Corporate Office Properties Trust (OFC) Q3 2019 Earnings Call Transcript

Corporate Office Properties Trust (OFC 3.63%)
Q3 2019 Earnings Call
Oct 29, 2019, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Corporate Office Properties third-quarter earnings conference call. As a reminder, today's conference call is being recorded. At this time, I'd like to turn the conference over to Stephanie Krewson-Kelly, COPT's vice president of investor relations. Ms.

Krewson-Kelly, please go ahead.

Stephanie Krewson-Kelly -- Vice President of Investor Relations

Thank you, Valerie. Good afternoon, and welcome to COPT's third-quarter conference call. 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 posted slides on the Investors section of our website to accompany management's remarks.

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

Steve Budorick -- President and Chief Executive Officer

Thank you, and good afternoon. We delivered excellent results in the third quarter and continue to capitalize on the opportunities we anticipated when the defense budget increases began in 2017. Demands continued to build throughout 2019, and our team has been very successful in converting it into leasing achievements. This elevated opportunity set has translated into record leasing volumes in the third quarter and for the first nine months of the year.

In the quarter, we set three new quarterly leasing records: total leasing of 1.7 million square feet; development leasing of 875,000 square feet; and vacancy leasing of 251,000 square feet. Year to date, our 2.1 million square feet of development leasing exceeds our prior annual record by almost 40 -- 70%, and it's 2.5 times our initial guidance. In our operating portfolio, the 622,000 square feet of vacancy leasing we executed during the first nine months exceeds 2018's full-year achievement, and we are on track to establish our best-ever annual vacancy leasing volume. Including the 40,000 square foot lease completed earlier this month, to date, we've executed 586,000 square feet of leasing with the government, a new annual record.

Within our operating portfolio, we leased 164,000 square feet to the government, also a new annual record. The 422,000 square feet of development leasing we've completed with the government is our second-highest annual volume ever. And by year-end, we may surpass our all-time record established in 2005. Furthermore, healthy defense spending continues to generate broad-based demand in all five categories of demand.

First, defense contractor expansions continue to drive our vacancy leasing. In the third quarter, 93% of our vacancy leasing occurred at defense/IT locations as contractors require incremental space to accommodate new business. Year to date, we've completed 47 leases totaling 338,000 square feet of defense contractor expansions, representing 55% of vacancy leasing. Secondly, the U.S.

government continues to lease additional space as agencies satisfied deferred demand. During the first nine months, we completed 12 leases with the government totaling 198,000 square feet that represented deferred demand. 77% of these transactions were in the Fort Meade market. Third, we continue to build limited amounts of speculative development in markets where demand is strong and we have limited inventory.

At Redstone Gateway in Huntsville, we completed 435,000 square feet of development leasing in the first nine months, and we have no contractor space available. Accordingly, we plan to start a 100,000 square-foot spec broadly in this quarter to accommodate defense contractor demand. At the Discovery District at the University of Maryland, the 71,000 square-foot spec building that we completed in 2018 is 100% leased. We're tracking strong demand, have no inventory left in this market and in September, commenced construction on 4600 River Road a 100,000 square-foot building.

The fourth category demand is build-to-suit major pre-lease activity with defense contractors. In the first nine months, we completed 1.7 million square feet of build-to-suit major pre-leases with defense contractors. This includes five data center shell leases in Northern Virginia totaling 1.2 million square feet, a 483,000 square feet of build-to-suit and pre-leasing transactions for contractor office facilities. The fifth demand driver is the government returning to long-term planning for new facilities at our secured campuses.

Year to date, we've completed 390,000 square feet of government leases for anti-terrorist force protected buildings in secured campuses, including a 350,000 square foot pre-lease with the U.S. government for NoVA C. When NoVA C is operational in 2022, this fully leased secured campus will contain 910,000 square feet and can accommodate up to another 700,000 square feet of development. As I mentioned earlier this month, we completed a 40,000 square foot lease with the first government user at 100 Secured Gateway, our initial building in Redstone secured campus.

We continue to execute on an expanding set of leasing opportunities that the past several years of defense spending increases have precipitated. Having more than doubled our initial development leasing expectation for this year, we also doubled our asset sales to responsibly fund this growth. These additional asset sales will comp per FFO growth in 2020 and set the stage for strong FFO growth in 2021. With that, I'll turn the call over to Paul.

