EASTERLY GOVERNMENT PROPERTIES, INC. 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", "potential", "project", "result", "seek", "should", "target", "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, 2020 and the
factors included under the heading "Risk Factors" in the Company's other
public filings;
• risks associated with our dependence on the
agencies for substantially all of our revenues, including credit risk and
risk that the
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;
• the continuing adverse impact of the novel coronavirus (COVID-19) on the
U.S. , regional and global economies and our financial condition and results of operations;
• 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.
20
-------------------------------------------------------------------------------- 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 endedDecember 31, 2020 , as may be supplemented or amended from time to time.
Overview
References to "we," "our," "us" and "the 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 theOperating 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 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 , or 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 ofJune 30, 2021 , we wholly owned 83 operating properties inthe United States , encompassing approximately 7.6 million leased square feet in the aggregate, including 81 operating properties that were leased primarily toU.S. Government tenant agencies, and two operating properties that were entirely leased to private tenants. As ofJune 30, 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.The Operating Partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of theOperating Partnership and owned approximately 88.2% of the aggregate limited partnership interests in theOperating Partnership , which we refer to herein as common units, as ofJune 30, 2021 . 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 forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2015 .
Impact of the COVID-19 Pandemic
The novel coronavirus, or COVID-19, pandemic has caused and continues to cause significant disruptions tothe United States , regional and global economies and has contributed to significant volatility and negative pressure in financial markets. We continue to carefully monitor the COVID-19 pandemic 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 COVID-19, including, but not limited to, implementing non-essential travel restrictions 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. The ability of our employees, including those working remotely, to securely access our IT networks and related systems has been a critical component of our ability to maintain business continuity during the COVID-19 pandemic. During this time, we have made additional investments in our IT networks and enhanced our existing cybersecurity plan, which utilizes standards established by reference to theNational Institute of Standards ("NIST") framework. As part of our ongoing cybersecurity plan, we conduct cybersecurity awareness training at least annually for all our employees, carry out quarterly control reviews, periodic penetration tests and annual investments in our security infrastructure, perform an assessment at least annually of our cybersecurity program against the NIST framework and conduct ongoing phishing simulations to raise awareness of critical security threats. The Audit Committee of our Board of Directors oversees our risk management processes related to cybersecurity, including discussing no less than annually our cybersecurity plan with management or our internal auditor. The operations of many of ourU.S. Government tenant agencies are deemed essential. We are working closely with our tenants to follow directions from the various federal government tenant agencies with respect to building operations within our portfolio, and have issued guidance for our vendors and building engineers grounded in applicable federal, state and local guidelines. Whenever we learn of a confirmed case of COVID-19 involving an individual known to have been in one of our buildings, we immediately take additional steps in collaboration with our tenants and vendors to disinfect and sanitize the affected spaces and all common areas in the building. 21 -------------------------------------------------------------------------------- To date, the impact of the COVID-19 pandemic on our business and financial condition has not been significant. Substantially all of our revenue continues to be generated through the receipt of rental payments fromU.S. Government tenant agencies, which accounted for 98.5% of our annualized lease income as ofJune 30, 2021 . We expect that leases to agencies of theU.S. Government will continue to be the primary source of our revenues for the foreseeable future. Notwithstanding the recent volatility in the financial markets, we also believe that our capital structure will continue to provide us with the resources, financial flexibility and the capacity to support the continued growth of our business. SinceJanuary 1, 2021 , we have issued an aggregate of 1,556,824 shares of our common stock, which were all issued in settlement of forward sales transactions, under ourDecember 2019 ATM Program (as described below). As ofJuly 23, 2021 , there are 3,999,697 shares underlying forward sale transactions that have not yet been settled. Subject to our right to elect net share settlement, we expect to physically settle the forward sales transactions betweenSeptember 2021 andJuly 2022 . As ofJune 30, 2021 , we also had$312.8 million available under our$450.0 million senior unsecured revolving credit facility. 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" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of the potential adverse impact of the COVID-19 pandemic on our business, results of operations and financial condition.
2021 Activity
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 with a lease expiration ofMay 2021 .
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 . Dispositions OnJune 4, 2021 , the Company 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 six months endedJune 30, 2021 .
Operating Properties
As ofJune 30, 2021 , our 83 operating properties were 99% leased with a weighted average annualized lease income per leased square foot of$33.72 and a weighted average age, based on the date of when the property was renovated or built-to-suit, of approximately 13.6 years. We calculate annualized lease income as annualized contractual base rent for the last month in a specified period, plus the annualized straight-line rent adjustments for the last month in such period and the annualized expense reimbursements earned by us for the last month in such period. 22
-------------------------------------------------------------------------------- Information about our leased operating properties as ofJune 30, 2021 is set forth in the table below: Annualized Percentage Lease of Total Income per Tenant Lease Leased Annualized Annualized Leased Property Expiration Square Lease Lease Square
Property Name Location Type (1) Year (2) Feet Income Income FootU.S. Government Leased VA - Loma Linda Loma Linda, OC 2036 327,614$ 16,388,079 6.4 %$ 50.02 CA Various GSA - Buffalo, NY O 2021 - 2025 266,668 8,526,101 3.3 % 31.97 Buffalo (3) JSC - Suffolk Suffolk, VA O 2028 403,737 8,181,271 3.2 % 20.26 IRS - Fresno Fresno, CA O 2033 180,481 6,975,024 2.7 % 38.65 FBI - Salt Lake Salt Lake O 2032 169,542 6,796,457 2.7 % 40.09 City, UT Various GSA - Des Plaines, O 2023 202,185 6,513,508 2.5 % 32.22 Chicago IL Various GSA - Portland, OR O 2022 - 2028 211,156 6,464,541 2.5 % 30.62 Portland (4) PTO - Arlington Arlington, VA O 2035 190,546 6,188,039 2.4 % 32.48 VA - San Jose San Jose, CA OC 2038 90,085 5,856,687 2.3 % 65.01 EPA - Lenexa Lenexa, KS O 2027 169,585 5,541,749 2.2 % 32.68 FBI - San San Antonio, O 2021 148,584 5,185,319 2.0 % 34.90 Antonio TX FEMA - Tracy Tracy, CA W 2038 210,373 4,610,303 1.8 % 21.91 FDA - Alameda Alameda, CA L 2039 69,624 4,561,039 1.8 % 65.51 FBI - Omaha Omaha, NE O 2024 112,196 4,424,959 1.7 % 39.44 TREAS - Parkersburg, O 2041 182,500 4,250,040 1.7 % 23.29 Parkersburg WV EPA - Kansas Kansas City, L 2023 71,979 4,226,457 1.6 % 58.72 City KS VA - South Bend Mishawaka, IN OC 2032 86,363 4,054,515 1.6 % 46.95 FBI / DEA - El El Paso, TX O 2028 203,269 4,046,258 1.6 % 19.91
Paso
ICE - North O 2022 / 2027 86,733 3,905,879 1.5 % 45.03
SC
FDA - Lenexa Lenexa, KS L 2040 59,690 3,889,133 1.5 % 65.16
USCIS - Lincoln Lincoln, NE O 2025 137,671 3,814,290 1.5 % 27.71
