Warehouse and cold storage, read analyst. This morning from COPT Defense Properties, we're fortunate to have President and CEO Steve Budorick, Executive Vice President and Chief Operating Officer Britt Snider next to him, and Executive Vice President and Chief Financial Officer Anthony Mifsud to the right. We've got a limited amount of time here, so I do want to jump right into it, and I'll start the Q&A, but to the extent the audience has questions, I will pause during the presentation and see if anyone wants to ask any. We do ask that you just speak into the microphone if you're going to come ask a question. If you don't want to do that, I can repeat the question.
So just to start out, for those that are unfamiliar with the company, Steve, can you just give a quick summary of your company and portfolio and what makes you different from your REIT peers?
Sure. So thank you. COPT Defense Properties.
Can you hear me?
Can you hear me?
is specialized, re deeply concentrated in mission critical asset to support national defense activity of the United States government. The vast majority of our 204 properties are located adjacent to, or in some cases occupied by, priority defense missions, generally involving knowledge-based defense missions. Some of the missions we support include intelligence and surveillance, cybersecurity and network activities, naval sea and air technology development, missile attack and defense systems, cloud computing, and, and many more. our property locations are not typical for an office company. They're proximate to U.S. defense installations in Maryland, Virginia, Alabama, and Texas. our properties are improved for top secret mission work. 80% of our portfolio contains high security operations, and that includes eight U.S. government secured campuses that exceed 4 million sq ft. Those campuses are built to secure compartmentalized information facility or SCIF level, and they're anti-terrorism force protected.
We have another 1.4 million sq ft of high security U.S. government leases that are SCIF and access controlled but not anti-terrorism force protected. We've got over 6 million sq ft of defense contractor space that contains SCIF, and we own 15 cloud computing campuses totaling 6 million sq ft that are fenced with limited access. An important point is these defense missions that require the secure, secured facilities. That mission work cannot be done from home. If you take your work home, it's a crime. So they work in the office. Today, over 90% of our annualized rental revenue is derived from our defense information technology properties. Our pre-lease developments will increase that figure in coming years, and our defense IT segment was 96.6% lease at quarter end, which is well above our peer average. The U.S. government is our largest tenant by revenue.
We have 101 separate leases, 71 different properties totaling 5.6 million sq ft, and that produces 36% of our annualized rental revenue. Our defense contractor tenants lease about 15 million sq ft. That includes 3 million sq ft of cyber, defense contractor tenants, which is kind of our fastest growing tenant segment, in the defense area. Defense contractors contribute 51% of our annualized rental revenue, and 15 of our top 20 defense tenants are defense contractors. Our non-defense locations provide just under 10% of our annualized rental revenue. They consist of five legacy regional office assets, three in Baltimore, one in Tyson's Corner, and one in downtown DC. We have great tenant credit in those buildings as well, but our plan is to recycle out of those as market conditions support it. Our strategy is very simple.
We allocate capital to durable demand locations that are adjacent to priority defense installations. We do that through either low-risk pre-lease development, in some cases redevelopment or repositioning of an asset that we would acquire, and we maintain a strong investment grade balance sheet. Our competitive advantage really sits on four pillars. First, it's an operating platform. We have an experienced and credentialed workforce that has managed some of the highest security properties in the country for over 20 years. Moreover, we have significant development expertise. That includes building buildings to SCIF, anti-terrorism force protection standards, data centers, and mission critical facilities that are specialized. We also have a 30-year track record of building and operating the highest security facilities for the government and their contractors. Our fourth advantage is advantaged land positions. We established our strategy early. We moved out. We acquired land.
We have significant development capacity in owned land, in the best locations in our markets. In summary, we're a specialized REIT that is not correlated to the broader economy. We're more correlated with national defense needs. Our assets have strategic features and locations. We have no risk from work from home, and we have strong demand for new developments and vacancy leasing at this time. The four points I guess I'd like investors to leave with is, first, we're a growth company. In 2025, we expect 3.5% FFO per share growth at the midpoint of our guidance, and that would mark our seventh consecutive year of positive FFO growth. We've increased the dividend by almost 11% over the last three years, and we're the only office REIT to have raised the dividend in both 2023 and 2024.
