Welcome to the COPT Defense Properties fourth quarter and full year 2024 results conference call. As a reminder, today's call is being recorded. At this time, I will turn it over to Venkat Kommineni, COPT Defense Properties' Vice President of Investor Relations. Mr. Kommineni, please go ahead.

Thank you, Dan. Fourth quarter and full year results. With me today are Steve Budorick, President and CEO, Britt Snider, Executive Vice President and COO, and Anthony Mifsud, Executive Vice President and CFO. Our results are available on our website in the results press release and presentation and our supplemental information package. As a reminder, forward-looking statements made during today's call are subject to risks and uncertainties, which are events and results that can differ materially from these forward-looking statements, and the company does not undertake a duty to update them. Steve?

Thank you, Venkat. 2024 was another outstanding year for COPT Defense Properties. Our business plan proved resilient yet again as we met or outperformed every major target metric. FFO per share, as adjusted for comparability, was $2.06, six cents above the midpoint of our initial guidance, and represents an increase of 6.2% over 2023's results. Excluding three cents of nonrecurring events, FFO per share still grew by a very healthy 5%. Same property cash NOI increased 9.1% year over year, which is the highest increase we've ever reported. We executed half a million square feet of vacancy leasing, which represented 45% of the space that we had vacant at the beginning of the year. We achieved tenant retention of 86%, which is the highest annual level in over twenty years. And we committed $212 million of capital to new investments, including our first building acquisitions since 2015, in San Antonio and Columbia Gateway. The execution of our strategy and the performance of our portfolio continue to differentiate our company in 2024. With respect to 2025, we are establishing FFO per share guidance of $2.66 at the midpoint, which implies nine cents or 3.5% growth over 2024's exceptional results. While also observing approximately a one and a half cent increase in financing costs, which Anthony will address in more detail later. Net of 2024 nonrecurring events, guidance implies 4.7% normalized FFO growth per share in 2025. So now I'd like to provide some thoughts on the new presidential administration. Similar to his first term, we expect a second Trump presidency will be very supportive of bolstering companies' defense programs. President Trump's national security philosophy for a second term is peace through strength, which implies dominant military capability, capacity, and technical superiority sufficient to protect our nation and deter the need to…

Thank you, Steve. Our operating business performed very well in 2024, with continued strong demand for secured mission spaces. The strength of this demand was particularly evident in our record tenant retention rate at 86%, which was the highest annual level in over twenty years, and compares extremely favorably to the rest of the office sector. A couple of the major factors driving our retention performance include our tenant's investment in security features to create SCIF space and the fact that SCIF space cannot be relocated. Moreover, we've experienced an extraordinary increase in tenant demand for SCIF space over the last twenty-four months, and that continues today. Evidencing this, over the last two years, we have backfilled over 160,000 square feet of nonrenewals with long-term defense contractor leases that added SCIF, further strengthening both our defense IT concentration and our retention profile. We finished the quarter with strong occupancy levels at 93.6% in the overall portfolio and 95.6% in the defense IT portfolio. Year over year, occupancy ticked down sixty basis points, which is a deliberate and short-term reduction resulting from 2024 investment activities, and is the result of our strategic accumulation of approximately 250,000 square feet of inventory to lease. Today, 180,000 square feet, or over 70% of this vacancy, is either already leased or is expected to be leased shortly. Net of this inventory we acquired, occupancy actually increased forty basis points year over year. The short-term reduction in occupancy relates to three investment activities. First, the Franklin Center acquisition in Columbia Gateway reduced occupancy thirty-five basis points. At this property, we currently have 180,000 square feet of prospects on approximately 90,000 square feet of vacancy acquired. We are in advanced negotiations on a 48,000 square foot lease for a top twenty defense contractor and expect to execute…

Thank you, Britt. We reported 2024 FFO per share as adjusted for comparability of $2.57. The year benefited from favorable renewal outcomes, including higher retention and lower concession levels, lower net operating expenses, primarily seasonal and utility costs, successful real estate tax appeals at several properties, higher interest income, and development fees. For the fourth quarter, we reported FFO per share as adjusted for comparability of $0.65, which was at the midpoint of our guidance. During 2024, our same property portfolio generated a 9.1% increase in cash NOI. This growth was driven primarily by cash rent increases from the burn-off of free rent on development leases placed into service in 2022, embedded escalations in virtually all of our leases, lower net operating expenses, an increase in same property occupancy of thirty basis points, which included the impact of several favorable renewal outcomes, and lower than expected free rent concessions. Several of these items that positively impacted 2024 results are non-recurring items, such as the benefit of the free rent burn-off, the real estate tax appeals, and lower seasonal operating expenses. Excluding those items, normalized 2024 same property cash NOI would have increased 3.4%. Same property occupancy ended the year at 94.1%, which is a fifty basis point increase compared to last quarter, a thirty basis point increase year over year, and is our highest level in over a decade. These gains were driven largely by the Fort Meade BW corridor, with occupancy up 130 basis points sequentially and up 70 basis points year over year, and Northern Virginia, with occupancy up 120 basis points sequentially and up 280 basis points year over year. Our balance sheet continues to be fortified and well-positioned to take advantage of opportunities. At year-end, 100% of our debt remained at fixed rates. We expect our…

