-A office in Downtown Baltimore 35% to 50% higher than in-place rents, which also mitigates the threat of new supply. Regarding the demand side of Baltimore’s office fundamentals, employers are moving into the downtown market to attract and retain highly educated workforces.
Against the backdrop of shrinking supply, demand from corporate relocations and expansions have supported 2% annual rent increases in recent years for Class-A products in Pratt Street Corridor, where 250 West Pratt and 100 Light are located. During the same time, Class-A rents nationally have increased less than 1%.
In short, while we understand that Baltimore isn’t Washington, Boston or San Francisco, its profile has improved greatly especially in the last decade. All the necessary fundamentals required to fulfill Baltimore’s economic growth are in place.
The urbanization, growing population of young affluent workers and the employers are moving into the market to hire those workers. Each characteristics are established and bolster our view that Baltimore is poised for growth.
Please turn to slide 15, which highlights our 100 Light Street acquisition. We posted a presentation and a press release on 100 Light earlier this morning, so I will keep my remarks brief and underscore why we are bullish on this building.
First, this is an outstanding property that checks all the real estate boxes. It's located in the heart of the Pratt Street Corridor and has great harbor views.
The average lease term is eight years. It's with good credit tenants.
In-place NOI is scheduled to increase between 2.5% to 3% a year. Notably, about $75 million has been invested into the property since 2009.
The building has good floor plates and ceiling heights, favorable onsite amenities such as parking, fitness, restaurant and Baltimore Center Club and a purchase price of $190 per square foot is less than half of replacement cost. Although the building is 94% leased, we believe the building has upside potential related to the retail garage income and restaurant operations, areas where our local sharpshooter expertise comes into play.
Additionally, given downtown Baltimore’s favorable supply and demand dynamics and the building's average in-place rents of approximately $28.50, we expect rent growth. At this point, I would like to discuss this funding.
Please turn to slide 16 which summarizes our sources and uses through 2016. Very simply, we are selling suburban assets for which there remains a strong bid.
The three buildings we bought this year are not incremental to our portfolio, but instead represent the execution of the densification strategy proportions of our portfolio. By selling suburban assets such as the MITRE Building that we just closed during yesterday we will optimize our portfolio's growth potential and also maintain our balance sheet's investment grade rating.
So to summarize the three main takeaways from today's call, our existing portfolio is recovering from a cyclical bottom has gained positive traction in terms of future expected same office NOI growth. Development continues to dominate our external growth given the increasing demand we see from our strategic tenant niche and we are selling suburban office buildings in order to fund our development pipeline which is primarily driven by strategic tenant demand and three compelling acquisitions we discussed, two of which significantly densify our regional office portfolio.
And with that, operator, please open up the call for questions.
Operator
[Operator Instructions] Our first question comes from the line of Gabriel Hilmoe with Evercore ISI. Please proceed.
Gabriel Hilmoe
I guess, Steve, just on the $200 million, $225 million of development spends, how much of the 1.2 million square feet of just shallow development pipeline needs to get converted to a prelease or built-to-suit to hit that number? It looks like you only have about $100 million left to spend on the current pipeline.
Steve Budorick
It's about right. I'd say maybe a third.
Gabriel Hilmoe
Okay. And I guess, Roger, just on the Booz Allen space and the move-out next year, is that a building you would consider selling or I know you mentioned you are looking to actively market right now, but just given what you did with MITRE Building, is that -- is the plan to try to re-tenant that or is that something you would potentially sell near term?
Roger Waesche
We are trying to re-tenant the building both from a commercial standpoint and a GSA point. And then secondly, we would consider selling the building as long as we could receive an attractive price.
Fortunately, we paid $71 million for the building back in 2003, or just $180 a square foot and has had significant cash flow for the last 12 years. So we are in good shape with respect to how we've done on that building.
And we would consider selling it, but only for an attractive price.
Gabriel Hilmoe
Okay. And then, just maybe one last quick one just for Anthony or Steve.
Can you just give a sense of what the mix is on the sales I guess, land versus operating assets that's embedded into the $350 million to $400 million and just maybe what the broad assumed cap rate is on the operating assets just given kind of the mid-teens cap rate on the MITRE deal?
Steve Budorick
Virtually all of the assumed dispositions are forecasted for the remainder of 2015 as well as 2016 are operating assets. And we have an assumption that the average of the dispositions would be an 8% cap.
Gabriel Hilmoe
Thank you.
Operator
Your next question comes from the line of Jamie Feldman with Bank of America. Please proceed.
