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, 2023
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 24, 2023, the registrant had 95,200,928 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, 2023 and December 31, 2022 (unaudited)
1
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)
2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)
3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)
4
Notes to the Consolidated Financial Statements
6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3: Quantitative and Qualitative Disclosures About Market Risk
39
Item 4: Controls and Procedures
Part II: Other Information
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Item 3: Defaults Upon Senior Securities
Item 4: Mine Safety Disclosures
40
Item 5: Other Information
Item 6: Exhibits
Signatures
Easterly Government Properties, Inc.
Consolidated Balance Sheets (unaudited)
(Amounts in thousands, except share amounts)
September 30, 2023
December 31, 2022
Assets
Real estate properties, net
$
2,262,502
2,285,308
Cash and cash equivalents
20,696
7,578
Restricted cash
12,753
9,696
Tenant accounts receivable
61,119
58,835
Investment in unconsolidated real estate venture
284,522
271,644
Intangible assets, net
140,505
157,282
Interest rate swaps
5,003
4,020
Prepaid expenses and other assets
38,379
35,022
Total assets
2,825,479
2,829,385
Liabilities
Revolving credit facility
—
65,500
Term loan facilities, net
298,982
248,972
Notes payable, net
696,411
696,052
Mortgage notes payable, net
221,448
240,847
Intangible liabilities, net
13,450
16,387
Deferred revenue
84,178
83,309
Accounts payable, accrued expenses and other liabilities
75,790
67,336
Total liabilities
1,390,259
1,418,403
Equity
Common stock, par value $0.01, 200,000,000 shares authorized, 95,117,527 and 90,814,021 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively
951
908
Additional paid-in capital
1,707,142
1,622,913
Retained earnings
107,865
93,497
Cumulative dividends
(549,562
)
(475,983
Accumulated other comprehensive income (loss)
4,430
3,546
Total stockholders’ equity
1,270,826
1,244,881
Non-controlling interest in Operating Partnership
164,394
166,101
Total equity
1,435,220
1,410,982
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,
2023
2022
Revenues
Rental income
68,205
72,643
204,111
214,238
Tenant reimbursements
2,704
1,616
7,279
3,676
Asset management income
526
377
1,560
942
Other income
579
405
1,657
1,244
Total revenues
72,014
75,041
214,607
220,100
Expenses
Property operating
18,746
17,802
54,263
48,811
Real estate taxes
7,814
8,177
22,901
23,854
Depreciation and amortization
22,245
25,050
67,945
73,552
Acquisition costs
321
275
1,226
939
Corporate general and administrative
6,107
5,870
20,426
17,819
Total expenses
55,233
57,174
166,761
164,975
Other income (expense)
Income from unconsolidated real estate venture
1,346
830
4,166
2,286
Interest expense, net
(12,046
(12,408
(35,739
(34,729
Impairment loss
(5,540
Net income
6,081
749
16,273
17,142
(707
(107
(1,905
(1,962
Net income available to Easterly Government Properties, Inc.
5,374
642
14,368
15,180
Net income available to Easterly Government Properties, Inc. per share:
Basic
0.06
0.01
0.15
0.16
Diluted
Weighted-average common shares outstanding
93,537,121
90,772,706
92,674,039
90,560,471
93,849,444
91,119,372
92,938,221
90,886,108
Dividends declared per common share
0.265
0.795
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(Amounts in thousands)
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swaps, net
(110
1,806
984
10,216
Other comprehensive income (loss)
Comprehensive income
5,971
2,555
17,257
27,358
Other comprehensive (income) loss attributable to non-controlling interest
22
(212
(100
(1,157
Comprehensive income attributable to Easterly Government Properties, Inc.
5,286
2,236
15,252
24,239
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
(2,661
559
(4,166
(2,286
Amortization of above- / below-market leases
(2,052
(2,373
Amortization of unearned revenue
(4,678
(4,313
Amortization of loan premium / discount
(820
(844
Amortization of deferred financing costs
1,572
1,538
Amortization of lease inducements
684
640
5,540
Distributions from investment in unconsolidated real estate venture
9,025
5,432
Non-cash compensation
4,625
4,891
Net change in:
408
544
(4,720
(2,598
Deferred revenue associated with operating leases
5,547
2,689
Principal payments on operating lease obligations
(369
(314
10,332
3,984
Net cash provided by operating activities
96,945
103,783
Cash flows from investing activities
Real estate acquisitions and deposits
(957
(93,737
Additions to operating properties
(20,168
(16,128
Additions to development properties
(9,798
(8,804
609
(17,736
(71,253
Net cash used in investing activities
(48,659
(189,313
Cash flows from financing activities
Issuance of common shares
86,472
9,504
Credit facility draws
100,750
200,750
Credit facility repayments
(166,250
(37,500
Term loan draws
50,000
Repayments of mortgage notes payable
(18,912
(3,942
Dividends and distributions paid
(83,774
(81,795
Payment of offering costs
(397
(136
Net cash (used in) provided by financing activities
(32,111
86,881
Net increase in Cash and cash equivalents and Restricted cash
16,175
1,351
Cash and cash equivalents and Restricted cash, beginning of period
17,274
20,143
Cash and cash equivalents and Restricted cash, end of period
33,449
21,494
Supplemental disclosure of cash flow information is as follows:
Cash paid for interest (net of capitalized interest of $1,038 and $850 in 2023 and 2022, respectively)
33,834
25,805
Supplemental disclosure of non-cash information
Additions to operating properties accrued, not paid
2,513
2,731
Additions to development properties accrued, not paid
5,178
2,550
Offering costs accrued, not paid
16
Deferred asset acquisition costs accrued, not paid
92
Contingent consideration accrued, not received
125
Unrealized gain on interest rate swaps, net
Properties acquired for Common Units
219
17,361
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
(164
(2,911
Common stock
164
2,909
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, 2022, 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, 2022 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2023.
