Q3 2023 Easterly Government Properties Inc Earnings Call
[music].
Yeah.
Greetings and welcome to the easterly government properties third quarter 2023 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session between the company's research analysts and easterly smashed machine SASSA.
To ask a question during this session analysts will need to press star one one on their telephone.
They will then hear an automated message advisor their hand is phrased.
Please be advised that today's competition being recorded.
I would now like to hand, the conference over to your Speaker today Lindsay Winterhalter head of Investor Relations. Please go ahead.
Good morning before the call begins please note that certain statements made during this conference call May include statements that are not historical facts are considered forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
Although the company believes that its expectations as reflected in any forward looking statements are reasonable it can give no assurance that these expectations will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward looking statements it'll be affected by a variety of risks and factors that are beyond the company's control.
Without limitation.
And in the company's most recent Form 10-K filed with the FCC and in its other SEC filings. The company is there's no obligation to update publicly any forward looking statements. Additionally on this conference call. The company may refer to certain non-GAAP financial measures such as funds from operations core funds from operations.
Our 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 dot easterly rate Dot Com 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 third 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 and CEO.
As we've been discussing for several quarters the real estate market is in flux and this uncertainty has created an environment of opportunity for easterly in 2024 that we intend to capitalize on.
Increasing defense needs onshore technology, and bringing in providing public safety are key objectives for the nation are mission critical facilities are needed now more than ever as the government addresses. These needs. There are facilities that need to be built we are a natural partner to work with developers tasked with these.
Projects and find ourselves being approached as a known leader in our space.
We are differentiated from any reads and better positioned for this forward environment.
Our revenue is incredibly stable and the FERC and Forecastable as we have long term leases with an average remaining term of over a decade and we have no credit concerns about our very high credit quality tenants. These attributes give us access to capital while others, particularly in the office sector financing sources to be.
Impaired.
While the economy may be slowing and patterns of work may be changing the world as we see in the headlines each day is becoming less safe. These projects need to be completed and we can work with developers to own. These attractive projects with long term leases on terms that are favorable to our shareholders now and into the future and with that.
I'll turn the call over to Bill to give further insights into our portfolio.
Thanks, Darryl and good morning, Thank you for joining us for our third quarter earnings call.
Been a productive quarter for easterly video market returned and we were able to transact on several accretive acquisitions during the quarter and subsequent to quarter end equally through its JV closed on VA Corpus Christi benign for 10 assets in the VA portfolio with an initial lease term of 20 years with the United States Federal government.
Ari pleased with stability of the cash flow brought to our growing portfolio.
Subsequent to quarter end, we announced the acquisition of our first state government lease deal located in Anaheim, California. This facility is 100% leased by tenant agencies of the state of California, including the Department of Industrial Relations and employment development Department. This public facing facility contains court hearing loans used for adjudicate.
Workers' compensation plans as well as training runs for further deployment opportunities with a weighted average exploration date of January 2030 for this facility has been occupied by the state of California since 2009.
And recently underwent a renewal exercise process post pandemic, whereby the tenants demonstrated their continued need for facility by executing several leases with a weighted average lease term of 10 seven years.
As mentioned on the prior call. We have always viewed easterly has a mechanism to access high quality cash flows through the lens of real estate with a goal of delivering long term growth to our shareholders. We have spent a large amount of time expanding on that credit analysis.
And that the U S. Government is joined by a number of states with very high credit ratings.
Also arent long term leases renewed post pandemic carry a higher degree of comfort and security, which is a key component of our strategy. We have executed all along.
This asset is a prime example of the output from those observations.
Also subsequent to quarter end, we closed on two additional properties both leased to the U S government.
First as a nearly 100000 square foot recently renovated facility leased to the transportation and security administration, and customs and border protection, both residing on the department of Homeland security and sitting on leases that can provide occupancy of up to 15 years through 2038 referred.
Two as DHS Atlanta. This facility serves as a strategic asset to its underlying tenants given its proximity to Hartsfield Jackson International Airport in Atlanta, Georgia.
With over 93 million passengers using this airport in 2022. It is ranked the busiest airport in the world given its proximity to the airport and the specialized build out of the facility, including a 50 by 18 foot airplane fuselage, Alex within the building this asset clearly helps fulfill with DHS assets Prime.
<unk> goal of keeping America safe.
And finally, the second federally leased asset we acquired subsequent to quarter end was an approximately 35000 square foot United States District Court House located in Newport News, Virginia.
As part of the Eastern District of Virginia at Newport News Division. This courthouse is a highly specialized facility that features 2008 built to suit LEED certified construction and a new 10 year firm lease does not expire until 2033.
So these houses or district judge's three senior district judges and three magistrate judges and is responsible for the city of Newport News Hampton and weight.
And the counties of York James City cluster in Matthews, given the highly sensitive operations housed within the courthouse. The facility was constructed according to the specific requirements of the U S courts, and the United States Marshal service meeting strict federal building and security standards, including isolated prisoner movement, a 50 foot perimeter it's secure.
Setback progressive collapse construction and blast resistant exteriors.
Our acquisitions team has been busy since the time of our last earnings call and in total easterly has acquired either directly or through the JV four properties for an aggregate pro rata contractual purchase price of approximately $84 million, which is comprised of $62 2 million of wholly owned acquisitions.
And an $18 2 million pro rata joint venture closing.
Easterly now loans directly or through the JV 90 properties totaling $8 9 million square feet.
Turning to development. Our team has made a lot of progress in recent months and we are pleased to report we now have a defined schedule for the completion of the FDA Atlanta project, which is currently estimated to deliver in <unk> 2025.
With approved budgets in hand, our team is fully mobilized on site and is actively engaged in the construction process through the team's effective dialogue in partnership with both the GSA and the FDA. We have estimated development project will cost approximately $227 million.
<unk> $151 million of this total cost will be reimbursed by the federal government by a lump sum payments.
