Welcome to the COPT Defense Properties Fourth Quarter and Full Year 2025 Results Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Venkat Kommineni, COPT Defense's Vice President, Investor Relations. Mr. Kommineni, please go ahead.

Thank you, Jonathan. Good afternoon, and welcome to COPT Defense's conference call to discuss 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. 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 could 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. 2025 was another great year for the company as we outperformed on virtually all of our operating and financial metrics. FFO per share was $2.72, which is $0.06 above the midpoint of our initial guidance and represents an increase of 5.8% over 2024's results and marks our seventh consecutive year of FFO per share growth. Same-property cash NOI increased 4.1% year-over-year, driven by a 40 basis point increase in our average occupancy. We executed 557,000 square feet of vacancy leasing, which represented 47% of the space we had vacant at the beginning of the year. We also executed 477,000 square feet of investment leasing at a weighted average lease term of 13 years. We committed $278 million of capital to new investments which consisted of 5 projects in 4 different markets and these projects are 81% pre-leased. Importantly, 4 of 5 projects represent expansions with existing tenants. In late December, we committed roughly $155 million to 2 build-to-suit projects in our Fort Meade BW Corridor and San Antonio markets. First, we committed $66 million to a fully pre-leased development with ARLIS, which is the University of Maryland's Applied Research Laboratory for Intelligence and Security to expand their footprint in our park. This 110,000 square foot project will expand our Discovery District campus which currently totals 415,000 square feet and is 98.4% leased. This new ARLIS facility will serve as the Capital Quantum Benchmarking Hub to test and evaluate quantum computing prototypes for national security in a partnership between the State of Maryland and DARPA, the Defense Advanced Research Projects Agency. In 2024, the University of Maryland received a $500 million contract from the DoD to support ARLIS and their mission of addressing complex national security problems. Second, we committed $88 million to…

Thank you, Steve. We finished the quarter with strong occupancy at 94% in the total portfolio and 95.5% in the Defense/IT portfolio. Year-over-year, occupancy increased 40 basis points in the total portfolio and 10 basis points in the Defense/IT portfolio. Our buildings remain highly leased with our total portfolio at 95.3% and our Defense/IT portfolio at 96.5%. The lease percentage for the total portfolio increased 20 basis points from the end of last year, driven by our incredibly strong vacancy leasing performance. And I want to give special recognition to our entire team who contributed to these outstanding results in terms of both vacancy and investment leasing. In fact, we executed 557,000 square feet of vacancy leasing during the year, which exceeded our initial target by 40% or over 150,000 square feet. In our Defense/IT portfolio, we executed 424,000 square feet, which alone exceeded our 400,000 square foot initial goal for our entire portfolio. The vacancy leasing achieved represented 47% of our available inventory at the beginning of the year for the total portfolio and 58% within our Defense/IT portfolio. Half of this leasing was tied to either secure space, cyber activity or a combination of both. In our Defense/IT portfolio, over half of our vacancy leasing and 90% of our investment leasing was executed with existing tenants. We enjoyed broad-based leasing activity across our markets. And notably, we executed roughly 110,000 square feet in our Navy support market, which represented 73% of our available inventory in that group at the beginning of the year. Many of you have asked about this market over the past few quarters, and we delivered. The lease rate in this portfolio increased nearly 200 basis points over the year and the occupancy rate increased over 400 basis points. We also executed over 130,000 square…

Thank you, Britt. We reported 2025 FFO per share of $2.72, which was $0.02 above the midpoint of our revised guidance and $0.06 above our initial guidance. The year benefited from earlier-than-expected leases commencements and success in flipping expected nonrenewals to renewals, lower-than-anticipated net operating expenses, including nonrecurring real estate tax refunds. The Stonegate acquisition in late October, additional interest and other income on investments and lower net interest expense from the timing of development funding, which was partially offset by higher interest expense from our October bond offering. During 2025, same-property cash NOI increased 4.1%, which was well above the midpoint of our original guidance of 2.75% and was driven by a 40 basis point increase in same-property average occupancy and operating expense savings, which also positively impacted FFO per share. Same-property occupancy ended the year at 94.2%, which is right in line with the midpoint of updated guidance and 20 basis points higher than initial guidance. The 10 basis point decline over the quarter was driven by a few previously discussed nonrenewals in the Fort Meade BW corridor, each of which were under 30,000 square feet. In October, we issued $400 million of 5-year unsecured notes at a yield to maturity of 4.6%. The bonds priced at a credit spread of 95 basis points and are currently trading at spreads that are tighter than our higher-rated office peers. The proceeds from the offering will be used to repay our $400 million 2.25% bond, which impacts 2026 FFO per share based on the higher interest rate between the new bond and the maturing bond. Our decision in September to prefund this bond maturity was driven by our conservative and risk-averse nature and the tight execution window that exists for any issuer early in the first quarter. Our decision not…

