Q3 2021 Easterly Government Properties Inc Earnings Call
Greetings and welcome to the easterly government properties third 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.
Note that this conference is being recorded I will now turn the conference over to your host Lindsay Winterhalter, Vice President of Investor Relations. Please go ahead.
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 and are considered forward looking.
The company intends. These forward looking statements to be covered by the safe Harbor provisions for forward looking statements.
And in the private Securities Litigation Act reform, a 1995 and is 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 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 tender achieved.
They're more actual results may differ materially from those described in the forward looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including without limitation those contained in item one a risk factors of its annual report on Form 10-K for the year ended December 31st 2020 filed with the STC.
On February 24th 2021 and then this other S. I S T SEC filings, including its Form 10-Q.
Which we expect will be filed later today 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 condition and results of operation of the company.
The company assumes no obligations to update publicly any forward looking statement, 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 from from funds from operations as adjusted and cash available for distribution you.
You can find a tabular reconciliation of these non-GAAP financial measures to the most.
Comparable current GAAP numbers in the company's earning release and separate supplemental information package on the Investor Relations page of the company's website at IR Dot 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 this third quarter conference call.
Today. In addition to Lindsay I'm also joined by Bill Trimble, the company's CEO, and Meghan <unk> company's CFO and CMO.
I could not be more pleased that our business progress during the third quarter, we were able to develop all stages of the acquisition pipeline, including identification negotiation of terms diligence and closing.
With this morning's announcement, we have exceeded our goal of 300 million in acquisitions for 2021 and as you saw in our release, we increased our guidance for acquisitions to $350 million. This is our second increase this metric during 2021 and all told this represents a 75% increase on a.
Our original acquisition volume target from one year ago.
In addition, we are very well positioned to achieve our acquisition target range of $200 million to $300 million for 2022.
In addition, we materially improved our competitive position and expanded our executable addressable market portfolios I over.
Over the medium term with the announcement of the portfolio purchase side by side with an outstanding joint venture partner.
As you May recall years ago, there was a sizable building we were bidding on it was squarely within our bullseye and while we were highly competitive as a bidder we lost the auction block.
Why we were not able to match the price given the cost of our capital and our speed to close given the scale our scale relative to our competitors.
Unequivocally the building we lost is one that we should have around we also realized that there was a universal several billion dollars' worth of buildings that could trade over the next 15 years, where we could find ourselves at a similar disadvantage. It was clear to us that we needed to solve this issue.
We began an effort to find a set of investors who see value in the enduring nature of our leases as they are backed by the full facing credit of the United States government have a life with several renewals that can reach or exceed 50 years.
On sites that will generally see economic development over the coming decades.
Ultimate in sleep, well at night real estate, whereas Bill says real estate without the drama.
We spoke with both domestic and global insurance companies pension funds and sovereign wealth funds.
What we learned is that the audience that most values. Our assets are folks who are also responsible for purchasing U S Treasury securities.
And they see their real estate holdings as part of an expansive global investment effort.
While we joined well we join our public company shareholders on these calls quarter after quarter and discuss the significant 500 plus basis point premium we offer relative to treasuries, we came to realize that the public REIT investors first instinct is not to approach the valuation of our assets with this risk premia in mind.
The results of our conversation was to narrow our interactions to several large global organizations that invested with a broader scope of risk and asset types.
Ultimately, we found a partner with whom we believe we can creatively and decisively work to harvest the most value and known the sizable assets in the United States at least market, while simultaneously serving the needs of our public REIT investors.
This has enabled us to deliver the portfolio transaction that we announced two weeks ago, which is an accretive transaction as measured by boat.
In CAD.
For our shareholders, while being competitive in the marketplace.
For the highest quality assets, it's important to note that the universe of global investors see value in these assets at a sub five cap rate.
While the purchase of this VA portfolio has an attractive addition to our existing assets as measured by duration quality scale and diversification. It more importantly illustrates a model by which we can transact within our total addressable market and positions us at a competitive advantage for the largest pristine assets in our target universe.
Complement the whole organization and our board for their efforts over the last couple of years as we work to solve this challenge and I'm very excited about the expanded capabilities that this new relationship brings to our enterprise with that I'll turn the call over to bill to further describe the activities for the quarter. Thanks, Darryl and good morning. Thank you for joining us for our third quarter.
