Q4 2024 Easterly Government Properties Inc Earnings Call
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Speaker Change: Greetings. Welcome to Easterly Government Properties' fourth quarter 2024 earnings conference call. At this time, all participants are in listening mode. After the speaker's presentation, there will be a question and answer session between the company's research analyst and Easterly's management team.
Speaker Change: To ask a question during the session, analysts will need to press star 1-1 on their telephone. They will then hear an automated message advising their hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lindsay Winterhalter, Head of Investor Relations. Please go ahead.
Speaker Change: 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.
Speaker Change: Although the company believes that its expectations are as reflected in any forward-looking statements are reasonable, it can give no assurance that these expectations will be attained or achieved.
Speaker Change: Furthermore, actual results may differ materially from those described in the forward-looking statements.
Speaker Change: 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 filings.
Speaker Change: The company assumes no obligation to update publicly any forward-looking statements. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures, such as funds from operations, core funds from operations, and cash available for distribution.
Speaker Change: I'd now like to turn the conference call over to Darrell Crate, President and CEO of Easterly Government Properties.
Darrell Crate: Thank you, Lindsay. Good morning, everyone, and thanks for joining us for this fourth quarter 2024 conference call. We're in the midst of a shift in how government will function. Some of the headlines are dramatic. The actions we see show us that the change is real.
Speaker Change: And we're pleased to say that we have been underwriting to Doge before Doge, you know, since we founded the company.
Darrell Crate: What I mean is that we have been focused on truly mission-critical facilities in agencies that align with what the American people would imagine their government does well.
Darrell Crate: Law Enforcement, Care for Veterans, Protecting the Food and Legal Drug Supply, just to name a few.
Darrell Crate: We're pleased to share the progress we've made in strengthening our partnerships with the government's mission-critical agencies.
Thank you.
Darrell Crate: The Department of Government Efficiency, or DOGE, has made speedy progress in cutting wasteful spending across federal agencies and optimizing expenditures on its real estate portfolio.
Doge's message to the American people is clear.
Speaker Change: Taxpayer funds must be utilized on government functions critical to the safety and well-being of the country. Its real estate portfolio is no exception. As a private sector specialist, we have a long-time proven track record of delivering cost efficiencies to the agencies that we serve.
Speaker Change: Through the GSA, the federal government owns over 1,500 buildings. The average age of its owned facilities is over 50 years, and it holds over $80 billion in deferred maintenance and repair liabilities as of fiscal year 2022.
Speaker Change: This is a remarkable 57% increase from just 5 years earlier.
Speaker Change: This exists in stark contrast to our portfolio of state-of-the-art Class A assets which hold a weighted average age of 15.7 years.
Speaker Change: These figures underscore the importance of the GSA's outlook as published on February 12th of this year.
GSA States and its press release.
Speaker Change: supporting the return to office of federal employees and taking advantage of a stronger private-government partnership in managing the workforce in the future.
Speaker Change: As a private sector partner to the GSA, we have championed government efficiency long before DOJ was created.
Speaker Change: Take our development projects at the FDA, for example. We estimate we can deliver a laboratory to the government three times cheaper and notably faster than it would cost for the government to develop and own it itself.
Speaker Change: The GSA and DOJ have recognized the value in federally leased real estate as a source of cost efficiency for taxpayers.
Speaker Change: and we are uniquely positioned to help them deliver quickly. Thomas Shedd, the GSA's Deputy Federal Acquisition Service Commissioner and Director of Technology Transformation Services.
Speaker Change: recently echoed this sentiment directly to his staffers stating the intention of the GSA and the whole federal government is to reduce the number of old buildings that are owned with high liabilities in favor of new or leased buildings which can be more flexible and are more modern.
Speaker Change: While we see Doge in the headlines, as we've said, we believe mission-critical properties will continue to be an important and ongoing component of the government real estate portfolio.
Speaker Change: As evidenced by that, just last week, we renewed a 33,000-square-foot, firm-term, non-cancellable lease for the U.S. Army Corps of Engineers in Portland, Oregon.
Speaker Change: While typically immaterial to our investors, we believe this execution is significant given the renewed emphasis on government efficiency.
Speaker Change: Allison will go into this later on our call, but 95% of our portfolio today is comprised of firm term leases and we look forward to strengthening its weighted average lease term under this new administration.
Speaker Change: A second emerging theme with DOJ is the redistribution of government spending away from Washington.
Speaker Change: Recently, confirmed FBI Director Kash Patel stated that he will relocate 1,500 agents from the DC headquarters to field offices like ours across the country.
