Corporate Office Properties Trust

F:WX7

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Corporate Office Properties Trust Third Quarter 2020 Earnings Conference Call. As a reminder, today's call is being recorded.

At this time, I will turn the call over to Ms. Stephanie Krewson-Kelly, COPT's Vice President of Investor Relations. Ms. Krewson-Kelly, please go ahead.

[Stephanie Krewson-Kelly, IR]

Thank you, Ryan. Good afternoon, and welcome to COPT's conference call to discuss third quarter results. With me today are Steve Budorick, President and CEO; 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, supplemental information package and results presentation posted on our website.

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?

[Steve Budorick, President & CEO]

Good afternoon, everyone, and thank you for joining us. I'm going to start my remarks by focusing on the big picture.

Between 2012 and 2017, we executed our strategic reallocation plan with the objective of creating a franchise that would generate durable cash flow growth regardless of the broader economic environment. We've methodically recycled capital away from traditional commodity suburban office properties and into developing assets as strategic Defense/IT Locations. We also delevered to create access to public investment-grade bond market and enhance our financial flexibility.

Before the SRP, we derived only half our annualized rents from Defense/IT Locations. Today, we derive 88% of our rents from locations that support defense activities of the United States government and its contractors engaged in national security, defense information technology and cybersecurity activities among others. These activities are driven by long-term contracts in U.S. government funding and are not correlated with the general economic activity. The missions executed in our buildings never shut down.

Our performance during the pandemic shutdowns in this period of economic uncertainty affirms the strength of the franchise and our differentiated investment strategy. Our portfolio locations and tenant concentrations position us to continue executing our straightforward disciplined plan of growing cash flow through low-risk developments at our Defense/IT Locations and solid property operations.

The fixed-income market validated the strength of our franchise in September when we issued $400 million of senior unsecured notes at an extremely attractive rate. We also received overwhelmingly positive feedback from investors regarding our portfolio quality, the strength of our balance sheet and the durability of our cash flows. In this context, I'll highlight our major achievements for the quarter and for the first 9 months.

Our third quarter FFO per share of $0.54 exceeded the high end of guidance by $0.01 and represented our third consecutive quarter of outperformance. Leasing has remained solid. We completed over 1.1 million square feet of total leasing during the quarter and 2.7 million square feet during the first 9 months. These totals include 244,000 square feet of development leasing in the quarter and 520,000 square feet during the first 9 months.

Today, we have completed build-to-suits at 3 different Defense/IT Locations, evidencing not only the depth but the breadth of demand. These build-to-suits include: 46,000-square-foot facility with an aerospace defense contractor, Redstone Gateway; and two, roughly 100,000-square-foot high-security buildings for defense contractors, one at the National Business Park and the other at our San Antonio campus. We also completed an approximate 170,000-square-foot lease with the U.S. government at our first secured campus building at Redstone Gateway.

Notwithstanding the 244,000 square feet of development leasing achieved during the quarter, our development leasing pipeline increased by 200,000 square feet to 2.4 million square feet, approximately half for the U.S. government and defense contractors and half for data center shells. Our development leasing pipeline remains robust and diversified, and we expect to meet or exceed 1 million square feet of development leasing for the year.

Renewal leasing volumes and tenant retention rates remain very strong. We're on track to exceed our 20-year record of 80% retention set in 2017. We completed 841,000 square feet of renewals in the quarter and 1.9 million square feet during the first 9 months, resulting in renewal rates of 89% and 84%, respectively.

Lease economics were in line with our expectations. In the quarter and for the 9 months, cash rent rolled down 2%, and annual escalations and renewing leases averaged 2.4%. CapEx on renewals was only $1.45 per square foot per year of term in the quarter and $2.05 for the 9 months. Average lease terms on renewals were 3.2 years in the quarter and 4.2 years for the 9 months, excluding the two 1-year annual renewals with Boeing at Redstone Gateway, totaling 242,000 square feet. Lease terms averaged 4 years in the quarter and nearly 5 years for the 9 months. We also completed an early renewal with Booz Allen Hamilton for 130,000 square feet at The National Business Park. As a result, and as shown on Slide 14, we have no leases of 100,000 square feet or more expiring in 2021, and only 7.7% of our annualized office rents expire next year.

Regarding the 11.25 megawatt renewal at DC-6, the lease converted to a rolling 6-month lease in August, so the tenant is under no pressure to conclude a transaction quickly, and we continue to work in harmony with them towards a longer-term lease. We are confident that the customer will remain in our property. The deployment is a high priority as power utilization is very high. And among the matters under negotiation are enrichments to the facility's resilience.

