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COPT Defense Properties (CDP)

Q3 2025 Earnings Call· Fri, Oct 31, 2025

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Transcript

Operator

Operator

Welcome to the COP Defense Properties Third Quarter 2025 Results Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Venkat Kommineni, COPT's Defense Vice President of Investor Relations. Mr. Kommineni, please go ahead.

Venkat Kommineni

Analyst

Thank you, Kevin. Good afternoon, and welcome to COP Defense's conference call to discuss third quarter 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. 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?

Stephen E. Budorick

Analyst

Good afternoon, and thank you for joining us. The company's strong performance during the first half of the year continued throughout the third quarter and has resulted in an increase to our guidance for the year across several financial and operating metrics. We've extended our streak of achieving or outperforming our FFO per share guidance to 31 consecutive quarters. And in October, we successfully closed on 3 important financings, which prefund our 2026 bond maturity and provide additional liquidity to fund our external growth. Turning to results. FFO per share as adjusted for comparability was $0.69 in the quarter, $0.02 above the midpoint of guidance and $2.02 for the first 9 months. This is a 6.2% year-over-year increase for the quarter and a 5.2% increase for the first 9 months. Same-property cash NOI increased 4.6% year-over-year for both the quarter and the first 9 months. We continue to outperform on the leasing front. The portfolio ended the quarter at 95.7% leased. That's our highest level in 20 years. We signed 78,000 square feet of vacancy leasing in the quarter and 432,000 square feet during the first 9 months. This volume represents 36% of the unleased space we had at the beginning of the year. Recall, our initial vacancy leasing target of 400,000 square feet was increased to 450,000 square feet at the end of the second quarter. So our achievement year-to-date already represents 96% of that elevated target. Tenant retention remains strong at 82%, both during the quarter and the first 9 months. We reduced our lease expiration exposure through year-end 2026 by 25% or 1 million square feet since last quarter, and we expect significant progress in the fourth quarter. In recent weeks, we committed $72 million of capital to 2 external growth investments, both of which enhance our…

Britt Snider

Analyst

Thank you, Steve. Throughout the year, we have continued to see strong demand from defense contractors looking for new or incremental space to support mission programs and contracts, a significant amount of which requires SCIF. As we had anticipated, occupancy in our total portfolio declined 10 basis points sequentially, but the lease rate increased 10 basis points. More importantly, the lease rate in our Defense/IT portfolio increased 20 basis points to 97%. The short-term occupancy decline over the quarter was driven primarily by 2 known nonrenewals totaling less than 80,000 square feet. This expiring area has already been leased to defense contractors with occupancy commencing in the first half of next year. In the Fort Meade BW corridor, we leased the space related to 41,000 square foot -- 41,000 square foot nonrenewal by a financial services tenant in Columbia Gateway to RealmOne, a rapidly growing cybersecurity innovator. RealmOne is expanding its footprint in the park from a little over 10,000 square feet to over 50,000 square feet. This is a continuation of our successful effort to increase the concentration of defense and cyber tenants in our Columbia Gateway portfolio. And in Huntsville, we leased the space related to a 37,000 square foot nonrenewal resulting from M&A activity to Georgia Tech Research Institute or GTRI, for its expansion. GTRI is doubling its footprint to 75,000 square feet and will fully occupy 8800 Redstone Gateway. GTRI is a DoD-sponsored university affiliated research center, which serves missions at the Redstone Arsenal, including Army Air Defense Systems and the Missile Defense Agency. We continue to outperform in terms of vacancy leasing as we leased 78,000 square feet during the quarter and 432,000 square feet during the first 9 months of the year. Our third quarter volume exceeded our plan as we anticipated activity in…