We anticipate receiving approximately $25 million reimbursement payment and three Q2 thousand 24, and the remaining 125 upon completion and acceptance of the space by the government.
We look forward to providing you with meaningful updates in the coming quarters as we make progress on this 162000 square foot state of the Art laboratory, 100% related to the United States government for Noncancelable term of 20 years.
Looking ahead, while we are pleased with our ability to accretively grow the portfolio. Our acquisitions team remains highly engaged with potential sellers of assets that meet our strict credit criteria and carry long standing leases with the government. We have also observed more of this past quarter than ever before signs of developers needing assistance to help fund.
Their pipeline projects as their access to capital has become particularly constrained.
Australia is currently reviewing several prospects that might afford these developers some relief, while also generating attractive opportunities for our shareholders.
Before turning the call over to Megan I wanted to spend a moment discussing the underlying credit of our primary tenant the United States government.
As interest rate headwinds continued to strain private companies. We believe it is important to spend some time focusing on the unique nature of the NOI that supports our business and just how different it is for many other Reits currently facing tenant credit and retention challenges it.
It is our belief that our focus on mission critical government leased assets has served us well in terms of retaining our tenants and maintaining the stability of our cash flow.
Because of our focus is unwavering when it comes to the mission criticality of our assets, our time horizon and certainly our cash flow is far greater than many rates. We recognize this is a very different reality than our current office REIT designation may lead some to ascent.
Since the pandemic, we have routinely been ask questions about the utilization rates at our facilities.
Through anecdotal evidence and in talking with our property managers, we have known that they were occupied throughout the pandemic and because our facilities are so overwhelmingly mission critical and often has highly sensitive government information we are not privy to the data generated from daily arrival and departure card swipes as one might see in the private sector.
We know this is an important metric and in an effort to work around this operational hurdle, we engaged in a private internal study, where we compare the electrical usage at the buildings. We owned in all of 2019 or pre pandemic and all of 2022 or post pandemic that are occupied by one of our top three tenants.
The VA, the FBI and the DEA with.
With the assumption that electrical use serves as an indicator of our buildings utilization for this study we observed consistent levels of electrical use with a margin of less than 1% pre and post pandemic.
In other words based on this data we believe that the operational usage of these facilities with nearly equivalent in 2022 after the pandemic as it was in 2019 before the pandemic, we're not surprised by these findings given our highly differentiated strategy from the rest of the office sector.
We believe the mission criticality of our assets observe go to utilization trends and the demonstrated strength of our renewals speak volumes for the necessity of our portfolio and the dependability of our underlying cash flow and closing, we're seeing prospects for attractive growth and we believe easily is well positioned to transact and pursue unique.
Opportunities to enhance the enterprise with a solid NOI supporting our platform. We hope our listeners today I appreciate the unique nature of our business with that I. Thank you for your time. This morning, and I will turn the call over to Megan to discuss quarterly financial results.
Thank you Bill good morning, everyone. I am pleased to report that Easter release portfolio performed solidly in the third quarter and our balance sheet at quarter end remains strong with leverage below the midpoint of our target range zero drawn on our revolver and no current floating rate debt exposure with this backdrop, our focus remains on growing the portfolio with the opportunity.
Yeah.
Turning to our portfolio for the quarter ended September 30th.
We owned 87 operating properties, comprising approximately $8 6 million leased square feet, either wholly owned or through our joint venture with a weighted average age of 14, and a half years and a weighted average remaining lease term of 10 four years through.
Through the acquisition of newer buildings and their renewal of key leases for a long term easterly has been able to maintain its young portfolio age and even grow the weighted average remaining lease term since the third quarter of 2022.
Further during the quarter Israeli renewed two important leases one of the DEA facility in Birmingham, Alabama.
And the other at the courthouse in del Rio Texas.
We certainly look forward to continuing to serve as the preferred landlord to the government. After these leases commence for terms of 15 years and 17 years respectively.
For the third quarter on a fully diluted basis net income per share grew to <unk> and core <unk> per share was 29.
Our cash available for distribution was $24 million.
At quarter end the company had total indebtedness of approximately $1 2 billion at a weighted average interest rate of 4% our weighted average maturity of five years and with 100% of all outstanding debt fixed at attractive levels.
This represents an adjusted net debt to annualized quarterly pro forma EBITDA ratio of six seven times, which is below the midpoint of our target range.
During the quarter, we executed on a number of debt and equity related activities first we funded $50 million delayed draw feature on our 2018 term loan facility and used the proceeds along with cash on hand to repay all borrowings under our $450 million revolver. Furthermore, given the Companys previously announced for its starting.
Swaps entered into in February of this year as of quarter end fleets really carries no floating rate debt on its balance sheet further insulating our shareholders from interest rate volatility easterly.
<unk> also said is settled one 7 million shares.
Greetings.
Forward equity raised on the company's ATM at a net weighted average combined sales price of $19 83 per share helping US fund. The recently acquired assets fell described at accretive levels to the organization.
Unknown Attendee: Welcome to Easterly Government Properties 3rd quarter of 2023 earnings conference call. At this time, all participants are in a listenly mode. After the speakers presentation, there will be a questioning at the session between the company's research analyst and Easterly's management team. To ask a question during the session, analysts will need to press star 1-1 on their telephone. They will then hear an automated message advising their hand is raised. Please be advised that today's conference is being recorded.
Turning to the company's 2023 guidance the company is maintaining maintaining its full year 2023 core <unk> per share guidance on a fully diluted basis and a range of a $1 13 to $1 15. This guidance reflects the closing of the <unk> Corpus Christi through the joint venture at its pro rata price of $18 $2 million and.
Unknown Attendee: I would now like to hand the conference over to your speaker today.
Lindsay Winterhalter: Lindsay Winterhalter, head of best relations. Please go ahead. Good morning. Before this call begins, please note that certain statements made during this conference call may include statements that are not historical facts and are considered forers looking. Statements within the meaning of the private security litigation reform act 1995. Although the company believes that its expectations is reflected in any forer looking statements are reasonable, they can give no assurance that these expectations will be attained or achieved.
