First Potomac Realty Trust's (FPO) CEO Bob Milkovich on Q4 2016 Results - Earnings Call Transcript

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First Potomac Realty Trust (NYSE:FPO)

Q4 2016 Earnings Conference Call

February 24, 2017, 9:00 P.M. ET

Executives

Randy Haugh - Vice President, Finance.

Bob Milkovich - Chief Executive Officer

Andy Blocher - Chief Financial Officer

Analysts

Craig Mailman - Keybanc Capital Markets

Blaine Heck - Wells Fargo

Sheila McGrath - Evercore ISI

Michael Lewis - SunTrust Robinson Humphrey

John Guinee - Stifel

Operator

Good morning and welcome to the First Potomac Realty Trust Fourth Quarter and Year End 2016 Earnings Conference Call. As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Randy Haugh, Vice President, Finance. Please go ahead.

Randy Haugh

Good morning and welcome to First Potomac Realty Trust’s fourth quarter 2016 conference call. On the call today are Bob Milkovich, Chief Executive Officer; Andy Blocher, Chief Financial Officer; Samantha Gallagher, General Counsel; Mike Comer, Chief Accounting Officer; Tricia Moore, SVP Investments and Portfolio Management; and other members of our management team.

After the market closed yesterday evening, our company issued its fourth quarter 2016 earnings press release and posted supplemental information relating to fourth quarter operating results and portfolio performance on our website. Shortly thereafter, we filed our 10-K. Many of you have signed up to receive this information automatically by email. This information was also included in the 8-K furnished last evening to the SEC. The press release can also be found under the Investor Relations section of our website, first-potomac.com.

During this call, we will discuss our anticipated operating results and future events, including anticipated earnings and related assumptions, certain non-GAAP financial measures such as FFO, FFO available to common shareholders and unit holders, core FFO, and same-property NOI, anticipated debt repayments and other potential financing transactions, expected dispositions and our ability to complete such dispositions, as well as our ability to identify and complete additional acquisitions.

All non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in our press release and supplemental information included in last evening’s 8-K. These and other statements relating to future results and events are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current assumptions; however, the company’s actual results or events might differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results or events to differ is contained in our company’s Annual Report on Form 10-K and described from time to time in the company’s other filings with the SEC. Many of these factors are beyond our ability to control or predict. We assume no obligation to update our forward-looking statements.

With that, I would like to turn the call over to our Chief Executive Officer, Bob Milkovich.

Bob Milkovich

Thank you, Randy. Good morning, everyone, and thank you for joining us. We began 2016 with the announcement of our strategic business plan. The major tenants of the plan are to de-risk the portfolio, de-lever the balance sheet and maximize shareholder value. We had a productive year and the progress we’re making against the plan has been substantial.

Let me quickly highlight our accomplishments. We have successfully sold $295 million against our goal of $350 million of asset sales. This included the monetization of Storey Park land site in July 2016, as well as the 2017 sales of Plaza 500, and One Fair Oaks, building that was vacated upon lease expiration on December 31 of last year.

Using the proceeds from these dispositions, we redeemed all $160 million of our Series A preferred shares and repaid additional corporate debt. We signed the lease with Avendra to take the lower two floors of 540 Gaither Road at Redland, which is being vacated by the Health and Human Services in March of this year.

As discussed previously, we think this is a big step in proving the value of our redevelopment at the property. We extended the bureau of prisons lease at 500 First Street for one year to July 2017, and we believe they are likely to extend again although nothing has been finalized. This provides us with continued cash flow at the property as we refine our redevelopment plans.

The 167,000 square foot Northern Virginia build-to-suit was delivered on budget and ahead of schedule. We made two significant additions with Tricia Moore to our management team and Kati Penney to our Board of Trustees. We reduced our corporate overhead by $3.7 million, $2 million of which was recognized in G&A. I’m extremely proud of our team's accomplishments on every front in 2016, and I'd live like to acknowledge all of my colleagues and associates for their continued hard work and dedication.

With these achievements in mind, I’d like to walk through the fourth quarter and full year results, as well as provide an update on some of our key initiatives in 2017. Core FFO for the fourth quarter was $0.27 per share, bringing our Core FFO for 2016 to $1.06 per share and that was at the high-end of the range of our guidance that we provided. We delivered positive 2.4% Same Property NOI growth for the full year, despite the impact of a $1.8 million of NOI write-offs associated with the single tenant in DC.

At year-end, our lease percentage was 93.8%, and our occupancy percentage was 92.6%. Year-over-year, our lease percentage increased by 170 basis points and our occupancy increased by 230 basis points. On a sequential basis, our lease and occupied percentages declined by 30 basis points and 20 basis points, respectively, largely as a result of a 37,000 foot move out at Crossways Commerce Center.

In the fourth quarter, we signed 96,000 square feet of leases bringing the total leasing for the year to 834,000 square feet. We signed 10 new leases for 54,000 square feet. Of the six comparable leases, which represent 30,000 square feet, we experienced a roll-up of 19.4% on a GAAP basis, and 9.6% on a cash basis.

We signed three renewal leases during the quarter totaling 42,000 square feet and representing a tenant retention rate of 36%, which was lower than normal, due to expected move outs of Harris connect at Crossways Commerce Center, and antenna research associates at Ammendale Business Park. However, for the full year, the retention rate was a strong 74%. On the renewal leases, we experienced a roll-up of 7.1% on a GAAP basis and a roll-down of 0.4% on a cash basis.

Moving on to the major projects in our portfolio. At the end of the third quarter, we completed renovations of 1401 K Street to the lobby, rest rooms, bike room, fitness centre and the mezzanine level, which includes a new conference centre and lounge. We are proceeding with base building work and have successfully leased the ground floor to three retail tenants, including Taylor Gourmet for 2,100 square feet, [indiscernible] for 950 square feet, and to subsequent year-end we leased LPQ for 9,500 square feet.

These tenants are very visible at the corner location Fun in Franklin Square and will provide a great amenity to both the building and the neighborhood, which aligns with our desire to provide exceptional amenities at our properties.

We continue to complete an internal market study and evaluation of the range of redevelopment scenarios for 11 DuPont Circle and 500 First Street. Both properties had corner locations with glass on all four sides so we have plenty of optionality on the level of renovations. Once completed, we would anticipate a construction period of approximately 12 months for each project.

We continue to be bullish about the redevelopment opportunities and our portfolio and the ability to create value. On January 9 of this year, we sold One Fair Oaks for gross proceeds of 13.7 million, followed by the sale of Plaza 500 on February 17 for gross proceeds of $75 million. These sales bring total dispositions identified as part of our strategic plan to $295 million and moves those closer to our stated goal of $350 million.

Additionally, we have two of our joint venture properties, Aviation Business Park, and Rivers Park I and II under contract for sale. We have a 50% and a 25% [indiscernible] in each of those assets respectively and we expect these sales to close in March 2017. Given our current progress, we plan for the remainder of our $350 million goal to be achieved during 2017 with the sale of additional non-core assets.

Turning to the Washington DC region, the area's economy performed very well in 2016, adding 65,500 new jobs during the year, including 22,000 jobs in the professional and business services sector and 6,600 new federal jobs. Despite this underlying employment growth, the overall Washington DC office vacancy rate dropped only 10 basis points of 14.1% in 2016. This was due to a continued rightsizing by both the government and public sector tenant, as well as the continued new supply delivered to the market.

An overall positive theme for 2016 is that the space demand was less reliant on the federal government, reflecting a continued diversification of the economy. Beyond that, the new administration has created some uncertainty in the Washington DC real estate market as we wait to see how the campaign promises and policy proposals are implemented. Also, despite the higher increase, the administration’s position on tax reform and government spending is generally believed to translate to stronger near-term growth for our region.

DC has been making strides towards diversification of the economy, which is demonstrated with the announcement of the move of the Nestlé headquarters to Northern Virginia. Additionally, the administration’s promised a decrease the federal workforce could lead to an increased opportunity in the federal contractor business, which ultimately could generate job growth in Northern Virginia. Uncertainty aside continued growth is projected in Washington D.C. for 2017.

Lastly, we are seeing an uptick in office construction activity across Washington D.C. However, the product coming online has significant pre-leasing in place that is above the historical average. Additionally, leasing demand remains focused on product quality, access to transportation, and amenity rich locations. Not all buildings are the same. However, each one performs specifically to its quality and position within the submarket and the factors I just mentioned are the key ingredients.

In summary, 2016 was a great year for First Potomac and we are extremely pleased with our execution so far against our strategic initiatives. Our market remains healthy and we are creating a company and a portfolio position to produce strong growth and value creation in the future with the balance sheet that provides adequate strength and flexibility to support long-term performance. We are committed to be being good stewards of the business focused on execution and making decisions that we believe create value for our shareholders over the long run.

With that, I’d like to turn the call over to Andy to review our financial results.

Andy Blocher

Thanks Bob and good morning everyone. Net loss attributable to common shareholders improved from $41.2 million in the fourth quarter of 2015 to $1.6 million in the fourth quarter 2016 or from $0.72 per diluted share to $0.03 per diluted share. Core FFO decreased from $17.1 million in the fourth quarter of 2015 to $16 million in the fourth quarter of 2016 or from $0.28 per diluted share to $0.27 per diluted share. The decrease in Core FFO was driven by $1.4 million write-off of unamortized lease incentives and rent abatement during the fourth quarter, associated with a defaulted tenant in our Washington D.C. portfolio.

The sales of Newington Business Park Center, Cedar Hill I and II and the NOVA Non-Core Portfolio resulted in a $3.5 million decrease in NOI. And the repayment of the $34 million mezzanine loan on 950 F Street in the second quarter of 2016 led to a $900,000 decrease in interest income. The decrease in Core FFO was partially offset by $900,000 increase in NOI from the Northern Virginia build-to-suit, which is excluded from the Same Property NOI and a $300,000 decrease in Core G&A as a result of lower compensation related expenses.

The decrease in Core G&A in does not include $6.1 million of severance cost incurred in the fourth quarter of 2015. We utilize the majority of the proceeds from asset sales in the repayment and the mezzanine loan to redeem our outstanding Series A preferred shares, which resulted in a $3.1 million reduction in preferred dividend on a year-over-year basis.

FFO available to common shareholders and unit holders increased from $9.2 million or $0.15 per diluted share in the fourth quarter 2015 to $16 million or $0.27 per diluted share in the fourth quarter 2016. There was no difference between FFO available to common shareholders and unit holders and Core FFO in the fourth quarter of 2016. For the full-year 2016, Core FFO increased from $62 million in 2015 to $63.9 million or from $1.02 per diluted share to $1.06 per diluted share.

The increase was primarily driven by $2.3 million increase in Same Property NOI, a $2 million decrease in Core G&A, which excludes 6.5 million of severance cost for 2015. A $2.1 million increase in NOI from Northern Virginia build-to-suit coming online, and a $400,000 decrease in interest expense.

These improvements were offset by a $12.8 million net decrease in NOI for the sales completed since the beginning of 2015, and $2.1 million decrease in interest income as a result of the mezzanine loan repayments on America's Square in the first quarter of 2015 and 950 F Street in the second quarter of 2016.

The loss of a NOI from dispositions in mezzanine loan prepayments was partially offset by using a significant portion of the proceeds to redeem all of our outstanding preferred shares, which reduced preferred dividends by $9.3 million year-over-year. The difference between Core FFO and FFO available to common shareholders and unit holders for 2016 was mainly due to the write-off of $5.1 million of original issuance costs, associated with the redemption of all of our outstanding preferred shares in 2016.

Same Property NOI decreased 5.2% during the fourth quarter, bringing total Same Property growth to positive 2.4% for 2016. The fourth quarter decrease was due to $1.4 million write-off of unamortized lease incentives and rent abatement related to a defaulted tenant at 840 First Street. Excluding the write-off, Same Property NOI would have been positive 0.5% for the quarter and positive 3.9% for the year.

Some of the largest contributors to our strong occupancy gains in Same Property NOI growth during the year were 440 First Street, Cloverleaf Center, Atlantic Corporate Park, and Greenbrier Business Park. Those increases were partially offset by a decrease in occupancy at 1401 K Street in Washington D.C. and Sterling Park Business Center in Northern Virginia, as well as the write-off at 840 First Street that I just mentioned.

On the financing side, in October, we prepaid without penalty the $12 million loan encumbering Hillside I and II, which draws on our unsecured revolving credit facility and available cash. We have approximately $94 million of consolidated debt maturing in 2017, which is comprised of a $62 million mortgage loan on Redland and $32 million construction loan on 440 First Street.

Before moving to 2017 guidance, I would like to briefly discuss our reporting treatment of the three single tenant properties with expirations in 2017. First CACI vacated One Fair Oaks on December 31, 2016. We subsequently sold the property in January, so it’s included in occupancy for the year end 2016, but obviously will no longer be included in future reporting.

The lease with Health and Human Services at 540 Gaither Road, one of the three buildings in Redland expires in March 2017. At termination, we will place the single building in redevelopment. It will be excluded from our square footage at the Same Property NOI calculation in telecoms back online. The reporting for 500 First Street will be handled in the same manner as 540 Gaither Road once the lease with the Bureau of Prisons expires.

Turning to our guidance, in our press release, we introduced our 2017 Core FFO guidance range of $0.78 to $0.84. We expect between $82 million and $88 million of portfolio NOI in 2017, which reflects the following; the sale of One Fair Oaks and Plaza 500, which were completed earlier this year; the sale of Rivers Park I and II and Aviation Business Park, which are owned in unconsolidated joint ventures and our currently under buying contract.

The move out at lease expiration of Health and Human Services at 540 Gaither Road and Bureau of Prisons at 500 First Street. It is important to note that this range excludes additional disposition and acquisition activity above and beyond the items just discussed. We will provide updates, as we gain more clarity on the specifics of the assets we plan to sell or buy to achieve our strategic business plan goal of $350 million in this position.

We expect between $17.5 million and $18.5 million of G&A for the year. Please note that the majority of the anticipated increase in G&A can be attributed to the company's transition in 2016 to a new long-term incentive compensation structure, based on forward-looking performance. While the total dollar amount of performance awards remained relatively unchanged from prior years, the new performance awards are based on future shareholder total returns on both a relative and absolute basis based on the forward three-year performance period.

The performance periods for the 2016 award commenced with the announcement of the strategic plan in February 2016, and the 2017 award began on January 1, 2017. None of the performance metrics were achieved under the prior awards, resulting in no expense recognition for the performance portion of our awards for each of the previous four years. Excluding these changes, the top end of the G&A range would represent a 4% increase in G&A relative to full year 2016.

Our year-end occupancy range is 91% to 93%. Our Same Property NOI guidance is negative 1% to positive 1%, reflecting tougher comps on a portfolio that is reaching a stabilized occupancy level. As previously discussed, 540 Gaither Road and 500 First Street are excluded from year-end occupancy and Same Property NOI as they are projected to be in redevelopment, once the current tenants vacate.

As we move three 2017, please not the following significant loan reductions with respect to our future NOI. We recognized over 2 million of NOI in 2016 from the NOVA Non-Core Portfolio, which we sold last year. Compared to 2016, we expect a reduction of approximately $11 million in NOI associated with lease expirations of CACI International, Health and Human Services at 540 Gaither in March 2017 and the Bureau of Prisons at 500 First Street at the end of the early fixed budget.

Plaza 500 will provide approximately $4 million less NOI in 2017 than in 2016. While the guidance provided does not assume additional dispositions or acquisitions, proceeds from additional sales will largely be utilized to repay outstanding balances on our unsecured revolving credit facility, and as a result could have a material impact on where actual results fall within the guidance range we provided.

In closing, we're very pleased with the progress we have made against the strategic plan over the last 12 months. And we remain firmly focused on continuing to execute the action items we have outlined.

With that, I would like to open the line for your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Craig Mailman with Keybanc Capital Markets. Please proceed with your question.

Craig Mailman

Hi guys. Can we just maybe follow up on the potential Bureau of Prisons extension, I mean what do you think is realistic in terms of the NOI stream there before they are ultimately lead?

Bob Milkovich

Good morning Craig, it’s Bob. How are you?

Craig Mailman

Good.

Bob Milkovich

Good. And as far as the Bureau of Prisons goes, we competed hard for renewal and we did not win. Having said that, they needed additional time and they extended for one year period through July 2017, based on what we know through market intelligence the recipient building does not have the space built out or constructed just yet. So, we are trying to gauging the amount of time it takes to build out space could require them to extend and they have signaled as much, although we don’t have anything in writing or formalize. We just feel like, it is going to be hard for them to get out by the end of July. So, how much more they would extend is, just undetermined until we get into deeper discussion with them.