We raised the dividend again this year in February in 2025. Second key point is leasing. We are very confident we will meet or exceed our vacancy leasing targets for the year. We are very highly occupied, so we set a goal of leasing 400,000 vacant sq ft. Year to date, we have achieved 288,000. We have another 120,000 sq ft in advanced negotiations we expect to close shortly. That will exceed our goal roughly around mid-year, and we have another half a year to go. The third is our development starts. We expect to commit this year an additional $150 million-$200 million to new developments, and they should primarily be pre-lease developments. The fourth point, which has been quite a point that we have gotten a lot of questions on, is DOGE.
There has been no impact to our company or our tenants from the DOD activities. Our portfolio supports critical missions that are vital and have permanence. The DOD's approach to DOD has been to cut headquarters overhead, fat, top line stuff, and reinvest that money to missions. The likelihood is the missions we serve will be the beneficiary of DOD activity and not a victim to it. I guess I have a last point. We are a great value at $27.60 a share. We're trading at 10.3 times F 2025 FFO at the midpoint. We've got a 4.4% dividend yield, and we're trading at a 16% discount to NAV. Now I'll turn it back to you.
Very impressed with the preparation here. Steve, you mentioned the correlation with national defense needs. I guess can you just talk a little bit about the defense budget, what you're expecting to see from an allocation perspective? You know, I think clearly cyber-related defense is a big part of your tenant base and strategy. You know, what gives you that confidence that you're unlikely to see disruption and may actually see a boost?
The specifics of the FY 2025 defense budget in the One Big Beautiful Bill are still a little opaque, but we understand that the bill is providing another $150 billion on top of the baseline of $850 billion, which is where you hear the defense budget will be $1 trillion. Some of that money might be multi-year money, as it shakes out. Either way, the vector is towards positive growth. There is $34 billion for shipbuilding and naval expansion, $25 billion down payment on Golden Dome, and that activity will be primarily orchestrated on missions at Redstone Arsenal, where we have a development, and another $1 billion to ramp up our cyber offensive capabilities. We expect intelligence will always remain well funded in this adversarial world we're in. We're very confident our missions will be funded well and supported.
Great. Thanks. COPT did a great job of leasing throughout the pandemic, and that momentum has continued since. Yeah. How do you feel about the leasing pipeline today? You got into it a little bit in your first answer, but, you know, your ability to maintain that momentum and potentially even grow?
I'll let Britt answer this one.
Thanks. Yeah. I mean, it again gets set back to the durable nature of our real estate and the secure facilities that we have. And so far we've had incredible leasing volume this year. Again, 400,000 sq ft target for the year. And actually we're doing a little better than what Steve just said at 288. We're actually at 303,000 sq ft for vacancy leasing for the year, which is great. We've definitely been outpacing even our own projections for the year. Investment leasing, we've executed over 100,000 sq ft in three buildings, two in Huntsville and another lease at Franklin Center, which we acquired last year.
If you recall, some of the folks who have been following this acquisition, the vacancy in that building was unleased for seven years, and then we bought the asset and we immediately were engaged in a lot of different leasing negotiations and signed a 48,000 sq ft lease last year with a, or earlier this year with a government contractor. Then renewal leasing, we've already executed 700,000 sq ft for the year. Activity ratio is really strong. Again, just speaking to the durable nature of these real estate assets and the unique secure nature, it's just really hard to find, and we're very fortunate that, the portfolio that we have.
Yeah. Maybe, just sticking with the development pipeline for a minute, you know, you guys have 760,000-ish sq ft under construction now, total investment of $308 million, 62% pre-lease.
you know, can you just talk about the demand you're seeing for the vacant space in the current pipeline and maybe even more importantly, you know, the demand you're seeing from prospective tenants that could be interested in, in future development?
I'll put you on tape.
Okay.
In Huntsville at 8100 Rideout Road, we're 75% leased. It's a 130,000 sq ft building. We have one floor left. We've actually held that floor off the market now, because we anticipate with the relocation of Space Command to Huntsville, they're gonna need immediate mission space. We expect, when that gets announced, we have a very high likelihood of leasing that to Space Command. We have a 140,000 sq ft development at the National Business Park, which we started last year, to support known U.S. government needs that will be funded in fiscal year 2026. Our relationship with that government customer requires we have a building built before they can lease it. We expect to lease that building in the latter half of this year and early into next year with fiscal year 2026 money.
