Copt Defense Properties (CDP) Q3 2026 Earnings Call Transcript

Welcome to Kopp Defense Properties Third Quarter 2026 Results Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Mr. Venkat Komineni, Kopp Defense's Vice President of Investor Relations. Sir, you may begin.

Thank you, Tawanda. Good afternoon, and welcome to Kopp Defense's conference call to discuss third quarter results. With me today are Steve Bedorek, President and CEO. Britt Snyder, Executive Vice President and COO, and Anthony Mifsud, 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. Actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update them. Steve?

Good afternoon, and thank you for joining us. We had another great quarter with continued strength in demand and a robust underlying business environment highlighted by our vacancy leasing achievements. It all translated into solid results, which I'll detail. For the third quarter, FFO per share was 71 cents, which was two cents above the midpoint of guidance and represents 2.9% increase year over year. Same property cash NOI increased 3.2% year-over-year and 5.3% during the nine months. We had a particularly strong quarter in terms of vacancy leasing, executing 222,000 square feet, which exceeded our trailing five-year quarterly average by 50%. This achievement brings vacancy leasing during the first nine months to 453,000 square feet, which amounts to 95% of our prior full-year target of 475,000 square feet and over 110% of our initial target of 400,000 square feet. We committed $88 million to two developments at Redstone Gateway, which we announced on our last call. The Huntsville operating portfolio is 98% leased and continues to see very strong demand, which led us to start these projects to provide the vital inventory we need to meet the demand we're seeing and to accelerate those lease commencements. Turning to guidance, we increased the midpoint of 2026 guidance for four metrics. FFO per share is adjusted for comparability, increased to $2.80 per share. Same property cash NOI growth increased to 4.25%. Capital committed to new investments increased to $375 million. And capital invested in development and acquisitions increased to $240 million. Anthony will provide additional detail on what drove these increases. We decreased the midpoint of our tenant retention guidance for a very good reason, to support the growth of core tenants and strengthen our tenant roster. Our tenant retention was actually tracking 84%, but we created an opportunity to recapture space from three suboptimal tenants and release those spaces to high-value tenants with strong long-term growth and credit profiles. As a result, we're reducing the midpoint of our tenant retention guidance by 250 basis points to a still very strong 80%. We made a corresponding change to our vacancy leasing target, increasing it to 625,000 square feet because we have leased or expect to lease over 145,000 square feet of this nearly 160,000 square feet of space recaptured from the three tenants. The strong level of demand in our portfolio position us to proactively enhance our tenant growth profile while continuing to maintain a sector-leading tenant retention rate. With the midterm election just days away, I'd like to remind everyone of the immense stability in our country's support for increased defense spending over the past 12 years, regardless of the shifts in control of the chambers of Congress and the presidency. First, over that period, there's been a balance between unified and split control of government, with six years of unified control, including the presidency in both chambers, four under the Republican Party and two under the Democrat Party, and six years of split control. Despite these control changes within the government, there has been strong bipartisan support for defense spending throughout the period. Since fiscal year 2015, the National Defense Authorization Act has, on average, passed the House by a margin of 3.5 to 1 and the Senate by over 7.5 to 1. During this period, the defense-based budget grew by $285 billion, or 51%, and that equates to a compound annual growth rate of nearly 4%, with annual increases incurring in each of those 12 years. Second, our business is primarily driven off the Department of War base budget, which, at $840 billion in fiscal year 2026, is the highest defense budget in history. Looking forward, the FY2027 base budget request is $1.1 trillion. With the challenging global threat environment, we expect defense spending will continue to be a priority, regardless of the election results. And finally, given the 12- to 18-month lag we generally experience between budget appropriation and leasing activity, there is embedded demand throughout our portfolio from funding that has already been appropriated. The FY 2025 and FY 2026 budgets, plus the $150 billion of funding appropriated in the One Big Beautiful Bill Act, will continue to produce demand in our portfolio through 2027. The FY 2027 budget, when ultimately passed, will drive activity in 2028 and 2029. So, notwithstanding the election, we have a very strong funding backdrop supporting our underlying industry. We're not the only company seeing growth opportunities created by the massive investments in technological advancement in support of national defense. There's a rising tide of private capital targeting the defense sector space, and in particular, emerging technologies. In fact, Blackstone has invested $20 billion in the sector over the past five years, with a recent investment of $1 billion to form a defense tech platform specializing in missile interceptor technology. Carlisle Group announced a $3 billion defense fund that recently invested in the company developing low-cost hypersonic weapons. And J.P. Morgan announced the $1.5 trillion Security and Resiliency Initiative last year to finance and facilitate investments in key areas of economic and national security, including aerospace and defense and frontier and strategic technologies such as cybersecurity and quantum computing. Clearly, the investment priorities of the Department of War are generating a strong response from the private sector to deploy capital to companies serving the same priority missions supported by our portfolio, which include intelligence, cybersecurity, and missile threats. So, having touched on the highlights of the business, I'll turn it over to Britt for additional detail.

