Q3 2024 Easterly Government Properties Inc Earnings Call
Greetings. Welcome to the East of League of Mid-Propody Stored Quarter, 2024, Ernix Conference Call. At this time, we'll participate on a list-nilly mode.
After the speaker's presentation there will be a question-answer session between the company's research analyst and East release management team. So as the question-burner session, analyst will need to press star-11 on their telephone. They will then hear an automated message advising their hand is raised.
Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to you, speaker today. Lindsay Winterhalter, Senior Vice President of Investor Relations, please go ahead.
Lindsay Winterhalter: Good morning. Before the call begins, please note that certain statements may during this conference call, may include statements that are not historical facts and are considered for looking statements within the naming of the private securities litigation reform act of 1995.
Although the company believes that its expectations is reflected in any four-looking statements are reasonable, it can give no assurance that these expectations will be achieved.
Furthermore, actual results made different materially than 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 10K filed with the SEC and in its other SEC filings. The company seems no obligation to update publicly any forward-booking statements.
Additionally, on this conference call, the company may refer to certain non-gapsign actual measures.
Such a fun term operations, core funds from operations and cash available for distribution.
The confine attabular 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 of the company's website at IR.EsterLiveReet.com.
Speaker Change: I would now like to turn the conference call over to Darrell Crate, President and CEO of Julie government properties.
Darrell Crate: Thank you, Lindsay. Good morning everyone and thanks for joining us for this third quarter conference call. Let's see through the progress that we've made in the third quarter.
Speaker Change: As we previously shared, we are executing our plan to achieve our stated growth goal of 2-3% Core FFO for shared growth year over year.
The Chieffield Confident and its ability to accomplish this goal by ex-seeding on a creative opposition, identifying and implementing operating efficiencies, and focusing our compensation plan around this group commitment to our shareholders.
We posed on 139.5 million of acquisitions in 2024, consisting of six new assets, either wholly under through our JV.
Speaker Change: We're striving to harvest a pipeline of roughly 1.5 billion in attractive potential opportunities.
We continue to closely examine our operations, both internally and externally, finding significant operational savings across the organization.
and the Tunisian Grace are well defined strategy that we believe represents the best value proposition for public reads.
In addition, our State of Gold of Achieving 2-3% Core FFO Grays target year over year. We are focusing growing CAD and achieving a targeted payout ratio below 100% by the end of 2020-6.
Speaker Change: I'm pleased with the work that has, you know, we've accomplished in the last several quarters, and I'm confident in the feasibility to navigate the company and its operations to meet these two important goals.
Of course, today's conference calls unique as the election to determine the next president of the United States is currently underway.
Speaker Change: As you know, East-Release focused on mission-critical areas of the U.S. government, law enforcement, national defense, support for our veterans and other core government functions are critical to any administration in remaining the foundation that supports our nation.
Political shifts have little influence on these functions. Their key influence is demographic trend principally driven by population growth.
Speaker Change: History shows the government consistently grows the agencies that support the safety and security of the country. And we continue to hone our defineable edge by acquiring, managing, and developing essential infrastructure that helps facilitate their operations.
Speaker Change: Our Acquisition Team is delivering for shareholders and a creatively growing the portfolio through mission-critical assets, least either the U.S. government, high credit U.S. states, with government adjacent tenants.
Speaker Change: with an expanded total addressable market, our pipeline is robust and our ability to invest in this strong.
Our development team is making great progress at our project site and we need a strong partner to our US government tenant.
We have two projects underway, one that is expected to deliver at the end of 2025 and the other in the middle of 2022. The team is pursuing further projects with the intensive delivering in 2022 and 28.
Speaker Change: Speaking of strong partnerships, our asset management team has been working alongside the U.S. government to ensure we are operating efficiently and effectively to meet the everyday needs of the key government agencies while also delivering for our shareholders.
Speaker Change: Finally, the finance team has been working with equity providers and cultivating relationships of debt providers in order to support our robust pipeline. All verticals are working together to deliver on our goal of achieving 2-3% for FFO growth year over year for our shareholders.
Speaker Change: This quarter we made progress by closing on our most recent VA acquisition in Jacksonville, Florida, and two highly secure assets in Dayton, Ohio, and Aurora, Colorado, least in Northrop and both of which sit adjacent to important military bases.
