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

CDP and CEO Steve. This session is for city clients only and disclosures have been made available at the corporate access desk. To ask a question you can raise your hand or go to LiveGata.com and enter code GPC26 to submit questions. Steve, we'll turn it over to you to introduce your company and team, provide any opening remarks, and tell the audience the top reasons an investor should buy your stock today and then we can jump in the Q&A.

Yeah, and just tap the mic to turn it on tap the mic to turn it on the green yes we're good my left is Anthony Mifsud he's our chief financial officer to my right Britt Snyder our chief operating officer and I'm Steve Bidork CEO so thank you Seth cap defense properties is a specialized read deeply concentrated in mission critical assets to support national defense activity of the United States government. The vast majority of our 207 properties are located adjacent to, or in some cases, occupied by priority defense missions, generally involving knowledge-based defense activities. The missions we support are intelligence, surveillance, and reconnaissance, cybersecurity security 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 permanents in Maryland, Virginia, Alabama, and Texas. Our properties are improved for top secret mission work, 80% of our defense IT portfolio contains high security operations, that includes 9 US government secured campuses representing over 4 million square feet, those campuses are anti-terrorism force protection constructed and include SCIF, which is Secured Compartmentalized Information Facility Improvements. We have another 1 million square feet of U.S. government high-security leases outside of campuses that are SCIF-ed and access-controlled. We have 6 million square feet with defense contractor leases that contain SCIF, and we own 15 cloud computing campuses with over 6 million square feet that are fenced and have limited access. Additionally, an important distinction is these defense tenants must work in their offices due to the security requirements. They're executing classified missions, which must be performed in a secure space. If you take your work home, you go to jail, it's called espionage. Today, over 90% of our annualized rental revenue, or ARR, is derived from our defense IT properties. Our pre-lease developments will increase that figure in the coming years. Our defense IT segment was 96.5% lease at year end, which is well above peer averages. 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 ARR. Our defense contractor tenants lease over 15 million square feet, this includes 3 million square feet of cyber defense contractor tenants. Defense contractors contribute 52% of our annualized rental revenue and 16 of our top 20 tenants are defense contractors. Non-defense locations provide just 10% of our ARR and this consists of five regional office assets located in the Baltimore waterfront, Tyson's Corner, and Washington, D.C. in the CBD area. Our tenants in these assets have excellent credit postures as well, and we plan to recycle these assets as markets support a reasonable sale value. Our strategy is very straightforward. We allocate capital to durable demand locations that are adjacent to priority defense installations emissions our playbook is also straightforward we execute low risk highly priest pre-lease development redevelopment or in some cases repositioning we maintain a strong investment grade balance sheet our competitive advantage really falls into four pillars one is our operating platform we have unique platform where we're deeply experienced and we have credentials over 35% of our company is credentialed to work in and create high security environments. We have deep development expertise including secured compartmentalized information facilities, anti-terrorism force protection, data center, and mission critical facilities. We have a 30 plus year track record of providing space and then operating that space for the the U.S. government and some of the most highly secure missions of our country. And we have advantaged land positions, proximate to these mission-critical, knowledge-based defense installations. So in summary, we're a specialized region, it's not really correlated with the broader economy. Our assets have strategic features and locations. There's little risk of work from home, and there's strong demand for new development and vacancy leasing. So with that, I'll turn it back to you.

Great. Maybe just starting with some of the leasing activity, you know, the defense budget exceeds $950 billion. Historically, there's been a 12 to kind of 18-month lag between the appropriations and leasing activity. Does some of the kind of administration's urgency behind Golden Dome shorten that timeline? Or, you know, is that still kind of the right timeline we should be thinking about from that impact?