Speaker Change: This should help the FBI fulfill its essential role in tackling high-profile crime from homicides to terror threats, drug enforcement, gang violence, and more.
Speaker Change: From Salt Lake City, Utah to Albany, New York, our FBI field offices have been housing these operations all along, and we look forward to supporting the agency as it increases its footprint across the country.
Speaker Change: As DOJ addresses the inefficiencies that exist in the thicket of the federal bureaucracy, we've continued to execute accretive acquisitions with a renewed emphasis on the cost-saving value proposition we deliver to our government agency partner.
Speaker Change: We closed 10 new assets, either wholly owned or through our joint venture, in 2024. We also materially expanded our total addressable market through leasing to investment-grade, government-adjacent tenants like Northrop Grumman.
Speaker Change: And we expect our exposure in the sector to expand as defense-focused corporations demonstrate a consistent demand for secure facilities to fulfill their government contracts.
Speaker Change: We remain focused on growing the portfolio, executing accretive lease renewals, and acquiring buildings that add value to our shareholders. We believe we're well positioned to execute these stated priorities.
Speaker Change: Thank you again for taking the time to join us this morning. And with that, I'll turn the call over to Allison Marino, our Chief Financial and Chief Accounting Officer.
Allison Marino: Thanks, Darrell. Good morning, everyone. I'm pleased to report the financial results for the fourth quarter and full year 2024.
Allison Marino: both on a fully diluted basis. Net income per share was $0.05, and core FFO per share grew 3% year-over-year and was $0.29.
Our cash available for distribution was $25.1 million.
Allison Marino: For the year, also both on a fully diluted basis, net income per share was $0.19, and Core FFO met the upper end of our raised guidance at $1.17.
Our cash available for distribution was $100.9 million.
Allison Marino: In 2024, we successfully delivered 3% earnings growth, a direct result of cultivating a robust pipeline of opportunities.
Allison Marino: A critical element of this success has been our ability to expand our total addressable market, opening new avenues for growth in the state and local and government-adjacent space.
while maintaining our disciplined approach to portfolio management.
Allison Marino: This expansion not only enhances our near-term prospects, but positions us strongly for continued long-term value creation.
Thank you for joining us.
Darrell Crate: As Darrell mentioned, a cornerstone of our strategy is the recognition that our current portfolio of assets is considered mission critical.
Darrell Crate: Many of the government operations we serve are dependent on the continued functionality of our real estate, with key tenants relying on these spaces to perform essential work.
Darrell Crate: This unique characteristic further solidifies the resilience of our business as the demand for emission-critical properties continues to outperform commodity government.
Bye.
Darrell Crate: Subsequent to quarter end, we amended our $100 million Senior Unsecured Term Loan Agreement originally executed in 2016.
Darrell Crate: By doing this, we have successfully extended the maturity date of the loan from 2025 to 2028.
Darrell Crate: Additionally, we have secured two one-year extension options, which could extend the maturity date to 2030, subject to certain conditions.
Darrell Crate: We also increased the borrowing capacity available through the accordion feature, providing us with greater flexibility moving forward.
Darrell Crate: We believe this amendment underscores the strength of our banking relationships and the stability of our balance sheet.
Darrell Crate: Thanks to these favorable terms, we can now focus even more intently on executing our disciplined investment strategy and continuing to drive long-term growth for our shareholders.
Darrell Crate: Additionally, in connection with the amended term loan, we entered into an interest rate swap that provides greater certainty around our rate exposure. These moves will strengthen our ability to pursue our strategic goals.
and the U.S. government.
Darrell Crate: There have been a lot of questions circulating in the news about the government's ability to cancel a lease. So here are the facts as it relates to our leases.
Darrell Crate: This is not necessarily true for a defense lease, so please keep that in mind.
Darrell Crate: A GSA or a VA lease can be structured in one of two ways.
Darrell Crate: First, it can be a firm term lease or non-cancellable for the entirety of the term. Or second, it can be a combination of firm term and soft term.
Darrell Crate: A typical example you'll see is a 20-year lease with a 15-year firm term.
Darrell Crate: If a lease is in firm term, the GSA cannot unilaterally cancel the lease. To do so unilaterally would be the equivalent of a government default.
Darrell Crate: When a lease is in soft term, the government is allowed to terminate its lease, but because our assets are so young and important to key government agencies.
Darrell Crate: The company believes this does not pose a significant risk to the portfolio.
Darrell Crate: As of quarter end, roughly 5% of the portfolio's annualized lease income is in soft term, and we feel comfortable with the ongoing need for those facilities.
Darrell Crate: The weighted average remaining lease term of the entire portfolio is exactly 10 years. If you back out the portions of the portfolio that have soft term, the weighted average remaining lease term is still a healthy 8.6 years.
