Easterly Government Properties, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited. The company completed its IPO and formation transactions on February 11, 2015; reported periods are therefore not directly comparable with 2014, and the accounting basis changed from investment-company fair value accounting to historical-cost accounting.
Business context and portfolio
Easterly is an internally managed REIT focused on acquiring, developing, and managing commercial properties leased primarily to U.S. Government agencies, generally through the GSA. It intends to qualify as a REIT beginning with 2015. At June 30, 2015, it owned 31 properties totaling approximately 2.25 million rentable square feet: 28 leased primarily to government tenants and three leased to private tenants. The portfolio was 100% leased; government agencies represented approximately 96% of Q2 rental income. The company owned 60.9% of its operating partnership.
Key financial results
| Metric | Q2 2015 | Six months 2015 | Comparable 2014 |
|---|---|---|---|
| Total revenue | $19.3 million | $29.3 million | $1.6 million Q2; $2.7 million six months |
| Operating income | $2.3 million | $0.1 million | $1.0 million Q2; $0.9 million six months |
| Consolidated net income (loss) | $1.0 million | $(7.0) million | $40.7 million Q2; $48.1 million six months |
| Net income (loss) attributable to Easterly | $0.6 million; $0.02 per share | $(2.3) million; $(0.12) per share | $(7.9) million Q2; $(1.4) million six months |
| FFO / adjusted FFO | $10.1 million / $9.7 million | $12.1 million / $14.2 million | Not presented for 2014 |
| Cash from operating activities | Not provided for the quarter | $7.0 million | $(27.3) million |
Q2 rental income was $17.6 million, tenant reimbursements $1.6 million, and property operating expenses, real estate taxes, and depreciation and amortization totaled $14.5 million. Six-month operating results include substantial acquisition, formation, and public-company costs: $1.6 million of acquisition costs and $1.7 million of formation expenses. The 2014 comparison includes large unrealized investment gains—$39.7 million for Q2 and $47.2 million for six months—under the predecessor’s former accounting basis. In 2015, the predecessor recorded a $5.1 million unrealized loss before the IPO, partly related to debt payoff valuation. These items make headline year-over-year profit comparisons especially difficult.
Balance sheet, cash flow, debt, and liquidity
- At June 30, 2015, total assets were $783.2 million, total liabilities $148.8 million, and total equity $634.5 million. Cash and cash equivalents were $3.4 million; restricted cash was $1.5 million.
- Reported debt was $102.8 million, comprising $33.4 million drawn on a $400 million unsecured revolving credit facility and $69.4 million of mortgage debt. The revolver had $366.6 million available; its disclosed borrowing rate was 1.59%. The company reported compliance with all facility covenants.
- Mortgage debt was fixed-rate and secured by four properties. Total principal debt maturities were $102.2 million, including $36.6 million in 2019 and $55.4 million thereafter. The company paid off or defeased approximately $293.4 million of prior secured debt in the formation transactions.
- Six-month cash flow included $28.2 million used in investing activities, mainly for two property acquisitions totaling $34.3 million, partly offset by $6.2 million of cash assumed in the formation. Financing activities used $6.9 million, reflecting IPO and private-placement proceeds, debt repayment, distributions, and financing and offering costs. Cash declined by $28.0 million from year-end 2014.
- Management stated that cash, operating cash flow, and available credit were expected to cover anticipated needs for the next 12 months. No material off-balance-sheet arrangements or known liquidity-impacting commitments were reported.
Changes, outlook, risks, and unusual items
- The February IPO raised approximately $191.6 million net; a concurrent private placement generated approximately $105.5 million. The company acquired 29 properties through formation transactions and acquired two additional properties during the period.
- Management provided no specific earnings or acquisition guidance. It identified acquisitions, development, redevelopment, leasing costs, debt service, and distributions as expected uses of capital.
- The board paid a first-quarter dividend of $0.11 per share and declared a second-quarter dividend of $0.21 per share, payable September 3, 2015. REIT qualification generally requires distribution of at least 90% of taxable income; the credit facility also restricts distributions.
- Tenant concentration is a key exposure: approximately 96% of Q2 rental income came from the GSA and other federal agencies. California held 11 properties, representing about 23% of rentable area and 31% of annualized lease income.
- Seven tenants, representing approximately 18.8% of rentable area and 21.3% of annualized lease income, had exercisable early-termination (“soft-term”) rights. Additional rights affecting 4.1% of area and 2.8% of income become exercisable in 2017. Management said it did not expect early termination, but this is not assured.
- Other stated risks include federal budget and leasing decisions, tenant loss or vacancy, property and development risks, refinancing and interest-rate exposure, covenant restrictions, environmental matters, and natural disasters. The company reported no material litigation and no material change to its previously disclosed risk factors.
- The filing states that a 25-basis-point move in variable rates would change annual interest expense by $0.2 million; investors should verify this sensitivity against the disclosed $33.4 million variable-rate borrowing balance.
Important facts for investors to verify
- How much of reported rent and annualized lease income is exposed to federal budget decisions, agency consolidation, and soft-term termination rights.
- Whether the company sustains 100% occupancy and renews or replaces leases approaching expiration, particularly in 2015–2019.
- The basis and timing of the preliminary acquisition-date fair-value allocations, and the effect of depreciation and lease-intangible amortization on reported earnings and FFO.
- Available revolver capacity, covenant headroom, future debt maturities, and the accuracy of the filing’s stated interest-rate sensitivity.
- The ability to fund declared distributions while meeting REIT requirements, debt-service obligations, and planned acquisition or capital needs.
- Comparability of results: 2015 reflects the IPO, acquisitions, noncontrolling interests, and historical-cost accounting, while 2014 includes predecessor investment-company accounting and material fair-value gains.