EASTERLY GOVERNMENT PROPERTIES, INC. You should read the following discussion of our results of operations and financial condition in conjunction with the audited consolidated financial statements and related notes thereto as ofDecember 31, 2021 and 2020 and for the years endedDecember 31, 2021 , 2020 and 2019 and the sections entitled "Risk Factors," "Forward Looking Statements," "Business," and "Properties" contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Annual Report on Form 10-K entitled "Risk Factors" and "Forward Looking Statements."
Overview
References to "Easterly," "we," "our," "us" and "our company" refer toEasterly Government Properties, Inc. , aMaryland corporation, together with our consolidated subsidiaries includingEasterly Government Properties LP , aDelaware limited partnership, which we refer to herein as our operating partnership. We present certain financial information and metrics "at Easterly Share," which is calculated on an entity-by-entity basis. "At Easterly Share" information, which we also refer to as being "at share," "pro rata," "our pro rata share" or "our share" is not, and is not intended to be, a presentation in accordance with GAAP. 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 toU.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 theU.S. General Services Administration , which we refer to herein as the GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation. We focus on acquiring, developing and managingU.S. Government -leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for theU.S. Government , working closely with the tenant agency to meet its needs and objectives. As ofDecember 31, 2021 , we wholly owned 85 operating properties and four operating properties through an unconsolidated joint venture inthe United States encompassing approximately 8.6 million leased square feet (8.4 million pro rata), including 88 operating properties that were leased primarily toU.S. Government tenant agencies and one operating property that was entirely leased to a private tenant. As ofDecember 31, 2021 , our operating properties were 99% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion. Our operating partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of our operating partnership and owned approximately 89.0% of the aggregate limited partnership interests in our operating partnership, which we refer to herein as common units, as ofDecember 31, 2021 . We have elected to be taxed as a REIT and believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2015 .
Acquisitions
OnMarch 17, 2021 , we acquired a 99,130 leased square footFederal Bureau of Investigation ("FBI") field office inKnoxville, Tennessee . The building is a built-to-suit property completed in 2010. The facility is leased to the GSA for beneficial use of theFBI with a lease expiration ofAugust 2025 . OnMarch 17, 2021 , we acquired a 60,000 leased square foot U.S Attorney's Office ("USAO") facility inLouisville, Kentucky . The building is a built-to-suit property completed in 2011. The facility is leased to the GSA for beneficial use of the USAO with a lease expiration ofDecember 2031 . OnMarch 17, 2021 , we acquired a 17,420 square footU.S Immigration and Customs Enforcement ("ICE") office inLouisville, Kentucky . The building is a built-to-suit office facility completed in 2011. The facility is leased to the GSA for beneficial use of ICE which expired inMay 2021 and is in holdover as ofDecember 31, 2021 . 37 --------------------------------------------------------------------------------
On
OnMay 20, 2021 , we acquired a 94,378 square footNational Weather Service Facility ("NWS") inKansas City, Missouri . The building was originally constructed in 1998 and substantially renovated in 2020. The facility is leased to the GSA for beneficial use of the NWS with a lease expiration ofDecember 2038 . OnJuly 22, 2021 , we acquired a 61,384 square footU.S. Department of Homeland Security facility inCleveland, Ohio . The building was originally constructed in 1981 and substantially renovated in 2016 and 2021. The facility is primarily leased to the GSA for beneficial use of ICE and the NWS and has lease expirations ranging fromAugust 2031 toSeptember 2040 . OnOctober 14, 2021 , we acquired a 489,316 leased square footU.S. Citizenship and Immigration Services ("USCIS") facility inKansas City, Missouri . The building was substantially renovated-to-suit in 1999. The facility is primarily leased to the GSA for beneficial use of theUSCIS and has lease expirations ranging from 2024 to 2042. In conjunction with the acquisition, we assumed$51.5 million of mortgage notes payable. OnNovember 1, 2021 , we acquired an 80,000 square footDepartment of Veteran Affairs ("VA") facility located in the Midwest United States. The building is a build-to-suit property that was completed during 2021. The facility is leased to theVA and has a lease expiration ofMay 2041 .
Dispositions
OnJune 4, 2021 , we sold SSA - Mission Viejo to a third party. Net proceeds from the sale of operating property were approximately$3.3 million and we recognized a gain on the sale of operating property of approximately$0.5 million for the year endedDecember 31, 2021 . OnSeptember 28, 2021 , we sold United Technologies Midland to a third party. Net proceeds from the sale of operating property were approximately$4.0 million and we recognized a gain on the sale of operating property of approximately$0.8 million for the year endedDecember 31, 2021 .
