COPT DEFENSE PROPERTIES (CDP)

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;

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

In 2024, we:

achieved year end occupancy of 93.6% for our total portfolio and 95.6% for our Defense/IT Portfolio;

completed strong leasing in our operating portfolio, with our highest tenant retention rate in over 20 years and vacant space leased during the year exceeding space vacated upon lease expirations;

placed into service space in three properties that were substantially leased and commenced development of two additional properties;

acquired operating properties for the first time in nine years to add supply to highly-leased business parks;

replenished our supply of land to support future data center shell development; and

ended the year with no significant debt maturing until 2026 and most of our Revolving Credit Facility’s borrowing capacity available.

Our business is driven by our Defense/IT Portfolio segment, which as of year end represented 91.3% 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% in recent years. In 2024, our Defense/IT Portfolio:

increased its Same Property pool’s average occupancy from 95.0% in 2023 to 95.8% in 2024, ending the year 96.4% occupied;

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achieved a near-record tenant retention rate of 88.6%, with average increases in rent per renewed square foot of 1.0% for cash rents (with a compound annual growth rate of 2.8%) and 8.9% for straight-line rents; and

leased 388,000 of its vacant space, which exceeded the expiring lease square footage that was vacated.

Demand for secure space was strong, which we believe was bolstered in part by the nation’s challenges associated with global conflicts and the continued need to boost cybersecurity capabilities, and enabled us to improve lease economics by increasing cash rental rates, with fewer rent concessions. We believe that this demand drove our strong retention rate for the properties in 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 benefited from continued defense budget appropriation increases, with bipartisan support in recent years. As global threats to our national security and that of our allies continue to evolve and, in some cases, escalate, we believe that defense spending for the critical missions that our portfolio supports, such as intelligence, surveillance and cyber, will continue to be considered vital for the foreseeable future.

Strong Defense/IT Portfolio demand coupled with limited vacancy drove our need to invest in additional space, which we addressed in 2024 by:

acquiring vacant space in two operating properties, including:

6841 Benjamin Franklin Drive, a 202,000 square foot property in Columbia, Maryland that was 56% leased, for a purchase price of $15.0 million on March 15, 2024; and

3900 Rogers Road, an 80,000 square foot property in San Antonio, Texas that was vacant on the acquisition date and subsequently leased in full to the USG, for a purchase price of $17.0 million on September 26, 2024.

We believe that these acquisitions provided space that was needed to service existing demand and were completed at substantial discounts to replacement cost; and

developing space in new properties, including:

399,000 square feet placed in service during the year in three properties that were 83% leased as of year end in our Data Center Shells and Redstone Arsenal sub-segments; and

606,000 square feet under development at year end in four properties that were 75% leased, including: two fully-leased data center shells scheduled to be placed in service in 2025; and one property each in Fort Meade/BW Corridor and Redstone Arsenal on which we commenced development in 2024 ahead of completed leasing to accommodate future anticipated USG and contractor demand; and

acquiring 365 acres of land near Des Moines, Iowa for $32.0 million on September 27, 2024 that we believe could be developed into approximately 3.3 million square feet of data center shell space in the long term. We believe that significant demand for data center shells exists, fueled in large part by advancements in cloud computing and artificial intelligence, and Des Moines is one of the largest hyperscale data center markets in the United States.

We funded these property investments primarily using excess available cash flow from operations and cash and cash equivalents that we had remaining from our issuance of unsecured senior notes in 2023.

In 2024, our total portfolio also included eight office properties in our Other segment, which as of year end represented 8.7% of our property square footage and 9.7% of our ARR. These properties, which have experienced a challenging leasing environment for several years, had an average occupancy rate of 72.7% in 2024. We do not consider these 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 2024 due in large part to the effects of increased interest rates and debt availability on potential buyers.

Our 2024 year end occupancy rate decreased (relative to 2023) from 94.2% to 93.6% for our total portfolio and from 96.2% to 95.6% for our Defense/IT Portfolio due primarily to the vacant space that we acquired and placed in service in 2024 to feed demand in highly-leased business parks. Conversely, the 2024 year end occupancy rate of our Same Property pool (which excludes the effect of properties acquired and placed in service) increased (relative to 2023) from 93.8% to 94.1% for our total portfolio and from 96.0% to 96.4% for the Defense/IT Portfolio component due to lease commencements on vacant space leasing and strong tenant retention (86.0% for the total portfolio and 88.6% for the Defense/IT Portfolio). As of December 31, 2024, we had scheduled lease expirations for 3.0 million square feet in 2025, representing 13.0% of our total occupied square feet and 19.2% of our total ARR, including:

2.8 million square feet in our Defense/IT Portfolio segment, a high proportion of which we expect to renew due to the unique retention advantages associated with our Defense/IT strategy discussed above; and

144,000 square feet in our Other segment, the renewal of which we believe was highly uncertain.

Please refer to the section below entitled “Occupancy and Leasing” for additional related disclosure.

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As of December 31, 2024, we ended the year with:

no significant debt maturing until 2026;

$525.0 million in available borrowing capacity under our Revolving Credit Facility;

no variable-rate debt exposure, including the effect of interest rate swaps;

only 2.9% 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.

Economically, we believe that the:

rate of cost increases that we observed or experienced in recent years subsided to a more normalized level, and therefore did not significantly affect us in 2024;

lingering effects of instability in debt and equity markets also did not significantly affect us in 2024 since we had sufficient liquidity to fund our forecasted investing and financing activities through at least 2025 and virtually no variable-rate debt exposure. However, constraints in commercial debt availability and elevated interest rates were not conducive to proper valuations from potential buyers of properties in our Other segment. In early 2026, we have $400.0 million in unsecured senior notes with a stated interest rate of 2.25% maturing that we will need to repay; to the extent that we refinance this debt with new unsecured fixed-rate debt, we expect it would be at a higher interest rate; and

continued prevalence of remote- and flexible-work arrangements that have adversely effected the United States office real estate industry in recent years has not significantly affected us due to our Defense/IT strategy, which results in a higher preponderance of tenants who require their employees to work in the properties for security purposes. However, the properties in our Other segment continued to experience a challenging lease environment.

For our 2024 results of operations:

our diluted earnings per share increased from a loss of $(0.67) per share in 2023 to earnings of $1.23 per share in 2024, and our net income increased from a loss of $(74.3) million in 2023 to income of $143.9 million in 2024 due primarily to $252.8 million in impairment losses that we recognized in 2023 on six operating properties in our Other segment and a parcel of other land that we control;

net operating income (“NOI”) from real estate operations, our segment performance measure, increased $34.9 million, or 9.1%, relative to 2023. This increase was driven primarily by a:

$19.9 million increase from newly-developed properties placed in service; and

$14.2 million increase from our Same Properties, which included the effect of increased rental and occupancy rates in our Defense/IT Portfolio; and

diluted funds from operations per share, as adjusted for comparability increased 6.2% and the numerator for that measure increased $20.9 million, or 7.6%, relative to 2023 due primarily to increased NOI from real estate operations in 2024, offset in part by higher interest expense.

Additional disclosure comparing our 2024 and 2023 results of operations is provided below.

We discuss significant factors contributing to changes in our net income or loss between 2024 and 2023 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 source 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.

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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 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, and estimated annual expense reimbursements (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

As discussed above, 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

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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, where 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.

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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:

(1)Includes affiliated organizations where applicable.

Concentration of Properties by Segment

The table below sets forth the segment allocation of our ARR (square feet in thousands):

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Occupancy and Leasing

The tables below set forth occupancy information (excluding our Wholesale Data Center that we sold on January 25, 2022):

(1)Includes lease terminations and space reductions occurring in connection with lease renewals.