Earnings call. It gives me great pleasure to discuss the specifics of the company's most recent acquisition activities and it's been a very productive three months since our last time together starting with our activities during the quarter. The acquisitions team continued to add mission critical bullseye properties with the third quarter acquisition of an approximately 61.
Thousand square foot class a facility located in Cleveland, Ohio that is leased to several key agencies within the U S. Government. This security level three facility was substantially renovated in 2016 and again in 2021 for the department of Homeland security and largely fulfills important missions such as investigating criminal.
Organizations and terrorist networks a portion of the property also serves as Cleveland National Weather service forecast office. The U S. Government has invested significant tenant improvements in this building who specialized features include a secured entry and parking Sally port a backup generator and an uninterrupted power supply batteries system, which all.
Support the weighted average potential lease term through June of $20 30 for 2034.
Subsequent to quarter end easterly through its JV entered into an agreement to acquire a brand new state of the art 1.2 million square foot portfolio leased entirely to the department of Veterans Affairs with two of the 10 assets already acquired this portfolio is a perfect fit for easterly and clearly differentiates us in any.
If our competitors, who may seek to build a portfolio in this niche market of V. A leased assets through this acquisition. The company is materially reducing the average age of our portfolio, while simultaneously extending its weighted average remaining lease term.
And with 100% of the portfolio's annualized lease income backed by the full faith and credit of the U S government easterly can deliver cash flow growth to shareholders through a strategic joint venture partnership with one of the world's leading investors.
If we assume September 30th profile metrics and a scenario, where all 10 buildings were acquired and operating on the earlier of its actual lease commencement date or October one 2021 easterly has weighted average age would dropped 13% from 13.8 years to 12.
Years, its weighted average remaining lease term would grow nearly 16% from $8 nine years to 10.3 years.
And the size of the portfolio would grow by 16% from 7.5 million square feet to eight 7 million square feet to improve all of these metrics through a single portfolio transaction is very exciting for us at easterly and we expected is for both our debt and equity.
Partners as well.
Also in the third quarter, we honed our discipline of owning government leased assets through the strategic disposition of a noncore asset a privately leased warehouse located in Midland Georgia.
While our quality asset owning a leased facility that lacks the credit worthiness of the United States government is by definition a disposition candidate for easily we have long communicated this asset as a potential source of funds for future acquisitions and with the rolling closings of the remaining eight properties in the VA portfolio between now and.
In 2023 easterly is able to put that capital to work, while simultaneously strengthening lease profile of the company's portfolio.
Subsequent to quarter end and in addition to the two VA outpatient facilities acquired by the JV easterly acquired in nearly 500000 square foot facility primary leased to the United States citizenship and immigration services or U S. C. I S. Located in the Metropolitan region of Kansas City, Missouri.
With the majority of the building leased to U S. C. I S. Through 'twenty 42, the total weighted average lease exploration date for facility is February 2036 should all in place tenant renewals options be exercised the weighted average lease expiration date for the facility could be as late as January of 'twenty 40.
Five.
Notably this property serves as U S. C. I S as national benefits center or N B C, which supports the processing of applications from every U S state and territory for the different immigration benefits, including the authorization for employment travel abroad permanent residency and naturalization.
The N V. Six primary function is to prepare the case files for eventual adjudication for more than 85 field offices nationwide.
And finally, just this morning, the company announced our latest acquisition, which not part of the 10 property VA portfolio.
Yesterday easterly acquired an 80000 square foot VA outpatient clinic located in the Midwest region of the United States V. A Midwest is a build to suit outpatient clinic that was recently completed in 2021.
State of the art to Green Globes certified facility is leased to the V. A for an initial noncancelable lease term of 20 years that does not expire until may of 'twenty 41.
The outpatient clinic provides a wide range of medical and ancillary services, including but not limited to primary care mental health Audiology, Optometry, dermatology radiology and prosthetics.
To summarize year to date easterly has acquired either directly or through the JV 10 properties for a total pro rata contractual purchase price of approximately $321 3 million exceeding its increased 300 million acquisition volume target for the year pro forma for these acquisitions.
He is truly owns directly or through the JV 87 properties totaling 8.3 million square feet.
As you recall, given the pace of our acquisitions and our clarity of pipeline, we increased our 2021 F O guidance per share on a fully diluted basis in conjunction with increasing our acquisition volume target by 50% for the year from 200 to 300 million. We also spent time in the last call letting you know the team.
