Q1 2021 Easterly Government Properties Inc Earnings Call
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Greetings and welcome to the easterly government properties first quarter 2021 earnings conference 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.
Please note this conference is being reported.
Now I'll turn the conference over to your host Lindsay Winterhalter, Vice President Investor Relations you may begin.
Good morning before the call begins please note the use of forward looking statements by the company on this conference call.
Made on this call may include statements, which are not historical facts and are considered forward looking on the.
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 is 1995 and is making this statement for the purpose of complying with the Safe Harbor provisions.
Although the company believes that its plans intentions expectations strategies and prospects as reflected in or suggested by those forward looking statements are reasonable. It can give no assurance that these plans intentions expectations or strategies will be a January 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 is contained in item <unk> risk factors.
<unk> and form 10-K for the year ended December 31, 2020 filed with the FCC on February 24, 2021, and then ex other SEC filings and risks and uncertainties related to the adverse impact of COVID-19 on the U S regional on global global economy, and the potential adverse impact on us.
Financial condition and results of operations at the company.
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 operations as adjusted and cash available for distribution.
And finally, a tabular reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information packet package on the Investor Relations page of the company's website at IR day easterly REIT Dot com.
I would now like to turn the conference call over to Darrell Crate chairman of easterly government properties.
Thank you Lindsey and good morning, everybody and thank you for joining us for this first quarter conference call. Today. In addition to Lindsay I'm also joined by Bill Trimble, the company's CEO and Meghan <unk>, the company's CFO and COO.
Easterly continues to consistently execute on its strategy of owning class a mission critical facilities leased to United States Federal government.
Our story is simple we seek to own a pristine portfolio is buildings. Many built to suit that are occupied by some of the country's most important tenant agencies, we aspire to be the chosen partner of our tenants to maintain and enhance their facilities to aid in the execution of their missions.
We grow our <unk> through acquisitions, non speculative development and through the renewal of existing assets or.
Our acquisitions this quarter were consistent with all of these objectives.
The first quarter of 2021 marks the sixth anniversary of easterly as a public company looking back at the value created during this six years, we're pleased with our progress we scaled our platform from 2009 to 82 properties through accretive acquisitions and development.
Diversified the tenant base from 12 to 39 U S government agencies, each with enduring missions.
We've grown the percentage of lease income backed by the full facing credit of the U S government from 96% to 99%.
We've increased our stable recurring cash flows in aggregate contractual rent due from the U S government from $360 million to $2 $1 billion. We've.
We've increased our weighted average remaining lease term from seven seven years to eight six years and finally, we have grown at a compound rate of approximately 4% annually, while also paying a dividend of 4% to 5%.
This supports a 9% total return, which implies a premium of about 730 basis points above treasuries. We're proud that we've delivered this attractive return profile to investors and we're pleased that the fundamentals of our business remains materially the same going forward as they have been in the past.
All of this has been achieved while maintaining the same investment discipline and values. We established six years ago, we're not a complicated story, we keep it simple we purchased and developed a U S government leased assets and pass along the stable cash flows and superior tenant credit quality to our shareholders generating strong risk adjusted returns.
And with a highly actionable pipeline, we believe we will be able to continue to execute on our original thesis for many years to come.
In closing the fundamentals of our business are strong our pipeline is robust and the credit quality of our underlying tenant with leases backed by the full faith and credit of the U S. Government remains the best of any public REIT out there. We thank you for your continued partnership and engagement as we work to grow this premier portfolio of real estate assets leased to the United States.
Government and with that I'll turn the call over to Bill to give you insights into the first quarter results.
Thanks, Darryl and good morning, Thank you for joining us for our first quarter earnings call. The acquisitions team continued its elevated acquisition pays for the closing of a bullseye portfolio of class a real estate lease to the United States Federal government. The three building approximately 177000 square foot portfolio is comprised of some of the government.
Important tenant agencies, including the Federal Bureau of investigation. The U S. Attorney's office in the U S immigration and customs enforcement agency. This LEED certified portfolio is entirely built to suit and operating under its first generation lease terms.