VA - Mobile Mobile, AL OC 2033 79,212 3,796,474 1.5 % 47.93
DOI - Billings Billings, MT O/W 2033 149,110 3,774,594 1.5 % 25.31
FBI - Birmingham Birmingham, O 2022 96,278 3,683,969 1.4 % 38.26
AL
FBI - Pittsburgh Pittsburgh, O 2027 100,054 3,672,014 1.4 % 36.70
PA
FBI - New New Orleans, O 2029 137,679 3,578,341 1.4 % 25.99
Orleans LA
DOT - Lakewood Lakewood, CO O 2024 122,225 3,489,124 1.4 % 28.55
FBI - Knoxville Knoxville, TN O 2025 99,130 3,459,600 1.3 % 34.90
VA - Chico Chico, CA OC 2034 51,647 3,221,867 1.3 % 62.38
USFS II - Albuquerque, O 2026 98,720 3,063,160 1.2 % 31.03
Albuquerque NM
FBI - Richmond Richmond, VA O 2041 96,607 3,047,997 1.2 % 31.55
OSHA - Sandy Sandy, UT L 2024 75,000 3,013,567 1.2 % 40.18
FDA - College College Park, L 2029 80,677 3,012,658 1.2 % 37.34
Park MD
USCIS - Tustin Tustin, CA O 2034 66,818 3,005,995 1.2 % 44.99
USFS I - Albuquerque, O 2026 92,455 2,999,662 1.2 % 32.44
Albuquerque NM
DEA - Vista Vista, CA L 2021 54,119 2,822,558 1.1 % 52.15
ICE - Albuquerque, O 2027 71,100 2,752,678 1.1 % 38.72
Albuquerque NM
JUD - Del Rio Del Rio, TX C/O 2024 89,880 2,718,710 1.1 % 30.25
VA - Orange (6) Orange, CT OC 2034 56,330 2,693,892 1.1 % 47.82
DEA - Pleasanton Pleasanton, L 2035 42,480 2,688,502 1.0 % 63.29
CA
JUD - El Centro El Centro, CA C/O 2034 43,345 2,663,767 1.0 % 61.46
FBI - Mobile Mobile, AL O 2029 76,112 2,639,933 1.0 % 34.68
SSA - Charleston Charleston, O 2024 110,000 2,604,011 1.0 % 23.67
WV
DEA - Sterling Sterling, VA L 2036 49,692 2,575,432 1.0 % 51.83
FBI - Albany Albany, NY O 2036 98,184 2,542,517 1.0 % 25.90
USAO - Louisville, O 2031 60,000 2,451,797 1.0 % 40.86
Louisville KY
TREAS - Birmingham, O 2029 83,676 2,449,143 1.0 % 29.27
Birmingham AL
DEA - Dallas Lab Dallas, TX L 2021 49,723 2,414,199 0.9 % 48.55
DHA - Aurora Aurora, CO O 2034 101,285 2,340,112 0.9 % 23.10
JUD - Charleston Charleston, C/O 2040 52,339 2,333,282 0.9 % 44.58
SC
DEA - Upper Upper L 2037 50,978 2,299,013 0.9 % 45.10
Marlboro Marlboro, MD
FBI - Little Little Rock, O 2021 102,377 2,271,725 0.9 % 22.19
Rock AR
MEPCOM - Jacksonville, O 2025 30,000 2,204,839 0.9 % 73.49
Jacksonville FL
DEA - Dallas Dallas, TX O 2041 71,827 2,175,689 0.8 % 30.29
CBP - Savannah Savannah, GA L 2033 35,000 2,171,087 0.8 % 62.03
23
--------------------------------------------------------------------------------
Annualized
Percentage Lease
of Total Income per
Tenant Lease Leased Annualized Annualized Leased
Property Expiration Square Lease Lease Square
Property Name Location Type (1) Year (2) Feet Income Income Foot
U.S. Government Leased (Cont.)
