Q2 2020 Easterly Government Properties Inc Earnings Call
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Greetings and welcome to easterly government properties second quarter 2020 earnings conference call. At this time all participants are now what's the only mode. A question and answer session will follow the formal presentation. If anyone should require operators. The since starting the conference. Please press star zero on Youtube.
Telephone keypad.
As a reminder, this conference is being recorded I would not like tried this conference over to your host that's something once your hold true Vice President Investor Relations. Thank you you may begin.
Good morning.
Copycats. Please note the use of forward looking statements by the company on this conference call.
That's made on this call may include statements, which are not historical facts and are considered forward looking.
The company intends. These forward looking statements to be covered by the safe Harbor provisions for forward looking statements contained in the private Securities litigation matter form of 1995, and he is making a statement for the purpose of complied with the safe Harbor provision.
Although the company believes that its plans intentions expectations strategies and prospects as reflected in or suggested by those forward looking statements are reasonable I can give no assurance that these plans intentions expectations or strategies will be obtained or achieved.
Furthermore, actual results may differ materially for most described in the forward looking statements thatll be affected by a variety of risks and factors that are being on the company's control, including without limitation those contained in item Onea risk factors of its annual report on form 10-K for the year ended December 31st 2019.
I mean I open the FCC on February 20, since 2020 and is making its other us and in its other RCC filings and risks and uncertainties related to the adverse impact is cobot 19 on the U.S. regional and global economies and the potential adverse impact on the financial condition results of operation.
The company.
The company assumes no obligations to update publicly any forward looking statements whether as a result, this new information future events or otherwise.
Additionally, on this call the company may refer to certain non-GAAP financial measures such as funds from operation funds from operations as a trusted and cash available for distribution.
Confided Fabulous a reconciliation of these non-GAAP financial measures to the most comparable crank out numbers in the company's earnings released and separate supplement medical information package on the Investor Relations page of the company's website at IR easterly rate dotcom.
I'd now like to turn the conference call over to Daryl Kramer Chairman of easterly government properties.
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Thank you Lindsay good morning, everyone and thank you for joining us for the second quarter Conference call.
Today. In addition to Lindsay I'm joined by Bill Trimble, the company's CEO and make it into the or the company's CFO and COO.
Given these challenging times that seemed to ever have in extending duration I thought it'd be helpful describe our business in the context of coded and highlight our areas of focus.
We could not be more pleased with the government as our tenant.
Our tenant credit quality is higher than any other read as rent dollars are being paid and our leases are backed by the full faith and credited the United States government.
Overall economic activity is uncertain, our businesses not correlated with any economic segment, if anything when there's economic uncertainty or societal unrest that is the time government isn't demand.
The team has done an outstanding job extending the average maturity of the portfolio has the weighted average remaining lease term for the portfolio has grown by over 35% since the beginning of 2017.
Growing duration, well time is ticking away is value added for investors.
In this environment, we are well positioned to grow through acquisitions, we continue to execute on our base case without question.
We are evaluating several portfolios of high quality long duration assets assets. In addition, we remain well positioned to purchase assets because we believe many owners may feel the need to generate some liquidity in their portfolios as the strains of Cove. It continue through the fall.
Our development efforts continue to execute without delay and we look forward to those projects going online over the next several years [noise].
All told we've increased the total leases on bills desk from 1.4 billion to $1.8 billion, representing a 30% increase over the last 12 months, which continues to build the foundation at the firm.
With 110 year lease roll.
In this young portfolio with an average duration of 13.1 years. This could lead to an excess of $4 billion do the easterly again based only upon the leases that we have today.
We also continue to prepare our balance sheet for disciplined accretive growth and we're building capacity.
We have a clear view of our future earnings which has caused us to positively revisit our guidance for 2020 as we look out over the next three years, we see a strong opportunity to continue to execute as we have in the past and continue to deliver steady growth with an opportunity to have some material upside surprises in acquisition development grow.
Both along the way.
With that I'll turn the call over to built to discuss the specific activities that we are engaged in to achieve our strong results.
Thanks, Darryl and good morning. Thank you for joining US first second quarter earnings call at almost the five month Mark entered the pandemic easily is not only weathering the storm, but thriving our team whether shareholder facing tenets servicing or acquiring and developing bulls eye properties has performed as well if not better.
Then before the crisis began.