Craig Mailman

Okay. And then just a follow up on earnings and EU with the co-working tenant at 840 versus the 1.4, kind of how much net should come out of the run rate as we think about heading into 1Q?

Andy Blocher

Well, I mean the entire 1.4 was written-off right. So, from that perspective when you are looking at what it is that we recognize net of that for 2016 relative to 2017 is probably about $1 million.

Craig Mailman

And then the stock is clearly rebounded hear from the lows, back in November, still these are the numbers trading at a discount here, but as you guys look to kind of growth of portfolio potentially, can you talk about how your cost of capital kind of fits with what you're seeing on the acquisition front?

Andy Blocher

I’ll talk about the capital side, I mean, from our perspective we still have some work to do with respect to the plan, we actually continue to finish of the dispositions work on the redevelopments, and certainly from a capital perspective, our goal is to really achieve and maintain the balance sheet that provides multiple sources to capital at the advantages pricing that we can access whenever it is that we want. So that will allow us to be opportunistic right. So, when you look at the sources, we do have potential, additional potential dispositions here that we can trigger as well to fund acquisitions that we so choose.

Craig Mailman

What are you guys seeing on the acquisition front, is there anything out there that would make sense given your cost of capital and what you guys have been trying to do with the portfolio?

Bob Milkovich

Yes, this is Bob. Just from a macro level we saw over 6.5 billion of office trade in 2015 and that came in to closer to 6 billion, 6.1 billion in 2016, so that was definitely best product coming to market, but we continue to underwrite opportunities that we think makes sense and in part that’s just to know exactly where the market is trading and it also helps us through our disposition program and having that type of information.

Craig Mailman

Okay great. Thanks guys.

Operator

Thank you. Our next question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Blaine Heck

Thanks good morning. So, you guys seem pretty close to the finish line on getting the dispositions done, you’ve redeemed the preferred and brought down G&A and you had delivered the GSA built-to-suit, so I guess at this point, one of the major kind of milestones [ph] we should be looking for in the next year, is it just kind of continuing with the repositioning, blocking and tackling on leasing and waiting for the lease up of the redevelopment, or are there any other kind of major initiatives that I’m missing there?

Bob Milkovich

Yes, Blaine this is Bob. I think the first thing is that we set forth a plan just over a year ago, and I think we've really accelerated through and we’ve had some great accomplishments in 2016, I don't want to overlook that and we measure ourselves as we get into 2017, we still have to finish out the plan and part of that plan is capital allocation and some of the redevelopment. So, I think continuing to be a best-in-class owner operator in D.C. where we can get more space leased and tried to push lease economics and really being a good operator and then again finishing of the plan is probably the main focus at this point as we go into 2017.

Blaine Heck

Okay and that’s helpful. And then can you just give a little bit more color on the tenant development 840 First maybe, how long where you guys aware that they were having problems and it seems like it was a relatively new tenant if you're writing off lease incentives and rent abatement, so I guess you guys have any other tenants in the portfolio that you are concerned about at this point?

Andy Blocher

Well let me start off and I’ll turn it over to Bob and Tricia, I mean, if you recall last quarter we wrote-off some bad debt in the quarter. It was a tenant that was signed up in late 2013 that dealt out the space on and so forth, we did take some bad debt, we've performed the Street that this could have been an issue and unfortunately became an issue, Bob I don't know if you want to talk about the nature of the lease [ph].

Bob Milkovich

Yes, I would just say that we look at the downtown property, certainly very bullishly this was the situation that had a very frontloaded concession package and the tenant was having trouble against its obligation and we just wanted to move swiftly with conviction to get the space and see if we can to release it.

Andy Blocher

And Blaine on a go forward basis, I mean, I think that the improvements that we made to the quality of the portfolio has really reflected improvements in the tenant fee as well and as a result, as we sit here today, there are no unit glaring issues that it would have the potential to present significant rest for us on the bad debt side or something, in the very near-term. Obviously bad debt is part of a business, but there is no other situation point that we are monitoring.

Blaine Heck

Okay good to hear. And then last question you guys had a couple move outs At Crossways and Avondale, how are the prospects of evacuating that space and how much downtime due guys expect at this one?

Andy Blocher

We think they are very normal situations in terms of - both situations we have the space on the market. We don't have anything in writing to back fill those spaces. So we are currently in marketing mode.

Blaine Heck

Okay, great. Thanks guys.

Bob Milkovich

Thank you.

Operator

Thank you. Our next question comes from Sheila McGrath with Evercore ISI. Please proceed with your question.

Sheila McGrath

Yes thank you, can you identify which other assets you are considering for sale and does your guidance reflect these sales and just for modeling purposes, what should we think about in terms of timing?

Bob Milkovich

Yes so Sheila we have - I think it was stated in our prepared remarks we talked about Aviation Rivers Park that are both in the queue right now. Those are held in joint venture. We anticipate those will close in March of this year. And once we work our way through that, we will be doing pretty thorough evaluation of what other properties to put in non-core properties to put in the queue for the remainder of 2017. Bear in mind that Aviation Rivers Park gets us over the 300 million mark, certainly, and much closer to our goal. So we can be a little bit more calculative.

Andy Blocher

And Sheila, I mean from following up on what Bob said, with the sales of Aviation and Rivers Park we would probably be in the 310 two 315 towards our goal of 350 and then as it relates to guidance, obviously we’ve included One Fair Oaks, Plaza 500, and the two JV assets in our guidance, but our guidance doesn't contemplate any additional disposition.

Sheila McGrath

Okay. And then, you guys made meaningful progress with the de-leveraging, just wondering given the maturity schedule what you're ending asset sales was - what your whole plan is, how that metric of get plus preferred to un-depreciated book will look roughly by year-end, do you expect it to be lower than the 57%?

Bob Milkovich

Yes, I mean from our perspective we think it will probably - on a book basis it will probably come down slightly, on a debt flow is preferred to EBITDA basis, which has been the measure that we have been focused on, obviously as the, we are paying down our debt with the sales of the asset that we have, but with the loss of Health and Human Services over 540 and when Bureau of Prison leads 500 that will probably put us in about a trough position with respect to debt loss preferred to EBITDA. Candidly, I mean with the execution of the plan we're just based on our initial forecast, we are doing a little bit better than we thought. We had thought that we were going to be right at about nine, you know when we troughed out, we are probably now going to be in the high, so we feel really good about what it is that we’re doing with the rest of the portfolio.

Sheila McGrath

Okay and last, quick question just on the Bureau of Prisons extension, in your guidance do you assume a hold over period or you assume exploration?

Bob Milkovich

Yes, so, I mean obviously when we provide guidance that’s a range of outcomes, right, so to the extent that Bureau of Prisons is extended it would put us a little bit higher in the range to the extent that they didn't, we are certainly covered by the range.

Sheila McGrath

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Michael Lewis with SunTrust Robinson Humphrey. Please proceed with your question.

Michael Lewis

Thank you. My first question I guess relates to an earlier question you got about cost of capital, I’m just wondering sort of a hypothetical now, but would you consider issuing equity at a material discount to NAV whether for an acquisition or opportunistically or do you kind of have a line in the stand, you know we own a ship below our internal NAV or 5% below or 10% below?

Andy Blocher

Yes we do.

Bob Milkovich

Michael, we don’t want to be speculative with respect to those questions, I mean we, I think that you’ve heard over, certainly over the course of the last year, you know we don’t publically discuss our cost capital. Obviously, we measure every situation that’s out there on a facts and circumstances basis and we are eyes wide open with respect to how important the capital decisions are. So, I don’t think that it benefits us in any way to speculate one way or the other.

Michael Lewis

Thank you. Fair enough. Is there, you mentioned 11 DuPont and 500 First among the redevelopment properties, is it too early to give kind of a sense of what the magnitude of this spend might be at those and then also what, the potential rent lift could be?

Bob Milkovich

Michael it is Bob. We are still working through those right now, and I think that’s the healthy tether that we want to make sure we’re gauging that being the rent versus the amount of spend that we have. Because you never want to under improve an asset or over to improve and asset, but what we feel very good about in both situations is, for carbon product they have windows on all four sides, which leads to better floor to glass ratio, you have corner locations, and of course 11 DuPont runs a park it is right at the Metro - DuPont Metro, so you really want to be measured in what you do because both of these, we believe are real good opportunities.

