Q1 2023 Easterly Government Properties Inc. Earnings Call
Speaker 1: calculation as compared to the broader office market. We believe these office renewal metrics speak volumes to the Easterly strategy and the mission criticality of our assets. In addition, it's also worth noting that only 51% of Easterly's annualized lease income comes from office assets. And this number will only shrink when we close on the two remaining VA properties in the previously announced VA portfolio acquisition. Examples of assets in this office bucket include 12 FBI field offices, or 31% of our office annualized lease income, seven DEA regional offices, or 7% of our office assets.
Speaker 1: We are categorized in several office indices as an office reef, but when you consider our unique portfolio and mission, we are a category of one focused on government infrastructure. Finally, before turning the call to Megan, our asset management team started the New Year Off Strong and executed a lease renewal at our courthouse in Jackson, Tennessee, for a brand new 20-year term. We have several great assets up for renewal in the near term, and I look forward to keeping you updated on our progress.
Speaker 1: In closing, there are opportunities on the horizon and we believe Eastley is well positioned to take advantage of these prospects when the moment is right. With a solid NOI supporting our platform, we hope our listeners today appreciate the distinction between us and our office brethren.
Speaker 1: With that, I thank you for your time this morning, and I'll turn the call over to Megan to discuss the quarterly financial results.
Speaker 2: Thank you, Bill. Good morning, everyone. As the market continues to absorb incremental increases in interest rates, the Israeli balance sheet remains strong. In 2022, we took several strategic steps to enhance our balance sheet by recycling capital, which in turn strongly positions us for opportunities to come.
Speaker 2: I'm pleased to report these efforts have continued in the first quarter of 2023, whereby Easterly significantly reduced its floating rate debt exposure by proactively and opportunistically entering into forward-starting interest rate swaps to fix the interest rates on $300 million of our 2016 and 2018 term loans.
Speaker 2: including the anticipated additional $50 million of delayed draw funds from our 2018 term loan.
Speaker 2: Specifically, on February 3rd, we entered into three forward-starting SOFR-based swaps, each with an ocean of $100 million.
Speaker 2: Net income per share was 4 cents and core FFO per share was 29 cents. Our cash available for distribution was $24.5 million. At quarter end, the company had total indebtedness of approximately $1.2 billion at a weighted average interest rate of 3.7% with 96% of all outstanding debt fixed at attractive levels. This represents a net debt to annualized quarterly EBITDA ratio of 7.2 times with over $400 million in capacity on our line of credit and an additional $50 million available under our 2018 term line.
Speaker 2: During the first quarter, East really issued an aggregate of approximately 2.6 million shares of the company's common stock comprised of 250,000 shares of common stock through the company's ATM program and approximately 2.3 million shares of the company's common stock through the August 2021 underwritten public offering.
Speaker 2: To the use of the forward component on both our ATM and the offering, the combined approximately 2.6 million shares of the company's common stock were settled at a highly attractive weighted average price of $20.46, raising net proceeds to the company of approximately $52.4 million.
Speaker 2: Easterly maintains a healthy balance of unsettled forward equity on our ATM. As of today, we expect to receive aggregate net proceeds of approximately $36.7 million from the sale of 1.7 million shares of the company's common stock that have not yet been settled. Assuming these forward sales transactions are physically settled in full.
Speaker 2: using a net weighted average combined initial forward sales price of $21.61 per share.
Speaker 2: At quarter end, Easterly has maintained strong liquidity for future opportunistic acquisitions and user development.
Speaker 2: Further, consistent dialogue with bankers, investors, and our JV partner indicates that our access to capital remains stable.
Speaker 2: With over $450 million in debt capacity and just under $37 million in unsettled forward equity, we believe Easterly has ample opportunity to execute on accretive deals without needing to go to the capital markets for the foreseeable future.
Speaker 2: Finally, turning to the company's 2023 guidance, recall that beginning this year and on a go-forward basis,
Speaker 2: We have transitioned to a core FFO metric.
