Okay, folks. Thanks for joining us for our last session for the day. My name is Mark Streeter, and in addition to being the high-grade and high-yield transportation analyst, which is the hat I've been wearing, I think, for the last two days. I get to put on my REIT hat, 'cause I'm also our REIT credit analyst, and very pleased to, in partnership with my colleague, who's on the road, Anthony Mifsud, who covers COPT Defense Properties. Very pleased to have with us Stephen Budorick, President and Chief Executive Officer, joined by Venkat and Britt on his team. Steve, thanks for joining us, making it all the way down from the home office or the corporate office and the home office.
I guess you have a long commute home tonight, but we were just talking about. Not that far, but.
It's
A little bit of traffic.
20 miles.
Yeah.
25 miles.
25 miles. So, you know, just sort of thinking about, you know, maybe because there's some folks here in the room that might not know a lot about the story, you know, hopefully the folks on the webcast probably are a little bit more familiar, but maybe sort of just talk a little bit about, you know, your focus and then we'll jump into, you know, some questions on how, you know, especially how events of the recent weeks, you know, are sort of impacting your business. Maybe just sort of lay the groundwork with the basics before we jump in.
Okay. COPT Defense Properties, we're a specialized real estate investment trust, or REIT, and we're deeply concentrated in mission-critical assets that support national defense activity in the United States. The vast majority of our 207 properties are located adjacent to or are 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, among others. Our property locations are not typical for an office company. They are proximate to United States defense installations that have permanence in Maryland, Virginia, Alabama, and Texas. Our properties are improved for top secret mission work. 80% of our portfolio contains high security operations.
That includes 9 U.S. government secured campuses representing over four million sq ft that are built to antiterrorism/force protection standards and developed with SCIF improvements. We have another one million sq ft with the U.S. government in non-full building properties or leases, six million sq ft of defense contractor leases with SCIF, and we have 15 cloud computing campuses representing over six million sq ft. How's that for an intro?
That's great. First off, occupancy right now in the portfolio, because certainly there's a lot of struggling office REITs, and I think that's probably the best sort of testament to your resiliency when I cover, certainly on the office side, some companies that have fallen below 80%. You know, where are you now and where have you been sort of at the lows?
Right now we're 94.5% occupied. We are 95.5% leased overall, and 96.5% leased in our defense assets. Our lows, when I first joined the company and we were more of a diversified REIT.
Mm-hmm
with a suburban office presence, our low was probably about 87%.
Yeah.
We spent seven years repositioning the company to be a pure defense play. During that period of time, we sold 11 million sq ft of property and replaced it with high-value new developments in the defense space. Since then we've never been below 93%.
Yeah. I mean, it's amazing testament to, especially with a low, now increasingly mid-triple B credit rating. Some of your peers in the pure office space, if we even want to call them peers, you know, have obviously, like I said, dipped below 80%, right? It's. You know, maybe you can talk a little bit about sort of your lease structure, you know, versus a typical sort of government lease. How are they different?
The leases we do with the United States government are with the missions that we support. They're not GSA structured leases. There are a couple differences that we're able to achieve. On the one hand, we get annual escalators on our rent. It's not a flat rent structure. On the other hand, we've learned to be very accommodating to our government customers by basically doing one-year leases. When we sign a lease with the US government for a new building, it'll be a one-year lease with nine automatic renewals or 14 automatic renewals. And we have the confidence to accept that structure, one, because we don't have property level debt, we don't have to deal with lenders, but secondly, we know that the government will co-invest in those buildings as much money as we do, and that not just on improvement, the whole structure.
With that confidence, we accept that structure because it allows them to score one year's rent at a time instead of scoring all the rent of a lease in one year.
What has your retention rate been running with your government tenants direct rather than, you know, separating that from sort of adjacency tenants?
Government approximates 100%.
Yeah.
In 34 years of leasing to the U.S. government, we've never had a full building non-renew.
An amazing statistic. Can we talk?
I like to point out, we have a building.
Mm-hmm.
Show me any other one in the country that's been leased every square foot every day for 34 years.
Yeah, it's amazing. Maybe can you talk a little bit about. It's funny, we were talking about moats around the airline businesses at this conference earlier today. You know, yes, you can think about, like, loyalty for the big airlines, et cetera. Maybe talk about the moats around your building. You know, why can't someone else buy land next to one of your campuses and sort of throw a building up? You know, maybe I'm sort of thinking about, you know, like, you have cables underground, right, that tie into, you know, critical facilities and so forth. Maybe just sort of describe, you know, how high your barrier to entry is.
