$
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, 2024
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 29, 2024, the registrant had 105,668,880 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, 2024 and December 31, 2023 (unaudited)
1
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)
2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)
3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (unaudited)
4
Notes to the Consolidated Financial Statements
6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3: Quantitative and Qualitative Disclosures About Market Risk
40
Item 4: Controls and Procedures
Part II: Other Information
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Mine Safety Disclosures
Item 5: Other Information
41
Item 6: Exhibits
Signatures
Easterly Government Properties, Inc.
Consolidated Balance Sheets (unaudited)
(Amounts in thousands, except share amounts)
September 30, 2024
December 31, 2023
Assets
Real estate properties, net
2,457,256
2,319,143
Cash and cash equivalents
31,202
9,381
Restricted cash
8,005
12,558
Tenant accounts receivable
70,280
66,274
Investment in unconsolidated real estate venture
315,886
284,544
Real estate loan receivable, net
30,689
—
Intangible assets, net
146,204
148,453
Interest rate swaps
514
1,994
Prepaid expenses and other assets
41,073
37,405
Assets held for sale
2,002
Total assets
3,103,111
2,879,752
Liabilities
Revolving credit facility
149,550
79,000
Term loan facilities, net
273,851
299,108
Notes payable, net
894,523
696,532
Mortgage notes payable, net
156,653
220,195
Intangible liabilities, net
11,367
12,480
Deferred revenue
121,767
82,712
Accounts payable, accrued expenses and other liabilities
113,766
80,209
Total liabilities
1,721,477
1,470,236
Equity
Common stock, par value $0.01, 200,000,000 shares authorized, 105,666,329 and 100,973,247 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively
1,056
1,010
Additional paid-in capital
1,845,271
1,783,338
Retained earnings
126,401
112,301
Cumulative dividends
(658,042
)
(576,319
Accumulated other comprehensive income
489
1,871
Total stockholders’ equity
1,315,175
1,322,201
Non-controlling interest in Operating Partnership
66,459
87,315
Total equity
1,381,634
1,409,516
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,
2024
2023
Revenues
Rental income
72,536
68,205
215,465
204,111
Tenant reimbursements
663
2,704
4,494
7,279
Asset management income
579
526
1,680
1,560
Other income
1,003
2,163
1,657
Total revenues
74,781
72,014
223,802
214,607
Expenses
Property operating
16,710
18,746
51,420
54,263
Real estate taxes
8,000
7,814
24,072
22,901
Depreciation and amortization
23,795
22,245
71,681
67,945
Acquisition costs
600
321
1,427
1,226
Corporate general and administrative
4,667
6,107
18,032
20,426
Provision for credit losses
1,260
1,478
Total expenses
55,032
55,233
168,110
166,761
Other income (expense)
Income from unconsolidated real estate venture
1,575
1,346
4,367
4,166
Interest expense, net
(16,209
(12,046
(45,210
(35,739
Net income
5,115
6,081
14,849
16,273
(252
(707
(749
(1,905
Net income available to Easterly Government Properties, Inc.
4,863
5,374
14,100
14,368
Net income available to Easterly Government Properties, Inc. per share:
Basic
0.05
0.06
0.13
0.15
Diluted
Weighted-average common shares outstanding
103,515,246
93,537,121
102,671,381
92,674,039
103,904,581
93,849,444
102,980,995
92,938,221
Dividends declared per common share
0.265
0.795
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(Amounts in thousands)
Other comprehensive gain (loss):
Unrealized gain (loss) on interest rate swaps, net
(1,952
(110
(1,481
984
Other comprehensive gain (loss)
Comprehensive income
3,163
5,971
13,368
17,257
Other comprehensive (gain) loss attributable to non-controlling interest
97
99
(100
Comprehensive income attributable to Easterly Government Properties, Inc.
3,008
5,286
12,718
15,252
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
(3,123
(2,661
(4,367
(4,166
Amortization of above- / below-market leases
(1,464
(2,052
Amortization of unearned revenue
(5,125
(4,678
Amortization of loan premium / discount
(669
(820
Amortization of deferred financing costs
2,286
1,572
Amortization of lease inducements
796
684
Amortization of real estate loan receivable origination fees
(22
Distributions from investment in unconsolidated real estate venture
11,059
9,025
Non-cash compensation
2,208
4,625
Net change in:
(888
408
(3,665
(4,720
Real estate loan interest receivable
(437
Deferred revenue associated with operating leases
44,180
5,547
Principal payments on operating lease obligations
(501
(369
9,806
10,332
Net cash provided by operating activities
138,082
96,945
Cash flows from investing activities
Real estate acquisitions and deposits
(73,464
(957
Additions to operating properties
(28,980
(20,168
Additions to development properties
(79,297
(9,798
2,037
(40,071
(17,736
Investment in real estate loan receivable, net
(31,472
Net cash used in investing activities
(251,247
(48,659
Cash flows from financing activities
Payment of deferred financing costs
(7,840
Issuance of common shares
43,414
86,472
Credit facility draws
353,550
100,750
Credit facility repayments
(283,000
(166,250
Term loan repayments
(25,500
Term loan draws
50,000
Issuance of notes payable
200,000
Repayments of mortgage notes payable
(63,183
(18,912
Dividends and distributions paid
(86,383
(83,774
Payment of offering costs
(625
(397
Net cash provided by (used in) financing activities
130,433
(32,111
Net increase in Cash and cash equivalents and Restricted cash
17,268
16,175
Cash and cash equivalents and Restricted cash, beginning of period
21,939
17,274
Cash and cash equivalents and Restricted cash, end of period
39,207
33,449
Supplemental disclosure of cash flow information is as follows:
Cash paid for interest (net of capitalized interest of $2,962 and $1,038 in 2024 and 2023, respectively)
38,955
33,834
Supplemental disclosure of non-cash information
Additions to operating properties accrued, not paid
6,047
2,513
Additions to development properties accrued, not paid
34,017
5,178
Offering costs accrued, not paid
21
16
Deferred asset acquisition costs accrued, not paid
156
92
Properties acquired for Common Units
219
Exchange of Common Units for Shares of Common Stock
(18,793
(164
Common stock
14
18,779
164
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, 2023, 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, 2023 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 27, 2024.
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 out 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 primarily 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 state and local governments with strong creditworthiness and other opportunities that directly or indirectly support the mission of select government agencies. As of September 30, 2024, we wholly owned 85 operating properties and ten operating properties through an unconsolidated joint venture (the “JV”) in the United States, encompassing approximately 9.3 million leased square feet, including 92 operating properties that were leased primarily to U.S. Government tenant agencies, two operating properties that were entirely leased to private tenants and one operating property entirely leased to tenant agencies of a U.S. state government. As of September 30, 2024, 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 two properties 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 95.2% of the aggregate limited partnership interests in the Operating Partnership (“common units”) as of September 30, 2024. We have elected to be taxed as a REIT and 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, 2024 and December 31, 2023, the consolidated results of operations for the three and nine months ended September 30, 2024 and 2023, and the consolidated cash flows for the nine months ended September 30, 2024 and 2023. The year-end 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
See below for our Current Expected Credit Loss (“CECL”) policy subsequent to the adoption of Accounting Standards Update (“ASU”) 2016-13 Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. All other 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, 2023.
