Jul 29, 2017
Operator
Welcome to the Corporate Office Properties Trust Second Quarter 2017 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, Kevin. Good afternoon and welcome to COPT's conference call to discuss our second quarter results in 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 web site 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 web site. 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 attendees. We had a solid quarter and we continue to execute according to our 2017 plan.
As highlighted on slide 4, FFO per share of $0.49 in the second quarter was at the top end of our guidance range. Same office cash NOI grew by 2.6% in the quarter, which exceeded our expectations.
Development leasing in the second quarter of 325,000 square feet, brings our total for the first half of the year to 383,000 square feet. Based on transactions under negotiation, we are highly confident we will exceed our full year development leasing goal of 700,000 square feet.
Regarding asset sales, later today, we expect to complete the sale of our remaining buildings on land in White Marsh for $47.5 million. Since 2011, we have sold more than $1.5 billion of assets, containing over 10.5 million square feet.
This final portfolio trade represents the last of our programmatic asset sales. In the quarter, we paid down $200 million term debt and redeemed their Series L preferred shares.
Our balance sheet metrics remain strong at 6.4 times net debt plus preferred to EBITDA and 42.4% net debt-to-adjusted book. We are on track to finish the year, at total leverage to EBITDA of about six times.
In terms of market sentiment, the French contractors remain optimistic about future trend spending and as illustrated on slide 5, are planning for average annual increases of 5% through 2021. For the upcoming 2018 fiscal year, the President's budget request implies an 8% increase in the DoD's base budget relative to 2017 levels.
Comments made by Secretary of Defense Mattis also support the industry's expectation for 5% annual growth. Mounting geopolitical tensions continue to bolster the bipartisan support for increased defense spending.
In May, the administration submitted next year's budget request, including a $575 billion base budget, detailed in the 2018 National Defense Authorization Act. Slide 7 summarizes the changes that Senate and House Armed Service Committees recommended in their mark-ups, which were released a few weeks ago.
The House Committee voted 60 to 1 to add another $18 billion to defense, which would result in a base budget of $593 billion. The Senate Committee unanimously approved the defense budget of $611 billion, an increase of $36 billion over the requested amount.
When Congress returns from recess in September, they will have a less little month to negotiate the federal budget. Given this tight timeframe, we expect fiscal year 2018 to begin under another continuing resolution, which would mark the ninth straight year, the Federal Government starts the fiscal year without a budget.
Similar to what we reported on our last call, demand throughout our portfolio remained steady and deliberate. The government contracting process that was frozen by the recent 216 day continuing resolution appears to be fine, albeit gradually.
As we anticipated on our first quarter call, some leasing will slip into next year, though we still expect to see a meaningful increase in lease executions this fall. We expect leasing in the second half of this year to parallel last year's activity, when demand picked up significantly, approximately six to nine months after the government appropriated the fiscal 2016 budget.
In the meantime, we are competing for demand to fill existing space, as well as for new build-to-suit projects. We have an excess of 550,000 square feet of new prospect activity in our operating portfolio, much of which is contract contingent.
Our shadow development pipeline of new opportunities remain strong, and most of these transactions are not contract contingent. Having successfully executed on 300,000 square feet of build-to-suits that we announced in many, our shadow development pipeline now stands at 1.4 million square feet, and is geographically dispersed throughout our portfolio.
Not wanting to overpromise, I will just say that we expect to have a busy second half of 2017 and a very busy 2018. On that note, I will turn it over to Paul.
Paul Adkins
Thank you, Steve. During the quarter, we leased a total of 696,000 square feet, including approximately 100,000 square feet to cyber security companies in the BW corridor.
As a result, our core portfolio was 93.8% occupied at the end of the quarter, a 50 basis point increase from March 31. Excluding the two recent developments held for government users, we have just over 1 million square feet of vacancy.
As Steve mentioned, we have over 550,000 square feet of new prospect activities spread across the portfolio. This number is down from the 800,000 we cited on our last call and reflects the fact that we converted 78,000 square feet into new leases, and that 150,000 square foot prospect in the BW corridor is now contemplating a build-to-suit.