Thanks. I'll close by summarizing our key accomplishments and messages. 2025 was a year of outstanding achievements, delivering strong performance across all segments of the portfolio and all departments of the business, resulting in FFO per share growth of 5.8% year-over-year and representing our third consecutive dividend increase, resulting in a 10.9% increase over the last 3 years. For 2026, we expect this will be our eighth consecutive year of FFO per share growth. We again set a target for vacancy leasing at 400,000 square feet, which is an aggressive goal given the limited amount of unleased space in our portfolio. We expect tenant retention will remain strong at 80%, and we expect to commit $250 million of capital to new investments, of which we've already committed $146 million. Our liquidity remains very strong, and we expect to continue self-funding the equity component of our capital investments. We now anticipate compound annual FFO per share growth of nearly 5% between 2023 and 2026, and we're already off to a great start. We expect to deliver another strong year of results. Before I wrap up, I want to make a comment about the passing of my good friend and former colleague, Roger Waesche. Sadly, Roger passed away suddenly on January 8. Much of the foundation that we have built on over the past decade is a result of the leadership and foresight of Roger Waesche. Roger worked for the company for over 3 decades, serving in a wide range of leadership roles, culminating with being the company's third Chief Executive Officer from 2011 and 2016. We have no need to idealize him beyond what he was because that was more than enough. A loving husband and father, a man of great faith and integrity, a fierce and loyal friend, a man of great intelligence and kindness and a colleague and leader who cared deeply for all those he encountered. Those of us who had the privilege to work with and alongside Roger are better off because of it. He is greatly missed. Operator, with that, please open up the call for questions.

[Operator Instructions] Our first question comes from the line of Seth Bergey from Citi.

I guess just starting off with the development pipeline. Are you starting to see opportunities from Golden Dome and the new kind of defense appropriations kind of trickle into that pipeline visibility? Or are projects kind of related to that still on the come?

I think the answer is both, Seth. Britt talked about the big backlog of prospects we have for RG 8500 in the 400,000 square foot range. Many, if not most, of those pertain to Golden Dome. And I believe they represent kind of initial footprints, early moves to get into the action. And I think subsequent down the road, you'll see larger requirements as awards are made and the contractors ramp up to perform the actual creation of the Golden Dome.

I'll just add a couple of things to that, too. I mean they're really trying to move that process forward from a contracting standpoint. And I mean, the Missile Defense Agency's Shield contract could afford DOD with quite a bit more flexibility to process orders more quickly. And then also, they're looking to fast track, especially some of the space-based interceptor contractors through OTAs or other transactional authority. So we actually -- we're seeing it not just through the tours, but also how they're setting up for these contracts to be awarded. So expect some velocity this year.

Great. And then just a second one on kind of the leasing assumptions around tenant retention, 80% at the midpoint. I guess, kind for the 20% that would not be retained, given kind of the type of tenant that you have, where are those tenants going? Is there like a cited reason for move out? Or could that be conservative just kind of given where your retention has been in the past couple of years?

Well, when you look at our nonrenewals from year-to-year, it's typically smaller tenants that are vulnerable to a relocation because they need a little less space or a little more space. Probably 70% of nonrenewals are just getting smaller tenants into the rightsized space. Some of those are nondefense tenants. And often, it's our asset managers managing their inventory to accommodate the growth of larger defense tenants. So there's always a little friction in there. But I have to remind you, for a decade, we've delivered 80% retention. It's a pretty astounding number.

And our next question comes from the line of Blaine Heck from Wells Fargo.

Just following up on potential additional investments, specifically the roughly $100 million of additional investments earmarked for guidance in 2026. I guess what do you think the mix between acquisitions and developments will be in that total? And can you talk about the profile and yields that you're targeting on acquisitions? And outside the activity in Huntsville you described, are there any additional near-term development projects that you're eyeing at the moment?

Well, we talked about our development pipeline having roughly 1 million square feet. A big chunk of that are smaller contractors for 8,500, but there are some build-to-suit opportunities. Our yield targets haven't really changed for developments. We target 8.5% cash-on-cash yield at the commencement of the lease. Regarding acquisitions, when they occur, we consider them opportunistic. We don't have any built into our guidance, if you will. And typically, the yield on that acquisition has to exceed that, which we can do on our development opportunities for us to make the move.