By way of example, since our last call, the tenant has requested an additional enhancement to our security system that is in excess of market norms, and we're working to provide that enhancement. Notwithstanding the outcome or the timing of the renewal, given the rolling lease structure, we are confident we will deliver healthy FFO growth in 2021.

In terms of vacancy leasing, results in the quarter were in line with our revised expectations. 61,000 square feet leased in the quarter brought our total for the 9 months to 274,000 square feet. Although vacancy leasing volumes trended lower during the shutdowns than our original forecast, impacting year-end occupancy expectations, based on our leasing activity ratio, we expect solid volume in the fourth quarter and should enter 2021 with strong leasing momentum.

Regarding our active development pipeline. At the end of the quarter, we had 12 buildings comprising 1.6 million square feet under development that are 84% leased. We placed into service 600,000 fully leased square feet in the quarter and 1.2 million fully leased square feet in the 9 months.

Before year-end, we expect to place over 0.5 million square feet in service that are 100% leased, bringing our total for the year to nearly 1.8 million square feet that are fully leased and increasing the size of our core portfolio by nearly 10% during the year. Our ability to place large volumes of stabilized development projects into service generates highly visible, low-risk EBITDA that maintains our strong balance sheet and drives cash flow growth.

Now for an update on the impacts of the pandemic shutdowns have had on our operations, which are minimal. Operationally, none of our office and data center properties were subject to pandemic shutdowns, and the preponderance of our tenants required employees to work in our properties, allowing only a small portion to work from home. Recall that the vast majority of our buildings either are in secured campuses, contain high-security SCIF environments or operate pursuant to other high-security standards. In each case, the missions at these top locations absolutely cannot be performed remotely.

In terms of utilization rates, half of our portfolio is back to normal pre-pandemic levels. Another 40% is running at or above 50% utilization with a current weighted average estimate of 63%. And only 10% of our portfolio is lightly utilized with daily attendance of roughly 20%. Lastly, as shown on Slide 20, rent accommodations remained below 1% of annualized rental revenues, and our rent collection rates in the second and third quarters, without adjusting for rent relief granted, were above 99.5%.

Finally, on our first quarter call, we reluctantly lowered guidance by $0.01 to create capacity for potential impacts from the pandemic. Today, we have more than offset $4 million of straight-line rent, parking income and other losses by outperforming at field generating higher development fees and managing interest expense. As a result, we are elevating the midpoint of our 2020 guidance by $0.02 to $2.09, which implies 3% FFO per share growth over 2019 results. Even with a higher-than-expected midpoint for 2020, we are confident we can grow FFO per share between 3% and 6% in 2021.

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

[Anthony Mifsud, EVP & CFO]

Thanks, Steve. Third quarter FFO per share, as adjusted for comparability, of $0.54 exceeded the high end of our guidance by $0.01. Stronger-than-expected development fees and cost savings from lower utilization rates at some of our properties translated into a modest 0.2% decrease in same-property cash NOI, which was at the high end of guidance.

September and October were very active and successful months in terms of raising capital. On September 10, we issued $400 million of 2 1/4% unsecured bonds that mature in March 2026. This was our first bond issuance since June 2015, and the transaction received an overwhelmingly positive response from investors. We noted the improvement in our portfolio composition, specifically the increase in concentration at our Defense/IT Locations, the conservative capitalization of our development pipeline over the past 5 years, the strengthening of our balance sheet and credit metrics, the disconnect between our 5 years of progress and our current ratings levels, and the durability of our cash flows through the pandemic shutdowns.

The initial order book totaled over $3 billion and was led by very strong institutional accounts. Accordingly, we upsized the deal from our initial expectation of $350 million and are in a strong position to refinance future maturities. Contemporaneously with the launching of the new notes offering, we announced a tender offer for the $300 million of 3.7% bonds due in June 2021. Approximately 40% of the 2021 bonds were tendered and simultaneously with the tender closing on September 19, we announced the redemption of the remaining 60% of those bonds. That redemption closed on October 19, repaying all but $12 million of next year's maturing debt.

Also on September 19, we terminated the $225 million of forward starting swaps for a cost of $53.1 million. When combining the cost of the hedge settlement and the prepayment charges associated with the tender and redemption of the 2021 bonds, the all-in cost of the new issuance is approximately 2.7%.