Anthony Mifsud

Analyst

Thank you, Britt. We reported third quarter FFO per share as adjusted for comparability of $0.69, which was $0.02 above the midpoint of guidance and represents a year-over-year increase of 6.2%. The outperformance versus the midpoint of our guidance was a combination of higher-than-anticipated same-property cash NOI, lower-than-anticipated interest expense as well as a $0.01 gain on an alternative investment. During the quarter, our same-property cash NOI increased 4.6%. The growth was driven primarily by the benefit from a 40 basis point increase in average occupancy in the same-property portfolio, lower-than-anticipated net operating expenses, including receipt of a nonrecurring real estate tax refunds and the burn off of free rent on development leases placed into service in 2023 and on leases that commenced later in 2024. The outperformance for the quarter was driven primarily by the net operating expense savings. Based on our achievement year-to-date, we are increasing the midpoint of our full year guidance for same-property cash NOI by 75 basis points to 4% with 4.6% growth during the first 9 months of the year, there are 2 offsetting factors to note in the fourth quarter. The first is $1 million of real estate tax refunds in the fourth quarter of last year that will not recur this year. And the second is the impact to NOI from a few previously discussed nonrenewals in the Fort Meade BW corridor, each of which are under 30,000 square feet. Despite these nonrenewals, we are increasing the midpoint of our year-end same-property occupancy by 20 basis points to 94.2% due to a few earlier-than-anticipated lease commencements now expected late in the fourth quarter. We've been very active in the capital markets over the past few months. When we established 2025 guidance in February, our forecast assumed we would prefund the capital required…

Stephen E. Budorick

Analyst

So we achieved great results, highlighted by our strong leasing and recent capital deployment. We delivered FFO per share growth of 6.2% year-over-year, marking our 21st consecutive quarter of year-over-year growth. We expect 2025 to be our seventh consecutive year of FFO growth per share, and our revised guidance implies an annual increase of 5.1%. We increased the midpoint of 2025 guidance for 6 key metrics. We committed $72 million of capital to 2 new investments, both of which are fully leased, and we expect additional activity in the fourth quarter. And notably, we had great success on 3 financings, increasing our liquidity by $400 million and achieving a sector-leading credit spread on our bond offering. Finally, we continue to anticipate self-funding the equity capital invested in development and acquisitions on a leverage-neutral basis and compound annual FFO per share growth of over 4% between 2023 and 2026. So we are well on track to deliver another successful full year. Operator, please open the call for questions.

Operator

Operator

[Operator Instructions] Our first question comes from Blaine Heck with Wells Fargo.

Blaine Heck

Analyst

Steve, can you give us an update on how you're thinking about how long of a lag there could be before we start to see the increased budget once approved and other positive policy decisions to really start impacting leasing decisions and activity mainly outside of Huntsville, which I think has its own demand driver dynamics.

Stephen E. Budorick

Analyst

Yes. So kind of pick up on your last point. Remember, the Golden Dome activities are already funded for the initial down payment through the One Big Beautiful Bill Act, and we see demand building right away. I wish I had a more specific answer for the first part of the question, which is when will the appropriation get approved. Clearly, the shutdown is not helping things. And before the shutdown, it was expected to do a continuing resolution into the end of November and then appropriate the 9 budgets in December. I'm not exactly sure it's not clear to us how that might be affected by the extended shutdown.

Blaine Heck

Analyst

That's helpful. I guess once approved, would you expect kind of a 6-month lag, a 9-month lag? How do you think this cycle compares with others that you've been through? And what was the lag that you've experienced in the past?

Stephen E. Budorick

Analyst

I got it. I would say this one, you'll start to see activity, I would think no later than 6 months. And I only say that, which is in contrast to our usual comments that demand arises 9 to 12 and sometimes 18 months after appropriation because we've had so many discussions with tenants that are contract contingent. They're planning for an expected win of a contract, and they need that appropriation for contract awards flow. So I would think it would be quicker this time around. There is pent-up need and expectation.

Blaine Heck

Analyst

Great. That's really helpful. Second question with respect to the acquisition of Stonegate I. I guess when I look at the aerial view in your presentation, this property seems to be just a little bit outside of the cluster that you've historically owned in that market. So without asking details on the seller, I'm just wondering if this acquisition might lead to more opportunities to acquire in that market and whether you'd be interested in growing -- continuing to grow your market share there?

