Q4 2023 Easterly Government Properties Inc Earnings Call

February 27, 2024

Operator: Greetings. Welcome to the Easterly Government Properties 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Great.

Welcome to the easterly government properties fourth quarter 2023 earnings conference call.

At this time all participants are in a listen only mode.

Operator: After the speaker's presentation, there will be a question and answer 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 that their hand is raised.

The speaker's presentation, there will be a question and answer session between the company's research analysts and eastern this management team.

To ask a question during the session analysts will need to press star one one or their telephone. They will then hear an automated message advising their hand is raised please be advised that today's conference is being recorded.

Operator: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lindsay Winterhalter, Head of Investor Relations. Please go ahead.

I'd now like to hand, the conference over to your Speaker today Lindsay Winterhalter head of Investor Relations. Please go ahead.

Lindsay Winterhalter: Good morning. Before the call begins, please note that certain statements made during this conference call may include statements that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's most recent Form 10-K filed with the SEC and in its other SEC The company assumes no obligation to update publicly any forward-looking statements.

Good morning before the call begins please note that certain statements made during this conference call May include statements that are not historical facts and are considered forward looking statements within the meaning of the private Securities Litigation Reform Act with 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 at home.

Furthermore, actual results may differ materially from those described in the forward looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including without limitation those contained in the Companys. Most recent Form 10-K filed with the SEC and its other SEC filings the cause.

<unk> assumes no obligation to update publicly any forward looking statements.

Lindsay Winterhalter: Additionally, on this conference call, the company may refer to certain non-GAAP financial measures, such as funds from operations, core funds from operations, 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.easterlyrate.com. I would now like to turn the conference call over to Darrell Crate, CEO of Easterly Government Properties. Good morning, everyone, and thank you for joining us for the fourth quarter conference call. Today, in addition to Lindsay, I'm also joined by Meghan Baivier, the company's president and COO, and Allison Marina, the company's CFO and CAO.

Additionally, on this conference call the company may refer to certain non-GAAP financial measures such as funds from operations core funds from operations 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 easterly rate Dot Com I would now like to turn the conference call over to Darrell crate.

CEO of easterly government properties.

Good morning, everyone and thank you for joining us for the fourth quarter Conference call. Today. In addition to Lindsay I'm also joined by Meghan <unk>, the company's president and CEO and Allison Marine out the company's CFO.

Darrell W. Crate: We're pleased with the earnings results for 2023, and we look forward to continuing to deliver predictable earnings to our shareholders, supported by our foundation of leases backed by the full faith and credit of the United States government. As you saw in our guidance, we are executing on a path for strong core FFO growth in 2024. Alison will speak to that in more detail.

We're pleased with the earnings results for 2023, and we look forward to continuing to deliver predictable earnings to our shareholders supported by our foundation of leases backed by the full facing credit of the United States government.

As you saw in our guidance, we are executing on a path for strong core <unk> growth in 2024.

Alison will speak to that in more detail Needless to say, we're excited to share our outlook with you.

Darrell W. Crate: Needless to say, we're excited to share our outlook with you. For over a decade, we have been honing a definable edge in the mission-critical facilities that serve our government. Our goal is to use that edge to provide our shareholders with a stable, predictable cash flow stream. By specializing in these mission-critical properties, Easterly can play an important role in supporting essential functions for the United States government and its adjacent partners.

For over a decade, we've been honing a definable edge in the mission critical facilities that serve our government.

Our goal is to use that edge to provide our shareholders with stable predictable cash flow stream.

By specializing in these mission critical properties easterly can play an important role in supporting our central functions for the United States government and its adjacent partners.

Darrell W. Crate: While office readers contend with remote work threatening their occupancy outlook and portfolio growth, Easterly's facilities remain critical to the safety and security of our government agency partners. Accordingly, this provides the stability we seek for our investors. While we are discussing predictability, let me address our dividends. We fully acknowledge our higher-than-average payout ratio, and we are confident in our ability to maintain and grow our dividends. Our disciplined approach to prudently managing our balance sheet, and our unique long-term visibility of cash flows, and the creditworthiness of our U.S. government tenancies continue to serve as sources of stability and growth.

While office Reits contended with remote work threatening their occupancy outlook and portfolio growth Easter lease facilities remain critical to the safety and security of our government Agency partners.

This provides us stability, we seek for our investors.

While we are discussing predictability, let me address our dividends, we fully acknowledge our higher than average payout ratio.

We are confident in our ability to maintain and grow our dividend.

Our disciplined approach to prudently managing our balance sheet, our unique long term visibility of cash flows and the creditworthiness of our U S. Government tenancies continued to serve as sources of stability and growth.

Darrell W. Crate: The capex in our buildings is predictable, and the demands for capital expenditures by our tenants are not excessive. Our view is to return as much cash flow to investors as is reasonable as a strong steward of their capital. The leases we have today provide $2.9 billion of rental income backed by the full faith and credit of the U.S. government. With only one renewal of all of our assets to only a 10-year term at a 10% spread, these aggregate cash flows will be just under $6 billion in rent. And as Meghan will share when she discusses our renewals to date, you will see those assumptions are quite modest. Given the strength of this cash flow, we are confident in our ability to provide healthy dividends to our investors for the years to come. What also sets us apart from typical office reefs is our commitment to customization.

The capex in our buildings is predictable and the demands for capital expenditures by our tenants are not excessive.

Our view is to return as much cash flow to investors is as reasonable as a strong stewards of their capital.

The leases we have today provide $2 9 billion of rental income backed by the full facing credit of the U S government.

With only one renewal of all of our assets to only a 10 year term at a 10% spread these aggregate cash flows will be just under $6 billion in rent.

And as Meg and we'll share when she discusses our renewals to date you will see those assumptions are quite modest.

Given the strength of this cash flow, we are confident in our ability to provide healthy dividends to our investors for the years to come.

We're also sets us apart from typical office rates as our commitment to customization. Our buildings are equipped and fortified with infrastructure and security protocols to ensure uninterrupted operations for key government agencies, such as the drug enforcement administration and the Federal Bureau of investigation.