Loan Receivable and Allowance for Credit Losses
The measurement of expected credit losses under the CECL methodology is applicable to our financial assets measured at amortized cost, including loan receivables and certain off-balance sheet credit exposures such as unfunded loan commitments. We adopted this standard on January 1, 2020 and apply this methodology to our loan receivables and off-balance sheet credit exposure. To determine our expected credit losses under CECL, we utilize a probability of default (“PD”) and loss given default (“LGD”) methodology. We determined that we have one portfolio segment and reserve for loan losses on an asset-specific basis. We have a limited history of incurred losses and consequently have elected to employ external data to perform our CECL calculation. Our model’s inputs consider a default grade or industry relative default grade associated with the borrower and prospective tenant funding the development to determine an appropriate default risk and allowance for credit loss under the PD and LGD methodology. If a reserve is recorded, the allowance is increased as a provision for credit losses and is decreased by charge-offs when losses are confirmed through the receipt of assets such as cash or via ownership control of the underlying collateral in full. The allowance for loan losses reflects management's estimate of loan losses as of the balance sheet date.
Reclassifications
Provision for credit loss amounts previously classified within Corporate general and administrative have been reclassified to Provision for credit losses on our Consolidated Statements of Operations to conform with the current period presentation.
Recent Accounting Pronouncements Not Yet Adopted
In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”). ASU 2023-06 adds interim and annual disclosure requirements to GAAP at the request of the Securities and Exchange Commission (the “SEC”). The guidance in ASU 2023-06 is required to be applied prospectively and the GAAP requirements will be effective when the removal of the related SEC disclosure requirements is effective. If the SEC does not act to remove its related requirement by June 30, 2027, any related FASB amendments will be removed from the ASC and will not be effective. We do not anticipate that the adoption of ASU 2023-06 will have a material impact on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The standard is intended to enhance the transparency and decision usefulness of income tax disclosures through changes to the rate reconciliation and income taxes paid information. The new standard is effective for annual periods beginning after December 15, 2024. We do not anticipate that the adoption of ASU 2023-09 will have a material impact on our consolidated financial statements.
7
3. Real Estate and Intangibles
Acquisitions
During the nine months ended September 30, 2024, we acquired four operating properties in asset acquisitions, ICE – Dallas, ICE – Orlando, HSI – Orlando, and Northrop Grumman – Dayton for an aggregate purchase price of $70.3 million. We allocated the aggregate purchase price of these acquisitions based on the estimated fair values of the acquired assets and assumed liabilities as follows (amounts in thousands):
Real estate
Land
17,585
Building
33,740
Acquired tenant improvements
6,568
Total real estate
57,893
Intangible assets
In-place leases
10,163
Acquired leasing commissions
3,438
Total intangible assets
13,601
Intangible liabilities
Below-market leases
(1,205
Total intangible liabilities
Purchase price
70,289
The intangible assets and liabilities of operating properties acquired during the nine months ended September 30, 2024 have a weighted average amortization period of 10.7 years as of September 30, 2024. During the nine months ended September 30, 2024, we included $3.2 million of revenues and $1.3 million of net income in our Consolidated Statements of Operations related to the operating properties acquired.
In addition to the above operating property activity, we acquired one land parcel for development, JUD – Flagstaff, during the nine months ended September 30, 2024.
During the three and nine months ended September 30, 2024, we incurred $0.6 million and $1.4 million of acquisition-related expenses, respectively, mainly consisting of internal costs associated with the property acquisitions.
Disposition and Asset Held for Sale
In July 2024, we entered into an agreement to sell a land parcel located in Lincoln, Nebraska for $2.3 million. As of September 30, 2024, we classified the land parcel as held for sale. The land parcel had a carrying value of $2.0 million and was included in Assets held for sale in our Consolidated Balance Sheets. On October 3, 2024, we sold the land parcel for a gross sales price of $2.3 million.
8
Consolidated Real Estate and Intangibles
Real estate and intangibles consisted of the following as of September 30, 2024 (amounts in thousands):
243,536
Building and improvements
2,410,103
92,517
Construction in progress
158,068
Accumulated depreciation
(446,968
Total Real estate properties, net
Total Assets held for sale
290,765
75,998
Above market leases
14,620
Payment in lieu of taxes
6,394
Accumulated amortization
(241,573
Total Intangible assets, net
Below market leases
(73,242
61,875
Total Intangible liabilities, net
(11,367
No operating properties were disposed of during the nine months ended September 30, 2024.
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, 2024 (amounts in thousands):
Acquired Above-Market Lease Intangibles
Acquired Below-Market Lease Intangibles
2024 (1)
274
(698
2025
1,097
(2,487
2026
1,096
(2,249
2027
(2,024
2028
725
(1,479
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.
9
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 that encompasses 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. We have joint approval rights with our JV partner on major decisions, including those regarding property operations. As such, we hold a non-controlling interest in the joint venture and account for the JV under the equity method of accounting.
During the nine months ended September 30, 2024, the JV acquired VA – Jacksonville, the last of the ten properties to be acquired in the VA portfolio, for an aggregate purchase price of $77.4 million.
5. Real Estate Loan Receivable
On August 6, 2024, we entered into a construction loan agreement to lend up to $52.1 million to a developer (the “Borrower”). The construction loan will accrue interest monthly at a fixed market rate of 9.00% per annum. The construction loan shall be re-paid in full on or before August 31, 2027, the maturity date. Upon completion of the development, we have the option to purchase at fair value all of the issued and outstanding membership interest from the Borrower in a special purpose entity (“SPE”) which solely holds the developed property. We hold a variable interest in the SPE, but we do not consolidate the SPE as we are not the primary beneficiary due to the lack of power to direct significant activities performed by the SPE.
A summary of our real estate loan receivable consisted of the following (in thousands):
Real estate loan receivable
31,931
Allowance for credit losses
(1,242
During both the three and nine months ended September 30, 2024, we recognized interest income from our real estate loan receivable of $0.4 million. No interest income was recognized from real estate loan receivables during the three and nine months ended September 30, 2023. Interest income from our real estate loan receivable is included within Other income on our Consolidated Statements of Operations. As of September 30, 2024, we recognized an allowance for credit loss liability of $0.2 million for the undrawn capacity on the construction loan. Allowance for credit loss liability is included within Accounts payable, accrued expenses and other liabilities on our Consolidated Balance Sheets.
The fair value of this real estate loan receivable was approximately $32.4 million as of September 30, 2024.
10
6. Debt
At September 30, 2024, our consolidated borrowings consisted of the following (amounts in thousands):
Principal Outstanding
Interest
Current
Loan
Rate (1)
Maturity
Revolving credit facility:
2024 revolving credit facility (2)
SOFR + 145 bps (3)
June 2028 (4)
Total revolving credit facility
Term loan facilities:
2016 term loan facility
100,000
5.63% (5)
January 2025
2018 term loan facility
174,500
5.23% (6)
July 2026
Total term loan facilities
274,500
Less: Total unamortized deferred financing fees
(649
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
2024 series A senior notes
150,000
6.56%
May 2033
2024 series B senior notes
August 2033
Total notes payable
900,000
(5,477
Total notes payable, net
Mortgage notes payable:
USFS II – Albuquerque
10,137
4.46% (7)
ICE – Charleston
10,874
4.21% (7)
January 2027
VA – Loma Linda
127,500
3.59% (7)
July 2027
CBP – Savannah
8,902
3.40% (7)
July 2033
Total mortgage notes payable
157,413
(634
Less: Total unamortized premium/discount
(126
Total mortgage notes payable, net
Total debt
1,474,577
11
As of September 30, 2024, the net carrying value of real estate collateralizing our mortgages payable totaled $218.3 million. See Note 8 for the fair value of our debt instruments.
