Executive Summary / Key Takeaways

• Defense Spending Inflection Point: The "One Big Beautiful Bill Act" appropriates $150 billion in additional defense spending over four years, with $113 billion allocated to 2026 alone, creating a multi-year tailwind for COPT Defense Properties' specialized portfolio near priority missions like Space Command relocation and the Golden Dome missile defense shield.

• Unassailable Specialization Moat: Over 32 years, CDP has built a fortress around mission-critical properties near U.S. defense installations, achieving 95.7% occupancy (a 20-year high) and nearly 80% tenant retention while traditional office REITs struggled with record vacancy, demonstrating the durability of its niche strategy.

• Financial Resilience Through Cycle: Despite macro headwinds from 2019-2024, CDP grew FFO per share 27%, expanded its portfolio 30%, and maintained sector-leading metrics. The recent oversubscribed $400 million bond offering at spreads tighter than higher-rated office peers validates the market's recognition of its resilient cash flows.

• Development Pipeline Positioned for Demand Surge: With 1.3 million square feet of development opportunities (50% likely to win within two years) and strategic inventory accumulation near Redstone Arsenal and Fort Meade, CDP is positioned to capture the 6-18 month lag between defense appropriations and contractor space demand.

• Critical Variables to Monitor: The investment thesis hinges on execution of the development pipeline to meet visible demand and the trajectory of defense spending, particularly the Space Command relocation timeline and Golden Dome contract awards, against risks of government concentration and potential budget volatility.

Setting the Scene: A Fortress Built for Defense

COPT Defense Properties, a self-managed REIT founded over 32 years ago and headquartered in Columbia, Maryland, operates a business model that looks nothing like traditional office landlords. The company owns, operates, and develops properties located near—or sometimes within—key U.S. Government defense installations. Its tenants are not generic corporate users but the U.S. Government itself and its defense contractors, who require mission-critical and high-security property enhancements that cannot be replicated in standard office buildings.

This specialization defines CDP's place in the real estate value chain. While most office REITs compete for tenants in commoditized urban markets, CDP operates in supply-constrained submarkets where proximity to military installations is non-negotiable. As of September 30, 2025, the Defense/IT Portfolio comprised 198 operating properties totaling 22.6 million square feet, including 16.7 million square feet in 167 office properties and 5.9 million square feet in 31 single-tenant data center shells. The Other segment includes six additional properties totaling 2 million square feet, representing approximately 10% of the company's revenue base.

The industry structure heavily favors incumbents. Defense contractors cannot simply relocate to cheaper suburban office parks when their work requires Sensitive Compartmented Information Facility (SCIF) space, specialized security infrastructure, and immediate proximity to government customers. This creates switching costs that manifest in CDP's tenant retention rate of nearly 80%—a figure that traditional office REITs, facing remote work headwinds and lease expirations, can only envy. The company's strategic land positions near Fort Meade (cybersecurity hub), Redstone Arsenal (missile defense and space activities), and other defense installations represent irreplaceable assets that would take decades for competitors to replicate.

Technology, Products, and Strategic Differentiation: The SCIF Moat

CDP's competitive advantage is not digital software but physical infrastructure that serves as the backbone for national security operations. The company's core technology is its expertise in developing and operating SCIF space and other mission-critical enhancements that defense contractors cannot easily build or relocate. Why does this matter? Because a defense contractor's investment in SCIF improvements—often costing millions per facility and requiring 12-18 months to construct—creates a powerful economic lock-in. When lease expirations approach, the tenant must weigh the cost and disruption of rebuilding these specialized facilities elsewhere against renewing at modest rent escalations.

This dynamic drives CDP's exceptional tenant retention metrics. The company achieved 82% retention in Q3 2025 and the first nine months of the year, with management expressing 100% confidence in renewing secure full-building U.S. government leases that comprise a significant portion of upcoming expirations. Over the last two years, CDP has backfilled over 160,000 square feet of non-renewals with long-term defense contractor leases that added SCIF space, further strengthening both its Defense/IT concentration and retention profile. The cost and time required to build SCIF space means that once a tenant commits to a CDP property, they become sticky for years, if not decades.

The development expertise extends to data center shells, where CDP has built 5.9 million square feet of single-tenant facilities. While Digital Realty Trust dominates the hyperscale data center market with global scale, CDP's niche is defense-specific data centers requiring enhanced security and proximity to government missions. This differentiation allows CDP to achieve 95.7% leased rates while Digital Realty faces competitive pressures in non-defense markets. The company's development pipeline of 1.3 million square feet of opportunities considered 50% likely to win within two years represents visible demand that competitors cannot easily intercept, as these projects require relationships, security clearances, and land positions that CDP has cultivated over three decades.

