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Corporate Office Properties Trust (NYSE:OFC)
Q1 2021 Earnings Call
Apr 30, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Corporate Office Properties Trust First Quarter 2021 Results 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 -- Vice President, Investor Relations

Thank you, Paul. Good afternoon, and welcome to COPT's conference call to discuss first quarter 2021 results. With me today are Steve Budorick, President and CEO; Todd Hartman, Executive Vice President and COO; and Anthony Mifsud, EVP and CFO. Reconciliations of GAAP and non-GAAP financial measures management discusses on this call are available on our website, in the results press release and presentation, and in our supplemental information package. As a reminder, forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in 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?

Stephen E. Budorick -- President and Chief Executive Officer

Good afternoon. Our unique strategy of concentrating assets around U.S. defense installations executing priority missions continues to produce highly resilient, growing cash flows, as demonstrated by our strong first quarter results, representing a great start toward shaping up to be another strong year. Driven by solid operations and interest savings from our recent bond financing, first quarter FFO per share, as adjusted for comparability, of $0.56 met the high end of guidance and is 10% higher than the first quarter results in 2020. Additionally, NOI from real estate operations in the quarter was up 6% from a year ago. And AFFO increased an impressive 26%.

As these year-over-year comparisons demonstrate, we are clearly on a path of sustainable and highly visible growth. First quarter leasing results were solid, totaling 258,000 square feet, and second quarter leasing is off to a blistering start. In April, we've completed 662,000 square feet of renewals and vacancy leasing, eclipsing first quarter volume by 2.5 times. Better-than-planned outcomes on vacancy and renewal leasing are driving our increased guidance for same-property results for the year. Development leasing in the quarter totaled 11,000 square feet. However, we're in advanced negotiations on nearly 900,000 square feet that should close in the coming months.

Bridging to financing activities, we completed a second landmark bond offering last month. The $600 million 10-year issuance has a 2.75% coupon and was the strongest debt financing in the company's history. The bonds priced a full notch higher than our current ratings, reflecting the market's growing recognition of the durability of our portfolio, our strategy and our cash flows. So for the second time in six months, the fixed income investor community unequivocally recognized and rewarded our company with robust demand for and exceptional pricing of our bond offerings. The improved outlook for same-property cash NOI and interest savings from the bond refinancing are driving the $0.03 increase in the midpoint of 2021 guidance for FFO per share as adjusted for comparability, which at the midpoint implies 4.7% growth over the elevated 2020 results.

And with that, I'll hand the call over to Todd.

Todd Hartman -- Executive Vice President and Chief Operating Officer

Thank you, Steve. First quarter total leasing of 258,000 square feet included 154,000 square feet of renewals. Renewal economics were in line with expectations, with cash rents rolling down 2.2%, annual escalations averaging 2.6% and leasing capital being only $1.93 per square foot per year of term. This month, we renewed 596,000 square feet of expiring leases, achieving an 88% renewal rate. Cash rents on April renewals rolled up 0.5% and carried an average lease term of 4.8 years. To date, we have completed 750,000 square feet of renewal leasing with a 77% retention rate and average lease term -- or an average term of 4.5 years and cash rents rolling flat.

Based on our renewal achievement to date, we are increasing our full year retention guidance to a new range of 70% to 75%. We completed 93,000 square feet of vacancy leasing in the quarter and 66,000 square feet in April, bringing our total to 159,000 square feet, and our leasing activity ratio remains strong. One lease to highlight from the quarter was a 2-floor 55,000 square foot lease at 6721 Columbia Gateway with Rekor Systems, a provider of real-time technology to enable AI-driven decisions. Recall that the nonrenewal of that building's anchor tenant a year ago left it 20% leased. We took the opportunity to reposition the asset, creating amenity areas which appeal to a growing list of high tech and cyber companies in the market. This property is now 80% leased with strong demand for the remaining availability.

