Easterly Government Properties, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Easterly is an internally managed REIT that primarily owns and develops commercial properties leased to U.S. Government agencies.
Business context and portfolio
- At year-end, the company owned 79 operating properties with approximately 7.3 million leased square feet; the portfolio was 99% leased. One additional property, a 162,000-square-foot FDA laboratory in Atlanta, was under development.
- Weighted-average remaining lease term was 8.2 years. U.S. Government agencies represented 98.5% of annualized lease income in the tenant table; another property table reports 99.6% for government-leased properties. Investors should note the differing presentations.
- The VA, FBI and DEA together accounted for approximately 44.5% of annualized lease income. California properties represented 24.8% of annualized lease income.
Financial performance
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total revenue | $245.1 million | $221.7 million | Up $23.4 million, or approximately 10.5% |
| Rental income | $238.1 million | $208.5 million | Up $29.6 million, primarily from acquisitions and a development property entering service |
| Net income | $13.5 million | $8.2 million | Up $5.3 million; 2020 included a $4.0 million property-sale loss, versus a $6.2 million gain in 2019 |
| Net income attributable to Easterly; diluted EPS | $12.0 million; $0.15 | $7.2 million; $0.10 | Share count increased during the year |
| FFO; FFO as Adjusted | $111.3 million; $106.1 million | $94.4 million; $92.8 million | Supplemental, non-GAAP measures; not measures of cash flow or liquidity |
| Operating cash flow | $145.2 million | $142.3 million | Up $2.9 million |
| Cash and cash equivalents | $8.5 million | $12.0 million | Additionally, $370.7 million was available on the revolving credit facility |
| Total debt principal | $983.4 million | $905.4 million | Debt increased; net carrying amount was $978.3 million after financing fees and adjustments |
The 2020 GAAP net margin was approximately 5.5%, calculated as net income divided by total revenue; the comparable 2019 margin was approximately 3.7%. This calculation is not a company-reported operating margin.
- Operating expenses totaled $192.1 million, including $93.8 million of depreciation and amortization, $48.4 million of property operating costs and $27.1 million of real estate taxes. Net interest expense was $35.5 million, up $2.0 million year over year.
- Investing cash outflow was $290.2 million, principally $232.7 million for real estate acquisitions, $43.0 million for development and $18.0 million for operating-property additions. Financing cash inflow was $144.1 million, including $162.0 million in common-share proceeds and $79.3 million in net revolving-credit draws; dividends and distributions paid were $91.7 million.
- Quarterly common dividends remained $0.26 per share throughout 2020, or $1.04 for the year. The board declared a further $0.26 fourth-quarter dividend in February 2021.
Material changes versus prior year
- Revenue increased mainly due to nine operating-property acquisitions and a development property placed in service, as well as the full-year contribution from properties acquired or completed in 2019. Tenant reimbursements fell $5.7 million, largely because of lower tenant-project reimbursements and related project-management income.
- Expenses rose $5.8 million, mainly reflecting acquired properties, higher real estate taxes and depreciation. Higher interest expense primarily reflected the $275 million of senior notes issued in 2019.
- The company acquired nine operating properties in 2020 for an aggregate purchase price of $252.7 million, compared with eight properties for $382.6 million in 2019. It sold DEA–Otay in November 2020, recognizing a $4.0 million loss; it had sold CBP–Chula Vista in 2019 at a $6.2 million gain.
- Common shares outstanding increased from 74.8 million at year-end 2019 to 82.1 million at year-end 2020. The company issued 7.0 million shares during 2020 through its ATM programs and forward sales.
Liquidity, debt and outlook
- Management expected cash, operating cash flow, available credit and other funding sources to cover anticipated requirements for the next 12 months, including debt service, tenant improvements and REIT distributions. The company reported compliance with all debt covenants at December 31, 2020.
- Debt had a 6.6-year weighted-average maturity and a 3.6% weighted-average interest rate; 90.3% was fixed-rate, including term loans fixed through swaps, and 20.8% was secured. The revolving facility had $79.3 million drawn and $370.7 million available, with a June 2022 maturity and two conditional six-month extension options.
- Scheduled principal maturities included $84.5 million in 2022, $171.3 million in 2023 and $114.1 million in 2024. Management identified no known commitments or events expected to have a material impact on liquidity as of the filing date.
- As of December 31, 2020, 22.8% of annualized lease income and 23.2% of portfolio square footage was scheduled to expire by the end of 2023. Tenants at 17 leases, representing 4.3% of leased square feet and 4.0% of annualized lease income, had exercisable early-termination rights.
- No specific earnings, acquisition, FFO or dividend guidance for 2021 is provided in the supplied filing text. Management said the COVID-19 impact on the business and financial condition had not been significant to date, while emphasizing uncertainty around future effects.
Risks, contingencies and unusual items
- Revenue is highly concentrated in U.S. Government leases and a limited set of agencies. Risks include nonrenewals, agency mission or workforce changes, budget impasses or shutdowns, and early termination rights. Government leases are supported by the Federal Buildings Fund as described in the filing, but delays in payments remain possible.
- California concentration exposes the portfolio to regional market conditions and natural disasters. The company also cites development cost and schedule risk, competition, property illiquidity, environmental and insurance exposure, and potential impairment charges.
- Debt and capital-market risks include refinancing, covenant and interest-rate exposure. $95.0 million of debt was variable-rate at year-end; the company had six interest-rate swaps with $250.0 million aggregate notional value. The filing discusses transition risks from the planned discontinuation of LIBOR.
- Forward sales for 3.75 million shares remained unsettled at December 31, 2020; the company estimated approximately $97.3 million of net proceeds if fully physically settled, subject to adjustments. Subsequent to year-end it entered into additional forward sales for 359,289 shares, with estimated net proceeds of approximately $8.1 million.
- The company reported no material litigation, no material off-balance-sheet arrangements, and no material tax liability for the years presented. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Reconcile the reported government share of annualized lease income (98.5% in the tenant table versus 99.6% in another property disclosure) and confirm the relevant denominator and treatment of mixed-tenant properties.
- Review near-term lease expirations, soft-term termination rights and renewal outcomes, particularly for leases expiring in 2021–2024 and large agency tenants.
- Track ATM issuance and settlement of forward sales, including dilution, actual proceeds and the timing of share delivery.
- Assess refinancing and covenant headroom around the 2022–2024 maturities, variable-rate exposure and the transition from LIBOR.
- Evaluate acquisition accounting estimates and development execution, including the Atlanta FDA project, as well as California property concentration and disaster exposure.
- Compare future cash generation with debt service, capital spending and distributions; the filing reports $8.5 million of cash and continued quarterly dividends but does not provide specific forward earnings guidance.