Darrell Crate: We have curated a portfolio where no more than 6% of our annualized lease income rolls in any given year, and we remain committed to our high credit leases with the U.S. government.
Darrell Crate: The government at renewal is known and that TI work is complete.
Darrell Crate: As such, there can be a lag in providing releasing data relative to the point at which we have signed the renewal lease.
Darrell Crate: As we scale and grow over the coming years, we remain focused on attractive tenant retention rates.
Darrell Crate: Ensuring that no single asset erodes value is a priority as we balance expansion with careful stewardship of our existing properties.
Darrell Crate: As of December 31st, 2024, we have renewed 34 lease assistance IPO. Of that 34, 22 are renewals for which there was a no associated renewal TI work or renewal TI work has been complete and accepted by the government.
Thank you for joining us. We appreciate it.
Darrell Crate: There are 12 other renewals with pending TI projects. This combined 2.3 million square feet across 34 renewals includes PTO Arlington, IRS Fresno, and various smaller leases at Buffalo.
Darrell Crate: When we exclude these assets, the average rent spread achieved on the remaining renewals is anticipated to be 16%, including an estimated amount of $41.55 a square foot of TI utilized by the government.
Darrell Crate: The weighted average total remaining renewal term for these leases was 17.4 years.
Darrell Crate: Stepping back, we achieved our 2024 objectives and we are on track to continue our strong execution.
in 2025.
beyond.
Darrell Crate: Our long-term vision remains clear. We have a strong pipeline, a disciplined growth strategy, and a continued focus on operational excellence as we look to the future.
Darrell Crate: I remain optimistic about the opportunities ahead and look forward to keeping you informed on our continued progress.
Darrell Crate: Before handing the call back to our operator, I'm pleased to report that we're bringing up the bottom end of our core FFO guidance for 2025 to a range of $1.18 to $1.21 on a fully diluted system.
and Ivanka Trump
Darrell Crate: This guidance assumes $100 million in wholly owned acquisitions and $25 to $75 million of gross development-related investment during 2025. This is consistent with our established goal of delivering 2 to 3% core FFO growth for shareholders.
Darrell Crate: With that, we thank you for your time this morning and for your ongoing support and commitment to our shared goals. I will now turn the call back to Shannon.
Shannon: Thank you. As a reminder to the analysts, to ask a question you will need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster.
Thank you. Bye.
Speaker Change: Our first question is from Michael Griffin of Citi. Please proceed with your question.
Speaker Change: Appreciate all the commentary there. Maybe just going and starting off with the acquisition pipeline and the opportunity set that you're saying, you know, if I recall, you're looking at deals, you know, around the mid eights versus your cost of capital, which on an implied cap rate basis, probably the mid sevens.
Speaker Change: How are you viewing the accretion of these deals now just given it seems like we're going to be at higher interest rates for longer than previously expected?
Speaker Change: And maybe Allison and I will just, you know, ham and egg the answer to this a bit. You know, which is, you know, we have a strong, really strong pipeline, I mean, both in acquisitions as well as development.
and opportunity.
Speaker Change: You know, the broad context, while, you know, we spend a lot of time talking about Doge on investor calls and with the media, but the background is banks are still not lending, you know, to particularly developers.
Speaker Change: And that being the case, having capital puts you in a very strong position. And, you know, we've seen for a set of sellers that are either facing maturities or it's just time for them to sell an asset. And they're looking and saying interest rates are going to be longer.
Speaker Change: you know, hire for longer, that now is an appropriate time to sell. So, the pipeline continues to grow, I think, with opportunities that are very attractive.
Speaker Change: As you know, Michael, I view our business principally as a net lease business in that we look at cost of capital, we look at the spread, we look at the risk of what we're underwriting.
Speaker Change: So I think we have plenty of accretive acquisitions. We've been conservative, I think, in our guidance. I mean, in that, as you heard, we have about $100 million of acquisitions in the guidance range.
Speaker Change: Obviously, you know, as we think about targeting a midpoint, when we give parameters around what the company is going to do, having a two and a half percent growth rate is what we're targeting and really the course that we're setting ourselves on for the next, you know, set of years.
Speaker Change: And so what we've got in our pipeline and harvesting that, you know, gets us to those levels. If we're in a space where we can announce more acquisitions, you know, in any year, we'd probably bring up the lower end of the guidance range unless it's a robust amount.
Speaker Change: And that positions us very well for our earnings growth in 2026, which again doesn't seem like a terribly high hurdle as we've increased our TAM and continue to build what we build.
Speaker Change: And Allison's doing a terrific job on the capital structure and, you know, we've had some good news regarding debt, you know, that's been in our past and how we're modifying that in the future. You know, as you know, REITs generally, as debt has rolled over, you know, face a headwind in their earnings.
Speaker Change: But I think we have plenty of opportunities and creativity in ways for us to get cheaper cost of capital. What's your thought, Allison?
Speaker Change: Yeah, so what I would add there is we are looking to an incremental cost of capital as we spread invest to the portfolio of acquisitions.
Thank you. Thank you.
Speaker Change: We are looking to generate that 50 to 100 basis point spread range on the next deals or the broader pipeline, and that will allow us to achieve our growth goals. But that certainly accounts for where interest rates are and are expected to be over the next few years.
Speaker Change: Appreciate all the context there. And then, Darrell, just going back to kind of the DOJ initiative, obviously, I think you guys have done a good job highlighting the difference of Easterly's portfolio relative to what the market might consider traditional government office space. But as you look to kind of the idea of austerity, whether it's
Speaker Change: the Pentagon potentially looking to cut its budgets or requisitions getting delayed for new projects. Could that impact the external growth side, whether it's being awarded new developments or some of these government-adjacent properties maybe not being as attractive, given worries about defense spending? Any commentary there would be helpful.
Speaker Change: Yeah, I mean, I think in the short term, I guess the metaphor that I've used internally is we're going to have some like a light chop turbulence here as
Speaker Change: as everybody figures out what is going on in the government.
Speaker Change: But we are all set for a very smooth landing because
Speaker Change: If you squinted our company, we've spent over a decade dedicating ourselves to be a specialist in helping in creating a private partnership with the U.S. government.
Speaker Change: And what that really means is improved mission. And I'll tell you, when you step back, maybe this is a little too detail-y, but when we speak to folks who work at the GSA, they care deeply about housing folks in the government to satisfy their mission.
Speaker Change: And, candidly, what I see from the outside and being somebody who works in private business is that they spend just as much time figuring out the right solution, you know, for the facilities that create mission as they do navigating the bureaucracy.
Speaker Change: And it's not irrational because, example, we would come to the GSA and have a couple million bucks that we could save. And the reality is they think that's a great idea. These agents and folks who work for the government are terribly hardworking.
and sincere and respect the taxpayers.
Speaker Change: But they would say, you know, the minimum amount of time that we could redo this procurement is eight months. And the reality is it'll probably take closer to three years.
Speaker Change: So, our choice is, hey, we can take three years and save a couple million dollars, but we know that facility that they're housed in today is not adequate, and we need for this mission to be accomplished in a way that would make the American people proud. We need a new facility.
Speaker Change: And it's that process that really needs to get fixed. That's what we call the thicket of bureaucracy.
Speaker Change: And there is no GSA member that I've ever met that's excited They want to do the right thing for the American people.
Speaker Change: to be operating and operating quickly. And that's why I really applaud their efforts and the DOJ efforts to look to have greater lease portfolio. We're good at real estate. They're good at mission. We can't catch criminals, but we certainly can replace paint carpet and make sure the roof doesn't leak.
Speaker Change: and that partnership will serve the government very well over time and so when we look forward to getting out of this just little short-term period I think we're one of the very best positioned to help them find savings and as the example that FDA building that I'm mentioning that's in Denver
Speaker Change: There are still people who are doing some work on that for reasons that are unaccountable to me because we can deliver it for a third of the cost, you know, that they're planning on. So that is what will get fixed and I know, I feel 100% aligned with the GSA to help them achieve their objective.
is. So.
Maybe more than you're asking, but.
Nope, really appreciate that, Darrell. Thanks so much.
Yeah.
Speaker Change: Our next question is from John Kim of VMO Capital Markets. Please proceed with your question.
John Kim: Thank you. Good morning. Good morning. How are you? Hey, Darrell. How's it going?
John Kim: Question on office utilization, which is typically a gauge of how much potential access is in leased real estate. Historically, I know you've been
Speaker Change: commenting that it's hard to measure within your portfolio. But I'm wondering if you find that that's an important measure for the DOJ leadership, and if it's something that you could take a more proactive approach in engaging.
Speaker Change: Yeah, I mean, it's a great question. It's kind of, you know, we're trying to ask ourselves a version of that question almost every day.
Speaker Change: incredibly limited exposure. I think those are the places where they look at at square feet, they look at utilization, and they're trying to navigate low utilization, return to work, and trying to get it figured out. But there will be a reduction in federal office footprint in Washington if they
Speaker Change: A bunch of our facilities, you think about the lab down in, you know, I mean, you know, let's just take the like the DE lab in Pleasanton.