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, 2023, we wholly owned 78 operating properties and nine operating properties through an unconsolidated joint venture (the “JV”) in the United States, encompassing approximately 8.6 million leased square feet, including 86 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, 2023, our operating properties were 97% 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 88.5% of the aggregate limited partnership interests in the Operating Partnership (“common units”) at September 30, 2023. 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, 2023 and December 31, 2022, the consolidated results of operations for the three and nine months ended September 30, 2023 and 2022, and the consolidated cash flows for the nine months ended September 30, 2023 and 2022. 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, the results of which form the basis for making judgments 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 our condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
3. Real Estate and Intangibles
Consolidated Real Estate and Intangibles
Real estate and intangibles consisted of the following as of September 30, 2023 (amounts in thousands):
Land
213,592
Building and improvements
2,298,345
Acquired tenant improvements
81,666
Construction in progress
41,912
Accumulated depreciation
(373,013
Total Real estate properties, net
In-place leases
271,066
Acquired leasing commissions
68,642
Above market leases
14,620
Payment in lieu of taxes
6,394
Accumulated amortization
(220,217
Total Intangible assets, net
Below market leases
(72,037
58,587
Total Intangible liabilities, net
(13,450
No operating properties were acquired or disposed of during the nine months ended September 30, 2023.
During the three and nine months ended September 30, 2023, we incurred $0.3 million and $1.2 million of acquisition-related expenses, respectively, mainly consisting of internal costs associated with future property acquisitions.
The following table summarizes the scheduled amortization of our acquired above- and below-market lease intangibles for each of the five succeeding years as of September 30, 2023 (amounts in thousands):
Acquired Above-Market Lease Intangibles
Acquired Below-Market Lease Intangibles
2023 (1)
292
(970
2024
1,129
(2,938
2025
1,097
(2,246
2026
1,096
(2,008
2027
(1,783
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.
7
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.
During the nine months ended September 30, 2023, the JV acquired one property, VA - Corpus Christi, for an aggregate purchase price of $34.5 million. As of September 30, 2023, nine of the ten properties in the VA Portfolio had been acquired by the JV.
We provide asset management services to the JV. During the three and nine months ended September 30, 2023, we recognized asset management service revenue of $0.5 million and $1.6 million, respectively. During the three and nine months ended September 30, 2022, we recognized asset management service revenue of $0.4 million and $0.9 million, respectively.
The following is a summary of financial information for the JV (amounts in thousands):
Balance sheet information:
Real estate, net
452,405
Other assets, net (1)
94,992
547,397
Total liabilities (2)
11,146
536,251
Company’s share of equity
284,147
Basis differential (3)
375
Carrying value of the Company’s investment in the unconsolidated venture
Income statement information:
Total revenue
10,137
7,136
29,993
17,799
Operating income
2,601
1,608
8,004
4,436
2,561
1,567
7,882
4,313
Company’s share of net income
8
5. Debt
At September 30, 2023, 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)
S + 135 bps
July 2025 (3)
Total revolving credit facility
Term loan facilities:
2016 term loan facility
100,000
5.05% (4)
March 2024
2018 term loan facility
200,000
5.39% (5)
July 2026
Total term loan facilities
300,000
Less: Total unamortized deferred financing fees
(1,018
Total term loan facilities, net
Notes payable:
2017 series A senior notes
95,000
4.05%
May 2027
2017 series B senior notes
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
2.89%
October 2030
Total notes payable
700,000
(3,589
Total notes payable, net
Mortgage notes payable:
VA – Golden
8,480
5.00% (6)
April 2024
USFS II – Albuquerque
12,080
4.46% (6)
ICE – Charleston
12,364
4.21% (6)
January 2027
VA – Loma Linda
127,500
3.59% (6)
July 2027
CBP – Savannah
9,762
3.40% (6)
July 2033
USCIS – Kansas City
51,500
3.68% (6)
August 2024
Total mortgage notes payable
221,686
(1,058
Less: Total unamortized premium/discount
820
Total mortgage notes payable, net
Total debt
1,216,841
9
As of September 30, 2023, the net carrying value of real estate collateralizing our mortgages payable totaled $328.4 million. See Note 7 for the fair value of our debt instruments.
On January 26, 2023, we used $15.7 million of available cash to extinguish the mortgage note obligation on DEA – Pleasanton.
On February 3, 2023, we entered into three SOFR-based interest rate swaps each with a notional value of $100.0 million that were designated as cash flow hedges of interest rate risk. Two of the interest rate swaps, with an aggregate notional value of $200.0 million, became effective in June 2023. The third swap, with a notional value of $100.0 million, became effective in September 2023. See Note 6 for more information on our interest rate swaps.
On May 30, 2023, we entered into the third amendment to our second amended and restated credit agreement, dated as of July 23, 2021 and into the sixth amendment to our senior unsecured term loan agreement, dated as of September 29, 2016. These amendments added a daily simple SOFR-based option to the term SOFR-based floating interest rate option as a benchmark rate for borrowings denominated in U.S. dollars for all purposes under the credit and term loan agreements, including, in each case, a credit spread adjustment of 0.10%.
On July 20, 2023, we exercised in full the $50.0 million delayed draw option on our 2018 term loan facility, increasing our 2018 term loan facility commitments from $150.0 million to $200.0 million, and transferred $50.0 million of our interest rate swap with a notional value of $100.0 million, from our revolving credit facility to the $50.0 million delayed draw.
Financial Covenant Considerations
As of September 30, 2023, 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, 2023 (amounts in thousands):
Notional Amount
Fixed Rate
Floating Rate Index
Effective Date
Expiration Date
Fair Value
4.01
%
USD-SOFR with -5 Day Lookback
June 23, 2023
March 23, 2025
1,586
4.18
December 23, 2024
1,251
3.70
September 29, 2023
June 29, 2025
2,166
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, 2023
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 our variable rate debt.