Speaker Change: We've collective attention fixated on the escalating conflicts across the world. Supporting the heroes who defend our nation comes with renewed urgency.
Speaker Change: Assets like VA Jacksonville have enduring missions as over 1.4 million veterans reside in the state of Florida. They represent about a third of the largest vet population in the nation.
Speaker Change: Veterans serviced within VA Jacksonville have access to primary and specialty health care services including physical and occupational therapy, traumatic brain injury treatment, and rehabilitation medicine.
Speaker Change: The property also maintains a domiciliary, serving as a transition facility for veterans who suffer from a service-related disability.
Further supporting our veterans, VA Charleston is a highly automated facility that uses state-of-the-art robotics and other production equipment to fill and mail prescription medicine.
Speaker Change: With approximately 500 employees working two shifts, 20 hours a day, this facility is responsible for filling 110,000 mail order prescriptions daily. It's an impressive, modern facility.
Speaker Change: During the quarter, we also closed on the acquisition of an asset that's 100% leased to Northrop Grumman Systems Corporation, an investment-grade rated multinational aerospace and defense company.
Speaker Change: The facility maintains robust security design standards in connection with the tenant's contracts with Wright-Patterson Air Force Base, the main access point for the Air Force Research Laboratory's headquarters and the Air Force Institute of Technology.
Speaker Change: We also acquired another facility housing essential operations leased to Northrop Grumman in Aurora, Colorado.
Speaker Change: constructed to meet the security standards of the Director of National Intelligence for the processing, storage, and discussion of sensitive compartmented information.
Speaker Change: The properties billed out is directly related to Northrop Grumman's contracts with Buckley Space Force Base, which provides missile warning operations to the United States and its international partners, while supporting 3,500 active duty members from every service.
Speaker Change: These acquisitions are important milestones for Easterly in the government-adjacent space and materially expand our total addressable market. We see consistent demand from defense sector companies with government contracts and a need for specialized, secure facilities.
Speaker Change: As a national security and international partner, defense continues to be prioritized amid global unrest and we anticipate our exposure in the sector to expand.
Speaker Change: Both our Aurora and Dayton facilities fulfill our approach to owning mission-critical real estate, and we're excited to continue to pursue accretive deals in the government-adjacent sector as an important component of our ability to deliver earnings growth to shareholders.
Speaker Change: In connection with our growth pipeline, we want to be very clear that we've charted a path towards lowering our payout ratio under a defined timeline. We've worked this year to model this path and we believe we are on track to achieve sustained dividend coverage within 24 months.
Speaker Change: Our focus is on continuing to execute this strategy with disciplined balance sheet management and operational efficiencies. We're committed to the earnings guidance we provide and will continue to honor that commitment as responsible stewards of our investors capital.
Speaker Change: And finally, in closing, we observe that price dislocations will exist over the coming year as private sellers have limited access to capital. We believe this dynamic presents more exciting opportunities for us as we again continue to focus on delivering 2-3% core FFO growth year-over-year for our investors.
Speaker Change: With that, we're introducing our 2025 core FFO guidance on a fully diluted basis in a range of $1.17 to $1.21. We believe we have the right pipeline, the right cost of capital, and the right team to deliver on this forecast.
Speaker Change: The future looks bright for our company, and we plan to enhance our portfolio under the foundation of stable cash flows derived from the U.S. government.
Speaker Change: Thank you again for taking time to join us this morning and now I'll hand things over to Allison Marino, our Chief Financial Officer.
Allison Marino: Thank you. Thank you.
Allison Marino: Thanks Darrell. Good morning everyone. I am pleased to report the financial results for the third quarter.
Allison Marino: Both on a fully diluted basis net income per share was 5 cents and core FFO per share grew to 30 cents.
Allison Marino: Our cash available for distribution was $25.1 million.
Allison Marino: As Daryl mentioned, our cost of capital continues to improve and this should enable us to accelerate our acquisition strategy and deliver earnings growth to shareholders.
Allison Marino: With an expanded total addressable market, which now includes assets leased to government contractors, our buying pool is materially larger and we seek to take advantage of that.
Allison Marino: While the acquisitions team is focused on growing the portfolio through mission-critical assets, we continue to renew leases in our existing portfolio, lengthening our weighted average remaining lease term and growing future cash flows.
Allison Marino: In total, we have renewed all of our significant 2024 leases and look towards 2025 and beyond to capture embedded growth opportunities on a same-store basis.