With regard to changes in occupancy from December 31, 2023 to December 31, 2024:

Lackland Air Force Base: Decreased due to the acquisition of 3900 Rogers Road, which was vacant at the time of acquisition and subsequently leased in full with occupancy commencing in 2025;

Navy Support: Decreased due primarily to tenant space down-sizings at two of our properties. As of December 31, 2024 we had scheduled lease expirations in 2025 for 166,000 square feet, or 15.8%, of this sub-segment’s occupied square feet, most of which we expect to renew;

Redstone Arsenal: Decreased due primarily to vacant space placed into service in a newly-developed property to accommodate future anticipated demand in a highly-leased business park; and

Other: Decreased due to vacated space resulting from a 49.4% tenant retention rate, the effect of which outweighed lease commencements on vacant space leased. As of December 31, 2024 we had scheduled lease expirations in 2025 for 144,000 square feet, or 9.2%, of this sub-segment’s occupied square feet, the renewal of which we believed was uncertain.

In 2024, we leased 3.2 million square feet, including the following:

2.6 million square feet in renewed leases, representing a tenant retention rate of 86.0%. Most of these lease renewals were for our Defense/IT Portfolio, which had a retention rate of 88.6%, while our Other segment had a retention rate of 49.4%. The cash rents for our renewals (totaling $35.26 per square foot) increased on average by approximately 0.6% and the straight-line rents (totaling $35.47 per square foot) increased on average by approximately 8.6% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of approximately 3.9 years, with average escalations per year of 2.4%, and the per annum average committed costs associated with completing the leasing was approximately $2.79 per square foot;

500,000 square feet of vacant space leased, most of which for our Defense/IT Portfolio. The cash rents of this leasing totaled $35.23 per square foot and the straight-line rents totaled $36.26 per square foot; these leases had a weighted average lease term of approximately 7.7 years, with average escalations per year of 2.5%, and the per annum average committed costs associated with completing this leasing was approximately $11.60 per square foot; and

124,000 square feet of investment space in our Defense/IT Portfolio, with weighted average lease terms of 8.2 years, including our leasing of 3900 Rogers Road subsequent to its acquisition.

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Lease Expirations

The table below sets forth as of December 31, 2024 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:

(1)Includes scheduled lease expirations in 2025 totaling $46.2 million in ARR on 703,000 square feet that we expect to renew.

The weighted average lease term as of December 31, 2024 was approximately five years. We believe that the weighted average ARR per occupied square foot for leases expiring in 2025, on average, approximated 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 2023 and 2022, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed on February 22, 2024.

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 (loss), the most directly comparable GAAP measure, to NOI from real estate operations:

We view our changes in NOI from real estate operations as being comprised of 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;

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acquired properties; and

disposed properties.

Our Same Property pool consisted of 189 properties, comprising 90.6% of our portfolio’s square footage as of December 31, 2024. This pool of properties changed from the pool used for purposes of comparing 2023 and 2022 in our 2023 Annual Report on Form 10-K due to the addition of seven properties placed in service and 100% operational on or before January 1, 2023 and two properties owned through a UJV that was formed in 2022.

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 income (loss) from continuing operations 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, 2024 and 2023

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NOI from Real Estate Operations

(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.

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Regarding the changes in NOI from real estate operations reported above:

the increase for our Same Property pool was due in large part to additional revenue in 2024 resulting from increased rental and occupancy rates;

developed properties placed in service reflects the effect of nine properties placed in service in 2024 and 2023;

acquired properties includes two operating office properties acquired in 2024; and

dispositions, net of retained interest in newly-formed UJVs reflects the effect of our sale of 90% of our interests in three data center shells in 2023.

NOI from Service Operations

Construction contract and other service revenues and expenses increased in 2024 due to a higher 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.

Impairment Losses

As part of our closing process for the three months ended September 30, 2023, we conducted our quarterly review of our portfolio of long-lived assets to be held and used for indicators of impairment. As a result of this process, we shortened the expected holding periods for six operating properties in our Other segment and a parcel of land located in Baltimore, Maryland, Northern Virginia and Washington, DC. We determined that the carrying amount of the properties would not likely be recovered from the undiscounted cash flows from the operations and sales of the properties over the shortened holding periods. Accordingly, we recognized impairment losses of $252.8 million on these properties during 2023.

