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Welcome to the COPT Defense Properties Second Quarter 2024 Results Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Venkat Kommineni, COPT Defense's Vice President of Investor Relations. Mr. Kommineni, please go ahead.

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

Good afternoon, and thank you for joining us. Just a quick note, Britt is representing the company in an important meeting for a new opportunity that could not be rescheduled. So he will not be participating on this call, and I'm covering his content this quarter. Turning to our achievements. We reported strong results for the second quarter and continue to drive our outperformance for the year. FFO per share as adjusted for comparability was $0.64, $0.01 above the midpoint of guidance. With this result, we've either met or exceeded guidance each quarter over the past 5.5 years. We've exceeded the midpoint 18 of the past 22 quarters, and we met the midpoint in the other four. Same-property cash NOI increased 10.9% year-over-year and our total portfolio and 11.2% in our Defense/IT portfolio. The 2023 same-property pool on a stand-alone basis generated 8.3% growth. The 10.9% is the highest growth rate for our total portfolio in over a decade, and 11.2% is the highest growth in our Defense/IT portfolio since we began reporting the segment in 2015. We completed 985,000 square feet of total leasing, which consisted of 881,000 square feet of renewals with an 86% retention rate and 104,000 square feet of vacancy leasing. This level of vacancy leasing is an impressive result given the fact that our total portfolio was 95% leased, and our Defense/IT portfolio was 97% leased at the beginning of the quarter. Overall, we produced very strong operating metrics, which have exceeded our plan and led us to enhance our full year outlook on four key guidance metrics, including same-property cash NOI growth, same-property year-end occupancy, tenant retention and FFO per share as adjusted for comparability. We increased the midpoint of 2024 FFO per share guidance again by $0.02 to $2.56, which implies nearly 6% year-over-year growth. Our 2024 FFO per share growth is one of the highest forecasted growth rates in the Nareit defined office REIT sector and ranks in the 75th percentile for the entire REIT sector. Turning to defense funding. There are a lot of moving pieces left to be settled, but overall, we expect a 3% to 4% year-over-year increase for the FY 2025 defense budget. Last month, the House approved the NDAA in line with President's requests. In this month, the Senator Services Committee, Advanced bill which approved an additional $25 billion over the President's request, implying roughly 3.5% year-over-year growth to a total of $860 billion. Notably, the FY 2025 budget request targets $14.5 billion to DoD cyber activities, which marks a 50% increase over the past five years. While there's a long way to go until appropriation given the upcoming election, the trend of increased investment in defense continues, and we expect will fund the high-priority national defense missions that both we and our tenant support. Now to our markets. Demand for secure space remains strong, especially given the challenges associated with the global conflicts we are witnessing and the need to boost cybersecurity capabilities. In this strong demand environment, we've had great success in improving lease economics by reducing concessions and defense IT assets with a particular focus on renewals. We're outperforming our initial forecast, which is contributing to our strong same property cash NOI growth results and our elevated outlook for the full year. Looking at our operating portfolio. At the National Business Park, our location offers compelling advantages to defense contractors, including proximity and connectivity to the customer and interoperability with other defense contractors. These advantages drive MVP's uniquely strong operating performance. The park is 99.4% leased and generated second highest average rents per square foot in our portfolio, trailing only San Antonio. Our largest available suite is only 7,800 square feet in the entire 4.3 million square foot park. In Columbia Gateway, we continue to outperform the overall market given our dominant Defense IT franchise with a focus on defense cyber requirements. Our portfolio is over 91% leased, including the 90,000 square feet of vacant space we acquired last quarter and is 9% higher than the market occupancy rate of 82%. Columbia Gate, we accounted for 25% of our total vacancy leasing achieved during the first half of the year, and our activity ratio is 185%, with 445,000 square feet of prospects and 240,000 square feet of availability. In Huntsville, our portfolio remains highly leased at 97.7%. Our activity ratio was 125% with 70,000 square feet of prospects and 55,000 square feet of availability. In Northern Virginia, our assets are concentrated in the Route 28 South Corridor and other primary defense locations. These targeted micro markets traditionally have and continue to outperform the overall market. In terms of occupancy and rent levels as growth in defense missions is driving contractors to our advantaged locations. Our portfolio is 93% leased, which marks an 80 basis point