CDP’s Q3 Call: Record Leasing Rates Unveiled!

Overview of Q3 Results and Portfolio Highlights

COPT Defense Properties (NYSE: CDP) – a REIT focused on leasing office and data facilities near U.S. defense installations – delivered a robust third-quarter performance. Funds From Operations (FFO) per share (as adjusted) came in at $0.69 for Q3 2025, up 6.2% year-over-year, marking CDP’s 21st consecutive quarter of FFO growth (^[1]). Management raised full-year FFO guidance by 3 cents to $2.70 (implying ~5% annual growth) on the back of this outperformance (^[2]). Top-line results beat expectations as well – Q3 revenue of $188.8 million surpassed forecasts by 7%, with GAAP EPS of $0.37 edging out consensus (^[1]). These gains were fueled by strong leasing momentum and high tenant retention, underpinned by a favorable defense spending environment.

Occupancy and Leasing: Tenant demand remains exceptional. The total portfolio ended Q3 2025 at 95.7% leased – the highest leased rate in 20 years for the company (^[2]). In CDP’s core Defense/IT segment, leased levels hit 97.0% with occupancy around 95%, reflecting nearly full utilization of space (^[2]) (^[1]). Third-quarter leasing volume was hefty: CDP signed 971,000 sq. ft. of leases in Q3 (including ~792k sf of renewals and 78k sf of new vacancy leasing) (^[2]). Year-to-date 2025, total leasing reached 2.3 million sq. ft., keeping pace with the prior year’s elevated activity (^[2]). Management even raised its annual leasing targets, citing a deeper pipeline of deals – the company boosted its 2025 vacancy leasing goal by 11% (to 500,000 sq. ft., up from an initial 400k) given robust demand from defense-related tenants (^[2]).

Rent Spreads and Retention: Not only is space nearly fully leased – it’s being re-leased at higher rents. In Q3 2025, CDP achieved rent increases on renewals averaging +7.5% on a cash basis (and +13.4% on a straight-line basis) (^[2]). This builds on the previous year’s gains – for example, in Q3 2024 cash rents on renewed space rose ~4%, with an outsized 17% jump in GAAP rents (boosted by a few long-term data center lease renewals) (^[3]) (^[3]). Tenant retention has also been exceptional. During 2024, retention hit 87–89% – the highest renewal rate in over a decade for the company (^[3]). High retention, record leasing percentages, and steady rent uplifts all underscore the critical importance of CDP’s specialized facilities to defense contractors and government agencies – even as the broader office market struggles.

Dividend Policy, History & AFFO Coverage

CDP has a long track record of consistent dividends, reflecting its stable cash flows. The REIT currently pays a quarterly dividend of $0.305 per share (raised from $0.295 last year), which annualizes to roughly $1.22. At the recent stock price, this equates to a ~4% dividend yield (^[4]) – an attractive payout given CDP’s growth rate. Impressively, the company has never missed a dividend in 34 years, underscoring a commitment to shareholder returns (^[4]). Dividend hikes have been modest but steady (about a one-cent increase per share annually in recent years), suggesting a cautious “pay what we can sustain” philosophy.

Importantly, CDP’s dividend is well-covered by its operating cash flow. Through the first nine months of 2024, dividends consumed only ~58% of Adjusted Funds From Operations (AFFO) (^[5]). Management targets an AFFO payout ratio below ~65%, and actual 2024 payouts were around 60% of AFFO – comfortably within that range (^[6]). In dollar terms, Q3 2025 AFFO easily exceeded the ~$35 million paid in common dividends for the quarter (^[2]). The cushion between AFFO and dividends allows CDP to retain cash for reinvestment and debt reduction. It also provides safety – even if earnings growth paused, the current dividend could be maintained without strain. Overall, CDP’s 4% yield looks secure, backed by defensive-tenanted cash flows and prudent payout ratios. The question ahead is whether management will accelerate dividend growth (given the low payout) or continue prioritizing internal reinvestment. So far, the approach has been conservative, balancing a reliable dividend with ample retained cash to fund development.

