Easterly Government Properties, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2019. Easterly is a REIT focused on owning, developing and managing commercial properties leased primarily to U.S. Government agencies. At quarter-end, it wholly owned 68 operating properties, all reported 100% leased, totaling approximately 6.3 million square feet, plus two properties under development. The U.S. Government accounted for approximately 98.2% of rental income.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $57.6 million | $39.4 million | $160.9 million | $112.4 million |
| Net income | $0.6 million | $2.5 million | $6.6 million | $6.0 million |
| Net income attributable to company | $0.5 million | $2.2 million | $5.8 million | $5.1 million |
| Basic and diluted EPS | $0.01 | $0.03 | $0.08 | $0.08 |
| FFO, as adjusted | $23.7 million | $16.5 million | $66.9 million | $44.4 million |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $119.4 million | $49.1 million |
At September 30, cash and cash equivalents were $65.4 million; restricted cash was $4.2 million. Debt principal was approximately $908.6 million, including $250 million of term loans, $450 million of senior unsecured notes and $208.6 million of mortgage debt. The $450 million revolving facility was undrawn. Debt had a weighted-average maturity of 8.3 years and weighted-average interest rate of 3.8%; 98.3% was fixed-rate, including debt fixed through swaps. Total assets were $2.224 billion and total liabilities were $1.040 billion.
Quarterly dividends declared were $0.26 per share, unchanged from the prior-year quarter. For the nine months, investing cash outflow was $356.5 million, principally for acquisitions and development; financing cash inflow was $295.6 million. Operating cash flow included a $52.3 million increase in deferred revenue, largely related to a $52.5 million government reimbursement for FDA-Alameda improvements. That payment was recorded as deferred revenue and is recognized over the lease term.
Material changes versus the prior comparable period
- Q3 revenue rose $18.2 million year over year, mainly from acquired properties and properties placed in service. Nine-month revenue increased $48.6 million.
- Q3 net income fell $1.9 million to $0.6 million. Expenses rose $16.5 million, while interest expense increased $3.5 million to $8.5 million; the revenue increase did not fully offset these costs.
- Nine-month net income increased $0.6 million to $6.6 million, including a $6.2 million gain on the sale of CBP-Chula Vista. Interest expense increased $8.6 million year over year.
- Nine-month FFO, as adjusted, increased to $66.9 million from $44.4 million. This is a non-GAAP supplemental measure, not a measure of cash flow or liquidity.
- The company acquired six operating properties for an aggregate purchase price of $316.2 million during the first nine months, sold one property for net proceeds of approximately $19.9 million, and completed FDA-Alameda, commencing a 20-year non-cancelable lease.
- Shares issued and outstanding increased to 73.3 million at quarter-end from 60.8 million at December 31, 2018, reflecting equity issuance and unit conversions.
Outlook, risks and unusual items
Management stated that available cash, operating cash flow, borrowing capacity, debt and equity issuance, and asset sales were expected to provide adequate capital for anticipated needs over the next 12 months. No numerical earnings or FFO guidance was provided in the filing. Management reported compliance with all debt covenants and no known commitments or events expected to materially affect liquidity.
Key exposures include dependence on U.S. Government tenants and spending decisions; lease termination rights in certain “soft-term” leases; real-estate development, acquisition and refinancing risks; interest-rate and capital-market risks; and geographic concentration. Seventeen properties in California represented 26.4% of annualized lease income. The company noted that it considered early termination of soft-term leases unlikely, but this is management’s assessment. It estimated that a 25-basis-point change in rates on variable-rate debt would affect annual interest expense by less than $0.1 million. The transition away from LIBOR after 2021 remained a potential uncertainty.
There was no material litigation reported, and the company reported no material changes to the risk factors in its 2018 Form 10-K. Subsequent to quarter-end, the company sold 810,616 shares under its ATM program for net proceeds of $17.5 million and acquired a fully leased USCIS facility in Tustin, California.
Important facts for investors to verify
- Whether the acquisition-driven rent growth and reported 100% occupancy translate into sustained cash earnings after higher operating costs, depreciation and interest expense.
- The recurring cash-flow contribution: nine-month operating cash flow included a substantial deferred-revenue movement tied to the FDA-Alameda reimbursement.
- Debt principal, refinancing needs, covenant headroom and the company’s capacity to fund development, acquisitions and dividends without further dilution.
- Lease expirations and soft-term termination rights: 17 tenants had exercisable early-termination rights covering approximately 5.9% of rentable area and 4.9% of annualized lease income.
- The sustainability of the $0.26 quarterly dividend relative to cash available for distribution and REIT distribution requirements.