Investment in unconsolidated real estate venture
OnOctober 13, 2021 , we formed a new JV with a global investor (the "JV Partner") to fund the acquisition of a portfolio of ten properties anticipated to encompass 1,214,165 leased square feet (the "Portfolio Acquisition"). We own a 53.0% interest in the JV, subject to preferred allocations as provided in the JV agreement, and will act as manager of the Portfolio Acquisition properties, with customary rights and obligations, and will receive asset management fees and a promote interest. The JV will serve as the vehicle for the Portfolio Acquisition and was assigned the rights of the purchase and sale agreement entered into by our operating partnership onSeptember 30, 2021 . The aggregate contractual purchase price for the Portfolio Acquisition is$635.6 million and the portfolio is 100% leased to theVA with a weighted average lease term of 19.6 years. As ofDecember 31, 2021 , the JV had closed on four of the ten properties included in the Portfolio Acquisition.
On
On
On
On
We expect the JV to close on the remaining Portfolio Acquisition during 2022 and 2023.
38
--------------------------------------------------------------------------------Impact of the COVID-19 Pandemic
The novel coronavirus, or COVID-19, pandemic, has caused and continues to cause
significant disruptions to the
We continue to carefully monitor the COVID-19 pandemic, including the emergence of new variants, and its potential impact on our business. We are following guidelines established by theCenters for Disease Control and the World Health Organization and orders issued by the state and local governments where we operate. In addition, we have taken a number of precautionary steps to safeguard our business and our employees from the COVID-19 pandemic, including, but not limited to, implementing non-essential travel restrictions when necessary and facilitating telecommuting arrangements for our employees. We have taken these precautionary steps while maintaining business continuity so that we can continue to deliver service to and meet the demands of our tenants, including ourU.S. Government tenant agencies. To date, the impact of the COVID-19 pandemic on our business and financial condition has not been significant. The future impact of the COVID-19 pandemic on our operations and financial condition will, however, depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. See "Item 1A Risk Factors" for a discussion of the potential adverse impact of the COVID-19 pandemic on our business, results of operations and financial condition. Financial information analyzed below reflects the audited financial statements as ofDecember 31, 2021 , included in the F pages of this Annual Report on Form 10-K. Results of Operations
Comparison of Results of Operations for the Years Ended
The financial information presented below summarizes the results of operations
of our company for the years ended
For the years ended December 31,
(Amounts in thousands) 2021 2020 Change
Revenues
Rental income $ 267,389 $ 238,131 $ 29,258
Tenant reimbursements 5,187 4,497 690
Asset management income 136 - 136
Other income 2,148 2,450 (302 )
Total revenues 274,860 245,078 29,782
Expenses
Property operating 56,693 48,430 8,263
Real estate taxes 30,429 27,125 3,304
Depreciation and amortization 91,266 93,803 (2,537 )
Acquisition costs 1,939 2,087 (148 )
Corporate general and administrative 23,522 20,630 2,892
Total expenses 203,849 192,075 11,774
Other income (expense)
Income from unconsolidated real estate venture 271 - 271
Interest expense, net (38,632 ) (35,480 ) (3,152 )
Gain (loss) on the sale of operating properties 1,307 (3,995 ) 5,302
Net income $ 33,957 $ 13,528 $ 20,429
Revenues
Total revenues increased
The$29.3 million increase in Rental income is primarily attributable to an increase in revenues from the eight operating properties acquired sinceDecember 31, 2020 , favorable lease renewals, a full period of operations from the nine operating properties acquired and one development property placed in service during the year endedDecember 31, 2020 , offset by a decrease in revenues 39 -------------------------------------------------------------------------------- attributable to the disposal of two operating properties sinceDecember 31, 2020 and the disposal of one operating property during the year endedDecember 31, 2020 .
The
The
The
Expenses
Total expenses increased by$11.8 million to$203.8 million for the year endedDecember 31, 2021 compared to$192.1 million for the year endedDecember 31, 2020 . The$8.3 million increase in Property operating expenses is primarily attributable to an increase in property operating expenses associated with the eight operating properties acquired sinceDecember 31, 2020 , a full period of operations from the nine operating properties acquired and one development property placed in service during the year endedDecember 31, 2020 and an increase in expenses associated with internal asset management costs. The$3.3 million increase in Real estate taxes is also primarily attributable to the eight operating properties acquired sinceDecember 31, 2020 as well as a full period of operations from the nine operating properties acquired and one development property placed in service during the year endedDecember 31, 2020 . Additionally, the$2.5 million decrease in Depreciation and amortization is primarily attributable to a decrease in amortization related to fully amortized lease intangibles offset by the eight operating properties acquired sinceDecember 31, 2020 , as well as a full period of operations from the nine operating properties acquired and one development property placed in service during the year endedDecember 31, 2020 .
