COPT Defense Properties Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 29, 2025
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Operator

Good day, ladies and gentlemen. Welcome to the Comp Defense Properties First Quarter twenty twenty five Results Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Venkat Kommeneni, Kop Defense's Vice President of Investor Relations. Mr.

Operator

Kommeneni, please go ahead.

Venkat Kommineni
Venkat Kommineni
Vice President, Investor Relations at COPT Defense Properties

Thank you, Howard. Good afternoon, and welcome to Calf Defense's conference call to discuss first quarter results. With me today are Steve Bedorek, President and CEO Britt Snyder, Executive Vice President and COO and Anthony Missford, 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.

Venkat Kommineni
Venkat Kommineni
Vice President, Investor Relations at COPT Defense Properties

Actual events and results can differ materially from these forward looking statements and the company does not

Venkat Kommineni
Venkat Kommineni
Vice President, Investor Relations at COPT Defense Properties

undertake a duty to update them. Steve?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Good afternoon and thank you for joining us. We're off to a strong start in 2025 and our meeting are in some cases on track to exceed all of our 2025 targets. Given our strong results in 2024 and our outlook for 2025, we increased our annual dividend by $04 which marks our third consecutive year of dividend increases, while continuing to maintain a very healthy AFFO payout ratio of 65. FFO per share as adjusted for comparability was $0.65 right on the midpoint of guidance of 4.8% year over year increase. Same property cash NOI increased 7.1% year over year.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Anthony will provide some context, but we reiterate our full year guidance of 2.7% at the midpoint as we recognize some expected one time items in the first quarter. We're off to an excellent start on the leasing front. We've signed 179,000 square feet of vacancy leasing year to date, which is 45% of our full year target. The 23 deals were distributed across each of our markets and nearly three quarters of the activity was at defense IT locations. These executions amount to 15% of the space we had vacant at the beginning of the year.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

We also executed a 100,000 square feet of investment leasing year to date across three properties, including a 48,000 square foot lease at Franklin Center and Columbia Gateway, a 41,000 square foot lease at 8100 Redout Road in Huntsville, and a 14,000 square foot lease at 9700 Advanced Gateway also in Huntsville, bringing that development to 100% lease. Tenant retention was a very healthy 75% during the quarter, even as we absorbed a few contractions and non renewals. We committed over $50,000,000 of capital to a new investment at Redstone Gateway. In Huntsville, we only have two suites, totaling 37,000 square feet available across our entire 2,500,000 square foot portfolio. As our 25 operating properties are 98.5% leased today with 23 of those buildings 100% leased.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Accordingly, we commenced development of our next inventory building, 8500 Advanced Gateway. This is 150,000 square foot building and we already have 90,000 square feet of prospects on this space from three large fence contractors. This new development continues our successful strategy of developing into visible demand. One statistic which illustrates the strength of our strategy and performance is that our defense IT portfolio occupancy rate has exceeded 94% for nine consecutive quarters. Turning to guidance, we are maintaining twenty twenty five FFO per share guidance of $2.66 at the midpoint and narrowing the range as our year to date performance is tracking according to plan.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

This guidance implies $09 or 3.5% growth over twenty twenty four's exceptional results. Now I want to make a few brief comments on the recent headlines. The primary questions we've received from investors and analysts over the past two months have centered on Doge and defense spending. We have not seen and we do not expect to see an impact from Doge and the priority missions we support. This statement is reinforced by our conversations with our government and contractor tenants and further evidenced by our strong leasing activity and pipeline.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

We believe priority missions will not be impacted by Doge And in fact, the 41,000 square foot investment lease we executed in Huntsville was with the Department of Defense and is an expansion of a priority program supporting missile defense. With respect to defense spending, in March, emerged about an 8% cut. In actuality, the Secretary of Defense was referring to reallocating, not cutting 8% of the defense budget from overhead commission. The secretary stated, and I quote, with Doge, we are focusing as much as we can and headquarters and fat and top line stuff that allows us to reinvest elsewhere. In addition, the DoD outlined 17 areas that would be exempt from Doge cuts and possibly be a beneficiary of reallocation, including cybersecurity and funding for cyber command, missile defense and funding for space command, surface ships and nuclear submarines, and autonomous and unmanned aerial systems.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

These are all missions that our portfolio supports in our Fort Meade BW Corridor, Redstone Gateway and Navy support locations. Although the details of the fiscal year twenty twenty five and expected fiscal year twenty twenty six defense budgets have not been released, the recent commentary suggests there will be increases in defense spending. In our view, the goal of the administration is to extract from defense spending more mission output for every dollar of input while continuing to increase investment in defense to achieve their ultimate goal of peace through strength. We believe the missions we serve could be beneficiaries of these policies and investments over time as they align with the administration's priorities for national defense. And with that, I'll turn the call over to Britt.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

