Easterly Government Properties, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company is an internally managed REIT focused on owning and developing properties leased mainly to U.S. government agencies. At quarter-end it owned 83 operating properties totaling approximately 7.5 million leased square feet; occupancy was 99% and 98.6% of annualized lease income came from U.S. government tenants.
Key financial results
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $69.6 | $61.1 | $203.2 | $179.9 |
| Net income | $9.0 | $4.8 | $26.2 | $10.9 |
| Net income attributable to company | $8.0 | $4.3 | $23.2 | $9.6 |
| Diluted earnings per share | $0.09 | $0.05 | $0.27 | $0.12 |
| FFO | $31.0 | $28.3 | $92.4 | $81.6 |
| FFO, as Adjusted | $29.2 | $27.2 | $86.7 | $78.7 |
| Dividends declared per common share | $0.265 | $0.260 | $0.785 | $0.780 |
Q3 total revenue rose 13.9% year over year, while net income increased $4.2 million. For the first nine months, revenue grew 13.0% and net income increased $15.3 million. Growth was primarily associated with acquired properties; gains on two property sales contributed $1.3 million to nine-month income. FFO and FFO, as Adjusted are non-GAAP supplemental measures, not substitutes for GAAP results or measures of liquidity.
Cash flow, balance sheet and capital
- Cash flow, nine months: Operating activities provided $94.5 million, down from $108.6 million. Investing used $127.5 million, including $115.4 million for acquisitions; financing provided $42.1 million. Cash and restricted cash increased $9.1 million to $23.7 million.
- Liquidity: Cash and cash equivalents were $16.1 million, with $337.5 million available under the revolving credit facility at September 30. Management stated it expected available sources to meet anticipated uses for the next 12 months.
- Debt: Debt principal was $1,013.7 million, with a 6.5-year weighted-average maturity and 3.5% weighted-average interest rate. 87.4% was fixed-rate and 12.6% variable-rate; 19.8% was secured. The balance-sheet carrying amount of debt was $1,008.2 million. The company reported compliance with all debt covenants.
- Equity: Common shares outstanding increased from 82.1 million at year-end 2020 to 86.1 million at September 30, 2021. The company issued shares through forward sales and ATM programs; additional unsettled forward sales were outstanding.
- Assets and equity: Total assets were $2,556.0 million and total equity was $1,370.7 million at quarter-end.
Material changes and notable items
- During the first nine months, the company acquired six operating properties for an aggregate $134.0 million and sold two properties, recognizing $1.3 million in aggregate gains. Acquired properties contributed $5.4 million of revenue and $1.2 million of net income during the period.
- Q3 property operating expenses rose $2.9 million, real estate taxes rose $0.8 million, and corporate general and administrative costs rose $1.3 million year over year. Interest expense increased $0.7 million in Q3 and $1.2 million for the nine-month period, primarily due to greater revolver borrowings and lower capitalized interest.
- On July 23, the company amended its unsecured credit agreement, increasing total facility capacity by $50 million to $650 million, including a $450 million revolver and a $200 million term loan facility.
- After quarter-end, the Operating Partnership issued $250 million of senior unsecured notes: $50 million at 2.62% due 2028 and $200 million at 2.89% due 2030.
- After quarter-end, a joint venture formed with a global investor began acquiring a ten-property VA portfolio for a contractual $635.6 million. The company holds a 53% interest, subject to adjustment, and expects the remaining acquisitions to close on a rolling basis through the end of 2023. Two properties had closed by October 13.
- Subsequent acquisitions included a USCIS facility in Kansas City on October 14, with $51.5 million of mortgage debt assumed, and a VA facility on November 1.
Outlook, risks and contingencies
- No specific earnings or operating guidance was provided. Management expected cash, operating cash flow, available credit, debt and equity issuance, and asset sales to fund anticipated needs over the next 12 months.
- Management said the COVID-19 pandemic had not significantly affected the business to date, but its future impact remained uncertain. The company continued tenant and employee safety measures and cybersecurity investments.
- Tenant concentration is substantial: U.S. government agencies represented 98.6% of annualized lease income. California properties accounted for 23.4% of annualized lease income. The filing identifies government spending or leasing changes, tenant loss, real estate and development risks, financing and interest-rate exposure, and natural disasters among material risks.
- Some leases have early-termination “soft-term” provisions. Seventeen tenants, representing approximately 5.9% of leased square feet and 5.4% of annualized lease income, had exercisable early-termination rights at quarter-end; management said it did not believe early termination was likely.
- Interest-rate swaps had an $8.5 million liability fair value. The company estimated $5.2 million would be reclassified from accumulated other comprehensive loss as increased interest expense over the next 12 months. It also noted the planned transition away from LIBOR and said the effects were uncertain.
- The company reported no material off-balance-sheet arrangements, no material litigation, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the unsettled forward share sales and subsequent $250 million note issuance have been completed and how proceeds were deployed.
- Progress, funding requirements, ownership terms and closing timetable for the VA portfolio joint venture, including the remaining eight properties.
- Lease renewal, termination and vacancy exposure, particularly near-term expirations and leases with soft-term rights.
- Changes in government tenant concentration and California exposure, and any effects on rent collections or property operations.
- Debt levels, variable-rate exposure, covenant compliance, and the impact of LIBOR replacement on loans and hedges.
- Whether operating cash flow and dividend coverage remain adequate as acquisition, development and financing activity continues.