Easterly Government Properties, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. The company is an internally managed REIT focused on U.S. government-leased commercial properties. Unless stated otherwise, amounts are in millions.
Business context and portfolio
- At quarter-end, the company wholly owned 72 operating properties, all reported 100% leased, totaling approximately 6.8 million square feet, plus two properties under development expected to total approximately 0.2 million square feet.
- The U.S. Government accounted for 98.3% of annualized lease income. Annualized lease income was $223.0 million, or $33.05 per leased square foot.
- During the quarter, the company acquired two operating properties for an aggregate purchase price of $51.6 million. It acquired additional VA outpatient facilities in Mobile, Alabama, on April 3 and Chico, California, on April 30.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior period |
|---|---|---|
| Total revenue | $58.2 | $50.6; up $7.6, or approximately 15% |
| Net income (loss) | $1.9 | $(0.5) |
| Net income (loss) attributable to Easterly | $1.7; $0.02 per diluted share | $(0.4); $(0.01) per diluted share |
| Interest expense, net | $8.9 | $8.1 |
| FFO / FFO, as Adjusted | $25.5 / $24.4 | $22.0 / $20.7 |
| Operating cash flow | $38.5 | $14.0 |
| Cash and cash equivalents at quarter-end | $14.5 | $12.0 at December 31, 2019 |
Revenue growth primarily reflected acquired and newly placed-in-service properties. Total expenses rose $4.4 million to $47.4 million, including higher property costs, depreciation and amortization, and corporate general and administrative costs. Management attributed the $0.8 million increase in interest expense mainly to notes issued in 2019, partly offset by lower revolver borrowings and rates. Operating cash flow included $14.4 million from changes in working-capital-related accounts, including deferred lease revenue; it should not be viewed as solely recurring rental cash generation.
- Investing cash outflow was $53.3 million, including $30.3 million for acquisitions and deposits and $18.4 million for development. Financing cash inflow was $17.8 million. Cash, including restricted cash, increased $3.1 million to $18.6 million.
- Total debt principal was $942.9 million; balance-sheet debt, net of financing costs and other adjustments, was $937.2 million. Weighted-average debt maturity was 7.6 years and weighted-average interest rate was 3.7%; 94.5% was fixed-rate and 22.0% secured. No outstanding debt was scheduled to mature before 2022.
- Cash and cash equivalents were $14.5 million, and $414.0 million remained available under the $450 million revolving facility. The company reported compliance with all debt covenants.
- The board declared a $0.26-per-share quarterly dividend, consistent with Q1 2019. Dividends and distributions paid during the quarter totaled $22.1 million.
Material changes, outlook and risks
- COVID-19: Management said the pandemic had not significantly affected the business or financial condition as of the filing, citing continued rent receipts and essential operations among many federal tenants. Nearly all employees had worked remotely since March 13. The eventual impact remained uncertain and could affect collections, leasing, construction schedules and costs, asset values, financing access, and operations.
- Lease and tenant exposure: 19 tenants, representing approximately 4.8% of rentable area and 4.4% of annualized lease income, had exercisable early-termination rights. Scheduled lease expirations represent 10.6% of annualized lease income in 2020 and 11.4% in 2021. Management said it did not believe early termination was likely, but this is not assured. California properties represented 26.3% of annualized lease income.
- Funding and equity: Management expected available cash, operating cash flow, the revolver, and capital markets to fund anticipated needs for the next 12 months. The company sold 200,000 shares under its March 2019 ATM program in Q1 for net proceeds of $4.8 million. At quarter-end, 3.4 million shares were subject to unsettled forward sales, expected to provide approximately $78 million net if physically settled in full, subject to adjustments. Subsequent forward sales for 3.3 million additional shares were expected to provide approximately $88 million net if fully settled.
- Development and hedging: The FDA-Lenexa project received a $20.5 million government progress payment, recorded as deferred revenue pending lease commencement. Interest-rate swaps had a $15.1 million liability; approximately $4.7 million was expected to be reclassified from accumulated other comprehensive loss as increased interest expense over the next 12 months. The company also identified LIBOR transition after 2021 as a risk.
- Management provided no numerical earnings guidance. It cited risks including dependence on government tenants and spending, lease renewals and early termination, real estate development, debt refinancing and covenants, interest rates, COVID-19, and market access. No material litigation or material off-balance-sheet arrangements were reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether government rent collections, lease renewals, and federal tenant operations remain stable as the COVID-19 situation evolves.
- The timing and terms of near-term lease expirations, especially the 2020–2021 expirations and leases with early-termination rights.
- Whether acquisition and development spending, including FDA projects, produces expected occupancy, rent, and cash flow.
- How unsettled ATM forward sales are ultimately settled, the resulting dilution and net proceeds, and the company’s continuing access to capital.
- Debt covenant headroom, refinancing conditions, swap liabilities, and the transition from LIBOR to an alternative reference rate.