DOE - Lakewood Lakewood, CO O 2029 115,650 2,093,583 0.8 % 18.10
NWS - Kansas Kansas City, O 2033 94,378 2,077,157 0.8 % 22.01
City MO
JUD - Jackson Jackson, TN C/O 2023 73,397 2,051,666 0.8 % 27.95
DEA - Santa Ana Santa Ana, O 2024 39,905 1,896,619 0.7 % 47.53
CA
ICE - Otay San Diego, O 2022 / 2026 49,457 1,780,658 0.7 % 36.00
CA
NPS - Omaha Omaha, NE O 2024 62,772 1,766,700 0.7 % 28.14
VA - Golden Golden, CO O/W 2026 56,753 1,755,455 0.7 % 30.93
CBP - Sunburst Sunburst, MT O 2028 33,000 1,631,438 0.6 % 49.44
USCG - Martinsburg, O 2027 59,547 1,610,513 0.6 % 27.05
Martinsburg WV
DEA - Birmingham Birmingham, O 2021 35,616 1,540,180 0.6 % 43.24
(7) AL
JUD - Aberdeen Aberdeen, MS C/O 2025 46,979 1,505,573 0.6 % 32.05
GSA - Clarksburg Clarksburg, O 2024 63,750 1,473,177 0.6 % 23.11
WV
DEA - North Sacramento, O 2033 37,975 1,461,610 0.6 % 38.49
Highlands CA
USAO - Springfield, O 2038 43,600 1,408,624 0.5 % 32.31
Springfield IL
VA - Charleston North W 2040 97,718 1,383,687 0.5 % 14.16
Charleston,
SC
DEA - Albany Albany, NY O 2025 31,976 1,360,564 0.5 % 42.55
DEA - Riverside Riverside, O 2032 34,354 1,254,927 0.5 % 36.53
CA
SSA - Dallas Dallas, TX O 2035 27,200 977,296 0.4 % 35.93
HRSA - Baton Baton Rouge, O 2040 27,569 838,276 0.3 % 30.41
Rouge LA
ICE - Pittsburgh Pittsburgh, O 2023 / 2032 25,245 803,823 0.3 % 31.84
(8) PA
JUD - South Bend South Bend, C/O 2027 30,119 796,555 0.3 % 26.45
IN
VA - Baton Rouge Baton Rouge, OC 2024 30,000 793,356 0.3 % 26.45
LA
ICE - Louisville Louisville, O 2021 17,420 713,912 0.3 % 40.98
KY
DEA - San Diego San Diego, W 2032 16,100 542,753 0.2 % 33.71
CA
SSA - San Diego San Diego, O 2032 10,059 423,446 0.2 % 42.10
CA
DEA - Bakersfield, O 2038 9,800 389,559 0.2 % 39.75
Bakersfield CA
Subtotal 7,424,979 $ 255,362,663 99.6 % $ 34.39
Privately Leased
5998 Osceola
Court -
United
Technologies Midland, GA W/M 2023 105,641 543,818 0.2 % 5.15
501 East Hunter
Street -
Lummus
Corporation Lubbock, TX W/D 2028 70,078 410,157 0.2 % 5.85
Subtotal 175,719 $ 953,975 0.4 % $ 5.43
Total / Weighted
Average 7,600,698 $ 256,316,638 100.0 % $ 33.72 (1) OC=
D=Distribution; M=Manufacturing.
(2) The year of lease expiration does not include renewal options.
(3) Private tenants occupy 14,274 leased square feet.
(4) Private tenants occupy 42,025 leased square feet.
(5) A private tenant occupies 21,609 leased square feet.
(6) Previously named VA - Northeast.
(7) The ATF occupies 8,680 leased square feet.
(8) A private tenant occupies 3,854 leased 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 15.8
years as of June 30, 2021 ), the mission-critical focus of the properties subject
to the leases and the current level of operations at such properties.
24
--------------------------------------------------------------------------------
The following table sets forth a schedule of lease expirations for leases in
place as of June 30, 2021 :
Percentage Annualized
Percentage of of Total Lease Income
Number of Leased Square Portfolio Annualized Annualized per Leased
Leases Footage Leased Square Lease Income Lease Income Square Foot
Year of Lease Expiration (1) Expiring Expiring Footage Expiring Expiring Expiring Expiring
2021 9 515,447 6.8 % $ 18,408,692 7.2 % $ 35.71
2022 8 272,463 3.6 % 9,501,899 3.7 % 34.87
2023 12 500,849 6.6 % 14,836,378 5.8 % 29.62
2024 10 727,374 9.6 % 22,816,256 8.9 % 31.37
2025 13 470,957 6.2 % 16,164,287 6.3 % 34.32
2026 4 249,466 3.3 % 7,874,922 3.1 % 31.57
2027 6 495,529 6.5 % 17,626,097 6.9 % 35.57
2028 8 783,003 10.3 % 16,486,960 6.4 % 21.06
2029 5 493,794 6.5 % 13,773,658 5.4 % 27.89
2030 - - - - - -
Thereafter 37 3,091,816 40.6 % 118,827,489 46.3 % 38.43
Total / Weighted Average 112 7,600,698 100.0 % $ 256,316,638 100.0 % $ 33.72 (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
2021, 17 tenants occupying approximately 5.3% of our leased square feet and
contributing approximately 5.0% of our annualized lease income have
exercisable rights to terminate their lease before the stated term of their
respective lease expires.
