What COPT Defense Properties (CDP) Said on Its Q3 Earnings Call

Key Points

• COPT Defense Properties exceeded Q3 expectations, reporting FFO of $0.71 per share, up 2.9% year over year, while same-property cash NOI rose 3.2%. Strong defense-related demand drove 222,000 square feet of vacancy leasing during the quarter.
• The company raised its 2026 outlook, lifting adjusted FFO guidance to $2.80 per share, same-property cash NOI growth to 4.25%, and its vacancy-leasing target to 625,000 square feet. COPT also increased planned investment commitments, despite lowering tenant-retention guidance to 80% as it recaptured underperforming space.
• COPT’s Defense/IT portfolio remained highly occupied at 96.2% leased and 95.2% occupied, supporting a 1.1 million-square-foot development pipeline in strong-demand markets such as Huntsville. Management cited durable defense spending, but warned that higher interest rates could increase 2027 interest expense by about $8 million, or $0.07 per share.

COPT Defense Properties NYSE: CDP reported third-quarter funds from operations of $0.71 per share, exceeding the midpoint of its guidance by $0.02 and rising 2.9% from a year earlier, as demand for defense-oriented office space supported leasing and development activity.

Same-property cash net operating income increased 3.2% year over year in the quarter and 5.3% over the first nine months of 2026. Chief Executive Officer Steve Budorick said the company’s operating environment remained strong, particularly in markets serving defense, intelligence, cybersecurity and missile-defense missions.

The company executed 222,000 square feet of vacancy leasing during the third quarter, 50% above its trailing five-year quarterly average. During the first nine months, it completed 453,000 square feet of vacancy leasing, approaching its prior full-year target of 475,000 square feet and exceeding its original 400,000-square-foot objective.

Guidance raised as leasing momentum continues

COPT raised the midpoint of its 2026 outlook for four metrics. Adjusted-for-comparability FFO guidance increased to $2.80 per share, while same-property cash NOI growth guidance rose to 4.25%. The company also lifted its target for capital committed to new investments to $375 million and increased expected capital invested in development and acquisitions to $240 million.

Chief Financial Officer Anthony Mifsud said the FFO guidance increase was driven primarily by third-quarter outperformance. The quarter benefited from lower-than-anticipated operating expenses, including repair and maintenance spending expected to occur in the fourth quarter, as well as higher space-recapture and development fees.

Mifsud said the company’s revised FFO outlook represented roughly 3% growth for 2026. He noted that additional dilution from the company’s exchangeable notes reduced annual FFO by an estimated $0.03 per share, including an incremental $0.02 tied to a 20% rise in the company’s stock price during the first nine months.

The company reduced the midpoint of its tenant-retention guidance by 250 basis points to 80%, although Budorick said retention had been tracking at 84%. The revision reflected COPT’s decision to recapture nearly 160,000 square feet from three tenants it characterized as suboptimal and replace that occupancy with tenants having stronger credit profiles and growth prospects.

COPT raised its full-year vacancy leasing target to 625,000 square feet. Management said it had leased or expected to lease more than 145,000 square feet of the strategically recaptured space.

Defense/IT portfolio remains highly occupied

At quarter-end, COPT’s total portfolio was 95% leased and 94% occupied. Its Defense/IT portfolio, which accounts for 93% of NOI, was 96.2% leased and 95.2% occupied.

Executive Vice President and Chief Operating Officer Britt Snider said the company executed 3 million square feet of total leasing in the first nine months. Vacancy leasing and investment leasing activity included tenants supporting missile-defense missions in Huntsville, Alabama, and U.S. Cyber Command-related activity in Columbia Gateway, Maryland.

Snider said roughly 80% of nearly 1 million square feet of combined vacancy and investment leasing completed year to date involved existing tenants. The company had more than 200,000 square feet of prospects in advanced negotiations, defined as transactions more than 90% likely to execute. Including those prospects, COPT had 710,000 square feet of vacancy leasing either completed or in advanced negotiations.

• About 390,000 square feet, or 55%, involved space vacant at the beginning of the year.
• About 175,000 square feet, or 25%, involved non-renewing space scheduled for 2026 and 2027.
• About 145,000 square feet, or 20%, involved strategically recaptured space.

In Redstone Gateway, COPT recaptured 46,000 square feet from a defense tenant that had been underutilizing space. Snider said the company was in advanced negotiations to lease most of that area to Lockheed Martin, which would expand its presence in the park by nearly 30%.

In Columbia Gateway, the company recaptured 56,000 square feet from a non-defense tenant scheduled to leave in 2027 and fully backfilled the space with Frequentis, an existing defense contractor focused on cyber and aviation. That lease is expected to begin in the first quarter of 2027. COPT also signed a 30,000-square-foot lease at Franklin Center, bringing the recent acquisition to 87% leased.

Development pipeline expands in Huntsville

COPT’s active development pipeline totaled 1.1 million square feet at quarter-end, was 64% pre-leased and represented nearly $530 million of capital commitments. Four of eight projects were fully pre-leased.

The company committed $88 million to two new inventory developments at Redstone Gateway: a 175,000-square-foot building at 6300 Redstone Gateway and a 59,000-square-foot project at 2200 Rideout Road. Management said the larger project had 235,000 square feet of prospects, while the smaller development had 105,000 square feet of prospects.

Budorick said the Huntsville operating portfolio was 98% leased, prompting the company to add inventory to address demand and accelerate lease commencements. COPT expanded Redstone Gateway’s development capacity by 500,000 square feet; the park can now accommodate 6.4 million square feet without structured parking, with 3.2 million square feet of future development capacity.

The company’s development leasing pipeline stood at 1.1 million square feet of opportunities considered at least 50% likely to be won within two years, with another 1.2 million square feet of potential development opportunities being tracked.

Management cites defense spending and interest rates

Budorick said COPT expects defense spending to remain a priority regardless of midterm election outcomes, citing bipartisan support for defense appropriations over the past 12 years. He said the company’s business is principally tied to the Department of Defense base budget, which he said was $840 billion in fiscal 2026, with a fiscal 2027 base-budget request of $1.1 trillion.

Management also pointed to appropriated fiscal 2025 and 2026 budgets and $150 billion of funding from the One Big Beautiful Bill Act as sources of portfolio demand through 2027. Budorick said COPT typically sees a 12-to-18-month lag between appropriations and leasing activity.

While management expressed confidence in underlying tenant demand, Mifsud said higher interest rates remain a pressure on FFO growth. Based on the forward curve for SOFR and expected growth in variable-rate debt, he estimated that interest expense could rise by approximately $8 million, or $0.07 per share, in 2027 compared with 2026. He added that COPT has no material debt maturities until September 2028.

About COPT Defense Properties (NYSE:CDP)

COPT Defense Properties is a real estate investment trust that owns, develops, manages and leases properties designed to support the U.S. government, defense and information technology sectors. Its portfolio includes office buildings, data centers, specialized facilities and other mission-critical properties leased primarily to government agencies, defense contractors and technology companies.

The company's properties are concentrated in key defense and national security markets, including Northern Virginia, suburban Maryland and the broader Washington, DC, region.

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