UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-36834
EASTERLY GOVERNMENT PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
47-2047728
(State of Incorporation)
(IRS Employer Identification No.)
2001 K Street NW, Suite 775 North, Washington, D.C.
20006
(Address of Principal Executive Offices)
(Zip Code)
(202) 595-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock
DEA
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 25, 2022, the registrant had 90,814,021 shares of common stock, $0.01 par value per share, outstanding.
INDEX TO FINANCIAL STATEMENTS
Page
Part I: Financial Information
Item 1: Financial Statements:
Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)
1
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)
2
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)
3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)
4
Notes to the Consolidated Financial Statements
6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3: Quantitative and Qualitative Disclosures About Market Risk
41
Item 4: Controls and Procedures
Part II: Other Information
Item 1: Legal Proceedings
42
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Mine Safety Disclosures
Item 5: Other Information
Item 6: Exhibits
43
Signatures
Easterly Government Properties, Inc.
Consolidated Balance Sheets (unaudited)
(Amounts in thousands, except share amounts)
September 30, 2022
December 31, 2021
Assets
Real estate properties, net
$
2,463,961
2,399,188
Cash and cash equivalents
11,032
11,132
Restricted cash
10,462
9,011
Tenant accounts receivable
60,250
58,733
Investment in unconsolidated real estate venture
199,338
131,840
Intangible assets, net
178,327
186,307
Interest rate swaps
4,515
—
Prepaid expenses and other assets
33,765
29,901
Total assets
2,961,650
2,826,112
Liabilities
Revolving credit facility
177,750
14,500
Term loan facilities, net
248,879
248,579
Notes payable, net
695,935
695,589
Mortgage notes payable, net
247,969
252,421
Intangible liabilities, net
19,139
19,718
Deferred revenue
85,510
87,134
5,700
Accounts payable, accrued expenses and other liabilities
67,673
60,890
Total liabilities
1,542,855
1,384,531
Equity
Common stock, par value $0.01, 200,000,000 shares authorized, 90,814,021 and 90,147,868 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
908
901
Additional paid-in capital
1,622,628
1,604,712
Retained earnings
77,203
62,023
Cumulative dividends
(451,917
)
(379,895
Accumulated other comprehensive income (loss)
3,987
(5,072
Total stockholders’ equity
1,252,809
1,282,669
Non-controlling interest in Operating Partnership
165,986
158,912
Total equity
1,418,795
1,441,581
Total liabilities and equity
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations (unaudited)
(Amounts in thousands, except share and per share amounts)
For the three months ended September 30,
For the nine months ended September 30,
2022
2021
Revenues
Rental income
72,643
67,439
214,238
197,713
Tenant reimbursements
1,616
1,527
3,676
3,746
Asset management income
377
942
Other income
405
642
1,244
1,764
Total revenues
75,041
69,608
220,100
203,223
Expenses
Property operating
17,802
15,188
48,811
41,578
Real estate taxes
8,177
7,626
23,854
22,465
Depreciation and amortization
25,050
22,765
73,552
67,615
Acquisition costs
275
518
939
1,488
Corporate general and administrative
5,870
5,893
17,819
17,469
Total expenses
57,174
51,990
164,975
150,615
Other income (expense)
Income from unconsolidated real estate venture
830
2,286
Interest expense, net
(12,408
(9,353
(34,729
(27,739
Gain on the sale of operating property
777
1,307
Impairment loss
(5,540
Net income
749
9,042
17,142
26,176
(107
(1,065
(1,962
(3,007
Net income available to Easterly Government Properties, Inc.
7,977
15,180
23,169
Net income available to Easterly Government Properties, Inc. per share:
Basic
0.01
0.09
0.16
0.27
Diluted
Weighted-average common shares outstanding
90,772,706
83,961,693
90,560,471
83,306,654
91,119,372
84,472,257
90,886,108
83,774,752
Dividends declared per common share
0.265
0.795
0.785
Consolidated Statements of Comprehensive Income (unaudited)
(Amounts in thousands)
Other comprehensive income:
Unrealized gain on interest rate swaps, net
1,806
1,180
10,216
4,275
Other comprehensive income
Comprehensive income
2,555
10,222
27,358
30,451
Other comprehensive income attributable to non-controlling interest
(212
(167
(1,157
(450
Comprehensive income attributable to Easterly Government Properties, Inc.
2,236
8,990
24,239
26,994
Consolidated Statements of Cash Flows (unaudited)
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities
Straight line rent
559
(4,317
(2,286
Amortization of above- / below-market leases
(2,373
(3,569
Amortization of unearned revenue
(4,313
(4,217
Amortization of loan premium / discount
(844
(57
Amortization of deferred financing costs
1,538
1,164
Amortization of lease inducements
640
647
(1,307
5,540
Distributions from investment in unconsolidated real estate venture
5,432
Non-cash compensation
4,891
3,700
Other
69
Net change in:
544
(3,217
(2,598
(4,890
Deferred revenue associated with operating leases
2,689
761
Principal payments on operating lease obligations
(314
(256
3,984
16,157
Net cash provided by operating activities
103,783
94,459
Cash flows from investing activities
Real estate acquisitions and deposits
(93,737
(115,440
Additions to operating properties
(16,128
(14,070
Additions to development properties
(8,804
(5,278
Proceeds from sale of operating property, net
7,336
609
(71,253
Net cash used in investing activities
(189,313
(127,452
Cash flows from financing activities
Payment of deferred financing costs
(3,575
Issuance of common shares
9,504
90,914
Credit facility draws
200,750
159,500
Credit facility repayments
(37,500
(126,250
Repayments of mortgage notes payable
(3,942
(2,948
Dividends and distributions paid
(81,795
(74,106
Payment of offering costs
(136
(1,463
Net cash provided by financing activities
86,881
42,072
Net increase in Cash and cash equivalents and Restricted cash
1,351
9,079
Cash and cash equivalents and Restricted cash, beginning of period
20,143
14,669
Cash and cash equivalents and Restricted cash, end of period
21,494
23,748
Supplemental disclosure of cash flow information is as follows:
Cash paid for interest, net of capitalized interest
25,805
27,395
Supplemental disclosure of non-cash information
Additions to operating properties accrued, not paid
2,731
1,029
Additions to development properties accrued, not paid
2,550
1,022
Offering costs accrued, not paid
16
Deferred asset acquisition costs accrued, not paid
144
Contingent consideration accrued, not received
125
Contingent consideration accrued, not paid
336
Properties acquired for Common Units
17,361
20,790
Recognition of operating lease right-of-use assets
101
Recognition of liabilities related to operating lease right-of-use assets
Exchange of Common Units for Shares of Common Stock
(2,911
(4,261
Common stock
2,909
4,258
Total
5
Notes to the Consolidated Financial Statements (unaudited)
1. Organization and Basis of Presentation
The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2021, and related notes thereto, included in the Annual Report on Form 10-K of Easterly Government Properties, Inc. (the “Company”) for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2022.
The Company is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2015. The operations of the Company are carried on primarily through Easterly Government Properties LP (the “Operating Partnership”) and the wholly owned subsidiaries of the Operating Partnership. As used herein, the “Company,” “we,” “us,” or “our” refer to Easterly Government Properties, Inc. and its consolidated subsidiaries and partnerships, including the Operating Partnership, except where context otherwise requires.
We are an internally managed REIT, focused primarily on the acquisition, development, and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate substantially all of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration (“GSA”). Our objective is to generate attractive risk-adjusted returns for our stockholders over the long-term through dividends and capital appreciation.
We focus on acquiring, developing and managing U.S. Government leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. As of September 30, 2022, we wholly owned 88 operating properties and seven operating properties through an unconsolidated joint venture (the “JV”) in the United States, encompassing approximately 9.1 million leased square feet, including 94 operating properties that were leased primarily to U.S. Government tenant agencies and one operating property that was entirely leased to a private tenant. As of September 30, 2022, our operating properties were 99% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion.
The Operating Partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of the Operating Partnership. We owned approximately 88.3% of the aggregate limited partnership interests in the Operating Partnership (“common units”) at September 30, 2022. We believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.
Principles of Consolidation
The accompanying consolidated financial statements are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company, Easterly Government Properties TRS, LLC, Easterly Government Services, LLC, the Operating Partnership and its other subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The condensed consolidated financial statements included herein are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the consolidated financial position of the Company at September 30, 2022 and December 31, 2021, the consolidated results of operations for the three and nine months ended September 30, 2022 and 2021, and the consolidated cash flows for the nine months ended September 30, 2022 and 2021. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the balance sheet, and the
reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the impact of extraordinary events such as the novel coronavirus (COVID-19) pandemic, the results of which form the basis for making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
2. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of the Company’s condensed consolidated financial statements are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
3. Real Estate and Intangibles
Acquisitions
During the nine months ended September 30, 2022, we acquired three operating properties in asset acquisitions, FBI – Tampa, NARA – Broomfield and JUD – Council Bluffs, for an aggregate purchase price of $108.1 million. We allocated the aggregate purchase price of these acquisitions based on the estimated fair values of the acquired assets and assumed liabilities as follows (amounts in thousands):
Real estate
Land
9,795
Building
83,403
Acquired tenant improvements
5,386
Total real estate
98,584
Intangible assets
In-place leases
7,927
Acquired leasing commissions
4,453
Total intangible assets
12,380
Intangible liabilities
Below-market leases
(2,858
Total intangible liabilities
Purchase price
108,106
The intangible assets and liabilities of operating properties acquired during the nine months ended September 30, 2022 have a weighted average amortization period of 15.5 years as of September 30, 2022. During the nine months ended September 30, 2022, we included $3.0 million of revenues and $1.0 million of net income in our Consolidated Statements of Operations related to the operating properties acquired.