Lastly, as referenced in our third quarter press release, we will be shortly under contract to sell a joint venture interest in 2 data center shells and expanding an existing joint venture. We expect these transactions to close before year-end, raising $165 million of equity proceeds.

The combination of this equity and incremental EBITDA from placing additional developments into service during the fourth quarter will lower overall debt to EBITDA to between 6.2 and 6.4x by year-end. The larger sale also lowers the risk to future equity funding and maintains our strong investment-grade balance sheet. After these 2 transactions, we will have wholly owned data center shells in service or under development that could generate over $500 million of equity to fund our development activities for the next 3 to 5 years. And this does not include capacity that will be created from data center shells in our development leasing pipeline.

An impact of this joint venture activity is that it removes 1.3 million fully leased square feet from the same-property pool. Because of this change to the composition of our same-property pool, we have lowered year-end same-property occupancy guidance from a prior range of 92.5% to 93.5% to a new range of 92% to 92.5%. More broadly, our portfolio continues to be extremely stable and well-leased. At the end of the quarter, our core portfolio was 94% occupied and 94.6% leased, and we expect core portfolio occupancy to tick slightly higher by year-end.

Slide 27 of our presentation details the major assumptions of our elevated 2020 guidance. For the full year, we are raising guidance for FFO per share as adjusted for comparability from $2.07 to $2.09, which is $0.01 higher than above the midpoint of our original range. We are also reiterating our fourth quarter guidance of FFO per share as adjusted for comparability, which has a midpoint of $0.53.

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

[Steve Budorick, President & CEO]

Thank you. The goal of our strategic reallocation plan was to create a portfolio for which demand was consistent in varying economic conditions and that, when paired with a conservatively levered balance sheet, will generate highly durable cash flows and ensure ongoing access to capital. The shutdowns and the economic challenges brought about by the pandemic provided a proving ground for our strategy of concentrating on assets around the government demand drivers we support. Our ability to outperform expectations in the face of this year's challenges, evidences strength of franchise. [Technical Difficulty]

We got dropped on our end. We're unsure as to where we were dropped, so I'm going to repeat our wrap-up. Bear with me if some of it's repetitive.

The goal of our strategic reallocation plan was to create a portfolio for which demand was consistent in varying economic conditions and that, when paired with a conservatively levered balance sheet, would generate highly durable cash flows and ensure ongoing access to capital.

The shutdowns and the economic challenges brought about by a pandemic provided a proving ground for our strategy of concentrating assets around the government demand drivers we support. Our ability to outperform expectations in the face of this year's challenges evidences the strength of our franchise. And while our business is not impervious to the negative effects of a crisis like the pandemic, we have demonstrated its resilience.

We are confident in our ability to grow FFO per share in 2021 by at least a healthy 3% to a robust 6%. Moreover, our pipeline of 1.6 million square feet of highly leased active developments, the breadth of future opportunities in our development leasing pipeline, and our access to attractively priced capital bode well for growth beyond 2021.

As a final reminder, the missions are building support, namely signals and human intelligence, missile defense, space exploration, law enforcement and cyberactivity are driven by national and global security needs. These missions are not correlated with traditional office fundamentals. They advance irrespective of election outcomes, and they absolutely cannot be performed from remote locations, least of all home offices.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Manny Korchman from Citi.

[Manny Korchman, Citi]

Anthony, the data center sale or the JV sale that you talked about, just want a couple points of clarification. So you are selling additional assets to the existing JV and then some assets to new JV? Or are you getting out of some of the assets and then forming a new JV?

[Anthony Mifsud, EVP & CFO]

So we are forming a new JV. We are contributing 2 wholly owned assets that are valued at $90 million by the venture, 100% value, which we expect to get 90% of that, so a little over $80 million. And then we will be increasing the size of the joint venture that's currently a 50-50 joint venture, to increase an investors' interest in that venture.

[Manny Korchman, Citi]

Can you share with -- when your new interest is going to be?

[Anthony Mifsud, EVP & CFO]

We will go up to 90%, and -- or excuse me, the investor will go up to 90%. So currently, it's a 50-50 venture. So we'll be selling 80% of our 50% interest. And that's expected to raise another $85 million.

[Manny Korchman, Citi]

Got it. And pricing on that fashion is going to be consistent with what you did the deal at, I assume?

[Anthony Mifsud, EVP & CFO]

Well we can talk about that more after it closes, but it's pricing that's more favorable than where we did those deals last year.

