Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should refer to our consolidated financial statements and the notes thereto as you read this section.
This section contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:
• general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability, property operating and construction costs, and property values;
• adverse changes in the real estate markets, including, among other things, increased competition with other companies;
• our ability to borrow on favorable terms or at all;
• risks of property acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;
• risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
• changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;
• potential impact of prolonged government shutdowns or budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by existing or new tenants;
• potential additional costs, such as capital improvements, fees and penalties, associated with environmental laws or regulations;
• adverse changes resulting from other government actions and initiatives, such as changes in taxation, zoning laws or other regulations;
• our ability to satisfy and operate effectively under federal income tax rules relating to real estate investment trusts and partnerships;
• the dilutive effects of issuing additional common shares; and
• security breaches relating to cyber attacks, cyber intrusions or other factors, and other significant disruptions of our information technology networks and related systems.
We undertake no obligation to publicly update or supplement forward-looking statements.
Overview
• achieved year end occupancy of 94.0% for our total portfolio and 95.5% for our Defense/IT Portfolio, both of which increased from year end 2024;
• completed strong leasing in our operating portfolio, including 557,000 square feet in vacancy leasing, a volume equating to 47% of the unleased space we had as of year end 2024, and a 77.9% tenant retention rate;
• committed capital to five new external growth investments across four Defense/IT Portfolio sub-segments, including:
• four new development properties totaling 498,000 square feet, three of which were fully pre-leased; and
• a fully-occupied, 142,000 square foot Defense/IT Portfolio property acquisition, which reinforces our position as the largest landlord in a highly-leased business park;
• placed into service 468,000 newly-developed, fully-leased square feet across three Defense/IT Portfolio properties;
• closed on three new financings, which pre-funded the repayment at maturity of a bond maturing in March 2026 and provided additional liquidity to fund our external growth; and
• ended the year with no significant debt maturing until 2028 other than the pre-funded 2026 bond maturity.
Our business is driven by our Defense/IT Portfolio segment, which as of year end represented 92.1% of our property square footage and 90.3% of our ARR. We believe that the critical nature of the activities served by this segment’s properties has
helped fuel strong demand for space, enabling the segment to consistently achieve year end occupancy of at least 93% for each of the last nine years. In 2025, our Defense/IT Portfolio:
• achieved a tenant retention rate of 79.3%, our 10th consecutive year with a retention rate of at least 75%, with average increases in rent per renewed square foot of 2.7% for cash rents and 11.0% for straight-line rents;
• leased 424,000 square feet of its vacant space, achieving progress across its sub-segments;
• increased its Same Property pool’s average occupancy from 95.9% in 2024 to 96.0% in 2025, ending the year 95.8% occupied; and
• completed 477,000 square feet in investment space leasing, including the four new development properties discussed below and vacant space in a property that we acquired last year.
Throughout 2025, we experienced strong demand from defense contractors looking for new or incremental space to support mission programs and contracts, a significant amount of which required secured space. We believe that this demand drove the strong performance of this segment, along with the following unique advantages associated with our Defense/IT strategy: proximity of the properties to the demand drivers they serve; prevalence of significant investments in high security improvements, which may make tenants unable, or less likely, to relocate; and the high level of technical proficiency and credentials of our operations team (many of whom are credentialed) charged with managing these spaces.
Our Defense/IT Portfolio also has benefited from continued defense budget appropriation increases, with bipartisan support, a trend we expect could continue for the foreseeable future with the 2026 USG defense budget appropriations increase approved in February 2026, along with the additional appropriations included in the One Big Beautiful Bill Act passed in July 2025. We expect that these enhanced USG commitments to defense investment will support additional demand for our portfolio as the priority missions our tenants support are expected to see increased funding to counter an increasingly complex national security environment. These missions include intelligence, surveillance and reconnaissance, cybersecurity and network activities, naval sea and air technology development, unmanned aerial vehicles and missile defense and space activities.
For the 43-day long federal government shutdown in 2025, the most significant effect on us was that it delayed our ability to progress, or finalize, certain of our Defense/IT Portfolio segment’s renewal leasing activities, but our existing USG leases remained in effect and the majority of our rent payments continued to occur in a timely manner.
Strong Defense/IT Portfolio demand coupled with limited vacancy in our operating portfolio drove our need to continue to invest in additional space, which we addressed in 2025 through the following external growth investments:
• developing space in new properties, including:
• 468,000 square feet placed in service during the year in three fully-leased, newly-developed properties in our Data Center Shells and Redstone Arsenal sub-segments; and
• 498,000 square feet in new capital commitments in four development properties across our Fort Meade/BW Corridor, Redstone Arsenal and Lackland Air Force Base sub-segments for an anticipated total cost of approximately $233.4 million.