<unk> is a 99000 square foot leased LEED certified build to suit property completed in 2010 and leased until August of 2025 from the initial 15 year lease term.
<unk> is 156 field offices at the FBI, a bureau level Federal agency within the U S Department of Justice, which serves a dual role as both a federal criminal investigative body and an intelligence agency.
This acquisition easterly now owns 12 of the FBI field offices.
U S. A O Louisville Ah 60000 leased square foot build to suit property completed in 2011 as least through December of 2031 by the GSA on behalf of the U S attorney for the Western District of Kentucky, which serves as the main U S. Attorney office for this district located directly across the street from the gene Snyder.
U S Federal courthouse, Usao Louisville houses the U S Attorney's office for the Western District of Kentucky.
And finally, icily, though a LEED silver build to suit efficient offers a facility completed in 2011 as least through May of 2021 of the GSA on behalf of the agency. This 17420 foot lease square foot office facility works in close cooperation with other customs agencies within the interior of our country and provides critical.
Administrative support for efforts such as custom trade and immigration.
Further just recently announced and subsequent to quarter end easterly purchased another build to suit mission critical facility for the U S Attorney's office in Springfield, Illinois.
Springfield, a three storey class a facility for the department of Justice attorneys office for the Central District of Illinois was constructed in 2002 and is 100% leased to the GSA on behalf of the U S. Ao for 20 year lease, which does not expire until March of 2038.
With 40% of our targeted $200 million of acquisitions for 2021 already completed we are as stated on our previous call seeing a lot of promising opportunities in our universe and will continue to drive towards adding accretive opportunities and both marketed and off market transactions or acquisitions.
On his team is constantly sourcing new high quality opportunities that mirror, our average portfolio building size and helped drive <unk> growth, we achieve scale and growth through a highly disciplined acquisition process. The targets buildings leased to a single tenant of the U S. Federal government that are often the result of a design build award and they are usually over.
Over 40000 square feet in size.
As mentioned previously in our targeted universe, we know and have already underwritten every property that fits into our bullseye for acquisition.
Another source of growth at easterly comes from our development program, we continue to make progress with the GSA and the FDA at the 162000 square foot FDA Laboratory in Atlanta, Georgia, which we expect to deliver in the third quarter of 2023, given the highly technical mission critical nature of these sophisticated laboratory.
We appreciate the opportunity to work so harmoniously with our federal partners to ensure we deliver a state of the art facility in.
In addition to FDA Atlanta, our team led by Mike IV and Mark Bauer are currently pursuing other opportunities that fit our non speculative development pipeline.
Turning to leasing updates our asset management team made great strides in the first quarter of 2021, as we renewed the lease at ice Pittsburgh for a 10 year term that will go into effect in 2022 and will not expire until 2032.
We also renewed the treasury Parkersburg facility for a new 20 year term commencing in March of 2021 and expiring in 2041, the DEA laboratory in Sterling, Virginia renewed for another 15 year term as well as the DEA Bakersfield facility for another 17 year term in total this represents for renewal.
<unk>, approximately 270000 square feet or three 1% of the total portfolio's annualized lease income that renewed in the first quarter of 2021.
Finally, we remain fully committed and focused on our ESG efforts, ensuring we deliver meaningful progress for our shareholders employees, our board of directors and the communities in which we serve.
We welcome those on the call today to soon visit our corporate responsibility website and review our commitments and what will be our newly amended environmental sustainability, social responsibility and human rights policy as well as our inaugural vendor code of conduct.
In closing we're off to a strong start in the new year with a three building portfolio and subsequent to quarter end the acquisition of the U S. Our Springfield facility from here you can expect the easterly team will continue to execute on its disciplined strategy of acquiring the most important assets and the federal government leased real estate portfolio.
So.
We will also continue to work hand in hand, with the GSA and underlying Kennedy agencies on upcoming renewals and long term strategic planning as it relates to non speculative development opportunities.
We look forward to seeing you in person at upcoming conferences and investor meetings, and the not so distant future.