In April, we completed a 7,000 square foot expansion with IntelliGenesis, a cybersecurity defense contractor at 6950 Columbia Gateway, bringing that 2020 redevelopment to 100% leased. We believe our leasing success at both properties demonstrates the value we add by repositioning buildings, as well as Columbia Gateway's growing importance as a preferred location for cyber and high-tech companies. Development leasing in the quarter was light at 11,000 square feet at Redstone Gateway. So far in the second quarter, we have 265,000 square feet of development leasing out for signature, and are in advanced negotiations for another 610,000 square feet. Our development leasing pipeline remains deep and diversified across our Defense IT locations and customer base.

We are tracking up to 2.1 million square feet of development opportunities, and are confident we will meet or exceed our one million square foot development leasing goal. During the quarter, we placed 7100 Redstone Gateway into service. The building is a build-to-suit for Cummings Aerospace. Our pipeline of active developments totals 1.4 million square feet that are 85% leased. During the remainder of the year, we expect to place 739,000 square feet of these projects into service, bringing our total for the year to 785,000 square feet. Regarding DC-6, our discussions with the 11.25-megawatt customer continue to progress. The original lease continues until such time as either party exercises a termination or the lease is amended or replaced, and we continue to believe the tenant will remain.

With that, I'll turn the call over to Anthony.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Thanks, Todd. First quarter FFO per share as adjusted for comparability of $0.56 met the high end of guidance, driven primarily by operations and interest savings from the recent bond refinancing. Similar to our transaction last fall, our March bond deal was an enormous success. Our original plan and guidance for 2021 assumed a $450 million bond issuance to repay or refinance some higher coupon debt. On March 3, we launched a new 10-year offering at initial price talk on credit spreads of 175 basis points. The offering was 8 times oversubscribed with an order book that totaled close to $3.5 billion. Strong demand from many high-quality investors allowed us to upsize the offering to $600 million and significantly drive down the credit spread. The deal priced at 140 basis points over the 10-year treasury, resulting in a 2.75% coupon and a 1% discount. We used the proceeds to retire two higher-cost issuances, blocking in annual interest savings of $7 million. The fixed income investors were highly focused on our ability to deliver large volumes of highly leased, low-risk development to continue to grow EBITDA and FFO.

They also appreciated our strategy of concentrating assets around mission-critical defense locations, which greatly insulates our cash flows from the impact of any work-from-home trends. The March bond issuance represented the fifth most oversubscribed book of all time in the office sector, and the seventh lowest coupon of any length note ever issued by an office REIT. This offering reset our credit spreads, which now are well within the band of spreads of peers who are rated one notch higher. Fixed income investors have expressed their views with their wallets, and clearly value the performance of our portfolio, the resiliency of our cash flows and our growth from low-risk developments. Regarding operations, same property cash NOI was roughly in line with the low end of our first quarter range.

As forecasted, weather-related expenses were at normal levels compared to extremely light levels in the first quarter of 2020, and parking income continued to be lower than last year, as employees start to return to our urban locations. Based on current negotiations, we expect several positive leasing outcomes that increase our forecast of same-property cash NOI from our original midpoint of negative 1% to a new range that is flat at the midpoint. As a reminder, our full year guidance continues to assume same-property occupancy declines modestly during the year, due to the diminished vacancy leasing volume last year and the projected impact of joint venturing additional wholly owned data center shells this year to raise equity.

With that, I'll turn the call back to Steve.

Stephen E. Budorick -- President and Chief Executive Officer

Thank you. Our central strategy of value creation through low-risk development, deeply concentrated adjacent to Department of Defense priority missions that support the U.S. government and its contractors, has and continues to provide an average of one million or more square feet of new development opportunities, and by extension, high-value defense IT assets each year. Our strategy also has created a portfolio of high-credit tenants, whose business cycles are not correlated to the general economy, who have durable and growing business demand, and who are supported by healthy defense spending on priority national defense programs. These attributes allowed both our company and our tenants' businesses to outperform during the pandemic shutdowns, and continue prospering now during the emerging recovery.

