Executive Summary / Key Takeaways

• COPT Defense Properties maintains a highly specialized and resilient real estate portfolio focused on mission-critical U.S. Government and defense contractor tenants, demonstrating sector-leading occupancy and retention rates that significantly outperform the broader office market.
• Recent financial performance, including 4.8% year-over-year FFO per share growth in Q1 2025 and 6.2% in 2024, along with robust Same Property Cash NOI growth (7.1% in Q1 2025), underscores the stability and embedded growth within its niche strategy, despite macroeconomic headwinds and specific one-time impacts.
• Strategic investments, notably the large-scale land acquisition for data center shell development in Iowa and opportunistic office acquisitions in key defense markets, position the company for future external growth and capitalize on secular trends like AI and cloud computing, although timing of power availability presents a challenge for data center expansion.
• Management's 2025 guidance projects continued FFO per share growth (3.5% at the midpoint), supported by NOI increases from portfolio operations and developments, while acknowledging potential drags from higher interest expense and the planned prefunding of a 2026 bond maturity.
• Key risks include potential impacts from government efficiency initiatives (DOGE), defense spending uncertainty, and challenges in disposing of non-core regional office assets, though management expresses confidence in the resilience of priority missions and the company's ability to navigate these factors.

The Bedrock of National Security Real Estate

COPT Defense Properties operates as a distinct entity within the real estate investment trust landscape, carving out a specialized niche centered on the critical infrastructure needs of the U.S. Government and its defense contractors. Unlike generalist office or industrial REITs, CDP's strategy is laser-focused on owning, operating, and developing properties located proximate to, or sometimes within, key U.S. defense installations. This deliberate concentration on the "DefenseIT Portfolio" means its tenant base is primarily engaged in priority national security activities, often requiring mission-critical and high-security property enhancements. This specialization, honed over a 32-year history of working closely with the USG, including a perfect 100% retention rate on full building government leases historically, forms the bedrock of its business model and sets it apart from broader market participants.

The company's operational structure, primarily conducted through its operating partnership, COPT Defense Properties, L.P., allows for flexibility in financing and growth. Over the past five years, CDP has demonstrated remarkable resilience, expanding its portfolio by 30% and achieving significant growth in FFO per share (27%) and AFFO (26%), even amidst the turbulence of a global pandemic, high inflation, rising interest rates, and the widespread shift to remote work that has challenged traditional office landlords. This period also saw a seventy basis point increase in occupancy and the maintenance of a sector-leading tenant retention rate, averaging nearly 80% and peaking at 86% in 2024.

CDP's competitive positioning is fundamentally shaped by its specialized focus. Against broader data center players like Digital Realty (DLR) and Equinix (EQIX), CDP's data center shell program offers a niche approach tailored to specific tenant needs, where tenants fund the power, fiber, and infrastructure, allowing CDP to provide the shell. This model, while potentially offering lower capital intensity for CDP on a per-square-foot basis compared to fully fitted data centers, means CDP's technological differentiation lies more in its ability to deliver highly secure, purpose-built facilities in strategic locations rather than cutting-edge data processing speeds or global interconnection ecosystems that characterize DLR and EQIX. CDP's properties are designed with high-security enhancements, including SCIF (Sensitive Compartmented Information Facility) space, present in 80% of its Defense/IT portfolio. This feature is a significant differentiator, requiring substantial tenant co-investment and making relocation difficult, thereby contributing directly to CDP's superior tenant retention and providing a competitive moat against general office REITs like Alexandria Real Estate Equities (ARE) or data management firms like Iron Mountain (IRM). While precise, directly comparable market share figures for all niche competitors are not publicly detailed, CDP's high occupancy and retention rates within its target markets suggest a strong competitive standing, particularly in areas like Columbia Gateway near Fort Meade, where its franchise dominates the defense contractor tenant base. In contrast, in its "Other" segment markets, CDP benefits from its strong balance sheet and ability to fund tenant improvements, which is a challenge for less capitalized landlords.

