COPT DEFENSE PROPERTIES Q1 FY2025 earnings call

Key Points

• Strong start in 2025, meeting or exceeding 2025 targets.
• Increased annual dividend by $0.04, marking third consecutive year of dividend increases with a 65% AFFO payout ratio.
• FFO per share at midpoint of guidance, up 4.8% y/y. Same property cash NOI up 7.1% y/y.
• Signed 179,000 square feet of vacancy leasing year to date (45% of full-year target), with nearly three-quarters at Defense IT locations.
• Executed over 100,000 square feet of investment leasing year to date. Tenant retention was 75% during the quarter.
• Committed over $50 million to a new investment at Redstone Gateway. Portfolio 98.5% leased, with 23 buildings 100% leased.
• Commenced development of 8500 Advanced Gateway, with 90,000 square feet of prospects. Defense/IT portfolio occupancy over 94% for 9 quarters.

FFO per share, as adjusted for comparability, was $0.65, a 4.8% year-over-year increase. Same property cash NOI increased 7.1% year-over-year. The Defense/IT portfolio occupancy rate has exceeded 94% for 9 consecutive quarters. Year-to-date, 179,000 square feet of vacancy leasing was signed, which is 45% of the full-year target, with nearly three-quarters of the activity at Defense IT locations. Over 100,000 square feet of investment leasing was executed year to date.

Guidance

• Maintaining 2025 FFO per share guidance of $2.66 at midpoint, narrowing the range as year-to-date performance tracks according to plan.
• Same property cash NOI growth guidance of 2.75% midpoint.
• Establishing second quarter FFO per share guidance in the range of $0.65 to $0.67.

Risks

• Concerns about DOGE (Defense Officer Personnel Management Act) impact on priority missions, but management states no expected impact.
• Uncertainties in defense spending reallocation, but administration's focus on extracting more mission output for every dollar of input.

Q: Blaine Heck from Wells Fargo asks about Space Command relocation to Huntsville and missile defense programs.

A: Steve Budorick responds that there's high expectation of Space Command relocation decision within weeks to a month, and while missile defense program details are early, the administration prioritizes it with concentration on current missions in Huntsville.

Q: Blaine Heck asks about investment pipeline, mix of acquisitions and developments in $225 million guidance, and near-term development projects.

A: Steve Budorick says current expectation is to meet the threshold with new development starts, may consider acquisition but no suitable ones found yet, and in discussions with users for mission growth.

Q: Seth Bergey from Citi asks about vacancy leasing translating to concessions or rent growth.

A: Steve Budorick states rent growth is market-dependent, but concessions have been pulled back. Anthony Mifsud talks about bond offering pricing at or slightly higher than 6% based on 10-year and bond trading.

Q: Anthony Paolone from JPMorgan asks about Columbia Gateway tenant mix and construction costs.

A: Steve Budorick says ~70-75% Defense/IT in Columbia Gateway, and Steve Budorick and Britt Snider discuss construction costs and locked-in pricing for developments.

Q: Manus Ebbecke from Evercore ISI asks about advanced negotiation pipeline mix and lease expirations.

A: Steve Budorick and Anthony Mifsud say pipeline is broad based across defense segments, and Steve Budorick discusses government lease renewals and standstill agreements.

Q: Richard Anderson from Wedbush Securities asks about stock performance, DOGE impact, and early retire offers.

A: Steve Budorick says no evidence of DOGE impacting priority missions, and early retire offers don't affect DoD personnel impacting their business.

Q: Peter Abramowitz from Jefferies asks about non-renewal backfill and leasing pipeline in other portfolios.

A: Britt Snider says backfill underwritten in 18-24 months, and Steve Budorick discusses leasing pipeline in other portfolios and capital recycling.

Q: Dylan Brzezinski from Green Street asks about DOGE monetization of real estate.

A: Steve Budorick says no impact on priority mission-owned properties, as DoD won't sell those.

Q: Thomas Catherwood from BTIG asks about FBI expansion in Huntsville and near-term development leasing pipeline.

A: Steve Budorick talks about FBI expansion potential and development pipeline in Fort Meade, BWI, Huntsville.

Q: Steve Sakwa from Evercore ISI asks about data center development in Iowa and timing of power supply.

A: Steve Budorick says power supply timing has elongated, potentially 3-4 years, and may temper enthusiasm for more data center development without clear power.