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COPT DEFENSE PROPERTIES 10-K Analysis & Summary – 2/21/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

COPT DEFENSE PROPERTIES

Filing date:

02/21/2025

TLDR:

COPT Defense Properties’ 2024 10-K filing reveals a REIT specializing in properties leased to the U.S. government and its defense contractors, demonstrating a strong focus on its Defense/IT portfolio. The company’s financial health appears stable, with high occupancy rates and strategic acquisitions.

ELI5:

COPT is like a landlord that mainly rents buildings to the U.S. government and companies that work for the government. They’re doing pretty well because these buildings are mostly full and they’re buying more.

Accession #:

0000860546-25-000008

Published on

Analyst Summary

  • Total portfolio occupancy decreased slightly from 94.2% to 93.6%, while the Defense/IT portfolio decreased from 96.2% to 95.6%.
  • Annualized Rental Revenue (ARR) increased to $686.8 million from $646.7 million in 2023.
  • Net Income improved significantly from a loss of $(74.3) million to a profit of $143.9 million.
  • Diluted FFO per share, as adjusted for comparability, increased by 6.2%.
  • Gross Profit Margin: 55.09%, a decrease of 0.72%.
  • Operating Profit Margin: 55.61%, a decrease of 0.82%.
  • Net Profit Margin: 19.11%, a significant increase.
  • Return on Assets (ROA): 3.38%, a significant increase.
  • Return on Equity (ROE): 9.37%, a significant increase.
  • Diluted EPS: $1.23, a significant increase.
  • Current Ratio: 1.58, a decrease of 12.71%.
  • Quick Ratio: 0.63, a decrease of 14.86%.
  • Cash Ratio: 0.16, a decrease of 77.14%.
  • Debt-to-Equity Ratio: 1.56, a decrease of 1.89%.
  • Debt-to-Assets Ratio: 0.56, a decrease of 1.75%.
  • Interest Coverage Ratio: 2.76, a significant increase.
  • Asset Turnover: 0.18, an increase of 12.5%.
  • Price-to-Earnings Ratio (P/E): 20.96.
  • Price-to-Book Ratio (P/B): 1.96.
  • Price-to-Sales Ratio (P/S): 4.01.
  • Enterprise Value to EBITDA (EV/EBITDA): 14.17.
  • Revenue Growth: 10.0%.
  • Net Income Growth: -293.6%.
  • EPS Growth: -273.1%.
  • FFO Payout Ratio: 44.8%, a decrease of 2.8%.
  • Same Property NOI Growth: 3.77%.

Opportunities and Risks

  • Opportunity: Strategic acquisitions to support future growth.
  • Risk: The U.S. government accounts for a significant portion of ARR (35.9%), creating a concentration risk.
  • Risk: Low occupancy rates (72.8%) in the “Other” segment indicate potential challenges.
  • Risk: Reliance on a single Fortune 100 cloud computing customer for data center shell development presents a risk.
  • Risk: Upcoming debt refinancing in 2026 could impact future profitability.

Potential Implications

Company Performance

  • Monitor the performance of the “Other” segment and evaluate potential strategies to improve occupancy and profitability.
  • Diversify the tenant base within the Defense/IT portfolio to reduce reliance on the U.S. government.
  • Develop a plan for refinancing debt in 2026, considering potential interest rate increases.

Stock Price

  • Challenges in the “Other” segment could negatively impact stock price.
  • Concentration of revenue from the U.S. government could create stock price volatility.
  • Successful debt refinancing in 2026 could positively impact stock price.

COPT Defense Properties – 2024 10-K Filing Analysis

Executive Summary

This report analyzes COPT Defense Properties’ (CDP) 2024 10-K filing. CDP is a REIT specializing in properties leased to the U.S. government and its defense contractors. The company demonstrates a strong focus on its Defense/IT portfolio, which drives the majority of its revenue. Key highlights include high occupancy rates in the Defense/IT portfolio, strong tenant retention, and strategic acquisitions to support future growth. While the “Other” segment presents challenges, CDP’s overall financial health appears stable. The recommendation is to HOLD, pending further observation of the “Other” segment’s performance and the refinancing of debt in 2026.

Company Overview

COPT Defense Properties is a REIT focused on owning, operating, and developing properties leased to the U.S. government and its defense contractors. The company’s Defense/IT portfolio is strategically located near key U.S. defense installations. CDP also owns other office properties in the Greater Washington, DC/Baltimore region. The company operates primarily through its operating partnership, COPT Defense Properties, L.P. (CDPLP).

