Q1 2022 Easterly Government Properties Inc Earnings Call
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Greetings and welcome to the easterly government properties first quarter 2022 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.
Please note. This conference is being recorded I will now turn the conference over to Lindsay Winterhalter, Vice President Investor Relations. Thank you you may begin.
Good morning, so far in the call me again. 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 of 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 tanger achieved.
Furthermore, actual results may differ materially from those described in the forward looking statements can be affected by a variety of risks and factors that are beyond the company's control.
But even without limitation that's contained in item one a risk factors factors of its annual report on Form 10-K for the year ended December 31st 2021, which was filed with the SEC on February 28, 2022, and its quarterly report on Form 10-Q for the quarter ended March 31 'twenty.
'twenty two to be filed with the FCC on May 3rd 2022, 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 our financial condition and results of operation of the company.
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 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 GAAP 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 <unk> 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, and thanks for joining the call.
As I look at the call attendance list I see the recent decline in the stock price has attracted some equity generalists. In addition to our regular REIT cohort welcome.
Given the audience, let me step back for a moment and speak to how you're viewing this period of rate reorientation in the bond market.
Obviously, the market is very concerned and uncertain about how the yield curve will change shape over the coming months and how assets will reprice.
What we see today and for the last year is a separation and how our assets are valued by the public market versus the private market.
And that capital becomes more expensive. We believe this disparity will diminish our competitors for acquisitions will have less access to cheap leverage and development competitors, who anticipate cap rate compression will no longer participate in the market.
We can imagine that this reduction in purchasing power will push up cap rates.
That's a very healthy dynamic we have not seen in years.
We're very pleased with our existing portfolio, while some investors are focused on the flat nature of our leases, which is not an optimal headlines in a rising rate environment I observed the quality of our buildings are strong and enduring.
These assets are supported by their replacement cost as the alternative for the government. Upon re leasing is to build or Redeveloped an alternative site.
As we've all observed construction costs are accelerating which translates into elevated and navy for our buildings.
The cash flow from that value growth will be realized upon release. In addition, theres a second dynamic that can improve our re leasing results.
Replacement cost will further increase as developers who have been pricing new constructions aggressively based upon the assumption that cap rate compression will continue and using cheap debt.
Those folks will be leaving the market both of these dynamics improve the environment for same store NOI growth over time for our portfolio.
Turning to the balance sheet, while we have been envious of companies with substantial floating rate debt for the last decade. We're pleased that we have locked in our debt cost and the duration of our liabilities is in line with the duration of our leases these debt obligations provide value for our shareholders.
While the transition to a new steady state in the debt markets will be bumpy, we are optimistic that the environment will present, a more fertile environment for our defined edge and the government lease space to create value for our shareholders with substantial cash flow backed by the full facing credit of the United States government.
Further given our audience today I'll share a brief summary of the progress we've made during the last seven years as a public company, we've scaled our platform either wholly owned or through joint venture from 29 to 89 properties maintain their trajectory of external growth through accretive acquisitions and non speculative development.
<unk> strengthened our portfolio through a strict adherence to the bull's eye acquisition strategy, while adding significant scale to that platform for.
Fortified our investment grade balance sheet with a highly fixed rate structure with long dated debt maturities recipes viewed favorably by the rating agencies.
We've captured enhance NOI through our CPI match lease structure, while an inflationary environment.
We've diversified our tenant base from 12 to 40 U S government agencies, each with enduring missions, we've increased our stable recurring cash flows and aggregate contractual rent due from the U S government from $360 million to $2 7 billion.
All of this has been achieved through the consistent and dependable execution of our core investment thesis.
We are real estate without the drama that thrives and many macro conditions.
When faced with inflation the in place portfolio as even more attractive at the time of renewal when the alternative is a new build to suit construction when faced with recession, there's no better tenant to have done the United States Federal government.
When faced with rising rate environments, we're pleased that 96% of our fixed rate structure with long dated maturities exists and finally when faced with global pandemic as we saw we're confident in the mission criticality of our buildings and the need for our federal workforce to work from our facilities versus at home.
