Easterly Government Properties(DEA) - 2024 Q2 - Quarterly Report

Part I: Financial Information Financial Statements The unaudited consolidated financial statements as of June 30, 2024, detail the company's financial position and performance Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $2,996,038 | $2,879,752 | | Real estate properties, net | $2,417,749 | $2,319,143 | | Total Liabilities | $1,623,564 | $1,470,236 | | Total debt (Revolving, Term, Notes) | $1,400,903 | $1,294,835 | | Total Equity | $1,372,474 | $1,409,516 | Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Total revenues | $76,221 | $149,021 | | Total expenses | $57,583 | $113,078 | | Interest expense, net | ($15,165) | ($29,001) | | Net income | $4,850 | $9,734 | | Diluted EPS | $0.04 | $0.09 | Notes to the Consolidated Financial Statements Detailed notes support the financial statements, covering the company's REIT structure, acquisitions, debt, and risk concentrations - The company operates as a REIT focused on U.S. Government-leased properties, owning 93 properties totaling 9.1 million leased square feet as of June 30, 2024[85][86] - During the six months ended June 30, 2024, the company acquired three operating properties for an aggregate purchase price of $52.1 million[94] - The U.S. Government accounted for approximately 96.9% of the company's total annualized lease income, indicating a high concentration of credit risk[160] - Subsequent to quarter-end, the company entered into forward sale transactions for 400,000 shares, expecting to receive net proceeds of approximately $5.3 million[167] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, property acquisitions, liquidity, and capital resources, highlighting revenue growth and rising interest expenses Overview and Portfolio Update The company's portfolio of U.S. Government-leased properties was 97% leased across 9.1 million square feet as of June 30, 2024 - In H1 2024, the company acquired three facilities in Texas and Florida leased to ICE and HSI, and land for a new 50,777 sq. ft. federal courthouse in Flagstaff, AZ, which will have a 20-year non-cancelable lease[175][177][181] - As of June 30, 2024, the operating property portfolio was 97% leased, with a weighted average annualized lease income of $36.00 per leased square foot[184] Results of Operations Revenue increased due to property acquisitions, but net income declined year-over-year for both Q2 and H1 2024 due to higher interest expense Comparison of Operations for the Three Months Ended June 30 (in thousands) | Account | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Total revenues | $76,221 | $71,373 | $4,848 | | Total expenses | $57,583 | $55,335 | $2,248 | | Interest expense, net | ($15,165) | ($11,678) | ($3,487) | | Net income | $4,850 | $5,778 | ($928) | Comparison of Operations for the Six Months Ended June 30 (in thousands) | Account | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Total revenues | $149,021 | $142,593 | $6,428 | | Total expenses | $113,078 | $111,528 | $1,550 | | Interest expense, net | ($29,001) | ($23,693) | ($5,308) | | Net income | $9,734 | $10,192 | ($458) | - The increase in rental income for both the three and six-month periods is primarily attributable to the six operating properties acquired since June 30, 2023[198][207] - The increase in interest expense for both periods was driven by higher weighted average borrowings and increased interest rates on swapped term loans[204][215] Liquidity and Capital Resources The company maintains liquidity through operating cash flow and its credit facility, with a $1.4 billion debt structure that is 96.6% fixed-rate - Primary sources of capital include operating cash flow, the 2024 revolving credit facility, existing cash balances, and issuance of long-term debt and equity[214][217] Debt Capital Structure as of June 30, 2024 | Metric | Value | | :--- | :--- | | Total principal outstanding | $1,407.5 million | | Weighted average maturity | 4.9 years | | Weighted average interest rate | 4.4% | | % Fixed debt | 96.6% | | % Variable debt | 3.4% | - In May 2024, the company issued $150 million of 6.56% Series A Senior Notes due 2033. In June 2024, it entered into a new $400 million senior unsecured revolving credit facility maturing in June 2028[231][232] - The maturity date of the 2016 term loan facility was extended from March 29, 2024, to January 30, 2025[1] Financial Condition and Policies The company declared a consistent dividend of $0.265 per share and saw operating cash flow increase to $80.9 million in H1 2024 Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Operating activities | $80,908 | $59,052 | | Investing activities | ($126,284) | ($20,967) | | Financing activities | $50,676 | ($33,573) | Dividends Declared per Share in 2024 | Quarter | Declaration Date | Record Date | Payment Date | Dividend | | :--- | :--- | :--- | :--- | :--- | | Q1 2024 | April 25, 2024 | May 9, 2024 | May 21, 2024 | $0.265 | | Q2 2024 | July 17, 2024 | August 1, 2024 | August 13, 2024 | $0.265 | - As of June 30, 2024, the company had invested $280.1 million in its unconsolidated real estate joint venture (JV) and had a remaining capital commitment of $46.6 million[8] Non-GAAP Financial Measures & Critical Accounting Estimates Core FFO for the first six months of 2024 was $62.1 million, and no material changes were made to critical accounting estimates - The company uses FFO and Core FFO as supplemental performance measures. Core FFO adjusts FFO for items not representative of ongoing operations, such as losses on extinguishment of debt and provision for credit losses[19][25] FFO and Core FFO Reconciliation (in thousands) | Metric | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net income | $4,850 | $9,734 | | FFO | $30,690 | $61,125 | | Core FFO | $31,373 | $62,129 | - There were no material changes to the company's significant accounting policies or critical accounting estimates during the six months ended June 30, 2024[34] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure, which is mitigated by maintaining 96.6% of its debt at fixed rates - The company's primary market risk is from interest rate changes on its debt, which is managed by using swap arrangements to fix rates[30] - As of June 30, 2024, 96.6% of the company's $1.4 billion debt had fixed interest rates. A 25 basis point fluctuation in rates on the variable portion would change annual interest expense by approximately $0.1 million[36] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes - Based on an evaluation as of June 30, 2024, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[31] - No changes occurred in internal control over financial reporting during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, these controls[37] Part II: Other Information Other Reporting Items The company reports no material litigation, no material changes to risk factors, and no unregistered sales of equity securities - The company is not currently involved in any material litigation, nor is any material litigation currently threatened against it[32] - There were no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023[38] - During the three months ended June 30, 2024, no directors or officers adopted, terminated, or modified a Rule 10b5-1 trading arrangement[43]