We estimate that $4.0 million will be reclassified from AOCI as a decrease to interest expense over the next 12 months.
10
The table below presents the effects of our interest rate derivatives on our Consolidated Statements of Operations and Comprehensive Income (Loss) (amounts in thousands):
Unrealized gain recognized in AOCI
1,443
1,801
5,778
8,046
Gain (loss) reclassified from AOCI into interest expense
1,553
(5
4,794
(2,170
Credit-Risk-Related Contingent Features
We have agreements with each of our derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on such indebtedness. As of September 30, 2023, we were not in a net liability position with any derivative counterparty. As of September 30, 2023, we were 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 we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We have determined that the significance of the impact of the credit valuation adjustments made to our 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 our derivatives held as of September 30, 2023 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 our assets measured at fair value on a recurring basis as of September 30, 2023, 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.
11
Financial assets and liabilities not measured at fair value
As of September 30, 2023, 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)
Notes payable
570,336
Mortgages payable
204,129
8. Equity Incentive Plan
Restricted Shares
We award 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 awards vest upon the earlier of the anniversary of the date of the grant or the next annual stockholder meeting, subject to the grantee's continued service with the Company through 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 for both the three months ended September 30, 2023 and 2022 and $0.4 million and $0.5 million for the nine months ended September 30, 2023 and 2022, respectively.
The fair value of restricted stock that vested was $0.4 million and $1.5 million during the nine months ended September 30, 2023 and 2022, respectively, based on the market price at the vesting date. The balance of unamortized restricted stock expense as of September 30, 2023 was $0.4 million, which is expected to be recognized over a weighted average period of 0.9 years.
A summary of the status of our restricted shares as of September 30, 2023 and changes during the nine months ended September 30, 2023 is presented below:
Restricted Shares Weighted Average Grant Date Fair Value Per Share
Outstanding, December 31, 2022
41,315
19.94
Vested
(30,987
19.43
Granted
32,486
14.18
Forfeited
Outstanding, September 30, 2023
42,814
15.94
LTIP Units
We grant 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 awards vest upon the earlier of the anniversary of the date of the grant or the next annual stockholder meeting, subject to the grantee's continued service with the Company through such date. Performance-based LTIP units are earned subject to us 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.
12
The following is a summary of our granted LTIP unit awards during the nine months ended September 30, 2023:
Award Type
Grant Date
Performance PeriodEnd Date
Vest Date
Units Granted
Service
January 3, 2023
December 31, 2025
219,859
Operational
127,291
Performance
148,633
March 2, 2023
March 2, 2026
3,438
May 9, 2023
16,244
2023 LTIP Grant
515,465
We value our operational LTIP unit awards that are subject to us 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 us 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, 2023:
Expected volatility
29.0
Dividend yield
5.6
Risk-free interest rate
4.2
Expected life
3 years
The fair value of LTIP units that vested were $4.0 million and $5.5 million during the nine months ended September 30, 2023 and 2022, respectively, based on the market price at the vesting date. Compensation expense related to LTIP unit awards was $1.5 million and $1.5 million for the three months ended September 30, 2023 and 2022, respectively, and $4.2 million and $4.4 million for the nine months ended September 30, 2023 and 2022, respectively. The balance of unamortized LTIP expense as of September 30, 2023 was $8.3 million, which is expected to be recognized over a weighted average period of 1.7 years. As of September 30, 2023, management considers it probable that the operational performance conditions on four of our five unvested grants will be achieved.
A summary of the status of our LTIP units as of September 30, 2023 and changes during the nine months ended September 30, 2023 are presented below:
LTIP Units (1)
LTIP Units Weighted Average Grant Date Fair Value Per Share
896,665
19.90
(204,570
21.50
12.25
(85,352
18.30
1,122,208
16.21
13
9. Equity
The following table summarizes the changes in our stockholders’ equity for the three months ended September 30, 2023 and 2022 (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, 2023
Balance at June 30, 2023
93,415,706
934
1,673,399
102,491
(524,806
4,518
165,531
1,422,067
Stock based compensation
134
1,524
1,658
Dividends and distributions paid ($0.265 per share)
(24,756
(3,399
(28,155
Redemption of common units for shares of common stock
1,821
24
(24
Issuance of common stock, net
1,700,000
17
33,662
33,679
Unrealized loss on interest rate swaps
(88
(22
707
Allocation of non-controlling interest in Operating Partnership
(77
77
Balance at September 30, 2023
95,117,527
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
126
1,499
1,625
(24,066
(3,314
(27,380
Forfeiture of unvested restricted stock
(2,601
1,594
212
107
1,214
(1,214
Balance at September 30, 2022
90,814,021
1,622,628
77,203
(451,917
3,987
165,986
1,418,795
The following table summarizes the changes in our stockholders’ equity for the nine months ended September 30, 2023 and 2022 (amounts in thousands, except share amounts):
Nine months ended September 30, 2023
Balance at December 31, 2022
427
4,198
Dividends and distributions paid ($0.795 per share)
(73,579
(10,195
Grant of unvested restricted stock
12,020
4,259,000
43
85,868
85,911
Contribution of property for common units
Unrealized gain on interest rate swaps
884
100
1,905
(2,230
2,230
Nine months ended September 30, 2022
Balance at December 31, 2021
90,147,868
901
1,604,712
62,023
(379,895
(5,072
158,912
1,441,581
478
4,413
(72,022
(9,773
26,477
204,751
434,925
9,394
9,399
9,059
1,157
1,962
5,135
(5,135
14
A summary of dividends declared by our 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 2023
April 26, 2023
May 11, 2023
May 23, 2023
Q2 2023
August 2, 2023
August 17, 2023
August 29, 2023
Q3 2023
October 26, 2023
November 9, 2023
November 21, 2023
Offering of Common Stock on a Forward Basis
On August 11, 2021, we 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. During the three months ended March 31, 2023, we issued 2,309,000 shares of common stock under the Forward Sale Agreements and received net cash proceeds of approximately $46.8 million. As of September 30, 2023, all shares of common stock under the Forward Sales Agreements had been issued and settled.
