Q4 2021 Easterly Government Properties Inc Earnings Call
Greetings welcome to easterly government properties fourth 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 recorded I will now turn the conference over to Lindsay Winterhalter, Vice President of Investor Relations. Thank you you may begin.
Good morning, so far the coffee, yes, so you should not be used as far as 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.
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 with 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 attained or 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 those items contained or those contained in item one a risk factors of its annual report on Form 10-K for the year ended December 30.
<unk> 2021 to be filed with the SEC February 'twenty, eight 2020 , two and in its other SEC filings and risks and uncertainties related to the adverse impact of COVID-19, our U S regional and global economies and the potential adverse impact impact of their financial condition and results of.
Operations of the company.
The company assumes no obligation 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 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 package on the Investor Relations page of the company's website at IR day easterly REIT dotcom.
I would now like to turn the conference call over to Darrell Crate chairman of easterly government properties.
Thank you Lindsay and good morning, everyone and thank you for joining us for this fourth quarter conference call. Today. In addition to Lindsay I'm also joined by Bill Trimble, the company's CEO and Meghan busier, the company's CFO and COO.
2021 was another strong year for the company and the portfolio. The year was defined by a record level of acquisition volume increased <unk> per share guidance and increased dividend strong capital markets execution, both debt and equity the formation of a joint venture with a leading global investor and successful.
Re leasing efforts with our primary tenant the United States Federal government.
We continue to rigorously rigorously maintain our investment discipline of purchasing mission critical facilities that are early in their lifecycle. We've been building. This portfolio of 89 buildings for the last 12 years and today. The average life of our buildings is just 13 years.
While maintaining our focus on long term quality, we were able to grow <unk> per share in 2021 by a strong 4%.
As you know this cash flows back by the full facing credit of the U S government.
While we spend a significant amount of time talking about growth through acquisition I would like to highlight the outstanding effort that produces strong consistent results by our re leasing and asset management group.
This team has developed a definable edge and how they work with our tenant the U S government to meet their unique set of needs.
As we've seen over the last 20 years there've been groups that have built GSA portfolios and chosen to service the government with folks who are trained and operating commercial office. This is not a match the government by definition must have a different set of tastes and preferences to achieve their goals as compared to a commercial tenants.
Our team is steeped in understanding these unique needs with the goal of being the private landlord of choice to the United States government.
We're certain this platform creates enduring long term value for our shareholders.
Further we're pleased that we can consistently deliver a strong dividend to our shareholders. Our cash available for distribution continues to grow and reduce our payout ratio as we emerge from a period of re leasing in 2020 in 'twenty 'twenty. One we are pleased that this favorable reporting trend will continue through 2022.
We'd like to take a moment to thank our board we have an exceptional group of directors, who have achieved significant success in their business endeavors, and we're grateful for their enduring engagement and guidance and lastly, I'd like to thank our investors for their support and interest in easterly government properties will continue to work to deliver high quality dividends and growth from our portfolio with the <unk>.
Highest credit worthy tenant the United States Federal government and with that I'll turn the call over to bill to further describe the activities of the quarter.
Thanks, Darryl and good morning, Thanks for joining us for our fourth quarter earnings call 2021 was an incredibly successful year for easterly on many fronts $412 million in mission critical acquisitions, the launch of a new joint venture partnership with a prominent global investor the renewal of a number of ways.
<unk> and the bolstering of our bullseye portfolio metrics on every measure all combined to put easterly government properties in a very strong position at year end.
This is a year, where our acquisition team broke all records dating back to our IPO in 2015. It was a year, where we raised expectations and delivered 2021 also saw the strengthening of our team the new C. E O a new head of sustainability and our manager of HR and <unk> initiatives.
Now I'll breakdown, the accomplishments and milestones.
In total easterly completed either directly or through its new JV 12 accretive acquisitions totaling approximately 412 million at a weighted average acquisition cap rate of 6% for the year. The weighted average remaining lease term of these 12 buildings to 16.6 years, assuming all options are exercised.
Further demonstrating the long term cash flows and stability of these assets. All 12 buildings are either build to suit or renovated to suit for the underlying tenant agency, we said it before but the successful accomplishment of mission as the guiding requirement for agencies and the ability of our facilities to aid that mission is why we have.
<unk> seen such a strong renewal profile since our predecessor fun box first building in 2010.
The highlight of our acquisition team's accomplishments in 2021, whereas the successful announcement and subsequent initial closings on a brand new state of the art, one 2 million square foot 10 building portfolio leased entirely to the department of Veterans Affairs to date, we have closed on four of these 10 properties.
