Q2 2022 Easterly Government Properties Inc Earnings Call
[music].
Greetings and welcome to easterly government properties second 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.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Lindsay Winterhalter, Vice President of Investor Relations. Thank you you may begin.
Good morning.
The coffee games. 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 contained 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 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. That's contained in item one a risk 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 June 30th 2022 to be filed with the SEC on August 2nd 2022, and 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.
The company assumes no obligations to update publicly any forward looking statements, whether as a result of new information future events or otherwise.
Additionally, on this conference call the company may refer to certain non-GAAP financial measures such as funds from operations funds from operations as adjusted and cash available for distribution.
You can find 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.
Good morning, everyone and thank you for joining us for this second quarter conference call today.
In addition to Lindsay I'm also joined by Bill Trimble, the company's CEO and Meghan <unk> the company's CFO cielo.
We had another strong quarter at easterly government properties, we continue to add high quality mission critical assets to grow and diversify our portfolio.
Like others, we are seeing a shift in the market. It seems we are entering a period of price discovery for assets.
We are optimistic about the effect this market dynamic will have on our business, particularly in the medium and long term.
We're seeing marginal buyers exit the market and we believe that there are developers in our space that have bid on projects with the expectation that cap rates will continue to decline they.
They may find themselves over extended at these projects approach completion.
We expect both of these dynamics, we will have a positive effect on our ability to gain bullseye assets over the next 24 months.
Further during times of uncertainty, we believe our strategy delivers predictable results to investors, we concentrate on mission critical assets that serve enduring missions during challenging times, our assets become more relevant and valuable.
The gun Coders can't work from home critical response functions can't be executed from home offices, and if a recession is near the crime business will be up these agencies that we serve will be called to action our facilities will be serving their occupants effectively.
While the asset side of our balance sheet is well curated our liability structure also provides investors with confidence.
<unk> has done a great job terming out our debt. Additionally, we have limited rollover in the next several years.
We do hear questions about the effects of inflation on the value of our assets.
Many of you know our leases have provisions that protect our investors from accelerating operating costs.
Inflation also improves the value creation related to renewal activity.
Megan will further describe some of the positive effects that inflation has on our portfolio.
We're pleased with how the company is positioned as we look forward and we'll continue to execute our business strategy with the intent to deliver safety and stability to our investors. The goal is to deliver an attractive risk adjusted return to our shareholders and is backed by tenants that represent the full facing credit of the United States government with that I will.
I'll turn the call over to Bill to give you insights into the second quarter results.
Thanks, Darryl and good morning, Thank you for joining us for our second quarter earnings call.
Turning to the acquisitions during the second quarter easily through our joint venture acquired the fifth and sixth brand New VA facilities, located in Birmingham, Alabama, and Marietta, Georgia, They're part of our previously announced 10 building portfolio and subsequent to quarter end, we were pleased to add the seven facilities to the portfolio VA Columbus.
Our brand new VA facility located in Columbus, Georgia currently the remainder of the assets and the VA portfolio continued to deliver as planned and we expect the JV to close on approximately $145 million of this portfolio throughout 2022.
In addition to the VA properties easterly had two wholly owned acquisitions during the second quarter.
First was the National Archives and record administration warehouse in Broomfield, Colorado Nehru Broomfield as a build to suit warehouse construction in 2012 and is 100% leased to the general services administration on behalf of neighborhood pursuant to a 20 year lease, which does not expire until may of 'twenty thirty-two neighbor Broomfield.
<unk> is one of the 18 facilities strategically located throughout the country that holds permanent and temporary records created by federal agencies and of course across seven states.
To ensure the preservation of these important documents the soil. He was specifically constructed the exact needs of the national archives, providing for optimal environmental controls and maintain certain checkpoints were both temperature and humidity.
Aside from its important voting attributes. It is also worth noting that our acquisitions team funded part of this acquisition through the issuance of operating partnership units and an accretive price of approximately $21 per unit once again, demonstrating the strength of an up REIT structure.
Our second wholly owned acquisition in the quarter was an FBI field office located in Tampa, Florida remaining true to our original thesis of owning class a mission critical facilities SDI Tampa defined this investment criteria.
In place lease does not expire until November of 'twenty 40. This 138000 square foot Trophy asset is enhanced by a number of important security features including but not limited to perimeter fencing controlled access last protection security setbacks vehicle barriers magnetometer.
<unk> and skip space.