Leverage, Debt Maturities & Coverage

CDP has managed its balance sheet to support growth while keeping leverage moderate. As of Q3 2025, net debt stood around $2.43 billion, about 6.1× EBITDA – a leverage level the company touts as conservative for its stable asset base (^[1]). This is in line with many investment-grade REITs. In fact, CDP carries BBB- (low investment-grade) credit ratings from major agencies (^[7]), which has enabled access to capital at reasonable costs. Interest coverage remains strong at roughly 4.8× fixed charges (^[5]), reflecting the robust cash flow relative to interest obligations. By keeping debt/EBITDA near 6x and coverage near 5x, CDP maintains a financial buffer appropriate for its high-occupancy, government-oriented portfolio.

Crucially, the debt maturity profile is well-staggered with no imminent refinancing cliffs. The next major maturity had been a $400 million unsecured bond coming due in Q1 2026 – a potential concern given higher interest rates – but CDP proactively pre-funded this obligation. In October 2025, the company issued $400 million of new 4.50% senior notes due 2030 (^[1]), using the expected proceeds to fully cover the March 2026 bond maturity and even bolster liquidity. (The maturing 2026 notes carried a low 2.25% coupon, so replacing them will raise interest costs modestly (^[4]), but CDP eliminated any near-term refinancing risk). Additionally, the company refinanced and extended its credit facilities: its revolving credit line maturity was pushed out from 2026 to 2029, with improved pricing (^[2]). As a result of these moves, CDP enters 2026 with no significant debt coming due until 2030, ample undrawn revolver capacity, and even ~$400 million in extra liquidity earmarked for growth investments (^[2]). This proactive liability management underscores CDP’s financial flexibility. Barring a major acquisition spree, leverage is expected to remain roughly flat – management noted new developments are being self-funded on a leverage-neutral basis (^[5]). Overall, CDP’s balance sheet appears positioned to weather higher rates and support expansion concurrently.

Valuation and Comparative Metrics

Despite its solid fundamentals, CDP’s market valuation remains relatively modest. The stock has recently traded around the high-$20s per share (^[1]), which on the newly raised guidance equates to roughly 10–11× 2025 FFO. This multiple is below the broader equity REIT average, reflecting in part the market’s cautious view of anything office-related. By comparison, high-growth property sectors (like industrial or data centers) command FFO multiples in the high teens or more. Even some pure government-leased office REITs trade at higher yields – for instance, CDP’s 4% yield is lower (i.e. a richer valuation) than many traditional office REITs, but higher than defensive peers in sectors like net lease or healthcare. In other words, CDP sits in a middle ground: investors reward its unique defense niche with a premium versus generic office landlords, yet it still trades at a discount to REITs with comparable stability (e.g. mission-critical facilities). Notably, CDP’s current dividend yield around 4.0% (^[4]) is roughly double the yield on the REIT sector’s most bond-like names, signaling some skepticism remains priced in.

On an AFFO yield basis (cash flow to equity), CDP looks even more appealing. With only ~60% of AFFO paid as dividends, the stock’s ~4% cash yield implies an AFFO yield closer to 7% – meaning the company’s retained cash flow yields ~3% on the market cap after paying investors ~4%. This internal funding capacity is valuable given the growth opportunities in CDP’s pipeline. Additionally, the company’s net asset value (NAV) appears well-supported by its high-occupancy portfolio and long lease terms. Many leases are to investment-grade defense contractors or U.S. government entities, which likely support property values at cap rates in the 6–7% range (consistent with the stock’s implied AFFO yield). While precise NAV is hard to pin down without recent appraisals, CDP does not appear excessively priced – if anything, it trades near or below the private-market value of its assets, especially considering recent acquisitions were done at accretive cap rates (^[2]). In short, the market valuation leaves room for upside if CDP continues to execute and if investor perception shifts to viewing its cash flows as truly “defense infrastructure” (more resilient than typical offices).