increase year-over-year and compares extremely favorably to the overall market, which is only 76% occupied. Our activity ratio is 50% with 105,000 square feet of prospects and 205,000 square feet of availability. And in our other segment, we're focused on driving occupancy. While deal cycle-times remain elongated, we are encouraged by the level of activity we're seeing with a nice uptick in both our leased and occupied rates sequentially, and we're achieving results as we executed 64,000 square feet of vacancy leasing during the first half of the year. This included 16,000 square feet at 2100 L Street in D.C., which is now 92% leased and nearly 25,000 square feet of Pinnacle Towers in Tysons Corner. Our activity ratio is 80% with 410,000 square feet of prospects and 500,000 square feet of availability. Regarding vacancy leasing, we executed 104,000 square feet during the quarter, bringing the year-to-date total to 264,000 square feet, and we are on track to exceed our full year target of 400,000 square feet. Vacancy achieved year-to-date was 24% of our total available inventory at the beginning of the year and 32% of availability within our defense IT portfolio. Renewal leasing was exceptional during both the second quarter and year-to-date. We executed 881,000 square feet of renewal leasing in the quarter, tenant retention was an impressive 86%, and Northern Virginia was a standout at 99%. Based on our performance year-to-date, we've increased the midpoint for tenant retention guidance by 250 basis points to a new range of 80% to 85%. Our sector-leading retention is driven by our unique investment strategy, which I'll discuss further in my wrap up. Cash rent spreads on renewals were up 60 basis points, while GAAP rent spreads were up 7.7%, driven by annual rent increases of 2.2% with a weighted average lease term of almost four years. We continue to expect cash rent spreads will be flat at the midpoint for the full year. Our outlook for retention over the next several years continues to remain very strong. Looking back, in the second quarter of 2022, we began disclosing our view of renewal leases in excess of 50,000 square feet over the next 30 months through year-end 2024. At that time, we had 25 large leases, totaling 2.8 million square feet set to expire over the following 10 quarters. Since then, we've renewed 20 of those leases, totaling 2.1 million square feet with a 97.5% retention ratio. We renewed all the tenants for two of the leases had modest contractions. That leaves five leases remaining in that pool, totaling 700,000 square feet, and we expect to retain 100% of that lease space. When these five leases are renewed, our retention of the 2.8 million square foot pool will be over 98% as compared to our initial projection of over 95%. So on page 20 of our book, we expanded our large lease disclosure to include our view of large lease expirations for the next 30 months through year-end 2026. In that window, we have 32 large leases expiring, totaling 4 million square feet. Of those leases, nearly 75% of the annualized rental revenue comes from full buildings leased to the United States government. And recall, in our 32-year history, we've had 100% renewal rate on full building government leases. Beyond the government leases, the pool is mostly defense contractor and data center shell leases. We expect a retention rate of over 95%, and this set of large leases expiring through year-end 2026, we're highly confident our overall tenant retention will remain very strong. Our active development pipeline totals roughly 960,000 square feet. It is 74% pre-lease and represents a total cost of $381 million. We continue to expect development and acquisition leasing activity to be weighted towards the back half of the year based on the timing of those negotiations. For our three inventory buildings in development and our recently acquired Franklin Center, we have combined 605,000 square feet of prospects and 340,000 square feet of available space, which equates to an activity ratio of 175%. At MVP 400, we have 190,000 square feet of prospects and 138,000 square feet of available space. We started this building due to the dearth of availability in the park. If we were to include this unleased building in our MVP operating portfolio, the park would still be over a 96% lease. The demand for this asset is targeting occupancy in 2025 and 2026, so we don't expect leasing progress until next year. At 8100 Rideout Road, we have 100,000 square feet of prospects and nearly 75,000 square feet of availability. At 9700 Advanced Gateway, we have 105,000 square feet of prospects and 40,000 square feet of availability. And finally, at the newly acquired Franklin Center, we have 210,000 square feet of prospects and the nearly 90,000 square feet of availability. For these three assets, we expect to report leasing progress over the next two quarters. Our development leasing pipeline, which we define as opportunities we consider 50% likely to win or better within two years or less, currently stands at about 700,000 square feet. Beyond that, we're tracking over 1.6 million square feet of potential development opportunities, which should allow us to maintain a solid development pipeline in the near and medium term. And with that, I'll hand the call over to Anthony.