I'll give you what we call our four pillars of strength. One is we have 30+ year track record with defense contractors in the U.S. government. The second is in those 34 years, we've developed a specialized workforce. 45% of our employees carry the highest credentials available to a contractor to support top secret missions.
Including yourself, right?
I'm not supposed to tell you.
Okay. Sorry.
Yes.
Sorry.
Yes. You're not supposed to ask.
I thought that was public knowledge. Oops.
It is now. We've committed to this business early. We have advantaged land positions. You know, our operating excellence, our top 15 tenants average six leases in four or five locations or more. We're tightly aligned with the industry, and we know how to support it.
You made a big bet on Huntsville and the Redstone Arsenal a number of years ago, right? Maybe you can talk about why, how has that played out, what's the growth opportunity there outside of sort of your original core D.C. properties?
In 2010, we entered into a joint venture relationship with a local developer that had won an enhanced use lease. We created a structure that gives them a preferred return of the incremental capital we invested in. It was barren land. We invested in infrastructure to create a business park. In 2011, we built our first building on spec. We had 0 pre-leasing. It took us about six months to convert that to a lease with Boeing, and it was actually a three-building lease, so we did two build-to-suits. That represented about 360,000 sq ft. Today, that park is over 2.5 million sq ft. It's virtually 100% leased or about to be leased.
We're actively developing 150,000 sq ft inventory building that we have great demand for, and we have significant runway with about 3-3.5 million sq ft of additional development capacity.
There's a lot of talk, you know, even before the hostilities in Iran, about the Golden Dome. You know, for those that don't understand the real estate business, don't understand your company, they read a lot about Trump's focus on a Golden Dome initiative. How does that impact your business?
Well, Golden Dome or the current activities?
Well, the Golden Dome first.
Well, I'm gonna do it backwards.
Okay. Do it backwards then.
The current activities personifies to America what it's like to live in a world where you can be under threat of multiple missiles inbound in the places where you live, and it's a threat that our president has identified as intolerable for this country. Golden Dome envisions the kind of anti-missile defenses that Israel's had to deploy with their Iron Dome distributed eventually across the entire United States of America. It's aspirational in many respects. It's gonna use a lot of the great technology you can now see on TV, but it also aspires to bring some of that technology into space with space-based interceptors and eventually weaponry to deter it.
Mm-hmm.
That activity is really centered around the Redstone Arsenal.
Mm-hmm
... where the Missile Defense Agency and the Defense Intelligence Agency for space are centered and, as a matter of fact, NASA and other space-oriented functions. We anticipate it's gonna be a big growth opportunity for our development outside the base. Remember, it just got funded in July. We've already signed one lease with defense contractors specifically.
What was the funding for it? I'm not an aerospace defense guy.
It was in the One Big Beautiful Bill Act.
Yeah.
It was $175 billion.
Dedicated just to Golden Dome.
to Golden Dome.
Mm-hmm.
If you think about that's roughly 20% of the prior year defense budget.
Mm-hmm
for one program over a three to four year period. The down payment that's in the FY 2026 budget is $25 billion.
Interesting. It sounds like a great opportunity. You know, at your heart, you're a developer, right? You have a land bank. When you think about how much inventory to have in land and that pace of, you know, building, now we can call it spec or whatever, or inventory building, but knowing that the government is likely gonna be on the back end, how big is that land bank? How much are you doing annually in terms of trying to turn that raw inventory into, you know, new leasing?
I think in total we've got development capacity for around eight million sq ft additional-
Mm-hmm
property, that's centered around priority defense locations.
Mm-hmm
Like Huntsville, Alabama, and I would say Fort Meade, Maryland. We don't force protection. We've just built it into our cost structure.
Mm-hmm.
We've achieved the point in time where we can self-fund $250 million-$300 million a year in new development without any external equity or capital source on a leverage neutral basis. We acquired this land to defend our franchise and to support our customers, and so we develop to known demand.
You know, speaking on the development side, you were early on in the data center shell business with Amazon Web Services, right?
I can neither confirm nor deny our tenant.
