Copt Defense Properties (CDP) June 2, 2026 Conference Transcript

All right, let's get going here. Thanks, everybody, and good morning. My name is Tony Pallone. I'm a research analyst at J.P. Morgan, and I'm here to present the management team of COPD Defense Properties. It's my pleasure to introduce these guys, and then I'll moderate some Q&A, and what we'll do, as we typically do with these, is keep these fairly open so that if you have any questions, go ahead and raise your hand, and I'll get you in here, and we'll keep the conversation going for the next 30 minutes. So with that, I'm going to start at your left end of the table, Anthony Mifsud. Who's Chief Financial Officer of the company, Steve Bedork, Chief Executive Officer, and Britt Snyder, Chief Operating Officer of CDP. So what I'll first do is kick it over to you, Steve, and maybe just give us a quick two, three minutes on COPD and what you do and what the portfolio looks like, and then we'll go from there.

Okay. Thank you. So Cap Defense Properties is a specialized, deeply concentrated and mission-critical asset to support the national defense activity of the United States government. The vast majority of our 207 properties are located adjacent to or occupied by priority defense missions, generally involving knowledge-based defense activities. The missions we support include intelligence, surveillance, and reconnaissance, cybersecurity and network activities, naval, sea, and air technology development, missile attack and defense systems, drone aviation technology development, Cloud computing, and others. Our property locations are not typical for an office company. They're approximate to United States defense installations that have permanence in Maryland, Virginia, Alabama, and Texas. Our properties are improved for top-secret mission work. Eighty percent of our defense IT portfolio. Contains high-security operations, and that includes nine U.S. government-secured campuses representing over 4 million square feet. That's anti-terrorism, force-protected, and contains SCIF, or Secured Compartmentalized Information Facility improvements. We have another 1 million square feet of high-security leases with the U.S. government that are SCIF and access-controlled. We have 6 million square feet of defense contractor leases with SCIF, and 15 cloud computing campuses representing over 6 million square feet that are fenced with limited access. Additionally, these defense tenants must work in their office due to the security requirements. They're executing classified missions, which must be performed in a secure space. So if you take your work home, you go to jail. It's called espionage. Today, over 93% of our cash on OIs derived from defense IT properties. Our pre-lease developments will increase that figure in the coming years, and our defense IT segment was 96.4% leased at quarter end, which is well above the peer average. The U.S. government is our largest tenant by revenue. We have 99 separate leases and 70 different properties, totaling 5.7 million square feet and producing 35% of our annualized rental revenue. Our defense contractor tenants lease over 15 million square feet. This includes over 3 million square feet of cyber defense contractor tenants. Defense contractors contribute 52% of our ARR. 16 of our top 20 tenants are defense contractors. Non-fence locations provide less than 7% of cash NOI today. This consists of five regional office assets located in the Baltimore waterfront, Tyson's Corner in Washington, D.C., and the CBD. Our tenants in these assets have excellent credit postures, and we do plan to recycle these assets as markets support reasonable sale values. Our strategy is straightforward. We allocate capital to durable demand locations adjacent to priority defense installations and missions, and our playbook is effective and low risk. We execute highly pre-leased developments, redevelopments, or repositionings. Occasionally, we find an asset that meets our criteria that we can invest in. We maintain a strong investment-grade rated balance sheet, evidenced by our recent upgrade. By Moody's to BAA2. Our competitive advantage really has four pillars of excellence. We have an operating platform that's operated U.S. government high security facilities for over 30 years. Their experience and credential, which is unique, 45% of our employees have active or pending security credentials. We have significant development expertise, which includes SCIF, ATFP, or Anti-Terrorism Force Protection, Data Center, and other mission-critical facilities. We have a 30-plus year track record of building and operating the highest security facilities for the U.S. government and their defense contractors. And we own advantaged land positions as our predecessors had foresight to invest in land proximate to priority locations. And they're proximate to the mission-critical knowledge-based defense installations that we serve. So in summary, we're a specialized REIT that is linked to the defense economy and not correlated with the broader economy. Our assets have strategic features and locations. There is little or no risk from work from home. And there's strong demand for new development and vacancy. With that, I'll turn it back to you.