The
Income from unconsolidated real estate venture
OnOctober 13, 2021 , the Company formed a new JV to fund the acquisition of a portfolio of ten properties in which the Company owns a 53.0% interest. The increase in Income from unconsolidated real estate venture is attributable to the Company's pro rata share of operations from properties acquired by the JV in the fourth quarter of 2021.
Interest Expense
Interest expense increased by
Gain (Loss) on the sale of operating properties
Gain (loss) on the sale of operating properties increased by$5.3 million to a$1.3 million gain for the year endedDecember 31, 2021 compared to a$4.0 million loss for the year endedDecember 31, 2020 . Loss on the sale of operating properties in 2020 of$4.0 million was due to the sale of DEA - Otay in the fourth quarter of 2020. The gain on the sale of operating properties in 2021 of$1.3 million was due to the sale of SSA - Mission Viejo in the second quarter of 2021 and United Technologies - Midland in the third quarter of 2021.
Comparison of Results of Operations for the Years Ended
Information pertaining to fiscal year 2019 was included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 on page 35 under Part II, Item 7, "Management's Discussion and Analysis of Financial Position and Results of Operations", which was filed with theSecurities and Exchange Commission , orSEC , onFebruary 24, 2021 . 40 --------------------------------------------------------------------------------
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, planned and possible acquisitions of properties, including the remaining Portfolio Acquisition properties through the JV, stockholder distributions to maintain our qualification as a REIT and other capital obligations associated with conducting our business. AtDecember 31, 2021 , we had approximately$11.1 million available in cash and cash equivalents and there was$435.5 million available under our revolving credit facility.
Our primary expected sources of capital are as follows:
• cash and cash equivalents; • operating cash flow; • distribution of cash flows from the JV; • 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, including our JV share of the
remaining Portfolio Acquisition properties;
• 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.
Equity
Shelf Registration Statement on Form S-3
OnFebruary 25, 2021 , we filed an automatic universal shelf registration statement on Form S-3 with theSEC , which was deemed automatically effective and which provides for the registration of unspecified amounts of securities. However, there can be no assurance that we will be able to complete any such offerings of securities in the future.
Offering of Common Stock on a Forward Basis
OnAugust 11, 2021 , we and the operating partnership completed an underwritten public offering of 6,300,000 shares of common stock offered by forward dealers. We also entered into separate forward sale agreements with each of the forward purchasers (the "Forward Sales Agreements"), pursuant to which the forward purchasers borrowed and sold to the underwriters an aggregate of 41 -------------------------------------------------------------------------------- 6,300,000 shares of our common stock. OnDecember 28, 2021 , we partially settled 3,991,000 shares of common stock under the Forward Sale Agreements and received net proceeds of approximately$85.0 million . We expect to physically settle the remaining Forward Sale Agreements and receive proceeds, subject to certain adjustments, from the sale of those shares of common stock upon one or more such physical settlements within approximately one year from the date of the offering. Although we expect to settle the Forward Sale Agreements entirely by the physical delivery of shares of our common stock for cash proceeds, we may also elect to cash or net-share settle all or a portion of our obligations under the Forward Sale Agreements, in which case, we may receive, or may owe, cash or shares of our common stock from or to the forward purchasers. The Forward Sale Agreements provide for an initial forward price of$21.64 per share, subject to certain adjustments pursuant to the terms of each of the Forward Sale Agreements. The Forward Sale Agreements are subject to early termination or settlement under certain circumstances.