With respect to our portfolio, we continue to work closely with our government tenants to ensure we maintain a clean and safe office environment for our federal workforce. Our asset management team has worked quickly to address any cobot related issues and provide a level of service that we believe distinguishes us from other landlords have federally least real estate.
We have received a high degree of praise from the GE essay and the underlying tenant agencies with respect to our level of service and we will continue to make sure. Our property management is second to not.
For those of you have followed us or have seen us in person we have since IPO discuss the government tenancy and are keen interest and not being run over by Glacier.
Things move at a geologic pace and the government, but being on the wrong side of a major shift is to be avoided I'm pleased to report that the very nature of the missions of our tenant agencies locations of our facilities and the fact that a majority of our properties are low rise buildings located in office parks combined to mitigate many of the negative issues at phase.
Most of our office brother, social distancing and many of the government's missions our entirely compatible.
As previously mentioned, we seek to own real estate that has leased to a single tenant agency and is located on a multi acre campus health concerns associated with many office settings are not as burden seminar portfolio, where we see more horizontal rather than vertical spread with a weighted average building height of just three stories are building.
Two facilities meet the tailored requirements of our unique tenants and we stand ready to help the government modify their exclusive use space in response any changes in health or safety protocols.
Second given emission credit criticality within our portfolio it would be largely impossible for the federal government to carry out their missions from home FDI agents cannot access secure networks and skiffs space for middle living rooms D. A scientist cannot analyze a host of illegal drugs from their kitchens and the v. medical professionals cannot.
Provide critical health services for their patients from their bedrooms I know this sounds obvious but just those three simple examples account for our top three tenants and over 45% of our annualized lease income this quarter.
Turning to our second quarter performance the acquisitions team started the quarter with its third acquisition of the year 79000 square foot Department of Veterans Affairs outpatient facility in mobile, Alabama like our other outpatient facilities via Imobile as a recently completed build to suit facility that is subject to an initial 15 year.
Sure Noncancelable lease expires on December 2033.
We also purchased a VA outpatient facility located in Chico, California. During the second quarter. This 51647 square foot building outpatient clinic was recently completed in mid 2019. The state of the our facility was designed to achieve a lead healthcare silver certification and is.
At least to the VA for an additional non cancelable lease term of 15 years that expires in June of 2034.
I'm, particularly pleased better acquisition team led by Andy Pulliam, and our Vice Chair, Mike I'd have literally not missed a beat the pipeline remains full third party providers are available for inspections and sellers are confident in our ability to close this coupled with our attractive cost of capital gives us confidence in.
Our ability to deliver on our stated goal of 200 million in acquisitions for 2020.
On the topic of our acquisition pipeline, we're committed to maintaining the quality and focus of our portfolio. There's many opportunities off market as we have ever seen and we continue to follow a number of portfolios both large and small.
You said that we do not want to beat the elephant in the swimming pool driving prices up for the sake of doing transactions. We expect stepped back from several marketed offerings, where sellers of combined quality properties with buildings that are not even close to our bulls eye, we have plenty to buy without diluting our focused portfolio and we will not pursue lower.
Quality non accretive or risky assets. The great news is we're pleased that sellers generally know what easily will and will not buy and we've seen an increase in inbound calls regarding bulls eye buildings.
And then our cost of capital deep knowledge of this market and prudent selective growth has and will be the driving force behind our acquisitions.
Turning to development, Mike Ivy and his team continued to make strong progress at our FDIC Lenexa facility.
Easterly isn't the final stages of delivering the newest stated the art laboratory facility for the FDA is exclusive use.
The FDA and its laboratories are critical to the current crisis and construction continues to progress at a rapid pace with various trades working and shifts in response to safety measures put in place due to covert 19.
We remain on track to deliver our brand new state of the Art laboratory facility for the FDA in the fourth quarter of 2020.
We also continue to make significant progress with the FDA and the G.S. day for the Atlanta Laboratory redevelopment project.
We're currently working with the government on construction drawings, while simultaneously executing demolition and shell construction.
We remain pleased with the progress being made do not expect any delays in our original timeline for FDA Atlanta and look forward to delivering another state of the our facility for the FDA and 2022.
In closing I would like to thank the easily team and all of our partners as we deliver growth to shareholders and time of global uncertainty.
We're in a terrific sector of rate market and we'll take full advantage of the opportunities provided against this unique backdrop.