We have excluded this potential tenant's demand from our new prospect activity, but because the client is still early in the process, we have not added the opportunity to our shadow development pipeline. We have also achieved new leasing at DC6, our wholesale datacenter north of Virginia.
The 2 megawatt long term lease we signed in June increase of DC6 to 87.6% leased. Same office cash NOI increased 2.6% in the quarter versus the second quarter of 2016.
By reporting segment, same office results in defense IT locations increased 5% in the quarter, and the regional office declined 11.2%. The decline in regional office was driven by non-renewals discussed on our last call, and by early renewals completed in the third quarter of last year.
We have re-leased over a third of this vacancy, and are seeing strong demand on the balance. Within the defense IT segment, the 5% increase in same office NOI reflected strength across the board, and with particularly strong year-over-year same office occupancy gains in our Navy Support Group, up 720 basis points to 81.9% and good visibility on demand to achieve over 90% leased by year end.
A 620 basis point gain in our Nova defense IT locations to 86.5%, a 110 basis point gain in Huntsville, Alabama, to 100%, and an 80 basis point gain in the BW corridor to 95.8%. Tenant retention in the quarter was 85% overall and was 88% in defense IT locations.
Our renewal rate for the six months ended June 30 was 67%. We are on track to exceed our original full year guidance of 70% to 75%, and accordingly, are increasing our tenant retention forecast for the year to between 75% and 80%.
Slide 8 summarizes forecasted retention for the nine largest expiring leases this year and next, which supports our expectations. We forecast a 100% renewal rate for the large government leases that expire in 2017 and 2018.
Note in the table that one contract or lease per 152,000 square feet has moved into the 2008 expirations. This is a full building lease in the NBP, where the tenant is competing for a large contract renewal with the government customer.
The government originally expected to award this contract next month, but delayed the decision until the first quarter of 2018. We are completing a one year renewal with this tenant, and next year, if they win the contract, we expect them to renew in full and for a longer term; or if they don't win, we expect them to give back up to 50% of their space and renew for a longer term.
If the latter occurs, we would have a good opportunity to re-lease the non-renewing space to the winning contractor. Steve touched on the two build-to-suits we announced in May.
Our second quarter development leasing also benefitted from a pickup in leasing velocity in redevelopment projects. We recently redeveloped three office buildings, 7134 Columbia Gateway drive and two buildings in the airport square submarket near BWI.
The three buildings totaled 104,000 square feet, and at June 30, we are 82% leased. Two of the three projects achieved 100% leased during the second quarter.
Demand for the redevelopments is predominantly from cyber-security and IT users seeking proximity to Fort Meade. We expect to achieve stabilized yields of 10% to 11% of incremental investment in these three projects.
Growing demand for cloud computing combined with improved clarity in the defense industry underpins the ongoing strength in our shadow development pipeline, which tracks projects where we believe we have a 50% or better chance at winning. On our last call, we were competing for 1.7 million square feet of projects, subtracting the build-to-suits announced in May, our shadow development pipeline now stands at 1.4 million square feet.
Given the depth of demand from commercial and government users for cloud computing, over the next 12 months, as much as 33% to 50% of our shadow development square footage could be in datacenter shelves. During any given quarter, we typically have 750,000 to 1 million square feet of projects under construction.
As slide 11 shows, since 2010, we have leased an average of 850,000 square feet in development projects annually. We normally begin construction with a sizable or full building lease in hand.
This high level of pre-leasing mitigates the vacancy risk that typically attends development and creates visibility into future cash flows for our company. Slide 10 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 this year and the balance over 2018 and 2019. For the second half of 2017, we expect to place into service, over 600,000 square feet of developments, and that this square footage will be 100% leased.
This will bring our total square feet placed into service for the year to nearly 1 million square feet that are virtually 100% leased. By continuously replenishing our pipeline of highly leased development projects, we increased the level of cash NOI that fuels our NAV growth.
With that, I will hand the call over to Anthony.
Anthony Mifsud
Thanks Paul. FFO per share of $0.49 in the second quarter equaled the high end of our guidance range.
We outperformed our internal same office cash NOI, due to the timing of our O&M expenses. Notwithstanding the timing events, the strength of the performance to-date translates into modestly more bullish forecast for same office cash NOI, which we now expect to increase between 3.3% and 3.6% for the year.