With this acquisition easily now owns 13 or just under a quarter of a 56 F. B I field offices located throughout the country.
We continue to monitor the acquisition pipeline as we believe we are now seeing cap rates backing up from a bottom as the market cost of capital has shifted.
We continue to see potential cat accretive and enhancing transactions and we'll remain focused on only the best opportunities within our niche market.
And as discussed last quarter private equity understands the unique nature of the GSA lease structure that protects us as landlord from inflation induced operating cost increases and have gotten more active in this space. We believe this heightened interest price value in the easily portfolio and introduces the potential to recycle capital.
In the back half of 2022.
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 portfolios in the second quarter, we renewed the ice facility located in Louisville, Kentucky for a new 15 year Noncancelable lease term this renewal coupled with the <unk>.
S P I, Birmingham, and EPA, Kansas City executions from the first quarter represents three successful re leasing exercises in the first half of 2022.
Remaining renewables for 2022 include the DEA laboratory in Dallas, and the F. B I feel Roberts and little rock both of which we are considering strong bull's eye assets in the east really portfolio.
As of quarter end negotiations on both leases are well underway and we look forward to providing updates in future quarters.
Finally, our F. D. A laboratory 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 2025.
In closing we had a strong first half of the year I expect that trajectory to continue in the second half of 2022 each.
Peacefully team will continue to execute on its disciplined strategy of acquiring the most important assets leased to the federal government will work with the GSA and underlying tenant agencies on upcoming renewals and look to non speculative development opportunities that can provide attractive returns with that I. Thank you for your time this morning.
I'll turn the call over to Megan to discuss the quarterly financial results and capital markets executions.
Thank you Bill good morning, everyone. It was another strong quarter for easterly and we are pleased to share our results and how we view the company's positioning in the current market environment.
As of June 30th we owned 93 operating properties, comprising approximately 9 million leased square feet, either wholly owned or through our joint venture with one additional development project and design totaling approximately 162000 square feet.
Through the acquisition of newer facilities, the weighted average age of our portfolio remains young at $13 nine years.
Asphalt long term renewals at existing properties have also allowed us to sustain a lengthy weighted average remaining lease term of $9 nine years.
As previously mentioned, 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 with enduring missions.
We believe this strategy provides us with distinctive future cash flow visibility, which in turn allows us to prudently manage the company's balance sheet and support our accretive acquisition and development project pipeline.
Turning to our second quarter results on a fully diluted basis net income per share was eight <unk> S.
<unk> per share was <unk> 33 cents and <unk> as adjusted per share was 33 cents.
Our cash available for distribution was $29 $5 million.
Turning to the balance sheet at quarter end. The company had total indebtedness of approximately $1 3 billion with approximately $307 million available on our line of credit for future acquisitions and development related expenses.
As of June 30th Easter leased net debt to total enterprise value was 45% and our adjusted net debt to annualized quarterly pro forma EBITDA ratio was seven two times with a weighted average debt maturity of six years and over 88% of all outstanding debt fixed at attractive levels I am pleased with our company's possess.
<unk> as we navigate a rising rate environment.
With a focus on leverage I would like to touch on how we view our balance sheet positioning as we enter the second half of 2022 as Don noted. We believe now is a good time to actively look at recycling capital. There is strong embedded value in the portfolio that we believe is being recognized by private players in our market.
We ended the quarter with leverage at seven two times a level that was a deliberate decision by the company as we have approximately 92 and a half million in proceeds of unsettled forward equity available to us.
Distant with standard practice, we will inform the market if and when deals are completed.
We like how the balance sheet is positioned and we are watching the market evolve. We believe it's truly is armed with the right set of tools to navigate the second half of the air and beyond this quarter. Our board approved an inaugural stock repurchase plan of up to 5% or approximately four 5 million shares of the company's outstanding shares.
The stock repurchase plan. The previously mentioned unsettled forward equity and our strong banking relationships will ensure we remain aligned with our consistent commitment to allocating capital in a way that drives the greatest value for shareholders.
The company and its shareholders do easterly is this steady Eddie REIT and we intend to continue being the consistent and dependable segment of the real estate sector, we have always been.
And finally, as Daryl and Phil 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 exploration is increasingly less desirable for the government and our existing asset is further distinguished it's been.
Natural cost effective renewal option for the GSA and the underlying tenant agency.
Further the unique nature of our leases allow us for NOI protection, while shell rent and most of or at least at this flat GSA leases generally contain an operating expense base, which grows uncapped with increases in urban CPI, that's protecting us against NOI degradation in an inflationary environment.
Men.
To be clear the relevant urban CPI index as of June 32022 was nine 8% higher than one year ago.
Turning to our earnings guidance. The company is maintaining its F. I felt guidance per 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. The closing of properties in the VA portfolio totaling approximately $145 million the company's pro rata share and up to 10 million and gross development related investment during 2022 edits.
At its midpoint is generally remains on track to continue our record of steady <unk> growth year over year with that we thank you for your commitment to our thesis and appreciate your partnership I will now turn the call back to Doug.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press Star two if you would like to remove your question from the queue.
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Our first question comes from the line of Michael Griffin with Citi. Please proceed with your question.
Hey, Thanks, they're on Bill you talked a little bit in your prepared remarks kind of about cap rates and kind of how you're seeing that maybe expand a little bit could you expand on that a bit sort of have you seen any assets trade sort of quantifying where youre seeing cap rates, maybe where do you expect that trend sort of in the near term.
We've certainly seen 25 basis points of movement I think Michael the thing is it's sort of an uncertain time things are moving right now we did see the MTI Baltimore transaction fall apart earlier this year.
I think what we really are trying to do is figure out when we get there I think a real balance they can figure out what the actual pricing should be I think as Daryl mentioned, we see a lot of opportunities out there our acquisitions team is doing all of their work.
I think until things settle down and I think we wanted to be make sure that we are not the elephant in the swimming pool.
A lot of splashing out there and then I think the bid ask is probably a bigger range than we've seen in a very long time.
Great. That's that's helpful. And then just maybe a quick question on office utilization I know you all mentioned that its maybe not affecting you as much relative topic fictional office peers, but I feel that you know every other you may see some headlines around you know the federal government trying to bring people back in the office and you know this might be starting going in fits and starts so kind of Q.
Can you maybe quantify the percentage of your portfolio that might kind of be impacted in sort of that delayed return to the office area well I think the great News is air folks are already I've always been working throughout the pandemic, so not really a factor for us.
We'll say about 85% of our buildings are those build to suit facilities that had very heavy usage like the FBI as Daryl alluded to the DEA laboratories.
But it really necessitated.
The folks being in there the whole time.
As you know more of a plain vanilla missions are about 15% of the overall portfolio and they are occupied as well.
I think though that as you heard President Biden mentioned the state of the Union address last winter that the efficiency of the federal government may be compromised by working from home and that there has been a huge backlog over the last years of Covid and the government does do a better job in their office space, which I think is probably.
Not a great surprise to all of us. So we are not particularly impacted luckily.
Those buildings that we say a more plain vanilla and our portfolio vast majority has been renewed for substantial 15 year terms just in the last several years so.
We're pretty happy to be where we are right now in those build to suit facilities are humming along all the time as they have been throughout the entire pandemic.
Okay. That's it for me thanks for the time thank you.
Yeah.
Our next question comes from the line of Michael Carroll with RBC Capital markets. Please proceed with your question.
Yeah. Thanks, Bill with your comments that cap rates are kind of up about 25 basis points and you're still trying to figure out.
The right valuations are I mean should we expect that investment activity for DEA is going to slow at least in the third quarter.
That fair and will it picked back up in the fourth quarter to hit your guidance.
Well I think I think that the.
The question is when things, we don't know yet I mean, I don't know if we aren't going to see something in a couple of weeks and I'll say it now, but we must do something in a month I do see a lot of activity out there and it's going to be the sellers.
Realizing that now is a better time to sell and then probably later and so I think you can you can rest assured that we're going to be very careful.
And not do anything that isn't at least <unk> neutral or positive for cat accretive.
Yep.
From that from that standpoint.
We're going to maintain our course.
There are plenty of opportunities out there.
But I think we really do need to see some sort of certainty and clarifying of the market before we're going to jump in and wholesale so more to come.
Okay is there I guess risk to the investment guidance and that'd be kept about another $110 million.
I mean is that something that you're willing to.
'twenty three if the market valuations don't kind of settle out by then.
Well I can't comment now what's going to happen next year, except for the fact that I think we're seeing plenty of opportunities and so far.
Steady as you go from our standpoint.
There's a lot of there's a lot of uncertain factors out there and I think that we're probably the most certain of the probably the range that you are following right now into what we're saying there is this is Daryl I mean, something I'd add is this is really where our market position.
Or is.
The folks who sort of occupy a.
Dominant position in and Thats us.
You do have these developers who I mean.
They all have excel spreadsheets and so folks are beginning to look at interest rates understand where the water gets kind of above their head.
And where we've had.
More calls with folks offering as an opportunity or a partnership to be.
Involved in their projects and as we've seen in the past that ultimately translates into.
You know people.
Needing help in ways that can be very accretive to our shareholders. So.
And none of that is going to abate soon so I think we really can see some activity as again you know our acquisitions, you can't predict by week or month.
There are few in number so they're lumpy, but that said the conversations that are happening are productive and I think we're as I said, we're very confident in the medium to long term about the change in these dynamics and what it means for shareholders.
Yeah.
Okay, Great and then can I go back to I guess, the transaction market I know Bill Megan both mentioned that Youre looking to potentially a recycled capital now.
What type of assets are you looking to sell in and what are the valuations on those specific properties I'm, assuming that you've already having discussions on those given that implied that something could happen in the back half of the year.
Well I think you know and the market environment, we're in that and we've mentioned before that it's another tool in our toolbox and Thats something that we could do.
I think that it would not be surprising.
Folks that as we acquire wonderful portfolios in buildings over the years. There are buildings in those portfolios that are not is central to our bull's eye, our mission as others and that would be terrific properties for other owners.
In the government space, but maybe not adhering to all the discipline points that we have.
And so I think that's just a natural opportunity for us and we would we would avail ourselves of it if the if the correct pricing and end market conditions warranted.
So without saying anything I think that would be on our radar screen and we will be sure to to to talk about it when there would be any certainty to that and obviously those properties would probably not be if we were looking to sell something and you know the F. B is one but maybe something in Michael you know us very well probably.
The buildings that are more plain vanilla or would have missions that or geographically challenged for us.
As a REIT.
Yeah.
Okay, Great and then just last one for me can we get an update on me to Atlanta.
I guess bill just thinking I know there that's been kind of in the design phase for a little while now is there.
Expectation that that can kind of break ground soon.
Yeah, and I'll start and take it to make it yes. The answer is finally and I think the wonderful thing is folks on this call I think should be reminded we do non speculative development.
So that's.
Thats certainly very important in general and particularly important right now this project was often running.
Our third FDA laboratory, just before Covid broke out.
The government basically had a lot of things on their mind and a lot of people working from home and I think.
Got sidetracked, a little bit, which obviously wasn't terrific for anyone but now we are thanks to our team.
And Bauer, Mike IV have worked very hard on getting this back on track with the federal government and so I think we'll be in future quarters talking about the the renewal of our people on site and building this amazing laboratory.
For the F D. A so yes I think we're finally, there it's been a lot of work.
It certainly hasn't been from our side the issues, but I think the government now realizes that they better get going so well.
We're confident and I said this is the first time I've said that a little while that this will be underway in the near future.
Thank you.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you.
You had mentioned price discovery and cap rate expansion back in the last call and at NAREIT.
Since that time with genuine.
Compared with the June , but the tenures come down 70 basis points and I was wondering if your appetite is more tied to the 10 year than typical office assets or is it purely based on funding costs.
Yeah.
Okay.
Yeah.
Got it.
Yeah.
John Good morning, it's Mike obviously.
There is definitely a correlation to 10 year I think we also see a little more tying in the private market participants to selling in more than five to seven range and.
In terms of how they think about their their financing today. So.
Absolutely. It's it's it's everybody in our market is looking to those those base rates.
Spreads as well.
As we as we settle in here to where where cap rates are starting to normalize.
Yeah.
And again, it's not.
<unk> science, but you know as we as.
As we've looked over time and we think about.
1.1 hundred basis point movement in the are in the 10 year is.
We've correlated cap rates over time, you'd think of that as being sort of 14 to 17 basis points in cap rate I mean, that's that's that.
It's in the classroom in the real world is different but if you ran regression and other things that some of the kind of the level of correlation that you can imagine.
Okay.
Even the.
The price discovery and increased acquisition opportunities that youre seeing.
Foreshadowing are you less inclined to buy back shares on your share repurchase program than when you first started to do that.
No I think.
It's a tool that's in our toolbox and.
As we are as we talked about you know potential.
Dispositions and we look at the environment that we're working to move into.
We're going to have every corporate finance tool available to maximize return for our shareholders.
And just to clarify on capital recycling.
Are these you know.
Purely going to be third party sales or is there an opportunity to sell assets into a joint venture.
Currently we would be considering.
Third party sales.
Obviously, we do have a third party or excuse me a joint venture partner, who is very eager to continue to deploy capital into this space and where we're always looking for opportunities to continue that relationship as well.
Outside of the scope of this.
Potential capital recycling.
As you have identified this opportunity did any components of your bull's eye target.
Change and Thats the reason for.
The sales at this time.
No I think that's one thing that we're trying to adhere to and I would say absolutely.
Absolutely no changes.
In that area and I think that one thing that just to sort of reiterate and Darryl mentioned this is the competitive environment for buying these properties. There are a couple of folks out there that we have happily sparred with for the last 10 or 12 years that are.
Knowledgeable.
There were a whole lot of new players we saw in the last 12 months to 18 months, that's simply cannot get financed in this market.
And so I think from a standpoint of our acquisitions going forward. We are very pleased.
That a number of these players.
Dropped out on the fringes and I think it just bodes for a terrific opportunity as Darryl mentioned, so from our standpoint, we're pretty excited about the <unk>.
Prospects for being able to too.
To manage this market much more effectively than we've been able to for the last 18 months.
That's very helpful. Thank you.
Yeah.
Okay.
Our next question comes from the line of Peter Abraham Whats with Jefferies. Please proceed with your question.
Yes. Thank you.
Just wanted to ask a within the acquisition markets.
Are there any portfolio deals that are out there.
You've been looking at and even if it <unk>.
But you're not considering.
Have you observed kind of a differential or difference in pricing between those in kind of one off single answer.
Yeah.
Well I think that.
We've always said there are a number of larger portfolios out. There. This is not probably the time youre seeing a lot of that occurring but I think that people do value portfolios more.
In that it's difficult to put.
Put some great buildings together right now, obviously and so I always I think is a premium on the portfolio acquisitions. We've enjoyed several of them as you noted and of course, there are JV opportunities that we are still purchasing.
Purchasing now, but I think there is a there is a premium to portfolios for sure.
Yeah.
Okay.
Okay.
And then on the development side I know it was a fair amount of leg work here with work up your Atlanta as he mentioned earlier I'm. Just wondering if you could go into a little bit more detail on kind of the.
The broader opportunity set.
You know, what we could expect potentially over the next year, well I think and I'll, let Megan stepped in as well I think this is a really it's going to be a really exciting area. You've got a couple of things going on as Darryl mentioned some of the smaller regional developers in this space are having troubles getting financing the government has been slow.
So initial indications of what they need in a new development project can change and the smaller developers cannot figure out what pricing is going to be for the next 123 years or whenever that you've seen it in Atlanta imagine if you were a small developer out on the line with a construction loan trying to get that building done.
So I think that the government understands that pricing is only going up inflation is not their friend.
And so they're going to want to move quicker on some of these development projects in the next several years I think there's going to be more room.
Certainly for the more successful developers that we know including ourselves for opportunities.
And we're certainly going to avail ourselves of that so just like I mentioned in the in the space of acquisitions. I think this is a good spot for both for the larger more seasoned and well capitalized folks within this business too.
To see some great opportunities in a lot of those smaller developers I think are going to be selling to some of these larger players like us we will be standing by with a life ring and ready to help out.
And we've done this in the past as Youll recall, the the FEMA Tracy was a wonderful wonderful opportunity that our development team took on from another developer and so from that standpoint.
I'm pretty excited about what we might see the next several years.
Got it for me thank you.
Our next question comes from the line of Michael Lewis with <unk>. Please proceed with your question.
Alright, great. Thank you.
Your cash flow growth.
Handful of quarters has been quite strong it looks like a lot of that institute of capital expenditures going down on a year over year basis.
I might have expected the opposite given inflationary pressures and growth in the portfolio could you just talk a little bit about whats happening on the Capex front end and on your cash flow growth.
Okay.
Hey, Mike Good morning, I'm, absolutely so the dynamic youre seeing over the last couple of quarters in.
In terms of Africa conversion downtown SSL, adjusted and CAD is coming from a couple a couple of places one.
Obviously as we've worked through some renewals over the course of last year, our free rent burden.
Lifted a bit in the first half of the year and thats to the tune of about $2 million.
You also.
We've talked about this for years, but.
Effect of the amortization of above and below market leases.
<unk> continues to be that burn off is that while a headwind to two F. O growth, obviously creates more conversion to cash and so that's contributing about another million dollars. When you think about sort of the six month year to date year over year comparison.
And from a Capex perspective that that's always one where we really look to.
To think about over a more medium term arc and trying to live in that dollar to $2 50 per foot.
We will obviously.
Yes.
Oftentimes to wait for renewals to occur too too to ensure that we are.
We are fully up to speed on some of our maintenance capital items. So.
That that could ebb and flow, but over the longer term medium to longer term you are going to still see that dollar $1 50 per foot range.
Okay. So do you expect cash flow growth to be better than <unk> growth.
As far as we could see or is it is it tough to determine that at this point.
Yeah, when I look out over the next.
Two to five years.
Does that dynamic on the above below burning off.
As well as the effect of continuing to buy younger assets, which require less in terms of maintenance capital. Yes, that's an expectation I have for the portfolio.
Okay, Great and then just last for me a clarification on how the expense reimbursements work I think you Meghan said.
Something about the CPI I understand CPI escalators, when they're applied to rent.
But for expenses don't you just get expense reimbursement based on what the actual expenses are over the pace here I'm not I'm not sure with the CPI has to do with that maybe I, maybe I heard wrong or I misunderstood.
No I appreciate the question that well, let's let's set the record straight on that.
In inherent to our rent is a agreed upon opex base.
So every year starting from the first year that base, let's call it $8 a foot.
Uh huh.
Accrete to growth on a compounded basis annually with urban CPI. So at the end of the lease year.
We're every year index.
Comparison is made and that increase is added to the opex space for the ensuing year.
It is not actually tied to actual operating expenses, but I will say that we are well we are well matched in terms of our current base.
With an accumulated reimbursement up above that base to our actual operating expenses.
No.
We do we.
We do have that nice.
Installation from NOI degradation by virtue of being well matched.
Okay I understand so.
I guess, if it's possible you know our properties either their taxes other utilities don't go up as much as the CPI. It still would be CPI applied to that pace here and so to your point, you're kind of protected from a an overall inflation standpoint.
Yeah, that's right, it's a broad CPI index and.
<unk> has proven certainly today to be.
Providing that the protection that we would expect it to.
Okay got it thanks a lot.
Mhm.
As a reminder, it is star one to ask a question. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.
Hey, good morning.
A question for you based on your comments on editors kind of pulling back from the marketplace.
This discovery.
Just given your dominance in the in the in the space I'm wondering if it doesn't make sense for you to pull back.
Further and for a longer.
Maybe help push rate yields on other acquisitions up even further.
Well Bill I think that we are.
Are definitely not going to be but the group the last group standing to validate expensive prices.
So you can figure that we have the foot on the brake and the accelerator, we are not going to keep marking the market all the way as it is the cap rates increase so we're going to be very careful there.
And we agree that there is absolutely no reason to shoot ourselves in the foot by playing ridiculous prices in the market.
So.
As to the time, so youre dead on as to the timing that.
When the turnaround occurs there's a whole lot of reasons as you might be heading into a recession that things opportunities can move quicker than we even see so rest assured.
And then where you used the term correctly, we're not on the sidelines not watching the game, we are eagerly watching but and not running in until we see the right plays being called.
Great can you remind me when the forward equity sale has to be completed.
We have 12 months from some end of the quarter to settle our forward equity.
Great.
There's not really a comment on easterly.
Amazing how how gosh the last couple of decades.
Times like this where stocks are going down.
To help management to identified non core assets.
I'm just curious whether you had thought about.
Capital recycling.
Last year the year before.
As a viable source of financing instead of just hitting the equity markets.
I think we've always I think we've always thought of it boy don't we wish we all thought of this on maybe December 15th or something or executed on December 15, but I think that we balance a lot of different things in this new knowledge coming in all the time and I think that.
You are correct that during these periods of turn downs, it's a wonderful opportunity to really go through and figure out what's core and non core to our particular business and Thats, what we are and that's what we're doing right now.
Okay. That's all from me thank you.
Hugh.
Hmm.
There are no further questions in the queue I would like to hand, the call back over to Darrell crate for closing remarks, great.
Thank you everyone and thanks for joining the easterly government properties second quarter 2022 conference call. We appreciate your time. This morning, and we look forward to keeping you appraised with future developments as they occur.
Yes.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.