Jamie Feldman
Thanks, good morning. I guess just focusing on Baltimore a little bit more, first of all, I think you gave a blended cap rate or yield for the assets, do you mind breaking them out in terms of what the cash and GAAP yields are, especially for 100 Light.
Roger Waesche
For 250 West Pratt Street, the approximate going-in yield was about 8%, and that was a on a GAAP basis because there was some free rent that rolled off by the end of 2015. So once we get to 2016, the GAAP and cash were pretty close.
On the MITRE Building, we were just a little over 8%, and then on 100 Light, the going-in yield is about 7.5%.
Steve Budorick
You said, MITRE, but you meant Metro Place.
Roger Waesche
Metro Place -- I am sorry, the Metro Place, yeah was 8%.
Jamie Feldman
Okay. And you said 100 Light is 7.5% GAAP or cash?
Roger Waesche
Cash.
Jamie Feldman
Okay. And then bigger picture, I know you said you wanted to keep some non-strategic assets in the portfolio for some diversification, risk diversification.
Can you talk about what you think about the long-term growth rates of your businesses, the Strategic Niche versus what you’re buying here in Baltimore?
Roger Waesche
When we had our Investor conference back last September, we suggested that our same-store NOI growth once we got finished with our cyclical challenges, which we’re nearby them now, would be in the 2.5% to 3% growth standpoint, and we still expect that both in our Strategic Tenant Niche and in our Regional Office portfolio.
Jamie Feldman
Okay. And then I guess incremental growth from development?
Roger Waesche
That’s correct.
Jamie Feldman
And then I think you guys previously gave 2016 guidance in terms of what or at least occupancy outlook in terms of you expect a hit from Booz, but then think you could get back to higher number by year-end. Can you update us on how you guys are thinking about the occupancy outlook going into over the next year and half?
Roger Waesche
Well, I think Jamie, what we have put out was that we would have a 60% renewal rate for a 24-month period. That renewal rate will go up somewhat now because the MITRE non-renewal is no longer in the portfolio.
And so what we said few minutes ago was that if you except out Booz Allen, we expect renewal rate in the 70% or even greater percent even beginning almost immediately.
Jamie Feldman
Okay. But in terms of the occupancy pickup in 2016, any thoughts there?
Roger Waesche
Yeah, we haven’t provided that number yet, but we – our expectation is that occupancy at the end of 2016 will be higher than it was going into 2015.
Jamie Feldman
Okay. And then I think on the last call, Anthony gave same-store outlook for this year of 50 basis points to 150 basis points of cash same-store growth.
Can you update that? That’s my last question.
Anthony Mifsud
Sure, what we are highlighting in our current assumptions is that the same-office cash NOI for the entire same-office portfolio is at 50 basis points, so at the lower-end of that range. But we also broke out those five assets that Roger referred to in his comments and absenting out those assets, the 96% of the same-office pool is growing at 2.5%.
So those five assets continue to be the ones that we are focused on with respect to the leasing challenges for the same-office portfolio.
Jamie Feldman
What if you gave a full year outlook, like for all of 2015?
Anthony Mifsud
For all of 2015, it’s at – it’s 50 base, so we were 50 basis points to 150 basis points in our original guidance, but currently we are at 50 basis points.
Jamie Feldman
And that’s your outlook for the rest of the year.
Roger Waesche
Right, so Jamie, we started the year in the whole if you remember, because we had a seasonally challenged winter and so were over 1% minus in the first quarter. So we’ve recovered in the second quarter to 0.6% bringing the year-to-date to still a little bit negative, and so we have got to go positive in the last two quarters in order to get to the 0.5% for the year.
Jamie Feldman
Okay, all right. Thank you.
Roger Waesche
Thank you.
Operator
Your next question comes from the line of Manny Korchman with Citi. Please proceed.
Manny Korchman
Hey, Roger. If we can just stay on the same topic for a second, I'm more curious what sort of a change in the last three months that your assumption would come in 100 basis points, you were negative in the first quarter, but that's when you reiterated the 50 to 150, so what changed in this quarter that could have gone better that didn't?
Roger Waesche
I think it's just timing of lease-up getting some tenants in. We had good leasing in the second quarter.
We had a positive replacement ratio that is what we lease was greater than what is non-renewed, but it's just getting the tenants in place and getting them renting.
Manny Korchman
Got it. And can you give us an update on Canton Crossing if anything, any progress there?
Wayne Lingafelter
This is Wayne. We will be going in front of the Baltimore planning by -- here in a couple of weeks to make our first presentation publicly on our plans for the site.