Was looking for large opportunities and we felt confident in our ability to meet or possibly significantly exceed this increased $300 million in acquisition volume since the time of our last call easterly has either directly or through our pro rata share of the JV more than doubled our acquisition volume for the year and identified a robust pipeline.
Line of actionable opportunities that will carry us into 2023.
And while the acquisitions team has created certainty of pipeline for the next couple of years. We are by no means slowing our pace. The team continues to work hard to identify future single and portfolio opportunities that will deliver growth to our shareholders.
Turning to development. We are pleased to report that the government has reached a determination on its new program requirements for the future F. D. A Atlanta Laboratory development project, the GSA and the F. D. A has spent the past several months working together to ensure maximum benefit from this facility and we are pleased to once again actively engaged with the Gulf.
And proceed with the redesign process given the non speculative nature of our development projects. The design process is heavily dependent on the government as they customize their specific requirements. After the government determines its functional needs, we work collaboratively and the design and the government then relies on us to construct the <unk>.
Build out during buildout given our expertise in this specialized field, we have the ability to accelerate the construction timeline as was demonstrated in the case of FDA lenexa.
Turning to leasing updates our asset management team continues to secure meaningful meaningful renewals that lengthen the duration of cash flows in the third quarter, we renewed the lease at D. E Vista for a 15 year term that retroactively applies to November of 'twenty, 'twenty and does not expire until November of 'twenty.
35, we also renewed several key leases at various GSA Buffalo asset, including the approximately 50000 square foot IRS lease for 10 years and the approximately 111000 square foot V. A lease for 15 years. These renewals combined with the other assets year to date translate into.
Eight successful re leasing exercises totaling over 530000 square feet or 7% of annualized leased income for a weighted average lease term of 16.1 years in 2021.
In closing we lease really have been busy since the time of our last call, we have meaningfully and accretively scaled the companys portfolio through the acquisition of Bullseye assets. We have chartered a course, the highest acquisition volume year on record as a public company. We have formed a new joint venture with an experienced global partner and we.
Even further refined our investment discipline of owning assets, primarily backed by the full faith and credit of the U S government.
With that I. Thank you for your time this morning, how I'll turn the call over to Megan to discuss the quarterly financial results and capital market executions.
Thank you Bill good morning, everyone. It gives me great pleasure to post another strong quarter and issued earnings guidance for 2022 demonstrative of our ability to deliver consistent growth to shareholders.
Turning to our quarterly results for the third quarter net income per share on a fully diluted basis with 910 <unk> per share on a fully diluted basis was 33 cents.
<unk> as adjusted per share on a fully diluted basis was 31.
And our cash available for distribution was $26 $1 million.
As of September 30th we owned 83 operating properties, comprising approximately seven and a half million square feet of commercial real estate with one additional development project and design totaling approximately 162000 square feet.
The weighted average age of our portfolio was 13 eight years and a weighted average remaining lease term was $8 nine years, well matched I'd like to point out to the weighted average debt maturity of nearly seven years.
As Bill pointed out these metrics are expected to continue improving through the acquisition of the 10 property VA portfolio announced subsequent to quarter end. These metrics are core to our strategy as reflected through the acquisition of young building and renewal of existing assets for a long lease duration.
These actions have also demonstrated the companys ability to continue to generate cash flow with strong visibility for years to come.
Turning to the balance sheet at quarter end. The company had total indebtedness of approximately $1 billion with ample capacity on our line of credit for future acquisitions and development related expenses.
As of September 30th easterly net debt to total enterprise value was 33, 2% and its adjusted net debt to annualized quarterly pro forma EBITDA ratio with a low six one time.
During the third quarter, you certainly had a number of notable capital markets events first the company Upsized its existing senior unsecured credit facility, the amended and restated credit facility consists of a $450 million revolver and a $200 million term loan facility up to $50 million of which will be available on a delayed draw basis for up to three <unk>.
Third 64 days post closing.
All her 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 four years from the closing date in July 2025, with the option to extend the maturity to July 2020.
The term loan will mature five years from the closing date in July 2020.
The term loan is pre payable without penalty for the entire term of the alone.
Borrowings under the revolver will bear interest at a rate of LIBOR plus a spread of 120 to 180 basis points and the term loan will bear interest at a rate of LIBOR plus a spread of 120 to 170 basis points, depending on the company's leverage ratio.
Given the company's current leverage ratio the initial spread to LIBOR are set at 125 for the revolver and 120 basis points for the term loan.
