Apr 29, 2017
Operator
Welcome to the Corporate Office Properties Trust First Quarter 2017 Earnings Conference Call. As a reminder, today's call is being recorded.
At this time, I like to 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, Nichole. Good afternoon and welcome to COPT's conference call to discuss our first quarter results for 2017.
With me today are Steve Budorick, President and CEO; Paul Adkins, Executive Vice President and COO; and Anthony Mifsud, EVP and CFO. In addition to the supplemental package and press release related to our results, we have posted slides on the Investors section of our website to accompany management’s remarks.
As management discusses GAAP and non-GAAP measures, you will find a reconciliation of such financial measures in the press release and on our website. At the conclusion of management's remarks, we will open the call for your questions.
Statements made during this call maybe forward-looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors. Please refer to today's press release and our SEC filings for a detailed discussion of forward-looking statements.
I will now turn the call over to Steve.
Steve Budorick
Thank you, Stephanie and good afternoon. We’re off to a solid start this year as highlighted on Slide 4.
FFO per share of $0.47 in the first quarter exceeded the high-end of our guidance by $0.01. Same office cash NOI grew by 5% in the quarter, exceeding our expectations by 150 basis points.
Our 58,000 square feet of development leasing was consistent with our forecast and we're encouraged by the number of discussions underway for development solutions with prospective tenants. We sold $53 million of assets, which was also in line with expectations and we now have about $50 million of planned dispositions remaining.
Our balance sheet metrics remain strong at 5.9 times debt-to-EBITDA and 38.2% net debt to adjusted book. We issued $20 million of common equity under our ATM to match fund pending build-to-suit development wins and continue to preserve our capital capacity for our growing possibilities of additional low risk developments.
The combination of the timing of R&M expenses and lower then explain expected weather related costs drove the out performance in FFO in same office cash NOI. Due to the timing component of the achievement and the dilutive impact of the unbudgeted ATM issuance, we are not increasing the midpoint of our full-year FFO guidance.
Well it’s been an interesting and we believe promising first 100 days under the new administration and another nail biting week in Congress, as Congress works of to pass a fiscal year 2017 budget. Regarding sentiment and actions in these early months, we are encouraged by the administration's unquestionable resolve to restore and strengthen our defense elements and its commitment to international leadership focused on the most unsettling threats to our national security.
Longer term we remain confident to the government's commitment to return to appropriate defense spending levels and sustained 5% to 6% annual increases to restore and strength and our defense capabilities. Regarding the outlook for defense spending, in the past few days it has become clear that before midnight tonight Congress intends to pass and the President intends to sign a one-week extension of the current continuing resolution in order to finalize budget negotiations.
We now expect the fiscal year 2007 budget will be approved, appropriated, and signed into law on or before May 5. Irrespective of whether the fiscal 2017 budget becomes law next week or a few weeks later, we expect to achieve our year-end forecast for same office occupancy and same office cash NOI and to meet or exceed our development lease and target of 700,000 square feet.
However, budget delays could start to place pressure on FFO per share if lease commencement dates associated with significant funding contingent projects are further delayed. The fiscal 2017 budget was authorized last December.
We established our 2017 plan assuming it would be adopted into law in the first quarter, providing the DOD with the base budget of $524 billion. The Slide 5 shows such spending will essentially be flat with fiscal year 2016's budget, but would enable the government to execute new leases into award new contracts.
We call it the 5% increase in defense spending funded by the fiscal 2016 budget, manifested in strong leasing and strong and same office performance in our 2016 results. Our 2017 plan does not contemplate or rely upon any increased funding beyond the original $524 billion level.
We don't need a bigger budget, we just need a budget, which we now expect to have next week. For the record this continuing resolution is less than 210 days and is the longest of the 12 continuing resolutions that have occurred over the past 16 years.
Ultimately Congress will fund the fiscal 2017 budget and we have very high confidence the base defense budget will be funded at a minimum level of $524 billion. We have in excess of 800,000 square feet of leasing prospect activity in our operating and active development portfolios, and fully 66% of that demand is either directly or indirectly dependent on having a 2017 budget signed in the line.
In the meantime, our shadow development pipeline of new opportunities remain strong and continues to increase. We have every confidence we will achieve significant leasing throughout this year and progress with strength in the 2018.
It’s important to note that not every transaction we are pursuing this contract are budget contingent and we expect to announce several build-to-suit development soon. As Slide 10 shows, between 2010 and 2016 the DOD's budget was pressured and in fiscal 2013 was actually cut by 6.6%.