During the nine months ended September 30, 2022, we incurred $0.9 million of acquisition-related expenses mainly consisting of internal costs associated with property acquisitions and future acquisitions.
7
Consolidated Real Estate and Intangibles
Real estate and intangibles consisted of the following as of September 30, 2022 (amounts in thousands):
231,599
Building and improvements
2,426,241
95,403
Construction in progress
39,338
Accumulated depreciation
(328,620
Total Real estate properties, net
293,642
75,964
Above market leases
17,541
Payment in lieu of taxes
6,394
Accumulated amortization
(215,214
Total Intangible assets, net
Below market leases
(76,745
57,606
Total Intangible liabilities, net
(19,139
During the quarter ended September 30, 2022, the Company recognized an impairment loss totaling approximately $5.5 million for its ICE – Otay property in order to reduce its carrying value to its estimated fair value, which declined due to changes in expected cash flows related to the existing tenant's lease expiration in 2022. ICE – Otay is a 47,919 rentable square foot office building located in San Diego, California. See Note 7 for additional information.
No operating properties were disposed of during the nine months ended September 30, 2022.
The following table summarizes the scheduled amortization of the Company’s acquired above- and below-market lease intangibles for each of the five succeeding years as of September 30, 2022 (amounts in thousands):
Acquired Above-Market Lease Intangibles
Acquired Below-Market Lease Intangibles
349
(1,117
2023
1,390
(4,307
2024
1,341
(3,160
2025
1,286
(2,454
2026
1,217
(2,216
Above-market lease amortization reduces Rental income on our Consolidated Statements of Operations and below-market lease amortization increases Rental income on our Consolidated Statements of Operations.
4. Investment in Unconsolidated Real Estate Venture
The following is a summary of our investment in the JV (dollars in thousands):
As of September 30,
Joint Venture
Ownership Interest
MedBase Venture
53.0%
On October 13, 2021, we formed an unconsolidated real estate venture, which we refer to as the JV, with a global investor to fund the acquisition of a portfolio of ten properties anticipated to encompass 1,214,165 leased square feet ("the "VA Portfolio"). We own a 53.0% interest in the JV, subject to preferred allocations as provided in the JV agreement.
8
During the nine months ended September 30, 2022 , the JV acquired three properties VA – Birmingham, VA – Marietta and VA – Columbus, for an aggregate purchase price of $135.3 million. As of September 30, 2022 seven of the ten properties in the VA Portfolio had been acquired by the JV.
We provide asset management services to the JV. We recognized asset management service revenue of $0.4 million and $0.9 million for the three and nine months ended September 30, 2022, respectively.
On January 20, 2022, the JV issued 125 Series A Preferred Units (“preferred units”) which resulted in net proceeds of $0.1 million. Holders of the preferred units are entitled to receive, when declared, cumulative preferential cash distributions.
The following is a summary of financial information for the JV (amounts in thousands):
Balance sheet information:
Real estate, net (1)
313,768
Other assets, net
71,116
384,884
Total liabilities (2)
9,407
375,477
Company’s share of equity
198,963
Basis differential (3)
375
Carrying value of the Company’s investment in the unconsolidated venture
Income statement information:
Total revenue
7,136
17,799
Operating income
1,608
4,436
1,567
4,313
Company’s share of net income
9
5. Debt
At September 30, 2022, our consolidated borrowings consisted of the following (amounts in thousands):
Principal Outstanding
Interest
Current
Loan
Rate (1)
Maturity
Revolving credit facility:
Revolving credit facility (2)
L + 135 bps
July 2025 (3)
Total revolving credit facility
Term loan facilities:
2016 term loan facility
100,000
2.77% (5)
March 2024
2018 term loan facility (4)
150,000
4.01% (6)
July 2026
Total term loan facilities
250,000
Less: Total unamortized deferred financing fees
(1,121
Total term loan facilities, net
Notes payable:
2017 series A senior notes
95,000
4.05%
May 2027
2017 series B senior notes
50,000
4.15%
May 2029
2017 series C senior notes
30,000
4.30%
May 2032
2019 series A senior notes
85,000
3.73%
September 2029
2019 series B senior notes
3.83%
September 2031
2019 series C senior notes
90,000
3.98%
September 2034
2021 series A senior notes
2.62%
October 2028
2021 series B senior notes
200,000
2.89%
October 2030
Total notes payable
700,000
(4,065
Total notes payable, net
Mortgage notes payable:
DEA – Pleasanton
15,700
L + 150bps (7)
October 2023
VA – Golden
8,692
5.00% (7)
April 2024
MEPCOM – Jacksonville (8)
5,858
4.41% (7)
October 2025
USFS II – Albuquerque
13,879
4.46% (7)
ICE – Charleston
13,792
4.21% (7)
January 2027
VA – Loma Linda
127,500
3.59% (7)
July 2027
CBP – Savannah
10,595
3.40% (7)
July 2033
USCIS – Kansas City
51,500
3.68% (7)
August 2024
Total mortgage notes payable
247,516
(1,519
Less: Total unamortized premium/discount
1,972
Total mortgage notes payable, net
Total debt
1,370,533
10
As of September 30, 2022, the net carrying value of real estate collateralizing our mortgages payable totaled $373.6 million. See Note 7 for the fair value of our debt instruments.
On July 22, 2022, we entered into the first amendment to our second amended and restated senior credit agreement (the “first amendment”). The first amendment extended the deadline for the $50.0 million delayed draw portion of the 2018 term loan to July 24, 2023 (from July 22, 2022).
Financial Covenant Considerations
As of September 30, 2022, we were in compliance with all financial and other covenants related to our debt.
6. Derivatives and Hedging Activities
The following table sets forth the key terms and fair values of our interest rate swap derivatives, each of which was designated as a cash flow hedge as of September 30, 2022 (amounts in thousands):
Notional Amount
Fixed Rate
Floating Rate Index
Effective Date
Expiration Date
Fair Value
1.41
%
One-Month LIBOR
March 29, 2017
September 29, 2023
2,881
2.71
December 13, 2018
June 19, 2023
1,634
The table below sets forth the fair value of our interest rate derivatives as well as their classification on our Consolidated Balance Sheet (amounts in thousands):
Balance Sheet Line Item
As of September 30, 2022
Interest rate swaps - Asset
Interest rate swaps - Liability
Cash Flow Hedges of Interest Rate Risk
The gains or losses on derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income (loss) (“AOCI”) and will be reclassified to interest expense in the period that the hedged forecasted transactions affect earnings on the Company’s variable rate debt.
The Company estimates that $4.5 million will be reclassified from AOCI as a decrease to interest expense over the next 12 months.
The table below presents the effects of our interest rate derivatives on our Consolidated Statements of Operations and Comprehensive Income (amounts in thousands):
Unrealized gain (loss) recognized in AOCI
1,801
(160
8,046
324
Loss reclassified from AOCI into interest expense
(5
(1,340
(2,170
(3,951
11
Credit-Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on such indebtedness. As of September 30, 2022, the Company did not have any derivates in a net liability position. As of September 30, 2022, the Company was in compliance with these agreements and had not posted any collateral related to these agreements.
7. Fair Value Measurements
Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standards also establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of these inputs is broken down into three levels: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Categorization within the valuation hierarchy is based upon the lowest level of input that is most significant to the fair value measurement.
Recurring fair value measurements
The fair values of our interest rate swaps are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities in such interest rates. While the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of September 30, 2022 were classified as Level 2 of the fair value hierarchy.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets and accounts payable and accrued expenses are reasonable estimates of fair values because of the short maturities of these instruments. The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2022, aggregated by the level in the fair value hierarchy within which those measurements fall (amounts in thousands):
Level 1
Level 2
Level 3
For our disclosure of debt fair values, we estimated the fair value of our 2016 term loan facility and our 2018 term loan facility based on the variable interest rate and credit spreads (categorized within Level 3 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments included scheduled principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement at such fair value amounts may not be possible and may not be a prudent management decision.
12
Nonrecurring fair value measurements
We assessed the recoverability of the carrying amount of our real estate and related intangibles as of September 30, 2022. The assessment resulted in the remeasurement of ICE – Otay, which was written down to its estimated fair value and was classified as Level 3 in the fair value hierarchy. Our estimate of the fair value was based on a combination of a pending offer from a third party to acquire the property and a discounted cash flow analysis. The Company used two significant unobservable inputs in the various scenarios, which were the cash flow discount rate (ranging from 6.25%-9.00%) and average price per square foot of comparable sales in the market ($109.08-$185.90). There is no assurance that the Company will sell ICE – Otay on the terms proposed or at all. The remeasurement resulted in an impairment loss of $5.5 million, which is included in "Impairment loss" in our Consolidated Statements of Operations.
Financial assets and liabilities not measured at fair value
As of September 30, 2022, all financial instruments and liabilities were reflected in our balance sheets at amounts which, in our estimation, reasonably approximated their fair values, except for the following:
Financial liabilities
Carrying Amount (1)
Fair Value (2)
2018 term loan facility
Notes payable
591,295
Mortgages payable
232,858
8. Equity Incentive Plan
Restricted Shares
The Company awards restricted stock to certain members of management and non‑employee directors. Management awards generally vest over a range of two to four years. Non‑employee director shares vest upon the earlier of the anniversary of the date of the grant or the next annual stockholder meeting, as long as the grantee remains a director or employee on such date. Restricted stock awards issued under the 2015 Equity Incentive Plan, as amended (the “2015 Equity Incentive Plan”), may not be sold or otherwise transferred until restrictions have lapsed, as established by the compensation committee.