The three additional wholly owned assets acquired subsequent to quarter end for a combined total price of $62 $2 million.
Lindsay Winterhalter: Furthermore, actual results may differ materially from those described in the forer looking statements. It will be affected by a variety of risks and factors that are beyond the company's control, including with that limitation, those contained in the company's most recent form 10K filed with the FCC and in its other FCC filings. The company assumes no obligation to update publicly any forer looking statements. Additionally, on this conference call, the company may refer to certain non-gap financial measures, such as funds from operations, core funds from operations, funds from operations as adjusted and cash available for distribution.
Additional.
Guidance further assumes up to $15 million of gross development related investment during 2023.
With that we thank you for your time this morning, and appreciate your partnership I will now turn the call back to Shannon.
Thank you.
A reminder to the analysts to ask a question you will need to press star one one or your telephone. Please standby was powered the Q&A roster.
Our first question is from Michael <unk> of Citi. Please proceed with your question.
Great. Thanks on the acquisition pipeline I'm curious if you can delineate between kind of the federal agencies that have kind of been your bread and butter versus the state agencies. The year kind of looking to go more into that route and there's one more attractive than the other or they both have their own kind of benefits.
Lindsay Winterhalter: You can find a tabular reconciliation of these non-gap financial measures to the most comparable current gap numbers in the company's earnings release and separate supplemental information package on the investor relations page in the company's website at ir.easterlyrate.com.
Hi, Thank you good morning, I think that we're seeing plenty of both and have seen plenty of both and Michael as I said before our view of the state.
As just like having another agency within the federal government pipeline. So I think that you would see most of the opportunities continuing to come from the from the federal side of things.
Darrell Crate: I'd now like to turn out a conference call over to Daryl Crate, Chairman of Easterly Government Properties. Good morning, everyone. Thank you for joining us for this third quarter conference call. Today, in addition to Lindsay, I'm also joined by Bill Trimble, the company's CEO and Megan Bavir, the company's CFO and COO. As we've been discussing for several quarters, the real estate market is in flux. And this uncertainty has created an environment of opportunity for Easterly in 2024 that we intend to capitalize on.
That's helpful and then I am curious if you could just comment on the dividend.
Our ratio is still remains elevated how should we think about that maybe on a go forward basis.
Yes, hi, its Matt again.
Got.
It's certainly our experience that our leases provide unique forward planning capabilities. We can look out further than the typical certainly the typical office REIT today.
We're really at a place today, a real opportunity to Daryl and Bill indicated and growth can be accretive. Furthermore, our reliability is theyre not repricing tomorrow with the with the swaps we put in place earlier. This year. So we're very attuned to this issue and will stay focused on what's best for shareholders, but that's the backdrop.
Darrell Crate: Increasing defense needs on short technology and bringing and providing public safety or key objectives for the nation. Our mission critical facilities are needed now more than ever. As the government addresses these needs, there are facilities that need to be built. We are a natural partner to work with developers tasked with these projects and find ourselves being approached as a known leader in our space. We are differentiated for many reads and better positioned for this forward environment.
Thank you.
Thank you.
Our next question comes from John Kim of BMO Capital markets. Please proceed with your question.
Thank you.
Phil you mentioned on mix.
<unk> in the market needing some kind of assistance or relief that youre able to divide.
Are you thinking more on a JV basis, or mezzanine financing or potentially taking out the development once complete.
Darrell Crate: Our revenue is incredibly stable and the fork and forecastable as we have long-term leases with an average remaining term of over a decade. And we have no credit concerns about our very high credit quality tenants. These attributes give us access to capital while others, particularly in the office sector, find financing sources to be impaired. While the economy may be slowing and patterns of work may be changing, the world as we see in the headlines each day is becoming less safe.
Well I think I'll, let Megan filling the rest, but I think the great news is we've been I think pretty engaged in seeing some wonderful opportunities certainly within our wheelhouse and what we would consider prime pipeline opportunities.
Thank you guys have all been board of hearing me say this for the last five earnings calls, but I think.
You hit the point, we're in a situation in the capital markets that we are a very attractive place to partner with.
Darrell Crate: These projects need to be completed and we can work with developers to own these attractive projects with long-term leases on terms that are favorable to our shareholders now and into the future.
Actually with these buildings that might be useful to us in the end and Megan is.
We've been very busy with eastern opportunities here, Yes, I think John right. There, there's a myriad of structures that could make sense for easterly it could be accretive to shareholders. I think we're going in with a very open aperture.
William Trimble: And with that, I'll turn the call over to Bill to give further insights into our portfolio. Thanks, Darryl, and good morning. Thank you for joining us for our third quarter earnings.
On how to best play.
William Trimble: Call. It's been a productive quarter for Easterly. The deal market returned and we were able to transact on several accrued acquisitions during the quarter and subsequent to quarter-end. Easterly, through its JV, closed on VA purpose Christie, the ninth of ten assets in the VA portfolio. With an initial lease term of 20 years with the United States federal government, we are very pleased with stability of the cash flow brought to our growing portfolio.
Playing in this opportunity.
And what kind of return.
With turns milestones are you looking at versus cap rates on recent investments.
Yes, I mean today, obviously at current levels, we're looking at a cost of capital.
With a 9%.
And.
And from a yield perspective, obviously today can can can breakeven and a low level low level of 9%.
William Trimble: Further, south of winter quarter-end, we announced the acquisition of our first state government lease deal located in Anaheim, California. This facility is 100% lease by 10 agencies in the state of California, including the Department of Industrial Relations and Employment Development Department. This public-facing facility contains core hearing rooms used for adjudicating workers' compensation plans, as well as training rooms for furthering employment opportunities. With a weighted average expiration date of January 2034, this facility has been occupied by the state of California since 2009 and recently underwent a renewal exercise process post-pandemic whereby the tenants demonstrated their continued need for the facility by executing several leases with a weighted average lease term of 10.7 years.
