Easterly Government Properties, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited. The company completed its IPO and formation transactions on February 11, 2015; therefore, reported results combine predecessor activity before that date with the post-IPO company, and are not directly comparable with Q1 2014.
Business context
Easterly is an internally managed REIT focused on acquiring, developing and managing commercial properties, primarily leased to U.S. Government agencies through the GSA. At quarter-end, it owned 29 properties totaling approximately 2.1 million square feet; all were leased. Government tenants accounted for approximately 96% of Q1 rental income. The company intended to qualify as a REIT beginning with tax year 2015.
Financial highlights
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $10.1 million | $1.1 million |
| Operating income (loss) | $(2.2) million | $(0.1) million |
| Net income (loss) | $(8.0) million | $7.4 million |
| Net income (loss) attributable to Easterly | $(2.9) million; $(0.22) per share | $6.5 million; per-share amount not presented |
| Operating cash flow | $(1.4) million | $(28.3) million |
| Cash and cash equivalents at period-end | $11.9 million | — |
Q1 2015 revenue included $9.3 million of rental income and $0.8 million of tenant reimbursements. Expenses included $1.4 million of acquisition costs, $1.6 million of formation expenses, and $4.9 million of depreciation and amortization. Net loss included a $5.1 million unrealized investment loss; Q1 2014 included a $7.5 million unrealized gain under the predecessor’s former investment-company accounting.
Management presented pro forma results as if the formation transactions had occurred on January 1, 2014: rental revenue was $18.5 million in both Q1 2015 and Q1 2014, while net income was $1.1 million versus a $1.9 million loss, respectively. These unaudited pro forma figures are not necessarily indicative of actual or future results.
FFO was $2.0 million and FFO, as Adjusted, was $4.5 million. These are supplemental non-GAAP measures, not substitutes for GAAP results or cash flow.
Balance sheet, debt and liquidity
- Total assets were $780.1 million and total liabilities were $142.7 million at March 31, 2015. Total equity was $637.4 million.
- Total debt was $100.9 million: $69.4 million of fixed-rate mortgage debt and $30.9 million drawn on a $400 million unsecured revolving credit facility. The facility allows up to $250 million of additional capacity, subject to conditions.
- The company reported $369.1 million of remaining revolver availability and $11.9 million of cash. It stated that expected sources of cash would cover anticipated needs for the next 12 months.
- Q1 cash flows were $(1.4) million from operations, $(14.0) million from investing, and $(4.2) million from financing, resulting in a $19.5 million decrease in cash. Financing included IPO and private-placement proceeds and substantial repayment of predecessor debt.
- The company repaid or defeased approximately $293.4 million of secured nonrecourse mortgage loans in connection with the formation and IPO. It was in compliance with its credit-facility covenants at quarter-end.
Material changes, outlook and risks
- The February IPO sold 13.8 million shares at $15 each, producing approximately $191.6 million in net proceeds. A concurrent private placement generated approximately $105.5 million. The transactions and property contributions materially changed the company’s scale, capital structure and accounting basis.
- On April 1, 2015, the company closed on the acquisition of a 115,650-square-foot, fully GSA-leased property in Lakewood, Colorado, for approximately $20.3 million; $20.2 million had been deposited at quarter-end.
- The board declared a first-quarter dividend of $0.11 per share and per operating-partnership unit, payable June 3, 2015 to holders of record May 18, 2015. The credit agreement limits distributions, and REIT qualification generally requires distribution of at least 90% of REIT taxable income.
- Management identified dependence on U.S. Government tenants and spending, lease renewals and early-termination rights, property and acquisition risks, financing and interest-rate risks, and real-estate concentration as key risks. Seven tenants, representing approximately 20.5% of rentable area and 22.7% of annualized lease income, had rights to terminate before stated lease expirations. California represented approximately 33% of annualized lease income.
- The company had no material litigation, no material off-balance-sheet arrangements, and reported no material change in risk factors from its 2014 Form 10-K. It disclosed an eight-year tax-protection agreement covering certain Western Devcon contributed properties. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Review the post-IPO, pro forma results and accounting changes when assessing comparisons with Q1 2014; reported periods reflect different accounting bases and operating durations.
- Assess the sustainability of cash generation and the capacity to fund dividends, acquisitions and debt service, given negative Q1 operating cash flow and remaining revolver availability.
- Verify tenant concentration, lease expiration and soft-term termination exposure, particularly the share of income dependent on government agencies and California properties.
- Monitor compliance with debt covenants, floating-rate exposure, refinancing needs and the terms of the $400 million revolving facility.
- Track completion and performance of the Lakewood acquisition and the company’s progress toward REIT qualification for 2015.