Thank you, Steve. We finished the quarter with strong occupancy in both the total portfolio at 93.6% and the defense IT portfolio at 95.3%. We're off to a great start in terms of our leasing activity and we're ahead of schedule for the year and our pipeline remains strong. During the first quarter, we executed 120,000 square feet of vacancy leasing comprised of 16 deals, over 40% of which contains secure space and nearly 50% of which is tied to cyber activity. We had broad based leasing activity throughout our markets, but Columbia Gateway was the standout.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

We executed nearly 50,000 square feet of vacancy leasing in the park, including a 40,000 square foot expansion lease to a DoD cyber contractor. In 2019, this contractor signed a 12,000 square foot lease with us in Columbia Gateway. As their business grew, they reached a significant milestone in the life cycle of a small to midsize contractor, which is the ability to control their own secure space to compete for, win and execute high security contract awards. With this expansion, the tenant now leases over 50,000 square feet, a majority of which will be secure space and we look forward to supporting their future growth. This is just another example of our success story in Columbia Gateway, which has become the hub for cyber innovators near support meet.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

It also illustrates our unique relationship with defense contractors as their life cycle landlord, as we provide high quality properties in the best locations to support priority missions, the expertise to construct secure space to execute those missions, and the ability for these tenants to scale within our parks as their business grows, while meeting their unique design and technology requirements. Sticking with the cyber theme, this quarter's cyber leasing volume was a continuation of the long term trend we've been seeing. Since 2011, we've completed 3,200,000 square feet of total leasing to DOD related cyber tenants, now representing over 12% of our portfolio. In fact, 2024 was our second highest year in terms of vacancy leasing tied to cyber activity. As shown on slide 15 of our flipbook, cyber leasing as a percentage of our vacancy leasing has steadily increased over the past ten years from roughly 10% to over 30%, which correlates with growth and funding for US Cyber Command located at Fort Meade.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

The National Business Park and Columbia Gateway have been the prime beneficiaries of this growth given their proximity to Fort Meade, as these parks have captured roughly 70% of all cyber leasing in our portfolio over the last ten years. Year to date, we have signed 179,000 square feet of vacancy leasing, nearly three quarters of which is at our defense IT locations. Notwithstanding our impressive leasing executions, our leasing pipeline remains strong as well. We have 975,000 square feet of prospects, which equates to a healthy activity ratio of 79% of the currently on lease space. 195,000 square feet of these prospects are classified as in advanced negotiations, which we define as over 90% likely to execute.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

Taken together, we have over 370,000 square feet of leases either executed or in advanced negotiations, which amounts to 93% of our full year target of 400,000 square feet and we're still only in April. These totals also reflect the positive momentum in our other segment with over 50,000 square feet of space leased year to date and another 50,000 square feet in advanced negotiations. Turning to renewal leasing, we executed 438,000 square feet in the first quarter, achieving a tenant retention of 75%. We renewed all of the leases we had expected and absorbed non renewals that we had negotiated in early twenty twenty three and 2024 as we discussed last quarter. Our full year outlook remains unchanged in the 75% to 85% range.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

The largest non renewal was a non defense tenant in Columbia Gateway, which provides us with another opportunity to further deepen our concentration of defense and cyber tenants in the submarket. Turning to large leases expiring through 2026, as shown on slide 17 of the flipbook, we renewed three large leases in the quarter totaling 250,000 square feet with 88% retention. Over the last three quarters, we've renewed 1,100,000 square feet of large leases at a 97% retention rate. That leaves 2,900,000 square feet of large leases expiring over the next seven quarters. And we continue to expect a 95% retention rate on the full set of large leases expiring.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

On slide 18, we provided additional detail on the large government leases included in that population. These government leases consist of 13 full building leases totaling 2,000,000 square feet. We continue to expect 100% retention on these leases. This confidence is driven by the fact that 97% of the square footage is located in secure facilities. The government has invested significantly in these assets and our thirty year history of achieving 100% retention on full building government leases.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

We've also been successful on the investment leasing front as we signed over a hundred thousand square feet year to date. At Franklin Center in Columbia Gateway, we signed a 48,000 square foot lease primarily supporting Navy Cyber with a top 10 US defense contractor. Franklin Center is now 78% leased, which is ahead of the pace assumed in our acquisition underwriting. And we have 140,000 square feet of prospects on the remaining 44,000 square feet of availability. At 8100 Rideout Road in Huntsville, we signed a 41,000 square foot lease with the DOD for a missile defense mission, and that property is now 79% leased with only one twenty seven thousand square foot floor remaining, And we have over 40,000 square feet of prospects for that space.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

