Easterly Government Properties, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company is a REIT focused on commercial properties leased primarily to U.S. government agencies. Financial amounts below are in millions, except per-share data and where noted.
Business context and portfolio
- At quarter-end, the company owned 78 operating properties and held an interest in nine properties through an unconsolidated joint venture; the portfolio encompassed approximately 8.6 million leased square feet and was 97% leased.
- Approximately 98.5% of annualized lease income came from the U.S. Government. One wholly owned property was under development, expected to comprise approximately 0.2 million leased square feet.
- The JV acquired VA–Corpus Christi in September, its ninth of ten planned VA properties; the company expects the final acquisition in 2024.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $72.0 | $75.0 | $214.6 | $220.1 |
| Net income | $6.1 | $0.7 | $16.3 | $17.1 |
| Net income attributable to Easterly | $5.4 | $0.6 | $14.4 | $15.2 |
| Basic and diluted EPS | $0.06 | $0.01 | $0.15 | $0.16 |
| FFO | $30.0 | $32.4 | $89.1 | $98.8 |
| FFO, as Adjusted | $28.9 | $33.3 | $87.1 | $98.9 |
- Q3 rental income declined $4.4 million, primarily reflecting ten property dispositions since September 2022; higher tenant reimbursements partially offset the decline. Nine-month rental income fell $10.1 million.
- Q3 net income increased versus 2022 partly because the prior-year quarter included a $5.5 million impairment loss on ICE–Otay. Nine-month net income and FFO were lower year over year.
- Q3 interest expense was $12.0 million, versus $12.4 million; nine-month interest expense increased to $35.7 million from $34.7 million. Nine-month cash interest paid was $33.8 million, up from $25.8 million.
- Nine-month operating cash flow was $96.9 million, compared with $103.8 million. Investing activities used $48.7 million, versus $189.3 million; financing activities used $32.1 million, versus generating $86.9 million.
- At September 30, cash and cash equivalents were $20.7 million, restricted cash was $12.8 million, and unused revolver capacity was $449.9 million. Total assets were $2.83 billion and total equity was $1.44 billion.
- Debt principal was approximately $1.22 billion, with a 5.0-year weighted-average maturity and 4.0% weighted-average interest rate. The company reported all debt as fixed-rate after swaps and stated it was in compliance with debt covenants.
- Quarterly dividends remained $0.265 per share; $0.795 per share was declared for the first nine months. Common shares outstanding increased to 95.1 million from 90.8 million at year-end, including issuances under forward sales and the ATM program.
Outlook, risks, and notable items
- Management said anticipated cash sources should cover liquidity needs for the next 12 months, including debt service, property investment, acquisitions and distributions. No numerical earnings or FFO guidance was provided.
- Management identified $46.5 million of remaining capital commitment to the JV. It also noted the final VA Portfolio acquisition is anticipated in 2024.
- A $100 million term loan matures in March 2024; mortgage maturities include $51.5 million in August 2024 and $8.5 million in April 2024. Refinancing and interest-rate risks remain relevant despite the reported fixed-rate position.
- Nineteen tenants, representing approximately 8.1% of leased square feet and 7.7% of annualized lease income, had exercisable early-termination rights. Management said it did not believe early termination was likely, citing mission-critical use and property characteristics.
- Key risks include dependence on government tenants and spending, lease renewals and termination rights, real estate operating and development risks, access to capital and refinancing, joint-venture commitments, and geographic exposure: California represented approximately 19.8% of annualized lease income.
- After quarter-end, the company acquired facilities in Anaheim, California; Atlanta, Georgia; and Newport News, Virginia. No material litigation was reported; management reported effective disclosure controls and no material changes to previously disclosed risk factors.
- The CEO adopted a Rule 10b5-1 plan permitting sales of up to 120,000 shares from December 14, 2023 through December 14, 2024, subject to plan limitations.
Important facts for investors to verify
- Lease expirations, renewal activity, and potential exercise of early-termination rights, particularly among government tenants.
- Funding and refinancing plans for 2024 debt maturities, and sensitivity of future borrowing costs to interest rates.
- Actual costs, funding needs, and timing for the JV’s remaining acquisition and the company’s development and capital projects.
- Whether revenue and FFO trends stabilize after property dispositions, and the effects of share issuance and dividend obligations on per-share performance.
- Reconcile reported GAAP cash flows with FFO and FFO, as Adjusted; the filing cautions these non-GAAP measures are not measures of cash flow or liquidity.