Of note the amended credit facility also features the sustainability linked pricing component whereby the pricing can improve by one basis point, if easterly meet certain sustainability performance targets as determined by an independent third party evaluation coupled.
Coupled with our hiring of a director of sustainability, a new role within our organization. It is our expectation that easterly earns its discounted spread and meaningfully demonstrates our commitment to environmental sustainability and strong corporate citizenship.
The second notable event for the quarter ended September 30th with an underwritten public offering of $6 3 million shares of the company's common stock sold on a forward basis.
Strategic offering executed a net price to the company of $21.64 per share has provided easterly with funding needed to continue pursuing this acquisition pipeline at levels that are accretive to shareholders.
In the third quarter of 2021, the company issued approximately two 1 million shares of its common stock through the company's ATM programs at weighted average price of $23 65 per share raising net proceeds to the company of approximately $50 million. All shares were from forward sales transactions entered into in prior quarters.
Today, the company has approximately $8 2 million shares which are subject to unsettled forward sales transactions. Assuming these shares are physically settled in fall at a weighted average initial forward sales price of $21 71 per share the company expects to receive net proceeds of approximately $178 million.
With these unsettled forward sales easterly is very well poised to continue funding our acquisition and development pipeline just in time at a highly attractive cost of capital.
Subsequent to quarter end easterly issued the previously announced $250 million principal amount of fixed rate senior unsecured notes.
The notes were issued and sold in two tranches series, a senior notes in the amount of $50 million with a seven year maturity and series B notes and the upsize the amount of $200 million with a nine year maturity to go.
The weighted average maturity of these notes is eight six years and the weighted average interest rate is 284%.
Raising long term unsecured debt at such an attractive weighted average rate and maturity is an extremely powerful tool and generating value for shareholders.
Finally in connection with the VA portfolio announced subsequent to quarter end easterly has entered into a joint venture with a leading global investor which served as the investment vehicle for this brand new anticipated $1 2 million square foot portfolio.
Easter lease JV partner will retain a 47 per stake, 47% stake and easterly will retain a 53% stake in the JV easterly.
Easterly will also receive asset management fees from the JV partner and will be responsible for the day to day management of the property.
This relationship with our new JV partner, we believe demonstrates the global interest in the strength and stability of the U S. Government cash flows that underpin Easter lease credit quality. We are excited by the partnership and look forward to a strong mutually beneficial relationship for many years to come.
Turning to re leasing as Bill previously mentioned, we continue to make progress in working through our pipeline of upcoming lease expirations with the successful execution of D. A better and two of the more sizable leases within various GSA Buffalo, We now have approximately 243000 square feet and five leases up for renewal through the end of <unk>.
'twenty one.
But the large percentage of their renewal work now behind US we continue to make meaningful progress with the GSA and are in active discussions regarding all properties at this time we.
We continue to feel good about the long term mission and tenancy of these upcoming exploration and we'll keep you apprised of future renewals in the coming quarters.
Turning to our earnings guidance as you recall 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.
Effective and part of our increased actionable acquisition pipeline. The midpoint of this guidance was predicated upon completing an enhanced $350 million in acquisition an increase from our previously stated $300 million in acquisition and up to 25 million and gross development related investment in 2021.
Today. The company is maintaining this increased guidance and at its midpoint easterly remains on track to continue our record of steady <unk> growth year over year at the midpoint of our 2020. One guidance, we are expected to achieve a three 8% CAGR in <unk> per share over the last three years.
When coupled with our recently increased dividend of <unk>, 26, and a half cents 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.
The company has also issuing 2022 <unk> per share on a fully diluted basis.
Guidance in a range of $1 34 to $1 36. This guidance is predicated upon completing $200 million to $300 million in acquisitions, including acquisitions through the JV at the company's pro rata share of the contractual purchase price and up to $25 million in gross development related investment in 2022.
Easterly remains on track to deliver a steady <unk> growth per share year over year is our goal to remain dependable and provide a constant source of growth for our shareholders.
To Echo Berlin, Darryl sentiment, we're excited by the events that have transpired since our last earnings call. We have raised equity at attractive levels to match, our forecasted record breaking acquisition volume we are fortifying the balance sheet with debt issued at attractive rates with long dated maturity.
We have formed a lasting relationship with a preferred global investor in the company's first ever joint venture and we've tried to it of course for future growth through the introduction of our 2000 22022 earnings guidance with that we thank you for your commitment to our investment thesis and appreciate your partnership.