In closing the fundamentals of our business are strong our prospects for value creation are excellent the credit quality of our underlying tenant with leases backed by the full faith and credit in the U S. Government remains the best of any public REIT with a current dividend yield of roughly 455%.
We thank you for your continued partnership and engagement as we work to grow this premier portfolio of real estate assets leased to the United States Federal government and with that I'll turn the call over to Bill to give you insights into the first quarter results.
Thanks, Darryl and good morning, Thank you for joining us for our first quarter earnings call. Just after the first quarter. We were pleased to add VA Birmingham through our joint venture the fifth brand New VA facility of our previously announced 10 building portfolio. This mission critical clinic is approximately 77000 square feet.
And provides state of the art care to our veterans through a multitude of important medical functions, including.
Including VA, Birmingham, we expect to close on approximately $145 million of this portfolio throughout 2022.
In addition, we've seen a strong pipeline of opportunities outside of this joint venture and look forward to announcing additional acquisitions as they take place.
I think it's important to look at the current state of the government lease market as we have seen the 10 year Treasury increased by over 100 basis points. Since we signed the PSA for the VA portfolio last summer.
Until recently, our market has been the beneficiary of increased institutional interest for several important reasons first private equity understands the unique inflation hedge GSA lease structure that protects us as landlord from inflation induced operating cost increases and have gotten more active in the spa.
Second while regular office has been challenged with occupancy and long term post pandemic space requirements. The U S. Government is back to work and continues to require a build to suit space to conduct their missions and our bullseye corner of a vast 550 million square foot U S leased market.
The government continued to utilize our facilities throughout the crisis work from home really was not an option for the FBI DEA CBP F D a and others in the laboratory supporting these critical agencies, President Biden announced the return to office for the rest of the U S government employees at the state of being drawn.
Several months ago.
On the current market, reflecting recent sales assets that resemble our portfolio's attributes with eight years or more of lease term remaining a comparable mission profile and our recent renovations are build to suits are generally commanding a five five cap rate.
See I feel the offices laboratories, and new outpatient facilities within 15 to 20 year remaining lease terms are inside of that demand and closer to a five cap.
We're very pleased that our season global JV partner understood that dynamic almost a year ago and move forward with us on a portfolio of that based on current market conditions appears to have already seen a great increase in implied value. We believe that we will see a turn in cap rates at some point sooner rather than later as the fed continues to.
Kris rates, we continue to see potential CAD accretive and enhancing transactions and we'll continue to focus on only the best opportunities within our universe.
Turning to leasing updates our asset management team continues to secure renewals that lengthen the duration of our government back cash flows and enhance the portfolio.
In the first quarter, we renewed two important leases EPA, Kansas City as well as the lease at FBI, Birmingham, both for 'twenty year Noncancelable terms.
These two renewables with a combined two 7% of our annualized lease income launched what we hope will be another successful renewal year for our seasoned asset management team.
The remaining renewals for 2022 include the DEA laboratory in Dallas, The FBI field office in little rock and ice facility in Louisville, Kentucky.
As of quarter end negotiations on these three leases are underway and we look forward to providing updates in future quarters.
Our FTAA Atlanta Laboratory project is now in the final stages of design drawings, which should lead to a restart in the near term.
We estimate this facility will be delivered in the second quarter of 2024.
In closing we're off to a strong start new year with the acquisition of VA, Birmingham facility and a strong pipeline of actionable opportunities as always you can expect the easterly team will continue to execute on its disciplined strategy of acquiring the most important assets leased to the federal government. We will continue to work with the <unk>.
And underlying tenant agencies on upcoming renewals and look to non speculative development opportunities that can provide attractive returns.
We have enjoyed seeing our investors in person once again and look forward to upcoming conferences and investor meetings in the not so distant future.
With that I. Thank you for your time this morning, and I will turn the call over to Meghan to discuss the quarterly financial results and capital markets executions.
Thank you Bill and good morning, everyone. It gives me great pleasure to post another strong quarter and commence another strong year here at easterly.
As of March 31st we own 89 operating properties, comprising 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.
The acquisition of newer facilities, the weighted average age of our portfolio remains young at $13 nine years successful long term renewals at existing properties have also allowed us to grow our weighted average remaining lease term to a historic high of nine eight years.
