Q3 2020 Easterly Government Properties Inc Earnings Call
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Lindsay Winterhalter, Vice President Investor Relations. Thank you you may begin.
Good morning before the call begins 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.
Okay.
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 Act reform of 1995, and he's making this statement for the purpose of complying with those safe Harbor provisions.
Although the company believes that its plans intentions expectations strategies and prospects.
Why did it in or suggested by those forward looking statements are reasonable.
We can give no assurance that these plans intentions expectations or strategies will be attained or achieved.
Furthermore, actual results may differ materially from those described in the forward looking statements and would be affected by a variety of risks and factors that are beyond the company's control, including without limitation those contained in item one a risk factors of its annual report on form 10-K for the year ended December.
31st 2019 filed with the FTC on February 26, 2020, and in its other FDIC filings and risks and uncertainties related to the adverse impact of Cobiz I team on the U.S. regional and global economies and the potential adverse impact on the financial condition and results of.
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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 call the company may refer to certain non-GAAP financial measures such as funds from operations funds from operation as adjusted and cash available for distribution.
You can find a tad below a reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information package on the Investor Relations page of the company's website at IR day, he's truly <unk> dot com.
I would now like to turn the conference call over to Darrell Crate chairman of easterly government properties.
Thank you Lindsey good morning, everyone and thank you for joining us in this third quarter conference call. Today. In addition to Lindsay I'm joined by Bill Trimble, the company's CEO, and Megan, but the or the company's CFO and COO.
[laughter] during this period Weve had a significant number of calls and meetings with new investors, particularly those from the international community. So I thought I'd share a frequent question that we received or were in office or are we in that lease read.
For those of you who are new to the call I'll share the answer the.
The principles that underpin our business are clearly net lease REIT.
We can develop purchased several hundred million dollars of mission critical buildings each year to grow earnings. However, there are two factors that make a superior to net lease the quality of our cash flows and the value of our young buildings to track the growth in replacement cost.
First and foremost our cash flows are based upon the full faith and credit of the U.S. government.
You will not find a single you esri with a better tenant quality than easterly.
Our leases supporting our portfolio are on average 10 to 20 years in length.
Which provides far superior visibility to future cash flows.
Than any traditional rate [noise].
The Street, we have extremely high renewal rates at lease expiration due to the build to suit mission critical nature of our portfolio.
Today, our existing leases each with one rule would equal $4.3 billion, a future cash flow that's backed by the full faith in credit at the United States government.
Like any net lease rebuild shareholder value through a robust acquisition program, coupled with a non speculative development activity.
Given our attractive cost of capital these activities translate into 2% to 3% AFFO growth per year, coupled with a roughly 5% dividend yield.
This delivers a 500 to 700 basis point premium to the 10 year Treasury I would observe that the premium we deliver relative to treasuries is near an all time high.
When you take a closer look at what we have built you will see easterly as real estate without the drama a pandemic does not diminish our value and we're not beholden to one political party to local rent markets for one geographic area of focus.
Added to net lease attributes without volatility our facilities are purpose built highly sophisticated government leased facility is designed with skiffs space secure networks perimeter fencing visitors screening bollards and a host of other improvements. These features add specific value to our tenants and provide an opportunity for.
Value creation upon release further.
Further we've created a portfolio that delivers stability with no single asset representing more than 2.7% of annualized lease income set to expire in the near term.
Given that our method of value creation is differentiated from the REIT market. We've done what we can to limit our exposure to index fund price movements by limiting their ownership I.
I would observe to those of you were managing to benchmarks. We've consistently performed in line or better with the Russell 1000, the cashless far less volatile based on the full faith and credit of the United States government.
[laughter] 2020, its been a dramatic here in every sense as the world navigates, a pandemic and here in the United States, we face economic political and social unrest.
It's often difficult to spot directional changes in history, but it certainly feels like one of those times.
Certainty extends to the real estate sector in general and the retail sector in particular as investors must make portfolio decisions based on macro and micro factors that have never been more opaque 10.
10 years ago, we purchased our first F.B.I. building for our new private equity fund that became the first building block of what is today easterly government properties.