So in the broader budget, I'd say the timeline would hold, 12 to 18 months from the time funding is created until we see the demand for our portfolio. And the reason for that is money tends to be allocated to a program. That program has to be defined, competed, awarded to a contractor, and then they can lease space. Golden Dome, on the other hand, is very different. is a fast-track program. The notional initial value of the program is $175 billion, and the intent is to have the Golden Dome functional by 2028. To put that in context, $175 billion is like 20% of one year's defense contract for one program. The $25 billion that was allocated to fiscal year 26 is a fast-track down payment, And the general who commands the program has been given uniquely strong authority to commit money quickly. And so we have, even though that program just got funded in July, on July 4th, we've already signed one lease for about 32,000 square feet with a contractor specifically related to Golden Dome and our development that is active at the Redstone Arsenal we have about a 400 percent demand to supply relationship and almost all of that is driven over Golden Dome. So it's pretty exciting it's early but we think through this year there'll be quite a bit of leasing driven off of that which is much quicker than normal. And then maybe following up on that for the 400,000 square feet of prospects at 8500 advanced gateway how much of that is tied to hard-funded Golden Dome mandates versus contractors just positioning kind of ahead of awards and anticipation of funding so right now I handicap that about 50-50 many contractors have received an award very few have received funding yet but they've been given what's called an IDIQ indefinite delivery, indefinite quantity contract vehicle that allows the money to flow into a specific program quickly. Some of them have real work objectives that they are pursuing, and the one lease we signed has a work objective. The two that were pretty advanced negotiations clearly have a work objective in mind. There are others that are handicapping the market for more of a long-term play, so about 50-50.

And then, with Space Command moving to Huntsville, are you seeing any preemptive leasing from contractors, or is the market waiting for that to kind of formally happen, and can you remind us just kind of the process, you know, in that moving to Huntsville?

So the Space Command is a relocation from Colorado Springs to the Redstone Arsenal. the command itself is going through its planning process we believe will be the beneficiary of one billed suit lease for the command if not more in the future the contractor tail is defined by the government is about two jobs for every one job that'll move but that command or that contractor tail is supporting the active command. So you won't see that relocation occur until the command starts to phase its occupancy into the Redstone arsenal, which is probably 24 months away. 18 to 24 before the first elements relocate.

And then you kind of have talked about, you know, trying on the development side, just, you know, not really starting kind of the next Redstone building until the 8500 advanced Gateway hits around that 60% kind of lease threshold. Just given the urgency of Golden Dome, would you kind of consider accelerating some of that development activity just in anticipation of that demand, or how do you think about Yeah, just to be clear, that's actually committing to putting, you know, investment in the ground is what you're referring to.

We've already pre-planned three different sized buildings, and we are permit ready on all three of those. So we've taken quite a bit of the development timeline and shortened that measurably. And as we see the demand for 8500 start to commit, we don't necessarily need signed leases, but when we see that demand filling that building, we will start the next one. We have three alternative kind of structures that we can build depending on what the demand looks like.

Maybe just kind of turning attention the kind of you know the expiration schedule for 2026 can you just kind of update us on on the delayed renewals from 2025 that got pushed you know from the government shutdown and and kind of walk us through how the rest of the years expirations are shaping up so we've got about 2.8 million square feet that expires this year the vast majority of that is US government leases the specific delays that you're referring to is about a million square feet located in one of in our Texas location that was because of approval processes just

flipped into this year our large lease projection for you know a 30 month period is we'll renew 95% of our large leases are better and this year on our overall retention we expect it to be we guide it to 80 percent and we like to be at our guidance um and then just on some of the expirations you know can you remind us how that works is there incremental you know ti's that kind of go into the space upon renewal or most renewals kind of as as renewals so uh yeah routinely we do give some ti on renewals but i think if you do a good comprehensive look at our tenant improvement allowances relative to other companies in our segment. They're a fraction of theirs. So typically about three dollars a square foot a year on a renewal would be a healthy renewal tenant improvement. And then, you know, with some of the kind of the geopolitical changes with Venezuela and more recently Iran, you know, kind of how does that change the way that the way you think about the government's need for space so the missions we support those two particular situations are employment of weapons systems and troops certainly the missions we support support those and some of them develop those systems but our business is that one that's going to flex up with the activity in Iran per se That's more consumption of established weapons systems and deployment of troops to a hot spot in the United States. This is more knowledge-based defense activities. Certainly many of the activities we support are clearly supporting that, but it's not going to be an inflection point for our business. Our business is more long-term and methodical.