We value our non-vested restricted share awards at the grant date fair value, which was the market price of our common stock as of the applicable grant date. Compensation expense related to restricted common stock awards was $0.1 million and $0.2 million for each of the three months ended September 30, 2022 and 2021, respectively, and $0.5 million and $0.6 million for each of the nine months ended September 30, 2022 and 2021, respectively.
The fair value of restricted stock that vested was $1.5 million and $0.9 million during the nine months ended September 30, 2022 and 2021, respectively, based on the market price at the vesting date. The balance of unamortized restricted stock expense as of September 30, 2022 was $0.5 million, which is expected to be recognized over a weighted‑average period of 1.1 years.
A summary of the status of our restricted shares as of September 30, 2022 and changes during the nine months ended September 30, 2022 is presented below:
Restricted Shares Weighted Average Grant Date Fair Value Per Share
Outstanding, December 31, 2021
86,006
19.16
Vested
(71,168
18.49
Granted
29,078
18.81
Forfeited
(2,601
21.16
Outstanding, September 30, 2022
41,315
19.94
13
LTIP Units
The Company grants LTIP units to certain members of management and non‑employee directors. Management awards generally vest immediately or over a range of two to four years. Non‑employee director shares vest upon the earlier of the anniversary of the date of the grant or the next annual stockholder meeting, as long as the grantee remains a director or employee on such date. Performance-based LTIP units are earned subject to the Company achieving certain thresholds, including absolute total shareholder returns, relative total shareholder returns, or operational hurdles through the performance period. Service-based LTIP units vest over time, subject to continued employment and other terms of the awards.
The following is a summary of our granted LTIP unit awards during the nine months ended September 30, 2022:
Award Type
Grant Date
Performance PeriodEnd Date
Vest Date
Units Granted
Service
January 3, 2022
December 31, 2024
110,906
Operational
80,160
Performance
158,535
May 11, 2022
11,238
2022 LTIP Grant
360,839
We value our operational LTIP unit awards that are subject to the Company achieving certain performance conditions at the grant date fair value, which is the market price of our common stock as of the applicable grant date. We value our service-based LTIP unit awards at the grant date fair value, which is the market price of our common stock as of the applicable grant date, discounted by the risk related to the timing of book-up events. For the performance LTIP unit awards granted that are subject to the Company achieving certain total shareholder return thresholds, we used a Monte Carlo Simulation (risk-neutral approach) to determine the grant date fair value.
The following is a summary of the significant assumptions used to value the total shareholder return for performance-based LTIP units during the nine months ended September 30, 2022:
Expected volatility
27.0
Dividend yield
4.8
Risk-free interest rate
1.0
Expected life
3 years
The fair value of LTIP units that vested were $5.5 million and $4.5 million during the nine months ended September 30, 2022 and 2021, respectively, based on the market price at the vesting date. Compensation expense related to LTIP unit awards was $1.5 million and $1.1 million for the three months ended September 30, 2022 and 2021, respectively, and $4.4 million and $3.1 million for the nine months ended September 30, 2022 and 2021, respectively. The balance of unamortized LTIP expense as of September 30, 2022 was $7.9 million, which is expected to be recognized over a weighted‑average period of 1.8 years. As of September 30, 2022, management considers it probable that the operational performance conditions on our unvested grants will be achieved.
A summary of the status of our LTIP units as of September 30, 2022 and changes during the nine months ended September 30, 2022 are presented below:
LTIP Units (1)
LTIP Units Weighted Average Grant Date FairValue Per Share
651,238
21.02
(115,412
18.66
17.48
896,665
19.90
14
9. Equity
The following table summarizes the changes in the Company’s stockholders’ equity for the three months ended September 30, 2022 and 2021 (amounts in thousands, except share amounts):
Shares
Common Stock Par Value
Additional Paid-in Capital
RetainedEarnings
CumulativeDividends
AccumulatedOtherComprehensiveIncome (Loss)
Non-controlling Interest in Operating Partnership
Total Equity
Three months ended September 30, 2022
Balance at June 30, 2022
90,816,622
1,621,288
76,561
(427,851
2,393
168,696
1,441,995
Stock based compensation
126
1,499
1,625
Dividends and distributions paid ($0.265 per share)
(24,066
(3,314
(27,380
Forfeiture of unvested restricted stock
Redemption of common units for shares of common stock
Contribution of property for common units
1,594
212
107
Allocation of non-controlling interest in Operating Partnership
1,214
(1,214
Balance at September 30, 2022
90,814,021
Three months ended September 30, 2021
Balance at June 30, 2021
83,931,290
839
1,471,928
47,157
(334,815
(8,539
157,967
1,334,537
216
1,117
1,333
(22,254
(3,075
(25,329
Grant of unvested restricted stock
11,066
59,774
836
(837
Issuance of common stock, net
2,114,408
21
49,926
49,947
1,013
167
1,065
(1,460
1,460
Balance at September 30, 2021
86,116,538
861
1,521,446
55,134
(357,069
(7,526
157,864
1,370,710
15
The following table summarizes the changes in the Company’s stockholders’ equity for the nine months ended September 30, 2022 and 2021 (amounts in thousands, except share amounts):
Nine months ended September 30, 2022
Balance at December 31, 2021
90,147,868
478
4,413
Dividends and distributions paid ($0.795 per share)
(72,022
(9,773
Grant of unvested restricted stock, net
26,477
204,751
434,925
9,394
9,399
9,059
1,157
1,962
5,135
(5,135
Nine months ended September 30, 2021
Balance at December 31, 2020
82,106,256
821
1,424,787
31,965
(291,652
(11,351
145,400
1,299,970
600
3,100
Dividends and distributions paid ($0.785 per share)
(65,417
(8,689
35,865
303,185
3,671,232
37
89,868
89,905
Unrealized loss on interest rate swaps, net
3,825
450
3,007
1,933
(1,933
A summary of dividends declared by the Company’s board of directors per share of common stock and per common unit at the date of record is as follows:
Quarter
Declaration Date
Record Date
Payment Date
Dividend (1)
Q1 2022
April 27, 2022
May 13, 2022
May 25, 2022
Q2 2022
July 27, 2022
August 11, 2022
August 23, 2022
Q3 2022
October 26, 2022
November 11, 2022
November 23, 2022
Offering of Common Stock on a Forward Basis
On August 11, 2021, the Company and the Operating Partnership completed an underwritten public offering of 6,300,000 shares of common stock offered on a forward basis. In connection with the offering, the Company also entered into separate forward sale agreements with each of the forward purchasers (the “Forward Sales Agreements”), pursuant to which the forward purchasers borrowed and sold to the underwriters an aggregate of 6,300,000 shares of the Company’s common stock. On December 28, 2021, the Company issued 3,991,000 shares of its common stock for net proceeds of $85.0 million, which shares were issued in partial settlement of the Forward Sales Agreements entered into in connection with the underwritten public offering. No shares were issued during the nine months ended September 30, 2022. The Company expects to physically settle the remaining Forward Sales Agreements and receive proceeds, subject to certain adjustments, from the sale of those shares of common stock upon one or more such physical settlements. During the nine months ended September 30, 2022, the Company extended the date by which settlement of the Forward Sales Agreements will occur to August 14, 2023. Although the Company expects to settle the Forward Sales Agreements
entirely by the physical delivery of shares of its common stock for cash proceeds, the Company may also elect to cash or net-share settle all or a portion of its obligations under the Forward Sales Agreements, in which case, the Company may receive, or may owe, cash or shares of its common stock from or to the forward purchasers. The Forward Sales Agreements provide for an initial forward price of $21.64 per share, subject to certain adjustments pursuant to the terms of each of the Forward Sales Agreements. The Forward Sales Agreements are subject to early termination or settlement under certain circumstances.
ATM Programs
The Company entered into separate equity distribution agreements on each of December 20, 2019 (the “2019 ATM Program”) and June 22, 2021 (the “2021 ATM Program” and, together with the 2019 ATM Program, the “ATM Programs”) with various financial institutions pursuant to which it may issue and sell shares of its common stock having an aggregate offering price of up to $300.0 million under each ATM Program from time to time in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Under each of the ATM Programs, the Company may enter into one or more forward transactions (each, a “forward sale transaction”) under separate master forward sale confirmations and related supplemental confirmations with each of the various financial institutions party to the respective ATM Program for the sale of shares of its common stock on a forward basis.
The following table sets forth certain information with respect to issuances under the 2019 ATM Program during the nine months ended September 30, 2022 (amounts in thousands except share amounts):
2019 ATM Program
For the three months ended
Number of Shares Issued(1)
Net Proceeds(1)
March 31, 2022
9,409
June 30, 2022
No sales of shares of the Company’s common stock were made under the 2021 ATM Program during the nine months ended September 30, 2022.
The Company used the net proceeds received from such sales for general corporate purposes. As of September 30, 2022, the Company had approximately $300.0 million of gross sales of its common stock available under the 2021 ATM Program and $87.4 million of gross sales of its common stock available under the 2019 ATM Program.
Share Repurchase Program
On April 28, 2022, the Company’s Board of Directors authorized a share repurchase program whereby the Company may repurchase up to 4,538,994 shares of its common stock, or approximately 5% of its outstanding shares as of the authorization date. The Company is not required to purchase shares under the share repurchase program, but may choose to do so in the open market or through privately negotiated transactions at times and amounts based on its evaluation of market conditions and other factors.
No repurchases of shares of the Company’s common stock were made under the share repurchase program during the nine months ended September 30, 2022.
17
Contribution of Property for Common Units
On May 10, 2022, the Company acquired NARA – Broomfield for which it issued, as partial consideration, 827,791 common units. The issuance of common units was effected in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act.
10. Earnings Per Share
Basic earnings or loss per share of common stock (“EPS”) is calculated by dividing net income attributable to common stockholders by the weighted average shares of common stock outstanding for the periods presented. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented. Unvested restricted shares of common stock and unvested LTIP units are considered participating securities, which require the use of the two-class method for the computation of basic and diluted earnings per share.
The following table sets forth the computation of the Company’s basic and diluted earnings per share of common stock for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands, except per share amounts):
Numerator
Less: Non-controlling interest in Operating Partnership
Less: Dividends on participating securities
(137
(120
(410
(350
Net income available to common stockholders
505
7,857
14,770
22,819
Denominator for basic EPS
Dilutive effect of share-based compensation awards
11,455
49,200
20,646
50,299
Dilutive effect of LTIP units (1)
335,211
425,317
304,991
384,694
Dilutive effect of shares issuable under forward sale agreements (2)
36,047
33,105
Denominator for diluted EPS
Basic EPS
Diluted EPS
18
11. Leases
Lessor
The Company leases commercial space to the U.S. Government through the GSA or other federal agencies or nongovernmental tenants. These leases may contain extension options that are predominately at the sole discretion of the tenant. Certain of our leases contain a “soft-term” period of the lease, meaning that the U.S. Government tenant agency has the right to terminate the lease prior to its stated lease end date. While certain of our leases are contractually subject to early termination, we do not believe that our tenant agencies are likely to terminate these leases early given the build-to-suit features at the properties subject to the leases, the weighted average age of these properties based on the date the property was built or renovated-to-suit, where applicable (approximately 18.0 years as of September 30, 2022), the mission-critical focus of the properties subject to the leases and the current level of operations at such properties. Certain lease agreements include variable lease payments that, in the future, will vary based on changes in inflationary measures, real estate tax rates, usage, or share of expenditures of the leased premises.
The following table summarizes the maturity of fixed lease payments under the Company’s leases as of September 30, 2022 (amounts in thousands):
Payments due by period
2022 (1)
Thereafter
Fixed lease payments
2,368,977
62,886
243,536
223,796
212,728
203,743
1,422,288
The table below sets forth our composition of lease revenue recognized between fixed and variable components (amounts in thousands):
Fixed
68,033
62,359
199,411
183,529
Variable
4,610
5,080
14,827
14,184
Lessee
The Company leases corporate office space under operating lease arrangements in Washington, D.C. and San Diego, CA. The San Diego, CA operating lease terminated on October 31, 2022. In April 2022, the Company entered into a lease agreement for new office space in San Diego, CA. This lease has a seven year term and a commencement date of October 26, 2022.
The leases include variable lease payments that, in the future, will vary based on changes in real estate tax rates, usage, or share of expenditures of the leased premises. The Company has elected not to separate lease and non-lease components for its corporate office leases.
As of September 30, 2022, the unamortized balances associated with the Company’s right-of-use operating lease asset and operating lease liability were $1.3 million and $1.4 million, respectively. The Company used its incremental borrowing rate, which was arrived at utilizing prevailing market rates and the spread on its revolving credit facility, in order to determine the net present value of the minimum lease payments.
The following table provides quantitative information for the Company’s commenced operating leases for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
Cash flows from operating lease costs
121
119
387
19
In addition, the maturity of fixed lease payments under the Company’s commenced corporate office leases as of September 30, 2022 is summarized in the table below (amounts in thousands):
Corporate office leases
54
277
446
456
309
Total future minimum lease payments
1,542
Imputed interest
(124
1,418
12. Revenue
The table below sets forth revenue from tenant construction projects and the associated project management income disaggregated by tenant agency for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
Tenant
Department of Veteran Affairs (“VA”)
1,271
352
1,573
Federal Bureau of Investigation (“FBI”)
1,141
1,057
1,791
U.S. Joint Staff Command (“JSC”)
34
525
60
Food and Drug Administration (“FDA”)
27
58
231
82
U.S. Citizenship and Immigration Services (“USCIS”)
87
197
108
Customs and Border Protection (“CBP”)
155
National Park Services (“NPS”)
100
Federal Emergency Management Agency (“FEMA”)
96
Occupational Safety and Health Administration (“OSHA”)
72
Drug Enforcement Agency (“DEA”)
40
Internal Revenue Service (“IRS”)
33
127
U.S. Coast Guard (“USCG”)
Patent and Trademark Office (“PTO”)
The Judiciary of the U.S. Government (“JUD”)
Federal Aviation Administration (“FAA”)
General Services Administration - Other
25
Health Resources and Services Administration (“HRSA”)
National Weather Service (“NWS”)
Immigration and Customs Enforcement (“ICE”)
Department of Energy (“DOE”)
95
Environmental Protection Agency (“EPA”)
204
Department of Transportation (“DOT”)
49
Military Entrance Processing Command (“MEPCOM”)
Bureau of the Fiscal Service (“BFS”)
1,792
1,639
4,166
4,090
20
The balance in Accounts receivable related to tenant construction projects and the associated project management income was $5.3 million as of September 30, 2022 and $5.0 million as of December 31, 2021.
The duration of the majority of tenant construction project reimbursement arrangements are less than a year and payment is typically due once a project is complete and work has been accepted by the tenant. There were no projects on-going as of September 30, 2022 with a duration of greater than one year.
During the three and nine months ended September 30, 2022, the Company recognized $0.1 million and $0.2 million, respectively, in parking garage income generated from the operations of parking garages situated on the Various GSA – Buffalo property and on the Various GSA – Portland property. During the three and nine months ended September 30, 2021, the Company recognized $0.1 million and $0.2 million, respectively, in parking garage income generated from the operations of parking garages situated on the Various GSA – Buffalo property and on the Various GSA – Portland property. The monthly and transient daily parking revenue falls within the scope of Revenue from Contracts with Customers (“ASC 606”) and is accounted for at the point in time when control of the goods or services transfers to the customer and the Company’s performance obligation is satisfied. The balance in Accounts receivable related to parking garage income was less than $0.1 million as of each of September 30, 2022 and December 31, 2021.
During the three and nine months ended September 30, 2022, the Company recognized less than $0.1 million and $0.1 million, respectively, in income for providing COVID-19 related cleaning services to certain tenants. During the three and nine months ended September 30, 2021, the Company recognized $0.3 million and $1.0 million, respectively, in income for providing COVID-19 related cleaning services to certain tenants. The income falls within the scope of ASC 606 and is recognized over time as the performance obligation is satisfied. The balance in Accounts receivable related to these services was less than $0.1 million as of September 30, 2022, and $0.1 million as of December 31, 2021.
There were no contract assets or liabilities as of September 30, 2022 or December 31, 2021.
13. Concentrations Risk
Concentrations of credit risk arise for the Company when multiple tenants of the Company are engaged in similar business activities, are located in the same geographic region or have similar economic features that impact in a similar manner their ability to meet contractual obligations, including those to the Company. The Company regularly monitors its tenant base to assess potential concentrations of credit risk.
As stated in Note 1 above, the Company leases commercial space to the U.S. Government or non-governmental tenants. At September 30, 2022, the U.S. Government accounted for approximately 97.9% of our total annualized lease income and non-governmental tenants accounted for the remaining approximately 2.1%.
Seventeen of our 95 wholly-owned and unconsolidated operating properties are located in California, accounting for approximately 14.7% of our total leased square feet and approximately 19.7% of our total annualized lease income as of September 30, 2022. To the extent that weak economic or real estate conditions or natural disasters affect California more severely than other areas of the country, our business, financial condition and results of operations could be significantly impacted.
14. Related Parties
The Company provides asset management services to properties owned by the JV. For the three and nine months ended September 30, 2022, we recognized Asset management income of $0.4 million and $0.9 million, respectively. We did not recognize Asset management income for the nine months ended September 30, 2021.
15. Subsequent Events
For its consolidated financial statements as of September 30, 2022, the Company evaluated subsequent events and noted the following significant events.
On October 12, 2022, the Company entered into a second amended purchase and sale agreement with a third party to dispose of a portfolio of ten properties totaling approximately 668,000 leased square feet (the “Disposition Portfolio Properties”) for an aggregate purchase price of approximately $205.3 million. Concurrently on October 12, 2022, the Company received a $3.5 million non-refundable deposit from the third party buyer. As of September 30, 2022, the carrying value of the Disposition Portfolio Properties was $187.1 million and did not meet the criteria for held-for-sale classification. The Company completed the sale of nine of the Disposition Portfolio Properties on October 27, 2022, including: DHA – Aurora, HRSA – Baton Rouge, VA – Baton Rouge, FDA – College Park, MEPCOM – Jacksonville, DOE – Lakewood, ICE – Pittsburgh, OSHA – Sandy, and CBP – Sunburst. The Company expects to close on the remaining property, DOI – Billings, prior to December 31, 2022, subject to the satisfaction of customary closing conditions.
On October 27, 2022, the Company used $5.8 million of proceeds from the sale of the Disposition Portfolio Properties to extinguish the $5.8 million mortgage note obligation on MEPCOM - Jacksonville.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We caution investors that forward-looking statements are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “potential”, “project”, “result”, “seek”, “should”, “target”, “will”, and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
For a further discussion of these and other factors, see the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as may be supplemented or amended from time to time.
