Q2 2021 Easterly Government Properties Inc Earnings Call
Greetings and welcome to easterly government properties second quarter of 2021 earnings conference call. At this time all participants on the listen only mode. A question of Astra the session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on yourself on keep at.
As a reminder, this conference is being recorded.
It is not for now I'd like to turn the conference over to your host Lindsay Winterhalter, Vice President Investor Relations.
Good morning, So for the call begins please note the use of forward looking statements by the company on this conference call.
<unk> 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 Act reform of 1995 and is making the statements 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 of our strategies will be attained or achieved for.
Furthermore, actual results may differ materially from those described in the forward looking statements and it'll be affected by a variety of risks and factors that are beyond the company's control, including without limitation those contained in item 1 a risk factors of its annual reports.
On form 10-K for the year ended December 31, 2020 filed with the SEC on February 24, 2021, and in its other SEC filings and risks and uncertainties related to the adverse impact of COVID-19 on the U S regional and global economies and the potential adverse impact on the financial.
The condition and results of operation of 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.
You can find the 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 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, everyone and thank you for joining us for the second 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.
It was the very strong quarter for easterly government properties.
We see the country opening up and as expected we have been identifying some pent up opportunity for our business.
We have emerged from COVID-19 stronger than we entered as measured by <unk> growth portfolio of scale age diversification and lease duration as well as an actionable pipeline of accident acquisition opportunities that materially exceeds pre pandemic levels.
This all leads us to believe that it'll be a very strong end to the year.
Today, we have 84 properties across 39, an important tenant agencies, we have a diverse portfolio of mission critical facilities leased to the United States Federal government the.
Quality of our portfolio in the space is excellent. The average age of our buildings is 13 point for years and the average duration of our leases is 8.6 years.
This translates into over $2.2 billion of cash embedded in our leases that is backed by the full facing credit of the United States government.
Given the young age of our buildings and the enduring mission of our agencies.
Surgically, assuming 1 modest 15 year role of each lease.
The 10% to 15% this drives that total to over $6 billion.
<unk> 6 billion backed by the full faith and credit of the United States government.
As you saw this last quarter, we increased our dividend we anticipate that this is the beginning of a new chapter for easterly government properties. Our business has matured we're.
We are entering a period, where distributable cash flow can outpace <unk> growth today.
Today, our stock trades with the dividend yield of roughly 5%. This represents a spread of over 370 basis points above the treasury, that's matched to our weighted average lease term.
Anticipated growth in our cash flow, we believe we will either see this yield grow it meaningfully for our stock price will increase.
We're excited for the second half of the year, given how we're positioned in the market the opportunities we see in the cash generating capacity of this portfolio.
With that I'll turn it over to Bill to give you his view of our second quarter results and the prospects for the future. Thanks, Darryl and good morning. Thank you for joining us for our second quarter earnings call. The acquisitions team continues to add mission critical bullseye properties with the second quarter acquisition of the National weather service Central region headquarters of 94.
4000 square foot facility located in Kansas City, Missouri. This build to suit facility is 100% leased on behalf of the National weather service for a 15 year term.
The 5 year fixed renewal options, which if exercised does not expire until December of 2038.
It's highly specialized facility serves as the central region headquarters for the National weather service 1 of 6 regional offices strategically located throughout the country.
All of the features of radar tower secure satellite field and how's the some of the most advanced technology in weather forecasting and advanced computer equipment, including the Alpha radar and the automated service observation system.
The acquisition of NWS, Kansas City serves as the Perfect example of the type of asset we would like to introduce and of our expanding portfolio here of the mission of the tenant agency cannot be performed without the real estate to support. It. This is the definition of of Bullseye properties.
In the second quarter, we disposed of SSA mission Viejo. This is an example of of building. This agency the social Security administration houses government employees that could 1 day accomplish their goals and objectives outside of this facility given its relatively small size and our belief regarding its long term mission, we thought it best to use SSA.
Mission Viejo as a source of funds for future Bullseye acquisitions.
Finally, subsequent to quarter end easterly acquired a roughly 61000 square foot class a facility located in Cleveland, Ohio that is least of several key agencies within the U S. Government. This security level 3 facility was substantially renovated in 2016 and again in 2021 for the department of Homeland security and larger.