ATM Programs
On each ofMarch 4, 2019 andDecember 20, 2019 , we entered into separate equity distribution agreements with various financial institutions pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to$200.0 million and$300.0 million , respectively, from time to time (the "2019 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. The 2019 ATM Programs implemented onMarch 4, 2019 andDecember 20, 2019 are referred to as the "March 2019 ATM Program" and "December 2019 ATM Program" respectively. Under each of the 2019 ATM Programs, we may also enter into one or more forward transactions (each, a "forward sale transaction") under separate master forward sale confirmations and related supplemental confirmations with each of the financial institutions and, under theDecember 2019 ATM Program only,Truist Bank , for the sale of shares of our common stock on a forward basis. OnJune 22, 2021 , we entered into separate equity distribution agreements with various financial institutions pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to$300.0 million from time to time (the "2021 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. Under the 2021 ATM Program, we may also enter into one or more forward sale transactions under separate master forward sale confirmations and related supplemental confirmations with each of the financial institutions for the sale of shares of our common stock on a forward basis. The following table sets forth certain information with respect to issuances, including in settlement of forward sales transactions, made under the 2019 ATM Programs in each fiscal quarter in the year endedDecember 31, 2021 (amounts in thousands except share amounts): March 2019 ATM Program December 2019 ATM Program For the Three Number of Shares Number of Shares Months Ended: Issued(1) Net Proceeds(1) Issued(1) Net Proceeds(1) March 31, 2021 - $ - 1,556,824 $ 39,998 June 30, 2021 - - - - September 30, 2021 246,363 6,451 1,868,045 43,556 December 31, 2021 - - - - Total 246,363 $ 6,451 3,424,869 $ 83,554
(1) Shares issued by us, which were all issued in settlement of forward sales
transactions. Additionally, as of
forward sales transactions under the
of an additional 2,135,289 shares of our common stock that have not yet
been settled. Subject to our right to elect net share settlement, we expect
to physically settle the forward sales transactions by the maturity dates
set forth in each applicable forward sale transaction placement notice,
which dates range from
sales transactions are physically settled in full utilizing a net weighted
average initial forward sales price of
receive net proceeds of approximately
offering costs, subject to adjustments in accordance with the applicable
forward sale transaction. We accounted for the forward sale agreements as
equity.
No sales of shares of our common stock were made under the 2021 ATM Program
during the year ended
We used the net proceeds received from such sales for general corporate purposes. As ofDecember 31, 2021 , we had approximately$300.0 million of gross sales of our common stock available under the 2021 ATM Program,$93.2 million of gross sales of its common stock available under theDecember 2019 ATM Program and no remaining availability under theMarch 2019 ATM Program. 42 --------------------------------------------------------------------------------
Contribution of Property for Common Units
OnMay 20, 2021 , we acquired NWS -Kansas City for which we paid, as partial consideration, 975,452 common units of our operating partnership. The issuance of the common units was effected in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act.
Debt
Indebtedness Outstanding
The following table sets forth certain information with respect to our
outstanding indebtedness as of
Principal
Outstanding Interest Current
December 31,
Loan 2021 Rate (1) Maturity
Revolving credit facility:
Revolving credit facility (2) $ 14,500 L + 120bps July 2025 (3)
Total revolving credit facility 14,500
Term loan facilities:
2016 term loan facility 100,000 2.62% (5) March 2024
2018 term loan facility (4) 150,000 3.91% (6) July 2026
Total term loan facilities 250,000
Less: Total unamortized deferred (1,421 )
financing fees
Total term loan facilities, net 248,579
Notes payable:
2017 series A senior notes 95,000 4.05% May 2027
2017 series B senior notes 50,000 4.15% May 2029
2017 series C senior notes 30,000 4.30% May 2032
2019 series A senior notes 85,000 3.73% September 2029
2019 series B senior notes 100,000 3.83% September 2031
2019 series C senior notes 90,000 3.98% September 2034
2021 series A senior notes 50,000 2.62% October 2028
2021 series B senior notes 200,000 2.89% October 2030
Total notes payable 700,000
Less: Total unamortized deferred (4,411 )
financing fees
Total notes payable, net 695,589
Mortgage notes payable:
DEA - Pleasanton 15,700 L + 150bps (7) October 2023
VA - Golden 8,832 5.00% (7) April 2024
MEPCOM - Jacksonville 6,764 4.41% (7) October 2025
USFS II - Albuquerque 15,135 4.46% (7) July 2026
ICE - Charleston 14,824 4.21% (7) January 2027
VA - Loma Linda 127,500 3.59% (7) July 2027
CBP - Savannah 11,203 3.40% (7) July 2033
USCIS - Kansas City 51,500 3.68% (7) August 2024
Total mortgage notes payable 251,458
Less: Total unamortized deferred (1,852 )
financing fees
Less: Total unamortized 2,815
premium/discount
Total mortgage notes payable, net 252,421 Total debt$ 1,211,089 43 --------------------------------------------------------------------------------
(1) At
interest rate is not adjusted to include the amortization of deferred
financing fees or debt issuance costs incurred in obtaining debt or any
unamortized fair market value premiums. The spread over the applicable rate
for each of our revolving credit facility, our 2018 term loan facility and
our 2016 term loan facility (each as defined below) is based on our
consolidated leverage ratio, as set forth in the respective loan agreements.