That I think you prefer your time this morning, and we'll turn the call over to Megan to discuss our quarterly financial results.
Thank you Bill good morning, everyone. It gives me great pleasure to post another strong quarter of demonstrable growth at easterly.
As with prior quarters, COVID-19 had no material negative financial impact on the organization as easterly received 100% of rental income due from our tenants in the first quarter.
As of March 31, we owned 82 operating properties totaling approximately seven 5 million square feet of commercial real estate with one additional development project and design comprised of approximately 162000 square feet.
Through the acquisition of newer facilities the weighted average age of our portfolio remains young at 13 four years.
Successful long term renewals at existing properties have also allowed us to grow our weighted average remaining lease term to a historic high of eight six years.
This represents a year over year lengthening of our weighted average remaining lease term of nine years.
Entailing, a young portfolio age and a long weighted average remaining lease term is reflective of our strategy of owning relatively new build to suit assets with enduring missions. This strategy provides us with distinctive future cash flow visibility, which in turn allows us to prudently manage the companys balance sheet and support our highly accretive acquisition.
And development project pipeline.
Turning to our quarterly results for the first quarter net income per share on a fully diluted basis was <unk>.
<unk> per share on a fully diluted basis was <unk> 33.
Nearly eight 5% year over year a rate, we are particularly proud of given the backdrop of a global pandemic.
<unk> as adjusted per share on a fully diluted basis was <unk> 31 and.
And our cash available for distribution was $24 4 million.
Turning to the balance sheet at quarter end. The company had total indebtedness of approximately $1 billion with $341 million available on our line of credit for future acquisitions and development related expenses.
As of March 31, Eastern release net debt to total enterprise value was 34% and its adjusted net debt to annualized net quarterly pro forma EBITDA ratio was six two times.
As previously mentioned with this low leverage level numerous sources of available debt capital access to equity sold on a forward basis and an attractive cost of equity, we are well poised to lean into future growth opportunities.
In the first quarter of 2021, the company issued approximately 156 million shares of its common stock through the company's ATM program raising net proceeds to the company of approximately $40 million.
At a net weighted average price of $25 69 per share in this highly attractive cost of capital delivers meaningful accretion to shareholders.
Today, the company has approximately $2 9 million shares which are subject to unsettled forward sales transactions under the company's ATM program.
Assuming these shares are physically settled in full at a net weighted average initial forward sales price of $24 43 per share the company expects to receive net proceeds of approximately $72 1 million.
Turning to our earnings guidance.
The company is maintaining its previously issued 2021 <unk> 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 on acquisitions and $25 million in growth development related investment in 2021.
Easterly remains on track to deliver 2% to 3% <unk> growth per share year over year percentage, we are proud to provide to our shareholders through underlying U S government cash flows.
Finally, as Bill previously mentioned, we've had a successful quarter of re leasing activity and with nearly 550000 square feet on 11 leases expiring through the end of 2021. We are pleased to report we are making meaningful progress with the GSA and are inactive discussions regarding our properties at this time.
Feel good about the long term mission and tenancy of these upcoming exploration and we will continue to keep you apprised of future renewals in the coming quarters as always we thank you for your commitment to our thesis and continued partnerships with that I will turn the call back to Shirley.
Okay.
Thank you and at this time, we will be conducting a question and answer session. If.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question Keith.
Price starting to if you would like to remove your question from the queue from participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys one on one.
Please while we poll for questions.
Our first question is from Michael.
Michael Carroll with RBC capital markets. Please proceed with your question.
Yes. Thanks, Bill are making can you talk a little bit of balance the renewals that you completed in the first quarter I guess, what's the cash lease spread and can you provide color on the base rent and how the Ti build out is kind of a real role in the numbers and the rent streams over the next few quarters.
Sure Good morning, Michael.
So as Bill mentioned, there were four renewals in the quarter to.
The buildings, we referred to as Treasury, Parkersburg, DEA, Bakersfield, Pittsburgh and DEA Sterling.
And interest in cross section of the portfolio.