Information about our development property as ofJune 30, 2021 is set forth in the table below: Estimated Leased Property Square Property Name Location Tenant Type (1) Lease Term Feet FDA - Atlanta Atlanta, GA Food and Drug Administration L 20-year 162,000 (1) L=Laboratory. Results of Operations
Comparison of Results of Operations for the three months ended
The financial information presented below summarizes our results of operations
for the three months ended
For the three months ended June 30,
2021 2020 Change
Revenues
Rental income $ 66,095 $ 59,550 $ 6,545
Tenant reimbursements 1,899 435 1,464
Other income 620 541 79
Total revenues 68,614 60,526 8,088
Expenses
Property operating 14,296 10,915 3,381
Real estate taxes 7,553 6,617 936
Depreciation and amortization 22,525 23,654 (1,129 )
Acquisition costs 483 668 (185 )
Corporate general and administrative 5,768 5,505 263
Total expenses 50,625 47,359 3,266
Other expense
Interest expense (9,265 ) (9,004 ) (261 )
Gain on sale of operating property 530 - 530
Net income $ 9,254 $ 4,163 $ 5,091
25
--------------------------------------------------------------------------------
Revenues
Total revenues increased
The
The
Expenses
Total expenses increased
The$3.4 million increase in property operating expenses is primarily attributable to the ten operating properties acquired and one development property placed in service, as well as a full period of operations from the two operating properties acquired during the three months endedJune 30, 2020 , and an increase in expenses associated with tenant project reimbursements, offset by two properties disposed of sinceJune 30, 2020 . The$0.9 million increase in real estate taxes is also primarily attributable to the ten operating properties acquired and one development property placed in service, as well as a full period of operations from the two operating properties acquired during the three months endedJune 30, 2020 , offset by two properties disposed of sinceJune 30, 2020 . The$1.1 million decrease in Depreciation and amortization is primarily related to the timing of intangible amortization and the two properties disposed of sinceJune 30, 2020 . This decrease is offset by an increase in depreciation attributable to the ten operating properties acquired and one development property placed in service sinceJune 30, 2020 , as well as a full period of operations from the two operating properties acquired during the three months endedJune 30, 2020 .
Gain on sale of operating property
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 three months endedJune 30, 2021 . 26
--------------------------------------------------------------------------------
Comparison of Results of Operations for the six months ended
The financial information presented below summarizes our results of operations
for the six months ended
For the six months ended June 30,
2021 2020 Change
Revenues
Rental income $ 130,274 $ 116,133 $ 14,141
Tenant reimbursements 2,219 1,587 632
Other income 1,122 1,024 98
Total revenues 133,615 118,744 14,871
Expenses
Property operating 26,390 22,173 4,217
Real estate taxes 14,839 13,179 1,660
Depreciation and amortization 44,850 47,210 (2,360 )
Acquisition costs 970 1,206 (236 )
Corporate general and administrative 11,576 10,988 588
Total expenses 98,625 94,756 3,869
Other income (expense)
Interest expense (18,386 ) (17,907 ) (479 )
Gain on sale of operating property 530 - 530
Net income $ 17,134 $ 6,081 $ 11,053
Revenues
Total revenues increased
The$14.1 million increase in Rental income is primarily attributable to an increase in revenues from the ten operating properties acquired and one development property placed in service, as well as a full period of operations from the four operating properties acquired during the six months endedJune 30, 2020 , offset by two properties disposed of sinceJune 30, 2020 .
