Easterly Government Properties, Inc. — Q2 2018 Form 10-Q
Business context and period. This unaudited filing covers the three and six months ended June 30, 2018. Easterly is an internally managed REIT focused on commercial properties leased primarily to U.S. Government agencies. At quarter-end it owned 47 operating properties, reported as 100% occupied by 24 tenants, and three properties under development. The U.S. Government represented approximately 98.7% of rental income.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $37.0 million | $30.6 million | $72.9 million | $60.5 million |
| Operating income | $7.2 million | $4.9 million | $14.6 million | $8.9 million |
| Net income | $1.7 million | $1.2 million | $3.5 million | $2.7 million |
| Net income attributable to Easterly | $1.4 million | $1.0 million | $3.0 million | $2.2 million |
| Diluted EPS | $0.02 | $0.02 | $0.05 | $0.05 |
| FFO, as Adjusted | $14.3 million | $13.5 million | $28.1 million | $27.1 million |
Q2 revenue rose about 21% year over year, primarily from acquired properties and higher tenant project reimbursements; six-month revenue rose about 21%. Operating expenses also increased, while interest expense rose to $5.5 million in Q2 and $11.1 million for the half, mainly reflecting debt issued or drawn in 2017. FFO, as Adjusted is a non-GAAP supplemental measure and is not a measure of cash flow or liquidity.
For the six months, operating cash flow was $28.6 million, investing cash outflow was $44.1 million, and financing cash inflow was $153.1 million. Cash and cash equivalents were $147.5 million at June 30, compared with $12.7 million at year-end 2017; including restricted cash, the period-end total was $153.8 million. Dividends and distributions paid were $29.2 million.
Total debt principal was approximately $487.8 million; balance-sheet debt, net of financing costs and other adjustments, was $484.2 million. Debt had a weighted average maturity of 8.8 years and weighted average interest rate of 3.8%; 96.8% was fixed-rate and 43.6% secured. The company reported compliance with debt covenants. It had $450 million available on its revolver and an undrawn $150 million term loan facility. Management said expected cash flows and available capital were adequate for anticipated needs over the next 12 months.
Material changes and capital allocation
- Revenue growth was primarily acquisition-driven. Operating income improved, but higher expenses and interest costs absorbed part of the revenue increase. Basic EPS declined to $0.02 from $0.03 in Q2, while diluted EPS was unchanged at $0.02.
- In June, Easterly completed an offering of 13.7 million shares for approximately $252.9 million net proceeds and entered forward sales agreements for 7.0 million additional shares. If physically settled in full, those agreements were expected to provide a further $129.3 million net proceeds by December 21, 2018. The ATM program had approximately $32.3 million of gross capacity remaining at quarter-end.
- The company amended its unsecured credit facility, increasing total capacity to $600 million: a $450 million revolving facility and a $150 million delayed-draw term loan. The revolver includes a potential accordion of up to $250 million, subject to conditions.
- Quarterly dividends were $0.26 per common share, up from $0.25 in the comparable 2017 quarter. The board declared another $0.26 dividend on August 1, 2018.
- Prior-period results were revised for a nonmaterial useful-life error affecting depreciation and amortization. The revision increased reported 2017 net income; Q2 2017 net income increased by $190,000 and six-month 2017 net income by $381,000.
Outlook, risks and unusual items
- A definitive agreement was signed to acquire a 14-property, 1.48-million-square-foot portfolio for approximately $430 million. The portfolio was 99% leased overall and 94% leased to the federal government. Closings were expected on a rolling basis from August through December 2018, subject to customary conditions; completion and timing were not assured. A $15 million nonrefundable deposit had been paid.
- After quarter-end, the company acquired a 90,085-square-foot VA property in San Jose, California, fully leased for an initial non-cancelable 20-year term.
- Management provided no specific earnings or FFO guidance. It cited U.S. Government spending and leasing decisions, property operations and development, vacancies and lease expirations, acquisition execution, financing and interest-rate exposure, and natural disasters among key risks. Four tenants, representing approximately 6.1% of rentable area and 4.4% of annualized lease income, had rights to terminate before stated lease expirations. California accounted for approximately 32.8% of annualized lease income.
- Interest-rate swaps with $100 million aggregate notional effectively fixed the 2016 term loan rate at 3.17%. A 25-basis-point move in rates on variable-rate debt was estimated to change annual interest expense by less than $0.1 million.
- The filing reported no material litigation, no material off-balance-sheet arrangements, and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor facts to verify
- Whether and when the $430 million portfolio acquisition closed, and its eventual financing and contribution to revenue and cash flow.
- Settlement of the forward share sales, including proceeds and resulting dilution; also monitor remaining ATM capacity and share count.
- Acquisition-driven operating growth against rising interest expense, per-share results, and dividend coverage.
- Federal tenant concentration, lease termination rights and near-term expirations, plus California property concentration.
- Available liquidity, debt covenant compliance, floating-rate exposure, and funding needs for development and acquisitions.