(2) Our revolving credit facility had available capacity of
additional lender commitments for up to
capacity, subject to the satisfaction of customary terms and conditions.
(3) Our revolving credit facility has two six-month as-of-right extension options
subject to certain conditions and the payment of an extension fee.
(4) Our 2018 term loan facility has undrawn capacity up to
is available during a delayed draw period.
(5) Entered into two interest rate swaps with an effective date of
with an aggregate notional value of
interest rate at 2.62% annually, based on our consolidated leverage ratio, as
defined in our 2016 term loan facility agreement.
(6) Entered into four interest rate swaps with an effective date of
2018 with an aggregate notional value of
the interest rate at 3.91% annually, based on our consolidated leverage
ratio, as defined in our 2018 term loan facility agreement.
(7) Effective interest rates are as follows: DEA -
5.03%, MEPCOM -
City 2.05%.
Our revolving credit facility, term loan facilities, notes payable, and mortgage notes payable are subject to ongoing compliance with a number of financial and other covenants. As ofDecember 31, 2021 , we were in compliance with all applicable financial covenants. The chart below details our debt capital structure as ofDecember 31, 2021 (dollars in thousands): Debt Capital Structure December 31, 2021 Total principal outstanding $ 1,215,958 Weighted average maturity 6.7 years Weighted average interest rate 3.5 % % Variable debt 2.5 % % Fixed debt (1) 97.5 % % Secured debt 20.7 %
(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.
Private Placement of Senior Unsecured Notes
OnMay 11, 2021 , we and our operating partnership entered into a note purchase agreement pursuant to which our operating partnership would issue and sell an aggregate of up to$250.0 million of fixed rate, senior unsecured notes (the "Notes") consisting of (i) 2.62% Series A Senior Notes dueOctober 14, 2028 , in an aggregate principal amount of$50.0 million , and (ii) 2.89% Series B Senior Notes dueOctober 14, 2030 , in an aggregate principal amount of up to$200.0 million . OnOctober 14, 2021 , our operating partnership issued and sold, an aggregate of$250.0 million of the Notes pursuant to the note purchase agreement entered into onMay 11, 2021 . The Notes are unconditionally guaranteed by us and various subsidiaries of our operating partnership.
Senior Unsecured Credit Facility and 2016 Term Loan Facility
OnJuly 23, 2021 , we entered into a second amended and restated senior unsecured credit agreement (the "second amended senior unsecured credit agreement") governing our senior unsecured credit facility. The second amended senior unsecured credit agreement increased the borrowing capacity under our prior senior unsecured credit facility by$50.0 million for a total credit facility size of$650.0 million , consisting of: (i) a$450.0 million senior unsecured revolving credit facility (our "revolving credit facility"), and (ii) a$200.0 million senior unsecured term loan facility (our "2018 term loan facility"), up to$50.0 million of which will be available for a 364-day delayed draw period. Our revolving credit facility also includes an accordion feature that will provide us with additional capacity, subject to the satisfaction of customary terms and conditions, of up to$250.0 million . 44 -------------------------------------------------------------------------------- Our operating partnership is the borrower, and certain of our subsidiaries that directly own certain of our properties are guarantors under our senior unsecured credit facility. Our revolving credit facility has an initial four-year term and will mature inJuly 2025 , with two six-month as-of-right extension options, subject to certain conditions and the payment of an extension fee. Our 2018 term loan facility has a five-year term and will mature inJuly 2026 . In addition, our 2018 term loan facility is prepayable without penalty for the entire term of the loan.
Borrowings under our senior unsecured credit facility bear interest, at our option, at floating rates equal to either:
• a Eurodollar rate equal to a periodic fixed rate equal to LIBOR plus, a
margin ranging from 1.20% to 1.80% for advances under our revolving
credit facility and a margin ranging from 1.20% to 1.70% for advances
under our 2018 term loan facility; or
• a fluctuating rate equal to the sum of (a) the highest of (x) Citibank,
N.A.'s base rate, (y) the federal funds effective rate plus 0.50% and
(z) the one-month Eurodollar rate plus 1.00% plus (b) a margin ranging
from 0.20% to 0.80% for advances under our revolving credit facility and
a margin ranging from 0.20% to 0.70% for advances under our 2018 term
loan facility, in each case with a margin based on our leverage ratio.