Thank you, Steve. We reported another strong quarter, with second quarter FFO per share as adjusted for comparability of $0.64, exceeding the midpoint of our guidance by $0.01. Same property cash NOI increased 10.9% for our total portfolio and 11.2% for our Defense/IT Portfolio. The year-over-year increase was driven by a 50 basis point increase in average occupancy, lower levels of free rent concessions on renewals, the burn off of free rent at recent developments now in service and lower net operating expenses resulting from successful real estate tax appeals primarily in Baltimore. As a result of our year-to-date achievement and our forecast for the remainder of the year, we increased the midpoint of our same-property cash NOI guidance by 150 basis points. This guidance range, combined with the 50 basis point increase at the end of the first quarter, elevated the expected midpoint of growth for the year to 8%. This increase is driven by many of the same factors benefiting the quarter, namely stronger volume and economics on lease renewals, combined with lower net operating expenses resulting from real estate tax appeals and reduced weather-related expenses. Same-property occupancy ended the quarter at 93.5%, which is flat compared to last quarter. We expect same property occupancy to increase towards the end of the year, and we raised the midpoint of expected year-end occupancy guidance by 250 basis points to 93.74%. Our balance sheet continues to be strong and well positioned to navigate the current interest rate environment and take advantage of future opportunities similar to Franklin Center. We have no significant debt maturities until March 2026. At the end of the quarter, we had over 85% of the capacity on our $600 million line of credit available and $100 million of cash on hand. During the quarter, we paid off a $28 million mortgage at maturity that was secured by three properties at Redstone Gateway using cash on hand. Our unencumbered portfolio now represents 97% of total NOI from real estate operations. We currently have no variable rate debt exposure. We expect 100% of our debt will be fixed until late 2024 as the equity component of our capital investments will be funded from cash from operations after the dividend and the debt component from our existing cash balance and subsequently from our line of credit. The first six months of 2024 demonstrate our ability to self-fund the equity required for investments. Year-to-date, we invested $82 million in developments and the acquisition of Franklin Center. We funded 52% of that spend with cash from operations after the dividend, which is neutral to overall leverage and the remainder with cash on hand. Our dividend payout ratio was 56% during the first half of the year and has been below 60% in each of the past four quarters. We expect the full year payout ratio will be roughly 60%. This strong payout ratio allows us to utilize the retained cash flow to help fund new investments as achieved during the first six months of the year. With our first quarter dividend increase, we are one of only two REITs in our sector to have raised the dividend during the first half of the year, which demonstrates the confidence we have in our ability to generate strong levels of AFFO. With respect to guidance, we increased 2024 FFO per share for the year by $0.02 at the midpoint, implying nearly 6% growth over 2023's results. This is our second increase this year as the initial FFO per share guidance midpoint was $2.51, which we increased to $2.54 last quarter and now sits at $2.56. The $0.05 guidance increase for the year is primarily driven by the increases in same-property cash NOI, the acquisition of Franklin Center and higher-than-expected interest income on cash balances. These items are partially offset by some GAAP NOI adjustments and slightly higher G&A expenses. We reduced the full year guidance for capital invested in development and acquisitions by $40 million at the midpoint, from $260 million to $220 million, driven by the timing of our expected investments. Finally, we are establishing third quarter guidance for FFO per share, as adjusted for comparability in a range of $0.63 to $0.65, which implies a slight increase in the fourth quarter. Looking forward, we continue to anticipate compound annual FFO per share growth of at least 4% between 2023 and 2026. With that, I'll turn the call back to, Steve.