All right. Thanks, Steve. So I want to get into the demand side because I think that's just so critical to what you all do. But before doing that, one thing you mentioned was your largest tenant being the U.S. government. And before we get too far, maybe can you step back and note the types of leases that you all have with the government that's in comparison to, say, like a typical GSA lease that many of us might be familiar with?

Yeah, so the parts of the government we do business with have their own procurement authority because they need to be exempt from... Just call it bureaucracy. They need what they need where they need it with the people they need to do business with, and they have discretion. One of the interesting components is our rents have escalators, annual escalators to the base rent, which is very different from GSA leases. Some of our customers... We sign what's technically a one-year lease, and those leases have automatic renewals that unless the tenant were to make an affirmative action, they automatically renew for four years, nine years, or 14 years. We do this to make it easy for them to score in the budget scoring process and use basically one-year money to fund these leases.

Got it. Thank you for that. So now let's go back to this demand. I think it's pretty clear these days that defense is pretty important, but maybe as you dig into your portfolio a bit more, are there parts of the defense budget or parts of the defense apparatus that are more or less important to driving demand? In your portfolio?

Well, our portfolio serves a variety of missions that I kind of went through in the beginning. So, generally, as defense budgets go up, we see increases in demand in our portfolio. The 2026 defense budget was pretty extraordinary because it's almost a trillion dollars. And that was a 20% year-over-year increase from 2025. Since 2016, we've enjoyed very good defense budget increases on average about 4.5%, but this 20% is the largest in over 10 years. There are two key areas in this year's defense budget that really stand out in favor of our portfolio. One is the intelligence budget, which is now $115 billion for 2026. It's a $14 billion increase, almost 14%, and that's the largest year-over-year increase in intelligence in over 20 years. Then, of course, the cyber budget was increased to $16.5 billion. For those of you that don't know this, DOD Cyber is under the command of the U.S. Cyber Command, which is located in Fort Meade, Maryland, which is basically the backyard of a company. They got a $2 billion increase at 13%, and that's a big driver of both our National Business Park and Columbia Gateway portfolio.

So, let's get into the portfolio. What's leasing been to date, and what did you tell us you were going to do on the leasing side this year?

I'm going to let Brent answer this.

Yeah, we've got a target of 400,000 square feet of vacancy leasing for the year. So far, we've completed 185,000 square feet of leasing towards that target. We also have another 150,000 square feet of deals that I would say are in advanced negotiations, which are kind of right at the end of the negotiation period. So if you take that, it's about 330,000, 340,000 square feet combined, and, you know, towards a 400,000 square foot total. So we're very confident where we are from a vacancy leasing perspective. Investment leasing, which is leasing we've done really for our development projects. That's approximately 400,000 square feet that we've completed so far to date. A couple of buildings, notably in our National Business Park portfolio in Maryland. And then we've done so far 1.2 million square feet of renewal volume in the portfolio, which includes our nearly 1 million square foot campus in San Antonio, which was obviously a huge driver to that early renewal number. But so far, very active and successful beginning of the year.

What's historically been your renewal rate? How frequently do your tenants stay?

Yeah, I mean, it's really the backbone stat, I would say, of our portfolio. Our retention is generally in the 80% range when a lot of our peers are typically in the 40 to 42% range. And if you really think about the cost advantage of that with the downtime, that other... That other companies have to, you know, to release their projects and their buildings that... It's just a huge advantage. Downtime, TI's, leasing commissions, whereas that's significantly less on a renewal. So 80% versus 42% retention, it's a huge advantage for us.

Okay. What about lease economics? You're renewing a lot of your leases. You're doing well on the vacancy leasing. What do rental rate economics look like? Do you typically have brokers involved in these deals? Is there a lot of TI? What happens on a lease deal in your portfolio that might be the same or different than a typical office asset?