If our operating partnership achieves certain sustainability targets as defined in the second amended senior unsecured credit agreement, the applicable margin will decrease by 0.01%. In addition, onJuly 23, 2021 , we entered into a fourth amendment to the loan agreement governing our$100.0 million senior unsecured term loan facility (our "2016 term loan facility"). The fourth amendment amends certain provisions in the loan agreement governing our 2016 term loan facility to conform to certain changes made to corresponding provisions in our second amended senior unsecured credit agreement. Material Cash Commitments The following table shows our material cash commitments as ofDecember 31, 2021 : Payments due by period Total 2022 2023 2024 2025 2026 Thereafter
Mortgage principal and interest$ 291,564 $ 14,609 $ 30,260 $ 73,000 $ 13,359 $ 15,470 $ 144,866 Revolving credit facility principal and interest 18,407 1,097 1,097 1,097 15,116 - - Term loan facilities
principal and interest 285,075 8,590 8,590 108,590 5,958 153,347
-
Senior unsecured notes
payable
principal and interest 916,291 24,885 24,885 24,885 24,885 24,885 791,866
Development property
obligations (1) 5,963 1,022 666 4,275 - - -
Total $ 1,517,300 $ 50,203 $ 65,498 $ 211,847 $ 59,318 $ 193,702 $ 936,732 (1) Due to the long-term nature of certain construction and development
contracts included in this line, the amounts reported in the table represent
our estimate of the timing for the related obligations being paid.
Unconsolidated Real Estate Venture
We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.
As ofDecember 31, 2021 , we have investments in our unconsolidated real estate venture totaling$131.9 million . For a more complete description of our unconsolidated real estate venture, see Note 4 to the Consolidated Financial Statements. As ofDecember 31, 2021 , we had capital commitments to our unconsolidated real estate venture totaling$131.2 million . As ofDecember 31, 2021 , none of the properties owned by our unconsolidated real estate venture were encumbered by mortgage indebtedness. 45 --------------------------------------------------------------------------------
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 forU.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 Pay Date Dividend Q1 2021 April 29, 2021 May 14, 2021 May 26, 2021 0.260 Q2 2021 July 27, 2021 August 12, 2021 August 24, 2021 0.265 Q3 2021 October 28, 2021 November 12, 2021 November 24, 2021 0.265 Q4 2021 February 22, 2022 March 10, 2022 March 22, 2022 0.265 We use long-term investment partnership units in our operating partnership, which we refer to herein as LTIP units, as a form of performance-based award and service-based award for annual long-term incentive equity compensation. LTIP units are convertible into common units upon the satisfaction of certain conditions. Prior to the end of the performance period as set forth in the applicable LTIP unit award, holders of performance-based LTIP units are entitled to receive dividends per LTIP unit equal to 10% of the dividend paid per common unit of our operating partnership. 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 of our operating partnership. Holders of LTIP units that are not subject to the attainment of performance goals are entitled to receive dividends per LTIP unit equal to 100% of the dividend paid per common unit beginning on the grant date.
Cash Flow
Comparison of Cash Flow for the Years Ended
The following table sets forth a summary of cash flows for our company for the
years ended
For the years ended December 31,
2021 2020 Change
(Amounts in thousands)
Net cash provided by (used in):
Operating activities $ 118,344 $ 145,197 $ (26,853 )
Investing activities (363,042 ) (290,175 ) (72,867 )
Financing activities 250,172 144,098 106,074
Operating Activities
We generated $118.3 million and $145.2 million of cash from operating activities
during the years ended December 31, 2021 and 2020, respectively. Net cash
provided by operating activities for the year ended December 31, 2021 included
$116.4 million in net cash from rental activities net of expenses and $2.0
million related to the changes in tenant accounts receivables, prepaid expense
and other assets, deferred revenue associated with operating leases, principal
payments on operating lease obligations and accounts payable, accrued expenses
and other liabilities. Net cash provided by operating activities for the year
ended December 31, 2020 included $105.0 million in net cash from rental
activities net of expenses and $40.2 million related to the changes in tenant
accounts receivables, prepaid expense and other assets, deferred revenue
associated with operating leases, principal payments on operating lease
obligations and accounts payable, accrued expenses and other liabilities.