As of December 31, 2025, we had an aggregate of 646,000 square feet under development in five properties that were 58% leased, including: three fully-leased properties expected to be placed in service in 2027; and two properties across our Fort Meade/BW Corridor and Redstone Arsenal sub-segments with minimal pre-leasing being developed to accommodate future anticipated USG and contractor demand, which are expected to be placed in service in 2026 and 2027; and
• acquiring 15050 Conference Center Drive, a 142,000 square foot property in Chantilly, Virginia (included in our NoVA Defense/IT sub-segment), for a gross purchase price of $40.0 million, or $32.6 million net of a $7.4 million credit for an unpaid tenant improvement allowance. This property, with significant secured-space enhancements, is located in a supply-constrained submarket in which we are the largest landlord, and is 100% leased to an existing defense contractor tenant of ours.
We funded these property investments primarily using excess available cash flow from operations and borrowings under our Revolving Credit Facility and Revolving Development Facility (discussed below).
In 2025, our total portfolio also included six office properties in our Other segment, which as of year end represented 7.9% of our property square footage and 9.7% of our ARR, and accounted for 31% of the portfolio’s vacant space. These properties, which have experienced a challenging leasing environment for several years, increased their average occupancy rate from 72.5% in 2024 to 75.5% in 2025, and we were successful in leasing 133,000 square feet of this segment’s vacant space in 2025, which exceeded the expiring lease square footage that was vacated. One property accounted for 37% of this segment’s vacant space and 11% of our total portfolio’s vacant space. We do not consider our Other segment’s properties to be strategic holdings since they do not align with our Defense/IT strategy. While we intend to sell them when market conditions and opportunities position us to optimize our return on investment, we did not initiate plans for sales in 2025 due in part to continued unfavorable capital markets for potential buyers.
Our total portfolio’s 2025 year end occupancy rate increased (relative to 2024) from 93.6% to 94.0% due primarily to improved occupancy in our Other segment resulting from vacant space leasing, with occupancy for our Defense/IT Portfolio increasing slightly from 95.4% to 95.5%. The 2025 year end occupancy rate of our Same Property pool (which excludes the effect of properties acquired and placed in service in 2024 and 2025) decreased (relative to 2024) from 94.4% to 94.2% for our total portfolio and from 96.4% to 95.8% for the Defense/IT Portfolio component due primarily to several leases not renewed upon expiration in our Fort Meade/BW Corridor and Redstone Arsenal sub-segments. As of December 31, 2025, we had scheduled lease expirations for 2.9 million square feet in 2026, representing 12.3% of our total occupied square feet and 19.3% of our total ARR, including:
• 2.8 million square feet in our Defense/IT Portfolio segment, which included several large USG leases whose renewals were affected by the federal government shutdown. We expect to renew virtually all of these scheduled lease expirations due to the strong demand for space and unique retention advantages associated with our Defense/IT strategy discussed above; and
• 82,000 square feet in our Other segment, which represented 5.4% of this segment’s occupied square feet.
Please refer to the section below entitled “Occupancy and Leasing” for additional related disclosure.
We were active in the capital markets in 2025, culminating in our:
• issuance of $400.0 million of 4.50% Senior Notes due 2030 (the “4.50% Notes”) at an initial offering price of 99.46% of their face value on October 2, 2025, resulting in proceeds, after deducting underwriting discounts and commissions, but before other offering expenses, of $395.5 million. The net proceeds from the notes will fund the repayment at maturity of $400.0 million in 2.25% Senior Notes due 2026 (the “2.25% Notes”). Until such time, the proceeds were used for general corporate purposes, including paying down amounts outstanding under our Revolving Credit Facility, which resulted in a portion of the net proceeds being invested in interest-bearing accounts;
• entry into an amendment to the existing credit agreement underlying our Revolving Credit Facility and term loan facility on October 6, 2025. The resulting Amended Credit Agreement provided for: an increase in the aggregate lender commitment under our Revolving Credit Facility from $600.0 million to $800.0 million; extension of the previous maturity date of our Revolving Credit Facility by approximately three years and expansion of the facility’s lender group; and changes in the facilities’ interest and quarterly fee terms, including a decrease in our interest rate spread over the Secured Overnight Financing Rate (“SOFR”) (effective as of the closing date) on the Revolving Credit Facility by 0.20% and on the term loan facility by 0.25%, and elimination of the 0.10% SOFR transition charge previously included in interest expense for both loans; and
• entry into the Revolving Development Facility, a secured facility with an initial aggregate lender commitment of $200.0 million, on October 16, 2025. While this facility can be used to fund any investment or for general corporate purposes, we plan on using it to fund property development activities. The net proceeds from our initial borrowing under this facility totaled approximately $154 million, which were used to pay down amounts outstanding under our Revolving Credit Facility previously borrowed to fund development activities.
As of December 31, 2025, we ended the year with:
• $400.0 million in 2.25% Notes maturing in March 2026 and no significant debt maturing thereafter until 2028;
• $275.0 million in cash and cash equivalents;
• $746.0 million in available borrowing capacity under our Revolving Credit Facility;
• $104.0 million in available borrowing capacity under our Revolving Development Facility;
• no variable-rate debt exposure, including the effect of interest rate swaps, although a $200.0 million notional amount of these swaps expired in February 2026;
• 5.1% of our outstanding debt encumbered by properties; and
• the ability to fund the equity portion of our investing activities with cash flow from operations for the foreseeable future.
