COPT Defense Properties (CDP) Q2 2018 Earnings Report, Transcript and Summary

Welcome to the Corporate Office Properties Trust Second Quarter 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.

Thank you, Herman. Good afternoon and welcome to COPT’s conference call to discuss results for the second quarter and first half of 2018. With me today are Steve Budorick, President and CEO; Paul Adkins, Executive Vice President and COO; and Anthony Mifsud, EVP and CFO. In addition to the supplemental package and press release related to our results, we have posted slides on the Investors section of our website to accompany management’s remarks. In the results press release we issued yesterday and on our website, you will find reconciliations of GAAP and non-GAAP financial measures management discusses. At the conclusion of management’s remarks, we will open the call for 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 yesterday’s press release and our SEC filings for a detailed discussion of forward-looking statements. I will now hand the call over to Steve.

Thank you, Stephanie and good afternoon. Second quarter performance reflects strengthening demand throughout our portfolio and continued leasing progress. We are on-track to meet or exceed the leasing, operating and investment goals in our original 2018 plan. During the quarter, we executed the full building lease with the government customer for NoVA B, a 159,000 square foot Anti-Terrorism Force Protected building, in which the customer will invest significantly and in all likelihood occupied for decades. Although executions took longer than anticipated, we will achieve the lease commencement date expected in our plan. At 310 NBP, our remaining property held for government use. The lease process for the remaining 169,000 square feet is advancing the similar NoVA B the government ultimately sets the pace. We now expect lease execution in the fourth quarter of this year instead of in September. More broadly in the first half of the year, we completed over 2 million square feet of leasing including 862,000 square feet of development and new leasing. We're encouraged by the growing breadth and depth of low-risk build-to-suite development opportunities throughout our defense IT locations. The fiscal '18 budget appropriate on March 23rd and summarized on Slide 7 increased the base defense budget by 14% over fiscal year 2017 and quarterly defense outlays were up 16% versus the second quarter of last year. As we said before, lease timing generally takes several quarters to materialize into new demand for space, but clearly the elevated spending levels bode well for future leasing opportunities. We continue to see strong bipartisan support to increase defense spending. The National Defense Authorization Act for fiscal year 2019 will increase DoD's base budget by another $14 billion next year to $619 billion, and both houses of Congress support higher funding. On May 24, The House passed by a vote of 351 to 66 and on June 18, the Senate passed it by vote of 85 to 10. For fiscal 2019 budget process is advancing so smoothly such the Congress maybe in a position to pass an Omnibus Budget before the end of the fiscal year. However, for the past 21 years, since fiscal 1998, the government has begun every fiscal year under a continuing resolution. Based on this history and because this is a mid-term election year, we expect to short-term continuing resolution by October 1st and passage of the 2019 budget in November or December. Any continuing resolution would put into effect would be at current fiscal years $605 billion level. Last quarter, we described the recovery in defense spending is driving five types of leasing opportunities in our portfolio, as summarized on Slide 9. The first is defense contractor expansion within our operating portfolio. The second, the realization of pent up government demand in our operating portfolio. The third is limited speculative development in select markets to capture emerging demand. The fourth is contractor demand for new build-to-suit projects in major pre-leases. And fifth, long-term planning for future goals at secured government locations. In the past few months, we have executed leases representing four of these five demand opportunities. First, of the 187,000 square of feet of new leasing we achieved in the first six months, a 169,000 or 90% was at defense IT locations, evidencing the incremental leasing many defense contractors require to accommodate mission expansion. Included in those 169,000 square feet were 42,000 square feet in our 1.3 million square foot maybe support portfolio, which ended the quarter at 91.6% lease. Also in Columbia gateway, the 18,000 square foot lease we completed in June with Maryland Innovation & Security Institute was another example of mission growth. Second, the full building lease we executed at NoVA B met a portion of the pent up government demand in that market for efficient anti-Terrorism Force Protected compliance space. Additionally, in the past 10 quarters, we have tripled the amount of space leased to the U.S. Navy at Pax River. And as I have discussed, we expect to complete the lease action at 310 NBP later this year. Third, we are successfully leasing our speculative development at Redstone Gateway that we will be delivering later this quarter. We anticipate signing an 18,000 square foot lease in a few days that will increase lease percentage of that development to approximately 50%. And we have multiple prospects for the balance Fourth, we increasingly see defense contractors exhibiting the confidence to commit to new build-to-suits in major preleases. Last month, we completed a 15-year contract with a defense contractor to use a kept owned asset in a non-disclosed location in support of mission growth. The economics of this confidential transaction are equivalent the preleased 115,000 square foot contractor office development or a preleased 190,000 square foot data center shop. We continue to develop data center shell to meet strong demand from a cloud computing defense contractor. Thus fall, we anticipate wining 11 build-to-suit data center shell developments and entered into a $285 million forward equity raise to ensure through shared sufficient capital was in place. We've now executed 6 of those 11 leases and expect to complete the remaining 5 between now in mid 2019. Beyond this immediate pipeline, demands forming for additional data center shell that would likely be executed in 2020 and beyond. New build-to-suits office opportunities are emerging and replenishing our shadow development pipeline, which currently tracks up to $2.5 million square feet of possible transactions. The fifth type of demand long-term planning for government expansion and secured parcels is reemerging albeit at the government space. And we're engaged some discussions with multiple users for several new facilities. Given the government's multiyear process, we expect to significant portion of this demand to emerge over the next few years and we'll provide appropriate updates as projects involve. So in summary, the combination of higher defense funding and confidence, the funding will continue as reestablish the business climate where defense contractors and government agencies are able to address their space planning requirements to accommodate mission growth, achieve operating efficiencies and comply with security mandates. We are prepared to capitalize on these opportunities and expect to win new business in our proven defense IT locations. With that, I'll hand over to Paul.