Fulfills important missions, such as investigating criminal organizations and terrorist networks of portion of the property also serves as Cleveland National Weather service forecast office for the potential weighted average lease expiration of June 2030 for the U S. Government has invested significant tenant improvements into the facility specialized features <unk>.
For the security and secured entry and parking of Sally port of backup generator and an uninterrupted power supply battery system to name a few.
To summarize year to date easterly has acquired 6 properties for a combined total of $134 million given the pace of our acquisitions and our clarity of pipeline. We increased our 2021 <unk> <unk> guidance per share on a fully diluted basis in conjunction with increasing our acquisition volume target by 50%.
<unk> for the year from 200 million the $300 million as of today, we've executed on 45% of the company's enhanced acquisition guidance of $300 million for the year and short the team as elephant hunting and we feel confident in our ability to meet or possibly significantly exceed even this 300.
On an acquisition volume on.
Unrelated note the acquisitions team continues to see an extremely robust acquisition pipeline, particularly in the VA market with the incredibly important mission of providing superior medical care to our servicemen and women new state of the art outpatient facilities similar to the ones already in our portfolio are actively being designed construct.
<unk> and delivered the features in these facilities and their fulfillment of long term missions, coupled with predominantly 20 year lease terms makes VA outpatient facilities compelling opportunities for our growing portfolio.
Turning to development, we continue to make progress for the GSA and the FDA at the 162000 square foot FDA Laboratory in Atlanta, Georgia, which we expect to deliberate on the third quarter of 2023, given the highly technical mission critical nature of the sophisticated laboratories, we appreciate the opportunity.
<unk> to work so harmoniously with our federal partners to ensure we deliver state of the art facility. In addition to F. D. At ladder, 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 continues to show its prowess and partnering with the U S government to execute on important bullseye lease renewals and secure the tenancy for future decades in the second quarter, we renewed the lease at day, a upper Marlboro for a 15 year from term that will go into effect in March 2022.
And will not expire until 2037 this combined with the successful renewals at ice Pittsburgh Treasury, Parkersburg, DEA Sterling and DEA Bakersfield from the first quarter easterly has now renewed 5 assets totaling over 320000 square feet or for 1% of annualized.
<unk> income for a weighted average lease term of 17.6 years in the first half of 2021 and.
In closing, we believe easterly has chartered of course for outsized growth opportunities the acquisition pipeline, coupled with the organic growth from the renewal of bullseye assets. All work together to set the stage for delivering strong risk adjusted returns to our shareholders with that I. Thank you for your time this morning, and I'll turn the call over to.
Megan to discuss the quarterly financial results and capital markets executions.
Thank you Bill good morning, everyone. It gives me great pleasure to post another strong quarter here at easterly.
As of June 30, we owned 83 operating properties totaling approximately 7.6 million square feet of commercial real estate with 1 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 of young at $13.6 years success.
The successful long term renewals of existing properties have also allowed us to maintain our weighted average remaining lease term at its historic high of 8.6 years.
When compared to this time last year, we have lengthened the remaining lease term, which in turn provides clarity of future cash flows while also acquiring newer assets to keep the average age of the portfolio relatively young the.
This combination allows us to prudently manage the company's balance sheet and support our highly accretive acquisition and development project pipeline.
Turning to our quarterly results for the second quarter net income per share on a fully diluted basis was 10 cents.
<unk> per share on a fully diluted basis was 33.
<unk> as adjusted per share on a fully diluted basis was <unk> 31.
And our cash available for distribution was $23.2 million.
The balance sheet at quarter end reflects the Companys total indebtedness of approximately $1 billion with $313 million available on our line of credit for future acquisitions and development related expenses.
As of June 30th easterly is net debt to total enterprise value of 33, 9% and its adjusted net debt to annualized quarterly pro forma EBITDA ratio remained at 6.2 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.
Since our last call we have executed on 2 notable debt capital markets events.
First in the second quarter. The company entered into a note purchase agreement to issue up to $250 million principal amount of fixed rate senior unsecured notes the.
The notes will be issued in 2 tranches with the weighted average maturity of $8 of half years, and a weighted average interest rate of 282%.
The first tranches $50 million of 7 year notes with a coupon of 262% and.
And the second is a $150 million of 9 year notes with a coupon of 289%.
The company has the option to increase the second $150 million tranche of the notes up to a principal amount of $200 million.
The notes are expected to be issued on October 14th 2021 subject to customary closing conditions.
With significant investor subscription this third entry into the debt private placement market was well received by the Investor community and helped fortify strong relationships with our existing of new lenders.
Subsequent to the quarter end the company Upsized its senior unsecured credit facility, the amended and restated credit facility consists of a $450 million revolving senior unsecured credit facility and the $200 million senior unsecured term loan facility up to a $50 million of which will be available on a delayed drop base.
For up to 364 days post closing.
The revolver includes an accordion feature that allows the company to request additional lender commitments of up to $250 million for a total amended credit facility capacity of up to $900 million.
The revolver will initially mature for years from the closing date in July 2025, with the option to extend the maturity to July 2026, the term loan will mature 5 years from the closing date in July 2026 the.
The term loan is pre payable without penalty for the entire term of the loans.
Borrowings under the revolver will bear interest at a rate of LIBOR plus the spread of 120 to 180 basis points, depending on the company's leverage ratio.
The term loan will bear interest at a rate of LIBOR plus the spread of 120 to 170 basis points, depending on the company's leverage ratio given the companys current leverage ratio of the initial spread to LIBOR is set at 125 basis points for the revolver and 120 basis points for the term loans.
Of note the amended credit facility also features the sustainability linked pricing component whereby the pricing can improve by 1 basis point of easterly meet certain sustainability performance targets as determined by an independent third party evaluation. It is our pleasure to strive to earn this discounted spread as we continue our commitment to corporate so.
The inability.
As of June 32021 pro forma for the closing of the private placement and issuance of the notes and the execution of the company's amended credit facility whereby outstanding balances on the company's existing revolving line of credit or repaid the companys weighted average debt maturity with meaningfully extended from 5.8 to 7.4.
For years and.
And its weighted average interest rate was 355%.
Turning to our quarterly ATM activities in the second quarter of 2021, the company did not issue any shares of common stock through the company's ATM program.
As of this call of the company has approximately 4 million shares which are subject to unsettled forward sales transactions under the company's ATM programs.
Assuming the shares are physically settled in full at a net weighted average initial forward sales price of $23.65 per share the.
The company expects to receive net proceeds of approximately $94.6 million.
Further with the newly implemented $300 million ATM program. The company remains well prepared to utilize the equity markets through our preferred method of just in time equity funding.
Turning to our earnings guidance during the quarter ended June 30th the company increased its guidance for 2021 <unk> per share on a fully diluted basis to a range of $1.30 to $1.32.
Reflective in part of our increased actionable acquisition pipeline. The midpoint of this guidance is predicated upon completing 300 million in acquisitions and up to $25 million in gross development related investment in 2021.
At its midpoint easterly would be on track to continue its track record of steady <unk> growth year over year, when coupled with our increased dividend of $26.05 per share, which generates a run rate dividend yield of 5% based on our quarter end stock price. We are proud to be in a position to continue to deliver attractive total returns.
To our shareholders through underlying U S government cash flows.
Finally, as Bill previously mentioned, we made progress in working through our pipeline of upcoming lease expirations.
With the successful execution at the EBITDA Upper Marlboro, we now have approximately 515000 square feet of 9 leases up for renewal through the end of 2021, we.
We continue to make meaningful progress with the GSA and are in active discussions regarding all properties at this time.
We feel good about the long term mission and tendency of these upcoming expirations and we'll continue to keep you apprised of future renewals in the coming quarters.
In conclusion on every operational and financial strength. It has been a strong first half of 2021 for easterly.
As always we thank you for your commitment to our thesis and continued partnership we look forward to seeing each of you in person in the back half of this year with that I will turn the call back to Joe.
Yeah.
Thank you.
We will now be conducting a question and answer session.
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1 moment, please open the call for questions.
Well. The first question is from non Korchman with Citigroup. Please proceed.
Hey, Good morning, everyone. This is park of the granting actually on for Manny. Thanks for taking the time just in terms of the acquisition market. I was wondering if you guys could touch on if youre seeing any additional competition or the impact on pricing just for some of those assets that youre looking at acquiring here over the next 12 months or so.
Good morning.