I will now turn the call back to Maria.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. He.
You May press star two if he would like to move to your questions from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Emmanuel Korchman with Citi. Please proceed with your question.
Hey, good morning, everyone.
Just thinking about the acquisition guidance for 2022 could you quantify how much of that is.
Contractual or at least planned under the JV versus.
New targeted acquisitions outside of what sort of we already know about.
Sure. So obviously as we continue to work on closing the VA portfolio.
We are basing that guidance, assuming $50 million of pro rata acquisition volume falls into.
Next year.
So $50 million of the two to three hunters JV to 50 of fresh.
Attrition is at the 300.
Mhm Yep.
Yep.
So one does the rest of the JV closed because I was under the impression that will close that margin. There was only one deal that was slated for 2023, so what am I missing in terms of what the messaging is that our important messaging is that our target is.
250.
Without that joint venture and.
We know that joint venture was done at levels that are accretive to <unk>.
But whether they fall at the tail end of this year or they slide into next year, where the messaging is really about deals in addition to that.
Those will be the primary draw.
Drivers of that that's over.
Remember the VA portfolio.
Accretive to <unk>, but really a driver of CAD.
And then bill in your quoted statement in the press release, you talked about.
Our largest identified pipeline.
If we were to sort of categorize that into a single asset deals versus portfolios are there more portfolios you're looking at now versus in the past or is the mix the same.
Just give us some more flavor on that identify but yeah I would say many of them as we mentioned in previous calls we are looking at some really interesting portfolios out there, but the timing is never certain.
But I think that as always it's the it's the ones and twos the ones that we the bullseye properties that we're looking at it gave us the confidence to issue that strong guidance for next years pipeline.
So I think the portfolios would probably be on top of that if that worked out.
Alright, thanks very much.
Yeah.
Our next question is from Michael Carroll with RBC.
Capital markets. Please proceed with your question.
Yeah, I just want to go back to Dominion's question real quick how much of the joint venture do you still have to close is it roughly just over $300 million of your share of that still needs to be closed within that portfolio.
That's correct Mike.
And then can you help us understand when will that close it sounds like the majority of it is going to close in 2022.
Yeah, So what we've said right as we expect.
But the final on a total purchase right.
Two of 100 million to fall by the by the end of the second quarter next year I think we don't we don't encourage you to get caught up as these are development properties and the perfect timing of when they will close the point is whether they are able to close in the end of this year at the beginning of next year that we're going to do.
A target of $250 million in addition to that.
In addition to the JV closing.
Yes.
Okay great.
The underlying assumption there yeah, I think we can't say it enough that our steady business I mean, we've got a business that's delivering a dividend yield of 5%.
Meghan said you know, we're growing between three and 4% a year and <unk> as we've demonstrated over the last three years.
Our steady state turn the crank business is $2 million to $300 million of acquisitions a year.
It's our belief that the full faith and credit cash flows of the government growing at a steady pace as a very attractive.
Investment proposition and these portfolios and.
These are one off value, creating activities, which I think can be many over this next decade are really in excess of sort of that base that base core business.
And I think it's so important to realize that.
The joint venture partner enabled us to go out and buy these portfolios in a way that it is marginally accretive death. So it's very attractive to CAD and what's most important is that we're owning these very large most pristine assets.
In the in the U S government lease market.
And as we continue to dominate and continue to build our.
Our competitive advantage relative to others in that space.
Enables us to do just that and I can't say enough.
Global investors, who are across a broad set of assets see these assets at a sub five cap.
Which is in Stark contrast to the overall cap rate you know that our enterprise.
Rented in the public markets today.
And then how do you plan on growing the the joint venture down the road I'm, assuming that the that there's other portfolios that you would want to do in the JV I mean should we assume that a larger billions and billions of dollars.
So where should we assume that larger portfolio deals could be put in the joint venture and then these one off smaller transactions will be completed on balance sheet.
It's not really that simple is that there are there are these there are these large portfolios, where we will go to this joint venture partner and we'll use the joint venture appropriately and and.
It's early days, we think they're fantastic I think they're very astute real estate investors.
And I think we have a clear understanding of their objectives and what you know and what we can deliver so again, our steady state business is going to be delivering that $2 million to $300 million of acquisitions a year.
That <unk> growth that is dividend yield 5% with a.
3% to 4% growth on top of it and and then as these are very large deals come forward.