Maybe switching some capital allocation topics with your blended kind of development yield at eight and a half percent and and where you know the hyperscale shells kind of trade at like six to seven yield does that kind of require you to have the office kind of above a nine percent to kind of maintain that blended yield or kind of where your kind of underwriting hurdles for development spend so we're very comfortable with our office our defense it generally at eight and a half or north sometimes we exceed that eight and a half threshold but that's that's our target certainly the work we've done in data center shelves

we can be a little more aggressive on the rate because of the deep spread between It's been a very profitable development realm for us, we'd welcome more, but the two are kind of not related.

And then just, you know, you've kind of discussed kind of self-funding of the equity that you need for development, just, you know, does the renewals and, you know, potential kind of TI's does that require you to hit the ATM or can you fully fund your anticipated development spend with with free cash flow yeah since really 2023 we've been in position to fund 275 to 300 million dollars a year on a leverage neutral basis because of the free cash flow we generate after our capital use

for the portfolio and the payment of our dividend, and we don't see that changing. We've projected out through our five-year forecast, we're solidly able to self-fund. And by the way, raise our dividend this year and the last three.

Yeah. You know, with the pipeline kind of 86% pre-leased, you know, and there have been some stabilization with construction costs, you know, Would you start to kind of do any development that's more spec development or are you primarily sticking towards build to suite or kind of waiting until you hit certain kind of leasing thresholds to start new development activity?

So we primarily build to suit for our tenants, but in a couple of our locations in particular, we need to have inventory. So we just announced the full building lease for a building that we started at the National Business Park. When we started that building, we were 99.7% leased, and our largest vacant space was 7,000 square feet. To defend our franchise and that development, we need to have inventory to support growth. So we built a 140,000 square foot building, which we just leased. Similarly, in Redstone Arsenal, we have two vacant suites in 2.5 million square feet. One's 10,000 feet, one's 25,000 feet. They are both actively, we're negotiating leases for both of those at this time. So we started RG8500, 150,000 square foot building, so we have inventory available. And so we don't call it spec, we call it inventory development. When we're so heavily leased, we just have to have space to work with. And we anticipate shortly proceeding with the next building in Redstone Gateway.

And then, you know, with being able to kind of develop that 8.5% yields with the credit primarily being, you know, the U.S. government or kind of, you know, contractors that work closely with the U.S. government, how is the competitive landscape for those development projects, especially just kind of given the backdrop of an increasing defense spending budget? Who do you compete against? How do you win kind of those mandates?

So the extent that we have competition, it's really market to market. And I'd have to walk you through the portfolio. But generally when we're developing, we're not really competing. We've got such a deep relationship with the contractors in the U.S. government. And remember, I talked about the four legs of our stool. We have advantaged land positions. And so there are companies that could develop in Huntsville, but they can't develop into the ecosystem of contractors we've built on our development, and they can't develop on the front door to the Redstone Arsenal with immediate access and interface with their government customer. And then in some of our locations, we have connectivity that they could not possibly compete with, which is a distinct advantage of having access to priority networks. So we tend to negotiate those build suits with the long term relationships we have with the contractors, and rarely are we head to head with another developer.

You mentioned the non-core buildings in D.C. and Baltimore and elsewhere. where can you just walk through maybe the timing and pricing expectations for those and, you know, what kind of pricing expectations would you have before you're looking to sell Well, I'm never going to talk about pricing.

I appreciate your question, but let's just put it this way. Timing will be dependent on the financial markets. so and and the interest rates that are available to investors to invest in real estate currently for office private user office borrowing and they're pretty high interest rates anybody wants to buy those buildings gonna look for a return spread above the cost of their debt and those are cap rates we're not willing to sell it for those five buildings are very stable and in particular the one in DC is an absolute trophy, we've got 12 years of walt on that class AA development and we'll be patient to let the capital markets pick back up.

Is there any sense of, you know, are those kind of assets being marketed and is there any kind of sense of increased interest that would suggest that it's more near term or is it more of kind of a long term play at this point?

So we're not actively marketing any of them, because we don't see the financial backdrop that we're looking for, and we're constantly working those assets to create value, so, you know, we'll just be very patient.

And then you recently kind of raised the dividend 4.9%, you know, which is kind of above, I think, what your guidance implies for, you know, FFO growth. You know, how do you kind of view the dividend and capital return? Or are you expecting kind of an acceleration in FFO growth, you know, kind of beyond where you're at now?