Thank you, Steve. Steve, before I walk through the operating performance during the quarter, I'd like to highlight the strong leasing results driven by our unique strategy. We have executed 3 million square feet of total leasing during the first nine months, which includes strong performance on the vacancy leasing front and very healthy demand. We are executing leases with tenants supporting broader missile defense missions in Huntsville and have a robust pipeline of additional prospects. We are also executing leases with tenants supporting U.S. Cyber Command and Columbia Gateway, which accounts for nearly half of our vacancy leasing year-to-date. And finally, of the nearly 1 million square feet of combined vacancy and investment leasing executed year-to-date, roughly 80% is with existing tenants. This highlights one of our key strengths, our tenant relationships, as the leading defense contractors in the country have multiple leases with us in multiple markets. At the end of the third quarter, our total portfolio was 95% leased and 94% occupied, while our defense IT portfolio, which accounts for 93% of our NOI, was 96.2% leased and 95.2% occupied. The 60 basis point decrease in the total portfolio's lease rate was primarily driven by two events. First, the law firm tenant that leased both its new and old space in Baltimore last quarter vacated their old space this quarter, which accounted for 30 basis points of the decrease. Second, as Steve discussed, a strategic early lease termination accounted for 20 basis points of the decrease. In Redstone Gateway, we recaptured 46,000 square feet from a defense tenant underutilizing their space. We are in advance negotiations to backfill the bulk of that space to Lockheed Martin to expand its presence in the park by nearly 30% and have several great prospects for the remainder of the space. This overall decline was mitigated by 50 basis points of offsetting occupancy by placing MBP 400, our 100% occupied inventory development at the National Business Park, into service during the quarter. As a result, total portfolio occupancy only declined by 10 basis points. Additionally, in Columbia Gateway, we recaptured 56,000 square feet from a non-defense tenant set to vacate in 2027. We fully backfilled that space to Frequentis, an existing and fast-growing defense contractor in the park, focused on both cyber and aviation. We expect that lease to commence in the first quarter of 2027. Frequentis has more than doubled its footprint in Columbia Gateway since the beginning of the year, Starting at 87,000 square feet, then expanding by nearly 100,000 square feet through four separate transactions. Both examples speak to a few of our key competitive advantages of proactive asset management scale, commitment to accommodate tenant growth throughout the portfolio, and a strong balance sheet and cash flow to fund tenant improvements. One additional point about Columbia Gateway, earlier this month, we also signed a 30,000 square foot lease at Franklin Center, bringing that recent acquisition up to 87% lease. We executed 222,000 square feet of vacancy leasing during the third quarter and 504,000 square feet year to date. This achievement equates to over 125% of our initial full year target of 400,000 square feet and over 105% of our second quarter full year target of 475,000 square feet. We have over 200,000 square feet of prospects in advanced negotiations, which we define as over 90% likely to execute. Taken together, there are 710,000 square feet of leases either executed or in advanced negotiations, which supports our decision to increase our target for vacancy leasing to 625,000 square feet for the year. Our leasing activity ratio has grown to a very strong 83%, which is based on over 1 million square feet of prospects on about 1.25 million square feet of