Performance Reflecting Specialization and Strategy

CDP's recent financial performance underscores the benefits of its specialized strategy. In the first quarter of 2025, the company reported FFO per share, as adjusted for comparability, of \$0.65, representing a solid 4.8% increase compared to the prior year period. This growth was achieved despite absorbing approximately \$0.05 in higher net weather-related expenses relative to budget and a \$0.25 year-over-year reduction in interest income resulting from the strategic deployment of exchangeable note proceeds into development and acquisitions in 2024.

The underlying operational strength is further evidenced by Same Property Cash NOI growth, which stood at a robust 7.1% for the total portfolio in Q1 2025. While this figure included some benefit from real estate tax refunds in the "Other" segment, normalizing for this item still resulted in a healthy 4.3% growth rate. This performance was primarily driven by embedded cash rent increases across the portfolio and the positive impact of free rent burn-off on development leases that commenced later in 2024 or were placed into service in 2023. Looking back at 2024, the company delivered exceptional results, with FFO per share growth of 6.2% and a remarkable 9.1% increase in Same Property Cash NOI, the highest reported in over a decade. This was fueled by favorable renewal outcomes, including higher retention (86% for the year, the highest in over twenty years) and lower concessions, as well as effective expense management and increased same property occupancy.

Operational metrics highlight the tight market conditions within CDP's niche. As of March 31, 2025, the total portfolio was 93.6% occupied and 95.1% leased, with the core DefenseIT Portfolio boasting even stronger figures at 95.3% occupied and 96.8% leased (as of year-end 2024). This high leased rate provides a strong foundation for future revenue. Leasing activity remains strong, with 647,000 square feet executed in Q1 2025, including a healthy 74.9% tenant retention rate. Notably, 120,000 square feet of this was vacant space leasing, with nearly three-quarters at Defense IT locations. Investment leasing also contributed, totaling 89,000 square feet in Q1 2025 across key markets like Columbia Gateway and Huntsville, supporting critical missions like Navy Cyber and missile defense. The company's leasing pipeline remains robust, with 975,000 square feet of prospects as of the Q1 2025 call, representing a strong 79% activity ratio on currently unleased space.

Strategic investments are positioning CDP for future growth. In September 2024, the company made a significant move into the hyperscale data center market with the acquisition of a 365-acre land parcel near Des Moines, Iowa, for \$32 million. This market is recognized as the fifth largest hyperscale hub in the U.S., offering ample power (with a high percentage from renewable sources), fiber connectivity, and supportive local government. Initial plans for the site envision 15 buildings totaling 3.3 million square feet, supported by approximately 1 gigawatt of electrical capacity, substantially increasing CDP's wholly-owned data center shell development capacity. This investment capitalizes on the explosive demand driven by cloud computing and AI, expanding a key tenant relationship to a new, attractive market. While this investment is expected to be initially dilutive to FFO (roughly half a penny in 2025 and 2026) due to planned site work and infrastructure costs (\$50 million in 2025/2026) before lease commencement, it represents a long-term growth runway.

Opportunistic acquisitions also play a role. The September 2024 acquisition of 3900 Rogers Road in San Antonio for \$17 million (total capital commitment \$21 million) is a prime example. This 80,000 square foot Class A office building, located near a large U.S. government campus, was acquired at an estimated 50% discount to replacement cost and was immediately leased upon acquisition, expected to be fully SCIF'd. This asset is anticipated to be accretive to FFO (half a penny in 2025, a full penny in 2026) and adds a strategic, long-term asset to the Defense/IT portfolio. These acquisitions, alongside active development projects like MVP 400 at National Business Park and the recently commenced 8500 Advanced Gateway in Huntsville, demonstrate a disciplined approach to external growth, developing into visible demand in highly leased parks.