On April 1, 2024, we used $8.4 million of available cash to extinguish the mortgage note obligation on VA – Golden.
On August 6, 2024, we used $51.5 million of available cash to extinguish the mortgage note obligation on USCIS – Kansas City.
2024 Senior Note Agreement
On May 29, 2024, we entered into a master note purchase agreement pursuant to which the Operating Partnership agreed to issue and sell an aggregate of up to $200 million of fixed rate, senior unsecured notes (“Senior Notes”) consisting of (i) 6.56% Series A Senior Notes due May 29, 2033 (“Series A Senior Notes”), in an aggregate principal amount of $150.0 million, and (ii) 6.56% Series B Senior Notes due August 14, 2033 (“Series B Senior Notes”), in an aggregate principal amount of $50.0 million. The Series A Senior Notes were issued on May 29, 2024 and the Series B Senior Notes were issued on August 14, 2024. We, together with various subsidiaries of the Operating Partnership, have guaranteed the Series A Senior Notes and the Series B Senior Notes.
2024 Revolving Credit Facility
On June 3, 2024, we entered into a credit agreement (the “2024 Credit Agreement”) that provides for a $400.0 million senior unsecured revolving credit facility which includes an accordion feature that provides us with additional capacity of up to $300.0 million, subject to syndication of the increase and the satisfaction of customary terms and conditions. The 2024 revolving credit facility has an initial four-year term and will mature in June 2028, with two six-month as-of-right extension options, subject to certain conditions and the payment of an extension fee.
Borrowings under the 2024 revolving credit facility will, at the Operating Partnership's option, bear interest at floating rates equal to either (i) a fluctuating rate equal to the sum of (a) the highest of (x) Citibank, N.A.'s base rate, (y) the federal funds effective rate plus 0.50% and (z) the one-month adjusted term SOFR plus 1.00%, plus, in each case, (b) a margin ranging from 0.20% to 0.80% based on our leverage ratio, (ii) the daily simple SOFR plus a credit spread adjustment of 0.10% (the “Adjusted DSS”), or (iii) the term SOFR, plus a credit spread adjustment of 0.10% (the “Term SOFR”), plus, in the case of borrowings bearing interest at Adjusted DSS or Term SOFR, a margin ranging from 1.20% to 1.80% based on our leverage ratio.
2021 Revolving Credit Facility
We are also party to the second amended and restated credit agreement, dated July 23, 2021, as amended by the first amendment, dated as of July 22, 2022, the second amendment, dated as of November 23, 2022, and the third amendment, dated as of May 30, 2023 (as amended, restated, or otherwise modified from time to time, the “2021 Credit Facility”), which provides for (i) a $450.0 million senior unsecured revolving credit facility (the “2021 revolving credit facility”) and (ii) our 2018 term loan facility.
In connection with the entry into the 2024 Credit Agreement on June 3, 2024, we prepaid all amounts outstanding under and terminated the revolver portion of the 2021 Credit Facility, including all unused commitments. Other than the foregoing, the terms of the 2021 Credit Facility remain unchanged and our 2018 term loan portion of the 2021 Credit Facility remains outstanding. We recognized an aggregate $0.3 million loss on debt extinguishment during the nine months ended September 30, 2024 which is included in Interest expense, net on our Consolidated Statements of Operations.
12
Term Loan Facilities
On January 23, 2024, we entered into the seventh amendment to the senior unsecured term loan agreement, dated as of September 29, 2016, that governs our 2016 term loan facility to extend the maturity date of our 2016 term loan facility from March 29, 2024 to January 30, 2025.
On June 3, 2024, we repaid $25.0 million of amounts outstanding under our 2018 term loan facility using available cash derived from the issuance of Series A Senior Notes.
On July 8, 2024, we used $0.5 million of available cash to pay down a portion of our 2018 term loan facility.
On July 15, 2024, we amended the credit agreements governing our 2016 and 2018 term loan facilities to conform certain definitions related to leverage covenants to the provisions of the 2024 Credit Agreement.
Financial Covenant Considerations
As of September 30, 2024, we were in compliance with all financial and other covenants related to our debt.
7. 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, 2024. We entered into these interest rate swap derivatives to reduce our exposure to the variability in future cash flows attributable to changes in our floating rate debt (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
153
4.18
December 23, 2024
116
3.70
September 29, 2023
June 29, 2025
245
The table below sets forth the fair value of our interest rate derivatives as well as their classification on our Consolidated Balance Sheets (amounts in thousands):
Balance Sheet Line Item
As of September 30, 2024
Cash Flow Hedges of Interest Rate Risk
The gains or losses on derivatives designated and that qualify as cash flow hedges are recorded in Accumulated other comprehensive income (“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 $0.9 million will be reclassified from AOCI as a decrease to interest expense over the next 12 months.
The table below presents the effects of our interest rate derivatives on our Consolidated Statements of Operations and Comprehensive Income (Loss) (amounts in thousands):
Unrealized gain (loss) recognized in AOCI
(917
1,443
1,614
5,778
Gain reclassified from AOCI into interest expense
1,035
1,553
3,095
4,794
13
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, 2024, we were not in a net liability position with any derivative counterparty. As of September 30, 2024, we were in compliance with these agreements and had not posted any collateral related to these agreements.
8. 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, 2024 were classified as Level 2 of the fair value hierarchy.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding our real estate loan receivable) and accounts payable and accrued expenses are reasonable estimates of fair values because of the short maturities of these instruments. The fair value of our real estate loan receivable, as disclosed in Note 5, is based on the discounted estimated future cash flows of the loan (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments. The table below presents our assets measured at fair value on a recurring basis as of September 30, 2024, 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.
Financial assets and liabilities not measured at fair value
As of September 30, 2024, 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)
2024 revolving credit facility
Notes payable
847,296
Mortgages payable
149,066
9. Equity Incentive Plan
The following is a summary of our stock-based compensation expense for the three and nine months ended September 30, 2024 and 2023, respectively:
Stock-based compensation expense, net (recovery)
(180
1,658
2,209
Stock-based compensation expense is included within corporate general and administrative expenses on our Consolidated Statements of Operations.
On January 2, 2024, we granted an aggregate of 201,150 service-based LTIP units and 193,993 performance-based LTIP units to members of management pursuant to the 2015 Equity Incentive Plan (the “2015 Plan”). The service-based LTIP units vest on December 31, 2026 subject to the grantee's continued employment and the other terms of the awards. The performance-based LTIP units consisted of (i) 77,256 LTIP units that are subject to us achieving certain total shareholder return performance thresholds (on both an absolute and relative basis) and (ii) 116,737 LTIP units that are subject to us achieving certain operational performance hurdles, in each case through a performance period ending on December 31, 2026. The performance-based LTIP units will vest to the extent earned following the end of the performance period on December 31, 2026, conditioned on the board of directors approval.
On January 19, 2024, we granted 69,419 performance-based LTIP units to members of management pursuant to the 2015 Plan that are subject to us achieving certain total shareholder return performance thresholds (on a relative basis) through a performance period ending on December 31, 2026. The performance-based LTIP units will vest to the extent earned following the end of the performance period on December 31, 2026, conditioned on the board of directors approval.