So before I wrap up, let me refer you to a list of our achievements over the past five years that we put on slide thirteen of our flipbook. Each of which is pretty remarkable given the macroeconomic climate that included the global COVID pandemic, the highest level of inflation in over forty years, the highest interest rate environment in over fifteen years, and a massive shift to work from home leading to the highest office vacancy rate in over forty years. And despite these headwinds since 2019, we grew our portfolio by 30%, increased our FFO per share by 27%, and our AFFO by 26%. We increased our occupancy by seventy basis points and maintained a sector-leading tenant retention rate of nearly 80%. So finally, I'll close by summarizing our key accomplishments and messages. We achieved excellent results in 2024, driven by the continued strength in our portfolio operations. We delivered FFO per share growth of 6.2% year over year, marking our sixth consecutive year of growth. We increased the dividend by 7.3% over the last two years. We expect 2025 to be our seventh year of FFO per share growth, and our guidance implies an increase of 3.5%. We set a demanding target for vacancy leasing at 400,000 square feet. Given how well-leased our portfolio is already, we expect tenant retention will remain strong at 80%. We expect to commit $225 million of capital to new investments, thereby restocking our development pipeline. Our liquidity remains very strong, and we expect to continue to self-fund the equity component of our capital investments going forward. And we continue to anticipate compound annual FFO growth of 4% between 2023 and 2026. So we're off to a great start in 2025, and we're looking forward to another highly successful year. And with that, operator, please open the call for questions.

Thank you, Mr. Budorick. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please standby while we compile the Q&A roster. And our first question comes from Tom Catherwood with BTIG. Your line is open.

Thank you, and good afternoon, everyone. Maybe, Steve, to start, in terms of the three defense priorities that you detailed in your prepared remarks, how would you expect demand to evolve in your markets around those? And is there consideration of getting ahead of that demand with additional inventory developments or acquiring assets with lease-up potential?

So the three priorities we named, space activities, we believe that will definitely affect Huntsville. Among them is strong consideration to relocate space command to Huntsville from Colorado Springs. And that could potentially create development in our immediate portfolio to house the initial standing up of that mission, and then subsequently contractor developments to support the contractors needing the service. The second is missile defense, which will likely affect Huntsville as well. The PEO of missiles in space is located on Redstone Arsenal. If you listen to what President Trump has talked about, he's talked about an Iron Dome equivalent, which is a significant expansion to the anti-missile defense system that's also headquartered in our park at Redstone Gateway, known as GMT ground missile defense. Then the third priority is naval capabilities expansion. And that could benefit our portfolio both in Washington DC next to the US Navy Yard, by the way, where we've already experienced increased demand. Last quarter was a nice lease to support the ARC US submarine development program, as well as our portfolio in Southern Maryland where we support weapons development and air. So I think I answered the question. Did I miss anything, Britt?

That was great. Thank you, Steve. And I also appreciated your thoughts on DOGE and the focus on GSA leases. But could there be an indirect impact to COPT Defense Properties if there's an increased focus or attention put on your contractor customers, or is that likely to be outside of their DOD-related businesses?

Well, it's interesting. If you look at their comments and earnings calls, then it won't be specific. Most of the service companies believe that they are part of the solution that DOGE is looking for. And they believe that they're well-positioned to bring efficiencies to the DOD. And the larger manufacturers have really focused on streamlining the procurement process to make it more competitive, more efficient, transition from contractor to contractor with less protesting. But the mood in the industry is this is an opportunity to kind of move beyond less efficient procurement methods and traditions and move to really more value for the dollar spent at the mission.

Got it. Appreciate that thought. And then last one for me. Can you provide an update on your data center land in Iowa that you acquired last quarter and the status of applications for power?

Yeah. We're working through our power request. We got an initial response from the power company in the last month. The good news is we have a path to a gigawatt. The less good news is timing is less clear from their standpoint. They have a variety of requests that they queued up in sequence. They've kind of got to work through some of those before they can bring us more specificity. We're excited. We're working with the customer and a kind of a global term sheet and then add specific discussions regarding power.

Got it. Appreciate all the answers. Thanks, everyone.

