COPT Defense Properties (CDP) - Hoya Hotseat

We are what we call a specialized real estate investment trust. We originally an office company but now over 90% of our assets support defense activities. Our strategy is to invest in assets that support priority defense missions and 197 of our 203 properties are oriented to our defense segment. We identify priority missions which are knowledge-based concentrated in very strategic locations that have a very high sense of permanence or growth. And then we accumulate advantaged land positions and properties near or sometimes containing these missions. And our long-term plan has been to develop. Occasionally, we acquire assets tied to the mission work. And we're a long-term holder. When we develop or buy a building, we will hold it through its life cycle. We've got a unique franchise. We've been at this for 30 years. For over 30 years, we've served high security missions at the Department of Defense and other parts of the US government.

We have accumulated, as I mentioned, land property adjacent to these priority missions, sometimes containing them. And over these 30 years, because of the work we've done for the government, literally 45% of our employees carry the highest credentials to operate secure facilities available to any contractor. And in that work, we design, develop, operate, and maintain some of the most high-security properties in the country. Because of that, we have very deep relationships with both the government missions, but also the defense contractors that support them and we're well capitalized to continue supporting growth needs. Our primary growth activity is and always has been development. Over 75% of the property we own, we develop. And when you narrow that down to our defense assets, it's 82.4% of those properties we built. Typically these have been pre-leased or build-to-suit and we maintain very low risk posture.

To give you an idea of the work we support, these are some of the missions. Intelligence and surveillance, all three human intelligence, signals intelligence, geospatial intelligence and satellite spy activity. We support cyber security and cyber warfare, DoD secure network activities, naval sea and air technology development. We support missile attack and defense systems. Army and Navy aviation research development, test evaluation and modernization. We support drone aviation technology, weapon lethality, law enforcement and terrorism explosive technology and of course cloud computing. The one common thread of all these missions is they require very high levels of secrecy or security and this work cannot be done from anyone's home. They have to do that work in their facilities. Our locations are very concentrated but they are proximate to very important DoD or intelligence community activities. We're about half our business is located adjacent to Fort Meade, Maryland. In Northern Virginia, we support several locations that are considered intelligence community hubs. We're at the Redstone Arsenal in Alabama, the Lackland Air Force Base in Texas, and of course, our data center portfolio is in the Nova or Loudoun County data center market, which is number one in the world. Our strategic advantages are many but one of them is the properties we own are specialized. They have anti-terrorism force protection features many of them and a vast preponderance have what we call anti-espionage features which is called SCIF.

70% of the overall portfolio, 80% of our defense portfolio has some or all of these high security features. They include multiple US government secured campuses, many many US government secure leases, a significant amount of defense contractor leases with security enhancements and then multiple campuses for hyperscale cloud computing that are secured. The key to that is secure facilities are highly valuable. They're very difficult to get permission to build. They're difficult to achieve the construction. They're very expensive to build. It's a time-intensive process. It can take up to two years to get a SCIF approved and constructed. And once they are installed, they cannot be moved. So, your tenant cannot jump to a competitive property and bring their SCIF features with them because that security is specific to the location it was built. So these facilities drive our amazing retention and stability. Again, the secure work cannot be performed at home. The secure facility cannot be moved. And oh, by the way, we have the best tenant credit in the universe of similar companies. Fully 36% of our revenue comes from the United States government and 54% comes from defense contractors. So that's who COPT Defense is.

Well, here's some of the history. The company was originally a diversification portfolio for Constellation Energy. They started accumulating real estate in and around Baltimore. In 1997, they looked to liquidate and reverse merged that into a public shell. And in 1998 that company had a new IPO, changed the name to Corporate Office Property Trust and they were listed on New York Stock Exchange. That's the origin of the company. The reason it was done was to create a liquidity event for significant early adopters. But I would say one of the advantages of us being a REIT, first of all the obvious is accessible to the small investor and medium-size investor. It gives you liquidity but it also gives you an opportunity to invest in a one-of-a-kind platform that has national purpose. We support national defense and because of our support of national defense it has a uniquely strong profile. So that's why it's great for us to be public. And then one last benefit, being public we're protected from hostile M&A and so that we're a key provider to the US government and we can assure the government that we will be there for the long term and that our mission to them will be fulfilled.

So first of all our base thesis is great. If we had more time, I'd run you through that. But I want you to point out, we have delivered six consecutive years of FFO growth. We have industry-leading statistics. And we have delivered that through a worldwide pandemic, the most inflationary period since I was graduating college, and the highest spike in interest rate. So, we're a great platform. The bull thesis is defense activity growth accelerates from where we're at today. That the USA actually addresses strategic weaknesses that we do have and adjusts to meet the international threat. Among the things that will help us significantly is if we actually address the cyber investment needs of the DoD and the country. And so that basically under the first Trump administration, we expect to get a Trump bump too. That's our bull thesis. We delivered twice as much development under Trump than we did under Biden. We delivered 40% more vacancy leasing. We delivered 70% more government leasing. And then the last bull thesis is looking forward in a world where interest rates decline, that we will be able to deliver higher growth than we're currently expecting in this environment and all these seem like opportunities that could happen in the current administration.

So I love the question because we've already proven the push back. We're largely protected from a bear scenario. The national defense challenges are extreme and they're not going away. During the sequestration period from 2011 to 2017, defense spending actually contracted and although we had more churn in our portfolio, we continued to grow our business with the DoD. So we proved it during sequestration. We proved it during COVID. But if you wanted to take a hypothetical view, if budget cuts were restricted and defense spending were pulled, our defense contractors might manage costs, shed a little space, some of our occupancy might deteriorate. But in our development pace would not increase. So hypothetically, our pace of growth could slow. Well, we've already proven that our level of FFO will not be contracted. There's no other REIT like us. We're unique, proven, safe, and reliable. We have strong competitive advantages that no company can replicate. 30-year history, credentialed staff, millions of square feet of development experience, and a portfolio that's rock solid with the advantages I pointed out. We have proven operating strength, best-in-class tenant retention. Our portfolio is the lowest capex burden in the industry. We've delivered 13 consecutive years of low-risk profitable development. And in fact, we delivered 2.5 billion alone in the last 10 years. And most importantly, we can self-fund our growth. We generate enough free cash flow after dividend to support $250 to $300 million a year in incremental growth without any need for financing. That's why you should own our stock. Oh, and then lastly, if I may, as of today, we're a pretty attractive value at $26.30. It's a screaming value to buy our stock, our multiples at 10x. Long-term average is 14. We got a 4.7% safe dividend and we have increased the dividend the last 3 years. Great opportunity to buy our shares.