During these same years, we averaged over 850,000 square feet of development leasing annually, while weather a continuing resolution each year. Our ability to execute on new demand through the cycle as the defense spending speaks to the essential nature of our defense IT locations, our expertise is one of the only turnkey developers and landlords for defense and government tenants requiring specialized and secure facilities.
The Slide 6 shows a level of our portfolio locations directly support 10 of the DOD's 14 stated spending priorities set forth in the fiscal year 2017 budget. We have experience and our tracking the increased demand this budget will drive and patiently await the ultimate budget resolution.
So in summary, we are executing well on our plan. We are confident that Congress will approve the fiscal year 2017 budget, hopefully in the next week, and assuming we are correct, we may still incur modest pressure on our earnings and expect to finish year at or near the midpoint of our guidance.
We will continue to manage and optimize what we can and we are poised to take advantage of the opportunities we know are coming. With that, I’ll hand the call over to Paul.
Paul Adkins
Thank you, Steve. I’ll touch on a few leasing highlights from the quarter, as well as are shallow development pipeline, which tracks development projects where we believe we have a 50% or better chance of winning the business.
At the end of the quarter, our core portfolio was 93.3% occupied, which represents a 40 basis point increase from year-end. Demand throughout our defense IT locations remain strong.
The lease execution on two thirds of the activity is fiscal 2017 budget dependent. As a result, execution on some leases has been delayed, but these leases are when not if events.
Despite the protracted continuing resolution, we have had some encouraging successes at several defense IT locations in recent months. At our Patriot Ridge project and Springfield, Virginia we have signed two leases in the past 90 days for a combined 18,000 square feet and are building stronger interest then 12 months ago for the remaining space.
In West Fields, which is adjacent to the National Reconnaissance office, we are negotiating with tenants to fill 120,000 square feet of our 201,000 square feet of vacancy. And in our Navy support portfolio, we continue to make solid progress at all three locations.
Tenant retention remains on track with our forecast of renewing 70% to 75% of expiring leases. Within our defense IT segment we renewed 96% of expiring square footage in the quarter.
In the region and office segment, we anticipated the 134,000 square feet of non-renewals in this quarter and have already backfield 87,000 square feet with new and expanding tenants. Referring to Slide 7, we have forecast a 100% renewal rate for the large government leases that expire this year and next, and continue to forecast of 50% renewal on the one large contractor lease that expires at MVP in the fourth quarter.
As a reminder, if that tenants government contract is renewed in full than we expect them to renew 100% of their existing lease. At the low end of our range, we conservatively forecast a 50% renewal rate with this tenant and we would have a good opportunity to release any space we get back to the competitor.
This robust retention rate amongst large leases underpins our confidence and our full-year guidance of renewing 70% to 75% of expiring leases. Strong demand throughout our portfolio also supports the size and geographic diversification of our shadow development pipeline that includes up to 1.7 million square feet of mostly build-to-suit projects.
Typically, our shadow development pipeline exceeds 1 million square feet and translates into 750,000 square feet to 1 million square feet of projects under construction each year. The newly developed space we place in the service each quarter tends to be significantly preleased.
On Slide 10, Steve highlighted our annual achievement in leasing new development projects. I would add that between 2012 and 2016, we delivered 800,000 square feet of new projects each year that were 90% leased.
This high degree of preleasing translates into low risk growth in future cash flows. Slide 9 shows the $27 million of annualized cash NOI currently associated with executed leases.
In accordance with our guidance, we will recognize between $11 million and $12 million of this $27 million this year and the balance over 2018 and 2019. By investing $200 million or more each year in low risk development projects with an average stabilized yield of 8%, we add $16 million of additional NOI to future results.
By continuously replenishing our pipeline of highly leased development projects we increased the level of cash NOI that fuels NAV growth. With that, I’ll hand the call over to Anthony.
Anthony Mifsud
Thanks Paul. FFO per share of $0.47 in the first quarter exceeded the high-end of our guidance range by $0.01.
We attribute the $0.02 of upside from the midpoint of guidance to the mild winter and delayed timing of certain R&M costs. These same factors drove our outperformance on same office NOI.
During the first quarter, we sold the suburban office property for $39 million and nonstrategic land for $14 million. Our 2017 guidance include selling the final $45 million to $50 million of assets during the second half of the year.
Recognizing our shadow development pipeline is strengthening and wanting to assure that we have the drive power to execute on such low risk value creating development opportunities, we issued $20 million of common equity under our ATM at an average gross price of $33.84. This funding positions us well to take advantage of development projects, while maintaining or slightly improving our balance sheet.
