Easterly Government Properties, Inc. annual report, FY2019

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Easterly Government Properties, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports fourth-quarter results; it is not a quarterly report. Amounts are in U.S. dollars.

Business context

Easterly is an internally managed REIT that acquires, develops and manages commercial properties leased mainly to U.S. Government agencies. At year-end, it owned 70 operating properties totaling approximately 6.5 million square feet, reported as 100% leased, plus two properties under development expected to add approximately 0.2 million square feet. Government agencies accounted for 99.6% of annualized lease income. The weighted-average remaining lease term was 7.5 years.

Financial and operating results

  • Revenue: $221.7 million, up $61.1 million, or 38%, from $160.6 million in 2018. Rental income was $208.5 million; tenant reimbursements were $10.2 million.
  • Profit: GAAP net income was $8.2 million, versus $6.7 million in 2018. Net income attributable to Easterly was $7.2 million, or $0.10 per diluted share, compared with $5.7 million, or $0.08, in 2018. Net margin was approximately 3.7%.
  • FFO: Nareit FFO was $94.4 million versus $73.1 million in 2018; adjusted FFO was $92.8 million versus $64.5 million. These are non-GAAP supplemental measures, not cash flow or liquidity measures.
  • Cash flow: Operating cash flow was $142.3 million, up from $62.8 million. Investing used $442.3 million, primarily for acquisitions and development; financing provided $304.5 million. Operating cash flow included a $51.6 million increase in deferred revenue and other working-capital movements, so it should not be viewed as recurring rental cash generation alone.
  • Liquidity: Cash and cash equivalents were $12.0 million, with the full $450.0 million revolving facility available at year-end. Management stated it expected cash sources to cover anticipated needs over the next 12 months.
  • Debt: Principal outstanding was approximately $907.8 million; the balance-sheet carrying value was $901.8 million after unamortized financing items. Weighted-average interest rate was 3.8%, weighted-average maturity 8.1 years, and 98.3% of debt was fixed-rate or swapped to fixed. Net debt to total enterprise value was 30.9%. The company reported compliance with debt covenants.
  • Distributions: Common dividends declared were $1.04 per share for 2019, unchanged from 2018. The fourth-quarter dividend of $0.26 was declared in February 2020. 2019 GAAP earnings per share were substantially below the annual dividend per share.

Material changes versus 2018

  • Revenue growth primarily reflected eight operating-property acquisitions and a development property placed in service, as well as a full year of operations from 2018 additions. The company sold one property in 2019.
  • Expenses increased $55.3 million, mainly with the larger portfolio, including higher property operating costs, taxes and depreciation. Interest expense rose $10.6 million to $33.5 million as borrowing levels increased and the company issued $275.0 million of senior notes.
  • Acquisitions included eight operating properties for an aggregate purchase price of $382.6 million. The FDA–Alameda development was completed and its 20-year lease commenced. The CBP–Chula Vista sale generated $19.9 million in net proceeds and a $6.2 million gain.
  • Common shares outstanding increased from 60.8 million to 74.8 million during the year. Equity issuance provided $258.6 million in cash proceeds.

Outlook, risks and unusual items

The filing gives no quantified earnings, FFO or acquisition guidance. Management’s strategy is to pursue government-leased acquisitions and build-to-suit development, renew leases at positive spreads, and control property expenses. It stated that liquidity was expected to be adequate for the coming 12 months and reported no known commitments or events expected to materially affect liquidity.

  • Tenant and lease concentration: Government agencies provide nearly all lease income. The FBI, VA and DEA together represented 43.2% of annualized lease income. Leases representing approximately 28.0% of annualized lease income expire by the end of 2022; some leases also have early-termination rights.
  • Geographic concentration: California represented 26.9% of annualized lease income and 20.5% of rentable area, exposing the portfolio to regional conditions and natural disasters.
  • Financing and capital: Risks include refinancing, covenant compliance, interest-rate changes and the transition from LIBOR. The company had six forward-starting interest-rate swaps with $250 million aggregate notional; swap liabilities and valuation changes affected other comprehensive income.
  • Development and acquisition: Cost overruns, delays, financing availability and tenant-specific improvements could affect returns. PwC identified purchase price accounting for 2019 acquisitions as a critical audit matter because of management estimates and assumptions used in property valuations.
  • Other: REIT qualification and distribution requirements may constrain operating flexibility or require borrowing or asset sales. The filing identifies environmental, insurance, cybersecurity, government shutdown and competition risks. It reports no material litigation and no material off-balance-sheet arrangements.
  • Subsequent events: In January 2020, Easterly acquired a 116,500-square-foot Defense Health Agency facility in Aurora, Colorado, and sold 200,000 shares under its ATM program for net proceeds of $4.8 million.

Important facts for investors to verify

  • Lease expiration and soft-term schedules, particularly the 2020–2022 expirations and tenant termination rights.
  • Tenant and California concentration, including the exposure to the FBI, VA, DEA and regional natural-disaster risks.
  • Recurring operating cash generation after separating working-capital movements, tenant reimbursements and development-related receipts.
  • Dividend coverage using appropriate REIT measures, and the potential dilution and proceeds from ATM and forward-sale share issuances.
  • Debt maturities, secured debt, covenant headroom, LIBOR transition provisions and the effect of interest-rate swaps.
  • Acquisition valuation assumptions and completion, leasing and cost risks for the two development properties.