Investing Activities
We used$363.0 million and$290.2 million in cash for investing activities during the years endedDecember 31, 2021 and 2020, respectively. Net cash used in investing activities for the year endedDecember 31, 2021 primarily included$214.7 million in real estate acquisitions,$131.6 million in investment in unconsolidated real estate venture,$17.9 million in additions to operating properties and$6.2 million in additions to development properties, offset by$7.3 million in proceeds from sales. Net cash used in 46 -------------------------------------------------------------------------------- investing activities for the year endedDecember 31, 2020 primarily included$232.7 million in real estate acquisitions,$43.0 million in additions to development properties and$18.0 million in additions to operating properties, offset by$3.5 million in proceeds from sales.
Financing Activities
We generated$250.2 million and$144.1 million in cash from financing activities during the years endedDecember 31, 2021 and 2020, respectively. Net cash provided by financing activities for the year endedDecember 31, 2021 included$250.0 million in gross proceeds from the issuance of Notes and$175.9 million in gross proceeds from issuance of shares of our common stock, offset by$100.0 million in dividends,$64.8 million in net paydowns under the revolving credit facility,$5.3 million in deferred financing costs,$4.2 million in mortgage debt repayment, and$1.5 million in payment of deferred offering costs. Net cash provided by financing activities for the year endedDecember 31, 2020 included$162.0 million in gross proceeds from issuance of shares of our common stock and$79.3 million in net draws under the revolving credit facility, offset by$91.7 million in dividends,$3.6 million in mortgage debt repayment, and$1.9 million in payment of deferred offering costs.
Comparison of Cash Flow for the Years Ended
Information pertaining to fiscal year 2019 was included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 on page 42 under Part II, Item 7, "Management's Discussion and Analysis of Financial Position and Results of Operations", which was filed withSEC onFebruary 24, 2021 .
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 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
FFO is a supplemental measure of our performance. We present FFO calculated in accordance with the currentNational Association of Real Estate Investment Trusts , or Nareit, definition set forth in the Nareit FFO White Paper - Restatement 2018. FFO includes the REIT's share of FFO generated by unconsolidated affiliates. 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, amortization of above-/below-market
leases, amortization of deferred revenue (which results from landlord assets
funded by tenants), non-cash interest expense, non-cash compensation, other
non-cash items and the unconsolidated real estate venture's allocated share of
these adjustments. 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.
47
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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 years ended December 31, 2021 , 2020, and 2019 (dollars
in thousands):
For the years ended December 31,
2021 2020 2019
Net income $ 33,957 $ 13,528 $ 8,224
Depreciation of real estate assets 91,189 93,803 92,439
(Gain) loss on the sale of operating properties (1,307 ) 3,995 (6,245 )
Unconsolidated real estate venture allocated
share of above adjustments 362 - -
FFO 124,201 111,326 94,418
Adjustments to FFO:
Acquisition costs 1,939 2,087 1,738
Straight-line rent and other non-cash
adjustments (4,417 ) (3,432 ) (2,276 )
Amortization of above-/below-market leases (4,589 ) (5,894 ) (6,320 )
Amortization of deferred revenue (5,616 ) (3,528 ) (1,007 )
Non-cash interest expense 1,369 1,441 1,333
Non-cash compensation 5,050 4,093 4,909
Depreciation of non-real estate assets 77 - -
Unconsolidated real estate venture allocated
share of above adjustments (54 ) - -
FFO, as Adjusted $ 117,960 $ 106,093 $ 92,795 Factors That May Influence Future Results of Operations
Revenue
Our revenues primarily arise from the rental of space to tenants in our properties and tenant reimbursements, which include reimbursement for operating expenses, which are determined by the base year operating expenses and are subject to reimbursement in subsequent years based on changes in the Consumer Price Index forUrban Wage Earners and Clerical Workers , or urban CPI. Our revenue also includes amounts due from tenants for real estate taxes, projects and other reimbursements. Real estate taxes over the base year are reimbursed by the tenant. Substantially all of our rental income comes fromU.S. Government tenants. We expect that leases to agencies of theU.S. Government will continue to be our primary source of revenues for the foreseeable future. Due to such concentration, adverse events or conditions that affect theU.S. Government could have a more negative effect on our financial condition and operations than if our tenant base was more diverse. However, positive or negative changes in conditions in local markets, such as changes in economic or other conditions, employment rates, local tax and budget conditions, recession, competition for real property investments in these markets, uncertainty about the future and other factors are significantly less likely to impact our overall performance.