Those four leases we are expecting.
On two of them do have on tenant improvement allowances included in the renewals.
But we are again expecting because these are not completed <unk>, an average of approximately eight 5% on rent spreads.
With that on average, 30% to $35 of Ti Treasury Parkersburg, Pittsburgh had no ti budget and and so on.
That brought down debt.
Average for the quarter.
Hey, Joe.
Yes.
Okay and the can you talk to us about the Ti budgeted and maybe explain how that rolls into the rent stream I guess you. Once you build out those spaces, that's going to add Ryan to the base rents over the next few quarters and how long will that take to complete this yes.
Sure. So as I said Treasury Parkersburg 90, Pittsburgh don't.
Don't have truly Parkersburg, Pittsburgh do not have any ti allowances so those.
Spreads would kick in on on on day, one and.
We don't have a perfectly clear crystal ball, but it's our expectation that in Bakersfield and Sterling that we would also be able to have the tenant improvement completed prior to the commencement of net new leases Sterling asset.
We will commence in the third quarter of 2022 and Bakersfield in January of 2022, and should provide us sufficient time this year.
Okay, Great and then I guess Bill can you talk a little bit of balance the FBI field offices. I think you highlighted that there's 12 that easterly owns a day when does that provide you incremental synergies with that.
The ability to maybe to complete more deals are signed.
Leases with them because what type of advantages does that have having full field offices.
Yes, good morning, Michael I think it does I think debt at the point, where now at 12. The FBI certainly knows who we are I think we're very pleased with how we run their buildings and what I think we're beginning to see as I mentioned before is there is a number of projects that will do it one building at the government expense.
We will then do another one of our facilities I think it's also smoothed those out.
Renewals, because I think they understand that we have a very good handle on what these buildings are worth what they would cost to develop and so I think thats going to only a newer to our benefit going forward.
So I am I am very pleased to get to the scale as you know that's the best group of buildings I think we can possibly on within the federal government.
And I think we have a terrific relationship with the agency.
I'm looking forward to owning more look forward to the next 12 months.
Okay, Great and then I guess last question can you talk a little bit about the deals that my diabetes pursuing with the GSA build to suits I think that you highlighted in your prepared remarks that he is pursuing I don't know if you put a qualifier on that though there is multiple or several.
But is there an expectation on how many GSA substitutes you could potentially announced this year on her how many are even out there.
What I would say Michael is it really hasnt changed because you can imagine the federal government does move at a glacial pace when it comes to a lot of these opportunities, but I would continue to say that this FDA laboratory program, which was slow during COVID-19. Luckily, we got everything we need to get done before the shutdown.
I think we will write off here on weather.
It starts from the fall or in the next winter I think theres going to be some terrific opportunities. There those are very expensive buildings, and we have a real expertise, especially on Mike and mark on on delivering from the FDA I think we're going to see some more FEMA projects I think thats a very popular agency with the current administration I think youre going to see more opportunities there.
And then from a purchasing standpoint as you know.
We have been.
Really terrific buying some of these brand new.
Facilities again, not overnight stays but the new face from the VA and I think youre seeing a lot of other developers executing on those plans. So I think we're going to see a lot of a lot of upside certainly from that from them as well. So all in all I think yes, we will see some new opportunities and look forward to announcing them, but I think we're still way.
To get out of the Barnwell debt with the COVID-19 world, but it isn't going to slow down our team. They are traveling around on looking at opportunities and fingers crossed but I think that will continue to be a strong driver of <unk> growth for us into the future.
Okay, great. Thanks from me.
Our next question is from Merrill Ross with Compass point. Please proceed with your question.
Hi, good morning.
I'm wondering if you can.
<unk>.
I mean, you described that you've already underwritten.
Net.
The GSA inventory, so the pace of acquisitions.
The flow from news.
The ability of your pipeline.
Kind of depends on the salaries being willing to sell you see anything sort of globally.
That makes people more willing to sell.
In 2021 or 2022, and then you had seen the previous ex yet.
Good morning Merrill and Thats, a great question I think absolutely is the answer.