And so we continue to work through that entitlement process and at this point, I don't have any immediate plans to be starting construction.
Manny Korchman
Great, thanks.
Operator
Your next question comes from the line of Craig Mailman with KeyBanc. Please proceed.
Craig Mailman
Hey, guys. Just curious on Baltimore, you guys have made the two acquisitions this year.
Is there anything else in that market that you guys are currently looking at, kind of what's the upper threshold of your concentration you want there?
Wayne Lingafelter
Right now, we’re very much on hold. We’re focused on selling assets, so that we can fund both the acquisitions that we've made so far this year plus the strategic tenant niche investments that we've committed to and those that we think we will commit to over the next several months or a couple of quarters.
So there are no current plans to add any additional assets from downtown Baltimore. We’re comfortable with the three assets we think, they are great assets, but where we want to be in terms of exposure at this point.
Craig Mailman
Okay. And then as we look at the asset sale you guys put out there, I noticed that about half of the Shadow pipeline is the Shell data centers, any thoughts about recycling some of the ones you guys have already done to redeploy into that product type?
Wayne Lingafelter
Right. So if you look at what we have in the queue to sell, number one are some assets in suburban Baltimore.
Number two is a few assets in Northern Virginia and number three are some data centers that are in the company's portfolio. So there are three primary targeted groupings in terms of asset sales for now and into 2016.
Craig Mailman
Okay. And then just on the Booz building, looking at the IRR you guys got on the MITRE asset, would it be similar to that type of kind of low-single digit IRR to that building you guys would accept, kind of thoughts there on what the floor would be and even how you’re thinking of it versus sell versus relet?
Wayne Lingafelter
Well, we think about a sale in the context of what we can sell it for as rebuying the property and what our IRR would be going forward. And so that's how we looked at the MITRE situation and that's why we decided to sell the building.
In terms of the Booz building, we bought it again at a very favorable price point, $71 million or under $180 a square foot and we've had cash flow from day one through the end of ’15, so 12 plus years and the building would sell empty for an amount greater than what we acquired the building for. So we would have a very positive IRR on that asset.
Craig Mailman
Okay. And then just the last one, thoughts on DT6 here [ph], how close are you guys to either seriously considering joint venturing or selling outright?
Wayne Lingafelter
Well, Craig, we've got another, we’re just about ready to put the final space in the place for our last tenant that we signed back in February and then we've got some other leasing that is a possibility and a possible expansion inside of the envelope that exists now for our large tenant and so we want to see that play out for the next couple of quarters and then we will give some serious focus to monetizing potentially part of that asset.
Craig Mailman
Great. Thank you guys.
Operator
Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed.
Michael Carroll
Thanks. Hey, Roger, can you describe your strategy to diversify from the company’s Strategic Niche, on what markets are you focusing on?
And do you want to grow this portfolio further, or are you happy with the current size?
Roger Waesche
Yeah, we are very happy because there are niches largely located in the Greater Baltimore, Washington, Northern Virginia region, we are a local sharpshooter in that market because of our operating platform, both our property management and development, re-development, tenant improvements, customer relationships, broker relationships et cetera, et cetera. And so the focus has been on for the Regional Office portfolio to stay within that envelop.
And I should say that the company has never been a 100% Strategic Tenant Niche, but today we’ve never been more Niche than we ever had. We’re more Niche today than we’ve ever been.
So today we’re 75% Niche, back when we started the strategic re-allocation plan back in April 2011, we were 60% Niche and 40% Regional Office portfolio, so we’ve grown to 60% to 75% and that’s a comfortable number for us.
Michael Carroll
Okay. And then out of the $400 million of planned sales, is there anything within the portfolio outside of that that you’re going to sell currently or just the $400 million is all you’re expecting?
Roger Waesche
Well, when we created the list we got well over $500 million and then we paired it down to in terms of hierarchy or priority for $400 million, but over time there are more assets that we are willing to sell. It really gets down to – with our stock price where it is, it has to do with choices, with trade-offs and we will sell assets identified for those that we can get to identification.
Michael Carroll
And are all those sales outside of your Strategic Niche?
Roger Waesche
They are, yes.
Michael Carroll
Okay, great. Thank you.
Operator
Your next question comes from the line Dave Rogers with Baird. Please proceed.
Dave Rogers
Yeah, good afternoon. Steve Budorick, maybe a question for you.
It looked like leasing economics in the quarter were pretty weak despite seeing some better velocity in the leasing. So can you a talk a little bit about maybe what drove the weaker leasing economics, was it a particular product type, mix, location that drove that or should we expect to see that bounce back, what are your thoughts?