Thank you, Steve. During the first six months, we leased over $2 million square feet including 1.2 million square feet of renewals, achieving a tenant retention rate of 77%. Economics on renewals were in line with expectations. We now have 800,000 square feet of explorations left to resolve this year, nearly all of which are located in the Fort Meade BW Corridor and maybe support sub-segments where demand has been strong. Based on these results in our outlook, we are raising our full year guidance for retention to a new range of 73% to 77%. Average lease terms for a second quarter renewals were impacted in two ways. First, building exercise the second of its 5 one-year renewals, after its original five year lease on 2 buildings at Redstone Gateway, totaling 242,000 square feet. Secondly, 92,000 square feet of renewals were associated with tenant expansions. These renewals were completed early to extend existing lease expirations to match the lease expirations of the new expansions. These transactions resulted in an average total lease term of almost six years. Same property and core portfolio occupancy is increased in the second quarter by 30 and 40 basis points respectively, reflecting hire new leasing volumes. The 187,000 square feet of new leasing achieved in the first half of the year is 30% higher than the volume achieved during the same period last year. As result of some occupancy days slipping a few months, we are reducing our year-end same property occupancy guidance by 100 basis points to a new range of 92% to 93%. Demand to fill tenant needs continues to grow through our throughout our portfolio. As June 30th, we had approximately 1.1 million square feet of vacancy in our core portfolio, two-thirds of which is in our Fort Meade BW Corridor sub segment. Our pipeline of leasing prospects continues to modestly exceed our un-leased space. Excluding 310 NBP, we now have 985,000 square feet to lease against which we are tracking 1.1 million square feet of active deals in prospects. Our shadow development pipeline continues to reflect growing demand for modern efficient space in mission growth. They contain 2 million to 2.5 million square feet of potential transactions. The data center project square footage accounts for about 50% of the high-end of the range. Based on our leasing success to-date and the volume of active opportunities, we are increasing our development leasing guidance for the year from the original 900,000 square feet to 1.1 million square feet. With that, I'll hand the call over to Anthony.

Thanks Paul. Second quarter FFO per share of $0.51 was $0.01 higher above the high-end of guidance due to the timing of certain operating expenses and property level efficiencies realized through expense management. During the quarter, we drew down $32 million of proceeds from our forward equity program to fund investments in our development pipeline and have approximately $157 million of issuance remaining. We've recently started construction on 2100 L. Street in Washington DC and expect to close on a $116 million construction loan next week. The loan proceeds will fund the remaining development cost associated with this project. In terms of guidance as Slide 16 shows, we are increasing the midpoint of our full year guidance by $0.01 to $2.01 and tightening the bottom-end of our range. The midpoint of our new range reflects operation savings realized during the second quarter. The $2.01 midpoint of our revised range represents a 4.7% increase over 2017 actual results adjusted for dispositions. Additionally, we continue to forecast AFFO will increase between 4% and 6% this year. We are establishing third and fourth quarter FFO per share guidance of $0.49 to $0.51 and $0.48 to $0.52 respectively. The $0.50 midpoint of our third quarter range is $0.01 below second quarter results due to the timing of our NIM expenses that were budgeted for the second quarter but were delayed by the rainy spring. With that, I'll turn the call back to Steve.