We have launched into our focus first tranche and government space, because we saw a clear opportunity to harness the world's best credit while also taking advantage of long duration leases, an incredibly high renewal rates.
10 years later that first F.B. I still provides a mission critical home for the San Antonio Field office and remains young and that's like.
The World has gone through many gyrations since 2010, but our story the government's mission and our strong and sustainable growth remain the same we're looking forward to 2021, we are pleased with the stability and predictability of our platform to create value for shareholders and of course, the coming year and the decade ahead. Thanks.
Thanks, everyone and with that I'll turn the call over to Bill.
Thanks, Darryl and good morning, Thank you for joining us for our third quarter earnings call as the pandemic continues to cripple. The American economy. It gives me great Pride report that easily is continuing to weather the storm with little to no impact on the Companys daily operations and maintains a portfolio where tenants continue to pay 100.
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Why were now eight months into the pandemic with no end date inside East really continues to work with our government tenants to provide a safe and clean work environment I want to highlight the incredible job or asset management team has done keeping our mission critical facilities open and ready to serve the American people. The unsolicited letters of appreciation we have received.
From the government makes us proud of the job our team is doing every day.
In an environment, where other office landlords are questioning their long term strategies due to the economic effects of coated I'm pleased to report that we remain so highly focused on owning Bulls eye mission critical assets leased the U.S. federal government the.
The missions locations and design of our majority low rise portfolio provides a safe and sustainable footprint for our enduring portfolio well.
Well the easily earnings call, maybe the most important event of the week to us I would be remiss, if I did not acknowledge the presidential election.
As the country is on edge awaiting the election of our next President I'm pleased to report that the impact on the easily portfolio should remain unchanged our investors to see easily thrive under both Democratic and Republican administrations as we remain apolitical owning buildings has missions transcend the parties different philosophies during the last 10 years.
Irrs of executing our strategy and the private and public markets. We have gone through government shutdown, continuing resolutions furloughs debt ceiling negotiations and are still navigating this historic pandemic.
These events often cause concern but are to be expected. When we created this strategy was for this very reason that events in the short term to mid term can cause huge swings and investors value perceptions, we've been very deliberate in our approach to provide attractive steady growth with a tenant credit second to none.
Turning to our third quarter performance, our acquisitions team completed the acquisition of the year and approximately 76000 square foot Federal Bureau of investigation field office in mobile, Alabama like many of our other FDIC field offices. This three storey office building sits in a large multi acre site and is in hand.
Asked by a number of security features including but not limited to perimeter fencing controlled access a vehicle repair annex and future plans for the construction of a visitor screening facility, which will reside on the perimeter of the property.
With this acquisition easterly now on 11 of the 56 F.B.I. field office is strategically located throughout the country and remains the single largest private owner of these highly important assets.
This was a multi year acquisition effort and I congratulate you truly came for its ability to navigate a lengthy transactional process and continue to deliver for the company and our shareholders. This effort is reflective of a high caliber team led by Andy Pulliam, and our Vice Chairman, Mike Ivey, who continued to ensure a robust pipeline.
Actionable opportunities and an exceptional ability to execute we continue to visit assets in person, while falling protocol to help ensure the safety of our team and work with third party providers to complete exacting due diligence and ensure smooth closings.
As we approach the end of 2020, we are confident in our ability to deliver on our stated goal of 200 million in acquisitions.
Turning to development. Another important milestone was achieved in the third quarter of 2028.
It's really has reached completion and commenced its new 20 year lease at the Ft. A laboratory in Lenexa, Kansas, Mike Abby Mark Bauer and team are truly talent in this niche market of the development World and were able to deliver this state of the art Laboratory a quarter ahead of schedule. The ft. Ala next laboratories now the new.
With regional laboratory for this highly important agency within the U.S. government.
This also marks the second successful ft, a redevelopment project can easily portfolio following the delivery of FDIC, Alameda and 2019 and preceding the anticipated delivery of ft, Atlanta, and the first half of 2023.
Turning to leasing updates our asset management team has remained extremely busy working with GSK and the underlying tenant agencies to renew the lease at the courthouse in Charleston, South Carolina as well as the SS a office in Dallas, Texas, Our new 20 year lease commenced the Charleston Courthouse effective August 2020, and earned a highly attractive.
