Q3 2019 Earnings Call
Greetings and welcome to the easterly government properties third quarter 2000, <unk> earnings call. At this time, all participants already listen only mode. A question answer session will follow the formal presentation. If any what's your require operate ever assistance. During the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'd now like to turn the conference over to your host, let's see what their halter Vice President Investor Relations. Please go ahead.
Good morning before the call began please note the use of forward looking statements by the company on this conference call statements made on this call may include statements, which are not historical facts and are considered forward looking.
The company intense these forward looking statements to be covered by the safe Harbor provisions for forward looking statements.
Changed in the private Securities Litigation actor form of 1995 and is making a statement for the purposes complying with the safe Harbor provision.
Although the company believes that its plans intentions expectations strategies and prospects, it's reflected in or suggested by these forward looking statements are reasonable it could give no assurance that these plans intentions expectations or strategies will be obtained or achieved. Furthermore, actual results may differ materially.
From those described in the forward looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including without limitation. Those items contained in item one day risk factors of its annual report on Form 10-K for the year ended December 31st 2018 filed with the.
Yes, you see on February 28, 2019, and in its other FCC filing.
The company assumes no obligations to update publicly any forward looking statements, whether as a result of new information future events or otherwise.
Additionally on this conference calls the company may refer to certain non-GAAP financial measures such as funds from operations funds from operations as adjusted and cash available for distribution you can find a kabili reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings.
Relief and separate supplemental information package on the Investor Relations page of the company's website at IR day easterly read Dot com.
I'd now like to turn the conference call over to Darrow Kramer chairman of easterly government properties.
Thank you Lindsay good morning, everyone and thank you for joining us for this third quarter conference call. Today. In addition to Lindsay I'm also joined by build Trimble, the company's CEO and making the via the company's CFO and COO.
He was a strong quarter.
Each area of our business performed well we made progress on milestones that we expect will deliver solid performance over the long term.
Our Bulls eye properties performed well the acquisition pipeline is robust, which we expect will allow us to deliver on our 200 million dollar plus target for the next several years, while being selective.
Our development effort progressed as well with the delivery of F.D.A. Alameda and our two additional FDA laboratories under development on schedule.
And our balance sheet is well positioned to support all these growth initiatives.
It is our goal to deliver 2% to 3% annual AFFO growth over the long term to shareholders along with the dividend, which today is approximately 5%.
We believe this provides an attractive opportunity, especially given that we have the highest quality time with our respect for the full facing credit into the United States government.
As our long term shareholders know our predecessors founding almost 10 years ago. Our mission is to be the partner of choice to the federal government, especially in mission critical assets.
All of our people understand that are enabling the U.S. government to achieve its mission with facilities. That's important its workforce is a pathway to being that best partner.
We strive to be our best for the FBI. The D. I tend to be a along with 32 other agencies each and every day.
In doing so we serve our tenant and build value for our shareholders.
Thank you for your time this morning ill turn the call over to build to share more detail on developments in the quarter. Thanks, Darryl and good morning. Thank you for joining us for third quarter earnings call. This is another great quarter for the acquisitions team here at East Julie we continue to deliver on our pipeline of actionable opportunities with the acquisition of nearly 100.
It and 70000 square foot Environmental Protection Agency regional headquarters in one exit Kansas.
This single tenant G.S.A. leased office building was originally constructed in 2007 and underwent a large scale renovation to suit for the specific use of the EPA in 2012.
That point the facility received a LEED gold for new construction in a LEED platinum certification for existing buildings. This facility was also awarded the energy Star with an impressive score of 94. The building is 100% occupied by the EPA through October of 2027, hundreds original 15 year lease which has.
As a five year renewal option, that's potentially carrying the term through October 2032.
An acquisition like this is the perfect marriage of our Bulls eye strategy and our commitment to good environmental stewardship through the ownership and management of a green real estate portfolio.
Further subsequent to quarter and it's really acquired the U.S. citizenship and immigration services facility in Tustin, California, located in Orange County.
This recently LEED certified fully renovated to suit 67000 square foot facility is 100% leased under a brand new 15 year lease which will expire in 2034.
Extensive renovations ensure the tenant is receiving an optimal working space for their highly important mission through these two accretive acquisitions, we have not only extended our average remaining lease term, but we have also reduce the average age of the company's overall portfolio.
In addition, the easterly team is nearing its state acquisition goal of 200 million for 2019, and I think use and expect to see has continued to deliver on this goal for the remainder of the calendar year.