General, Administrative, Leasing and Other Expenses

Our general, administrative, leasing and other expenses increased in large part due to compensation-related expenses, including the effects of the resignation of our Chief Operating Officer in early 2023 and hiring of his replacement in late 2023 and higher incentive compensation awards in 2024 in recognition of the Company’s performance.

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 $9.3 million in 2024 and $9.5 million in 2023.

Interest Expense

The table below sets forth components of our interest expense:

Interest expense increased due primarily to the issuance in September 2023 of our 5.25% Exchangeable Senior Notes due 2028 (“5.25% Notes”).

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Our average outstanding debt was $2.4 billion in 2024 and $2.3 billion in 2023, and our weighted average effective interest rate on debt was approximately 3.2% in 2024 and 3.0% in 2023.

Gain on Sales of Real Estate

The gain on sales of real estate recognized in 2023 was due to our sale of a 90% interest in three data center shell properties.

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; 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

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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.

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The table below sets forth the computation of the above stated measures for 2024 and 2023 and provides reconciliations from the GAAP measures associated with such measures:

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Property Additions

The table below sets forth the major components of our additions to properties for 2024 and 2023:

(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 increased $54.7 million, or 19.8%, from 2023 to 2024 due primarily to the effects of the growth of our operating portfolio, along with an increase in interest income on investing receivables received in 2024, and partially offset by higher cash paid for interest expense on our 5.25% Notes issued in September 2023.

Net cash flow used in investing activities increased $121.4 million from 2023 to 2024 due primarily to proceeds from properties sold in 2023 (which included our sale of a 90% interest in three data center shells), which was partially offset by decreased cash paid for properties in development or held for future development.

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.

Net cash flow provided by financing activities in 2023 was $46.3 million, and included primarily the following:

net proceeds from debt borrowings during the period of $181.4 million, which included the net effect of our issuance of the 5.25% Notes and a net paydown of borrowings under our Revolving Credit Facility using proceeds from the notes issuance and from property sales; and

dividends to common shareholders of $127.2 million.

Supplemental Guarantor Information

As of December 31, 2024, 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, 2024, we had $38.3 million in cash and cash equivalents.

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We have a Revolving Credit Facility with a maximum borrowing capacity of $600.0 million. We use this facility to initially fund most of the cash requirements from our investing activities, including property development and acquisition costs, as well as certain debt balloon payments due upon maturity.  We then subsequently pay down the 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.  The facility matures in October 2026 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 $525.0 million as of December 31, 2024.

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 and, to a lesser extent, preferred 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 2025);

debt balloon payments due upon maturity; and

dividends to our shareholders.

We expect to use cash flow from operations in 2025 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 2025, we expect to spend $180 million to $220 million on costs for properties actively under development, most of which was contractually obligated as of December 31, 2024, and have $22.1 million in debt balloon payments maturing in 2025 that we expect to extend to 2026. In 2025 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 and any excess available cash and cash equivalents, with the balance funded, at least initially, using borrowings under our 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 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, 2024, we were compliant with these covenants.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements for information regarding recent accounting pronouncements.

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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;

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 a 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

In 2023, we:

experienced continued strong demand across our Defense/IT Portfolio segments that drove:

strengthened occupancy of our operating properties, with year-end occupancy and leased rates at near-record levels; and

near-record tenant retention rates, at increased rent levels;

continued growth through substantially pre-leased development, with space placed in service during the year that was virtually full and a pipeline of substantially pre-leased properties under development at year end;

raised capital from a sale of interests in data center shell properties, using the proceeds to create borrowing capacity to fund future development activities;

opportunistically issued debt through a private placement to pre-fund the expected borrowings needed to fund our forecasted development activities for most of the next three years; and

ended the year with no significant debt maturing until 2026, most of our Revolving Credit Facility’s borrowing capacity available and significant cash balances on hand.