The outlook offered by management remains positive. They are guiding for 4%+ compound FFO growth through 2026 (^[2]), a target that looks achievable given steady rent escalations and new projects coming on line. Defense spending tailwinds are a big factor – the latest federal defense appropriations include the largest annual budget increase in decades, which should translate into continued demand for facilities supporting those missions (^[8]) (^[8]). With high occupancy, built-in rent bumps, and a pipeline of build-to-suit developments (often pre-leased), CDP’s earnings trajectory appears steady. The company’s ability to self-fund development (through retained cash and incremental debt capacity) means it can grow without relying on dilutive equity issuance. All told, CDP’s valuation at ~10× FFO and ~4% yield seems undemanding for a REIT delivering mid-single-digit growth with such durable occupancy. The stock’s performance around the Q3 call (up ~3.4% on results) suggests some recognition of this strength (^[1]), but there may still be a valuation gap if investors lump CDP with weaker office landlords.

Key Risks and Red Flags

While CDP’s fundamentals are strong, investors should monitor a few risk factors and potential red flags:

– Defense Budget Dependency: A significant portion of CDP’s tenant demand is driven by U.S. government defense budgets and related contracts. Any delays or cuts in federal defense spending could slow leasing momentum. For instance, management noted that late approval of the FY2025 defense budget temporarily delayed some contract awards and leasing decisions – deals only moved forward once funding was confirmed (^[8]). Geopolitical shifts or federal budget standoffs (e.g. debt ceiling issues or government shutdowns) could similarly postpone new leases or renewals in the short term. On the flip side, the current environment is favorable – the latest appropriations bill boosted defense outlays by ~13%, providing a strong demand backdrop (^[8]) (^[8]). Investors will want to watch that this tailwind doesn’t reverse; a flattening or reduction in defense spending growth beyond 2026 would likely moderate CDP’s expansion prospects.

– Interest Rate Exposure: As a REIT, CDP is sensitive to interest rates in multiple ways. Rising rates increase borrowing costs and can pressure property values (via higher cap rates). CDP has largely mitigated near-term refinancing risk by extending maturities, but interest expense will creep up as low-coupon debt rolls over. For example, the $400 million of 2.25% notes due 2026 are being refinanced with 4.50% notes (^[4]), roughly doubling the interest rate on that tranche of debt. While CDP’s fixed-charge coverage (nearly 5×) is strong, higher interest costs could eat into future AFFO growth if not offset by rent increases. Additionally, if interest rates remain elevated, REIT share prices (including CDP’s) may stay under pressure due to competition from higher-yield bonds. CDP’s investment-grade balance sheet and long leases help here, but it is not immune to capital market conditions – for example, its stock currently yields about 4%, which must stay competitive with risk-free yields to attract investors.

– Office Market Sentiment and Asset Liquidity: Although CDP’s properties are defense-centric and enjoy unique demand, they are still office and flex buildings at the end of the day. The broader office sector is out of favor, with high vacancy in many markets and investors demanding high cap rates for any transactions. Market illiquidity for office sales is a challenge – CDP has some non-core “regional office” assets it has wanted to sell, but management acknowledges buyer appetite is weak in the current climate (^[3]). This means CDP might not be able to easily divest older or non-strategic buildings at reasonable prices, potentially limiting capital recycling. It also implies that if CDP needed to raise cash quickly (which it currently does not, given ample liquidity), selling properties could be slow or require a discount. Investors should keep an eye on the composition of CDP’s portfolio – while the vast majority is dedicated to defense/IT tenants, any lingering general office exposure or vacant properties could be a drag. So far occupancy remains very high, but a prolonged slump in office demand generally is a background risk factor for valuation.