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management emphasizes the strength of the Defense/IT portfolio, driven by national security spending. They highlight high occupancy rates, strong tenant retention, and strategic acquisitions. The MD&A also acknowledges the challenges in the “Other” segment and the intent to sell those properties when market conditions are favorable. There is a clear focus on maintaining an investment-grade credit rating and managing debt effectively.

Financial Statement Analysis

Key Ratios and Trends:

  • Occupancy Rate: Total portfolio occupancy decreased slightly from 94.2% to 93.6%, while the Defense/IT portfolio decreased from 96.2% to 95.6%. However, the Same Property pool occupancy increased.
  • Annualized Rental Revenue (ARR): Increased to $686.8 million from $646.7 million in 2023.
  • Net Income: Improved significantly from a loss of $(74.3) million to a profit of $143.9 million, primarily due to impairment losses recognized in 2023.
  • Funds From Operations (FFO): Diluted FFO per share, as adjusted for comparability, increased by 6.2%.

Visual Aids:

(Note: Due to the limitations of HTML output, actual charts and graphs cannot be generated. However, descriptions of potential visual aids are included.)

  • Chart: Trend of occupancy rates for the total portfolio and Defense/IT portfolio over the past 3 years.
  • Table: Comparison of key financial ratios (e.g., debt-to-equity, interest coverage) for CDP against industry peers.

Red Flags and Uncommon Metrics:

  • Tenant Concentration: The U.S. government accounts for a significant portion of ARR (35.9%), creating a concentration risk.
  • “Other” Segment: Low occupancy rates (72.8%) in the “Other” segment indicate potential challenges and a drag on overall performance.
  • Data Center Shell Customer Concentration: Reliance on a single Fortune 100 cloud computing customer for data center shell development presents a risk.

Comparative and Trend Analysis

CDP’s performance is benchmarked against prior periods and industry peers. The company shows improvement in net income due to the absence of impairment losses that affected 2023. The Defense/IT portfolio continues to be a strong performer, while the “Other” segment lags behind. The company’s debt levels are manageable, but refinancing in 2026 could lead to higher interest expenses.

Conclusion and Actionable Insights

COPT Defense Properties demonstrates a solid financial position, driven by its focus on the Defense/IT portfolio. The company’s strategic acquisitions and strong tenant retention are positive indicators. However, the challenges in the “Other” segment and the concentration of revenue from the U.S. government are risks to consider. The upcoming debt refinancing in 2026 could impact future profitability.

Overall Assessment: HOLD

Recommendations:

  • Monitor the performance of the “Other” segment and evaluate potential strategies to improve occupancy and profitability or expedite the sale of these assets.
  • Diversify the tenant base within the Defense/IT portfolio to reduce reliance on the U.S. government.
  • Develop a plan for refinancing debt in 2026, considering potential interest rate increases.

Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin:

    • Calculation: (Total Revenue – Property Operating Expenses – Construction contract and other service expenses) / Total Revenue = ($753,267 – $266,001 – $73,265) / $753,267 = 55.09%
    • Trend: (($753,267 – $266,001 – $73,265) / $753,267) – (($684,982 – $247,385 – $57,416) / $684,982) / (($684,982 – $247,385 – $57,416) / $684,982) = 55.09% – 55.49% / 55.49% = -0.72%
    • Industry: The average gross profit margin for REITs can vary widely depending on the specific sector (e.g., office, retail, industrial). A reasonable proxy for the office sector would be around 60-70%. COPT’s gross profit margin is slightly below this range.
  • Operating Profit Margin:

    • Calculation: NOI from real estate operations / Total Revenue = $418,933 / $753,267 = 55.61%
    • Trend: ($418,933 / $753,267) – ($384,077 / $684,982) / ($384,077 / $684,982) = 55.61% – 56.07% / 56.07% = -0.82%
    • Industry: A good operating margin for REITs is typically in the 40-60% range. COPT’s operating margin is within this range.
  • Net Profit Margin:

    • Calculation: Net Income / Total Revenue = $143,942 / $753,267 = 19.11%
    • Trend: ($143,942 / $753,267) – ($-74,347 / $684,982) / ($-74,347 / $684,982) = 19.11% – (-10.85%) / (-10.85%) = -276.04%
    • Industry: Net profit margins for REITs can vary significantly. A healthy net profit margin would typically be above 10%. COPT’s net profit margin is above this range.
  • Return on Assets (ROA):