As shown on Slides 11 and 12, our balance sheet metrics remains strong and we are on track to lower our debt plus preferred equity to EBITDA to six times by the end of the year. We have no debt maturing until 2020 at which time we have $300 million of unsecured bank term loans due.
These loans are pre-payable without penalty and are swapped to a fixed rate of 3.1%. With the continued low interest rate environment, we are evaluating when it makes sense to extend these maturities.
Slide 13 of our presentation summarizes our guidance and the major assumptions that support it. Based on first quarter performance, including executing on dispositions as contemplated, we are narrowing our full-year guidance from its initial range of $2 to $2.08 to a new range of $2.01 to $2.07.
The midpoint remains at $2.04 per share because the benefit of lower first quarter expenses is offset by timing variances and the impact of the ATM issuance to fund anticipated development activities. We are also establishing guidance for FFO per share as adjusted for comparability for the second quarter of $0.47 to $0.49.
The $0.01 increase relative to first quarter results implied by the midpoint is driven by lower seasonal operating expenses and a stable outlook for same office occupancy. Slide 13, summarizes our second quarter and full-year guidance assumptions.
In addition, as noted in the guidance reconciliation provided in last night's press release, the non-cash write-off of the original issuance cost associated with redeeming our series L preferred shares is included in the second quarter. We intend to redeem these securities at the first possible redemption date in late June, making that expense a second quarter event for forecasting earnings per share, and funds from operations per share as calculated by NAREIT’s guidelines.
With that, I’ll turn the call back to Steve.
Steve Budorick
Thanks Anthony. Our ultimate objective is to deliver reliable competitive total returns to shareholders and our primary tactics for achieving this are to aggressively pursue defense IT business and to minimize risk in our portfolio and balance sheet.
By focusing on high quality defense IT assets and proven relevant missions we will generate stable predictable growth throughout future economic cycles. Our four key strengths, our portfolio, our balance sheet, our organization and our industry outlook should combine to produce very attractive risk-adjusted returns for shareholders.
Our defense IT locations are uniquely aligned with US government's spending priorities and intelligence, surveillance, reconnaissance, missile defense, Navy force, and cyber security. We are optimistic and excited about our prospects for adding value for shareholders.
With that operator, please open the call for questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Craig Mailman of KeyBanc Capital Markets.
Your line is now open.
Craig Mailman
Hi guys. Steve appreciate your commentary on kind of when you guys think the budget can ultimately be passed, but just curious how many weeks from now or at what point is FFO potentially become impacted than a point where you guys may need to revise the mid-point.
Steve Budorick
You know it is kind of tough to answer because it depends on the timing of when we get things done, following the passage, but I would say a month from now we’d start to feel an impact.
Craig Mailman
I mean you guys are talking about the conversations that you are having and where the shadow development pipeline is, just curious, if the budget does get passed in a week or so, can you kind of walk through the timing lag you may see on when that ultimately flows through to these potential development starts and also maybe break out of the 1.7 million square feet, how much is data center versus how much the shale data centers versus how much is your kind of traditional defense IT type tenants.
Steve Budorick
So I will take the last one first. Data centers probably 30% to 35% and the rest is defense IT.
With regard to timing, the government moves slow, let us assume we get a passage next week I think you could see lease activity completed on the major leases we’re focused on September-ish.
Craig Mailman
So truly it is going to be 4Q weighted to get to the 700 just given the slow start?
Steve Budorick
Yes. I would expect that.
Having said that, I did mention that we are very confident, we are going to announce two build-to-suit shortly and we're working on a third that we have very high confidence so we can get done in the next 30 days.
Craig Mailman
And those are all defense idea related?
Steve Budorick
Some data, some defense.
Craig Mailman
Okay. And then just lastly on the data centers two items.
One there was an article about a potential joint venture with GFH, just curious you can comment on that and then also, there is some news report so you guys are in the process of entitling Paragon Park, can you kind of talk about the timing there and when that land maybe entitled for some build-to-suit?
Steve Budorick
So that land we expect to be entitled in coming weeks. And I would expect some activity immediately thereafter.
With regard to the article on the joint venture that was almost irresponsible disclosure of a discussion that’s nowhere near a deal yet and it pertained to discussions on a potential joint and the north of government data centers we have in Richmond and Western Virginia.
Craig Mailman
Okay. And then just one last quick one if I can, Page 10, if you pull out shale data centers, is there more variability related to previous continued resolution and sequestration?
Steve Budorick
Well there is no question that has been a pretty significant component of what we have been delivering. I will just run that for you and send you an email Craig.
Craig Mailman
That would be great. Thanks guys.
Steve Budorick
Thank you.
Operator
Thank you. And our next question comes from the line of Jamie Feldman of Bank of America.
Your line is now open.
Jamie Feldman
Thanks. I am following up on Craig's question, so I mean how much of the FFO guidance is at risk, if it slips versus how much is going to end the bag, like should we think about the potential slippage here, the magnitude of it?
Steve Budorick
$ 0.01 at most. Let’s just say $ 0.01.
Jamie Feldman
Okay. I mean I assume a lot of it is, if it is leases, if it is development leases you are signed today you are not going to see an impact for 18 months, 12 months to 18 months?
Is that the right way to think about it?
Paul Adkins
Jamie none of it is development leasing. It is all leasing of existing operating assets or development projects that have already been completed and are awaiting leases.
So it’s not about getting a lease and then putting a capital in and having the NOI start. It is really about executing on the leases that are in progress, in order for them to have an impact from really from a GAAP standpoint by the end of the year.
That’s the reason we didn’t change our same office cash NOI guidance or our occupancy guidance.
Jamie Feldman
So you are saying you are comfortable within a penny or two of your original guidance even if there is slippage?
Paul Adkins
Yes, that’s correct.
Jamie Feldman
And then, I mean we have definitely seen a pickup in military activity with Syria, Afghanistan, North Korea can you just talk about how the tone has changed and if it has changed, I assume it changed post-election, but then has it changed even more over the last month or so among your tenants?
Anthony Mifsud
Well I will say this. We are getting increasing anecdotes of a high degree of urgency into a lot of fun locations.
In some in patients with senior officers in charge of missions that were attempting the same leases to serve. So, we didn’t really have that kind of clarity on urgency and the frustration of administrative processes this time last year.
Jamie Feldman
Okay. And any shift in the agencies that are getting more prominence or is that pretty consistent with what you have been talking about?
Anthony Mifsud
It’s pretty consistent with what we have been talking.
Jamie Feldman
Okay. And then finally, just on Northern Virginia in general, I mean definitely has been slow there, can you maybe, are you seeing any general improvement in the market, I know you are expecting more releasing but like concessions, rents, anything just to speak generally about the market that may have changed over the last quarter?
Steve Budorick
Sure. So with our sales we are really concentrated in two locations.
I will let Paul talk about Tysons Corner, which is getting pretty exciting, but in the route 20 a quarter near dollars larger blocks of vacancy are becoming more scarce, there is upward pressure on rental rates. We have been able to move our rate up in the largest vacancy we have there.
No progress on concessions yet, but we are seeing improvement. Paul you want to talk about Tysons?
Paul Adkins
Yes with Tysons Corner as a residual from our Wells Fargo renegotiation last year we've had some vacant space, which we’ve had good luck in releasing. We have a law firm vacancy later this year, which is at top two floors of 1751 pinnacle drive and our activity, again, it is walk able to the Metro, you have an increasingly amenity base within a walk able distance and we have four prospects looking at this top two floors, and rents are being slightly pushed up.
So we are optimistic about the ability to raise rents modestly in our Tysons Corner assets.
Jamie Feldman
Okay great, that's helpful. Thank you.
Operator
Thank you. Our next question comes from the line of David Rodgers of Baird.
Your line is now open.
David Rodgers
Hi good afternoon guys. I wanted to ask a little bit about the non-strategic customer that moved out on the first quarter, the 134,000 square feet, was that in the same-store pool, did that hit the numbers, what kind of impact did that have in the first quarter, it sounds like you backfill the decent portion of that, did you give a sense on kind of on what the backfill was relative to the existing lease?
Steve Budorick
So there were really three. One was the bank that we originally brought Canton Crossing from they have been facing out.
We have got activity to backfill the bank. One was a residential developer, it is in our pinnacle building in Tysons Corner and 90% of that space has already been released.
Third was a utility in White Marsh, in one of the assets that we have under contract for sale. And that was 88% of the non-removal.
David Rodgers
Okay and did that have an impact on same-store at all?
Steve Budorick
All three of those are in the same-store.
David Rodgers
Okay that’s helpful.
Steve Budorick
I'm sorry, the White Marsh is out.
Paul Adkins
Yes the White Marsh as was not in same offices and held for sale, but the other two had slight impact.