Stephen E. Budorick

Analyst

Well, first, I'll take a little exception to your analysis. We have 2 buildings immediately across the street from this building and a secure campus kitty corner on that intersection. And it fits quite nicely into the geographical footprint of our portfolio in that market. And you'll come on a tour, and I'll show you that in person. With regard to expanding our concentration in that market, I've been interested in doing that for a long period of time. It's a -- we have key demand drivers in the market. It's one of the markets where although we have -- we're now up to about 1/3 of the inventory, that's relatively low for our deep concentration in the submarkets that we tend to have. So there are other good assets and there are a significant amount of defense contractors in buildings we don't own. And if the opportunity arose to acquire them with the kind of returns we achieved on this one, I would strongly look to do so.

Operator

Operator

Our next question comes from Steve Sakwa with Evercore ISI.

Steve Sakwa

Analyst · Evercore ISI.

Yes, just on that Stonegate, I guess, Steve, given the location, the tenant, kind of the work they put in, I guess I'm a little surprised at how good the yield is for you. Obviously, that's a great outcome for you guys. But I guess why is the yield so high on this? It just strikes me as kind of an above-market return for what seems like little risk. So is there something we're missing here?

Stephen E. Budorick

Analyst · Evercore ISI.

There are 3 factors that really play into it. One, the seller had a specific time line to sell this asset, and they were delayed in getting their renewal done. We started looking at this building, I think, late 2024. So there was a pressured time frame to execute. We were by no means the lowest bidder, but the strength of our bid was clearly superior in terms of surety of capital and time to execute a transaction. So that was the second major factor. The third is the tenant was involved in influencing the outcome because they had a very strong preference that the asset be transferred to us because of our deep relationship with them. As I mentioned in our remarks, this is the ninth lease we have with the tenant in the building. And so all those 3 factors worked in our favor.

Steve Sakwa

Analyst · Evercore ISI.

Okay. And I know I can't remember if it was Britt or Anthony talked about Page 23 where you have the 1.7 million square feet of space rolling. And I know you're highly confident that basically all the space is going to get renewed. But you do have this one purple box where you're basically, I guess, expecting about 660,000 feet to effectively get pushed into the first quarter of '26, which is understandable. Just from an accounting standpoint, what happens if that lease expires but doesn't get renewed? Does that go into holdover rent? Does it just stay at the same rent? What sort of happens from, I guess, your financials on that space?

Anthony Mifsud

Analyst · Evercore ISI.

So on our financials, Steve, we execute holdover agreements or standstill agreements with the government. In the term of the expiration through the expected renewal date. So based on those standstill agreements, they continue to pay us rent at the expiring cash rent level. And that's what we will recognize as NOI during that standstill period. And then once the renewal is executed, we will catch up in that quarter for the impact on the straight-line rent of the term of the renewal.

Steve Sakwa

Analyst · Evercore ISI.

Got it. So basically, there's -- you're just teated a little bit in terms of the uplift, you'll get that in the first quarter, but there's no negative impact in the fourth quarter from that holdover. That's correct.

Operator

Operator

Our next question comes from Seth Bergey with Citi.

Seth Bergey

Analyst · Citi.

With the Missile Defense Agency or Redstone Arsenal, do you kind of view the Golden Dome property as creating any near-term development opportunities? Or does this -- do you kind of currently view that as just driving leasing demand for that real estate?

Stephen E. Budorick

Analyst · Citi.

Well, the answer is yes. Our portfolio is so well occupied now. An additional lease has got to go into a new development. We literally have no operating or minimal operating square footage to lease. The lease that we did execute yesterday, that's in a new development. And certainly, there are conversations with several contractors that contemplate much bigger commitments that would require build-to-suit or significant pre-leases to accommodate. So in essence, I think all of that Golden Dome incremental opportunity will be manifested in new developments.

Seth Bergey

Analyst · Citi.

And is that kind of contemplated in the potential development square footage bucket? Or is that further out where that would be kind of incremental to what you've kind of outlined?

Stephen E. Budorick

Analyst · Citi.

So the way we develop that pipeline, those are known opportunities where we've had conversations with specific tenants. There is no speculative kind of allowance put into that. So yes, there's quite a few of them in the active -- those prospects, we expect 50% likely to win in 2 years or less as well as some in the next 1 million square feet.

Operator

Operator

Our next question comes from Rich Anderson with Cantor Fitzgerald.

Richard Anderson

Analyst · Cantor Fitzgerald.

So Steve, can you talk a little bit about the process with Space Command moving from Peterson to Huntsville? I mean its worst kept secret perhaps, but was that a lobbying effort by you, by the government because they liked Huntsville? Like who drove the initial thought about moving it there? And what did you have to do as an organization to push that through to the point where we're at now where you've kind of gotten it to happen? Can you just talk about that?

Stephen E. Budorick

Analyst · Cantor Fitzgerald.

Sure. The process is really quite protracted. Under Trump's first term, he created Space Force and then that kind of led to the natural creation of an integrated combatant command, Space Command. We're talking about Space Command relocating to Redstone Arsenal, not Space Force, to be clear. At that point in time, the Air Force was charged with determining the best location for the combatant command. And they went through a very comprehensive process. Many states and other facilities were competing to be the awardee. And that process determined Redstone Arsenal was the optimal location for the command. Subsequent to that decision, Other locations filed protests. It was reviewed by oversight in the DoD. It was readjudicated as properly awarded one time, then it was challenged again based on changes in criteria. We went through that process. It came out first again. It was readjudicated a second time. These last 2 events occurred during the Biden administration to Redstone Arsenal. And then President Joe Biden signed an executive order freezing it in Colorado. In the current administration, the executive order was overturned and the proper decision is determined by the DoD process. was allowed to be awarded to Redstone Arsenal. So I'd love to think I have influence to make that kind of stuff happening. But the reality is I'm rather -- or we are rather inconsequential. Now with regard to the opportunity coming to us, we're an integrated value proposition with the command on Redstone Arsenal. Remember, the Army is our indirect joint venture partner because we lease the space from them. And our purpose is to serve our shareholders, of course, but we're also there to help the missions on Redstone Arsenal succeed. So we're part of that value proposition, and we actually represent the quickest way to establish the proper mission operability for the United States government and taxpayer, and that's why we're getting the opportunity.

Britt Snider

Analyst · Cantor Fitzgerald.

And Rich, this is Britt. I mean just one extra thing on that. I mean they really need to be behind the fence, and they can't wait for Milon. So the ability for us to control that secured parcel through an enhanced use lease behind the fence, that's really -- and there's really no other option that could meet their speed requirements and achieve the security they need.

Richard Anderson

Analyst · Cantor Fitzgerald.

So it sounds like 450,000 directly 2x contract or tail, so call it 1.5 million square feet eventually associated with this effort. Is that Chapter 1? Or is there like a kind of a big growth story behind that in your mind?

Stephen E. Budorick

Analyst · Cantor Fitzgerald.

So in my mind, I think that's the buck. Chapter 1 is the command, Chapter 2 is growth in the support of the command. Certainly, the command's importance and challenges are going to increase over time as the progression of defense activities further moves into space. And certainly, Golden Dome is going to be a huge component of developing new capabilities that, that command will have to coordinate. So that's one of the reasons why it makes so much sense to put the command here are the agencies that are building the systems that command is going to rely upon.

Richard Anderson

Analyst · Cantor Fitzgerald.

That's my next question. The interplay between Golden Dome missile command and Space Command, I guess, is an obvious part of the selling point as well. Is that fair to say?