availability. Of the 710,000 square feet of vacancy leasing executed or in advanced negotiations, approximately 55% or 390,000 square feet leases space that was vacant at the beginning of the year. 25%, or 175,000 square feet, leases non-renewing space in 2026 and 2027, and backfills nearly 20% of the forecasted non-renewals in 2026, and 20%, or 145,000 square feet, backfills the majority of the nearly 160,000 square feet of the strategically recaptured space. Again, this activity demonstrates our proactive asset management, the result of which is to satisfy our tenants' needs while minimizing downtime and capitalize on the strong level of demand across the defense IT portfolio. Turning to renewal leasing, we executed nearly 550,000 square feet in the quarter. With tenant retention of 70%, cash rent spreads up 8.5%, and gap rent spreads up 20%. Retention results were heavily influenced by two of the three space recapture activities, which impacted tenant retention in the third quarter by 11 percentage points. Cash rent spreads in the quarter were heavily influenced by our 10% joint venture share of three data center shell renewals, which had a weighted average increase in cash rent spreads of 140%. Over the past three years, we have executed 10 data center shell renewals, all of which are held in JVs, totaling 1.7 million square feet at a weighted average cash rent spread of over 120 percent. Excluding the data center shell renewals, cash rent spreads would have been up 70 basis points in the quarter and up 2.7 percent over the nine months. Moving on to development, our active pipeline now totals 1.1 million square feet. That is 64% pre-leased and amounts to nearly $530 million in capital commitment. Four of the eight projects are 100% pre-leased. Of the remaining four projects, 8,500 Advanced Gateway is nearly 90% pre-leased, as we signed a 75,000-square-foot lease this quarter tied to missile defense and are in advance negotiations on a 14,000-square-foot lease, which will bring the building up to just over 98% leased. This inventory building will essentially be fully leased only six months after substantial completion of construction. We are in active discussions with multiple government missions related to space and missile defense at 410 Goss Road, which is our inventory building for the government, and we continue to expect lease activity for that building sometime in 2027. With the bulk of our Huntsville portfolio already leased, we kicked off development of two defense contractor inventory projects this quarter, which total $88 million in capital commitment. At 6300 Redstone Gateway, a 175,000 We have 235,000 square feet of prospects. At 2200 Rideout Road, a 59,000 square foot development, we have 105,000 square feet of prospects. The government's massive investment in missile defense, which includes the Golden Dome Initiative, is emerging as a catalyst for growth in our Huntsville portfolio. Within the past year, we have already executed 170,000 square feet of vacancy and investment leasing tied to these missions, with a strong pipeline of demand behind that. Given the dynamic environment we're in, we revisited our Redstone Gateway Master Plan and expanded our development capacity by an additional 500,000 square feet. The park can now accommodate 6.4 million square feet without structured parking, increasing our future development capacity to 3.2 million square feet. We are already designing the next five buildings and planning the next eight buildings after that. When fully built out, the Redstone Gateway would become the largest park in our portfolio. 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 1.1 million square feet. Beyond that, we are tracking an additional 1.2 million square feet of potential development opportunities. With that, I'll hand it over to Anthony.

