COPT DEFENSE PROPERTIES Q3 FY2026 earnings call

• Leasing Strength: Executed 222,000 square feet of vacancy leasing in Q3, exceeding the trailing 5-year quarterly average by 50%. Year-to-date vacancy leasing stands at 453,000 sq ft, representing 110% of the initial annual target.
• Portfolio Occupancy: Total portfolio is 95% leased and 94% occupied. The Defense IT portfolio (93% of NOI) is 96.2% leased and 95.2% occupied.
• Strategic Recaptures: Proactively recaptured space from three suboptimal tenants to backfill with high-growth, credit-worthy tenants (e.g., Lockheed Martin in Huntsville, Frequentis in Columbia Gateway). This strategy reduced reported tenant retention but improved overall portfolio quality.
• Development Pipeline: Active development pipeline totals 1.1 million square feet, with 64% pre-leased and nearly $530 million in capital commitment. Redstone Gateway master plan expanded by 500,000 sq ft to accommodate missile defense demand.
• Defense Spending Outlook: Management emphasized bipartisan support for defense spending, noting the FY2026 base budget of $840 billion and the FY2027 request of $1.1 trillion. Demand is driven by initiatives like 'Golden Dome' (missile defense) and cyber command requirements.

The transcript does not provide a breakdown of financial performance by specific product segment (e.g., defense IT vs. other) in terms of absolute revenue or contribution percentages for the quarter. However, it notes that the Defense IT portfolio accounts for 93% of Net Operating Income (NOI). For the total company, Third Quarter FFO per share was $0.71 (up 2.9% YoY), and Same Property Cash NOI increased 3.2% year-over-year.

• FFO Per Share: Increased midpoint to $2.80 (from prior estimates), reflecting strong operational performance despite dilution from exchangeable notes.
• Same Property Cash NOI Growth: Increased midpoint to 4.25%, up 25 basis points from previous guidance.
• Capital Committed to New Investments: Increased midpoint to $375 million, up $40 million, driven by enhanced security requirements for mission work in San Antonio.
• Capital Invested in Development/Acquisitions: Increased midpoint to $240 million, up $15 million, as projects are ahead of schedule.
• Tenant Retention: Decreased midpoint to 80% (down 250 basis points) due to strategic early lease terminations to upgrade tenant quality.
• Vacancy Leasing Target: Increased to 625,000 square feet for the full year, supported by a robust pipeline of executed and advanced negotiation leases.

• Interest Rate Environment: Higher short-term rates (SOFR forecasted to rise) and long-term treasury yields increase interest expense, negatively impacting FFO per share growth. Variable rate debt exposure of over $125 million next year poses a risk.
• Exchangeable Notes Dilution: Stock price appreciation increases the hypothetical dilution from exchangeable notes, creating a drag on FFO per share.
• Political/Policy Uncertainty: While management cites strong bipartisan support, changes in congressional control could potentially impact the timeline for passing the FY2027 budget, though core defense needs remain stable.

Q: Manus Ebbecke asked about the expansion of the Redstone Gateway master plan, specifically regarding the number of new buildings, the depth of the demand pipeline, and whether underwriting economics have changed given strong demand. / A: CEO Stephen Budorick explained that the master plan was revised to add approximately 500,000 square feet of capacity without structured parking. He confirmed that underwriting thresholds remain unchanged at an 8.5% initial cash yield. However, due to high urgency among tenants awaiting customer opportunities, COPT is advancing pre-planning to shorten delivery cycles and accelerate lease commencements. Demand appears split evenly between existing tenants expanding and new tenants entering the submarket.

Q: Blaine Heck inquired if a change in congressional control would delay the FY2027 budget passage and if programs like 'Golden Dome' face funding uncertainty compared to the base budget. / A: Budorick stated that regardless of election results, the budget will likely be passed earlier than usual during a lame-duck session, with no later than February. Regarding Golden Dome, he clarified it represents missile defense technology applied nationally. He asserted that the technological threat environment (drones, missiles) ensures continued investment and deployment regardless of political party, as the need for defensive shields is non-negotiable.

Q: Blaine Heck followed up on the proactive space recaptures, asking about mark-to-market impacts, downtime risks, and whether this is a repeatable strategy. / A: COO Britt Snider noted that the three recaptures had mixed rent spread outcomes (flat, +20%, -20%), resulting in a neutral net impact. She emphasized that immediate backfills minimized downtime. CFO Anthony Mifsud added that for two of the three tenants, reserves were already established, meaning the transition was effectively from zero cash flow to new rent, making the mark-to-market less relevant to current earnings.

Q: Richard Anderson asked if COPT’s portfolio is aligned with current fast-growing defense initiatives (like cyber and AI) or if they are missing emerging sectors, and how close the portfolio is to maximum occupancy. / A: Budorick highlighted that missile defense (Redstone Arsenal) and Cyber Command (Columbia Gateway/Fort Meade) are key growth drivers exposed in their portfolio. He acknowledged AI as a cyber threat requiring more spending but noted they are not currently involved in high-tech manufacturing shipbuilding. Regarding occupancy, he stated that while frictional vacancy exists, there is still upside, and they aim to optimize returns through continuous leasing rather than aiming for 100% occupancy immediately.

Q: Dylan Brzezinski asked about near-term business risks and whether rental rate economics allow for higher rent bumps or relief on free rent. / A: Budorick identified interest rates as the primary risk affecting shareholder returns, rather than demand, which remains strong due to global threats. Snider responded that they continue to reduce free rent due to lack of availability. She noted that new buildings in Huntsville achieve rents 10-20% higher than surrounding markets, indicating they are already pricing at the top of the market and cannot significantly push rates higher.