For our 2025 results of operations:
• our diluted earnings per share increased from $1.23 per share in 2024 to $1.34 per share in 2025, and our net income increased from $143.9 million in 2024 to $159.5 million in 2025, due primarily to increased income from our real estate operations;
• net operating income (“NOI”) from real estate operations, our segment performance measure, increased $26.7 million, or 6.4%, relative to 2024. This increase was driven primarily by a $14.9 million increase from our Same Properties, which included the effect of increased rental and occupancy rates in our Defense/IT Portfolio, and an $11.0 million increase from external growth in our portfolio, including newly-developed properties placed in service and property acquisitions; and
• diluted funds from operations per share, as adjusted for comparability increased 5.8% relative to 2024 due primarily to increased NOI from real estate operations in 2025.
Additional disclosure comparing our 2025 and 2024 results of operations is provided below.
We discuss significant factors contributing to changes in our net income between 2025 and 2024 in the section below entitled “Results of Operations.” In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:
• how we expect to generate and obtain cash for short and long-term capital needs; and
• material cash requirements for known contractual and other obligations.
We refer to the measures “ARR”, “tenant retention rate”, “investment space leasing” and “vacant space leasing” in various sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K. ARR is a measure that we use to evaluate the sources of our rental revenue as of a point in time. It is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time (ignoring free rent then in effect and rent associated with tenant funded landlord assets). Our computation of ARR excludes the effect of lease incentives. We consider ARR to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under GAAP does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis. In instances in which we report ARR per occupied square foot, the measure excludes revenue from leases not associated with our buildings. Tenant retention rate is a measure we use that represents the percentage of square feet renewed in a period relative to the total square feet scheduled to expire in that period, including the effect of early renewals. Investment space leasing represents vacant space leased within two years of the shell completion date for development properties or the acquisition date for operating property acquisitions. Vacant space leasing represents our vacated second-generation space leased and vacant space leased in development properties and operating property acquisitions after two years from such properties’ shell completion or acquisition date.
We also refer to the measures “cash rents”, “straight-line rents”, and “committed costs” in the “Occupancy and Leasing” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Cash rents include monthly contractual base rent (ignoring rent abatements and rent associated with tenant-funded landlord assets) multiplied by 12, plus estimated annualized expense reimbursements (average for first 12 months of term for new or renewed leases or as of lease expiration for expiring leases). Straight-line rents include: (1) annual minimum base rents, net of abatements and lease incentives and excluding rent associated with tenant funded landlord assets, on a straight-line basis over the term of the lease; (2) and estimated annual expense reimbursements. Straight-line rents are disclosed as of lease commencement for new or renewed leases or as of lease expiration for expiring leases. We believe that cash rents and straight-line rents are useful measures for evaluating the rental rates of our leasing activity, including changes in such rates relative to rates that may have been previously in place, with cash rents serving as a measure to evaluate rents at the time rent payments commence, and straight-line rents serving as a measure to evaluate rents over the related lease terms. Committed costs includes tenant improvement allowances (excluding tenant-funded landlord assets), leasing commissions and estimated turn key costs and excludes lease incentives; we believe this is a useful measure for evaluating our costs associated with obtaining new leases.
For operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Annual Report on Form 10-K, amounts disclosed include information pertaining to properties owned through unconsolidated real estate joint ventures except for amounts reported for ARR, which represent the portion attributable to our ownership interest.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which require us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 2 to our consolidated financial statements. The following section is a summary of certain aspects of those accounting policies involving estimates or assumptions that (1) involve a significant level of estimation uncertainty and (2) have had or are reasonably likely to have a material impact on our financial condition or results of operations. It is possible that the use of different reasonable estimates or assumptions could result in materially different amounts being reported in our consolidated financial statements. While reviewing this section, refer to Note 2 to our consolidated financial statements, including terms defined therein.
Assessment of Lease Term as Lessor
A significant portion of our portfolio is leased to the USG, and the majority of those leases provide for one-year terms, with a series of one-year renewal options (with defined rent escalations upon each renewal), and/or provide for early termination rights. Applicable accounting guidance requires us to recognize minimum rental payments on operating leases, net of rent abatements, on a straight-line basis over the term of each lease. We estimate a tenant’s lease term at the lease commencement date and do not subsequently reassess such term unless the lease is modified. When estimating a tenant’s lease term, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives to the tenant based on any existing contract, asset, entity or market-based factors associated with the lease. Factors we consider in making this
assessment include the uniqueness of the purpose or location of the property, the availability of a comparable replacement property, the relative importance or significance of the property to the continuation of the lessee’s line of business and the existence of tenant leasehold improvements or other assets whose value would be impaired by the tenant vacating or discontinuing use of the leased property. For most of our leases with the USG, our estimates of lease term conclude that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably certain as it relates to the expected lease end date. As a result, our recognition of minimum rents on these leases includes the effect of annual rent escalations over our estimate of the lease term (including on one-year renewal options) and our depreciation and amortization of costs incurred on these leases is recognized over the lease term. An over-estimate of the term of these leases by us could result in the write-off of any recorded assets associated with straight-line rental revenue and acceleration of depreciation and amortization expense associated with costs we incurred related to these leases. We had no significant USG leases with lease terms determined to have been over-estimated during the reporting periods included herein.