Well, I would say from a lease economics perspective, our concessions are much more manageable. So the TIs, free rent, are significantly less than a typical deal. And also, I would say that the amount of investment that these tenants are making is significantly more. And so that creates alignment between us and the tenant. And actually, it really speaks to the retention of why these tenants stick with us longer. But, yeah, I would say our concessions are down 25% since 2023, so pretty significant ability for us to have additional pricing power when we're talking to tenants.

And one more item I throw in. Our leases are unique in that, as I mentioned, they have annual escalators of growth. So they tend to grow north of 3.5% over the term. And for the last three years, our market and markets have been positive, you know, one to two percent. But the embedded growth is really an indicator of how strong our portfolio functions.

One of the things we've seen lately is a lot of tech companies, quantum, some of these other AI buzzwords and things out there doing work for the government and becoming effectively contractors. Are you seeing that in your portfolio? Do these folks want to be in certain areas? Can you comment on that?

We have quite a bit of tech company leases embedded in our portfolio. We don't identify where, but some of the big, very big names that choose to be anonymous are in multiple locations serving the DOD client. When it comes to quantum, Brick can share with you some recent news. It's pretty exciting.

We recently just had a groundbreaking at the University of Maryland, a site that we control in College Park, Maryland, with I built a suit for ARLIS, which is the Applied Research Laboratory for Intelligence and Security, and that is a very unique building that's going to be, ARLIS is already a tenant in our portfolio on one floor of an existing building there, but now they came to us wanting an HQ, and so having them there, it's a partnership with the University of Maryland, with DOD, and specifically DARPA. And it actually will house the first quantum computer in the state of Maryland. And so it's a very unique build-out for us. We're excited about the project. And Maryland is making a huge investment to become what they call the quantum capital of the United States. So investing, there's, I think, a total $1 billion investment that's going into how to create a quantum ecosystem in Maryland. So we're excited to be a part of that.

I think it's a good pivot point into development here. So maybe with that, why don't you give us a little bit more detail on the development pipeline today, what you plan to spend on it over the course of this year, and just how you think about allocating to development over time, like your multi-year cadence of projects.

Sure, so currently we have about a million square feet under development, seven separate projects, combined about 71% pre-lease represents a little over a half a trillion dollars. We have been a regular developer for 15 years. If you look back the last 10 years, on average, we put about $275 million to work primarily in development. During the last 10 years, we've only found three assets that fit our portfolio criteria that we could acquire. So it's an essential part of our company. It's an essential part of servicing our clients because as missions grow, they need new, modern facilities to support the missions that we align with. And so it's been... Right down the middle of our fairway.

Do you typically think about starting with a lease in hand, or how do you think about when to start projects?

The vast majority of our development has been either significantly pre-leased or built to suit. But we have two locations, two of our most. Successful parks, where we have gotten to the point where we are so fully leased, we have no inventory left. So we start a building because we need inventory. For instance, in Alabama right now, we have 2.5 million square feet. We have 24 buildings that are 99.6% leased. We have one 10,000-square-foot vacancy in 24 buildings, and we have a tenant who's negotiating to lease that. So we started a building last year to create inventory to support the growth at Redstone Arsenal. That building's 150,000 square feet. It's 41% leased right now. Active negotiations will consume, if successful. The rest of that vacancy, and we're currently working to kick off our next inventory building to supply that. We have similar characteristics at our National Business Park. For the last building we started, we were 4.5 million square feet. It was 99.5% lease, and our biggest vacancy was 7,000 square feet. So we built a building.

How much, going back to Huntsville, how much runway do you have there? How much land or how many years of projects do you think you could do there?