Importantly, both of these leases support two priorities for the administration, cybersecurity and missile defense. And finally at 9700 Advanced Gateway in Huntsville, we signed a lease for the remaining 14,000 square feet to a leading firm in the field of fiber laser technology. The building, just reached substantial completion two months ago, is now fully leased and demonstrates the efficacy of our strategy to develop into visible demand. With respect to our inventory building in National Business Park, we commenced development on MVP 400 last year to provide 138,000 square feet of inventory at the 4,300,000 square foot National Business Park, which is 98% leased. This building is now substantially complete and our pipeline of prospects for this asset has grown to 340,000 square feet, one third of which is related to DoD cyber activity.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

Our development leasing pipeline, which we define as opportunities we consider 50% likely to win or better within two years or less, currently stands at about 1,200,000 square feet. Beyond that, we're tracking another 1,500,000 square feet of potential development opportunities. 100% of this 2,700,000 square feet of demand for office space is at our defense IT locations. In closing, our leasing activity to tenants executing priority missions is strong and broad based throughout our defense IT portfolio, demonstrating that our portfolio and our leasing momentum have not been and are not expected to be impacted by any of the Doge initiatives, and we are well positioned to meet or beat our full year vacancy leasing target. With that, I'll hand it over to Anthony.

Anthony Mifsud
Anthony Mifsud
EVP & CFO at COPT Defense Properties

Thank you, Britt. We reported first quarter FFO per share as adjusted for comparability of $0.65 which was at the midpoint of guidance and represents a year over year increase of 4.8%. We achieved the midpoint of guidance despite incurring zero five zero from higher net weather related expenses relative to our budget. Year over year, FFO per share increased $03 absorbing a $0.25 reduction in interest income resulting from the investment of the proceeds from our exchangeable note offering into development and acquisitions last year, which led to $120,000,000 lower average cash balance and an $8,000,000 decline in our note receivable balance from the City of Huntsville due to a significant TIF repayment received last quarter. During the quarter, our same property cash NOI increased 7.1%, and excluding the benefit from real estate tax refunds recognized in our other segment, the year over year increase was 4.3%.

Anthony Mifsud
Anthony Mifsud
EVP & CFO at COPT Defense Properties

This growth was driven primarily by cash NOI increases of approximately 3% from the vast majority of our portfolio, driven by the embedded cash rent increases in virtually all of our leases and the burn off of free rent on development leases placed into service in 2023 and on leases that commenced later in 2024. These items were partially offset by higher year over year net weather related expenses. We are maintaining the midpoint of our full year guidance for same property cash NOI growth of 2.75%. We expect growth for the remainder of the year from the majority of the portfolio will be relatively consistent with the 3% growth generated in the first quarter, which will be diminished by the impact from the first quarter contractions and nonrenewals and the timing differences from the receipt of real estate tax refunds in 2024 as compared to 2025. To be clear, we expect the refunds from the successful appeals in 2025 will approximate the amount received in 2024, and therefore have no impact on our expected full year growth in same property cash NOI, but creates quarterly noise.

Anthony Mifsud
Anthony Mifsud
EVP & CFO at COPT Defense Properties

Our balance sheet remains strong and well positioned to take advantage of opportunities, and at quarter end, '90 '8 percent of our debt remained at fixed rates. We have been funding, and expect to continue to fund, the equity component of our investments with cash flow from operations after the dividend on a leverage neutral basis, and will continue to draw on the line of credit to fund the debt component. With respect to debt maturities, we plan on prefunding the capital required to refinance our $400,000,000 2 point 2 5 percent bond, which matures in March of twenty twenty six. Our guidance continues to assume a $400,000,000 bond issuance in the fourth quarter, and we plan on using the proceeds to temporarily repay down the outstanding balance on the line of credit and hold the excess proceeds as cash until the March maturity. Despite the recent volatility in interest rates and in credit spreads in the fixed income market, our bonds continue to trade at one of the tightest spreads to treasuries of any equal or higher rated office peer.

Anthony Mifsud
Anthony Mifsud
EVP & CFO at COPT Defense Properties

With respect to guidance, we are affirming the midpoint of $20.25 FFO per share at $2.66 while narrowing the range by $01 at the high and low end as the year is progressing right on track with our forecast. We're establishing second quarter guidance for FFO per share as adjusted for comparability in the range of $0.65 to $0.67 With that, I'll turn the call back to Steve.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Thank you. I'll close by summarizing our key accomplishments and messages. We achieved excellent results in the first quarter highlighted by our leasing achievements. We delivered FFO per share growth of 4.8% year over year, marking our nineteenth consecutive quarter of year over year growth. We expect 2025 to be our seventh consecutive year of FFO per share growth and our guidance implies an annual increase of 3.5%.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

We increased the dividend again in the first quarter by 3.4% and have increased it by nearly 11% over the last three years. Our portfolio ended the year 95.1% leased, but we still set an aggressive target for vacancy leasing at 400,000 square feet. We're off to a strong start with over 370,000 square feet either executed or in advanced negotiations year to date. And we are well positioned to meet or beat that target. We completed 103,000 square feet of investment leasing year to date.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Our liquidity remains very strong and we expect to continue self funding the equity component of our capital investments going forward. And we continue to anticipate compound annual FFO per share growth of 4% between 2023 and 2026. Again, we're off to a great start in 2025 and we expect to deliver another successful year. With that operator, please open the call for questions.

Operator

Thank you, Mr. Badorek. Ladies and gentlemen, if you have a question or comment at this time, please press 11 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 11 again. Again, if you have a question or comment at this time, please press 11 on your telephone keypad.

Operator

Please stand by while we compile the q and a roster. Our first question or comment comes from the line of Blaine Heck from Wells Fargo. Your line is open.

Blaine Heck
Blaine Heck
Executive Director & Senior Equity Research Analyst at Wells Fargo Securities

Great. Thanks. Good afternoon. Steve, can you give us any updates you might have on the potential Space Command relocation to Huntsville and also the potential for additional missile defense programs in Huntsville that you referenced on last call?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Sure. There's, I'll just say there's a lot in the newsprint, particularly in the city of Huntsville. And there are very high expectations that a decision to relocate command will occur. The timing we believe is within weeks, maybe a month. And it should be a pretty exciting opportunity for our shareholders overall.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

It's a little early in the process regarding missile defense to try to quantify increased demand. But the administration has made very clear that the Golden Dome missile defense program is gonna be a high priority. And that program will be heavily concentrated on current missions and contractors that operate missile defense programs in Huntsville. So it's not quite clear from a production standpoint, but it's a very exciting programmatic shift that we think will serve us well.

Blaine Heck
Blaine Heck
Executive Director & Senior Equity Research Analyst at Wells Fargo Securities

Got it. That's helpful. Switching gears real quick. Can you talk about your investment pipeline, specifically the $225,000,000 earmarked in guidance for new investments in 2025. I guess what do you think the mix between acquisitions and developments will be in that total?

Blaine Heck
Blaine Heck
Executive Director & Senior Equity Research Analyst at Wells Fargo Securities

Can you talk about the profile and yields you're targeting on acquisitions? And then any color on additional near term development projects that you guys are eyeing at the moment?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Certainly, so let me take that in the layers. My current expectation is we'll meet that threshold with new development starts. There could be a possibility of an acquisition. We continue to look at opportunities as they arise. But as I've said on earlier calls, we have a very specific set of criteria that we apply to acquisition opportunities.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

And thus far we have not found one that satisfies all our criterias. Turning to our expectations for that development, we are in multiple discussions with users that are motivated to get new facilities to support mission growth or programmatic growth in multiple places in our location. And I don't wanna be any more specific than that, but we're pretty excited about our opportunity to start new buildings for priority programs.

Blaine Heck
Blaine Heck
Executive Director & Senior Equity Research Analyst at Wells Fargo Securities

Okay, great. Last one for Yeah,

Blaine Heck
Blaine Heck
Executive Director & Senior Equity Research Analyst at Wells Fargo Securities

go ahead.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Yeah, I'm sorry, I talked to yield question. Our acquisition yields are at least, they at least have to meet the threshold of our development yields. And you recall, we're targeting 8.5 cash yield on new development for non data center assets. An acquisition yield would have to at least hit that threshold and show us some opportunity for growth from that level and long term sustainability of demand in the asset.

Blaine Heck
Blaine Heck
Executive Director & Senior Equity Research Analyst at Wells Fargo Securities

Okay, great. Very helpful there. Last one for me with respect to data centers, there have been a lot of mixed messages on hyperscaler demand and some news of pullbacks from certain groups in the market. Do you see any of that impacting your tenants plans with you in Des Moines or elsewhere, or even impacting any of the data centers you currently own?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

So let me take the last question. In no way will it affect the data centers we currently own. Then with regard to our customers long term demand, we do not believe they are pulling back in the sense of the business component we serve with our data shell program. I think the biggest challenge we have with our customer, particularly in our land site in Iowa is the timing of power availability. And currently we don't have a clear path to the delivery timing yet.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

And so that's not really a component in our development pipeline as we speak today.

Blaine Heck
Blaine Heck
Executive Director & Senior Equity Research Analyst at Wells Fargo Securities

Got it. Thanks, Steve.

