Easterly Government Properties, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company is an internally managed REIT focused on commercial properties leased primarily to U.S. Government agencies. At quarter-end, it owned 78 operating properties and held interests in eight through a joint venture, with approximately 8.6 million leased square feet and 98% occupancy.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $71.4 million | $72.8 million | $142.6 million | $145.1 million |
| Net income | $5.8 million | $8.1 million | $10.2 million | $16.4 million |
| Net income attributable to Easterly | $5.1 million | $7.2 million | $9.0 million | $14.5 million |
| Diluted EPS | $0.05 | $0.08 | $0.09 | $0.16 |
| FFO, as Adjusted (non-GAAP) | $29.1 million | $33.7 million | $58.1 million | $65.6 million |
- Q2 revenue declined 1.9% year over year and net income declined 28.9%. For the first half, revenue fell 1.7% and net income fell 37.8%.
- Management attributed lower rental income mainly to ten property dispositions since June 30, 2022. Higher tenant reimbursements and joint venture income partly offset the decline.
- Q2 expenses increased $1.3 million, including higher property operating costs and corporate general and administrative expense. First-half expenses rose $3.7 million, led by reimbursable project costs, utilities, and employee costs. Net interest expense increased $1.4 million in the first half, primarily due to higher rates on the revolving facility.
- First-half operating cash flow was $59.1 million, versus $64.4 million a year earlier. Investing activities used $21.0 million, compared with $147.0 million, largely reflecting lower acquisition and JV investment outlays. Financing activities used $33.6 million; dividends paid were $55.6 million and share issuance provided $52.4 million.
Balance sheet, debt, and liquidity
- At June 30, 2023, total assets were $2.81 billion and total liabilities were $1.39 billion. Cash and cash equivalents were $9.8 million, with restricted cash of $12.0 million.
- Total principal debt was approximately $1.226 billion. The company reported a 3.8% weighted-average interest rate, 5.2-year weighted-average maturity, and 99.8% fixed-rate debt. Debt includes $53 million drawn on the revolver, $250 million in term loans, $700 million in senior notes, and approximately $223 million in mortgages.
- Revolver availability was $396.9 million at quarter-end. The company stated it was in compliance with all debt covenants. 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.
- After quarter-end, on July 20, the company drew the remaining $50 million delayed-draw capacity under its 2018 term loan and reassigned part of an interest-rate swap to that borrowing.
- The quarterly dividend was $0.265 per share, unchanged from the prior-year quarter. A $0.265 dividend for Q2 was declared August 2, payable August 29, 2023.
Outlook, risks, and notable items
- Management expects available cash, operating cash flow, JV distributions, borrowing capacity, and other financing sources to cover anticipated needs for the next 12 months. No numerical earnings or FFO guidance was provided.
- The company had one wholly owned property under development, FDA–Atlanta, expected to provide approximately 162,000 leased square feet upon completion. The JV had acquired eight of ten planned VA Portfolio properties and the company reported a remaining JV capital commitment of $64.2 million.
- Approximately 98.5% of annualized lease income came from the U.S. Government. Management identified dependence on government spending and leasing preferences, property and development risks, refinancing and interest-rate exposure, tenant loss, and natural-disaster, climate, insurance, and litigation risks.
- Nineteen tenants, representing approximately 6.6% of leased square feet and 6.5% of annualized lease income, had exercisable early-termination rights. Management said early termination was not considered likely, citing mission-critical uses and build-to-suit features.
- California represented approximately 20% of annualized lease income. The company reported no material litigation, no material changes to previously disclosed risk factors, and no significant subsequent events; disclosure controls were judged effective.
- FFO, Core FFO, and FFO, as Adjusted are supplemental non-GAAP measures and are not measures of cash flow or liquidity. FFO, as Adjusted declined about 13.5% in Q2 and 11.4% in the first half.
Investor verification priorities
- Review upcoming 2024 debt maturities, refinancing plans, and the effect of floating-rate borrowing costs despite the reported fixed-rate hedges.
- Track renewals, extensions, and early-termination exposure for leases expiring in 2023–2025 and for tenants with soft-term rights.
- Verify the timing, capital requirements, and expected returns for completion of the VA Portfolio and FDA–Atlanta development.
- Assess whether occupancy, rental income, and cash generation stabilize after property dispositions and amid higher operating, utility, and corporate costs.
- Monitor dividend coverage using recurring cash flow and the company’s non-GAAP reconciliations; do not treat FFO measures as substitutes for cash flow.
- Consider potential dilution from equity issuance and unsettled forward sales, including the expected approximately $36.7 million net proceeds from 1.7 million shares under the 2019 ATM forward sales.