Thank you, Anthony. The defense industry has in the early stages of the sustained recovery supported by recent budget increases and a rare but durable bipartisan willingness to fund defense and intelligence activities going forward. Summarizing our resulting demand opportunities; first the incremental contract demand to accommodate mission expansion should continue to support higher occupancies in our operating portfolio; second, we expect to capture up to 200,000 square feet of new government leasing in the second half of this year. Third, we are building spec in Huntsville to meet emerging demand and are preparing to start measured levels of speculative development elsewhere in the future when excess demand emerges; fourth, we expect demand for data center shells to remain robust and for additional contractors to commit the major preleases and build-to-suits office projects. And then fifth, we are in discussion with our government customers for multiple new facilities in several locations. We continue to expect the buying with defense related opportunities to grow and through advanced at a measured and deliberate pace. We're working patiently and steadily with current and potential customers and real-estate solutions to support their growth, modernization and security requirements. And we look forward to discussing our progress on future calls. With that, operator, please open the call for question.

Thank you, Mr. Budorick. [Operator Instructions] Our first question is from Manny Korchman with Citi. Your line is open.

Steve, just given your comments on how good environment is or is getting, are you surprised there hasn’t been a pickup and will be characterized for spec development by if not use then others trying to capture sort of the same budget underpinnings that you are talking about?

Well, in most locations that our defense IT is at, we don’t have a lot of competitive supply or land positions that compete directly. So, no, we’re not willing to go widely speculate. We do it when we don’t have space left to lease and I guess I am really not surprised because the advantage positions of our land.

And then in terms of your guidance with occupancy coming down, could you give us more specific as to what’s changed that versus you plan? I know you said there is a couple of leases that have been shifted. But give us more colors s to what those rooms why they were shifted?

I let Paul answer that one.

Hey Manny. Really, the fact of matter is just there is a few deals that are slipping into 2019 that are on our radar screen in terms of their commencement dates. But the amount of new leasing that we expect this year still should remain how to pace of that increase I referenced in my piece over last year. So, the pace of leasing is continuing, just a few -- there is no -- the handful of deals that just now have 19 commencement dates, but at the end of the year I think our leasing percentage will be exactly where we want it, if not better.

And one last for me, if we could. Appreciate the color and why the lease terms and renewals were sort of shorter than what we would have expected. Is there any change in the structure of leases going forward where maybe you can avoid that and get either longer contractual renewals or otherwise the sort of steady out that explorations pipeline?

Well, the Boeing situation is contractual and that’s going to continue to for three more years. In that they have two buildings that had a fixed five year term and five consecutive one year renewals. We're seven years now committed to the potential of 10. We fully expect them to exercise the next three and we’re just going to have to wait that one out. With regard to the 92,000 square, I view that as there very good news. We have tenants who need to expand who are committing to a longer term in their expansion and want to top up the remained term. I think this quarter it is the mix up pure renewals and renewals with expansion kind of created that situation.

And the good news is one of the tenants, one of the tenants that comprises have said that expanded while it's slightly extending their term is any growth mode in the asset that they are in and we expect them to take down more space as well.

Thank you. Our next question comes from Craig Mailman with KeyBanc Capital. Your line is open.

Just want to follow up on kind of what you have left to lease for the balance of the year? I think to hit the midpoint of your new range or somewhere in the range of 350,000 to 400,000 of new leases needed, given what you have expiring. Paul, I know you kind of hit on the 1.1 million square feet of active prospects for all of your vacancy. But just curious as we look in the back half of the year kind of what's the pipeline of LOIs or real deals you guys have today that kind of goes against the 120 basis points of net absorption you need?

The pipeline is good. We've made significant progress in the third quarter on signing a number of deals. And as I said, we expect new leasing for the year which we have a pretty good handle on to happily exceed last year's number, which accounts for the absorption that we expect to achieve.

Anyway you can put some numbers around what you guys have done in the third quarter? Just looking back…

Well, we've done a 187,000 square feet year-to-date, right. And we probably I think, on balance expect to lease 300,000 square feet additionally by your-end give or take 50,000 feet, but probably roughly take 50,000 feet.

I guess it's about 300,000 how much is actually dug?

Don't have that in front us, Craig, we didn't get that for you.

Ballpark maybe just to get in the transcript?

Maybe 150,000 square feet of it.

Okay. That's helpful. And then, Steve, you have mentioned kind of building spec in Huntsville, you guys have some space to lease up there already kind of how big, are you guys wanting to go on this next building?