Okay. That's who it is. Okay. We're gonna pretend we don't know.
As I repeat, I neither confirmed nor denied.
Okay. How much of your NOI comes from data centers? How has the shell business worked out? We can admit that you have data center shells, right? Maybe you could just talk about sort of the data center contribution and, you know, and I wanna dig into, as those leases come due, you know, how are rents rolling over? Maybe just whatever you can tell us about that side of the business.
Sure. In total, we've developed about 4.6 million sq ft of data center shells.
Mm-hmm
for a very impressive customer.
Mm-hmm.
They were all pre-leased build-to-suits on a negotiated yield basis. One of the prices we had to pay-
Mm-hmm
to get ourselves to a point where we are able to self-fund our development-
Mm-hmm
... is we entered into joint ventures with, quite a few of those, with Blackstone ultimately as our joint venture partner. We still own 10% of, let's say, two-thirds of that.
Mm-hmm.
Currently our data center shell exposure is really only about 8%. We have several that we've just completed the development of, and as rents kick in, it'll get up to 10 or 11. It's not as great. In a perfect world, I'd have kept every one of them.
Mm-hmm
because as the leases have matured, the net rents have increased by a minimum of 100%.
Okay
... as high as about 130%.
How much of those, you know, what's the cadence for? I know it's a smaller part of the portfolio, but how much is rolling over this year, next year? What's that churn?
I think it's, you know, like two-three a year.
Okay. All right, interesting. You know, is there any concern about the Department of Defense sort of taking its eyes off the ball of leasing space because they're so distracted with a war? Does it impact the day-to-day? I mean, we've got a government shutdown that we're dealing with partially. There's noise at the airports with TSA, et cetera. Does any of this noise, either with the war or the government funding, impact your ability to do sort of your regular way relationship with all the government agencies that you work with?
No, it doesn't. First of all, during a shutdown, we do get paid rent. Government regulations require the contracts get paid, so it's never been an issue. The war fighting part of our customer base is not who we negotiate with for leasing space or renewing leases. It really has no material effect. It's more a headline risk.
Sure.
I like to say, when the headlines hit, it's a great opportunity to get an entry point in our stock.
Yeah
'Cause we usually trade off a few dollars, and you can make a quick gain pretty quickly.
Yeah. It's interesting, right? That kind of brings me to one of the points I wanted to mention. It's just, you know, when we look at the catalyst for the stock, right? You know, you hate to, like, boil it down to, like, war is good for you or conflict is good for you, and so forth. But I mean, if we try to separate what's going on with Iran and the Middle East and maybe, I mean, we had Venezuela, we have potentially Cuba coming, and so forth. You know, how do you think about sort of the catalyst for the stock outside of the conflicts, and what you think could propel the stock higher?
I really don't believe the conflicts are the catalysts that drive our stock price.
Mm-hmm
our company. When the conflict occurs, the missions we support, the technology that's been developed, they apply that to the situation. The leases we have are with a variety of groups that are heavily engaged in executing that. That's not really what drives our stock. We're not selling missiles or weapons.
Yeah.
We're providing facilities for knowledge-based defense installations long term. I think a great catalyst for our stock is peace through strength. The recognition that the United States government is under-invested in defense, that at least before this most recent conflict, we've run the risk that we no longer have uncontested dominance in every theater of war, and that peace through strength demands that we invest to make sure that we have the most lethal fighting force in the world.
You know, we talked a little bit about Golden Dome, but specifically on Space Command, are there different drivers there or opportunities for you there?
Yeah. Space Command is one of the 11 combatant commands which are formed to integrate the activities of Army, Navy, Air Force, Space Force, Coast Guard into a single command structure for a theater. Current events, Central Command is executing oversight on all activities that involve the current conflict. Space Command is going to concentrate all the capabilities of the armed services for space activities. It had been stood up temporarily in Colorado Springs. When Space Force was created, Space Command was structured under the first Trump administration. They went through a process to pick the best location where it would be, should be. They came up with Huntsville, Alabama, Redstone Gateway, or Redstone Arsenal that was challenged and readjudicated twice. In all three competitions, Redstone Arsenal won the competition.