This is also an exciting quarter for the development size. The house led by our Vice Chairman, Mike Ivy, We were pleased to deliver the brand new state of the our FDIC Laboratory and Alameda, California. This August at FDA Alameda is now the newest of the 13 regional FD laboratories located strategically throughout the country now that we've completed the.
Good afternoon Alameda the government has reimburse us for our outstanding lump sum expenses and has commenced a brand new 20 year lease which carries that turned to August of 2039.
This project completed on schedule and on budget is another measure success for our team.
Laboratories that FDA Alameda are extremely sophisticated even compared to the private sector, requiring a top tier developer architect and general contractor in order to construct and lover.
Our decades of experience in our strong partnerships with the government and our builders allowed us to provide stayed the art facility to the U.S. government. So they can fulfill an absolutely critical mission for the safety and security of the American public.
Continuing with development this quarter remarks, the closing on our existing property for the future redevelopment of the FDA Atlanta Regional laboratory.
As mentioned this is a wonderful opportunity for us we're honored once again to serve as the partner of choice to the U.S. government.
FDA Atlanta at 162000 square feet will be over twice the size of the FDA Alameda project.
Statements Arctic facility is expected to has both laboratory and office space for the Atlanta District office as well as the southeast food and feed laboratory and the southeast Tobacco Laboratory.
The Atlanta District office overseas, the regulatory operations within the Atlanta region, while the southeast food and feed Laboratory provides laboratory testing and regulation for the region as well as research into new methodologies and regulatory areas within the FDA.
Realty is expected to house four separate laboratories for nutritional analysis chemistry, microbiology and tobacco. Once this project is delivered the GSK will commence its noncancelable 20 lease for the beneficial use of the FDA.
Starting with the delivery of FEMA Tracy in 2018, followed by FDA Alameda in 2019, and then the anticipated deliveries of FDA Lenexa in 2020, and FDA Atlanta in 2021, or 22 easily started to establish a pattern of delivering a project to year pattern.
We hope to continue for years to come we're taking advantage of these opportunities at attractive yields with long term lease duration starting on day. One. So we are well positioned to provide long term predictable financial results for our shareholders.
And finally, turning to re lease renewals. We were pleased to report we assigned a new lease what's a good safely at the field office located in Richmond, Virginia. This new lease which will go into effect on January 2021 will be for 20 years 15 years from which carries the term through 2040.
One.
This is a center of the Bulls eye property, and we were able to earn highly attractive releasing spreads on this location.
Bull's eye renewal thesis was unequivocally demonstrated through this lease renewal exercise with the federal government and it is our pleasure to continue to serve as the government's landlord at this mission critical facility.
The success is also reflective of our asset management team demonstrating their differentiated skills and abilities to work hand in hand, with the U.S. government to continue to provide an asset that meets the everyday needs of these important agencies.
To summarize growth at easterly continues the square footage of our portfolio has tripled since the time of IPO, our company's market cap has grown by nearly four times and our flight slowed by over six and a half times over that same timeframe.
This offering greater liquidity to our new and existing investors.
Prudent management of our balance sheet has increased the capacity to accretively acquire and develop assets.
Growth in scale has allowed us to diversify the portfolio with no single asset that's a near term exploration representing more than 2.4% of the total portfolio and we continue to grow the overall any of the of the portfolio as the asset management team works for the U.S. government on tenant funded improvements further.
With the stability of tenant occupancy superior to that of our net lease peers. We believe this vehicle for growth will only continue over time.
Theres a lot to be proud of it is really and I. Thank you again for your partnership and commitment to our investment thesis I'll turn the call over to Megan to discuss the company's quarterly financial results.
Thank you Bill good morning, everyone easterly is unique portfolio and business strategy allowed us in the third quarter to once again consistently post strong earnings this time against the backdrop of increasing market uncertainty and volatility as you saw on our earnings release for the third quarter net income per share in a fully diluted basis with one cents.
FFO per share on a fully diluted basis was 29 cents.
FFO as adjusted per share on a fully diluted basis was 29 cents and our cash available for distribution was $20.7 million.
As of September Thirtyth, we owned at 68 operating properties, comprising approximately 6.3 million square feet of commercial real estate with two additional projects totaling 220000 square feet under development or in design.
The weighted average age of our portfolio was 12.7 years is through the acquisition of young mission critical although properties and the delivery of our latest state of the our FDA Laboratory project Alameda, California, and we were able to reduce the age of our portfolio again quarter over quarter looking back to our IPO, while four and a half years has path.