Stephen E. Budorick

Analyst · Cantor Fitzgerald.

That's very fair. And remember, there's also NASA in a 50-year history of missile rocket and space activities and a deep, deep pool of PhD level workers that support those activities in Huntsville, Alabama.

Richard Anderson

Analyst · Cantor Fitzgerald.

Okay. And my second question is perhaps not as cool and exciting, but just as equally as important. You had some really great success in terms of your debt issuance, interplay with the banks a 10x oversupplied that you talked about, Anthony. What do you think is driving -- what is -- what are the fixed income investor communities getting that the equity investor community is not getting? Because oftentimes, we see this -- we do a lot of work on fixed income investing and how that might foreshadow fortunes for the stock. Why is the fixed income community so sort of willing to be so supportive of you, whereas not that you've been -- your people aren't turned their back on the story, but you still haven't had the same type of performance in the equity markets that you had in the fixed income markets. Anything you can sort of talk about in terms of your conversations?

Anthony Mifsud

Analyst · Cantor Fitzgerald.

Well, the fixed income investor community and the conversations we've had leading up to the offering as well as interactions that we have with them throughout the year, focus on really the things that we mentioned for the reasons for the success of the transaction. They look a little bit backward more than forward. They look at how the company has performed during the cycles, and they look at how the company performed during COVID, how we performed during the high inflationary environment of the last several years during the higher interest rate environment. And they -- from that, they see that the strategy that has been executed has created an incredibly resilient cash flow base and that the when you think about fixed income investors, typically, they would look at development and sort of turn their noses to it. Our -- the fixed income investors actually have a deep appreciation for the development pipeline that we execute because they see it in terms of the high level of pre-leasing and build-to-suit as incremental EBITDA in the future that's contractual that will continue to support the unsecured bonds. So how that then translates into how an equity investor might view the company, I'm not quite sure. But the fixed income community absolutely appreciates the strength of the strategy and the performance of the company over the past several years.

Operator

Operator

Our next question comes from Dylan Burzinski with Green Street.

Dylan Burzinski

Analyst · Green Street.

Great to hear that the leasing story continues to play out. I guess just one thing that we were curious about, I think it was last week or maybe a week before the Trump administration or there was an article that the Trump administration has been making cuts to cyber defense and U.S. Cyber Command. So just sort of curious if that's having any sort of impact on the leasing demand prospects in the Fort Meade area given the prominence of the cyber demand there.

Stephen E. Budorick

Analyst · Green Street.

Well, I'm not familiar with the article you're looking at. So I can't really address that question specifically. But Cyber Command got a huge step-up funding in the one Big Beautiful Bill and the expected increase is significant for FY '26. I'm kind of shocked at the tone of the article as you describe it. I don't know if he's looking at some overhead in cyber activities outside of the DoD, but I can't really answer the question. Dylan.

Britt Snider

Analyst · Green Street.

I've seen some of that, too, and it's -- I've seen it more on the CISA side and less on -- not really on Cyber Command. In fact, there's a number of -- yes, I mean, there's a number of different efforts going on from a leasing perspective here that we're actually very encouraged about from Cyber Command and some of the related contractors. So I have heard some of that with CISA, but not Cyber Command. But...

Stephen E. Budorick

Analyst · Green Street.

Remember, Cyber Command is DoD activity. CISA is the rest of the government, and we don't serve CIS.

Dylan Burzinski

Analyst · Green Street.

Okay. That makes sense. And as I just look at it, sometimes these headlines just only talk about the high-level stuff rather than get into the details. So those comments are appreciated.

Operator

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Budorick for closing remarks.

Stephen E. Budorick

Analyst

Thank you all for joining our call today. We are in our offices this afternoon, so please coordinate to Venkat if you'd like a follow-up call and enjoy your Halloween.

Operator

Operator

Thank you for participating in today's COPT Defense Properties Third Quarter 2025 Results Conference Call. This concludes the presentation. You may now disconnect. Good day.