Operator

Thank you. Our next question or comment comes from the line of Seth Berge from Citi. Your line is now open.

Seth Bergey
Seth Bergey
Senior Research Associate at Citi

Hi. Kind of talked about the progress you've made on vacancy leasing. Are you seeing that translate into fewer concessions or signs of stronger rent growth?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Rent growth is really kind of determined by market overall. We've had solid rent performance over the last several years. Our markets tend to stay very stable and don't spike and crash. So not so much in rent growth, but certainly in the strength of the concessions we give to lease that space. I think if you look at our statistics and the cost of leasing this quarter, you can see that.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

What you don't see on that report is, we've been able to pull back quite a bit any free rent concessions.

Seth Bergey
Seth Bergey
Senior Research Associate at Citi

Thanks, that's helpful. And just one question about the bond offering. Where do you think you could kind of price that today?

Anthony Mifsud
Anthony Mifsud
EVP & CFO at COPT Defense Properties

Given where the ten year is right now and where our longest bond is trading, that bond would probably price at or slightly higher than 6%.

Seth Bergey
Seth Bergey
Senior Research Associate at Citi

Great. Thanks.

Operator

Thank you. Our next question or comment comes from the line of Anthony Paolone from JPMorgan. Your line is open.

Anthony Paolone
Anthony Paolone
Executive Director at J.P. Morgan

Yes, thanks. You mentioned Columbia Gateway, I think a few times in the commentary.

Anthony Paolone
Anthony Paolone
Executive Director at J.P. Morgan

Can you

Anthony Paolone
Anthony Paolone
Executive Director at J.P. Morgan

just remind us how much of that is tenanted by defense IT folks at this point versus more traditional office or is there still more to kind of convert there?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

I haven't run that exact math in a couple of quarters, but it's about 7075% defense IT in our properties. There are other landlords in fact that don't have nearly as much or much of any defense contractor tenants because our franchise tends to dominate with that segment.

Anthony Paolone
Anthony Paolone
Executive Director at J.P. Morgan

Okay, got it. And then you talked about the investment spending likely skewed to development. Any sense as to construction cost implications from just what's happening on the macro side and whether or not you're still pretty comfortable with yields and rents will be there at a level to achieve the yields you want?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Sure. So thus far, there's a lot of talk about tariffs, but there's really very little data coming out on the implications of tariffs. What I can tell you is we are very active in there. All of our active and potential developments, making sure we understand what our costs are and making sure we manage through the yields we deliver to our investors and where possible we're locking into our longer lead term items to share the pricing that we're counting on. With regard to the future, I just wanna remind people, we operated through the inflationary period three years ago.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

And in one year we had identical buildings escalating costs by 22% under the prior president. And that speaks to our ability to maintain the rents we need to get the yield on the costs we have. So we're very confident that we can maintain our yield and we're very diligent in being prepared to be nimble should costs start to shift from the current tariff discussions.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

And if I could just add one thing on the development project that Steve mentioned that we're kicking off, all of that pricing is locked in already. So that's a guaranteed maximum price contract.

Anthony Paolone
Anthony Paolone
Executive Director at J.P. Morgan

Okay. Got it. Sorry, guys. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Manus Ebeck from Evercore ISI. Your line is open.

Manus E
Senior Associate at Evercore

Thanks for taking the question. Just wanted to hop on to the advanced negotiation pipeline and deals that you have in there. Has maybe that mix changed since the April in terms of what the U. S. Government represents out of prospects in that pipeline versus like maybe top 10 defense contractors, if there are more like new expansion type requirements or typical relocations to a certain area close to a base?

Manus E
Senior Associate at Evercore

Just maybe if you could help us understand that, that would be very helpful.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

So that statistic is vacancy leasing advanced negotiations. It's pretty broad based, it's across multiple defense segments. There is one tenant in other that Brett's comments spoke to That's pretty large tenant. Besides that tenants all defense and it's, you know, Northern Virginia, Fort Meade and Navy support.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

And pretty even between government and contractor.

Manus E
Senior Associate at Evercore

Got you. Perfect. And if I could maybe follow-up with one here on the lease expirations. I know if you've alluded on the call and also talked about it last quarter that there is around that there is a larger share of government leases that are set to expire in 2025 and 2026, which you would tag like a very low risk of losing those leases. And then now we've talked about like 600,000 square feet of those short term ones that were expected to be pushed from 2025 expiration into 2026.

