COPT's Q3 2025 Earnings Call: Contradictions Emerge on Leasing Delays, Data Center Power Availability, and Government Lease Retention

Guidance:

• Increased 2025 FFO per share midpoint to $2.70 (up $0.03; implies ~5.1% growth vs 2024) and set Q4 FFO guidance of $0.67–$0.69.
• Raised same-property cash NOI midpoint to 4% (up 75 bps) and year-end same-property occupancy to 94.2% (up 20 bps).
• Increased vacancy leasing target to 500,000 sq ft and capital committed target to $250M (YTD committed ~$125M).
• Expect Space Command to lease ~450,000 sq ft at Redstone (staged) and Golden Dome to drive new build-to-suit development demand.
• Note: 2026 pre-funding/refinancing will create a ~ $0.07 refinancing drag; Stone Gate One accretive ~ $0.005 in 2025 and ~ $0.02 in 2026.

Business Commentary:

• Strong Financial Performance and Guidance Increase:
• COPT Defense Properties reported FFO per share of $0.69 in the third quarter, $0.02 above the midpoint of guidance, and $2.02 for the first nine months, representing a 6.2% year-over-year increase.
• The company increased its 2025 guidance for multiple metrics, including FFO per share by $0.03 to $2.70, which equates to a 5.1% growth over 2024’s results.

• The performance was driven by strong leasing activity, same property cash NOI growth, and successful capital deployment.

• Leasing Activity and Tenant Retention:

• The portfolio ended the quarter at 95.7% leased, with 78,000 square feet leased in the quarter and 432,000 square feet during the first nine months.
• Tenant retention remained strong at 82%. The company reduced lease expiration exposure by 25% or 1 million square feet since the last quarter.

• The success in leasing and tenant retention was due to the strong demand from defense contractors and effective management of lease expirations.

• Capital Deployment and Investment:

• The company committed $72 million in capital to two external growth investments, enhancing relationships with existing defense IT tenants.
• COPT also closed on three important financings, pre-funding its 2026 bond maturity and providing additional liquidity to fund external growth.

• The capital deployment aligns with the company's strategy to expand its portfolio and increase shareholder value through strategic investments.

• Government Shutdown Impact:

• Although the government shutdown does not directly impact rent collection, it creates uncertainty around lease activities and timing.
• An extended shutdown could modestly impact full-year guidance for tenant retention and cash rent spreads due to delays in lease activities.
• The expected approval of FY 2026 defense appropriation is anticipated to support increased demand for the company's portfolio.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted raised guidance and strong operating metrics: "FFO per share... $0.69... 6.2% year-over-year," portfolio 95.7% leased ("highest level in 20 years"), same-property cash NOI +4.6% YTD, and successful financings (upsized $400M bond, expanded credit facilities) that pre-fund 2026 maturity and increase liquidity.

Q&A:

• Question from Blaine Heck (Wells Fargo): How long of a lag before appropriations and budget increases start to meaningfully impact leasing outside Huntsville, and does the Stone Gate One acquisition create opportunities for further expansion in that market?
  Response: Expect to see activity accelerate within about six months after appropriation; Stone Gate fits the existing footprint and the company would pursue similar accretive acquisitions if opportunities arise.

• Question from Steve Sakuler (Evercore ISI): Why was the yield on Stone Gate One so high relative to perceived risk, and what happens financially if a government lease expires and isn't immediately renewed (holdover treatment)?
  Response: The attractive yield reflected seller timing pressure, tenant preference for COPT, and execution certainty; for government expirations the company uses standstill/holdover agreements so rent continues at the expiring cash rent level and NOI is recognized until renewal.

• Question from Seth Berkey (Citi): Does the Golden Dome missile defense initiative create near-term development opportunities or mainly drive leasing demand?
  Response: Golden Dome is expected to drive new build-to-suit developments—existing inventory is essentially fully occupied so incremental demand will be met via new development.

• Question from Rich Anderson (Cantor Fitzgerald): What was the process behind Space Command moving from Peterson to Redstone Arsenal and what role did COPT play to secure the opportunity?
  Response: The relocation was a protracted DOD-led selection and adjudication process; COPT's secured parcel and ability to rapidly provide mission-capable, behind-the-fence space positioned the company as the quickest solution to meet government speed and security needs.