So, the project that we're currently developing is totaled about 85,000 square feet and we'd like to wrap that up before pursue anything further without a major release. But we recognized this recovery was kicking in the cycle times of some of the smaller tenants, are too fast for us to get a prerelease and build the products. So we pretty committed to make sure we have space to lease, so we captured with demand that once be at our development.

Okay. And I know a lot of demands coming from comments just kind of what's the aspirations look like they're in the next year to that gives you guys a lot of comfort that you are going see a lot more activity there?

Well, I don't have that statistic handy and we can follow up and get it for you. But our confidence comes from the people we're in discussions with about potential occupancies on Redstone Gateway.

Yes and it's driven as much by new contract awards and real growth as opposed to just explorations upcoming.

And then just last one -- sorry go ahead.

Most of the activity that we're seeing is new net growth, not just musical chairs coming to research part.

That's helpful. And then last one for Anthony, the takedown of the remaining forward equity kind of what's the thought process there or just timing?

So, based on our expectations for development investments for the balance of the year and into the first half of next year, we think that what remains fund the equity component of that capitalization through at least through the first quarter of next year.

I mean is there where the stocks been trading kind of the built together given any thoughts of accelerating that to take advantage of that where you guys wanting to time to take down?

The way the forward works is the price is already fixed. So, when we did the transaction back last October, the transaction was done at $31 net. And then fees were netted out of that. So there is no price variability to the shares we take down. It was committed back in November, and we're really not exposed to any change in the price as we take the forward down.

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

Couple of questions. First, defense contractors, they can either occupy space with the client with the DoD, Department of Defense on base, or they can occupy in say, third-party space yours contiguous or they can office at their headquarters typically Northern Virginia. Do you have a sense for what sort of ratio you typically get with the defense contractors? How much of the -- how many of their people -- what percentage are for example on-base or contiguous to the base versus at their headquarter location?

So, I don't have a statistical number to share. I can't say there are rare occasions when people are invited to do business in the government space. But generally, a contractor can't lease space from the U.S. government on a base. So, I would hypothesize that fraction is pretty well.

Well, I think it's a little bit like accounting firm just going to their offices and the way the defense contractor world works. When they're bidding, it's either accommodated or un-accommodated. And one of them relates to the defense contractors personnel just occupying NSA or DoD space not leasing it but just occupying it as they execute on their defense contract. Does that help at all?

Well, I can tell you this, John. You've referenced things in Maryland and we have very healthy inventory of occupied space. With defense contractors growing in the nature of their business is especially you need to talk to them about.

Okay. Yes, well, the reason I'm asking it, I did talk to one of them last week and they said 70% of their people fit in NSA or DoD space not third-party lease space. So, I'm just trying to get a sense for that little nuance of your business.

John, I can neither confirm that contractor's facts nor deny them. I can talk about our business. I can talk about growth in lease space for mission acceleration in a variety of locations.

Thank you. Our next question comes from Tom Catherwood with BTIG. Your line is open.

Steve, just want to talk about for data center shell. So, you mentioned that there is the five remaining from the initial list of 2011. As far as sense of timing on those, is anything shifted from when you first put out that list? And do you need to take down anymore land in order to get those started?

So, we’re under contract on every chunk of land we need. We have a couple of closing dates later in the year. The timing has been fairly fluid depending on zoning in other approvals, but generally it's on track maybe a month or two on average later. But as I said, we expect to get the final five before mid year, next year.

Okay. And then, you mentioned the next wave of potential data center shell developments and you said 2020. Were you referencing 2020 completions or 2020 executions? Or could we kind of not see a new waver starts until then?

Well, first of all I was referencing executions and secondly some healthy conservatism in that answer.

Got it. And then one for me. You guys took 6950 Columbia Gateway Drive offline this quarter. When the redevelopment played in there, I know, you're targeting the design to a particular type of company or industry.

Sure, so that building, it was the first building that capped actually built in this part. Functionally, a great building, but we found with the some of the redevelopments we have done is introducing kind of some new architectural treatments. We've enabled the tract some of the really fast growing cyber in defense IT techie tenants, primarily cyber. So, we're kind of repositioning the look and feel for that cyber tenant.

And can you remind me of what yield you typically target when you did these type of redevelopments?

So, minimum 8, and on incremental it is north of 10 routinely.

And activity is good.