Impairment of Long-Lived Assets
We assess the asset groups associated with each of our properties for indicators of impairment quarterly or when circumstances indicate that an asset group may be impaired. If our analyses indicate that the carrying values of certain properties’ asset groups may be impaired, we perform a recoverability analysis for such asset groups. If and when our plans change for a property, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of such property using holding periods that are consistent with our revised plans. In our accounting for impairment of long-lived assets, we estimate property fair values based on contract prices, indicative bids, discounted cash flow analyses or comparable sales analyses. We estimate cash flows used in performing impairment analyses based on our plans for the property and our views of market and economic conditions. Our estimates consider items such as current and future market rental and occupancy rates, estimated operating and capital expenditures, leasing commissions, absorption and hold periods and recent sales data for comparable properties. Most of these items are influenced by market data obtained from real estate leasing and brokerage firms and our direct experience with the properties and their markets. Our determination of appropriate capitalization or discount rates for use in estimating property fair values also requires significant judgment and is typically based on many factors, including the prevailing rate for the market or submarket, as well as the quality, location and other unique attributes of the property.
Since asset groups associated with properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell, decisions by us to sell certain properties will result in impairment losses if the carrying values of the specific properties’ asset groups classified as held for sale exceed such properties’ estimated fair values less costs to sell. Our estimates of fair value consider matters such as recent sales data for comparable properties and, when applicable, contracts or the results of negotiations with prospective purchasers. These estimates are subject to revision as market conditions, and our assessment of such conditions, change.
Historically, future market rental and occupancy rates and tenant improvement requirements have tended to be the most variable assumptions in our impairment analyses of properties to be held and used; while changes in these assumptions can significantly affect our estimates of property undiscounted future cash flows in our recoverability analyses, such changes historically have not usually resulted in impairment losses since the resulting recoverability analyses still have tended to exceed the carrying value of the property asset groups. Historically, our recognition of impairment losses has most often occurred due to changes in our estimates of future cash flows resulting from a change in our plans for a property, such as a decision by us to sell or shorten our expected holding period for a property or to not develop a property. Changes in the estimated future cash flows due to changes in our plans for a property or significant changes in our views regarding property market and economic conditions and/or our ability to obtain development rights could result in recognition of impairment losses that could be substantial.
Concentration of Operations
Customer Concentration of Property Operations
The table below sets forth the 20 largest tenants in our portfolio of operating properties based on percentage of ARR (dollars in thousands):
Percentage of ARR of Operating Properties
for 20 Largest Tenants as of December 31,
Tenant (1)
USG
Fortune 100 Company
General Dynamics Corporation
Peraton Corp.
The Boeing Company
Northrop Grumman Corporation
CACI International Inc
Fortune 100 Company
Booz Allen Hamilton, Inc.
Morrison & Foerster, LLP
KBR, Inc.
CareFirst, Inc.
Amentum Holdings, LLC
Yulista Holding, LLC
Mantech International Corp.
AT&T Corporation
University System of Maryland
Wells Fargo & Company
Lockheed Martin Corporation
The MITRE Corporation
Miles and Stockbridge, P.C.
RTX Corporation
Jacobs Engineering Group Inc.
Subtotal of 20 largest tenants
All remaining tenants
Total
Total ARR
(1) Includes affiliated organizations where applicable. Percentages shown as of December 31, 2024 and 2023 have not been restated for organizational changes of our top 20 largest tenants that occurred subsequent to those respective reporting periods.
Concentration of Properties by Segment/Sub-Segment
The table below sets forth the allocation of our ARR by segment/sub-segment (square feet in thousands):
Percentage of ARR as of
December 31,
Operational Square Feet as of
December 31,
Region
Defense/IT Portfolio
Fort Meade/BW Corridor
Redstone Arsenal
NoVA Defense/IT
Lackland Air Force Base
Navy Support
Data Center Shells
Total Defense/IT Portfolio
Other
The increase in our portfolio’s concentration in the Data Center Shells sub-segment was attributable to newly-developed properties that we placed into service.
Occupancy and Leasing
The tables below set forth occupancy information:
December 31,
Occupancy rates at year end
Total
Defense/IT Portfolio:
Fort Meade/BW Corridor
Redstone Arsenal
NoVA Defense/IT
Lackland Air Force Base
Navy Support
Data Center Shells
Total Defense/IT Portfolio
Other
ARR per occupied square foot at year end
Rentable
Square Feet
Occupied
Square Feet
(in thousands)
December 31, 2024
Vacated upon lease expiration (1)
Occupancy for new leases
Development placed in service
Acquisition
Other changes
December 31, 2025
(1) Includes lease terminations and space reductions occurring in connection with lease renewals.