Pursuant to the 2015 Plan, the significant assumptions used to value the performance-based LTIP units using a Monte Carlo Simulation (risk -neutral approach) include expected volatility (24.0%), dividend yield (6.6% - 6.7%), risk-free interest rate (4.1%) and expected life (3 years).
On May 17, 2024, at our 2024 annual meeting of stockholders, the stockholders approved the Easterly Government Properties, Inc. 2024 Equity Incentive Plan (the “2024 Plan”). The 2024 Plan replaced the 2015 Plan and no further awards will be granted under the 2015 Plan. The maximum number of shares of common stock reserved for issuance under the 2024 Plan is 3,600,000.
On June 14, 2024, in connection with our 2024 annual meeting of stockholders, we issued an aggregate of 35,623 shares of restricted stock and 13,601 LTIP units to our non-employee directors pursuant to the 2024 Plan. The LTIP units grants will vest upon the earlier of the anniversary of the date of the grant or the next annual stockholder meeting, so long as the grantee remains a director on such date.
15
Pursuant to the 2024 Plan, the significant assumptions used to value the service-based LTIP units using a Monte Carlo Simulation (risk -neutral approach) include expected volatility (27.0%), dividend yield (7.8%), risk-free interest rate (5.2%) and expected life (0.9 years).
During the three months ended September 30, 2024, 206,307 LTIP units were forfeited in connection with an employee departure under the terms of the applicable award agreements.
10. Equity
The following table summarizes the changes in our stockholders’ equity for the three months ended September 30, 2024 and 2023 (amounts in thousands, except share amounts):
Shares
Common Stock Par Value
Additional Paid-in Capital
RetainedEarnings
CumulativeDividends
AccumulatedOtherComprehensiveIncome
Non-controlling Interest in Operating Partnership
Total Equity
Three months ended September 30, 2024
Balance at June 30, 2024
103,034,602
1,030
1,810,678
121,538
(630,738
2,344
67,622
1,372,474
Stock based compensation, net
125
(306
(181
Dividends and distributions paid ($0.265 per share)
(27,304
(1,551
(28,855
Issuance of common stock, net
2,631,727
26
35,007
35,033
Unrealized loss on interest rate swaps
(1,855
(97
252
Allocation of non-controlling interest in Operating Partnership
(539
539
Balance at September 30, 2024
105,666,329
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
(24,756
(3,399
(28,155
Redemption of common units for shares of common stock
1,821
24
(24
1,700,000
17
33,662
33,679
(88
707
(77
77
Balance at September 30, 2023
95,117,527
951
1,707,142
107,865
(549,562
4,430
164,394
1,435,220
The following table summarizes the changes in our stockholders' equity for the nine months ended September 30, 2024 and 2023 (amounts in thousands, except share amounts):
AccumulatedOtherComprehensiveIncome (Loss)
Nine months ended September 30, 2024
Balance at December 31, 2023
100,973,247
325
1,883
Dividends and distributions paid ($0.795 per share)
(81,723
(4,660
Grant of unvested restricted stock
35,623
1,436,085
3,221,374
32
42,893
42,925
Unrealized loss on interest rate swaps, net
(1,382
(99
749
(64
64
Nine months ended September 30, 2023
Balance at December 31, 2022
90,814,021
908
1,622,913
93,497
(475,983
3,546
166,101
1,410,982
427
4,198
(73,579
(10,195
32,486
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
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 2024
April 25, 2024
May 9, 2024
May 21, 2024
Q2 2024
July 17, 2024
August 1, 2024
August 13, 2024
Q3 2024
October 31, 2024
November 15, 2024
November 27, 2024
(1) Prior to the end of the performance period as set forth in the applicable LTIP unit award, holders of performance-based LTIP units are entitled to receive dividends per LTIP unit equal to 10% of the dividend paid per common unit. After the end of the performance period, the number of LTIP units, both vested and unvested, that LTIP award recipients have earned, if any, are entitled to receive dividends in an amount per LTIP unit equal to dividends, both regular and special, payable per common unit. Holders of LTIP units that are not subject to the attainment of performance goals are entitled to receive dividends per LTIP unit equal to 100% of the dividend paid per common unit beginning on the grant date.
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, 2024 (amounts in thousands except share amounts):
2019 ATM Program
For the three months ended
Number of Shares Issued (1)
Net Proceeds (1)
March 31, 2024
June 30, 2024
589,647
7,903
35,077
42,980
(1) Shares issued by us, which were all issued in settlement of forward sale transactions. As of September 30, 2024, we had settled all of our outstanding forward sale transactions under the 2019 ATM Program. We accounted for the forward sale transactions as equity.
No sales of shares of our common stock were made under the 2021 ATM Program during the nine months ended September 30, 2024.
As of September 30, 2024, we had approximately $300.0 million of gross sales of our common stock available under the 2021 ATM Program and $43.9 million of gross sales of common stock available under the 2019 ATM Program.
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, 2024.
11. 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, 2024 and 2023 (amounts in thousands, except per share amounts):
Numerator
Less: Non-controlling interest in Operating Partnership
Less: Dividends on participating securities
(148
(151
(431
(450
Net income available to common stockholders
4,715
5,223
13,669
13,918
Denominator for basic EPS
Dilutive effect of share-based compensation awards
16,233
14,363
19,190
18,483
Dilutive effect of LTIP units (1)
373,102
297,960
290,424
245,699
Denominator for diluted EPS
Basic EPS
Diluted EPS
18
12. 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 19.4 years as of September 30, 2024), 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 table below sets forth our composition of lease revenue recognized between fixed and variable components (amounts in thousands):
Fixed
67,474
63,098
199,959
188,991
Variable
5,062
5,107
15,506
15,120
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, 2024, the unamortized balances associated with our right-of-use operating lease asset and operating lease liability were both $2.5 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 for the three and nine months ended September 30, 2024 and 2023 (amounts in thousands):
Cash flows from operating lease costs
193
175
574
436
In addition, the maturity of fixed lease payments under our commenced corporate office leases as of September 30, 2024 is summarized in the table below (amounts in thousands):
Corporate office leases
Payments due by period
195
793
661
368
385
Thereafter
333
Total future minimum lease payments
2,735
Imputed interest
(257
2,478
19
13. 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, 2024 and 2023 (amounts in thousands):
Tenant
Department of Veteran Affairs (“VA”)
112
1,589
1,842
4,221
Customs and Border Protection (“CBP”)
148
1,742
230
U.S. Joint Staff Command (“JSC”)
104
839
487
2,092
U.S. Citizenship and Immigration Services (“USCIS”)
244
286
56
Food and Drug Administration (“FDA”)
124
Federal Bureau of Investigation (“FBI”)
38
277
122
655
Internal Revenue Service (“IRS”)
89
The Judiciary of the U.S. Government (“JUD”)
Environmental Protection Agency (“EPA”)
34
National Weather Service (“NWS”)
25
Department of Transportation (“DOT”)
136
Immigration and Customs Enforcement (“ICE”)
111
General Services Administration - Other
Department of Homeland Security (“DHS”)
U.S. Coast Guard (“USCG”)
343
Federal Emergency Management Agency (“FEMA”)
Bonneville Power Administration (“BPA”)
National Archives and Records Administration (“NARA”)
Department of Labor (“DOL”)
741
3,027
4,877
8,102
As of September 30, 2024 and December 31, 2023, the balance in Accounts receivable related to tenant construction projects and the associated project management income was $10.7 million and $9.6 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, 2024 with a duration of greater than one year.
