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, 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 April 23, 2024, the registrant had 102,998,979 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, 2024 and December 31, 2023 (unaudited)

1

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023 (unaudited)

2

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2024 and 2023 (unaudited)

3

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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

18

 

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk

32

 

 

Item 4: Controls and Procedures

32

 

 

Part II: Other Information

 

 

 

Item 1: Legal Proceedings

32

 

 

Item 1A: Risk Factors

32

 

 

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

32

 

 

Item 3: Defaults Upon Senior Securities

32

 

 

Item 4: Mine Safety Disclosures

32

 

 

Item 5: Other Information

33

 

 

Item 6: Exhibits

33

 

 

Signatures

 

 

 

 


 

Easterly Government Properties, Inc.

Consolidated Balance Sheets (unaudited)

(Amounts in thousands, except share amounts)

 

 

March 31, 2024

 

 

December 31, 2023

 

Assets

 

 

 

 

 

 

Real estate properties, net

 

$

2,337,307

 

 

$

2,319,143

 

Cash and cash equivalents

 

 

43,545

 

 

 

9,381

 

Restricted cash

 

 

12,557

 

 

 

12,558

 

Tenant accounts receivable

 

 

73,092

 

 

 

66,274

 

Investment in unconsolidated real estate venture

 

 

282,879

 

 

 

284,544

 

Intangible assets, net

 

 

143,044

 

 

 

148,453

 

Interest rate swaps

 

 

2,897

 

 

 

1,994

 

Prepaid expenses and other assets

 

 

47,494

 

 

 

37,405

 

Total assets

 

$

2,942,815

 

 

$

2,879,752

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Revolving credit facility

 

 

144,500

 

 

 

79,000

 

Term loan facilities, net

 

 

298,917

 

 

 

299,108

 

Notes payable, net

 

 

696,655

 

 

 

696,532

 

Mortgage notes payable, net

 

 

218,916

 

 

 

220,195

 

Intangible liabilities, net

 

 

11,593

 

 

 

12,480

 

Deferred revenue

 

 

88,746

 

 

 

82,712

 

Accounts payable, accrued expenses and other liabilities

 

 

95,642

 

 

 

80,209

 

Total liabilities

 

 

1,554,969

 

 

 

1,470,236

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Common stock, par value $0.01, 200,000,000 shares authorized,
  
102,354,702 and 100,973,247 shares issued and outstanding at
   March 31, 2024 and December 31, 2023, respectively

 

 

1,024

 

 

 

1,010

 

Additional paid-in capital

 

 

1,801,304

 

 

 

1,783,338

 

Retained earnings

 

 

116,927

 

 

 

112,301

 

Cumulative dividends

 

 

(603,443

)

 

 

(576,319

)

Accumulated other comprehensive income

 

 

2,753

 

 

 

1,871

 

Total stockholders’ equity

 

 

1,318,565

 

 

 

1,322,201

 

Non-controlling interest in Operating Partnership

 

 

69,281

 

 

 

87,315

 

Total equity

 

 

1,387,846

 

 

 

1,409,516

 

Total liabilities and equity

 

$

2,942,815

 

 

$

2,879,752

 

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,

 

 

 

2024

 

 

2023

 

Revenues

 

 

 

 

 

 

Rental income

 

$

70,746

 

 

$

68,148

 

Tenant reimbursements

 

 

1,017

 

 

 

2,075

 

Asset management income

 

 

550

 

 

 

517

 

Other income

 

 

487

 

 

 

480

 

Total revenues

 

 

72,800

 

 

 

71,220

 

Expenses

 

 

 

 

 

 

Property operating

 

 

16,592

 

 

 

17,888

 

Real estate taxes

 

 

8,229

 

 

 

7,468

 

Depreciation and amortization

 

 

23,800

 

 

 

23,081

 

Acquisition costs

 

 

419

 

 

 

461

 

Corporate general and administrative

 

 

6,455

 

 

 

7,295

 

Total expenses

 

 

55,495

 

 

 

56,193

 

Other income (expense)

 

 

 

 

 

 

Income from unconsolidated real estate venture

 

 

1,415

 

 

 

1,402

 

Interest expense, net

 

 

(13,836

)

 

 

(12,015

)

Net income

 

 

4,884

 

 

 

4,414

 

Non-controlling interest in Operating Partnership

 

 

(258

)

 

 

(523

)

Net income available to Easterly Government
   Properties, Inc.

 

$

4,626

 

 

$

3,891

 

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

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

0.04

 

Diluted

 

$

0.04

 

 

$

0.04

 

Weighted-average common shares outstanding

 

 

 

 

 

 

Basic

 

 

101,993,143

 

 

 

91,099,357

 

Diluted

 

 

102,235,012

 

 

 

91,329,140

 

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 (Loss) (unaudited)

(Amounts in thousands)

 

 

 

For the three months ended March 31,

 

 

 

2024

 

 

2023

 

Net income

 

$

4,884

 

 

$

4,414

 

Other comprehensive gain (loss):

 

 

 

 

 

 

Unrealized gain (loss) on interest rate swaps, net

 

 

902

 

 

 

(2,013

)

Other comprehensive gain (loss)

 

 

902

 

 

 

(2,013

)

Comprehensive income

 

 

5,786

 

 

 

2,401

 

Non-controlling interest in Operating Partnership

 

 

(258

)

 

 

(523

)

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

 

 

(20

)

 

 

240

 

Comprehensive income attributable to
   Easterly Government Properties, Inc.

 

$

5,508

 

 

$

2,118

 

 

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,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

4,884

 

 

$

4,414

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

23,800

 

 

 

23,081

 

Straight line rent

 

 

(856

)

 

 

(463

)

Income from unconsolidated real estate venture

 

 

(1,415

)

 

 

(1,402

)

Amortization of above- / below-market leases

 

 

(594

)

 

 

(700

)

Amortization of unearned revenue

 

 

(1,604

)

 

 

(1,484

)

Amortization of loan premium / discount

 

 

(275

)

 

 

(270

)

Amortization of deferred financing costs

 

 

582

 

 

 

514

 

Amortization of lease inducements

 

 

258

 

 

 

216

 

Distributions from investment in unconsolidated real estate venture

 

 

3,079

 

 

 

2,158

 

Non-cash compensation

 

 

1,229

 

 

 

1,668

 

Net change in:

 

 

 

 

 

 

Tenant accounts receivable

 

 

1,339

 

 

 

734

 

Prepaid expenses and other assets

 

 

(6,458

)

 

 

(4,313

)

Deferred revenue associated with operating leases

 

 

510

 

 

 

55

 

Principal payments on operating lease obligations

 

 

(166

)

 

 

(127

)

Accounts payable, accrued expenses and other liabilities

 

 

(422

)

 

 

(2,456

)

Net cash provided by operating activities

 

 

23,891

 

 

 

21,625

 

Cash flows from investing activities

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(612

)

 

 

124

 

Additions to operating properties

 

 

(7,906

)

 

 

(7,756

)

Additions to development properties

 

 

(12,945

)

 

 

(2,944

)

Investment in loan receivable

 

 

(3,440

)

 

 

 

Net cash used in investing activities

 

 

(24,903

)

 

 

(10,576

)

Cash flows from financing activities

 

 

 

 

 

 

Payment of deferred financing costs

 

 

(350

)

 

 

 

Issuance of common shares

 

 

 

 

 

52,414

 

Credit facility draws

 

 

73,000

 

 

 

20,750

 

Credit facility repayments

 

 

(7,500

)

 

 

(36,750

)

Repayments of mortgage notes payable

 

 

(1,117

)

 

 

(16,744

)

Dividends and distributions paid

 

 

(28,686

)

 

 

(27,464

)

Payment of offering costs

 

 

(172

)

 

 

(56

)

Net cash provided by (used in) financing activities

 

 

35,175

 

 

 

(7,850

)

Net increase in Cash and cash equivalents and Restricted cash

 

 

34,163

 

 

 

3,199

 

Cash and cash equivalents and Restricted cash, beginning of period

 

 

21,939

 

 

 

17,274

 

Cash and cash equivalents and Restricted cash, end of period

 

$

56,102

 

 

$

20,473

 

 

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,

 

 

 

2024

 

 

2023

 

Cash paid for interest (net of capitalized interest of $672 and $339 in 2024 and 2023, respectively)

 

$

12,276

 

 

$

11,080

 

Supplemental disclosure of non-cash information

 

 

 

 

 

 

Additions to operating properties accrued, not paid

 

$

9,832

 

 

$

2,255

 

Additions to development properties accrued, not paid

 

 

22,078

 

 

 

5,380

 

Offering costs accrued, not paid

 

 

28

 

 

 

10

 

Deferred asset acquisition costs accrued, not paid

 

 

115

 

 

 

1

 

Unrealized gain (loss) on interest rate swaps, net

 

 

902

 

 

 

(2,013

)

Properties acquired for Common Units

 

 

 

 

 

219

 

Exchange of Common Units for Shares of Common Stock

 

 

 

 

 

 

Non-controlling interest in Operating Partnership

 

$

(18,088

)

 

$

(140

)

Common stock

 

 

14

 

 

 

 

Additional paid-in capital

 

 

18,074

 

 

 

140

 

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, 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 March 31, 2024, we wholly owned 81 operating properties and nine operating properties through an unconsolidated joint venture (the “JV”) in the United States, encompassing approximately 8.9 million leased square feet, including 88 operating properties that were leased primarily to U.S. Government tenant agencies, one operating property entirely leased to tenant agencies of a U.S. state government and one operating property that was entirely leased to a private tenant. As of March 31, 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 one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion.

The Operating Partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of the Operating Partnership and owned approximately 95.0% of the aggregate limited partnership interests in the Operating Partnership (“common units”) as of March 31, 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 March 31, 2024 and December 31, 2023, the consolidated results of operations for the three months ended March 31, 2024 and 2023, and the consolidated cash flows for the three months ended March 31, 2024 and 2023. 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.

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 are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.

3. Real Estate and Intangibles

Consolidated Real Estate and Intangibles

Real estate and intangibles consisted of the following as of March 31, 2024 (amounts in thousands):

 

 

Total

 

Real estate properties, net

 

 

 

Land

 

$

221,999

 

Building and improvements

 

 

2,359,074

 

Acquired tenant improvements

 

 

85,949

 

Construction in progress

 

 

79,776

 

Accumulated depreciation

 

 

(409,491

)

Total Real estate properties, net

 

 

2,337,307

 

Intangible assets, net

 

 

 

In-place leases

 

 

280,604

 

Acquired leasing commissions

 

 

72,560

 

Above market leases

 

 

14,620

 

Payment in lieu of taxes

 

 

6,394

 

Accumulated amortization

 

 

(231,134

)

Total Intangible assets, net

 

 

143,044

 

Intangible liabilities, net

 

 

 

Below market leases

 

 

(72,037

)

Accumulated amortization

 

 

60,444

 

Total Intangible liabilities, net

 

 

(11,593

)

No operating properties were acquired or disposed of during the three months ended March 31, 2024.

During the three months ended March 31, 2024, we incurred $0.4 million of acquisition-related expenses mainly consisting of internal costs associated with future property acquisitions.

7

 


 

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, 2024 (amounts in thousands):

 

 

Acquired Above-Market Lease Intangibles

 

 

Acquired Below-Market Lease Intangibles

 

2024 (1)

 

$

836

 

 

$

(2,051

)

2025

 

 

1,097

 

 

 

(2,246

)

2026

 

 

1,096

 

 

 

(2,008

)

2027

 

 

1,096

 

 

 

(1,783

)

2028

 

 

725

 

 

 

(1,238

)

(1)
Represents the nine months ending December 31, 2024.

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):

 

 

 

 

As of March 31,

 

Joint Venture

 

Ownership Interest

 

2024

 

MedBase Venture

 

53.0%

 

$

282,879

 

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. We have joint approval rights with our JV partner on major decisions, including those regarding property operations. As such, the Company holds a non-controlling interest in the joint venture and accounts for the JV under the equity method of accounting.

No operating properties were acquired by the JV during the three months ended March 31, 2024. As of March 31, 2024, nine of the ten properties in the VA Portfolio had been acquired by the JV.

8

 


 

5. Debt

At March 31, 2024, our consolidated borrowings consisted of the following (amounts in thousands):

 

 

Principal Outstanding

 

 

Interest

 

Current

 

Loan

 

March 31, 2024

 

 

Rate (1)

 

Maturity

 

Revolving credit facility:

 

 

 

 

 

 

 

 

Revolving credit facility (2)

 

$

144,500

 

 

S + 134 bps

 

July 2025 (3)

 

Total revolving credit facility

 

 

144,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan facilities:

 

 

 

 

 

 

 

 

2016 term loan facility

 

 

100,000

 

 

5.05% (4)

 

January 2025

 

2018 term loan facility

 

 

200,000

 

 

5.38% (5)

 

July 2026

 

Total term loan facilities

 

 

300,000

 

 

 

 

 

 

Less: Total unamortized deferred financing fees

 

 

(1,083

)

 

 

 

 

 

Total term loan facilities, net

 

 

298,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable:

 

 

 

 

 

 

 

 

2017 series A senior notes

 

 

95,000

 

 

4.05%

 

May 2027

 

2017 series B senior notes

 

 

50,000

 

 

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

 

 

100,000

 

 

3.83%

 

September 2031

 

2019 series C senior notes

 

 

90,000

 

 

3.98%

 

September 2034

 

2021 series A senior notes

 

 

50,000

 

 

2.62%

 

October 2028

 

2021 series B senior notes

 

 

200,000

 

 

2.89%

 

October 2030

 

Total notes payable

 

 

700,000

 

 

 

 

 

 

Less: Total unamortized deferred financing fees

 

 

(3,345

)

 

 

 

 

 

Total notes payable, net

 

 

696,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage notes payable:

 

 

 

 

 

 

 

 

VA – Golden

 

 

8,395

 

 

5.00% (6)

 

April 2024(7)

 

USFS II – Albuquerque

 

 

11,122

 

 

4.46% (6)

 

July 2026

 

ICE – Charleston

 

 

11,627

 

 

4.21% (6)

 

January 2027

 

VA – Loma Linda

 

 

127,500

 

 

3.59% (6)

 

July 2027

 

CBP – Savannah

 

 

9,335

 

 

3.40% (6)

 

July 2033

 

USCIS – Kansas City

 

 

51,500

 

 

3.68% (6)

 

August 2024

 

Total mortgage notes payable

 

 

219,479

 

 

 

 

 

 

Less: Total unamortized deferred financing fees

 

 

(830

)

 

 

 

 

 

Less: Total unamortized premium/discount

 

 

267

 

 

 

 

 

 

Total mortgage notes payable, net

 

 

218,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

$

1,358,988

 

 

 

 

 

 

(1)
At March 31, 2024, the USD SOFR with a five day lookback (“S”) was 5.31%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for each of our $450.0 million senior unsecured revolving credit facility (our “revolving credit facility”), our $200.0 million senior unsecured term loan facility (as amended, our “2018 term loan facility”) and our $100.0 million senior unsecured term loan facility (our “2016 term loan facility”) is based on our consolidated leverage ratio, as set forth in the respective loan agreements.
(2)
Our revolving credit facility had available capacity of $305.4 million at March 31, 2024 with an accordion feature that permits us to request additional lender commitments for up to $250.0 million of additional capacity, subject to the satisfaction of customary terms and conditions.
(3)
Our revolving credit facility has two six-month as-of-right extension options subject to certain conditions and the payment of an extension fee.
(4)
Our 2016 term loan facility is subject to one interest rate swap with an effective date of September 29, 2023 and a notional value of $100.0 million, which effectively fixes the interest rate at 5.05% annually, based on our consolidated leverage ratio, as defined in our 2016 term loan facility agreement.

9

 


 

(5)
Our 2018 term loan facility is subject to two interest rate swaps with an effective date of June 23, 2023 and an aggregate notional value of $200.0 million, which effectively fixes the interest rate at 5.38% annually, based on our consolidated leverage ratio, as defined in our 2018 term loan facility agreement.
(6)
Effective interest rates are as follows: VA – Golden 5.03%, USFS II – Albuquerque 3.92%, ICE – Charleston 3.93%, VA – Loma Linda 3.78%, CBP – Savannah 4.12%, USCIS – Kansas City 2.05%.
(7)
On April 1, 2024, we used $8.4 million of available cash to extinguish the mortgage note obligation on VA – Golden.

As of March 31, 2024, the net carrying value of real estate collateralizing our mortgages payable totaled $323.5 million. See Note 7 for the fair value of our debt instruments.

On January 2, 2024, the margin spreads under the second amended senior unsecured credit agreement, that governs our revolving credit facility and 2018 term loan facility, were reduced by 1 basis point as a result of achieving our sustainability metric percentage.

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.

Financial Covenant Considerations

As of March 31, 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 March 31, 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 2016 term loan facility and 2018 term loan facility (amounts in thousands):

Notional Amount

 

 

Fixed Rate

 

 

Floating Rate Index

 

Effective Date

 

Expiration Date

 

Fair Value

 

$

100,000

 

 

 

4.01

%

 

USD-SOFR with -5 Day Lookback

 

June 23, 2023

 

March 23, 2025

 

$

904

 

$

100,000

 

 

 

4.18

%

 

USD-SOFR with -5 Day Lookback

 

June 23, 2023

 

December 23, 2024

 

$

648

 

$

100,000

 

 

 

3.70

%

 

USD-SOFR with -5 Day Lookback

 

September 29, 2023

 

June 29, 2025

 

$

1,345

 

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 March 31, 2024

 

 Interest rate swaps

 

$

2,897

 

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 $3.7 million will be reclassified from AOCI as a decrease to interest expense over the next 12 months.

10

 


 

The table below presents the effects of our interest rate derivatives on our Consolidated Statements of Operations and Comprehensive Income (Loss) (amounts in thousands):

 

 

For the three months ended March 31,

 

 

 

2024

 

 

2023

 

 Unrealized gain (loss) recognized in AOCI

 

$

1,932

 

 

$

(506

)

 Gain reclassified from AOCI into interest expense

 

 

1,030

 

 

 

1,507

 

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 March 31, 2024, we were not in a net liability position with any derivative counterparty. As of March 31, 2024, we were in compliance with these agreements and had not posted any collateral related to these agreements.

7. Fair Value Measurements

Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standards also establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of these inputs is broken down into three levels: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Categorization within the valuation hierarchy is based upon the lowest level of input that is most significant to the fair value measurement.

Recurring fair value measurements

The fair values of our interest rate swaps are determined using widely accepted valuation techniques, including discounted cash flow analysis, on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We have determined that the significance of the impact of the credit valuation adjustments made to our derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives held as of March 31, 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 March 31, 2024, aggregated by the level in the fair value hierarchy within which those measurements fall (amounts in thousands):

 

 

As of March 31, 2024

 

Balance Sheet Line Item

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swaps

 

$

 

 

$

2,897

 

 

$

 

For our disclosure of debt fair values, we estimated the fair value of our 2016 term loan facility and our 2018 term loan facility based on the variable interest rate and credit spreads (categorized within Level 3 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments included scheduled principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement at such fair value amounts may not be possible and may not be a prudent management decision.

11

 


 

Financial assets and liabilities not measured at fair value

As of March 31, 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:

 

 

As of March 31, 2024

 

Financial liabilities

 

Carrying Amount (1)

 

 

Fair Value (2)

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

144,500

 

 

$

144,500

 

2016 term loan facility

 

$

100,000

 

 

$

100,000

 

2018 term loan facility

 

$

200,000

 

 

$

200,000

 

Notes payable

 

$

700,000

 

 

$

612,213

 

Mortgages payable

 

$

219,479

 

 

$

207,483

 

(1)
The carrying amount consists of principal only.
(2)
We deem the fair value measurement of the financial liability instrument a Level 3 measurement.

8. Equity Incentive Plan

The following is a summary of our stock-based compensation expense for the three months ended March 31, 2024 and 2023, respectively:

 

 

For the three months ended March 31,

 

 

 

2024

 

 

2023

 

Stock-based compensation expense

 

 

1,229

 

 

$

1,668

 

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).

12

 


 

9. Equity

The following table summarizes the changes in our stockholders’ equity for the three months ended March 31, 2024 and 2023 (amounts in thousands, except share amounts):

 

 

Shares

 

 

Common
Stock
Par
Value

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Cumulative
Dividends

 

 

Accumulated
Other
Comprehensive
Income

 

 

Non-
controlling
Interest in
Operating
Partnership

 

 

Total
Equity

 

Three months ended March 31, 2024

 

Balance at December 31, 2023

 

 

100,973,247

 

 

$

1,010

 

 

$

1,783,338

 

 

$

112,301

 

 

$

(576,319

)

 

$

1,871

 

 

$

87,315

 

 

$

1,409,516

 

Stock based compensation

 

 

 

 

 

 

 

 

123

 

 

 

 

 

 

 

 

 

 

 

 

1,106

 

 

 

1,229

 

Dividends and distributions paid
   ($
0.265 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,124

)

 

 

 

 

 

(1,561

)

 

 

(28,685

)

Redemption of common units for
   shares of common stock

 

 

1,381,455

 

 

 

14

 

 

 

18,074

 

 

 

 

 

 

 

 

 

 

 

 

(18,088

)

 

 

 

Unrealized gain on interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

882

 

 

 

20

 

 

 

902

 

Net income

 

 

 

 

 

 

 

 

 

 

 

4,626

 

 

 

 

 

 

 

 

 

258

 

 

 

4,884

 

Allocation of non-controlling interest
   in Operating Partnership

 

 

 

 

 

 

 

 

(231

)

 

 

 

 

 

 

 

 

 

 

 

231

 

 

 

 

Balance at March 31, 2024

 

 

102,354,702

 

 

$

1,024

 

 

$

1,801,304

 

 

$

116,927

 

 

$

(603,443

)

 

$

2,753

 

 

$

69,281

 

 

$

1,387,846

 

Three months ended March 31, 2023

 

Balance at December 31, 2022

 

 

90,814,021

 

 

$

908

 

 

$

1,622,913

 

 

$

93,497

 

 

$

(475,983

)

 

$

3,546

 

 

$

166,101

 

 

$

1,410,982

 

Stock based compensation

 

 

 

 

 

 

 

 

145

 

 

 

 

 

 

 

 

 

 

 

 

1,523

 

 

 

1,668

 

Dividends and distributions paid
   ($
0.265 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,068

)

 

 

 

 

 

(3,395

)

 

 

(27,463

)

Grant of unvested restricted stock

 

 

6,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of common units for shares of common stock

 

 

10,199

 

 

 

 

 

 

140

 

 

 

 

 

 

 

 

 

 

 

 

(140

)

 

 

 

Issuance of common stock, net

 

 

2,559,000

 

 

 

26

 

 

 

52,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52,232

 

Contribution of property for
   common units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

219

 

 

 

219

 

Unrealized loss on int