ATM Programs
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 of 1933, as amended (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, 2023 (amounts in thousands except share amounts):
2019 ATM Program
For the three months ended
Number of Shares Issued(1)
Net Proceeds(1)
March 31, 2023
250,000
5,562
June 30, 2023
33,717
1,950,000
39,279
No sales of shares of our common stock were made under the 2021 ATM Program during the nine months ended September 30, 2023.
We used the net proceeds received from sales under our 2019 ATM Program for general corporate purposes. As of September 30, 2023, 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 common stock available under the 2019 ATM Program.
15
Share Repurchase 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 our 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, 2023.
Contribution of Property for Common Units
On January 25, 2023, the Operating Partnership issued 12,391 common units and fully settled a contingent earn-out liability in connection with our acquisition of FBI / DEA - El Paso on May 26, 2020. The issuance of the 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 our basic and diluted earnings per share of common stock for the three and nine months ended September 30, 2023 and 2022 (amounts in thousands, except per share amounts):
Numerator
Less: Non-controlling interest in Operating Partnership
Less: Dividends on participating securities
(151
(137
(450
(410
Net income available to common stockholders
5,223
505
13,918
14,770
Denominator for basic EPS
Dilutive effect of share-based compensation awards
14,363
11,455
18,483
20,646
Dilutive effect of LTIP units (1)
297,960
335,211
245,699
304,991
Dilutive effect of shares issuable under forward sale agreements (2)
Denominator for diluted EPS
Basic EPS
Diluted EPS
11. Leases
Lessor
We lease 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 19.3 years as of September 30, 2023), 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 our leases as of September 30, 2023 (amounts in thousands):
Payments due by period
Thereafter
Fixed lease payments
2,076,511
54,924
214,169
205,924
199,096
187,562
1,214,836
The table below sets forth our composition of lease revenue recognized between fixed and variable components (amounts in thousands):
Fixed
63,098
68,033
188,991
199,411
Variable
5,107
4,610
15,120
14,827
Lessee
We lease corporate office space under operating lease arrangements in Washington, D.C. and San Diego, CA. 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. We have elected not to separate lease and non-lease components for our corporate office leases.
As of September 30, 2023, the unamortized balances associated with our right-of-use operating lease asset and operating lease liability were both $3.1 million. We used our incremental borrowing rate, which was arrived at utilizing prevailing market rates and the spread on our revolving credit facility, in order to determine the net present value of the minimum lease payments.
The following table provides quantitative information for our commenced operating leases (amounts in thousands):
Cash flows from operating lease costs
175
121
436
324
In addition, the maturity of fixed lease payments under our commenced corporate office leases as of September 30, 2023 is summarized in the table below (amounts in thousands):
Corporate office leases
150
768
793
661
368
718
Total future minimum lease payments
3,458
Imputed interest
(352
3,106
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, 2023 and 2022 (amounts in thousands):
Tenant
Department of Veteran Affairs (“VA”)
1,589
1,271
4,221
1,573
U.S. Joint Staff Command (“JSC”)
839
69
2,092
525
Federal Bureau of Investigation (“FBI”)
277
655
1,057
U.S. Coast Guard (“USCG”)
343
33
Customs and Border Protection (“CBP”)
148
230
155
Department of Transportation (“DOT”)
136
The Judiciary of the U.S. Government (“JUD”)
122
Immigration and Customs Enforcement (“ICE”)
111
Federal Emergency Management Agency (“FEMA”)
96
89
U.S. Citizenship and Immigration Services (“USCIS”)
26
87
56
197
Bonneville Power Administration (“BPA”)
National Archives and Records Administration (“NARA”)
Food and Drug Administration (“FDA”)
27
231
Internal Revenue Service (“IRS”)
Department of Labor (“DOL”)
Federal Aviation Administration (“FAA”)
National Weather Service (“NWS”)
Occupational Safety and Health Administration (“OSHA”)
72
National Park Services (“NPS”)
General Services Administration - Other
Drug Enforcement Agency (“DEA”)
Patent and Trademark Office (“PTO”)
Health Resources and Services Administration (“HRSA”)
3,027
1,792
8,102
18
As of September 30, 2023 and December 31, 2022, the balance in Accounts receivable related to tenant construction projects and the associated project management income was $9.1 million and $6.8 million, respectively.
The duration of the majority of tenant construction project reimbursement arrangements is 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, 2023 with a duration of greater than one year.
During the three and nine months ended September 30, 2023, we recognized $0.1 million and $0.3 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, 2022, we 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 our performance obligation is satisfied. As of both September 30, 2023 and December 31, 2022, the balance in Accounts receivable related to parking garage income was less than $0.1 million.
During both the three and nine months ended September 30, 2023, we recognized less than $0.1 million in income for providing COVID-19 related cleaning services to certain tenants. During the three and nine months ended September 30, 2022, we recognized less than $0.1 million and $0.1 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 both September 30, 2023 and December 31, 2022.
There were no contract assets or liabilities as of September 30, 2023 or December 31, 2022.
13. Concentrations Risk
Concentrations of credit risk arise for us when multiple of our tenants 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 obligations owed to us. We regularly monitor our tenant base to assess potential concentrations of credit risk.
As stated in Note 1 above, we lease commercial space to the U.S. Government or non-governmental tenants. At September 30, 2023, the U.S. Government accounted for approximately 98.5% of our total annualized lease income and non-governmental tenants accounted for the remaining approximately 1.5%.
Seventeen of our 87 wholly-owned and unconsolidated operating properties are located in California, accounting for approximately 14.9% of our total leased square feet and approximately 19.8% of our total annualized lease income as of September 30, 2023. 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
We provide asset management services to properties owned by the JV. For the three and nine months ended September 30, 2023, we recognized Asset management income of $0.5 million and $1.6 million, respectively. For the three and nine months ended September 30, 2022, we recognized Asset management income of $0.4 million and $0.9 million, respectively.