In 2025, we leased 3.1 million square feet, including the following:
• 2.0 million square feet in renewed leases, representing a tenant retention rate of 77.9%. Most of these lease renewals were for our Defense/IT Portfolio, which had a retention rate of 79.3%, while our Other segment had a retention rate of 60.5%. The cash rents for our renewals (totaling $34.38 per square foot) increased on average by approximately 1.1% and the
straight-line rents (totaling $34.50 per square foot) increased on average by approximately 9.6% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of approximately 5.3 years, with average escalations per year of 2.0%, and the per annum average committed costs associated with completing the leasing was approximately $2.51 per square foot;
• 557,000 square feet of vacant space leased, including 424,000 in our Defense/IT Portfolio and 133,000 in our Other segment. The cash rents from this leasing totaled $31.66 per square foot and the straight-line rents totaled $31.88 per square foot. These leases had a weighted average lease term of approximately 7.6 years, with average escalations per year of 2.7%, and the per annum average committed costs associated with completing this leasing was approximately $8.04 per square foot; and
• 477,000 square feet of investment space in our Defense/IT Portfolio, with weighted average lease terms of 13.1 years, virtually all of which was for development properties.
Lease Expirations
The table below sets forth as of December 31, 2025 our scheduled lease expirations based on the non-cancelable term of tenant leases determined in accordance with GAAP for our properties by segment/sub-segment in terms of percentage of ARR:
Expiration of ARR of Operating Properties
Thereafter
Total
Defense/IT Portfolio
Fort Meade/BW Corridor
Redstone Arsenal
NoVA Defense/IT
Lackland Air Force Base
Navy Support
Data Center Shells
Other
Total
As of December 31, 2025, USG leases accounted for 83.3% of our total portfolio’s 2026 scheduled lease expirations, including 80.0% of Fort Meade/BW Corridor and 100% of Lackland Air Force Base scheduled lease expirations. As discussed above, we encountered some delays in the latter portion of 2025 due to the federal government shutdown. We expect that virtually all of the USG leases scheduled to expire in 2026 will be renewed.
The weighted average lease term as of December 31, 2025 was approximately five years. We believe that the weighted average ARR per occupied square foot for leases expiring in 2026, on average, was approximately 1.0% to 3.0% lower than estimated current market rents for the related space, with specific results varying by segment/sub-segment.
Results of Operations
For a discussion of our results of operations comparison for 2024 and 2023, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 filed on February 21, 2025.
We evaluate the operating performance of our properties using NOI from real estate operations, our segment performance measure, which includes: real estate revenues and property operating expenses; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate joint ventures (“UJV” or “UJVs”) that is allocable to our ownership interest (“UJV NOI allocable to COPT Defense”). The table below reconciles net income, the most directly comparable GAAP measure, to NOI from real estate operations:
For the Years Ended December 31,
(in thousands)
Net income
Construction contract and other service revenues
Depreciation and other amortization associated with real estate operations
Construction contract and other service expenses
General, administrative, leasing and other expenses
Interest expense
Interest and other income, net
Gain on sales of real estate
Loss on early extinguishment of debt
Equity in income of unconsolidated entities
UJV NOI allocable to COPT Defense included in equity in income of unconsolidated entities
Income tax expense
NOI from real estate operations
Our changes in NOI from real estate operations included the following primary categories:
• Same Property, which we define as properties stably owned and 100% operational throughout the two years being compared. For further discussion of the concept of “operational,” refer to the Properties section of Note 2 of the consolidated financial statements;
• developed properties placed into service that were not 100% operational throughout the two years being compared; and
• acquired properties.
Our Same Property pool consisted of 198 properties, comprising 94.9% of our portfolio’s square footage as of December 31, 2025. This pool of properties changed from the pool used for purposes of comparing 2024 and 2023 in our 2024 Annual Report on Form 10-K due to the addition of six properties placed in service and 100% operational on or before January 1, 2024 and three properties owned through a UJV that was formed in 2023.
In addition to owning properties, we provide construction management and other services. The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations.
Since both of the measures discussed above exclude certain items includable in net income or loss, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures. A reconciliation of NOI from real estate operations and NOI from service operations to net income reported on the consolidated statements of operations is provided in Note 13 to our consolidated financial statements.