[Manny Korchman, Citi]

Great. And then it sounds like leasing is starting to pick up. Has there been any change or discussion changing lease rate or other sort of components of leasing coming out of the pandemic? Or is it sort of business as usual from a rate perspective?

[Steve Budorick, President & CEO]

In our active markets, business is very much as usual right now. We've seen no intensity of demands for concessions or change in leverage and then negotiating posture. I think there's a great deal of that in some markets in the region but not where our properties are located.

[Operator]

Your next question comes from the line of Steve Sakwa from Evercore ISI.

[Steve Sakwa, Evercore ISI]

Steve, I was just wondering if you could talk a little bit more about the vacancy leasing. I know it kind of dipped and we've seen leasing activity down for just about every office company. But what are the discussions like with existing and other tenants for the vacancy leasing, which seems to be kind of one of the areas to drive upside earnings going forward?

[Steve Budorick, President & CEO]

That's a great question. The impact on our company was really timing. It was a process delay. As the brokerage community that represents most of our tenants, they really shut down over the summer. Our -- we measure our activity every week. And from a normal activity ratio of about 80%, meaning we have 80% of identified opportunities relative to the amount of vacancy we have. By the time we got to July, that was down near 50%. It's back up north of 80%, so we just had a slowdown in timing. We expect a strong fourth quarter relative to the 61,000 square feet we did this year, and we have strong demand going into next year. So I think we're moving beyond it.

[Steve Sakwa, Evercore ISI]

Okay. And then on the development side, I think you've done -- maybe it's a little over 500,000 square feet of development leasing in it. I think you said you're going to hit at least 1 million, which implies a pretty strong fourth quarter. I realize you can't share too many specifics. But how does that sort of break out between data center shells, traditional office, and are there particular regions, whether it's Huntsville or NBP, where you're seeing stronger demand?

[Steve Budorick, President & CEO]

Well, we're seeing demand throughout the portfolio, but relative to the rest of this year, I'd say 80% is likely -- sorry, data center shell.

[Steve Sakwa, Evercore ISI]

Great. And then last question. You talked about 2021, and I guess you've derisked it from a large tenant standpoint, but you've got a little under 8% rolling. How do you just sort of see tackling that? And was your expectation that retention rates for that remaining 1.1 million would still be in the 80% range?

[Steve Budorick, President & CEO]

It's early first to put out guidance, but I would say north of 70 or 70 or above.

[Operator]

Your next question comes from the line of Jamie Feldman from Bank of America.

[Jamie Feldman, Bank of America]

Great. I appreciate the range of guidance outlook for next year, the 3% to 6%. Can you just help us understand what gets you to the 3% and what gets you to the 6% and maybe even above the 6%?

[Steve Budorick, President & CEO]

Sure. I'll be very clear. And I referenced it in my comments about the renewal at DC-6. We believe we're in a position where, if the renewal were not to be achieved, we'd be at the 3% range. Midpoint would be represented by achieving the renewals we spec -- we expect. And the upside would be additional velocity in starts of vacancy leasing.

[Jamie Feldman, Bank of America]

Okay. So that would be NBP?

[Anthony Mifsud, EVP & CFO]

Throughout the portfolio.

[Steve Budorick, President & CEO]

Throughout the portfolio. Just overall volume of new rent starts.

[Jamie Feldman, Bank of America]

Okay. All right. So DC-6 really is the big swing?

[Steve Budorick, President & CEO]

Yes. The key point we're trying to convey is, irrespective of that lease, we're going to deliver growth next year.

[Jamie Feldman, Bank of America]

Okay. Do you have a sense yet of what same-store could look like next year for leasing spreads?

[Steve Budorick, President & CEO]

I think it's too early. I would expect leasing spreads, I can talk about that, to remain in the range they have been.

[Anthony Mifsud, EVP & CFO]

Yeah, Jamie, as Steve said, the reason we put the 3% to 6% out there was to give those guide points -- sort of the goalpost for where we expect next year's growth to be. It wasn't to put out specific guidance about the assumptions behind that. So we'll be following that up with our typical guidance information and detail as we start next year.

[Jamie Feldman, Bank of America]

Okay. That makes sense. And then there's been some commentary on conference calls, especially from Boeing and Raytheon, about cutting office space. I know you've got expirations coming up in the next 2 years with both. Can you just talk about your reaction to their comments on their calls and how you're thinking about what it could mean for the leases you have?

