Easterly Government Properties, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; dollar amounts are in millions unless stated otherwise.
Business context
Easterly is an internally managed REIT focused on acquiring, developing and operating properties leased primarily to U.S. Government agencies. At quarter-end it owned 76 operating properties totaling approximately 7.0 million rentable square feet; the portfolio was 99% leased. The company also had one property under development. The U.S. Government represented 98.5% of annualized lease income.
Financial highlights
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $61.1 | $57.6 | $179.9 | $160.9 |
| Net income | $4.8 | $0.6 | $10.9 | $6.6 |
| Net income attributable to Easterly | $4.3 | $0.5 | $9.6 | $5.8 |
| EPS, basic and diluted | $0.05 | $0.01 | $0.12 | $0.08 |
| FFO | $28.3 | $23.9 | $81.6 | $69.1 |
| FFO, as Adjusted | $27.2 | $23.7 | $78.7 | $66.9 |
Q3 revenue increased 6.2%; net income attributable to Easterly rose to $4.3 million. For the first nine months, revenue increased 11.8%. Nine-month net income benefited from higher rental income, partly offset by increased expenses and interest costs; 2019 results included a $6.2 million property-sale gain that did not recur in 2020. FFO and adjusted FFO are non-GAAP measures and are not measures of cash flow or liquidity.
Rental income rose $6.5 million in Q3 and $23.6 million for the nine months, primarily reflecting acquired properties and a development property placed in service. Nine-month interest expense increased $1.9 million to $26.5 million, largely due to notes issued in 2019. Q3 net income margin was approximately 7.9%, compared with 1.0% a year earlier; nine-month margin was approximately 6.1%, versus 4.1%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $108.6 million, down from $119.4 million. Investing used $181.3 million, primarily for acquisitions and property development; financing provided $71.0 million. Cash and restricted cash ended the period at $13.9 million.
- At September 30, cash and cash equivalents were $9.0 million, and the $450.0 million revolving credit facility was undrawn and available. Management said expected sources of liquidity should cover anticipated uses for the next 12 months.
- Total debt principal was $905.1 million ($899.8 million net carrying value); weighted-average maturity was 7.3 years and weighted-average interest rate 3.7%. Approximately 98.3% was fixed-rate, including debt fixed through swaps. The company reported compliance with all debt covenants and no scheduled debt maturity until 2022.
- Cash dividends declared were $0.26 per share for Q3, unchanged from the prior-year quarter; $0.78 per share was declared for the first nine months of both years.
Material changes and notable items
- The company acquired five operating properties during the first nine months for an aggregate purchase price of $150.4 million and acquired adjacent land in Lincoln, Nebraska. Acquired properties contributed $7.1 million of revenue and $2.2 million of net income during the period.
- The FDA–Lenexa development was substantially completed in September and its 20-year GSA lease commenced. A $41.7 million government reimbursement for landlord improvements was recorded as deferred revenue and will be recognized over the lease term.
- Equity issuance was a significant funding source: the company reported $143.2 million in proceeds from common-share issuance in the cash flow statement. At quarter-end, 3.83 million shares remained under unsettled forward-sale agreements, with estimated net proceeds of approximately $99.1 million if physically settled in full. Additional forward sales were entered into after quarter-end.
- Rents receivable increased to $49.2 million from $27.8 million at year-end 2019. The filing does not attribute this balance-sheet increase to a specific cause in the supplied text.
Outlook, risks and contingencies
Management stated that COVID-19 had not significantly affected the business or financial condition to date, citing the government-heavy tenant base and continued rental receipts. It cautioned that future effects remain uncertain and depend on the pandemic, government actions and economic conditions. The filing provides no specific earnings or growth guidance.
Key risks include dependence on government agencies and budgets, lease renewals and early-termination rights, property development and acquisition execution, access to capital, interest-rate and LIBOR transition exposure, and COVID-19 effects. Nineteen tenants had exercisable early-termination rights covering 4.7% of leased area and 4.1% of annualized lease income. California properties generated 25.6% of annualized lease income. The company reported no material litigation and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether elevated rents receivable converts to cash as expected and how it affects operating cash flow.
- Lease expirations and early-termination rights, particularly the 2020–2021 schedule and tenant renewal outcomes.
- Government tenant concentration and any changes in agency leasing, funding or payment behavior.
- Debt covenant headroom, refinancing plans, swap liabilities and the transition from LIBOR.
- Expected proceeds and potential dilution from unsettled forward-share sales, alongside acquisition and development funding needs.
- Whether the company’s stated expectation of adequate liquidity for the next 12 months remains supported by operating cash flow and available credit.