Happy birthday, Tom.

Thank you. Our next question comes from Michael Griffin with Citi. Your line is open.

Great. Thanks. Maybe just going back to sort of defense budget expectations for this year. I know the appropriations were deferred until the middle of March, and there's precedent for reaching a deal there. But given the different factions in Congress and the razor-thin majority that Republicans have, do you foresee any potential issue of this being stalled or continued delays, and could that impact your business if that were the case?

Well, anything can happen when it comes to DOD spending. I'll say this, that after the initial Trump election victory, the continuing resolution that occurred that year was, I believe, the longest in history. It went all the way to the end of May, primarily because there's significant effort to get a dramatic increase in that budget, which could potentially happen. There's a lot of promotion flying around the House and Senate right now. So I'm not smart enough to predict really how that translates to the final negotiations and the DOD authorization. But I can say that over the last eight years, there's been amazing bipartisan support to increase funding into the DOD and a broad recognition that even at our level of spending today, we're probably a full percentage point of GDP lower than we should be. And so when all is said and done, I think you'll see an increase.

And, Michael, this is Britt. I mean, just one thing to add on that is our direct conversations with the customers are showing no slowdown whatsoever. In fact, potentially the opposite of that with expansion with military customers and their contractors. So there may be some process stuff that gets figured out here, but we're not seeing any slowdown from the customers themselves.

Thanks for that. And, Britt, this segues well into my next question, but as you think about sort of leasing and renewal rates and the ability to push pricing, I understand particularly the government side is sensitive about increases. But as you look to the private sector tenant base, have you seen any ability to push on pricing, greater landlord pricing power from that perspective? I understand it could be kind of a give and take with the relationship you have with your customers, but are you noticing any pricing differences as a result of that demand?

Yeah. I mean, we continue to push where we can, but as we've pointed out many times, we're really focused initially on concessions and reducing those, which we were very successful in doing last year. Then also just going back to that retention, I mean, it is a massive cost benefit over the cash rent spread. So we're very focused on that. We'll take those opportunities when we can push rate where it makes sense to do so. But we're not going to risk losing tenants.

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

Thanks, Michael.

Thank you. And our next question comes from Anthony Palone with JPMorgan. Your line is open.

Great. Thanks. Just going back to the data center land in Des Moines, is it fair then to assume, just trying to parse through your comments, that that's probably not going to be a lot of the spending this year?

That is very fair.

Okay. And so if we go to your development starts for 2025, can you maybe just give us some additional color and thoughts on what you might do there, where the nature of the projects?

Well, for sure, we're going to start RG 8500 in Redstone, as Britt mentioned in his comments. As we signed this lease with the US government, we will have very little space available on the park. And we're anticipating a lift in demand and potentially advancement on some of the build-to-suits that we've been talking about over the past twelve months. So we plan to have inventory in production there. We are preparing to develop on our secure campus to provide the solution for a space force space command relocation should it occur. And moreover, across the portfolio, in the last thirty days, we've moved to some pretty encouraging build-to-suits with as many as four different tenants in multiple locations, all defense IT.

Okay. If space command were to just get hung up in a process this year, would that change the starts in Huntsville or just the guidance there?

Well, we won't start that building without a recognition that the relocation would occur and that there's at least an intent to lease from us. But I don't think it'll affect our overall numbers at all.

Yeah. And, Tony, in terms of the development capital that we're assuming to invest during the year, there's really not any capital assumed for the space command vertical development.

Okay. Got it. And then just one last one if I could sneak in. Just over on the regional office side, any change to liquidity or anything you're seeing out there that might prompt you to kind of sell anything on that front?

No. I don't think so. There's really not a lot of investment sales activity, and what has occurred or is about to occur is deeply distressed assets, short sales, workouts. We just don't see cap rates potentially getting to a range where it'd be an efficient sale. We continue to monitor, but it's too early. Rates are high.

Okay. Great. Thank you.

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

Great. Thanks. Good afternoon, and happy birthday, Tom. So, Steve, you mentioned there's been a lot of news and conversation focused on the administration's changes to government workforce and properties. But I guess just to put a finer point on it, can you just talk us through whether you think any of your tenants are susceptible to these changes and whether you see any potential for an impact to your portfolio?

So, you know, we've reviewed deeply our divisions we support and the leases we have, and we do not see anything at risk. By proactively addressing that GSA component, we have a couple of functions we mentioned where those leases are under a GSA form. Because of the group, they have put their first SCIF space that correlates and interplays with the overall missions in and around them. And then we have a court system and a police force. So, yeah, we don't see that affecting our tenants.

