The U.S. government employs nearly 2 million people and has double the number of contractors. All those people require a significant amount of workspace. While the federal government and its contractors own many of their workspaces, they lease quite a bit of office space and other real estate from third-party landlords like real estate investment trusts (REITs).
One REIT focused on meeting these real estate needs is Corporate Office Properties Trust (NYSE: OFC). Here's a closer look at the REIT.
Corporate Office Properties Trust profile
Corporate Office Properties, or COPT, is an office REIT that owns, manages, leases, develops, and acquires office and data center properties. The bulk of its portfolio is in locations that support the U.S. government and federal contractors, most of which are in the national security, defense, and information technology (IT) sectors. It also owns a portfolio of Class A office properties in urban submarkets of the Greater Washington, D.C./Baltimore region.
As of the end of 2020, the REIT's core portfolio consisted of the following defense/IT locations:
- Fort Meade/Baltimore Washington Corridor: 89 properties with more than 8.3 million square feet.
- Northern Virginia Defense/IT: 13 properties with nearly 2 million square feet.
- Lackland Air Force Base (San Antonio, Texas): Seven properties with almost 1 million square feet.
- Navy Support: 21 properties with more than 1.2 million square feet.
- Redstone Arsenal (Huntsville, Alabama): 15 properties with more than 1.4 million square feet.
- Data center shells:
- Consolidated properties: Nine data centers with nearly 2 million square feet.
- Unconsolidated joint venture properties: 17 data centers with more than 2.7 million square feet.
COPT also has eight regional office properties with more than 2 million square feet in its core portfolio. Meanwhile, it has two non-core properties with 157,000 square feet.
Overall, the company has 179 core properties with 20.8 million square feet. It gets 87% of its annualized rental revenue from defense/IT locations and 13% from regional offices.
Given the REIT's heavy presence in locations that support the U.S. government and its contractors, it should come as no surprise that these entities are its largest tenants. The federal government is the largest by far, at 34.1% of its annualized rental revenue. Rounding out the top five are:
- An undisclosed Fortune 100 company: 9.1%
- General Dynamics (NYSE: GD): 5.6%
- Boeing (NYSE: BA): 3%
- CACI International (NYSE: CACI): 2.4%
Overall, its top 20 tenants contribute a whopping 72% of its annual rent. While that's significant tenant concentration, these tenants tend to be very strong financially and less likely to relocate given their proximity (close location to the U.S. Capital or military bases) and technology needs.
Corporate Office Properties Trust news
While 2020 was a challenging year for most office REITs because the pandemic forced many companies to pivot to remote work, it didn't have much impact on COPT. CEO Stephen Budorick stated in the company's fourth-quarter earnings press release that:
Notwithstanding the challenges presented by the COVID-19 pandemic, 2020 was a very strong year for our company. Our operations were minimally impacted by the pandemic shutdowns, as demonstrated by our 99.7% rent collection rate, the record 1.8 million square feet of fully leased developments we placed in service, and the 1 million square feet of new development leasing we completed during the year. Additionally, fourth-quarter and full-year FFO per share, as adjusted for comparability, outperformed the high ends of guidance by $0.02 due to nonrecurring items in the quarter.
While the pandemic negatively impacted leasing, as its full-year volume of 416,000 square feet was 60% of its original target, occupancy, cash NOI growth, tenant retention, and change in cash rent were all right on target with its updated guidance.
Development projects are a key growth driver for COPT. It placed a record 1.8 million square feet of projects into service in 2020, 99% of which it had leased to tenants. That was more than the 1.4 million square feet of fully leased space it expected to finish last year.
Completed development projects included several data center shells and office space in the Fort Meade/BW Corridor, Redstone Arsenal, and another regional office building in Washington, D.C. The company ended the year with 11 more properties in development totaling 1.5 million square feet (84% leased), with an estimated cost of $613 million (more than half of which it had already funded).
Finally, COPT formed a new joint venture with an affiliate of the private equity giant Blackstone Group (NYES: BX) in the fourth quarter of 2020. It sold a 90% interest in two wholly-owned data center shell properties and a 40% interest in six other data center shell properties already owned in a 50-50 joint venture. These transactions provided the company with $165 million, which it used to help fund its development pipeline.
Corporate Office Properties Trust stock price
Corporate Office Properties' focus on providing office and data center space to the U.S. government and its contractors hasn't created much value for shareholders in recent years: