Easterly Government Properties, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company is an internally managed REIT focused on owning and developing commercial properties leased primarily to U.S. Government agencies. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
- At quarter-end, the portfolio comprised 87 wholly owned operating properties and six properties held through an unconsolidated joint venture (JV), totaling approximately 9.0 million leased square feet; occupancy was 99%.
- The U.S. Government represented approximately 98% of annualized lease income. The company also had one wholly owned property under development, expected to total approximately 0.2 million leased square feet.
- During the first half, the company acquired two properties for approximately $93.1 million. Its 53%-owned JV acquired two VA outpatient facilities; a third JV acquisition closed in July.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $72.8 million | $68.6 million | $145.1 million | $133.6 million |
| Net income | $8.1 million | $9.3 million | $16.4 million | $17.1 million |
| Net income attributable to Easterly | $7.2 million | $8.2 million | $14.5 million | $15.2 million |
| Diluted EPS | $0.08 | $0.10 | $0.16 | $0.18 |
| FFO, as adjusted | $33.7 million | $29.2 million | $65.6 million | $57.5 million |
- Q2 revenue increased 6.0%, mainly from acquisitions; net income attributable to Easterly declined about 12%. The net income margin was approximately 11.2%, compared with 13.5% a year earlier.
- For the first half, revenue rose 8.6%, while net income attributable to Easterly fell about 4%. The net income margin was approximately 11.3%, versus 12.8% in 2021.
- Management attributed higher expenses to the enlarged portfolio, and higher interest expense mainly to the 2021 senior notes issuance. The prior-year comparison also included a $0.5 million property-sale gain. Adjusted FFO increased in both periods.
- Rental income was $71.2 million in Q2 and $141.6 million for the first half. First-half income from the JV was $1.5 million; the company also recognized $0.6 million of JV asset-management income.
Cash flow, debt and liquidity
- First-half operating cash flow was $64.4 million, up from $56.7 million. Investing used $147.0 million, including $78.8 million for property acquisitions and $52.7 million invested in the JV. Financing provided $80.6 million, including revolving-credit draws; dividends and distributions paid were $54.4 million.
- Cash and cash equivalents were $8.3 million at June 30; restricted cash was $9.8 million. The revolving facility had $307.1 million available, for approximately $315.4 million of cash and stated undrawn capacity combined.
- Total debt principal was approximately $1.342 billion; balance-sheet debt, net of financing items, was approximately $1.337 billion. Debt was 88.2% fixed-rate and 11.8% variable-rate, with a 3.5% weighted-average rate and 6.0-year weighted-average maturity. The company reported compliance with debt covenants.
- A 25-basis-point change in variable rates would change annual interest expense by approximately $0.4 million, according to the filing. Interest-rate swaps had a $2.7 million asset fair value at quarter-end.
- The company reported $183.9 million of capital commitments to the JV. Management said expected cash sources should cover anticipated uses over the next 12 months, including debt service, acquisitions, capital needs and distributions.
Outlook, risks and notable items
- The filing provides no specific earnings or revenue guidance. Management expects the JV to complete the remaining three properties in its portfolio acquisition during 2022 and 2023.
- The board declared a Q2 dividend of $0.265 per share, payable August 23, 2022. The filing notes REIT distribution requirements and that distributions may require use of cash reserves, asset sales, additional debt or, potentially, shares.
- Lease concentration is significant: approximately 98% of annualized lease income came from the U.S. Government. Some leases permit early termination during “soft-term” periods; 18 tenants, representing 5.6% of leased area and 5.2% of annualized lease income, had exercisable termination rights. Management considered early termination unlikely, citing mission-critical use and property characteristics.
- California represented approximately 19.9% of annualized lease income; the company cautioned that more severe regional economic conditions or natural disasters could affect results. Other cited risks include real estate and development execution, acquisitions, JV performance, refinancing and interest rates, and the transition from LIBOR to replacement rates. Relevant LIBOR settings were expected to end or become unrepresentative after June 30, 2023.
- Management said COVID-19 had not significantly affected the business to date, while noting uncertainty about future effects. On July 22, the company amended its credit agreement to extend the deadline for drawing up to $50 million under the 2018 term loan to July 24, 2023. The filing reported no material litigation and effective disclosure controls.
Important facts for investors to verify
- Whether acquisition-led rental growth can offset operating costs, depreciation and rising interest expense, and whether the decline in GAAP earnings continues.
- The timing, funding and returns of the remaining JV acquisitions, including the $183.9 million capital commitment.
- Lease expirations and early-termination exposure, especially among U.S. Government tenants, and the effect of renewals or vacancies.
- Liquidity and refinancing capacity given debt levels, upcoming maturities, variable-rate exposure and the LIBOR transition.
- Dividend coverage and the cash requirements of acquisitions, capital spending, JV commitments and any share repurchases.
- How adjusted FFO reconciles to GAAP results; adjusted FFO is a supplemental non-GAAP measure and is not a measure of cash flow or liquidity.