Easterly Government Properties(DEA) - 2024 Q3 - Quarterly Results

Disclaimers and Introductory Information This section provides essential disclaimers, forward-looking statements, and definitions of key financial terms Forward-looking Statement This section outlines the company's forward-looking statements, emphasizing that actual results may differ due to various risks and factors, including dependence on the U.S. Government, real estate market risks, and compliance with REIT provisions - Forward-looking statements are subject to risks and factors beyond the company's control, including dependence on the U.S. Government for substantially all revenues, real estate ownership and development risks, and market volatility[1] - Key risks include potential reductions in U.S. Government spending on real estate, changes in preference away from leased properties, decreased rental rates, increased vacancy rates, and intense competition in the real estate market[1] - The company's qualification as a real estate investment trust (REIT) depends on meeting technical and complex provisions of the Internal Revenue Code[1] Ratings This section clarifies that any ratings mentioned are not recommendations to buy, sell, or hold the Company's securities - Ratings are explicitly stated not to be recommendations to buy, sell, or hold the Company's securities[2] - The financial discussion should be read with the Form 10-Q for the quarter ended September 30, 2024, to be filed around November 5, 2024[2] Supplemental Definitions This section provides definitions for key non-GAAP financial measures and other terms used in the Supplemental Information Package, explaining their calculation and management's rationale for their use - The document defines several non-GAAP financial measures, including Cash Available for Distribution (CAD), Core Funds from Operations (Core FFO), EBITDA, Net Operating Income (NOI), and Adjusted Net Debt, which management believes provide useful information to investors[3][4] - CAD is calculated as FFO minus normalized recurring real estate-related expenditures and other non-cash/nonrecurring items, intended to show the ability to fund dividends[3] - Core FFO adjusts FFO to exclude items not representative of ongoing operating results, such as liability management costs and credit loss provisions, aiming to reflect core business performance[3] - Adjusted Net Debt reduces Net Debt by estimated portions of projects under construction or in design that are financed with debt repayable by government reimbursements or have not yet produced earnings[4] Corporate Overview This section provides corporate details, analyst coverage, and a summary of key financial and operational metrics Corporate Information and Analyst Coverage This section provides essential corporate contact details, including headquarters, stock exchange listing, investor relations contacts, and lists the executive team and board of directors - Easterly Government Properties Inc. is listed on the New York Stock Exchange under the ticker DEA[7] - The executive team includes Darrell Crate (President & CEO), Michael Ibe (Vice-Chairman & EVP), and Allison Marino (CFO & CAO)[7] - The company is covered by several equity research firms, including Citigroup, Raymond James & Associates, RBC Capital Markets, Jefferies, Truist Securities, Compass Point Research & Trading, LLC, and BMO Capital Markets[8] Executive Summary The executive summary provides a snapshot of key financial and operational metrics for Q3 2024 compared to Q3 2023, highlighting changes in net income, FFO, Core FFO, and CAD, alongside stable debt leverage Key Financial Metrics (Q3 2024 vs. Q3 2023, in thousands) | Metric | Q3 2024 | Q3 2023 | Change (YoY) | |:-------------------------------------------|:--------|:--------|:-------------| | Net income available to Easterly Government Properties, Inc. | $4,863 | $5,374 | -9.5% | | Net income per share (Basic/Diluted) | $0.05 | $0.06 | -16.7% | | Funds From Operations (FFO) | $30,634 | $29,963 | +2.2% | | FFO, per