Strong demand from our Defense/IT Portfolio drove increased property occupancy that more than offset the continuing effects of lagging demand in our Other segment. Our strengthened operating property occupancy in 2023 included increases in:

total portfolio year-end occupancy rate from 92.7% to 94.2%, with a year-end leased rate of 95.3%;

Defense/IT Portfolio year-end occupancy rate from 94.1% to 96.2%, with a year-end leased rate of 97.2%;

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Same Property year-end occupancy rate from 92.0% to 93.4%, with a year-end leased rate of 94.7% for our Same Properties in total and 96.8% for the Defense/IT Portfolio component; and

average Same Property occupancy from 91.6% to 92.7%, and from 92.9% to 94.7% for the Defense/IT Portfolio component.

We also in 2023 achieved a tenant retention rate of 79.7% for the portfolio, and 85.7% for our Defense/IT Portfolio segment, which were near record levels. Our increased occupancy and leased rates were attributable primarily to our strong tenant retention coupled with the effects of our vacant space leasing efforts.

Defense/IT Portfolio demand also continued to feed growth in our portfolio through property development. In 2023, our Defense/IT Portfolio:

placed into service 848,000 square feet in six properties that were 98% leased, mostly in our Data Center Shells, Redstone Arsenal and Fort Meade/BW Corridor sub-segments; and

ended the year with 817,000 square feet under development in an additional five properties that were 91% leased, three of which were scheduled to be placed in service in 2024. Our properties under development included three data center shells and two properties in Redstone Arsenal.

We believe that our Defense/IT Portfolio has strongly benefited from continued:

defense budget appropriation increases, with bipartisan support, and without extended delays in appropriations in recent years. As global threats to our national security and that of our allies continue to evolve and, in some cases, escalate, we believe that defense spending for the critical missions that our portfolio supports, such as intelligence, surveillance and cyber, will continue to be considered vital for the foreseeable future. However, future leasing demand could be delayed or diminish if this bipartisan support does not continue or if appropriations legislation to fund approved defense budgets faces extended delays (including the USG’s 2024 fiscal year defense budget, which was authorized but was awaiting appropriations as of the date of this filing); and

demand for data center shells in Northern Virginia, one of the largest data center markets in the world. We believe that our properties in operations and undergoing development in this sub-segment will continue to benefit from strong demand through high tenant retention, with renewals at increased rental rates. However, as of December 31, 2023, we did not have additional land under control in Northern Virginia for the future development of data center shells. As a result, our ability to continue to develop data center shells, as we have for the past decade, may be limited.

As of December 31, 2023, we had scheduled lease expirations for 2.6 million square feet in 2024, representing 11.5% of our total occupied square feet and 12.8% of our total annualized rental revenue, including:

2.4 million square feet in our Defense/IT Portfolio segment, a high proportion of which we expect to renew; and

161,000 square feet in our Other segment, most of which we do not expect to renew.

Please refer to the section below entitled “Occupancy and Leasing” for additional related disclosure.

On January 10, 2023, we raised $190.2 million in capital from our sale of a 90% interest in three data center shell properties in Northern Virginia, resulting in a gain on sale of $49.4 million. We retained a 10% interest in the properties through a newly-formed joint venture. We used substantially all of the proceeds from this sale to pay down our Revolving Credit Facility to create additional borrowing capacity available to fund future development.

On September 12, 2023, we issued $345.0 million aggregate principal amount of 5.25% Exchangeable Senior Notes due 2028 (the “5.25% Notes”) in a private placement to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). While we were previously anticipating issuing debt through the capital markets in late-2024, due to what we considered to be a potentially challenging capital environment, we opportunistically completed this issuance to remove future execution and debt-pricing risk, while pre-funding and creating capacity under our Revolving Credit Facility for the expected borrowings needed to fund our forecasted development activities for most of the next three years. The proceeds from this issuance, after deducting the initial purchasers’ commissions, but before other offering expenses, were $336.4 million. The net proceeds from the notes were primarily used for general corporate purposes, including repayment of borrowings under our Revolving Credit Facility and pre-funding of future development investments, which resulted in a portion of the net proceeds being invested in short-term interest-bearing money market accounts pending such use.