We started 8500 Advanced Gateway in Huntsville because we have literally no space left to lease. We took the one floor off and we reserved it for Space Command, and we have about 75% of that building under consideration from various tenants, both government and defense contractor. Our demand is broad-based. Beyond that, we're in several discussions for build suit opportunities and other locations. I won't discuss till we get them done, but our development demand has remained strong over the last four years, but it is certainly ramped up under the new administration.
You mentioned Space Command. I think that's an important topic here. Maybe you can give just a little background on the evolution of the political draft backdrop there and, I guess, how you're currently thinking about the prospects of Space Command moving to Huntsville and potential opportunities that could come for you guys with that.
Sure. Space Force was established by, under, Donald Trump in his first presidency, and the creation of Space Force required an integrated combatant command, which was, created as well under, Trump. The initial selection for the combatant command was to be put in Huntsville. In January 2021, the Air Force announced that decision. It was contested by other states that would like to see the command in, in their locations. It was adjudicated internally in the DOD twice. In May of 2022, the U.S. Government Accountability Office reaffirmed Redstone again. In early 2023, the Secretary of the Air Force announced Redstone Arsenal's location yet again. In July of 2023, Joe Biden signed an executive order requiring it to stay in Colorado Springs. It's pretty widely known that Trump is going to put it where it should be on the merits, which is Redstone Arsenal.
The words that we understand is when the Secretary of the Air Force gets confirmed, it'll be one of his new decisions. He got confirmed last week. We expect an announcement could be imminent, you know, this week or in coming weeks.
Great. I guess what opportunities would that afford you? Is that just, you know, build suit opportunities? Is it leasing up space that you might already have?
We anticipate a minimum of one building to be built in our secure campus. That's land that we control inside the Arsenal secure gate, to handle the first wave of the mission. That could expand to as many as three buildings or more, but we've provided a plan, 450,000 sq ft, three buildings inside the fence for new development, in addition to the swing space I talked about, leasing up 8,100. Then there'll be a long-term growth of that mission that could be either government developed and occupied or leased from us. Beyond that, there's a contractor tail that will follow the command. It, you know, it's hard to predict the size of a tail, but I think, you know, two to one, two jobs outside the fence for every one in is kind of a rule of thumb, a norm.
and so you think about somewhere near 450,000 sq ft of government occupancy, it could be twice that outside.
Great. All right. Anthony, we'll get you involved here too. So one of the most kind of obvious hurdles, I'll call it, for the company coming up, that you guys have to overcome is the 2026 bond maturity, $400 million, that to a quarter maturing in March of next year. Just talk about your plans to address that and potentially get in front of it and how you're feeling about the debt market.
So.
Our current plan is to prefund the capital for that maturity in mid-March of 2026. Our plan is to go to the fixed income market sometime in the fall, to prefund the capital required for that maturity. We have had incredibly strong support from the fixed income community over the past several years as our bonds have traded at spreads that are close to, if not at points inside of, our triple B flat sector peers. We plan on using that market to prefund the capital. We'll use the capital initially to pay down the line of credit, and then put the balance in money markets until the maturity in March because the rate on the bond that's maturing is only 2.25%.
We can earn a better spread by putting the capital essentially in the bank until we need it to pay off the bond. But, you know, we continue to expect strong support from that community.
Okay. Great. I've got a follow-up, but I'm gonna open it up for Q and A after that. If you do have a question, we just ask that you ask it into the microphone so you can make your way over there. Sticking with the balance sheet, you guys are at relatively low leverage, 6.1 times. Can you just talk about your philosophies and targeted leverage range and how you think about sources of capital for additional acquisitions or developments that you might come across in the future?
Sure. Our, we're very comfortable with the balance sheet at, plus or minus six times debt to EBITDA. I think the support that we have seen in the, the resiliency that we have seen in the operations of our portfolio over the past five or six years sort of demonstrates the strength of the execution of the strategy, the resiliency of our cash flows, and the strength of our cash flows were proved out over several economic cycles over the past six years. Maintaining a balance sheet with leverage and that kind of strong cash flows at a six times debt to EBITDA, we're very comfortable with. You combine that with a development pipeline that is low risk, because the majority of it is build suits for the government or contractors or largely, largely pre-leased development projects.
