UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
EASTERLY GOVERNMENT PROPERTIES, INC.
(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 |
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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.
Large Accelerated Filer |
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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 |
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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 Act). Yes ☐ No ☒
As of July 26, 2019, 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, 2019 and December 31, 2018 (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, 2019 and 2018 (unaudited) |
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6 |
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3: Quantitative and Qualitative Disclosures About Market Risk |
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32 |
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33 |
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33 |
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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds |
33 |
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33 |
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33 |
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33 |
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34 |
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Easterly Government Properties, Inc.
Consolidated Balance Sheets (unaudited)
(Amounts in thousands, except share amounts)
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June 30, 2019 |
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December 31, 2018 |
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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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Deposits on acquisitions |
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Rents receivable |
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Accounts receivable |
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Deferred financing, net |
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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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Interest rate swaps |
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Accounts payable and accrued liabilities |
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Total liabilities |
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Equity |
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Common stock, par value $ and December 31, 2018, respectively |
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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 (loss) |
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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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2019 |
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2018 |
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2019 |
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2018 |
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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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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 (expense) income |
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Interest expense, net |
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( |
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Gain on the sale of operating property |
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— |
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— |
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Net income |
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Non-controlling interest in Operating Partnership |
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Net income available to Easterly Government Properties, Inc. |
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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 Properties, Inc. per share: |
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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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$ |
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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 (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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2019 |
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2018 |
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2019 |
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2018 |
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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 income (loss): |
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Unrealized gain (loss) on interest rate swaps, net |
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( |
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( |
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Other comprehensive income (loss) |
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( |
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( |
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Comprehensive income (loss) |
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( |
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Non-controlling interest in Operating Partnership |
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( |
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Other comprehensive (income) loss attributable to non-controlling interest |
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( |
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Comprehensive income (loss) attributable to Easterly Government Properties, Inc. |
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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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2019 |
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2018 |
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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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Amortization of above- / below-market leases |
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( |
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Amortization of unearned revenue |
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Amortization of loan premium / discount |
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Amortization of deferred financing costs |
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Gain on sale of operating property |
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— |
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Non-cash compensation |
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Net change in: |
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Rents receivable |
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Accounts receivable |
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( |
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Prepaid expenses and other assets |
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( |
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Accounts payable and accrued 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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Proceeds from sale of operating property, net |
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— |
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Net cash used in investing activities |
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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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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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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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Net cash provided by financing activities |
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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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2019 |
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2018 |
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Cash paid for interest, net of capitalized interest |
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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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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 (loss) gain on interest rate swaps, net |
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( |
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Debt assumed on acquisition of operating property |
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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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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, 2018, 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, 2018 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2019.
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.
As of June 30, 2019, we wholly owned
The Operating Partnership holds substantially all of our assets and conducts substantially all of our business. The Company is the sole general partner of the Operating Partnership. The Company 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, 2019, and the consolidated results of operations for the three and six months ended June 30, 2019 and 2018 and the consolidated cash flows for the six months ended June 30, 2019 and 2018. 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 and 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. Actual results could differ from those estimates.
6
2. Summary of Significant Accounting Policies
See below for the Company’s revenue recognition policy subsequent to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases discussed below. All other significant accounting policies used in the preparation of the Company’s condensed consolidated financial statements are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Revenue Recognition
Rental income includes base rents paid by each tenant in accordance with its lease agreement conditions. We recognize rental income on a straight-line basis over the lease term of the respective leases. For acquisitions of existing buildings, we recognize rental income from leases already in place coincident with the date of property closing. Lease incentives are recorded as a deferred asset and amortized as a reduction of rental income on a straight-line basis over the respective lease term. Above- and below-market leases are amortized into Rental income over the terms of the respective leases. Further, Rental income includes certain tenant reimbursement income (real estate taxes, operating expenses, utility usage, and other reimbursements), which are accrued as variable lease payments in the same periods as the related expenses are incurred.
Tenant reimbursement income includes income from tenant construction projects. We recognize revenue from tenant construction projects using the percentage of completion method when the revenue and costs for such projects can be estimated with reasonable accuracy; when these criteria do not apply to a project, we recognize revenue from that project using the completed contract method. Under the percentage of completion method, we recognize a percentage of the total estimated revenue on a project based on the cost of services provided on the project as of a point in time relative to the total estimated costs on the project. Fully reimbursed income was included within Tenant reimbursements and associated expenses were included in Property operating expenses. Income on these projects was included in Other income.
Other income includes income on the associated tenant reimbursement construction projects, parking income and other miscellaneous income.
Reclassifications and New Accounting Standards
Certain prior year amounts have been reclassified to conform to the current year presentation. Amounts previously classified as tenant reimbursements which qualified for the practical expedient and were determined to be lease components have been reclassified to rental income to conform with current period presentation.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases, along with various subsequent ASUs, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in the same manner as the previous guidance for operating leases.
The Company adopted ASU 2016-02 on January 1, 2019, using the modified retrospective transition method such that we applied the standard as of the adoption date. The Company adopted the new standard using the practical expedient package which allowed the Company, as both the lessor and lessee to 1) not reassess whether any expired or existing contracts are or contain leases; 2) not reassess the lease classification for any expired or existing leases; and 3) not reassess initial direct costs for any existing leases.
Going forward, ASU 2016-02, will also require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under ASU 2016-02, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained will no longer be capitalized as initial direct costs and instead will be expensed as incurred within Corporate general and administrative expense on the Company's Consolidated Statements of Operations.
Additionally, in July 2018, the FASB issued ASU 2018-11, Target Improvements to Topic 842 Leases. ASU 2018-11 provides lessors a practical expedient to not separate nonlease components from the associated lease component if the timing and pattern of transfer for the lease and nonlease components are the same and if the lease component, if accounted for separately, would be classified as an operating lease. Lease components are elements of an arrangement that provide the customer with the right to use an
7
identified asset. Nonlease components are distinct elements of a contract that are not related to securing the use of the leased asset and revenue is recognized in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts and Customers (“ASC 606”). The Company assessed and concluded that the timing and pattern of transfer for nonlease components and the associated lease component are the same. The Company determined that the predominant component was the lease component and as such the Company has made a policy election to account for and present the lease component and the nonlease component as a single component in the revenue section of the Consolidated Statements of Operations. While application of the practical expedient did not result in a material change to the recognition of rental income, nonlease components included within Tenant reimbursement prior to the adoption of Accounting Standards Codification Topic 842, Leases (“ASC 842”) are now included within Rental income on the Company's Consolidated Statements of Operations.
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements which amended the transition guidance in ASC 842 to explicitly exempt entities from the interim disclosures required by Accounting Standards Codification Topic ASC 205, Presentation of Financial Statements, related to changes in accounting principles. The provision is applicable at the time that entities adopt ASC 842, however implementation of this update did not have a material impact on our consolidated financial statements.
The adoption of this standard also resulted in a cumulative effect adjustment of less than $
On January 1, 2019, the Company adopted ASU 2017-12 (Topic 815), Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The Company adopted this ASU using the modified retrospective method and the adoption did not have a material impact on our consolidated financial statements.
3. Real Estate and Intangibles
Acquisitions
During the six months ended June 30, 2019, we acquired
|
|
Total |
|
|
Real estate |
|
|
|
|
Land |
|
$ |
|
|
Building |
|
|
|
|
Acquired tenant improvements |
|
|
|
|
Total real estate |
|
|
|
|
Intangible assets |
|
|
|
|
In-place leases |
|
|
|
|
Acquired leasing commissions |
|
|
|
|
Above-market leases |
|
|
|
|
Total intangible assets |
|
|
|
|
Intangible liabilities |
|
|
|
|
Below-market leases |
|
|
( |
) |
Total intangible liabilities |
|
|
( |
) |
Purchase price |
|
$ |
|
|
8
We did not assume any debt upon acquisition of these properties. The intangible assets and liabilities of operating properties acquired during the six months ended June 30, 2019 have a weighted average amortization period of
On June 15, 2018, we entered into a purchase and sale agreement to acquire a
During the six months ended June 30, 2019, we incurred $
Dispositions
On May 8, 2019, the Company sold CBP – Chula Vista to a third party. Net proceeds from the sale of operating property were approximately $
Consolidated Real Estate and Intangibles
Real estate and intangibles consisted of the following as of June 30, 2019 (amounts in thousands):
|
|
Total |
|
|
Real estate properties, net |
|
|
|
|
Land |
|
$ |
|
|
Building |
|
|
|
|
Acquired tenant improvements |
|
|
|
|
Construction in progress |
|
|
|
|
Accumulated depreciation |
|
|
( |
) |
Total Real estate properties, net |
|
|
|
|
Intangible assets, net |
|
|
|
|
In-place leases |
|
|
|
|
Acquired leasing commissions |
|
|
|
|
Above market leases |
|
|
|
|
Accumulated amortization |
|
|
( |
) |
Total Intangible assets, net |
|
|
|
|
Intangible liabilities, net |
|
|
|
|
Below market leases |
|
|
( |
) |
Accumulated amortization |
|
|
|
|
Total Intangible liabilities, net |
|
$ |
( |
) |
The following table summarizes the scheduled amortization of the Company’s acquired above- and below-market lease intangibles for each of the five succeeding years as of June 30, 2019 (amounts in thousands):
|
|
Acquired Above-Market Lease Intangibles |
|
|
Acquired Below-Market Lease Intangibles |
|
||
2019 |
|
$ |
|
|
|
$ |
( |
) |
2020 |
|
|
|
|
|
|
( |
) |
2021 |
|
|
|
|
|
|
( |
) |
2022 |
|
|
|
|
|
|
( |
) |
2023 |
|
|
|
|
|
|
( |
) |
9
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. Debt
At June 30, 2019, our consolidated borrowings consisted of the following (amounts in thousands):
|
|
Principal Outstanding |
|
|
Interest |
|
|
Current |
|
||
Loan |
|
June 30, 2019 |
|
|
Rate (1) |
|
|
Maturity |
|
||
Revolving credit facility: |
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility (2) |
|
$ |
|
|
|
|
|
|
|
||
Total revolving credit facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan facilities: |
|
|
|
|
|
|
|
|
|
|
|
2016 term loan facility |
|
|
|
|
|
2.67% (4) |
|
|
|
|
|
2018 term loan facility |
|
|
|
|
|
3.96% (5) |
|
|
|
|
|
Total term loan facilities |
|
|
|
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees |
|
|
( |
) |
|
|
|
|
|
|
|
Total term loan facilities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable: |
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes payable, series A |
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes payable, series B |
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes payable, series C |
|
|
|
|
|
|
|
|
|
|
|
Total notes payable |
|
|
|
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees |
|
|
( |
) |
|
|
|
|
|
|
|
Total notes payable, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable: |
|
|
|
|
|
|
|
|
|
|
|
CBP - Savannah |
|
|
|
|
|
3.40% (6) |
|
|
|
|
|
ICE - Charleston |
|
|
|
|
|
4.21% (6) |
|
|
|
|
|
MEPCOM - Jacksonville |
|
|
|
|
|
4.41% (6) |
|
|
|
|
|
USFS II - Albuquerque |
|
|
|
|
|
4.46% (6) |
|
|
|
|
|
DEA - Pleasanton |
|
|
|
|
|
L + 150bps (6) |
|
|
|
|
|
VA - Loma Linda |
|
|
|
|
|
3.59% (6) |
|
|
|
|
|
VA - Golden |
|
|
|
|
|
5.00% (6) |
|
|
|
|
|
Total mortgage notes payable |
|
|
|
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees |
|
|
( |
) |
|
|
|
|
|
|
|
Less: Total unamortized premium/discount |
|
|
|
|
|
|
|
|
|
|
|
Total mortgage notes payable, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
|
|
|
|
|
|
|
|
|
|
(1) |
At June 30, 2019, the one-month LIBOR (“L”) was |
|
(2) |
Available capacity of $ |
|
(3) |
Our |
|
(4) |
|
|
(5) |
Entered into |
10
|
(6) |
Effective interest rates are as follows: CBP - Savannah |
Financial Covenant Considerations
The Company was in compliance with all financial and other covenants as of June 30, 2019 related to its revolving credit facility, 2016 term loan facility, 2018 term loan facility, notes payable and mortgage notes payable.