And I expect to acquire the remaining properties during 2022 and 2023.
This unique portfolio a natural addition to our growing organization.
It's a perfect opportunity for the creation of our joint venture with a global asset allocator, who understands the enduring nature of these assets and the meaning a full faith in credit.
With a weighted average lease duration of $19 six years. This portfolio only further differentiates us from any of our private competitors. As previously mentioned this portfolio materially reduces the average age of our already young portfolio and extends its weighted average remaining lease term we were.
Pleased to add to our cash flow to investors for the long term, while opening up new strategic opportunities in the future at this time. The JV is limited to just these 10 properties, but we look forward to further conversations.
In addition to the four VA outpatient facilities acquired by the JV in the fourth quarter easterly acquired a nearly 500000 square foot facility, primarily 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 a <unk>.
Weighted average lease expiration date of February of 'twenty 36, and this property serving as U S. C. I S. As National benefits Center, we believe the long term tenancy and this facility is predictable.
Finally in the fourth quarter is truly a required an 80000 square foot at least.
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.
They are two green Globes certified facility is leased the VA for an initial noncancelable lease term of 20 years. It does not expire until may of 'twenty 41, yeah.
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.
On our development status, we have previously reported that the government has reached the determination on its new program requirements for the future FDA Atlanta Laboratory development project, the GSA and the FDA, It's best past several months working together to ensure maximum benefit from this facility and we are pleased to reengage with the government.
Actively proceed with next steps.
Since the time of our last call easterly has proceeded with the redesign of the project in collaboration with the FDA and the GSA and completion of the project is now anticipated in the second quarter of 'twenty 'twenty four.
Turning to leasing updates and our asset management team continues to secure meaningful renewals have lengthened the duration of cash flows in the fourth quarter, we renewed the small business administration or SBA leasing multi tenanted facility located in Buffalo, New York with.
With the lease commencement date of August of 2022 easterly has the opportunity to proceed with tenant improvement work in advance of the start date.
Once the new lease commences a brand new 17 year term 15 years firm will begin that can take sba's tenancy in August of 2039. This renewal combined other assets year to date translate into nine successful re leasing exercises totaling approximately 500.
74000 square feet or just under 7% of the annualized lease come in.
For a weighted average lease term of $16 two years in 2021.
In closing, we had easterly had a very productive last quarter of 2021, including another strong year for the company, we are meaningfully and Accretively scale, the company's portfolio through the acquisition of Bullseye assets, we executed on our highest acquisition volume year on record as a public company.
We have formed a new joint venture with an experienced global partner.
And we have even further refined our investment discipline of owning assets, primarily backed by the full faith and credit of the United States government.
That I. Thank you for your time this morning, and I'll turn the call over to Megan to discuss the quarterly and year end financial results and capital markets executions.
Thank you Bill good morning, everyone. It gives me great pleasure to post another strong quarter close at a very successful year here at easterly as of December 31st We earned 89 operating property.
Rising approximately $8 6 million square feet, either wholly owned or through our joint venture with one additional development project and design totaling approximately 162000 square feet.
In 2021, we acquired 12 properties and sold two through the acquisition of newer facilities, the strategic disposition of non core assets and the successful long term renewal of an existing property. The weighted average age of our portfolio remains young at 13 six years and the weighted average remaining lease term has grown to $9 seven years.
Turning to our quarterly results for the fourth quarter all on a fully diluted basis net income per share was <unk> <unk>.
<unk> per share was 33 cents and <unk> as adjusted per share was <unk> 32 cents.
Our cash available for distribution was $26 $3 million.
For the year ended December 31 2021.
Fully diluted basis net income per share was 36 <unk>.
Per share was $1 31, and <unk> as adjusted per share was $1 24, our cash available for distribution was 100 million.
At $1 31 per share on a fully diluted basis easterly delivered at the mid point of its previously increased guidance. This represents an impressive 4% growth rate year over year, when coupled with a roughly 5% dividend yield. We believe these truly presents a unique opportunity for investors to receive a robust current yield.
By the full facing credit of the U S government alongside long term inflation protection.
On that note, let me actually take a moment to remind us on the call. So while the typical GSA lease does not provide for shell ramp up it does contain an operating expense base, which protects us as landlords from bearing the burden of increased operating expenses and thus diminishing NOI in an inflationary environment.