Financial Performance & Segment Dynamics: Resilience as Evidence of Strategy

CDP's financial results serve as proof that specialization pays. In Q3 2025, the company reported FFO per share of $0.69, exceeding guidance midpoint by $0.02 and representing 6.2% year-over-year growth. For the first nine months, FFO per share grew 5.2%. Same-property cash NOI increased 4.6% year-over-year for both Q3 and the nine-month period, driven by a 40 basis point increase in average occupancy, lower net operating expenses (including a nonrecurring real estate tax refund), and the burn-off of free rent on development leases placed into service in 2023 and 2024.

The Defense/IT segment demonstrates the power of the moat. Revenues from real estate operations reached $161.6 million in Q3 2025, up 4.1% year-over-year, while NOI grew 4.8% to $102.9 million. The segment's assets total $3.41 billion, representing the core of CDP's value. With occupancy at 95.7%—the highest level in nearly 20 years—CDP is capturing the full benefit of its supply-constrained markets. This performance occurred while traditional office REITs like Boston Properties and Cousins Properties struggled with vacancy pressures and rent roll-downs in their non-defense portfolios.

The Other segment, while smaller, shows strategic progress. Revenues grew 7.6% to $18.7 million in Q3, while NOI surged 21.3% to $9.0 million, reflecting successful leasing efforts. The segment's occupancy increased over 300 basis points to 76% and lease rate by nearly 450 basis points to 81% over the past year. Management is focused on driving occupancy higher to eventually position these assets for sale, though the likelihood of capturing strong shareholder value in the current financing environment remains low due to high interest rates and distressed asset pricing. The bulk of the segment's vacancy is concentrated in 100 Light Street in Baltimore, with approximately 170,000 square feet; excluding this property, the segment is 86% leased, indicating that the non-core assets are performing better than headline numbers suggest.

Balance sheet strength underpins the strategy. As of September 30, 2025, CDP held $23.7 million in cash and had $476 million of available capacity on its $600 million revolving credit facility. Subsequent to quarter-end, the company executed three major financings: issuing $400 million of 4.50% Senior Notes due 2030 at spreads tighter than equal and higher-rated office peers, upsizing its revolving credit facility to $800 million at improved pricing (SOFR spread reduced 20 basis points to 85 basis points), and establishing a new $200 million revolving development facility. These moves prefunded the March 2026 bond maturity and added $400 million of capital capacity, putting CDP in a stronger position to capitalize on external growth opportunities.

The company's debt metrics remain reasonable for a REIT. Debt-to-equity stands at 1.58x, with 95% of debt fixed-rate, limiting interest rate exposure. If interest rates were 1% higher, interest expense would have increased by only $480,000 in the nine months ended September 30, 2025, based on variable-rate debt balances. The fair value of fixed-rate debt would increase by approximately $75 million if rates were 1% lower, indicating manageable duration risk. With an investment-grade rating and access to unsecured, primarily fixed-rate debt from public markets and banks, CDP maintains financial flexibility that many office REITs lack.

Outlook, Management Guidance, and Execution Risk

Management's guidance tells a story of accelerating momentum. For 2025, CDP raised its FFO per share guidance midpoint to $2.70, representing 5.1% growth over 2024 and $0.04 above initial guidance. Same-property cash NOI growth guidance increased to 4%, 125 basis points above initial guidance, driven by higher occupancy and lower expenses. The vacancy leasing target was increased to 500,000 square feet, 25% above the initial target, reflecting strong year-to-date performance and a robust pipeline of advanced negotiations.

The capital commitment target increased to $250 million for 2025, with the company expecting to exceed its original $200-250 million range due to multiple build-to-suit opportunities in advanced stages. This capital will fund developments like the 100% pre-leased 7700 Advanced Gateway ($27 million investment) and acquisitions like Stonegate I in Chantilly, Virginia ($40 million purchase at a 9% initial cash NOI yield). The development pipeline of 1.3 million square feet of opportunities considered 50% likely to win within two years provides visible growth that traditional office REITs cannot match.

The defense spending environment supports this optimism. The "One Big Beautiful Bill Act," signed July 4, appropriates $150 billion in additional defense spending over four years, with $113 billion allocated to 2026. Combined with the President's budget request, this amounts to nearly $950 billion in defense spending, a 13% year-over-year increase—the largest nominal increase in at least 25 years. Intelligence spending of $116 billion (14% increase) and cybersecurity spending of over $16 billion (14% increase) directly benefit CDP's Fort Meade and Northern Virginia portfolios. The Golden Dome missile defense shield, with $25 billion appropriated for 2026 and total projected cost of $175 billion, positions Redstone Arsenal as a center of excellence for missile defense technology development.