– Concentration and Tenant Credit: By design, CDP is concentrated in a narrow sector – primarily leasing to the Department of Defense, intelligence agencies, and a roster of defense contractors (often through long-term build-to-suit deals). This focus yields benefits (high tenant credit quality, low default risk), but it also means exposure to a few large tenants and agencies. A significant portion of rental revenue comes either directly from U.S. government leases or from a handful of top defense firms. If one of those top tenants were to consolidate operations, lose a key contract, or face budget cuts, CDP could have a large block of space to backfill. Thus far, the opposite has been true – tenants are expanding and renewing (some renewals in specialized facilities have come at over 130% higher cash rent as old leases roll (^[3])). Still, investors should monitor tenant concentration metrics in CDP’s filings. Additionally, any project-specific issues (e.g. a development for a single tenant that doesn’t commence on time, or a base closure event in a region) could create volatility. The current risk here appears low, but concentration is inherently a “all eggs in one basket” dynamic that warrants attention.

– Accounting and One-Time Items: One red flag from 2023 was CDP’s GAAP net loss in Q3 2023 (a reported EPS of –$1.94) (^[9]). This was driven by non-cash and one-time accounting items – likely an impairment charge or loss on property sale – as actual FFO remained positive. While such charges can be housekeeping to clear underperforming assets off the books, they highlight that CDP isn’t completely insulated from the broader real estate headwinds. Investors should look for any impairment of assets or big valuation write-downs in future reports as a sign of stress in parts of the portfolio. Thus far, 2024–2025 has not seen repeats of such charges. CDP’s core metrics (occupancy, NOI, FFO) continue to rise, indicating the Q3’23 loss was an isolated accounting adjustment. Nonetheless, it’s a reminder that book earnings can swing when assets are sold or written down – something to watch if CDP does manage to sell any non-core properties in a difficult market.

Overall, CDP’s risk profile is mitigated by its niche and execution, but not risk-free. The “safety moat” of defense spending could erode if political winds shift, and higher interest rates or market aversion to office real estate could weigh on the stock’s valuation. So far, management has navigated these challenges adeptly – maintaining high occupancy, refinancing early, and driving cash flow growth. Continued vigilance on the above issues will be important for investors as we move into 2026.

Valuation Upside and Open Questions

CDP’s Q3 call showcased record leasing metrics and solid growth, yet its stock still reflects some caution. This dichotomy raises a few open questions for the investment thesis going forward:

– Will the Market Re-rate CDP? With occupancy near 96–97% and FFO compounding ~5% annually (^[2]), one could argue CDP deserves a higher valuation multiple than ~10×. If investors come to view CDP more like an infrastructure-like REIT (reliable government tenancy) rather than an office REIT, the stock’s yield could compress (e.g. from 4% toward 3%), implying a price re-rating. A key catalyst could be a few more quarters of execution – e.g. hitting guidance, leasing up any remaining vacancy, and demonstrating that defense budgets continue fueling growth. On the other hand, if interest rates stay high or recession fears emerge, CDP might remain “cheap” even as it performs well. The question remains whether the current discount is an opportunity (for a high-quality specialized REIT) or a reflection of secular headwinds that won’t abate. Investors will be watching for any sign of multiple expansion relative to peers as a signal of changing sentiment.

– How Will CDP Deploy its Liquidity? After the October financings, CDP not only addressed 2026 debt but also added ~$400 million of cash for growth investments (^[2]). Management has already committed ~$72 million to a new development and an acquisition in late 2025 (^[2]), and guidance suggests $225–$300 million of capital deployment this year (^[1]). The open question is: Can CDP earn strong returns on this capital in the current environment? Thus far, signs are positive – the Q3 acquisitions are fully leased to top-tier defense tenants at accretive yields (^[2]). However, deals must clear a high bar: CDP’s cost of debt is ~4.5%, and equity cost (implied AFFO yield ~7%). Management will likely focus on build-to-suit projects and selective buys where stabilized yields exceed financing costs by a healthy spread. If opportunities are scarce or cap rates too low, CDP might simply hold the cash or pay down more debt. How aggressively (and prudently) they use that $400M war chest in 2026 will influence growth. Investors should look for updates on the development pipeline lease-up and any sizable acquisitions – each deployment will signal management’s view on risk-adjusted returns in this niche. In essence, CDP has the capacity to expand; whether it can execute accretively in a higher-rate world is an open question.