So before I get to my final remarks, I really want to drive home one of our key differentiators, which is our sector-leading tenant retention rate. Year-to-date, we've delivered 83% retention. And over the past five years, we've delivered an average of 77%. Our tenant retention record delivers immense value to our shareholders, which is realized, is elevated AFFO, because the capital required to attract a new tenant for our company is about three times capital required to renew a tenant. That ratio is likely much higher for gateway office rates. Vacancy or downtime is a cash negative event, as rents or loss and operating expenses for vacant space diminishes the bottom-line. New leasing typically involves free rent periods and that extend the negative cash flow period. We included exhibits on Page 18 and 19 of our flip book, that examined the AFFO impact and two million square feet of leasing, comparing a hypothetical 80% retention rate and flat change in cash rents, to an industry average 35% retention rate with 10% cash rent increases on renewal. The bottom-line, is high retention scenario with zero year one rent growth, dominates a portfolio that generates a 10% increase on renewals, but as industry average retention. The high retention scenario generates $45 million or 10% more in positive cash flow as compared to the industry average scenario, even assuming some pretty optimistic re-tenancy periods. These exhibits drive on the cash flow strength that our portfolio is delivering it partially explains our ability to self-fund the equity component of our incremental investment on a leverage-neutral basis. So I'll close by summarizing our key messages. We've achieved solid results during the first half of the year. Our Defense/IT segment is 96.7% leased. Year-to-date, we generated same property cash NOI growth of 8.5% in our total portfolio and 9.4% in our Defense/IT portfolio. We increased the midpoint of 2024 guidance for same-property eared occupancy, same-property cash NOI growth and tenant retention. We executed 264,000 square feet of vacancy leasing year-to-date. Our $381 million of active developments or 74% pre-leased and will contribute to NII -- NOI growth over the next few years. Our liquidity is very strong, and we expect to continue to self-fund the equity component of our planned capital investments going forward. And we increased the midpoint of 2024 FFO per share guidance by another $0.02 to $2.56, which implies nearly 6% year-over-year FFO growth. This quarter's performance clearly shows the benefit of our unique investment strategy. So operator, with that, please open up the call for questions.

Thank you, Mr. Budorick. [indiscernible] Our first question comes from the line of Richard Anderson of Wedbush Securities.

Hey, thanks. Good morning or good afternoon. So, on the same-store growth profile, first, great job there. It's -- I guess there is precedence, but it doesn't seem like something that you've achieved much at all in the past. But you said that the building blocks behind it, correct me if I'm wrong, essentially better-than-expected renewal options and lower OpEx. Is that basically and a little bit upside on occupancy in the back half of the year?

That's correct.

Okay. So on the vacancy leasing side, that probably doesn't have as much of an impact, if at all? Is there sort of a free rent component that so you don't really get a same-store impact from the vacancy leasing activity?

Typically, vacancy leasing requires six to maybe even eight months of tenant improvement, or we get a commencement and a rent start and even in a scenario with no free rent. It's really hard to get a deal done in the current year to contribute to that current year cash NOI.

Yes. Okay. Fair enough. So 8%, I'm just going to take a flyer maybe not sustainable on a long-term basis, maybe you disagree. What do you think the real sort of internal growth firepower of this company? I know you're reiterating your 4% FFO growth to 2026. So what should investors be expecting from an organic growth point of view as we look out?

Well, I think a good run rate is 4% internal and then additional contributions from development.

Okay. And Steve, you mentioned the defense budget and expecting 3% to 4% for FY 2025. So, talk to me remind me about how that translates into leasing. I think we've talked about this before directly as the government is pretty quick, but with contractors, it kind of takes time for it to matriculate to a leasing event. Is that a fair way to look at it?

