Easterly Government Properties, Inc. — Q1 2016 10-Q
Reporting period: Three months ended March 31, 2016. The company is an internally managed REIT focused on acquiring, developing, and managing properties leased primarily to U.S. government agencies through the GSA. At quarter-end, it owned 37 properties totaling approximately 2.7 million square feet; all were reported 100% occupied.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $24.0 million | $10.1 million |
| Operating income (loss) | $3.0 million | ($2.2) million |
| Net income (loss) | $1.1 million | ($8.0) million |
| Net income (loss) attributable to Easterly; diluted EPS | $0.7 million; $0.03 | ($2.9) million; ($0.22) |
| Net cash from operating activities | $9.9 million | ($1.4) million |
| Funds from Operations (FFO) | $12.0 million | $2.0 million |
| FFO, as Adjusted | $11.5 million | $4.5 million |
Revenue increased 138%, principally because Q1 2016 included a full quarter of properties contributed in the February 2015 formation transactions, plus subsequent acquisitions. The reported periods are not directly comparable: the company had little meaningful operating history before its February 2015 IPO, and accounting for contributed properties changed from investment-company fair-value accounting to historical cost. Q1 2015 also included a $5.1 million unrealized investment loss and formation/offering-related costs. Operating expenses rose to $20.9 million, including $10.9 million of depreciation and amortization; interest expense increased to $1.9 million as debt levels rose.
Operating margin was approximately 12.7% in Q1 2016 versus negative 21.6% in Q1 2015, but the accounting and portfolio comparability limitations above make this comparison especially qualified. FFO and adjusted FFO are non-GAAP supplemental measures, not measures of cash flow or liquidity.
Cash, debt, and liquidity
- Cash and cash equivalents were $4.4 million at March 31, 2016, down from $8.2 million at year-end 2015. Restricted cash was $1.5 million.
- Total debt was $267.4 million: $184.4 million outstanding on the $400 million revolving credit facility and $83.0 million of mortgage debt. The revolver had $215.6 million available; an accordion feature may increase facility size to $650 million subject to conditions.
- Debt was predominantly floating-rate: 75% variable and 25% fixed, excluding unamortized premiums and discounts. The company estimated that a 25-basis-point change in rates would change annual interest expense by approximately $0.5 million.
- Operating cash flow of $9.9 million compared with $34.2 million used in investing, principally for the $34.1 million ICE–Albuquerque acquisition. Financing provided $20.5 million, including $30.0 million of net revolver draws; dividends and distributions paid were $8.8 million.
- Management stated that cash, operating cash flow, and available financing should cover anticipated needs for the next 12 months. The company reported compliance with debt covenants and no known commitments or events expected to materially affect liquidity. It also had an effective shelf registration statement that could permit up to approximately $500 million of additional equity offerings.
Portfolio, distribution, and risks
- The Albuquerque property was acquired February 17 for $34.1 million; it is 100% leased to the GSA for ICE under a lease expiring in January 2027. Its purchase-price allocation was preliminary.
- Annualized lease income was $88.1 million, with a weighted-average annualized lease income of $32.68 per leased square foot. The filing reports government agencies accounted for approximately 96.3% of rental income; its property table shows 96.9% of annualized lease income. California represented 30.8% of annualized lease income.
- Eight tenants, representing 20.8% of rentable area and 21.2% of annualized lease income, had exercisable early-termination rights at quarter-end. Additional rights become exercisable later in 2016 and in 2017. The company said mission-critical uses and build-to-suit features reduce, in its view, the likelihood of early termination; this remains a material exposure to verify.
- On May 4, the board declared a $0.23-per-share and per-common-unit quarterly dividend, payable June 23 to holders of record June 8. REIT status generally requires distribution of at least 90% of taxable income; the company anticipates distributing all taxable income. The credit facility also limits distributions, subject to its terms.
- Key risks include dependence on U.S. government tenants and spending decisions, lease expirations and termination rights, interest-rate exposure, refinancing and covenant risk, acquisition execution, real-estate market conditions, and geographic concentration. The filing reported no material litigation, no material change to previously disclosed risk factors, and no material off-balance-sheet arrangements. No specific earnings or FFO guidance was provided.
Important facts for investors to verify
- Lease termination rights and near-term expirations, including tenant renewal or replacement prospects.
- Government revenue concentration and the potential effect of federal budget or real-estate leasing decisions; assess California concentration and property-level exposure.
- Floating-rate debt sensitivity, revolver maturity and extension conditions, refinancing needs, and covenant headroom.
- Whether operating cash flow and available borrowing capacity can support acquisitions, capital needs, debt service, and distributions without additional equity or debt.
- The comparability of reported year-over-year results, and the assumptions behind acquisition valuations, FFO adjustments, and the declared dividend.