With that I will turn the call over to Megan to discuss the Companys quarterly financial results.
Thank you Bill good morning, everyone. It gives me great pleasure to post another strong quarter that exceeds consensus expectations enables us to raise our FFO guidance for the year and positions the balance sheet with tremendous strength and flexibility to continue on our growth path.
Through and eventually beyond these trying times.
Easter lease operations from a financial standpoint has strengthened and the financial impact from Cowen 19 on easterly rent roll continues to be de Minimis and we do not expect any material rent collection issues for the third quarter and beyond.
Turning to our quarterly results as you saw in our earnings release for the second quarter net income per share on a fully diluted basis was five cents.
FFO per share on a fully diluted basis with 32 cents.
FFO as adjusted per share on a fully diluted basis was 31 cents.
And our cash available for distribution with $23.4 million.
Our performance relative to expectations of our quarterly result was attributable to lower than expected utility expenses across the portfolio.
As of June Thirtyth, we averaged 74 operating properties, comprising approximately 6.9 million square feet of commercial real estate with two additional projects totaling approximately 222000 square feet under development or in design.
The weighted average age of our portfolio continues to defy time and remain once again at 13.1 years.
Our weighted average remaining lease term at 7.7 years has never been longer and with the opportunity to renew the nearly 22% of our portfolio that is expiring over the next year and a half we foresee the ability for this duration to lengthen despite the passage of time and the value of the underlying future cash flows owed to us.
The U.S. government to meaningfully grow.
Acquisition and development of brand new state of the our facilities will only compound effect.
As we continue to manage this portfolio and make capital planning decisions for the short medium and long term this improving visibility to future cash flow I would argue rivals that have any other publicly.
Turning to the balance sheet at quarter end. The company had total indebtedness of approximately $906 million with all $450 million available on our line of credit for future acquisitions and development related expenses.
As of June Thirtyth easterly net debt to total enterprise value was 30.1% and its adjusted net debt to annualized quarterly pro forma EBITDA ratio was below 5.7 time.
And this time of strength, we have and expect to continue to use outperformance as an opportunity to incrementally de lever the balance sheet and position ourselves for steady future earnings growth as the world in time returns to normal.
And the second quarter of 2020, the company issued approximately 4.5 million shares of common stock through the company's ATM program at a net weighted average price of $23.12 per share raising net proceeds to the company of approximately $103.4 million 3.4 million envy shares were from forward.
Sales transaction transactions entered into in prior quarters.
Today. The company has approximately 3.9 million shares which are subject to unsettled forward sales transaction under the company's ATM program I.
Assuming the shares are physically settled landfall at a weighted average initial forward sales price of $25.54. The company expects to receive net proceeds of approximately $98.9 million.
With these unsettled forward sales each of these very well poised to continue funding our acquisition and development pipeline just in time at a highly attractive cost of capital.
Turning to our earnings guidance due to the company's strong performance year to date, we are increasing our guidance for 2020 FFO per share on a fully diluted basis to a range of $1.23 to $1.25.
The midpoint of this guidance is based on the company completing $200 million of acquisitions and $40 million to $50 million of growth development related investment in the year and at the midpoint represents an over 3% growth rate year over year.
This growth coupled with a strong dividend. We believe provides an attractive combination to our value to investors.
In closing we are pleased with our performance year to date and remain optimistic about the future growth opportunities for easterly at a time of overarching negative trends and contraction within the U.S. economy. It gives me great pride to remain a source of consistent growth and dependability for our shareholders.
As always thank you for your time in partnership we wish you all the vast and please stay safe with that I will turn the call back to Laura.
We will now be conducting and answer a question answer session. If you like to ask a question. Please press star one on your telephone keypad.
Formation, Tom will indicate your line is in the question Q. You May proceed start to if you like Joe will get question from the Q4 participants using speaker equipment and may be necessary for you to pick up your handset before pressing the star Keith.
Goldman while we pull for questions.
My first question comes from the line of Manny Korchman with City. You May proceed with your question.
Good morning, Katy Mcconnell on for Manny could you discuss your thoughts around potentially using dispositions are jvs as an alternate source of capital assuming that there could be capital out there thats more interested owning your type secure asset today.
Good morning.
One let's start with the disposition part of your question.
The thing about having a a portfolio that is still incredibly young at only 13.1 years and the average stand. These buildings that over 40 years is that our portfolio really is not even getting to middle aged yet and we have a terrific group of buildings and so it really wouldn't be prudent at this time to to sell to sell any of those properties having said.
