Easterly Government Properties, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; filed August 3, 2021. Easterly is a REIT focused on acquiring, developing and managing properties leased primarily to U.S. Government agencies. At quarter-end it owned 83 operating properties totaling approximately 7.6 million leased square feet, was 99% leased, and had one property under development.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $68.6 | $60.5 | $133.6 | $118.7 |
| Net income | $9.3 | $4.2 | $17.1 | $6.1 |
| Net income attributable to Easterly | $8.2 | $3.7 | $15.2 | $5.4 |
| Diluted EPS | $0.10 | $0.05 | $0.18 | $0.07 |
| FFO, as Adjusted (non-GAAP) | $29.2 | $27.0 | $57.5 | $51.5 |
Q2 operating margin, calculated as revenue less operating expenses divided by revenue, was approximately 26.2%, versus 21.8% a year earlier. Q2 net margin was approximately 13.5%, versus 6.9%. These improvements include the effect of a $0.5 million property-sale gain in 2021. Adjusted FFO is a supplemental non-GAAP measure and is not a measure of cash flow or liquidity.
For the first half, cash from operations was $56.7 million, down from $75.6 million; investing cash outflow was $103.8 million, compared with $139.6 million; and financing cash inflow was $47.1 million, compared with $61.9 million. Cash and restricted cash totaled $14.7 million at June 30, including $8.1 million of unrestricted cash. Management cited lower working-capital-related cash contributions as a factor in the operating cash-flow decline.
Quarter-end debt principal was approximately $1,039.6 million, with a 5.8-year weighted-average maturity and a 3.4% weighted-average interest rate. Approximately 85.3% was fixed-rate and 19.5% was secured. The company reported $312.8 million available on its $450 million revolving facility and compliance with debt covenants. Total assets were $2,543.6 million and total liabilities were $1,209.0 million.
Material changes versus the prior comparable period
- Q2 revenue rose $8.1 million, primarily from acquired properties and a development property placed in service; tenant reimbursements also increased.
- Q2 expenses increased $3.3 million, mainly from property operating costs and real estate taxes associated with portfolio growth. Interest expense increased $0.3 million.
- First-half revenue increased $14.9 million and net income increased $11.1 million year over year. Results included a $0.5 million gain on sale, while weighted-average common shares increased materially following equity issuance.
- During the first half, the company acquired five operating properties for an aggregate purchase price of $111.4 million, sold SSA–Mission Viejo for net proceeds of approximately $3.3 million, and issued 1.56 million shares through settlement of forward sales for approximately $40.0 million net proceeds.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash flow, borrowing availability and other funding sources were expected to cover anticipated needs for the next 12 months. The filing provides no quantitative earnings or FFO guidance.
- Management said COVID-19 had not had a significant impact on the business to date, while noting future effects remained uncertain. U.S. Government tenants represented approximately 98.5% of annualized lease income.
- Lease concentration and termination provisions merit attention: 17 tenants, representing about 5.3% of leased space and 5.0% of annualized lease income, had exercisable early-termination rights. About 23.6% of annualized lease income came from California properties.
- Subsequent to quarter-end, the company acquired a Cleveland federal facility and amended its credit facility, increasing total capacity to $650 million. It also agreed to issue up to $250 million of fixed-rate senior notes, expected in October 2021 subject to customary conditions.
- Interest-rate exposure includes variable-rate debt; management estimated a 25-basis-point rate change would affect annual interest expense by approximately $0.4 million. The company also disclosed LIBOR transition uncertainty and estimated $5.2 million of swap-related losses would be reclassified from accumulated other comprehensive income to interest expense over the following 12 months.
- The board declared a Q2 dividend of $0.265 per share after quarter-end, up from $0.260 for Q1. The filing reports no material litigation, no material off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Acquisition contribution to rental growth, occupancy and the near-term lease-expiration and early-termination schedule.
- Cash-flow conversion and the sustainability of distributions relative to operating cash flow and adjusted FFO.
- Debt maturities, borrowing costs, covenant headroom and completion and terms of the proposed senior-note issuance and amended credit facility.
- Potential dilution from unsettled forward sales and available ATM equity capacity; approximately 4.0 million shares were underlying unsettled forward transactions as of July 23, 2021.
- Exposure to U.S. Government leasing decisions, California concentration, property development execution, COVID-19 effects and LIBOR transition.