I think <unk> got a number of a number of factors I think first as you know most of our buildings are owned by individuals.
And I think it's no secret out there that we're going to see some sort of change in the capital gains rate there might be from 10 to 31 exchange change there might be a lot of things happening within the tax code that will make a lot of these owners make that decision sooner rather than later, so I think thats an important factor. Obviously, we are the only group out there that really can.
And also offer units for tax efficiency to these owners. So that is a big advantage over anybody else in our space.
I think that on another thing Thats happening is a lot of these newer facilities were built so to 2006 2007, theyre rolling they've just been renewed and a lot of these owners are in their <unk> and <unk> and I think theyre going to day, taking advantage from a state planning or whatever it might be or maybe to take advantage of the world restarting to.
That equity to put out from fires in our hotel tour, and that's literally or to come up with some new opportunities. So I think everything out there is putting a tailwind to us in this market.
And Megan will go into it but I think the HR attractive cost of capital allows us to make accretive acquisitions, everybody knows who we are and I think we execute very quickly.
I think our relationships with the brokers are very strong and so.
Im very gratified to see what what we see out there going forward from this year end.
Excited to exceed that 200 volume as soon as possible.
Thank you.
Yeah.
And as a reminder, if anyone has any questions you May press star one on your telephone keypad doing so on ensuring that you join the question queue.
Our next question is from frankly with BMO. Please proceed with your question.
Hi, good morning, everyone.
If we annualize the 33 cents you reported in the first quarter and considering that you could exceed your $200 million acquisitions target that.
Can you talk about the pace of activity so far that could get you to the top end of the guidance range or even above it.
Just wondering if there's anything else, we should consider that could be a drag on earnings. This year aside from maybe some more ATM issuances or what prevented you from raising guidance this quarter.
Good morning, Frank.
Obviously very proud of the strong quarter, we put out I think as we look at the remainder of the year, we continue to work on the pipeline.
And we've never Saad from COVID-19, pandemic before and so.
It's just the approach that I took in terms of approaching our board and.
And getting approvals for the guidance that we project the tire.
Our preference at this time to stay with the current range, we look forward to the opportunity to.
To exceed that and hopefully look to higher levels as the year progresses.
Okay great.
And then just wanted to touch on the.
Leases are expiring in 2023.
<unk> from last quarter, it looks like two or three.
Our renewed on a shorter term basis, just curious what happened with it the last lease and your expectations to renew the other two on a longer term basis.
Yes so.
Last quarter those three one was the DEA Vista.
One with DEA Birmingham.
Youll note that the GSA, if you're sort of nearing the end of a renewal.
Process.
They can they can oftentimes get into whats called a holdover position where they'll just.
Stay in on month to month situation, while they are waiting to get paperwork.
Signed or through their through their queues.
And so the both of those are we believe in that in that in that stage, we don't want to pre announce any renewals before they happen, but thats the status of those two and the third was a very small.
Delhi, and our in our Buffalo asset growth 1100 square feet, yet Unfortunately won't be able to get one in the future.
Okay and then just one last one from me on your Atlanta, FDA development project. It looks like the completion date got pushed back by a quarter and costs were slightly up.
Yes, maybe just a minor detail, but is there any additional color on what drove this.
They are in the design phase they are working out the final.
Final set of requirements and drawings and so it pushed a little doesn't change.
We're always happy to let the government figure out how they can spend more money with us to build a better buildings. So we always were patient.
Okay, and then still no additional clarity on timing on the lump sum right.
That's correct. That's correct. It's still are our strong desire and we do believe will be successful as we were in the past.
And FDA lenexa on on receiving progress payments from the government that no no finality there yet.
Okay, great. Thank you.
And we have reached the end of the question and answer session and I will now turn the call over to Dow crate for closing remarks.
Great. Thank you everyone for joining the easterly government properties first quarter 2021 conference call. We appreciate your time. This morning, and we look forward to keeping you posted on our developments as we strive to build and enhance our portfolio of pristine assets backed by the full facing credit of the U S government.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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