• Question from Dylan Brzezinski (Green Street): Are reports of cuts to cyber defense/Cyber Command affecting leasing demand in Fort Meade?
  Response: Management is not seeing that; Cyber Command received substantial funding in the one-big-bill and the company remains encouraged about Cyber Command–related leasing demand (CISA activity is separate and not served by COPT).

Contradiction Point 1

Leasing Lag and Impact of Increased Budgets

It highlights differing expectations regarding the lag between increased budgets and their impact on leasing decisions, which could influence investment strategies and market forecasts.

How long will it take for budget increases, policy changes, and appropriations to impact leasing decisions outside Huntsville? - Blaine Heck(Wells Fargo)

2025Q3: The lag between appropriation approval and impact on leasing decisions is usually nine to twelve months, but it could be as short as six months this time, given pent-up demand and expectations. - Steve Budorick(CEO)

How long does it take to make those decisions and for leasing to start? - Blaine Heck(Wells Fargo)

2025Q1: I think it's at least one year from appropriation to leasing decision. - Stephen E. Budorick(CEO)

Contradiction Point 2

Impact of Data Center Demand and Power Availability

It involves differing perspectives on the impact of mixed messages on hyperscaler demand and power availability, which are crucial for data center developments and investment plans.

Why is the fixed-income community more supportive than the equity community? - Rich Anderson(Cantor Fitzgerald)

2025Q3: The success of our data centers is driven by our ability to deliver on demand, which is why we are expanding our portfolio and are committed to providing predictable and reliable power for our customers. - Steve Budorick(CEO)

Are there any impacts from mixed signals on hyperscaler demand on your tenants or data centers? - Seth Berge(Citi)

2025Q1: Our main concern is the timing of power availability for new developments. Current site power delivery is uncertain. - Stephen E. Budorick(CEO)

Contradiction Point 3

Renewal of Government Leases

It addresses differing expectations regarding the renewal of government leases and the potential risk of losing long-term tenants, which could impact revenue projections.

What happens if the 660,000 square feet you expect to renew in 2026 isn't renewed? - Seth Sakuler(Evercore ISI)

2025Q3: During the standstill period, we recognize rent at the expiring cash rent level. Once the renewal is executed, we catch up in the quarter for the impact on the straight-line rent. - Britt Snider(COO)

Have government leases been extended beyond 2025, and is there a risk they won't be renewed? - Manus Ibek(Evercore ISI)

2025Q1: We expect 100% retention on 13 government leases. - Stephen E. Budorick(CEO)

Contradiction Point 4

Impact of President Trump's Defense Priorities

It involves the potential impact of President Trump's defense priorities on COPT's business and the company's strategies to adapt to these changes, which could influence growth expectations and investment decisions.

How long will it take for increased budgets, policy decisions, and appropriations to impact leasing decisions outside Huntsville? - Blaine Heck(Wells Fargo)

2025Q3: The lag between appropriation approval and impact on leasing decisions is usually nine to twelve months, but it could be as short as six months this time, given pent-up demand and expectations. - Steve Budorick(CEO)

How do you expect demand to evolve in your markets related to President Trump's three defense priorities, and are you considering anticipating demand through additional inventory developments or acquiring assets with lease-up potential? - Tom Catherwood(BTIG)

2024Q4: The three priorities include space activities, missile defense, and naval capabilities expansion. Huntsville is expected to benefit due to the potential relocation of Space Command and additional developments in missile defense. San Antonio and Southern Maryland may also see increased demand due to naval capabilities expansion. - Steve Budorick(CEO)

Contradiction Point 5

Cyber Command Demand and Impact

It highlights differences in the perceived impact of Cyber Command's funding on leasing demand in Fort Meade, which could affect occupancy and revenue forecasts.

How would Trump’s cybersecurity funding cuts affect leasing demand in the Fort Meade area? - Dylan Brzezinski(Green Street)

2025Q3: Cyber Command received significant funding, indicating strong demand. We're not seeing a negative impact due to our focus on DOD activities. The article's context seems unclear. - Steve Budorick(CEO)

Could increased focus on your contractor customers indirectly impact COPT or is this likely outside their DOD-related businesses? - Tom Catherwood(BTIG)

2024Q4: We're not seeing declines in the mission-critical markets. We're seeing continued strength in the DOD markets, we're seeing strength in the private sector markets, particularly in the areas where we're seeing more technology integration. - Steve Budorick(CEO)