While we are increasing our same office NOI forecast, we are lowering our year end same office occupancy forecast modestly, to reflect the delay in certain lease start dates. We discussed the possibility of potential leasing delays caused by the protracted continuing resolution on our last call.
Slide 14 shows our revised year end same office occupancy forecast of 92% to 93%. Our pipeline of leasing prospects remains strong, but the occupancy dates on some transactions will now occur in 2018.
During the quarter, we sold one suburban office property for $2.3 million and today, are completing the $47.5 million sale of our remaining assets in White Marsh. This transaction will complete the programmatic asset sales that have been a continuous drag on earnings for the past several years.
Once the White Marsh portfolio went under contract, we repaid $200 million of our 2020 term loan, and in accordance with our 2017 plan, redeemed all of the outstanding 7.375% Series L preferred shares at the end of June. This redemption improves our fixed charge coverage ratio by 50 basis points.
The only preferred equity outstanding is $9 million of 7.5% preferred Series I preferred units, which are callable in September of 2019. As shown on slides 12 and 13, our balance sheet metrics remains strong, and we are on track to lower our debt plus preferred equity to EBITDA, to approximately six times by the end of the year.
Assuming we exercise the extension options on our line of credit, we have no debt maturing until 2020, at which time our $100 million term loan and line of credit mature. Both loans are prepayable, without penalty, and together represent $294 million of borrowings.
Given the continued low interest rate environment, we are evaluating the timing to extend these maturities. Slide 14 of our presentation summarizes the major assumptions behind our guidance for full year FFO per share, as adjusted for comparability, which we are narrowing from a range of $2.01 to $2.07 to a new range of $2.02 and $2.06.
Note that the midpoint of our revised guidance remains at $2.04 per share. We are establishing guidance for the third and fourth quarters of $0.51 to $0.53 and $0.54 to $0.56 respectively.
The $0.03 increase implied by the midpoint of our third quarter range, reflects savings related to our Series L redemption and NOI from development placed into service, partially offset by the impact of our third quarter sales. We expect additional NOI gains related to occupancy increases, particularly among development and redevelopment projects to add another $0.03 to our fourth quarter results.
With that, I will turn the call back to Steve.
Steve Budorick
Thank you, Anthony. The ramp up in our shadow development pipeline from less than 1 million square feet for several years to 1.4 million today is encouraging, as is the breadth of that demand.
We are in final negotiations in several transactions, and expect to have a busy second half of the year, that should generate strong momentum heading into 2018. By relentlessly pursuing every defense IT business opportunity in our proven locations and keeping a steady hand on our balance sheet, we will generate attractive predictable returns for shareholders.
Our growth should occur, regardless of the broader economic cycles, because our defense IT locations are aligned with priority defense missions that are enjoying renewed support from Congress and increased U.S. government spending, and intelligence, surveillance, reconnaissance, missile defense, navy force and cyber security.
The combination of our portfolio, our balance sheet, our organization, the positive outlook for defense spending, and the increasing demand from our development segments, should continue adding value for our shareholders. With that operator, please open up the call for questions.
Operator
[Operator Instructions]. Our first question comes from Jamie Feldman with Bank of America Merrill Lynch.
Jamie Feldman
Great, thank you. I guess Anthony, can you just walk through one more time, the changes to the same store guidance, the fact that you are taking occupancy down, but you are raising the cash growth outlook?
Anthony Mifsud
So we continue to experience growth in our same office cash NOI, not just in line with what we originally expected for the year, but slightly higher. Where we are seeing the pressure is on some leases that we had expected to start, not generating cash NOI for the third and fourth quarter, but generating GAAP NOI that are influencing occupancy.
So we are seeing some strength in our same office cash NOI portfolio, but that's not sort of two separate things, the client occupancy is really driving an impact on GAAP NOI and not cash.
Jamie Feldman
Okay. And you are saying, none of these leases have disappeared, it's just a matter of taking longer to get done?
Anthony Mifsud
That's right.
Jamie Feldman
Okay. And then can you guys talk about rent growth, and maybe what is the expectation here for leasing spreads going forward, GAAP and cash?
Steve Budorick
So we guided on a cash basis zero to minus 2%, and this quarter was right in the middle of those goalposts. On a GAAP basis, about 9%, slightly higher.
Jamie Feldman
And as you look into next year, what kind of mark-to-market are you looking at?
Steve Budorick
I would guess it's going to remain about where it is for at least another 12 months.
Jamie Feldman
Okay. And then, I mean, we have been reading articles that you guys may get started on some DC development or JV/DC development, can you just talk about any plans in that market?
Steve Budorick
So we did commit to a JV with the Akridge Company at 2100 L. We anticipate that starting next year -- and I will let Paul talk about our progress.
Paul Adkins
So it's a 190,000 square foot trophy office building at the corner of 21st and L Street. Delivery, as Steve just said, we expect to start next year, midyear approximately.
We are in advanced negotiations with an anchor tenant for 45% to 55% of the office space that would begin upon delivery of building. So I expect that we will have some announcement in the third quarter.
Jamie Feldman
Okay. And then how do you think about the competitive landscape for new development in DC?
It seems like there is a bunch of similar projects that are less than fully leased, getting started with half the rest of the building to backfill? What gives you comfort?
Paul Adkins
Well, we are going to deliver at least a year after many of the buildings. I think you are referring to in the competitive landscape.
So sequenced timing is an important variable. We are not delivering until mid to late 2020.
We have somewhat satisfying that we are only a 190,000 square feet building. We have an anchor tenant to lease, as I said, half of it.
And it's a corner building, with windows all the way around, which much of our competition does not have. And frankly, there is other activity for additional leasing, that is -- we are exchanging paper with some of those prospects.
So this is three years from where we are sitting today from delivery, and so there is reason to -- I am fully aware of all the competition, but each building has its own story. I am saying about the way our development is going to perform.
Jamie Feldman
Okay. All right, great.
Thanks for the color.
Paul Adkins
Sure.
Operator
Our next question comes from Rob Simone with Evercore ISI.
Rob Simone
Hey guys, thanks for taking the question. Forgive me if you guys covered this already, but I was just wondering if you could update that figure that I think you discussed at NAREIT.
Against the -- call it, outside of your development pipeline, against the 1.2 million square feet of vacancy, I think you had about 1.1 million square feet in the form of a pipeline, and there was about 800,000 that was associated with specific contracts, and I was just wondering if you could update that figure, if there is any change there?
Steve Budorick
Sure. It's about the same level, 1.1 million square feet overall, a big chunk of that is pre-prospect categorization, so what we call names and tours, and we are not yet negotiating with it.
That 1.1 million related to about 800,000 of prospects. We just reported on this call, that that number is down about 550.
We signed almost 80 and then we moved one of the larger prospects into shadow development -- well not yet shadow development pipeline, but we are working with them on a build-to-suit, because our space needs exceeded what we had in our inventory. But it's about static Rob.
Rob Simone
Got it. Thanks Steve.
Appreciate it.
Operator
Our next question comes from Manny Korchman with Citi.
Manny Korchman
Hey everyone. If we think about the budget from -- specifically from a tenant perspective, how much confidence do they have to start discussions now, versus waiting for something to actually get past or as we get further down that road?
Steve Budorick
So we mentioned in our speaking points, the significant amount of the leasing demand that we are working with is contract contingent. And that's -- all those contract contingent deals that we are currently working on, pertain the contracts that will come out of the fiscal year 2017 budget, which is now passed in mid-May.
The activity that would ensue from a higher 2018, it's a little preliminary to see what the confidence level will be on that.
Anthony Mifsud
And just to add a little color to that, the activity that Steve is referring to, generally refers to, I think the larger contractors that occupy national business park. One item of note is that, within Columbia Gateway, we are seeing a burst of activity, from what I would call the smaller and medium size cyber security and tech companies that have led to some recent successful leases within Columbia Gateway.
So it's a different species as compared to the large contractors, but there is continuing new demand growth in activity within that segment.
Manny Korchman
Got it. And if we think about your comments on data center growth, is that going to be leaning towards the defense IT sector, is it going to be just more generally data centers?
Are you going to stick to sort of the same geography? How should we think about your growth in that space?
Steve Budorick
It speaks to our expectations that the demand from the customers we have, will either be preserved or accelerate. In terms of geographies, we are going to maintain where we are at currently, and it's just a very fast growing business, that we think will lead to increased opportunity on a fractional level to our overall development opportunities.
Manny Korchman
Thanks Steve.
Steve Budorick
Thanks Manny.
Operator
Our next question comes from Craig Mailman with KeyBanc Capital Markets.
Craig Mailman
Hey guys.
Steve Budorick
Hello Craig.
Craig Mailman
How are you? Anthony, just wanted to follow-up on the same store question from earlier.
I get that, from the GAAP perspective occupancy, the difference there, but as we look at it, I mean, is it -- with leases kind of being pushed into next year, I know first half has been okay, but is it mostly expenses being deferred that's driving the upside in guidance?
Anthony Mifsud
Well, it's a combination of some expense savings and it's not really a deferral, it's operating savings on a net basis. And there are -- even though we do have some leasing activity that's being pushed in 2018, there is some benefit from some leasing that is starting earlier than we expected.
So it's a combination of the two, that's really generating the movement in guidance.
Craig Mailman
Got you. Would you call like half and half expenses, versus federal leasing timing?
Anthony Mifsud
Probably 75-25 expenses and leasing timing.
Craig Mailman
Okay. That's helpful.
Then Steve, I get your comments here about the expected ramp in the back half of the year. I am just curious, just -- your fourth largest [ph] on their recent call was kind of venting a little about the delays in appointments to the Pentagon and the delay in contracts as a result of that.
As we look at last year, what happened in the back half of leasing versus this year, I mean, the difference is, the changeover of the administration. I mean, as you kind of stick with guidance and put your views out there, I mean, is the base case feeling a little bit better about the same type of ramp, or maybe a little bit less with -- some things need to fall in place to get you as good or better than last year?
Steve Budorick
My base case is as good or better than last year. But potentially, a little later.
So last year, we started showing results and the third quarter and fourth quarter was high. This year it could be fourth quarter and a bigger ramp in the first quarter and next year.
Craig Mailman
Are you seeing that contracts are coming out slower than you would have thought, because of what's going on with just putting people in place?
Steve Budorick
I can't tie it to putting people in place. I know that, there is transition going on in the administration, and I think new leadership on various levels.
But I will tie it more to the delay, 216 day Continuing Resolution, trading a big backlog of activity that needs to get executed by the same size staff it was before the big backlog, and it's just friction, friction in the system.
Craig Mailman
I don't have these numbers on my fingertips, maybe you do or don't, but just curious of the last kind of nine consecutive continued resolutions, obviously last year's was pretty long. I mean, what's the longest that we have seen?
I am just curious, because this budget maybe is in 2018 kind of setting up for a more contentious fight, and I am just kind of curious, how long it has been? And in that year and how that affected leasing?
Steve Budorick
So 2017 was the longest in the last 14 years, and the second longest occurred in fiscal year 2011. So 2017 was 216 days, 2011 was about 196.
It's average in the 75 to 80 day range.
Craig Mailman
All right. Great.
Thank you.
Steve Budorick
Thanks Craig.
Operator
Our next question comes from Tom Catherwood of BTIG.
Tom Catherwood
Thanks. Good afternoon everybody.
Following up on Craig's question, I think it's important. So let me try to put all the pieces together here.
So Steve, you had referenced that in 2016, leasing picked up about six to nine months after the DoD budget went through, which given the May budget approval, pushes things as you talked about to the end of this year or early 2017. So it's not a matter of deals taking longer, it's a deal of -- just the fact that the budget itself was delayed, that's kind of the gist of what's pushing things at, correct?
Steve Budorick
Correct.
Tom Catherwood
So if we look to 2018 with the DoD budget, what's the timeline or what the kind of hurdle points we should be looking out for, as that budget is kind of put together and it's debated, as far as if there could be a delay, or if we should have some sort of concern, that could kind of push out 2018 expectations?
Steve Budorick
So first let's just deal with 2017 funding. So we expect the leasing lift to occur in the fourth quarter and first quarter of 2018, so I think 2018 starts at a pretty good pace.
The commensurate activity that comes out of the 2018 budget, we expect the same kind of timing. It all depends on when it can get passed, and then flow through the system and translate into real contract awards that require leases.
So I think the benchmark to look for is how quickly we can get that budget passed.
Tom Catherwood
Got you. That's helpful.
Rotating over to development; Paul, you talked about the progress that you guys have made on the redevelopments. I think you referenced 10% to 11% yield on the incremental spends, which is strong.
Now that you guys are kind of taking care of most of the redevelopments that you had, what's the kind of next step in the redevelopment process? Do you have more buildings that you are looking at, you are more teed up, and how do you think that plays out over the next few years?
Paul Adkins
Thanks Tom. Actually, with the success that we experienced with the circle product, which is the innovative investment in the single storey buildings here in Columbia Gateway, we are commencing.
You may know and have seen it in the supplemental, one of the projects is the next phase. Essentially, we are taking the same idea, which is the innovative rehabilitation of this one storey project, and it's 22,000 square feet, we are starting in October, but we are already about 40% strong advanced interest, frankly overflow from tenants that couldn't fit into the first space.
So that's -- it is successful, of what I think is repositioning of some of our product, and I think it's the beginning of the ability to look at advantage repositionings of other product in our portfolio, especially in Columbia Gateway.
Steve Budorick
And Tom, almost all of that demand through the innovative kind of techy rehab of good, but older single storey buildings, just coming from cyber companies.
Tom Catherwood
Got it. Appreciate that.
And then finally, a partial development, partial regional office, but the development site that used to be called M2, I think the name may have changed. But there is a lot of development going on kind of around that site in College Park, both apartments and hotel and retail.
How do you view that M2 site kind of, as far as an opportunity set for corporate office?
Paul Adkins
Yeah. What's going on in College Park is pretty transformational.
All around, it's kind of cool, as a Maryland fan. But our 5801 University Research port is the name of the 71,000 square foot three storey building that's under construction and delivering at the beginning of 2018.
We expect to announce a third quarter lease for about 70% of that building, and that there is interest from that same tenant to potentially take more of the space. So that spec development is meeting with good demand.
There is other interest in some of the other land and build-to-suit opportunities that we have within that park. We have added another amenities to that park too, that are adding to the attractiveness of that development grouping.
So 5801, we are hoping that will have -- we are expecting to have an announcement in the third quarter of this year.
Tom Catherwood
Got it. Appreciate it.
Thanks guys.
Operator
Our next question comes from Jed Reagan with Green Street Advisors.
Chris Belosic
Hi. It's Chris Belosic here with Jed.
So one for me. You guys have pretty heavy lease roll coming up in 2018 and 2019, with the bulk of that coming from your primary Fort Meade markets, and I have seen your investor presentation, you have laid out some pretty strong retention rates for the large box hits, which probably capture some of that.
But can you kind of refresh me again on what your expectations are for overall Fort Meade, 18 to 19 retention rates, is that kind of still in the same 80% to 100% range, and then what renewal spreads are you guys expecting in that market?
Steve Budorick
So I would fully expect it to be 80% or better, and our cash rent spreads in that market tend to be above 3% positive.
Jed Reagan
Thanks guys. It's Jed here with Chris.
On the DC development, the one in the district, that anchor tenant you mentioned, is that an existing customer and/or a defense related tenant?
Paul Adkins
No it is not an existing tenant and it's a major top 25 law firm.
Jed Reagan
Okay. That's helpful.
And then one of your peer REITs mentioned that defense tenant lease and acuity seems to have faded a bit over the past quarter. I mean, is that consistent with what you have seen or is that -- or not so much?
Steve Budorick
Yeah. And that's what we have been kind of talking, which is the timing.
It's not that the demand has faded, it has just been delayed, so it has not been as robust the close rate as we would have or could have had, had the continuing resolution been resolved earlier.
Paul Adkins
And contradicting that is our success down at the navy support group, where I mentioned we were up nearly 800 basis points since last year, and active deals with the contractors and the government should take us to about 90% plus by the end of this year. So it's episodic, as opposed to -- we have some strength in the other parts of the portfolio.
Jed Reagan
Okay. That makes sense.
Thanks guys.
Operator
Our next question comes from Dave Rodgers, Baird.
Steve Budorick
Hello Dave.
David Rodgers
Hey, good afternoon. Steve, appreciate the time.
Maybe just talk a little bit about Baltimore, and just kind of what you are seeing regional activity there. I think you really only have one space that might come due here in the next 12 to 18 months, but just kind of curious, if you are seeing more kind of transaction tenants drive runs, etcetera?
Steve Budorick
So we got a four back last quarter from a bank at Canton Crossing, and we did an early renewal, that will give us a floor of availability at the end of this year, and we have prospects for both. So we are pretty optimistic we are going to backfill those in a very timely manner.
And then we have one floor at 100 Lake that's available and we are in advanced negotiations with the law firm for that.
David Rodgers
And rents on that space, is consistent or better than where you were?
Steve Budorick
It's consistent with the last year we did, which is pretty significantly above our underwriting.
David Rodgers
Okay, that's helpful. And I know your development leasing target, I think you said 700,000 square feet for the year.
I missed the earlier part of the call, where do you consider yourselves against that target as of midyear?
Steve Budorick
So we are 383, as we speak, so slightly above half, and what we said in the earlier part of the call is, active negotiations that we are currently engaged in, give us very high confidence, we will exceed that number.
David Rodgers
Okay. That's helpful.
And then maybe last question, I don't know if you addressed this or not, a $14 million difference between kind of what you have already leased and what the net potential is of the development NOI? How much of that might be driven by budget versus just kind of programmatic timing?
Any thoughts on that? That would be helpful.
Thanks.
Steve Budorick
Are you talking about future NOI from development, that is non-contractual?
David Rodgers
Correct.
Steve Budorick
The biggest shock of that pertains to the buildings we built for the United States government. The leasing got delayed and those processes are starting to begin.
David Rodgers
Okay. Thanks.
Operator
Our next question comes from Erin Aslakson with Stifel.
Erin Aslakson
Hey good afternoon. Yes.
So maybe just dovetail as well with that last question actually. So could you actually discuss the RFP process that's going on with the 310 Sentinel and Nova office B, assets that have been delayed.
In assuming kind of the continuing -- of the continuation -- the continuation of the continuing resolution into 2018, how does that affect the potential occupancy of those buildings?
Steve Budorick
So I would not consider 2018 as a critical element to either one of them. With regard to one of the buildings, I think there is planning and programming activities, where the customers trying to evaluate its strategic needs.
In the other, the process has commenced, and it will -- the acquisition process, and it will take some months to work its way through. But we see progress on both fronts.
Erin Aslakson
Okay. But so for one of the assets, it's pretty certain, and for the other asset, it's still up in here?
Steve Budorick
I think it's a when, not if, and I can't tell you what the one is yet.
Erin Aslakson
Okay. But 2018 in general?
Steve Budorick
Yeah. One I will expect to done in 2017 and one could drift to 2018.
Erin Aslakson
Okay. Great.
Thank you very much.
Steve Budorick
Thanks Erin.
Operator
[Operator Instructions]. Our next question comes from Bill Crow with Raymond James.
Bill Crow
Good afternoon now guys. I think in the past, your company has kind of followed tenant demand into some new markets, and I am just curious whether there is any pattern in merging that might tempt you into establishing beachhead in some other markets?
Steve Budorick
No. We currently aren't considering any other markets.
We see good opportunity at priority defense missions that we serve and we are focused on generating development at those locations.
Bill Crow
I hope that was the answer, but you have answered the rest of my questions. So thanks.
Steve Budorick
Do I get a cookie?
Bill Crow
Appreciate it guys.
Steve Budorick
Thanks Bill.
Operator
And I am not showing any further questions at this time. I would like to turn the call back over to Mr.
Budorick for closing comments.
Steve Budorick
Thank you all for joining our call today. We are in our offices this afternoon, so please coordinate any questions through Stephanie Krewson-Kelly if you'd like a follow-up call later today.
Operator
Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.