$
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in Its Charter)
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(State of Incorporation) |
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(IRS Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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(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 |
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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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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
As of July 23, 2024, the registrant had
INDEX TO FINANCIAL STATEMENTS
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Part I: Financial Information |
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Item 1: Financial Statements: |
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Consolidated Financial Statements |
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Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023 (unaudited) |
1 |
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2 |
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3 |
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Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023 (unaudited) |
4 |
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6 |
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
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Item 3: Quantitative and Qualitative Disclosures About Market Risk |
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37 |
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37 |
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37 |
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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds |
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37 |
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37 |
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38 |
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39 |
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Easterly Government Properties, Inc.
Consolidated Balance Sheets (unaudited)
(Amounts in thousands, except share amounts)
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June 30, 2024 |
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December 31, 2023 |
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Assets |
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Real estate properties, net |
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$ |
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$ |
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Cash and cash equivalents |
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Restricted cash |
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Tenant accounts receivable |
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Investment in unconsolidated real estate venture |
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Intangible assets, net |
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Interest rate swaps |
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Prepaid expenses and other assets |
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Total assets |
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$ |
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$ |
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Liabilities |
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Revolving credit facility |
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Term loan facilities, net |
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Notes payable, net |
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Mortgage notes payable, net |
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Intangible liabilities, net |
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Deferred revenue |
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Accounts payable, accrued expenses and other liabilities |
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Total liabilities |
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Equity |
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Common stock, par value $ |
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Additional paid-in capital |
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Retained earnings |
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Cumulative dividends |
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Accumulated other comprehensive income |
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Total stockholders’ equity |
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Non-controlling interest in Operating Partnership |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
1
Easterly Government Properties, Inc.
Consolidated Statements of Operations (unaudited)
(Amounts in thousands, except share and per share amounts)
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For the three months ended June 30, |
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For the six months ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenues |
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Rental income |
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$ |
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$ |
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$ |
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$ |
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Tenant reimbursements |
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Asset management income |
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Other income |
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Total revenues |
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Expenses |
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Property operating |
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Real estate taxes |
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Depreciation and amortization |
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Acquisition costs |
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Corporate general and administrative |
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Total expenses |
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Other income (expense) |
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Income from unconsolidated real estate venture |
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Interest expense, net |
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Net income |
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Non-controlling interest in Operating Partnership |
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( |
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( |
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( |
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Net income available to Easterly Government |
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$ |
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$ |
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$ |
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$ |
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Net income available to Easterly Government |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average common shares outstanding |
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Basic |
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Diluted |
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Dividends declared per common share |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
2
Easterly Government Properties, Inc.
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(Amounts in thousands)
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For the three months ended June 30, |
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For the six months ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive gain (loss): |
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Unrealized gain (loss) on interest rate swaps, net |
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( |
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Other comprehensive gain (loss) |
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Comprehensive income |
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Non-controlling interest in Operating Partnership |
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( |
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( |
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( |
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( |
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Other comprehensive (gain) loss attributable to |
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( |
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( |
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Comprehensive income attributable to |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
3
Easterly Government Properties, Inc.
Consolidated Statements of Cash Flows (unaudited)
(Amounts in thousands)
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For the six months ended June 30, |
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2024 |
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2023 |
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Cash flows from operating activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities |
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Depreciation and amortization |
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Straight line rent |
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( |
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Income from unconsolidated real estate venture |
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( |
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( |
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Amortization of above- / below-market leases |
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( |
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( |
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Amortization of unearned revenue |
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( |
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( |
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Amortization of loan premium / discount |
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( |
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( |
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Amortization of deferred financing costs |
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Amortization of lease inducements |
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Distributions from investment in unconsolidated real estate venture |
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Non-cash compensation |
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Provision for credit losses |
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— |
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Net change in: |
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Tenant accounts receivable |
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( |
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( |
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Prepaid expenses and other assets |
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( |
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( |
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Deferred revenue associated with operating leases |
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Principal payments on operating lease obligations |
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( |
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Accounts payable, accrued expenses and other liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Real estate acquisitions and deposits |
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( |
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Additions to operating properties |
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( |
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( |
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Additions to development properties |
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( |
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( |
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Investment in loan receivable |
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( |
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— |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities |
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Payment of deferred financing costs |
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( |
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— |
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Issuance of common shares |
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Credit facility draws |
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Credit facility repayments |
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( |
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( |
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Term loan repayments |
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( |
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— |
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Issuance of notes payable |
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— |
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Repayments of mortgage notes payable |
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( |
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( |
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Dividends and distributions paid |
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( |
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( |
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Payment of offering costs |
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( |
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( |
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Net cash provided by (used in) financing activities |
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( |
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Net increase in Cash and cash equivalents and Restricted cash |
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Cash and cash equivalents and Restricted cash, beginning of period |
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Cash and cash equivalents and Restricted cash, end of period |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
4
Easterly Government Properties, Inc.
