10-Q
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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 March 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-36834

 

EASTERLY GOVERNMENT PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

 

47-2047728

(State of Incorporation)

 

(IRS Employer Identification No.)

2001 K Street NW, Suite 775 North, Washington, D.C.

 

20006

(Address of Principal Executive Offices)

 

(Zip Code)

(202) 595-9500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

DEA

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of April 25, 2023, the registrant had 93,389,906 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 March 31, 2023 and December 31, 2022 (unaudited)

1

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022 (unaudited)

2

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022 (unaudited)

3

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited)

4

 

 

Notes to the Consolidated Financial Statements

6

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk

34

 

 

Item 4: Controls and Procedures

34

 

 

Part II: Other Information

 

 

 

Item 1: Legal Proceedings

34

 

 

Item 1A: Risk Factors

34

 

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

Item 3: Defaults Upon Senior Securities

34

 

 

Item 4: Mine Safety Disclosures

35

 

 

Item 5: Other Information

35

 

 

Item 6: Exhibits

36

 

 

Signatures

 

 

 

 


 

Easterly Government Properties, Inc.

Consolidated Balance Sheets (unaudited)

(Amounts in thousands, except share amounts)

 

 

March 31, 2023

 

 

December 31, 2022

 

Assets

 

 

 

 

 

 

Real estate properties, net

 

$

2,277,307

 

 

$

2,285,308

 

Cash and cash equivalents

 

 

8,852

 

 

 

7,578

 

Restricted cash

 

 

11,621

 

 

 

9,696

 

Tenant accounts receivable

 

 

58,334

 

 

 

58,835

 

Investment in unconsolidated real estate venture

 

 

270,889

 

 

 

271,644

 

Intangible assets, net

 

 

151,335

 

 

 

157,282

 

Interest rate swaps

 

 

2,460

 

 

 

4,020

 

Prepaid expenses and other assets

 

 

38,488

 

 

 

35,022

 

Total assets

 

$

2,819,286

 

 

$

2,829,385

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Revolving credit facility

 

 

49,500

 

 

 

65,500

 

Term loan facilities, net

 

 

249,079

 

 

 

248,972

 

Notes payable, net

 

 

696,171

 

 

 

696,052

 

Mortgage notes payable, net

 

 

223,942

 

 

 

240,847

 

Intangible liabilities, net

 

 

15,392

 

 

 

16,387

 

Deferred revenue

 

 

81,881

 

 

 

83,309

 

Interest rate swaps

 

 

454

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

 

62,828

 

 

 

67,336

 

Total liabilities

 

 

1,379,247

 

 

 

1,418,403

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Common stock, par value $0.01, 200,000,000 shares authorized,
  
93,389,906 and 90,814,021 shares issued and outstanding at
   March 31, 2023 and December 31, 2022, respectively

 

 

934

 

 

 

908

 

Additional paid-in capital

 

 

1,672,467

 

 

 

1,622,913

 

Retained earnings

 

 

97,388

 

 

 

93,497

 

Cumulative dividends

 

 

(500,051

)

 

 

(475,983

)

Accumulated other comprehensive income (loss)

 

 

1,773

 

 

 

3,546

 

Total stockholders’ equity

 

 

1,272,511

 

 

 

1,244,881

 

Non-controlling interest in Operating Partnership

 

 

167,528

 

 

 

166,101

 

Total equity

 

 

1,440,039

 

 

 

1,410,982

 

Total liabilities and equity

 

$

2,819,286

 

 

$

2,829,385

 

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)

 

 

For the three months ended March 31,

 

 

 

2023

 

 

2022

 

Revenues

 

 

 

 

 

 

Rental income

 

$

68,148

 

 

$

70,439

 

Tenant reimbursements

 

 

2,075

 

 

 

1,144

 

Asset management income

 

 

517

 

 

 

248

 

Other income

 

 

480

 

 

 

471

 

Total revenues

 

 

71,220

 

 

 

72,302

 

Expenses

 

 

 

 

 

 

Property operating

 

 

17,888

 

 

 

15,458

 

Real estate taxes

 

 

7,468

 

 

 

7,826

 

Depreciation and amortization

 

 

23,081

 

 

 

24,159

 

Acquisition costs

 

 

461

 

 

 

362

 

Corporate general and administrative

 

 

7,295

 

 

 

5,983

 

Total expenses

 

 

56,193

 

 

 

53,788

 

Other income (expense)

 

 

 

 

 

 

Income from unconsolidated real estate venture

 

 

1,402

 

 

 

631

 

Interest expense, net

 

 

(12,015

)

 

 

(10,882

)

Net income

 

 

4,414

 

 

 

8,263

 

Non-controlling interest in Operating Partnership

 

 

(523

)

 

 

(922

)

Net income available to Easterly Government
   Properties, Inc.

 

$

3,891

 

 

$

7,341

 

Net income available to Easterly Government
   Properties, Inc. per share:

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

0.08

 

Diluted

 

$

0.04

 

 

$

0.08

 

Weighted-average common shares outstanding

 

 

 

 

 

 

Basic

 

 

91,099,357

 

 

 

90,150,518

 

Diluted

 

 

91,329,140

 

 

 

90,571,571

 

Dividends declared per common share

 

$

0.265

 

 

$

0.265

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2

 


 

Easterly Government Properties, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(Amounts in thousands)

 

 

 

For the three months ended March 31,

 

 

 

2023

 

 

2022

 

Net income

 

$

4,414

 

 

$

8,263

 

Other comprehensive income:

 

 

 

 

 

 

Unrealized gain (loss) on interest rate swaps, net

 

 

(2,013

)

 

 

5,507

 

Other comprehensive income (loss)

 

 

(2,013

)

 

 

5,507

 

Comprehensive income

 

 

2,401

 

 

 

13,770

 

Non-controlling interest in Operating Partnership

 

 

(523

)

 

 

(922

)

Other comprehensive (income) loss attributable to
   non-controlling interest

 

 

240

 

 

 

(607

)

Comprehensive income attributable to
   Easterly Government Properties, Inc.

 

$

2,118

 

 

$

12,241

 

 

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)

 

 

For the three months ended March 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

4,414

 

 

$

8,263

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

Depreciation and amortization

 

 

23,081

 

 

 

24,159

 

Straight line rent

 

 

(463

)

 

 

(982

)

Income from unconsolidated real estate venture

 

 

(1,402

)

 

 

(631

)

Amortization of above- / below-market leases

 

 

(700

)

 

 

(860

)

Amortization of unearned revenue

 

 

(1,484

)

 

 

(1,398

)

Amortization of loan premium / discount

 

 

(270

)

 

 

(285

)

Amortization of deferred financing costs

 

 

514

 

 

 

509

 

Amortization of lease inducements

 

 

216

 

 

 

212

 

Distributions from investment in unconsolidated real estate venture

 

 

2,158

 

 

 

1,819

 

Non-cash compensation

 

 

1,668

 

 

 

1,629

 

Net change in:

 

 

 

 

 

 

Tenant accounts receivable

 

 

734

 

 

 

1,235

 

Prepaid expenses and other assets

 

 

(4,313

)

 

 

(4,728

)

Deferred revenue associated with operating leases

 

 

55

 

 

 

175

 

Principal payments on operating lease obligations

 

 

(127

)

 

 

(95

)

Accounts payable, accrued expenses and other liabilities

 

 

(2,456

)

 

 

(4,910

)

Net cash provided by operating activities

 

 

21,625

 

 

 

24,112

 

Cash flows from investing activities

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

124

 

 

 

(498

)

Additions to operating properties

 

 

(7,756

)

 

 

(5,275

)

Additions to development properties

 

 

(2,944

)

 

 

(965

)

Investment in unconsolidated real estate venture

 

 

 

 

 

(21,723

)

Net cash used in investing activities

 

 

(10,576

)

 

 

(28,461

)

Cash flows from financing activities

 

 

 

 

 

 

Issuance of common shares

 

 

52,414

 

 

 

9,504

 

Credit facility draws

 

 

20,750

 

 

 

32,000

 

Credit facility repayments

 

 

(36,750

)

 

 

(11,500

)

Repayments of mortgage notes payable

 

 

(16,744

)

 

 

(1,300

)

Dividends and distributions paid

 

 

(27,464

)

 

 

(27,035

)

Payment of offering costs

 

 

(56

)

 

 

(125

)

Net cash provided by (used in) financing activities

 

 

(7,850

)

 

 

1,544

 

Net increase (decrease) in Cash and cash equivalents and Restricted cash

 

 

3,199

 

 

 

(2,805

)

Cash and cash equivalents and Restricted cash, beginning of period

 

 

17,274

 

 

 

20,143

 

Cash and cash equivalents and Restricted cash, end of period

 

$

20,473

 

 

$

17,338

 

 

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:

 

 

For the three months ended March 31,

 

 

 

2023

 

 

2022

 

Cash paid for interest (net of capitalized interest of $339 and $257 in 2023 and 2022, respectively)

 

$

11,080

 

 

$

9,705

 

Supplemental disclosure of non-cash information

 

 

 

 

 

 

Additions to operating properties accrued, not paid

 

$

2,255

 

 

$

2,360

 

Additions to development properties accrued, not paid

 

 

5,380

 

 

 

3,299

 

Offering costs accrued, not paid

 

 

10

 

 

 

10

 

Deferred asset acquisition costs accrued, not paid

 

 

1

 

 

 

2

 

Unrealized gain (loss) on interest rate swaps, net

 

 

(2,013

)

 

 

5,507

 

Properties acquired for Common Units

 

 

219

 

 

 

 

Recognition of operating lease right-of-use assets

 

 

 

 

 

101

 

Recognition of liabilities related to operating lease right-of-use assets

 

 

 

 

 

101

 

Exchange of Common Units for Shares of Common Stock

 

 

 

 

 

 

Non-controlling interest in Operating Partnership

 

$

(140

)

 

$

(2,700

)

Common stock

 

 

 

 

 

2

 

Additional paid-in capital

 

 

140

 

 

 

2,698

 

Total

 

$

 

 

$

 

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, 2022, and related notes thereto, included in the Annual Report on Form 10-K of Easterly Government Properties, Inc. (the “Company”) for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2023.

The Company is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2015. The operations of the Company are carried on primarily through Easterly Government Properties LP (the “Operating Partnership”) and the wholly owned subsidiaries of the Operating Partnership. As used herein, the “Company,” “we,” “us,” or “our” refer to Easterly Government Properties, Inc. and its consolidated subsidiaries and partnerships, including the Operating Partnership, except where context otherwise requires.

We are an internally managed REIT, focused primarily on the acquisition, development, and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate substantially all of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration (“GSA”). Our objective is to generate attractive risk-adjusted returns for our stockholders over the long-term through dividends and capital appreciation.

We focus on acquiring, developing and managing U.S. Government leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. As of March 31, 2023, we wholly owned 78 operating properties and eight operating properties through an unconsolidated joint venture (the “JV”) in the United States, encompassing approximately 8.6 million leased square feet, including 85 operating properties that were leased primarily to U.S. Government tenant agencies and one operating property that was entirely leased to a private tenant. As of March 31, 2023, our operating properties were 98% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion.

The Operating Partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of the Operating Partnership. We owned approximately 88.4% of the aggregate limited partnership interests in the Operating Partnership (“common units”) at March 31, 2023. We believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.

Principles of Consolidation

The accompanying consolidated financial statements are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company, Easterly Government Properties TRS, LLC, Easterly Government Services, LLC, the Operating Partnership and its other subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The condensed consolidated financial statements included herein are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the consolidated financial position of the Company at March 31, 2023 and December 31, 2022, the consolidated results of operations for the three months ended March 31, 2023 and 2022, and the consolidated cash flows for the three months ended March 31, 2023 and 2022. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the balance sheet, and the

6

 


 

reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including the impact of extraordinary events, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

2. Summary of Significant Accounting Policies

The significant accounting policies used in the preparation of our condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

3. Real Estate and Intangibles

Consolidated Real Estate and Intangibles

Real estate and intangibles consisted of the following as of March 31, 2023 (amounts in thousands):

 

 

Total

 

Real estate properties, net

 

 

 

Land

 

$

213,592

 

Building and improvements

 

 

2,285,139

 

Acquired tenant improvements

 

 

81,666

 

Construction in progress

 

 

35,211

 

Accumulated depreciation

 

 

(338,301

)

Total Real estate properties, net

 

 

2,277,307

 

Intangible assets, net

 

 

 

In-place leases

 

 

271,066

 

Acquired leasing commissions

 

 

68,642

 

Above market leases

 

 

14,620

 

Payment in lieu of taxes

 

 

6,394

 

Accumulated amortization

 

 

(209,387

)

Total Intangible assets, net

 

 

151,335

 

Intangible liabilities, net

 

 

 

Below market leases

 

 

(72,037

)

Accumulated amortization

 

 

56,645

 

Total Intangible liabilities, net

 

 

(15,392

)

No operating properties were acquired or disposed of during the three months ended March 31, 2023.

During the three months ended March 31, 2023, we incurred $0.5 million of acquisition-related expenses mainly consisting of internal costs associated with future property acquisitions.

The following table summarizes the scheduled amortization of our acquired above- and below-market lease intangibles for each of the five succeeding years as of March 31, 2023 (amounts in thousands):

 

 

Acquired Above-Market Lease Intangibles

 

 

Acquired Below-Market Lease Intangibles

 

2023 (1)

 

$

882

 

 

$

(2,912

)

2024

 

 

1,129

 

 

 

(2,938

)

2025

 

 

1,097

 

 

 

(2,246

)

2026

 

 

1,096

 

 

 

(2,008

)

2027

 

 

1,096

 

 

 

(1,783

)

(1)
Represents the nine months ended December 31, 2023.

Above-market lease amortization reduces Rental income on our Consolidated Statements of Operations and below-market lease amortization increases Rental income on our Consolidated Statements of Operations.

7

 


 

4. Investment in Unconsolidated Real Estate Venture

The following is a summary of our investment in the JV (dollars in thousands):

 

 

 

 

As of March 31,

 

Joint Venture

 

Ownership Interest

 

2023

 

MedBase Venture

 

53.0%

 

$

270,889

 

On October 13, 2021, we formed an unconsolidated real estate venture, which we refer to as the JV, with a global investor to fund the acquisition of a portfolio of ten properties anticipated to encompass 1,214,165 leased square feet (the "VA Portfolio"). We own a 53.0% interest in the JV, subject to preferred allocations as provided in the JV agreement.

No operating properties were acquired by the JV during the three months ended March 31, 2023. As of March 31, 2023, eight of the ten properties in the VA Portfolio had been acquired by the JV.

We provide asset management services to the JV. We recognized asset management service revenue of $0.5 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively.

The following is a summary of financial information for the JV (amounts in thousands):

 

 

As of March 31,

 

Balance sheet information:

 

2023

 

Real estate, net

 

$

428,254

 

Other assets, net (1)

 

 

90,287

 

   Total assets

 

$

518,541

 

 

 

 

 

Total liabilities (2)

 

$

8,069

 

Total equity

 

 

510,472

 

   Total liabilities and equity

 

$

518,541

 

 

 

 

 

Company’s share of equity

 

$

270,514

 

Basis differential (3)

 

 

375

 

Carrying value of the Company’s investment in the unconsolidated venture

 

$

270,889

 

 

(1)
At March 31, 2023, this amount included right-of-use assets - finance leases totaling approximately $4.9 million representing a ground lease at VA – Lubbock.
(2)
At March 31, 2023, this amount included lease liabilities - finance leases totaling approximately $5.0 million representing a ground lease at VA – Lubbock.
(3)
This amount represents the aggregate difference between our historical cost basis and the basis reflected at the joint venture level.

 

 

For the three months ended March 31,

 

Income statement information:

 

2023

 

 

2022

 

Total revenue

 

$

9,780

 

 

$

4,698

 

Operating income

 

 

2,687

 

 

 

1,231

 

Net income

 

 

2,646

 

 

 

1,190

 

 

 

 

 

 

 

 

Company’s share of net income

 

$

1,402

 

 

$

631

 

 

8

 


 

5. Debt

At March 31, 2023, our consolidated borrowings consisted of the following (amounts in thousands):

 

 

Principal Outstanding

 

 

Interest

 

Current

 

Loan

 

March 31, 2023

 

 

Rate (1)

 

Maturity

 

Revolving credit facility:

 

 

 

 

 

 

 

 

Revolving credit facility (2)

 

$

49,500

 

 

S + 145 bps

 

July 2025 (3)

 

Total revolving credit facility

 

 

49,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan facilities:

 

 

 

 

 

 

 

 

2016 term loan facility

 

 

100,000

 

 

2.82% (5)

 

March 2024

 

2018 term loan facility (4)

 

 

150,000

 

 

3.98% (6)

 

July 2026

 

Total term loan facilities

 

 

250,000

 

 

 

 

 

 

Less: Total unamortized deferred financing fees

 

 

(921

)