Darrell W. Crate: Our buildings are equipped and fortified with infrastructure and security protocols to ensure uninterrupted operations for key government agencies, such as the Drug Enforcement Administration and the Federal Bureau of Investigation. To reiterate, these assets have one important trade in common; they all help fulfill important government missions that cannot be accomplished from home. For example, drug enforcement agents require secure laboratories to analyze and store confiscated contraband. FBI agents must investigate crimes in person and at facilities designated for their use.

To reiterate these assets at one important trait in common.

I'll help fulfill an important government missions that cannot be accomplished for call for.

For example, drug enforcement agents require secured labs to analyze and store accomplished scale contraband FBI agents must investigate crimes in person and facilities designated for their use.

Darrell W. Crate: Our facilities continue to support the work that ensures the safety of the country, and as a result, 97% of our properties remain leased. It's clear to us that as we explore how to best collaborate with other state and local agencies, we can find additional facilities with similar longevity with the added benefit of lease escalation. We see potential to grow our holdings of government and government-adjacent assets with lease escalations to approximately 15% of our portfolio. We can further apply our definable edge in the development of properties for both government tenants and government-related tenants that have similar facility needs to our most tenant-improvement-intensive buildings.

Facilities continue to support the work that ensures the safety of the country and as a result of 97% of our properties remain lease.

It is clear to us that as we explore how to best collaborate with other state and local agencies, we find additional facilities with similar longevity with the added benefit of lease Escalations.

We see potential to grow our holdings of government and government adjacent assets with lease escalations to approximately 15% of our portfolio.

We can further our player definable edge in development of properties for both government tenants and government adjacent tenant that a similar facility needs to our most tenant improvement intensive buildings.

Darrell W. Crate: We're keenly aware of investors seeking the opportune moment as assets in the liability are repriced. With accelerated interest rates and liquidity drying up in the bank market, this development segment is taking the lead on repricing. A pipeline of opportunities lies ahead where we believe we can engage in these products accretively at our current cost of capital. All of this leads to our commitment to grow Easterly Core FFO on a trajectory of more than 2% for the foreseeable future. We believe we are positioned to deliver a consistently growing core FFO cash flow stream, which in turn would allow us to increase our dividend and continue to deliver stronger results for our shareholders. This is an exciting time for Easterly.

We're keenly aware of investor seeking the opportune moment as assets and liabilities reprice.

With accelerated interest rates and liquidity drying up in the bank market. This development segment is taking the lead on repricing.

Pipeline of opportunities lies ahead, where we believe we can engage in these products accretively at our current cost of capital.

All of this leads to our commitment to grow easterly core <unk> on a trajectory of more than 2% for this foreseeable future. We believe we are positioned to deliver a consistently growing cash flow stream, which in turn would allow us to increase our dividend and continue to deliver strong results for our shareholders.

This is an exciting time for easterly we're seeing a pipeline of mission critical opportunities in 2024 and beyond while also building a portfolio with a foundation of cash flows backed by the full facing credit of the U S. Government. Thanks for your time. This morning, now I will turn the call over to Meghan to discuss opportunities for growth in 2024.

Meghan Baivier: We're seeing a pipeline of mission-critical opportunities in 2024 and beyond, while also building a portfolio with a foundation of cash flows backed by the full faith and credit of the U.S. government. Thanks for your time this morning. Now, I'll turn the call over to Meghan to discuss opportunities for growth in 2024 and beyond. Thanks, Darrell, and good morning. Thank you for joining us for our fourth quarter earnings call. 2023 was a productive year for Easterly. The deal market returned, and we were able to transact on several accretive acquisitions during the second half of the year. In total, Easterly acquired, either directly or through the joint venture, four properties leased to tenants that include the United States Judiciary, the Department of Veterans Affairs, the Department of Homeland Security, and the State of California for an aggregate pro rata contractual purchase price of approximately $80.4 million. Easterly now owns, directly or through the JV, 90 properties totaling 8.8 million leased square feet.

Yes.

Thanks, Darryl and good morning, Thank you for joining us for our fourth quarter earnings call two.

2023 was a productive year for Australia.

The market returned and we were able to transact on several accretive acquisitions during the second half of the year.

In total easterly acquired either directly or through the joint venture for properties leased to tenants that include the United States Judiciary. The Department of Veterans Affairs, The Department of Homeland Security and the state of California for an aggregate pro rata contractual purchase price of approximately $84 million.

Eastern easterly now owned directly or through the JV 90 properties totaling $8 8 million leased square feet. Our portfolio remains young with a weighted average age of 14 six years and our duration of cash flow remains enduring with a weighted average remaining lease term.

Meghan Baivier: Our portfolio remains young with a weighted average age of 14.6 years, and our duration of cash flows remains enduring with a weighted average remaining lease term of 10.5 years. As mentioned on prior calls, we have always viewed Easterly as the mechanism to access high-quality cash flows through the lens of real estate income derived from one of the world's most stable economic entities, the United States government. The most recent example of that is found in today's development land.

Of 10 five years.

As mentioned on prior calls we have always viewed easterly is the mechanism to access high credit quality cash flows through the lens of real estate income derived from one of the worlds most.

Table economic entities in the United States government.

The most recent example of that is found in today's development landscape.

Meghan Baivier: Here we are observing a stark contrast between the limitations faced by private developers and the resources available through a public rebalance sheet. Private developers, constrained by financial considerations, are encountering challenges accessing the substantial capital required for ambitious building projects. The complexities of securing financing, coupled with market uncertainties, appear to be impeding private developers' ability to embark on large-scale projects.

Here, we are observing a stark contrast between the limitations faced by private developers and their resources available through our public REIT balance sheet.

Private developers constrained by financial considerations are encountering challenges in accessing the substantial capital required for ambitious building projects.

The complexities of securing financing coupled with market uncertainties appear to be impeding private developers the ability to embark on large scale projects.

Meghan Baivier: In contrast, Easterly's fortified balance sheet and enduring financing partner relationships emerge as a potential reservoir of capital. Easterly possesses the tools and capacity to leverage various debt and equity markets and tap into diverse revenue streams to finance projects. With that background, we are currently pursuing an attractive set of opportunities with private developers to serve as a partner and help finance and subsequently own a pipeline of mission-critical assets primarily leased to the U.S. government. Turning to the company's wholly owned development activities, our FDA Atlanta project continues to progress nicely with an estimated 150 workers on site daily. We expect that the project will cost approximately $229 million and be delivered in the fourth quarter of 2025. Approximately $150 million of the total cost will be tenanted improvement reimbursed by the federal government via lump sum payment.

In contrast, Israelis fortified balance sheet and enduring financing partner relationships emerge as a potential reservoir of capital.

Surely possesses the tools and capacity to leverage various debt and equity markets and tap into diverse revenue streams to finance projects.

With that background. We are currently pursuing an attractive set of opportunities with private developers to serve as a partner and help finance and subsequently own a pipeline of mission critical assets, primarily leased to the U S government.

Turning to the company's wholly owned development activity, our FDA Atlanta project continues to progress nicely with an estimated 150 workers on site daily we.

We expect that the project will cost approximately $229 million and deliver in the fourth quarter of 2025.

Approximately $150 million of the total cost will be tenant improvement reimbursed by the federal government the lump sum payments we.

Meghan Baivier: We anticipate receiving an approximately $25 million reimbursement payment in the third quarter of 2024 and the remaining $125 million 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 162,000 square foot, state-of-the-art laboratory 100% pre-leased to the United States government for a non-cancelable term of 20 years. With such a substantial TI investment in this project, we anticipate this facility will serve the needs of the government for in excess of 50 years. Turning to cash flow predictability, during the fourth quarter, Easterly renewed GSA Clarksburg, a 70,000 square foot facility, for a new 15-year term that began in January 2024. For the entirety of 2023, we renewed 100% of our expiring leases for a combined 4.4% of annualized lease income at year end, all for a weighted average term of 16.4 years. These results serve as a stark contrast to our Office 3 brethren.

We anticipate receiving an approximately $25 million reimbursement payment in the third quarter of 2004, and the remaining $125 million 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% pre leased to the United States government for a noncancelable term of 20 years.

With such a substantial investment in this project. We anticipate this facility will serve the needs of the government for in excess of 50 years.

Turning to cash flow predictability during the fourth quarter is purely renewed GSA Clarksburg, a 70000 square foot facility for a new 15 year term that commenced in January 2024.

For the entirety of 2023, we renewed 100% of our expiring leases for a combined four 4% of annualized lease income at year end all for a weighted average term of 16 four years.

These results serve as a stark contrast to our office REIT Brethren.

Meghan Baivier: Further, as is customary on our fourth quarter earnings calls, we'd like to discuss our leasing successes as of year end. However, due to the unique nature of our leases, final renewal rents cannot be ascertained until the exact amount of TI dollars required by the government at renewal is known and the TI work is done. As such, there can be a lag in providing release data relative to the point at which we have signed a renewal. As of December 31, 2023, we have renewed 32 leases since IPO. Of those 32, 18 are renewals for which TI work, if any, has been completed and accepted by the government.

Further as is customary on our fourth quarter earnings call, we'd like to discuss our re leasing successes as of year end.

Due to the unique nature of our leases final renewal rents cannot be ascertained until the exact amount of Ti dollars required by the government at renewal is known in the Ti work is complete as such there can be a lag in providing releasing data relative to the point at which we have signed a renewal lease.

As of December 31, 2023, we have renewed 32 leases since IPO.

Of that 30 to 18 or renewals for which Ti work if any has been completed and accepted by the government.

The other 14 or renewals with pending Ti projects. This combined to one 8 million square feet across 32 renewals include CTO, Arlington, IRS, Fresno and various smaller leases in Buffalo when we exclude these assets the average rent spread achieved on the remaining renewals is anticipated to be 18%.

Meghan Baivier: The other 14 are renewals with pending TI projects. This combined 2.18 million square feet across 32 renewals includes PTO Arlington, IRS Fresno, and various smaller leases in Buffalo. When we exclude these assets, the average rent spread achieved on the remaining renewals is anticipated to be 18%, including an estimated $40 per square foot of TI utilized by the government. The weighted average total renewal term for these leases was 17.2 years.

Including an estimated $40 per square foot of Ti utilized by the government.

The weighted average total renewal term for these leases were $17 two years.

In closing, we believe the essential nature of our assets observed building 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.

We are seeing prospects for attractive growth and we believe easterly is well positioned to transact and pursue unique opportunities to enhance the enterprise.

Meghan Baivier: In closing, we believe the essential nature of our assets, observed building 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. We are seeing prospects for attractive growth, and we believe Easterly 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 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 Allison to discuss the quarterly and year-end financial reports. Thank you, Meghan. Good morning, everyone.

With a solid NOI supporting our platform, we hope our listeners today 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 Alison to discuss the quarterly and year end financial results.

Thank you Meghan good morning, everyone.

It is my pleasure to be joining you. This morning and report the company's strong quarterly and year end consensus meeting results given the predictability of cash flows and uncertainty of our leading role in this market. We believe is certainly poised for growth in 2024.

I am pleased to report that at year end Easter lease portfolio performed solidly.

Allison Marina: It is my pleasure to be joining you this morning and to report the company's strong quarterly and year-end consensus meeting results. Given the predictability of cash flows and the certainty of our leading role in this market, we believe Easterly is poised for growth in 2024. I am pleased to report that at year-end, Easterly's portfolio performed solidly. We have leverage at the midpoint of our target range, less than $80 million drawn on our resolver, and only 6% floating rate debt exposure. For the fourth quarter, on a fully diluted basis, net income per share was $0.04.

Leverage at the midpoint of our target range less than $80 million drawn on our revolver and only 6% floating rate debt exposure.