Consolidated Statements of Cash Flows (unaudited)
(Amounts in thousands)
Supplemental disclosure of cash flow information is as follows:
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For the six months ended June 30, |
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2024 |
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2023 |
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Cash paid for interest (net of capitalized interest of $ |
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$ |
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$ |
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Supplemental disclosure of non-cash information |
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Additions to operating properties accrued, not paid |
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$ |
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$ |
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Additions to development properties accrued, not paid |
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Deferred financing costs accrued, not paid |
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— |
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Offering costs accrued, not paid |
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Deferred asset acquisition costs accrued, not paid |
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Unrealized gain on interest rate swaps, net |
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Properties acquired for Common Units |
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— |
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Exchange of Common Units for Shares of Common Stock |
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Non-controlling interest in Operating Partnership |
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$ |
( |
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$ |
( |
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Common stock |
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— |
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Additional paid-in capital |
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Total |
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$ |
— |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
5
Easterly Government Properties, Inc.
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 June 30, 2024, we wholly owned
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
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 June 30, 2024 and December 31, 2023, the consolidated results of operations for the three and six months ended June 30, 2024 and 2023, and the consolidated cash flows for the six months ended June 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.
6
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the balance sheet, and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the impact of extraordinary events, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
2. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of our condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Accounting Pronouncements Not Yet Adopted
In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.
3. Real Estate and Intangibles
Acquisitions
During the six months ended June 30, 2024, we acquired
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Total |
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Real estate |
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$ |
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Total real estate |
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Intangible assets |
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In-place leases |
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Acquired leasing commissions |
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Total intangible assets |
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Purchase price |
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$ |
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The intangible assets and liabilities of operating properties acquired during the six months ended June 30, 2024 have a weighted average amortization period of
In addition to the above operating property activity, we acquired
During the three and six months ended June 30, 2024, we incurred $
7
Consolidated Real Estate and Intangibles
Real estate and intangibles consisted of the following as of June 30, 2024 (amounts in thousands):
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Total |
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Real estate properties, net |
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Land |
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$ |
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Building and improvements |
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Acquired tenant improvements |
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Construction in progress |
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Accumulated depreciation |
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( |
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Total Real estate properties, net |
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Intangible assets, net |
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In-place leases |
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Acquired leasing commissions |
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Above market leases |
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Payment in lieu of taxes |
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Accumulated amortization |
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( |
) |
Total Intangible assets, net |
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Intangible liabilities, net |
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Below market leases |
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( |
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Accumulated amortization |
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Total Intangible liabilities, net |
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( |
) |
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 June 30, 2024 (amounts in thousands):
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Acquired Above-Market Lease Intangibles |
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Acquired Below-Market Lease Intangibles |
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2024 (1) |
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$ |
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$ |
( |
) |
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2025 |
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( |
) |
|
2026 |
|
|
|
|
|
( |
) |
|
2027 |
|
|
|
|
|
( |
) |
|
2028 |
|
|
|
|
|
( |
) |
|
Above-market lease amortization reduces Rental income on our Consolidated Statements of Operations and below-market lease amortization increases Rental income on our Consolidated Statements of Operations.
4. Investment in Unconsolidated Real Estate Venture
The following is a summary of our investment in the JV (dollars in thousands):
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As of June 30, |
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|
Joint Venture |
|
Ownership Interest |
|
2024 |
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|
MedBase Venture |
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|
$ |
|
||
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
8
5. Debt
At June 30, 2024, our consolidated borrowings consisted of the following (amounts in thousands):
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Principal Outstanding |
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Interest |
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Current |
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Loan |
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June 30, 2024 |
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Rate (1) |
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Maturity |
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Revolving credit facility: |
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|
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2024 revolving credit facility (2) |
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$ |
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|||
Total revolving credit facility |
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Term loan facilities: |
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2016 term loan facility |
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|||
2018 term loan facility |
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|||
Total term loan facilities |
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|
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Less: Total unamortized deferred financing fees |
|
|
( |
) |
|
|
|
|
|
Total term loan facilities, net |
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|
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|
|
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|
|
|
|
|
|
|
|
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|
Notes payable: |
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2017 series A senior notes |
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|||
2017 series B senior notes |
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|||
2017 series C senior notes |
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|||
2019 series A senior notes |
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2019 series B senior notes |
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|||
2019 series C senior notes |
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2021 series A senior notes |
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2021 series B senior notes |
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2024 series A senior notes |
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|||
Total notes payable |
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|
|
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|
Less: Total unamortized deferred financing fees |
|
|
( |
) |
|
|
|
|
|
Total notes payable, net |
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Mortgage notes payable: |
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USFS II – Albuquerque |
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ICE – Charleston |
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VA – Loma Linda |
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CBP – Savannah |
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USCIS – Kansas City |
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|||
Total mortgage notes payable |
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|
|
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|
|
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|
Less: Total unamortized deferred financing fees |
|
|
( |
) |
|
|
|
|
|
Less: Total unamortized premium/discount |
|
|
( |
) |
|
|
|
|
|
Total mortgage notes payable, net |
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|
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|
|
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Total debt |
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$ |
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|
|
|
|
|
|
9
As of June 30, 2024, the net carrying value of real estate collateralizing our mortgages payable totaled $
On April 1, 2024, we used $
2024 Senior Note Agreement
On May 29, 2024, we entered into a master note purchase agreement pursuant to which the Operating Partnership will issue and sell an aggregate of up to $
2024 Revolving Credit Facility
On June 3, 2024, we entered into a credit agreement (the “2024 Credit Agreement”) that provides for a $
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
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 $
Effective on June 3, 2024 upon the entry into the 2024 Credit Agreement and the prepayment of all amounts outstanding under the 2021 revolving credit facility, the component of the 2021 Credit Facility providing for the 2021 revolving credit facility, including all unused commitments, was terminated. Other than the foregoing, the terms of the 2021 Credit Facility remain unchanged and our 2018 term loan facility remains outstanding. We recognized an aggregate $
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.
10
On June 3, 2024, we repaid $
On July 8, 2024, we used $
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 June 30, 2024, we were in compliance with all financial and other covenants related to our debt.
6. Derivatives and Hedging Activities
The following table sets forth the key terms and fair values of our interest rate swap derivatives, each of which was designated as a cash flow hedge as of June 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 |
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Fixed Rate |
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Floating Rate Index |
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Effective Date |
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Expiration Date |
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Fair Value |
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|||
$ |
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% |
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|
|
|
$ |
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||||||
$ |
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|
|
% |
|
|
|
|
$ |
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||||||
$ |
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|
% |
|
|
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|
$ |
|
||||||
The table below sets forth the fair value of our interest rate derivatives as well as their classification on our Consolidated Balance Sheet (amounts in thousands):
Balance Sheet Line Item |
|
As of June 30, 2024 |
|
|
Interest rate swaps |
|
$ |
|
|
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 $
The table below presents the effects of our interest rate derivatives on our Consolidated Statements of Operations and Comprehensive Income (Loss) (amounts in thousands):
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|
For the three months ended June 30, |
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|
For the six months ended June 30, |
|
||||||||||
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|
2024 |
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|
2023 |
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|
2024 |
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|
2023 |
|
||||
Unrealized gain recognized in AOCI |
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$ |
|
|
$ |
|
|
$ |
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|
$ |
|
||||
Gain reclassified from AOCI into interest expense |
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|
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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 June 30, 2024, we were
11
7. Fair Value Measurements
Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standards also establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of these inputs is broken down into three levels: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Categorization within the valuation hierarchy is based upon the lowest level of input that is most significant to the fair value measurement.
Recurring fair value measurements
The fair values of our interest rate swaps are determined using widely accepted valuation techniques, including discounted cash flow analysis, on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We have determined that the significance of the impact of the credit valuation adjustments made to our derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives held as of June 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 and accounts payable and accrued expenses are reasonable estimates of fair values because of the short maturities of these instruments. The table below presents our assets measured at fair value on a recurring basis as of June 30, 2024, aggregated by the level in the fair value hierarchy within which those measurements fall (amounts in thousands):
|
|
As of June 30, 2024 |
|
|||||||||
Balance Sheet Line Item |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
Interest rate swaps |
|
$ |
— |
|
|
$ |
||||||