Speaker 2: Core FFO, a Just FFO, is defined by NEHRE to present an alternative measure of the company's operating performance, which, when applicable, excludes items which we believe are not representative of ongoing operating results.
Speaker 2: Examples of such exclusions include liability management related costs, catastrophic event charges, and depreciation of non-real estate assets.
Speaker 2: Today, the company is maintaining its full year 2023 core FFO per share guidance on a fully diluted basis in a range of $1.12 to $1.15.
Speaker 2: This guidance assumes, one, the closing of VA Corpus Christi, a property within the VA portfolio, at the company's prorated share of approximately $21 million, and two, up to $15 million of growth development-related investment during 2023.
Speaker 2: As a reminder, this guidance incorporates the dilution from the disposition of our 10 property portfolio in 2022, but does not yet assume any wholly owned acquisitions for the year.
Speaker 2: We look forward to redeploying recycled capital at higher cap rates as the bid ask spread continues to narrow. We will be sure to keep everyone informed if we begin to see strengthening opportunities to transact in this market. With that, we thank you for your time this morning and appreciate your partnership. I will now turn the call back to Shannon.
Speaker 3: Thank you. As a reminder to the analysts, to ask a question, you will need to press star 1 1 on your telephone.
Speaker 3: Please stand by while we compile the Q&A roster.
Speaker 3: Our first question comes from the line of Michael Griffin with Citi. Your line is now open.
Speaker 4: Great thanks. Maybe just starting with guidance, you know I think the first quarter results imply kind of a run rate around your midpoint. Megan I'm curious are there any kind of issues maybe you're on OpEx or G&A that we should kind of keep in mind when when we're looking to kind of estimate out that forward earnings for the year? That kind of a cadence?
Speaker 2: Mike, good morning. As we march through the year, as you said, we are run rating at a level that's just as shy as the midpoint of our guidance range. I think we're looking forward to our renewals continuing to come online and the TI work continue to be completed.
Speaker 2: with a small offset headwind from our expiring interest rate swap.
Speaker 4: Awesome. And then just maybe on the macro, I mean, I know we were talking Washington around the debt ceiling limit and potential implications of kind of that. Is there any potential adverse impact on your business if we see something like a government shutdown or sequestration? You know, I think some in the house are calling for these budget talks to coincide maybe with some spending cuts, but anything you can maybe illuminate the debt ceiling limit.
Speaker 1: were funded right through to the end of the fiscal year for all of our properties. We don't believe that this is going to be a lot of theater. I think we might see some, which would be very sad this summer, potential national parks being closed, some other things, Kabuki theater. From the standpoint of easterly government properties, I'm fairly confident that you're not going to see any issues.
Speaker 4: And Bill, do your buildings shut down concurrently with the government shutdown? Like you can't enter the building or anything like that?
Speaker 4: No, they don't. Cool. And then just one last one on transaction activity. I think you talked about maybe being opportunistic if deals make sense. I think your implied cap's around in the high sixes now. I mean, what cap rates would you need to be looking at in order to get those kind of bullseye properties that you always talk about to look more attractive? Is it seven? Is it north of seven? Yeah.
Speaker 1: No, I think that we're looking at the high sixes will be fine for us. I think we also have to mention that with our strategic partner, we have the ability to really purchase stuff as it becomes available, especially the highest quality assets. From our standpoint, business is open. We're ready to go. We're seeing some narrowing in the market.
Speaker 1: and our teams are out visiting. So, I think we've been sort of glum for the last two quarters, but I think there is a sea change at this point, and we're busy here. So, looking forward to getting some stuff done.
Speaker 4: Awesome. Sounds good. Appreciate the time.
Speaker 3: Thank you. As a reminder, to ask a question at this time, please press star 11 on your touchstone telephone.
Speaker 3: Our next question comes from the line of Michael Carol with RBC. Your line is now open.
Speaker 3: Michael Carroll, your line is open. Please check your move button.
Speaker 4: Thanks, sorry about that. Bill, can you talk a little bit about the investments that you're targeting today? I know you kind of highlighted to Mike in the prior question in your prepared remarks. Are you looking more at developments or broken development deals that you could acquire? I mean, I guess what's out there today?
Speaker 1: Yeah, well, I think the first thing to take away, and it was separate, and good morning, Michael.
Speaker 1: I think the first thing, let's take all three. I think from the development side, our team has never seen as many opportunities as we're seeing right now. And those would be amongst all the sorts of agencies, the bullseye agencies that we care about. And so they're on the road. And I think that it makes sense because guess what?
Speaker 1: the population is growing, the mission critical needs are increasing, and our buildings service those needs. And the old buildings had not been replaced for, in some cases, decades. So from that standpoint, our most accretive area, which is raw development from our standpoint, I think is seeing a healthy uptick in opportunity.
Speaker 1: From the broken deal standpoint, and that's something that we've, I think, been very good at doing, and that's a wonderful marriage of our acquisition team here in Washington and our development team in San Diego. We are looking at potential opportunities there as well, and we think they're only going to increase.
Speaker 1: Certainly as we head into potential recession here in the fall, I'm not calling that, I'm not an expert on that, but from that standpoint, that's all good from our standpoint.
Speaker 1: Finally, in the acquisition market, I think we are seeing a narrowing. We are talking to the sellers of these properties, which is something that we really weren't seeing as much of in the last few quarters. I think there's a realization that interest rates are probably not going to drop precipitously. It's going to be a slow decline. After 35 days, things are going to fly and I'm glad to say that the..
Speaker 1: And I think a number of these sellers are getting a lot more realistic about what's going to be happening in the future. So from our standpoint, we're busy. Is it full speed ahead? Yes. Are we seeing incredible opportunities now? I think we will. And I wanted to signal that because that's a very different situation than we saw about a year ago. And then are the cap rates on these deals? I guess how different are they from one another?
Speaker 1: realize too that a lot of the competition that was in this business heretofore is no longer there. They don't have the financing. It's difficult for them to do the TI's as you and I know that the government will come up with at the last juncture, which by the way is very profitable for us. So that's the most accretive. I'd say the broken deals and I talked about that Tracy deal is one of the best deals.
Speaker 1: gives us a lot more flexibility.
Speaker 4: Okay, and then is the government prepared to break ground on new developments? I know the FDA Atlanta building has been kind of just in the planning stages for a while. Absolutely. Absolutely. All over the country.
Speaker 1: It's COVID's over and finally realized that everybody else has gone back to work.
Speaker 4: Okay. And then just last week, can you talk to us about the dividend coverage and how comfortable you are with that rate? I know at this quarter, I guess, ASFO, if you take out cap backs, TI's and maintenance, it kind of dropped below the current dividend rate. I mean, I guess, how are you thinking about that going forward?
Speaker 2: Good morning, Mike. It's Megan. As we've discussed many times......as we've discussed many times...
Speaker 2: We've maintained a consistent dividend policy and continue to rely on the strength of our underlying U.S. government backed cash flows. We've got one of the longest visibility we've had ever with a visibility of over ten years. And our comfort around the dividend is built around the strength and stability of that NOI.
Speaker 2: That's definitely taken into account by management and the board as we look at setting the governance. That's definitely taken into account by management and the board as we look at setting the governance
Speaker 4: Okay, so is there anything lumpy in the maintenance cap ex charges? I guess in the first quarter, I mean, do you expect that to drop or do you expect cash flows to increase to kind of get the dividend back covered off of that metric?
Speaker 2: Q1, CapEx is not materially off or run rate level, but as I said in my prior comments, we do look forward to renewals in the business to continue to drive cash flow.
Speaker 3: Before gaffix. Okay, great. Thank you. Thank you. I would now like to turn the conference back to Daryl Craig, Chairman of Easterly Government Properties for closing remarks.
Speaker 1: Great, thank you everyone for joining the Easterly Government Properties first quarter 2023 conference call. We hope this call has been helpful and we look forward to speaking with you all again soon.
Speaker 3: This concludes today's conference call. Thank you for participating. You may now disconnect.