For the fourth quarter, all on a fully diluted basis net income per share was <unk> <unk>.

<unk> per share was 28.

Our cash available for distribution was 29 $21 9 million.

For the full year net income per share was <unk> <unk>.

Core <unk> per share met consensus at $1 14, and cash available for distribution was $94 8 million.

With an eye to the balance sheet. It is important for us to stagger debt maturities and manage our interest rate risk. We have thoughtfully managed our assets and liabilities, ensuring that robust position to address 2024 maturities and capitalize on emerging opportunities.

Allison Marina: And core FFO per share was $0.28. Our cash available for distribution was $21.9 million. For the full year, net income per share was $0.20, core FFO per share met consensus at $1.14, and cash available for distribution was $94.8 million.

As you can see from our fourth quarter and full year results, our balance sheet reflects stability and strategic foresight.

Strength of the Companys cash flows are backed by the full faith and credit of the United States government.

This allows us to achieve a better cost of capital through lower cost of debt.

Allison Marina: With an eye to the balance sheet, it is important for us to stagger debt maturities and manage our interest rate risk. We've thoughtfully managed our assets and liabilities, ensuring that we're well positioned to address our 2024 maturities and capitalize on emerging opportunities. As you can see from our fourth quarter and full year results, our balance sheet reflects stability and strategic foresight. The strength of the company's cash flows is backed by the full faith and credit of the United States government.

All we can be quickly lumped in with our office peers and broader sector weakness the superior credit of our U S government tenants and forecast ability of our cash flows separates Easter really from other office Reits.

Our commitment to financial Prudence is reflected in our recent announcement of our inaugural investment grade Triple B credit rating from KBR.

We have finalized the rating in the fall of 2022 and have maintained it since that time, we believe this will serve us well as our capital needs expand.

Allison Marina: This allows us to achieve a better cost of capital through a lower cost of debt. While we can be quickly lumped in with our office peers and broader sector weakness, the superior credit of our U.S. government tenant and forecastability of our cash flows separates Easterly from other office regions. Our commitment to financial prudence is reflected in our recent announcement of our inaugural investment grade Triple B credit rating from KBRA. We finalized the rating in the fall of 2022 and have maintained it since that time.

While growth is at the heart of our strategy, we view the momentum behind that growth as a key differentiator for easterly.

As power in our working capital management, which is reflected in achieving ongoing property operating expense savings managing G&A increased and re leasing at positive spreads.

We have taken a disciplined approach to operational efficiencies and tenant engagement.

With this backdrop, our focus remains on growing the portfolio at opportune moments.

Particularly when compared to private developers and other real estate owners the advantages of being a public company are central to our growth strategy.

Allison Marina: We believe this will serve us well as our capital needs expand. Furthermore, while growth is at the heart of our strategy, we view the momentum behind that growth as a key differentiator for Easterly. There's power in our working capital management, which is reflected in achieving ongoing property operating expense savings, managing DNA creep, and releasing a positive spread. We have taken a disciplined approach to operational efficiencies, and with this backdrop, our focus remains on growing the portfolio at every opportunity. Particularly when compared to private developers and other real estate owners, the advantages of being a public company are central to our growth strategy.

As Megan shared earlier, we have access to a diverse pool of debt and equity sources, which allows us to acquire accretively and maintain our cost of capital advantage, even when others may be faced with constraints.

Turning to 2024, we are introducing our full year core <unk> per share guidance on a fully diluted basis and a range of $1 14 to $1 16.

This guidance assumes the closing of the Jacksonville through the joint venture at its pro rata acquisition price of $40 $9 million and that we will have $100 million to $110 million of gross development related investment during 2024.

Allison Marina: As Meghan shared earlier, we have access to a diverse pool of debt and equity sources, which allows us to acquire accretively and maintain a cost of capital advantage even when others may be faced with constraints. Turning to 2024, we are introducing our full-year core FFO per share guidance on a fully diluted basis in a range of $1.14 to $1.60. This guidance assumes the closing of VA Jacksonville through the joint venture at a pro rata acquisition price of $40.9 million and that we will have $100 to $110 million of gross development related investment during 2024. At its midpoint, this sets the path for Easterly to deliver strong core FFO per share earnings growth to shareholders in 2024. We believe this represents a market-leading risk-adjusted return and charts the course for delivering long-standing growth opportunities for our shareholders. With that, we thank you for your time this morning and appreciate your partnership. I will now turn the call over to Shannon for questions. Thank you. As a reminder to analysts, to ask a question, you will need to press star 11 on your telephone.

At its midpoint.

What's the path for Easter relates to deliver a strong core <unk> per share earnings growth to shareholders. In 2024. We believe this represents a market leading risk adjusted return and charts of course for delivering long standing growth opportunities for our shareholders.

With that we thank you for your time this morning, and appreciate your partnership I will now turn the call over to Shannon for questions.

Thank you.

As a reminder to analysts to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from the line of Michael Griffin of Citi. Please proceed with your question.

Great. Thanks.

Darrell you said you remain committed to the dividend at least in the near and medium term, but.

Look I guess expectations for 'twenty, four and 'twenty five 'twenty four and then probably consensus on 25, it seems like the.

The dividend is not near.

And of that coverage level I guess is it a function of executing on external growth to grow earnings you talked about the 2% kind of expectation for the near term as it is a throttling down capex just how do we get comfortable around more normalized payout ratio going forward does noted.

Operator: Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Griffin of Citi. Please proceed with your question. Great, thanks.

Darrell W. Crate: Darrell, you said you remain committed to the dividend, at least in the near and medium term. But, you know, if I look at, I guess, expectations for 24 and 25, you know, 24, and then probably consensus on 25, it seems like, you know, the dividend is not near that coverage level. Is it a function of executing on external growth to grow earnings?

Great question.

Think of it.

One of the things I was trying to emphasize in my prepared remarks is the predictability of our cash flow well with a with a very very.

Our horizon far in the future.

And so as we look forward, we see with our existing portfolio. We can of course grow into our dividend as we have lease renewals.

But youre exactly right, we confirm a little capex to manage cash and we're also working hard on avoiding the G&A increase and continue to cut expenses in order to make that so and as I said, we're looking at as we as we discussed on our analyst day, we're seeing some real opportunities in the in the development.

Darrell W. Crate: You talked about the 2% kind of expectation for the near term. Is it throttling down capex? Just, how do we get comfortable around a more normalized payout ratio going forward? No, no.

Darrell W. Crate: Great question. You know, and I think, as we all know, one of the things I was trying to emphasize in my prepared remarks was the predictability of our cash flow. You know, well, you know, with a very, very, you know, horizon far in the future. And so as we look forward, we see, you know, with our existing portfolio, we can, of course, you know, grow into our dividend as we have lease renewals. But you're exactly right.

<unk> and <unk>.

Individual assets in the wholly owned asset area, where we can buy some things accretively. So we feel very good about our earnings. This year and then if you continue to take the trajectory that we're giving we're guiding to and push it out.

One or two more years I think youll see that we are in a nice place with our dividend and we.

Darrell W. Crate: We can trim a little capex to manage CAV, and we're also working hard on avoiding the GNA creep and continuing to cut expenses in order to make that so. And as I said, we're looking at, and as we sort of discussed on our analyst day, we're seeing some real opportunities in the development market. And, you know, and sort of individual assets in the wholly owned asset area where we can buy some things accretively. So we feel very good about our earnings this year.

We feel that our business given the predictability and the stability of the cash flows and the long enduring nature of our lease obligations.

As much cash to shareholders.

Is the right way to to.

To continue to deliver return for folks who invest and DEA.

Great. That's helpful. And then maybe turning to guidance I noticed you Havent incorporated expected acquisitions.

Darrell W. Crate: And then if you continue to take the trajectory that we're giving, guiding to and push it out for one or two more years. I think you'll see that we are in a nice place with our dividend and we feel that our business, given the predictability and the stability of the cash flows and the long-term nature of our lease obligations, that getting as much cash to shareholders is the right way to continue to deliver return for folks who invest in us. Great That's helpful. And then maybe turn to guidance.

Full year guide.

Historically done and I think in 'twenty, two and 'twenty, one maybe not so last year, but you've talked about this pipeline that youre seeing can you maybe quantify.

How many acquisitions Youre looking to do is here I imagine that would help move the needle on earnings and maybe where youre seeing cap rates or return hurdles have on those acquisition targets.

Yeah, Hey, good morning, Greg.

So we're prudently not including it in our in our guidance just for everybody to be able to understand sort of the the growth potential embedded in and the assets, we own going into the year.

Meghan Baivier: I noticed you hadn't incorporated expected acquisitions into the full-year guide. You've historically done it, I think, in 22 and 21, maybe not so last year, but you've talked about this pipeline that you're seeing. Can you maybe quantify how many acquisitions you're looking to do this year? I imagine that would help move the needle on earnings and maybe where you're seeing cap rates or return hurdles on those acquisition targets. Yeah, hey, good morning, Griff.

We will close on our remaining VA in the joint venture and what I would say looking at the acquisition market today is.

There is robust levels of potential deal flow in the market.

Excuse me.

And we are engaged with numerous sellers both on that.

Meghan Baivier: So we're prudently not including it in our guidance, just for everybody to be able to understand sort of the growth potential embedded in the assets we own going into the year. We will close on our remaining VA in the joint venture. And, you know, what I would say looking at the acquisition market today is there is robust levels of potential deal flow in the market. And, excuse me, and we are engaged with, you know, numerous sellers both on the, in particular on the wholly owned, acquisition side of the house, in addition to sort of the development, the developers who are facing needs that would be more sort of longer term over the next couple of years.

In particular on the wholly owned acquisition side of the house and.

In addition to sort of the development.

<unk>, who are facing needs that would be more sort of longer term over the next couple of years. So.

We see value in that market.

In the mid in the mid 7% type cap rate range, which is a level.

That we will.

When we look to be able to transact that accretively and continue to contribute to the growth of for shareholders, but.

Think going into this year.

As that market continues to.

To build and I would say over the course of the spring and summer were really were really excited about the ability to add that onto what is already a platform of growth.

Meghan Baivier: So, you know, we see value in that market, kind of in the mid-7% type cap rate range, which is a level that we look to be able to transact that accretively and continue to contribute to the growth of shareholders, but I think going into this year, as that market continues to build, I would say, over the course of the spring and summer. We're really, really excited about the ability to add that to what is already a platform. It's great.

It's great.

I'd like to just say it again, because I think it's such an important point our guidance. This year does not include.

US having to buy anything.

And the market that we're seeing to provide a little bit more color is that the bid ask spread on cap rates is wide, but there's opportunities to pick off building the timing of that is uncertain.

Darrell W. Crate: And I'll just say, I'd like to just say it again, because I think it's such an important point, you know, our guidance this year does not include us having to buy anything. And the market that we're seeing to provide a little bit more color is that the bid-ask spread on cap rates is wide, but there are opportunities to pick off buildings. The timing of that is uncertain.

But as Meghan said, where transaction transacting at accretive levels in those mid sevens.

And we will look forward to increasing our guidance as we find those opportunities, but we just given where the market is given the positioning and given that we want investors to just understand the track that we're on we're being conservative.

<unk> and how we're bringing things forward and only talking about guidance about things that we feel are a certain and don't require things.

Darrell W. Crate: But as Meghan said, you know, we're transacting at accretive levels in those mid-sevens, and we will look forward to increasing our guidance as we find those opportunities. But we just, given where the market is, given the positioning, and given that we want investors to just understand, you know, the track that we're on, we're being conservative in how we are bringing things forward. And only talking about guidance about things that we feel are certain and don't require things outside of the four walls of this office in order to make that guidance a reality. Great. That's it for me.

Things outside of the four walls of this this office in order to make those meet that guidance a reality.

Great. That's it from me thanks for the time.