Thank you, Britt. We reported third quarter FFO per share of 71 cents, which was 2 cents above the midpoint of guidance and included 1.3 cents of dilution from our exchangeable notes. The quarter benefited primarily from lower than anticipated net operating expenses, including the timing of R&M expense, which will occur in the fourth quarter, and higher space recapture and net development fees. Same property cash NOI for the quarter increased 3.2% year-over-year, driven by cash rent starting on development and acquisition leases, which commenced in prior years, partially offset by lower real estate tax refunds. Same property occupancy ended the quarter at 93.9%, and we continue to expect to end the year at roughly 94%. With respect to guidance, we increased the midpoint for the following four key metrics. We increased the midpoint of same property cash NOI growth by 25 basis points to 4.25%, 175 basis points above initial guidance, based on our outperformance this quarter. We increased the target of capital committed to new investment guidance by $40 million to $375 million, which is 50% above initial guidance. This increase is to accommodate enhanced security requirements for the mission work at our fully pre-leased development project in San Antonio, with a commensurate increase in rent, which will maintain our development yield. We increased the midpoint of capital invested in development and acquisitions by $15 million to $240 million, as we are ahead of schedule on several projects. Finally, we increased the midpoint of FFO per share, as adjusted for comparability, by $0.02 to $2.80, driven primarily by the overachievement in the third quarter. When we provided our $2.75 per share initial 2026 guidance for FFO, we explained that the 1.1% implied growth was muted when compared to the 5% compound annual growth we achieved between 2019 and 2025. As it incorporated the increase in interest expense associated with the refinancing of the $400 million, two and a quarter percent bond, and the required recognition of the hypothetical dilution from our exchangeable notes. Since then, the 20 percent increase in our stock price during the first nine months has increased the dilution from the notes by an additional two cents, for a total of three cents for the year. Our revised guidance reflects overcoming that incremental drag and increasing the midpoint of our FFO per share guidance from our initial estimate by $0.05 to $2.80 per share, equating to roughly 3% growth. Excluding the increased dilution from our exchangeable notes, FFO per share growth would have been roughly 4% this year. A common theme among the sell-side REIT earnings previews has been how the impact of the higher interest rate environment will weigh on FFO per share growth over the next few years. Regarding short-term rates, the forward curve for SOFR forecasts an increase from an average rate of 3.7% in 2026 to 4.4% in 2027. The impact of this 70 basis point average increase in SOFR, combined with a forecasted increase in our variable rate debt of over $125 million next year, results in an increase in our interest expense in 2027 relative to 2026 of approximately $8 million, or $0.07 per share. With respect to long-term rates, the 5- and 10-year Treasury yields have increased roughly a 105 and 80 basis points respectively since the beginning of the year. The market suggests we could currently price 5-year unsecured debt at a spread of 100 basis points for an all-in rate of 5.8 percent and 10-year unsecured debt at a spread of 130 basis points for an all-in Despite these increases in long-term treasury rates, we are well positioned given the fact that we have no material debt maturities until September, 2028. Our credit spreads are the lowest in the office subsector. We enjoy tremendous support from the fixed income investor community, and our balance sheet and financial metrics continue to strengthen as the operating portfolio continues to grow, and we place highly leased development projects into service. With that, I'll turn the call back to Steve.