Very helpful. And somewhat related to that, Britt mentioned the 600,000 square feet of government leases expiring this year that are expected to extend into 2026. Can you just confirm whether those tenants have additional one-year extension options or are likely to remain sticky in your portfolio, or if there's any risk of move out in 2026 from that group?

No. We really don't see any move-outs of that group. This is something that really happens every single year, and it's just the amount changes a little bit. But we feel very good about that. It's just more administrative process. I mean, those processes could actually help this if they get the leases processed and renewals processed faster. So it's not something that's atypical.

Alright. Great. That's all.

Okay. Thanks. That's helpful. And then I think Anthony mentioned that 25% of the non-renewals were communicated. Can you talk about the other 75%? Were those surprises to you guys, and any color on the profile of those tenants or other commentary would be helpful.

No. The largest of which is the medical system. It's CareFirst. CareFirst Blue Cross Blue Shield. They're in our headquarters, three-building complex. We've known that they've been moving out for several years. It's about 50,000 square feet. We've been premarketing it, and I think Britt mentioned in his comments, we've got strong demand there. And, you know, at Columbia Gateway, nonrenewing a nondefense tenant, we actually view as an opportunity. Because we have so much demand for cyber and SCIF, it allows us to more deeply concentrate the tenancy in our buildings that we want.

Great. Thanks, everyone.

Thank you. Our next question comes from Richard Anderson with Webber Security. Your line is open.

Thanks. Great question for you. On the availability as we saw at the end of the year, so something like 1.2 million square feet if I'm doing my math right. And then you're adding some availability. I think you said 130,000 square feet. Correct me if I'm wrong on that. But I guess the question for me is, is there always a natural level of or what is the natural level of frictional vacancy in the portfolio in your mind? Or, you know, is there some nirvana moment where you can actually be almost 100% leased? I'm just curious what we should expect as, like, the topping point of the lease percentage for you guys.

Yeah. I mean, I think that the 95% to 96% is kind of the natural occupancy for us. But, I mean, there are opportunities to close the gap a little bit, but, you know, I think remaining flat for this year is a good assumption.

Yeah. That's okay. That's good enough for me. On the same-store growth, 2.75% at the midpoint, you know, you talked about the one-time events in 2024. I think I heard it right. Nine one becomes three four without it. Was that the right?

That's correct.

Okay. So to get to the top end of the range, is there any noise in the number this year, I guess, is the question around the same-store pool? In terms of the growth, the internal growth.

There is no noise in the projected results because we're not assuming any one-time items in 2025. The noise is really off the amount you're benchmarking against for last year. So normalizing that gets you to the three three versus the three four for last year.

Okay. Fair enough. And then last for me, you know, you mentioned in the release, you know, the first time you've done some acquisitions in a while. And I'm wondering what the pipeline looks like, whether it's more land like Des Moines or operating assets like San Antonio and Franklin. Do you see a pipeline of opportunity from acquisitions, or are those sort of kind of one-off-ish and unlikely to be a meaningful part of the external growth story? Thanks.

Yeah. This is Britt. I mean, we are seeing some opportunities that are distressed out there that we're taking a look at. I would say one or two. I would say similar to the Franklin Center profile. But we're out there looking, but, again, it has to meet all of our criteria.

Yeah. That's the important point. It's not going to be programmatic. We've got a very strict criteria on what we'd be willing to buy. It's got to fit into our portfolio. And then the use has to be defense IT, near a mission, servicing a mission that we believe in. Or we're not going to buy it.

Okay. Fair enough. Thanks very much.

Thank you. As a reminder, to ask a question, again, that is star one one to ask a question. Our next question comes from Dylan Burzinski with Greenstreet. Your line is open.

Thanks for taking the question, guys. Just sort of wanting to touch on future development prospects. I mean, obviously, you guys talked about the strong demand environment that you're currently seeing. The operating portfolio is 95% occupied today, and you expect sort of defense spending, especially as it relates to spending dollars towards the missions itself, to go up over the near term. So I guess with that in mind, does it seem reasonable to expect that the development spend starting in 2026 and beyond will meaningfully pick up in the level that we see in 2025, or how should we be thinking about that?

Well, I would view it on average in the range that we've provided, with some ebb and flow from year to year. You know, we'll see what this administration brings to the table. Let's say there's some optimism, there'll be increased opportunity. We can already see behaviors that have more confidence in our tenants. But I think our range is pretty good.

Awesome. That's it for me. Thanks, guys.

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

So thank you all for joining our call today, and happy birthday again, Tom. We are in our offices, so please coordinate through Venkat if you'd like to follow up. Thank you.

Thank you for your participation today in the COPT Defense Properties fourth quarter and full year 2024 results conference call. This concludes the presentation. You may now disconnect. Good day.