15. Subsequent Events
For our consolidated financial statements as of September 30, 2023, we evaluated subsequent events and noted the following significant events.
On October 3, 2023, we acquired a 95,273 leased square foot Class A facility located in Anaheim, California. The building was renovated in 2020. The facility is 100% leased by tenant agencies of the state of California for beneficial use of the Employment Development Department and Department of Industrial Relations and has lease expirations ranging from 2033 to 2034.
On October 3, 2023, we acquired a 91,185 leased square foot Department of Homeland Security (“DHS”) facility in Atlanta, Georgia. The building was renovated to suit in 2023. The facility is primarily leased to the GSA for beneficial use of the Custom and Border Protection and Transportation Security Administration and has lease expirations ranging from 2031 to 2038.
19
On October 19, 2023, we acquired a 35,005 leased square foot Judiciary of the U.S. Government (“JUD”) courthouse in Newport News, Virginia. The building is a build-to-suit courthouse completed in 2008. The facility is leased to the GSA for beneficial use of the JUD with a lease expiration of July 2033.
20
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 that could affect us and the statements contained herein, see the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, 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 accounting principles generally accepted in the United States of America (“GAAP”).
We are an internally managed real estate investment trust (“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. We may also consider other potential opportunities to add properties to our portfolio, including acquiring properties leased to states and local governments with strong creditworthiness. As of September 30, 2023, we wholly owned 78 operating properties and nine operating properties through an unconsolidated joint venture (the “JV”) in the United States encompassing approximately 8.6 million leased square feet (8.2 million pro rata), including 86 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, 2023, our operating properties were 97% 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 88.5% of the aggregate limited partnership interests in the operating partnership, which we refer to herein as common units, as of September 30, 2023. 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.
2023 Activity
Acquisitions
On September 22, 2023, the JV acquired a 69,276 square foot Veteran Affairs (“VA”) outpatient facility located in Corpus Christi, Texas. The building is a build-to-suit property that was completed during 2022. The outpatient facility is leased to the VA and has a lease expiration of November 2042. The facility is the ninth of ten properties to be acquired in the previously announced portfolio of ten properties 100% leased to the VA (the “VA Portfolio”). We anticipate the JV will acquire the tenth property in the VA portfolio in 2024.
23
Operating Properties
As of September 30, 2023, our operating properties were 97% leased with a weighted average annualized lease income per leased square foot of $35.79 ($35.44 pro rata) and a weighted average age of approximately 14.5 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, 2023, 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
16,592,268
5.5
50.65
USCIS - Kansas City (3)
Lee's Summit, MO
O/W
2024 - 2042
416,399
10,356,616
3.5
24.87
JSC - Suffolk
Suffolk, VA
O
2028
403,737
8,437,944
2.8
20.90
Various GSA - Chicago
Des Plaines, IL
202,185
6,971,858
2.3
34.48
IRS - Fresno
Fresno, CA
2033
180,481
6,944,600
2.2
38.48
FBI - Salt Lake
Salt Lake City, UT
2032
169,542
6,904,306
40.72
Various GSA - Portland (4)
Portland, OR
2023 - 2039
205,478
6,837,561
33.28
Various GSA - Buffalo (5)
Buffalo, NY
2025 - 2039
273,678
6,788,982
24.81
VA - San Jose
San Jose, CA
2038
90,085
5,765,363
1.9
64.00
EPA - Lenexa
Lenexa, KS
169,585
5,684,119
1.8
33.52
PTO - Arlington
Arlington, VA
2035
190,546
5,339,380
1.7
28.02
FBI - San Antonio
San Antonio, TX
148,584
5,262,920
35.42
FBI - Tampa
Tampa, FL
2040
138,000
5,177,074
37.52
FDA - Alameda
Alameda, CA
L
2039
69,624
4,892,834
1.6
70.28
FBI / DEA - El Paso
El Paso, TX
203,683
4,655,530
1.5
22.86
FEMA - Tracy
Tracy, CA
W
210,373
4,646,120
22.09
FBI - Omaha
Omaha, NE
112,196
4,466,756
1.4
39.81
TREAS - Parkersburg
Parkersburg, WV
2041
182,500
4,355,673
23.87
DOT - Lakewood
Lakewood, CO
122,225
4,154,365
1.3
33.99
VA - South Bend
Mishakawa, IN
86,363
4,149,754
48.05
FDA - Lenexa
59,690
4,102,149
68.72
FBI - Pittsburgh
Pittsburgh, PA
100,054
4,037,239
40.35
USCIS - Lincoln
Lincoln, NE
137,671
3,982,813
28.93
VA - Mobile
Mobile, AL
79,212
3,973,045
50.16
FBI - New Orleans
New Orleans, LA
2029
137,679
3,970,217
28.84
JUD - Del Rio
Del Rio, TX
C/O
89,880
3,831,310
1.2
42.63
FBI - Knoxville
Knoxville, TN
99,130
3,607,448
36.39
FBI - Birmingham
Birmingham, AL
2042
96,278
3,535,446
1.1
36.72
EPA - Kansas City
Kansas City, KS
2043
55,833
3,493,954
62.58
ICE - Charleston
North Charleston, SC
65,124
3,334,548
51.20
USFS II - Albuquerque
Albuquerque, NM
98,720
3,323,744
33.67
VA - Chico
Chico, CA
2034
51,647
3,318,030
64.24
FBI - Richmond
Richmond, VA
96,607
3,310,029
34.26
LeasedSquareFeet
Wholly Owned U.S. Government Leased Properties (Cont.)