Operating Expenses
Our operating expenses generally consist of repairs and maintenance, utilities, roads and grounds, property management fees, insurance, janitorial and other operating expenses. Factors that may impact our ability to control these operating expenses include increases in utilities, increases in third party management expenses, increases in insurance premiums, increases in repair and maintenance costs and expenses related to inclement weather. Additionally, the cost of compliance with zoning and building codes as well as local, state and federal tax laws may impact our expenses. As a public company our annual general and administrative expenses are meaningfully higher due to legal, insurance, accounting, audit and other expenses related to corporate governance,SEC reporting, other compliance matters and the costs of operating as a public company. Increases in costs from any of the foregoing factors may adversely affect our future results and cash flows. Circumstances such as declines in market rental rates or increased competition may cause revenues to decrease, although the expenses of owning and operating a property will not necessarily decline. For certain of our properties, expenses may vary with occupancy, while costs arising from our property investments, interest expense and general maintenance will not be materially reduced even if a property is not fully occupied. As a result, our future cash flow and results of operations may be adversely affected and losses could be incurred if revenues decrease in the future. 48 --------------------------------------------------------------------------------
Cost of Funds and Interest Rates
We expect future changes in interest rates will impact our overall performance. We manage and may continue to manage our market risk on variable rate debt by entering into interest rate swap agreements or similar instruments, subject to maintaining our qualification as a REIT forU.S. federal income tax purposes. Although we may seek to cost-effectively manage our exposure to future rate increases through such means, a portion of our overall debt may at various times float at then current rates.
Development Activities
As ofDecember 31, 2021 , we had one property under development. We intend to continue to engage in development and redevelopment activities with respect to our properties, including build-to-suit new developments and redevelopments for existingU.S. Government tenant agencies. These development activities may include some risks such as:
• the availability and timely receipt of zoning and other regulatory approvals;
• development costs exceeding expectations;
• cost overruns and untimely completion of construction (including risks
beyond our control, such as weather or labor conditions, or material
shortages);
• the inability to complete construction and leasing of a property onschedule, resulting in increased debt service expense and development and
redevelopment costs; and
• the availability and pricing of financing on favorable terms or at all.
Inflation Substantially all of our leases provide for operating expense escalation. We believe inflationary increases in expenses may be at least partially offset by the contractual expense escalations described above. We do not believe inflation has had a material impact on our historical financial position or results of operations. Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base these estimates, judgments, and assumptions on historical experience, current trends, and various other factors that we believe to be reasonable under the circumstances. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, which utilize these critical accounting estimates, can be found in Note 2, "Significant Accounting Policies," of our consolidated financial statements.
Real Estate Properties Acquired
When we acquire properties, we allocate the purchase price to numerous tangible and intangible components. Our process for determining the allocation to these components requires many estimates and assumptions, including the following: (1) determination of market land, rental, discount and capitalization rates; (2) estimation of leasing and tenant improvement costs associated with the remaining term of acquired leases; (3) assumptions used in determining the in-place lease and if-vacant value including the rental rates, period of time that it would take to lease vacant space and estimated tenant improvement and leasing costs; (4) renewal probabilities; and (5) allocation of the if-vacant value between land and building. A change in any of the above key assumptions can materially change not only the presentation of acquired properties in our consolidated financial statements but also our reported results of operations. We completed acquisitions of eight wholly owned properties for an aggregate purchase price of$287.6 million during the year endedDecember 31, 2021 . We completed acquisitions of nine wholly owned properties for an aggregate purchase price of$252.7 million during the year endedDecember 31, 2020 . These transactions were accounted for as asset acquisitions, and the purchase price of each was allocated based on the relative fair value of the asset acquired and liabilities assumed. 49 --------------------------------------------------------------------------------
Impairment of Long-Lived Assets
We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long-lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.
As of
Impairment of Unconsolidated Real Estate Venture
We account for our investment in the unconsolidated real estate venture under the equity method. Under the equity method of accounting, we initially recognize our investment at cost and subsequently adjust the carrying amount of the investment for our share of the earnings or losses, distributions received, and other-than-temporary impairments. Our unconsolidated real estate venture is evaluated for impairment when conditions exist that may indicate that the decrease in the carrying amount of our investment has occurred and is other than temporary. Triggering events or impairment indicators for our unconsolidated real estate venture include, recurring operating losses of an investee, absence of an ability to recover the carrying amount of the investee, the ability of an investee to sustain an earnings capacity and a carrying amount that exceeds the fair value of the investment. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of investment to its estimated fair value. As ofDecember 31, 2021 , the carrying amount of our investment in in our unconsolidated real estate venture was$131.8 million , or approximately 4.7% of our total assets. During the year endedDecember 31, 2021 , no other-than-temporary impairment related to our unconsolidated real estate venture was identified. We did not own an interest in the unconsolidated real estate venture as ofDecember 31, 2020 .
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