Active re leasing spread which we believe is customary for bulls eye renewals.
Similarly, the SSH facility in Dallas, all through renewed for a new 15 year terms starting August of 2020.
These renewals once again demonstrate the underlying value of these assets as well as the strength of the easily team as they successfully navigate a lengthy renewal process with the government I congratulate the asset management team on a job well done this quarter.
Finally, before handing the call over to Megan I want to thank all of our capital partners Nuno for their commitment to the easterly investment thesis.
As I was recently talking with Andy Pulliam, our head of acquisitions, we realized the just a little under two weeks ago October 20, Onest marked an important milestone for the company as Daryl previously mentioned 10 years ago on this date, our predecessor company purchased our very first building the F.B.I. field office in San Antonio Texas.
10 years later and falling remains just as important as it did that our focus on acquiring bulls eye assets, our confidence in our releasing abilities, our commitment to our U.S. government tenants and our unparalleled understanding of how to effectively own and operate a federally leased facility and for those of you that have followed.
Yes, and remain committed to our thesis it should serve as no surprise that our investment approach has not changed in the last decade. Thank.
Thank you again for your time this morning, and with that I will turn the call over to Megan to discuss the quarterly financial results and provide guidance for 2020 and 2021.
Thank you Michelle good morning, everyone. It gives me great pleasure to post another strong quarter and continue demonstrating our ability to grow by once again, raising our 2020 guidance and is showing strong earnings guidance for 2021.
Oh, the 19 continues to have no material financial impact on the organization at each are you received a 100% of rental income due from our tenants in the third quarter sales.
Finally, we still do not expect any material recollection issues for the fourth quarter and beyond.
Turning to our quarterly results for the third quarter net income per share on a fully diluted basis was five cents.
Oh per share on a fully diluted basis was 31 cents.
As is always the adjusted per share on a fully diluted basis was 30, Ben and our cash available for distribution was $23 million.
As of September Thirtyth, we own 76 operating properties, comprising approximately 7 million square feet of commercial real estate with one additional development project in design totaling approximately 162000 square feet.
The weighted average age of our portfolio remains young at 13.3 years on a weighted average remaining lease term grew from last quarter to 7.8 years.
Given the delivery of SDN and NFV the acquisition of young buildings and the renewal several leases at our facility. We have demonstrated the company's ability to continue to generate cash flow strong visibility for years to come.
Turning to the balance sheet at quarter end. The company had total indebtedness of approximately $905.1 million with all $450 million available on our line of credit for future acquisitions and development related expenses.
As of September Thirtyth affiliates net debt to total enterprise value is 30.4% and adjusted net debt to annualized quarterly pro forma EBITDA ratio was below 5.6 times.
And the third quarter 2020, the company issued approximately 1.5 million shares of its common stock through the Companys ATM program at an eight net weighted average price of 20 to 72 per share raising net proceeds to the company of approximately $33.5 million approximately.
Approximately 951080 shares were from forward sales transaction entered into in prior quarters.
Today. The company has approximately 4.6 million shares which are subject to unsettle forward sales transaction under the Companys ATM program assuming.
Assuming we shared our physically settled all at a weighted average initial forward sales price 25, 27 per share the company expects to receive net proceeds of approximately $116.2 million.
With these unsettled forward sales, it's really very well poised to continue funding our acquisition and development pipeline just in time at a highly attractive cost to capital.
Turning to earnings guidance once again the company is increasing its guidance for 2020 AFFO per share on a fully diluted basis to a range of $1.24 to $1.27.
The midpoint of this guidance is based on the company completing $200 million of acquisition and $35 million to $45 million of growth development related investment in the year and at the midpoint represents over 4% growth rate year over year.
This growth coupled with a roughly 5% dividend. We believe provides a highly attractive return to our valued investor, especially when considering the easterly platform is built on a credit to the U.S. federal government.
The company is also pushing 2021 AFFO per share on a fully diluted basis guidance in a range of $1.28 to $1.30.