Turning to the balance sheet at quarter end. The company had total indebtedness of approximately $1 $2 billion with nearly full capacity on our line of credit for future acquisitions and development related expenses.
At December 31st easterly net debt to total enterprise value was 34, 1% and its adjusted net debt to annualized quarterly pro forma EBITDA ratio of six seven times.
With a weighted average debt maturity of six seven years, and 97, 5% of all outstanding debt fixed at attractive levels I am, particularly pleased with our company's positioning as we enter a potentially rising rate environment.
On the debt side in the fourth quarter, it's really issued the previously announced $250 million principal amount of fixed rate senior unsecured notes. The notes were issued and sold in two tranches series 18 announcing the amount of $50 million with a seven year maturity and series B notes and the outsized amount of $200 million with a nine year maturity.
Together at a weighted average maturity of these notes is eight six years and a weighted average interest rate was 284%.
We believe raising long term unsecured debt at such an attractive weighted average rate immature. He is an extremely powerful tool in generating value for shareholders.
Terms of equity during the fourth quarter, Italy issued just under $4 million of the $6 3 million shares the company sold on a forward basis in connection with an underwritten public offering that took place in the third quarter at a net price to the company of $21 64 per share.
But the settlement of these shares in the fourth quarter Easter They received approximately $85 million in net proceeds delivering the funding needed to continue pursuing our acquisition pipeline at levels that are accretive to shareholders.
At present, we truly expect to receive net proceeds of approximately $102 7 million from the sale of an aggregate $4 7 million shares of the company's common stock that have not yet been settled.
Clothing, the remaining $2 3 million shares pursuant to the company's third quarter underwritten public offering and two 4 million shares from sales under the company's $300 million ATM program. Assuming these forward sales transactions are physically settled in full using in that weighted average combined initial forward sales price of $21 87.
Finally in the fourth quarter, He's really announced the formation of a joint venture in connection with the agreement to purchase 10 assets that we referred to as the VA portfolio.
As mentioned on the last call each release JV partner will retain a 47% stake in the JV and easterly will retain a 53% stake in the JV.
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 outside current yields of GSA assets like those and easterly portfolio yields which are backed by the strength and stability of the U S government cash flows that underpin Easter lease credit quality there.
We're excited by the partnership and look forward to a strong mutually beneficial relationship for many years to come.
Turning to renewal I would like to highlight some of our releasing successes as of year end as previously mentioned due to the unique nature of our leases final renewal rent cannot be ascertained until the exact amount of tenant improvement our ti dollars required by the government at reasonable is known in the Ti work is complete.
As such there can be a lag in providing releasing data relative to the point at which we have signed a renewal lease.
As of December 31, 2021, we had executed 12 renewals for which the renewal Ti work was complete and accepted by the government.
This 12 include CTO, Arlington and IRS Fresno.
We exclude PTO Arlington IRS Fresno, the average rent spread achieved on our remaining 10 renewals with 10%, including approximately $22 per foot of Ti utilized by the government.
The average total renewal term for these 10 renewal leases was 15 years.
I can also share that we currently expect our single tenant Bull's eye properties that have renewed but for which the new lease has not yet commenced or for which it has commenced but the ti has not yet been accepted by the government to realize an average renewal rent spread of 10% to 15%.
This group of assets totals roughly 346500 square feet across seven property and each have renewed for total lease terms of 15 to 20 years with an average of $16 seven years.
In addition to these both at renewal, we executed either renewal options or long term extensions across 713250 square feet of our portfolio.
We look forward to working with the GSA upon the exploration of these assets between years in 2023 and 2026.
Finally, with approximately 341900 square feet and six leases expiring through the end of 2022.
We are pleased to report we are making meaningful progress with the GSA and are in active discussions regarding our properties. At this time, we feel good about the long term mission and tenancy of these upcoming bone marrow aspiration.
Turning to our earnings guidance as you recall during the last quarter call. There were questions surrounding acquisitions within the JV and those outside of the JV to provide further clarity of the company at maintaining <unk> guidance per share on a fully diluted basis in the range of $1 34 to $1 36, but expanding its disclosure surrounding the assumptions.
This guidance.
Guidance is predicated upon $200 million to $250 million of wholly owned acquisition and closing our properties in the VA portfolio totaling approximately $145 million at the company's pro rata share.
To $10 million in gross development related investment during 2022.
At its midpoint easterly remains on track to continue our record of steady <unk> growth year over year.
With that thank you for your commitment to our thesis and we appreciate your partnership I will now turn the call back to Sheri.
Thank you if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star.
Yes.
Our first question is from John Kim with BMO capital markets. Please proceed.
Thank you good afternoon good morning.
Megan your guidance for <unk> was unchanged, but you did increase the acquisition guidance to 270 million, including the JV assets, where there are other components of guidance that changed offset that acquisition target.
So John what that's indicative of his deal that we had.
Expectations could have close to that last year, but will now be closing in 2022. So it's not only for deals forward, it's actually deals that moved from 'twenty Monday.
Okay.
And you talked about the leasing spreads being 10%.
Through 2021, and 10% to 15% on leases that have not yet closed.
But I'm wondering what that how that compares to market wise.
So if you signed two non GSA tenant would you have gotten to higher leasing spread.
Yeah, as you know John rates of renewals within the GSA market and particularly within our asset are decoupled from quote.
Office market rents in the markets, where we operate it's really an exercise in replacement cost for that asset.
And obviously, we have that within our back, particularly today in an inflationary environment and we seem to find ourselves in so.
It's really apples and oranges.
We think about our renewals in that context.
And how does inflation the current inflation environment impact.
Kind of.
Discussions on leases expiring this year.
Yeah, I mean, it's a great backdrop I think everybody.
<unk> quote in the room is our renewal process understand.
The current dynamic and when you truly our fate.
In most instances with the alternative being a new build time is time is on our side.
Okay.
Just to put it just to put a point on that inflation is one of the dynamics that the government does understand.
So often you know our conversations we have we're very focused on sort of the commercial net present value IRR numbers related to our assets. They're very focused on mission inflation is something where they understand that that has an impact on value and I can't emphasize enough how many challenges the governments having.
Across the board with construction costs and needing to re look at projects. So I think that it's a it's one of these few times, where there's a there's news in the market that is.
<unk> seen the same way by up by both parties.
So Darryl do you think.
The GSA is open to having leases have a higher.
Leasing spreads, so implying more than 1% growth per annum.
Well I think that we can't know what's in the mind of the GSA, but we certainly know that when we're signing at least today that we both understand that.
That inflation is maybe ahead of us and.
Where it's a constructive conversation, we'll see how it turns out.
Great. Thank you.
Okay.
Our next question is from Michael Carroll with RBC capital markets. Please proceed.
Yes, Thanks, I wanted to talk a little bit about the company and sustainability goals I know what you kind of mentioned this in your prepared remarks that you recently hired a new director of sustainability I mean.
How does D. A look at kind of advertising its ESG initiatives I know that there has been a report kind of online highlighting what you're currently doing but do you plan on having a more of a formal report that you are going to publish every year like a lot of the other Reits do.
Hey, Michael Good morning.
So yes, we're very excited to have hired a director of sustainability for a company of our size to be at that at that places a really exciting moment.
We have consistently said that.
Focused on through the energy Star framework.
The framework the government piece closest attention to.
And so we obviously have our portfolio in the energy Star tracker, and we report within that framework, but our new director of sustainability is very.
We're very much focused today on a great baseline within the company as we begin to take off and yes. It would absolutely be our expectation to have a formal sustainability report.
Is it really it next year.
Okay, Great and then can you talk a little bit about the type of goals that you want is that I'm assuming that if you are just starting the baseline now than like setting those goals are still multiple years away I mean, how are you thinking about that.
No.
Not years away I would say, it's 2022 priority.
We will definitely inform how we how we come out in our report for 2023.
Okay, and then how much type information do you get from the government I mean do you get all the necessary information on the environment from their type of buildings like energy usage and things like that I mean is there any difficulties getting that data given the leases that you have.
No. We don't face the same difficulties that are a triple net REIT with face.
Okay, we do have today.
Great and then just last one for me can you talk a little bit about the the FDA Atlanta building, what's the progress on that and is there any idea of when that could officially break ground.
Yeah. So you know Daryl point earlier really comes into play here with FDA Atlanta right. There, they're all on the construction side facing the realities of inflation.
And <unk>.
Finalizing their tenant improvement budgets in that spend.
That's been the story for FDA Atlanta as well.
We are at a good inflection point, we believe that the government and.
You have to move that commencement dates in the middle of 2024 breaking.
Breaking ground.
I wouldn't be breaking down, but continuing to really put dollars to work closer to the end of this year and into next year you can see our budget for this year is $10 million.
Our spend.
Okay, great. Thank you.
Hmm.
Our next question is from Emmanuel Korchman with Citigroup. Please proceed.
Hey, good morning.
