COPT Defense Properties: A Solid Buy For Its Government Rent Checks

Core Viewpoint - COPT Defense Properties (CDP) continues to present good value and income opportunities for long-term investors despite a recent decline in stock price, driven by market speculation around interest rates [2] Company Overview - CDP is a self-managed REIT focused on properties associated with the Defense/IT segment, deriving 89% of its annual recurring rents from U.S. government and defense contractors [3][4] - The portfolio consists of 188 properties covering 21.3 million square feet, with 47% of annual rents coming from the Ft. Meade/Baltimore-Washington Corridor [4] Portfolio Strength - CDP has concentrated capital allocation to a Defense/IT portfolio that supports critical missions, with a total of 8,693 thousand square feet leased at a 97% occupancy rate [5] - The company has seen steady FFO per share growth at a 4.1% CAGR since 2018, contrasting with upheaval in commercial office real estate [5] Government Spending and Stability - The National Defense budget has consistently risen, with a 9.7% increase in FY23 over FY22, indicating strong demand for CDP's properties [7] - The FY 2024 budget request represents a 3.3% increase over FY23, supporting the stability of CDP's tenant base [11] Operational Performance - CDP's occupancy improved by 230 basis points from Q2 to Q3, reaching 95.9%, with a record high leased rate of 97% for the Defense/IT portfolio [10] - Same property cash NOI growth was 4.5% in Q3, supported by strong leasing volume and high tenant retention of 83% [9] Growth Potential - CDP has 1 million square feet of active developments underway, representing 4.7% of its current portfolio, with projects already 90% leased [10] - There is potential for an additional 1.2 million square feet of development, indicating strong future growth prospects [10] Financial Health - CDP maintains a strong balance sheet with no variable debt exposure, $200 million in cash, and a net debt to EBITDA ratio of 6.0x, supporting its BBB- investment grade credit rating [12] - The current yield is 4.7%, with a 47% payout ratio, and the company has demonstrated its ability to raise dividends [12] Valuation - CDP is currently valued at $24.36 with a forward P/FFO of 10.2, below its normal P/FFO of 13.4, indicating potential undervaluation [12] - Analysts project a 4% annual FFO/share growth over the next two years, supported by a conservative 2% annual reversion to mean valuation [12] Comparative Analysis - Compared to Office REIT peers, CDP has a middle-of-the-road valuation, with a cheaper EV/EBITDA than some competitors, making it a solid choice for investors seeking stability and dividend growth [13] Investment Thesis - CDP's strong portfolio, stable cash flow, reasonable leverage, and solid dividend growth potential make it a worthy addition to a diversified income portfolio [14]