Easterly Government Properties, Inc. Q4 FY2024 earnings call

• Darrell Crate highlighted the shift in government functioning and the company's focus on mission-critical facilities, citing examples like FDA development projects being cheaper and faster than government-owned alternatives. Renewed a 33,000 square foot lease for the US Army Corps of Engineers in Portland, Oregon.
• Allison Marino reported financial results, amended a $100 million senior unsecured term loan to extend maturity and increase borrowing capacity, discussed lease structures (firm term vs soft term), renewal details (34 leases renewed since IPO, with 22 having completed or no TI work and 12 with pending TI projects), and updated core FFO guidance for 2025 to $1.18 to $1.21 assuming $100 million in acquisitions and $25-$75 million in development-related investment.

For the fourth quarter of 2024, on a fully diluted basis, net income per share was $0.05, core funds from operations (FFO) per share grew 3% year over year to $0.29, and cash available for distribution was $25.1 million. For the full year 2024, net income per share was $0.19, core FFO met the upper end of guidance at $1.17, and cash available for distribution was $100.9 million. The portfolio is composed of 95% firm term leases, and the weighted average remaining lease term is 10 years, with back-out soft term still at 8.6 years.

• Amended core FFO guidance for 2025 to a range of $1.18 to $1.21 on a fully diluted basis.
• Guidance assumes $100 million in fully owned acquisitions and $25 million to $75 million of gross development-related investment during 2025, consistent with 2%-3% core FFO growth goal.

• GSA or VA leases can be firm term (government cannot unilaterally cancel) or soft term (government can terminate). Currently, ~5% of portfolio's annualized lease income is in soft term. Also, there's a lag in releasing data for renewals due to unknown renewal TI work requirements until completion.

Q: Appreciate all the commentary there. Maybe just going and starting off with the acquisition pipeline and the opportunity set that you are seeing. You know, if I recall, you are looking at deals, you know, around the mid-eight versus, you know, your cost of capital, which, you know, on an implied cap rate basis, is probably the mid-sevens. You know, how are you viewing the accretion of these deals now just given it seems like, you know, we are going to be at higher interest rates for longer than previously expected?

A: And maybe Allison and I will just, you know, ham and egg the answer to this a bit, you know, which is, you know, we have a strong, really strong pipeline, I mean, both in acquisitions as well as development opportunities. You know, the broad context, while, you know, we spend a lot of time talking about Doge on investor calls and with the media, but the background is banks are still not lending, you know, to particularly developers. And that being the case, having capital puts you in a very strong position, and, you know, we have seen for a set of sellers that are either facing maturities or it's just time for them to sell an asset and they're looking and saying interest rates are going to be higher for longer, that now is an appropriate time to sell. So the pipeline continues to grow, I think, with opportunities that are very attractive. As you know, you know, Michael, I view our business principally as a net lease business. In that we look at cost of capital, we look at the spread, we look at the risk of where we are underwriting. So I think we have plenty of accretive acquisitions. We've been conservative, I think, in our guidance. I mean, in that as you heard, we have about $100 million of acquisitions in the guidance range. Obviously, you know, as we think about targeting a midpoint, when we give parameters around what the company is going to do, having a 2.5% growth rate is what we are targeting, and we are in the course that we are setting ourselves on for the next set of years. And so, you know, what we've got in our pipeline and harvesting that gets us to those levels. If we are in a space where we can announce more acquisitions, you know, in any year, we probably bring up the lower end of the guidance range unless it's a robust amount. And that positions us very well for our earnings growth in 2026, which again doesn't seem like a terribly high hurdle as we've increased our TAM and continue to build what we build. And Allison's doing a terrific job on the capital structure and, you know, we've had some good news regarding debt, you know, that's been in our past and how we're modifying that in the future. You know, as you know, REITs generally, as debt has rolled over, you know, face headwinds in their earnings. But I think we have plenty of opportunities and creativity, you know, in ways for us to get cheaper cost of capital. What's your thought, Allison? Allison Marino: Yeah. So what I would add there is we are looking to an incremental cost of capital as we spread and invest in the portfolio of acquisition and opportunity we see. So we are looking to generate that 50 to 100 basis point spread range on the next deals or the broader pipeline, and that will allow us to achieve our growth goals. But that certainly accounts for where interest rates are and are expected to be over the next few years.

Q: Appreciate all the context there. And then, you know, Darrell, just going back to kind of the Doge initiative, obviously, I think you guys have done a good job highlighting the difference of Easterly's portfolio relative to what the market might consider traditional government office space. But as you look to kind of the idea of austerity, whether it's, you know, the Pentagon potentially looking to cut its budgets or, you know, requisitions getting delayed for new projects, I mean, could that impact the external growth side, whether it's being awarded new developments or some of these government-adjacent properties maybe not being as attractive given worries about spending? Any commentary there would be helpful.

A: Yeah. I mean, I think in the short term, I guess the metaphor that I've used internally is we're going to have some, like, a light chop turbulence here as everybody figures out what is going on in the government, but we are all set for a very smooth landing because if you squint at our company, we've spent over a decade dedicating ourselves to be a specialist in helping in creating a private partnership with the US government. We have terrific relationships with the folks that we build buildings with or with our leasing officers. I think we try to be very creative in suggesting ways in which they can improve those facilities. And what that really means is improved mission. I'll tell you, you know, when you step back, maybe this is a little too detailed, but when we speak to, you know, folks who work at the GSA, they care deeply about housing folks in the government to satisfy their mission. And candidly, what I see from the outside and being somebody who works in private business is that they spend just as much time figuring out the right solution, you know, for the facilities that create mission as they do navigating the bureaucracy. I mean, and it's not irrational because, for example, we would come to the GSA and have a couple million bucks that we could save. And the reality is they think that's a great idea. These agents, you know, and folks who work for the government are terribly hardworking, and sincere and respect the taxpayers. But they would say, you know, the minimum amount of time that we could redo this procurement is eight months. And the reality is it'll probably take closer to three years. So our choice is, hey, we can take three years and save a couple million dollars, but we know that facility that they're housed in today is not adequate. And we need for this mission to be accomplished in a way that would make the American people proud. We need a new facility. And it's that process that really needs to get fixed. That's what we call the thicket of bureaucracy. And there is no GSA member that I've ever met that's excited to become professional in navigating the bureaucracy. They want to do the right thing for the American people. They want to get these facilities to be operating and operating quickly. And that's why I really applaud, you know, their efforts and the Doge efforts, you know, to look to have a greater lease portfolio. We're good at real estate. They're good at mission. We can't catch criminals, but we certainly can replace paint, carpet, and make sure the roof doesn't leak. And that partnership will serve the government very well over time. And so when we look forward to getting out of this just little short-term period, I think we're one of the very best positioned to help them find savings. And as the example, that FDA building that I'm mentioning that's in Denver, there are still people who are doing some work on that for reasons that are unaccountable to me because we can deliver it for a third of the cost, you know, that they're planning on. So that is what will get fixed, and I feel a hundred percent aligned with the GSA to help them achieve their objectives. So maybe more than you're asking, but...

Q: Thank you. Good morning. Hey, Darrell. How's it going? Question on office utilization, which is, you know, typically a gauge of how much potential excess is in leased real estate. And historically, I know you've been commenting that it's hard to measure within your portfolio. But I'm wondering if you find that that's an important measure for the Doge leadership and if it's something that you could take a more proactive approach in engaging.

A: Yeah. I mean, it's a great question. It's kind of, you know, we're trying to ask ourselves a version of that question almost every day. And I think here, I would draw the distinction between offices that are in Washington, you know, where we have incredibly limited exposure. I think those are the places where they look at square feet, they look at utilization, and they're trying to navigate low utilization, return to work, and trying to get it figured out. But there will be a reduction in, you know, federal office footprint in Washington when all of these things balance out. A bunch of our facilities, you think about the lab down in, you know, I mean, you know, let's just take the, like, the DEA lab in Pleasanton. There's a room that is very stable. It houses a hundred thousand dollar machine. In that machine, you can take any organic drug, put it in that machine, go get yourself a nice little Nespresso, and come back. And it will tell you the exact, you know, think of if Columbia had ZIP codes, it would tell you the ZIP code that that drug came from. And what's the utilization in that room? You know, I don't know, but it has to exist. And so when we look at these mission-critical facilities, they have facilities that help them execute mission. And we fully know that they're, you know, they've been using a lot of utilities, you know, all through COVID. And I don't think COVID solved the illegal drug problem. And when we think about the buildings that we're trying to maintain and deliver for the US government, they have those kinds of functions. And I could go on about romaine lettuce, to the cotton that we import, to the drugs that get filled for the veterans. All of that is happening. And so I see on the other end the mission delivery is very strong, and we see that happening in our buildings when we go and visit. And we see it in the numbers that the government publishes about what they're up to and what they're doing.

Q: Can you provide any commentary on the $100 million of acquisitions that you now have in guidance? Whether they will be GSA leases that were in your bull's eye historically or if they're going to be the non-GSA leases that you've been acquiring more recently.

A: Yeah. I mean,我 think we'll look, you know, probably the state and local as well as nonadjacent, you know, for that bit in the guidance.

Q: Okay. And then the final question on AFFO or CAD growth. Was wondering if you could provide some commentary on where you think that goes just given there's higher CapEx and TIs in some of these government-adjacent leases. Allison Marino: Great question. Sure. So we are committed to the path of growth that we've been talking about for the last successful lease renewals, year. And growth in CAD comes through a combination of improved operating margins and managing capital levels to an effective place. And they are also driven by opportunities that Darrell mentioned that we're seeing in the market on an acquisition basis. So we're evaluating CAD impact as we look at new deals as well and trying to do accretive deals on that end.

Q: But is it going to be in line with your FFO growth, or will it be lagging in the initial phases and forward? Darrell Crate: Oh, yeah. Yeah. Yeah. Yeah. I mean, you know, and as we've looked at it, as we've said, you know, trying to get, you know, get our CAD generation and dividend within striking distance by the end of 2026 is what we're focused on. I think we'll have some, you know, good news as we look to next year. But that said, you know, our stock price at $11 provides the paradox of this business is, you know, at $11, you know, we've got the guidance that we put forward here. At $12, you know, we're in a place where we're going to see, you know, incremental cost of capital is going down and the price of buildings is staying the same, and it's, you know, $13 or $14, we can kind of clean up the market. So that's where we find ourselves. We think we're super excited about the projects and, like, leaning into what we're doing. If, you know, I mean, maybe I'm not going to say stuff like this, but if the stock is at $13 covering the dividends, no problem. I mean, that's from where we stand today.

Q: I know touching on CapEx that we previously spoke about, it was a little higher this quarter. Is that a good run rate going forward? Allison Marino: Hi. Yeah. So Q4 does have what I would call the impact of seasonality. So, typically, there are a lot of projects that wrap up in Q4. On a run rate basis, I would expect to share that we're in that $1.75 to $2 per square foot range going forward. Typically, Q1 capital tends to be a little bit lighter as we hit the winter months and then spread more evenly throughout the year. That's not to say it's zero. It just seasonality tends to put things in the last three months of the quarter or three quarters of the year.

Q: And then what's your plan for the SSA Chicago building post the expiration? Do you plan on releasing the facility, or should we think about this being a sale? Allison Marino: Yep. So we acquired that building as part of a portfolio a number of years ago at a 20% cap rate. So this is certainly a victory in terms of the property itself. It's outperformed our underwriting by three times in both term and performance. Our goal would be to we are not expecting the GSA to remain in that building, and we would look to outcome following the expiration, whatever that might be. Darrell Crate: I mean, then if anything, I mean, just a little detail on that building, which is, I mean, the degree to which, you know, those today is examining what they're doing next and how they're moving things forward. The tenancy in that building will either be what we expect it to be or be something a little bit longer. And if you were to go visit the place, you'd see that the market will give us a price that I think investors will be pleased by when the FAA moves to their new facility.