Easterly Government Properties, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Easterly is an internally managed REIT that acquires, develops and operates commercial properties leased primarily to U.S. Government agencies.
Business context and portfolio
- At year-end, the company owned 62 operating properties totaling approximately 5.3 million square feet; the portfolio was 100% leased. It also had two properties under development, expected to total approximately 129,000 square feet.
- U.S. Government agencies accounted for 98.8% of annualized lease income. Weighted-average remaining lease term was 7.6 years.
- California represented 30.1% of annualized lease income. Three agencies—the VA, FBI and DEA—accounted for 46.8% of annualized lease income.
Financial results and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $160.6 million | $130.7 million | Up $29.9 million, or 22.9% |
| Net income, consolidated | $6.7 million | $5.4 million | Up $1.3 million |
| Net income available to Easterly, diluted EPS | $5.7 million; $0.08 | $4.4 million; $0.10 | Net income rose; diluted EPS fell |
| Operating cash flow | $62.8 million | $49.2 million | Up $13.6 million |
| FFO | $73.1 million | $60.6 million | Up $12.5 million |
| FFO, as Adjusted | $64.6 million | $54.8 million | Up $9.8 million |
| Dividends declared per common share | $1.04 | $1.00 | Up $0.04 |
GAAP net income was about 4.1% of revenue in 2018. This calculation is a simple ratio, not a company-reported margin. FFO and FFO, as Adjusted are supplemental non-GAAP measures and are not measures of cash flow or liquidity.
- Year-end cash and cash equivalents were $6.9 million, plus $4.3 million of restricted cash. Available capacity on the revolving credit facility was $315.2 million.
- Debt principal outstanding was $770.9 million; debt carrying value, net of fees and other adjustments, was $766.4 million. The company reported net debt to total enterprise value of 41.1%, a weighted-average debt maturity of 6.7 years and a weighted-average interest rate of 3.7%.
- Of debt principal, 80.5% was fixed-rate and 19.5% variable-rate. The company had $250 million of interest-rate swaps. It reported compliance with applicable debt covenants.
- Investing activities used $466.7 million, principally for acquisitions and development. Financing activities provided $398.9 million, including common-stock issuance and borrowings.
Material changes versus the prior comparable period
- Revenue growth primarily reflected 15 operating-property acquisitions and a development property placed in service since year-end 2017, together with a full year of operations from properties acquired in 2017.
- Expenses rose $23.1 million, including higher property costs, real estate taxes and depreciation associated with portfolio expansion. Interest expense increased $5.8 million to $22.9 million, partly reflecting notes and loans added in 2017 and 2018.
- Common shares issued and outstanding increased to 60.8 million from 44.8 million. The 2018 public offering generated approximately $252.9 million in net proceeds from shares sold directly; forward sales agreements covering 7.0 million shares were expected to be settled by June 21, 2019, subject to settlement choices and terms.
- Principal debt increased to $770.9 million from $580.0 million. Despite higher consolidated net income, diluted EPS declined to $0.08 from $0.10, reflecting a substantially larger weighted-average share count.
- Fourth-quarter revenue was $48.2 million versus $36.3 million in fourth-quarter 2017. Net income available to Easterly was $0.6 million versus $1.3 million, and basic and diluted EPS were $0.01 versus $0.03.
Outlook, risks and unusual items
- Management said anticipated cash flows and available sources of capital were expected to cover uses over the next 12 months, including debt service, tenant improvements and REIT distributions. It reported no known commitments or events expected to materially affect liquidity; this is management’s assessment, not formal earnings guidance.
- Near-term lease expirations are significant: leases representing approximately 33.3% of annualized lease income and 36.9% of portfolio square footage were scheduled to expire by the end of 2021. Eight leases, covering about 6.0% of rentable area and 4.4% of annualized lease income, had exercisable early-termination rights at year-end.
- Key risks include dependence on federal tenants and budgets, agency-level tenant concentration, lease renewals and early termination, California geographic concentration and natural disasters, acquisition and development execution, refinancing and interest-rate exposure, and REIT qualification and distribution requirements.
- In 2018 the company acquired 15 operating properties for an aggregate purchase price of approximately $412.0 million and placed the FEMA–Tracy development into service under a 20-year lease. The remaining three properties in a 14-property acquisition portfolio closed on January 31, 2019.
- The 2018 adoption of revenue-recognition guidance did not materially affect the financial statements. The company expected adoption of the new lease standard in 2019 to recognize a $1.3 million right-of-use asset and lease liability for its office leases.
- No material litigation was reported. Management and the external auditor concluded that internal control over financial reporting was effective as of year-end; the auditor also issued an unqualified opinion on the financial statements.
Investor facts to verify
- Lease-expiration and soft-term schedules, renewal status and any changes in federal agency space requirements.
- Settlement and final proceeds from the 7.0 million forward-sale shares, alongside the effect of equity issuance on per-share results.
- Acquisition integration, completion and leasing of development projects, and the economics of the 2019 portfolio closings.
- Debt covenant headroom, variable-rate exposure, refinancing needs and the timing of upcoming debt maturities.
- Cash available for distributions relative to the dividend and REIT taxable-income distribution requirements; GAAP earnings and FFO are not interchangeable with distributable cash.