[Steve Budorick, President & CEO]

Sure. I've got a couple summaries I'll run through. With regard to Raytheon, we have them in 6 separate buildings, 3 concentrations. The largest component is the intelligence and space activities, which is about 66% of 156,000 square feet. The balance are either missile systems or signals and cyber. None of this activity has been impaired by the slowdown in commercial airline -- airplane creation. So we don't see it affecting us all.

With regard to Boeing, similarly, we have them in 5 locations, and they're over -- well, there's 614,000 square feet. The largest concentration, 60% of the area, just renewed. And that has -- those buildings house ground missile defense, which is our nation's antimissile defense system and space launch system, which is the heavy lift rocket for future space exploration. So we know that to be stable.

And then the other 4 locations are -- represent intelligence and analytics, aerospace operations, intelligence services and Navy aviation. Again, none of these tied to the commercial doldrums that they're in. So we think we're fine.

[Jamie Feldman, Bank of America]

Okay. And then just any big-picture thoughts heading into the election next week. Just latest thoughts from what you think it could mean either way?

[Steve Budorick, President & CEO]

Well, it's going to be a nail-biter. What we have said all along is look to the actions of the House Armed Services Committee. Since it turned over in 2018, it's been very pro-defense and has recommended spending at or above the level the White House has requested. That, combined with comments from the presidential candidate of the Democratic Party suggests the level of defense spending would be maintained. Perhaps the concentrations would be shifted with Joe Biden emphasizing more advancement in technology and less focus on capacity, which frankly would play to our favor.

[Operator]

Your next question comes from the line of Craig Mailman from KeyBanc.

[Craig Mailman, KeyBanc]

Maybe just a follow-up on Manny's question on the JV contribution. Is GI still going to be in the JV? Or are you replacing them with your newer partner?

[Anthony Mifsud, EVP & CFO]

We'll get into the details of that once the transaction is closed, Craig.

[Craig Mailman, KeyBanc]

Okay. And then just separately, clearly, demand's been good. Work from home is less of an issue for you guys. But the government, at least the GSA, really tried to densify their spaces. I'm just curious what you guys are seeing from defense contractors and government agencies on the densification side of things, and whether that could be a potential tailwind as well for you guys when leasing comes back in bigger volumes?

[Steve Budorick, President & CEO]

Well, I certainly hope they rent more space per person. But we've seen nothing to-date that would indicate that trend. I will say the government customers we have are configured in a high-density configuration. We had some preliminary what-if discussions back in May and June but nothing affirmative that I could say would indicate a trend.

[Anthony Mifsud, EVP & CFO]

And Craig, one indication of where they -- their view on that is the government tenant that just occupied space in the third quarter down in Huntsville, it's the 170,000-square-foot tenant Steve referred to in his comments, the space planning for which had been done months ago and was executed in line with that space plan that was done pre-pandemic, and they took occupancy in August.

[Craig Mailman, KeyBanc]

Okay. And then just lastly, on the DC-6 renewal, have there been any discussions with this tenant, given just the complexity of the requirements that they're looking at, just whether they buy it from you guys and eventually absorb the space over time. Is that an option that they want in the lease or that you guys would offer to them?

[Steve Budorick, President & CEO]

We haven't had that discussion. I have no reason to believe they had that interest. That would be an interesting discussion if we had it.

[Operator]

Your next question comes from the line of Dave Rodgers from Baird.

[Dave Rodgers, Baird]

Anthony, just on the rough guidance for next year, the 3% to 6%. I mean, I wanted to clarify, is that after you sell the assets in the fourth quarter this year, and is that related to any financing next year? And I guess I just ask that because the asset sales in the fourth quarter were bigger than anticipated and have about a 300 basis point negative impact next year. So I wanted to clarify that, if I could.

[Anthony Mifsud, EVP & CFO]

Sure. So the 3% to 6% does take into account the impact of the increased amount of equity raised in 2020. So the $165 million that we expect to raise this year is a little more than double what was in our initial guidance. So the impact in -- late in the fourth quarter as well as for the full year next year is included in those numbers.

I think with respect to additional equity for next year, I think we're still in the process of finalizing that math. And again, we'll put those details out as we put out the other specifics around guidance next year.

[Dave Rodgers, Baird]

Great. That's helpful. Development NOI contribution for 2021 based on what you've announced today so far, do you have a bracketed amount for what you expect to see from a development NOI contribution? If you had put that in something, I haven't seen it, so I might have missed it.