Just thinking about the comments you've made thus far on increasing costs sort of maybe more a tactical negotiations et cetera, how has that changed.
The competitive landscape out there are other developers either finding it.
Easier or harder to sort of make their deals pencil out.
I think the you know.
There's a small subset of folks who even traffic in the development space within within the U S government requirements and I'd say it hasnt changed that landscape maybe that's it.
Particular skill set just like ours is within the asset management.
Side of the business, but.
It certainly has has that created a sharpening the pencils right as folks are getting these deals and responding to rfps.
It hasn't gotten yet, but you know in many I think was very helpful.
For folks, who arent as a sort of immersed in in our company as you are.
Fundamentally you step back and the Valley you know the government really has two alternatives, which is to renew our building where it go build a new one.
And when you look at the new building and are are sort of.
Related depreciation our building is essentially our edge because it's there it's working we work very hard to keep the tenant happy.
The agency happy you know back in Washington, and the GSA who's in charge of doing all of this so.
So as we look forward. It is very clear that construction costs are getting higher.
And that factors into our negotiation.
When we look at when we look at new builds out there. There is a you know clearly there's less certainty about future construction costs, which would again.
You can only imagine that contractors are not going to be in a position to build into to give a guaranteed price today.
With very thin margins the volatile volatility in those construction cost is our friend and construction costs generally.
Or is the friend of our portfolio.
Great Daryl. Thank you and then maybe this one's for you as well, but just there's been a little bit more perhaps on the government pushing to bring people back to offices I think that's a little bit less relevant maybe for your direct to agency relationships, but have you seen any change in either the usage of the buildings or.
We renewed conversations and maybe went on hold.
People just weren't using the office base, Yeah Manny good morning, It's Bill I think that I think it's obviously overall Pos.
Positive. However, as you know our buildings are mission critical and the folks in those buildings have really been working throughout the entire pandemic, having said that I think that we are seeing more interest in some facilities for potential expansion in the future.
So I would say all the all the all the winds are blowing in the right direction.
Our buildings are busier than they've been and will continue to do so so I think it's been a great place to be and I think the government has also realized that it is very very difficult and I'm talking about more of a plain vanilla emissions because as most as you know most of our missions are are mission critical but on those other missions that it's hard to do it from home it's very.
Very inefficient and and they too are realized in order to conduct the mission, they're going to have to execute that from their offices.
Okay. Thanks, Paul.
Sure.
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is a follow up from John Kim with BMO capital markets. Please proceed.
Thanks, Hey, Megan you mentioned the increased Atlas acquisition guidance in 2020 to reflect some delays that you had from last year, but last year, you did exceed your acquisition guidance of $250 million.
So I'm just wondering what if there were any other offsetting factors to that increased acquisition guidance. This year that would impact your episodic items.
Yeah, I think we would have.
I remember last year by a larger amount Johnson.
No outside the expectations outside of the joint venture have not changed.
And so where do you see cap rates.
On the targeted acquisitions this year.
Well I think John it's been an interesting it's been an interesting market.
I can tell you that certainly even though we're seeing the turn in interest rates going up nobody's heard it in the GSA space, There's a lot of money coming in and I think they are continuing to be compressed.
As you know on this pristine building portfolio that we just purchased was at a five and a quarter cap.
I think were trading more to six and a quarter cap. So there's there's.
There's a big gap right, there and I think the private markets are valuing these buildings and I think they're able to do that through utilization of leverage, which obviously makes a lot of sense. When you consider the counterparties the United States Federal government. So I think that's I think we are seeing a continuing move down and cap rates in this area.
However, we are always opportunistic and we do only accretive transactions and we're very pleased to have her global JV partner assisting us with some of those transactions.
So we're being nimble, but it.
It is a different game out there.
And bill for those type of assets are you willing to do those on balance sheet or strictly through.
Through the JV.
Well it depends bottomline is accretive John and so it just depends which buckets they fall into.
I think if you see some of these super do new new buildings, they're even talking under five caps for them. So.
We are aware of that and we have the capability of executing on those but obviously, we will do it on balance sheet.
Property fits that bucket clearly two buckets out there.
Great. Thanks for the color.
We have reached the end of our question and answer session I would like to turn the conference back over to Daryl for closing comments.
Yes.
Great. Thank you everyone for joining the easterly government properties fourth quarter 2020 conference call. We appreciate your time and we'll continue to work hard to deliver strong risk risk adjusted returns for our shareholders for years to come.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
Yes.
Yeah.
Yes.
Yes.