Thank you. So we're having another very successful year, and we are once again outperforming on virtually all our key measures. We increased the midpoint of 2026 guidance for four key metrics. We now expect FFO per share growth of nearly 3% in 2026, despite the headwinds from higher financing costs. We expect to commit $375 million to new investments during the year, which is the highest level of capital commitment since 2021 and brings our two-year total for capital commitments to $650 million. Our revised guidance demonstrates the strength of our defense IT strategy, as our compound annual growth rates since 2019 are now 5.1% for NOI, 5.2% for EBITDA, 4.7% for FFO per share, which demonstrates the durability of our portfolio and cash flows during some very challenging market environments. We're highly confident tenant demand will remain healthy, given the strong Department of War spending levels, supported by both parties in Congress, and ratified by the amount of private capital flowing into the space. This all provides the platform for us to continue to execute on our strategy and create shareholder value. Operator, please open the call for questions.

Thank you, Mr. Bedorek. Ladies and gentlemen, to ask a question, please press star 1-1 on your telephone. Then wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of names, Ibeki, with Evercore ISF. Your line is open.

Thanks. Could you please expand a little bit on your commentary about upsizing your future development opportunities at Redstone and just kind of, like, help us understand how many buildings, like, going forward you kind of, like, expect to maybe start and, like, how deep the demand pipeline there is specifically in Redstone. Obviously, it sounds very encouraging, and whether you've changed your underwriting economics that you expect there, based on the strong demand you've been seeing.

A lot of layers in that question, Manis. All right, let me talk about the master plan. As we commit to buildings and fulfill the demand of our development, it's not always to the plan that we've had, so we routinely revise it. We put a heavy emphasis on this current reassessment to maximize square footage, and we're able to squeak out some additional buildings. I don't remember the exact count, but it compiles about 500,000 square feet. So that was layer one. Layer two, let's talk about underwriting. Now, we have not changed our underwriting. We remain with the same threshold cash returns that we have had in the past, which currently is 8.5% initial cash yield on development costs. Demand remains very high, and I would say there's a uniquely strong sense of urgency behind the demand that we are seeing. Tenants are looking in advance for their opportunities. They're awaiting certain things to develop with their ultimate customer, but once they have their opportunity set lined up, they want to move out quickly. In response to that, we are advancing our pre-planning so that we can cut several months off the development cycle by having plans already developed that we can site appropriate to that use and shorten our delivery period, accelerating lease commencements. I might have missed the layer. You'll have to remind me.

All right. I really appreciate it. Just one quick follow-up on the demand that you see there. Could you maybe help us think through how much of the tenant demand is from tenants currently already with a presence in that specific sub-market versus tenants that are coming new to Redstone to capture business opportunities there?

Yeah, I'd say it's about half and half.

Got it. Okay. Thank you.

Thank you. Our next question comes from the line of Blaine Heck with Wells Fargo. The line is open.

Great, thanks. Steve, appreciate your commentary on midterms, but just to dig deeper and give you an opportunity to offer any more comfort on demand, I guess in the events of a change in congressional control, could that meaningfully change the timeline for getting the base budget passed? And specifically, do you think programs like the Golden Dome might be more exposed to funding uncertainty than the base budget?

Well, so I think if there is a change in control, you've got a lame duck session, and I think they're going to jam that FY27 budget through earlier than they might if there's not a change in control. where there's more time to be thoughtful about the programs that they're going to fund. Either way, I would expect no later in February we're going to have an FY27 DOD appropriation. Trying to remember the second half of the question?

Golden Dome.

Oh, well, you know, Golden Dome is a specific funding name, but it's generally missile defense. Golden Dome is applying that missile defense in an aspirational way across the United States of America to bring home that defensive shield in a deployable way to protect our country instead of the theaters of war, Where it's typically been deployed. Long term, that's not going to change. They might call it something different, but absolutely the need has been identified and it's going to be deployed. Timing might be an issue. With regard to the technology, there's no turning back. The investment in technology that's needed in this new threat environment where we've seen the impacts of drones and swarms of missiles, irrespective of which party's in, they've got to recognize the technological threat. And the shortage or, you know, the imbalance between what we currently are able to deploy and the cost and volume of things we need to deploy in the future.

Great. Thanks. Maybe for Britt, with respect to the proactive space recaptures, can you comment at all on the marked market you expect on the releasing of that space? How much downtime might be baked into guidance and whether this is a one-time opportunistic move or a strategy you think you can repeat where you see a credit or growth upgrade available?

Yeah, I'll hit the first part first. I mean, in terms of the three recaptures, you know, I would say one of them is essentially flat, maybe slightly lower than one was up about 20 percent and the other was about down 20 percent. So, you know, overall, pretty close when you put them all together. And then I would say, in terms of the timing of this, you know, we're just seeing so much demand, both in Columbia Gateway and in Huntsville, that it just, it was a good time to do it and, you know, evaluate, as Steve pointed out, some suboptimal tenants, and can we replace them with higher credit profiles, higher growth profiles, it was just a good time to do it.

