Easterly Government Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 7, 2017. The company is an internally managed REIT focused on commercial properties leased primarily to U.S. Government agencies. At quarter-end it owned 46 operating properties, totaling about 3.7 million square feet, and two properties under development. Operating properties were 100% leased to 24 tenants.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $33.9 million | $27.0 million | $94.3 million | $75.9 million |
| Operating income | $6.4 million | $3.2 million | $14.9 million | $9.2 million |
| Net income | $0.9 million | $1.1 million | $3.3 million | $3.3 million |
| Net income attributable to the company | $0.8 million | $0.9 million | $2.7 million | $2.3 million |
| Diluted EPS | $0.02 | $0.02 | $0.07 | $0.07 |
| FFO, as Adjusted (non-GAAP) | $13.4 million | $13.1 million | $40.5 million | $36.3 million |
| Operating cash flow | Not presented by quarter | $42.8 million | $36.2 million |
Q3 operating margin was approximately 19.0%, versus 11.8% a year earlier; the nine-month margin was approximately 15.8%, versus 12.2%. These are calculated as operating income divided by revenue. Nine-month dividends declared were $0.74 per common share, up from $0.68.
Balance sheet, debt and liquidity
- Total assets were $1.368 billion at September 30, 2017, up from $1.045 billion at December 31, 2016. Real estate properties, net, were $1.196 billion.
- Total debt was about $539.9 million principal outstanding (reported carrying value: $536.1 million). Weighted-average maturity was 8.5 years and weighted-average interest rate was 3.6%; 86.1% was fixed-rate and 38.1% secured.
- Debt included $59.3 million drawn on the revolving facility, a $100 million term loan swapped to a 3.17% fixed rate, $175 million of senior unsecured notes, and $205.7 million of mortgage principal. Available revolver capacity was $340.7 million, with an accordion allowing facility capacity up to $650 million.
- Cash and cash equivalents were $6.6 million; restricted cash was $3.9 million. Management said it expected cash flows and available funding sources to meet anticipated liquidity needs for the next 12 months. The company reported compliance with debt covenants.
Changes and management commentary
- Q3 revenue increased $6.9 million year over year, primarily from properties acquired since Q3 2016; expenses rose $3.6 million. Nine-month revenue increased $18.5 million, while expenses rose $12.8 million.
- Net income was nearly flat for the nine-month period as higher operating income was largely offset by a $5.7 million increase in interest expense. Q3 net income fell $0.2 million despite higher operating income, also reflecting higher interest expense.
- During the first nine months, the company acquired three operating properties and one property under development for an aggregate operating-property purchase price of approximately $337.6 million. Acquisitions included the VA Loma Linda property, acquired for $212.6 million and financed in part with a $127.5 million mortgage.
- Investing activities used $352.6 million, principally for acquisitions; financing activities provided $311.4 million. The company issued $175 million of senior unsecured notes and raised equity, including approximately $92.7 million gross proceeds from settling forward sales and $14.3 million net proceeds through its ATM program.
- U.S. Government tenants accounted for approximately 97.4% of rental income. Five tenants, representing about 12.5% of rentable area and 11.4% of annualized lease income, had exercisable early-termination rights. The filing notes that some leases have “soft-term” provisions but management did not believe early termination was likely.
Outlook, risks and unusual items
No specific earnings or FFO guidance was provided. Management described liquidity as adequate for anticipated needs over the next 12 months. Principal stated risks include dependence on U.S. Government tenants and spending, lease termination or nonrenewal, acquisition and development execution, refinancing and interest-rate exposure, debt covenant compliance, and real estate, weather and natural-disaster risks. Fourteen properties were in California, representing approximately 34.0% of annualized lease income; the filing highlights potential exposure to regional economic conditions and natural disasters. Management reported no material litigation, no material off-balance-sheet arrangements, and no significant subsequent events. Risk factors were unchanged from the 2016 Form 10-K.
Important facts for investors to verify
- Whether acquisition-driven revenue growth translates into durable per-share cash earnings as interest expense and depreciation rise.
- Debt maturities, refinancing capacity, covenant headroom, and the costs or dilution associated with additional debt or equity funding.
- Tenant retention, renewal outcomes, and the five tenants’ early-termination rights, including lease expirations concentrated in 2018–2021.
- Exposure to U.S. Government leasing decisions and California concentration, including potential disaster and regional-market impacts.
- FFO and FFO, as Adjusted are non-GAAP supplemental measures, not measures of cash flow or liquidity; compare their reconciliation and dividend coverage with GAAP cash flows.