It represents a year over year lengthening of our weighted average remaining lease term of one two years.
Maintaining a young portfolio age and a long weighted average remaining lease term is reflective of our strategy of owning relatively new build to suit assets within during mentioned this.
This strategy provides us with distinctive future cash flow visibility, which in turn allows us to prudently manage the companys balance sheet and support our highly accretive acquisition and development project pipeline.
Turning to our first quarter results on a fully diluted basis net income per share was <unk> <unk>.
<unk> per share was 33.
<unk> as adjusted per share was 31.
Our cash available for distribution was $28 8 million.
Turning to the balance sheet at quarter end. The company had total indebtedness of approximately $1 2 billion with approximately $415 million available on our line of credit for future acquisitions and development related expenses.
As of March 31st Easter lease net debt to total enterprise value was 35, 9% and its adjusted net debt to annualized quarterly EBITDA ratio was six seven times.
With a weighted average debt maturity of six and a half years, but weighted average interest rate of three 5% and 96% of all outstanding debt fixed at attractive levels I am, particularly pleased with our company's positioning as we enter a rising rate environment.
During the first quarter easterly issued approximately 435000 shares of the company's common stock sold on a forward basis at an average net price to the company of $21 63 per share but.
But the settlement of the shares in the first quarter easily received approximately $9 4 million in net proceeds.
I present, Israeli expects to receive net proceeds of approximately $92 5 million from the sale of an aggregate of approximately $4 3 million shares of the company's common stock that have not yet been settled including the remaining $2 3 million shares pursuant to the company's third quarter 2021 underwritten public offering.
And 195 million shares from sales under the company's $300 million ATM program. Assuming these forward sales transactions are physically settled in fall using in that weighted average combined initial forward sales price of $21 72 per share.
As Darryl and Bill mentioned, an inflationary environment serves as a real strategic benefit for easterly compared to other rates due to the build to suit nature of our assets the cost of constructing another facility upon lease expiration is increasingly less desirable for the government and our existing asset is further distinguished as the natural cost effective renewable option for the <unk>.
And the underlying tenant agency.
Further the unique nature of our leases allows for operating expense protection, while shell and most of our leases as flat GSA leases generally contained in operating expense base, which grows uncapped with increases in urban CPI, that's protecting us against NOI degradation in an inflationary environment to be clear.
The relevant urban CPI index as of March 31, 2022, with nine 4% higher than one year ago.
Turning to our earnings guidance. The company is maintaining its guidance for share on a fully diluted basis in a range of $1 34 to $1 36.
This guidance is predicated upon $200 million to $250 million of wholly owned acquisitions and closing our properties in the VA portfolio totaling approximately $145 million at the company's pro rata share and up to $10 million in gross development related investment during 2022 and its midpoint easterly remains on track to continue on.
Record of steady <unk> growth year over year.
And finally subsequent to quarter end, our board approved an inaugural stock repurchase plan of up to 5% of the company's outstanding shares.
Suddenly four 5 million shares in total.
This new tool in our capital markets still Curt will ensure we remain aligned with our consistent commitment to allocating capital in a way that drives the greatest value for shareholders.
With that we thank you for your commitment to our thesis and 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 so if I can instead using speaker equipment. It may be necessary to pick up your handset before pressing the psyche.
Yes.
Our first question is from Manny Korchman with Citi. Please proceed.
Hey, This is Michael Griffin on for many I'm curious you know you mentioned the share buyback program kind of how are you balancing capital for acquisitions versus the buyback program going forward in the near term.
Sure I think it's.
Fantastic tool as we sit here looking at the stock today to be responsive to what the remainder of 2022 brings.
Be it an opportunity to recycle capital or two to continue to address the strength of our balance sheet.
It's going to allow us the flexibility we need in the coming year.
Okay, great and on those future acquisitions that you mentioned or do you see them as more attractive than a wholly owned versus in any future joint ventures.
Well I think it's sort.