Anthony Mifsud
And the backfield tenants have, not only we have, we not only lease that space they are occupying here in the first quarter too. So it is a very short brief downtime between the vacancy and the occupancy of the following tenant.
David Rodgers
Okay, good, that’s helpful. Thanks for that color.
And then down it rents down, I didn’t know if you commented, I think some of the moves that you were waiting for anticipating there were less contract or budget dependent, correct me if I am wrong on that and then any update on what you have seen at Redstone and the potential move.
Steve Budorick
I will let Paul handle that one.
Paul Adkins
Yes. I would say that the prospect that we have for a build-to-suit down there is not contract dependent and it represents a consolidation and new facility.
So we expect to, we’re progressing nicely on that transaction and hope to have it concluded in the not too distant future.
Anthony Mifsud
We also have pretty good demand from non-four building users and so there is pretty high likelihood we are going to kick up couple of single stories to handle tenants we have been talking to for several years, but are now capturing additional business and need expansion in their facilities.
David Rodgers
That’s helpful. Last question maybe from me is the build-to-suit that you talked about the demand and the development pipeline Steve, is that greater than you had kind of initially anticipated coming into the year and maybe a partial question to that is, what you contemplate just kind of selling more assets to fund that or the ATM position?
Steve Budorick
Well our plan is to finish the sales of the assets that we are engaged and have under contract now that completely get us out of the suburban Baltimore market, and then they are after try to match fund with ATM.
Paul Adkins
This is Paul and I think it is fair to say that we would characterize it as being a slightly uptick in the build-to-suit development pipeline from a quarter or two quarters ago.
David Rodgers
Okay, great. Thank you.
Steve Budorick
Thanks David.
Operator
Thank you. Our next question comes from the line of Tom Catherwood of BTIG.
Your line is now open.
Tom Catherwood
Yes, thanks, good afternoon. Paul quick question on the expiration at National Business Park that takes place at the end of 2017 what is the timing on that contract award that the tenant is waiting for and is that budget dependent?
Paul Adkins
That lease expires on December 31 of this year.
Steve Budorick
The contract is a little fluid. We are hearing June, July it could be awarded.
And it is a big long-term contract so there is probably high likelihood of contest over that contract after the award, which would add another 90.
Paul Adkins
And there is more new loses to is, and you may have hear d in my remarks that there is only, I believe two contractors competing for that award and our conservative, but operating assumption is that we get half of that space back, but there is logic to the idea that the winning contractor might backfill the space, should the existing tenant lose that contract.
Anthony Mifsud
And Tom with respect to your question about the budget, this is a contract that is already being serviced by the contract that is in the building, so it is currently being funded by the continuing resolution, so it would - even though new contract is really a replacement of the existing one. So, it wouldn't be held up if the budget got held up.
Tom Catherwood
Got it. So it sounds like this is more of a likely third quarter 2017 and timing a little bit more, is that an actual statement?
Steve Budorick
Yes two or three.
Tom Catherwood
Okay. And then switching over to the regional office portfolio, could you talk a little bit about the Baltimore market and specifically when you guys purchase 100 Light in 250 West Pratt there was a potential to potentially add some retail there and any progress on that front?
Steve Budorick
So we are in the process of having the exclusive development right through the retail, finalized with Citi. We submitted a bid.
The bid was accepted, we are negotiating the agreements. We have a team - we have a development plan and a team working on preleasing that retail.
The nature and the identity of the prelease tenants are confidential, but we're pretty excited about the opportunity. With regards to the overall market, it continues to be strong, probably about 8% vacant in the 15 waterfront properties that we compete with.
That vacancy ticked up when Exelon moved into their full building lease and gave back space and two buildings on Pratt Street. Big chunk of that space that was returned are already backfilled are re-let.
There is still some additional vacancy and rates are stable. So the market is performing well.
Tom Catherwood
Got it. That's it from me.
Thanks guys.
Operator
Thank you. Our next question comes from the line of Emmanuel Korchman of Citi.
Your line is now open.
Emmanuel Korchman
Hi guys. If we think about sort of the commentary to being in the call about just on a, budget is necessary that these deals are on, how much does a quarter beneficial budget or a budget that is sort of larger than some expectations help you whether it be the land new deals or get these details signed versus just signing at the minimum levels?
Steve Budorick
Candidly there is no real way to know until they pass it an appropriate the money. So, we just are guiding our investors to a baseline of 524, which gave us good progress last year and will continue that progress into 2018, and I really think the fiscal 2018 budget will tell us more about how much upside there could be in the future.