So let me just share our development opportunity in Huntsville. We're literally partners with the United States Army in Huntsville. The land we control is owned by the U.S. Army. It's on the installation but outside the secure perimeter, and we control it with what's essentially a perpetual land lease. And by the way, we don't pay rent on land until we get a building and collect rent. So we're built to two and a half million square feet. We have over three million square feet of it. Development capacity and the identified land under our lease right now with opportunities to expand that in the future as our success merits it. I might add, it's a pretty exciting market right now because if you pay attention to some of the activities that, you know, the... The drone attack and missile activities that happened in the Middle East over the last couple of years, the U.S. government's response is the Golden Dome Program, which is designed or conceptually will bring anti-missile, anti-drone defense to the continental United States and Alaska and Hawaii. A pretty impressive program. Its initial earmark is $185 billion over five years to create new technology and then coordinate existing technologies in the United States. The first $21 billion got appropriated in July, and very little of that money has been actually allocated to contract awards. So, in our business, when money gets allocated, Typically, we see the demand from that program expansion 12 to 18 months later, so that sets forth a pretty exciting runway for us in Huntsville, and by the way, that program is being coordinated out of the Redstone Arsenal in Huntsville, and then there's another $17 billion requested for FY27, so it's one program. It's a staggering amount of money for one program.

Remind us, what did you tell the investment community that you would do in terms of starts this year on the development side and development leasing? Remind us, and where are you with that?

So we put out a dollar value, and the midpoint of our guidance was $250 million. On our last call, we elevated that to $290 million. We're basically at $250,000 right now, and so one additional start, which will clearly happen in Huntsville, if not more than one, would satisfy the midpoint of our guidance. Okay.

What do you make on all these developments? All right. Good answer.

So our threshold cash on cash yield is 8.5% on the first years. Cash rent. Sometimes we can do better than that, but that's our threshold for approval.

Got it. So I want to pivot for one minute because of data centers. Talk about your data center business, just because it's such a hot topic, and I think you all were. Doing this way before many others were doing it, and I think you've had one of the best interesting data center businesses out there. But just give everybody a sense of where that is today.

So we've been developing data centers for a particular cloud computing customer for 13 years. In total, we've developed about 6.3 million square feet. All of that has been pre-leased in a structure that's very compatible with our business and ours, and that we acquire land, build the shell. The system securing the location for them, and they invest in the critical power and MEP to make it a tier three or four data center. So we're co-invested in these assets in a significant way. Spend ratio traditionally has been nine or ten to one. Nine or ten dollars of the tenants for every dollar that we put. Currently, we've got, we've just completed two build-the-suits. We've got a couple of smaller infill locations that we're working on that are modest in size. And we acquired some land in Iowa, aspiring to do about, you know, maybe 3 million square feet of data centers totally, in total, and a gigawatt of power. But the conditions in the United States right now is the demand for power. Exceeds the available supply and the distribution network, so we're probably three to four years out from being able to start development on that project.

Okay, so right now, though, as you said, it's a percentage of the company's NOI. How much is data centers?

About nine.

You know, you'd mentioned earlier that it's been very difficult to find acquisitions. You're a developer. You did make an interesting acquisition this past quarter, though, basically a covered land plate. Can you talk about that for a minute?

Yeah, so the market it's in is in Northern Virginia that serves the intelligence community. We're currently the largest landlord in that market. We'd like to deepen our concentration, and another owner had a property that sits on the land lease, and they needed to refinance in 2024, and we looked to buy the asset and the land in a kind of a combined purchase, and it didn't work out from a pricing standpoint. The land became available, and we stepped in and we bought the land, so now we have the senior position, if you will, in the capital stack. The owner of the building is hoping to refinance a mortgage. It's already matured. Long-term, we aspire to own the asset, but we aspire to own it with returns that are satisfactory to our objectives, similar to our development yields. So we'll just sit and wait. But the buildings are excellent buildings. First of all, they're pretty unusual, and they were built to ATFP standards. Without a pre-lease with the U.S. government tenant in it, and the major tenant is the FBI Technology Division, which includes their cyber capabilities, and it is the co-op for the FBI headquarters, where the FBI director would displace in an event that the facility in the Reagan building is compromised.

Okay. Excuse me. So we touched on a number of parts of your business. I'm going to loop Anthony into this. Why don't you piece this together for us, if you can? You've got internal growth on the leasing side. You've got developments. You did make an acquisition. You've got a balance sheet. Tie this all together for us, and what are the components of growth, and how do you think about growth in earnings in the next couple years?

