Easterly Government Properties, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. The company is a REIT focused on U.S. government-leased commercial properties. It owned 85 operating properties and held interests in four through an unconsolidated joint venture (JV); properties were 99% leased.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $72.3 million | $65.0 million | +$7.3 million |
| Rental income | $70.4 million | $64.2 million | +$6.3 million |
| Total expenses | $53.8 million | $48.0 million | +$5.8 million |
| Net income | $8.3 million | $7.9 million | +$0.4 million |
| Net income attributable to Easterly | $7.3 million | $7.0 million | +$0.4 million |
| Basic and diluted EPS | $0.08 | $0.08 | No change |
| Operating cash flow | $24.1 million | $26.0 million | −$1.9 million |
| FFO, as Adjusted (non-GAAP) | $32.0 million | $28.3 million | +$3.7 million |
Revenue growth primarily reflected five properties acquired since March 2021 and a full quarter of operations from three properties acquired in Q1 2021, partly offset by two property dispositions. Expense growth reflected property operating costs, taxes and depreciation associated with the expanded portfolio. Interest expense rose $1.8 million, primarily due to the 2021 senior-note issuance. The filing does not provide a clear operating-margin figure.
Financial position, debt and liquidity
- At March 31, total assets were $2.83 billion and total liabilities were $1.39 billion. Real estate properties, net, were $2.39 billion.
- Debt principal outstanding was approximately $1.24 billion; debt carrying value, net of financing adjustments, was approximately $1.23 billion. Weighted-average debt maturity was 6.5 years and weighted-average interest rate was 3.5%; 95.9% of debt was fixed-rate and 20.4% was secured.
- Cash and cash equivalents were $7.8 million, with an additional $9.5 million of restricted cash. Revolver availability was $414.9 million. The company reported compliance with all debt covenants.
- Investing activities used $28.5 million, including $21.7 million invested in the JV. Financing activities provided $1.5 million; dividends and distributions paid were $27.0 million.
Outlook, developments and risks
- Management said expected cash flows and financing sources should cover anticipated uses for the next 12 months, including debt service, property investment, distributions and possible share repurchases. No numerical earnings or FFO guidance was provided.
- The company expects the JV to acquire the remaining properties in its ten-property portfolio during 2022 and 2023. Its March 31 investment in the JV was $152.4 million, with capital commitments of $152.9 million. The JV acquired a VA field office in Birmingham, Alabama, on April 1, 2022.
- On April 28, the board authorized repurchases of up to 4,538,994 shares, approximately 5% of outstanding shares; purchases are discretionary and may be suspended or discontinued.
- The $0.265-per-share Q1 dividend was declared April 27 and scheduled for payment May 25, 2022. The reported Q1 2022 dividend declaration is subsequent to the quarter-end.
- U.S. government tenants represented approximately 97.6% of annualized lease income. California properties represented approximately 21.0%. Management cited government-spending and tenant-concentration exposure, real-estate and acquisition risks, financing and interest-rate risks, natural disasters, and potential impacts from COVID-19. Management said the pandemic had not significantly affected the business to date.
- Some leases have early-termination “soft-term” rights: 20 tenants, accounting for about 6.1% of leased area and 5.7% of annualized lease income, had exercisable rights before stated lease expirations. Management did not consider early termination likely, citing mission-critical use and property characteristics.
- LIBOR transition remains a risk for applicable borrowings and swaps after June 30, 2023; the company noted that replacement rates could increase borrowing costs. A 25-basis-point movement in variable rates was estimated to change annual interest expense by about $0.1 million.
Most important facts for investors to verify
- Whether property and JV acquisitions proceed on schedule, and how they are funded.
- Lease renewals and termination exposure, particularly near-term expirations and soft-term rights.
- Debt maturities, refinancing costs, variable-rate exposure and the LIBOR-to-replacement-rate transition.
- Cash available after dividends, capital needs, JV commitments and any discretionary share repurchases.
- Performance of adjusted FFO relative to GAAP results; FFO and FFO, as Adjusted are supplemental non-GAAP measures, not measures of cash flow or liquidity.