The
Expenses
Total expenses increased
The$4.2 million increase in property operating expenses is primarily attributable to the ten operating properties acquired and one development property placed in service, as well as a full period of operations from the four operating properties acquired during the six months endedJune 30, 2020 , and an increase in expenses associated with tenant reimbursements, offset by two properties disposed of sinceJune 30, 2020 . The$1.7 million increase in real estate taxes is also primarily attributable to the ten operating properties acquired and one development property placed in service, as well as a full period of operations from the four operating properties acquired during the six months endedJune 30, 2020 , offset by two properties disposed of sinceJune 30, 2020 . The$2.4 million decrease in Depreciation and amortization is primarily related to the timing of intangible amortization and the two properties disposed of sinceJune 30, 2020 . This decrease is offset by an increase in depreciation attributable to the ten operating properties acquired and one development property placed in service sinceJune 30, 2020 , as well as a full period of operations from the four operating properties acquired during the six months endedJune 30, 2020 .
Additionally, Corporate general and administrative costs increased by
27
--------------------------------------------------------------------------------Gain on sale of operating property
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 six months endedJune 30, 2021 .
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. AtJune 30, 2021 , we had$8.1 million available in cash and cash equivalents and there was$312.8 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.
Equity
ATM Programs
On each of March 4, 2019 and December 20, 2019 , the Company 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 ,
Truist Securities, Inc. (f/k/a SunTrust Robinson Humphrey, Inc. ) and Wells Fargo
Securities, LLC pursuant to which it may issue and sell shares of its 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
on March 4, 2019 and December 20, 2019 are referred to as the "March 2019 ATM
Program" and "December 2019
28
-------------------------------------------------------------------------------- ATM Program" respectively. Under each of the 2019 ATM Programs, the Company 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 ofCitibank, N.A ., Bank of Montreal,Jefferies LLC, Raymond James & Associates, Inc. , Royal Bank of Canada andWells Fargo Bank, National Association and, under theDecember 2019 ATM Program only,Truist Bank , for the sale of shares of its common stock on a forward basis. OnJune 22, 2021 , the Company entered into separate equity distribution agreements with each ofCitigroup Global Markets Inc. ,BMO Capital Markets Corp. ,BTIG, LLC ,Capital One Securities, Inc. ,CIBC World Markets Corp. ,Jefferies LLC, Raymond James & Associates, Inc. ,RBC Capital Markets, LLC ,Truist Securities, Inc. andWells Fargo Securities, LLC pursuant to which it may issue and sell shares of its 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, the Company may also enter into one or more forward sale transactions under separate master forward sale confirmations and related supplemental confirmations with each ofCitigroup Global Markets Limited , Bank of Montreal, Canadian Imperial Bank of Commerce,Jefferies LLC, Raymond James & Associates, Inc. , Royal Bank of Canada,Truist Bank andWells Fargo Bank, National Association for the sale of shares of its common stock on a forward basis. The following table sets forth certain information with respect to issuances under each of the 2019 ATM Programs during the quarters endedMarch 31, 2021 andJune 30, 2021 (amounts in thousands, except share amounts): March 2019 ATM Program December 2019 ATM Program Number of Shares Number of Shares For the Three Months Ended: Issued(1) Net Proceeds(1) Issued(1) Net Proceeds(1) March 31, 2021 - $ - 1,556,824 $ 39,998 June 30, 2021 - - - - Total - $ - 1,556,824 $ 39,998
(1) Shares issued by us, which were all issued in settlement of forward sales
transactions. Additionally, as of
forward sales transactions under the 2019 ATM Programs for the sale of an
additional 3,499,697 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
transactions are physically settled in full utilizing a net weighted
average initial forward sales price of $23.96 per share, we expect to
receive net proceeds of approximately $83.8 million , after deductingoffering 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 quarter ended
We have used the net proceeds received from such sales for general corporate purposes. As ofJune 30, 2021 , we had approximately$300.0 million of gross sales of our common stock available under the 2021 ATM Program,$111.8 million of gross sales of our common stock available under theDecember 2019 ATM Program and no remaining availability under theMarch 2019 ATM Program.