Our portfolio has only aged on a weighted average basis by 1.8 years.
For the same reason and even with time working against US. We were also able to lengthen the weighted average remaining lease term quarter over quarter from 7.4 to 7.6 years.
Our portfolio has grown from 56 to 68 properties. Since this time last year, representing approximately 30% growth in the overall sides of the company's portfolio based on square footage by.
By achieving our stated goal to meaningfully scale. The portfolio. We have created a more diversified stream of cash flows supporting the company's operation earnings predictability and ultimately its dividend.
Given the superior credit quality of our primary tenant.
The duration of the governments and during missions within our facilities and the prolonged nature of the average remaining lease term. We believe these factors give us unique visibility toward the future cash flows of this portfolio.
Turning to the balance sheet at quarter end. The company had total indebtedness of $908.6 million with a fully available $450 million line of credit for future acquisitions and development related expenses.
As of September Thirtyth, Israelis net debt to total enterprise value was 32.3%.
As adjusted net debt to annualized quarterly EBITDA ratio with six times.
Meaningful progress on our development projects will bring higher levels of reported leverage as we near project completion adjusted leverage impart neutralizes this leverage drag and at six times demonstrates the strength of the balance sheet and available dry powder as we continue to pursue our target of 200 million acquisitions. This year next.
As part of our goal to purchase properties through just in time funding the company with active on its ATM program throughout the third quarter and subsequent to quarter end.
Its June Thirtyth of this year. The company has issued 4.3 million shares of common stock raising approximately $86.3 million in total gross proceeds at a weighted average price of $20.05.
During the third quarter the company closed and funded the previously announced private placement of 275 million principal amount of unregistered fixed rate senior unsecured notes the second trip to the unsecured debt private placement market solidified existing partnerships and initiated strong relationships with new lenders.
The weighted average maturity of the notes was 12.4 years at the time of clothing and the weighted average interest rate as an impressive 3.85%.
Extending the company's liabilities at such an attractive fixed rate positions the company for future growth by deploying capital accretively into acquisitions and development opportunities.
As Daryl mentioned earlier, we achieved the majority of our growth externally through accretive acquisitions and opportunistic non speculative development projects.
As such efficient management of the company's balance sheet is among our top priorities and I'm pleased to have a quarter and six times adjusted leverage with a weighted average interest rate of 3.8% and a weighted average maturity of 8.3 years I'll remind you. This compares favorably to our weighted average remaining lease term of 7.6 years.
Turning to our earnings guidance for the 12 months ending December 30, Onest 2019, the company has maintaining its guidance for AFFO per share in a fully diluted basis of $1.18 to $1.20.
This guidance is based on the company completing 200 million of acquisitions separate and apart from the January 2019 closing of the final three properties in the 14 property portfolio and $75 million to $100 million of gross development related investment in the year.
The company is also introducing guidance for AFFO per share in a fully diluted basis for the 12 months ending December 30, Onest 2020 of $1.22 to $1.20 for.
The midpoint of this guidance is based on the company completing 200 million of acquisitions and 40 to 50 million of gross development related investment in the year.
For midpoint to midpoint. This 2020 guidance represents approximately 3% growth from our 2019 guidance.
In line with our long term goal of delivering 2% to 3% annual earnings growth to investors. We believe that long term steady growth paired with a secure sector leading dividend is the recipe for consistently improving our cost of capital and we strive to achieve this combination again in 2020.
With that ill turn the call back to Stacy.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is and the question Q you May Press Star too if you would like to remove your question from the Q for participants using speaker equipment.
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Our first question comes from Michael Carroll with RBC capital markets. Please go ahead.
Yeah. Thanks, Bill can you talk a little bit about what you're seeing in the acquisition market today.
No that you previously said that there has been more broker transactions coming in.
Looking within the space I mean, how does that impact your volume and your pricing on these types of deals.
Good morning. Thanks for the question I think I will say that we are seeing more brokerage opportunities, but I think recently, we've also seen some more off market opportunities as well and stepping back and looking at our pricing I think the supply is very strong so Michael I feel really good about that I'd say that we've probably seen 10 to 15 base.
His point change in the market over the last nine to 10 months and so we're seeing where we were seeing.
Six Fiftys I think we're seeing sort of you know in the 636 35 category, but I'd also say.
That the properties that we've been purchasing as you've noted have been brand new state of the our facilities that have very long lease terms, so that might be shading, it a little bit, but our pipeline remains robust and we are seeing some more and more off market opportunities now as well.