– What is the Long-Term Dividend Trajectory? As noted, CDP’s dividend is well-covered, and AFFO payout is relatively low. This raises the question of future dividend growth: will increases continue at the ~$0.01 per share annual pace (3–4%), or could shareholders eventually see larger bumps? If AFFO continues to grow mid-single-digits and payout stays at ~60%, CDP will accumulate retained cash. That could fund more projects – but at some point, if growth opportunities taper or leverage is optimal, returning more cash to shareholders might make sense. For now, management appears content with measured raises, prioritizing balance sheet strength and self-funding. However, if the stock stays undervalued, a compelling case could be made to deploy excess cash flow into buybacks or higher dividends. It remains to be seen if CDP will stick to the current policy or adjust capital return strategy. Investors may press management on this in future calls, especially as leverage has moderated and an investment-grade profile is secured. The timeline and magnitude of dividend growth thus remain an open item moving forward.

– Can CDP Streamline its Portfolio Further? Another strategic question is whether CDP will double-down on its specialization by exiting any remaining non-core assets. In prior communications, the company has indicated interest in selling some traditional office properties (to concentrate 100% on defense/IT sites), but the weak office transaction market has delayed plans (^[3]). Will 2026–2027 offer a window to unload these assets? If so, proceeds could be redeployed to high-demand defense markets or to debt reduction. If not, CDP may continue to carry a small subset of lower-growth assets. How management handles this last mile of portfolio pruning is an open question. Successful sales at reasonable prices would be a bullish sign (validating stated book values/NAV for those assets), whereas an inability to ever sell might imply they must be held or eventually written down. This ties back to market sentiment: improving liquidity in real estate would help CDP as both a buyer and a seller. It’s an area to watch over the next 1–2 years.

In conclusion, CDP’s Q3 call highlighted a company firing on all cylinders – record-high lease rates, rising rents, and confident guidance. The REIT’s focus on mission-critical defense facilities has paid off with steady growth and resilience. Its financial footing is sound, and its dividend is safe. The main challenges lie not in operations, but in external perception and capital allocation decisions. If CDP continues on its current trajectory and macro conditions cooperate (no drastic rate spikes or defense cuts), the stock appears well-positioned for solid total returns. Shareholders will be looking for management to keep delivering sustained FFO growth (as it has for 5+ years straight) and to deploy capital shrewdly. Any signs of faltering demand or missteps in investment could give pause, but right now CDP is bolstered by secular tailwinds and strong execution. The Q3 results unveiled just how robust its leasing fundamentals are – now it’s about translating that strength into shareholder value in the quarters ahead.

Sources: COPT Defense Properties investor reports and earnings releases (^[2]) (^[2]); Q3 2024–2025 earnings call highlights (^[3]) (^[2]); company press releases on financial results (^[2]) (^[4]); and credible financial media analysis (^[1]) (^[1]), as cited above.

Sources

1. https://za.investing.com/news/company-news/copt-defense-properties-q3-2025-slides-ffo-growth-accelerates-guidance-raised-93CH-3953659
2. https://marketchameleon.com/PressReleases/i/2195622/CDP/copt-defense-reports-third-quarter-2025-results
3. https://investing.com/news/stock-market-news/earnings-call-copt-defense-properties-reports-strong-q3-2024-results-93CH-3692194
4. https://za.investing.com/news/company-news/copt-defense-prices-400-million-senior-notes-offering-93CH-3891756
5. https://investors.copt.com/news-events/press-releases/detail/517/copt-defense-reports-strong-third-quarter-2024-results
6. https://investors.copt.com/news-events/press-releases/detail/522/copt-defense-establishes-2025-guidance
7. https://investors.copt.com/news-events/press-releases/detail/277/copt-announces-investment-grade-ratings-from-fitch
8. https://statementdog.com/analysis/CDP/earnings_calls/295831
9. https://investors.copt.com/news-events/press-releases/detail/495/copt-defense-reports-third-quarter-2023-results

For informational purposes only; not investment advice.