Outlook and Considerations

Management's outlook for 2025 reflects cautious optimism and a focus on executing its strategic plan. The company is maintaining its full-year FFO per share guidance, as adjusted for comparability, at a midpoint of \$2.66, which implies a 3.5% growth rate over 2024's strong results. This guidance is supported by an expected increase in NOI from both the existing portfolio and developments placed into service during 2024 and 2025. However, it also factors in anticipated headwinds, including higher net interest expense due to a projected increase in debt balance and lower interest and other income.

The guidance for Same Property Cash NOI growth in 2025 is reiterated at a midpoint of 2.75%. Management expects the underlying growth rate for the majority of the portfolio to remain consistent with the approximately 3% normalized growth seen in Q1 2025, driven by embedded rent escalations and free rent burn-off. The difference from the higher 2024 growth rate is primarily attributed to the normalization of one-time benefits realized in the prior year. Tenant retention is expected to remain strong, projected in the 75% to 85% range for the year, reflecting the sticky nature of the tenant base and the specialized properties.

The capital plan for 2025 includes committing \$200 million to \$250 million to new investments, primarily focused on development starts, and a total development spend of \$250 million to \$300 million. A significant portion of the spend on actively developing properties (\$150 million to \$180 million) is already contractually obligated. The company's strong balance sheet, characterized by an investment-grade rating and 98% fixed-rate debt as of Q1 2025, supports its strategy of self-funding the equity component of investments through retained cash flow, maintaining a leverage-neutral position. A notable financing plan for 2025 involves prefunding the \$400 million bond maturing in March 2026 with a planned bond issuance in the fourth quarter. While prudent for liquidity management, this strategy is expected to create a temporary drag on FFO due to paying down the line of credit and holding excess cash.

CDP continues to anticipate compound annual FFO per share growth of 4% between 2023 and 2026, a target management has consistently reiterated. This outlook is underpinned by the expected continued demand for its specialized real estate, particularly in high-priority defense areas like cybersecurity, missile defense, and space command, which are aligned with stated administration priorities and the "peace through strength" philosophy. Management expresses confidence that initiatives like the Department of Government Efficiency (DOGE) will focus on administrative streamlining rather than impacting the core missions their portfolio supports.

However, potential risks warrant consideration. While management downplays the impact of DOGE on their specific tenant base, any broader defense spending cuts or shifts in allocation could potentially slow leasing processes or impact demand. The timing and pace of development, particularly for the large Iowa data center project, are contingent on securing necessary power availability, which management notes has faced elongated timelines. Challenges persist in the disposition of non-core regional office assets, as market conditions for office investment with debt are not currently favorable, and any sales could be dilutive to earnings. Furthermore, government administrative backlogs can cause delays in lease renewals, resulting in short-term extensions, although the company has a strong track record of ultimately retaining these leases. Construction costs, while the rate of increase has abated, remain higher than in prior years, posing a challenge to underwriting new development yields.

Conclusion

COPT Defense Properties offers investors a unique opportunity to gain exposure to a highly specialized and resilient segment of the real estate market tied to critical national security missions. The company's focus on properties near U.S. defense installations, coupled with its expertise in providing high-security, mission-critical facilities, has resulted in sector-leading operational metrics like occupancy and tenant retention, which translate into stable and growing cash flows. Recent performance highlights, including strong FFO and Same Property Cash NOI growth, demonstrate the embedded value within its portfolio and the effectiveness of its operational execution.

Strategic investments in expanding its data center shell program and opportunistic acquisitions in core defense markets position CDP for future growth, capitalizing on secular trends in cloud computing, AI, and the ongoing need for secure defense infrastructure. While the company faces potential headwinds from interest rate dynamics, timing challenges in large-scale development, and broader government spending uncertainties, management's clear guidance, disciplined capital allocation strategy, and strong balance sheet provide a degree of confidence in its ability to navigate these factors. The core investment thesis remains centered on the durable demand for CDP's specialized real estate, underpinned by its long-standing government relationships and the critical nature of the missions it supports, offering a compelling profile for discerning investors seeking stability and growth in a differentiated REIT.