That we have sold properties that for various reasons. We believe wouldn't renew 10 years from now were perhaps we thought there were constrained or perhaps we thought there might be a mission change.
So we are always evaluating our properties but.
As you know we have several non GM say properties and we are always available as a source of funds in the future, but I don't think disposition is really part of our of our funding plan going forward, Megan maybe you'd like to Tegra tour and with regard to JV skating, obviously, our public cost of equity today. Thanks.
Streamlines.
Productive in terms of what we can do in terms of putting that act that capital to work towards acquisition and development opportunities, but there is attention on this asset class and this company in particular from multiple sources of capital both public and private so.
The opportunity set awareness first capital does continue to grow as we continue to position. This company publicly so we're confident in our ability to be able to go out there and and complete deals.
Okay, great continue to create value for shareholders.
And just say by contrast, you see a lot of other reads, there where they're having the sets of financial challenges they need to go be more creative about finding capital if they're even going to think about growing.
But we we find ourselves up year to date and.
With that as Megan said, a cost of capital where.
Our challenges is making sure we mean team the discipline instead of going out there and buying everything making sure that we're buying the highest quality buildings in our bulls eye that are going to be most accretive to shareholders today and in the future.
Got it and then so with.
Cost of capital secured to what extent you think there could be upside to your acquisition guidance sorry. Your plans for development starts if you start to see the right types of deals coming out of my guess.
Well I think that we've always said from the development side, which is certainly our most accretive area and led by Mike IB and his team have just done an amazing job and and basically we've won almost every project since we've gone public that has been out there and so while we would like to do more of that is up to our friends at the federal government to come out with.
RF piece that we win and then obviously when we do will we have plenty of capacity to to expand in that area, having said that I think we see some opportunities out there certainly in the FDIC laboratory space certainly in the FBI space and we will continue to pursue those right now we're on track to deliver I think a terrific developed.
About one a year, we can do more than that but I think thats a great run rate so far from our acquisitions pipeline I'm pleased to report that we're always in the market.
I think that you can expect that we're always working on something we're seeing lots of off market opportunities and if and if they're accretive.
And the sort of buildings, we wanted in our Bulls eye, we will not hesitate. The only thing we want to make sure is that we don't run the market up too quickly in front of this and we don't think that's a problem right now so I think you'll see us very active there.
And I'd say as you heard in my comments this sort of echoes what bill thing just to put a point on it I mean, you hear US we're building capacity, we're strengthening our balance sheet, we're doing that in accretive way and as you know what we've said to investors is look out 123456 years, and we're going to be delivering our.
Dividend plus a growth rate, that's kind of 1.5% to 2% and we are that is what we will do if we're not going to get there we're going to cut our comp if were going to get there we're going to make sure that we're delivering doing everything we can deliver stability to investors year in in year out now we're building this capacity why because as.
As you look in real estate and particularly through the summer you saw banks, giving a lot of forbearance to a lot of real estate folks.
And hoping covert would you just go away and we think Cove. It is here for maybe a little bit longer.
And on and that will mean that some folks who own.
On broad set of of real estate in the different segments are going to once and liquidity and.
Dividing them liquidity for these kinds of buildings is the is what we should be there to do and I think that will present, an attractive opportunity. So that's one opportunity we're being prepared for the other is as what bill was referencing we're looking at a lot assets right now and we're really thinking about what would be the best portfolio for us to be.
Delivering to investors today at 2021, 22 and 23.
Okay, great. Thanks Sara.
Our next question comes from the line.
Well Carroll with RBC capital markets. You May proceed with your question.
Yes. Thanks Bill in your prepared remarks, you talked about portfolios that are on the market that have more I guess mixed of asset quality I guess, what type of bidders or are going after these deals and have those deals shred it yet.
We've seen some actually one failed I think people instead of trying to fro the kitchen sink in with some some some higher quality assets and.
Obviously.
Well, it's gotten a little frothy I think for some of these folks however, I think what we've seen from an off market.
Situation has been an increase in the opportunities in the Bulls eye areas, so were but rather gratified with how it's progressing right now.
But if we see people come back to reality in separate the good assets from the bad.
Obviously, we'll take a look at those as well.
Okay. So those deals are those portfolio deals that's really havent haven't shred it yet.