Okay.
Can you walk us through the.
The yield expectations on your developments I know, it's a little bit unique.
<unk>, but.
How should we look at it as far as the yield you're expecting on your semi signals on that spend on the developments.
Yes.
We're really pleased to have Atlanta back on track moving job site mobilized.
Government excited to be to be beyond this process with us once again.
What I can tell you is that we have worked with the government to ensure that we are.
Back to looking at yields similar to where we underwrote this asset.
A couple of years ago.
So think of that back into that kind of 100, 150 basis point spread to where does that type of asset could be acquired when we when we when we underwrote it back in 2019.
William Trimble: As mentioned on the prior call, we have always viewed Easterly as the mechanism to access high-quality cash flows through the lens of real estate. With the goal of delivering long-term growth to our shareholders, we have spent a large amount of time expanding on that credit analysis. We learned that the US government has joined by a number of states with very high credit ratings. We also learned long-term leases renewed post-pandemic carry a higher degree of comfort and security, which is a key component of the strategy we have executed all along.
The yield would have increased just given.
The change in interest rates.
Yes.
Structure that we that we're able to underwrite.
You can you can you can hold your economics, but but working with the government and Premier economics can get can get tricky.
Okay.
One final question, a follow up to Michaels on dividends.
Sometimes.
William Trimble: This asset is a prime example of the output from those observations. Also, South Sequenta Quarter End, we closed on two additional properties both leased to the US government. The first is a nearly 100,000 square foot recently renovated facility leased to the Transportation and Security Administration and Customs and Border Protection, both residing under the Department of Homeland Security and sitting on leases that can provide occupancy of up to 15 years through 2038.
Right.
Have.
Are influenced by the capital markets.
Your stock is yielding nine 7% today, which is a huge spread versus the tenure on a very similar credit.
How much does the capital markets and your stock price.
Influenced or changed the way you view the dividend policy.
I mean look I think just.
Actually sure what the question is so I think.
The easiest answer is no we're not we're not looking to the capital markets to set our dividend policy as Meghan said, we're on the edge.
William Trimble: Referred to as DHS Atlanta, this facility serves as a strategic asset to its underlying tenants, given its proximity to Hartfield Jackson International Airport in Atlanta, Georgia. With over 93 million passengers using this airport in 2022, it is ranked the busiest airport in the world, given its proximity to the airport and the specialized buildout of the facility, including a 50 by 18 foot airplane fuselage house within the building. This asset clearly helps fulfill the DHS's primary goal of keeping America safe.
Of analyzing terrific opportunity for the company.
As you have seen we have.
Most forecastable revenue stream of maybe any REIT in the United States, So the opportunity in <unk>.
Megan has done such a great job getting our liability is priced out we feel like we have plenty of opportunity in order for us to.
Have a terrific return for shareholders and we think that'll be recognized by the capital markets.
William Trimble: And finally, the second federally leased asset we required South Sequenta Quarter End was an approximately 35,000 square foot United States District Courthouse located in Newport, Virginia. As part of the Eastern District of Virginia's Newport News Division, this Courthouse is a highly specialized facility that features 2008 built-of-suit lead certified construction and a new 10-year firm lease that does not expire until 2033. The facility houses four district judges, three senior district judges and three magistrate judges, and is responsible for the cities of Newport News, Hampton, and Ways, and the Countries of York, James Fittie, Gloucester, and Matthews, given the highly-fensive operations housed within the courthouse, the facilities constructed according to the specific requirements of the U.S, courts and the United States Marshall Service, meaning strict federal building and security standards, including isolated prison removing, a 50-foot perimeter of security setback, progressive collapse construction, and blast resistance exteriors.
Great. Thank you.
Thank you.
Our next question is from Bill Crow of Raymond James. Please proceed with your question.
Hey, good morning, Megan one for you how much could you acquire add.
And balance sheet before you hit the upper end of your guardrail for leverage assuming of course, no equity issuance.
Sure I think.
At the type of.
The cap rate environment, we're seeing today, right youre going to be kind of in that $150 million to $200 million range.
Okay.
Thats, a pretty firm ceiling I assume at this point.
And we've always been committed to running a mid triple to AIG.
Profile balance sheet.
No intent to change that.
Just mixed comment bill is that.
But I want to make it very clear that we are differentiated with regard to our cap our access to capital markets today compared to many rates because of this durability of cash flow. So when we're looking at leverage and leverage ceilings and talking with debt providers.
William Trimble: Our acquisitions team has been busy since the time of our last earnings call and in total Easterly has acquired either directly or through the JV for properties for an aggregate pro-rata contractual purchase price of approximately 80.4 million, which is comprised of 62.2 million of wholly-owned acquisitions and an 18.2 million pro-rata joint venture closing. Easterly, now owns directly or through the JV, 19 properties totaling 8.9 million square feet. Turning to development, our team has made a lot of progress in recent months and we are pleased to report we now have a defined schedule for the completion of the FDA Atlanta project, which is currently estimated to deliver in 4Q 2025.
Get into specific conversations, but we hear again and again from various sources in the capital markets.
Given what we're doing and what we're looking to do that these are.
There are very financeable projects, and our opportunity to take on leverage with comfort with debt providers is very high.
Yes, I think that's absolutely true and especially true in the private market, but I think theres a public REIT you have.
Other contingency out there that would.
Probably not.
That necessarily agree with higher leverage is better at this point.
William Trimble: With approved budgets in hand, our team is fully mobilized on site and is actively engaged in the construction process. Through the team's effective dialogue and partnership with both the GSA and the FDA, we've estimated the development project will cost approximately $200 and $27 million. Approximately 151 million of this total cost will be TI reimbursed by the federal government by alongside payments. We anticipate receiving an approximately $25 million reimbursement payment in 3Q 2024 and the remaining 125 upon completion and acceptance of the space by the government.