As of December 31, 2023, we ended the year, with:

no significant debt maturing until 2026;

$525.0 million in available borrowing capacity under our Revolving Credit Facility;

no variable-rate debt exposure expected until late-2024, including the effect of interest rate swaps;

only 4.1% of our outstanding debt encumbered by properties; and

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$167.8 million in cash on hand.

In 2023, the United States economy experienced inflationary conditions, increased interest rates, higher volatility in the debt and equity capital markets and certain supply-chain related shortages that, coupled with increased prevalence of remote- and flexible-work arrangements in recent years, adversely affected the United States office real estate industry. For us:

the above conditions have not significantly affected our ability to achieve expected leasing in our Defense/IT Portfolio, although the properties in our Other segment continue to experience a challenging leasing environment that has not improved;

inflationary conditions have contributed to increased costs for certain property operating expenses and building equipment and materials, which affects our development of new properties and improvements for existing properties. For:

property operating expenses, most of our leases obligate tenants to pay either their full share of a building’s operating expenses or their share to the extent such expenses exceed amounts established in their leases. These lease arrangements reduce our exposure to increases in property operating expenses;

new property development and tenant improvements associated with new leasing in our Defense/IT Portfolio, increased costs have not significantly affected our ability to achieve targeted yields due to continued strong demand for space, which has generally enabled us to increase rents to maintain such yields. However, continued cost increases could adversely affect our ability to continue to achieve targeted yields on future new property development and future new leasing of our existing properties to the extent increases in market rental rates do not keep pace; this could also reduce our willingness to develop, or our tenants’ willingness to commit to leasing, new properties; and

other capital improvements, the increasing cost environment could affect our willingness, or timeline, for completing such improvements;

we observed uncertainty in the debt markets in 2023 both in terms of availability and pricing, particularly for commercial real estate. Due to this uncertainty, we chose to issue our 5.25% Notes to remove future execution and debt-pricing risk by pre-funding and creating capacity under our Revolving Credit Facility for the expected borrowings needed to fund forecasted future development activities;

the effects of increased interest rates were limited to a certain extent since our debt is predominantly fixed rate and in the form of long-term unsecured notes that we issued prior to 2022. Notable effects include the following:

for variable-rate loans, we use interest rate swaps to hedge the effect of interest rate changes. We had interest rate swaps for a $200.0 million notional amount that fixed the one-month LIBOR interest rate in 2022 at 1.9% through December 1, 2022; and, effective February 1, 2023, fixed the one-month SOFR interest rate at 3.7% for a three-year term;

for the 5.25% Notes issuance, the interest rate was higher than our previous senior notes issuance in November 2021; and

for net proceeds resulting from the 5.25% Notes issuance that we invested in short-term money market accounts pending use for future development activities, elevated U.S. Treasury Rates in 2023 enabled us to realize interest income at rates slightly in excess of the debt issuance rate; and

both our operating and development activities experienced supply-chain related shortages in 2023 that, due in large part to our anticipatory efforts, did not significantly affect our ability to execute such activities.

In addition, we owned eight office properties in our Other segment as of December 31, 2023 that we do not consider strategic holdings since they do not align with our Defense/IT strategy. We intend to sell these properties when we believe that market conditions and opportunities position us to optimize our return on investment. However, we did not initiate plans for sales of these properties in 2023 due in part to the anticipated effects of increased interest rates and debt availability on potential buyers.

For our 2023 results of operations:

our diluted earnings per share decreased from $1.53 per share in 2022 to a loss per share of $(0.67) in 2023, and our net income decreased from $178.8 million in 2022 to a loss of $(74.3) million in 2023 due primarily to $252.8 million in impairment losses that we recognized in 2023. We recognized these impairment losses on: six operating properties in our Other segment after shortening their expected holding periods; and a parcel of other land that we controlled;

net operating income (“NOI”) from real estate operations, our segment performance measure, increased $21.8 million, or 6.0%, relative to 2022. This change was comprised primarily of:

a $26.4 million increase from newly-developed properties placed in service; and

a $10.5 million increase from our Same Properties, which included the effect of increased occupancy in our Defense/IT Portfolio; offset in part by

a $15.1 million decrease from property dispositions; and

diluted funds from operations per share, as adjusted for comparability increased 2.5% and the numerator for that measure increased $6.9 million, or 2.6%, relative to 2022, due primarily to increased NOI from real estate operations in 2023, offset in part by higher interest expense.