Manus E
Senior Associate at Evercore

Could you maybe just kind of like shine some light on how much progress has been done for those ones in the first quarter and why maybe the government wouldn't want to sign longer renewals there kind of going forward?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Well, they will sign longer renewals. The short term push speaks to the way they address. I don't wanna use the word holdover, it's not holdover, but when they haven't gotten their renewal lease completed, they have a process where we sign a different agreement called standstill agreement. And they continue to pay the rent under the lease that's just expired. We continue to deliver the services called for in the lease.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

And when the ultimate longer term renewal is done, we true up on the ultimate rate that should have been charged. It really speaks more to their ability to handle all the work and get it through the system in a timely basis. And that's why we set out to advise people that last year we had some leases delayed into this year. And similarly, we expect that to kind of flow into next year. With regard to first quarter, I don't believe we signed any of those leases.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

The government has a very predictable leasing cycle And that activity tends to start to ramp up in June often is completed either in August or September at the end of their fiscal year. So look for Q3 and potentially some Q2 results and those US government leases. But I reiterate those 13 leases, we have full confidence we will renew 100% of them.

Manus E
Senior Associate at Evercore

Perfect. Thank you. That's for

Manus E
Senior Associate at Evercore

me.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Thanks.

Operator

Thank you. Our next question or comment comes from the line of Richard Anderson from Wedbush Securities. Your line is open.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay. Thanks. Good afternoon. First question is for Anthony, and I'm not sure I'm exactly asking this correctly, but for the same store guidance of 2.75% for the full year, is that assuming the 4.3% in the first quarter absent the tax appeal or the 7.1%? I'm just trying to get a sense of how things will sort of flow on for the remaining quarters to get you to that 2.75.

Anthony Mifsud
Anthony Mifsud
EVP & CFO at COPT Defense Properties

Well, think you can look at it both ways. So the 2.75 is not impacted on an annual basis by the real estate tax refunds received in 2024 and 2025 because the amounts in in each year approximate the same amount. So you can take it off the the seven one or the four three. It's the the seven one is impacted by the the higher tax amount is received in the first quarter. Some of the the subsequent three quarters in 2025 will be impacted by the fact that there's zero assumed in 2025, but we did receive refunds in each of the last three quarters of 'twenty four.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay. How would you, if you were me, how would you model? Is it sort of ratable growth across the remaining three quarters of the year? Or is there some sort of deceleration internal growth as the year progresses?

Anthony Mifsud
Anthony Mifsud
EVP & CFO at COPT Defense Properties

The largest of the three refunds we received last year was in the second quarter and then it tailed off in the third and fourth.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Steve, maybe just a question to sort of explain why your stock isn't maybe doing as well as you thought it might be doing this year. You said that you see no expectation of impact from Doge on any of your programs that you're exposed to. But is

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

it

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

impacting, I assume, some programs out there, right, perhaps not related to what you're working on. Is it sort of like a too close for comfort type of thing or is Doge not really affecting much in the way of any kind of contract work going on in the space?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

So honestly, we have no evidence of Doge impacting the portions of the business of the tenants in our buildings. It might impact some of those tenants in other parts of their business, but certainly not the work they're doing in our buildings for the missions we support. And if you look at the, there's a list of canceled leases that's been put out and there were a few DoD leases in those in very odd places. They really weren't in the Washington area and they're small leases in ancillary functions. Some of them I would almost guess were recruiting facilities based on, you know, the five or 6,000 square feet that got canceled.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

But there's really no activity visible or discussed affecting the priority missions we support.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay, and then lastly on sort of the offer for people to early retire, is it possible that, there's sort of like a broad offer that didn't necessarily take into account where these people were coming from and what agencies. And is there a risk perhaps that a disproportionate amount of people could, through these job cut offers, come out of certain areas in too much of a cluster that could cause problems from that standpoint? Is that something that is even a part of the conversation or am I just off base entirely on the question?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

I think the matters are already settled, Rich, because they had a very tight time frame to execute that offer.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Right. Now now you're now you're left with fewer people. And are there fewer people in too many? Is it too clustered, I guess is question.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Well, there's no data that I have that could inform me of where they came out of, but remember, it's the larger government DC that was being targeted more so than DOD. And kind of speaking to that, recall that Pete Heixeth invited the DOD people that were forced to resign or leave the military because they would not get the COVID vaccine back to the military. And this year, US Army achieved its full year goal of recruiting in the fastest time period in history, meeting the goal by April. So we just don't see it in DoD. And then with regard to the people we deal with every day across our various government customers, There's none that I know of that are accepted that resignation.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

It could impair their ability to process the business we do.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay, fair enough. Thanks very

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

And then, know, Britt just gave me a quick note. We took some investors on a property tour recently and if you saw our parking lot, you know, they're not short on people. The lots are jammed.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

I'm not gonna start counting cars and parking lots just yet, but maybe something.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

But I do wanna make one comment about how our stock has performed. It's an awfully good opportunity for a savvy investor. Just had to let somebody know that fear can affect price, but as we've made clear in our comments and our results, our business is as strong as ever. It's a good opportunity to make an investment.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Okay, Thanks very much.