Let me shift over to the the leases that were signed.
In the quarter you the DEA the courthouse del Rio and then the ones that were signed on the asset acquisitions that extended the way for another 10 years.
What were the economics of that lease.
Old lease rate to new lease rate change.
Yes, so we typically.
Try to create full transparency at the end of the year, but.
So we're very proud of the renewables, we continue to post.
Post pandemic and and this.
Typical office backdrop, so what I would share with you is Birmingham and and a courthouse from del Rio are Bang on the center of our target range and right around that 20% level on a net effective.
William Trimble: We look forward to providing you with meaningful updates in the coming quarters as we make progress on this 162,000 square foot state-of-the-art laboratory 100% relays to the United States government for a non-cancel term of 20 years. Looking ahead, while we are pleased with our ability to equitably wear the portfolio, our accessitions team remains highly engaged with potential sellers of assets that meet our strict credit criteria and carry long-standing leases with the government.
Fred.
And.
And Thats for 2016 year new term.
Up 20.
From the expiring and what about the ones that were signed prior to the change in ownership.
William Trimble: We have also observed more of this past quarter than ever before, signs of developers needing assistance to help fund their pipeline projects as their access to capital has become particularly constrained. East release currently reviewing several prospects that might afford these developers some relief while also generating attractive opportunities for our shareholders.
Are you referring to the.
The Ana Anaheim or Atlanta, Yes, you've mentioned in the.
Acquisitions were where they've just incentives just side to do.
Lease extension I'm, just curious how those economics work.
Yes.
I'll have to follow up with you on that Bill and I don't have them at all.
Then finally from me.
William Trimble: Before turning the call over to Megan, I want to spend a moment discussing the underlying credit of our primary tenant, the United States government. Because this interest rate headwinds continues to strain private companies, we believe is important to spend some time focusing on the unique nature of the NOI that supports our business and just how different it is from many other currently facing tenant credit and retention challenges. It is our belief that our focus on mission critical government leased assets has served as well in terms of retaining our tenants and maintaining the stability of our cash flow, because our focus is unwavering when it comes to the mission criticality of our assets.
Thank you Pat or a decent sized debt maturity next year are there extension options on that or what are you thinking about the.
Cost of.
Pre doing that.
100, some odd.
Million.
Yes, so we've got the two components would be our $100 million term loan with <unk>.
Set of our bank syndicate and in just a little under $50 million mortgage what I would tell you is we consistently are able to differentiate ourselves with the banks today, while they are all certainly undergoing a lot of.
Deep dives into their office portfolio.
The thing I consistently hear is.
William Trimble: Our time horizon and certainly of cash flow is far greater than many rates. We recognize this is a very different reality than our current office read designation may lead some to assume. Since the pandemic we have routinely been asked questions about the utilization rates at our facilities. Through anecdotal evidence and in talking with our property managers, we have known that they were occupied throughout the pandemic and because our facilities are so overwhelmingly mission critical and often has highly sensitive government information, we are not privy to the data generated from daily arrival and departure card swipes as one might see in the private sector.
No credit issues top up don't even want to call you off as looking at your position in the market and ability to continue to grow that's obviously, an attractive longer term relationships and so I'm very comfortable with our ability to continue to maintain capacity at the banks and from the perspective of the mortgage.
We have capacity on our revolver today, but we'll continue to pull that in and evaluate the hawk our entire debt structure as we move forward.
And look at the marginal most attractive place to to refi debt, but for.
Certainly we have the capacity to to kind of warehouse it on the line.
William Trimble: We know this is an important metric and an effort to work around this operational hurdle. We engage in a private internal study where we compare the electrical usage at the buildings we owned in all of 2019 or pre-pandemic and all of 2022 or post-pandemic that are occupied by one of our top three tenants, the VA, the FBI and the DEA. With the assumption that electrical use serves as an indicator of a building utilization, through this study we observe consistent levels of electrical use with a margin of less than 1% free and post-pandemic.
Okay are you in discussions about those maturities.
Have a sense for.
Or how much to the interest rates made gap up.
Okay.
Yes, and conversations on the term loan.
Expecting consistent spreads there.
And not looking to refinance the mortgage on that existing asset looking to roll that into the broader Kazakh.
Thank you all.
Thank you. Thank you.
Thank you.
Our next question is from DT power Chandran.
Of RBC capital markets. Please proceed with your question.
William Trimble: In other words, based on this data, we believe that the operational usage of these facilities was nearly equivalent in 2022 after the pandemic as it was in 2019 before the pandemic. We are not surprised by these findings, given our highly differentiated strategy from the rest of the office sector. We believe the mission criticality of our assets, observability utilization trends, and the demonstrated strength of our renewals speak volumes for the necessity of our portfolio and the dependability of our underlying cash flow. In closing, we are seeing prospects for attractive growth, and we believe each really is well-positioned to transact and pursue unique opportunities to enhance the enterprise.
Hi, good morning.
Bill you kind of touched on this in your prepared remarks, but I guess can you go into a little more color about your investment.
Outlook for either one.
I'm wondering can take years and what types of deals you're looking to target.
Absolutely I think it's important to note that we had a nice little run and we took advantage of it over the summer we saw some great opportunities for accretive transactions and I think we've been very consistent in saying, we're not interested in doing things that arent accretive right now of a market.
Slightly shocked by by recent increases in interest rates certainly the sellers I think you've gone back into their wholesome hiding for Lopez, but I'm sure they'll be right back out.
William Trimble: With a solid NOI supporting our platform, we hope our listeners today appreciate the unique nature of our business.
Like they were before.
But I think the next several years, you're going to see just what Daryl.
Meghan Baivier: With that, I thank you for your time this morning, and I will turn the call over to Megan to discuss quarterly financial results. Thank you, Bill. Good morning, everyone. I am pleased to report that Easterly's portfolio performed solidly in the third quarter, and our balance sheet at quarter N remains strong with leverage below the midpoint of our target range, zero drawn on our revolver and no current floating-rate debt exposure. With this backdrop, our focus remains on growing the portfolio at the opportune moments.
Darrell and I were discussing which we're going to see some incredible development opportunities I am quite sure of that I think we're going to continue to see some accretive opportunities primarily federal and I think some interesting state ones as well. So I think the one thing that you can expect is that we're going to see some opportunities we're going to do them accretively.
And I think that the buildings that we buy will continue to inure to our benefit and we'll be right in the middle of all that.
Meghan Baivier: Turning to our portfolio for the quarter-ended September 30th, we owned 87 operating properties, comprising approximately 8.6 million leased square seat, either wholly owned or through our joint venture, with a weighted average age of 14 and a half years, and a weighted average remaining lease term of 10.4 years. Through the acquisition of newer buildings and the renewal of key leases for long-term, Easterly has been able to maintain its young portfolio age and even grow the weighted average remaining lease term since the third quarter of 2022. Further, during the quarter, Easterly renewed two important leases, one at the DEA Facility in Birmingham, Alabama, and the other at the Courthouse in Del Rio, Texas.
Got it and I guess, just how different our development cap rates from acquisition cap rates of assuming the development.
Cap rates are much higher but just for next year.
Well I think we've got two things metering in there, we obviously wanted to be accretive from our cost of capital on one standpoint, and obviously, we realize the risk inherent in development and we need a premium for that as well and.
And I think we've always done that and the great News is anything we're going to do obviously, we will be assigned lease will have something at the end and in fact it was building. So I think from that standpoint. It has always been the most I think.
First and most highest and best use of our capital.
Meghan Baivier: Census. Easterly looks forward to continuing to serve as the preferred landlord to the government after these leases commenced for terms of 15 years and 17 years respectively. For the third quarter, all on a fully diluted basis, net income per share grew to 6 cents, and core FFO per share was 29 cents. Our cash available for distribution was $24 million. At quarter end, the company had total indebtedness of approximately $1.2 billion at a weighted average interest rate of 4%, a weighted average maturity of 5 years, and with 100% of all outstanding debt-fixed at attractive levels. This represents an adjusted net debt to annualized quarterly pro-form EBITDA ratio of 6.7 times, which is below the midpoint of our target range.
Great. Thanks.
Thank you as a reminder to ask a question at this time. Please press star one on one on your Touchtone telephone.
Our next question comes from the line of Peter Abramowitz of Jefferies. Please proceed with your question.
Thank you.
Apologize team if I missed this but could you just talk about what the going in yields.
For the wholly owned acquisitions.
Both the federally leased and the state agency leased.
Good morning, Good morning, Peter and I think youre going to see that pretty close to eight cap across the board on those which.
Certainly at the time was accretive.
Risk capital to do it.
Got you and there wasn't much of a difference there in terms of not particularly no.
Meghan Baivier: During the quarter, we executed on a number of debt and equity-related activities. First, we funded the $50 million delayed draw feature on our 2018 term-long facility and used the proceeds, along with cash on hand, to repay all borrowings under our $450 million revolver. Furthermore, given the company's previously announced forward-searning swaps entered into in February of this year, as of quarter end Easterly carries no floating rate debt on its balance sheet, further insulating our shareholders from interest rate volatility.
Gotcha, and then just a question on the.
Anaheim asset.
With us here.
Department of industrial relations in employment development Department can you just talk a little bit more about actually what goes on in this facility specifically.
Specifically kind of.
What you say here about training room for further.
Employment opportunity there Judy <unk> adjudicating, so think of it as almost a court that's going on.
Meghan Baivier: Easterly also set up 1.7 million shares of forward equity raised on the company's ATMs at a net weighted average combined sales price of $19.83 per share, helping us fund the recently acquired assets bill described at a creative level to the organization. Turning to the company's 2023 guidance, the company is maintaining its full year 2023 CoreFFO per share guidance on a fully diluted basis in a range of $1.13 to $1.15. This guidance reflects the closing of VA corpus Christi through the joint venture at its pro-rata price of $18.2 million, and the three additional wholly-owned assets acquired subsequent to quarter end for a combined total price of $62.2 million. Guidance further assumes up to 15 million of growth development-related investment during 2023.
Slash specialized activity.
For these these compensation claims so that's one that we looked at hard and realized that that is something that is certainly not going to be going away anytime in the future and we were particularly gratified to see the renewal post pandemic and that's and I think youre going to see that common thread.
Every building that we buy is that there is a real need for this mission.
It has been verified after the pandemic.
So I think thats, probably a new a new.
Attribute that.
We're going to demand in our bullseye.
I guess I was a little more curious and the second part of that training rooms for further employment opportunities I guess.
Could you could you give a more a little more color on that part of what goes on with the asset and what makes it kind of remote work resistant.
Well, if youre doing it.
Meghan Baivier: With that, we thank you for your time this morning, and appreciate your partnership.
I'd like to bring the folks and it's a public facility.
Unknown Attendee: I will mouse from the call back to Shannon.
And they are helping these folks out that obviously are in a situation in the case.
Unknown Attendee: Thank you. As a reminder to the analyst, to ask a question, you will need to press star 11 or your telephone. Please stand by, we'll compile the Q&A roster.
California is certainly is probably at the leading edge of making sure everybody gets it.
<unk> help from the from the state and these situations. So I am not sat in that room theater, we can join me come out with me.
Michael Griffin: Our first question is from Michael Griffin of City. Pleased to see with your question. Great. Thanks. On the acquisition pipeline, I'm curious that you can delineate between kind of the federal agencies that have kind of been your bread and butter versus the state agencies, that you're kind of looking to go more into that route. Is one more attractive than the other, and they both have their own kind of benefits? I think you can morning.
Dutiful teardown of it but I think it's from all indications. It is an ongoing mission and important mile to the state of California.
Michael Griffin: I think that we're seeing plenty of both and have seen plenty of both, and Michael has said before I viewed the state as just like having another agency within the federal government pipeline, so I think that you see most of the opportunities continuing to come from the federal side. Thanks. That's helpful. And then I'm curious if you can just comment on the dividend, I mean, into the pay-out ratio, still remains elevated.
Gotcha.
That's helpful. Thank you.
Thank you I would now like to turn the conference back to Darrell Crate Chairman of easterly government properties for closing remarks.
Thank you everyone for joining the easterly government properties third quarter 2023 conference call I'd like to thank our investors and stakeholders for their continued support and trust in our company we value your confidence and we are committed to delivering sustained long term success to our shareholders.
This concludes today's conference call. Thank you for participating you may now disconnect.
Meghan Baivier: How should we think about that maybe on a go forward date?
Meghan Baivier: Hi, it's Megan. It's certainly our experience that our leases provide unique forward planning capabilities. We can look out further than the typical, certainly the typical office week today.
Okay.
[music].
Okay.
Yes.
Meghan Baivier: We're really at a place today of real opportunity. Darrell and Bill indicated and growth can be accretive. Furthermore, our reliability are not repricing tomorrow with the swaps we put in place earlier this year. So we're very soon to this issue. We'll stay focused on what's best for shareholders, but that's the backdrop today.
Okay.
Unknown Attendee: Thank you.
[music].
Thank you.
[music].
John Kim: Our next question comes from John Kim of BMO Capital Markets. Please proceed with your question. Thank you. Phil, you mentioned on developers in the market needing some kind of assistance or relief that you're able to provide. Are you thinking more on a JV basis or mezzanine financing or potentially taking out the development was complete? Well, I think, and I'll let Megan fill in the rest, but I think the great news is we've been, I think, pretty engaged in seeing some wonderful opportunities, certainly within our wheelhouse and what we consider prime pipeline opportunities.
John Kim: I think you guys have all been bored of hearing me say this for the last five earnings calls, but I think we're finally hit the point. We're in a situation in the capital markets that we are a very attractive place to partner with, especially with these buildings that might be useful to us in the end and Megan has been very busy looking at some opportunities here. Yeah, I think John, right, there's a there's a myriad of structures that could make sense for Easterly could be a creative to shareholders.
John Kim: I think we're going in with a very open aperture on on how to best play play in this opportunity. And what kind of returns, I shall say, looking at versus cap rates on recent investments. Yeah, I mean, today, obviously, at the current levels, we're looking at a pasta capital that's north of 9%. And from a yield perspective, obviously, today can break even in the low level, low level 9. Okay.
John Kim: Can you walk us through the yield expectations on your developments? I know it's a little bit unique with the reimbursements, but how should we look at it as far as the yield expecting on your 76 million are net spend on the development starts. Yeah, and you know, we're really pleased to have Atlanta back on track moving job site mobilized government excited to be to be on this process. Yes, with us once again, what it can tell you is that we have worked with the government to ensure that we are back to looking at yields similar to where we under wrote this asset.
John Kim: A couple years ago, so think of that, you know, back into that kind of 150 basis point spread to where the best that type of asset could be acquired when we when we when we under wrote it back in 2019. The yield wouldn't have been created just given the change in interest rates. Yeah, I mean, the structure that we that we're able to underwrite, you know, you can you can you can hold your economics, but but working with the government to improve your economics can get can get.
John Kim: Just one final question, a follow-up to Michael's on the dividends. Sometimes REITs have or are influenced by the capital markets. Your stock is yielding 9.7% today, which is a huge spread versus the 10-year on a very similar credit. How much does the capital markets and your stock price influence or change the way you view the dividend policy? I mean, look, I'm not actually sure what the question is, so I think the easiest answer is, no, we're not looking at the capital markets to set our dividend policy.
John Kim: As Megan said, we're on the edge of analyzing terrific opportunity for the company. As you've seen, we have the most forecastable revenue stream of maybe any REIT in the United States, so the opportunity, and Megan's done such a great job getting her liabilities priced out, we feel like we have plenty of opportunity in order for us to have a terrific return for shareholders, and we think that'll be recognized by the capital markets.
Unknown Attendee: Great. Thank you.
William Crow: Our next question is from Bill Crow of Raymond James.
William Crow: Please see with your questions. Hey, good morning.
Meghan Baivier: Megan, one for you. How much could you acquire on balance sheet before you hit the upper end of your guard rail for leverage, assuming, of course, no equity issues? Sure.
Meghan Baivier: I think that's the type of decaparate environment we're seeing today, right? You're going to be kind of in that $150 to $200 million range. Okay. And that's a pretty firm ceiling, I assume, at this point.
William Trimble: We're boy's been committed to running a, you know, the triple BIG profile balance sheet, and I think that there's no intent to change that.
William Trimble: Hey, you know, I'm just like to make a comment, Bill, is that one, and I want to make it very clear that we're differentiated with regard to our access to capital markets today compared to many reads because of this durability of cashflow. So when we're looking at leverage and leverage ceilings and talking with debt providers, I can't get into specific conversations, but we hear again and again from various sources in the capital markets, you know, that given what we're doing and what we're looking to do, that these are, you know, these are a very, very financial project and our opportunity to take on leverage with comfort with debt providers is very high.
William Trimble: Yeah, I think that's absolutely true, and especially true in the private market, but I think as a public read, you have another contingency out there that would probably not necessarily agree that higher leverage is better at this point.
William Crow: Let me shift over to the leases that were signed in the quarter, the DEA, the Courthouse Del Rio, and then the ones that were signed on the asset acquisitions that extended the length of another 10 years. What were the economics of that lease? You know, old lease rate to new lease rate change. Yeah, so we typically try to create full transparency at the end of the year, but you know, we're very proud of the renewals.
William Crow: We continue to post post pandemic and in this, in this, you know, typical office backdrop. So what I would share with you is Birmingham and the courthouse and Del Rio are, you know, bang on the set. Center of our target range and read around that 20% level on an effective spread. And, and that's for, you know, for a 16 year new term.