I guess, if they do I guess, if they what's the chances of those sellers had been talking to them. I mean are they going to try to break them up and you have more of the one off type opportunities I suppose.
I think that would be probably the smartest opportunity I mean for some smaller players in this business. When you think of small social security buildings, which aren't really our cup of tea I think that there are some great people that by them post offices, those sorts of things, but we're really interested as you know Michael on it in a certain group of buildings enduring larger single tenant.
New.
Noncontroversial, and ER and and Bulls eye, Yes, I mean, let's not forget about our strategic position in the choices that we've made over the last 12 in 24 months to be where we are which is again plenty of capital lowest cost of capital and if we didnt have quarterly calls if they were annual calls for example, we.
The incredibly bullish about one of those material upside opportunities that would come along what we've never wanted to do is get excited about a portfolio and then here we are in November.
On the phone with you and you're saying, we'll where's that portfolio that you're thinking about and right now.
We know what's out there that could make a material difference for the company that is in our Bulls eye Theres plenty of capacity, we just need to make sure we're doing that with the right context in the environment in the market.
In order to make that not only exciting today, but in in during benefit for for investors.
Okay, great. Thanks for that and then I guess nagging can you talk a little bit about the leverage targets. The DTA has I know that net debt targets have been between six and seven your blow that today and significantly below that if you include the forward equity commitments I mean is there a plan to reduce that targets I guess, what's the expert.
Stations that we should think about.
Hey, Mike So youre right six to seven is arsone sustainable range by we've actually gone the other way in this moment strength and what I can tell you is it from my position I don't mind, having three to five plus pennies on the balance sheet in terms of dry powder on the leverage side. So.
We are certainly right in a position of strength as we look to deploy that additional equity capital and and work the adult pipeline.
But longer term you still still feel comfortable at that six to seven range. Yes, absolutely I think this is a moment if ever there were one to show that the this portfolio can stay sustain that level.
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Okay, great. Thank you yes.
As a reminder, she would like.
Please press star one telephone keypad.
Well, we pull for questions.
Our next question comes from the line of Peter Abramowitz with Jefferies. You May proceed with your question.
Yes. Thank you.
Just wondering do you have any sense for how market rents have moved in some of your markets, where you might have a.
Renewal negotiations coming up and kind of how the environment.
Potentially impact.
The rents are getting there.
Sure This is Mike and.
The dynamic around replacement cost than that conversation.
Really hasn't shifted would never will shift to the with respect to our properties and so underlying construction costs continuing to be supportive of that conversation, we havent seen.
We haven't seen any any shifts or dynamics around our renewal to up to set that off track.
Got it Okay, and then on the guidance raise I think.
If you look at the midpoint of where the new guidance ranges would imply 31 cents in the back office. So.
Is that just a degree of conservatism relative to this quarter or do you have any kind of onetime things.
Maybe on the expense side that kind of.
To help bump that up a little bit this quarter.
Yes, what I do know is that the utilities benefit to this quarter was approximately.
Penny and we're continuing to see occupancy our buildings improve.
And where we're comfortable with with the viewpoint that this is a.
Confined event to this quarter.
Got it thank you.
And then one more I think you've talked about sort of the long term target for for earnings growth on an annual basis.
In that 2% to 3% range, but I.
I know bill mentioned with potential for some upside surprises in terms of.
Your acquisition volume or development.
Projects that you can win is that sort of still the target.
Something I considered sort of revisiting.
Can seems like you don't potentially some upside there or just based on.
Your commentary about acquisitions.
Yes, I know you're right, we're still very comfortable as Daryl I think but have been in there at the end of our prepared remarks with that one and that the 2% growth rate.
We're never going to to make statements around when we expect portfolios to come in but we do know the in the market.
We don't want to be they often assuming both what we have enough to.
Productive cost to capital relative to our competitors and we have connectivity with the sellers. So as I look out over the next 12345 years, we do feel confident that there will be those moments, where we can have a step function of growth that exceeds that level, but.
The long term planning is based around that that one at 2% growth.
Well, let me thank you.
Thanks.
Ladies and gentlemen. This concludes today's question and answer session I would like to trend this call back over to Mr., Daniel Craig for closing remarks.
Great. Thank you everyone for joining the easterly government properties second quarter 2020 conference call say stay safe and well and we look forward to seeing you at the end of October.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a breakdown.
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