Operator

Thank you. Our next question or comment comes from the line of Peter Abramowitz from Jefferies. Your line is open, sir.

Peter Abramowitz
Peter Abramowitz
SVP - Equity Analyst at Jefferies

Yes. Thank you very much. I know you've talked a lot about the retention. Just wanted to touch on the nonrenewal. I think you mentioned it was in Columbia Gateway and maybe a question for Britt or Steve.

Peter Abramowitz
Peter Abramowitz
SVP - Equity Analyst at Jefferies

I guess, how long are you underwriting right now to sort of backfill those spaces? Just so we can get a sense, if you do have any other move outs or explorations in the portfolio?

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

Yeah, this is Britt. Yeah, mean, there's already a number of prospects looking at this. We have it, I mean, conservatively underwritten in the eighteen month timeframe, eighteen months to two years in that timeframe.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

But just given where the prospect activity is, we're confident we can get to a lease here quickly.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

And then one other comment, Peter, that space is immediately across the courtyard in our headquarters three buildings. 2020, we had a full building tenant non renew and that tenant was, that function was non defense. So it had a name that of the same name as one of our long term great tenants, but it was non defense function. We backfilled it in a year and it's now over 80% defense contractors and has significant skiff in the building. And we think we view this non renewal of a Blue Cross Blue Shield affiliate affords us a great opportunity to bring more cyber and defense tenants into our portfolio.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

So it's a good thing in the long term.

Peter Abramowitz
Peter Abramowitz
SVP - Equity Analyst at Jefferies

Got it. That's helpful. And then just wondering if you could touch on how's the leasing pipeline on some of those vacancies you have in the other portfolio? And I guess, how does that affect the capital plans longer term to eventually sell those buildings?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

I'm happy to the first part.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

Yeah, so the pipeline for those other assets has actually been phenomenal. I mean, based on historical performance, what we're seeing is the credit of the landlords are being heavily evaluated by tenants and the brokers because obviously they wanna see execution and the ability to pay on TIs and leasing commissions. And there's a lot of landlords that are struggling in those markets. And so now we're seeing more tenants being directed our way. So we feel very confident about our ability lease up that space and get more than our fair share of tenants in those markets.

Britt Snider
Britt Snider
Executive VP & COO at COPT Defense Properties

Do wanna talk to the capital?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Yeah, and with regard to capital recycling, it's really gonna be more a function. It's great news that we're gonna get some occupancy back and clearly when you look at our vacancy, we've got a lot in those buildings. So this is one of the places where we can really drive FFO growth. But in terms of recycling, that pricing is really gonna be tied to interest rates and the ability of another investor to get attractive debt to make an investment in three very high quality buildings. And I just don't see that occurring yet.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

So it'll be a year or two up.

Peter Abramowitz
Peter Abramowitz
SVP - Equity Analyst at Jefferies

Got it. That's all for me. Thanks.

Operator

Thank you. Our next question or comment comes from the line of Dylan Brzezinski from Green Street. Your line is open, sir.

Dylan Brzezinski
Analyst at Green Street Advisors, LLC

Hey, guys. Thanks for taking the question. And appreciate your comments on Doge not having an impact in your guys' leasing activity or or demand. But just sort of curious, you know, one of the initiatives of Doge floating around out there is the idea of them to monetize some of their real estate. So just curious if that is a potential opportunity for you guys in terms of acquisition set.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

So nothing I've seen or we've seen yet. My understanding is most of the real estate they wanna sell is in Downtown DC occupied by non defense tenants. That's not a sandbox we wanna play in. So I'm not expecting an opportunity. The priority missions we support in the buildings that are owned by the US government are on military installations and they will not sell those.

Dylan Brzezinski
Analyst at Green Street Advisors, LLC

Makes sense. That's all for me. Thanks guys.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Good.

Operator

Thank you. Our next question or comment comes from the line of Tom Catherwood from BTIG. Mr. Catherwood, your line is open.

Thomas Catherwood
MD & REITs Equity Research at BTIG

Thank you. Just wanted to follow-up on the Blaine's initial Huntsville question. I think the FBI recently discussed expanding at the Arsenal. And if memory serves me, the last large expansion there by the FBI was, I think, 2017 and 2018. Is that correct?

Thomas Catherwood
MD & REITs Equity Research at BTIG

And how did that result in demand and leasing it your portfolio?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

I think most of the relocation was to a new micro campus they built on the Arsenal, which is very impressive by the way, when you tour it. And we have some FBI in our portfolio as well, but the bulk of it went to develop buildings. To the extent there's an increase in FBI, call it assignments to Redstone, they could potentially drive leasing to some extent in our portfolio. It's too early to tell.

