Easterly Government Properties, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter earnings report.
Business context
Easterly is an internally managed REIT that acquires, develops and operates commercial properties leased primarily to U.S. Government agencies. At year-end it owned 81 operating properties and held interests in nine more through a joint venture, totaling approximately 8.8 million leased square feet (8.3 million at Easterly’s pro rata share). The portfolio was 97% leased, with a 10.5-year weighted-average remaining lease term.
U.S. Government agencies represented 97.3% of annualized lease income. The VA, FBI and DEA together accounted for 53.2% of annualized lease income. The company also had one property under development, FDA–Atlanta, expected to provide approximately 162,000 square feet under a 20-year lease.
Financial performance and position
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Total revenue | $287.2 million | $293.6 million |
| GAAP net income | $21.1 million | $35.6 million |
| Net income attributable to Easterly | $18.8 million | $31.5 million |
| Diluted EPS | $0.19 | $0.34 |
| FFO | $119.0 million | $129.7 million |
| Core FFO | $120.1 million | $130.9 million |
| Cash provided by operating activities | $114.5 million | $125.9 million |
FFO and Core FFO are supplemental, non-GAAP measures and are not measures of cash flow or liquidity. Rental income declined to $273.9 million from $284.5 million; management attributed the decrease mainly to the 2022 sale of ten properties, partly offset by acquired properties. Interest expense rose to $49.2 million from $47.4 million, primarily due to higher average borrowings and rates on swapped term loans.
Cash used in investing activities was $127.0 million, mainly for acquisitions, property additions, development and joint-venture investment. Financing activities provided $17.2 million, including equity proceeds and term-loan and revolver borrowings, partly offset by $112.4 million of dividends and debt repayments. Dividends declared remained $1.06 per common share for the year, or $0.265 quarterly.
At December 31, total debt principal was approximately $1.300 billion; the balance-sheet carrying amount was $1.295 billion. Weighted-average debt maturity was 4.6 years and weighted-average interest rate was 4.2%. Approximately 93.9% of debt was fixed-rate, including term loans fixed through swaps; 6.1% was variable-rate. The company had $79.0 million drawn on its $450 million revolving facility, leaving $370.9 million available. Cash and cash equivalents were $9.4 million, plus $12.6 million of restricted cash.
Material changes and notable events
- Revenue declined 2.2%; GAAP net income fell by $14.5 million and diluted EPS declined from $0.34 to $0.19.
- 2022 results included a $13.6 million gain on property sales and a $5.5 million impairment charge; neither item recurred in 2023. No impairment charges or property dispositions were reported in 2023.
- The company acquired three wholly owned properties for $63.1 million. Its joint venture acquired a ninth VA portfolio property, and Easterly expects the final acquisition in that portfolio in 2024.
- The company issued 1.95 million shares under its ATM program for $39.3 million net proceeds and settled 2.309 million shares under prior forward sales for $46.8 million net proceeds. Shares also increased through common-unit redemptions.
- William C. Trimble III retired as CEO and President effective December 31, 2023. Darrell Crate became CEO, Meghan Baivier became President and COO, and Allison Marino became CFO and Chief Accounting Officer, effective January 1, 2024.
Outlook, risks and contingencies
Management said expected cash flows and available borrowing capacity should be adequate for the next 12 months, including debt service, tenant improvements, development, acquisitions and REIT distributions. No numerical earnings or FFO guidance is provided. A $100 million 2016 term loan scheduled to mature in March 2024 was extended after year-end to January 30, 2025. Management also expected to acquire the final VA portfolio property through the joint venture in 2024.
- Tenant and lease concentration: Dependence on federal agencies exposes the business to agency mission or space changes, lease nonrenewals, government shutdowns and budget impasses. Leases representing 13.7% of annualized lease income expire by the end of 2026. Tenants with 6.9% of annualized lease income had exercisable early-termination rights at year-end.
- Debt and refinancing: Significant indebtedness, interest rates, refinancing availability and covenant compliance could affect liquidity, distributions and growth. The company reported compliance with applicable debt covenants at year-end.
- Geographic and property exposure: California represented 20.2% of annualized lease income; natural disasters, climate change, insurance costs, construction inflation and property operating costs could affect results.
- Development and joint venture: Cost overruns, delays, financing constraints and partner-related risks may affect projects or returns.
- REIT and distributions: REIT qualification requires ongoing compliance and distributions generally of at least 90% of taxable income. The board determines future dividend amounts, and distributions may require borrowing or asset sales.
- Other disclosures: The company reported no material litigation and no known cybersecurity incident that had materially affected, or was reasonably likely to materially affect, the business. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Lease expiration and soft-term exposure, especially agency-level renewals and the concentration in VA, FBI and DEA tenants.
- Near-term debt maturities, refinancing plans and the effect of interest rates on borrowing costs and dividend capacity.
- Whether operating cash flow and FFO support the $1.06 annual dividend, considering capital needs and REIT distribution requirements.
- Progress, remaining funding needs and expected returns for FDA–Atlanta and the final VA joint-venture acquisition.
- The impact of share issuance and common-unit conversions on per-share results and ownership dilution.
- The distinction between unrestricted cash ($9.4 million) and total cash including restricted cash ($21.9 million), alongside the stated $370.9 million of revolver availability.