And Blaine, I would add the mark-to-market is relevant, but in two of these cases, it's a little less relevant because they were the only two tenants in our portfolio where we had gone on a – reserved their balances, so we were on a cash basis with both of those. So from a true rent standpoint, at least with both of those, it was going from almost nothing to the new rent from the new tenants.

Got it. Thanks, guys.

Thank you. Our next question comes from Milan of Richard Anderson with Canter Fitzgerald. Milan is open.

Hey, thanks. Good afternoon. So despite the bipartisan comments that you made, you know, clearly Trump is making copped great again, to put it that way. And I'm curious if there's any, you mentioned kind of constantly, you know, kind of looking at what you have underway and revising the plan. When you think about the different forms of defense that you have embedded in your portfolio, some are involved, you know, some of which, excuse me, you're missing some that maybe are growing at a faster rate because, you know, you had this thing all embedded five years ago. I'm sort of spitballing the question, but the idea is, are new initiatives coming online now that you, in history, have not been necessarily a part of, and so you're having to retweak the platform and be a part of that growth profile, or do you feel like you're kind of there and largely aligned with where the big parts of the defense budget that are growing today, if that makes sense?

Yeah, it's hard to nail that down simply, but I would say some of the most advanced, the highest investment in advanced technology pertains to missile defense. That's why we highlight it, and all of that will be coordinated out of the command structure that's on the Redstone arsenal. So that's ground zero for the missile and anti-missile world. But there's also advancements that are occurring for the naval fleet in the command and control structure, technological research development, test and evaluation. We're exposed to that as well with our Navy portfolio. I think Rick commented about the success we're having at Columbia Gateway. That's largely tied to increased requirements in the cyber defense. And we all know that DOD, U.S. Cyber Command, is based at Fort Meade. We have several business parks that serve it. I would say there's going to be some interesting breakthroughs in manufacturing and construction, so I think you can expect over the next three years some pretty significant expansion of shipbuilding in a variety of places along the eastern and gulf seaboard. We're not going to be a part of that manufacturing. There's some high-tech manufacturing that's occurring in Southern California. Thus far, we haven't seen an opportunity for us to be involved in that. But I think where the long-term mission funding and the defense of the United States is coordinated, we're in the right spots.

Okay, fair enough. And specific on cyber, it's growing, of course, but is it the same level of priority as it was five or ten years ago with the advent of AI and everything else that's changing technologically? Or do you feel like it's just as much a priority to defense as it was a few years ago?

Well, I'm hardly the cyber expert of the country, but in my view, AI is an immense threat to our cyber defense position from everything I've read. I think it's going to require increased spending to counter the efficiency that AI might bring to the adversary trying to hack our networks.

Okay, fair enough. And just a quick last question for whoever wants to take it. 95%, 95.2% precisely on the defense IT portfolio. I mean, great vacancy leasing activity obviously upped your number, but how close are we to sort of a, you know, a frictional level of vacancy that is not a whole lot of upside from that point? Or do you think that you could still, you know, get close into 100% or something like that? I'm not sure if that's possible, but you tell me.

Well, it's always tough to drive it much higher because you're trying to measure the demand or match the demand in the market with the space you have available. But we're optimistic we can push it up over the next couple of years. Not sure how hard, but we're how high, but we're focused on it.

Right. But vacancy leasing, probably this is your sweet spot now, and maybe it starts to sort of naturally decline because there's just nothing more to do. There's not as much more to do. Is that a fair statement?

Well, I think you can see during the year the change in our guidance. We started with 400,000 square feet, which we thought was aspirational. We're enjoying really strong demand. I think Brett broke out our projected leasing for the year. 55% went to space that was vacant at the beginning of the year. Twenty-five percent was pre-leasing maturities that were scheduled, and then another 20 percent was asset managing a couple of lower credit tenants, taking that space back and putting it to better use with faster-growing tenants. So, you know, we'll continue to manage the portfolio to optimize the return.