Emmanuel Korchman
And then Anthony, if we look at the pipeline of upcoming, whether it be development deals or move ins, help us think about how that flows into income from both a GAAP and cash perspectives, so [indiscernible] obviously is going to be quicker and built-to-suit is going to be quicker than sort of a speculative or a new build, but if everything were to happen the way you expected to now, when do you start seeing the positive cash impact of these leases?
Paul Adkins
Well for buildings that are already built and in our pipeline that’s the NOI that we are showing in our guidance for this year, as well as for the $41 million for the projects that are underway. With respect to projects in the pipeline, it really varies by the type of project that would be commenced, I mean a data centre shale lease from lease to rent commencement has, the team has that down to 5 months to 6 months with respect to - the government leases for the two buildings that we are continuing to wait for the leasing on.
Once they lease those assets, it is going to be a good 12 months for the design and fit out to take place for those leases to start cash rent flowing. So, it’s really dependent on the type of investment that we're really making.
Emmanuel Korchman
That's helpful and then in terms of the ATM issuance, how did you decide on the 20 million, especially since those ATM, why not truly match fund and as you get the developments underway just issue the equity as you go?
Paul Adkins
We really tied it to the equity component of development projects that we see in sort of foreseeable future that we expect to announce in the next 30 to 60 days. So we really matched it around that combined with the capital that we are raising from the dispositions.
So it was really focused on the assets, the leases that we are seeing sort of eminent from that demand that we have.
Emmanuel Korchman
Thanks everyone.
Steve Budorick
Thanks Emmanuel.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Jed Reagan of Green Street.
Your line is now open.
Jed Reagan
Hi good morning guys. Sorry if I missed this, but can you provide the aggregates square footage of the three potential build-to-suit you mentioned that are on the front burner?
Steve Budorick
Just under 450,000. I'd say 420,000 to 450,000.
Jed Reagan
Okay that is helpful, and then sort of split up between data centers and office?
Steve Budorick
Two-thirds, one-third, data.
Jed Reagan
Okay. And just looking at the Northern Virginia assay, you saw last quarter, curious how representative you would say that building as for kind of the rest of what you own out there in terms of quality and rent profile and then can you provide a cap rate for that sale?
Steve Budorick
I will leave their cap rate to Anthony. So that was 3120 Fairview Park.
It is a very good building that the company bought slightly before I joined the company, but we’ve had a real struggle leasing it and the submarket, it was in had at a one-time been a dominant defense submarket, but increasingly defense contractors are vacating there, but most importantly it is not metro served. So, it really from a submarket location perspective we viewed it as disadvantage and not a long-term hold.
The route 28 quarter has permanent priority demand drivers in it. So it’s much different than the submarket that 3120 was in.
Anthony Mifsud
And Jet, from a cap rate perspective on a in-place cash cap rate was about 6, 7 stabilized a little bit over 7 and that asset was about 87% occupied when we sold it.
Jed Reagan
Okay great.
Paul Adkins
This is Paul. Just to contrast Fairview Park from our other Northern Virginia assets our Merrifield assets are within a five minute walk of metro and plenty of restaurants and immunities.
Fairview Park has a suffering of not only, just a lot of vacations by firms who have no places to eat within close proximity, our Tysons Corner asset is obviously a five minute walk to the metro, as well as our Sunrise Valley, so and have places to eat. So it is a, it is a classic business park, but obviously time has been damaging to it because of the lack of immunities and its lack of metro service as compared to our other assets.
Jed Reagan
Okay appreciate that. And then just kind of looking ahead to the 2018 budget, when do you think that gets debated and potentially passed and what’s your level of confidence that what ultimately gets passed resembles the Presidents initial proposal?
Steve Budorick
That’s very good Jed. So the skinny budget is out, I will flip through that.
They are sitting forth an expectation that defense spending will be increased from the cap level by $54 billion, which would put it, another $25 billion or above of what we are expecting this year. Who knows on timing, we are focused on 2017.
It would be nice to see government function in a way that that budget could be passed as we enter into the fiscal year, the following severance straight years of continuing resolution, I wouldn't say I’m confident that can happen.
Jed Reagan
Yes, makes sense. Okay, thanks a lot.
Operator
Thank you. Our next question comes from the line of Rich Anderson of Mizuho Securities.
Your line is now open.