The midpoint of this guidance is predicated upon completing $200 million in acquisition and $25 million Congrats development related investment in 2021.
Easterly remains on track to deliver 2% to 3% AFFO growth per share year over year, regardless of macroeconomic global health our political uncertainty. It is our goal to remain dependable providing constant first of growth for our shareholders.
Our strategy and the strength that is provided in today's market stands alone in the public REIT space.
Thank you for your commitment to our thesis and appreciate your partnership as we continue to deliver for you.
Good day, everyone and with that I will turn the call back to Rob.
Thank you at.
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Our first question comes from Manny Korchman Korchman with Citi. Please proceed with your question.
Hey, good morning, everyone.
Megan just how should we think about next year, especially where the stock price is today, how do you think about funding.
Is there an opportunity to expand the existing Oh, it's even more as you did in Threeq you.
Yeah. Good morning, Manny you know they see and what the forward capability really is a a very strong tool for us it worked well for the just in time, finding and the nature of our pipeline. So you can expect us to continue to use that into next year I'm, sorry, I didn't catch the second half about.
Yeah, you bet.
So look in Threeq you like you made those programs.
Had more available proceeds on them then you had the previous quarter.
That's one thing you can continue to do and maybe I misunderstood what was happening there.
Oh sure so and just in terms of where he said with what we could take time, that's right. We've been you know its a.
Moved throughout the year.
I had some strong performance relative to our sales and I hear the backdrop, we obviously were very.
Recent addition capital north of $25 and so really really like what we've got in the hopper there, but you.
We'll continue to say probably two to three quarters ahead of ourselves.
Course of action.
Great and then just down in Atlanta could you maybe elaborate on what's causing that delay of a couple of quarters and not the development completion.
Sure Manny Hey, good morning, Bill you're well.
I'll tell you one thing with it with the federal government and I've always said as the federal government as a profit is partner.
We have found in every one of our other projects is the reason that things are move back it's because the federal government wants to put more bells and whistles and the building which of course were only too happy to provide and I think you can imagine an FDA laboratory, especially with what we're seeing today is one of the most important mission critical assets, we can possibly develop so were happy appeal.
I want to do some change orders and and make that even more relevant facility and so we're we're it's up to the federal government as you know they basically run the process and were only too eager to do whatever they want to do.
Oh, great. Thanks very much.
Our next question is from Michael Carroll with RBC capital markets. Please proceed with your question.
Yeah. Thanks, Bill can you give us some color on the investment type pipeline today, maybe versus 64 months ago. I mean, do you expect activity will kind of picked up given the amount of equity in the four contracts you have outstanding arose really those four contracts that you did just a way to be more opportunistic.
I will tell you that we have never seen more opportunities than we're seeing right now Michael that's an absolute certainty.
And we're very pleased and that falls across a number of different agencies number of different owners a lot mine by our own team not on market.
So I think that I think we have the prudent amount of equity that were.
There were raising on a forward basis its not speculative is based on what we're going to accomplish and.
Even in this environment I am incredibly proud of our team to be able to get the stuff done, but no on track and in good shape from a pipeline standpoint.
And then why is that activity is stronger than it has been in years passed through the just the uncertainty caused by the pandemic that people are looking to monetize their assets that they have.
I might not have been able to do that before I want to do that before I guess, what's driving that I said to be higher I, certainly think that will be one of the many reasons that we see I think it's a source of funds.
For folks that might have a hotel under development or other areas of real estate that are certainly not as certain as ours and so we're actually seeing some some some.
Some some reach out there I think you're also seeing that massive V.A. pipeline was created during the Obama administration and then end of the Trump administration and will continue $63 billion program. There is a lot of brand new 15, and 20 year mission critical facilities that are being developed and I think thats going to be.
Got there for quite some time as well so I think it's a combination but I think the the wind seems to be at our back right now.
Okay, Great and then just last question on the FDIC Atlanta property is there any update on the expect that lump sum and when will those flow into your numbers are we still waiting for the GSK to kind of finalize those plans.
Yeah, we're still waiting for the G. I say, it's a complete design for us to be able to give.
Give a give them so.
Stronger estimate of what that total cost would be but we.
We are looking for that lump sum budget to in and around $100 million.
Okay, great. Thank you.
Our next question is from Michael Lewis with Truest Securities. Please proceed with your question.
Great. Thank you I apologize if you already touched on this but.
Yeah now was the lowest since one Q 19, almost about a million bucks loans that had been running over the past four quarters was there anything specific to this quarter and you know can you speak to kind of the run rate going forward.
Hey, Michael Good morning, you're right, you're you're picking up on just some seasonality with a a.
Very nice professional services.
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No nothing.
I think I'm out of the norm.
Combination of those two.
[music].
Okay. So.
Probably a run rate a little higher more like what we see in the last few quarters. If we were going to estimate for next year.
Yes, that's right.
Okay and then.
Somebody has to ask about the election, I guess right. So I won't ask you who's going to win.
No I see that you had asked about five years of average lease term left that's 10% of your end or ice has about five years left.
That's about 3% I mean do you have any concern at all that is there any other expenses could be downsized or anything else.
Particularly in the event of a Democratic sweep whether you know they've talked about some.
Some of these expenses.
No I think D.A. is something that both parties are pretty much in agreement with you know what's going on with the opioid crisis I don't know who is going to jump to try to prosecute people quicker in that area. So I think that.
That's that's a new that's a new world that we've been in for quite sadly for quite some time and I think both parties are pretty aligned and very eager to make sure. We would lessen the drug problem. So I think we have other facilities in almost every agency, but we went through every every mission and a hierarchy of mission and.
In all the agencies and we're very pleased very pleased with our portfolio and how it's positioned but it shouldn't be a surprise, that's where our mantra was to begin with to stay out of politics.
Don't forget we live eight years with one of the candidates as Vice President We've just live for years and the other one is president and we've thrived under both scenarios.
Okay, Great and then.
Last one for me kind of bigger picture.
Question I think it was on your Q2 18 call.
Daryl and expected dividends because it was 30 cents a share about going into 2020, so I didn't notice that in my model and now that you're I'll ask about it I think it's been it's been arguing for a while that your work ethic that mark or maybe just give us a little sense of.
What happens what happens.
I haven't been able to raise the dividend at all since since then and kind of what your expectations for the dividend our going forward over whatever period, you're comfortable talking about.
Yeah, Michael it's Darryl I'll speak to it.
Our our development pipeline, while it continues to grow and is robust has probably taken a little bit longer to harvest than we imagined and we.
As we look forward if you look at the run rate that underlies those buildings in our portfolio, we feel very confident about our cash flows and our cash flow growth. We've also done a very good job of.
Of Delevering, our balance sheet and again positioning the business. So that we have some extra pennies stored away with the with some extra leverage that we can put on the business to get back to normal rates as we transition over the next year or two.
Again, I feel very good about the consistent growth and you know as we've laid out.
We will.
We looked at this FFO growth being kind of 2% steady and we will as we.
Move to our renewals and get existing buildings online we will.
Over time, we could imagine seem as dividend increases.
Okay, Great and then maybe I'll just ask one more that tell about it.
You know the attractiveness of development versus acquisitions, you know the development and get a nice yield that adds a little lumpiness to the story or whats. Your just you. Just kinda described you know you've got now that were in excess can start to see Atlanta, one which is a bigger project you know how do you think about.
Backfilling the development pipeline versus spending that money elsewhere, mainly on acquisitions.
I mean, I I would say that development continues to be a very accretive place for us to put our capital.
As we've said all along we're not trying to be the biggest reason the world. We're not trying to give our every every jack in the box that we can find we're picking.
If anything as we look over these last couple of years since we were talking before the call. The quality of the buildings that we are bringing into the portfolio has never been stronger.
And the quality of the cash flow the stability. It. It can deliver is what we're trying to bring to shareholders. It's our our most differentiating characteristic is backed by full faith and credit of the U.S. government.
As I said.
Low volatility cash flows and outperforming the Russell 1000, we think that this is an anchor to winward for both equity managers and folks who are also managing read security. So as we look forward to husbanding.
Husbanding, our dollars putting them to work in development these very high quality new buildings.
Will serve our shareholders incredibly well and I'll just highlight one other point, which is as we look at our existing leases.
And as they roll we have $4.3 billion of cash that's ahead of us all guaranteed by the by the federal government that is true I mean, I remember when we first met.
With that number was just over $1 billion and we've continued to find higher quality buildings continue to compound and and again can forecast the consistency of those curves well into the future.
Great. Thanks, a lot.
Our next question is from Peter Abramowitz with Jefferies. Please proceed with your question.
Hi, Thank you just wanted to ask about the acquisition market are you seeing any kind of change in terms of any more or less competition for the bulls eye assets you're looking at.
Really recently versus last six to 12 months.
And is there any impact from that on pricing either way.
Hey, good morning, we really haven't seen any new competitors come into the market just the same usual players.
And it's certainly gratifying to have the lowest cost of capital.
In that in that competition.
Really no public competitors at all that we're dealing with and that's sort of been the same thing since we were in a private equity days. So no we really haven't seen anybody.
Sure most of both our properties.
Okay got it and then I'm just looking at the guidance Ah I think if you look at.
Sort of the implied guidance 31 to 33 cents in the fourth quarter, so either at the midpoint or the high end would be a 3% to 6.5% over what you had this quarter. So anything underlying that but we should be aware of that's kind of Oh would would have you reaching.
Sort of Ah going up a penny or to the high end up two pennies.
Sure Yeah, when you think about what's changing in the fourth quarter relative to the third quarter, you've got lenexa coming online earlier than we anticipated by about a month.
Yes, there is.
Really looking quite strong and then obviously, we've got a 200 million dollar target and acquisitions for the year that roughly 50 million for completion, that's a pretty strong restaurant number to hit on one one quarter relative to where we were run rating this quarter. So.
Both of those sitting fourth quarter could.
Will be the driver of that.
Got it.
That's it for me thank you.
Our next question is from Bill Crow with Raymond James. Please proceed with your question.
Thanks, Good morning folks I've two questions on the on.
On the acquisition front again.
But no new competition I'm, just wondering why that might be because it seems like success kind of brings more.
Competition, you've delivered on the success part of it. So why are you seeing more capital earmarked your sector well I think you know with the with the public markets. Obviously, there's only so much room out there and and we'd be well. We all know that was coming if somebody went public and we don't anticipate doing that on the private sector.
I think several reasons our cost of capital is only becoming more attractive everyday and I think that our ability not only to harness our partners and the debt and the equity markets.
Is it is a tough is a tough competitor for some of these private equity funds.
I'd also say that our knowledge of the space all the work we've done since 2009.
Puts us well ahead of anybody that wants to get into this space.
I think it's easier if somebody wants to invest whether we've seen a lot of international interest of recent just to go ahead and buy D.A. than to go out and start a new a new private equity fund so I think thats the reason.
And finally, I don't know I mean, I don't need to tell you that the government is a is an interest a wonderful partner, but very interesting to deal with and obviously, we have set up an organization that has an incredible team whether it's on candle in our government affairs or Nick number all in our asset management group and keep going down the list.
But these people are really dedicated and experienced within this particular sector and it would be very hard for somebody to get that kind of talent.
At a dead standstill.
Yeah fair enough. Thank you, yes, the other question I.
Again as I've covered you for a long time so.
I think I know the story, but.
Within other parks office, we're certainly seeing a lot of pain related to work from home and the economic downturn and job losses and things like that.
I don't anticipate obviously any impact on your tenant base.
From that but as markets around the country come under pressure is that does that take any.
Ability of viewers to push rents.
I'm renewals off the table or or it's just you're in such unique markets that that it's just not relevant.
I'll start I'll, let me finish I think yeah, and Bill you certainly do understand her story. It has been a long time aging myself, but in any case.
Certainly with the Bulls eye properties. The first thing I'd say is you know I don't know how we all got shoved into office to begin with we really our own asset class and I think Darrell explained that beautifully and as intro.
You know you can't you can't go out and do IRS.
Work at from your home you can't take the records that you can prosecute the FBI can do that from their living room. So there's a whole bunch of reasons that this this footprint is completely necessary, including the laboratories and everything else I'll say with a small minority part of our portfolio, which we call that more of a plain vanilla.
