Summary
- Corporate Office Properties Trust has weathered the pandemic-induced crisis virtually unscathed with its mission-critical properties in the Defense/IT sector.
- Solid tenant retention metrics, combined with a robust build-to-suit pipeline, provide both safety and growth going forward.
- Low leasing capex costs and a strong balance sheet provide a safe stream of dividend income.
Investment Thesis
Corporate Office Properties Trust (OFC) has weathered the pandemic-induced economic crisis virtually unscathed. The company operates a recession-resistant business model that is largely uncorrelated with the general economic cycle. Its 169 mission-critical properties are leased primarily to Defense/IT tenants that support the government’s defense and national security operations. While COPT is unlikely to provide exciting tech company-like results, I believe it has a strong growth runway ahead, while providing investors with a steady stream of dividend income.
Latest Results
COPT had a good Q1 amidst the pandemic, with FFO coming in at 0.51 per share, which is essentially flat YoY. Its same-property cash NOI grew an impressive 5% YoY, and the core portfolio was 95.2% leased at quarter-end, driven by high retention rates and record leasing last year.
What I like about COPT is that 88% of its revenues comes from tenants in the Defense/IT space, most of whom are engaged in mission-critical national security and operations. The remaining 12% mostly comes from tenants in the essential healthcare/public health and financial services sectors.
Unlike retail and hospitality REITs that were hit hard by the pandemic, 100% of COPT’s properties are deemed essential and have been fully operational during the pandemic. The total tenant rent relief impact is low and is at less than 0.5% of annualized cash rents. It should come as no surprise that the company collected virtually all of its rents for April and May at 98.6% and 98.1% of total contractual billings, which, when adjusted for rent relief, comes in even higher at 99.5% and 99.1%.
Tenant retention remained robust at 89%, and leasing volume was strong as the company leased out 143,000 square feet in the quarter, representing a 13% YoY increase from Q1’19. COPT also has a number of high-profile leases just coming on-line, including an executed lease with the U.S. government for a large block of space at 100 Secured Gateway. In addition, management just executed a 3.1 megawatt agreement with a government contractor for a long-term super-computing lease and is in negotiations for an 11.25-megawatt location, as CEO Steve Budorick noted on the conference call:
