Easterly Government Properties, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company is a REIT focused on owning and managing commercial properties leased primarily to U.S. Government agencies. Unless otherwise stated, financial amounts below are in millions.
Business context and portfolio
- At quarter-end, the company wholly owned 78 operating properties and held interests in eight properties through an unconsolidated joint venture (JV), totaling approximately 8.6 million leased square feet. Operating properties were 98% leased.
- The U.S. Government accounted for approximately 98.4% of annualized lease income. One wholly owned property was under development, expected to encompass about 0.2 million leased square feet upon completion.
- Annualized lease income was $303.2 million ($284.7 million at the company’s pro rata share); weighted-average annualized lease income was $35.25 per leased square foot ($34.92 pro rata).
Financial performance and position
| Metric | Q1 2023 | Q1 2022 or prior date |
|---|---|---|
| Total revenue | $71.2 | $72.3 |
| Net income | $4.4 | $8.3 |
| Net income attributable to company; diluted EPS | $3.9; $0.04 | $7.3; $0.08 |
| Net cash provided by operating activities | $21.6 | $24.1 |
| Funds from operations (FFO) | $29.1 | $33.1 |
| Core FFO | $29.5 | $33.3 |
| FFO, as Adjusted | $29.0 | $32.0 |
| Dividends declared per common share | $0.265 | $0.265 |
- Net margin was approximately 6.2%, compared with 11.4% in Q1 2022, based on reported net income and revenue.
- At March 31, total assets were $2.82 billion and total liabilities were $1.38 billion. Debt principal outstanding was $1.223 billion (net carrying amount $1.219 billion); weighted-average maturity was 5.5 years and weighted-average interest rate was 3.7%.
- Debt was 96% fixed-rate and 4% variable-rate. The revolving facility had $49.5 million drawn and $400.4 million available; an additional $50 million was available under the 2018 term loan delayed-draw feature. The company reported compliance with all debt covenants.
- Cash and cash equivalents were $8.9 million, with restricted cash of $11.6 million. Management cited $20.5 million of cash and cash equivalents and $400.4 million of revolver capacity in its liquidity discussion.
Changes versus the prior comparable period
- Revenue declined $1.1 million, mainly because of ten property dispositions since March 31, 2022, partly offset by three acquisitions. Rental income fell $2.3 million; tenant reimbursements and JV asset-management income increased.
- Total expenses rose $2.4 million, primarily from higher property operating costs and employee costs. Interest expense increased $1.1 million, reflecting higher rates and greater revolver borrowings.
- Net income declined $3.8 million. FFO, Core FFO and FFO, as Adjusted also decreased year over year.
- Operating cash flow fell $2.5 million. Investing cash outflow was lower than in Q1 2022, when the company invested $21.7 million in the JV. Financing shifted to a $7.9 million cash outflow from a $1.5 million inflow, including dividends, mortgage repayments and net revolver paydowns, partly offset by equity proceeds.
Outlook, risks and notable items
- No specific earnings or operating guidance was provided. Management said it expects available cash, operating cash flow, JV distributions, borrowing capacity and other funding sources to cover anticipated uses for the next 12 months.
- The JV had acquired eight of ten planned VA Portfolio properties by quarter-end. The company reported a remaining JV capital commitment of $64.2 million.
- Scheduled debt maturities include $100 million of term debt and mortgage notes due in 2024. The company used $15.7 million of cash to extinguish the DEA–Pleasanton mortgage in January 2023.
- In Q1, the company issued 2.309 million shares under previously entered forward sale agreements for approximately $46.8 million net proceeds and settled 250,000 shares under the 2019 ATM program for $5.6 million. It also had forward sales for 1.7 million additional shares expected to produce about $36.7 million net proceeds if physically settled; settlement dates ran from June to December 2023.
- Lease expirations include 3.4% of portfolio leased square footage in 2023 and 6.9% in 2024. Separately, 19 tenants, representing about 6.6% of leased square feet and 6.5% of annualized lease income, had exercisable early-termination rights. Management said it did not believe tenants were likely to terminate early.
- Key disclosed risks include dependence on federal tenants and government leasing/spending decisions, real-estate and development risks, interest rates and refinancing, and geographic exposure: California represented 19.9% of annualized lease income. Management stated that inflation had not materially affected historical results and that operating-expense escalations and contractual rent increases may partly offset cost inflation.
- The company recorded a $0.1 million natural-disaster event expense, net of recovery, and $0.5 million of acquisition-related expenses. It reported no material litigation, no significant subsequent events, and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Investor facts to verify
- How the company will refinance or repay 2024 maturities, and the effect of prevailing rates on borrowing costs.
- Whether scheduled lease expirations and tenants’ early-termination rights result in renewals, vacancies or changed rents.
- Completion timing, remaining funding needs and investment returns for the VA Portfolio JV and FDA–Atlanta development.
- Expected dilution and proceeds from outstanding forward sales and any future ATM issuance, alongside the unchanged $0.265 quarterly dividend.
- Whether government concentration, California exposure, operating-cost increases and property-level capital needs affect occupancy, cash flow or distributions.
FFO measures are non-GAAP supplemental measures and are not substitutes for GAAP results or cash flow; the company notes that peer calculation methods may differ.