Thank you.

Our next question is from John Kim of BMO Capital markets. Please proceed with your question.

Thank you.

I just wanted to clarify on your guidance of $100 million to $110 million of developer.

Development related investments, but that's the financing that you're providing to private developers.

And I'm, just wondering what the yield youre expecting on it.

Michael Griffin: Thanks for the time. Thank you. Our next question is from John Kim of BMO Capital Markets. Please proceed with your question. Thank you. I just wanted to clarify on your guidance of $100 to $110 million of development-related investments, that that's the financing that you're providing to private developers? And I'm wondering what the yield you're expecting on it. Hi, John. It's Alison.

Hi, John It's Allison so for that guidance that is purely FDA, Atlanta, which is our previously announced development.

And we're targeting yields in the mid sevens on that as we discussed last quarter.

Yeah.

Okay. So the development financing is not.

In your guidance correct no the opportunity set for these sort of private developers looking for capital that would also to Darryl prior point be additive.

Allison Marina: So for that guidance, that is purely FDA Atlanta, which is our previously announced development. And we're targeting yields in the mid sevens on that, as we discussed last quarter. Okay, so the development financing is not... in your guidance? Correct.

As we as we look to.

To engage with those folks.

And just to clarify is that I think Darryl mentioned that the.

The financing you're providing is our projects we plan to own once they're complete.

You broke up a little bit, but yes. We would these are assets that we would be looking to.

Allison Marina: No, the opportunity set for these sort of private developers looking for capital, that would also, to Darrell's prior point, you know, be additive, as we look to engage with those folks. And just to clarify, I think Darrell mentioned that the financing you're providing is for projects you plan to own once they're complete? He broke up a little bit, but yes, these are assets that we would be looking to own at completion as well. What leverage level can you get to to maintain your investment grade rating from KBRA? Yeah, they're very comfortable with our six and a half to seven and a half times the range.

One one at completion as well.

Okay.

What leverage level can you get to to maintain your investment grade rating from KBR, Inc.

Yes, they are very comfortable with our six 5% to seven five times range not that we'd be looking to do that so I think opportunistically and it certainly set at the higher end of that if not a little bit in excess but that's a range of their abundantly comfortable.

Comfortable with.

Again, none of that exit that excess leverage would come from developing these buildings and again be repaid with.

Allison Marina: Not that we'd be looking to do this, but I think, you know, opportunistically, we could certainly sit at the higher end of that, if not a little bit in excess, but that's a range that they are abundantly comfortable in. Again, a lot of that excess leverage would come from developing these buildings and would again be repaid with lump sums or long-term leases. Right. Okay. My final question is just to follow up on Michael's on the dividend. Your payout ratio on CAD was 118% last year.

With lump sums or these long.

Our long term leases.

Alright, okay.

Final question is just a follow up on Michaels on the dividend.

Your payout ratio on CAD was 118% last year.

If you assume growth of 4% per annum that'll take about five years to cover it.

Im assuming some of these development loans that you provide.

John P. Kim: If you assume growth of 4% per annum, that'll take about five years to cover it. I'm assuming some of these development loans that you provide are probably not going to be on a cash basis as far as yield is concerned. Why not address the dividend now as you're going through more of a growth strategy rather than the stability and high yield focused strategy that you've had previously? Yeah, I mean, John, we're really taking a long, long view on this.

Probably not going to be cash on a cash basis as far as the yield.

Why not address the dividend now as youre going through more of a growth strategy rather than that of stability.

High yields.

<unk>.

Strategy that you've had previously.

Yeah, I mean, John we are really taking along long view on this and we have the fortunate ability to do so given.

The types and the nature of assets that we have in our portfolio. So.

Meghan Baivier: And we have the fortunate ability to do so, given the types and the nature of assets that we have in our portfolio. So, as Darrell said earlier, you know, we're really going to look at all the levers we have with regard to our, quote unquote, you know, same store portfolio to manage the payout levels. But we're not looking just one, two quarters ahead. We're really looking one, two years ahead.

As Darryl said earlier, we're really going to look at all the levers we have with regard to our same.

Same store portfolio to two to manage the payout levels, but.

We're not looking just one two quarters ahead, we're really looking one two years ahead and the opportunity that we see in front of US is one that we.

Meghan Baivier: And the opportunity that we see in front of us is one that we think we can, we can sort of bridge into. Okay, I mean, I would argue a pad ratio above 100% shouldn't persist for more than a couple of years, but we can talk about offline. Thank you. Thank you, John. Thank you. The next question is from Michael Carroll of RBC. Please proceed with your question. Yeah, thanks. Meghan, I know you touched on this in your prepared remarks.

We think we can we can reach into nicely.

Okay.

Your payout ratio above 100%.

Should persist for more than a couple of years, but.

We can talk about offline. Thank you.

Thank you John.

Thank you.

Our next question is from Michael Carroll of RBC. Please proceed with your question.

Yes, Thanks, Meg and I know you touched on this in your prepared remarks, but how many leases are you currently on waiting on the Ti build out before those rent escalators can be realized I mean should we see.

Michael Carroll: But how many leases are you currently on waiting on the TI build out before those rent escalators can be realized? I mean, should we see, I mean, is it a meaningful amount where there's some more embedded organic growth that's not realized in your fourth-quarter numbers now, but it will be realized once those TI projects are complete in the new renaissance? Yeah, Mike, it's, from a single-tenant perspective, it's 11, and you've got a couple other smaller leases in Buffalo, so it's 14 total leases for over a million square feet that are still going through the TI buildout process.

Is that a meaningful amount where there are some more embedded organic growth does not realized in your fourth quarter numbers now, but it will be realized once those projects are complete and the new Renaissance.

Yeah, Mike it's a.

It's.

From a single tenant perspective, it's 11, then you've got a couple other smaller assets are smaller leases in Buffalo third 14 total leases.

For over 1 million square feet that are still going through the.

Ti build out process.