Thomas Catherwood
MD & REITs Equity Research at BTIG

Got it. Appreciate that, Steve. And then last one for me on the near term development leasing pipeline, when we adjust for roughly 100,000 square feet of development that you've done, the pipeline is up 500,000 square feet quarter over quarter. Which geographies or priority missions really drove that uptick?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Well, it's quite a bit in Fort Meade, BWI and Huntsville. One other, but not gonna mention it.

Thomas Catherwood
MD & REITs Equity Research at BTIG

I appreciate the answers. Thanks, everybody.

Operator

Thank you. Our next question or comment comes from the line of Steve Sakwa from Evercore ISI. Your line is open.

Steve Sakwa
Senior Managing Director & Senior Equity Research Analyst at Evercore ISI

Yeah, thanks. I just had one follow-up, Steve. And I guess related to Blaine's earlier question on the data center development in Iowa. When you bought that, I think there was an expectation it would take you maybe upwards of two years to secure power with the local power company. Has anything changed in that timeframe?

Steve Sakwa
Senior Managing Director & Senior Equity Research Analyst at Evercore ISI

Have things gotten elongated or more difficult? So just kind of looking for any color on how those processes are unfolding in these municipalities.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Well, they're not unfolding quickly. And I would say if anything, our expectations have elongated. Two years would be a great result right now and we have no specificity. I think it could be more like three to four years.

Steve Sakwa
Senior Managing Director & Senior Equity Research Analyst at Evercore ISI

Got it. I guess, does that maybe temper your enthusiasm for doing more of those just given the uncertainty around the timing?

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Well, this last say twelve months has been an extraordinary period of time across the country with companies, individuals of all sorts asking for new power supply. And undoubtedly the utility we're relying on has been, it's our interpretation they've been overwhelmed by the requests for power. And I think with some of the pullback on AI computing expectations that might mitigate. But from our standpoint, if we're gonna buy another piece of land on spec or informed demand as we like to think of it, we're gonna have to understand the power pretty clearly.

Steve Sakwa
Senior Managing Director & Senior Equity Research Analyst at Evercore ISI

Gotcha. Thanks for the

Steve Sakwa
Senior Managing Director & Senior Equity Research Analyst at Evercore ISI

color.

Richard Anderson
Managing Director - Equity Research at Wedbush Securities

Yep.

Operator

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Badorek for any closing remarks.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Sure. Well, thank you all for joining our call today. We are in our offices. So please, if you want to talk to us, follow-up by calling VENCAT. And we look forward to talking to you if you do.

Stephen Budorick
Stephen Budorick
President & Chief Executive Officer at COPT Defense Properties

Thanks.

Operator

Ladies and gentlemen, thank you for your participation today in the Cop Defense Properties first quarter twenty twenty five results conference call. This concludes the presentation. You may now disconnect. Good day.

Executives
    • Venkat Kommineni
      Venkat Kommineni
      Vice President, Investor Relations
    • Stephen Budorick
      Stephen Budorick
      President & Chief Executive Officer
    • Britt Snider
      Britt Snider
      Executive VP & COO
    • Anthony Mifsud
      Anthony Mifsud
      EVP & CFO
Analysts
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Key Takeaways

  • Comp Def’s Q1 performance was strong with FFO per share of $0.65 (mid‐point of guidance), a 7.1% same‐property cash NOI increase, and a $0.04 dividend hike marking the third straight year of growth at a 65% payout ratio.
  • Leasing momentum remains robust, having signed 179,000 sq ft of vacancy leases (45% of the annual target) and 100,000 sq ft of investment leases, while achieving a 75% tenant retention rate and commencing a new 150,000 sq ft development at Advanced Gateway due to 98.5% portfolio occupancy.
  • The defense IT portfolio has maintained >94% occupancy for nine consecutive quarters, with 975,000 sq ft of leasing prospects (79% activity ratio) and 195,000 sq ft in advanced negotiations, positioning the company to meet its 400,000 sq ft vacancy leasing goal for 2025.
  • Management sees no material impact from the DoD’s “Doge” efficiency initiative on the priority missions it supports, noting an 8% reallocation (not cuts) of overhead funds and exemptions for key areas like cybersecurity and missile defense that align with the company’s portfolio.
  • Comp Def reaffirmed full-year guidance of $2.66 FFO per share (3.5% growth) and 2.75% same‐property NOI growth, while maintaining a strong balance sheet with 98% fixed‐rate debt, self-funding equity investments, and plans to pre-fund a $400 million bond maturing in March 2026.
AI Generated. May Contain Errors.
Earnings Conference Call
COPT Defense Properties Q1 2025
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