Overview
References to “we,” “our,” “us” and “the Company” refer to Easterly Government Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Easterly Government Properties LP, a Delaware limited partnership, which we refer to herein as the “operating partnership.” We present certain financial information and metrics “at Easterly Share,” which is calculated on an entity-by-entity basis. “At Easterly Share” information, which we also refer to as being “at share,” “pro rata,” “our pro rata share” or “our share” is not, and is not intended to be, a presentation in accordance with GAAP.
We are an internally managed real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate substantially all of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration (“GSA”). Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.
We focus on acquiring, developing and managing U.S. Government-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. As of September 30, 2022, we wholly owned 88 operating properties and seven operating properties through an unconsolidated joint venture (the “JV”) in the United States encompassing approximately 9.1 million leased square feet (8.8 million pro rata), including 94 operating properties that were leased primarily to U.S. Government tenant agencies and one operating property that was entirely leased to a private tenant. As of September 30, 2022, our operating properties were 99% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion.
The operating partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of the operating partnership and owned approximately 88.3% of the aggregate limited partnership interests in the operating partnership, which we refer to herein as common units, as of September 30, 2022. We have elected to be taxed as a REIT and we believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.
2022 Activity
On May 10, 2022, we acquired a 161,730 leased square foot National Archives and Record Administration (“NARA”) federal records center in Broomfield, Colorado. The building is a build-to-suit warehouse completed in 2012. The facility is leased to the GSA for beneficial use of the NARA with a lease expiration of May 2032.
On May 18, 2022, we acquired a 138,000 leased square foot Federal Bureau of Investigation (“FBI”) field office in Tampa, Florida. The building is a build-to suit property completed in 2005. The facility is leased to the GSA for beneficial use of the FBI with a lease expiration of November 2040.
On August 23, 2022, we acquired a 28,900 leased square foot U.S. District ("JUD") courthouse in Council Bluffs, Iowa. The building is a build-to-suit facility completed in 2021. The facility is leased to the GSA for beneficial use of the JUD with a lease expiration of December 2041.
Dispositions
On October 12, 2022, we entered into a second amended purchase and sale agreement with a third party to dispose of a portfolio of ten properties totaling approximately 668,000 leased square feet (the “Disposition Portfolio Properties”) for an aggregate purchase price of approximately $205.3 million. Concurrently on October 12, 2022, we received a $3.5 million non-refundable deposit from the
24
third party buyer. As of September 30, 2022, the carrying value of the Disposition Portfolio Properties was $187.1 million and did not meet the criteria for held-for-sale classification. We completed the sale of nine of the Disposition Portfolio Properties on October 27, 2022, including: DHA – Aurora, HRSA – Baton Rouge, VA – Baton Rouge, FDA – College Park, MEPCOM – Jacksonville, DOE – Lakewood, ICE – Pittsburgh, OSHA – Sandy, and CBP – Sunburst. We expect to close on the remaining property, DOI – Billings, prior to December 31, 2022, subject to the satisfaction of customary closing conditions.
On October 13, 2021, we formed the JV with a global investor to fund the acquisition of a portfolio of ten properties anticipated to encompass 1,214,165 leased square feet (the “Portfolio Acquisition”). We own a 53.0% interest in the JV, subject to preferred allocations as provided in the JV agreement. During 2021, the JV closed on four of the ten properties included in the Portfolio Acquisition.
On April 1, 2022, the JV acquired a 77,128 square foot Veterans Affairs (“VA”) outpatient facility located in Birmingham, Alabama. The building is a build-to-suit property that was completed during 2021. The outpatient facility is leased to the VA and has a lease expiration of October 2041.
On May 20, 2022, the JV acquired a 76,882 square foot VA outpatient facility located in Marietta, Georgia. The building is a build-to-suit property that was completed during 2021. The outpatient facility is leased to the VA and has a lease expiration of December 2041.
On July 14, 2022, the JV acquired a 67,793 square foot VA outpatient facility located in Columbus, Georgia. The building is a build-to-suit property that was completed during 2021. The outpatient facility is leased to the VA and has a lease expiration of January 2042.
We expect the JV to close on the three remaining properties in the Portfolio Acquisition during 2022 and 2023.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has caused, and continues to cause significant disruptions to the U.S., regional and global economies and has contributed to significant volatility and negative pressure in financial markets.
We continue to carefully monitor the COVID-19 pandemic, including the emergence of new variants, and its potential impact on our business. We are following guidelines established by the Centers for Disease Control and the World Health Organization and orders issued by the state and local governments where we operate. In addition, we have taken a number of precautionary steps to safeguard our business and our employees from the COVID-19 pandemic, including, but not limited to, implementing non-essential travel restrictions when necessary and facilitating telecommuting arrangements for our employees. We have taken these precautionary steps while maintaining business continuity so that we can continue to deliver service to and meet the demands of our tenants, including our U.S. Government tenant agencies.
To date, the impact of the COVID-19 pandemic on our business and financial condition has not been significant. The future impact of the COVID-19 pandemic on our operations and financial condition will, however, depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. See the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of the potential adverse impact of the COVID-19 pandemic on our business, results of operations and financial condition.
Operating Properties
As of September 30, 2022, our operating properties were 99% leased with a weighted average annualized lease income per leased square foot of $34.56 ($34.30 pro rata) and a weighted average age of approximately 14.0 years based on the date the property was built or renovated-to-suit, where applicable. We calculate annualized lease income as annualized contractual base rent for the last month in a specified period, plus the annualized straight line rent adjustments for the last month in such period and the annualized net expense reimbursements earned by us for the last month in such period.
The table set forth below shows information relating to the properties we owned, or in which we had an ownership interest, at September 30, 2022, and it includes properties held by the JV:
Property Name
Location
PropertyType (1)
Tenant LeaseExpiration Year (2)
Leased SquareFeet
Annualized Lease Income
Percentage of Total AnnualizedLeaseIncome
Annualized LeaseIncome perLeased SquareFoot
Wholly Owned U.S. Government Leased Properties
VA - Loma Linda
Loma Linda, CA
OC
2036
327,614
16,444,222
5.2
50.19
USCIS - Kansas City (3)
Lee's Summit, MO
O/W
2023 - 2042
491,226
12,026,995
3.8
24.48
JSC - Suffolk
Suffolk, VA
O
2028
403,737
8,381,901
2.7
20.76
IRS - Fresno
Fresno, CA
2033
180,481
6,972,995
2.2
38.64
Various GSA - Portland (4)
Portland, OR
2022 - 2039
218,798
6,953,863
31.78
Various GSA - Chicago
Des Plaines, IL
202,185
6,812,395
33.69
FBI - Salt Lake
Salt Lake City, UT
2032
169,542
6,802,806
40.12
Various GSA - Buffalo (5)
Buffalo, NY
2025 - 2039
273,678
6,691,883
2.1
24.45
VA - San Jose
San Jose, CA
2038
90,085
5,725,957
1.8
63.56
EPA - Lenexa
Lenexa, KS
2027
169,585
5,603,247
33.04
FBI - San Antonio
San Antonio, TX
148,584
5,241,403
1.7
35.28
PTO - Arlington
Arlington, VA
2035
190,546
5,154,770
1.6
27.05
FBI - Tampa
Tampa, FL
2040
138,000
5,057,412
36.65
FDA - Alameda
Alameda, CA
L
2039
69,624
4,834,488
1.5
69.44
FBI / DEA - El Paso
El Paso, TX
203,683
4,682,935
22.99
FEMA - Tracy
Tracy, CA
W
210,373
4,646,467
22.09
FBI - Omaha
Omaha, NE
112,196
4,548,028
1.4
40.54
TREAS - Parkersburg
Parkersburg, WV
2041
182,500
4,302,091
23.57
EPA - Kansas City
Kansas City, KS
2042
71,979
4,291,659
59.62
VA - South Bend
Mishakawa, IN
86,363
4,155,805
1.3
48.12
FDA - Lenexa
59,690
3,990,453
66.85
FBI - Pittsburgh
Pittsburgh, PA
100,054
3,981,726
39.80
VA - Mobile
Mobile, AL
79,212
3,908,885
1.2
49.35
USCIS - Lincoln
Lincoln, NE
137,671
3,887,343
28.24
DOI - Billings (6)
Billings, MT
149,110
3,871,654
25.97
FBI - New Orleans
New Orleans, LA
2029
137,679
3,802,565
27.62
DOT - Lakewood
Lakewood, CO
122,225
3,668,047
30.01
FBI - Knoxville
Knoxville, TN
99,130
3,579,291
1.1
36.11
FBI - Birmingham
Birmingham, AL
96,278
3,433,823
35.67
ICE - Charleston
North Charleston, SC
65,124
3,301,629
50.70
VA - Chico
Chico, CA
2034
51,647
3,282,987
63.57
FBI - Richmond
Richmond, VA
96,607
3,252,338
33.67
USFS II - Albuquerque
Albuquerque, NM
98,720
3,249,952
32.92
FBI - Little Rock
Little Rock, AR
102,377
3,189,062
31.15
26
LeasedSquareFeet
Wholly Owned U.S. Government Leased Properties (Cont.)