Fair Value of Debt
As of June 30, 2019, the carrying value of our revolving credit facility approximated fair value. In determining the fair value we considered the short term maturity, variable interest rate and credit spreads. We deem the fair value of our revolving credit facility as a Level 3 measurement.
As of June 30, 2019, the carrying value of our 2016 term loan facility approximated fair value. In determining the fair value we considered the variable interest rate and credit spreads. We deem the fair value of our 2016 term loan facility as a Level 3 measurement.
As of June 30, 2019, the carrying value of our 2018 term loan facility approximated fair value. In determining the fair value we considered the variable interest rate and credit spreads. We deem the fair value of our 2018 term loan facility as a Level 3 measurement.
As of June 30, 2019, the fair value of our notes payable was determined by discounting future contractual principal and interest payments using prevailing market rates. We deem the fair value measurement of our notes payable instruments as a Level 3 measurement. At June 30, 2019, the fair value of our notes payable was $
As of June 30, 2019, the fair value of our mortgage notes payable was determined by discounting future contractual principal and interest payments using prevailing market rates. We deem the fair value measurement of our mortgage notes payable instruments as a Level 3 measurement. At June 30, 2019, the fair value of our mortgage notes payable was $
5. 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, 2019 (amounts in thousands):
Notional Amount |
|
|
Fixed Rate |
|
|
Floating Rate Index |
|
Effective Date |
|
Expiration Date |
|
Fair Value |
|
|||
$ |
|
|
|
|
|
% |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
|
|
$ |
( |
) |
The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheet as of June 30, 2019 (amounts in thousands):
Balance Sheet Line Item |
|
As of June 30, 2019 |
|
|
Interest rate swaps - Asset |
|
$ |
|
|
Interest rate swaps - Liability |
|
$ |
( |
) |
Cash Flow Hedges of Interest Rate Risk
The gains or losses on derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income (loss) (“AOCI”) and will be reclassified to interest expense in the period that the hedged forecasted transactions affect earnings on the Company’s variable rate debt.
Amounts reported in Accumulated other comprehensive income (loss) related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on the Company's variable rate debt. The Company estimates that $
11
The table below presents the effects of our interest rate derivatives on our Consolidated Statements of Operations and Comprehensive Income (amounts in thousands):
|
|
For the three months ended June 30, |
|
|
For the six months ended June 30, |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Unrealized gain (loss) recognized in AOCI |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Gain reclassified from AOCI into interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on such indebtedness. As of June 30, 2019, the net fair value of derivatives in a liability position related to these agreements was $
6. 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 the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its 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 the Company’s derivatives held as of June 30, 2019 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. For our disclosure of debt fair values in Note 4, 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.
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall (amounts in thousands):
|
|
As of June 30, 2019 |
|
|||||||||
Balance Sheet Line Item |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
Interest rate swaps - Asset |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
Interest rate swaps - Liability |
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
12
7. Equity
The following table summarizes the changes in our stockholders’ equity for the three months ended June 30, 2019 and 2018 (amounts in thousands, except share amounts):
|
|
Shares |
|
|
Common Stock Par Value |
|
|
Additional Paid-in Capital |
|
|
Retained Earnings (Deficit) |
|
|
Cumulative Dividends |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Non- controlling Interest in Operating Partnership |
|
|
Total Equity |
|
||||||||
Three months ended June 30, 2019 |
|
|||||||||||||||||||||||||||||||
Balance at March 31, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
Stock based compensation |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Dividends and distributions paid ($ |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Grant of unvested restricted stock |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Redemption of common units for shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized loss on interest rate swaps, net |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of non-controlling interest in Operating Partnership |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Balance at June 30, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
Three months ended June 30, 2018 |
|
|||||||||||||||||||||||||||||||
Balance at March 31, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Stock based compensation |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Dividends and distributions paid ($ |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Grant of unvested restricted stock |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Redemption of common units for shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized gain (loss) on interest rate swaps, net |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Net income |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Allocation of non-controlling interest in Operating Partnership |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Balance at June 30, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
13
The following table summarizes the changes in our stockholders’ equity for the six months ended June 30, 2019 and 2018 (amounts in thousands, except share amounts):
|
|
Shares |
|
|
Common Stock Par Value |
|
|
Additional Paid-in Capital |
|
|
Retained Earnings (Deficit) |
|
|
Cumulative Dividends |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Non- controlling Interest in Operating Partnership |
|
|
Total Equity |
|
||||||||
Six months ended June 30, 2019 |
|
|||||||||||||||||||||||||||||||
Balance at December 31, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Cumulative effect adjustment related to adoption of Leases (Topic 842) |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Stock based compensation |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Dividends and distributions paid ($ |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Grant of unvested restricted stock |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Redemption of common units for shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized loss on interest rate swaps, net |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of non-controlling interest in Operating Partnership |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Balance at June 30, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
Six months ended June 30, 2018 |
|
|||||||||||||||||||||||||||||||
Balance at December 31, 2017 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Stock based compensation |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Dividends and distributions paid ($ |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Grant of unvested restricted stock |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Redemption of common units for shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized gain on interest rate swaps, net |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Allocation of non-controlling interest in Operating Partnership |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Balance at June 30, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
On January 18, 2019, the Company granted an aggregate of
On March 11, 2019, the Company issued an aggregate of
In connection with the Company’s 2019 annual meeting of stockholders, the Company issued an aggregate of
14
A summary of our shares of restricted common stock and LTIP unit awards at June 30, 2019 is as follows:
|
|
Restricted Shares |
|
|
Restricted Shares Weighted Average Grant Date Fair Value Per Share |
|
|
LTIP Units |
|
|
LTIP Units Weighted Average Grant Date Fair Value Per Share |
|
||||
Outstanding, December 31, 2018 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
Outstanding, June 30, 2019 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
We recognized $
A summary of dividends declared by the Company’s board of directors per share of common stock and per common unit at the date of record is as follows:
Quarter |
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Dividend (1) |
|
|
Q1 2019 |
|
|
|
|
|
|
|
$ |
|
|
Q2 2019 |
|
|
|
|
|
|
|
$ |
|
|
|
(1) |
|
ATM Programs
On March 3, 2017, we entered into separate equity distribution agreements with each of Citigroup Global Markets Inc., BTIG, LLC, Jefferies LLC, Raymond James & Associates, Inc., RBC Capital Markets, LLC and SunTrust Robinson Humphrey, Inc., pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $
On March 4, 2019, we entered into separate equity distribution agreements with each of Citigroup Global Markets Inc., BMO Capital Markets Corp., BTIG, LLC, Capital One Securities, Inc., Jefferies LLC, Raymond James & Associates, Inc., RBC Capital Markets, LLC, SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $
The following table sets forth certain information with respect to sales made under each of the ATM Programs as of June 30, 2019 (amounts in thousands except share amounts):
|
|
2017 ATM Program |
|
|
2019 ATM Program |
|
||||||||||
For the Three Months Ended: |
|
Number of Shares Sold |
|
|
Net Proceeds |
|
|
Number of Shares Sold(1) |
|
|
Net Proceeds(1) |
|
||||
March 31, 2019 |
|
|
|
|
|
$ |
|
|
|
|
— |
|
|
$ |
— |
|
June 30, 2019 |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
15
|
(1) |
During the six month period ended June 30, 2019, we entered into and fully settled forward sale transactions under the 2019 ATM Program by selling and issuing an aggregate of |
We have used the net proceeds received from such sales for general corporate purposes. As of June 30, 2019, we had approximately $
Offering of Common Stock on a Forward Basis
On June 21, 2018, we completed an underwritten public offering of an aggregate of
On March 27, 2019, we physically settled a portion of the forward sale agreements by issuing an aggregate of
On June 14, 2019, we completed the physical settlement of the remaining shares underlying the forward sale agreements by issuing an aggregate of
8. Earnings Per Share
Basic earnings or loss per share of common stock (“EPS”) is calculated by dividing net income attributable to common stockholders by the weighted average shares of common stock outstanding for the periods presented. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented. Unvested restricted shares of common stock and unvested LTIP units are considered participating securities, which require the use of the two-class method for the computation of basic and diluted earnings per share.