During the three and nine months ended September 30, 2024, we recognized $0.1 million and $0.4 million, respectively, in parking garage income. During the three and nine months ended September 30, 2023, we recognized $0.1 million and $0.3 million, respectively, in parking garage income. 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, 2024 and December 31, 2023, the balance in Accounts receivable related to parking garage income was less than $0.1 million.
There were no contract assets or liabilities as of September 30, 2024 or December 31, 2023.
14. 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.
20
As stated in Note 1 above, we lease commercial space to the U.S. Government or non-governmental tenants. At September 30, 2024, the U.S. Government accounted for approximately 96.4% of our total annualized lease income, state and local government tenants accounted for approximately 1.1% of our annualized lease income and non-governmental tenants accounted for the remaining approximately 2.5%.
Eighteen of our 95 wholly-owned and unconsolidated operating properties are located in California, accounting for approximately 14.9% of our total leased square feet and approximately 19.3% of our total annualized lease income as of September 30, 2024. 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.
15. Related Parties
We have reimbursement arrangements with entities controlled by our former Chairman, who was appointed Chief Executive Officer effective January 1, 2024, and Vice Chairman, which provide for reimbursement of costs paid on our behalf, or those we pay on their behalf. During the three and nine months ended September 30, 2024, we were responsible for reimbursing costs of $0.5 million and $0.7 million, respectively, and received reimbursement for costs of less than $0.1 million and $0.1 million, respectively. During the three and nine months ended September 30, 2023, we were responsible for reimbursing costs of $0.1 million and $0.3 million, respectively, and received reimbursement for costs of less than $0.1 million for both periods.
We provide asset management services to properties owned by the JV. For the three and nine months ended September 30, 2024, we recognized Asset management income of $0.6 million and $1.7 million, respectively, and reimbursement for certain costs that we paid on their behalf of less than $0.1 million and $0.5 million, respectively. For the three and nine months ended September 30, 2023, we recognized Asset management income of $0.5 million and $1.6 million, respectively, and reimbursement for certain costs that we paid on their behalf of less than $0.1 million and $0.3 million, respectively.
As of September 30, 2024, Accounts receivable from related parties was $0.4 million. As of September 30, 2024, Accounts payable, accrued expenses and other liabilities owed to related parties was $0.3 million.
16. Subsequent Events
For our consolidated financial statements as of September 30, 2024, we evaluated subsequent events and noted the following significant events.
On October 10, 2024, we acquired a 104,136 leased square foot Northrop Grumman facility in Aurora, Colorado with a 9-year lease through February 2032.
Subsequent to September 30, 2024, we entered into forward sale transactions under the 2019 ATM Program for the sale of an additional 500,000 shares of our common stock that have not yet been settled. Subject to our right to elect net share settlement, we expect to physically settle the forward sale transactions no later than October 14, 2025. Assuming the forward sale transactions are physically settled in full utilizing a net weighted average initial forward sales price of $13.32 per share, we expect to receive net proceeds of approximately $6.7 million, after deducting offering costs, subject to adjustments in accordance with the applicable forward sale transaction.
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, 2023, 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 primarily 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 state and local governments with strong creditworthiness and other opportunities that directly or indirectly support the mission of select government agencies. As of September 30, 2024, we wholly owned 85 operating properties and ten operating properties through an unconsolidated joint venture (the “JV”) in the United States, encompassing approximately 9.3 million leased square feet (8.8 million pro rata), including 92 operating properties that were leased primarily to U.S. Government tenant agencies, two operating properties that were entirely leased to private tenants and one operating property entirely leased to tenant agencies of a U.S. state government. As of September 30, 2024, 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 two properties 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 95.2% of the aggregate limited partnership interests in the Operating Partnership, which we refer to herein as common units, as of September 30, 2024. We have elected to be taxed as a REIT and 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.
2024 Activity
On April 12, 2024, we acquired a 129,046 leased square foot U.S. Immigration and Customs Enforcement (“ICE”) facility near Dallas, Texas. The building was renovated to suit in 2020. The facility is primarily leased to the GSA for beneficial use of ICE and has lease expirations ranging from 2032 to 2040.
On May 7, 2024, we acquired a 27,840 leased square foot Homeland Security Investigations (“HSI”) facility in Orlando, Florida with a 15-year lease that does not expire until March 2036. HSI is the principal investigation arm within the Department of Homeland Security.
On May 9, 2024, we acquired a 49,420 leased square foot ICE facility in Orlando, Florida with a 20-year lease that does not expire until August 2040.
On September 4, 2024, we acquired a 99,246 leased square foot Northrop Grumman facility near Dayton, Ohio with a 5-year lease through August 2029.
23
On August 29, 2024, the JV acquired a 193,100 square foot Veteran Affairs (“VA”) outpatient facility located in Jacksonville, Florida. The building is a build-to-suit property that was completed in 2023. The outpatient facility is leased to the VA and has a lease expiration of October 2043. The facility is the final property to be acquired in the previously announced portfolio of ten properties 100% leased to the VA (the “VA Portfolio”).
Development
On April 4, 2024, we acquired land to develop a 50,777 square foot Federal courthouse in Flagstaff, Arizona. The courthouse will be primarily leased to the GSA for beneficial use of the Judiciary of the U.S. Government (“JUD”) over a 20 year non-cancelable term.
Operating Properties
As of September 30, 2024, our operating properties were 97% leased with a weighted average annualized lease income per leased square foot of $35.92 ($35.56 pro rata) and a weighted average age of approximately 14.8 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, 2024, 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
16,812,723
4.9
51.32
USCIS - Kansas City (3)
Lee's Summit, MO
O
2024 - 2042
403,178
10,170,319
2.9
25.23
JSC - Suffolk
Suffolk, VA
SF
403,737
8,503,831
2.5
21.06
Various GSA - Chicago
Des Plaines, IL
188,768
7,789,136
2.3
41.26
IRS - Fresno
Fresno, CA
2033
180,481
6,916,710
2.1
38.32
Various GSA - Portland (4)
Portland, OR
2025 - 2039
205,478
6,910,724
33.63
FBI - Salt Lake
Salt Lake City, UT
2032
169,542
6,897,319
40.68
Various GSA - Buffalo (5)
Buffalo, NY
273,678
6,887,944
25.17
VA - San Jose
San Jose, CA
2038
90,085
5,819,576
1.7
64.60
EPA - Lenexa
Lenexa, KS
169,585
5,741,220
33.85
FBI - Tampa
Tampa, FL
2040
138,000
5,313,546
1.6
38.50
FBI - San Antonio
San Antonio, TX
148,584
5,229,718
35.20
FDA - Alameda
Alameda, CA
L
2039
69,624
4,966,673
1.5
71.34
PTO - Arlington
Arlington, VA
2035
190,546
4,683,980
1.4
24.58
FBI / DEA - El Paso
El Paso, TX
203,683
4,669,165
22.92
FEMA - Tracy
Tracy, CA
W
210,373
4,658,468
22.14
TREAS - Parkersburg
Parkersburg, WV
2041
182,500
4,399,697
1.3
24.11
FDA - Lenexa
59,690
4,253,539
71.26
VA - South Bend
Mishawaka, IN
86,363
4,128,602
1.2
47.81
FBI - Pittsburgh
Pittsburgh, PA
100,054
4,079,780
40.78
ICE - Dallas (6)
Irvine, TX
2032 / 2040
129,046
4,063,824
31.49
VA - Mobile
Mobile, AL
79,212
4,023,649
50.80
USCIS - Lincoln
Lincoln, NE
137,671
3,968,833
28.83
FBI - New Orleans
New Orleans, LA
2029
137,679
3,964,861
28.80
FBI - Omaha
Omaha, NE
2044
112,196
3,959,898
35.29
FBI - Knoxville
Knoxville, TN
99,130
3,629,035
1.1
36.61
FBI - Albany
Albany, NY
69,476
3,591,446
51.69
FBI - Birmingham
Birmingham, AL
2042
96,278
3,564,008
37.02
EPA - Kansas City
Kansas City, KS
2043
55,833
3,556,597
63.70
USFS II - Albuquerque
Albuquerque, NM
98,720
3,419,082
1.0
34.63
DOT - Lakewood
Lakewood, CO
116,046
3,383,707
29.16
ICE - Charleston
North Charleston, SC
65,124
3,362,481
51.63
VA - Chico
Chico, CA
2034
51,647
3,341,876
64.71
LeasedSquareFeet
Wholly Owned U.S. Government Leased Properties (Cont.)