Yes, as long as we are talking about that, we’ve got a bunch of pretty exciting tenants interesting in that building. We just started some repositioning of the landscape in our construction commences and earnest next month, but we expect to be preleased pretty quickly or significantly.

Thank you. Our next question comes from Blaine Heck with Wells Fargo. Your line is open.

It looks like development spending is set to ramp up pretty significantly from first half levels. Is that all due to 2100 L Street? And I guess, should we look at that Q3 and Q4 spend guidance as a fair run rate as we think about 2019?

Blaine, the third and fourth quarter have a few sort of unique transactions in a mannerly due to include as you said the commencement of the construction at 2100 L, but we also have the closing on some of those land parcels that Steve just refer to for the balance of the data center leases that we’re doing. So that sort of some of the anomaly is running through Q3 and Q4. With respect to run rate, I think for 2019 it's a development spend that's probably in that $300 million to $325 million in total probably consistent with what we've done this year or what we plan on doing this year.

Okay. So related to that, you guys have the $167 million remaining on your good forward equity net-net, the second half development spend is higher and somewhat continues into 2019. So, how are you guys thinking about sources of funding to cover that development spend as we look forward?

So for a portion of our developments spend for that's 2100 L Street, all of our equity is in today. And we're in the midst of closing a construction loan that's going to find the balance of that development project in the grounds, if they are starting to go in the ground now through the end of 2021 when the buildings complete. With respect to the equity component of the remainder -- of the development pipeline for next year, we continue to will monitor our stock price, we have been consistent about saying we would match fund the development investment with ATM draws, if we believe is the right price. If not, we have access to venture capital for some of our data center shells or office buildings to raise that equity capital to continue to fund the development pipeline.

Okay, in such way, we mentioned 2100 L a couple of times. Can you guys just talk about the demand trends you're seeing in the [indiscernible] DC office market and specifically, any incremental interest in 2100 L?

I prefer to speak to just directly 2100 L as opposed to the broader demand trends. Because we -- this is our one project under construction. As Anthony just said, we started construction last week and I'm happy to say that we have three prospects that accounts for 80,000 feet, which is the amount of office space we have left in the building that are active LOIs that we're negotiating. So, 2 or 20,000 square foot deals and a 40,000 square foot deal. So frankly, I'm very pleased with where we stand right now on those transactions. And so that's the update on to 2100 L.

Thank you. Our next question comes from Jed Reagan with Green Street Advisors.

Couple or just a quick follow-up first on the Columbia Gateway asset there was putting redevelopment. Was that contemplated in previous same-store occupancy guidance for the year?

It was.

Okay, great. And the development leasing guidance that was increased by 2,000 square feet, can you break that out between how much of incremental leasing is data centers versus office leasing?

So, it's primarily office. The data center plan is tracking through what we expected. So, it's other development beyond that.

Okay, that's helpful. On Page 11 of the presentation, you guys laid out a pretty high renewal rate on the larger leases expiring in terms of making 2019. Can you give a sense of the expected renewal rate on the remaining called 1.8 million square feet of smaller leases through the end of next year?

Yes, I think with respect to overall retention for 2019, our expectation is that on average, we're going to continue to be in that sort of mid-70% range of overall portfolio renewal.

Okay that's helpful. And then sort of a similar number for the back half of '18?

Yes.

Okay. And then just one last one for me. We've recently saw the army choose Austin as location for its future command center. I think it was driven primarily by the kind of tapping to the highly skilled labor and being close to private sector innovation. Do you think that could start to trend where defense tenants increasingly choose to be in more urban settings and kind of further away from the bases to sort of attract and retain the talented workforce?

I don't. If you read the government documents pretending to the objectives for futures command. It's really the gain access to innovation outside of the defense contractor industry. And it so accelerates the identification and implementation of technologies from other sectors. So I don't anticipate it's going to have a material change to the way the defense contractors operate. So my understanding is the futures command is going to be somewhere in that 30,000 to 50,000 square feet.

Okay. I mean do you hear from your defense contractor tenants at all that, geez, it's hard to attract the talent we need and kind of the suburban Maryland versus maybe infield DC or what not. Is that a common you've heard from people?

Not really isn't. One of the things we like to point about our success at Columbia Gateway is it's really the first high-quality development you can access from outside Baltimore and the community is very quick, it's a 15-minute drive. And the other parts in the area had the same kind of travel. So no that's not a thing that we've heard.

Thank you. Our next question is from Rich Anderson with Mizuho Securities.

