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COLUMBIA, MD-Its tenants may not be as glamorous as some, but analysts say that Corporate Office Properties Trust stands to perform solidly with its tenant base of government agencies, according to two new reports issued last week by Milwaukee-based Robert W. Baird & Co. COPT is a specialty office REIT that focuses on tenants in the US government, defense information technology and data sectors.

COPT’s tenants tend to be stable and long-term, one of the factors that Baird analysts Christopher R. Lucas, Avi Lerner and David S. Nebinski cite in their generally optimistic outlook regarding the REIT. The analysts say “while we are less bullish on office companies generally,” that they believe COPT’s focus on the federal government and its contractors “insulates it from typical landlord concerns such as credit and demand risk.”

The REIT generates nearly 50% of its revenue from the government and its contractors. It expects to generate at least 40% of demand for development activity over the next 24 months from that core tenant base. What’s more, the Baird analysts anticipate that COPT’s development will accelerate over the next five years due to projected new demand from the government and its contractors.

The reports say COPT has developed into the premier provider of office space to key agencies of the federal government, building a reputation for quality customer service leading to “a higher-than-industry-average retention rate” for its tenants. By keeping its tenants, the Baird analysts point out, COPT lowers both the amount of capital that it needs to spend to bring in and build-out space for new tenants as well as limiting the down-time associated with retrofitting space for new tenants.

COPT owns its properties principally in eight major markets: the Baltimore-Washington, DC Corridor, Suburban Maryland, Southern Maryland, Northern Virginia, Greater Harrisburg, Greater Philadelphia, Northern and Central New Jersey, San Antonio and Colorado Springs, CO. Washington, DC is an example of why the concentration of government tenants bodes well for the REIT, according to Baird.

“The strong Washington, DC economy has and will continue to, in our view, outperform the national economy on job growth, unemployment, economic and wage growth due to strong federal government investment and a highly educated work force,” findings conclude in one report. Since job growth or lack of job growth is one of the chief drivers of office space demand, Baird’s team sees the DC area as a plus for COPT, especially in comparison with the US office market n generally.

In addition to its existing buildings, COPT for the quarter ending March 31 had 11 buildings under construction at an estimated cost of $214 million. The 1.1 million sf is 26.4% preleased.

The REIT has an additional nine buildings under development, but not yet under construction. The 897,000 sf will cost about $181 million to develop. The pipeline includes two redevelopment projects, totaling 493,000 sf, that have been allocated $56 million. One of the new projects is InterQuest Office Park along the Interstate 25 northeast submarket of Colorado Springs, where COPT recently preleased 73,000 sf.

The Baird analysts point out that their “investment thesis for REITs operating multi-tenant properties is straightforward.” They explain, “We favor companies that operate in good economic markets, in sectors with favorable demand and supply characteristics.” COPT fits those requirements, with “properties strategically located in key government and government contracting submarkets,” according to the Baird reports. The REIT owns 230 properties totaling 17.9 million sf.

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