Speaker Change: There's a room that is very stable, it houses a $600,000 machine.
Speaker Change: In that machine, you can take any organic drug, put it in that machine, go get yourself a nice little Nespresso and come back. And it will tell you the exact, you know, think if Columbia had zip codes, it would tell you the zip code that that drug came from.
Speaker Change: And what's the utilization in that room? You know, I don't know, but it has to exist.
Speaker Change: And so when we look at these mission-critical facilities, they have facilities that help them execute mission. And we fully know that they've been used in a lot of utilities all through COVID. And I don't think COVID solved the illegal drug problem.
Speaker Change: And when we think about the buildings that we're trying to maintain and deliver for the U.S. government, they have those kinds of functions. And I could go on about romaine lettuce.
Speaker Change: the cotton that we import, to the drugs that get filled for the veterans.
Speaker Change: All of that is happening and so I see on the other end, the mission delivery is very strong and we see that happening in our buildings when we go and visit and we see it in the numbers that the government publishes about what they're up to and what they're doing.
Speaker Change: Can you provide any commentary on the $100 million of acquisitions that you now have in guidance, whether they will be GSA leases that were in your bullseye historically or if they're going to be the non-GSA leases that you've been requiring more recently?
Yeah.
Speaker Change: I mean, I think we'll look probably to the state and local as well as non-adjacent for that bit that's in the guidance.
Speaker Change: Okay and then the final question on AFFO or CAD growth. I was wondering if you could provide some commentary on where you think that goes just given there's higher CAPEX and TI's in some of these government-adjacent leases.
Speaker Change: Great question. Sure, so we are committed to the path of growth that we've been talking about for the last year and growth in CAD comes through a combination of successful lease renewals
Darrell Crate: And they are also driven by opportunities that Darrell mentioned that we're seeing in the market on an acquisition.
Darrell Crate: So we're evaluating CAD Impact as we look at new deals as well and trying to do a creative deals on that end.
what we're.
Darrell Crate: is what we're focused on. I think we'll have some good news as we look to next year.
Darrell Crate: And, but that said, you know, our stock price at $11 provides, the paradox of this business is
Darrell Crate: Our cost of capital is going down and the price of buildings is staying the same. And at $13 or $14, we can kind of clean up the market. So that's where we find ourselves. We think we're super excited about the projects and leaning into what we're doing.
Darrell Crate: I mean, maybe I'm not allowed to say stuff like this, but if the stock is at $13, covering the dividends, no problem. I mean, that's from where we stand today.
Got it. Thank you.
Darrell Crate: Thank you. As a reminder, to ask a question at this time, please press star 11 or your touch-tone telephone.
Our next question is from Aditi Balachandran.
of RBC Capital Markets, please proceed with your question.
Speaker Change: I know, touching on CapEx that we previously spoke about, it was a little higher this quarter, so is that a good run rate going forward?
Yeah, so Q4 does have what I would call the
Speaker Change: impact of seasonality. So typically there are a lot of projects that wrap up in Q4. On a run rate basis, I would expect to share that we're in that
Speaker Change: $1.75 to $2 per square foot range going forward. Typically Q1 capital tends to be a little bit lighter as we hit the winter months and then spread more evenly throughout the year. That's not to say a zero, it's just seasonality tends to put things in the last three months of the quarter or three quarters of the year.
Speaker Change: All right, got it. And then what's your plan for the FAA's Chicago building post the expiration? Do you plan on releasing the facility or should we think about this being a sale?
Speaker Change: So we acquired that building as part of a portfolio a number of years ago at a 20% cap rate. So this is certainly a victory in terms of the property itself. It's outperformed our underwriting by three times.
and...
Speaker Change: Our goal would be to, we are not expecting the GSA to remain in that building and we would look to a disposition.
and outcome following the expiration, whatever that might be.
Speaker Change: I mean, if anything, I mean, just a little, little, little detail on that building, which is, I mean, the degree to which, you know, today is examining what they're doing next and how they're moving forward.
Speaker Change: The tenancy in that building will either be what we expect it to be or be something a little bit longer.
Speaker Change: And if you were to go visit the place, you'd see that the market will give us a price that I think investors will be pleased by when the FAA moves to their new facility.
Great, thank you.
Speaker Change: Thank you. I would now like to turn the conference back to Darrell Crate, President and CEO of Easterly Government Properties, for closing remarks.
Speaker Change: Thank you everybody for joining us for our Year Ends 2024 conference call. We really look forward to posting you on DOJ and all the events that we have to move the company forward in the coming quarter and we'll be back to chat with you in three months. All the best.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.
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