We couldn't be more excited to have our joint venture partner work with us to craft a transaction that helps us meet public shareholder public REIT shareholder.
Demand for return on capital.
While also allowing us to grow our dividend.
Okay, and then can you talk a little bit of balance.
Your asset sales I know you had one small one completed I guess post quarter end I mean is there a plan to sell the other privately at least properties in them.
Do you are you marketing those for sale or is this one that was just completed was just kind of an opportunistic type transaction that someone came out to you and said they wanted to buy it.
Yeah, Great question I think we've said probably since we met you first and we went public that these non gov.
Government core assets, we're always available for sale.
In this case it was just a good time to transact that that sale and we did and the answer is absolutely. Those other properties would be viewed as a source of funds for new opportunities going forward and we're always looking if we can execute it at a accretive value for our shareholders. We will do it the other properties are terrific.
Property basically and.
And it would be for sale at any moment, if we saw the right pricing on them.
Okay, and then there's one small asset that's in there. So I don't want to put too much stress on X a super small but.
It looks like the lease expires within the next six months I mean, what's the plan with that specific asset like we are sharing hope.
Yeah, I mean, Mike you're asking about.
So a net of a lease but we.
That lease because certainly could certainly not get renewed but.
De Minimis, it's not even worth our time on an earnings call, but yes.
Small small private sector Lee.
Our Charleston asset.
Okay, great. Thank you.
Yes.
Our next question is from John Kim with BMO capital markets. Please proceed with your question.
Thank you.
Bill in your prepared remarks, you talked about the number of renewals.
You've done on the leasing side, where those all 21.
Of those 22 explorations and then can you talk about what the leasing spread was almost one year olds.
Oh, I'll hand that thank you and good morning, I'll hand that over to Megan She's got it right in front of me sure. So obviously the two the IRS, we N V a lease and Buffalo.
Were renewed in the quarter as well as a D. A.
I'd been in.
Had been in what we call a holdover and then.
The other two were one was.
One was in 2021.
The other one.
As well in 2020, one so just the three leases and John as we said we've always got renewals that are impacting different years. Some have tenant improvements that we have insight into some of our developing our insights. So we're going to continue to talk about renewables.
Annually as we started last year.
Courts doing that on our next quarter call.
But what was the.
The leasing spreads.
Yeah, John we talk about leasing spreads.
Within the portfolio on an annual basis, we're going to continue that track record.
As we are.
Yeah about next quarter.
Okay. So just again in the year, you're just going to renew what happened during the year.
Right.
I know you don't report same store NOI, but.
Looking at operating expenses this quarter, it was up 6% sequentially, which was higher than the revenue growth.
Is that a good run rate.
Going forward on expenses and can you just comment on.
Any inflationary impact on some of those items.
Yeah. So.
I encourage everyone to remember that the we have a tenant reimbursement line item in our revenue that relates to the.
Projects that we will perform for the GSA during the term of the lease equal offsetting.
Amount in our property operating expenses.
We obviously finance that project and then the government reimburses us so when youre thinking about operating expenses to truly operate the property you need to Peel out that tenant reimbursement amounts from Opex and so if you were to do that John I think you would see.
Barry.
Very consistent NOI margin year to date.
For year end.
Okay.
<unk> is obviously something we're aware of.
We have.
We have the benefit of our opex spaces in our in our leases, which will which will also grow with with C. T I D.
This year, we said we said.
Well well insulated.
Yeah.
There's typically a lag between reimbursement and in the Opex.
Yeah.
No.
It's an annual.
Annual trip.
Okay.
And just a final question for me.
Expecting as far as cap rates.
For 2022, and I think part of it is.
The mix of what you do a JV versus on balance sheet, but generally are you expecting cap rates to continue to trend down.
Yeah, I think I think it's sort of a tale of two cities, which when we're looking at our.
250 million outside of the JV.
Well I think we'll be consistent what we've seen this year and we've seen lots of opportunities ranging for anywhere from sort of a $5 six up to north of.
Now the six cap and so that market continues to be robust and I think we will do a great job mining those opportunities, yes, they've come in a little bit this year, but I think also at the same time, if you look what we purchased this year for.
For the most part they've been very long term leases with bullseye sorts of properties you are pointing to that national weather service headquarters. So we purchased earlier this year, but there's also another set of buildings and Daryl talked about this that are in the pristine.