The prior president used the executive order to freeze it in Colorado Springs. The current president has overruled that order, allowed the Air Force to make its own decision, and it was once again selected for Redstone Arsenal. It will be moving in these next three years to the Redstone Arsenal. The opportunity for us initially is we have a high confidence we're gonna provide an initial building-
Mm-hmm
to accept the early relocations because we can develop much quicker than the government can. There could potentially be opportunity to house the command itself beyond that, but we don't have clarity into that at this point in time. Ultimately, as the command relocates, the defense contractor community that supports that command is roughly 800 to 1.2 million sq ft of future demand that's going to want to be co-located with the command in Alabama. We think over the next two-four years, there'll be a really nice runway of growth for us in our Redstone Gateway.
All right. That's helpful. If we take a step back, if you look at your total rental income, total NOI pie chart, how much right now is direct government leases versus government contractors versus something outside of that ecosystem, if we were to split it in those three ways?
Roughly 35-36% U.S. government.
Mm-hmm.
55% defense contractors, 10% non-defense.
You know, we know on the government direct related, that's where the retention is highest, right? I mean, with the government contractors or the non-defense related, you know, how different are the characteristics of those, you know, of tenant retention rollover in those two subsets?
Government, I'll just throw government defense contractors in.
Okay.
They're very comparable.
Mm-hmm.
You know, over the last 10 years, we've averaged 80% retention.
Mm-hmm.
That includes part of the portfolio that was non-defense.
Mm-hmm.
Our government tends to approximate one. Defense contractors, you know, any given year, there's some flux as contractors win or lose business.
Mm-hmm
... make adjustments. I like to point out if we measured our renewal statistics as binary events, do we keep them or lose them?
Yep.
We'd be at almost one with defense contractors. They have to manage their portfolio to the current business needs.
You sort of mentioned that you can self-fund the development without raising equity capital. Can you just update us on, you know, where leverage is versus your target? Let's start there.
Our target is approximately 6x debt to EBITDA. We finished the year at 5.9x debt to EBITDA. Our credit rating and, our benchmark of peers would suggest we could get up to 6.4x or 6.5x debt to EBITDA, and we like to manage to a lower level, so we have embedded capacity to accept excess opportunity in the future. In a year where our development opportunity set were to exceed $250 million-$300 million, we have that capacity to go out and grab those developments.
Mm-hmm
Complete them. They will, of course, be pre-leased. The predominant portion of our development is pre-leased development. When that income comes online, it'll naturally return to the 6.0 debt to EBITDA.
I'm sure you do your own benchmarking. I'm sure your finance team has done this with you going in to see the rating agencies. When you compare, you know, 6x leverage on your portfolio, which is, you know, mid-90s leased and so forth or occupied and show the stability of that cash flow, I mean, you have some, what I would call more the commodity office peers or even if we call it premium workspaces and so forth. The bottom line is we can look at the volatility of that cash flow, and there the leverage is often higher, much higher than your leverage, and the credit rating is often a notch or two higher. Now you've made some progress with the rating agencies recently.
Maybe you could talk about that, and, you know, why do they still apply sort of a penalty to you? I mean, are they so fixated on size?
No, it's actually worse than that. First of all, shameless plug, we just got upgraded by Moody's to Baa2 from Baa3. We're very,
That was a layup for you.
thrilled.
I was leading you to that. Yes.
All right. Did I slam it like Jordan?
Yeah. Yeah.
Good.
You got it.
Their argument for delaying or not upgrading through both of the major rating agencies is highly theoretical.
Mm-hmm.
They say we have a very tight concentration of customers.
Mm-hmm
a very tight concentration of assets. Now, I would flip it and say, "That's why we should be higher rated.
Mm-hmm.
We have the best credit tenants.
Mm-hmm
in the country, in the best locations where demand has proven to be high in any cycle you wanna refer to, but they kinda get that backwards. My smart-ass comment is, "Would we be a better risk if we had law firms across the country?
Mm-hmm.
I don't think we would. We have the United States government and defense contractors, and by the way, defense contractors have to be in good financial standing to do business with the United States government.
What do you really think drove Moody's? What, you know, what changed in their mind? Was it just a recognition of the stability of your cash flow and occupancy in light of what's happened with the broader office peer set?
They've always recognized the argument, but on several occasions they'd say, "Well, let's see how you do in this environment." When COVID hit, they said, "Let's see what happens through COVID." Well, we sailed through COVID without any problem. It was higher interest rates, it was higher inflation. Our durability, our seven-year track record of FFO growth, high occupancy, we've really demonstrated to them that we are far more resilient than their theoretical arguments might suggest.