Yeah, and Rich, the, you know, our retention rate's the highest in the sector, but there's still the component that's the inverse of the 80% retention, which is that 20% of the space, which is this year through the nine months ended is about a half a million square feet. So there's always that churn that's going to happen that will continue to backfill that space and provide metrics within the vacancy leasing target.

Yep, fair enough. Thanks, everyone.

Thank you. As a reminder, ladies and gentlemen, that's star 1-1 to ask a question. Our next question comes from the line of Seth Bergy with Citi. Your line is open.

Hey, thanks for taking my question. I guess just looking at kind of the mark-to-market you put up on the three data center shell renewals this quarter, how much kind of data center shell square footage remains in the expiration schedule over the next 12 to 24 months? And do you think you would kind of achieve similar uplift on renewal of those, if any?

Well, I'd say over the last three years, the uplift has gotten higher, peaking this year at 140%. I think it breaks down to 110, 120, now 140. So it's pretty exciting when we get to see a renewal in that segment. Anthony, do you have an idea?

Yeah, I think the, you know, over the next several years we have, these are gross square footage numbers. So we have 300,000 square feet expiring in 2028. We have almost a million square feet in 2029. But again, that's the gross amount. So it's only 10% of that would fall into our results. I think the more impactful results for the company will come when some of the wholly owned data center shells come up for renewal, all of which are outside of the next five-year period.

And then, just is there any update on kind of a timeline to dispose of kind of the non-core assets that remain in your portfolio?

No, I mean, the timing of our ability to do that in an accretive way for our shareholders is just directly tied to the interest rate environment in the investment market. With interest rates high, there's really very little ability to sell assets at a level that makes sense for our shareholders. I'd say several years out. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Dylan Brzezinski with Green Street. Your line is open.

Hi, guys. Thanks for taking the question. I guess it seems like things continue to sort of remain very positive in your guys' sort of realm of the world and defense-oriented assets. But I guess, you know, what do you guys sort of see as potentially the biggest near-term risk overall to the business?

So I think the demand is driven by DOD spending, and DOD spending is driven by the global threat environment. I think that's going to remain pretty consistent to what it is for quite some time. That's not a concern we have in the business. I would say the one thing that affects what we can deliver to shareholders is interest rates. We've talked a little bit of that on the call. Higher interest rates leaks out money that could be FFO per share. And so we're focused on maximizing the financing impact on the company as we have opportunities to influence it in the future. But our underlying business strategy is strong, and I have no concern about our ability to continue to execute the plan we have.

Great. And then, you know, in light of that strong backdrop and seemingly, you know, limited risk to that, you know, as you sort of look at rental rate economics, I know you guys sort of always like to talk about having a partnership with your client and therefore not pushing too hard on the face rent side of things. But are you continuing to see at all further relief on free rent and or the ability to maybe embed higher rent bumps into the overall lease structure? Or is that still sort of at the same pace as maybe where we were at the start of the year?

The last three years, well, Britt, you can talk about it. It's your success. Yeah, no, no. I was going to say we continue to drive down that free rent where we can due to the demand we're seeing and lack of availability. But, I mean, again, every time we build a new building in Huntsville, we're pushing – I mean, we set a new record with rate. You know, in most of our markets, we're 10% to 20% higher than the rest of the surrounding markets. So, I mean, we'll push where we can on rate, but, you know, we're already at the top and I think pushing at a healthy level.

Thank you.

Ladies and gentlemen, I'm Sean. No further questions in the queue. I would now like to turn the call back over to Mr. Bedorek for closing remarks.

Thank you for participating in our call today. We are in our offices, so please coordinate through NCAT if you'd like to follow up phone call. Thank you very much. Have a great day.

Thanks for participating in today's Copy Defense Properties 3rd Quarter 2026 Results Conference Call. This concludes the presentation. You may now disconnect. Good day.