Great and then if you're looking about some of your assets that are within your portfolio that more the plain vanilla.
I guess, what are you kind of taking about in terms of asset sales is that something that you want to pursue right. Now are you happy holding those properties here in the near term.
Well I think I think as you've seen that we've renewed certainly the largest of airplanes and all assets with very long lease terms going forward. So we have a number of years. The management team can decide what we're going to do there I think we're pleased with everything we have in the portfolio.
But you know as I've mentioned before obviously, we're always trying to refresh the portfolio add new Bulls eye properties was because we believe in the long term, they're going to be the most valuable. So I think no surprises there as we see opportunities, we'll certainly take advantage of.
Okay. Great then last one from me can you talk a little bit about the the G.S. a build to suit opportunities and then I guess Megan does does your guidance range assume any other new starts this year or does it just assume that you completes the projects that are in your pipeline in starts the project Atlanta.
Well I think from the build to suit opportunities. We are any unique space in that the government decides when they want something to be built we're not going on doing speculative development. So there's two sides to that point.
I think we have mentioned that the FDA has 13 of these facilities throughout the country laboratories through Mike IB and teams hard work. We've been awarded the first three of them I would not be surprised to see us get awarded more of those in the future.
I don't think I can guarantee we're going to get every single one of them as we've mentioned before there are some FDI opportunities. There's some FEMA opportunity is there some stuff out there. So we will be certainly tuned.
Soon to what's happening there and right now I think we're in a terrific run rate of coming up in delivering one of these new projects every year and we hope this stand that way for quite some time and Mike our guidance contemplates the completion of Lenexa and.
Very small level of initial investment Atlanta, but nothing further.
Okay, great. Thank you.
Yes.
Our next question comes from Merrill Ross with Compass point. Please go ahead.
Hey, good morning.
No I forgot to ask on the lease renewal enrichment.
What was the spread.
Yeah, Good morning, Merrell says Megan.
We're really excited about.
The the outcome at Richmond.
First of all that that renewals and completed over a year in advance of exploration. So we're going to have.
Good time to complete the T. I work before the commencement of that lease and and while that to your work is not yet fully determined by the government. We are expecting that lead on an effective basis to roll up in the area of 25%.
Thank you know you had that other property and I know that small.
Yes, and okay and on the border and San Diego.
It looks like they're going to be leaving that building at the end of the lease amended the outgrew it.
Suspect.
Are there any prospects.
We met that it's clearly suited for federal.
Agency I couldn't agree more I stood on that property. We've got two facilities. There and you are literally looking at the Mexican border from one and expect the other a mile away. There are all sorts of opportunities for for that building, we believe and also.
It is really on the only office space along with our other is located in that position. Most of it is a warehouse and industrial so we are sanguine about the the prospects for that for that property and Im sure.
Current situation with Mexico, there'll be plenty of opportunities.
Yes, when seen that way.
Okay.
Yes, it would like to know if you can.
Circle, Megan the bumps from expense reimbursement from L. Anita.
I'm, sorry, if we can if and when can we.
Ed.
We did receive the lump sum.
$52 million, so that we have nothing further waiting all out we're not waiting on the government for that.
So with that unless im sorry.
$52 million.
Thank you.
Yeah.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Next question comes from Jon Petersen with Jefferies. Please go ahead.
Hi, This is Peter on for John just looking at similar lease expirations.
Through the rest of this year in 2020.
I guess just from a higher level what are you seeing in terms of where those leases are rolling directionally, whether it be.
Positive or negative spreads I think I think the first thing is is certainly where we where we anticipate them rolling as reflected in our guidance for next year, which I'm very happy to deliver today I'd also say that I think that were.
Certainly.
Not worried about the leases going over the next year in fact very positive in that we have sort of transitioned in the last few years, where we had some plain vanilla. These are as evidenced by our FDI Richmond.
Bull's eye properties, and you know where they renew very favorably for most part I will tell you that we're not going to begin a trend of discussing during negotiations with the federal government, where we think the the leases are going to turn out but I think they will be as anticipated and we're very pleased as I was going.
Got it thank you.
Thank you I would like to turn the floor over to Daryl for closing remarks.
Thanks, Stacy so thank you everyone for joining the certainly government properties third quarter 2019 conference call. We appreciate your time, we look forward to keep you posted on all of our work and as we strive to build a portfolio of pristine assets back, but the full faith and credits of the U.S. government.
This concludes today's conference. Thank you for your participation.