It's Bill I think the story is first of all of that we're seeing more opportunities than we've ever seen before in the acquisition pipeline I think from the standpoint of the pricing. If you look where we came out on our most recent for acquisitions were right, where we would think they'd be sort of in the low sixes on average.
But I will say that I think from a competition standpoint, we're not seeing any new players in the market.
We do have some strong competitors in the private equity space.
I think we have a better cost of capital. So when we want to buy something we seem to we seem to still be able to accretively get what we need to do.
I will say, though that as we looking towards more and more brand new buildings and you've seen some of those in the past.
Those cap rates are going to be a little further below the 6 cap range, just because I think.
Think people understand with 20 year leases on brand New mission critical properties are worth but from that standpoint, no new competition.
Got it. Thank you and then just in terms of the FSA.
SSA facility sale this quarter I understand that it's strategic day on you guys gave some comments in your opening remarks, but should we just anticipate other sales like this 1.
Over the next 12 months as you look to sort of in a way you know recycle capital.
And try to be positioned some of your sort of portfolio altogether.
Yes, I think I think the real answer there is we are so pleased with our portfolio of 83 buildings, but there are very few that are not young conducting mission for very important government agencies right in the middle of the full side. We do have a few properties and this will be 1 of them that was part of the portfolio acquisition that we just.
Felt the time was right to moving along so I would never really think of of.
Of our dispositions as an important part of our overall strategy, let's talk about that for 10 years.
But right now I think we on the best boating as we possibly can on and so we will move things along when we think either they don't fit in or it may be a source of funds for something better, but I don't think of you guys see of steady drumbeat of of sales within this very young portfolio.
Okay. Thanks, Bill appreciate it.
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The next question is from Michael Carroll with RBC capital markets. Please proceed.
Yeah. Thanks, Bill can you highlight the type of the agency's dac's the most of the opportunities to expand with today.
And if there are any new agencies like the national weather service you'd like to add to the portfolio that is currently not in the portfolio.
Yes, good morning, Michael.
Yes, I mean, I think the ones that youre going to see the most of it Ive mentioned with all of the opportunities that are out there today.
The only real major building program with brand new facilities going on within the federal government are in the FDA laboratories, and we're building them and the other is in the VA space and I think you are going to see more of these brand new output.
Outpatient clinics available in the coming years, and so I imagine we get our fair share of those wonderful opportunities in that space.
Other than that I think with new agencies, it's always going to be ones that we care about the most of that are not political footballs not the the poster child for ease of the Democrat or Republican Party. So I think you can expect anything and law enforcement will always be popular with us mission critical facilities within agencies like these national weather service.
It's an amazing facility that we picked up in the in Kansas City basically if you've been on an airplane you have been getting your web of any kind of aircraft you've been getting your weather from this particular facility and it might be 1 of the most of aluminum facilities in the country. So.
You can expect to see no matter what the agency if you've got a building with the hierarchy of mission like this we're going on we're going to go ahead and take advantage of it.
But the.
The usual I think youll see a lot of law enforcement FBI DEA, the usual suspects going forward.
And then what is the growth opportunity with the national while the weather service I mean, how many buildings are out there that kind of fits your bull's eye target and are you able to out there and acquire some of those.
I think you saw it that would be the Kansas City facility there are 6.
And the rest are just not of the scale and that this 1 is the new facility handling all of air traffic.
For the United States.
On the others of smaller facilities, so probably not as much of interest to us.
Okay great.
And then Meg it related to the sustainability linked the facility can you briefly talk about what targets DEA needs to achieve to reduce those spreads.
And what's the company doing today to hit those targets.
Sure so out of the box, we are linking to our ISS.
Environmental quality score and we are able to achieve that 1 basis points with someone.
The 1 basis point, rather with the 10% improvement in that score.
And.
We think that's of great great incentive and are working throughout the portfolio on numerous energy efficiency projects to add to be able to obtain that.
Okay great.
Thank you.
Okay.
Thank you.
Ladies and gentlemen, there are no more.
There are no more questions. So I would like to turn the call back over to Darrell crate for closing remarks.
Yes.
Great. Thank you everyone for joining the easterly government properties second quarter 2021 conference call. We appreciate your time and we will continue to work hard to deliver strong risk adjusted returns for our shareholders for years to come.
This ends today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.