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. 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. 29 --------------------------------------------------------------------------------
Debt
The following table sets forth certain information with respect to our
outstanding indebtedness as of
Principal
Outstanding Interest Current
Loan June 30, 2021 Rate (1) Maturity
Revolving credit facility:
Revolving credit facility (2) $ 137,250 L + 130bps June 2022 (3)
Total revolving credit facility 137,250
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 (852 )
financing fees
Total term loan facilities, net 249,148
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
Total notes payable 450,000
Less: Total unamortized deferred
financing fees (2,849 )
Total notes payable, net 447,151
Mortgage notes payable:
DEA - Pleasanton 15,700 L + 150bps (6) October 2023
VA - Golden 8,922 5.00% (6) April 2024
MEPCOM - Jacksonville 7,351 4.41% (6) October 2025
USFS II - Albuquerque 15,738 4.46% (6) July 2026
ICE - Charleston 15,494 4.21% (6) January 2027
VA - Loma Linda 127,500 3.59% (6) July 2027
CBP - Savannah 11,600 3.40% (6) July 2033
Total mortgage notes payable 202,305
Less: Total unamortized deferred (1,338 )
financing fees
Less: Total unamortized
premium/discount 82
Total mortgage notes payable, net 201,049
Total debt $ 1,034,598 (1) At
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 the
to herein as our revolving credit facility, the
unsecured term loan facility, which we refer to herein as our 2018 term
loan facility, and the
which we refer to herein as our 2016 term loan facility, is based on the
Company's consolidated leverage ratio, as defined 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.
30
--------------------------------------------------------------------------------
(4) Entered into two interest rate swaps with an effective date of
2017 with an aggregate notional value of
the interest rate at 2.67% annually, based on our consolidated leverage
ratio, as defined in our 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
fix the interest rate at 3.96% annually, based on our consolidated leverage
ratio, as defined in our 2018 term loan facility agreement.
(6) Effective interest rates are as follows: DEA - Pleasanton 1.80%, VA -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 ofJune 30, 2021 , we were in compliance with all applicable financial covenants. The chart below details our debt capital structure as ofJune 30, 2021 (dollar amounts in thousands): Debt Capital Structure June 30, 2021 Total principal outstanding$ 1,039,555 Weighted average maturity 5.8 years Weighted average interest rate 3.4 % % Variable debt 14.7 % % Fixed debt (1) 85.3 % % Secured debt 19.5 %
(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 , the Company and theOperating Partnership entered into a note purchase agreement pursuant to which theOperating Partnership will 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$150.0 million .The Operating Partnership has the option to increase the Series B tranches of the Notes up to a principal amount of$200.0 million . The Notes are expected to be issued on or aroundOctober 14, 2021 , subject to customary closing conditions. The Notes will be unconditionally guaranteed by the Company and various subsidiaries of theOperating Partnership (the "Subsidiary Guarantors").
Amended and Restated Senior Unsecured Credit Facility and Term Loan Facility
OnJuly 23, 2021 , we entered into a second amended and restated senior unsecured credit facility (our "second amended senior unsecured credit facility"). Our second amended senior unsecured credit facility increased the total borrowing capacity of our existing senior unsecured credit facility by$50.0 million for a total credit facility size of$650.0 million , and consists of two components: (i) a$450.0 million senior unsecured revolving credit facility (the "amended revolving credit facility"), and (ii) a$200.0 million senior unsecured term loan facility (the "amended term loan facility"), up to$50.0 million of which will be available for a 364-day delayed draw period. The amended 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 .The Operating Partnership is the borrower, and certain of our subsidiaries that directly own certain of our properties are guarantors under our second amended senior unsecured credit facility. The amended 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. The amended term loan facility has a five year term and will mature inJuly 2026 . In addition, the amended term loan facility is prepayable without penalty for the entire term of the loan.
Borrowings under our amended 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 the amended
revolving credit facility and a margin ranging from 1.20% to 1.70% for
advances under the amended 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
31
--------------------------------------------------------------------------------
advances under the amended revolving credit facility and a margin ranging
from 0.20% to 0.70% for advances under the amended term loan facility, in
each case with a margin based on our leverage ratio.
If theOperating Partnership achieves certain sustainability targets as defined in our second amended senior unsecured credit facility agreement, the applicable margin will decrease by 0.01%.