Rich Anderson
Thanks, good afternoon folks. So on the same-store outlook, I know I understand the 5% and it was impacted by a mild winter and timing and so on and so forth, but do you think just putting out of side you might have been more inclined to get more constructive on the same-store outlook had it not been for this kind of this dysfunction of the government, are you kind of leaving, do you know what I mean, like did the broader landscape play a role in you keeping your same-store where it was for now?
Paul Adkins
I would say that that landscape probably played a slight role in the decision to keep it where it is. If we incur delays in revenue and leave starts and therefore revenue because of the situation we are in, the vast majority of that was GAAP related revenue as it relates to cash.
So, from a same office cash NOI growth, the impact on that metric isn't really being felt by what we are going through in terms of the lease commencements.
Rich Anderson
Right, okay. And so if I can then talk a little bit more bigger picture, can you just kind of provide a range of possible outcomes, which might be a tough thing to do in this administration, but if there is a thousand of them we can go through all of them if you like, but is it simply continuing resolution, if we get that for a week or some period of time and then followed by one or the other of binary, either government shutdown or appropriation of the 524 or is there some derivative outcome that’s even more likely than one of those two?
Steve Budorick
Well we’ve been on the phone with advisors we have inside the Beltway are weak. The three outcomes are continuing resolution for some period and the worst case would be through the end of the fiscal year.
Shutdowns bring a sense of urgency, the longest in history are 16 days, the average is about 4.5 days, the good news about the shutdown as it brings a deal in order to end it. And then the third is, what we have been guided to expect it, progress is really being made on a bipartisan basis and that by the end of next year we should have it wrapped up.
Rich Anderson
Okay, so when I look at your chart on Page 5, and you have 522 billion for fiscal 2016 going to 524, so not a very large increase as you went through, but is it more about just behavioral issues and people feeling confident because the dollars don't seem to matter much, is it more about confidence are is that the way to think about the situation as it relates to your tenants?
Steve Budorick
Yes and certainly the 522 and the 524 were agreed upon in December of 2015 for the fiscal year 2016 and 2017 budget. Since the administration won the election they have been seeking to top up the 524.
And there is a lot of discussion around that and that’s why the continuing resolution was pushed out until today. And so we've been guiding people to remember.
The impact of the increase from the 497 or the 522 had very significant positive effects on our leasing. And we expect to just continue at that funding level by giving the customers the ability to allocate money to new contracts and new leases.
We will generate a lot of progress.
Rich Anderson
Got you. Okay.
Thanks very much for the color.
Steve Budorick
Everything beyond that is upside.
Rich Anderson
Okay. Looking forward to tomorrow night I guess.
Steve Budorick
Yes.
Rich Anderson
Thanks.
Steve Budorick
We are just advised that the house passed the continuing resolution this morning and it's progressing to the Senate.
Rich Anderson
Oh, how about that. Glad to be a part of it.
Steve Budorick
It's all you Rich.
Operator
Thank you. Our next question comes from the line of John Guinee of Stifel.
Your line is now open.
John Guinee
John Guinee here. Question, I guess probably for Antony, it looks to me like your guidance midpoint for 2017 applies a nice ramp up to maybe $0.54 or $0.55 a share in 3Q and 4Q 2017, is that accurate one and then if it is what drives it?
Anthony Mifsud
That is accurate and what drives that is the continued contribution from the development projects that are placed in service. NOI as well as the first half of the year has dampened a bit because we pre-funded the equity to redeem the preferred shares at the end of June.
So, the benefit of using that capital to redeem those preferred shares at the end of June will really impact the third and fourth quarter.
John Guinee
So the two data centers, the North Virginia office and the 50% occupancy at 540 NVP is the date driver that all happens here, very recently in the immediate future.
Anthony Mifsud
Yes the only one in that list that wouldn't impact 2017 with any significance is 310 to the extent that that incrementally leases up throughout the year, it’s going to be small when the government takes the whole building there it will really impact 2018 much more, but the other projects you mentioned are correct.
John Guinee
Okay. And then on Page 7, if I look at, you got a, well it appear to be very favorable renewal rates on the 125,000 square feet in January of this year, you have got another 1.2, do you expect these to the rent roll-ups, or rent roll downs and are these heavy in concessions or light in concessions?
Steve Budorick
These will all be neutral to positive role up and moderate in concessions.
John Guinee
And will they be, what sort of term we notice that your renewals this quarter where light on term?
Steve Budorick
Yes the government renewal was 10-year term. Interestingly this quarter, probably 85% of the renewal activity that we did do were with non-defense tenants and a couple of those went very short term, one was an insurance company, was a law firm and one small type tenant.