Yes. So if the government has additional leasing authority approved in a budget, they typically have to commit that within the fiscal year. As we all know, the appropriations tend to happen on a delayed basis, because of continuing resolutions. So once again an appropriation, it's usually six to seven months following that, that the US government lease action could -- would have to be executed. With defense contractors, we typically experience the benefit through their ability to capture additional business through contracts and that contract award process takes quite a bit of time. Often, there's protests that need to get adjudicated -- an award is finalized, and then that contractor can commit to additional space. So we say that tends to lag 12 to 18 months.

Okay. And then last for me, it looks like things are going well at Franklin Center. Any other hidden gems you kind of referenced acquisition, potentially some similar opportunities like that with upside under your umbrella. Do you got your eyes on a few things out there, even though you're really dissent [ph] a development-oriented story. Is there stuff out there that is interesting, at least in terms of the pipeline? Thanks.

We're still looking Rich. That's all I'd say.

Good luck. Thanks. Thanks, guys.

You're correct on all those points. The weather-related expenses were experienced in the first quarter and reported through our results for the first three months. The successful real estate tax appeal in Baltimore came through our second quarter results. We'll see some benefit of that going forward because that reduction will continue through the current year expense and into the future. But if you look at the total change in same-property cash NOI in terms of gross dollars between the 6% original guidance and the 8%, it's about $7 million. About 30% of that is expense related and the balance is a combination of stronger renewals, lower free rent on renewals and better economics on our leases.

Great. Very helpful. And then maybe just back to Steve for one more. Can you just talk about any additional data center opportunities that you have maybe in Northern Virginia and even potentially elsewhere and talk about how the limited power availability might have kind of resulted -- has it resulted in a road block with respect to further expansion of that program? And how do you think about that going forward?

Well, I wouldn't call it a roadblock, but it might be a long traffic late. So clearly, without available power, we've talked about this on prior calls, it's and factoring in the extremely high price of land today. It's tough to move forward until we have clarity where we can match power and land and have confidence our customer would be interested in that solution. So the power situation is no clear today than I think it was a year ago, and we await some clarity on available power, and we work the market to understand what pieces of land we could buy and develop solutions. But as I said last quarter, I don't expect expansion of that program during the current calendar year could be into the later half of next year.

Great. Thank you.

Thank you. Our next question comes from the line of Michael Griffin of Citi.

Great. Thanks. Just going back to leasing for a bit, just given the high lease rate and limited vacancy in your portfolio, is it fair to expect kind of outsized future cash re-leasing spreads or maybe greater lease escalators, given the favorable supply/demand backdrop. And then maybe following up on that, for your non-US government leases, have you been able to push leasing more for these kind of tenants?

So I think what you're seeing this year is the benefit of tighter supply and demand is manifesting itself in reduced free rent on renewal, and that's flowing through our same office results in a pretty positive way. With regard to market rent, as we've talked about before, it's not the best metric to judge our company on because our markets are very stable. We don't get peaks. We don't get crashes with recoveries. So we -- and the internal growth in our leases tends to move about with market rent. And so we get very little cash rent change on renewal and then continued growth. So I guess to wrap it up, where we're seeing the most advantage is lower free rent concessions, which is a big boost to cash.

Great. Appreciate that color, Steve. And then I'd be curious to get your thoughts just on kind of the cybersecurity industry. Obviously, we saw the impact of the recent CrowdStrike outage had on things. So would you view an event like this as kind of a way to catalyze tenants in your tenant base to invest more in cybersecurity? And I know that this is a growing portion of your portfolio. So any kind of comment you could have on the outlook for that industry would be helpful.

Well, it's been a great performer for us since we first started to realize the benefit of US Cyber Command being co-located at Fort Meade. I think our total cyber tenancy where we can tie new leases that we've achieved to the missions coming out of Cyber Command is nearing 3 million square feet in our portfolio. And I have to say those tenants they're not contracting very frequently. They're expanding. And I think it's just a great fundamental set of tenants to have in your portfolio because the threat is asymmetric and it's an environment of constant innovation. The threat constantly innovates to the fed protection. And so the protectors need to constantly innovate to protect that threat. I think you see that a little bit in the comments that we made about DoD cyber being earmarked for $14.5 billion, that's $13.5 billion last year. So targeted $1 billion increase, that's about 7.5%. On a long-term basis, that's a compound rate. I'm pretty satisfied that will be well served to continue to try to capture that tendency.