Well, to be clear, the board makes decisions on our dividend. But our raises are tied to our projection of taxable income growth. So you can kind of put two and two together from there.

One of the questions we've kind of been asking all the companies is on AI. You know, obviously your product is very specialized, but just for how do you use AI at the company? You know, what AI tools do you use is the first part of the question. And then how do you determine whether or not to develop something either internally or to use a third-party application?

So, from an AI standpoint, we're very conservative. We do not, we would not, do not, will not allow any AI application inside of our network, period. We just won't take the risk. We have a couple of uses through our accounting and reporting group where they are procuring data from AI located somewhere else to simplify their world, but we're not by design a leader in AI applications inside our company.

And then how do you think AI changes, you know, obviously your space is very specialized to support government missions. How do you think AI changes the way government kind of uses space? Does it change anything at all from your perspective?

I think there's a lot of room for the government to get a boost out of AI, but I think about the IRS and administrative functions, I don't see it in the DOD in the near term.

And then, you know, maybe flipping to kind of the data center business that you guys have, you know, obviously, AI has been a driver for development in that sector. Has it changed kind of any views on how much you would like to kind of do there? You know, you have the Iowa site, you know, can you give us an update there and then just how you think overall about kind of the data center platform that you have?

So let me just address Iowa and then I'll bridge back. Iowa's a long-term investment, a very modest amount of money. We're able to control significant anchorage in a market that an existing customer finds attractive. It'll probably take us four years to get the power to develop there. So it's more of a long-term investment play. We put a very modest amount of money into that land, $32 million, and the entirety of that development will be billed to suit for an existing customer when we get to the point where we can develop. With respect to AI, we have not done any AI data center development that we know of. We've developed on a build-the-suit basis only for a large cloud computing and government contractor.

And then would you kind of, as you think about deploying capital, would you look to do kind of any additional land sites or additional data center development or, you know, how often do you kind of look at your land bank and see if there's a higher and better use for any land you have if it's possible to develop data centers?

So with the client in hand, we'd be willing to go to other markets and develop, acquire land and develop. The challenge right now nationally is there's not enough power. It's just not available in almost any market. And I don't see us making any incremental land investment until there's access to power. And then, with regard to redeploying our current land bank, I don't see us using that for AI data centers.

Speaking of kind of the land bank, you know, you have, I think, at National Business Park, around 1.5 million square feet of future development. How are you thinking about kind of the scoping, you know, like a dollar amount of that future development? and, you know, kind of timeline at which that could be developed.

So the one and a half million square feet you're referring to, I think, is the NBP.

Yep.

We've held land in inventory supporting the missions at Fort Meade for the 15 years I've been with the company. And we'll continue to hold that land because it's very valuable, not only to our company and our shareholders, but to national security generally to have the capacity to provide the support to the missions that we support. And so we don't have a timeline. We've built it into our cost structure. The land is valuable and we just announced the development that will go there on that land that's important to our country. And that's kind of the way we view it. We have significantly more development capacity in Huntsville. We were developed at two and a half million square feet. We, the land we control, we have three and a half million square feet of incremental capacity, surface park generally, and we're very happy to just hold that position for the long term and develop into the mission growth.

I guess as you think about kind of the demand drivers and the increased government spending, what would kind of drive you to accelerate some of that, you know, development of the land bank to the near term? Is there just not enough demand from tenants or leasing activity yet to warrant kind of shovels in the ground or, you know, just can you talk a little bit more about that?

Yeah, I think I kind of already have. So we, at the National Business Park, we built the building to create inventory. We have that lease that actually is going to give us a little more room because some of that occupancy will move out of existing buildings we have. But when we get to a point where the accommodating the growth in mission is limited, then we'll deploy capital and build another building. And that's why I think that pace is much quicker. You can expect, with what I think is going to happen over the next two years, maybe two buildings a year, just to keep the inventory up.

And then maybe just kind of moving into our rapid fire within the last minute here. What will net effective rent growth be for the office sector overall in 2027, not your specific company?

Nationally?

Nationally.

Minus 2%. Minus 2%.

And then, will the office sector have more, fewer, or the same number of public companies a year from now?

Fewer.

Great. Thank you so much.

Great.

Thank you.