Anthony Mifsud
And the quantity of square footage was very like to. So the short-term was heavily influenced.
The 1.6 years does not include the 10-year renewal at the MVP to 122, but the expectation is that the government leases are longer term.
John Guinee
Right. Thank you very much.
Steve Budorick
And one further comment John. We worked very hard last year to get a bunch of early renewals done and rollover risk out of the equation for 2017 and that has a lot to do with the way our volumes sold late in the first quarter.
John Guinee
Perfect, thank you.
Steve Budorick
Thank you.
Operator
Thank you. Our next question comes from the line of Rob Stone - Evercore ISI.
Your line is now open.
Rob Stone
Hi guys thanks for taking the question.
Steve Budorick
How are you doing Rob?
Rob Stone
Good, good. Kind of a two-parter from me, a lot of my questions have been answered, but the 1,700,000 square feet that’s in your shadow pipeline, I know you guys defined that as a space that has a 50% likelihood that you guys are winning, I was just wondering if you could talk philosophically about how you kind of come to that determination, does that mean you are one of two developers and then secondarily looking back historically versus that like 50% assumption, what has been your actual win rate on that?
Steve Budorick
I’m pretty sure it has been well in excess of 50%. But candidly we have measured that.
And we handicap it deal by deal, but as the discussions we're having with the potential customers, often we don't have competition and it is a question of whether the project is pushed forward. And when there is a competition, if it’s one-on-one then we will call that 50% and handicap it.
Paul Adkins
In some of the non-government deals though, I think it is fair to say that we do apply a final list of one of two as some of these deals - on some of these other deals that are outside the government envelop or the data center envelope. So that’s, it is a methodology of being a finalist in the competition.
Rob Stone
Got it. Thanks guys.
Appreciate it.
Steve Budorick
And Rob we just got word that Senate passed the continuing resolution, so it looks like it is on the way to the President’s desk.
Rob Stone
You guys are on fire. Thanks guys.
Steve Budorick
Thank you.
Operator
Our next question comes from the line of Chris Lucas of Capital One Securities. Your line is now open.
Chris Lucas
Hi, good afternoon everybody. Most of my questions have been answered as well, just a couple of cleanup questions.
On Redstone, what’s the progress on the gate move there, has that been completed and what can you tell me about sort of the impact that’s having on interest in the park?
Steve Budorick
It’s not moved yet. I think the schedule date is July 1.
Paul Adkins
July 5.
Steve Budorick
July 5, okay. Shoot me for four days.
And I think that has a strong impact, interest is strong at the park. We opened our restaurant amenities in October.
There are activities really ramping up, it’s been a big hit in the local community, the quality of the food that we have offered their and our Hotel opened in February. So, it is driving traffic into the parking’s wall and we are seeking another hotel operator to progress with the second there.
Chris Lucas
Okay great, and then on the first quarter call you had, I think it was $39 million to $49 million of assets under contract, you closed on the $39 million, is there still $10 million out there that’s under contract or did that fall out or where do you stand with sort of rest of the stuff that’s for sale right now?
Paul Adkins
Currently we have about $50 million under contract and those buyers are going through the diligence process with expiration on their diligence within the next 30 days to 45 days. So, we are making good progress of the - surely no issues with the buyers through the diligence process.
So, we feel pretty confident about executing on those transactions later in the second half of the year.
Chris Lucas
Okay, great. And then last question, going to Pinnacle is obviously a lot of activity in that area, Tysons, do you guys explore as there are much to do there at some point down the road as it relates to taking a hard look at that footprint, it’s a big footprint?
Steve Budorick
Which footprint are you referring to? Our building footprint?
Chris Lucas
Yes the parking garage, the amount of space, the land of that, those two buildings are massive.
Steve Budorick
You are talking from a land standpoint, a redevelopment. Well we committed to a 12-year term with Wells Fargo, so we can't really even consider that for a while.
Longer term I think it is very valuable piece of land as Tysons becomes more residential and retail driven along with the heavy concentration office. It’s going to be a very attractive location and I think that the entire value of the asset will appreciate.
Chris Lucas
Great, thanks a lot.
Steve Budorick
Thank you, Chris.
Operator
[Operator Instructions]
Steve Budorick
Thank you all for joining our call today. We are in the office all afternoon, so please coordinate through Stephanie if you would like to follow up, call later.
Thank you all.
Operator
Ladies and gentlemen thank you for your participation today in the Corporate Office Properties Trust first quarter 2017 earnings conference call. This concludes the presentation.
You may now disconnect. Have a good day.