The following table sets forth the computation of the Company’s basic and diluted earnings per share of common stock for the three and six months ended June 30, 2019 and 2018 (amounts in thousands, except per share amounts):
|
|
For the three months ended June 30, |
|
|
For the six months ended June 30, |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Less: Non-controlling interest in Operating Partnership |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income available to Easterly Government Properties, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Dividends on participating securities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income available to common stockholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Denominator for basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of share-based compensation awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of LTIP units (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of shares issuable under forward sales agreements |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Denominator for diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Diluted EPS |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
16
|
(1) |
|
9. Leases
Lessor
The Company leases commercial space to the U.S. Government through the GSA or other federal agencies or nongovernmental tenants. These leases may contain extension options that are predominately at the sole discretion of the tenant. Certain of our leases contain a “soft-term” period of the lease, meaning that the U.S. Government tenant agency has the right to terminate the lease prior to its stated lease end date. While certain of our leases are contractually subject to early termination, we do not believe that our tenant agencies are likely to terminate these leases early given the build-to-suit features at the properties subject to the leases, the weighted average age of these properties based on the date the property was built or renovated-to-suit, where applicable (approximately
As discussed above in Note 2, the Company elected a practical expedient to not separate nonlease components from the associated lease component if the time and pattern of transfer for the lease and nonlease components are the same and if the lease component, if accounted for separately, would be classified as an operating lease.
The following table summarizes the maturity of fixed lease payments under the Company’s leases as of June 30, 2019 (amounts in thousands):
|
|
Payments due by period |
|
|||||||||||||||||||||||||
|
|
Total |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
Thereafter |
|
|||||||
Fixed lease payments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the adoption of ASC 842 on January 1, 2019, the Company’s leases associated with its operating properties fell under the guidance of Accounting Standard Codification Topic ASC 840, Leases (“ASC 840”). As of December 31, 2018, the future non-cancelable minimum contractual rent payments on our operating properties were as follows (amounts in thousands):
|
|
Payments due by period |
|
|||||||||||||||||||||||||
|
|
Total |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
Thereafter |
|
|||||||
Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 20, 2019, the Company was awarded a
Lessee
In October 2015, we entered into a sublease agreement for office space in Washington, D.C. with a commencement date of March 2016 and expiration date of
Neither of the leases contain extension options, however they do include variable lease payments that, in the future, will vary based on changes in real estate tax rates, usage, or share of expenditures of the leased premises. The Company has elected not to separate lease and nonlease components for both corporate office leases.
As of June 30, 2019, the unamortized balance associated with the Company’s right-of-use operating lease asset and operating lease liability for the Company’s
17
The following table provides quantitative information for the Company’s operating leases for the three and six months ended June 30, 2019 (amounts in thousands):
|
|
For the three months ended June 30, 2019 |
|
|
For the six months ended June 30, 2019 |
|
||
Operating leases costs |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Other Information |
|
|
|
|||||
Weighted average remaining lease terms (in years) |
|
2.39 |
|
|||||
Weighted average discount rate |
|
|
|
In addition, the maturity of fixed lease payments under the Company’s corporate office leases as of June 30, 2019 is summarized in the table below (amounts in thousands):
|
|
Payments due by period |
|
|||||||||||||||||||||||||
|
|
Total |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
Thereafter |
|
|||||||
Fixed lease payments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Prior to the adoption of ASC 842 on January 1, 2019, the Company’s corporate office leases fell under the guidance of ASC 840. As of December 31, 2018, the future minimum rental payments under the Company’s corporate office leases were as follows (amounts in thousands):
|
|
Payments due by period |
|
|||||||||||||||||||||||||
|
|
Total |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
Thereafter |
|
|||||||
Corporate office leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
10. Revenue
The table below sets forth revenue from tenant construction projects disaggregated by tenant agency for the three and six months ended June 30, 2019 and 2018 (amounts in thousands):
|
|
For the three months ended June 30, |
|
|
For the six months ended June 30, |
|
||||||||||
Tenant |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Food and Drug Administration (“FDA”) |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
Federal Bureau of Investigation (“FBI”) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Department of Veteran Affairs (“VA”) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Enforcement Administration (“DEA”) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Forest Service (“USFS”) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Citizenship and Immigration Services (“USCIS”) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Revenue Service (“IRS”) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
The Judiciary of the U.S. Government (“JUD”) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Social Security Administration (“SSA”) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Coast Guard (“USCG”) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Immigration and Customs Enforcement (“ICE”) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
National Park Service (“NPS”) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Federal Emergency Management Agency ("FEMA") |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
Environmental Protection Agency ("EPA") |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Department of Transportation ("DOT") |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Customs and Border Protection ("CBP") |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
Bonneville Power Administration ("BPA") |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The balance in Accounts receivable related to tenant construction projects was $
18
The duration of the majority of tenant construction project reimbursement arrangements are less than a year and payment is typically due once a project is complete and work has been accepted by the tenant. There were no projects ongoing as of June 30, 2019 with a duration of greater than one year.
During the three and six months ended June 30, 2019, the Company also recognized $
Additionally, the Company also earns credits on its utility bills at certain properties for the use of energy efficient building materials, which also fall within the scope of ASC 606. The pattern of recognition for the credits is in line with the recognition of the associated utility expense. The Company recognized less than $
There were
11. Concentrations Risk
Concentrations of credit risk arise for the Company when multiple tenants of the Company are engaged in similar business activities, are located in the same geographic region or have similar economic features that impact in a similar manner their ability to meet contractual obligations, including those to the Company. The Company regularly monitors its tenant base to assess potential concentrations of credit risk.
As stated in Note 1 above, the Company leases commercial space to the U.S. Government or nongovernmental tenants. At June 30, 2019, the U.S. Government accounted for approximately
12. Subsequent Events
For its consolidated financial statements as of June 30, 2019, the Company evaluated subsequent events and noted the following significant events.
Subsequent to June 30, 2019, we issued and sold an aggregate of
On July 30, 2019, the Company entered into a note purchase agreement for the future private placement by the Operating Partnership of an aggregate of $
19
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We caution investors that forward-looking statements are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “project”, “result”, “should”, “will”, and similar expressions, which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
|
• |
the factors included under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and the factors included under the heading “Risk Factors” in the Company’s other public filings; |
|
• |
risks associated with our dependence on the U.S. Government and its agencies for substantially all of our revenues, including credit risk and risk that the U.S. Government reduces its spending on real estate or that it changes its preference away from leased properties; |
|
• |
risks associated with ownership and development of real estate; |
|
• |
the risk of decreased rental rates or increased vacancy rates; |
|
• |
loss of key personnel; |
|
• |
general volatility of the capital and credit markets and the market price of our common stock; |
|
• |
the risk we may lose one or more major tenants; |
|
• |
difficulties in completing and successfully integrating acquisitions; |
|
• |
failure of acquisitions or development projects to occur at anticipated levels or yield anticipated results; |
|
• |
risks associated with actual or threatened terrorist attacks; |
|
• |
intense competition in the real estate market that may limit our ability to attract or retain tenants or re-lease space; |
|
• |
insufficient amounts of insurance or exposure to events that are either uninsured or underinsured; |
|
• |
uncertainties and risks related to adverse weather conditions, natural disasters and climate change; |
|
• |
exposure to liability relating to environmental and health and safety matters; |
|
• |
limited ability to dispose of assets because of the relative illiquidity of real estate investments and the nature of our assets; |
|
• |
exposure to litigation or other claims; |
|
• |
risks associated with breaches of our data security; |
|
• |
risks associated with our indebtedness, including failure to refinance current or future indebtedness on favorable terms, or at all; failure to meet the restrictive covenants and requirements in our existing and new debt agreements; fluctuations in interest rates and increased costs to refinance or issue new debt; |
|
• |
risks associated with derivatives or hedging activity; and |
|
• |
risks associated with mortgage debt or unsecured financing or the unavailability thereof, which could make it difficult to finance or refinance properties and could subject us to foreclosure. |
For a further discussion of these and other factors, see the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
20
Overview
References to “we,” “our,” “us” and “the Company” refer to Easterly Government Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries including Easterly Government Properties LP, a Delaware limited partnership, which we refer to herein as the Operating Partnership.
We are an internally managed real estate investment trust, or 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, or GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.
As of June 30, 2019, we wholly owned 66 operating properties in the United States, including 64 operating properties that were leased primarily to U.S. Government tenant agencies and two operating properties that were entirely leased to private tenants, encompassing approximately 6.1 million square feet in the aggregate. In addition, we wholly owned two properties under development that we expect will encompass approximately 0.1 million square feet upon completion. 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 with the tenant agency to meet its needs and objectives.
Our operating partnership holds substantially all of our assets and conducts substantially all of our business. As of June 30, 2019, we owned approximately 87.6% of the aggregate limited partnership interests in our operating partnership, or common units. We have elected to be taxed as a REIT and 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.
Recent Activity
On January 31, 2019, the Company completed the acquisition of the three remaining properties (the “Final Closing Properties”) in a 1,479,762-square foot portfolio of 14 properties acquired pursuant to a purchase and sale agreement entered into on June 15, 2018.
On May 8, 2019, the Company acquired a 403,737 square foot U.S. Joint Staff Command (JSC) facility in Suffolk, Virginia. The building was originally constructed in 1993 and renovated in 2004. The facility is 100% leased to the GSA for a 10-year lease term, which expires in June 2028.
On May 8, 2019, the Company sold CBP – Chula Vista to a third party. Net proceeds from the sale of operating property were approximately $19.9 million and we recognized the full gain on the sale of operating property of approximately $6.2 million for the six months ended June 30, 2019.
On May 9, 2019, the Company acquired a 137,679 square foot Federal Bureau of Investigation (FBI) field office in New Orleans, Louisiana. The building was originally constructed in 1999 and fully renovated in 2006. The field office is 100% leased to the FBI for an initial, non-cancelable lease term of 10 years, through August 2029.
On June 20, 2019, the Company was awarded a 20 year non-cancelable lease for a 162,000-square foot build-to-suit Food and Drug Administration (FDA) laboratory in Atlanta, Georgia (“FDA – Atlanta”). Closing of the acquisition of the underlying property to be redeveloped is subject to customary closing conditions.