    • Calculation: Net Income / Total Assets = $143,942 / $4,254,191 = 3.38%
    • Trend: ($143,942 / $4,254,191) – ($-74,347 / $4,246,966) / ($-74,347 / $4,246,966) = 3.38% – (-1.75%) / (-1.75%) = -293.14%
    • Industry: ROA for REITs is typically lower than other industries due to the asset-heavy nature of the business. A reasonable ROA for a REIT would be in the 2-4% range. COPT’s ROA is within this range.
  • Return on Equity (ROE):

    • Calculation: Net Income / Total Equity = $143,942 / $1,536,593 = 9.37%
    • Trend: ($143,942 / $1,536,593) – ($-74,347 / $1,523,755) / ($-74,347 / $1,523,755) = 9.37% – (-4.88%) / (-4.88%) = -291.93%
    • Industry: A good ROE for a REIT is typically in the 8-12% range. COPT’s ROE is within this range.
  • Earnings Per Share (EPS) – Basic and Diluted:

    • Calculation: Diluted EPS = $1.23
    • Trend: ($1.23 – (-$0.67)) / (-$0.67) = -273.13%
    • Industry: EPS varies widely. It’s more useful to compare to historical EPS and competitor EPS.

Liquidity

  • Current Ratio:

    • Calculation: Current Assets / Current Liabilities. Need to calculate current assets and current liabilities from the balance sheet. Assuming current assets include: Cash and cash equivalents, Accounts receivable, net, Deferred rent receivable, Lease incentives, net, Investing receivables. And current liabilities include: Accounts payable and accrued expenses, Rents received in advance and security deposits, Dividends and distributions payable, Deferred revenue associated with operating leases. Current Assets = $38,284 + $42,234 + $161,438 + $64,013 + $69,680 = $375,649. Current Liabilities = $126,031 + $38,560 + $33,909 + $39,752 = $238,252. Current Ratio = $375,649 / $238,252 = 1.58
    • Trend: ($375,649 / $238,252) – ($167,820 + $48,946 + $149,237 + $61,331 + $81,512) / ($133,315 + $35,409 + $32,644 + $29,049) / (($167,820 + $48,946 + $149,237 + $61,331 + $81,512) / ($133,315 + $35,409 + $32,644 + $29,049)) = 1.58 – 1.81 / 1.81 = -12.71%
    • Industry: A current ratio of 1.0 or greater is generally considered healthy. COPT’s current ratio is above 1.0.
  • Quick Ratio (Acid-Test Ratio):

    • Calculation: (Current Assets – Inventory) / Current Liabilities. Since inventory is not applicable, we will exclude Deferred Rent Receivable and Lease Incentives, net. Quick Assets = $38,284 + $42,234 + $69,680 = $150,198. Quick Ratio = $150,198 / $238,252 = 0.63
    • Trend: ($150,198 / $238,252) – (($167,820 + $48,946 + $81,512) / ($133,315 + $35,409 + $32,644 + $29,049)) / (($167,820 + $48,946 + $81,512) / ($133,315 + $35,409 + $32,644 + $29,049)) = 0.63 – 0.74 / 0.74 = -14.86%
    • Industry: A quick ratio of 0.5 or greater is generally considered acceptable. COPT’s quick ratio is slightly above 0.5.
  • Cash Ratio:

    • Calculation: Cash and Cash Equivalents / Current Liabilities = $38,284 / $238,252 = 0.16
    • Trend: ($38,284 / $238,252) – ($167,820 / ($133,315 + $35,409 + $32,644 + $29,049)) / ($167,820 / ($133,315 + $35,409 + $32,644 + $29,049)) = 0.16 – 0.70 / 0.70 = -77.14%
    • Industry: A cash ratio of 0.1 or greater is generally considered acceptable. COPT’s cash ratio is above 0.1.

Solvency/Leverage

  • Debt-to-Equity Ratio:

    • Calculation: Total Debt / Total Equity = $2,391,755 / $1,536,593 = 1.56
    • Trend: ($2,391,755 / $1,536,593) – ($2,416,287 / $1,523,755) / ($2,416,287 / $1,523,755) = 1.56 – 1.59 / 1.59 = -1.89%
    • Industry: A debt-to-equity ratio of 1.0 to 2.0 is common for REITs. COPT’s debt-to-equity ratio is within this range.
  • Debt-to-Assets Ratio:

    • Calculation: Total Debt / Total Assets = $2,391,755 / $4,254,191 = 0.56
    • Trend: ($2,391,755 / $4,254,191) – ($2,416,287 / $4,246,966) / ($2,416,287 / $4,246,966) = 0.56 – 0.57 / 0.57 = -1.75%
    • Industry: A debt-to-assets ratio of 0.5 to 0.7 is common for REITs. COPT’s debt-to-assets ratio is within this range.
  • Interest Coverage Ratio (Times Interest Earned):

    • Calculation: EBIT / Interest Expense = (Net Income + Interest Expense + Income Tax Expense) / Interest Expense = ($143,942 + $82,151 + $288) / $82,151 = 2.76
    • Trend: (($143,942 + $82,151 + $288) / $82,151) – ((-$74,347 + $71,142 + $588) / $71,142) / ((-$74,347 + $71,142 + $588) / $71,142) = 2.76 – (-0.04) / (-0.04) = -7000%
    • Industry: An interest coverage ratio of 2.0 or greater is generally considered healthy. COPT’s interest coverage ratio is above 2.0.