How should investors that might be new to your story, you know, think about which party is in control in Washington, D.C.? We have the midterm elections coming up. I think the expectation is that the Republicans won't hold everything, and that the pendulum will shift a little bit to the left. You know, is there. You've obviously done all the tracking, you know, between the correlation between the elections and DOD budget and so forth. What are some of the misconceptions regarding that? Is it something anyone should be worried about if that political pendulum does shift come November?
The misconception is that throughout all parts of government, we have a disagreement between the parties, but in defense, we have very strong alignment.
Mm-hmm.
Over the last three presidential terms, it's a question of is it good or great?
Mm-hmm.
In each, through each one of those presidencies, there is a common recognition in the House Armed Services Committee and the Senate Committee on Armed Services.
Mm-hmm
... that we need to invest in defense to keep America strong. We've, since sequestration, we have a graph, if you look at our reference material-
Mm-hmm
Defense budget has increased every year.
Yeah. By an average of what? I think you know the stat.
probably 7%.
Yeah, 7%. Pretty good CAGR when that's driving your business. I wanna give our audience here in the room a chance to ask any questions. Anyone have one? Please, the mic is coming.
Thank you. Can you talk about, there's a lot of energy, as evidenced by this conference and just what's going on in the world, around new entrants into the defense space. Can you talk about the kind of interactions you're having with some of those new entrants, and the kind of services or opportunities you can deliver to them, with your business?
You're talking about the new startup companies?
New startup companies who might not be familiar with this world and maybe.
Yeah
Say, "Oh, what's a SCIF?
One, some of them have developed technology in other parts of the country and need, now that they've proven it out, to relocate to be near the commands they're gonna support. To that point, Golden Dome.
Mm-hmm.
Three or four technology companies are looking at leasing in our business park right now, because they'll be adjacent to the Golden Dome command structure. Another area of great demand that we've enjoyed is cybersecurity, 'cause we have significant holdings outside Fort Meade, where U.S. Cyber Command is held. We've been able to attract the good idea startup company, put them into, you know, the space that they can't afford, support 'em as they grow their business, relocate them to other buildings, and support them as they get the contract that allows them to have a SCIF with our deep experience in constructing SCIF, and guide them through the process and help get them up to speed. We have a concept that we call Life Cycle Landlord.
We're constantly looking for that small guy who's breaking out, and we tell 'em, "I wanna be your landlord when you need a full building.
One more in the room. Yilma Abebe.
Can you talk about the 35% of your business that's direct in the government? Why would the government choose to lease and then own real estates outright?
Well, the fact of the matter is the government never has enough money for the facilities that they require. The missions we support generally are funded out of the DOD, and there's a line item in the DOD budget called MILCON or military construction. For them to get a facility that they own, they have to compete with all the missions worldwide in the DOD from, you know, Okinawa to Europe to get that priority funding to build the building and there's just never enough money. We are, we don't get all of their business, but I like to say we fill the gaps. When there's not enough money for the missions we support, then they can move forward to lease space, and we've been a go-to source of that leasing for over 30 years.
Anybody else?
By the way, we can also build the antiterrorism/force protection building in half the time for half the money than it takes the U.S. government. We're also a speed to market kinda solution as well.
Last question from me, Steve. Is there any opportunity to recreate what you did in Huntsville in another market? Is there like a list of. You know, does the government say, "Hey," not that they're gonna just tell you, but that, you know, "We'd like to work with you on, you know, here's a new area of the country that we think we might be building up a bigger presence"?
We have several active dialogues where we've identified parts of the DOD that need the same kind of help we've given to the missions.
Mm-hmm
We support. I will never tell you where they are, and I will never tell you when we expect them to occur.
I don't expect you to tell me where they are, but I am curious if you think that if we look five or 10 years from now, will your geographic footprint look different?
I think five years from now we should be able to add at least one if not two more locations.
Okay. Interesting. All right. I think we'll end it on that with a minute to spare.
Great
Stephen, thank you very much. Thanks to Britt and Venkat for coming. We appreciate you joining us at the Industrials Conference for a different twist on you know some of the opportunities in the defense-related industry. Good to have you.
Thank you for having us.
Okay.
Appreciate it.
Thank you.