Easterly Government Properties, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. The company is an internally managed REIT focused on U.S. Government-leased commercial properties.
Business context
At quarter-end, the company owned 82 operating properties totaling approximately 7.5 million leased square feet, with 99% occupancy, plus one property under development. U.S. Government tenants represented 98.6% of annualized lease income. During the quarter, the company acquired three properties for approximately $64.1 million; it acquired a further U.S. Attorney’s Office property in April.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $65.0 million | $58.2 million |
| Net income | $7.9 million | $1.9 million |
| Net income attributable to company; diluted EPS | $7.0 million; $0.08 | $1.7 million; $0.02 |
| FFO; FFO, as Adjusted | $30.2 million; $28.3 million | $25.5 million; $24.4 million |
| Cash from operating activities | $26.0 million | $38.5 million |
| Cash used in investing activities | $72.1 million | $53.3 million |
| Cash from financing activities | $44.6 million | $17.8 million |
Revenue increased $6.8 million, principally reflecting acquisitions and a development property placed in service. Expenses rose $0.6 million, while net income increased $6.0 million. Operating cash flow fell by $12.5 million; management attributed the comparison partly to working-capital movements, including unusually strong cash-flow contributions from those movements in Q1 2020. FFO and adjusted FFO are non-GAAP supplemental measures, not substitutes for GAAP results or cash flow.
At March 31, total debt principal was approximately $1.012 billion, with a weighted-average interest rate of 3.5% and weighted-average maturity of 6.2 years. Debt was 87.7% fixed-rate and 12.3% variable-rate; secured debt was 20.3%. Cash and cash equivalents were $6.3 million, and revolving-credit availability was $341.0 million. The company reported compliance with debt covenants. Total assets were $2.508 billion and total equity was $1.327 billion.
Changes and notable items
- Rental income increased $7.6 million year over year, primarily from properties acquired or placed in service since March 2020; tenant reimbursements declined $0.8 million.
- Q1 investing outlays included $63.0 million for acquisitions, $5.6 million for operating-property additions, and $3.4 million for development. Financing included $40.4 million of share proceeds and net revolving-credit-facility draws of $29.8 million.
- The company issued 1.56 million shares through forward-sale settlements for approximately $40.0 million net proceeds. A further 2.95 million shares were subject to unsettled forward sales; estimated net proceeds upon full physical settlement were approximately $72.1 million, subject to adjustments.
- Quarterly dividends declared were $0.26 per share, unchanged from Q1 2020. The board declared a $0.26 Q1 2021 dividend payable in May.
- Interest-rate swaps produced a $1.8 million unrealized gain in other comprehensive income, compared with a $9.8 million unrealized loss in Q1 2020. The company estimated $5.2 million would be reclassified from accumulated other comprehensive loss as higher interest expense over the next 12 months.
Outlook, commentary, and risks
Management stated that available liquidity and expected cash flows should cover anticipated uses for the next 12 months, including debt service, tenant improvements, distributions, and other obligations. No formal earnings or operating guidance was provided. Management said the COVID-19 pandemic had not had a significant impact on the business or financial condition to date, while noting that future effects remain uncertain.
Key exposures include dependence on the U.S. Government for substantially all revenue; real-estate, acquisition, development, refinancing, and interest-rate risks; and potential tenant early termination under “soft-term” provisions. Seventeen tenants, representing approximately 4.3% of leased square feet and 4.0% of annualized lease income, had exercisable early-termination rights. Leases representing 7.7% of annualized lease income were scheduled to expire in 2021. California accounted for 23.9% of annualized lease income. The company also noted the planned phaseout of USD LIBOR after June 30, 2023 and uncertainty around the transition. Management reported no material litigation, no material off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Lease renewals, extensions, or terminations for the 2021 expirations and other leases with soft-term rights.
- Timing and actual proceeds from the unsettled forward-sale transactions, including resulting share dilution.
- Acquisition and development spending, and whether acquired or completed properties deliver expected rental income.
- Refinancing and interest-rate exposure, covenant headroom, and the transition from LIBOR to a replacement benchmark.
- Dividend coverage and the company’s ability to fund distributions alongside acquisitions, capital needs, and debt obligations.