So, we've generated 4.5% compound annual growth in FFO per share from 2019 to the midpoint of our guidance for 2026. So, that is a combination of 2 to 2.5% internal growth because of the escalators within our leases in our portfolio and then the benefit of our developments placed into service throughout that period. Our expectation is that that platform will continue going forward with our operating portfolio continuing to generate that 2% to 2.5% internal growth and then external growth coming in that same kind of range, 2% to 2.5% as developments are placed into service. Um, for 2026, um, the midpoint of our guidance. That we updated in our last call is a 1.5% growth over 2025's results. That's a bit muted compared to what we've executed over the past several years because of the impact of a refinancing of a $400 million bond that matured in March. That bond had an interest rate of two and a quarter percent, was refinanced with the lowest credit spread in the office sector at 95 basis points for a five-year bond, but the rate went from two and a quarter to four and a half. That is about a nine-cent impact for 2026 FFO per share, excluding the impact of that financing FFO, that one and a half percent would have been 4.8 percent. So, again, in line with what we've produced over the last seven years.

Got it. And to fund the development, walk us through where your target leverage is and what your source and uses look like.

Our target leverage is a bit where we've maintained leverage over the past six to seven years at plus or minus six times. As a developer, and as Steve mentioned, having about a half a billion dollars worth of development for non-income-producing assets on . Underway at any one time. Our portfolio generates about $100 million worth of free cash flow after our dividend and after the capital we invest in our operating portfolio. That combined with the incremental EBITDA from our operating portfolio and from the developments placed into service gives us the capacity to fund $250 to $300 million worth of new development each year on a leverage neutral basis. So, that's been, we've been in that position since 2024 with the ability to self-fund those development opportunities, and it's really largely driven by what Steve and Britt mentioned with respect to our retention rate. Our capital can go to external growth as opposed to funding the releasing of non-renewals within the existing portfolios, so our very strong renewal rate supports that ability to self-fund.

Got it. And, yeah, we got a question, so I'll let that happen because we're coming up on time. Yeah, let me just repeat it for the webcast. The question is just useful life of your assets and residual value, effectively.

Well, I don't think it normally in terms of useful life. When we develop a new asset, I would expect that the basic mechanicals are good for 25 to 30 years. But some of the assets that we have in the U.S. government have been fully leased for over 30 years. And over time, we routinely reinvest in those assets to keep them current and functioning. So there's no shelf life, if you will. They are office buildings primarily. We have about six million square feet of data centers, but besides that, they're well-located office buildings, and their proximity to the mission is one of the key advantages to them, that the contractor or the government user is very proximate to the main mission, and the interaction that's required between the contractor and the mission is A critical point of difference, so we have a building that's been leased every day, every square foot, for 32 years to the United States government, and that building will be leased for the next 10 to 20, at least. Find me another one of those.

Well, we have one other question. Go ahead.

ATFP. SCIF and ATFP, anti-terrorism force protection. What percentage? 80% of the portfolio contains some form of high security measures, and I went through that. It starts with the nine U.S. government campuses. They're about 4.5 million square feet, both ATFP and SCIF. ATFP is a requirement for the government, not necessarily a defense contractor. We have another million square feet that's SCIF but not ATFP, where under certain rules they can be in other buildings, and then we've got over six million square feet of defense contractor space that is SCIF. What rule, SCIF? Yeah, they have changed over time. There is a current standard that's more significant. It was really initiated about 2011. So there are times when older SCIFs have to get upgraded to that current standard. That burden is really a tenant burden, not a landlord burden. And it's one of the things that really drives our... What drives our amazing retention rate is the location, for one. You can't get closer to the mission. And two is the tenant co-investment, because when we fund the lease, we give it a market tenant improvement allowance. To build a new skiff today is almost $300 a foot. It's well above our tenant improvement, so the tenant is coming out of pocket to make the investment. Once they build the skiff, It can't be relocated. It can't be breached. It takes a special authorization to be able to build one in the first place. You can't just build one on spec. You have to be authorized by the government. So it's a key component to our retention.

Well, we're up on time. I want to thank you guys for doing this and appreciate the audience here today. Thanks, everybody.