COPT Defense Properties Q3 FY2025 earnings call

• The company's strong performance in the third quarter continued the first half's trend, extending the streak of achieving or outperforming FFO per share guidance to 31 consecutive quarters.
• In October, they closed on 3 important financings, prefunding the 2026 bond maturity and providing liquidity for external growth.
• FFO per share was $0.69 in the quarter, $2.02 for the first 9 months, with a 6.2% year-over-year increase for the quarter and 5.2% for the first 9 months. Same-property cash NOI increased 4.6% year-over-year for both the quarter and first 9 months.
• The portfolio ended the quarter at 95.7% leased, highest in 20 years; leased 78,000 sq ft in Q3 and 432,000 sq ft YTD; tenant retention at 82%; reduced lease expiration exposure by 1M sq ft YTD.
• Committed $72 million to 2 external growth investments: commenced construction of 7700 Advanced Gateway (100% pre-leased, 4th build-to-suit with tenant) and acquired Stonegate I in Chantilly ($40M, fully leased to top defense contractor, 9% initial cash NOI yield).
• Space Command relocation to Redstone Arsenal expected in 2027, expecting ~450k sq ft lease; Golden Dome Missile Defense Shield driving quicker contractor opportunities.
• Government shutdown since Sep, no material impact on business, but could modestly impact full year guidance for tenant retention and cash rent spreads due to timing delays.

In the third quarter, FFO per share adjusted for comparability was $0.69, which was $0.02 above the midpoint of guidance, and $2.02 for the first 9 months, representing 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. The portfolio ended the quarter at 95.7% leased, the highest level in 20 years. They signed 78,000 square feet of vacancy leasing in the quarter and 432,000 square feet during the first 9 months, which represents 36% of the unleased space at the beginning of the year. Tenant retention remained strong at 82% both during the quarter and the first 9 months, and they reduced their lease expiration exposure through year-end 2026 by 25% or 1 million square feet since last quarter.

• Increasing the midpoint of 2025 guidance for 6 metrics: FFO per share increases to $2.70 a share (5.1% growth over 2024, $0.04 above initial); same-property cash NOI growth to 4% (75 bps above initial); same property year-end occupancy to 94.2% (+20 bps); cash rent spreads on renewals to 2% (+200 bps); vacancy leasing target to 500,000 sq ft (+50,000 above initial); capital committed to new investments to $250 million (+$25 million above initial).
• Space Command relocation expected in 2027, with defense contractor growth likely; Golden Dome Missile Defense Shield driving contractor opportunities quicker.

• Government shutdown since September could modestly impact full year guidance for tenant retention and cash rent spreads due to timing delays in lease activities.

Q: Can you give an update on 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?

A: Steve says he thinks no later than 6 months, quicker than usual due to contract contingent tenants planning for expected wins.

Q: Second question with respect to the acquisition of Stonegate I. Why is the yield so high?

A: Steve says 3 factors: seller had pressured timeline, strength of bid in terms of surety of capital and time to execute, tenant's strong preference to transfer to them as they have 9th lease with them.

Q: With the Missile Defense Agency or Redstone Arsenal, do you view the Golden Dome property as creating any near-term development opportunities?

A: Steve says yes, additional leases will require new developments, with conversations with contractors for bigger commitments needing build-to-suit or pre-leases.

Q: Can you talk a little bit about the process with Space Command moving from Peterson to Huntsville?

A: Steve explains the protracted DoD process, Redstone Arsenal was determined optimal location through multiple reviews, and COP is part of the value proposition for the command.

Q: With the Trump administration article about cuts to cyber defense, any impact on leasing demand in Fort Meade?

A: Steve says he's not familiar with the article, but Cyber Command got huge step-up funding in FY '26, and leasing from Cyber Command and related contractors is encouraged, not CISA.