Paul Adkins -- Executive Vice President and Chief Operating Officer

Thanks, Steve. As a result of record vacancy leasing in the quarter, our core portfolio was 94.5% leased at September 30, 40 basis points higher than the last quarter. Our Fort Meade B/W Corridor sub-segment is now 93.5% leased, up 100 basis points from last quarter. At the National Business Park, we executed on 52,000 square feet of vacancy leasing in the quarter, and the park is now 91% occupied and leased.

We continue to track strong demand for the park's remaining inventory. Our redevelopment at 6950 Columbia Gateway is now at 80% leased, and we are in advanced negotiations with the defense technology firm that would increase this project to 98% leased by year-end. In Northern Virginia, we scored a major win on the development leasing front, executing a 350,000 square foot pre-lease with the government at our secured campus. In the third quarter, we also completed 92,000 square feet of vacancy leasing in our NoVA defense/IT portfolio, 20,000 square feet of which was at Patriot Ridge.

And then earlier this month, we completed another 20,000 square-foot lease in that building, which is now 80% leased. Defense demand at Patriot Ridge is a direct byproduct of recent budget increases at the National Geospatial Intelligence Agency. Turning to Huntsville. We completed a total of 717,000 square feet of leasing in the first nine months, including 435,000 square feet in development projects.

We have zero uncommitted space in that park, and we anticipate starting our next spec building this quarter to capture strong contractor demand. Earlier this month, we completed a 40,000 square foot lease with our first government tenant at 100 Secured Gateway. Negotiations with the second government customer are progressing well and would bring that building to 80% leased in the coming months. In terms of our active construction projects.

We have 2.6 million square feet under development and redevelopment that are currently 82% pre-leased and which will increase our existing core portfolio by nearly 15%. In the first nine months, the 804,000 square feet of developments we've placed into service were 100% leased. We expect to place another nine properties containing 1.3 million square feet of 100% leased contractor space into service between now and the end of 2020, plus approximately 200,000 square feet at 100 Secured Gateway. These 10 highly pre-leased developments should support strong FFO growth in 2021.

In terms of future development projects. Our shadow development pipeline contains up to 1.7 million square feet of potential transactions, of which two-thirds are data center shells and up to 20% are government deals. We expect to execute on at least another 100,000 square feet of leases before year-end and are increasing our development leasing goal to 2.2 million square feet. With that, I'll hand the call over to Anthony.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Thanks, Paul. Third-quarter FFO per share met the high end of guidance, driven in part by some accelerated lease starts and ongoing expense management. We are modestly reducing our year-end guidance for same-property occupancy to a new range of 91.5% to 92%. This change reflects the impact of commencement dates on a few late December starts slipping into the first quarter of 2020 and the impact of the tenant at DC-3 terminating its lease three months earlier than expected.

Even with these modest decreases to year-end expected occupancy, we are raising our full-year guidance on same-property cash NOI growth again to a new range of 3.25% to 3.5%. The 37.5 basis point increase at the midpoint versus prior guidance reflects early commencements, lower rent abatements and lower property operating expenses. Tenant retention was 72% in the quarter, marking the 10th consecutive quarter in excess of 70%, and we expect it to be between 75% and 80% for the full year. Although 1.5 million square feet of renewals to date have been executed at current market rents, cash rents on renewals rolled down 6% in the quarter and 5% in the nine months.

To date, 82% of expiring leases rolled down within our original guidance of down 1.5% to 3%. The renewal of three expiring long-term leases totaling 280,000 square feet brought down the average to negative 5%. On these larger roll-downs, we still achieved new market rents of approximately $35 a foot. As a reminder, Slide 14 demonstrates that high retention with modest cash roll-downs is more effective on preserving FFO and growing AFFO than achieving rent growth on lower retention and incurring retenanting costs.

Lastly, we are tightening our guidance for FFO per share for the full year around $2 -- or $2.03 midpoint to a new range of $2.02 to $2.04 and are establishing fourth-quarter guidance of $0.49 to $0.51. This guidance assumes we sell a 90% interest in two more data center shells to our BREIT joint venture in December, raising additional equity to fund development. With that, I'll turn the call back to Steve.

Steve Budorick -- President and Chief Executive Officer

Thank you, Anthony. The three key messages of this call are: one, record leasing driven by healthy defense budgets; two, record development investment to drive FFO growth; and three, elevated asset sales to assure appropriate funding of development activity. We're now 30 months beyond the first material defense budget increase that occurred in May of 2017. We expected our opportunity set to lag the appropriation dates by 12 to 18 months, and indeed, it has.