In addition, on
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 at the date of record is as follows:
Quarter Declaration Date Record Date Payment Date Dividend (1)
Q1 2021
(1) 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. After the end of the performance period, the number of LTIPunits, 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. 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.
Off-balance Sheet Arrangements
We had no material off-balance sheet arrangements as of
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
For the six months ended June 30,
2021 2020
Net cash (used in) provided by:
Operating activities $ 56,717 $ 75,594
Investing activities (103,802 ) (139,586 )
Financing activities 47,094 61,860
32
--------------------------------------------------------------------------------
Operating Activities The Company generated$56.7 million and$75.6 million of cash from operating activities during the six months endedJune 30, 2021 and 2020, respectively. Net cash provided by operating activities for the six months endedJune 30, 2021 includes$56.9 million in net cash from rental activities net of expenses offset by$0.2 million related to the change in tenant accounts receivable, prepaid expenses and other assets, deferred revenue associated with operating leases, and accounts payable, accrued expenses and other liabilities. Net cash provided by operating activities for the six months endedJune 30, 2020 includes a$50.7 million increase in net cash from rental activities net of expenses and$24.9 million related to the change in tenant accounts receivable, prepaid expenses and other assets, deferred revenue associated with operating leases, and accounts payable, accrued expenses and other liabilities.
Investing Activities
The Company used$103.8 million and$139.6 million in cash for investing activities during the six months endedJune 30, 2021 and 2020, respectively. Net cash used in investing activities for the six months endedJune 30, 2021 includes$93.0 million in real estate acquisitions,$9.6 million in additions to operating properties and$4.5 million in additions to development properties, offset by$3.3 million in proceeds from the sale of SSA -Mission Viejo during the quarter. Net cash used in investing activities for the six months endedJune 30, 2020 includes$101.4 million in real estate acquisitions,$29.3 million in additions to development properties and$8.8 million in additions to operating properties.
Financing Activities
The Company generated$47.1 million and$61.9 million in cash from financing activities during the six months endedJune 30, 2021 and 2020, respectively. Net cash generated by financing activities for the six months endedJune 30, 2021 includes$125.3 million in draws under our revolving credit facility and$40.4 million in gross proceeds from issuances of shares of our common stock, offset by$67.3 million in net pay downs under our revolving credit facility,$48.8 million in dividend payments,$1.9 million in mortgage notes payable repayment,$0.6 million in payment of offering costs, and$0.1 million in payment of deferred financing fees. Net cash generated by financing activities for the six months endedJune 30, 2020 includes$116.5 million in draws under our revolving credit facility and$109.3 million in gross proceeds from issuances of shares of our common stock, offset by$116.5 million in net pay downs under our revolving credit facility,$44.4 million in dividend payments,$1.7 million in mortgage notes payable repayment and$1.3 million in payment of offering costs.
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, 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. 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. 33 --------------------------------------------------------------------------------
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, depreciation of non-real estate assets 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. Certain prior year amounts have been updated to conform to the current year FFO, as Adjusted definition. 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
For the three months ended June 30 ,
For the six months ended
2021 2020 2021 2020
Net income $ 9,254 $ 4,163 $ 17,134 $ 6,081
Depreciation of real
estate assets 22,502 23,654 44,820 47,210
Gain on sale of operating
property (530 ) - (530 ) -
FFO 31,226 27,817 61,424 53,291
Adjustments to FFO:
Acquisition costs 483 668 970 1,206
Straight-line rent and
other non-cash
adjustments (1,324 ) (620 ) (2,737 ) (1,329 )
Amortization of
above-/below-market
leases (1,225 ) (1,527 ) (2,511 ) (3,048 )
Amortization of deferred
revenue (1,398 ) (697 ) (2,819 ) (1,394 )
Non-cash interest expense 364 360 727 718
Non-cash compensation 1,033 1,021 2,367 2,021
Depreciation of non-real
estate assets 23 - 30 -
FFO, as Adjusted $ 29,182 $ 27,022 $ 57,451 $ 51,465
34
--------------------------------------------------------------------------------
© Edgar Online, source