Great. That's it for me. Thanks for the time.

Thanks.

Thank you. Our next question comes from the line of Steve Sakwa of Evercore ISI.

Thanks. Good afternoon. Steve, I guess, I wanted to circle back on the development, kind of, pipeline and the activity level that you're seeing. It's clearly very robust. And it sounds like the big property of NBP has good demand, but maybe it's a little bit early to sign. I guess what I'm trying to figure out is what gets you guys to start new development projects? Is it pre-leasing? Is it getting some of these existing projects closer to the finish line? It sounds like there's so much good demand. I'm not sure why you're not starting more projects today.

Well, we tend to be pretty conservative on our commitment to new supply until we see immediate opportunity satisfied what we've already started. We have three inventory buildings through vacancy. We see the demand as those buildings -- as the demand nears leases, we're already prepared and planning subsequent buildings to bring to market quickly. For instance, at the national business -- or I’m sorry, Redstone Gateway, we are ready to go to permit on our next inventory building. We've already prepared the site. We're ready to start on below grade improvements and be up in, call it, 12 months. So we like to have the past year of preparedness, but we don't want to put out too much capital at risk. So we see that demand materializing.

Okay. Thanks. And then maybe just turning to some of the non-core assets, some of the downtown Baltimore assets. Just how are you thinking about those? I know Troll price is kind of getting set to move out of their headquarters building and move further east in Baltimore, which will create some more vacancy, which isn't too far from some of your buildings there on Light and Pratt Street. So how are you thinking about, hey, the leasing on those and then ultimately, the disposition of those Baltimore assets as well as 2100 L Street?

Well, let me take that in reverse order. So 2100 at 92% leased. The buildings stabilized, it has inherent value to sell. We need a capital market environment that will support a proper valuation. And that really speaks to the cost of debt for a buyer and availability of debt, and that's just not today. So we think we're launch ready when the market is in a position to get a proper valuation. With regard to Downtown Baltimore, yes, indeed, T. Rowe will vacate that building, leaving a significant amount of vacancy. We consider that a potential significant challenge relative to our 100 Light building, which has quite a bit of vacancy. But it looks like the good news is that the owners of that building are not very well-capitalized. And for them to interpreting what we've heard in the market to get a deal, they're going to need incremental financing from the lender. I just don't think that's going to win in today's environment. But we are laser-focused on the opportunities in the market, competing well for them and getting leases reestablished in the vacancy at 100 Light. And then the other two buildings compete in their own kind of micro market, we have a pretty good band on both of them. I think you'll see their occupancies improve over the next two quarters. With regard to capital markets, again, we got to have a market where a buyer can finance an acquisition to give us a proper value before we bring to market.

Okay. Thanks. Just one quick follow-up on this 2100 L. Would you be willing to do any kind of seller financing on that? Obviously, capital markets are getting better and rates are coming down, but would you do seller financing on that building to effectuate a transaction sooner?

With the significant down strip, yeah.

Okay, great. Thanks. That's it for me.

Thank you. Our next question comes from the line of Camille Bonnel of Bank of America.

Hi, everyone. I appreciate that the pipeline remains robust, but I'm curious as we get closer to the elections, if you're starting to see any slowdown in decision-making from your tenants, or just a difference in mindset whether that be on your vacancy or development pipeline?

Well, so it's tough to know what's inside the head of our tenants, because we just don't have clarity into what they're thinking is. But as long as I've been at the company, I've never really seen the election result influence the need for lease space. It's more from our viewpoint, contractors waiting to get confidence on an award win, planning for the facility to verify that they're ready to move forward, it really tends to be more focused at the contractors business. So my answer is no, I have no evidence that the election is influencing decision.