Our leasing achievements have strengthened consistently to new record levels. Demand for our defense locations remain strong, and we look forward to continuing to deliver incremental gains throughout 2020 and 2021. With that, operator, please open up the call for questions.

Questions & Answers:

Operator

Thank you, Mr. Budorick. [Operator instructions] Our first question comes from Jason Green of Evercore. Your line is open.

Jason Green -- Evercore ISI -- Analyst

Good morning. To the extent you're able to comment, does Microsoft being awarded the JEDI deal versus, say, other competitors have any positive or negative impact for OFC? And is there already a relationship in place with Microsoft to utilize moving forward?

Steve Budorick -- President and Chief Executive Officer

Tough question. So with regard to our shell development program, it's a matter of indifference. We've never discussed with our tenant anything to do with that contract, and our opportunities in shell development should remain strong. I can't comment on our relationship with Microsoft.

Jason Green -- Evercore ISI -- Analyst

OK. And then I guess as we think about leasing spreads over the next 12 to 18 months, not necessarily looking for guidance, but do you expect, broadly speaking, for those spreads to be in the kind of negative mid- to low single digits? Or is there something unique about fiscal-year '19 that was a little bit more pressured?

Steve Budorick -- President and Chief Executive Officer

I think Anthony hit that right on the head. We guided to minus 1.5% to 3%. And I want to say 83 of the 86 leases we renewed in total fell right in that range. We had three large, very long-term leases, where that market rent -- where the lease rent had escalated above current market, and those really drove the higher percentage roll-down.

If you look at the average leases we tend to have in place for five years, we don't have that kind of imbalance between in-place and market. So we expect them to come back into that zero to minus three.

Jason Green -- Evercore ISI -- Analyst

Got it. Thanks very much.

Operator

Thank you. Our next question comes from Manny Korchman of Citi. Your line is open.

Manny Korchman -- Citi -- Analyst

Hey, everyone. How are you? At a recent conference, you had put out a presentation that showed consensus FFO growth for 2020, and you had highlighted a midpoint of about 4% growth. If I look at consensus now, it's probably closer to 5% growth. Did you present that as a good metric to go off of? Or were you sort of just presenting the facts? And I realize you haven't given 2020 guidance yet.

Steve Budorick -- President and Chief Executive Officer

So we're a little confused by the question.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

I'm not sure what your...

Manny Korchman -- Citi -- Analyst

The question is, is that 4% to 5% FFO growth for 2020 an appropriate baseline to go off of as we think about our numbers for next year?

Stephanie Krewson-Kelly -- Vice President of Investor Relations

This is actual presentation of where First Call was for 2021.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Yes. That was..

Steve Budorick -- President and Chief Executive Officer

So that was representing what First Call was presenting. That's not our number, and we're not giving out guidance yet.

Stephanie Krewson-Kelly -- Vice President of Investor Relations

And we're not...

Steve Budorick -- President and Chief Executive Officer

But I think First Call has changed since we reported that data.

Manny Korchman -- Citi -- Analyst

OK. And then the expense savings that you highlighted that helped your same-store NOI numbers, are those sort of more permanent and we should expect them going forward? Or is there anything onetime about this?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

They were split about half onetime and half ongoing. The ongoing related to just ongoing operating expense management, and the other half related to a onetime real estate tax refund that we received as a result of our work on changing assessments.

Manny Korchman -- Citi -- Analyst

Great. Thank you.

Steve Budorick -- President and Chief Executive Officer

Thanks, Emmanuel.

Operator

Our next question comes from Blaine Heck of Wells Fargo. Your line is open.

Blaine Heck -- Wells Fargo Securities -- Analyst

Thanks. Hey, guys. Paul, just thinking about the total portfolio occupancy. I think in the past, and as recently as 2017, you guys have increased occupancy into the kind of 93.5% to 94% range.

As you think about the portfolio now and the demand environment you guys are in, is that an achievable stabilized occupancy target? Or is there maybe something about the portfolio that's changed and stabilization might be a little lower and closer to where you guys are operating now?

Paul Adkins -- Executive Vice President and Chief Operating Officer

Right. I think if you -- I think you referenced 2017. But in January 1, 2018, NoVA B and 310 went into the pool that knocked it down almost 200 basis points. So we've now -- we've climbed back up then, driven by the demand in the portfolio and the occupancy.

And yes, I think it's sustainable to get back to those levels over the next -- end of 2020 into 2021. So in short, we see the demand that's gotten us from that point in the beginning of 2018 to continue for the next 12 to 18 months at least.