Michael Lewis

Okay and then, lastly you have an NAV sheet in your supplemental, what’s not there in there of course is the cap rate and I could see where the Street is and where we are in kind of estimate, I’m curious more kind of around some of the products that’s not DC office or some of the business part stuff, the things you have listed as non-Core, really not exactly what the cap rate is, but how confident you are that you could pinpoint that, in other words, is there a wide range of values there or do you think you have a pretty good sense of what the value of this non-core portfolio is?

Andy Blocher

Yes, let me start off Michael. I think that our disclosure gives you a pretty good roadmap for the assumptions that you need to make with respect to the income statement balance sheet line items in order to come to NAV, similar to cost of capital, we don't think that it benefits us in any way to go and speculate with respect to the valuations. Bob, I don't know if you, liquidity in the submarkets or…

Bob Milkovich

I think there is, you know everything depends on how the product is positioned, and it depends on if there are some leasing that needs to be done and things of that nature, you know if I use Aviation Rivers marked by example, I mean it’s a much different asset offering in the capital markets today than it was a year ago because our team performed very well and procuring a fair amount of leasing in both of those assets. And so it just, it really depends on if you have near-term role, if you have certain things it’s kind of very asset specific, but we do monitor it, we get very granular on our internal analysis of all of our properties. We price them frequently. So we’re on top of that.

Andy Blocher

And Michael, I mean it is Andy again. We have executed a variety of different property types in submarkets you know through the $295 million and soon to be more than that with the joint ventures that are out there. So to the extent that there were assets to sell, I think that we don't believe that we’ve really sacrificed pricing in order to achieve our result, which is to sell the assets and work on the balance sheet.

Michael Lewis

Thanks a lot.

Operator

Thank you. Our final question comes from the line of John Guinee with Stifel. Please proceed with your question.

John Guinee

Great. Thank you. Nice job guys.

Andy Blocher

Thanks John.

John Guinee

Couple of detailed questions and some big picture questions, first, when I am looking at Page 38, you guys are nice enough to provide net rents and most of them seem to be at market, but the exception of Redland II and III, net rents almost $28 and prosperity metro center the net rent is about $27. How much are those above market and if I look at Page 33, do I tie in some big rents with highly visible tenants to those two or three buildings?

Bob Milkovich

Well, I think the general way to think about it and we’ve seen see this across the portfolio and I think most property owners for the last several years have seen this across their own portfolios is that contractual rent - annualized contractual rent optimizations have outpaced market increases. So, as certain tenancies role, you do experience a slight decline. However, if you are in a renewal position your hope is that even if you end up with a lower face rate, you end up with a lower amount of concession. So some of that can be tied out.

Andy Blocher

And John, I am sorry. This is Andy. It is obviously backs on circumstances base, in this area, I mean it is not, all the properties aren’t signed at the same time. They are at least, that were signed earlier, big TI packages, or smaller TI packages whatever maybe is not a straight line, there is variability obviously.

John Guinee

Got you. Okay, then second, Bob can you just give us some big picture thoughts on how defense contractor leasing actually works, in this day and age? In the old days they were able to pass through all of their occupancy cost to the federal government, they seem to stay forever. And in this day and age, it seems to me that they are not able to pass through those cost, they are much more price sensitive. The contracts are tied to, while the leases are tied to contract, can you just help people understand that and also where the defense contractors tend to want to be in this day and age.

Bob Milkovich

Sure, I would concur with your thesis there in terms of way the contracts were passed through. There is lot more scrutiny on that today. You know from a very big picture, if you look at most of your big government/defense contract organizations within the D.C. area. They tend to warehouse millions of square feet. Some of it are for very contract specific purposes.

You know if you take a [indiscernible] or a General Dynamics or some of these big names, they tend to set up different positions in the region. Some of them will become regional hubs and some will become contract based offices. There was always the theory in the old day as well, that you had to be within close proximity to the contracting officer. I think we will continue to see the defense contractor locations be Northern Virginia. Again, near the Pentagon, near NRO, near National Geospatial and then I think on the Merlin side you tend to see those congregating around Fort Meade, NSA, Cyber Security. So, they really are located proximate to where the contracts are being led.

John Guinee

Great, okay, thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the call back over to Bob Milkovich for closing remarks.

Bob Milkovich

Thank you very much. I would like to thank everyone for joining us today. We really had a good year and we are glad to be on the phone with you. I am sure a lot of us will be cross paths as we move through 2017 and we look forward to seeing all of you. This concludes our call for today. So, thank you very much.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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