share - fully diluted basis | $0.28 | $0.28 | 0.0% | | Core FFO | $32,172 | $30,238 | +6.4% | | Core FFO, per share - fully diluted basis | $0.30 | $0.29 | +3.4% | | Cash Available for Distribution (CAD) | $25,102 | $23,958 | +4.8% | Debt Ratios (as of September 30, 2024) | Ratio | Value | |:--------------------------------------------|:--------| | Net debt to total enterprise value | 49.0 % | | Net debt to annualized quarterly EBITDA | 7.8 x | | Adjusted Net Debt to annualized quarterly pro forma EBITDA | 7.0 x | | Cash interest coverage ratio | 3.0 x | | Cash fixed charge coverage ratio | 2.6 x | - As of September 30, 2024, the company had $33,239 thousand in cash and cash equivalents and $250,325 thousand available under its $400 million senior unsecured credit facility[9] Corporate Financials This section presents the company's balance sheets, income statements, and key financial performance metrics including NOI, EBITDA, FFO, CAD, and details of its unconsolidated real estate venture Balance Sheets The balance sheet shows an increase in total assets from $2,879,752 thousand at December 31, 2023, to $3,103,111 thousand at September 30, 2024, primarily driven by an increase in real estate properties, net, and investment in unconsolidated real estate venture Balance Sheet Summary (in thousands) | Item | Sep 30, 2024 | Dec 31, 2023 | |:--------------------------|:-------------|:-------------| | Real estate properties, net | $2,457,256 | $2,319,143 | | Investment in unconsolidated real estate venture | $315,886 | $284,544 | | Total assets | $3,103,111 | $2,879,752 | | Total liabilities | $1,721,477 | $1,470,236 | | Total equity | $1,381,634 | $1,409,516 | - Total assets increased by approximately $223 million, largely due to growth in real estate properties and investments in unconsolidated ventures[10] - Total liabilities increased by approximately $251 million, with significant increases in revolving credit facility, notes payable, and deferred revenue[10] Income Statements For the three months ended September 30, 2024, total revenues increased to $74,781 thousand from $72,014 thousand in the prior year, primarily driven by higher rental income, though net income decreased due to increased interest expense Income Statement Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:-------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Total revenues | $74,781 | $72,014 | $223,802 | $214,607 | | Total expenses | $55,032 | $55,233 | $168,110 | $166,761 | | Interest expense, net | $(16,209) | $(12,046) | $(45,210) | $(35,739) | | Net income | $5,115 | $6,081 | $14,849 | $16,273 | | Net income available to Easterly Government Properties, Inc. | $4,863 | $5,374 | $14,100 | $14,368 | | Net income per share (Basic/Diluted) | $0.05 | $0.06 | $0.13 | $0.15 | - Rental income increased by $4,331 thousand (6.3%) for the three months ended September 30, 2024, compared to the same period in 2023[12] - Interest expense, net, significantly increased by $4,163 thousand (34.6%) for the three months ended September 30, 2024, compared to the same period in 2023, impacting net income[12] Net Operating Income Net Operating Income (NOI) increased to $53,684 thousand for Q3 2024 from $48,747 thousand in Q3 2023, reflecting improved property performance, with Cash NOI also seeing a healthy increase Net Operating Income (in thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:-------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Net Operating Income | $53,684 | $48,747 | $158,871 | $147,481 | | Cash Net Operating Income | $50,192 | $45,193 | $149,239 | $137,851 | - NOI increased by $4,937 thousand (10.1%) year-over-year for the three months ended September 30, 2024[13] - Cash NOI increased by $4,999 thousand (11.1%) year-over-year for the three months ended September 30, 2024[13] EBITDA EBITDA for the three months ended September 30, 2024, was $46,687 thousand, an increase from $42,615 thousand in the prior year, with pro forma EBITDA reaching $47,540 thousand EBITDA (in thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Net income | $5,115 | $6,081 | $14,849 | $16,273 | | EBITDA | $46,687 | $42,615 | $137,436 | $126,602 | | Pro forma EBITDA | $47,540 | N/A | N/A | N/A | - EBITDA increased by $4,072 thousand (9.6%) year-over-year for the three months ended September 30, 2024[14] - Pro forma EBITDA for Q3 2024 includes adjustments for a full quarter of operations from two properties acquired in the third quarter of 2024[14] FFO and CAD Funds From Operations (FFO) increased to $30,634 thousand for Q3 2024 from $29,963 thousand in Q3 2023, with Core FFO and Cash Available for Distribution (CAD) also showing increases FFO and CAD (in thousands, except per share) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:-------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | FFO | $30,634 | $29,963 | $91,759 | $89,104 | | FFO, per share - fully diluted basis | $0.28 | $0.28 | $0.85 | $0.85 | | Core FFO | $32,172 | $30,238 | $94,301 | $90,005 | | Core FFO, per share - fully diluted basis | $0.30 | $0.29 | $0.87 | $0.86 | | Cash Available for Distribution (CAD) | $25,102 | $23,958 | $75,793 | $72,973 | - FFO increased by $671 thousand (2.2%) year-over-year for the three months ended September 30, 2024[15] - Core FFO increased by $1,934 thousand (6.4%) year-over-year for the three months ended September 30, 2024[15] - CAD increased by $1,144 thousand (4.8%) year-over-year for the three months ended September 30, 2024[15] Unconsolidated Real Estate Venture The unconsolidated real estate venture's balance sheet shows total assets of $607,590 thousand and total equity of $595,431 thousand as of September 30, 2024, with Easterly's share being $322,021 thousand and $315,886 thousand, respectively Unconsolidated Real Estate Venture Balance Sheet (in thousands, as of Sep 30, 2024) | Item | Venture Total | Easterly's Share | |:---------------------------|:--------------|:-----------------| | Real estate properties - net | $504,812 | $267,550 | | Total assets | $607,590 | $322,021 | | Total liabilities | $12,159 | $6,443 | | Total equity | $595,431 | $315,886 | Unconsolidated Real Estate Venture Income Statement (in thousands) | Metric | Three Months Ended Sep 30, 2024 (Venture Total) | Easterly's Share (Q3 2024) | Nine Months Ended Sep 30, 2024 (Venture Total) | Easterly's Share (YTD 2024) | |:---------------|:------------------------------------------------|:---------------------------|:-----------------------------------------------|:----------------------------| | Total Revenues | $11,410 | $6,047 | $32,862 | $17,417 | | Net income | $2,981 | $1,575 | $8,248 | $4,367 | | EBITDA | $6,751 | $3,574 | $19,856 | $10,521 | | FFO | $6,708 | $3,551 | $19,539 | $10,351 | | Core FFO | $6,739 | $3,568 | $19,632 | $10,401 | | CAD | $6,748 | $3,574 | $19,613 | $10,391 | - Easterly's share of the unconsolidated venture's net income for the three months ended September 30, 2024, was $1,575 thousand[17] Debt Analysis This section details the company's debt structure, including unsecured and secured debt, interest rates, and maturity schedules Debt Schedules As of September 30, 2024, the company's total indebtedness was $1,481,463 thousand, with 89.5% unsecured debt and 10.5% secured mortgage debt, featuring a weighted average maturity of 4.9 years Debt Breakdown (as of Sep 30, 2024, in thousands) | Debt Type | Balance | Percent of Total Indebtedness | |:----------------------|:-------------|:------------------------------| | Total unsecured debt | $1,324,050 | 89.5% | | Total secured mortgage debt | $157,413 | 10.5% | | Total Debt | $1,481,463 | 100.0% | Debt Statistics (as of Sep 30, 2024) | Statistic | Value | |:------------------------------|:--------------------| | Variable rate debt - unhedged | $124,050 thousand | | % Variable rate debt - unhedged | 8.4 % | | Fixed rate debt | $1,357,413 thousand | | % Fixed rate debt | 91.6 % | | Weighted average maturity | 4.9 years | | Weighted average interest rate | 4.6 % | | Net Debt | $1,448,224 thousand | | Adjusted Net Debt | $1,326,954 thousand | - The company has a high proportion of fixed-rate debt (91.6%), indicating a strategy to mitigate interest rate risk[19] Debt Maturities The debt maturity schedule indicates significant maturities in 2025 ($104,598 thousand) and 2026 ($184,554 thousand), with the largest single year of debt maturity being 2027 ($230,733 thousand) Debt Maturity Schedule (in thousands) | Year | Total Debt Maturing | Percentage of Debt Maturing | Weighted Average Interest Rate of Scheduled Maturities | |:-----|:--------------------|:----------------------------|:-------------------------------------------------------| | 2024 | $1,116 | 0.1 % | 0.00 % | | 2025 | $104,598 | 7.1 % | 5.63 % | | 2026 | $184,554 | 12.5 % | 5.19 % | | 2027 | $230,733 | 15.6 % | 3.81 % | | 2028 | $200,533 | 13.5 % | 5.26 % | | 2029 | $136,016 | 9.2 % | 3.89 % | | 2030 | $201,049 | 13.6 % | 2.89 % | | 2031 | $101,081 | 6.8 % | 3.83 % | | 2032 | $31,116 | 2.1 % | 4.30 % | | 2033 | $200,667 | 13.5 % | 6.43 % | | 2034 | $90,000 | 6.0 % | 3.98 % | | Total | $1,481,463 | 100.0 % | N/A | - The largest single year of debt maturity is 2027, with $230,733 thousand (15.6% of total debt) maturing[20] - A significant portion of debt, $200,667 thousand, matures in 2033 at a weighted average interest rate of 6.43%, which is higher than most other maturity years[20] Property Portfolio This section provides an overview of the company's leased operating properties, tenant breakdown, lease expiration schedule, and current re/development projects Leased Operating Property Overview The company's portfolio comprises 9,330,122 leased square feet with an annualized lease income of $335,124,106, averaging $35.92 per square foot, with wholly-owned U.S. Government leased properties forming the largest segment Property Portfolio Summary (as of Sep 30, 2024) | Property Type Segment | Leased Square Feet | Percentage of Total Leased Square Feet | Annualized Lease Income | Percentage of Total Annualized Lease Income | Annualized Lease Income per Leased Square Foot | |:-----------------------------------------------------|:-------------------|:---------------------------------------|:------------------------|:--------------------------------------------|:-----------------------------------------------| | Wholly Owned U.S. Government Leased Properties | 7,851,360 | 83.1% | $278,784,266 | 83.1% | $35.51 | | Wholly Owned State and Local Government Leased Property | 95,273 | 1.0% | $3,364,379 | 1.0% | $35.31 | | Wholly Owned Privately Leased Property | 169,324 | 0.8% | $2,733,203 | 0.8% | $16.14 | | U.S Government Leased to Unconsolidated Real Estate Venture | 1,214,165 | 15.1% | $50,242,258 | 15.1% | $41.38 | | Total / Weighted Average | 9,330,122 | 100.0% | $335,124,106 | 100.0% | $35.92 | - The largest wholly-owned property by annualized lease income is VA - Loma Linda, generating $16,812,723 from 327,614 square feet[22] - The unconsolidated real estate venture primarily consists of VA outpatient clinics, with VA - Phoenix being the largest contributor to annualized lease income at $10,736,674[26] Tenants The tenant base is highly concentrated with U.S. Government agencies, accounting for 94.9% of leased square feet and 96.4% of total annualized lease income, with the Department of Veteran Affairs (VA) as the largest tenant Tenant Breakdown (as of Sep 30, 2024) | Tenant Segment | Weighted Average Remaining Lease Term | Leased Square Feet | Percentage of Leased Square Feet | Annualized Lease Income | Percentage of Total Annualized Lease Income | |:---------------------------|:--------------------------------------|:-------------------|:---------------------------------|:------------------------|:--------------------------------------------| | U.S. Government | 10.5 years | 8,850,483 | 94.9% | $322,849,172 | 96.4% | | State and Local Government | 8.3 years | 109,547 | 1.2% | $3,756,254 | 1.1% | | Private Tenants | 4.1 years | 370,092 | 3.9% | $8,518,680 | 2.5% | | Total / Weighted Average | 10.2 years | 9,330,122 | 100.0% | $335,124,106 | 100.0% | Top