Meghan Baivier: How much, I guess, rent or incremental rent does that represent that could flow in through the numbers? Uh, We can isolate that for you, Mike, but we don't know just yet where those full all-in rents are going to land, so we've held back on that. But that subset really is the subset of assets that we're looking for increases north of 25% on, so it's a considerable tailwind with regard to the growth we're talking about over the next one to two years. OK, and then that is what's going to come online in 24 and 25. So it's a two-year time frame for that stuff to get kind of realized. Yes, the vast majority of that we expect to come on over the course of 2024, primarily in the back half of 2024.

How much I guess rent alright incremental rent does that represents that could flow through numbers.

We can isolate that for you Mike.

But where we don't know just yet where those were those all in rents are going to land. So we've we've held back on that but that subset really is.

Subset of assets that we're looking for increases north of 25% Tom So it's a considerable tailwind with regard to the growth we're talking about over the next one to two years.

Okay, and then that is that's going to come online in 2425. So it's a two year type timeframe for that stuff gets kind of realized.

Yes, the vast majority of that we expect to come on.

Over the course of 2024, primarily in the back half of 2024.

Meghan Baivier: A bit of it could be expected, you know, 20% or so to flow over into 2025. Okay, and then on the investment side, I mean, how do you plan on funding, I guess, new deals? I mean, before you can kind of pursue some of those transactions that you highlighted, does DEA need to raise equity to kind of fund that? Is that kind of what we should be expecting?

A bit of it could.

Could be expected, 20% or so two to flow over into 2025.

Okay, and then on the investment side I mean, how do you plan on funding I guess, new deals I mean before you can kind of pursue some of those transactions that you highlighted.

Does <unk> need to raise equity to fund that is that kind of.

Allison Marina: So how aggressive you get really depends on where your cost of capital kind of trends. Yeah, so we look at each deal with a mix of debt and equity tailored to that deal. But generally, we look to acquire 75 bits wide of our cost of capital considering both debt and equity sources. And yeah, Mike, with our forward equity position today, yes, we look at deals relative to, as Allison says, there's a marginal cost of capital for, for, for the company and relative to that deal, but incremental external growth will require additional new, Okay. And are you comfortable with your current leverage metrics right now? I mean, would you want to kind of trend lower from that 7, 7 plus type range to a more midpoint of your longer term target? And so we're sitting right at seven times from an adjusted net leverage perspective. And so that's a very, obviously, very comfortable place for us.

Well, we should be expecting so how aggressive you get really depends on where your cost of capital kind of trends.

Yes, so we look to each Joe with a mix of debt and equity tailored to that deal, but generally we look to acquire 75 <unk> of our cost of capital considering both debt and equity sources.

Yeah, Mike with our with our <unk>.

<unk> equity position today, yes, we we look at deals relative to 1000 tests into the marginal cost of capital for.

For the company and relative to that deal but.

Incremental external growth will require additional new capital.

Okay, and then are you comfortable with your current leverage metrics right now I mean would you want to kind of.

Im trying to lower from that seven seven plus type range to more mid point of your longer term targets.

And so we are sitting right at seven times from a.

Adjusted net leverage perspective, and so that's a very obviously very comfortable place for us.

Okay, great. Thank you.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Allison Marina: Okay, great. Thank you. Thank you. Our next question is a follow-up from Michael Griffin of Citi. Please proceed with your question. Thanks for taking the follow-up. Just a quick question on the guidance.

Our next question is a follow up from Michael <unk> of Citi. Please proceed with your question.

Thanks for taking the follow up just a quick question on the guidance curious if there is any capitalized interest embedded in the 2024 guide.

Michael Griffin: Curious if there is any capitalized interest embedded in the 2024 guide? So as we continue to build out FDA Atlanta, yes, incremental borrowings would, would, would, you know, would draw interest that we would be able to capitalize. So, no change in that expectation. Obviously, all developments are treated that way.

So as we continue to build out FDA Atlanta, yes, incremental borrowings would withdraw.

Withdraw interests that we would be able to capitalize so.

No change in that expectation, obviously, all developments are treated that way.

Michael Griffin: Great, thanks. Thank you. Our next question is from Michael Lewis of True Securities. Please proceed with your question. Thanks. I'm sorry if I missed this. I got on a little late.

Great. Thanks.

Okay.

Thank you.

Our next question is from Michael Lewis of Trust Securities. Please proceed with your question.

Thanks, I'm, sorry, if I missed this I got on a little late.

Michael Carroll: You did a few shares in the forward offering. I just wanted to ask about the pricing, right? The pricing on the shares was below consensus NAV by a material amount. And I know this is a dangerous question.

Did a few shares in the in the forward offering I just wanted to ask about the pricing the pricing on the shares was below consensus NAV by a material amount and I noticed that a dangerous question.

Meghan Baivier: But how do you think, you know, about a price that you wouldn't issue below? Or, you know, how do you think about protecting the equity value? Yeah, it's obviously a balance, Mike, I think we're seeing opportunities where equity kind of in the low $13 range makes a ton of sense. And, you know, those are certainly assets that are going to come wide to that, to that type of implied cap rate way to discuss capital. And so, to the extent we see those opportunities, and they are maybe opportunistic, we will look to bring them in. They're consistent with our portfolio and help resume that growth path that we're looking to get back on. Okay. And then I guess this is a follow-up to a follow-up.

But how do you think.

Price.

Wanted to issue below.

Or how do you kind of think about protecting the the equity value.

Yes, it's a balance of assignment, Mike I think we're seeing opportunities where equity kind of in that low $13 range makes a ton of sense.

And as.

Those are certainly assets that are going to come from wide to that to that type of implied cap rate weighted average cost of capital.

So to the extent, we see those opportunities and they are may be opportunistic we will we will look to to bring them in they are consistent with our portfolio in health.

Resume.

That growth path that we are looking to get back on.

Okay and then.