Got it. That's helpful color. And then just switching gears, you guys have been pretty steadfast in your messaging around not needing equity as a source of funds to support your investment initiatives. But given that the stock performance has been very strong thus far this year, I'm wondering whether you'd be more open to issuance at these levels. I guess, how equity would rank in your options for funding sources? And maybe alternatively, are there any assets that you would consider for dispositions if you were to add significant developments or acquisitions this year?

Well, many layers to that question. It's nice to be in a position where we could consider issuing equity, but it's kind of a last alternative. We have -- as we have made very clear, the ability to handle our expected development investments with the cash we generate internally. We actually have the ability to flex up in a given year or 2 with a modest increase in our debt ratio, which on a pre-lease basis will only be temporary. Regarding dispositions, there are a few assets that we've clearly indicated we'd like to sell. They're all in the other segment, not defense. Timing of those sales is not so much dependent on our development -- our pace of development opportunities, but more market conditions in the markets where they exist, where we can get an efficient sale and preserve shareholder value.

So I guess just asked another way, I guess, you don't feel like your hesitation to issue equity has held you back at all from taking on more projects. Is that correct?

Not at all.

Okay.

If God forbid, we get so much that we have to issue equity, well, that will be a happy day for our investors, and we'll let everyone know well in advance, but we don't expect that to happen.

And our next question comes from the line of Anthony Paolone from JPMorgan.

So first one, just on the starts that you anticipate for 2026. It sounds like maybe the follow-up for 8,500 in Huntsville. And then are there any others in the plan?

Well, we have our eye on a few, but you know we're not going to tell you where they are at. We're working several other opportunities. And yes, you're right. We expect to start an inventory pretty quickly after 8,500 gets committed.

Okay. And so I guess if we're kind of looking out even beyond '26, like your investment spending has been pretty consistent the last couple of years in your guidance for '26. But if we look at like what's left to spend on the developments in place right now, it sounds like you'll still have a couple of hundred million to spend after 2026. And then if you start some things this year, that will kind of add to that. So I guess, should we expect development spending or investment spending to maybe ramp a bit in the next couple of years?

From a spending standpoint, yes, because if you look at the development chart in our supplement, you'll notice that the two buildings that we committed to, one in late December and one in early January have placed in service dates that are in 2027 and late 2028. So you're correct, the spending for the significant spending for those isn't going to occur in 2026, it will occur in '27 and 2028. So there will be incremental funding for the commitments that we've made this year as well as the commitments we expect to make in 2026 and beyond.

Okay. And then I guess my follow-up then on all of that because it seems like the business is going well. And a few years ago, you had laid out your 4% kind of earnings CAGR as an intermediate or maybe even longer-term growth rate. Do you think that still stands? Is there a chance that could bump a bit higher given all the conditions surrounding the business? Or maybe how to think about that?

Well, this year is a transition year because of the impact of the refinancing costs. I think later in the year, we'll probably try to give you a little more of a view of what our future looks like but we're very confident we're going to continue to produce solid growth as we have and that's my message.

And our next question comes from the line of Manus Ebbecke from Evercore ISI.

Out of demand that you're seeing in your markets, how much is driven by existing tenants versus new tenants? And have you witnessed any like meaningful uptake and in-migration from maybe like tech defense tenants into your markets from other regions in the U.S.

Yes, I would say it's about 50-50 existing and new biz. And then we are seeing some groups come in from other locations, including Colorado and California. So it's we're encouraged by seeing some influx from people into our markets that have not had footprints there previously.

Got you. I appreciate the commentary about maybe getting another outlook later this year. So we're definitely looking forward to that one. But just maybe in your view, obviously, with now the demand picture looking really good and you're certainly like being able to capitalize on that, like how do you expect your like tenant mix maybe to change if we compare today's portfolio maybe to one potentially in like 5 years from now? Like where do you think like maybe the mix is shifting in your portfolio?

The mix of tenants, or are you talking about concentration?

Specifically tenants, like government versus tech defense versus traditional contractors, like where do you think there's maybe outside growth? Who do you think is going to take bigger shares going forward?

Well, that's a hard one to answer. I think it will be roughly comparable to what it is, 2 parts defense contractor for every one part government, and we'll see that growth in a variety of markets.

And our next question comes from the line of Rich Anderson from Cantor Fitzgerald.