Allison Marino: Bank markets are open to us because we are not office, and banks view our assets as some of the most secure that they can finance.
Allison Marino: We are in constant dialogue with lenders to translate our market-leading tenant credit into tighter spreads and a cheaper cost of capital.
Allison Marino: We have been able to further capitalize on the shift in underlying market fundamentals by recently raising roughly 40 million dollars in forward equity on our ATM.
Allison Marino: With our more attractive cost of capital, we are positioned to significantly increase our acquisition volume.
Allison Marino: With a larger pool of assets to acquire, a strong portfolio, a cheaper cost of capital, and improving market dynamics, we believe we can chart a course for sustained 2-3% earnings growth year-over-year for the foreseeable future.
Allison Marino: Turning to guidance, we are maintaining our full-year core FFO per share guidance for 2024 in a range of $1.15 to $1.17 on a fully diluted basis.
Allison Marino: on top of the 139.
Allison Marino: $1.5 million in operating properties we have already acquired year-to-date, either on a wholly owned or pro-rata basis. This guidance assumes an additional $90 million in acquisitions later this year.
Allison Marino: We raised equity at levels that drive accretion for these acquisitions, and we look forward to keeping you posted on exciting developments in the final months of the year.
Allison Marino: Finally, I'm happy to share that today we introduced our full year core FFO per share guidance for 2025 in a range of $1.17 to $1.21 on a fully diluted basis.
Allison Marino: This guidance assumes that we will have $25 to $35 million of growth development-related investment during the year, and is consistent with our established goal of delivering 2 to 3% core FFO growth for shareholders.
Allison Marino: With that, we thank you for your time this morning and appreciate your partnership. I will now turn the call back to Shannon.
Shannon: As a reminder to the analysts, to ask a question you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster.
Speaker Change: Thank you for watching!
Speaker Change: Thank you.
Shannon: Our first question is from Michael Griffin of Citi. Please proceed with your question.
Michael Griffin: Great, thanks. Just wanted to dive a little bit more into the 2025 guidance. Any chance you can maybe elaborate on some of the building blocks of that growth, whether it's
Allison Marino: rent bumps or expectations around upcoming lease expiries and releasing those. And then can you give us a sense of where you expect leverage to trend in the year and then how accretive acquisitions you expect them to be?
Speaker Change: Thanks. Good morning. So the range we provided indicates an expectation of likely outcomes based on things like property NOI growth, GNA levels, interest rate expectations, and of course the pipeline.
Speaker Change: And all of that is sort of maintained when we think about leverage as well. We are still very comfortable in that six and a half to seven and a half range and this guidance would put us in that range as well.
Speaker Change: Thanks, Allison, appreciate the color there. And then maybe Darrell, going back to the acquisition pipeline, it seems like you're expanding more into these government adjacent type properties, the Northrop Grumman acquisition as an example. I mean, how do you see kind of the opportunity set within that part of the pipeline? And then maybe you can give us a sense of where kind of yield expectations are relative to how you see your cost of capital.
Darrell Crate: Yeah, sure. I mean, stepping way back, when we look at the portfolio, we're going to strive to have about 15% of our portfolio in high-credit state exposure and about 15% of our portfolio in this government-adjacent space.
Darrell Crate: and continuing, of course, to have 70% of our portfolio in the GSA, VA, U.S. government full faith and credit tenant leases.
Darrell Crate: very similar and work operationally in a way that's similar to the buildings that we already own.
Darrell Crate: That's why in my prepared remarks we talk about the compartmented information space and essentially the SCIF spaces.
Darrell Crate: That's what we're used to maintaining, and those are the buildings that we understand how they operate. We have an ability to forecast their NOI.
Speaker Change: One of the things that is beautiful that you're going to love, Griff, is that these government-adjacent buildings have bumps in their leases.
Speaker Change: So.
Speaker Change: As you know, at the beginning of the year, we changed our strategy and enhanced it so that our total addressable market was larger. As I've said, we're sorting through a little over a billion five of identified buildings. We can be very disciplined in finding the right ones.
Speaker Change: I think we're able to acquire buildings at a cap rate that's
Speaker Change: 50 to 100 basis points above our cost of capital. And I think Allison's doing a great job working with a wide range of debt providers. So I imagine as we move through 2025, you know, we're going to continue to be able to maintain those spreads.