FBI - Little Rock
Little Rock, AR
102,377
3,217,259
1.0
31.43
DEA - Sterling
Sterling, VA
57,692
3,209,041
55.62
USFS I - Albuquerque
92,455
3,180,431
34.40
USCIS - Tustin
Tustin, CA
66,818
3,159,190
47.28
DEA - Vista
Vista, CA
52,293
3,110,917
59.49
VA - Orange
Orange, CT
56,330
2,976,200
52.84
VA - Indianapolis
Brownsburg, IN
80,000
2,954,619
36.93
ICE - Albuquerque
71,100
2,822,205
0.9
39.69
DEA - Dallas Lab
Dallas, TX
49,723
2,774,089
55.79
FBI - Mobile
76,112
2,773,577
36.44
JUD - El Centro
El Centro, CA
43,345
2,772,153
63.96
DEA - Upper Marlboro
Upper Marlboro, MD
2037
50,978
2,745,212
53.85
DEA - Pleasanton
Pleasanton, CA
42,480
2,743,024
64.57
SSA - Charleston
Charleston, WV
110,000
2,712,183
24.66
FBI - Albany
Albany, NY
69,476
2,697,700
38.83
TREAS - Birmingham
83,676
2,601,278
0.8
31.09
USAO - Louisville
Louisville, KY
2031
60,000
2,538,338
42.31
JUD - Charleston
Charleston, SC
52,339
2,481,397
47.41
JUD - Jackson
Jackson, TN
75,043
2,386,455
31.80
NARA - Broomfield
Broomfield, CO
161,730
2,373,591
14.68
Various GSA - Cleveland (6)
Brooklyn Heights, OH
2028 - 2040
61,384
2,260,734
0.7
36.83
CBP - Savannah
Savannah, GA
35,000
2,257,793
64.51
DEA - Dallas
71,827
2,253,538
31.37
NWS - Kansas City
Kansas City, MO
94,378
2,142,661
22.70
DEA - Santa Ana
Santa Ana, CA
39,905
1,999,617
0.6
50.11
DEA - North Highlands
Sacramento, CA
37,975
1,913,404
50.39
NPS - Omaha
62,772
1,848,140
29.44
VA - Golden
Golden, CO
56,753
1,730,399
30.49
USCG - Martinsburg
Martinsburg, WV
59,547
1,604,660
0.5
26.95
JUD - Aberdeen
Aberdeen, MS
46,979
1,572,610
33.47
GSA - Clarksburg
Clarksburg, WV
63,750
1,522,026
VA - Charleston
97,718
1,472,208
15.07
DEA - Birmingham
35,616
1,444,548
40.56
DEA - Albany
31,976
1,400,197
43.79
USAO - Springfield
Springfield, IL
43,600
1,381,505
0.4
31.69
DEA - Riverside
Riverside, CA
34,354
1,346,376
39.19
25
JUD - Council Bluffs
Council Bluffs, IA
28,900
1,283,504
44.41
SSA - Dallas
27,200
1,063,304
0.3
39.09
JUD - South Bend
South Bend, IN
30,119
788,893
26.19
ICE - Louisville
17,420
655,365
0.2
37.62
DEA - San Diego
San Diego, CA
16,100
555,895
34.53
DEA - Bakersfield
Bakersfield, CA
9,800
487,179
49.71
SSA - San Diego
10,059
442,607
0.1
44.00
ICE - Otay
7,434
259,066
34.85
Subtotal
7,544,936
266,119,083
86.2
35.27
Wholly Owned Privately Leased Property
501 East Hunter Street - Lummus Corporation
Lubbock, TX
W/D
70,078
410,392
5.86
Wholly Owned Properties Total / Weighted Average
7,615,014
266,529,475
86.3
35.00
Unconsolidated Real Estate Venture U.S. Government Leased Properties
VA - Phoenix (7)
Phoenix, AZ
257,294
10,679,166
41.51
VA - San Antonio (7)
226,148
9,341,291
3.0
41.31
VA - Chattanooga (7)
Chattanooga, TN
94,566
4,333,812
45.83
VA - Lubbock (7) (8)
120,916
4,030,913
33.34
VA - Marietta (7)
Marietta, GA
76,882
3,908,473
50.84
VA - Birmingham (7)
Irondale, AL
77,128
3,154,679
40.90
VA - Corpus Christi (7)
Corpus Christi, TX
69,276
2,927,676
42.26
VA - Columbus (7)
Columbus, GA
67,793
2,887,003
42.59
VA - Lenexa (7)
31,062
1,309,621
42.16
1,021,065
42,572,634
13.7
41.69
Total / Weighted Average
8,636,079
309,102,109
100.0
35.79
Total / Weighted Average at Easterly's Share
8,156,177
289,092,971
35.44
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 19.3 years as of September 30, 2023), 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, 2023:
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
226,108
2.6
7,947,093
35.15
383,585
4.4
11,454,330
3.7
29.86
630,692
7.3
20,776,075
6.7
32.94
294,245
3.4
9,575,114
3.1
32.54
506,510
5.9
18,658,872
6.0
36.84
778,474
9.0
16,547,020
5.4
21.26
337,372
3.9
11,344,689
33.63
2030
0.0
100,502
4,077,198
40.57
531,001
6.1
16,863,155
31.76
55
4,847,590
56.2
191,858,563
62.0
39.58
117
Information about our development property as of September 30, 2023 is set forth in the table below:
Lease Term
Estimated Leased SquareFeet
FDA - Atlanta
Atlanta, GA
Food and Drug Administration
20-year
162,000
Results of Operations
Comparison of Results of Operations for the three months ended September 30, 2023 and 2022
The financial information presented below summarizes our results of operations for the three months ended September 30, 2023 and 2022 (amounts in thousands).
Change
(4,438
1,088
149
174
(3,027
944
(363
(2,805
46
237
(1,941
516
362
5,332
Total revenues decreased $3.0 million to $72.0 million for the three months ended September 30, 2023 compared to $75.0 million for the three months ended September 30, 2022.