Our 2021 business plan had a great start in the first quarter and adds accelerating achievement and demand levels thus far into the second quarter. Our recent experience in the debt markets, achieving landmark results for our company, combined with our stock's relative outperformance last year, demonstrate that the investment community recognizes the strength of our strategy, our assets and tenants that result in the strength of our franchise. Our increased midpoint of full year FFO guidance of $2.22 implies 4.7% growth over the elevated 2020 results and 4.8% compound growth from 2019. We're firmly on a path of sustainable growth, driven by a durable operating portfolio, a strong balance sheet and a reliable low-risk development program that is producing incremental NOI annually. We look forward to capitalizing on the growing set of impressive opportunities we have before us.

With that, operator, please open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from the line of Manny Korchman with Citi. Your line is open.

Manny Korchman -- Citi -- Analyst

Hi, everyone. Good afternoon. Looking through your investor presentation, it looks like the retention rate on the 2022 expirations is now more of a firm number. Does that imply that you have more conviction in getting those leases retained at that number? Or is there something else driving sort of that minor change in reporting?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

The minor change in reporting was, we had -- those two tenants are two large regional office tenants in Baltimore. And our previous math had the one tenant with a partial renewal and staying in the building for about 30,000 square feet. And our expectation is that they will totally vacate now. The second was that we had a contraction for the second tenant that ended up not being as large as what we had forecasted, which resulted in the net change.

Manny Korchman -- Citi -- Analyst

Thank you. And then maybe sticking to regional office for a second. Others in the space have accelerated their noncore or nonstrategic disposition programs. You've certainly sold nonstrategic assets in the past. But have you given any renewed thought to selling the regional office assets? And maybe I'll wrap that with -- you made a comment on working from home and being protected within your current portfolio. How do you feel about the working from home trends with your regional office portfolio?

Stephen E. Budorick -- President and Chief Executive Officer

Well, I'll take the second part of that first. There's clearly one large tenant, the one that's not renewing, that is implementing a significant work from home strategy. The other large tenant that we're renewing is not, and their contraction is less severe than we anticipated before the pandemic, which is good news for our shareholders. With regard to recycling those assets, we have always maintained that they're our future opportunity for recycling. We don't anticipate doing it this year in particular, because we need to renew those tenants or reestablish the occupancy that we're going to lose. But they are certainly candidates for recycling in future years.

Manny Korchman -- Citi -- Analyst

Thanks, Steve.

Operator

Our next question is from the line of Craig Mailman with KeyBanc Capital Markets. Your line is open.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys. Good afternoon. Just curious, Anthony, on the timing of potential JV sales. Is the slower development leasing out of the gate impacting that timing at all? Or is the, kind of what you guys assumed in guidance standing pat?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

No. What we're assuming in guidance is standing pat. When you think about the investment of our development capital into the development projects, what we've projected for this year is -- the majority of it is an investment in projects that are currently under construction, and then the commencement of some of the projects that we expect to lease this year, later in the year. So the leasing pace is not correlated to the timing of our development investment for the year.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Fair enough. It's infinite off of 0, right? And then just another quick one. On DC-6, I think previous guidance had assumed kind of 331 renewal and new lease on that. Now it looks like it's going to take longer. Does that materially impact earnings at all, getting the higher rent for another quarter or 2? Can you kind of just remind me of the order of magnitude?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Sure. The incremental benefit per quarter is about $0.5 million.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then just as we -- it sounds like you guys have good momentum in the development pipeline for leasing. Could you just kind of go through the 875,000 square feet that's in alpha signature and advanced negotiations? Just break it down by either geography or office versus shell data centers. Just give us a sense of who is kind of more active these days?

Stephen E. Budorick -- President and Chief Executive Officer

Sure. So first, by breakdown, it's 70% Defense IT office, 30% shell. By location, it's diversified. It includes the NBP land that we own in Northern Virginia in Redstone Gateway.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And does that totally -- the 30% totally exhaust your remaining data center land?