Comparison of Statements of Operations for the Years Ended December 31, 2025 and 2024
For the Years Ended December 31,
Variance
(in thousands)
Revenues
Revenues from real estate operations
Construction contract and other service revenues
Total revenues
Operating expenses
Property operating expenses
Depreciation and amortization associated with real estate operations
Construction contract and other service expenses
General, administrative, leasing and other expenses
Total operating expenses
Interest expense
Interest and other income, net
Gain on sales of real estate
Loss on early extinguishment of debt
Equity in income of unconsolidated entities
Income tax expense
Net income
NOI from Real Estate Operations
For the Years Ended December 31,
Variance
(Dollars in thousands, except per square foot data)
Revenues
Same Property revenues
Lease revenue, excluding lease termination revenue and collectability loss provisions
Lease termination revenue, net
Collectability loss provisions included in lease revenue
Other property revenue
Same Property total revenues
Developed properties placed in service
Acquired properties
Other
Property operating expenses
Same Property
Developed properties placed in service
Acquired properties
Other
UJV NOI allocable to COPT Defense
Same Property
NOI from real estate operations
Same Property
Developed properties placed in service
Acquired properties
Other
Same Property NOI from real estate operations by segment
Defense/IT Portfolio
Other
Same Property rent statistics
Average occupancy rate
Average straight-line rent per occupied square foot (1)
(1) Includes minimum base rents, net of abatements and lease incentives and excluding lease termination revenue, on a straight-line basis for the years set forth above.
Regarding the changes in NOI from real estate operations reported above:
• the increase for our Same Properties was due in large part to additional revenue in 2025 resulting from increased rental and occupancy rates. Our Same Properties also experienced increased property operating expenses, driven primarily by higher utility expenses (largely due to rate increases), labor-related increases in landscaping and janitorial and increased snow removal costs, the effect of which was mostly offset by increased tenant expense reimbursements and prior year real estate taxes refunded upon appeal;
• developed properties placed in service reflects the effect of sixproperties placed in service in 2025 and 2024; and
• acquired properties includes threeoperating office properties acquired in 2025 and 2024.
NOI from Service Operations
For the Years Ended December 31,
Variance
(in thousands)
Construction contract and other service revenues
Construction contract and other service expenses
NOI from service operations
Construction contract and other service revenues and expenses decreased in 2025 due to a lower volume of construction activity for one of our tenants. Construction contract activity is inherently subject to significant variability depending on the volume and nature of projects undertaken by us primarily on behalf of tenants. Service operations are an ancillary component of our overall operations that typically contribute an insignificant amount of income relative to our real estate operations.
General, Administrative, Leasing and Other Expenses
Our general, administrative, leasing and other expenses are reported net of amounts capitalized for compensation and indirect costs associated with properties, or portions thereof, undergoing development activities. Our capitalized compensation and indirect costs totaled $10.6 million in 2025 and $9.3 million in 2024.
Interest Expense
The table below sets forth components of our interest expense:
For the Years Ended December 31,
Variance
(in thousands)
Interest on unsecured senior notes
Interest on mortgage and other secured debt
Interest on unsecured term debt
Interest on Revolving Credit Facility
Interest expense offsets from interest rate swaps
Amortization of deferred financing costs
Other interest
Capitalized interest
Interest expense
Interest expense increased due primarily to the issuance in October 2025 of our 4.50% Senior Notes due 2030 to pre-fund the repayment at maturity of our 2.25% Notes.
Our average outstanding debt was $2.5 billion in 2025 and $2.4 billion in 2024, and our weighted average effective interest rate on debt was approximately 3.4% in 2025 and 3.3% in 2024. We have used interest rate swaps to hedge the effect of interest rate increases on variable rate debt, including swaps for a $200.0 million notional amount that expired in February 2026.
Gain on Sales of Real Estate
We recognized a gain on sale of real estate of $3.0 million in 2025 in connection with our sale of an undeveloped land parcel.
Funds from Operations
Funds from operations (“FFO”) is defined as net income or loss computed using GAAP, excluding gains on sales and impairment losses of real estate and investments in UJVs (net of associated income tax) and real estate-related depreciation and amortization. FFO also includes adjustments to net income or loss for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe that we use the Nareit definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs. We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains on sales and impairment losses of real estate (net of associated income tax), and real estate-related depreciation and amortization, FFO can help one compare our operating performance between periods. In addition, since most equity REITs provide FFO information to the investment community, we believe that FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs. We believe that net income or loss is the most directly comparable GAAP measure to FFO.
Since FFO excludes certain items includable in net income or loss, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in balance with other GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income or loss when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
Basic FFO available to common share and common unit holders (“Basic FFO”) is FFO adjusted to subtract (1) preferred share dividends, (2) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (3) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (4) Basic FFO allocable to share-based compensation awards. With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares. We believe that net income or loss is the most directly comparable GAAP measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO.
Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below. We believe that net income or loss is the most directly comparable GAAP measure to Diluted FFO. Since Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. Diluted FFO (which includes discontinued operations) is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income or loss when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
Diluted FFO available to common share and common unit holders, as adjusted for comparability is defined as Diluted FFO adjusted to exclude: operating property acquisition costs (for acquisitions classified as business combinations); gain or loss on early extinguishment of debt; demolition costs on redevelopment and nonrecurring improvements; FFO associated with properties that secured non-recourse debt on which we defaulted and, subsequently, extinguished via conveyance of such properties (including property NOI, interest expense and gains on debt extinguishment); loss on interest rate derivatives; and executive transition costs associated with named executive officers. This measure also includes adjustments for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe this to be a useful supplemental measure alongside Diluted FFO as it excludes gains and losses from certain investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that net income or loss is the most directly comparable GAAP measure to this non-GAAP measure. This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that Diluted FFO per share is useful to investors because it provides investors with a further context for evaluating our FFO results in the same manner that investors use earnings per share (“EPS”) in evaluating net income or loss available to common shareholders. In addition, since most equity REITs provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful
supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO results. We believe this to be a useful supplemental measure alongside Diluted FFO per share as it excludes gains and losses from investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that diluted EPS is the most directly comparable GAAP measure to this per share measure. This measure has most of the same limitations as Diluted FFO (described above) as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
The computations for all of the above measures on a diluted basis assume the conversion of common units in CDPLP but do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities would increase per share measures in a given period.
We use measures called payout ratios as supplemental measures of our ability to make distributions to investors based on each of the following: FFO; Diluted FFO; and Diluted FFO, adjusted for comparability. These measures are defined as (1) the sum of dividends on unrestricted common and deferred shares and distributions to holders of interests in CDPLP to the extent they are dilutive in the respective related non-GAAP per share numerators divided by (2) the respective non-GAAP measures.
The table below sets forth the computation of the above stated measures for 2025 and 2024 and provides reconciliations from the GAAP measures associated with such measures:
For the Years Ended December 31,
(Dollars and shares in thousands, except per share data)
Net income
Real estate-related depreciation and amortization
Gain on sales of real estate
Depreciation and amortization on UJVs allocable to COPT Defense
FFO
FFO allocable to other noncontrolling interests
Basic FFO allocable to share-based compensation awards
Basic FFO available to common share and common unit holders
Redeemable noncontrolling interests
Diluted FFO adjustments allocable to share-based compensation awards
Diluted FFO available to common share and common unit holders
Loss on early extinguishment of debt
Executive transition costs
Loss on early extinguishment of debt on unconsolidated real estate JVs
Diluted FFO comparability adjustments allocable to share-based compensation awards
Diluted FFO available to common share and common unit holders, as adjusted for comparability
Weighted average common shares
Conversion of weighted average common units
Weighted average common shares/units - Basic FFO per share
Dilutive effect of share-based compensation awards
Redeemable noncontrolling interests
Weighted average common shares/units - Diluted FFO per share and as adjusted for comparability
Diluted EPS
Diluted FFO per share
Diluted FFO per share, as adjusted for comparability
Denominator for diluted EPS
Weighted average common units
Redeemable noncontrolling interests
Denominator for diluted FFO per share and as adjusted for comparability
Dividends on unrestricted common and deferred shares
Distributions on unrestricted common units
Dividends and distributions on restricted shares and units
Dividends and distributions for net income payout ratio
Dividends on unrestricted common and deferred shares
Distributions on unrestricted common units
Dividends and distributions for FFO payout ratio
Dividends and distributions adjustments for dilution
Dividends and distributions for diluted non-GAAP payout ratios
Net income payout ratio
FFO payout ratio
Diluted FFO payout ratio
Diluted FFO payout ratio, as adjusted for comparability
Property Additions
The table below sets forth the major components of our additions to properties for 2025 and 2024:
For the Years Ended December 31,
Variance
(in thousands)
Properties in development or held for future development
Tenant improvements on operating properties (1)
Capital improvements on operating properties
Acquisition of operating properties (2)
(1) Tenant improvement costs incurred on newly-developed properties are classified in this table as development.
(2) Excludes intangible assets associated with acquisitions.
Cash Flows
Net cash flow from operating activities decreased $21.0 million, or (6.4)%, from 2024 to 2025 due primarily to the timing of certain USG lease payments in 2025, along with decreased interest and other income and higher lease incentive payments in 2025.
Net cash flow used in investing activities decreased $1.3 million from 2024 to 2025, which included the effects of additional cash flow from distributions in 2025 of debt refinancing proceeds received from two of our UJVs, offset in part by increased cash outlays for property development activities, tenant improvements on operating properties and leasing costs.
Net cash flow provided by financing activities in 2025 was $216.5 million, and included primarily the following:
• net proceeds of debt borrowings during the period of $371.7 million, which included proceeds from our issuance of the 4.50% Notes; and
• dividends to common shareholders of $136.6 million.
Net cash flow used in financing activities in 2024 was $169.7 million, and included primarily the following:
• net repayments of debt borrowings during the period of $30.0 million; and
• dividends to common shareholders of $131.8 million.