It depends on the particular asset and we've mentioned before that there is a bit of a tale of two cities. While all of the assets has certainly increased in value rather remarkably over the last 12 months to 18 months, we're seeing a real premium put on those longer term assets. Those 15 to 20 year think brand new Ashland place in clinic think Etsy is.
We're I think we're seeing a lot of international interest we are seeing a lot of private equity interest in those pricing our pricing you know 25 50 basis points inside of the other side, which would be a wonderful opportunity for our JV. We have a very long term perspective on the value of these assets on the other side of the equation and you know what.
We see interest there as well, but those would probably be bought individually by us so and.
And they don't really conflict with each other which is certainly very healthy.
Got you Oh, that's great I appreciate the color thanks for the time.
Our next question is from Michael Carroll with RBC capital markets. Please proceed.
Yes, Thanks, I Wonder if you can provide some color on overall private market valuations I know I think Daryl said in his prepared remarks that you expect cap rates to trend higher.
Then you also said that your private market valuations are for your portfolio has increased fairly meaningfully over the past 12 to 18 months I mean, how do we coordinate between those two what's the cap rates going higher or are they going lower or how should we think about that let.
Let me start and then maybe Daryl can follow I think you're in a transition moment. So several things are happening at once.
It is a huge demand certainly for all of our assets in the Bull's eye category.
They are the occupied office asset Theyre understood I think we've done a great job explaining it to the world over the last seven years of being public and they continue to draw a lot of attention.
But at the same time, we've seen the industrial world in other areas Youre very familiar with Mike are beginning to make the turn as they reflect the change and try to fight the fed which in the long term I don't think is never a successful endeavor.
So we're seeing both things happening at the same time, you can be assured from our standpoint.
Then we're going to be careful we're very we're very focused on being NAV accretive here at easterly and in making sure we have the finest assets. So.
We're looking at all sorts of different options in this in this particular market and.
I'm not going to go out there and get crazy, but continue to.
To try to do the best for our shareholders.
We don't have a crystal ball, but one of the things that we know is true. It is so much capital, it's just flooded into real estate broadly high quality assets in and lesser.
Uniform lower scale assets or assets are a little different the cap rate compression among all of those just got tighter and tighter and tighter and so as we look forward I think there's a couple of things that we see.
There will be dispersion.
Of GSA leases among agency amongst size and I think thats more opportunity for us to find value.
Okay.
And then can you probably quantify where are the cap rates today for the types of assets in the bullseye that youre looking at and have they started to move higher yet I mean have you seen that.
When youre bidding on deals.
No I think we're at five in the quarter and you know I think our entire portfolio would probably trade under that right now just to give you an idea so it's.
It's an interesting time.
Okay, Great and then with the stock repurchase program, how aggressive can you be pursuing or you're willing to increase leverage to pursue some of your buybacks I guess, how should we think about that.
Sure So I think the.
The tool like I said, it's meant to be responsive to multiple potential.
Past that we could take.
Be it.
You're returning the balance sheet in line post some recycling capital or internally as we recycle capital and but you're right, Matt Mike at six seven times, a turn of leverage.
We've never believed to disrupt the ability of this cash flow to perform and I'm, obviously, a turn is that.
Yes.
The rating agencies, and others would view that as a solid investment grade balance sheet.
I think we have a lot of flexibility.
And then would you pursue some asset sales and any kind of talked a little bit about capital recycling is that the plan is kind of being more aggressive pursuing asset sales and then using that those proceeds to buy back stock is that how we should think about it I think that's a great question and I think thats another tool in our toolkit and obviously I think we see a lot of folks that understand the value of all.
Our assets and we're constantly looking at all of them, we do love our children, but you know theres different buildings, we have in the portfolio. We're always trying to drive to our particular bullseye and and we have stayed very constant on that we have a number of buildings. We purchased a bunch of years ago that had been an incredible return to our investors at this point and we've got a.
Vic footprint all over the country and maybe there's some spots that.
Or are more difficult for us to service and others. So everything's on the table and you can expect us to do whatever we do it very prudently and the best thing for shareholders.
Okay, great. Thank you. Thank you.
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 great. Thank you everyone for joining the easterly government properties first quarter 2022 conference call. We appreciate your time and we'll continue to work hard to deliver strong 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.
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