Speaker Change: in so many of the buildings where we're reaching out and identifying, they have some sort of capital issue.
Allison Marino: Either the seller has some maturing debt, you know, that they're looking to clean up their real estate balance sheet.
Allison Marino: or the private buyers that brokers would tell us would normally be present seem to be absent because they can't find the leverage that they've been able to find in the past. So as we look forward to this year, I think we're being...
Allison Marino: We were being very prudent about our guidance, you know, as Allison was saying, you know, the lower end of the range is, is us continuing to execute on the 90 million dollars of acquisitions that we need to close by the end of the year, so they'll have their full year effect for next year.
Allison Marino: and will continue to manage costs well, which Allison's doing a fabulous job housing us all.
Allison Marino: And with that, you know, with two or three hundred million dollars of acquisitions, we can get to the upper end of the range. And as we, you know, think about it broadly, you know, what we're delivering to shareholders.
Allison Marino: You know, our unlevered return in our portfolio is between 5% and 6%. Add 3% growth to that, you're getting into the eights.
Speaker Change: relative to the very low risk that we have in our portfolio, the high credit tenancy, when we look at that relative to, you know, REITs writ large, and we look at, you know, other opportunities in the capital markets for folks to invest, you know, we think that's a very attractive opportunity.
Speaker Change: We could exceed our acquisition goal that we have in our guidance, but we're at the beginning of 2025.
Speaker Change: but we're really in search of opportunities and we think the cost of capital that we've been awarded with by investors plus what we're seeing in the market gives us a really nice optimistic orientation as we start 2025.
Speaker Change: Great. That's it for me. Thanks for the time.
Speaker Change: Our next question is from Peter Abramowitz of Jeffries. Please proceed with your question.
Peter Abramowitz: Yes, thank you. Just to dig a little bit more into the comments on leverage, I think you said you could get to the high end of the range without bringing leverage up. So, just curious how you sort of see your cost of equity versus your cost of debt today and maybe how that kind of overall
Peter Abramowitz: compares to the spread. I know you said 50 to 100 basis points is sort of what you're you're targeting, but just curious sort of how you're thinking about that.
Speaker Change: Yep, so you know I think
Speaker Change: From a cost of debt perspective, from an overall cost of capital perspective, maybe to start, I would say we're in the low sevens. Certainly, higher stock prices help that for sure. But from a cost of debt specifically perspective,
Speaker Change: I would say we're in the low sixes on an unsecured basis, so for new debt, of course, not for the overall stack as we look at it.
Speaker Change: And then, you know, with that, I mean, finding acquisitions that are in the high sevens and eights is what we're seeing and, you know, the opportunities that we're acting upon.
Speaker Change: Okay, that's helpful, thank you. And then within that $1.5 billion investment pipeline, are there any portfolios out there and how much of that pipeline is made up of larger portfolio transactions that maybe we should be thinking about?
Speaker Change: No, I mean, there's nothing significant, you know, in the Billion Five. I mean, there's a couple of small portfolios, two-building, three-building kind of portfolios.
Speaker Change: But nothing that, it's a great question because it's not like there's a billion dollar portfolio and we've got a little cobble of five hundred millions of other buildings that we're looking at. I think we've got a robust pipeline.
Speaker Change: you know obviously with dislocation sellers have.
Speaker Change: They start with some higher expectations than what the market can satisfy.
Speaker Change: And, you know, I think our guidance anticipates that acquisitions can be lumpy, that we're trying to seize on dislocations and we're trying to get an attractive spread to our cost of capital.
Speaker Change: That's helpful. And one last one. Just in Aurora, I think they're...
Speaker Change: You're adjacent there to the Buckley base. There's been some conversations possibly around
Speaker Change: If Trump wins, he will be moving Space Force, at least in Colorado Springs, potentially back to Huntsville. So just curious, is that something you have to consider when you're underwriting that asset? Is that something that kind of impacts the thinking and went to the underwriting, or is that sort of not an issue there?
Speaker Change: The answer is yes. We've determined it's not an issue. I mean, there's critical functions that are at present in Buckley. We are also, we've got a couple plane tickets, you know, down to Alabama. We've been spending time understanding what's going on there as well, and so I think that we've been mindful of what the opportunity is in each of those regions.
Speaker Change: Got it. That's all for me. Thank you.