15, 20 year brand, new sorts of facilities and those properties are trading at a five and a quarter of $5 40, and in some cases lower and now we have the opportunity to go ahead and enhance our portfolio of those acquisitions. So think of sort of as I mentioned the tale of two cities.
One barely accretive but doing wonders for our CAD doing wonders for our metrics in one or two of our overall enterprise value and the other one of the real driver of growth and an F. F L.
I appreciate the color. Thank you.
Yeah.
Our next question is Manny Korchman with Citi. Please proceed with your question.
Hey, I'm going to come back to two acquisitions, because I know I'm not the only one confused by this so you have 300 million left to close on the JV assets. Your guidance for this year includes another call it $25 million to $30 million of acquisitions close your guidance next year includes 59 at the close.
So one does when in our model should we include the $200 million to $225 million piece of the JV to close is that early.
Early 'twenty three because it might close by into 'twenty, two and Youre being conservative or am I, just completely missing something here.
Yeah. So.
Youre not missing something other than the real takeaway, which is.
We're obviously trying to guide to an appropriate level next year. So people can think about where to build last point right where real well.
<unk> drivers will go versus where system assets like we're doing in the joint venture. So there is a base assumption that.
That $50 million of pro rata purchase prices and that amount. If that's the case, obviously the remainder would be in this year.
But whether it whether it falls into this year or into next quarter and next year and.
We're in.
Different total acquisition volume next year, it's something that.
We're going to continue to telegraph to you all as we do close these are development property timing is never perfect.
But do you think you've got what you need from a earnings perspective.
Model out next year, whether something's in December or January.
Thanks Gino.
I mean, maybe just to say it again, which is these assets are going to close but for an earnings from an earnings driving perspective.
Accretion of the assets is what's consistent with our guidance so.
There as these development projects, we're uncertain what will be done this year next year 2023.
It has a marginal effect on on.
<unk>.
However, there will be a cat effect and I think that will be the the.
That we get at these things.
These things do close I hope that's helpful.
It is Daryl Thank you and then in terms of the management fee.
Is that contractual to this set of assets or to the JV itself. So if you were to do another deal with the same partner.
Would that be at the same figure would that just would that be renegotiated based on what you are buying in and structure et cetera.
I mean, I think the intent as we did this deal and all parties are happy So I think it's a blueprint for where we go in the future.
Thanks Al.
Thanks.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Merrill Ross with Compass point. Please proceed with your question.
Hi, good morning.
A question on the Kansas City property Summit Tech Center.
From the records.
GSA leases it seems that the government lease it's about 67%.
Two thirds of that topic, so as far as the English yep.
I'd be interested in or shadow rating is the remaining tenants if any and.
What are the characteristics of those private leases do they piggyback on the GSA lease essentially.
I assume there are companies that have some synergies with it.
Thank you.
Morning, Maryland, Thanks for asking those are mostly local hospitals health care organizations. They are not necessarily pegging back with the GSA, but I think there are wonderful tenants and.
And our <unk>.
<unk> way on down the line. So I think the overall buildings absolutely terrific, obviously, an amazing mission for the federal government portion and we're very pleased with the private tenants in the building and one of the great things is you get bumps with private tenants that we're excited about that.
Yeah.
Right exactly thank you.
Okay.
Our next question is with Michael Carroll from RBC Capital markets. Please proceed with your question.
Yeah. Thanks, I guess, Daryl Euro is talking about this the JV transaction is going to be more accretive to CAD than it is to <unk> I mean, I guess first I hear that correctly and why.
Why is that is does the GAAP rents does that come in later than the cash rents or how should we think about that.
No that's all about.
Young asset with de Minimis capex requirements maintenance Capex requirements.
While you can while.
You can experience less.
Accretion on the <unk> lineup.
Yield is accretive to our overall average cash yield.
Okay. So it's more related to the Capex side of things then they didn't relate to anything else.
Yep Yep.
Okay. Thanks.
Thanks.
Okay.
It appears that there are no further questions.
I would like to now turn the call back over to Darrell crate for closing remarks.
Great. Thank you everyone for joining the easterly government properties third quarter 2021 conference call. We appreciate your time and we'll continue to work hard to deliver strong risk adjusted returns for our shareholders in the year to come thanks, So much.
Okay.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Okay.
Okay.
Yeah.
Okay.
Yeah.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Yes.
Okay.
[music].
Yeah.
[music].
Right.
[music].
Okay.
[music].
Yeah.
[music].
Okay.