FBI - Richmond
Richmond, VA
96,607
3,334,875
34.52
JUD - Del Rio
Del Rio, TX
C
89,880
3,312,024
36.85
USFS I - Albuquerque
92,455
3,270,004
35.37
FBI - Little Rock
Little Rock, AR
102,377
3,237,404
31.62
DEA - Sterling
Sterling, VA
57,692
3,222,788
55.86
USCIS - Tustin
Tustin, CA
66,818
3,142,255
0.9
47.03
DEA - Vista
Vista, CA
52,293
3,141,911
60.08
VA - Indianapolis
Brownsburg, IN
80,000
2,981,475
37.27
VA - Orange
Orange, CT
56,330
2,980,679
52.91
ICE - Albuquerque
71,100
2,841,468
0.8
39.96
FBI - Mobile
76,112
2,823,646
37.10
SSA - Charleston
Charleston, WV
110,000
2,806,152
25.51
DEA - Dallas Lab
Dallas, TX
49,723
2,786,394
56.04
JUD - El Centro
El Centro, CA
43,345
2,785,903
64.27
DEA - Pleasanton
Pleasanton, CA
42,480
2,775,202
65.33
DEA - Upper Marlboro
Upper Marlboro, MD
2037
50,978
2,761,611
54.17
NARA - Broomfield
Broomfield, CO
161,730
2,690,321
16.63
TREAS - Birmingham
83,676
2,616,096
31.26
DHS - Atlanta (7)
Atlanta, GA
2031 - 2038
91,185
2,574,358
28.23
USAO - Louisville
Louisville, KY
2031
60,000
2,550,159
42.50
JUD - Charleston
Charleston, SC
52,339
2,522,970
48.20
JUD - Jackson
Jackson, TN
75,043
2,403,192
0.7
32.02
CBP - Savannah
Savannah, GA
35,000
2,289,519
65.41
DEA - Dallas
71,827
2,269,404
31.60
Various GSA - Cleveland (8)
Brooklyn Heights, OH
2028 - 2040
61,384
2,244,582
36.57
NWS - Kansas City
Kansas City, MO
94,378
2,151,911
0.6
22.80
DEA - Santa Ana
Santa Ana, CA
39,905
2,025,762
50.76
GSA - Clarksburg
Clarksburg, WV
70,495
1,920,539
27.24
NPS - Omaha
62,772
1,891,182
30.13
DEA - North Highlands
Sacramento, CA
37,975
1,885,075
49.64
VA - Golden
Golden, CO
56,753
1,773,841
0.5
JUD - Newport News
Newport News, VA
35,005
1,672,759
47.79
ICE - Orlando
Orlando, FL
49,420
1,660,402
33.60
USCG - Martinsburg
Martinsburg, WV
59,547
1,618,049
27.17
JUD - Aberdeen
Aberdeen, MS
46,979
1,569,076
33.40
VA - Charleston
2024 / 2040
97,718
1,493,988
0.4
15.29
DEA - Albany
31,976
1,407,704
44.02
USAO - Springfield
Springfield, IL
43,600
1,391,454
31.91
JUD - Council Bluffs
Council Bluffs, IA
28,900
1,364,225
47.21
DEA - Riverside
Riverside, CA
34,354
1,320,529
38.44
DEA - Birmingham
35,616
1,251,695
35.14
SSA - Dallas
27,200
1,069,445
0.3
39.32
HSI - Orlando
27,840
1,065,323
38.27
JUD - South Bend
South Bend, IN
30,119
794,845
0.2
26.39
ICE - Louisville
17,420
661,535
37.98
DEA - San Diego
San Diego, CA
16,100
562,837
34.96
DEA - Bakersfield
Bakersfield, CA
9,800
492,965
0.1
50.30
SSA - San Diego
10,059
451,544
44.89
ICE - Otay
7,434
261,222
Subtotal
7,851,360
278,784,266
83.1
35.51
Wholly Owned State and Local Government Property
CA - Anaheim
Anaheim, CA
2033 / 2034
95,273
3,364,379
35.31
Wholly Owned Privately Leased Property
Northrop Grumman - Dayton
Beavercreek, OH
99,246
2,321,179
23.39
501 East Hunter Street - Lummus Corporation
Lubbock, TX
70,078
412,024
5.88
169,324
2,733,203
16.14
Wholly Owned Properties Total / Weighted Average
8,115,957
284,881,848
84.9
35.10
Unconsolidated Real Estate Venture U.S. Government Leased Properties
VA - Phoenix (9)
Phoenix, AZ
257,294
10,736,674
3.2
41.73
VA - San Antonio (9)
226,148
9,254,429
2.8
40.92
VA - Jacksonville (9)
Jacksonville, FL
193,100
7,330,590
2.2
37.96
VA - Chattanooga (9)
Chattanooga, TN
94,566
4,369,452
46.21
VA - Lubbock (9) (10)
120,916
4,248,831
VA - Marietta (9)
Marietta, GA
76,882
3,941,850
51.27
VA - Birmingham (9)
Irondale, AL
77,128
3,175,571
41.17
VA - Corpus Christi (9)
Corpus Christi, TX
69,276
2,938,590
42.42
VA - Columbus (9)
Columbus, GA
67,793
2,917,896
43.04
VA - Lenexa (9)
31,062
1,328,375
42.77
1,214,165
50,242,258
15.1
41.38
Total / Weighted Average
9,330,122
335,124,106
100.0
35.92
Total / Weighted Average at Easterly's Share
8,759,464
311,510,245
35.56
27
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 19.4 years as of September 30, 2024), 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, 2024:
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
592,906
6.4
19,045,322
5.7
32.12
394,832
4.2
14,532,251
4.3
36.81
506,510
5.4
18,829,913
5.6
37.18
802,397
8.6
17,605,584
5.3
21.94
631,036
6.8
19,132,304
30.32
2030
1,536
0.0
59,478
38.72
117,875
4,560,497
38.69
579,524
6.2
18,826,395
32.49
566,197
6.1
22,233,253
6.6
39.27
60
5,044,854
54.0
197,029,105
58.8
39.06
130
Information about our development property as of September 30, 2024 is set forth in the table below:
PropertyType
Lease Term
Estimated Leased SquareFeet
FDA - Atlanta
Food and Drug Administration
L (1)
20-year
162,000
JUD - Flagstaff
Flagstaff, AZ
Judiciary of the U.S. Government
C (2)
50,777
212,777
28
Results of Operations
Comparison of Results of Operations for the three months ended September 30, 2024 and 2023
The financial information presented below summarizes our results of operations for the three months ended September 30, 2024 and 2023 (amounts in thousands).