The $4.4 million decrease in Rental income is primarily attributable to a decrease in revenues from the ten properties disposed of since September 30, 2022, offset by a full period of operations from the one operating property acquired during the three months ended September 30, 2022.
The $1.1 million increase in Tenant reimbursements is primarily attributable to an increase in tenant project reimbursements.
The $0.1 million increase in Asset management income is attributable to the fee we earned for asset management on two operating properties acquired by the JV since September 30, 2022, as well as from one operating property acquired during the three months ended September 30, 2022.
The $0.2 million increase in Other income is primarily attributable to an increase in project overhead income from our tenant reimbursable projects.
Total expenses decreased $1.9 million to $55.2 million for the three months ended September 30, 2023 compared to $57.2 million for the three months ended September 30, 2022.
The $0.9 million increase in Property operating expenses is primarily attributable to an increase in reimbursable projects.
The $0.4 million decrease in Real estate taxes is primarily attributable to the ten properties disposed of since September 30, 2022, offset by a full period of operations from the one operating property acquired during the three months ended September 30, 2022.
28
The $2.8 million decrease in Depreciation and amortization is primarily attributable to the ten properties disposed of since September 30, 2022, offset by a full period of operations from the one operating property acquired during the three months ended September 30, 2022.
The $0.2 million increase in Corporate general and administrative is primarily due to an increase in legal and professional fees.
The $0.5 million increase in Income from unconsolidated real estate venture is primarily attributable to our pro rata share of operations from two operating properties acquired by the JV since September 30, 2022, as well as a full period of operations from one operating property acquired during the three months ended September 30, 2022.
The $0.4 million decrease in Interest expense, net is primarily attributable to lower weighted average borrowings on our credit facility, partially offset by increased weighted average borrowings and interest rates on our swapped term loans.
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.
Comparison of Results of Operations for the nine months ended September 30, 2023 and 2022
The financial information presented below summarizes our results of operations for the nine months ended September 30, 2023 and 2022 (amounts in thousands).
(10,127
3,603
618
413
(5,493
5,452
(953
(5,607
287
2,607
1,786
1,880
(1,010
(869
Total revenues decreased $5.5 million to $214.6 million for the nine months ended September 30, 2023 compared to $220.1 million for the nine months ended September 30, 2022.
The $10.1 million decrease in Rental income is primarily attributable to a decrease in revenues from the ten properties disposed of since September 30, 2022, offset by a full period of operations from the three operating properties acquired during the nine months ended September 30, 2022.
29
The $3.6 million increase in Tenant reimbursements is primarily attributable to an increase in tenant project reimbursements.
The $0.6 million increase in Asset management income is attributable to the fee we earned for asset management on two operating properties acquired by the JV since September 30, 2022, as well as from three operating properties acquired during the nine months ended September 30, 2022.
The $0.4 million increase in Other income is primarily attributable to an increase in project overhead income from our tenant reimbursable projects.
Total expenses increased $1.8 million to $166.8 million for the nine months ended September 30, 2023 compared to $165.0 million for the nine months ended September 30, 2022.
The $5.5 million increase in Property operating expenses is primarily attributable to an increase in tenant reimbursable projects.
The $1.0 million decrease in Real estate taxes is primarily attributable to the ten properties disposed of since September 30, 2022, offset by a full period of operations from the three operating properties acquired during the nine months ended September 30, 2022.
The $5.6 million decrease in Depreciation and amortization is primarily attributable to the ten properties disposed of since September 30, 2022, offset by a full period of operations from the three operating properties acquired during the nine months ended September 30, 2022.
The $2.6 million increase in Corporate general and administrative is primarily attributable to an increase in employee costs.
The $1.9 million increase in Income from unconsolidated real estate venture is primarily attributable to our pro rata share of operations from two operating properties acquired by the JV since September 30, 2022, as well as a full period of operations from three operating properties acquired during the nine months ended September 30, 2022.
The $1.0 million increase in Interest expense, net is primarily attributable to higher weighted average borrowings and interest rates on our swapped term loans.
During the nine months 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.
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 one remaining property in the portfolio of ten properties anticipated to be acquired through the JV (the “VA Portfolio”), stockholder distributions to maintain our qualification as a REIT, potential repurchases of common stock under our share repurchase program and other capital obligations associated with conducting our business. At September 30, 2023, we had $33.4 million available in cash and cash equivalents and there was $449.9 million available under our revolving credit facility.
Our primary expected sources of capital are as follows:
30
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.
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.
31
The following table sets forth certain information with respect to issuances under the 2019 ATM Program during the nine months ended September 30, 2023 (amounts in thousands, except share amounts):
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 our evaluation of market conditions and other factors.
32
Debt
Indebtedness Outstanding
The following table sets forth certain information with respect to our outstanding indebtedness as of September 30, 2023 (amounts in thousands):
On February 3, 2023, we entered into three SOFR-based interest rate swaps each with a notional value of $100.0 million that were designated as cash flow hedges of interest rate risk. Two of the interest rate swaps, with an aggregate notional value of $200.0 million, became effective in June 2023. The third swap, with a notional value of $100.0 million, became effective in September 2023. For more information on our interest rate swaps, see Note 6 to the Consolidated Financial Statements.
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, 2023, we were in compliance with all applicable financial covenants.
The chart below details our debt capital structure as of September 30, 2023 (dollar amounts in thousands):
Debt Capital Structure
Total principal outstanding
1,221,686
Weighted average maturity
5.0 years
Weighted average interest rate
4.0
% Variable debt
% Fixed debt (1)
% Secured debt
17.9
Material Cash Commitments
During the nine months ended September 30, 2023, 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, 2022.
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, 2023, we have invested $284.5 million in the JV. As of September 30, 2023, we committed capital, net of return of over committed capital, to the JV totaling $291.8 million and have a remaining capital commitment of $46.5 million. 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.
