Easterly Government Properties(DEA) - 2022 Q3 - Quarterly Report

Part I: Financial Information Financial Statements This section presents the unaudited consolidated financial statements for the period ended September 30, 2022, including Balance Sheets, Statements of Operations, Cash Flows, and detailed notes Consolidated Balance Sheets The balance sheets show total assets increased to $2.96 billion and total liabilities rose to $1.54 billion by September 30, 2022, driven by property and credit facility changes Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $2,961,650 | $2,826,112 | | Real estate properties, net | $2,463,961 | $2,399,188 | | Investment in unconsolidated real estate venture | $199,338 | $131,840 | | Total Liabilities | $1,542,855 | $1,384,531 | | Revolving credit facility | $177,750 | $14,500 | | Notes payable, net | $695,935 | $695,589 | | Total Equity | $1,418,795 | $1,441,581 | Consolidated Statements of Operations Total revenues increased to $220.1 million, but net income decreased to $17.1 million due to an impairment loss and higher interest expenses, impacting diluted EPS Statement of Operations Summary (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Total Revenues | $220,100 | $203,223 | | Rental income | $214,238 | $197,713 | | Total Expenses | $164,975 | $150,615 | | Depreciation and amortization | $73,552 | $67,615 | | Impairment loss | $5,540 | $0 | | Net Income | $17,142 | $26,176 | | Net income available to Easterly | $15,180 | $23,169 | | Diluted EPS | $0.16 | $0.27 | | Dividends declared per common share | $0.795 | $0.785 | Consolidated Statements of Cash Flows Net cash from operating activities increased to $103.8 million, while investing activities used $189.3 million, and financing activities provided $86.9 million Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $103,783 | $94,459 | | Net cash used in investing activities | ($189,313) | ($127,452) | | Net cash provided by financing activities | $86,881 | $42,072 | Notes to the Consolidated Financial Statements Detailed notes cover accounting policies, $108.1 million in property acquisitions, a $5.5 million impairment loss, joint venture formation, and a subsequent $205.3 million property portfolio sale - The company is an internally managed REIT focused on acquiring, developing, and managing Class A commercial properties leased to U.S. Government agencies[22] - During the first nine months of 2022, the company acquired three operating properties for an aggregate purchase price of $108.1 million[31] - A $5.5 million impairment loss was recognized for the ICE – Otay property due to changes in expected cash flows related to a 2022 lease expiration[33] - Subsequent to the quarter's end, on October 12, 2022, the company agreed to sell a portfolio of ten properties for approximately $205.3 million The sale of nine of these properties was completed on October 27, 2022[103] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, including revenue growth from acquisitions, net income decline due to impairment and interest costs, liquidity, capital resources, and non-GAAP FFO reconciliation - As of September 30, 2022, the company wholly owned 88 operating properties and seven through a joint venture, totaling 9.1 million leased square feet, with a 99% lease rate[110] - Subsequent to the quarter, the company completed the sale of nine properties from a ten-property disposition portfolio for an aggregate price of approximately $205.3 million[115][116] Results of Operations Total revenues increased by $16.9 million to $220.1 million, while net income decreased by $9.0 million to $17.1 million due to higher expenses and an impairment loss Comparison of Operations for the Nine Months Ended September 30 (in thousands) | Item | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $220,100 | $203,223 | $16,877 | | Rental income | $214,238 | $197,713 | $16,525 | | Total Expenses | $164,975 | $150,615 | $14,360 | | Property operating | $48,811 | $41,578 | $7,233 | | Interest expense, net | ($34,729) | ($27,739) | ($6,990) | | Impairment loss | ($5,540) | $0 | ($5,540) | | Net Income | $17,142 | $26,176 | ($9,034) | Liquidity and Capital Resources The company maintains liquidity via operating cash flow, a revolving credit facility with $272.1 million available, and $1.37 billion in total debt with a 5.6-year weighted average maturity - Primary sources of capital include operating cash flow, the revolving credit facility, debt and equity issuances, and asset sales[169] Debt Capital Structure as of September 30, 2022 | Metric | Value | | :--- | :--- | | Total principal outstanding | $1,375.3 million | | Weighted average maturity | 5.6 years | | Weighted average interest rate | 3.7% | | % Fixed debt (incl. swaps) | 85.9% | | % Variable debt | 14.1% | - As of September 30, 2022, the company had unsettled forward sales transactions for 1,950,000 shares under its 2019 ATM Program, with expected net proceeds of approximately $42.6 million upon physical settlement[176] Non-GAAP Financial Measures The company reports FFO of $98.8 million and FFO, as Adjusted, of $98.9 million for the nine months ended September 30, 2022, reflecting growth from property acquisitions FFO and FFO, as Adjusted Reconciliation (in thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net income | $17,142 | $26,176 | | Depreciation of real estate assets | $72,810 | $67,561 | | Impairment loss | $5,540 | $0 | | FFO | $98,844 | $92,430 | | Adjustments (Acquisition costs, non-cash items, etc.) | $5,089 | ($5,754) | | FFO, as Adjusted | $98,933 | $86,676 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with 85.9% of debt fixed, and it is managing the transition from LIBOR to SOFR for its credit facilities - As of September 30, 2022, 85.9% of the company's $1.2 billion in debt had fixed interest rates, with the remaining 14.1% ($193.5 million) at variable rates[217] - A hypothetical 25 basis point fluctuation in market interest rates on variable-rate debt would change annual interest expense by approximately $0.5 million[217] - The company is preparing for the discontinuation of LIBOR after June 30, 2023, and its credit facilities include provisions for replacing LIBOR with an alternative rate like SOFR[219] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[221] - No material changes to the company's internal control over financial reporting were identified during the third quarter of 2022[224] Part II: Other Information Legal Proceedings The company is not currently involved in any material litigation and is unaware of any threatened material legal actions - As of the filing date, the company is not a party to any material legal proceedings[225] Risk Factors No material changes to risk factors were noted, except for a new risk concerning the share repurchase program's potential impact on stock price and cash reserves - A new risk factor was added regarding the company's share repurchase program, stating that repurchases are not guaranteed and could affect stock price, liquidity, and cash reserves[227] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities in the quarter[228] Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, credit agreements, and CEO/CFO certifications - Exhibits filed include the First Amendment to the Second Amended and Restated Credit Agreement, and certifications from the CEO and CFO as required by the Securities Exchange Act of 1934[232]