So question on forward leasing last question in '19 and perhaps 2020, 17% and 14% of your portfolio expire and sounds like and you feel kind of confident about that and kind of high about 70% retention. But can you talk about where that's happening and the risk that there might be that maybe won't be able to keep up with the retention pace that you're talking about this year?

So, I don't have that breakdown in front of me. But for the last few years significant portions are in Fort Meade -- 65% in Fort Meade corridor adjacent to central mission. We expect that to be very high. The retention challenge that we had earlier in the year was early renewals on some non-defense leases that we had cut in 2016. We've got activity on back filling that, but by and large our defense [activity] retention has been extremely high.

There is nothing in the dispersion of our expirations that should change our general feeling that will be in the mid-70s as a retention rate.

Then on NoVA B and the work you are putting together on 310 NBP. I am curious you said that it takes time for some of these defense budget increases to make their way through to bottom line leasing for you. But would you be able to say if any of these two situations are tied to that? I mean in your conversations with incoming tenants or potential incoming tenants are they saying kind of explicitly that it's about or it is about the contract rewards that are coming through from the development increase -- development budget increases? Or is it sort of separate issue at that point for them?

So, all procurement by the government needs to have the budget approval. So, in a sense, yes, I mean everything is tied to approval the defense budget in one way, shape or form. The current environment that we’re experiencing is more timing and process, and it's not awaiting incremental growth and spending.

Thank you. [Operator instructions] And our next question is from Rob Simone with Evercore ISI.

I don't have a question here, but just wanted if Steve, I think you may have touched this on this on a prior call. But with some -- and industries leading up to the NoVA B lease being signed, but now that NoVA B is dealt with. What are -- are there any updates on the next kind of phase of that park, anything you can share with us at this point?

Other then -- we have customers plan for future occupancies in that park, its master plan for a consolidation of the central mission, nothing beyond that. But our confidence level is very high that we will fulfill the entirety of the capacity of that site, which is 1.37 million square feet.

And then just a quick follow-up. You've kind of been canvassing all of our -- all the office names we recovered, but have you guys internally taken a look at, just in terms of earnings or at FFO per share impact? And what the change in lease accounting could lean for you next year? Is it too early? So some companies have given like a preliminary view, I am just wondering if you guys thinking about that internally at this point?

Sure Rob. The impact for us for next year is going to be slightly over a penny, and in terms of the -- its penny down in terms of the amount of incremental leasing expense, leasing costs that we will be required to expense versus capitalizing the current year.

Thank you. And our next question is from Chris Lucas with Capital One Securities.

Anthony, just a quick question on the forward equity, can you remind us what are the datas that you are supposed to have the issuance wrapped up?

So, the total period we had was 18 months. So, we have until the April 2 of 2019 to fund all of the proceeds that we raised.

And then while the forward is outstanding, is it possible for you to issue additional equity outside of that?

Yes, it is. There's no restriction. We had a 30-day lockout. I think it was after the initial transaction was done, but there's no prohibition to issue equity until to wait to have to fund all of the forward proceeds.

Thank you. And our next question is from Jamie Feldman with Bank of America Merrill Lynch.

Steve, at the end of your comments, you kind of wrapped up listing bunch of things you've focused on. One of them you said was multiple new facilities in several locations. Should we assume -- are you thinking about additional markets for some of these new facilities? Or this is still within your footprint?

Within our footprint.

Okay.

On land that we're already on.

On land that we're already on, all right, great. And then, Anthony, can you talk more about operational savings in the quarter? And how sustainable that better margin is going to be? Or is it something maybe that comes back in the back half of the year?

So, back half of the operational savings will come back in the second half of the year or that really were deferrals of R&M projects that we had planned for the second quarter that got pushed into the third quarter. And now there half were $0.01 is really operational efficiencies we gained as compared to work to our original budget for the year, so that was really the reason for the moving up with the midpoint of our guidance range.

Okay. So the efficiencies where the new programs put in place to drive margins down or maybe a little bit more color?

So a lot of different sources, it's effective tax appeal, it's great energy management, it's squeezing costs out of our R&M. We've got a fantastic operating team that looks at every spend as an opportunity to be more efficient for the shareholder.

Okay. Alright, my phone kept cutting off, so I'll just touch base offline. So I don't ask a bunch of questions that have already been asked. Thank you.

Okay, we're here. So thanks. So thank you all for joining our call today. We are in our offices this afternoon so please coordinate through Stephanie, if you like follow-up call. Thank you.

And thank you for your participation today in the Corporate Office Properties Trust second quarter earnings conference call. This concludes the presentations. You may now disconnect. Good day.