Yes. Rich Anderson here. I got caught off there. Steve, first, well said on Roger, one of the best that I can recall ever working with, soft spoken, unassuming, but probably a big part, as you mentioned, the architect of where you guys are today. So his legacy lives. Just now getting under the questions. In terms of Huntsville and kind of where it is in terms of the size of the portfolio, 2.5 million square feet or thereabouts, NBP is 4.3 million square feet and growing from there. When I think about all the forces at work moving to Huntsville, whether it's Missile Command, Space Command, Golden Dome, do you feel like you could get to a point where you just kind of run out of opportunity to meet some of these demand forces coming at the area? Or do you see opportunities to expand to be able to build more in the area? I'm curious what your sort of 5-year outlook is on Huntsville in terms of how big it can become within the portfolio.

Well, I can't wait to be on a call to tell you how we're going to manage that growth. And it's going to happen. It's just going to take a year or 2, Rich. But do recall, we're built to 2.4 million square feet right now. We've got a little bit under development. Our overall capacity on the land we control without structured parking is 5.5 million square feet. So we got 3 million square feet of development runway on the enhanced use land that we do currently control. We believe there is a significant opportunity at the point where we have consumed that development that we can continue to expand our enhanced use lease presence on the base because there's ample land available. The existence of our contractor and government campus is a well-appreciated catalyst to the missions on the base. And in essence, we work in partnership with the U.S. Army overall Commands to support their missions. So I don't think we're ever going to run out of runway there. There might be some processes we have to go through. But we've got a long runway in Huntsville.

Okay. In terms of the organic growth of the company, you guys have been successful at improving upon whatever your guidance was to start the year. I think in the last 2 years, you've seen it steadily sort of improve from one quarter to the next. Maybe the calculus is a little bit different this year. I'm not sure. But would you say that you've left some opportunity on the table from a pure organic point of view? And what has to happen for same-store to sort of get a little boost up as the year progresses and maybe you've left some conservatism on the table as well?

Well, same-store is a battle of inches. It's square feet renewed weeks of earlier or later commencements, pennies of rents. It's hard to say we're leaving anything on the table. Last year, our team executed extraordinarily well at getting the best outcome of probably 150 different transactions. And meanwhile, our operating teams have to keep the expenses in line and contest taxes. It's a hand-to-hand combat in same-store growth. And I think we've put out a good solid forecast, and we'd like to beat it, but I don't think we've sugar coated it.

Okay. Last for me, the $950 billion defense budget with the OBBB. I'm curious if you could sort of frame when that will start to matter from -- to the bottom line in terms of leasing and actual opportunities for the company? I mean it's great, obviously, as a setup for the long term. But is that like a 2- or 3-year type of process before you actually see it, make its way to your FFO line?

Yes. We've traditionally conveyed that from an appropriation, our demand impact is 12 and sometimes 18 months down the road. And particularly with some of the big funding things that are occurring right now because the funding is going to new programs. New programs have to be conceptualized, then put into contract competitions, defense contractors have to compete for the contract, get an award, survive a protest, finally get an adjudicated result and then they can lease space. So 12 to 18 months, it's really a very strong signal that our demand is going to remain very healthy, if not improve, over the next 2 years.

Rich, I would just add that there's a couple -- like if you look at what I was referring to earlier, Golden Dome and even Golden Fleet, which is less applicable to us. But those 2 initiatives, they're working on ways to fast track those dollars in the program. So Golden Dome for us is certainly has the potential to see benefit from that sooner than that.

That was the genesis of my question, like it's somewhat political that all this is happening, although it is bipartisan, I get it in terms of the spending bills. But I just wondered if there was -- given the geopolitical climate of today, maybe you would see the benefits of this appropriations bill and so on sooner than 12 months, but I guess you're holding the line on that for now.

Well, I think what Britt conveyed is you're going to see a mix of both. But one thing that's crystal clear is this administration is very high sense of urgency. So it could be quicker than we have traditionally seen, but it's hard to tell you it will be.

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

I know the Iowa data center development plans has sort of been pushed back a little bit, but just sort of wondering if there are any other sort of markets that you're looking to sort of go out and gobble up some land parcels for future development opportunities on the data center side?

Not currently. We're constantly evaluating opportunities, but there's nothing that we're seriously considering.

And then I guess just one last one on sort of the office disposition plans. I think the theme that we've heard over the last several months is that debt capital markets are improving, bidding tents are getting more full. Just sort of curious on your thoughts on sort of bringing 2100 L to market because I know that's sort of largely stabilized now.

Well, the D.C. market has not yet indicated pricing for assets that excites us. And so I don't expect that to happen for 12 months, but we have that building extremely well positioned. It's a fantastic development with great tenants. And when we see capitalization rates approach the level that makes sense for our shareholders, we can move on it.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mr. Budorick for any further remarks.

Thank you all for joining our call today. We are in our offices, so please feel free to coordinate through Venkat if you'd like to talk to us further. Have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.