34
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, 2023 and 2022 (amounts in thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating Activities
We generated $96.9 million and $103.8 million of cash from operating activities during the nine months ended September 30, 2023 and 2022, respectively. Net cash provided by operating activities for the nine months ended September 30, 2023 includes $76.7 million in net cash from rental activities net of expenses, $9.0 million related to distributions from investment in unconsolidated real estate venture and $11.2 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, 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.
35
Investing Activities
We used $48.7 million and $189.3 million in cash for investing activities during the nine months ended September 30, 2023 and 2022, respectively. Net cash used in investing activities for the nine months ended September 30, 2023 includes $20.2 million in additions to operating properties, $17.7 million in investment in unconsolidated real estate venture, $9.8 million in additions to development properties and $1.0 million in real estate acquisitions and deposits. 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.
Financing Activities
We used $32.1 million and generated $86.9 million in cash from financing activities during the nine months ended September 30, 2023 and 2022, respectively. Net cash used in financing activities for the nine months ended September 30, 2023 includes $83.8 million in dividend payments, $65.5 million in net pay downs under our revolving credit facility, $18.9 million in mortgage notes payable repayment and $0.4 million in the payment of offering costs, offset by $86.5 million in gross proceeds from issuance of shares of our common stock and $50.0 million delayed draw on our 2018 term loan. Net cash generated by financing activities for the nine months ended September 30, 2022 includes $163.3 million in net 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, $3.9 million in mortgage notes payable repayment and $0.1 million in the payment of offering costs.
36
Non-GAAP Financial Measures
We use and present Funds From Operations (“FFO”), Core FFO and FFO, as Adjusted as supplemental measures of our performance. The summary below describes our use of FFO, Core 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.
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 (“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 Core FFO and 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 Core FFO as an alternative measure of our operating performance, which, when applicable, excludes items which we believe are not representative of ongoing operating results, such as liability management related costs (including losses on extinguishment of debt and modification costs), catastrophic event charges, depreciation of non-real estate assets, and the unconsolidated real estate venture's allocated share of these adjustments. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results. We believe Core FFO more accurately reflects the ongoing operational and financial performance of our core business.
We adjust FFO to present FFO, as Adjusted as an alternative measure of our operating performance, which, when applicable, excludes the impact of losses on extinguishment of debt, depreciation of non-real estate assets, acquisition costs, straight-line rent and other non-cash adjustments, amortization of deferred revenue (which results from landlord assets funded by tenants), non-cash interest expense, non-cash compensation, amortization of above-/below-market leases, 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, Core 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, Core FFO and FFO, as Adjusted or use other definitions of FFO, Core FFO and FFO, as Adjusted and, accordingly, our presentation of these measures may not be comparable to other REITs. Neither FFO, Core FFO nor FFO, as Adjusted are 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.
37
The following table sets forth a reconciliation of our net income to FFO, Core FFO and FFO, as Adjusted for the three and nine months ended September 30, 2023 and 2022 (amounts in thousands):
Depreciation of real estate assets
21,995
24,802
67,194
72,810
Unconsolidated real estate venture allocated share of above adjustments
1,887
1,347
5,637
3,352
FFO
29,963
32,438
89,104
98,844
Adjustments to FFO:
Loss on extinguishment of debt
Natural disaster event expense, net of recovery
86
Depreciation of non-real estate assets
250
248
751
742
50
48
Core FFO
30,238
32,703
90,005
99,643
Adjustments to Core FFO:
Straight-line rent and other non-cash adjustments
(1,296
1,090
Amortization of above-/below-market leases
(676
(769
Amortization of deferred revenue
(1,572
(1,472
Non-cash interest expense
264
235
752
695
(8
(86
(9
(391
(55
(1,099
FFO, as Adjusted
28,944
33,296
87,076
98,933
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, 2022 contains a discussion of our significant accounting policies, which utilize relevant critical accounting estimates. During the nine months ended September 30, 2023, 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, 2022.
38
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 may bear 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. For more information on our interest rate swaps, see Note 6 to the Consolidated Financial Statements.
As of September 30, 2023, $1.2 billion, or 100.0% of our debt, excluding unamortized premiums and discounts, had fixed interest rates and none had variable interest rates. If market rates of interest on variable rate debt fluctuate by 25 basis points there would be no impact to us.
As of September 30, 2023, each of the agreements governing our variable rate debt have been transitioned to SOFR.
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, 2023. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2023, 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, 2023 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 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, 2022.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
On September 14, 2023, William C. Trimble, III, our president and chief executive officer, entered into a pre-arranged trading plan (the “10b5-1 plan”) for the sale of our common stock that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act. Under the 10b5-1 plan, Mr. Trimble can sell up to 120,000 shares of our common stock between December 14, 2023 and December 14, 2024, subject to the price and trading limitations in the plan.
During the three months ended September 30, 2023, no other directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).
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)
3.2
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)
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 Purchase and Sale Agreement between the sellers identified therein and Easterly Government Properties LP dated as of October 12, 2021
10.2
Second Amendment to Purchase and Sale Agreement between the sellers identified therein and Easterly Government Properties LP dated as of November 1, 2021
10.3
Third Amendment to Purchase and Sale Agreement between the sellers identified therein and Easterly Government Properties LP dated as of December 21, 2021
10.4
Fourth Amendment to Purchase and Sale Agreement between the sellers identified therein and Easterly Government Properties LP dated as of December 21, 2021
10.5
Fifth Amendment to Purchase and Sale Agreement between the sellers identified therein and Easterly Government Properties LP dated as of November 14, 2022
10.6
Sixth Amendment to Purchase and Sale Agreement between the sellers identified therein and Easterly Government Properties LP dated as of April 10, 2023
10.7
Seventh Amendment to Purchase and Sale Agreement between the sellers identified therein and Easterly Government Properties LP dated as of August 17, 2023 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on August 23, 2023 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
41
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: October 31, 2023
/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)