Speaker Change: Our next question is from Aditi Balachandran of RBC Capital Markets. Please proceed with your question.
Aditi Balachandran: Thank you.
Aditi Balachandran: Yep, so we have completed all of our remaining important 2024 renewals, and as we look to 2025,
Aditi Balachandran: We've got a few FBIs in the courthouse in Aberdeen. We're feeling good about those renewals as well and we're expecting net effective run spreads to be consistent with our prior achievements in that mid to high teens levels.
Speaker Change: Got it and I guess just in general as rates have been coming down have you been seeing any overall changes in the buyer pool or any more competition for specific assets?
Speaker Change: No, I mean, that's really, it feels like it's a time that is certainly in transition, because private...
Speaker Change: private buyers, which probably represent two thirds of our competition, you know, one random private buyer after another.
Speaker Change: They have...
Speaker Change: We've spent a lot of time touring, as you know, our debt providers into our facilities. It's very clear to folks who've been supportive of us and prospective folks who can give us some additional debt capacity that we're certainly not office.
Speaker Change: and they understand the credit worthiness of our tenant and the mission critical nature of our buildings. And I think we'll continue to be rewarded with access to the debt markets.
Speaker Change: That's all from me, thanks.
Speaker Change: As a reminder, to ask a question, you will need to press star 11 on your telephone.
Speaker Change: Our next question is from Michael Lewis of Truist Securities. Please proceed with your question.
Michael Lewis: Great, thanks.
Michael Lewis: The GNA expense was down materially in the quarter. I don't think it's because you split out the
Speaker Change: the provision for credit losses, because I don't think that was material in prior periods, so you could correct me if I'm wrong. Can you just talk about, you know, what drove that decrease, what the, you know, run rate might be going forward, and then also related to that, you know, do you expect to record any severance or separation costs?
Speaker Change: Great question. So with several great questions, we will try to tackle them one by one.
Speaker Change: So, for J&A, what you're seeing from a quarter-over-quarter trend is with Meghan's voluntary resignation, she forfeited all of her invested.
Speaker Change: equity awards, and we recapture the award-to-date expense with her last day. So that is driving the change on a quarter-over-quarter basis. You're correct, it was not the credit losses on a Q2 to Q3 basis.
Speaker Change: What about run rate gna for next year? Yep so run rate gna for next year we are expecting consistent levels hopefully flat to where we were this year that
Speaker Change: are not accepted.
Speaker Change: and those numbers.
Speaker Change: Okay, got it. And then, you know, on the provision for credit losses, I assume that's just an accounting construct. Is that going to be like a number that that now bounces around or maybe kind of, you know, what determined what that amount was?
Speaker Change: So without getting into a huge accounting class, it is an accounting provision that would require us to estimate.
Speaker Change: potential loss on that loan, and while we're not experiencing actual loss or default, we would have to update the probability quarterly while it is outstanding.
Speaker Change: Okay, got it. And then lastly, for me, you know, you talked about the
Speaker Change: you know, the pipeline of investment opportunities. Where does, you know, deals like this development loan fit into that? I mean, is that something where you might allocate more capital? You know, this one may be, I mean, I don't, you know, it has a purchase option, so it could turn into a loan to own. But, you know, how do you think about that, you know, that particular type of investment?
Speaker Change: I think it's an attractive use of our cost of capital. To be honest, I think it's a great opportunity for us to provide liquidity to developers who aren't able to go out to their average regional bank and get these projects financed. I think for us, we
Speaker Change: Think about it in the lens of the pipeline. It's just an asset that we understand, we can underwrite well, that we think will generate an attractive return through the lending period particularly, but also something we have potential in acquiring in the future that complements our portfolio.
Speaker Change: Our intent would be for these buildings to be part of our portfolio. It's why we're getting involved with them and we think by being helpful to a development partner it's also going to give us a terrific building at a price that's attractive relative to our cost of capital.
Speaker Change: Understood. Thank you very much.
Speaker Change: Thank you for joining us.
Speaker Change: I would now like to turn the conference back to Darrell Crate, President and Chief Executive Officer of Easterly Government Properties, please for closing remarks.
Darrell Crate: Thank you everyone and thanks for joining Easterly Government Properties third quarter 2024 conference call. We look forward to keeping posted on the coming quarters as we make progress on our pipeline of growth opportunities. Again, thanks for joining.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.