U.S. Government Tenants (as of Sep 30, 2024) | Tenant | Weighted Average Remaining Lease Term | Leased Square Feet | Percentage of Leased Square Feet | Annualized Lease Income | Percentage of Total Annualized Lease Income | |:----------------------------------------|:--------------------------------------|:-------------------|:---------------------------------|:------------------------|:--------------------------------------------| | Department of Veteran Affairs ("VA") | 14.4 years | 2,251,131 | 24.0% | $96,115,532 | 28.7% | | Federal Bureau of Investigation ("FBI") | 9.2 years | 1,498,607 | 16.1% | $53,272,188 | 15.9% | | Drug Enforcement Administration ("DEA") | 11.0 years | 607,290 | 6.5% | $27,900,724 | 8.3% | - The company's tenant base is highly stable, with a weighted average remaining lease term of 10.2 years across all tenants[28] Lease Expirations The lease expiration schedule indicates that a significant portion of leases, representing 54.0% of total leased square footage and 58.8% of total annualized lease income, expire in 2034 and thereafter, providing long-term revenue stability Lease Expiration Schedule (as of Sep 30, 2024) | Year of Lease Expiration | Number of Leases Expiring | Leased Square Footage Expiring | Percentage of Total Leased Square Footage Expiring | Annualized Lease Income Expiring | Percentage of Total Annualized Lease Income Expiring | Annualized Lease Income per Leased Square Foot Expiring | |:-------------------------|:--------------------------|:-------------------------------|:---------------------------------------------------|:---------------------------------|:-----------------------------------------------------|:--------------------------------------------------------| | 2024 | 1 | 92,455 | 1.0% | $3,270,004 | 1.0% | $35.37 | | 2025 | 12 | 592,906 | 6.4% | $19,045,322 | 5.7% | $32.12 | | 2026 | 6 | 394,832 | 4.2% | $14,532,251 | 4.3% | $36.81 | | 2027 | 9 | 506,510 | 5.4% | $18,829,913 | 5.6% | $37.18 | | 2028 | 11 | 802,397 | 8.6% | $17,605,584 | 5.3% | $21.94 | | 2029 | 8 | 631,036 | 6.8% | $19,132,304 | 5.7% | $30.32 | | 2030 | 1 | 1,536 | 0.0% | $59,478 | 0.0% | $38.72 | | 2031 | 3 | 117,875 | 1.3% | $4,560,497 | 1.4% | $38.69 | | 2032 | 9 | 579,524 | 6.2% | $18,826,395 | 5.6% | $32.49 | | 2033 | 10 | 566,197 | 6.1% | $22,233,253 | 6.6% | $39.27 | | Thereafter | 60 | 5,044,854 | 54.0% | $197,029,105 | 58.8% | $39.06 | | Total / Weighted Average | 130 | 9,330,122 | 100.0% | $335,124,106 | 100.0% | $35.92 | - The weighted average annualized lease income per leased square foot for expiring leases is $35.92[29] - Tenants may have provisions allowing them to terminate leases before the stated expiration term[30] Summary of Re/Development Projects The company has one project currently under construction, the FDA - Atlanta Laboratory, with an anticipated total cost of $237,105 thousand and $158,555 thousand incurred to date, expected to be completed in Q4 2025 Projects Under Construction (as of Sep 30, 2024, in thousands) | Property Name | Location | Property Type | Total Leased Square Feet | Lease Term | Anticipated Total Cost | Cost to Date | Anticipated Lump-Sum Reimbursement | Anticipated Completion Date | Anticipated Lease Commencement | |:--------------|:------------|:--------------|:-------------------------|:-----------|:-----------------------|:-------------|:-----------------------------------|:----------------------------|:-------------------------------| | FDA - Atlanta | Atlanta, GA | Laboratory | 162,000 | 20-Year | $237,105 | $158,555 | $150,680 | 4Q 2025 | 4Q 2025 | Projects in Design (as of Sep 30, 2024) | Property Name | Location | Property Type | Total Estimated Leased Square Feet | Lease Term | Anticipated Completion Date | |:--------------|:--------------|:--------------|:-----------------------------------|:-----------|:----------------------------| | JUD - Flagstaff | Flagstaff, AZ | Courthouse | 50,777 | 20-Year | 2Q 2026 | - The FDA - Atlanta project has an anticipated lump-sum reimbursement of $150,680 thousand[32]