Demand typically lags appropriations by 6-18 months, setting up a strong tailwind for 2026 and beyond. Management expects this cycle to be faster, with discussions already underway with contract-contingent tenants planning for expected wins. The Space Command relocation to Redstone Arsenal, announced September 2, represents a 450,000 square foot opportunity that will likely lease in increments over time, with a 2:1 contractor tail expected to materialize after the 2027 relocation. The company has already signed one new lease tied to Golden Dome opportunities since July funding, with additional contract awards expected by year-end.

Execution risks remain manageable but material. Government shutdowns could delay lease renewals, though management emphasizes that rent collection continues and buildings remain occupied by essential missions. Any delay impacts timing, not the ultimate renewal. The company has 2.2 million square feet expiring in its Defense/IT portfolio over the next two quarters, but nearly 70% (1.5 million square feet) are secure full-building U.S. government leases where CDP expects 100% retention. The Department of Government Efficiency (DOGE) initiatives appear to be tailwinds rather than risks, as they streamline administrative processes and expose ineffective legacy systems, reinforcing demand for CDP's efficient, mission-focused properties.

Competitive Context: Dominance in a Supply-Constrained Niche

CDP's competitive positioning is best understood by comparison to ostensible peers. Easterly Government Properties (DEA) specializes in properties leased to federal agencies but lacks CDP's defense-specific focus and development pipeline. DEA's TTM profit margin of 4.15% and ROE of 1.05% trail CDP's implied margins from 6.2% FFO growth and 9.99% ROE. While DEA offers a higher dividend yield (8.23% vs. 4.13%), its growth trajectory and scale are modest compared to CDP's 22.6 million square foot Defense/IT portfolio.

Digital Realty Trust (DLR) dominates the hyperscale data center market but serves a different customer base. DLR's global scale and $74 billion enterprise value dwarf CDP's $5.83 billion, but its 27.82x EV/EBITDA multiple reflects competitive pressures and expansion risks that CDP's niche avoids. CDP's defense-specific data center shells, while smaller, command premium pricing and near-perfect occupancy due to security requirements that DLR's general-purpose facilities cannot easily replicate. The 95.7% leased rate in CDP's Defense/IT portfolio compares favorably to DLR's more variable occupancy.

Traditional office REITs like Boston Properties (BXP) and Cousins Properties (CUZ) compete indirectly in the Washington, DC region but lack CDP's mission-critical focus. BXP's negative profit margin (-5.85%) and CUZ's modest 6.03% margin reflect broad office market headwinds that CDP's defense specialization has avoided. While BXP and CUZ trade at similar EV/Revenue multiples (8.30x and 7.78x respectively) to CDP's 7.77x, their growth prospects are tied to general economic conditions rather than the durable, growing demand for defense infrastructure.

CDP's moats manifest in tangible advantages. The company is the dominant landlord in supply-constrained submarkets like the Westfield submarket in Northern Virginia, owning roughly one-third of the 4 million square feet of office inventory in the tightest submarket in the region at 94% leased with Class A rents increasing 25% over five years. Other landlords with secure space are "burdened with heavy traditional office in their portfolio" and struggle to fund deals, while CDP's balance sheet strength and specialized focus allow it to "help fund their deals and co-invest with them." This positions CDP as the partner of choice for defense contractors seeking expansion space.

The barriers to entry in CDP's niche are formidable. High capital requirements, established relationships with government contractors requiring security clearances, and regulatory hurdles for sensitive locations protect its market share. New entrants would need decades to replicate CDP's land positions and tenant relationships, implying sustained competitive advantages. The company's development expertise in SCIF space and data center shells further widens the moat, as these specialized skills are not easily transferred from traditional office development.

Valuation Context: Pricing for Quality in a Distressed Sector

At $29.11 per share, CDP trades at approximately 10.8x 2025 FFO guidance midpoint of $2.70 per share. This multiple reflects a discount to the broader REIT market but a premium to distressed office REITs, appropriately pricing the company's specialized focus and resilient cash flows. The 4.13% dividend yield, with a healthy 65% AFFO payout ratio, provides income while investors wait for the defense spending tailwind to fully materialize.

EV/EBITDA of 14.97x sits between Easterly's 13.89x and Boston Properties' 15.11x, suggesting fair valuation relative to direct and indirect peers. However, CDP's 5.1% FFO growth guidance for 2025 and projected 4%+ compound annual growth through 2026 exceed the flat to negative growth expectations for traditional office REITs. The company's debt-to-equity ratio of 1.58x is reasonable for a REIT with 95% fixed-rate debt and investment-grade access, particularly when compared to Boston Properties' 2.31x leverage.

