Easterly Government Properties, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. The company is an internally managed REIT focused on U.S. Government-leased commercial properties.
Business and portfolio
- At year-end, Easterly owned 43 operating properties totaling approximately 3.1 million square feet, plus one property under development. Operating properties were reported 100% occupied, with a 5.9-year weighted-average remaining lease term.
- U.S. Government agencies represented 96.8% of annualized lease income. Annualized lease income was $101.3 million; average annualized lease income was $32.77 per leased square foot.
- During 2016, the company acquired seven operating properties and one development property. The Alameda, California development is a 65,810-square-foot FDA laboratory planned for a 20-year GSA lease upon completion.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $104.6 million | $71.4 million |
| Operating income | $12.9 million | $4.0 million |
| Net income (loss) | $4.7 million | $(6.0) million |
| Net income (loss) attributable to Easterly | $3.4 million; $0.11 basic EPS and $0.10 diluted EPS | $(1.7) million; $(0.08) EPS |
| Cash from operating activities | $47.4 million | $30.0 million |
- Revenue increased $33.2 million, primarily from acquired properties. Expenses rose $24.4 million, including acquisition-related property operating costs, taxes and depreciation. Interest expense increased to $8.2 million from $5.0 million, mainly due to higher revolver borrowings and rates.
- 2016 cash flows: investing outflow of $170.2 million, primarily acquisitions; financing inflow of $119.5 million. Cash and cash equivalents were $4.8 million at year-end.
- FFO was $51.4 million and FFO, as Adjusted, was $49.6 million. These are non-GAAP supplemental measures, not substitutes for GAAP results or cash flow.
- Total debt was approximately $293.0 million: $212.2 million drawn on the $400 million revolver and $80.8 million of mortgage debt. The company reported $187.8 million of remaining revolver capacity and an undrawn $100 million term loan facility. Management said expected sources of liquidity were adequate for anticipated needs over the next 12 months.
- Debt maturities are concentrated in 2019, including the revolver. Variable-rate debt was $227.9 million, or 77.9% of debt; a 25-basis-point rate change was estimated to affect annual interest expense by approximately $0.6 million. Forward swaps were intended to fix rates on a future $100 million term-loan draw at 3.12%.
- Total assets were $1.045 billion, total liabilities $348.6 million and total equity $696.9 million. The company reported net debt to total enterprise value of 23.8%.
Material changes and outlook
- Compared with 2015, 2016 revenue and operating income rose with portfolio expansion, and the company moved from a net loss to net income. Comparisons are affected by the 2015 IPO and formation transactions, acquisitions occurring during each year, and a shift from predecessor investment-company fair-value accounting to historical-cost accounting.
- Quarterly 2016 revenue increased from $24.0 million in Q1 to $28.8 million in Q4. Q4 net income attributable to Easterly was $1.1 million, or $0.03 per share.
- Dividends declared for 2016 increased from $0.23 per share in the first two quarters to $0.24 in the last two quarters; the Q4 dividend was declared in February 2017 and paid in March. The board controls future distributions, subject to REIT requirements and financing restrictions.
- No specific numerical earnings or acquisition guidance was provided. Management described a strategy of disciplined acquisitions, build-to-suit development, lease renewals and expense control.
Risks, contingencies and unusual items
- Revenue is highly concentrated in U.S. Government tenants; the FBI, DEA and AOC together represented 45.4% of annualized lease income. Government budget, mission, workforce or leasing changes could affect renewals and occupancy.
- Tenants occupying 18.9% of rentable area and contributing 19.2% of annualized lease income had exercisable early-termination rights at year-end. In 2017, rights were expected to become exercisable for an additional 3.8% of area and 3.0% of income. Leases representing 25.8% of annualized lease income were scheduled to expire by the end of 2019.
- California accounted for 26.8% of annualized lease income; geographic concentration exposes the portfolio to regional conditions and natural disasters.
- Other material risks include refinancing and interest-rate exposure, development costs and delays, competition, environmental and insurance liabilities, REIT qualification and distribution requirements, and the relative illiquidity of real estate. One property, DEA–Dallas, is subject to a right of first refusal through at least 2025 unless specified sale conditions occur.
- The filing reported no material litigation, no material off-balance-sheet arrangements, and no known commitments or events expected to materially affect liquidity. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide a Section 404 attestation because the company was an emerging growth company.
Important facts for investors to verify
- Lease termination options, expirations and renewal prospects, particularly for major agency tenants and properties with specialized build-outs.
- The revolver’s 2019 maturity, refinancing plans, covenant headroom and the effects of higher rates on variable-rate borrowings.
- Completion timing, remaining cost and lease commencement conditions for the FDA–Alameda development.
- Whether reported occupancy and tenant concentration remain stable, and how government policy or agency mission changes affect leasing.
- Dividend coverage and REIT taxable-income requirements; FFO and adjusted FFO reconciliations and their limitations.