Stephen E. Budorick -- President and Chief Executive Officer

Not at all. We have four -- at least four additional shells that we can add on the land we own.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

The next question is from Jamie Feldman with Bank of America. Your line is open.

Jamie Feldman -- Bank of America -- Analyst

Thank you. I guess to start with, Anthony, do you -- can you talk about the next refi opportunity or the next potential debt rate you might do? It sounds like this one was so successful. How are you thinking about maybe more?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Well, in terms of debt maturities, we have $400 million term loan that comes due in December of 2022. That's our next maturity. And currently, that term loan is priced at a BBB flat credit spread based on the renegotiated deal we did with our banks last March. So that's very competitive capital right now in terms of pricing. And then our next sort of maturity after that is the 2025 bond issuance that comes due. So I think we'll continue to monitor the bond markets and see if there's an opportunity to continue to take advantage of where our bonds are trading, and refinance that out to extend out our debt ladder.

Jamie Feldman -- Bank of America -- Analyst

Okay. And when you think about the leasing pipeline pickup, is there anything new, news-wise, or that you're seeing in the market that's driving this, beyond what was expected and kind of pent-up demand? Like, is there new -- any of the data breaches we've seen or anything else that's kind of driving -- or the new administration perhaps? Or this is all kind of what you thought, it was just pent-up demand?

Stephen E. Budorick -- President and Chief Executive Officer

Well, I can't really tie it to the administration, by any means. But it is clear that the need for SCIF space in the Fort Meade area is at a very high level of demand, and much of the leasing that I think we're going to do in that subsegment is driven by new contracts, driving need for new or expanded SCIFs.

Jamie Feldman -- Bank of America -- Analyst

Okay. And then if you look at the portfolio of occupancy quarter-to-quarter, you did see a slip in Fort Meade/BW corridor and [noted] Defense is actually much -- is only 10 basis points in regional office. Can you just talk about what happened in those two submarkets? And that's more temporary or that's -- and that's stuff you're going to backfill? Or how should we think about that?

Stephen E. Budorick -- President and Chief Executive Officer

Well, particularly in Fort Meade, I would expect it to be backfilled, I would say, the next six to 12 months. And what space we did get back had to do with either merger and acquisition activity in the past that resulted in surplus space, or similarly consolidation reorganization. But demand where we did get that space back is pretty high.

Jamie Feldman -- Bank of America -- Analyst

Okay. And then just any more detail on DC-6 in terms of how the conversations are going and your expected time line?

Stephen E. Budorick -- President and Chief Executive Officer

Well, they're going well, but they're painfully slow. Our client is extremely busy -- our tenant, their team. And getting on their schedule to drive the negotiation of the document forward has been slow. I read through the redline status -- or current status of the agreement. It feels like we're very close on the open issues. There are a couple more levels of documents that need to be settled, and I would hope we could do it this quarter.

Jamie Feldman -- Bank of America -- Analyst

Okay. What's included in your latest guidance? I think last time you said maybe April, if I remember correctly?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Our latest guidance assumes the end of the quarter -- end of the second quarter.

Jamie Feldman -- Bank of America -- Analyst

Okay. Great. Thank you.

Operator

The next question is from the line of Steve Sakwa with Evercore ISI. Your line is open.

Steve Sakwa -- Evercore ISI -- Analyst

Yes. Thanks. A lot of my questions have been asked and answered. But Steve, I was just curious, as you're talking to new tenants, both for development and for your existing vacancy, is there anything that you're seeing different in the density or seating, or how they're laying out the space versus kind of current configurations?

Stephen E. Budorick -- President and Chief Executive Officer

Interestingly, and I touched on this on the last call, one of the customers were working to complete build-to-suit for their density requirement -- it's at Redstone Gateway -- is higher than the density requirement and, therefore, parking of the full 1.5 million we've built over the last, call it, nine years. And everything else is kind of normal. But in this particular case, we're investing additional money and using -- or using more land, because the parking ratio is higher than normal.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. So they're actually packing more people in, kind of going in the wrong direction. But then I guess, what we would have thought would happen?