Activity/Efficiency

  • Asset Turnover:

    • Calculation: Total Revenue / Total Assets = $753,267 / $4,254,191 = 0.18
    • Trend: ($753,267 / $4,254,191) – ($684,982 / $4,246,966) / ($684,982 / $4,246,966) = 0.18 – 0.16 / 0.16 = 12.5%
    • Industry: Asset turnover for REITs is typically low due to the asset-heavy nature of the business. A reasonable asset turnover for a REIT would be in the 0.1 to 0.3 range. COPT’s asset turnover is within this range.

Valuation

  • Price-to-Earnings Ratio (P/E):

    • Calculation: Market Cap / Net Income. Market Cap = Stock Price * Shares Outstanding = $26.77 * 112,703,460 = $3,017,191,464.20. P/E Ratio = $3,017,191,464.20 / $143,942,000 = 20.96
    • Industry: P/E ratios for REITs can vary significantly. It’s more useful to compare to historical P/E ratios and competitor P/E ratios.
  • Price-to-Book Ratio (P/B):

    • Calculation: Market Cap / Total Equity = $3,017,191,464.20 / $1,536,593,000 = 1.96
    • Industry: A P/B ratio of 1.0 to 3.0 is common for REITs. COPT’s P/B ratio is within this range.
  • Price-to-Sales Ratio (P/S):

    • Calculation: Market Cap / Total Revenue = $3,017,191,464.20 / $753,267,000 = 4.01
    • Industry: P/S ratios for REITs can vary significantly. It’s more useful to compare to historical P/S ratios and competitor P/S ratios.
  • Enterprise Value to EBITDA (EV/EBITDA):

    • Calculation: (Market Cap + Total Debt – Cash) / (Net Income + Interest Expense + Taxes + Depreciation & Amortization) = ($3,017,191 + $2,391,755 – $38,284) / ($143,942 + $82,151 + $288 + $153,640) = $5,370,662 / $379,021 = 14.17
    • Industry: EV/EBITDA ratios for REITs can vary significantly. It’s more useful to compare to historical EV/EBITDA ratios and competitor EV/EBITDA ratios.

Growth Rates

  • Revenue Growth:

    • Calculation: (Current Revenue – Previous Revenue) / Previous Revenue = ($753,267 – $684,982) / $684,982 = 10.0%
    • Industry: Revenue growth depends on the market.
  • Net Income Growth:

    • Calculation: (Current Net Income – Previous Net Income) / Previous Net Income = ($143,942 – (-$74,347)) / (-$74,347) = -293.6%
    • Industry: Net Income growth depends on the market.
  • EPS Growth:

    • Calculation: (Current EPS – Previous EPS) / Previous EPS = ($1.23 – (-$0.67)) / (-$0.67) = -273.1%
    • Industry: EPS growth depends on the market.

Other Relevant Metrics

  • FFO Payout Ratio:

    • Calculation: Dividends Paid / FFO = $134,615 / $300,638 = 44.8%
    • Trend: 44.8% – 46.1% / 46.1% = -2.8%
    • Significance: This ratio indicates the proportion of Funds From Operations (FFO) that is distributed as dividends. A lower ratio suggests the company retains more earnings for reinvestment.
  • Same Property NOI Growth:

    • Calculation: (Same Property NOI 2024 – Same Property NOI 2023) / Same Property NOI 2023 = ($391,069 – $376,839) / $376,839 = 3.77%
    • Significance: This metric provides insight into the organic growth of the company’s existing portfolio, excluding the impact of acquisitions and dispositions.

Commentary

COPT Defense Properties demonstrated a mixed financial performance. The company experienced a significant increase in net income, reversing a loss from the previous year, and revenue growth. However, profitability margins experienced slight declines, and the cash ratio decreased substantially. The company’s leverage remains within typical REIT ranges, and the FFO payout ratio suggests a balanced approach to dividend distribution and earnings retention. Overall, COPT shows signs of recovery and growth, but some key metrics warrant monitoring.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️