Executive Summary / Key Takeaways

• COPT Defense Properties (CDP) is a specialized REIT uniquely positioned in the defense/IT real estate sector, leveraging its expertise in secure, mission-critical facilities like SCIFs and data center shells for U.S. Government and defense contractor tenants.
• The company has demonstrated exceptional resilience and consistent performance, achieving 31 consecutive quarters of meeting or outperforming FFO per share guidance, with 2025 projected to be its seventh consecutive year of FFO per share growth, implying a 5.1% annual increase over 2024's results.
• Significant tailwinds from increased defense spending, including the "One Big Beautiful Bill Act" and the Golden Dome missile defense initiative, coupled with the Space Command relocation to Redstone Arsenal, are expected to drive substantial future demand and development opportunities.
• CDP maintains a strong balance sheet and robust liquidity, successfully prefunding its 2026 bond maturity and expanding credit facilities, while adhering to a disciplined capital allocation strategy that self-funds equity components of investments.
• The company's competitive advantage stems from its specialized portfolio, deep tenant relationships, and regulatory expertise, which translate into high tenant retention rates (82% year-to-date 2025) and stable cash flows, differentiating it from broader office and data center REITs.

A Fortress of Defense: CDP's Enduring Strategy and Technological Edge

COPT Defense Properties (CDP) operates as a self-managed real estate investment trust, strategically focused on owning, operating, and developing properties in locations critical to U.S. Government (USG) defense installations and missions. With a history spanning over three decades, CDP has cultivated a specialized niche, serving the USG and its defense contractors who require mission-critical and high-security property enhancements. This foundational strategy has enabled the company to thrive even amidst challenging macroeconomic environments, including the global COVID-19 pandemic, periods of high inflation, rising interest rates, and a significant shift to remote work.

The company's core technological differentiation lies not in traditional R&D, but in its specialized expertise in developing and managing Sensitive Compartmented Information Facility (SCIF) space and single-tenant data center shells. These are not merely buildings; they are highly specialized environments designed to meet stringent national security requirements. The tangible benefits of this specialization are profound: SCIFs are expensive and time-consuming to construct, and once built, they cannot be easily relocated, fostering exceptional tenant stickiness and retention. This expertise allows CDP to provide tailored solutions that meet unique design and technology requirements for priority missions. For instance, over 80% of vacancy leasing in Northern Virginia over the past five years has been with defense IT tenants, many of whom have invested in SCIF facilities, further strengthening the portfolio's retention posture.

CDP's data center shells represent another critical technological offering. These properties are leased to tenants who then fund the costs for power, fiber connectivity, and data center infrastructure, providing a stable revenue stream with reduced capital expenditure for CDP. As of September 30, 2025, the Defense/IT Portfolio included 5.90 million square feet in 31 single-tenant data center shells, with 24 of these (4.30 million square feet) owned through unconsolidated real estate joint ventures. The company's strategic intent is to continue developing these specialized assets, as evidenced by five properties currently under development, including two data center shells. The "so what" for investors is clear: this specialized portfolio and operational expertise create a significant competitive moat, driving high tenant loyalty, stable occupancy, and resilient cash flows, which are paramount in the often-volatile real estate sector.

Competitive Stronghold in a Specialized Arena

CDP operates within a competitive landscape that includes broader data center REITs like Digital Realty Trust (DLR) and Equinix (EQIX), as well as office REITs such as Alexandria Real Estate Equities (ARE) and storage solutions provider Iron Mountain (IRM). However, CDP's competitive positioning is distinct due to its unwavering focus on the defense/IT sector. While DLR and EQIX boast global scale and extensive digital infrastructure, CDP's strength lies in its deep penetration and specialized offerings within mission-critical government-adjacent markets.

CDP's specialized portfolio and regulatory expertise provide a qualitative edge. Its ability to deliver secure, government-grade facilities, often "behind the fence" of defense installations, is a critical differentiator that larger, more generalized competitors may struggle to replicate. This specialization translates into enhanced tenant loyalty and recurring revenue, as the cost and complexity of relocating SCIF-enabled operations are prohibitive for tenants. For example, CDP is the dominant landlord in the supply-constrained Westfield submarket in Chantilly, Virginia, owning roughly one-third of the 4 million square feet of office inventory, with Class A office rents increasing 25% over the past five years. This dominance is further underscored by the fact that other landlords, burdened with traditional office portfolios, often struggle to fund specialized deals, leading more tenants to CDP.

While direct quantitative financial comparisons with all niche competitors are challenging to ascertain, CDP's financial health, characterized by consistent FFO per share growth and strong operating margins, suggests effective operational execution in its core segments. Its bonds consistently trade at tighter spreads than those of equal or higher-rated office peers, reflecting fixed income investors' appreciation for the resiliency of its cash flows and the strength of its strategy. This indicates a strong market perception of CDP's stability and lower risk profile compared to its broader-market counterparts.

Financial Resilience and Operational Excellence

CDP's financial performance in 2025 has continued its impressive trajectory. For the nine months ended September 30, 2025, Net Income attributable to common shareholders increased to $114.81 million, up from $103.81 million in the prior year period. FFO per share as adjusted for comparability reached $2.02 for the first nine months of 2025, representing a 5.2% year-over-year increase. This consistent growth underscores the effectiveness of its specialized strategy.

The company's operational details further highlight its strength. The portfolio ended Q3 2025 at an impressive 95.7% leased, marking its highest level in 20 years. The Defense/IT portfolio specifically saw its lease rate increase by 20 basis points to 97% in Q3 2025. Tenant retention has been exceptionally strong, standing at 82% for both the third quarter and the first nine months of 2025. This is significantly driven by the mission-critical nature of its tenants and their substantial investments in secure facilities.

Same-property cash NOI increased by 4.6% year-over-year for both the third quarter and the first nine months of 2025, primarily due to increased rental and occupancy rates, as well as lower net operating expenses. While construction contract and other service revenues decreased due to lower activity for one tenant, this segment is considered ancillary to the core real estate operations.

CDP's balance sheet remains robust. As of September 30, 2025, 97% of its debt was at fixed rates. The company has proactively managed its debt profile, successfully prefunding its March 2026 bond maturity by issuing $400 million of 4.50% Senior Notes due 2030 in October 2025. This offering was 10x oversubscribed, pricing at a credit spread of 95 basis points and a yield to maturity of 4.6%, tighter than its peers. Furthermore, CDP upsized its Revolving Credit Facility to $800 million and established a new $200 million Revolving Development Facility, significantly enhancing its liquidity for future growth.

Strategic Initiatives and a Bright Outlook

The outlook for CDP is exceptionally compelling, driven by a confluence of strategic initiatives and favorable defense spending trends. Management has consistently raised its 2025 guidance, reflecting strong year-to-date performance. The midpoint of 2025 FFO per share guidance has been increased to $2.70, implying a 5.1% growth over 2024's results. Same-property cash NOI growth is now projected at 4%, and the year-end occupancy target has been raised to 94.2%.

Key demand drivers include:

• Space Command Relocation: The announced relocation of Space Command's headquarters to Redstone Arsenal in Huntsville is a significant catalyst. CDP expects the Command to lease approximately 450,000 square feet, likely in increments, at its Redstone Gateway secured parcel. This is anticipated to be followed by a 2:1 contractor tail, driving substantial incremental demand.
• Golden Dome Missile Defense Shield: This new Trump administration priority, with a projected cost of $175 billion and a $25 billion down payment appropriated for 2026, is expected to significantly increase activity at Redstone Arsenal. CDP has already signed a new lease tied to this initiative and anticipates further development opportunities.
• Increased Defense Spending: The "One Big Beautiful Bill Act" and the President's 2026 Budget Request amount to nearly $950 billion for defense, a 13% year-over-year increase and the largest nominal increase in at least 25 years. This funding is expected to bolster priority missions like intelligence, cybersecurity, naval technology, and missile defense, all of which are directly supported by CDP's portfolio. Management anticipates a quicker translation of appropriations into leasing activity this cycle, potentially within six months, due to pent-up demand.

CDP's development pipeline is robust, with $125 million of capital committed to new investments year-to-date against an original target of $225 million, with expectations to exceed this target. The company commenced construction on 7700 Advanced Gateway in Redstone Gateway, a 100% pre-leased $27 million development, and acquired Stonegate I in Chantilly, Virginia, a 142,000 square foot property fully leased to a top 20 U.S. defense contractor at a 9% initial cash NOI yield. These strategic deployments are expected to be accretive to FFO per share.

Risks and Mitigation

While CDP's investment thesis is strong, it is not without risks. Exposure to interest rate changes remains a predominant market risk, potentially increasing interest expense on variable-rate debt and refinancing fixed-rate debt. However, the company mitigates this through its high percentage of fixed-rate debt and strategic use of interest rate derivatives.

Government shutdowns and budgetary impasses, while creating uncertainty around lease timing, do not materially impact CDP's business. The company's buildings are leased to essential missions, and standstill agreements ensure rent collection at expiring cash rent levels during delays. Management explicitly states that any delay "only impacts the when for these renewals, not the if."

A potential vulnerability is tenant concentration, particularly with government entities. However, CDP's focus on mission-critical, high-security facilities significantly reduces this risk, as these operations are difficult and costly to relocate. The company's minimal exposure to general GSA leases (less than 1% of annualized rental revenue) further insulates it from broader government office reductions.

Finally, the development of its data center land in Iowa faces challenges with power availability, with current expectations suggesting a 3-4 year timeline for new capacity. While this delays a significant future opportunity, it is a long-term investment, and the company's strong liquidity allows it to manage this timing without constraining other growth initiatives.

Conclusion

COPT Defense Properties stands as a highly differentiated REIT, fortified by its specialized focus on mission-critical defense and IT real estate. Its enduring strategy, characterized by deep tenant relationships, unparalleled expertise in secure facility development, and a disciplined capital allocation approach, has consistently delivered strong financial performance and shareholder value. With a robust development pipeline, strategic acquisitions, and significant tailwinds from increased defense spending and key government initiatives like Space Command relocation and the Golden Dome project, CDP is poised for continued growth. While market risks and operational challenges exist, the company's proven resilience, proactive risk management, and unique competitive advantages underscore a compelling investment thesis for discerning investors seeking stable, growth-oriented exposure to the vital national security sector.