Darrell W. Crate: You know, just on the dividend, you talked about the predictability of cash flows in relation to the dividend policy. But, obviously, when you set that dividend, you didn't predict, obviously, that you'd be, you know, materially below your cash flow. You raised the dividend in 3Q21, but you haven't covered it since 3Q22. You know, I get that the company is built for stability, and I know the dividend is a big piece of that. But I guess this goes back to kind of the other questions people ask. You know, I guess you've answered this. It sounds like you're willing to fund this for, you know, a material amount of time. Just confirming. Yeah, no. I mean, the answer to that is yes.

Hi, Yes. This is a follow up to a follow up just on the dividend.

You talked about the predictability of cash flows in relation to the dividend policy.

But obviously when you set the dividend.

You didn't predict obviously that you'd be material below your cash flow you raised the dividend in <unk> 'twenty, one you havent covered at <unk> 22.

I get the.

The company is built for stability and I know the dividend is a big piece of that but I guess this goes back to kind of the other questions people ask.

I guess you've answered this it sounds like Youre willing to fund that score for.

A material amount of time.

Just confirming I guess.

Yes.

Darrell W. Crate: I mean, it's not a material amount in the context of, you know, some of the opportunities that we're seeing, and we're aware, not blind to, you know, the issue or the dollars, but as we look out, again, with $6 billion of government money that's going to, you know, as we release it, it feels like there's no uncertainty, you know, in the future. You know, I think sometimes we debate whether we should give guidance for the next five years, just to, you know, sort of put it out there. And, as we look at these development opportunities and some of what we see in the pipeline, we feel very good that we're going to get to a place that covers the dividend and also continues to grow it. I really appreciate it. Thank you. Yeah, no, thank you.

The answer to that is yes, I mean, it's not a.

We don't look at it as a material amount in the context of some of the opportunities that we're seeing and we're aware of and are not blind to it.

The issue.

The $1, but as we look at again with $6 billion of government money, that's going to as we release that.

It feels like there is no uncertainty in the future and I think sometimes we debate maybe we should give guidance for the next five years.

Just to sort of put it out there.

And as we look at these development opportunities.

What we see in the pipeline.

Feel very good that we're going to get to a place that covers the dividend.

And also continues to grow it.

Okay really appreciate it thank you.

Darrell W. Crate: And we really appreciate the question, too. I mean, because it is something we are different than the office, and it is that predictability and stability. And we're not just saying it.

And we really appreciate the question too I mean, because it is it is something we are different than office and it is that predictability and stability and we're not just saying it.

Darrell W. Crate: I mean, if you look at the term of the leases and the real dollars that are coming in, our business operates over years, not quarters. And so we think the dividend is an important part of the story, and I don't think we're being dogged about it. I just think in the context of the business, the profile, and the cash flow that we have over these coming years, we feel very comfortable with where the dividend is. Thank you. Our next question is from Bill Crow of Raymond James. Please proceed with your question. Hey, good morning, and Darrell. And given the question line, not only this quarter but past quarters, are you increasingly feeling like a little bit of a, uh, round peg in a square hole from the rate perspective isn't it the right strategy for this company to keep that rate rapid? What was the last word you said, Bill? I'm sorry.

If you look at the term of the leases in real dollars that are coming in.

Our business operates over years not quarters.

And so and we think the dividend is an important part of the story.

I don't think we're being dogged about it.

In the context of the business the profile and the cash flows that we have over these coming years, we feel very comfortable with the dividend.

Thank you.

Our next question is from Bill Crow of Raymond James. Please proceed with your question.

Hey, good morning Daryl.

Given the question line not only this quarter, but quarters are you increasingly feeling like a little bit about.

Round peg in a square haul from a REIT perspective right.

Our rates strategy fluids company team to keep that Robert.

There was less where would you say bill I'm sorry.

Bill Crow: I'm just, I'm just wondering about the, you know, longer term, whether that REIT structure is the right place for Easterly. Yeah, no, I think it's a good question. You know, but it's, I think that, again, having the profile of the cash flows that we have, we've always expected there to be a little bit more appreciation because we are the most secure set of cash flows, you know, that of any of the REITs that are out there, and only for maybe, you know, 10 days during COVID did we see the real premium of that certainty and stability. I think there are things that we can I mean, you see, when we sit with debt providers and we talk about our business, we're strongly encouraged to put more leverage on the company or understand that that's a capability. And we do have, you know, strength in that full faith and credit backing of some of our rent profiles.

Just wondering about the longer term whether that REIT structure is the right place for easterly yes.

Yes, no I think it's I think it's a very good question.

But I think that again, having the profile of the cash flows that we have.

As expected there to be.

A little bit more appreciation because we are the most secure a set of cash flows.

Have any of the Reits that are out there and only but for maybe 10 days during COVID-19.

See the real premium of that certainty and stability.

I think there are things that we can do on our cost of debt I mean, you see the when we sit with the debt providers and we talk about our business.

We are strongly encouraged to put more leverage on the company.

I understand that Thats a capability.

And we do have strength in that full facing credit backing of some of our rent profile. So I think we can be clever on that front.

Darrell W. Crate: So I think we can be, you know, clever on that front in finding some solutions where we can be very competitive relative to other REITs on our cost of debt. I think that we also, you know, as you know, as you know, putting 15% of our portfolio into, you know, state and local and government adjacent, we think it's smart, because we can find buildings with, you know, similar close credit ratings, very high credit ratings, and with escalations. And we do think if we're adding another 80 to 100 basis points to our core FFO, that gets our cash flow profile more in line with the expectations of REITs broadly. Yeah, I think it's sometimes our point of view. I, you know, I would sort of go out on a limb and say, I think if we ask our analysts to pick the stock that they want to hold for 20 years, I think lots of folks might pick us.

Finding some solutions, where we can be very competitive relative to other reads on our cost of debt.

I think that we also as you as you know.

No.

15% of our portfolio into state and local and government adjacent we think it's smart because we can find buildings with similar similar close credit rating very high credit rating and.

And with Escalations and we do think if we're adding another 80 to 100 basis points and our core <unk> that gets our cash flow profile.

Q4 2023 Easterly Government Properties Inc Earnings Call

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