The recent bond offering at 4.50% due 2030, priced at spreads tighter than equal and higher-rated office peers, signals that fixed income investors recognize CDP's credit quality. As CFO Anthony Mifsud noted, "The credit spread achieved was tighter than the trading levels of all of our equal and higher-rated office peers, and these bonds continue to trade at levels that are tighter than those peers." This financing flexibility provides a competitive advantage, allowing CDP to prefund its 2026 maturity and maintain dry powder for acquisitions while competitors face financing constraints.

Trading at 2.18x book value, CDP commands a premium to Easterly's 0.74x and Cousins' 0.87x, reflecting the market's recognition of its specialized asset quality. The price-to-operating cash flow ratio of 10.32x and price-to-free cash flow of 11.11x indicate reasonable valuation for a company with visible growth prospects tied to defense spending rather than cyclical economic recovery.

Risks and Asymmetries: Where the Thesis Can Break

The primary risk to CDP's thesis is concentration. With 90% of revenue derived from defense and IT tenants, the company is exposed to federal budget volatility. While the current political environment strongly supports defense spending, a future administration could shift priorities, impacting demand for CDP's properties. However, the bipartisan nature of national security and the specific initiatives around Space Command and Golden Dome provide some insulation from political swings.

Government shutdowns present timing risks rather than fundamental threats. As CEO Stephen Budorick emphasized, "Government shutdowns do not materially impact our business as we still collect rent. And two, our buildings are well occupied because they are leased to essential missions." Any delay in lease renewals affects timing, not the ultimate outcome, as standstill agreements require rent to continue at current rates until formal renewals are signed. With 1.5 million square feet of secure full-building government leases expiring through 2026, CDP expects 100% retention, but administrative backlogs could push some renewals into 2027.

Execution risk on the development pipeline is material. The company has committed $72 million to two new investments in Q3 2025 and expects to commit $250 million for the full year. While the 1.3 million square feet of opportunities are considered 50% likely to win, any misjudgment of demand timing or tenant requirements could result in speculative development that pressures returns. Management's strategy of building inventory in highly occupied markets like Redstone Gateway mitigates this risk, but development yields must be maintained above the 8.5% cash yield target for non-data center assets.

Interest rate risk is modest but present. With 95% fixed-rate debt, CDP is insulated from rate volatility, but rising rates could impact acquisition cap rates and tenant cost of capital, potentially slowing defense contractor expansion. The company's successful bond offering at 4.50% demonstrates access to capital at reasonable rates, but the $0.07 refinancing drag expected in 2026 from the 235 basis point spread between the new 4.50% bond and the maturing 2.25% notes will pressure FFO per share until the higher-rate environment is fully absorbed.

The Iowa data center land acquisition highlights execution challenges beyond CDP's core competency. Power availability remains uncertain, with management stating "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." This suggests that data center development outside CDP's established defense markets may face delays that don't exist in its primary segments.

Conclusion: A Defensive Growth Story at the Right Moment

COPT Defense Properties has engineered a business model that transforms the typically cyclical real estate sector into a defensive growth story. The company's 32-year focus on mission-critical properties near defense installations has created an unassailable moat that manifests in 95.7% occupancy, 80%+ tenant retention, and resilient cash flows that grew 27% through the most challenging office market environment in decades. While traditional office REITs grapple with remote work and oversupply, CDP benefits from non-discretionary demand driven by national security imperatives.

The defense spending inflection point—marked by the "One Big Beautiful Bill Act," Space Command relocation, and Golden Dome missile defense shield—provides a multi-year demand catalyst that is just beginning to materialize. With a 6-18 month lag between appropriations and contractor leasing activity, CDP's strategic accumulation of 250,000 square feet of inventory and 1.3 million square feet of development opportunities positions it to capture this surge. The company's balance sheet strength, evidenced by the oversubscribed $400 million bond offering and $800 million upsized revolver, provides the firepower to execute while competitors remain capital-constrained.

The investment thesis ultimately depends on two variables: CDP's ability to deliver its development pipeline on time and on budget to meet visible demand, and the durability of defense spending growth beyond the current political cycle. While government concentration presents inherent risks, the bipartisan nature of national security and the specific, funded initiatives around space and missile defense provide unusual visibility. Trading at 10.8x FFO with a 4.13% dividend yield and 5%+ growth prospects, CDP offers a compelling risk-reward profile for investors seeking exposure to defense spending without the volatility of defense contractors. The company's fortress is not just physical—it's financial, strategic, and temporal, built to capitalize on a moment in defense policy that may define the next decade.