Which is based more on market rent.
I'm very pleased to report that we basically renewed most of those for very long term lease terms going forward.
And so.
I don't really see any issues, there and I think our timing was lucky but also was also good when you consider some of those properties that will be there for quite some time Megan.
Oh My God.
Obviously.
Financing costs et cetera, can and likely will on regular oftentimes puts and put some pressure on utilization as well, but remember when we approach a renewal of one of our assets I mean, we're not we're not we're not moving right out to what we believe replacement cost is we're able to review with you the Chaffetz Brad.
He is the best alternative to the replacement cost that we've got some natural built in cushion there.
That we expect and are continuing to see buffer our hour huh.
All right. Thank you Buck congratulations.
Thank you.
Our next question is from Merrill Ross with Compass point. Please proceed with your question.
Thank you and good morning, I see in the renewals floors 2021. There are four buildings that are 20 years old I clearly described as Bulls eye Whitening said do you have in Dallas actually three it shouldn't do you want to see us yet.
Do you have a preliminary view or what have you got.
Any conversations too that would allow us to estimate the renewal at replacement cost.
After 20 years for those buildings or tea ice it might be.
Posted by the 10.
Well I'll start and Megan can fill you in further and good morning.
When you look at our laboratory in Dallas.
That probably would fall within the most sophisticated facilities that we have and our team just construct is the most recent DTA laboratory and Pleasant in California, and the Bay area, which models, our Dallas Laboratory I mean, they're very much the same and and the price on a new one of those.
Facility is so astronomical said if were government friends around there but are very expensive.
A facility that I think we have plenty of room, obviously to not only get very substantial rent increases on that building, but still be a very attractive option for our government partners compared to building something new because basically if you travel into both the new one and the Dallas is voluntary if you take our Vista out in California.
Those laboratories are almost identical Megan.
You know, we're always going to be careful in terms of commenting on and process renewal everything that's up for renewal this year or next year in process that has an argument.
Right.
But one thing I look forward to sharing with you the outcome.
Our target of high teens low Twentys, we had expected that to comment on average.
25.
Will range from zero to 50, depending upon a particular asset but that is the ZIP code that we have performed within back a little bit like that but where we expect Q.
Q2 to be next year and this year.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question is from Manny Korchman with Citi. Please proceed with your question.
It's Michael Bilerman here with Manny good morning.
Yes.
Back to sort of growth and cash flow and congratulations on the 10 year anniversary from buying that original be idled.
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But I guess, we just take a shorter time period, let's look at the last five years 2016 to today.
Your core earnings and cash flow.
Yes relatively flattish your gross assets have increased three <unk>.
Yeah, you've de Levered over that time your equity base has grown for us.
But it hasn't translated yet into strong earnings or cash flow growth and I know you and I over the years I've had discussions about what's on the com dividends and flat for the last three years. So can you just sort of step back a little bit and if you're able to project forward.
Let's say the next five years, how should investors think about cash flow growth dividend growth.
At the expense of just total equity and asset growth.
Yes, Michael I think its great question and I'm you know as we have tried to communicate and I really appreciate the opportunity for us to share we're not.
We're not intending to be sort of a volatile.
So a lot shrink a lot right I mean, given our strategy is to be the stable table real estate with no drama.
And and what that means is again starts with full faith and credit of the U.S. government and as we've said grow our FFO, 2% to 3% a year and as we look at sort of 18 to 1919 to 20, we've sort of granted a little over a little over 3%.
We are de levering the balance sheet, which is you guys know adds 1234 pennies of potential earnings growth into what we became full if we wanted to run it hot.
And the choices that we've made and what Weve heard again from investors is.
If we can deliver this consistent growth of 2% to 3% plus this dividend that's 4% to 5%.
That should deliver to investors what.
Very attractive opportunity and that's again when we look at the Russell 1000, and we look at our cash flows we looked at what we deliver again, our intent is to be stability in a in anyone's portfolio.
So I mean, I think thats the trajectory draw a line that is.
