Easterly Government Properties, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Amounts below are in U.S. dollars unless noted.
Business context
Easterly is an internally managed REIT focused on acquiring, developing and managing properties leased primarily to U.S. Government agencies. At quarter-end, it owned 74 operating properties, all reported 100% leased, totaling approximately 6.9 million square feet, plus two properties under development. The U.S. Government represented 98.4% of annualized lease income.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $60.5m | $52.7m | $118.7m | $103.4m |
| Net income | $4.2m | $6.5m | $6.1m | $6.0m |
| Net income attributable to Easterly | $3.7m | $5.6m | $5.4m | $5.2m |
| Basic and diluted EPS | $0.05 | $0.08 | $0.07 | $0.08 |
| FFO, as Adjusted | $27.0m | $22.5m | $51.5m | $43.2m |
- Q2 revenue growth was primarily driven by acquired properties and a development property placed in service. Q2 net income declined from 2019, which included a $6.2m gain on a property sale.
- For the first six months, rental income rose $17.1m; total expenses increased $7.3m and interest expense increased $1.8m. Adjusted FFO rose about 20% for both Q2 and the six-month period.
- Operating cash flow was $75.6m in the first half, versus $38.4m a year earlier. Investing used $139.6m; financing provided $61.9m. Operating cash flow included a significant increase in deferred lease revenue and other working-capital movements.
- At June 30, cash and cash equivalents were $8.9m, restricted cash was $4.5m, and the $450m revolving facility was undrawn and available. Management said anticipated sources of capital were expected to cover needs for the next 12 months.
- Total debt principal was approximately $906.0m ($900.5m net carrying value); weighted-average maturity was 7.6 years and weighted-average interest rate 3.7%. About 98.3% was fixed-rate or hedged; all debt covenants were met. No debt was scheduled to mature until 2022.
- Assets totaled $2.36bn and total equity was $1.28bn. The quarterly dividend was $0.26 per share, unchanged from 2019; $0.26 for Q2 was declared after quarter-end.
Material changes, outlook and risks
- Four operating properties were acquired in the first half for an aggregate purchase price of $123.6m. The company also had two laboratory developments underway, expected to total approximately 221,700 square feet.
- Common shares outstanding increased to 79.7m from 74.8m at year-end 2019. First-half common-stock issuance generated $109.3m in cash proceeds. Forward sales for 3.35m shares remained unsettled at June 30; the company estimated approximately $87m of net proceeds if physically settled in full, subject to adjustments.
- Management reported that COVID-19 had not significantly affected the business to date, citing continued rental payments and essential operations by many federal tenants. The ultimate effects remained uncertain and could affect leasing, construction, property values, capital access and private tenants.
- Key exposures include dependence on federal tenants, lease expirations and early-termination rights, real estate and development risks, financing and interest-rate risks, and geographic concentration: California accounted for 26.6% of annualized lease income. Eighteen tenants had exercisable early-termination rights covering about 4.0% of annualized lease income.
- Interest-rate swaps had a $15.4m liability at quarter-end; the company estimated $5.1m would be reclassified from accumulated other comprehensive loss as additional interest expense over the next 12 months. The company also noted uncertainty around the transition from LIBOR after 2021.
- No numerical earnings or FFO guidance was provided. The filing reported no material litigation or material off-balance-sheet arrangements, and management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether federal rent collections, renewals and tenant operations remain stable, especially for leases expiring in 2020 and 2021 and leases with soft-term termination rights.
- How much of reported operating cash flow reflects recurring property cash generation versus timing and working-capital changes.
- Debt covenant headroom, refinancing plans and the effects of swap liabilities and LIBOR transition on future interest expense.
- Potential dilution and proceeds from outstanding forward equity sales, alongside the pace and funding of acquisitions and development.
- Whether COVID-19, construction delays, impairment risk or private-tenant weakness materially changes the company’s stated assessment of limited impact to date.