Got it. And looking towards Redstone Arsenal, the retention there was much lower this quarter, and you have a few projects under development as well as the new opportunities that you mentioned in that market. So, could you expand a bit more on what's driving the move-outs there?

Yes. So the 2 small tenants downsized. But the largest of the nonrenewals we got reported was a contractor who we gave temporary space in one of our buildings off of Redstone Gateway. So they had time for us to build them a new building, and we moved that contractor into their new building and took back their swing space. So that was the bigger driver. And if you look at -- it's a very small amount of square footage.

Okay. Thanks. And lastly, can you please elaborate a bit more on the acquisition guidance update this quarter? Is it more of a timing factor of when you expect to close on a deal? Or has anything changed in what you're seeing in the investment market?

Our update was of our development spend. So it's really the forecast we have for just development capital invested in our existing pipeline that's in the ground, as well as the capital we're anticipating investing in new projects later in the year.

Okay. Got it. Thank you.

Thank you. Our next question comes from the line of Peter Abramowitz of Jefferies.

Thanks. Most of my questions have been answered. But I guess just 2 here. First, to start out, I guess it's become much quieter on this front, not a tough conversation much anymore. But just wondering if you can comment on construction costs, sort of how things are trending there? And how do you feel relative to cost of capital and to your underwriting yields?

So the rate of increase in construction costs has clearly abated. I would say year-to-date, it's pretty close to stable. We're not seeing big increases like we did over the last few years. Having said that, it costs a lot more to build a building today than it did 3 years ago. And cost capital has been essentially constant this year, maybe a little bit improved as we get into the midyear. So it's still a challenge to get rents to support new development. And I think that had some impact on our overall ability to generate development progress. But we have not yet seen construction costs start to decrease in a more competitive environment.

All right. That's helpful. Thanks, Steve. And then one on just the overall sort of market for our assets. Have you seen any sales in the transaction market, particularly for defense contract or government build-to-suits, particularly the BW corridor, but overall in the portfolio. Any sales that give you a sense of cap rates and pricing for those assets in your portfolio?

Nothing I could speak to right now. There were a few acquisition opportunities we looked at over the last year that were not in the BW corridor, where we observed the transaction in prices bid to a level below what we would have paid, so pretty aggressive pricing. And those involve defense contractor buildings. And so, I think if you have a good asset with a mission-oriented defense contractor, there's still a tremendous amount of value in those assets.

Sure. And I guess just to follow-up on that. Where did the pricing go from an initial cap rate perspective that kind of precluded you from following up on going through with those?

Well, below 8% in my recollection is closer to 7.

Got it. That’s helpful. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Dylan Burzinski of Green Street.

Hi, guys. Thanks for taking the question. Just curious how you guys are thinking about future occupancy growth given that occupancy is now approaching, call it, the mid-90% range? I mean, are we sort of approaching frictional vacancy levels in the portfolio today? Or do you guys think you can sort of move occupancy past, call it, the 94%, 95% range over the next few years?

Well, we're never satisfied with where we are, and we're going to continue to try to fill every square foot. But matching the vacancy to the demand gets much tougher as you're over 95% leased. So, I'd like to say we're going to continue to make some incremental progress, but it's not going to be easy.

And then as a sort of a parallel to that, given where occupancy is today given some of the demand drivers that you outlined on the call, are you guys -- do you guys envision yourself being able to sort of push embedded rent bumps in leases? Or has that not changed at all over the last few years? And where should we expect that to sort of go on a go-forward basis?

Well, from quarter-to-quarter, those bumps will move a bit. We've had a couple of quarters where they are a little higher than there this quarter. We're always trying to push on the entirety of the profitability of a lease. So, I mean, there's some trade-offs. We'll push across the board and get where we can.

Thanks. Appreciate the comment.

Thank you. I will now turn the call back to Mr. Budorick for closing remarks.

Well, thank you all for joining our call. We are in our offices, so please coordinate through Venkat, if you like a follow-up call. Thanks again for joining us.