2.5% out for the next five years and as we get development and bring it online the dividend should be should move in line with that sort of growth.
But shouldn't you be able to generate much I mean, just given the amount of capital you're putting out in the spread on that capital and then also the embedded.
Leases that you have.
You really should be able to put forth a lot better growth and very very low single digits.
Gross profit.
I don't know I mean, I look at the that they can either.
Yes, we have one building P.T. O you know that if you that if you.
Notice we had a.
It's a long term lease we've got a free rent that's going to burn off here pretty soon so thats certainly going to lead to more cash flow generation and I.
If you look at the spread that we are generating relative to what treasury 10 year treasuries are yielding.
I think it's very very attractive you know we're not.
We're not in the Super Ferrari part of real estate.
We're taking the stability of government cash flows and we're delivering healthy premium to investors.
So I and I believe.
That's where we're sort of setting expectations and where and again privately we're happy to hear any ideas on how we should be managing the business or where we should take things or how you think that we could deliver a little more growth to add to shareholders.
Right. Thanks again.
The last three years I don't think the intent was to have a 26 cents quarterly dividend at certainly you know it.
It just seems that there's something not connecting between all the dots and I'm not doubting your business is a great business.
It's it's an attractive business.
I mean to be flowing into your results as much and I'm trying to figure out where does a mismatch between what you're talking about and ultimately the results. Yeah. I mean, I know, it's a great question and really appreciate it. The I mean again, you know peto, it's probably been the biggest cash.
Cash drag that was is as a unified.
For folks who may not be familiar.
That was a.
A building that was in close to Washington, DC, The patent and trade office, it's got some dark fiber to the add to their headquarters.
And when we originally purchased the building the commercial rates were actually in excess of what we were getting paid on our leases and those submarkets in Washington.
Sadly it came up for release before Amazon had decided that they're going to move to Washington and.
And that led to us having to you. There was another building that was a competitor and instead of jeopardizing, leaving to stabilize the building.
We ended up not having the revenue growth that we anticipated. When we gave you gave away significant free rent. So I think that's that's driven.
The dividend sort of lack of.
US being more conservative with how we've said we've put the dividend forward and as you know these development.
Projects that were moving forward with the FDA lab are very lucrative and so I think the dividend will catch up some of this growth, but I know you guys.
Again, where we have tried to be very clear is the ability to deliver this f. AFFO growth based on a very stable set of cash flows.
Yeah.
And then just in terms of matching match funding from here.
Just outlined do you feel that at this point Youre at Youre.
Sort of targeted leverage or do you feel you're a little bit below just to think about if you had $250 million of external growth how investors should think about programming equity versus debt.
Look I would say, we'll be opportunistic in the market and megginson terrific job of.
Raising significant proceeds so we as we look out we have very attractive equity you know that we can put to work.
And I would say you know continuing to de lever a little bit is is is is a prudent thing to do as long as we can deliver that growth I mean, I think if we can emerge from this pandemic with investors understanding that we're going to deliver 2% to 3% Fs FFO growth consistently you know as we look out over a five year.
Term and that we've taken the balance sheet to a place where we have.
One turn or more of additional leverage that we can put to work. So that we could do a year's worth of acquisitions for example.
Without raising any equity that's going to be very powerful as it as it comes and.
As the early public company.
And as you know you start out with the maximizing the ability to maximizing your earnings and fighting your DNA in making sure that you can continue to go from subscale to a scale business.
We certainly accomplish that and now as we look at our portfolio our ability to deliver what should be differentiated stable learnings. While also doing that at a pace that is not putting a lot of pressure on our ability to raise capital. We're we're requiring us to have Uh huh.
Certain defend high levels of leverage.
I think is putting us in a very good spot as we look out over the next again five years to deliver very consistent growth and exceed expectations for investors.
Okay. Thank you.
Thanks, so much.
Ladies and gentlemen, we've reached the end of the question and answer session. At this time I'd like to turn the call back over to Darrell crate for closing remarks.
Well. Thank you everyone. Thanks for joining the easterly government properties third quarter 2020 conference call. We look forward to continuing again to deliver stable and stability and growth to shareholders and we appreciate you joining the call today.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.