COPT Defense Properties: Slow And Steady Growth

Company Overview - COPT Defense Properties (NYSE:CDP) owns 210 properties primarily focused on the defense industry, classified as an office REIT but with unique fundamentals [2][3] - The company is positioned for moderate growth, with expected growth rates of approximately 4%-5% over the next few years, supported by high renewal rates and rent roll-ups [2][9] Property Characteristics - COPT's properties resemble office buildings but include extra security features and are located in designated defense areas, making them unique [3][9] - Over 80% of COPT's properties are equipped with Sensitive Compartmented Information Facilities (SCIFs) to meet Anti-Terrorism Force Protection (ATFP) requirements, resulting in high tenant retention [3][7] Tenant Stability - COPT enjoys a reliable tenant roster, with 35.9% of revenues coming from the U.S. government and large defense companies, leading to an average lease renewal rate of about 77% [12][14] - The company has been able to increase occupancy rates to the mid to high 90s, contrasting with the broader office sector's struggles [11][12] Financial Performance - COPT has experienced growth in occupancy and rental rates, with government and private defense spending continuing to rise [11][12] - The company benefits from annual rent escalators of approximately 2.5%, contributing to steady growth in FFO per share [14][30] Development and Growth Potential - COPT has 1 million square feet currently under construction and an additional 8.45 million square feet in preconstruction or planning stages [19][20] - The company has been self-funding its developments through the sale of data centers, which have provided significant gains [23][24] Valuation Insights - COPT's market price has declined by 14.5% over the last five years, despite steady growth in FFO per share, leading to a low valuation multiple compared to traditional office REITs [25][26] - The current AFFO multiple of 13.1X is considered low relative to the company's growth rate, suggesting potential undervaluation [27][30] Land and Leasing Considerations - COPT owns 660 acres of land with the potential to develop nearly 8 million square feet, which is not currently contributing to AFFO [31] - A significant portion of leases will expire between 2024-2026, with the company estimating over 90% renewal, which could positively impact future revenue [32] Conclusion - Overall, COPT is expected to outperform the market due to its valuation, stability, and growth prospects, with anticipated annual returns in the 9%-10% range [33]