Supplemental Guarantor Information
As of December 31, 2025, CDPLP had several series of unsecured senior notes outstanding that were issued in transactions registered with the SEC under the Securities Act of 1933, as amended. These notes are CDPLP’s direct, senior unsecured and unsubordinated obligations and rank equally in right of payment with all of CDPLP’s existing and future senior unsecured and unsubordinated indebtedness. However, these notes are effectively subordinated in right of payment to CDPLP’s existing and future secured indebtedness. The notes are also effectively subordinated in right of payment to all existing and future liabilities and other indebtedness, whether secured or unsecured, of CDPLP's subsidiaries. COPT Defense fully and unconditionally guarantees CDPLP’s obligations under these notes. COPT Defense’s guarantees of these notes are senior unsecured obligations that rank equally in right of payment with other senior unsecured obligations of, or guarantees by, COPT Defense. COPT Defense itself does not hold any indebtedness, and its only material asset is its investment in CDPLP.
As permitted under Rule 13-01(a)(4)(vi), we do not provide summarized financial information for the Operating Partnership since: the assets, liabilities, and results of operations of the Company and the Operating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company; and we believe that inclusion of such summarized financial information would be repetitive and not provide incremental value to investors.
Liquidity and Capital Resources
As of December 31, 2025, we had $275.0 million in cash and cash equivalents. We were carrying a significant amount of cash and cash equivalents as of the end of the year due to the net proceeds from the October issuance of our 4.50% Notes that will fund the repayment at maturity of our 2.25% Notes in March 2026. Until such time, the proceeds were used for general corporate purposes, which resulted in a portion of the net proceeds being invested in interest-bearing accounts.
We have a Revolving Credit Facility with a maximum borrowing capacity of $800.0 million. The facility matures in October 2029 and may be extended by two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.0625% of the total availability under the facility for each extension period. Our available borrowing capacity under the facility totaled $746.0 million as of December 31, 2025.
We also have a Revolving Development Facility with a maximum borrowing capacity of $200.0 million. The facility matures in October 2029 and may be extended by a 12-month period at our option, provided that there is no default under the facility and we pay an extension fee of 0.250% of the total amount available under the facility. Our available borrowing capacity under the facility totaled $104.0 million as of December 31, 2025.
We expect to use our Revolving Development Facility to fund most of our property development cash requirements and subsequently pay it down as development properties are placed into service using cash available from operations, any excess available cash and cash equivalents and borrowings from our Revolving Credit Facility. We expect to use our Revolving Credit Facility to initially fund most of the cash requirements from our other investing activities, including development cash requirements in excess of Revolving Development Facility available borrowings, as well as pay downs of the Revolving Development Facility discussed above and certain debt balloon payments due upon maturity; we expect to pay down this facility using cash available from operations and proceeds from financing and/or investing activities, such as long-term borrowings, equity issuances and sales of interests in properties.
Our senior unsecured debt is rated investment grade, with either stable or positive outlooks, by the three major rating agencies. We aim to maintain an investment grade rating to enable us to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks. We also use secured nonrecourse debt from institutional lenders and banks primarily for joint venture financings. In addition, we periodically raise equity when we access the public equity markets by issuing common shares.
We have a program in place under which we may offer and sell common shares in at-the-market stock offerings having an aggregate gross sales price of up to $300 million. Under this program, we may also, at our discretion, sell common shares under forward equity sales agreements. The use of a forward equity sales agreement would enable us to lock in a price on a sale of common shares when the agreement is executed but defer issuing the shares and receiving the sale proceeds until a later date.
We believe that our liquidity and capital resources are adequate for our near-term and longer-term requirements without necessitating property sales. However, we may dispose of interests in properties opportunistically or when market conditions otherwise warrant.
Our material cash requirements, including contractual and other obligations, include:
• property operating expenses, including future lease obligations from us as a lessee;
• construction contract expenses;
• general, administrative, leasing and other expenses;
• debt service, including interest expense;
• property development costs;
• tenant and capital improvements and leasing costs for operating properties (expected to total approximately $100 million in 2026);
• debt balloon payments due upon maturity; and
• dividends to our shareholders.
We expect to use cash flow from operations in 2026 and annually thereafter for the foreseeable future to fund all of these cash requirements except for debt balloon payments due upon maturity and a portion of property development costs, the fundings for which are discussed below.
In 2026, we expect to spend $135 million to $175 million on costs for properties actively under development, most of which was contractually obligated as of December 31, 2025, and have $445.6 million in debt balloon payments maturing in 2026 (including the repayment at maturity of the 2.25% Notes). In 2026 and beyond, we expect to continue to actively develop additional properties and also could opportunistically acquire operating properties. We expect to fund these activities using, in part, available cash flow from operations, with the balance funded using any remaining excess available cash and cash equivalents and borrowings under our Revolving Development Facility and Revolving Credit Facility.
We provide disclosure in our consolidated financial statements on our future lessee obligations (expected to be funded primarily by cash flow from operations) in Note 5 and future debt obligations (expected to be funded by any remaining excess available cash and cash equivalents, refinanced by new debt borrowings or funded by future equity issuances and/or sales of interests in properties) in Note 8.
Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. As of December 31, 2025, we were compliant with these covenants.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for information regarding recent accounting pronouncements.