William Crow: So up 20 from the expiring and what about the ones that were signs prior to the change in ownership. Are you referring to the, the, the, the animal Anaheim or Atlanta? Yeah, you mentioned the acquisitions where you, where they've just, the tenants have just signed a new lease extension. I'm just curious how those economics were.
William Crow: Yeah, I'll have to follow up with you on that bill. I don't have that. Okay.
Meghan Baivier: Alright, then finally for me. Thank you for a decent size that maturity next year. Are there extension options on that? Or what are you thinking about from the cost of, of, of redoing that debt? Like 100 to my million. Yeah, so we've got the two components would be our $100 million term loan with a set of our banks into debt and, and just a little over $50 million mortgage. What I would tell you is we consistently are able to differentiate ourselves with the banks today while they are all certainly undergoing a lot of deep dives into their office portfolio.
Meghan Baivier: The, the thing I consistently hear is no credit issues top of, you know, don't even want to call you office looking at your position in the market and ability to continue to grow. That's obviously an attractive longer term relationship. And so I'm very comfortable with our ability to continue to maintain capacity at the banks. And from the perspective of the mortgage, you know, we have capacity on our revolver today, but we'll continue to pull that in and evaluate the whole, you know, our entire debt structure as we move forward and look at the marginal most attractive place to, to refine debt. But for certainly we have the capacity to kind of warehouse it on the line.
Meghan Baivier: Are you, are you, are you, are you in discussions about these maternities and you have a sense for, for how much the interest rates may gap up. Yes, and in conversations on the term loan, expecting consistent spread there. And not looking to refinance the mortgage on that existing asset, looking to roll that into the broader cast act.
Unknown Attendee: Perfect.
Unknown Attendee: Thank you all. Thank you.
Unknown Attendee: Our next question is from a DT ball of chandron. Of RBC capital markets, please to see with your question. Hi, good morning.
William Trimble: I know Bill, you kind of touched on this near prepared remarks, but I guess can you go into a little more color about your investment outlook for, I guess, the next one or two years and what types of deal you're looking to target. Absolutely. I think it's important to note that we had a nice little run, and we took advantage of it over the summer with some great opportunities for creative transactions.
William Trimble: And I think we've been very consistent in saying we're not interested in doing things that aren't creative. Right now, the market, I think, slightly shocked by recent increases in interest rates or in the sellers, I think you've gone back into their holes in hiding for a little bit, but I'm sure they'll be right back out, sent them like they were before. But I think the next several years you're going to see just what Darrell and I were discussing, which we're going to see some incredible development opportunities.
William Trimble: I'm quite sure of that. I think we're going to continue to see some creative opportunities primarily federal, and I think some interesting state ones as well. So I think the one thing you can expect is that we're going to see some opportunities, we're going to do them incredibly. And I think that the buildings that we buy will continue to a newer to our benefit, and we'll be right in the middle of the whole slide.
William Trimble: And I guess just how different our development cap rates from acquisition cap rates and assuming the development cap rates are much higher, but just for an idea. Well, I think we've got two things metering in there. We obviously want to be a creative from our cost of capital on one standpoint. And obviously we realize the risk inherent in development, and we need a premium for that as well. And I think we've always done that.
William Trimble: And the great news is, anything we're going to do, obviously we'll be assigned lease and we'll have something at the end, and factor was building. So I think from that standpoint it has always been the most, I think that's the highest and best use of our capital.
Unknown Attendee: Great. Thanks. Thank you. As a reminder, task a question at this time. Please press star 11 on your touch on telephone.
Peter Abramowitz: Our next question comes from the line of Peter Abramowitz of Jeffries.
Peter Abramowitz: Please first be with your question. Thank you. And apologize team if I missed this up front, but could you just talk about what the going in yields were for the Holy-owned acquisitions, both the federally leased and the state agency leased? Good morning, good morning, Peter. And I think you're going to see that pretty close to ACAT across the board on those, which certainly at the time was quite different when we raised the cap. Gotcha. And there wasn't much of a difference there in terms of not particularly. Gotcha.
William Trimble: And then just a question on the the Anaheim asset. So with this here, Department of Industrial Relations and Employment Development Department, could you just talk a little bit more about actually what goes on in this facility, specifically kind of what you say here about training room for further employment opportunities? Yeah, they're judicating. So think it looks almost a court that's going on. That's a slash specialized activity for these compensation claims. So that's one that we looked at hard and realized that that is something that is certainly not going to be going away anytime in the future.
William Trimble: And we were particularly gratified to see the renewal post pandemic in this. And I think you're going to see that common thread in every building that we buy is that there is a real need for this mission. And it has been verified after the pandemic.
William Trimble: So I think that's probably a new attribute that we're going to demand in our goals. Okay, I guess that was a little more curious in the second part of that training rooms for further employment opportunities. I guess could you give a little more color on that part of what goes on at the asset and what makes it kind of remote work resistant? Well, if you're doing it, I think that they like to bring the folks in.
William Trimble: It's a public facility and they're helping these folks out that obviously are in a situation. And there's California, certainly it's probably the leading edge of making sure that everybody gets the maximum help from the state in these situations. So I have not sat in that room, Peter.
William Trimble: We can join you, come out with me. We can get do-a-full. Jared Allen, but I think it's for my all-indications. It is an ongoing mission and important one to the state of California. Got to. That's helpful.
Unknown Attendee: Thank you.
Darrell Crate: I would now like to turn the conference back to Darrell Crate, Chairman of Easterly Government Properties for closing remarks. Great.
Darrell Crate: Thank you, everyone, for joining the Easterly Government Properties third quarter, 2020-23 conference call. I'd like to thank our investors and stakeholders for their continued support and trust in our company. We value your confidence and we're committed to delivering sustained long-term success to our shareholders.
Unknown Attendee: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you.