Easterly Government Properties, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The unaudited results are not necessarily indicative of full-year performance. Easterly is an internally managed REIT focused on properties leased primarily to U.S. Government agencies.
Business context
At quarter-end, the company owned 88 operating properties and held an interest in seven properties through an unconsolidated joint venture, representing approximately 9.1 million leased square feet. The portfolio was 99% leased; the U.S. Government represented approximately 97.9% of annualized lease income. One wholly owned property was under development.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $75.0 million | $69.6 million | $220.1 million | $203.2 million |
| Net income | $0.7 million | $9.0 million | $17.1 million | $26.2 million |
| Net income attributable to Easterly | $0.6 million | $8.0 million | $15.2 million | $23.2 million |
| Diluted EPS | $0.01 | $0.09 | $0.16 | $0.27 |
| FFO | $32.4 million | $31.0 million | $98.8 million | $92.4 million |
| FFO, as Adjusted | $33.3 million | $29.2 million | $98.9 million | $86.7 million |
Revenue growth reflected acquired properties and, for the nine-month period, JV asset-management income. GAAP net income fell despite higher revenue, principally reflecting higher interest expense, a $5.5 million impairment charge on ICE–Otay, and the prior-year benefit from property-sale gains. The impairment followed lower expected cash flows related to the tenant’s lease expiration. FFO and adjusted FFO increased year over year; these are non-GAAP supplemental measures, not measures of cash flow or liquidity.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $103.8 million, versus $94.5 million a year earlier. Investing activities used $189.3 million, including $93.7 million for acquisitions and $71.3 million invested in the JV. Financing activities provided $86.9 million.
- At September 30, cash and cash equivalents were $11.0 million and restricted cash was $10.5 million. Management cited $21.5 million in cash and cash equivalents and $272.1 million of revolver availability.
- Total debt principal was approximately $1.375 billion; 85.9% was fixed-rate and 14.1% variable-rate. Weighted-average interest rate was 3.7%, and weighted-average maturity was 5.6 years. The revolving facility had $177.8 million drawn and $272.1 million available. The company reported compliance with all debt covenants.
- A 25-basis-point change in rates on variable-rate debt was estimated to change annual interest expense by approximately $0.5 million. LIBOR-linked contracts extending beyond June 2023 will require transition to a replacement rate, with potential cost and contract-transition uncertainty.
- The company paid $81.8 million in dividends and distributions during the nine-month period. The board declared a Q3 dividend of $0.265 per share, payable November 23, 2022.
Material changes and notable events
- During the first nine months, Easterly acquired three wholly owned properties for an aggregate purchase price of approximately $108.1 million. Its JV acquired three properties, bringing the portfolio acquired by the JV to seven of ten planned properties.
- After quarter-end, the company completed the sale of nine properties from a ten-property portfolio for an aggregate agreed price of approximately $205.3 million. It expected to close on the remaining property before year-end, subject to customary conditions. Proceeds were used to repay the $5.8 million mortgage on one sold property; management intended to use additional proceeds to pay down the revolver.
- As of September 30, the planned disposition properties had a $187.1 million carrying value and did not qualify for held-for-sale classification. The sale price is not itself reported as a realized gain in this quarter’s results.
- In April 2022, the board authorized repurchases of up to 4,538,994 shares, approximately 5% of outstanding shares at authorization. No shares had been repurchased through September 30.
Outlook, commentary and risks
Management stated that expected cash flows and available capital sources should provide adequate funds for anticipated needs over the next 12 months, including debt service, tenant improvements, distributions, acquisitions and possible repurchases. The filing provides no specific earnings, revenue or FFO guidance. Management said COVID-19 had not had a significant impact on the business to date, while noting that future effects remain uncertain. It also stated that inflation had not materially affected historical results and that lease expense escalations and contractual rent increases may partly offset higher costs.
Key risks include dependence on the U.S. Government for substantially all revenue, lease termination and renewal risk, real estate and development risks, interest-rate and refinancing exposure, JV execution, and market and capital availability. Nineteen tenants, representing approximately 6.6% of leased square feet and 6.8% of annualized lease income, had exercisable early-termination rights. The company noted that it did not believe early termination was likely, but the rights remain contractual. Management also disclosed geographic concentration: California represented approximately 19.7% of annualized lease income.
Investor verification points
- Confirm closing of the remaining disposition property and the final net proceeds, gains or losses, and application of proceeds to debt.
- Track ICE–Otay’s tenant outcome, lease status, valuation assumptions and any further impairment or sale.
- Review revolver borrowings, variable-rate exposure, debt maturities and the financial impact of the LIBOR transition.
- Monitor lease expirations and early-termination rights, especially the 2023–2025 expirations, and the ongoing 99% occupancy level.
- Assess JV acquisition funding and the remaining $136.5 million capital commitment against liquidity and planned distributions.
- Compare future GAAP results with FFO and adjusted FFO, and verify whether dividend levels remain supported by operating cash flow and REIT distribution needs.