[Anthony Mifsud, EVP & CFO]

For '20 or 21?

[Dave Rodgers, Baird]

'21.

[Anthony Mifsud, EVP & CFO]

I just don't have that with me. I think we put that out. I don't -- I think we've put out the NOI contribution with respect to the projects that are part of the development pipeline right now. So that's really a subset of what will be included in that specific guidance.

[Dave Rodgers, Baird]

Okay. And then maybe, Steve, last for you, on the COO search. I don't think you mentioned in your prepared comments. Is that something you're still moving forward with? And any timing you expect with that?

[Steve Budorick, President & CEO]

Yes. We've been engaged in a process for the last quarter, and you'll see an announcement before the next call.

[Operator]

[Operator Instructions] Our next question comes from the line of Dave Rodgers.

[Steve Budorick, President & CEO]

I think we just talked to Dave Rodgers.

[Stephanie Krewson-Kelly, IR]

It looks like Tayo from Mizuho is on the line.

[Omotayo Okusanya, Mizuho Securities]

So I just had a very quick one about the development pipeline. I mean, there were just some decisions there, 2 projects delivering earlier than expected and 1 delayed. Kind of any color on kind of some of the movement that's happening with the time line?

[Steve Budorick, President & CEO]

Well, 2 we completed early and delivered.

[Omotayo Okusanya, Mizuho Securities]

So you have [novo] office city that's not delivering in fourth quarter of 2021 versus 2Q '22.

[Anthony Mifsud, EVP & CFO]

Yes. There's a -- the one building in our government campus in Northern Virginia has been accelerated from the second quarter of next -- of 2022 into the -- in the fourth quarter of next year. So that's based on the progress that the team has been able to make with the government on the buildout of the building and the buildout of that project.

[Omotayo Okusanya, Mizuho Securities]

Got you. And then 4600 River Road, that was delayed like a quarter or two?

[Steve Budorick, President & CEO]

The building is completed. Frankly, half the tenant improvements are completed. The local power company has been frustrating in the timing to relocate switchgear for the streetlights, which are right in front of our front steps. And we can't get our permit till they move that equipment. So we're ready to go, and the tenants are ready to go. Just waiting on Prince George's County.

[Operator]

Our next question comes from the line of Danny Ismail of Green Street.

[Danny Ismail, Green Street]

Steve, I appreciate the discussion on the history of the portfolio. But can you refresh us maybe over the next 3, 5 years, what you see as the optimal mix of data center as an office as well as what you see as the optimal geographic mix for the portfolio?

[Steve Budorick, President & CEO]

Well, the optimal mix is as much as we can get our hands on from both. But 50-50 makes sense to us. We've had really strong preliminary discussions in government and defense contractors. I think that's going to prove to be a big component over the next couple years. We believe our data center shell development relationship is very strong. What was the second half of the question?

[Anthony Mifsud, EVP & CFO]

Region geographically.

[Steve Budorick, President & CEO]

I mean, geographically, we're very happy with the regions we're in. Our data center shell activity is the strongest data center market in the world. And the demand that we have at our existing Defense/IT Locations continues to be strong and strengthening. So I don't see any new regional endeavors at this point in time.

[Anthony Mifsud, EVP & CFO]

Yes. The other thing you just need to note is with respect to the data center shells, if you go back and you look at the size of those projects, when we first started the relationship with our tenant, they were probably half of the size of the buildings we're developing today. So one building is worth probably twice the square footage it was 5 or 6 years ago. So it's just a -- therefore, it becomes a bigger percentage of the total.

[Danny Ismail, Green Street]

And then as you think about development over the next few years, any discussion on the direction of yields and possible influences of reduced construction costs on development profits over the next few years?

[Steve Budorick, President & CEO]

So we have not really experienced upward pressure on construction costs overall. During the pandemic, there was some pressure on some smaller components like, believe it or not, lumber because of some delivery restrictions. But what we experienced is we bought out our jobs over the summer and finished several of the developments is that we actually were able to achieve savings and increased our yields modestly. And I would expect in the environment that we're in for the next 12 months, it would be stable to -- we'd have a little more pricing pressure because I think a lot of development activity was stopped by other developers.

Thank you all for joining us today. We're in our offices all afternoon, so please coordinate through Stephanie if you'd like a follow-up call. Thank you.

[Anthony Mifsud, EVP & CFO]

Thank you.