Change
4,331
(2,041
53
424
2,767
(2,036
186
1,550
279
(1,440
(201
229
(4,163
(966
Total revenues increased $2.8 million to $74.8 million for the three months ended September 30, 2024 compared to $72.0 million for the three months ended September 30, 2023.
The $4.3 million increase in Rental income is primarily attributable to the seven operating properties acquired since September 30, 2023.
The $2.0 million decrease in Tenant reimbursements is primarily attributable to a decrease in tenant project reimbursements.
The $0.1 million increase in Asset management income is primarily attributable to the fee earned by us for asset management of the JV from the one property acquired since September 30, 2023 and the one property acquired during the three months ended September 30, 2023.
The $0.4 million increase in Other income is primarily attributable to an increase in interest income.
Total expenses decreased $0.2 million to $55.0 million for the three months ended September 30, 2024 compared to $55.2 million for the three months ended September 30, 2023.
The $2.0 million decrease in Property operating expenses is primarily attributable to a decrease in reimbursable projects and federal and state taxes across the portfolio partially offset by an increase from the seven operating properties acquired since September 30, 2023.
The $0.2 million increase in Real estate taxes is primarily attributable to the seven operating properties acquired since September 30, 2023.
The $1.6 million increase in Depreciation and amortization is primarily attributable to the seven operating properties acquired since September 30, 2023.
29
The $1.4 million decrease in Corporate general and administrative is primarily due to a decrease in employee costs and non-cash compensation.
The $1.3 million increase in Provision for credit losses is primarily due to a construction loan entered into on August 6, 2024 to lend up to $52.1 million to a developer.
The $0.2 million increase in Income from unconsolidated real estate venture is primarily attributable to the one operating property acquired by the JV since September 30, 2023 and the one property acquired during the three months ended September 30, 2023.
The $4.2 million increase in Interest expense, net is primarily attributable to the fixed rate, senior unsecured notes entered into during the three months ended June 30, 2024 and September 30, 2024.
Comparison of Results of Operations for the nine months ended September 30, 2024 and 2023
The financial information presented below summarizes our results of operations for the nine months ended September 30, 2024 and 2023 (amounts in thousands).
11,354
(2,785
120
506
9,195
(2,843
1,171
3,736
201
(2,394
1,349
(9,471
(1,424
Total revenues increased $9.2 million to $223.8 million for the nine months ended September 30, 2024 compared to $214.6 million for the nine months ended September 30, 2023.
The $11.4 million increase in Rental income is primarily attributable to the seven operating properties acquired since September 30, 2023.
The $2.8 million decrease in Tenant reimbursements is primarily attributable to a decrease in tenant project reimbursements.
The $0.1 million increase in Asset management income is primarily attributable to the fee earned by us for asset management of the JV from the one property acquired since September 30, 2023 and the one property acquired during the nine months ended September 30, 2023.
The $0.5 million increase in Other income is primarily attributable to an increase in interest income.
30
Total expenses increased $1.3 million to $168.1 million for the nine months ended September 30, 2024 compared to $166.8 million for the nine months ended September 30, 2023.
The $2.8 million decrease in Property operating expenses is primarily attributable to a decrease in reimbursable projects and utility costs across the portfolio partially offset by an increase from the seven operating properties acquired since September 30, 2023.
The $1.2 million increase in Real estate taxes is primarily attributable to the seven operating properties acquired since September 30, 2023 as well as an increase in real estate taxes across our portfolio.
The $3.7 million increase in Depreciation and amortization is also primarily attributable to the seven operating properties acquired since September 30, 2023.
The $2.4 million decrease in Corporate general and administrative is primarily due to a decrease in employee costs and non-cash compensation.
The $1.5 million increase in Provision for credit losses is primarily due to a construction loan entered into on August 6, 2024 to lend up to $52.1 million to a developer.
The $0.2 million increase in Income from unconsolidated real estate venture is primarily attributable to the one operating property acquired by the JV since September 30, 2023 and the one operating property acquired during the nine months ended September 30, 2023.
The $9.5 million increase in Interest expense, net is primarily attributable to the fixed rate, senior unsecured notes entered into during the three months ended June 30, 2024 and September 30, 2024 and higher weighted average interest rates across the Company's borrowings.
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, development activities at FDA – Atlanta and JUD – Flagstaff, planned and possible acquisitions of properties, 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, 2024, we had approximately $31.2 million available in cash and cash equivalents, $8.0 million of restricted cash and there was approximately $250.3 million available under our 2024 revolving credit facility.
Our primary expected sources of capital are as follows:
Our short-term liquidity requirements consist primarily of funds to pay for the following:
31
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.
The following table sets forth certain information with respect to issuances under the 2019 ATM Program during the nine months ended September 30, 2024 (amounts in thousands, except share amounts):
Subsequent to September 30, 2024, we entered into forward sale transactions under the 2019 ATM Program for the sale of an additional 500,000 shares of our common stock that have not yet been settled. Subject to our right to elect net share settlement, we
expect to physically settle the forward sale transactions no later than October 14, 2025. Assuming the forward sale transactions are physically settled in full utilizing a net weighted average initial forward sales price of $13.32 per share, we expect to receive net proceeds of approximately $6.7 million, after deducting offering costs, subject to adjustments in accordance with the applicable forward sale transaction.
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.
33
Debt
Indebtedness Outstanding
The following table sets forth certain information with respect to our outstanding indebtedness as of September 30, 2024 (amounts in thousands):
In connection with the entry into the 2024 Credit Agreement on June 3, 2024, we prepaid all amounts outstanding under and terminated the revolver portion of the 2021 Credit Facility, including all unused commitments. Other than the foregoing, the terms of the 2021 Credit Facility remain unchanged and our 2018 term loan portion of the 2021 Credit Facility remains outstanding. We recognized an aggregate $0.3 million loss on debt extinguishment during the nine months ended September 30, 2024 which is included in Interest expense, net on our Consolidated Statement of Operations.
35
Our 2024 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, 2024, we were in compliance with all applicable financial covenants.
The chart below details our debt capital structure as of September 30, 2024 (dollar amounts in thousands):
Debt Capital Structure
Total principal outstanding
1,481,463
Weighted average maturity
4.9 years
Weighted average interest rate
4.6
% Variable debt
8.4
% Fixed debt (1)
91.6
% Secured debt
10.5
Material Cash Commitments
As of September 30, 2024, we have a commitment through a loan receivable of $52.1 million. As of September 30, 2024 and the date of this filing the outstanding balance of the loan receivable was $32.4 million and $33.8 million, respectively. We expect to fund the remaining commitment through the anticipated maturity of the loan on August 31, 2027, dependent on the borrower's election to use the commitments. For a more complete description of the real estate loan receivable, see Note 5 to the Consolidated Financial Statements.
Other than as described above, during the nine months ended September 30, 2024, 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, 2023.
