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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 June 30, 2023

OR

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

For the transition period from to

Commission file number: 001-36834

 

EASTERLY GOVERNMENT PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

 

47-2047728

(State of Incorporation)

 

(IRS Employer Identification No.)

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

 

20006

(Address of Principal Executive Offices)

 

(Zip Code)

(202) 595-9500

(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

DEA

New York Stock Exchange

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

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

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

As of August 1, 2023, the registrant had 93,415,706 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 June 30, 2023 and December 31, 2022 (unaudited)

1

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)

2

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)

3

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (unaudited)

4

 

 

Notes to the Consolidated Financial Statements

6

 

 

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

21

 

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk

38

 

 

Item 4: Controls and Procedures

38

 

 

Part II: Other Information

 

 

 

Item 1: Legal Proceedings

38

 

 

Item 1A: Risk Factors

38

 

 

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

38

 

 

Item 3: Defaults Upon Senior Securities

38

 

 

Item 4: Mine Safety Disclosures

39

 

 

Item 5: Other Information

39

 

 

Item 6: Exhibits

40

 

 

Signatures

 

 

 

 


 

Easterly Government Properties, Inc.

Consolidated Balance Sheets (unaudited)

(Amounts in thousands, except share amounts)

 

 

June 30, 2023

 

 

December 31, 2022

 

Assets

 

 

 

 

 

 

Real estate properties, net

 

$

2,270,435

 

 

$

2,285,308

 

Cash and cash equivalents

 

 

9,816

 

 

 

7,578

 

Restricted cash

 

 

11,970

 

 

 

9,696

 

Tenant accounts receivable

 

 

60,862

 

 

 

58,835

 

Investment in unconsolidated real estate venture

 

 

268,594

 

 

 

271,644

 

Intangible assets, net

 

 

145,837

 

 

 

157,282

 

Interest rate swaps

 

 

5,114

 

 

 

4,020

 

Prepaid expenses and other assets

 

 

35,335

 

 

 

35,022

 

Total assets

 

$

2,807,963

 

 

$

2,829,385

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Revolving credit facility

 

 

53,000

 

 

 

65,500

 

Term loan facilities, net

 

 

249,179

 

 

 

248,972

 

Notes payable, net

 

 

696,290

 

 

 

696,052

 

Mortgage notes payable, net

 

 

222,711

 

 

 

240,847

 

Intangible liabilities, net

 

 

14,421

 

 

 

16,387

 

Deferred revenue

 

 

85,932

 

 

 

83,309

 

Accounts payable, accrued expenses and other liabilities

 

 

64,363

 

 

 

67,336

 

Total liabilities

 

 

1,385,896

 

 

 

1,418,403

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Common stock, par value $0.01, 200,000,000 shares authorized,
  
93,415,706 and 90,814,021 shares issued and outstanding at
   June 30, 2023 and December 31, 2022, respectively

 

 

934

 

 

 

908

 

Additional paid-in capital

 

 

1,673,399

 

 

 

1,622,913

 

Retained earnings

 

 

102,491

 

 

 

93,497

 

Cumulative dividends

 

 

(524,806

)

 

 

(475,983

)

Accumulated other comprehensive income (loss)

 

 

4,518

 

 

 

3,546

 

Total stockholders’ equity

 

 

1,256,536

 

 

 

1,244,881

 

Non-controlling interest in Operating Partnership

 

 

165,531

 

 

 

166,101

 

Total equity

 

 

1,422,067

 

 

 

1,410,982

 

Total liabilities and equity

 

$

2,807,963

 

 

$

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 June 30,

 

 

For the six months ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

67,758

 

 

$

71,156

 

 

$

135,906

 

 

$

141,595

 

Tenant reimbursements

 

 

2,500

 

 

 

916

 

 

 

4,575

 

 

 

2,060

 

Asset management income

 

 

517

 

 

 

317

 

 

 

1,034

 

 

 

565

 

Other income

 

 

598

 

 

 

368

 

 

 

1,078

 

 

 

839

 

Total revenues

 

 

71,373

 

 

 

72,757

 

 

 

142,593

 

 

 

145,059

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

17,629

 

 

 

15,551

 

 

 

35,517

 

 

 

31,009

 

Real estate taxes

 

 

7,619

 

 

 

7,851

 

 

 

15,087

 

 

 

15,677

 

Depreciation and amortization

 

 

22,619

 

 

 

24,343

 

 

 

45,700

 

 

 

48,502

 

Acquisition costs

 

 

444

 

 

 

302

 

 

 

905

 

 

 

664

 

Corporate general and administrative

 

 

7,024

 

 

 

5,966

 

 

 

14,319

 

 

 

11,949

 

Total expenses

 

 

55,335

 

 

 

54,013

 

 

 

111,528

 

 

 

107,801

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Income from unconsolidated real estate venture

 

 

1,418

 

 

 

825

 

 

 

2,820

 

 

 

1,456

 

Interest expense, net

 

 

(11,678

)

 

 

(11,439

)

 

 

(23,693

)

 

 

(22,321

)

Net income

 

 

5,778

 

 

 

8,130

 

 

 

10,192

 

 

 

16,393

 

Non-controlling interest in Operating Partnership

 

 

(675

)

 

 

(933

)

 

 

(1,198

)

 

 

(1,855

)

Net income available to Easterly Government
   Properties, Inc.

 

$

5,103

 

 

$

7,197

 

 

$

8,994

 

 

$

14,538

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.08

 

 

$

0.09

 

 

$

0.16

 

Diluted

 

$

0.05

 

 

$

0.08

 

 

$

0.09

 

 

$

0.16

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

93,358,851

 

 

 

90,751,351

 

 

 

92,235,346

 

 

 

90,452,594

 

Diluted

 

 

93,641,382

 

 

 

91,083,980

 

 

 

92,508,651

 

 

 

90,799,647

 

Dividends declared per common share

 

$

0.265

 

 

$

0.265

 

 

$

0.530

 

 

$

0.530

 

 

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 June 30,

 

 

For the six months ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income

 

$

5,778

 

 

$

8,130

 

 

$

10,192

 

 

$

16,393

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swaps, net

 

 

3,107

 

 

 

2,903

 

 

 

1,094

 

 

 

8,410

 

Other comprehensive income

 

 

3,107

 

 

 

2,903

 

 

 

1,094

 

 

 

8,410

 

Comprehensive income

 

 

8,885

 

 

 

11,033

 

 

 

11,286

 

 

 

24,803

 

Non-controlling interest in Operating Partnership

 

 

(675

)

 

 

(933

)

 

 

(1,198

)

 

 

(1,855

)

Other comprehensive income attributable to
   non-controlling interest

 

 

(362

)

 

 

(338

)

 

 

(122

)

 

 

(945

)

Comprehensive income attributable to
   Easterly Government Properties, Inc.

 

$

7,848

 

 

$

9,762

 

 

$

9,966

 

 

$

22,003

 

 

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 six months ended June 30,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

10,192

 

 

$

16,393

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

45,700

 

 

 

48,502

 

Straight line rent

 

 

(1,365

)

 

 

(531

)

Income from unconsolidated real estate venture

 

 

(2,820

)

 

 

(1,456

)

Amortization of above- / below-market leases

 

 

(1,376

)

 

 

(1,604

)

Amortization of unearned revenue

 

 

(3,106

)

 

 

(2,841

)

Amortization of loan premium / discount

 

 

(543

)

 

 

(563

)

Amortization of deferred financing costs

 

 

1,031

 

 

 

1,022

 

Amortization of lease inducements

 

 

431

 

 

 

428

 

Distributions from investment in unconsolidated real estate venture

 

 

5,870

 

 

 

3,369

 

Non-cash compensation

 

 

2,967

 

 

 

3,266

 

Net change in:

 

 

 

 

 

 

Tenant accounts receivable

 

 

(754

)

 

 

2,712

 

Prepaid expenses and other assets

 

 

(1,598

)

 

 

(1,510

)

Deferred revenue associated with operating leases

 

 

5,730

 

 

 

1,464

 

Principal payments on operating lease obligations

 

 

(218

)

 

 

(195

)

Accounts payable, accrued expenses and other liabilities

 

 

(1,089

)

 

 

(4,102

)

Net cash provided by operating activities

 

 

59,052

 

 

 

64,354

 

Cash flows from investing activities

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

107

 

 

 

(78,771

)

Additions to operating properties

 

 

(12,105

)

 

 

(10,891

)

Additions to development properties

 

 

(8,969

)

 

 

(4,949

)

Distributions from investment in unconsolidated real estate venture

 

 

 

 

 

304

 

Investment in unconsolidated real estate venture

 

 

 

 

 

(52,721

)

Net cash used in investing activities

 

 

(20,967

)

 

 

(147,028

)

Cash flows from financing activities

 

 

 

 

 

 

Issuance of common shares

 

 

52,414

 

 

 

9,504

 

Credit facility draws

 

 

53,750

 

 

 

157,250

 

Credit facility repayments

 

 

(66,250

)

 

 

(29,000

)

Repayments of mortgage notes payable

 

 

(17,812

)

 

 

(2,628

)

Dividends and distributions paid

 

 

(55,619

)

 

 

(54,415

)

Payment of offering costs

 

 

(56

)

 

 

(136

)

Net cash (used in) provided by financing activities

 

 

(33,573

)

 

 

80,575

 

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

 

 

4,512

 

 

 

(2,099

)

Cash and cash equivalents and Restricted cash, beginning of period

 

 

17,274

 

 

 

20,143

 

Cash and cash equivalents and Restricted cash, end of period

 

$

21,786

 

 

$

18,044

 

 

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 six months ended June 30,

 

 

 

2023

 

 

2022

 

Cash paid for interest (net of capitalized interest of $665 and $531 in 2023 and 2022, respectively)

 

$

23,555

 

 

$

21,766

 

Supplemental disclosure of non-cash information

 

 

 

 

 

 

Additions to operating properties accrued, not paid

 

$

5,404

 

 

$

1,207

 

Additions to development properties accrued, not paid

 

 

2,350

 

 

 

2,534

 

Offering costs accrued, not paid

 

 

10

 

 

 

 

Deferred asset acquisition costs accrued, not paid

 

 

18

 

 

 

128

 

Unrealized gain on interest rate swaps, net

 

 

1,094

 

 

 

8,410

 

Properties acquired for Common Units

 

 

219

 

 

 

17,361

 

Recognition of operating lease right-of-use assets

 

 

 

 

 

101

 

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

 

 

 

 

 

101

 

Exchange of Common Units for Shares of Common Stock

 

 

 

 

 

 

Non-controlling interest in Operating Partnership

 

$

(140

)

 

$

(2,911

)

Common stock

 

 

 

 

 

2

 

Additional paid-in capital

 

 

140

 

 

 

2,909

 

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 June 30, 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 June 30, 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 June 30, 2023. We believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.

Principles of Consolidation

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

Basis of Presentation

The condensed consolidated financial statements included herein are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the consolidated financial position of the Company at June 30, 2023 and December 31, 2022, the consolidated results of operations for the three and six months ended June 30, 2023 and 2022, and the consolidated cash flows for the six months ended June 30, 2023 and 2022. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

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

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 June 30, 2023 (amounts in thousands):

 

 

Total

 

Real estate properties, net

 

 

 

Land

 

$

213,592

 

Building and improvements

 

 

2,292,532

 

Acquired tenant improvements

 

 

81,666

 

Construction in progress

 

 

38,254

 

Accumulated depreciation

 

 

(355,609

)

Total Real estate properties, net

 

 

2,270,435

 

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

 

 

(214,885

)

Total Intangible assets, net