FDA - College Park (6)
College Park, MD
80,677
3,107,988
38.52
USCIS - Tustin
Tustin, CA
66,818
3,102,375
46.43
USFS I - Albuquerque
92,455
3,100,080
33.53
OSHA - Sandy (6)
Sandy, UT
75,000
3,077,661
41.04
DEA - Vista
Vista, CA
52,293
3,067,840
58.67
VA - Indianapolis
Brownsburg, IN
80,000
2,958,386
0.9
36.98
VA - Orange
Orange, CT
56,330
2,937,172
52.14
JUD - Del Rio
Del Rio, TX
C/O
89,880
2,792,219
31.07
ICE - Albuquerque
71,100
2,789,429
39.23
DEA - Dallas Lab
Dallas, TX
49,723
2,716,354
54.63
DEA - Pleasanton
Pleasanton, CA
42,480
2,716,215
63.94
JUD - El Centro
El Centro, CA
43,345
2,702,496
62.35
FBI - Mobile
76,112
2,682,150
35.24
FBI - Albany
Albany, NY
69,476
2,677,247
38.53
SSA - Charleston
Charleston, WV
110,000
2,660,225
0.8
24.18
DEA - Sterling
Sterling, VA
2037
49,692
2,607,909
52.48
DEA - Upper Marlboro
Upper Marlboro, MD
50,978
2,522,977
49.49
USAO - Louisville
Louisville, KY
2031
60,000
2,506,169
41.77
TREAS - Birmingham
83,676
2,487,887
29.73
DHA - Aurora (6)
Aurora, CO
101,285
2,392,674
23.62
NARA - Broomfield
Broomfield, CO
161,730
2,346,885
0.7
14.51
JUD - Charleston
Charleston, SC
52,339
2,333,282
44.58
Various GSA - Cleveland (7)
Brooklyn Heights, OH
2028 - 2040
61,384
2,253,745
36.72
CBP - Savannah
Savannah, GA
35,000
2,234,261
63.84
DEA - Dallas
71,827
2,215,883
30.85
MEPCOM - Jacksonville (6)
Jacksonville, FL
2,215,374
73.85
DOE - Lakewood (6)
115,650
2,126,332
18.39
NWS - Kansas City
Kansas City, MO
94,378
2,114,807
22.41
JUD - Jackson
Jackson, TN
73,397
2,105,260
28.68
DEA - Santa Ana
Santa Ana, CA
39,905
1,943,792
0.6
48.71
DEA - North Highlands
Sacramento, CA
37,975
1,896,685
49.95
NPS - Omaha
62,772
1,829,413
29.14
ICE - Otay
San Diego, CA
2022 / 2027
47,919
1,761,413
36.76
VA - Golden
Golden, CO
56,753
1,741,257
30.68
USCG - Martinsburg
Martinsburg, WV
59,547
1,651,037
0.5
27.73
CBP - Sunburst (6)
Sunburst, MT
33,000
1,646,988
49.91
JUD - Aberdeen
Aberdeen, MS
46,979
1,552,938
33.06
VA - Charleston
97,718
1,539,323
15.75
GSA - Clarksburg
Clarksburg, WV
63,750
1,499,446
23.52
DEA - Birmingham
35,616
1,423,869
39.98
DEA - Albany
31,976
1,380,195
0.4
43.16
USAO - Springfield
Springfield, IL
43,600
1,372,735
31.48
DEA - Riverside
Riverside, CA
34,354
1,280,417
37.27
JUD - Council Bluffs
Council Bluffs, IA
28,900
1,272,798
44.04
SSA - Dallas
27,200
1,058,859
0.3
38.93
HRSA - Baton Rouge (6)
Baton Rouge, LA
27,569
965,676
35.03
VA - Baton Rouge (6)
823,488
27.45
ICE - Pittsburgh (6)(8)
2028 / 2032
25,369
803,239
31.66
JUD - South Bend
South Bend, IN
30,119
782,994
0.2
26.00
ICE - Louisville
17,420
647,615
37.18
DEA - San Diego
16,100
552,336
34.31
SSA - San Diego
10,059
433,434
0.1
43.09
DEA - Bakersfield
Bakersfield, CA
9,800
402,401
41.06
Subtotal
8,347,728
285,544,707
90.7
34.21
Wholly Owned Privately Leased Property
501 East Hunter Street - Lummus Corporation
Lubbock, TX
W/D
70,078
410,344
5.86
Wholly Owned Properties Total / Weighted Average
8,417,806
285,955,051
90.8
33.97
Unconsolidated Real Estate Venture U.S. Government Leased Properties
VA - San Antonio (9)
226,148
9,802,802
3.1
43.35
VA - Chattanooga (9)
Chattanooga, TN
94,566
4,154,710
43.93
VA - Lubbock (9) (10)
120,916
3,961,655
32.76
VA - Marietta (9)
Marietta, GA
76,882
3,795,065
49.36
VA - Birmingham (9)
Irondale, AL
77,128
3,105,255
40.26
VA - Columbus (9)
Columbus, GA
67,793
2,863,407
42.24
VA - Lenexa (9)
31,062
1,298,203
41.79
694,495
28,981,097
9.2
41.73
Total / Weighted Average
9,112,301
314,936,148
100.0
34.56
Total / Weighted Average at Easterly's Share
8,785,887
301,315,032
34.30
28
Certain of our leases are currently in the “soft-term” period of the lease, meaning that the U.S. Government tenant agency has the right to terminate the lease prior to its stated lease end date. We believe that, from the U.S. Government’s perspective, leases with such provisions are helpful for budgetary purposes. While some of our leases are contractually subject to early termination, we do not believe that our tenant agencies are likely to terminate these leases early given the build-to-suit features at the properties subject to the leases, the weighted average age of these properties based on the date the property was built or renovated-to-suit, where applicable (approximately 18.0 years as of September 30, 2022), the mission-critical focus of the properties subject to the leases and the current level of operations at such properties.
The following table sets forth a schedule of lease expirations for leases in place (including for wholly owned properties and properties held by the JV) as of September 30, 2022:
Year of Lease Expiration (1)
Number of Leases Expiring
Leased Square Footage Expiring
Percentage of Portfolio Leased Square Footage Expiring
Annualized Lease IncomeExpiring
Percentage of Total Annualized Lease IncomeExpiring
AnnualizedLease Incomeper LeasedSquare FootExpiring
41,683
1,543,184
37.02
437,753
13,523,681
4.3
30.89
740,595
8.1
23,731,586
7.5
32.04
660,128
7.2
22,652,412
34.32
294,245
3.2
9,477,011
3.0
32.21
506,510
5.6
18,494,025
5.9
36.51
805,055
8.8
18,191,041
5.8
22.60
493,794
5.4
14,206,922
4.5
28.77
2030
0.0
100,502
4,042,792
40.23
59
5,032,036
55.3
189,073,494
60.0
37.57
130
Information about our development property as of September 30, 2022 is set forth in the table below:
Lease Term
Estimated Leased SquareFeet
FDA - Atlanta
Atlanta, GA
Food and Drug Administration
20-year
162,000
29
Results of Operations
Comparison of Results of Operations for the three months ended September 30, 2022 and 2021
The financial information presented below summarizes our results of operations for the three months ended September 30, 2022 and 2021 (amounts in thousands).
Change
5,204
89
(237
5,433
2,614
551
2,285
(243
(23
5,184
(3,055
(777
(8,293
Total revenues increased $5.4 million to $75.0 million for the three months ended September 30, 2022 compared to $69.6 million for the three months ended September 30, 2021.
The $5.2 million increase in Rental income is primarily attributable to an increase in revenues from the five operating properties acquired since September 30, 2021, as well as a full period of operations from the one operating property acquired during the three months ended September 30, 2021, offset by one property disposed of during the three months ended September 30, 2021.
The $0.1 million increase in Tenant reimbursements is primarily attributable to an increase in tenant project reimbursements.
The $0.4 million increase in Asset management income is attributable to the fee we earned for asset management of the JV.
The $0.2 million decrease in Other income is primarily attributable to a decrease in COVID-19 cleaning reimbursements.
Total expenses increased $5.2 million to $57.2 million for the three months ended September 30, 2022 compared to $52.0 million for the three months ended September 30, 2021.
The $2.6 million increase in Property operating expenses is primarily attributable to the five operating properties acquired since September 30, 2021, as well as a full period of operations from the one operating property acquired during the three months ended September 30, 2021, offset by one property disposed of during the three months ended September 30, 2021.
The $0.6 million increase in Real estate taxes is also primarily attributable to the five operating properties acquired since September 30, 2021, as well as a full period of operations from the one operating property acquired during the three months ended September 30, 2021, offset by one property disposed of during the three months ended September 30, 2021.
30
The $2.3 million increase in Depreciation and amortization is primarily related to depreciation attributable to the five operating properties acquired since September 30, 2021, as well as a full period of operations from the one operating property acquired during the three months ended September 30, 2021, offset by a decrease in fully amortized lease intangibles.
On October 13, 2021, we formed the JV, in which we own a 53.0% interest, to fund the Portfolio Acquisition. The increase in Income from unconsolidated real estate venture is attributable to our pro rata share of operations from properties acquired by the JV since the fourth quarter of 2021.
Interest expense
The $3.1 million increase in Interest expense is primarily related to the issuance of our 2021 series of unsecured senior notes.
Gain on the sale of operating property decreased by $0.8 million for the three months ended September 30, 2022. The gain on the sale of operating property for the three months ended September 30, 2021 was attributable to the sale of United Technologies – Midland in the third quarter of 2021.
During the quarter ended September 30, 2022, we recognized an impairment loss totaling approximately $5.5 million for our ICE – Otay property in order to reduce its carrying value to its estimated fair value, which declined due to changes in expected cash flows related to the existing tenant’s lease expiration in 2022. ICE – Otay is a 47,919 rentable square foot office building located in San Diego, California.
Comparison of Results of Operations for the nine months ended September 30, 2022 and 2021
The financial information presented below summarizes our results of operations for the nine months ended September 30, 2022 and 2021.
16,525
(70
(520
16,877
7,233
1,389
5,937
(549
350
14,360
(6,990
(9,034
Total revenues increased $16.9 million to $220.1 million for the nine months ended September 30, 2022 compared to $203.2 million for the nine months ended September 30, 2021.
31
The $16.5 million increase in Rental income is primarily attributable to an increase in revenues from the five operating properties acquired since September 30, 2021, as well as a full period of operations from the six operating properties acquired during the nine months ended September 30, 2021, offset by two properties disposed of during the nine months ended September 30, 2021.
The $0.1 million decrease in Tenant reimbursements is primarily attributable to a decrease in tenant project reimbursements.
The $0.9 million increase in Asset management income is attributable to the fee we earned for asset management of the JV.
The $0.5 million decrease in Other income is primarily attributable to a decrease in COVID-19 cleaning reimbursements.
Total expenses increased $14.4 million to $165.0 million for the nine months ended September 30, 2022 compared to $150.6 million for the nine months ended September 30, 2021.
The $7.2 million increase in Property operating expenses is primarily attributable to the five operating properties acquired since September 30, 2021, as well as a full period of operations from the six operating properties acquired during the nine months ended September 30, 2021, offset by two properties disposed of during the nine months ended September 30, 2021.
The $1.4 million increase in Real estate taxes is also primarily attributable to the five operating properties acquired since September 30, 2021, as well as a full period of operations from the six operating properties acquired during the nine months ended September 30, 2021, offset by two properties disposed of during the nine months ended September 30, 2021.
The $5.9 million increase in Depreciation and amortization is primarily related to depreciation attributable to the five operating properties acquired since September 30, 2021, as well as a full period of operations from the six operating properties acquired during the nine months ended September 30, 2021, offset by a decrease in fully amortized lease intangibles.
Additionally, Corporate general and administrative costs increased by $0.4 million, primarily due to an increase in employee costs.
The $7.0 million increase in Interest expense is primarily related to the issuance of our 2021 series of unsecured senior notes.
Gain on the sale of operating property decreased by $1.3 million for the nine months ended September 30, 2022. The gain on the sale of operating property for the nine months ended September 30, 2021, was attributable to the sale of SSA – Mission Viejo in the second quarter of 2021 and United Technologies – Midland in the third quarter of 2021.
32
Liquidity and Capital Resources
We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant improvements, planned and possible acquisitions of properties, including the remaining Portfolio Acquisition properties through the JV, stockholder distributions to maintain our qualification as a REIT, repurchases of common stock under our share repurchase program and other capital obligations associated with conducting our business. At September 30, 2022, we had $21.5 million available in cash and cash equivalents and there was $272.1 million available under our revolving credit facility.
Our primary expected sources of capital are as follows:
Our short-term liquidity requirements consist primarily of funds to pay for the following:
Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or required. As of the date of this filing, there were no known commitments or events that would have a material impact on our liquidity.
On August 11, 2021, we and the operating partnership completed an underwritten public offering of 6,300,000 shares of common stock offered on a forward basis. In connection with the offering, we also entered into separate forward sale agreements with each of the forward purchasers (the “Forward Sales Agreements”), pursuant to which the forward purchasers borrowed and sold to the underwriters an aggregate of 6,300,000 shares of our common stock. On December 28, 2021, we issued 3,991,000 shares of our common stock for net proceeds of $85.0 million, which shares were issued in partial settlement of the Forward Sales Agreements entered into in connection with the underwritten public offering. No shares were issued during the three and nine months ended September 30, 2022. We expect to physically settle the remaining Forward Sales Agreements and receive proceeds, subject to certain adjustments, from the sale of those shares of common stock upon one or more such physical settlements. During the nine months
ended September 30, 2022, we extended the date by which settlement of the Forward Sales Agreements will occur to August 14, 2023. Although we expect to settle the Forward Sales Agreements entirely by the physical delivery of shares of our common stock for cash proceeds, we may also elect to cash or net-share settle all or a portion of our obligations under the Forward Sales Agreements, in which case, we may receive, or may owe, cash or shares of our common stock from or to the forward purchasers. The Forward Sales Agreements provide for an initial forward price of $21.64 per share, subject to certain adjustments pursuant to the terms of each of the Forward Sales Agreements. The Forward Sales Agreements are subject to early termination or settlement under certain circumstances.
We entered into separate equity distribution agreements on each of December 20, 2019 (the “2019 ATM Program”) and June 22, 2021 (the “2021 ATM Program” and, together with the 2019 ATM Program, the “ATM Programs”) with various financial institutions pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $300.0 million under each ATM Program from time to time in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. Under each of the ATM Programs, we may enter into one or more forward transactions (each, a “forward sale transaction”) under separate master forward sale confirmations and related supplemental confirmations with each of the various financial institutions party to the respective ATM Program for the sale of shares of our common stock on a forward basis.
The following table sets forth certain information with respect to issuances under the 2019 ATM Program during the nine months ended September 30, 2022 (amounts in thousands, except share amounts):
No sales of shares of our common stock were made under the 2021 ATM Program during the nine months ended September 30, 2022.
We used the net proceeds received from such sales for general corporate purposes. As of September 30, 2022, we had approximately $300.0 million of gross sales of our common stock available under the 2021 ATM Program and $87.4 million of gross sales of our common stock available under the 2019 ATM Program.
On April 28, 2022, our Board of Directors authorized a share repurchase program whereby we may repurchase up to 4,538,994 shares of our common stock, or approximately 5% of our outstanding shares as of the authorization date. We are not required to purchase shares under the share repurchase program, but may choose to do so in the open market or through privately negotiated transactions at times and amounts based on its evaluation of market conditions and other factors.
No repurchases of shares of our common stock were made under the share repurchase program during the nine months ended September 30, 2022.
On May 10, 2022, we acquired NARA – Broomfield for which we issued, as partial consideration, 827,791 common units. The issuance of common units was effected in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act.
Debt
The following table sets forth certain information with respect to our outstanding indebtedness as of September 30, 2022 (amounts in thousands):
35
Our revolving credit facility, term loan facilities, notes payable, and mortgage notes payable are subject to ongoing compliance with a number of financial and other covenants. As of September 30, 2022, we were in compliance with all applicable financial covenants.
On July 22, 2022, we entered into the first amendment to our second amended and restated senior credit agreement (the “first amendment”). The first amendment extended the deadline for the $50.0 million delayed draw portion of the 2018 term loan facility to July 24, 2023 (from July 22, 2022).
The chart below details our debt capital structure as of September 30, 2022 (dollar amounts in thousands):
Debt Capital Structure
Total principal outstanding
1,375,266
Weighted average maturity
5.6 years
Weighted average interest rate
3.7
% Variable debt
14.1
% Fixed debt (1)
85.9
% Secured debt
18.1
Material Cash Commitments
During the nine months ended September 30, 2022, there were no material changes to the cash commitment information presented in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021.
Unconsolidated Real Estate Venture
We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.
As of September 30, 2022, we have invested $199.3 million in the JV and committed capital totaling $202.4 million to the JV. We have a remaining capital commitment of $136.5 million to the JV. None of the properties owned by the JV are encumbered by mortgage indebtedness.
For a more complete description of the JV, see Note 4 to the Consolidated Financial Statements.
36
Portfolio Disposition
On October 27, 2022, we completed the sale of nine of the ten Disposition Portfolio Properties. Concurrent with closing, proceeds from the sale were used to extinguish the mortgage debt at MEPCOM – Jacksonville. We intend to further use proceeds to pay down amounts outstanding under our revolving credit facility.
We expect to close on the final Disposition Portfolio Property prior to December 31, 2022, subject to the satisfaction of customary closing conditions.
For a more complete description of the Disposition Portfolio Properties, see the 2022 Activity – Dispositions above.
Dividend Policy
In order to qualify as a REIT, we are required to distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We anticipate distributing all of our taxable income. We expect to make quarterly distributions to our stockholders in a manner intended to satisfy this requirement. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. It is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions. It is also possible that our board of directors could decide to make required distributions in part by using shares of our common stock.
A summary of dividends declared by the board of directors per share of common stock and per common unit at the date of record is as follows:
Inflation
Substantially all of our leases provide for operating expense escalations. We believe inflationary increases in expenses may be at least partially offset by the operating expenses that are passed through to our tenants and by contractual rent increases. We do not believe inflation has had a material impact on our historical financial position or results of operations.
Cash Flows
The following table sets forth a summary of cash flows for the nine months ended September 30, 2022 and 2021 (amounts in thousands):
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Operating Activities
We generated $103.8 million and $94.5 million of cash from operating activities during the nine months ended September 30, 2022 and 2021, respectively. Net cash provided by operating activities for the nine months ended September 30, 2022 includes $94.0 million in net cash from rental activities net of expenses, $5.4 million related to distributions from investment in unconsolidated real
estate venture and $4.3 million related to the change in tenant accounts receivable, prepaid expenses and other assets, deferred revenue associated with operating leases, principal payments on operating lease obligations, and accounts payable, accrued expenses and other liabilities. Net cash provided by operating activities for the nine months ended September 30, 2021 includes $85.9 million in net cash from rental activities net of expenses and $8.6 million related to the change in tenant accounts receivable, prepaid expenses and other assets, deferred revenue associated with operating leases, and accounts payable, accrued expenses and other liabilities.