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, 2024, we had invested $315.9 million in the JV. As of September 30, 2024, we had committed capital, net of return of over committed capital, to the JV totaling $332.9 million and had a remaining commitment of $8.5 million available. 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.
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.
36
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, 2024 and 2023 (amounts in thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating Activities
We generated $138.1 million and $96.9 million of cash from operating activities during the nine months ended September 30, 2024 and 2023, respectively. Net cash provided by operating activities for the nine months ended September 30, 2024 includes $78.5 million in net cash from rental activities net of expenses, $48.5 million related to the change in tenant accounts receivable, prepaid expenses and other assets, real estate loan interest receivable, deferred revenue associated with operating leases, principal payments on operating lease obligations, and accounts payable, accrued expenses and other liabilities and $11.1 million related to distributions from investment in unconsolidated real estate venture. 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.
Investing Activities
We used $251.2 million and $48.7 million in cash for investing activities during the nine months ended September 30, 2024 and 2023, respectively. Net cash used in investing activities for the nine months ended September 30, 2024 includes $79.3 million in additions to development properties, $73.5 million in real estate acquisitions and deposits, $40.1 million in investments in unconsolidated real estate venture, $31.5 million in investment in real estate loan receivable, net and $29.0 million in additions to operating properties, offset by $2.0 million in distributions of capital from unconsolidated real estate venture. 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.
37
Financing Activities
We generated $130.4 million and used $32.1 million in cash from financing activities during the nine months ended September 30, 2024 and 2023, respectively. Net cash generated in financing activities for the nine months ended September 30, 2024 includes $200.0 million in note payable issuances, $70.6 million in net draws under our revolving credit facility and $43.4 million in gross proceeds from issuance of shares of our common stock, offset by $86.4 million in dividend payments, $63.2 million in mortgage notes payable repayment, $25.5 million in term loan repayments, $7.8 million in deferred financing costs, and $0.6 million in the payment of offering costs. Net cash used by 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 a $50.0 million delayed draw on our 2018 term loan.
Non-GAAP Financial Measures
We use and present Funds From Operations (“FFO”) and Core FFO as supplemental measures of our performance. The summary below describes our use of FFO and Core FFO and 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 Core Funds From Operations
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 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, provision for credit losses 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.
FFO and Core FFO are presented as supplemental financial measures and do not fully represent our operating performance. Other REITs may use different methodologies for calculating FFO and Core FFO or use other definitions of FFO and Core FFO and, accordingly, our presentation of these measures may not be comparable to other REITs. Neither FFO nor Core FFO is intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.
The following table sets forth a reconciliation of our net income to FFO and Core FFO for the three and nine months ended September 30, 2024 and 2023 (amounts in thousands):
Depreciation of real estate assets
23,543
21,995
70,926
67,194
Unconsolidated real estate venture allocated share of above adjustments
1,976
1,887
5,984
5,637
FFO
30,634
29,963
91,759
89,104
Adjustments to FFO:
Loss on extinguishment of debt
260
Natural disaster event expense, net of recovery
(1
86
Depreciation of non-real estate assets
250
755
751
50
Core FFO
32,172
30,238
94,301
90,005
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, 2023 contains a discussion of our significant accounting policies, which utilize relevant critical accounting estimates. See below for our Current Expected Credit Loss (“CECL”) policy subsequent to the adoption of Accounting Standards Update (“ASU”) 2016-13 Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. During the nine months ended September 30, 2024, there were no other 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, 2023.
The measurement of expected credit losses under the CECL methodology is applicable to our financial assets measured at amortized cost, including loan receivables and certain off-balance sheet credit exposures such as unfunded loan commitments. We adopted this standard on January 1, 2020 and apply this methodology to our loan receivables and off-balance sheet credit exposure. To determine our expected credit losses under CECL we utilize a probability of default (“PD”) and loss given default (“LGD”) methodology. We determined that we have one portfolio segment and reserve for loan losses on an asset-specific basis. We have a limited history of incurred losses and consequently have elected to employ external data to perform our CECL calculation. Our model’s inputs consider a default grade or industry relative default grade associated with the borrower and/or prospective tenant funding the development to determine an appropriate default risk and allowance for credit loss under the PD and LGD methodology. If a reserve is recorded, the allowance is increased as a provision for credit losses and is decreased by charge-offs when losses are confirmed through the receipt of assets such as cash or via ownership control of the underlying collateral in full. The allowance for loan losses reflects management's estimate of loan losses as of the balance sheet date. For more information on the measurement of expected credit losses with respect to our real estate loan receivable, see Note 5 to the Consolidated Financial Statements.
39
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and variable rates. We manage and may continue to manage our market risk on variable rate debt by entering into swap arrangements to, in effect, fix the rate on all or a portion of the debt for varying periods up to maturity. This in turn, reduces the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when undertaking such arrangements is to reduce our floating rate exposure and we do not intend to enter into hedging arrangements for speculative purposes. For more information on our interest rate swaps, see Note 7 to the Consolidated Financial Statements.
As of September 30, 2024, $1.4 billion, or 91.6% of our debt, excluding unamortized premiums and discounts, had fixed interest rates and $124.1 million, or 8.4%, had variable interest rates based on SOFR. If market interest rates on our variable rate debt fluctuate by 25 basis points, our interest expense would increase or decrease, depending on rate movement, by $0.3 million annually.
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, 2024. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2024, 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, 2024 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, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
During the three months ended September 30, 2024, none of our 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
3.1
Amended and Restated Articles of Amendment and Restatement of Easterly Government Properties, Inc. (previously filed as Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
Amended and Restated Bylaws of Easterly Government Properties, Inc. (previously filed as Exhibit 3.2 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
3.3
First Amendment to Amended and Restated Bylaws of Easterly Government Properties, Inc. (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on February 27, 2019 and incorporated herein by reference)
3.4
Second Amendment to Amended and Restated Bylaws of Easterly Government Properties, Inc. (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K on May 20, 2021 and incorporated herein by reference)
4.1
Specimen Certificate of Common Stock of Easterly Government Properties, Inc. (previously filed as Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
10.1
Eighth Amendment to Term Loan Agreement, dated as of July 15, 2024, by and among Easterly Government Properties Inc., Easterly Government Properties LP, the Guarantors named therein, PNC Bank, National Association, as Administrative Agent and a Lender, and U.S. Bank National Association and Truist Bank, as Lenders (previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q on July 31, 2024 and incorporated herein by reference)
10.2
Fourth Amendment to Second Amended and Restated Credit Agreement, dated as of July 15, 2024, by and among Easterly Government Properties Inc., Easterly Government Properties LP, the Guarantors named therein, the Initial Lenders and Initial Issuing Banks named therein, and Citibank, N.A., as Administrative Agent, Wells Fargo Bank, N.A. and PNC Bank, National Association, as Co-Syndication Agents, BMO Harris Bank, N.A., Raymond James Bank, Royal Bank of Canada and Truist Bank, as Co-Documentation Agents, and Citibank, N.A., Wells Fargo Securities, LLC and PNC Capital Markets LLC, as Joint Lead Arrangers and Joint Book Running Managers (previously filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q on July 31, 2024 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 as its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents
104*
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 5, 2024
/s/ Darrell W. Crate
Darrell W. Crate
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Allison E. Marino
Allison E. Marino
Executive Vice President, Chief Financial Officer and Chief Accounting Officer
(Principal Financial and Accounting Officer)