Additional disclosure comparing our 2023 and 2022 results of operations is provided below.

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We discuss significant factors contributing to changes in our net income between 2023 and 2022 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 “annualized rental revenue” and “tenant retention rate” 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. Annualized rental revenue is a measure that we use to evaluate the source 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 annualized rental revenue excludes the effect of lease incentives. We consider annualized rental revenue 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 generally accepted accounting principles in the United States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis. 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; we include the effect of early renewals in this measure.

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 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, and estimated annual expense reimbursements (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.

With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Annual Report on Form 10-K, amounts disclosed include total information pertaining to properties owned through unconsolidated real estate joint ventures except for amounts reported for annualized rental revenue, 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

As discussed above, 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 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

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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, where 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 have tended to be the most variable assumption 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.

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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 annualized rental revenue:

(1)Includes affiliated organizations where applicable.

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Concentration of Properties by Segment

The table below sets forth the segment allocation of our annualized rental revenue (excluding our Wholesale Data Center that we sold on January 25, 2022) as of the end of the last three calendar years:

The changes in revenue concentration reflected above between year-end 2022 and 2023 were attributable primarily to the: increasing effects in 2023 of occupied properties placed in service (most notably for Fort Meade/BW Corridor, Redstone Arsenal and Data Center Shells) and occupancy from vacant space leasing for Fort Meade/BW Corridor and Redstone Arsenal; offset in part by the decreasing effect from our sale of interests in Data Center Shells in 2023.

Occupancy and Leasing

The tables below set forth occupancy information (excluding our Wholesale Data Center that we sold on January 25, 2022):

(1)Includes lease terminations and space reductions occurring in connection with lease renewals.

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With regard to changes in occupancy from December 31, 2022 to December 31, 2023:

Fort Meade/BW Corridor: Increase was due primarily to the commencement of occupancy from vacant space leasing in a number of properties in this sub-segment;

Navy Support: Decreased despite an 80.5% tenant retention rate in 2023 due to minimal commencement of occupancy from vacant space leasing. As of December 31, 2023 we had scheduled lease expirations in 2024 for 352,000 square feet, or 32%, of this sub-segment’s occupied square feet, most of which we expect to renew;

Redstone Arsenal: Increase was due primarily to the commencement of occupancy from vacant space leasing in a number of properties in this sub-segment; and

Other: Decreased due to vacated space resulting from its 25.3% tenant retention rate and minimal vacant space leasing.

In 2023, we leased 2.9 million square feet, including 747,000 square feet of development space in our Defense/IT Portfolio, with weighted average lease terms of 14.4 years.

In 2023, we renewed leases on 1.7 million square feet, representing a tenant retention rate of 79.7%. Most of these lease renewals were for our Defense/IT Portfolio, which had a retention rate of 85.7%, while our Other segment had a retention rate of 25.3%. The cash rents for our renewals (totaling $34.69 per square foot) increased on average by approximately 1.5% and the straight-line rents (totaling $34.69 per square foot) increased on average by approximately 9.3% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of approximately 4.8 years, with average escalations per year of 2.6%, and the per annum average committed costs associated with completing the leasing was approximately $3.16 per square foot.

In 2023, we also completed leasing on 452,000 square feet of vacant space, predominantly for our Defense/IT Portfolio. The cash rents of this leasing totaled $34.87 per square foot and the straight-line rents totaled $35.10 per square foot; these leases had a weighted average lease term of approximately 8.2 years, with average escalations per year of 2.5%, and the per annum average committed costs associated with completing this leasing was approximately $9.41 per square foot.

Lease Expirations

The table below sets forth as of December 31, 2023 our scheduled lease expirations based on the non-cancelable term of tenant leases determined in accordance with generally accepted accounting principles for our properties by segment/sub-segment in terms of percentage of annualized rental revenue: