Easterly Government Properties, Inc. Q1 FY2025 earnings call

• Implemented key changes to capital allocation strategy, including reducing quarterly dividend and two-for-five reverse stock split to position for long-term growth and free up capital for accretive investments. - Aligned dividend philosophy to match peers, created flexibility for growth initiatives, and strengthened balance sheet. - Announced two accretive portfolio additions: development of a federal courthouse in Medford, Oregon and acquisition of a 290,000 square foot facility leased to the District of Columbia government. - Actively managed assets, such as re-tenanting the US Forest Service facility in Albuquerque to the state of New Mexico. - Increased borrowing capacity and extended debt obligation maturity, and executed private placement to raise additional debt capacity.

For the first quarter of 2025, on a fully diluted basis, net income per share was $0.07 and core FFO per share was $0.73. Cash available for distribution was $31.1 million. The company is on track to deliver an estimated 2% to 3% core FFO per share growth in 2025. The weighted average remaining lease term is strong at 9.8 years, and over 95% of lease income is in firm term.

• Brought up the bottom end of full-year core FFO per share guidance for 2025 to a range of $2.98 to $3.03 on a fully diluted basis. - Guidance assumes an additional $20 million in wholly-owned acquisitions on top of already closed ~$120 million and $25 to $75 million of gross development-related investment during the year.

• Uncertainty regarding the execution of the Doge initiative in the government real estate market which could impact lease terms and portfolio performance. - Potential impact of market variables such as tariff uncertainty on project costs for development projects.

Q: Guys, thanks for taking my question. I was just kinda wondering if you could kinda get into the economics of the acquisition and the development, you know, the cap rate or unlevered IRR, just however you think about it. How small do you think this?

A: Sure. So I'll touch on the DC acquisition first, and then I'll hit on the development at Medford. So for DC, that asset was roughly $120 million in acquisition cost. When we acquired that in the high nine, which does provide for that magic hundred basis point premium to our cost of capital that we hope to achieve. So we're very pleased with that acquisition. We did a ton of underwriting on it, and we think it really complements and augments the state and local exposure that we're growing within the portfolio. On Medford, we are still in the very beginning stages of design on that lease award. So without the final determination of the lump sum, it would be hard to put a very specific number to it. But broadly, we achieve and see to achieve a hundred and fifty basis point spread to our cost of capital, particularly on a yield basis, and you'll continue to see us execute at that level on this particular project.

Q: Thank you very much. Just wondering, could you quantify kind of what the size of the pipeline of opportunities you're looking at right now and sort of how that breaks down between GSA opportunities versus developments versus state and local government facilities.

A: Yeah. No. Good. Thanks, Peter. We have about a billion and a half dollars in our pipeline. You know, that doesn't mean that's where we're executing. But we really have a choice of opportunities not only, you know, the GSA opportunities, you know, US federal, but also some state and local, you know, as well as these government adjacent facilities. And it's really a unique time in our history. There are certain developments for the US government that we are looking at. Where not one, you know, but two or three folks who are also looking at that have come to partner with us, you know, on those projects. Why is that? Because, you know, and as I've shared on some prior calls, the government lease backed by the full faith and credit of the US government was terrific collateral and going to banks. So, like, two people and a dog could start a development company and be able to get an exceptional amount of financing. With the Doge overhang and folks not being able to actually underwrite to the agencies, you know, many of the mid-tier banks that don't have insights into this have stepped away from the market. And are no longer providing those folks with the capital that they would need in order to begin a development project. What's also happened, you know, with the with Doge is that they they do understand the capital markets. And today, more than ever, the government actually has to look at the balance sheet quality of a developer particularly in larger products before they award a development award. So with that, obviously, we're very well positioned relative to some other folks that we've competed with. Our Medford, Oregon courthouse is a is a is a terrific win for us. It speaks to our strengths and, you know, you could hear from Allison you know, our ability to develop at a premium you know, is is is is robust. So, you know, for us to continue to achieve, you know, our 2% to 3% growth going forward, we feel very well positioned with our existing portfolio to do exactly that. And we continue to see ways to put our money to work, you know, in a in a very creative way that'll build our portfolio. With each of the three, you know, areas that we focused on. We would, over the next three to five years, like 15% of our portfolio to be state and local and 15% of it to be government adjacent. And we and we will see, you know, given that development is our most accretive way to put capital to work, I think you'll see most of what we do in the federal space you know, is is development going forward.