You know, we feel very comfortable at that six, plus or minus six times. We have achieved, back in sort of mid-2023, the ability to self-fund the equity required for about $250 million-$275 million worth of development investment each year from cash flows from operations after our dividend. We have no reliance on external equity sources for continuing to invest in our development pipeline or when we have the acquisitions like we invested in last year.
Great. Thanks, Anthony. Any questions from the audience? All right. We'll keep going here. So Steve, you've also got a data center shelf development program. Can you just describe that part of your business, how it came about, and, and I guess how, how you think it fits in with the rest of the portfolio and strategy overall?
Sure. We have a single customer in that business segment, if you will. It's a large international cloud computing company. We earned our opportunity to do build-to-suits for them back in 2012, and there was a compatibility between the work we do for our defense customers and their needs and their development. With that first opportunity, we did a two-building build-to-suit for them, and did it in such an accomplished way that it led to a program where we've developed 36 properties, 6.4 million sq ft, 100% pre-leased before we started. Every development has been done on time or early, and we've been under budget on every one of them. We have a very strong relationship built on development expertise and capabilities.
Maybe you can touch on the latest kind of land acquisition in Des Moines and, you know, the timing and scope of that opportunity for y'all.
Yeah. In 2024, we did our last three build to suits on land that we controlled in Northern Virginia. Land in Northern Virginia has gotten crazy expensive and power is almost unattainable in the short term. We kind of leaped forward and we looked to the future and we identified a 365-acre parcel in Des Moines, Iowa, which is actually the fifth biggest hyperscale market in the United States. We commenced pre-development activities on what will be 3.3 million sq ft of build to suits, ideally for the customer we have, but potentially for other customers. It's a longer-term play because of the immense demand on power nationally and in that market. It'll take as many as three or four years till we get power to develop. It's a forward-looking activity, kind of working towards creating the opportunity for tomorrow.
Great. Thank you. You also own, as you mentioned a little bit earlier, a handful of regional office assets that have been earmarked for sale. You know, can you just touch on how you're thinking about the potential timing of those sales, how the market feels for those sales, and whether, you know, you feel like it's best to kind of rip the Band-Aid off or wait for that market to establish itself?
Timing will be driven by the capital markets. We have an intent to sell them. They'll be sold individually. I don't see a scenario where a single buyer would want to take all five. Four of them are very well leased in the 90% plus range. One, we have a little wood to chop to get that leased up. We've got really strong demand for that building currently. Interest rates are gonna have to come down to create pricing that will be good for our shareholders. They are not a challenge for our company's reputation or its operations. They're generating good cash flow. Our thinking is we're in the business to create shareholder value, and we're not gonna give it up and rip the Band-Aid off. It'll be a multi-year activity, and eventually we'll sell them.
Currently it's five out of 204 buildings.
Okay. All right. We've got time for probably one more question. Anyone in the audience?
I'm sorry. Are these officially accessed for sale?
They're not for sale. They will be Sunday.
They are for sale?
They are five office assets that do not fit our defense segment. They were legacy. They were acquired before I became CEO and reestablished a different strategy nine years ago. At the appropriate time, when we get the appropriate pricing, we'll sell them. Good question. Would you like one?
All right. Any last one from me? You know, I think media reports are suggesting that the administration has focused on, quote unquote, privatizing some of the traditional government functions. Can you talk about whether that process can be disruptive to any of your contractor tenants in the near term and how you are thinking about the potential for incremental demand from those contractors over the mid to longer term?
First of all, the primary role of the federal government is national defense. I don't see any privatization within the DOD activities per se that could affect our government functions or the elements of the defense contractors that serve them. Some of those companies do work for the non-defense part of the U.S. government as well. Booz Allen would be a great example. It may create opportunities for them. Certainly, there's gonna be pressure on the cost of the services they provide to the balance of the government. I do not see privatization per se, or DOD for that matter, impacting the activities of the missions that we have aligned with.
All right. Great. I wanna thank Steve, Britt, and Anthony. Thank you all for being here. Enjoy the rest of your day.