Operating Properties
As of June 30, 2019, our 66 operating properties were 100% leased with a weighted average annualized lease income per leased square foot of $32.99 and a weighted average age based on the date of when the property was renovated or built-to-suit was approximately 13.0 years. We calculate annualized lease income as annualized contractual base rent for the last month in a specified period, plus the annualized straight-line rent adjustments for the last month in such period and the annualized expense reimbursements earned by us for the last month in such period.
21
Information about our operating properties as of June 30, 2019 is set forth in the table below:
Property Name |
|
Location |
|
Property Type (1) |
|
Tenant Lease Expiration Year (2) |
|
Rentable Square Feet |
|
|
Annualized Lease Income |
|
|
Percentage of Total Annualized Lease Income |
|
|
Annualized Lease Income per Leased Square Foot |
|
|||||||
U.S. Government Leased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VA - Loma Linda |
|
Loma Linda, CA |
|
OC |
|
|
2036 |
|
|
|
|
327,614 |
|
|
$ |
16,111,542 |
|
|
|
8.0 |
% |
|
$ |
49.18 |
|
Various GSA - Buffalo (3) |
|
Buffalo, NY |
|
O |
|
2019 - 2025 |
|
|
|
|
267,766 |
|
|
|
8,388,234 |
|
|
|
4.1 |
% |
|
|
31.33 |
|
|
JSC - Suffolk |
|
Suffolk, VA |
|
O |
|
|
2028 |
|
|
|
|
403,737 |
|
|
|
8,074,740 |
|
|
|
4.0 |
% |
|
|
20.00 |
|
FBI - Salt Lake |
|
Salt Lake City, UT |
|
O |
|
|
2032 |
|
|
|
|
169,542 |
|
|
|
6,826,753 |
|
|
|
3.4 |
% |
|
|
40.27 |
|
Various GSA - Portland (4) |
|
Portland, OR |
|
O |
|
2020 - 2025 |
|
|
|
|
223,261 |
|
|
|
6,796,650 |
|
|
|
3.4 |
% |
|
|
30.96 |
|
|
IRS - Fresno |
|
Fresno, CA |
|
O |
|
|
2033 |
|
|
|
|
180,481 |
|
|
|
6,686,460 |
|
|
|
3.3 |
% |
|
|
37.05 |
|
PTO - Arlington |
|
Arlington, VA |
|
O |
|
|
2035 |
|
|
|
|
190,546 |
|
|
|
6,546,803 |
|
|
|
3.3 |
% |
|
|
34.36 |
|
Various GSA - Chicago (5) |
|
Des Plaines, IL |
|
O |
|
2020 / 2022 |
|
|
|
|
232,759 |
|
|
|
6,434,294 |
|
|
|
3.2 |
% |
|
|
28.70 |
|
|
VA - San Jose |
|
San Jose, CA |
|
OC |
|
|
2038 |
|
|
|
|
90,085 |
|
|
|
5,782,190 |
|
|
|
2.9 |
% |
|
|
64.19 |
|
FBI - San Antonio |
|
San Antonio, TX |
|
O |
|
|
2021 |
|
|
|
|
148,584 |
|
|
|
5,159,501 |
|
|
|
2.6 |
% |
|
|
34.72 |
|
FEMA - Tracy |
|
Tracy, CA |
|
W |
|
|
2038 |
|
|
|
|
210,373 |
|
|
|
4,640,242 |
|
|
|
2.3 |
% |
|
|
22.06 |
|
FBI - Omaha |
|
Omaha, NE |
|
O |
|
|
2024 |
|
|
|
|
112,196 |
|
|
|
4,459,261 |
|
|
|
2.2 |
% |
|
|
39.75 |
|
TREAS - Parkersburg |
|
Parkersburg, WV |
|
O |
|
|
2021 |
|
|
|
|
182,500 |
|
|
|
4,427,336 |
|
|
|
2.2 |
% |
|
|
24.26 |
|
EPA - Kansas City |
|
Kansas City, KS |
|
L |
|
|
2023 |
|
|
|
|
71,979 |
|
|
|
4,213,094 |
|
|
|
2.1 |
% |
|
|
58.53 |
|
VA - South Bend |
|
Mishawaka, IN |
|
OC |
|
|
2032 |
|
|
|
|
86,363 |
|
|
|
3,975,368 |
|
|
|
2.0 |
% |
|
|
46.03 |
|
ICE - Charleston (6) |
|
North Charleston, SC |
|
O |
|
2021 / 2027 |
|
|
|
|
86,733 |
|
|
|
3,800,808 |
|
|
|
1.9 |
% |
|
|
43.82 |
|
|
DOT - Lakewood |
|
Lakewood, CO |
|
O |
|
|
2024 |
|
|
|
|
122,225 |
|
|
|
3,488,745 |
|
|
|
1.7 |
% |
|
|
28.54 |
|
FBI - New Orleans |
|
New Orleans, LA |
|
O |
|
|
2029 |
|
|
|
|
137,679 |
|
|
|
3,472,512 |
|
|
|
1.7 |
% |
|
|
25.22 |
|
FBI - Pittsburgh |
|
Pittsburgh, PA |
|
O |
|
|
2027 |
|
|
|
|
100,054 |
|
|
|
3,407,585 |
|
|
|
1.7 |
% |
|
|
34.06 |
|
USCIS - Lincoln |
|
Lincoln, NE |
|
O |
|
|
2020 |
|
|
|
|
137,671 |
|
|
|
3,393,736 |
|
|
|
1.7 |
% |
|
|
24.65 |
|
FBI - Birmingham |
|
Birmingham, AL |
|
O |
|
|
2020 |
|
|
|
|
96,278 |
|
|
|
3,207,521 |
|
|
|
1.6 |
% |
|
|
33.32 |
|
JUD - El Centro |
|
El Centro, CA |
|
C/O |
|
|
2034 |
|
|
|
|
43,345 |
|
|
|
3,036,785 |
|
|
|
1.5 |
% |
|
|
70.06 |
|
OSHA - Sandy |
|
Sandy, UT |
|
L |
|
|
2024 |
|
|
|
|
75,000 |
|
|
|
2,988,944 |
|
|
|
1.5 |
% |
|
|
39.85 |
|
FDA - College Park |
|
College Park, MD |
|
L |
|
|
2029 |
|
|
|
|
80,677 |
|
|
|
2,957,789 |
|
|
|
1.5 |
% |
|
|
36.66 |
|
USFS II - Albuquerque |
|
Albuquerque, NM |
|
O |
|
2026 |
|
|
|
|
98,720 |
|
|
|
2,946,150 |
|
|
|
1.5 |
% |
|
|
29.84 |
|
|
USFS I - Albuquerque |
|
Albuquerque, NM |
|
O |
|
2021 |
|
|
|
|
92,455 |
|
|
|
2,877,379 |
|
|
|
1.4 |
% |
|
|
31.12 |
|
|
DEA - Vista |
|
Vista, CA |
|
L |
|
|
2020 |
|
|
|
|
54,119 |
|
|
|
2,798,970 |
|
|
|
1.4 |
% |
|
|
51.72 |
|
DEA - Pleasanton |
|
Pleasanton, CA |
|
L |
|
|
2035 |
|
|
|
|
42,480 |
|
|
|
2,789,001 |
|
|
|
1.4 |
% |
|
|
65.65 |
|
ICE - Albuquerque |
|
Albuquerque, NM |
|
O |
|
|
2027 |
|
|
|
|
71,100 |
|
|
|
2,757,943 |
|
|
|
1.4 |
% |
|
|
38.79 |
|
FBI - Richmond |
|
Richmond, VA |
|
O |
|
|
2021 |
|
|
|
|
96,607 |
|
|
|
2,755,886 |
|
|
|
1.4 |
% |
|
|
28.53 |
|
JUD - Del Rio |
|
Del Rio, TX |
|
C/O |
|
|
2024 |
|
|
|
|
89,880 |
|
|
|
2,696,566 |
|
|
|
1.3 |
% |
|
|
30.00 |
|
DEA - Dallas Lab |
|
Dallas, TX |
|
L |
|
2021 |
|
|
|
|
49,723 |
|
|
|
2,433,565 |
|
|
|
1.2 |
% |
|
|
48.94 |
|
|
DEA - Sterling |
|
Sterling, VA |
|
L |
|
|
2020 |
|
|
|
|
49,692 |
|
|
|
2,403,448 |
|
|
|
1.2 |
% |
|
|
48.37 |
|
TREAS - Birmingham |
|
Birmingham, AL |
|
O |
|
|
2029 |
|
|
|
|
83,676 |
|
|
|
2,379,514 |
|
|
|
1.2 |
% |
|
|
28.44 |
|
SSA - Charleston |
|
Charleston, WV |
|
O |
|
|
2024 |
|
|
|
|
110,000 |
|
|
|
2,322,332 |
|
|
|
1.2 |
% |
|
|
21.11 |
|
DEA - Upper Marlboro |
|
Upper Marlboro, MD |
|
L |
|
|
2022 |
|
|
|
|
50,978 |
|
|
|
2,289,287 |
|
|
|
1.1 |
% |
|
|
44.91 |
|
FBI - Little Rock |
|
Little Rock, AR |
|
O |
|
|
2021 |
|
|
|
|
101,977 |
|
|
|
2,246,497 |
|
|
|
1.1 |
% |
|
|
22.03 |
|
MEPCOM - Jacksonville |
|
Jacksonville, FL |
|
O |
|
|
2025 |
|
|
|
|
30,000 |
|
|
|
2,189,904 |
|
|
|
1.1 |
% |
|
|
73.00 |
|
CBP - Savannah |
|
Savannah, GA |
|
L |
|
|
2033 |
|
|
|
|
35,000 |
|
|
|
2,144,467 |
|
|
|
1.1 |
% |
|
|
61.27 |
|
FBI - Albany |
|
Albany, NY |
|
O |
|
|
2019 |
|
|
|
|
98,184 |
|
|
|
2,126,817 |
|
|
|
1.1 |
% |
|
|
21.66 |
|
DOE - Lakewood |
|
Lakewood, CO |
|
O |
|
|
2029 |
|
|
|
|
115,650 |
|
|
|
2,064,224 |
|
|
|
1.0 |
% |
|
|
17.85 |
|
DEA - Santa Ana |
|
Santa Ana, CA |
|
O |
|
|
2024 |
|
|
|
|
39,905 |
|
|
|
1,912,663 |
|
|
|
1.0 |
% |
|
|
47.93 |
|
JUD - Charleston |
|
Charleston, SC |
|
C/O |
|
|
2019 |
|
|
|
|
50,888 |
|
|
|
1,810,980 |
|
|
|
0.9 |
% |
|
|
35.59 |
|
NPS - Omaha |
|
Omaha, NE |
|
O |
|
|
2024 |
|
|
|
|
62,772 |
|
|
|
1,771,759 |
|
|
|
0.9 |
% |
|
|
28.23 |
|
ICE - Otay |
|
San Diego, CA |
|
O |
|
2022 / 2026 |
|
|
|
|
52,881 |
|
|
|
1,752,889 |
|
|
|
0.9 |
% |
|
|
35.44 |
|
|
VA - Golden |
|
Golden, CO |
|
O/W |
|
|
2026 |
|
|
|
|
56,753 |
|
|
|
1,730,118 |
|
|
|
0.9 |
% |
|
|
30.49 |
|
DEA - Dallas |
|
Dallas, TX |
|
O |
|
|
2021 |
|
|
|
|
71,827 |
|
|
|
1,686,629 |
|
|
|
0.8 |
% |
|
|
23.48 |
|
DEA - Otay (7) |
|
San Diego, CA |
|
O |
|
|
2020 |
|
|
|
|
32,560 |
|
|
|
1,621,374 |
|
|
|
0.8 |
% |
|
|
49.80 |
|
CBP - Sunburst |
|
Sunburst, MT |
|
O |
|
|
2028 |
|
|
|
|
33,000 |
|
|
|
1,599,828 |
|
|
|
0.8 |
% |
|
|
48.48 |
|
USCG - Martinsburg |
|
Martinsburg, WV |
|
O |
|
|
2027 |
|
|
|
|
59,547 |
|
|
|
1,593,519 |
|
|
|
0.8 |
% |
|
|
26.76 |
|
JUD - Aberdeen |
|
Aberdeen, MS |
|
C/O |
|
|
2025 |
|
|
|
|
46,979 |
|
|
|
1,485,353 |
|
|
|
0.7 |
% |
|
|
31.62 |
|
DEA - Birmingham (8) |
|
Birmingham, AL |
|
O |
|
|
2020 |
|
|
|
|
35,616 |
|
|
|
1,466,342 |
|
|
|
0.7 |
% |
|
|
41.17 |
|
DEA - North Highlands |
|
Sacramento, CA |
|
O |
|
|
2033 |
|
|
|
|
37,975 |
|
|
|
1,441,221 |
|
|
|
0.7 |
% |
|
|
37.95 |
|
GSA - Clarksburg |
|
Clarksburg, WV |
|
O |
|
|
2024 |
|
|
|
|
63,750 |
|
|
|
1,431,148 |
|
|
|
0.7 |
% |
|
|
22.45 |
|
DEA - Albany |
|
Albany, NY |
|
O |
|
|
2025 |
|
|
|
|
31,976 |
|
|
|
1,349,109 |
|
|
|
0.7 |
% |
|
|
42.19 |
|
DEA - Riverside |
|
Riverside, CA |
|
O |
|
|
2032 |
|
|
|
|
34,354 |
|
|
|
1,245,565 |
|
|
|
0.6 |
% |
|
|
36.26 |
|
SSA - Dallas |
|
Dallas, TX |
|
O |
|
|
2020 |
|
|
|
|
27,200 |
|
|
|
1,073,215 |
|
|
|
0.5 |
% |
|
|
39.46 |
|
ICE - Pittsburgh (9) |
|
Pittsburgh, PA |
|
O |
|
2022 / 2023 |
|
|
|
|
33,425 |
|
|
|
792,601 |
|
|
|
0.4 |
% |
|
|
31.40 |
|
|
VA - Baton Rouge |
|
Baton Rouge, LA |
|
OC |
|
|
2024 |
|
|
|
|
30,000 |
|
|
|
772,128 |
|
|
|
0.4 |
% |
|
|
25.74 |
|
22
Property Name |
|
Location |
|
Property Type (1) |
|
Tenant Lease Expiration Year (2) |
|
Rentable Square Feet |
|
|
Annualized Lease Income |
|
|
Percentage of Total Annualized Lease Income |
|
|
Annualized Lease Income per Leased Square Foot |
|
|||||||
U.S. Government Leased (Cont.) |
|
||||||||||||||||||||||||
JUD - South Bend |
|
South Bend, IN |
|
C/O |
|
|
2027 |
|
|
|
|
30,119 |
|
|
|
762,709 |
|
|
|
0.4 |
% |
|
|
25.32 |
|
DEA - San Diego |
|
San Diego, CA |
|
W |
|
|
2032 |
|
|
|
|
16,100 |
|
|
|
556,452 |
|
|
|
0.3 |
% |
|
|
34.56 |
|
SSA - Mission Viejo |
|
Mission Viejo, CA |
|
O |
|
|
2020 |
|
|
|
|
11,590 |
|
|
|
532,626 |
|
|
|
0.3 |
% |
|
|
45.96 |
|
DEA - Bakersfield |
|
Bakersfield, CA |
|
O |
|
|
2021 |
|
|
|
|
9,800 |
|
|
|
357,559 |
|
|
|
0.2 |
% |
|
|
36.49 |
|
SSA - San Diego |
|
San Diego, CA |
|
O |
|
|
2032 |
|
|
|
|
10,856 |
|
|
|
332,445 |
|
|
|
0.2 |
% |
|
|
33.05 |
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
5,927,562 |
|
|
$ |
199,577,075 |
|
|
|
99.5 |
% |
|
$ |
33.81 |
|
Privately Leased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5998 Osceola Court - United Technologies |
|
Midland, GA |
|
W/M |
|
|
2023 |
|
|
|
|
105,641 |
|
|
|
542,600 |
|
|
|
0.3 |
% |
|
|
5.14 |
|
501 East Hunter Street - Lummus Corporation |
|
Lubbock, TX |
|
W/D |
|
|
2028 |
|
|
|
|
70,078 |
|
|
|
409,366 |
|
|
|
0.2 |
% |
|
|
5.84 |
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
175,719 |
|
|
$ |
951,966 |
|
|
|
0.5 |
% |
|
$ |
5.42 |
|
Total / Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
6,103,281 |
|
|
$ |
200,529,041 |
|
|
|
100.0 |
% |
|
$ |
32.99 |
|
|
(1) |
OC=Outpatient Clinic; O=Office; C=Courthouse; L=Laboratory; W=Warehouse; D=Distribution; M=Manufacturing. |
|
(2) |
The year of lease expiration does not include renewal options. |
|
(3) |
Private tenants occupy 15,374 rentable square feet. |
|
(4) |
Private tenants occupy 50,222 rentable square feet. |
|
(5) |
Private tenants occupy 2,987 rentable square feet. |
|
(6) |
A private tenant occupies 21,609 rentable square feet. |
|
(7) |
ICE occupies 5,813 rentable square feet. |
|
(8) |
The ATF occupies 8,680 rentable square feet. |
|
(9) |
A private tenant occupies 3,854 rentable square feet. |
Certain of our leases are currently in the “soft-term” period of the lease, meaning that the U.S. Government tenant agency has the right to terminate the lease prior to its stated lease end date. We believe that, from the U.S. Government’s perspective, leases with such provisions are helpful for budgetary purposes. While some of our leases are contractually subject to early termination, we do not believe that our tenant agencies are likely to terminate these leases early given the build-to-suit features at the properties subject to the leases, the weighted average age of these properties based on the date the property was built or renovated-to-suit, where applicable (approximately 16.1 years as of June 30, 2019), the mission-critical focus of the properties subject to the leases and the current level of operations at such properties.
The following table sets forth a schedule of lease expirations for leases in place as of June 30, 2019:
Year of Lease Expiration (1) |
|
Number of Leases Expiring |
|
|
Square Footage Expiring |
|
|
Percentage of Portfolio Square Footage Expiring |
|
|
Annualized Lease Income Expiring |
|
|
Percentage of Total Annualized Lease Income Expiring |
|
|
Annualized Lease Income per Leased Square Foot Expiring |
|
||||||
2019 |
|
|
3 |
|
|
|
161,125 |
|
|
|
2.7 |
% |
|
|
4,229,260 |
|
|
|
2.1 |
% |
|
|
26.25 |
|
2020 |
|
|
19 |
|
|
|
764,519 |
|
|
|
12.6 |
% |
|
|
25,980,973 |
|
|
|
13.0 |
% |
|
|
33.98 |
|
2021 |
|
|
13 |
|
|
|
940,098 |
|
|
|
15.5 |
% |
|
|
27,828,023 |
|
|
|
13.9 |
% |
|
|
29.60 |
|
2022 |
|
|
7 |
|
|
|
124,523 |
|
|
|
2.0 |
% |
|
|
4,762,814 |
|
|
|
2.4 |
% |
|
|
38.25 |
|
2023 |
|
|
10 |
|
|
|
291,498 |
|
|
|
4.8 |
% |
|
|
8,082,809 |
|
|
|
4.0 |
% |
|
|
27.73 |
|
2024 |
|
|
10 |
|
|
|
727,374 |
|
|
|
12.0 |
% |
|
|
22,444,756 |
|
|
|
11.2 |
% |
|
|
30.86 |
|
2025 |
|
|
6 |
|
|
|
187,680 |
|
|
|
3.1 |
% |
|
|
7,683,920 |
|
|
|
3.8 |
% |
|
|
40.94 |
|
2026 |
|
|
3 |
|
|
|
157,011 |
|
|
|
2.6 |
% |
|
|
4,732,913 |
|
|
|
2.4 |
% |
|
|
30.14 |
|
2027 |
|
|
5 |
|
|
|
325,944 |
|
|
|
5.4 |
% |
|
|
11,710,306 |
|
|
|
5.8 |
% |
|
|
35.93 |
|
2028 |
|
|
3 |
|
|
|
506,815 |
|
|
|
8.3 |
% |
|
|
10,083,934 |
|
|
|
5.0 |
% |
|
|
19.90 |
|
Thereafter |
|
|
18 |
|
|
|
1,891,999 |
|
|
|
31.0 |
% |
|
|
72,989,333 |
|
|
|
36.4 |
% |
|
|
38.58 |
|
Total / Weighted Average |
|
|
97 |
|
|
|
6,078,586 |
|
|
|
100.0 |
% |
|
$ |
200,529,041 |
|
|
|
100.0 |
% |
|
$ |
32.99 |
|
|
(1) |
The year of lease expirations is pursuant to current contract terms. Some tenants have the right to vacate their space during a specified period, or “soft term,” before the stated terms of their leases expire. As of June 30, 2019, 16 tenants occupying |
23
|
approximately 5.9% of our rentable square feet and contributing approximately 5.0% of our annualized lease income have exercisable rights to terminate their leases before the stated term of their lease expires. |
Results of Operations
Comparison of Results of Operations for the three months ended June 30, 2019 and 2018
The financial information presented below summarizes the results of operations of the Company for the three months ended June 30, 2019 and 2018 (amounts in thousands). Certain prior year amounts have been reclassified to conform with the current year presentation as a result of the adoption of Accounting Standards Codification Topic ASC 842, Leases (“ASC 842”), effective January 1, 2019.
|
|
For the three months ended June 30, |
|
|||||||||
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
50,513 |
|
|
$ |
35,288 |
|
|
$ |
15,225 |
|
Tenant reimbursements |
|
|
1,655 |
|
|
|
1,260 |
|
|
|
395 |
|
Other income |
|
|
581 |
|
|
|
424 |
|
|
|
157 |
|
Total revenues |
|
|
52,749 |
|
|
|
36,972 |
|
|
|
15,777 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Property operating |
|
|
10,934 |
|
|
|
7,223 |
|
|
|
3,711 |
|
Real estate taxes |
|
|
5,465 |
|
|
|
3,845 |
|
|
|
1,620 |
|
Depreciation and amortization |
|
|
22,967 |
|
|
|
14,588 |
|
|
|
8,379 |
|
Acquisition costs |
|
|
452 |
|
|
|
499 |
|
|
|
(47 |
) |
Corporate general and administrative |
|
|
4,667 |
|
|
|
3,623 |
|
|
|
1,044 |
|
Total expenses |
|
|
44,485 |
|
|
|
29,778 |
|
|
|
14,707 |
|
Other (expense) income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(8,018 |
) |
|
|
(5,475 |
) |
|
|
(2,543 |
) |
Gain on sale of operating property |
|
|
6,245 |
|
|
|
— |
|
|
|
6,245 |
|
Net income |
|
$ |
6,491 |
|
|
$ |
1,719 |
|
|
$ |
4,772 |
|
Revenues
Total revenues consist primarily of rental income from our properties, tenant reimbursements for real estate taxes and certain other expenses, and project management income.
Total revenues increased by $15.8 million to $52.8 million for the three months ended June 30, 2019 compared to $37.0 million for the three months ended June 30, 2018. The increase is primarily attributable to an additional $16.4 million of revenue from the 20 operating properties acquired and one development property placed in service, offset by one property disposed of since June 30, 2018, and a $0.3 million increase in tenant project reimbursements and the associated project management income, offset by a $0.8 million decrease in the timing of intangible asset amortization and a $0.5 million decrease in real estate tax reimbursements.
Expenses
Total expenses increased by $14.7 million to $44.5 million for the three months ended June 30, 2019 compared to $29.8 million for the three months ended June 30, 2018. The increase is primarily attributable to $14.9 million in property operating expenses, real estate taxes, and depreciation and amortization associated with the 20 operating properties acquired and one development property placed in service, offset by one property disposed of since June 30, 2018, a $0.3 million increase in expenses associated with projects fully reimbursed by the tenants and $0.3 million in property operating related employee costs, partially offset by a $1.7 million decrease in depreciation related to the timing of intangible asset amortization and $0.4 million decrease in real estate expense. Additionally, corporate general and administrative costs increased by $1.0 million primarily due to an increase in employee costs.
Interest Expense
Interest expense increased by $2.5 million to $8.0 million for the three months ended June 30, 2019 compared to $5.5 million for the three months ended June 30, 2018. The increase is primarily due to a $1.4 million increase in interest owed on our 2016 term loan facility and our 2018 term loan facility, which were amended and entered into, respectively, on June 18, 2018 and a $1.3 million increase in interest on our revolving credit facility due to an increase in the weighted average interest rate from 3.40% during the three
24
months ended June 30, 2018 to 3.76% during the three months ended June 30, 2019. This increase was partially offset by an increase in capitalized interest associated with properties under development resulting in a $0.2 million decrease in interest.
Gain on the sale of operating property
On May 8, 2019, we sold CBP – Chula Vista to a third party. Net proceeds from the sale of operating property were approximately $19.9 million and we recognized a full gain on the sale of operating property of approximately $6.2 million for the three months ended June 30, 2019.
Comparison of Results of Operations for the six months ended June 30, 2019 and 2018
The financial information presented below summarizes the results of operations of the Company for the six months ended June 30, 2019 and 2018 (amounts in thousands). Certain prior year amounts have been reclassified to conform with the current year presentation as a result of the adoption of ASC 842, effective January 1, 2019.
|
|
For the six months ended June 30, |
|
|||||||||
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
99,001 |
|
|
$ |
70,119 |
|
|
$ |
28,882 |
|
Tenant reimbursements |
|
|
3,239 |
|
|
|
2,201 |
|
|
|
1,038 |
|
Other income |
|
|
1,116 |
|
|
|
626 |
|
|
|
490 |
|
Total revenues |
|
|
103,356 |
|
|
|
72,946 |
|
|
|
30,410 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Property operating |
|
|
20,897 |
|
|
|
13,783 |
|
|
|
7,114 |
|
Real estate taxes |
|
|
11,220 |
|
|
|
7,545 |
|
|
|
3,675 |
|
Depreciation and amortization |
|
|
45,418 |
|
|
|
29,222 |
|
|
|
16,196 |
|
Acquisition costs |
|
|
922 |
|
|
|
723 |
|
|
|
199 |
|
Corporate general and administrative |
|
|
8,984 |
|
|
|
7,082 |
|
|
|
1,902 |
|
Total expenses |
|
|
87,441 |
|
|
|
58,355 |
|
|
|
29,086 |
|
Other (expense) income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(16,150 |
) |
|
|
(11,057 |
) |
|
|
(5,093 |
) |
Gain on sale of operating property |
|
|
6,245 |
|
|
|
— |
|
|
|
6,245 |
|
Net income |
|
$ |
6,010 |
|
|
$ |
3,534 |
|
|
$ |
2,476 |
|
Revenues
Total revenues consist primarily of rental income from our properties, tenant reimbursements for real estate taxes and certain other expenses, and project management income.
Total revenues increased by $30.4 million to $103.4 million for the six months ended June 30, 2019 compared to $72.9 million for the six months ended June 30, 2018. The increase is primarily attributable to an additional $31.0 million of revenue from the 20 operating properties acquired and one development property placed in service offset, by one property disposed of since June 30, 2018, and a $1.0 million increase in tenant project reimbursements and the associated project management income, offset by a $1.3 million decrease in the timing of intangible asset amortization and a $0.3 million decrease in real estate tax reimbursements.
Expenses
Total expenses increased by $29.1 million to $87.4 million for the six months ended June 30, 2019 compared to $58.4 million for the six months ended June 30, 2018. The increase is primarily attributable to $28.0 million in property operating expenses, real estate taxes, and depreciation and amortization associated with the 20 operating properties acquired and one development property placed in service offset, by one property disposed of since June 30, 2018, a $0.9 million increase in expenses associated with projects fully reimbursed by the tenants and $0.4 million in property operating related employee costs, partially offset by a $2.8 million decrease in depreciation related to the timing of intangible asset amortization and $0.2 million decrease in real estate tax expense. Additionally, corporate general and administrative costs increased by $1.9 million primarily due to an increase in employee costs.
25
Interest Expense
Interest expense increased by $5.1 million to $16.2 million for the six months ended June 30, 2019 compared to $11.1 million for the six months ended June 30, 2018. The increase is primarily due to a $2.7 million increase in interest owed on our 2016 term loan facility and our 2018 term loan facility, which were amended and entered into, respectively, on June 18 2018 and a $2.7 million increase in interest on our revolving credit facility due to an increase in the weighted average interest rate from 3.25% during the six months ended June 30, 2018 to 3.76% during the six months ended June 30, 2019. This increase was partially offset by an increase in capitalized interest associated with properties under development, resulting in a $0.5 million decrease in interest.
Gain on the sale of operating property
On May 8, 2019, the Company sold CBP - Chula Vista to a third party. Net proceeds from the sale of operating property were approximately $19.9 million and we recognized the full gain on the sale of operating property of approximately $6.2 million for the six months ended June 30, 2019.
Liquidity and Capital Resources
We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant improvements, stockholder distributions to maintain our qualification as a REIT and other capital obligations associated with conducting our business. At June 30, 2019, we had $9.7 million available in cash and cash equivalents and there was $188.0 million available under our revolving credit facility.
Our primary expected sources of capital are as follows:
|
• |
cash and cash equivalents; |
|
• |
operating cash flow; |
|
• |
available borrowings under our revolving credit facility; |
|
• |
issuance of long-term debt; |
|
• |
issuance of equity, including under our ATM Programs (as described below); and |
|
• |
asset sales. |
Our short-term liquidity requirements consist primarily of funds to pay for the following:
|
• |
development and redevelopment activities, including major redevelopment, renovation or expansion programs at individual properties; |
|
• |
property acquisitions under contract; |
|
• |
tenant improvements allowances and leasing costs; |
|
• |
recurring maintenance and capital expenditures; |
|
• |
debt repayment requirements; |
|
• |
corporate and administrative costs; |
|
• |
interest payments on our outstanding indebtedness; |
|
• |
interest swap payments; and |
|
• |
distribution payments. |
Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or required. As of the date of this filing, there were no known commitments or events that would have a material impact on our liquidity.
26
Equity
ATM Program
On March 3, 2017, we entered into separate equity distribution agreements with each of Citigroup Global Markets Inc., BTIG, LLC, Jefferies LLC, Raymond James & Associates, Inc., RBC Capital Markets, LLC and SunTrust Robinson Humphrey, Inc., pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time, which we refer to herein as the “2017 ATM Program”, in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act.
On March 4, 2019, we entered into separate equity distribution agreements with each of Citigroup Global Markets Inc., BMO Capital Markets Corp., BTIG, LLC, Capital One Securities, Inc., Jefferies LLC, Raymond James & Associates, Inc., RBC Capital Markets, LLC, SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $200.0 million from time to time, which we refer to herein as the “2019 ATM Program” and together with the 2017 ATM Program, the ATM Programs, in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. Under the 2019 ATM Program, we may also enter into one or more forward transactions under separate master forward sale confirmations and related supplemental confirmations with each of Citibank, N.A., Bank of Montreal, Jefferies LLC, Raymond James & Associates, Inc., Royal Bank of Canada and Wells Fargo Bank, National Association for the sale of shares of our common stock on a forward basis.
The following table sets forth certain information with respect to sales made under each of the ATM Programs as of June 30, 2019 (amounts in thousands, except share amounts):
|
|
2017 ATM Program |
|
|
2019 ATM Program |
|
||||||||||
For the Three Months Ended: |
|
Number of Shares Sold |
|
|
Net Proceeds |
|
|
Number of Shares Sold(1) |
|
|
Net Proceeds(1) |
|
||||
March 31, 2019 |
|
|
366,455 |
|
|
$ |
6,504 |
|
|
|
— |
|
|
$ |
— |
|
June 30, 2019 |
|
|
— |
|
|
|
— |
|
|
|
1,200,712 |
|
|
|
21,155 |
|
Total |
|
|
366,455 |
|
|
$ |
6,504 |
|
|
|
1,200,712 |
|
|
$ |
21,155 |
|
|
(1) |
During the six month period ending June 30, 2019, we entered into and fully settled forward sale transactions under the 2019 ATM Program by selling and issuing an aggregate of 1,200,712 shares of our common stock in exchange for net proceeds to us of approximately $21.2 million, after deducting offering costs. The Company accounted for the forward sale agreements as equity. |
We have used the net proceeds received from such sales for general corporate purposes. As of June 30, 2019, we had approximately $204.4 million of gross sales of our common stock available under the ATM Programs, including approximately $25.8 million of gross sales available under the 2017 ATM Program and approximately $178.6 million of gross sales available under the 2019 ATM Program.
Offering of Common Stock on a Forward Basis
On June 21, 2018, we completed an underwritten public offering of an aggregate of 20,700,000 shares of our common stock. The public offering included 13,700,000 shares sold by us directly to the underwriters (including 2,700,000 shares pursuant to the underwriters’ exercise of their option to purchase additional shares), resulting in net proceeds to us of approximately $252.9 million, after deducting underwriting discounts and commissions and our offering expenses. In connection with the public offering, we also entered into forward sale agreements with certain financial institutions, acting as forward purchasers pursuant to which the forward purchasers borrowed and the forward sellers, acting as agents for the forward purchasers, sold an aggregate of 7,000,000 shares.
On March 27, 2019, we physically settled a portion of the forward sale agreements by issuing an aggregate of 6,700,000 shares of our common stock in exchange for approximately $119.2 million in net proceeds after deducting underwriting discounts and commissions and our offering expenses.
On June 14, 2019, we completed the physical settlement of the remaining shares underlying the forward sale agreements by issuing an aggregate of 300,000 shares of our common stock for approximately $5.3 million in net proceeds after deducting underwriting discounts and commissions and our offering expenses. The Company accounted for the forward sale agreements as equity.
Subsequent to June 30, 2019, we issued and sold an aggregate of 1,398,814 shares of our common stock under the 2017 ATM Program generating net proceeds of $25.4 million, after deducting underwriting discounts, commissions and offering costs, and
27
205,215 shares of our common stock under the 2019 ATM Program generating net proceeds of $3.7 million, after deducting underwriting discounts, commissions and offering costs.
Debt
The following table sets forth certain information with respect to our outstanding indebtedness as of June 30, 2019 (amounts in thousands):
|
|
Principal Outstanding |
|
|
Interest |
|
|
Current |
|
||
Loan |
|
June 30, 2019 |
|
|
Rate (1) |
|
|
Maturity |
|
||
Revolving credit facility: |
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility (2) |
|
$ |
262,000 |
|
|
L + 130bps |
|
|
June 2022 (3) |
|
|
Total revolving credit facility |
|
|
262,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan facilities: |
|
|
|
|
|
|
|
|
|
|
|
2016 term loan facility |
|
|
100,000 |
|
|
2.67% (4) |
|
|
March 2024 |
|
|
2018 term loan facility |
|
|
150,000 |
|
|
3.96% (5) |
|
|
June 2023 |
|
|
Total term loan facilities |
|
|
250,000 |
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees |
|
|
(1,580 |
) |
|
|
|
|
|
|
|
Total term loan facilities, net |
|
|
248,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable: |
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes payable, series A |
|
|
95,000 |
|
|
4.05% |
|
|
May 2027 |
|
|
Senior unsecured notes payable, series B |
|
|
50,000 |
|
|
4.15% |
|
|
May 2029 |
|
|
Senior unsecured notes payable, series C |
|
|
30,000 |
|
|
4.30% |
|
|
May 2032 |
|
|
Total notes payable |
|
|
175,000 |
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees |
|
|
(1,169 |
) |
|
|
|
|
|
|
|
Total notes payable, net |
|
|
173,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable: |
|
|
|
|
|
|
|
|
|
|
|
CBP - Savannah |
|
|
13,128 |
|
|
3.40% (6) |
|
|
July 2033 |
|
|
ICE - Charleston |
|
|
18,035 |
|
|
4.21% (6) |
|
|
January 2027 |
|
|
MEPCOM - Jacksonville |
|
|
9,424 |
|
|
4.41% (6) |
|
|
October 2025 |
|
|
USFS II - Albuquerque |
|
|
16,420 |
|
|
4.46% (6) |
|
|
July 2026 |
|
|
DEA - Pleasanton |
|
|
15,700 |
|
|
L + 150bps (6) |
|
|
October 2023 |
|
|
VA - Loma Linda |
|
|
127,500 |
|
|
3.59% (6) |
|
|
July 2027 |
|
|
VA - Golden |
|
|
9,260 |
|
|
5.00% (6) |
|
|
April 2024 |
|
|
Total mortgage notes payable |
|
|
209,467 |
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees |
|
|
(1,739 |
) |
|
|
|
|
|
|
|
Less: Total unamortized premium/discount |
|
|
238 |
|
|
|
|
|
|
|
|
Total mortgage notes payable, net |
|
|
207,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
892,217 |
|
|
|
|
|
|
|
|
|
(1) |
At June 30, 2019, the one-month LIBOR (“L”) was 2.40%. 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 the revolving credit facility and the term loan facilities is based on the Company’s consolidated leverage ratio, as defined in the respective loan agreements. |
28
|
(2) |
Available capacity of $188.0 million at June 30, 2019 with an accordion feature that provides additional capacity of up to $250.0 million, 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) |
Entered into two interest rate swaps with an effective date of March 29, 2017 with an aggregate notional value of $100.0 million to effectively fix the interest rate at 2.67% annually, based on the Company’s consolidated leverage ratio, as defined in the 2016 term loan facility agreement. |
|
(5) |
Entered into four interest rate swaps with an effective date of December 13, 2018 with an aggregate notional value of $150.0 million to effectively fix the interest rate at 3.96% annually, based on the Company’s consolidated leverage ratio, as defined in the 2018 term loan facility. |
|
(6) |
Effective interest rates are as follows: CBP - Savannah 4.12%, ICE - Charleston 3.93%, MEPCOM - Jacksonville 3.89%, USFS II - Albuquerque 3.92%, DEA - Pleasanton 1.80%, VA - Loma Linda 3.78%, VA - Golden 5.03%. |
Our revolving credit facility, term loan facilities, unsecured notes, and mortgage notes payable are subject to ongoing compliance with a number of financial and other covenants. As of June 30, 2019, we were in compliance with all applicable financial covenants.
The chart below details our debt capital structure as of June 30, 2019 (dollar amounts in thousands):
Debt Capital Structure |
|
June 30, 2019 |
|
|
Total principal outstanding |
|
$ |
896,467 |
|
Weighted average maturity |
|
5.7 years |
|
|
Weighted average interest rate |
|
|
3.7 |
% |
% Variable debt |
|
|
31.0 |
% |
% Fixed debt (1) |
|
|
69.0 |
% |
% Secured debt |
|
|
23.4 |
% |
|
(1) |
Our 2016 term loan facility and 2018 term loan facility are swapped to be fixed and as such are included as fixed rate debt in the table above. |
On July 30, 2019, the Company entered into a note purchase agreement for the future private placement by the Operating Partnership of an aggregate of $275.0 million of fixed rate, senior unsecured notes consisting of (i) 3.73% Series A Senior Notes due September 12, 2029 in an aggregate principal amount of $85.0 million, (ii) 3.83% Series B Senior Notes due September 12, 2031 in an aggregate principal amount of $100.0 million, and (iii) 3.98% Series C Senior Notes due September 12, 2034 in an aggregate principal amount of $90.0 million.
Dividend Policy
In order to qualify as a REIT, we are required to distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We anticipate distributing all of our taxable income. We expect to make quarterly distributions to our stockholders in a manner intended to satisfy this requirement. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. It is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions. It is also possible that our board of directors could decide to make required distributions in part by using shares of our common stock.
A summary of dividends declared by the board of directors per share of common stock and per common unit of our operating partnership at the date of record is as follows:
Quarter |
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Dividend (1) |
|
|
Q1 2019 |
|
May 2, 2019 |
|
June 10, 2019 |
|
June 27, 2019 |
|
$ |
0.26 |
|
Q2 2019 |
|
July 31, 2019 |
|
September 12, 2019 |
|
September 26, 2019 |
|
$ |
0.26 |
|
|
(1) |
Prior to the end of the performance period as set forth in the applicable award for long term incentive plan units in the Operating Partnership, or the LTIP units, holders of LTIP units are entitled to receive dividends per LTIP unit equal to 10% of the dividend paid per common unit. After the end of the performance period, the number of LTIP units, both vested and unvested, that LTIP award recipients have earned, if any, are entitled to receive dividends in an amount per LTIP unit equal to dividends, both regular and special, payable per common unit. |
29
Off-balance Sheet Arrangements
We had no material off-balance sheet arrangements as of June 30, 2019.
Inflation
Substantially all of our leases provide for operating expense escalations. We believe inflationary increases in expenses may be at least partially offset by the operating expenses that are passed through to our tenants and by contractual rent increases. We do not believe inflation has had a material impact on our historical financial position or results of operations.
Cash Flows
The following table sets forth a summary of cash flows for the six months ended June 30, 2019 and 2018 (amounts in thousands):
|
|
For the six months ended June 30, |
|
|||||
|
|
2019 |
|
|
2018 |
|
||
Net cash (used in) provided by: |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
38,433 |
|
|
$ |
28,614 |
|
Investing activities |
|
|
(273,638 |
) |
|
|
(44,126 |
) |
Financing activities |
|
|
239,021 |
|
|
|
153,146 |
|
Operating Activities
The Company generated $38.4 million and $28.6 million of cash from operating activities during the six months ended June 30, 2019 and 2018, respectively. Net cash provided by operating activities for the six months ended June 30, 2019 includes $42.3 million in net cash from rental activities net of expenses offset by $3.9 million related to the change in rents receivable, accounts receivable, prepaid expenses and other assets, and accounts payable and accrued liabilities. Net cash provided by operating activities for the six months ended June 30, 2018 includes a $27.3 million increase in net cash from rental activities net of expenses offset by $1.4 million related to the change in rents receivable, accounts receivable, prepaid expenses and other assets, and accounts payable and accrued liabilities.
Investing Activities
The Company used $273.6 million and $44.1 million in cash for investing activities during the six months ended June 30, 2019 and 2018, respectively. Net cash used in investing activities for the six months ended June 30, 2019 includes $257.6 million in real estate acquisitions, $33.8 million in additions to development properties and $2.2 million in additions to operating properties, offset by $19.9 million in proceeds from the sale of CBP-Chula Vista in the second quarter of 2019. Net cash used in investing activities for the six months ended June 30, 2018 includes $5.5 million in real estate acquisitions related to the purchase of VA – Golden, $21.1 million in additions to development properties, $2.4 million in additions to operating properties and a $15.0 million increase in deposits on acquisitions.
Financing Activities
The Company generated $239.0 million and $153.1 million in cash from financing activities during the six months ended June 30, 2019 and 2018, respectively. Net cash generated by financing activities for the six months ended June 30, 2019 includes $158.1 million in gross proceeds from issuances of shares of our common stock and $287.0 million in draws under our revolving credit facility, offset by $159.8 million in net pay downs under our revolving credit facility, $38.7 million in dividend payments, $5.9 million in payment of offering costs and $1.7 million in mortgage notes payable repayment. Net cash generated by financing activities for the six months ended June 30, 2018 includes $297.8 million in gross proceeds from our underwritten public offering and sales under the 2017 ATM Program and $19.0 million in draws under our revolving credit facility, offset by $118.8 million in net pay downs under our revolving credit facility, $29.2 million in dividends, $11.1 million in payment of offering costs, $3.1 million in payment of deferred financing costs and $1.6 million in mortgage notes payable repayment.
Non-GAAP Financial Measures
We use and present Funds From Operations, or FFO, and FFO, as Adjusted as supplemental measures of our performance. The summary below describes our use of FFO and FFO, as Adjusted, provides information regarding why we believe these measures are
30
meaningful supplemental measures of our performance and reconciles these measures from net income (loss), presented in accordance with GAAP.
Funds From Operations and Funds From Operations, as Adjusted
Funds From Operations, or FFO, is a supplemental measure of our performance. We present FFO calculated in accordance with the current National Association of Real Estate Investment Trusts, or Nareit, definition as defined in the Nareit FFO White Paper – Restatement 2018. In addition, we present FFO, as Adjusted for certain other adjustments that we believe enhance the comparability of our FFO across periods and to the FFO reported by other publicly traded REITs. FFO is a supplemental performance measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of REITs.
FFO is defined by Nareit as net income, (calculated in accordance with GAAP), excluding:
|
• |
Depreciation and amortization related to real estate. |
|
• |
Gains and losses from the sale of certain real estate assets. |
|
• |
Gains and losses from change in control. |
|
• |
Impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. |
We present FFO because we consider it an important supplemental measure of our operating performance, and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting results.
We adjust FFO to present FFO, as Adjusted as an alternative measure of our operating performance, which, when applicable, excludes the impact of acquisition costs, straight-line rent, above-/below-market leases, non-cash interest expense, non-cash compensation and other non-cash items. By excluding these income and expense items from FFO, as Adjusted, we believe we provide useful information as these items have no cash impact. In addition, by excluding acquisition related costs we believe FFO, as Adjusted provides useful information that is comparable across periods and more accurately reflects the operating performance of our properties.
FFO and FFO, as Adjusted are presented as supplemental financial measures and do not fully represent our operating performance. Other REITs may use different methodologies for calculating FFO and FFO, as Adjusted or use other definitions of FFO and FFO, as Adjusted and, accordingly, our presentation of these measures may not be comparable to other REITs. Neither FFO nor FFO, as Adjusted is intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.
The following table sets forth a reconciliation of our net income to FFO and FFO, as Adjusted for the three and six months ended June 30, 2019 and 2018 (amounts in thousands):
|
|
For the three months ended June 30, |
|
|
For the six months ended June 30, |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net income |
|
$ |
6,491 |
|
|
$ |
1,719 |
|
|
$ |
6,010 |
|
|
$ |
3,534 |
|
Depreciation and amortization |
|
|
22,967 |
|
|
|
14,588 |
|
|
|
45,418 |
|
|
|
29,222 |
|
Gain on sale of property |
|
|
(6,245 |
) |
|
|
— |
|
|
|
(6,245 |
) |
|
|
— |
|
FFO |
|
|
23,213 |
|
|
|
16,307 |
|
|
|
45,183 |
|
|
|
32,756 |
|
Adjustments to FFO: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs |
|
|
452 |
|
|
|
499 |
|
|
|
922 |
|
|
|
723 |
|
Straight-line rent and other non-cash adjustments |
|
|
(592 |
) |
|
|
(1,253 |
) |
|
|
(1,566 |
) |
|
|
(3,047 |
) |
Above-/below-market leases |
|
|
(1,515 |
) |
|
|
(2,239 |
) |
|
|
(3,244 |
) |
|
|
(4,518 |
) |
Non-cash interest expense |
|
|
323 |
|
|
|
299 |
|
|
|
645 |
|
|
|
563 |
|
Non-cash compensation |
|
|
697 |
|
|
|
712 |
|
|
|
1,431 |
|
|
|
1,576 |
|
FFO, as Adjusted |
|
$ |
22,578 |
|
|
$ |
14,325 |
|
|
$ |
43,371 |
|
|
$ |
28,053 |
|
31
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and variable rates. We manage and may continue to manage our market risk on variable rate debt by entering into swap arrangements to, in effect, fix the rate on all or a portion of the debt for varying periods up to maturity. This in turn, reduces the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when undertaking such arrangements is to reduce our floating rate exposure and we do not intend to enter into hedging arrangements for speculative purposes.
As of June 30, 2019, $618.8 million, or 69.0% of our debt, excluding unamortized premiums and discounts, had fixed interest rates and $277.7 million, or 31.0% had variable interest rates. If market rates of interest on our variable rate debt fluctuate by 25 basis points, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows, by $0.7 million annually.
Item 4. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a -15(e) and Rule 15d-15 of the Exchange Act, as of June 30, 2019. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2019, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2019 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
32
Part II
Item 1. |
Legal Proceedings |
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against us.
Item 1A. |
Risk Factors |
There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. |
Defaults Upon Senior Securities |
Not applicable
Item 4. |
Mine Safety Disclosures |
Not applicable
Item 5. |
Other Information |
None.
33
Item 6. |
Exhibits |
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q:
Exhibit |
|
Exhibit Description |
|
|
|
|
|
3.1 |
|
||
|
|
|
|
3.2 |
|
||
|
|
|
|
3.3 |
|
||
|
|
|
|
4.1 |
|
||
|
|
|
|
31.1* |
|
||
|
|
|
|
31.2* |
|
||
|
|
|
|
32.1** |
|
||
|
|
|
|
101.SCH* |
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB* |
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE* |
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
104* |
|
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*) |
|
|
|
|
* |
Filed herewith |
** |
Furnished herewith |
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Easterly Government Properties, Inc. |
|
|
|
|
|
Date: August 2, 2019 |
|
/s/ William C. Trimble, III |
|
|
William C. Trimble, III |
|
|
Chief Executive Officer and President (Principal Executive Officer) |
|
|
|
Date: August 2, 2019 |
|
/s/ Meghan G. Baivier |
|
|
Meghan G. Baivier |
|
|
Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial Officer) |
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
I, William C. Trimble, III, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Easterly Government Properties, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 2, 2019
/s/ William C. Trimble, III |
William C. Trimble, III |
Chief Executive Officer and President |
(Principal Executive Officer) |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
I, Meghan G. Baivier, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Easterly Government Properties, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 2, 2019
/s/ Meghan G. Baivier |
Meghan G. Baivier |
Executive Vice President, Chief Financial Officer and Chief Operating Officer |
(Principal Financial Officer) |
Exhibit 32.1
Certification
Pursuant to 18 U.S.C. Section 1350
The undersigned officers, who are the Chief Executive Officer and Chief Financial Officer of Easterly Government Properties, Inc. (the “Company”), each hereby certifies to the best of his or her knowledge, that the Company’s Quarterly Report on Form 10-Q to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ William C. Trimble, III |
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/s/ Meghan G. Baivier |
William C. Trimble, III |
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Meghan G. Baivier |
Chief Executive Officer and President |
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Executive Vice President, Chief Financial Officer and Chief Operating Officer |
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August 2, 2019 |
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August 2, 2019 |
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