Easterly Government Properties, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. This quarterly report covers the three and six months ended June 30, 2019. Easterly is an internally managed REIT focused on commercial properties leased primarily to U.S. government agencies. At quarter-end, it owned 66 operating properties, all 100% leased, with approximately 6.1 million square feet, plus two properties under development. The company owned approximately 87.6% of its Operating Partnership.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $52.7 million | $37.0 million | $103.4 million | $72.9 million |
| Net income | $6.5 million | $1.7 million | $6.0 million | $3.5 million |
| Net income attributable to Easterly | $5.6 million | $1.4 million | $5.2 million | $3.0 million |
| EPS, basic and diluted | $0.08 | $0.02 | $0.08 | $0.05 |
| Dividends declared per share | $0.26 | $0.26 | $0.52 | $0.52 |
- Q2 revenue increased 42.7% year over year; net income rose $4.8 million. The quarter included a $6.2 million gain on the sale of CBP–Chula Vista. Net income margin was approximately 12.3%, compared with 4.6% in Q2 2018; the gain contributed to the increase.
- For the first half, revenue increased 41.7%, while net income increased $2.5 million. The six-month results also include the $6.2 million property-sale gain.
- Management attributed revenue growth mainly to 20 operating properties acquired and one development property placed in service since June 2018. Higher property costs, depreciation and amortization, corporate costs, and interest expense partly offset that growth.
- Q2 interest expense was $8.0 million, up $2.5 million year over year; six-month interest expense was $16.2 million, up $5.1 million. Management cited higher debt balances and revolving-facility rates.
- Six-month operating cash flow was $38.4 million, versus $28.6 million. Investing used $273.6 million, primarily for acquisitions and development; financing provided $239.0 million, including equity proceeds and net revolving-credit draws. Cash and restricted cash totaled $14.9 million at June 30.
- Adjusted FFO was $22.6 million for Q2, versus $14.3 million; for the first half it was $43.4 million, versus $28.1 million. FFO measures are supplemental, non-GAAP measures and are not measures of cash flow or liquidity.
Debt, liquidity and capital
- Total debt principal was approximately $896.5 million; the balance sheet reported debt net of financing costs and premiums at $892.2 million. Debt had a 5.7-year weighted-average maturity and a 3.7% weighted-average interest rate; 69% was fixed-rate (including swapped term loans) and 31% variable-rate. Secured debt was 23.4%.
- The revolving facility had $262.0 million drawn and $188.0 million available. The company reported compliance with all debt covenants. Management stated it expected cash flows and available capital sources to cover anticipated needs for the next 12 months.
- A 25-basis-point change in rates on variable-rate debt would change annual interest expense by approximately $0.7 million, according to the filing.
- During the first half, the company issued shares through ATM and forward-sale arrangements and raised approximately $158.1 million in gross equity proceeds. Shares outstanding were 69.6 million at June 30 and 78.4 million as of July 26.
Material changes, outlook and risks
- During the first half, Easterly acquired five operating properties for an aggregate purchase price of $262.8 million, including completion of three properties from a previously announced portfolio. It sold CBP–Chula Vista for net proceeds of approximately $19.9 million.
- On June 20, the company was awarded a 20-year non-cancelable lease for a planned 162,000-square-foot FDA laboratory in Atlanta; acquisition of the property for redevelopment remained subject to customary closing conditions.
- After quarter-end, the company sold additional shares under its ATM programs for net proceeds of approximately $29.1 million. On July 30, it entered into an agreement for the future private placement of $275 million of fixed-rate senior unsecured notes, with maturities in 2029, 2031 and 2034.
- The company declared a $0.26-per-share Q2 dividend, payable September 26, 2019. It stated that it anticipates distributing its taxable income to maintain REIT status; distributions remain subject to operating and debt-service requirements.
- Concentration is a central risk: the U.S. Government accounted for approximately 98.2% of rental income. Sixteen properties in California represented 25.7% of annualized lease income. Some government leases have early-termination “soft-term” rights; management said it did not believe tenants were likely to exercise them, but this is not assured.
- Other cited risks include government spending or leasing-policy changes, acquisition and development execution, tenant loss or vacancy, refinancing and interest-rate exposure, real-estate market conditions, natural disasters and insurance limits. Management reported no material change to previously disclosed risk factors, no material litigation, and no material off-balance-sheet arrangements.
- The filing provides no formal earnings or FFO guidance. Management’s liquidity statement is an expectation, not a guarantee.
Important facts for investors to verify
- How much of earnings growth reflects recurring property operations versus the $6.2 million sale gain, and how do GAAP earnings compare with FFO and adjusted FFO?
- Whether acquisitions and the Atlanta FDA development meet expected timing, cost and return assumptions, including satisfaction of closing conditions.
- Debt and liquidity after the planned $275 million note issuance, including use of proceeds, facility availability, refinancing needs and interest-rate exposure.
- Lease expirations and early-termination exposure: the filing lists 16 tenants with exercisable early-termination rights covering approximately 5.9% of rentable area and 5.0% of annualized lease income.
- Equity issuance and dividend coverage, including dilution from ATM and forward sales and the company’s capacity to fund distributions alongside acquisitions and development.