Investing Activities
We used $189.3 million and $127.5 million in cash for investing activities during the nine months ended September 30, 2022 and 2021, respectively. Net cash used in investing activities for the nine months ended September 30, 2022 includes $93.7 million in real estate acquisitions and deposits, $71.3 million in investment in unconsolidated real estate venture, $16.1 million in additions to operating properties and $8.8 million in additions to development properties, offset by $0.6 million in distributions of capital from unconsolidated real estate venture. Net cash used in investing activities for the nine months ended September 30, 2021 includes $115.4 million in real estate acquisitions, $14.1 million in additions to operating properties and $5.3 million in additions to development properties, offset by $7.3 million in proceeds from the sale of SSA – Mission Viejo and United Technologies – Midland.
Financing Activities
We generated $86.9 million and $42.1 million in cash from financing activities during the nine months ended September 30, 2022 and 2021, respectively. Net cash generated by financing activities for the nine months ended September 30, 2022 includes $200.8 million in draws under our revolving credit facility and $9.5 million in gross proceeds from issuances of shares of our common stock, offset by $81.8 million in dividend payments, $37.5 million in pay downs under our revolving credit facility, $3.9 million in mortgage notes payable repayment and $0.1 million in the payment of offering costs. Net cash generated by financing activities for the nine months ended September 30, 2021 includes $159.5 million in draws under our revolving credit facility and $90.9 million in gross proceeds from issuances of shares of our common stock, offset by $126.3 million in pay downs under our revolving credit facility, $74.1 million in dividend payments, $3.6 million in payment of deferred financing fees, $2.9 million in mortgage notes payable repayment and $1.5 million in the payment of offering costs.
Non-GAAP Financial Measures
We use and present Funds From Operations (“FFO”), and FFO, as Adjusted as supplemental measures of our performance. The summary below describes our use of FFO and FFO, as Adjusted, provides information regarding why we believe these measures are meaningful supplemental measures of our performance and reconciles these measures from net income, presented in accordance with GAAP.
38
Funds From Operations and Funds From Operations, as Adjusted
FFO is a supplemental measure of our performance. We present FFO calculated in accordance with the current National Association of Real Estate Investment Trusts, or Nareit, definition set forth in the Nareit FFO White Paper – Restatement 2018. FFO includes the REIT’s share of FFO generated by unconsolidated affiliates. In addition, we present FFO, as Adjusted for certain other adjustments that we believe enhance the comparability of our FFO across periods and to the FFO reported by other publicly traded REITs. FFO is a supplemental performance measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of REITs.
FFO is defined by Nareit as net income (calculated in accordance with GAAP), excluding:
We present FFO because we consider it an important supplemental measure of our operating performance, and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting results.
We adjust FFO to present FFO, as Adjusted as an alternative measure of our operating performance, which, when applicable, excludes the impact of acquisition costs, straight-line rent, amortization of above-/below-market leases, amortization of deferred revenue (which results from landlord assets funded by tenants), non-cash interest expense, non-cash compensation, depreciation of non-real estate assets and other non-cash items and the unconsolidated real estate venture’s allocated share of these adjustments. By excluding these income and expense items from FFO, as Adjusted, we believe we provide useful information as these items have no cash impact. In addition, by excluding acquisition related costs we believe FFO, as Adjusted provides useful information that is comparable across periods and more accurately reflects the operating performance of our properties.
FFO and FFO, as Adjusted are presented as supplemental financial measures and do not fully represent our operating performance. Other REITs may use different methodologies for calculating FFO and FFO, as Adjusted or use other definitions of FFO and FFO, as Adjusted and, accordingly, our presentation of these measures may not be comparable to other REITs. Neither FFO nor FFO, as Adjusted is intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.
39
The following table sets forth a reconciliation of our net income to FFO and FFO, as Adjusted for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
Depreciation of real estate assets
24,802
22,741
72,810
67,561
Gain on sale of operating property
Unconsolidated real estate venture allocated share of above adjustments
1,347
3,352
FFO
32,438
31,006
98,844
92,430
Adjustments to FFO:
Straight-line rent and other non-cash adjustments
1,090
(1,580
Amortization of above-/below-market leases
(769
(1,058
Amortization of deferred revenue
(1,472
(1,398
Non-cash interest expense
235
380
695
1,107
Depreciation of non-real estate assets
248
742
(374
(1,051
FFO, as Adjusted
33,296
29,225
98,933
86,676
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base these estimates, judgments, and assumptions on historical experience, current trends, and various other factors that we believe to be reasonable under the circumstances. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements.
Our Annual Report on Form 10-K for the year ended December 31, 2021 contains a discussion of our significant accounting policies, which utilize relevant critical accounting estimates. During the nine months ended September 30, 2022, there were no material changes to the discussion of our significant accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and variable rates. We manage and may continue to manage our market risk on variable rate debt by entering into swap arrangements to, in effect, fix the rate on all or a portion of the debt for varying periods up to maturity. This in turn, reduces the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when undertaking such arrangements is to reduce our floating rate exposure and we do not intend to enter into hedging arrangements for speculative purposes.
As of September 30, 2022, $1.2 billion, or 85.9% of our debt, excluding unamortized premiums and discounts, had fixed interest rates and $193.5 million, or 14.1% had variable interest rates. If market rates of interest on our variable rate debt fluctuate by 25 basis points, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows, by $0.5 million annually.
In July 2017, the Financial Conduct Authority announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In March 2021, the ICE Benchmark Administration, the administrator of LIBOR, announced its intention to cease publication of certain LIBOR settings after 2021, while continuing to publish overnight and one-, three-, six-, and twelve-month U.S. dollar LIBOR rates through June 30, 2023. While this announcement extended the transition period to June 2023, the United States Federal Reserve Board and other regulatory bodies concurrently issued guidance encouraging banks and other financial market participants to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate as soon as practicable and in any event no later than December 31, 2021. In the U.S., the Alternative Reference Rates Committee (“AARC”), which was convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended that the Secured Overnight Financing Rate (“SOFR”) plus a recommended spread adjustment as its preferred alternative to USD-LIBOR. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities.
We expect that all LIBOR settings relevant to us will cease to be published or will no longer be representative after June 30, 2023. As a result, any of our LIBOR-based borrowings that extend beyond such date will need to be converted to a replacement rate. Certain risks may arise in connection with transitioning contracts to SOFR or any other alternative variable rate, including any resulting value transfer that may occur. The value of loans, securities, or derivative instruments tied to LIBOR could also be impacted. Our senior unsecured revolving credit facility and term loan facilities provide for replacement of LIBOR if it becomes unavailable during the term of the facilities. However, for instruments into which we may enter in the future, the method of transitioning to an alternative rate may be challenging, as they may require substantial negotiation with each respective counterparty. If a contract is not transitioned to an alternative variable rate and LIBOR is discontinued, the impact is likely to vary by contract.
The discontinuation of LIBOR will not affect our ability to borrow or maintain already outstanding borrowings or swaps, but if our contracts indexed to LIBOR, including certain contracts governing our variable rate debt and our interest rate swaps, are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available. Additionally, although SOFR is the AARC’s recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in ways that would result in higher interest costs for us. It is not yet possible to predict the magnitude of LIBOR’s end on our borrowing costs given the remaining uncertainty about which rates will replace LIBOR.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a -15(e) and Rule 15d-15 of the Exchange Act, as of September 30, 2022. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2022, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II
Item 1. Legal Proceedings
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against us.
Item 1A. Risk Factors
Except to the extent updated below or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.
We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.
The timing and amount of repurchases of shares of our common stock, if any, will depend upon several factors, including market and business conditions, the trading price of our common stock, our cost of capital and the nature of other investment opportunities. Our share repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our common stock pursuant to our share repurchase program could affect our stock price and increase its volatility. The existence of our share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of stock. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q:
Exhibit
Exhibit Description
Amended and Restated Articles of Amendment and Restatement of Easterly Government Properties, Inc. (previously filed as Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
Amended and Restated Bylaws of Easterly Government Properties, Inc. (previously filed as Exhibit 3.2 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
3.3
First Amendment to Amended and Restated Bylaws of Easterly Government Properties, Inc. (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on February 27, 2019 and incorporated herein by reference)
3.4
Second Amendment to Amended and Restated Bylaws of Easterly Government Properties, Inc. (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on May 20, 2021 and incorporated herein by reference)
4.1
Specimen Certificate of Common Stock of Easterly Government Properties, Inc. (previously filed as Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
10.1
First Amendment to Second Amended and Restated Credit Agreement, dated as of July 22, 2022, by and among Easterly Government Properties, Inc., Easterly Government Properties LP, the Guarantors named therein, the Initial Lenders and Initial Issuing Banks named therein, and Citibank, N.A., as administrative agent, Wells Fargo Bank, N.A. and PNC Bank, National Association, as co-syndication agents, BMO Harris Bank, N.A., Raymond James Bank, Royal Bank of Canada and Truist Bank, as co-syndication agents, BMO Harris Bank, N.A., Raymond James Bank, Royal Bank of Canada and Truist Bank as co-documentation agents, and Citibank, N.A., Wells Fargo Securities, LLC and PNC Capital Markets LLC, as joint lead arrangers and joint book running managers (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on July 26, 2022 and incorporated herein by reference)
31.1*
Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2*
Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1**
Certification of Chief Executive Officer and Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended
101.INS*
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*)
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 1, 2022
/s/ William C. Trimble, III
William C. Trimble, III
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Meghan G. Baivier
Meghan G. Baivier
Executive Vice President, Chief Financial Officer and Chief Operating Officer
(Principal Financial Officer)