Blaine Heck -- Wells Fargo Securities -- Analyst

Great. That's helpful. And then just on the balance sheet. You guys last issued the forward equity at $31 a share, and you guys have the ATM in place that you haven't really used in a while.

You guys aren't quite back to that $31 yet, but this year's performance certainly helps. I guess just with that context, how do you think about the mix of funding between the sales and JVs versus issuing equity if we do get closer to kind of the low 30s levels?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

In terms of the capital that we need to execute the plan over the next several years, the over-equitizing of the JV, increasing asset sales for 2019 really puts us in a position where we can execute on the development that's in the ground right now, plus what we see on the horizon for 2020 with relatively limited needs for equity capital. I think we'll leave our -- leave the choices sort of out there right now. The equity that we raised through the BREIT transaction was incredibly price-effective, and we know that our partner there has the capital and the demand for future transactions. So I think right now, we would see that as the avenue we would go for next year.

But again, we'll continue to look at that as our price changes.

Blaine Heck -- Wells Fargo Securities -- Analyst

Very helpful. Thanks, everyone.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Thanks, Blaine.

Operator

Thank you. Our next question comes from Jamie Feldman of Bank of America Merrill Lynch. Your line is open.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. And I apologize if I missed it, but in the presentation, you talked about your 100,000 square foot and larger blocks. Can you just talk us through your thoughts on the 2020 expirations, I guess, for those and anything else that's meaningful, which ones we should be keeping our eyes on?

Paul Adkins -- Executive Vice President and Chief Operating Officer

Right now, we -- out of all of our 100,000 square foot and greater blocks for 2020, we only have one non-renewal that we see.

Steve Budorick -- President and Chief Executive Officer

Partial.

Paul Adkins -- Executive Vice President and Chief Operating Officer

And that's a partial non-renewal, but it will bring back to us 130,000 square feet in Columbia Gateway. Other than that, we expect to renew all of the other 100,000 square foot plus leases. So that's not anything we haven't known about. And we're well under way in our marketing efforts to backfill that space.

Steve Budorick -- President and Chief Executive Officer

And to be clear, the lease that's expiring was executed 10 years ago with a tenant who subleased it almost immediately. So it's been occupied by subtenants for more than eight years. And the existing subtenant will renew some of it, but we do have some leasing to do on that one maturity.

Paul Adkins -- Executive Vice President and Chief Operating Officer

Three floors in one building.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

So is the 130,000 net of the renewal you expect or that's the total amount?

Steve Budorick -- President and Chief Executive Officer

It's total amount.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

So how much do you think your -- how much does that tenant currently occupy?

Paul Adkins -- Executive Vice President and Chief Operating Officer

It currently occupies -- I'd say four-floor building. They will keep on one floor long term out of those four floors beyond April of next year.

Steve Budorick -- President and Chief Executive Officer

It's a little over 100,000.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

That you'll get back?

Paul Adkins -- Executive Vice President and Chief Operating Officer

Yes. A little over 100,000. 131,000 was the whole building.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Got it. And then anything else that's still sizable, like 75,000 and larger or not really?

Paul Adkins -- Executive Vice President and Chief Operating Officer

No. Next year's retentions, we expect to be -- you don't know all of them yet, obviously, at this juncture, but we expect to still perform in the mid-70s range, but hopefully better.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. And then I know you had mentioned using the data center JV for additional -- or if you decide you want additional equity capital, but what are your thoughts on just continuing to prune the portfolio, kind of more traditional office and defense assets?

Steve Budorick -- President and Chief Executive Officer

Well, right now, we're very happy with the composition of our portfolio. And throughout our defense segment, we've got increasing demand and opportunity to create additional value in those buildings. So there's nothing that we would want to sell currently. The pricing strength of the data center JV is extraordinary that it would probably be our first preference.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. All right. Thank you.

Steve Budorick -- President and Chief Executive Officer

Thanks, Jamie.

Operator

Our next question comes from Tom Catherwood of BTIG. Your line is open.

Tom Catherwood -- BTIG -- Analyst

Thank you. So in the presentation you put out, you mentioned that the expectations are that the fiscal-year 2020 budget will be funded through a continuing resolution up until December, but you also mentioned as a risk that lease commencement can slip due to continuing resolutions. With there being some talk about potential shutdowns in the future in D.C. yet again, how much of an impact is kind of operating under continuing resolutions having on your business right now? And kind of how do you think about that going forward?

