Easterly Government Properties, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 9, 2017. The company is an internally managed REIT focused on owning, acquiring and developing commercial properties leased mainly to U.S. government agencies through the GSA. At quarter-end it owned 44 operating properties, all reported 100% leased, totaling approximately 3.2 million square feet, plus one property under development.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $29.9 million | $24.0 million |
| Operating income | $3.8 million | $3.0 million |
| Net income | $1.35 million | $1.11 million |
| Net income attributable to Easterly | $1.08 million; $0.03 per basic and diluted share | $0.68 million; $0.03 per share |
| Operating cash flow | $10.7 million | $9.9 million |
| FFO / FFO, as Adjusted | $14.4 million / $13.6 million | $12.0 million / $11.5 million |
| Total assets / total equity | $1,078.6 million / $688.0 million | $1,045.5 million / $696.9 million at Dec. 31, 2016 |
| Cash and cash equivalents | $5.2 million | $4.8 million at Dec. 31, 2016 |
| Total debt, carrying value | $337.3 million | — |
Revenue increased 24.7% year over year, principally from properties acquired since Q1 2016 and higher tenant project reimbursements and related management income. Expenses rose 24.8% to $26.1 million, including higher property costs, depreciation and amortization, and corporate costs. Operating margin was approximately 12.6%, versus 12.7% a year earlier. Interest expense rose to $2.4 million from $1.9 million. FFO, as Adjusted, increased approximately 18.8%; management cautions that FFO measures are supplemental, not GAAP cash flow or liquidity measures.
Operating cash flow was $10.7 million; investing cash outflow was $44.5 million, including the $37.0 million OSHA–Sandy acquisition and $7.0 million of acquisition deposits. Financing cash inflow was $34.2 million, reflecting a $100 million term-loan draw, net revolver repayments, mortgage repayment and distributions. Dividends and distributions paid were $11.0 million.
Debt comprised $158.2 million drawn on a $400 million revolving facility, $100 million gross principal on the term loan, and $79.7 million mortgage principal. The revolver had $241.8 million available and a 2.31% stated rate at quarter-end; it matures in February 2019, subject to extension options. The $100 million term loan matures in September 2023; swaps fix its rate at 3.12%. Approximately 51.5% of debt was variable-rate; management estimates a 25-basis-point rate change would affect annual interest expense and cash flows by about $0.4 million. The company reported compliance with debt covenants.
Material developments and outlook
- Acquired the 75,000-square-foot OSHA laboratory in Sandy, Utah, for approximately $37.0 million. The property is fully leased to the GSA under a 20-year lease.
- Agreed to acquire a 327,614-square-foot VA Ambulatory Care Center in Loma Linda, California; the filing reports acquisition deposits but does not state a completed purchase.
- Completed a forward public offering of 4.945 million shares. The company had not initially received proceeds and expected approximately $94 million upon physical settlement, no later than September 27, 2017. A separate $100 million ATM program had no sales to date.
- After quarter-end, the company was awarded a 52,870-square-foot FDA laboratory lease in Lenexa, Kansas, for a 20-year term upon completion.
- Management stated that cash, operating cash flow and available financing were expected to meet anticipated liquidity needs for the next 12 months. No earnings or FFO guidance was provided. The board declared a $0.25-per-share and per-common-unit quarterly dividend, payable June 29, 2017, to holders of record June 14.
Risks, contingencies and unusual items
- Approximately 96.9% of rental income was from the GSA and other federal agencies, creating exposure to government spending, leasing preferences and tenant decisions. The portfolio was 100% occupied, but nine tenants representing approximately 17.5% of annualized lease income had exercisable early-termination rights.
- California accounted for approximately 26.0% of annualized lease income; the filing highlights exposure to regional economic, real estate and natural-disaster risks.
- Future minimum contractual tenant rent payments were $488.6 million. Debt refinancing, interest-rate changes, acquisition and development execution, vacancies, and covenant restrictions are among the stated risks.
- The company reported no material litigation, no material off-balance-sheet arrangements and no material changes to the risk factors in its 2016 Form 10-K. Disclosure controls were deemed effective.
Key facts for investors to verify
- Timing and net proceeds from physical settlement of the 4.945 million-share forward offering, and resulting dilution.
- Completion, price and financing for the Loma Linda acquisition, and execution of the development pipeline.
- Lease renewals or terminations, particularly leases expiring in 2017–2021 and those with soft-term rights.
- Federal tenant concentration, California portfolio exposure, and occupancy and rent collection trends.
- Revolver refinancing or extension before its 2019 maturity, debt covenant headroom, and interest-rate exposure.
- Cash available for the declared dividend and future capital needs; reported FFO measures should not be treated as GAAP cash flow.