Steve Budorick
Well, they are actually stronger in the second quarter than they were in the first quarter, if you look at the last supplement. We did a lot of real activity in sub-urban Baltimore that was a little bit more negative on our cash rent rolldown than expected than we would hope.
But it’s the quarter as a whole is about in-line with what we have guided to for the year.
Dave Rogers
In early here in the third quarter, what would leasing velocity look like, are you feeling better, similar trends, any thoughts there?
Steve Budorick
We waited for that question. Yeah, we are feeling really good about the third and fourth quarter, particularly in the context of some of the larger buildings that we have identified as leasing challenges.
On page 7, we identified five buildings that are kind of pulling back our same-office cash NOI growth. Started to tap at 310 The Bridge, we’re in lease activity right now that will bring us over 90% on that building by year-end.
At 3120 Fairview Park, we’re currently leased 80 plus and we’re working on one of two deals to put that building away. In Maritime Plaza, our activities picked up, we’ve got 87,000 square feet of leasing activity against 101,000 square feet of vacancy.
So on coming quarters, we’re expecting improvement. The aerospace building that we got back late last year, we identify [indiscernible] we’ve got a 150,000 square feet to lease and about 120,000 square feet of active prospects right now.
And then again at Patriot Ridge, we had better activity this year than we have had in a long period of time with about a 100,000 square foot of tenants working against 116,000 square feet of vacancy, all of that is contract driven work with demand drivers in the area and as those contracts get awarded we are optimistic, we are going to put leases away in the second half.
Dave Rogers
Maybe a last question on the Booz space, I guess taking a sale of that building aside, what’s the activity or the traction on that space?
Steve Budorick
It’s a little preliminary, it’s hard to show the building right now because it has cure elements in it. Our strategy on that building is focused on large tenants, that’s where the real value creation can come from.
It’s one of the few large blocks of that size in all of Northern Virginia and it’s certainly the best or among the best building quality for that size. We’re tracking three large consolidation opportunities, they’re in very early stages but we’ve shown the buildings several times, all those are 300,000 square feet or bigger and then with the little further out timeline there are several large GSA requirements that -- could be getting through Congress funding approval, all of those over 300,000 square feet, so we’re working for big tenants.
Dave Rogers
Okay, great thanks for the update Steve.
Operator
Your next question comes from the line of Brendan Maiorana with Wells Fargo, please proceed.
Brendan Maiorana
Thanks, good afternoon. Steve, in response to I think it was Jamie’s question about the occupancy, I think you mentioned that ‘16 occupancy you expected to be higher than the beginning of the year, I was just wondering or the end of ’15, is that inclusive of the vacancy with Booz or you’re saying if you include Booz at a 100% occupied or the 400,000 square feet, you still think given by the ’16, you get to a number that’s higher than that occupied number?
Steve Budorick
It presumes that we address some of the buildings that I just spoke in detail significantly by the end of ’16. And then, capture some additional occupancy around the portfolio and absorb the hit from Booz.
Brendan Maiorana
Okay. So it would be your -- to take your statements there, you’d have net pick up of more than 400,000 square feet of net absorption ex-Booz?
Steve Budorick
That’s what contemplated.
Brendan Maiorana
Great, okay thank you. So Roger, just with the Booz building that’s there, maybe you can kind of highlight how you guys thought about the sale of MITRE and the return outlook relative to $28 million purchase price and is that illustrative to think about the returns that you thought about for that building if you were to hold it versus how you’re thinking about the Booz building as well?
Roger Waesche
Right, so, well, we try to look at the MITRE building in isolation but also put it in the broader context of the company, the fact that we don’t have our share price, overall risk profile and take a hard look at the Northern Virginia operating environment, so it was an off-market deal, the tenant in our view had a very low probability of renewing and so then, we started to look at the building from a regional office standpoint and looked at its characteristics in terms of metro and amenities and looked at the Northern Virginia leasing situation in terms of downtime, free rent, the amount of TI that was going to be required to invest in the building and plus the likelihood of multi-tenanted and so when we took – looked at the offer and added the costs, we determined that our capital was better invested in our existing development portfolio than it was in -- we investing into the MITRE building. Now obviously there is a buyer on the other side and they probably have a different perspective in us and maybe around where the rent ultimately is, but in the broader context, we think we made a good transaction, it was the right value decision for our shareholders.
Brendan Maiorana
And do you feel like just looking at sort of the exit cap rate and even -- maybe rents were a little bit above market and maybe there is lots of downtime and bunch of other assumptions that I can go into it. But are the challenges that were present at the MITRE building also – do they also exist in the Booz building or do you feel like an empty Booz building is better positioned in the market versus the MITRE building?
Steve Budorick
I’ll take that one and I think the Booz building is far better positioned; it’s a fantastic building with great visibility right off the Tollway, very close to Dulles. It’s in a submarket that tends to compete for large tenants; conversely the MITRE building is in a submarket that competes for smaller tenants, so re-tenanting 150,000 square foot building in Tysons Corner without metro access was nowhere near as predictable or likely for quick successes I think that are ultimate outcome that you can achieve on the Booz building.
Brendan Maiorana
Okay, great. And then just last one for Anthony.
$300 million on security issuance, it seem like the spread was maybe a little bit wider than what we would have expected. Was there consideration to -- or could you maybe give us some thoughts as to -- did you think about a term loan swapping it to fixed and would pricing there have been more attractive if you chose to go down that route?
Anthony Mifsud
Yeah. I think the expectation on our end was that it also was a bit wider than what we had thought, but the fixed -- just to give you a little bit of context on a fixed income market, it has been [indiscernible] throughout 2015 and based on our desire to go long on our maturity schedule, we chose to execute the transaction and eliminate that risk.
We are considered in the fixed income market to be infrequent issuer and because we’re infrequent and because we’re going to be seen as an issuer that’s going to come in at the index eligible size or something just over that, we’re penalized for that because investors have the option of going to much larger, much more liquid transactions and when a smaller issuer comes, they have been demanding additional spread to compensate for that illiquidity. We thought it was the right transaction -- we thought it was the right move for the Company to put the tenure money sort of away and to extend our debt maturity latter.
I think if we have chosen to go for a bank deal or bank term loan, which we did do one this quarter as well, we could have upsized that transaction, but I think we believed the rate was the right decision for the extra five years of term because in the bank market, we probably would have been locked in at a five-year term. So, we thought that long-term was the right capital for the Company.
Brendan Maiorana
Sure. Okay.
Thanks for the time.
Operator
Your next question comes from the line of John Bejjani from Green Street Advisors. Please proceed.
John Bejjani
Hi guys. Steve, on the leasing front, is there any reason for the slower than expected development pipeline leasing velocity and then on the -- the average of lease term on renewals this quarter seem fairly short.
Is this reflective of any change in the defense leasing environment or is there anything to read into this?
Steve Budorick
No, I think -- let me address the term, just think of it as a statistical coincidence this quarter. It’s not representative of overall change.
With regard to development leasing, it’s lumpy. It has been in the past and it is, it continues to be.
We’ve got a lot of good activity on existing buildings in our development pipeline right now and we’re expecting some pretty positive results in the next two quarters.
John Bejjani
You guys have any thoughts toward slowing the growth of the development pipeline, given your current share valuation and sub-60% pre-leasing out today?
Steve Budorick
Right now, we’re going to -- well, we will do as much development as we can as long it is highly pre-leased and we’ll again be selling assets to fund development pipeline and so, we think will be selling shorter maturity leases for longer-term leases with the development pipeline and that’s really our goal.
Anthony Mifsud
And John, if you look at page 11 of the flipbook, the first two, which are the two largest subset of ours -- of our shadow development pipeline, the data center sales and the campus in Huntsville, all of those would be pre-leased transactions in order for us to put the shovel on the ground.
John Bejjani
Okay, great. And I guess, Roger, a related question.
You guys have been a meaningful non-external grower this year and expect to continue to be so through 2016. How do you guys justify or how do you think about non-external growth when you’re trading at a 20% plus discount NAV?
Or just more broadly, how do you think about your cost of capital?
Roger Waesche
Clearly, our cost of capital has increased and we’re not -- we have no appetite to issue equity and so, that means we’ve got to look at our existing portfolio and make choices and that’s what we’re currently doing, but we still think even with our elevated cost of capital that we have a positive favorable spread on development that we can accrete both from an earnings standpoint and more importantly from an NAV standpoint for our shareholders. So we will keep doing that.
Now, acquisitions on the other hand will take a very backward step to where we were when were entered the year.
John Bejjani
Alright, thanks.
Roger Waesche
Thank you, John.
Operator
Your next question comes from the line of John Guinee with Stifel. Please proceed.
John Guinee
Great. Thank you.
We are rooting for the home team, but it feels a little bit like the Baltimore Orioles right now. Let me ask, Roger, sort of the I think, the million dollar question that no one is asking.
If I look at page 11, which is your core portfolio in your sub and I look at the secondary defense industry market, so excluding NDP Columbia Gateway which are obviously great sub markets, you got airport square, a bunch of tire products about 88% leased, Westfields 770,000 square feet, 78% leased despite giving back two buildings that are now 25% leased. Patriot Ridge, I think that's been stabilized for two or three years now, that's 50% leased.
Merrifield sounds like from your footnote maybe it's got some traction, that's been a full year lease up. Capitol Riverfront 70% leased.
St. Mary’s, King George County, these assets are 80% leased with a ton of role as it shows up on page 17.
North Gate Business Park at Aberdeen proven ground, 46% leased. And now I flip to the development pipe and National Business Park 310 Centennial Way finished, that's vacant.
NOVA Office B that's Westfields, that's just finished this quarter, that's vacant. Is maybe this strategic niche long in the tooth?
Roger Waesche
No, we are very confident in the strategic tenant niche. You got to remember, we are just cyclically challenged.
After 9/11 the business took off like a rocket and then as things do, it overshot and the Budget Control Act of 2011 kicked in and the contractor saw that coming, so they started to rationalize their business models and right-size their space. And unlike a hotel company, we get our occupancy back over an extended period of time.
So it's been painful, but we do think that the majority of the tenants in our portfolio have now had a role since the Budget Control Act and what we said for the last couple of quarters is that it would be finalized by the end of 2016. But most of the locations have durable demand drivers.
You mentioned Westfields, for instance, with the NRO there and now the FBI has moved in with their cyber operations and then there's another government anchor that's moving into that park. So we are very bullish long-term on Westfields.
We are very bullish long term on Pax River and its growth. The only one that where we are concerned about is Aberdeen and the company has $51 million invested in three buildings there and we are doing the best we can there trying to create niche product to satisfy the base there.
But I think long-term we are where we want to be. It's just that in any business there is a cycle and we've been on the downside of that cycle, but we think we are at the bottom and we will be bouncing back imminently.
John Guinee
Okay. And then the second question, obviously I am looking out the window and you put together a great slide deck on Baltimore, but you can put together that slide deck on 15, 20 markets throughout the country.
How did you pick Baltimore to double down in your own backyard as opposed to any of 20 or 30 other markets in the Southeast or the Southwest?
Roger Waesche
Actually we did look at a number of markets and what we determined was that while there is growth in many of the Southeast markets, we determined that from an employment situation, again healthcare, education, technology those industries -- biotech, those things that we thought that were going to grow, Baltimore really showed up very well on all the statistics. Plus, there is the concept that we’re a local sharpshooter, we’ve got the platform to operate locally, we don't have that elsewhere and we don't need to create a second or third market.
We like our strategic tenant niche. We think it will grow and supplement it with a modest 20% to 25% regional office portfolio housed in the Baltimore-Washington-Northern Virginia region will give this company great stability long-term and great growth prospects.
John Guinee
Great. Alright, thank you very much.
Operator
Your next question comes from the line of Tom Catherwood with Cowen and Company. Please proceed.
Tom Catherwood
Yes, thank you. Just a couple of quick cleanup items.
In the presentation about 100 Light Street, you talk about, about 2.5% to 3% internal growth. Is that the contractual lease bumps on what you have in place or is that kind of an expectation of what you’ll get from lease-ups?
Wayne Lingafelter
No, the average in place lease maturity is eight years and actually with the big three tenants, it's 11 years and so that's really locked in and so the risk on the portfolio is, we actually say the variability and the opportunity on the portfolio is to grow the rents on the three big – non big -- three big tenants and so our forecast shows a very stable 2.5% to 3% internal growth rate on that asset for the next 10 years.
Tom Catherwood
Got you. And also in the presentation, you mentioned lease up of current and future retail space, is that alluding to that, maybe there is potential there for a retail expansion similar to what you had at 250 West Pratt Street?
Wayne Lingafelter
Well, Tom, the garage came with retail space embedded along the main streets in front of it and so the opportunities to lease up that space, there is probably a second retail opportunity, surrounding the building itself, but we’re not factoring that in when we said with a near-term upside for the asset.
Tom Catherwood
Got you. Okay.
And then… Sorry, go ahead.
Steve Budorick
I was going to say the same potential exists long-term.
Tom Catherwood
Okay, thank you, Steve. And then one more last one, just going back to the debt issuance, Anthony, we heard that one of the things, pushing up some of the spreads for issuers this past quarter was change in control, kind of items being pushed by lenders.
Was that something that you had to pay up to avoid in your issuance or was that not a concern from lenders?
Anthony Mifsud
That was not a concern for the investor base. That was looking at our transactions.
So we don't believe there was any spread increment that we paid as a result of not having to change our indenture for that.
Tom Catherwood
Got it. That's it from me.
Thank you.
Operator
Your next question comes from the line of Tayo Okusanya with Jefferies. Please proceed.
Tayo Okusanya
Yes, good afternoon, everyone. Just a quick question on guidance, again when you look at 1Q, you were originally guiding to $0.48 to $0.50, midpoint $0.49.
You come in at $0.52, which is a nice consensus [ph] to beat, but then you only raised full-year guidance by a penny, I’m just wondering what all the offsets are in the back half of the year that resulted in that guidance just being raised by a penny at the midpoint?
Anthony Mifsud
Tayo, thanks for the question. The answer is very simply, it's the variability and the timing of selling assets and so we want to leave ourselves room in the expectation that we could sell assets faster and that’s why we would go away sooner.
Tayo Okusanya
Okay. And are you making any assumptions about variability and asset pricing as well?
Is that part of what’s also driving that or no?
Anthony Mifsud
No, I think we've got a pretty strong bid for suburban assets in the market. So I don't think that's going to be the issue.
It really gets down to timing and I think we would be more sensitive to faster rather than slower to the extent that we can get that done.
Tayo Okusanya
Okay, that's helpful. And then just the MITRE building, we’ve all taken a shot that -- estimating the cap rate somewhere in the low double-digits, but I don't think you guys have explicitly said what cap rate you sold it at, is that something you could provide?
Anthony Mifsud
We sold it at about 14% cap rate. Obviously, it's going to go to minus 3% cap rate in a year.
So that's probably not the right way to look at it, but in the short run, the investor is getting a very high return on that asset.
Tayo Okusanya
Okay. Thank you very much.
Operator
Your next question comes from the line of Rich Anderson with Mizuho Securities. Please proceed.
Rich Anderson
Thanks for sticking around. I don’t know if anyone exclusively mentioned the word buyback, is it something that’s on your plate right now, selling assets more than maybe 400 and buying back your stock?
Roger Waesche
We would consider a buyback if our share price remained depressed for an extended period of time. In the short run, we are focused on customer oriented development and really getting the portfolio shaped to where we wanted, that’s why we are trading the sub-urban assets for the in-fill assets.
Obviously, there is a lot of considerations if you go down the buyback path. Number one, we are a REIT and structurally retain a little cash and we would want it to be real and able to execute not just a price signaling exercise.
And we are long-term investors, not short-term traders and so we have a development franchise and we have a customer franchise and we want to protect them, number one and so I think that’s really where the focus of our capital is currently.
Rich Anderson
Okay. And then, I think it was last quarter when the question was asked, it might have been from me or somebody, what the pipeline was for additional so called urbanization of the regional portfolio.
And the answer was I sought [ph] no pipeline, and then 100 Light happens. So I am just curious how faster this kind of happen come full circle of Lexington?
Roger Waesche
Well, the asset was in the market and we had no view on whether or not we were going to be a buyer or not, we made a bid and ultimately we’re the successful bidder, and ultimately buyer, but back at the time, there were no other assets we were focused on that are urbanizing, currently that is also the case. I can assure you that when have this call in October, we won’t be announcing another acquisition, there is no acquisitions at this point.
Rich Anderson
And how much of the 25% of the Regional Office portfolio that makes up your portfolio is a long-term hold for you now or do you – I know you’re not going to do – you don’t plan to change that number meaningfully in the short-term, but how much of it is something you would like to have five years from now as well?
Roger Waesche
I think we are -- about a third now of our portfolio is what we call of our Regional Office portfolio, now is what we call in-fill. We would like to grow that to two-thirds or three-quarters and so whatever those assets that we have to sell to fund the further densification of the portfolio is what it would be, I don’t have an exact number in front of it.
Rich Anderson
But that’s a several year plan, right, that’s a five-ish, five-year plan type thing?
Roger Waesche
That’s correct.
Rich Anderson
Okay, great. Thank you.
Operator
Your next question comes from the line of Bill Crow with Raymond James Associates. Please proceed.
Bill Crow
Good morning. Hey, Roger, if we go back a few questions, the subject of the cost of capital came up and certainly, it’s not like you’re frustrated by the stock price.
But answer how does buying an asset in a market, which you admit is contrary and how is that designed to change your cost of capital for the better? And the follow-up to that would be, you talked about the resurgence in the growth on Baltimore and pointed to kind of new industries, biotech, tech, healthcare, industries of the future, but 100 Light is to all firms and financial services firm.
So is the asset designed to exploit any of those changes within that marketplace?
Roger Waesche
Well, to answer your second question first, we weren’t looking at 100 Light as a user necessarily of healthcare and education, and tech, we were looking at it that the marketplace because of the demand from those new industries was going to tighten up and therefore, the supply and demand equation was going to get more favorable for existing landlords and we would be able to take advantage of that in renewals going forward and letting the whole macro trend of urbanization play itself out in Baltimore. To answer your first question, the asset that we bought we’re about to buy in August is not meant to be an incremental asset, it’s meant to be a replacement asset that is we will sell sub-urban assets to fund the incremental urban asset and by so doing and extending our lease maturity schedule and showing that we’re going to have steady same office growth for an extended period of time without asset, we ultimately believe that that will generate a lower cost of capital because our same office situation will be much more positive going forward.
Bill Crow
All right. I’m just trying to think about how it risk adjust your sub-markets and see where from today you have the best growth potential and total return potential.
So, is that asset more compelling than putting the money into the development program? I understand you’re selling existing assets to fund it, but I’m still looking at what the best opportunity is for you for your capital today and this is I guess compelling enough and provides diversification, et cetera, is that the way you’re thinking about it?
Roger Waesche
Well, our number one priority is development because it deals with customers and it deals with NAV accretion immediately, et cetera. And so, if we didn’t think we could sell suburban assets, we would not be buying an asset like 100 Light Street to add to our portfolio.
Unfortunately, the sequence is a little out of order here. It would be preferable if we could have sold suburban to buy this urban asset but you can’t pick and choose when opportunities come about.
And so, that’s what the sequence is but we’re confident we’re going to be able to sell assets to fund 100 Light Street.
Bill Crow
Okay, thank you.
Roger Waesche
Thank you.
Operator
Your next question comes from the line of Christopher Lucas with Capital One Securities. Please proceed.
Christopher Lucas
Good afternoon everyone. Just a couple of quick follow-ups.
Roger, on the buyback question, is there an authorization in place right now or would you have to go to the board and get one?
Roger Waesche
There is not an authorization in place.
Christopher Lucas
Okay. And then on the Booz building to go back to that for a second, is it relates to sort of the thought process just in terms of making a decision about timing on what to do, i.e., sale or lease?
It seems like if you marketed the building today, you would have probably a decision pretty quickly as to whether or not that would happen relative to waiting for your ability to get the building back and then having to go through the process of leasing such a large space. How should we be thinking about how you guys are thinking about the actual decision-making process on what to do with that building?
Roger Waesche
Well, we’ve gone to the market to get some indications of value and so, we think we know what the building would sell for in its current state and so, we look at that number as our rebuying number if you will and so then, we add towards the downtime and the free rent and the building improvements and the tenant improvements and we look at where we think rents will be and cap them in the future and look at what kind of return we would get by staying in the building and reinvesting in it versus letting another buyer to may have a different set of circumstances acquire the asset. And so, that’s how we did with MITRE, it was real simple.
We said, we had an offer in hand and we said that’s our new basis and so, what are the costs that we have to add to that basis and what kind of rental we get and yield and decided to sell the building and we’ll do the same analysis for Booz.
Christopher Lucas
Okay. And then you’ve talked about being the local sharpshooter and putting capital work in Baltimore.
Did you guys look at anything that’s been available in DC over the last six months or so and is that a market that you’re looking at at all?
Roger Waesche
We looked at DC for about a year and a half and obviously concluded that we could not be a core buyer in DC, the cap rates and costs of buildings relative to replacement costs were significantly above where we thought we could create value and so, we have not looked at acquisitions in DC for an extended period of time.
Christopher Lucas
Okay. And then the last question, just on the supplement on the redevelopment schedule.
Airport Square 5 went from buying a just sort of a defined program to sort of to be determined I guess, I’m just curious from first quarter to this second quarter. What’s going on there?
Roger Waesche
There is a high probability that it will get converted to retail, retail tide and some small retail, which is good because it’s in the middle of a grouping of buildings that will satisfy the needs of those buildings it surrounded.
Christopher Lucas
Great. Thank you very much.
Roger Waesche
Thank you. Thank you all for joining us today.
If your question did not get answered, we all are available to speak with you later today. Good day.
Operator
Thank you for your participation today in the Corporate Office Properties Trust second quarter 2015 earnings conference call. This concludes the presentation, you may now disconnect.
Good day.