Easterly Government Properties, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial amounts below are in U.S. dollars; figures are rounded to millions unless otherwise noted.
Business context
Easterly is an internally managed REIT focused on acquiring, developing and managing commercial properties leased primarily to U.S. Government agencies. At quarter-end, it wholly owned 65 operating properties, reported as 100% leased, totaling approximately 5.6 million square feet, plus two properties under development. The company completed the final three acquisitions in a 14-property portfolio on January 31, 2019.
Financial performance and condition
- Revenue: $50.6 million, up $14.6 million, or about 40.7%, from $36.0 million in Q1 2018. Rental income was $48.5 million.
- Expenses and earnings: Total expenses rose to $43.0 million from $28.6 million; net interest expense increased to $8.1 million from $5.6 million. The company recorded a $0.5 million net loss, compared with $1.8 million net income a year earlier. Loss attributable to Easterly was $0.4 million, or $0.01 per share, versus income of $1.5 million, or $0.03 per share.
- FFO: Nareit funds from operations was $22.0 million, versus $16.4 million. FFO, as Adjusted, was $20.8 million, up from $13.7 million. These are supplemental, non-GAAP measures and are not measures of cash flow or liquidity.
- Cash flow: Operating activities provided $14.0 million, compared with $12.1 million. Investing activities used $168.0 million, primarily for $152.1 million of acquisitions and $18.8 million of development spending. Financing activities provided $156.2 million, including equity proceeds and net revolver borrowing. Cash and restricted cash totaled $13.3 million at quarter-end.
- Debt and liquidity: Total debt principal was $819.8 million; the balance sheet reported debt net of financing costs and other adjustments of $815.4 million. Cash and cash equivalents were $8.7 million, with $265.5 million available on the revolving facility. Management stated that expected sources of cash should meet anticipated needs for the next 12 months. The company was in compliance with debt covenants.
- Debt profile: Weighted-average maturity was 6.2 years and weighted-average interest rate was 3.7%. About 75.6% of debt was fixed-rate, including debt fixed through swaps; 24.4% was variable-rate. Management estimated that a 25-basis-point change in rates on variable-rate debt would affect annual interest expense by approximately $0.5 million.
- Dividend and equity: The declared quarterly dividend was $0.26 per common share, unchanged from Q1 2018. Shares issued and outstanding increased from 60.8 million at December 31, 2018, to 68.0 million at March 31, 2019. The increase included settlement of 6.7 million forward-sale shares for approximately $119.2 million of net proceeds and ATM sales.
Changes versus Q1 2018
- Revenue growth primarily reflected 18 operating properties acquired and one development property placed in service since March 31, 2018. Higher property expenses and depreciation accompanied that growth.
- Interest expense rose $2.6 million, reflecting debt facilities entered into or amended after Q1 2018 and a higher average revolver rate; increased capitalized interest partly offset the increase.
- Net income shifted to a loss. The company also reported a $3.0 million unrealized loss on interest-rate swaps in other comprehensive income, compared with a $1.9 million gain in Q1 2018.
- Operating cash flow increased, while acquisition and development spending drove a substantial increase in investing outflows. Financing shifted from a net cash use to a large source, supported by equity issuance and revolver activity.
Outlook, commentary and risks
- No numerical earnings or acquisition guidance was provided. Management said available cash, operating cash flow, revolver capacity and other potential financing sources were expected to cover anticipated uses over the next 12 months; it reported no known commitments or events expected to materially affect liquidity.
- The company depends heavily on government tenants: the U.S. Government accounted for approximately 98.2% of rental income. Management cited risks including changes in government spending or leasing preferences, tenant loss, acquisition and development execution, real estate and capital-market conditions, interest rates, refinancing and covenant compliance.
- California represented approximately 28.2% of annualized lease income. Fifteen tenants, representing about 5.6% of rentable area and 4.2% of annualized lease income, had exercisable early-termination rights before stated lease expirations; management said it did not expect likely early termination based on property characteristics and tenant missions.
- The company adopted the new lease accounting standard on January 1, 2019. It recorded an approximately $1.3 million operating lease right-of-use asset and liability and a less-than-$0.1 million reduction to retained earnings; management reported no material overall impact.
- There were no material changes to previously disclosed risk factors, no material litigation reported, and no significant subsequent events noted. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the acquired properties and development projects deliver expected rental income and returns, and how related costs affect earnings and FFO.
- Lease expirations and early-termination rights, particularly the 2020–2021 expirations and the concentration of government tenants.
- Debt maturities, variable-rate exposure, revolver usage and covenant compliance, including the effects of refinancing conditions.
- The impact of further share issuance or forward settlements on per-share results and dividend capacity.
- Cash available for dividends and investment needs; FFO and FFO, as Adjusted should be considered alongside GAAP earnings and cash flows, not as substitutes.