Steve Budorick -- President and Chief Executive Officer

Well, fortunately, because of the lag between appropriations and demand, I wouldn't expect the continuing resolution to materially affect our demand profile. Most of the opportunities that we're working on currently are really based on prior-year fundings that are flowing through the system. So I don't believe continuing resolution this year will affect us at all, frankly. Currently, it's expected to continue through about November 20.

With regard to a government shutdown, our rent always gets paid. We have no real impact from those shutdowns. Other than some unhappy tenants and some traffic situations in various areas, that is not a concern of ours this year.

Tom Catherwood -- BTIG -- Analyst

So the leases then moving from kind of late 2019 into 2020 were not related to any issues around continuing resolutions or any budget challenges?

Steve Budorick -- President and Chief Executive Officer

Not at all. It's just getting space built and set up. We're having record volumes of leasing and just a few timing delays that are weeks, not months.

Tom Catherwood -- BTIG -- Analyst

Got it. Got it. And then kind of moving over to Huntsville. You guys upsized the development at 100 Secured Gateway this quarter.

What was kind of the driver behind kind of changing that design?

Steve Budorick -- President and Chief Executive Officer

Well, we were able to identify expansion needs for both the tenants that we expect to anchor the building. We made a decision to incorporate future expansion into the current development as the most economical way to provide it, but it has to do with mission growth.

Tom Catherwood -- BTIG -- Analyst

When you talk about that mission growth -- and I think, Paul, you had mentioned, obviously, the increase in demand in Huntsville. Is this relocations from some of the older product that's out in the Huntsville market on the office side? Or is this new -- just pure expansions by contractors? What's the kind of composition of this demand?

Paul Adkins -- Executive Vice President and Chief Operating Officer

It's both. It's both. It's relocations from outside the market. It's relocations from older inventory in the Huntsville market, and it is new expansions of new missions going on at Redstone Gateway.

And that includes defense contractors, as well as the U.S. government.

Steve Budorick -- President and Chief Executive Officer

Yes.

Tom Catherwood -- BTIG -- Analyst

All right. Thank you, guys.

Steve Budorick -- President and Chief Executive Officer

Thanks, Tom.

Operator

Our next question comes from John Guinee of Stifel. Your line is open.

John Guinee -- Stifel Financial Corp. -- Analyst

So John Guinee here. Nice quarter, guys. You were nice enough on Page 21 of your slide deck, I think Stephanie put it together, where you outlined the DC-3 risk and then also you addressed DC-6. I think DC-6 is the wholesale data center with about two-thirds of the NOI lease expiration in 2020.

Can you elaborate more on what you see happening to both DC-3 and the wholesale data center, otherwise known as DC-6?

Steve Budorick -- President and Chief Executive Officer

So I'll take DC-3. DC-3 is a legacy asset the company's owned for many, many years back. We're going through a strategic reallocation plan. We identified this as an asset with the highest and best use is raw land.

So it's a very profitable full building lease that we milked to the lease expiration. We've already leased that land through a retail user, and a long-term land lease was to create additional value. So as that lease expires, we will complete our obligations by demolishing it, doing various things to prepare the land for the retail user and delivering it for their use on a very long-term land lease. Anthony, do you want to take DC-6?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

OK. I'll take it. So at DC-6, I just want to note first that this is the time where the original leases that filled up 87% of DC-6 are -- were expiring. So we have a flurry of expirations.

Earlier in the second quarter of this year, we had a tenant that had exercised the right to contract, giving back 1 megawatt. So that's been in our information for two quarters now. We have another megawatt. It's a non-renewal that commences October 1 in the building, and we have two contractions of existing tenants, one who gave back 0.5 megawatt -- a 1 megawatt user, but they did extend their lease for three years.

And then another user that was under lease for 1 megawatt gave back 0.75 megawatt and also has a lease that -- the remaining lease expires in 2022. The impact of all that contraction in non-renewals is factored into our internal forecast of growth -- modest growth for next year. That's the important point to make. And the good news is that with these givebacks, we now have a larger contiguous block of capacity that, frankly, can serve the larger deployments that are out in the marketplace and more characterize the marketplace demand right now.

In fact, we are in pursuit of a 3 megawatt requirement, as we speak, for a next-year occupancy. And lastly, and most importantly, I think, is that the largest tenant that we have in the building at 11.25 megawatts out of the total 19.25, we are in discussions and are highly optimistic to renew that user for a new -- for the -- renew their lease. So that's the...

John Guinee -- Stifel Financial Corp. -- Analyst

And the 11.25 megawatts, that's the five-year lease done in 2015. But do you feel good about that?

Steve Budorick -- President and Chief Executive Officer

Very.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Yes.

John Guinee -- Stifel Financial Corp. -- Analyst

Is that a roll-up or a roll-down?

Steve Budorick -- President and Chief Executive Officer

Yet to be determined. If you're modeling, I'd just model it for flat.

John Guinee -- Stifel Financial Corp. -- Analyst

Perfect. All right. Nice job. Thank you.

Steve Budorick -- President and Chief Executive Officer

Thanks. John.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Our next question comes from Rich Anderson of SMBC. Your line is open.

Rich Anderson -- SMBC -- Analyst

Good afternoon, folks. So Steve, one of the things I think about, all this kind of exciting development and leasing stuff that's going on, but it's kind of -- it weighs down on your growth profile, as you mentioned for 2020, is going to extend into 2021 to get some real meaningful FFO growth. Is it correct to think about it as like the pie of the operating portfolio becomes big enough that you can actually have some FFO growth while you continue to do your development? At this point in time, development -- the development effort and the funding of it is basically overwhelming the stuff that the stock market likes, which is FFO growth. Is that a fair way to think about it?

Steve Budorick -- President and Chief Executive Officer

Yes. I think it is. We've secured twice the annual development spend opportunity this year, and we had to raise the capital. So we have -- saw some earnings get capital to add to it.

And as we get through that -- I think Paul mentioned, if you just look at the sheer magnitude of the portfolio we're building, it's 15% growth on our current operating portfolio. And that will all kick in, in 2021 and 2022, and it becomes pretty accretive. And as we've said, we'll have impressive growth in 2021.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

And Rich, the one thing to just add to that is we -- as I said earlier, our equity capital needs in order to execute the development pipeline going forward do diminish over time as the benefit of the EBITDA comes online from not just the development pipeline, but also the lease-up of the operating portfolio. So not that we can continue at $300 million to $400 million forever without raising additional equity capital, but we do get to a point where -- that we have a year or two of the benefit of that EBITDA kicking in and the need for incremental capital does go down.

Rich Anderson -- SMBC -- Analyst

Right. But did you say 15% on the current operating portfolio today that's the growth profile?

Steve Budorick -- President and Chief Executive Officer

Just on a square footage basis.

Rich Anderson -- SMBC -- Analyst

Yeah. OK.

Paul Adkins -- Executive Vice President and Chief Operating Officer

It's under construction development right now.

Rich Anderson -- SMBC -- Analyst

OK. Got you. Now last quarter, I wrote a note following your earnings, and perhaps a part of it wasn't the most popular, which I mentioned you're taking a rent roll-down in those three bulky releasing situations to resolve the situation and not have to release it and spend the capital, all that sort of stuff. And I understand the economics of that -- of those transactions.

But now that I'm on the phone with you and you have a chance to slap me around a little bit, like, why is it OK to -- I understand the short-term benefits of the economics, but why is it OK to kind of discount the rent for the -- in these three cases to keep people there that couldn't pay the current rent as it was in place?

Steve Budorick -- President and Chief Executive Officer

Well, in those three cases...

Rich Anderson -- SMBC -- Analyst

I'm talking longer term, longer term, long -- looking further out, not just in the short term.

Steve Budorick -- President and Chief Executive Officer

In all three cases, we achieved really strong market rent. And the important thing for us, we are shareholders, good value on a relative market basis. When the lease had been in place for a very long period of time and escalated to a point where we wouldn't be able to replace the lease with a new tenant at the same amount, why lose the tenant who's in our defense family of tenants and have to put up capital to retenant at the same market? The average rent we achieved was over $35 on those three leases, which is a strong rent.

Rich Anderson -- SMBC -- Analyst

Could you have gotten another tenant and maybe not -- maybe you wouldn't have been able to avoid the roll-down but, perhaps, at a better rent than $35?

Steve Budorick -- President and Chief Executive Officer

I don't believe we would have.

Rich Anderson -- SMBC -- Analyst

OK. That's all I have. Thanks.

Steve Budorick -- President and Chief Executive Officer

Thanks.

Operator

Thank you. Our question comes from Craig Mailman of KeyBanc Capital Markets. Your line is open.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys. Could we go back to the DC-6 commentary, Paul? I know you said it's kind of embedded in your budget for next year. Could you give a sense of what the NOI roll-down will be from the contractions?

Paul Adkins -- Executive Vice President and Chief Operating Officer

Yes. The roll-down will be about $4 million annually for 2020.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And that doesn't include any potential impact from the 11.25-megawatt tenant depending on what -- kind of where the rent ultimately settles out if they do renew?

Steve Budorick -- President and Chief Executive Officer

That's correct. It doesn't factor in any change there, and it doesn't factor in any new leasing.

Paul Adkins -- Executive Vice President and Chief Operating Officer

That's right.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And I know I've asked you guys this many times in the past, but this asset has got a lot of value kind of tied up in it. Is there any viewpoint here on ultimately monetizing this asset as you guys look to fund future development?

Steve Budorick -- President and Chief Executive Officer

So I would say a few years out, it's something that we consider. But right now, it makes sense for us to hold on to it. It makes sense for us to reestablish the income that's currently going to be diminished for a year or so. And we'll keep our options open for what to do with that asset long term.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful. And then just going back, I know the 1.7 million square foot development pipeline, you guys said about two-thirds of that is data center shell. Is that -- are those potential leases with your current existing tenants who you do business with? Or are there kind of new tenants rolled in there? And just curious how that tenant not getting JEDI and buying another piece of land in Herndon kind of affect that demand or if that's kind of locked down from your standpoint?

Steve Budorick -- President and Chief Executive Officer

Well, our relationship with that tenant is long. We've never done all the development for that tenant. So the fact -- and they've always done some of their own, so their buying land is -- has no impact on us. The developments in that 1.7 million square foot shell development pipeline, we have the land as a byproduct of the 11 data center shell program we built.

We have demand for those sites, and we fully expect to realize those developments over 12 to 18 months.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

All right. And then just the last one. I guess DC-3 came back to you at the beginning of the fourth quarter. Is that correct? And that's, what, a little bit less than a $0.01 drag? Is there any lease term fee associated with that? Or do you guys just let them off the hook?

Paul Adkins -- Executive Vice President and Chief Operating Officer

No. They -- that lease actually had an initial termination date of the end of last year, and then they had some renewal options in monthly increments that they exercised through the end of September. Our initial thought back at the beginning of the year was that they were going to extend through the end of the year. And it is about 600 -- plus or minus $600,000 a quarter.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great. Thank you, guys.

Paul Adkins -- Executive Vice President and Chief Operating Officer

Thanks, Craig.

Operator

Thank you. [Operator instructions] Our next question comes from Dave Rodgers of Baird. Your line is open.

Dave Rodgers -- Robert W. Baird -- Analyst

Yes, good afternoon, guys. Paul, maybe just three questions for you all around vacant demand that you've been leasing, as well as kind of the deferred U.S. government demand, and I realize there's some overlap. But first question is, I guess, how much more of that deferred U.S.

government demand do you guys sense is still out there? The second would be kind of, of that uptake of 800,000 square feet or more this year, how much of that has commenced and how much still has to commence from a rent perspective on a GAAP basis? And then the last question is, can you dive a little bit further into 310 and how that fits in and what your updated thoughts are? Thanks.

Paul Adkins -- Executive Vice President and Chief Operating Officer

Sure. The first question on the deferred demand, we still have -- deferred demand, we define as conversations that we've been having with the U.S. government that have been going on for one or two years, where there's an identified need for space, additional space, and yet it was kind of captured by the funding or there was a lack of funding. So that funding spicket has now been turned on, leading to Steve's points about our record amount of government leasing.

So our sense is that deferred demand, we are having those conversations. There is additional demand in our portfolio where we expect the government to continue to lease through the end of this year and into next year. Second question?

Steve Budorick -- President and Chief Executive Officer

310.

Paul Adkins -- Executive Vice President and Chief Operating Officer

310. 310, the saga continues, but that -- the truth of the matter is, is that we are -- feel like we are also having great discussions with the government. There is -- that is deferred demand. There's identified need by the users to take that space.

The building is one-third leased now, and I think it's been around for a while. But the conversations are such that we hope that that demand is met and that situation is resolved in the coming months.

Dave Rodgers -- Robert W. Baird -- Analyst

And then the third was just on the timing of the lease commencements of the vacant and deferred leasing that you've done, how much of that's commenced, how much is still going to kind of be an incremental contributor to revenues, NOI going forward.

Steve Budorick -- President and Chief Executive Officer

So I would guess of the 160,000 square feet of operating leasing, maybe 30% commenced. So call it, 50,000 square feet with 100,000-or-so scheduled to commence later when we get space built out. With regard to the bigger number, the record U.S. government leasing, that includes NoVA C, and that's a first-quarter 2022 target commencement date.

And then the 40,000 square feet in Alabama will be a 2020 commencement that we have yet to -- we're not prepared to give you a month.

Dave Rodgers -- Robert W. Baird -- Analyst

And then, sorry, last one on the 622,000 that you kind of quoted as vacancy leasing in the first nine months, and it sounds like maybe there's some different components to that. Is there a remainder amount, too, that that would still contribute? Or is that taken care of in the other buckets as well?

Steve Budorick -- President and Chief Executive Officer

That 622,000 is all defense contractor operating leasing, and quite a bit of that has yet to commence. Anthony, go ahead.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

That's correct. There's -- some of that has commenced through this year. It's a big difference between our occupied and leased percentage at the end of the quarter. And the benefit of that is really going to -- most of that is going to flow through the results in 2021 -- excuse me, 2020.

Dave Rodgers -- Robert W. Baird -- Analyst

In 2020, OK. Thanks, guys.

Operator

Thank you. Our next question comes from Daniel Ismail of Green Street Advisors. Your line is open.

Daniel Ismail -- Green Street Advisors -- Analyst

Just going back to DC-6. Maybe I missed it, but will you be putting any additional capital into the property? And is there any associated free rents with any of the renewals or discussions you're having with the 11.25-megawatt tenant?

Steve Budorick -- President and Chief Executive Officer

No. There's no discussion about free rent. There's minimal capital associated with what we're doing now. Nothing more than I would consider just routine capital investment for a property we've owned for a decade.

Daniel Ismail -- Green Street Advisors -- Analyst

OK. And are you able to share when the lease expires with that 11.25-megawatt tenant?

Paul Adkins -- Executive Vice President and Chief Operating Officer

31st July next year.

Daniel Ismail -- Green Street Advisors -- Analyst

OK. And just on the D.C. CBD developments, any expectation of having any additional pre-leasing done by year-end?

Paul Adkins -- Executive Vice President and Chief Operating Officer

Yeah. I'd say that a high likelihood -- the decent likelihood that we'll have another 10,000 to 20,000 square feet leased by the end of the year. And we have a handful of prospects that are doing test fits and have chosen 2100 L as one of their shortlisted options for new space in D.C. But feel good about 10,000 to 20,000 more square feet.

Again, our lead tenant doesn't occupy and lease commence until January 1, 2021.

Daniel Ismail -- Green Street Advisors -- Analyst

It's helpful. Thanks, guys.

Paul Adkins -- Executive Vice President and Chief Operating Officer

You're welcome.

Operator

Thank you. Our next question comes from John of Stifel. Your line is open.

John Guinee -- Stifel Financial Corp. -- Analyst

Great. What's the status on NoVA B and what's the locational difference between B and C?

Steve Budorick -- President and Chief Executive Officer

So NoVA B is fully leased. When is it commencing?

Paul Adkins -- Executive Vice President and Chief Operating Officer

It's commenced.

Steve Budorick -- President and Chief Executive Officer

Sorry, commenced. NoVA C is...

Paul Adkins -- Executive Vice President and Chief Operating Officer

Not much.

Steve Budorick -- President and Chief Executive Officer

Right next door.

John Guinee -- Stifel Financial Corp. -- Analyst

OK. Are they both behind defense secured facilities?

Steve Budorick -- President and Chief Executive Officer

Oh, they are. The entire campus is and will be fenced.

John Guinee -- Stifel Financial Corp. -- Analyst

Perfect, all right. Thank you.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Budorick for any closing remarks.

Steve Budorick -- President and Chief Executive Officer

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

Paul Adkins -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Stephanie Krewson-Kelly -- Vice President of Investor Relations

Steve Budorick -- President and Chief Executive Officer

Paul Adkins -- Executive Vice President and Chief Operating Officer

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Jason Green -- Evercore ISI -- Analyst

Manny Korchman -- Citi -- Analyst

Blaine Heck -- Wells Fargo Securities -- Analyst

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Tom Catherwood -- BTIG -- Analyst

John Guinee -- Stifel Financial Corp. -- Analyst

Rich Anderson -- SMBC -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Dave Rodgers -- Robert W. Baird -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

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