Stephen E. Budorick -- President and Chief Executive Officer

Well, certainly it's not a work-from-home situation. That's for sure.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. And then I know when you've talked about sort of buying land positions for the data center shells, you've sort of suggested or said that you've kind of done it in concert with your partner and you've kind of let them kind of drive the process a bit. Is that still the case? Are you looking to kind of broaden out with other partners? And would you be looking to take down any land for potentially other JV partners?

Stephen E. Budorick -- President and Chief Executive Officer

Well, certainly, we have no plan to buy land with a JV partner. We do, and are, from time to time having conversations with other potential tenants. Our interest in buying land would have to be tied to some pretty advanced negotiations for development. With regard to our current customer, we've always worked in harmony with them, and we continue to have 800,000 to one million square feet of development capacity in what we've already bought.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. And then just last question. I know you've kind of tightened up the footprint over the last couple of years. Are there any new potential locations that could emerge that would fit the current kind of Defense IT profile that you're not currently in?

Stephen E. Budorick -- President and Chief Executive Officer

None that we've identified to date, Steve.

Steve Sakwa -- Evercore ISI -- Analyst

Great. Thank you.

Stephanie Krewson-Kelly -- Vice President, Investor Relations

Thanks.

Operator

The next question from the line of Tom Catherwood with BTIG. Your line is open.

Tom Catherwood -- BTIG -- Analyst

I want to stick with the data center shells for a second. Just, I'm thinking more about development funding in general. And when we think about your pipeline going forward, obviously as you stabilize properties, the additional NOI allows you to borrow against that on a leverage-neutral basis and redeploy that into development. And then the data center shell contributions provide a nice source of low-cost equity. Do you have a sense of kind of the runway that you could get or the number of years of development you could fund just from the contributions of the data center shells you wholly own right now and the ones that are close to being developed?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

So Tom, at the end of the year, the portfolio of wholly owned data center shells that were operational, or -- plus the two that were under development had a gross value based on the cap rate that we achieved in 2020's joint venture of about $650 million. And that doesn't include any incremental development projects that we would expect to do this year or next year. Based on our current pipeline as well as what we expect to do, we have modeled out that, that capital would be able to continue to fund the development pipeline on a leverage-neutral basis over the next four to five years.

Tom Catherwood -- BTIG -- Analyst

Got it. Thanks for that, Anthony. And then, Todd, just wanted to check. I thought I heard you say that the April leases were done at cash leasing spreads of positive 0.5%. Did I hear that right?

Todd Hartman -- Executive Vice President and Chief Operating Officer

That's correct. The renewal leasing, yes.

Tom Catherwood -- BTIG -- Analyst

Got it. Got it. So it sounds like those rents held in, I guess, maybe a little better than we had expected. Can you talk more broadly about rent trends in your markets? And along with that, it also seems like the leasing that was done in 1Q, the bumps were a little higher -- the annual bumps were a little higher than we're used to. Was that just a leasing mix? Or are you being -- are you able to push those more in your leases?

Todd Hartman -- Executive Vice President and Chief Operating Officer

Well, I would say, generally rents are tracking to where they were last year. We haven't seen any material decline in face rates. In terms of the annual bumps, I think that's probably a mix basis rather than a sign of a market shift.

Tom Catherwood -- BTIG -- Analyst

Got it. Thanks for that. And then you mentioned kind of certainty on the one regional office expiration in 2022. Now you've put capital into a lot of those, especially your Baltimore buildings, over the past few years. Other than leasing capital to get that space backfilled, are you expecting any incremental capital to put into that asset in order to get it stabilized again?

Todd Hartman -- Executive Vice President and Chief Operating Officer

No, we're not.

Tom Catherwood -- BTIG -- Analyst

Great. And then last one for me. The last quarter, you had mentioned that there was an opportunity -- or sorry, an expectation of leasing some of 310 NBP in 2021. Is that still the expectation?

Todd Hartman -- Executive Vice President and Chief Operating Officer

Yes. It is still our expectation, with a portion of the space midyear and the balance of it by the end of the year.

Tom Catherwood -- BTIG -- Analyst

Nice one. Thank you, everyone.

Stephanie Krewson-Kelly -- Vice President, Investor Relations

Thank you, Tom.

Operator

The next question is from the line of Rich Anderson with CMBC SMBC. Your line is open.

Rich Anderson -- CMBC -- Analyst

SMBC here, I'm not a reporter. So DC-6, if you don't mind, you described as moving slowly. That's a kind of obvious statement. But maybe is there a Plan B, like are you engaging potential third parties in case this doesn't come through to the finish line? And one, in particular, I'm thinking about is that amazing customer of yours in the shell business. I'm wondering if there's any fit there for this 11 million -- I mean the 11-megawatt space?

Stephen E. Budorick -- President and Chief Executive Officer

Our confidence is very high. The current tenant over the 5, now call it 6-year term has adapted new documentation standards, and we've been working to translate our form into the -- comply with their structure. And we've moved through that. But last year, there was a lot of what-ifs on further upgrades to things like security and fire control, which we've moved through and we've resolved. So at this point in time, we feel like we're in a mop-up. We just need to get the contract wrapped up and executed. And I would not compromise our relationship by putting that space on the market with the confidence we have.

Rich Anderson -- CMBC -- Analyst

Okay. That's quite fair. On the growth profile of the company, you described the negative 2.7% same-store cash NOI is consistent with guidance. I guess, define consistent, but it was outside of the range. And yet, you did better than we thought from a previous question, under the renewal rates during the quarter. So what happened there? And maybe if I -- if it's an obvious thing that I missed, I apologize.

Stephen E. Budorick -- President and Chief Executive Officer

It's the -- the result for the quarter was driven by sort of two things. One was weather-related expenses, both snow and energy, that were significantly higher than the first quarter of 2020 and slightly higher than our forecast on a net basis. And then the parking revenue from our urban locations, which is Baltimore and Maritime primarily, was clearly lower than the first quarter of last year, which was pre-pandemic shutdowns, and again, was slightly -- the reduction was slightly higher than what we were expecting.

Rich Anderson -- CMBC -- Analyst

Okay. Fair enough. So then with that observation, what I'm -- what I'd like to know longer term and maybe to you, Steve, once you kind of get through these kind of last remaining sort of nuances to the story, and you just kind of get into a steady-state operating environment, what do you see as the growth profile of the company when you take into consideration same-store growth, leverage, the development pipeline, all the things that you mash together and come to a bottom line number? Is it like a 5% type of growth model? Or do you see it as something greater than that?

Stephen E. Budorick -- President and Chief Executive Officer

I think over a longer period, that's probably a good number to rely on, 5. 2% to 2.5% same-office, and then the balance being incremental growth from development.

Rich Anderson -- CMBC -- Analyst

Great. Okay, good. Thanks very much.

Operator

The next question is from the line of Dave Rogers with Baird. Your line is open.

Dave Rogers -- Baird -- Analyst

Good afternoon. Between Todd and Anthony, I think you guys have talked about several positive leasing outcomes that you hadn't anticipated. And so I guess I wanted to just dive into those a little bit more. Can you talk about whether that was on the vacancy, renewal, or just on rate overall? And then Anthony, wanted to dovetail in with that, the question on the lease term fee in the quarter, will that continue to be amortized? Or was that a onetime fee?

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

In terms of the better-than-expected leasing activity, it was both: renewals that occurred that we were expecting nonrenewals on, and then some additional leasing that was done on vacancy leasing, both additional square footage and sooner than what we had forecasted. So -- and with respect to the term fees, a portion of the termination fees that we recognized in the first quarter will continue to be amortized through the balance of the year, with that tenant expiring at the end of 2021.

Dave Rogers -- Baird -- Analyst

Okay. Thanks for that. And then Steve, you haven't really talked too much about Washington and the government and any potential issues there. You've been pretty positive over the past several quarters in terms of the budget. Is there anything kind of in the pipeline now as you talk and have these advanced negotiations, that is a risk in your mind to kind of executing these transactions in the very near term?

Stephen E. Budorick -- President and Chief Executive Officer

Certainly not the near term. We talked about being in advanced negotiations, we wouldn't have identified them if we weren't working on lease documents. And with regard to the government,, the outlook looks to be status quo with 1% to 2% growth on a very high defense budget basis. And I think that will be very stable and promising for our portfolio.

Dave Rogers -- Baird -- Analyst

Any issues as, obviously, Congress is kind of battling and fighting out all these other issues, in terms of funding other programs that would just put this on the back burner from a timing perspective, not necessarily in a current perspective?

Stephen E. Budorick -- President and Chief Executive Officer

The timing is driven by the appropriation of an annual budget. And I think we've only had one budget appropriated on time in the last nine years that I've been here. I would fully expect this year to be another year where there's a continuing resolution that pushes that appropriation from the scheduled September outcome to November or December. That's kind of become the norm.

Dave Rogers -- Baird -- Analyst

Back to normal. I appreciated the help. Thanks.

Operator

The next question is from Daniel Ismail with Green Street. Your line is open.

Daniel Ismail -- Green Street -- Analyst

I'm just curious to see if there's been any update on 2100 L Street. I believe on the last call, you mentioned some early stage prospects. And I was curious to see how those conversations have evolved.

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Those conversations are ongoing. We have actually more prospects now for the space than we had last quarter. And -- but no real advancement in the discussions other than it's a lease process, a lease negotiation process -- or deal process, I should say, that's going to take its time.

Daniel Ismail -- Green Street -- Analyst

Any anticipation for that being done this year? Or is that still pretty hard to say?

Stephen E. Budorick -- President and Chief Executive Officer

50-50. We're certainly trading paper with a couple of prospects. And there's at least 50% likelihood we could win one of those deals.

Daniel Ismail -- Green Street -- Analyst

Great. And then just two questions on development costs. So obviously, development costs are moving higher. So I'm just curious if there's been any impact on the pipeline? And then two, assuming replacement costs are moving higher in conjunction with construction costs, should we see that translate into better, longer-term rent growth for either the Defense or regional office portfolio?

Stephen E. Budorick -- President and Chief Executive Officer

Certainly, there's short-term pressure on costs. Throughout the last 12 months, we have not had difficulty completing our developments. We're hearing some material segments that are under some pretty significant cost increases right now, like drywall. With regard to the longer-term elevation of replacement costs, certainly it would follow that we could drive rate into higher long-term replacement costs. But I'm not convinced that this is a permanent shift in the cost structure as much as a short-term supply and demand issue.

Daniel Ismail -- Green Street -- Analyst

Great. Thanks, Steve.

Operator

The next question is from the line of Omotayo Okusanya with Mizuho. Your line is open.

Omotayo Okusanya -- Mizuho -- Analyst

Hi. Yes. good afternoon. I just wanted to focus on the regional office portfolio, the nonrenewal and also the renewal of the two tenants you talked about. Could you just kind of talk about mark-to-market prospects on both the renewal and possibility of when you get a new tenant for the space that wasn't renewed?

Stephen E. Budorick -- President and Chief Executive Officer

So mark-to-market on rents, we're probably negative 8% to 10% for a long-term renewal. And the second part was...

Omotayo Okusanya -- Mizuho -- Analyst

So that's 8% to 10% for the new space, for the empty space?

Stephen E. Budorick -- President and Chief Executive Officer

Yes. I think that's about right.

Omotayo Okusanya -- Mizuho -- Analyst

And then what about for the tenant that is renewing?

Stephen E. Budorick -- President and Chief Executive Officer

Same.

Omotayo Okusanya -- Mizuho -- Analyst

Okay, great. Okay. And then again, if you could indulge me, I know again, you guys, the bigger driver for you is kind of Department of Defense budget, specifically around the areas of security and things like that. But the big amount of spending that President Biden is trying to do across all these major bills, whether it's the coronavirus bill or the education bill or what have you. So I mean do you guys expect that to have any kind of meaningful impact on tenant demand, specifically for you or even just for the general kind of D.C. Washington area?

Stephen E. Budorick -- President and Chief Executive Officer

So with regard to our portfolio of Defense IT assets or priority missions, no, I don't see any correlation with the bulk of our portfolio. More spending in DC could -- and the DC real estate community tends to believe that when that kind of spending increases, they do get growth in demand. And I would say as a landlord finishing a development, we'd welcome it.

Omotayo Okusanya -- Mizuho -- Analyst

[Indecipherable] Thank you.

Stephanie Krewson-Kelly -- Vice President, Investor Relations

Thanks, Tayo.

Operator

The next question is from the line of Bill Crow with Raymond James. Your line is open.

Bill Crow -- Raymond James -- Analyst

Good afternoon. Going back to Baltimore quickly. Does the outcome of those two leases change in any way the prospective timing of selling those assets?

Stephen E. Budorick -- President and Chief Executive Officer

Potentially. I mean certainly a successful outcome than the one we're expecting, could change our thoughts. We're presuming an unsuccessful outcome on the second. And we prefer to bring that building to market fully leased, as opposed to with a significant vacancy.

Bill Crow -- Raymond James -- Analyst

All right. That was it for me. Everything else has been covered. Thank you.

Stephanie Krewson-Kelly -- Vice President, Investor Relations

Thanks, Wil.

Operator

We have an additional question from the line of Manny Korchman with Citi.

Manny Korchman -- Citi -- Analyst

Yes. In response to an earlier question about new markets, you gave a very, very quick no. And I was just -- want to dig into that and just figure out what's driving that now? Is that because you don't have a presence in the space now? Is it because you just don't think that those tenants are expanding quick enough in those markets? Are there others that are just more entrenched? Or what's driving that very firm no?

Stephen E. Budorick -- President and Chief Executive Officer

Well, there are certainly some markets that we've evaluated from time to time. We're just not in a position, where I'd want to start indicating that we're ready to make a new market move until we're more certain. But we continue regularly to evaluate opportunities that have come up from time to time, to open up in a new market.

Manny Korchman -- Citi -- Analyst

Thanks, again.

Operator

[Operator Instructions] The next question is from the line of Steve Sakwa, Evercore ISI. Your line is open.

Steve Sakwa -- Evercore ISI -- Analyst

Yes. Sorry, my questions were all been asked. That just I could not get a queue. Sorry about that.

Stephanie Krewson-Kelly -- Vice President, Investor Relations

So risky..,

Stephen E. Budorick -- President and Chief Executive Officer

So thank you for joining our call today. We will be in our offices this afternoon. Please coordinate through Stephanie if you'd like a follow-up call.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Stephanie Krewson-Kelly -- Vice President, Investor Relations

Stephen E. Budorick -- President and Chief Executive Officer

Todd Hartman -- Executive Vice President and Chief Operating Officer

Anthony Mifsud -- Executive Vice President and Chief Financial Officer

Manny Korchman -- Citi -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Jamie Feldman -- Bank of America -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Tom Catherwood -- BTIG -- Analyst

Rich Anderson -- CMBC -- Analyst

Dave Rogers -- Baird -- Analyst

Daniel Ismail -- Green Street -- Analyst

Omotayo Okusanya -- Mizuho -- Analyst

Bill Crow -- Raymond James -- Analyst

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