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Edited Transcript of DEA earnings conference call or presentation 25-Feb-20 7:00pm GMT

Q4 2019 Easterly Government Properties Inc Earnings Call

WASHINGTON Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Easterly Government Properties Inc earnings conference call or presentation Tuesday, February 25, 2020 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darrell W. Crate

Easterly Government Properties, Inc. - Chairman of the Board

* Lindsay Winterhalter

Easterly Government Properties, Inc. - VP, IR & Operations

* Meghan G. Baivier

Easterly Government Properties, Inc. - Executive VP, CFO & COO

* William C. Trimble

Easterly Government Properties, Inc. - President, CEO & Director

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Conference Call Participants

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* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* Jonathan Michael Petersen

Jefferies LLC, Research Division - SVP & Equity Analyst

* Michael Albert Carroll

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the Easterly Government Properties Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions)

Please note this conference is being recorded.

I will now turn the conference over to your host, Lindsay Winterhalter, Vice President, Investor Relations. Ms. Winterhalter, you may begin.

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Lindsay Winterhalter, Easterly Government Properties, Inc. - VP, IR & Operations [2]

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Good afternoon. Before the call begins, please note the use of forward-looking statements by the company on this conference call. Statements made on this call may include statements which are not historical facts and are considered forward looking. The company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Act Reform of 1995 (sic) [Private Securities Litigation Reform Act of 1995] and is making the statements for the purpose of complying with those safe harbor provisions. Although the company believes that its plans, intentions, expectations, strategies and prospects, as reflected in or suggested by those forward-looking statements, are reasonable, it can give no assurance that these plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in Item 1A, Risk Factors of its annual report on Form 10-K for the year ended December 31, 2019, to be filed with the SEC on February 25, 2020, and in its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Additionally, on this conference call, the company may refer to certain non-GAAP financial measures, such as funds from operations, funds from operations as adjusted and cash available for distribution. You can find a tabular reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information package on the Investor Relations page of the company's website at ir.easterlyreit.com.

I would now like to turn the conference call over to Darrell Crate, Chairman of Easterly Government Properties.

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Darrell W. Crate, Easterly Government Properties, Inc. - Chairman of the Board [3]

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Thank you, Lindsay. Good afternoon, everyone, and thank you for joining us for this fourth quarter conference call. Today, in addition to Lindsay, I'm also joined by Bill Trimble, the company's CEO; and Meghan Baivier, the company's CFO and COO.

We're pleased with our results for 2019. We delivered our first completed development project, won our third and have further positioned the company to continue to win accretive technical projects like these FDA laboratories. The acquisition execution was disciplined with material additions to our bull's-eye properties. We continue to build upon our definable edge in the United States Federal Government lease market, and most importantly, we were able to deliver an attractive return to our shareholders.

Just last month, we marked our fifth year as a public company with 71 properties, comprising 6.6 million square feet with 36 agencies. During our time as a public company, we've achieved scale in our operations, meaningfully diversified and maintained the average length of our leases. I'm proud of our team and the expertise they bring to our market each day. I'd also like to thank our Board for the guidance and wisdom they brought to our efforts.

As we look ahead to 2020, it's shaping up to be a very good year for the company. We appreciate the confidence that investors have shown in our business model through the strong appreciation in our stock price. The equity currency, combined with the very attractive rates we can obtain in the debt markets, gives us a very attractive cost of capital relative to our market. We've spent 10 years identifying high-quality properties and cultivating their owners. With our stock at a premium to NAV, we find ourselves with the ability to deploy capital in an attractive, disciplined and accretive way. We believe we may be entering a period which gives us the opportunity to deliver particularly accretive growth, and we are grateful for the confidence investors have shown in our capital deployment discipline.

With that, I'll turn the call over to Bill to give you insights into the 2019 results.

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William C. Trimble, Easterly Government Properties, Inc. - President, CEO & Director [4]

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Thanks, Darrell, and good afternoon. Thank you for joining us for our fourth quarter earnings call.

The acquisitions team closed out a successful 2019 with another 2 great additions to the company's growing portfolio in the fourth quarter of 2019. The first was the U.S. Citizenship and Immigration Services facility in Tustin, California. This 67,000-square-foot, LEED-certified facility is 100% leased to the GSA for the beneficial use of the USCIS. The facility recently underwent a sizable renovation-to-suit for USCIS whereby the tenant provided a substantial capital investment into this facility. The government recently signed a 15-year lease for the building which expires in 2034.

Our second acquisition of the fourth quarter was a new VA outpatient facility located in the Northeast U.S. This 56,000-square-foot facility is an expansion and relocation of an existing VA presence in the region. The facility is located in close proximity to the existing VA hospital campus and carries a new, noncancelable lease term of 15 years. This facility has been designed to achieve Green Globes Certification for New Construction and will serve as the new home for a multitude of services and programs, including primary care, mental health care, team vocational services and various national VA programs, including the National Center for PTSD Clinical Neurosciences Administration Division and the Pain, Research, Informatics, Medical, Comorbidities and Education Center.

Upon reflection, 2019 was an incredible year for the acquisitions team, and I congratulate each member of the team for growing the company's portfolio so materially. In 2019, we closed on $381 million in acquisitions, $228.8 million of which was predicated on our 2019 acquisition guidance of $200 million. We grew the company's portfolio by 23% through the acquisition of 8 properties in 2019 and the delivery of 1 build-to-suit development to the FDA while still maintaining 100% occupancy throughout the entire portfolio. We also increased our LEED-certified portfolio by 15% based on total square feet. These are all metrics to be proud of and ones that contributed to the overall success of our 2019.

I'm pleased to report that 2020 is off to a strong start. Subsequent to quarter-end, we began executing on our stated target of $200 million in acquisitions for the year 2020 by acquiring a 116,500-square-foot Defense Health Agency facility in Aurora, Colorado. DHA - Aurora is a build-to-suit property specifically constructed for the DHA that was originally built in 1998 and underwent a sizable renovation in 2018 upon the execution of a new 15-year lease. This facility has a portion of the DHA's health insurance program referred to as TRICARE. The TRICARE Program is responsible for providing insurance to approximately 9.5 million beneficiaries through private medical providers or the DHA's own network of 51 military hospitals, 424 military medical clinics and 248 dental facilities located worldwide.

Through these 2019 and early 2020 acquisitions and our delivered FDA laboratory development project in Alameda, California, we maintained the average age of the company's portfolio and the remaining average lease term at our properties even with time working against us. In short, we are constantly ensuring we keep our portfolio young and relevant to the missions of the federal government.

Turning to development. Our team, led by Mike Ibe, continues to make meaningful progress at our 2 active development sites, FDA - Lenexa and FDA - Atlanta. On the development pipeline, we continue to monitor potentially relevant projects that could provide us with an opportunity to deploy our capital accretively and expand the portfolio with a new mission-critical facility.

And finally, turning to lease renewals. We are pleased to report that we have signed a new lease with the GSA for the FBI field office located in Albany, New York. Executed well in advance of its current lease expiration, this new, 15-year, 10-year firm lease will go into effect no later than September of 2021, thus extending the FBI's tenancy in our facility through 2036. This early lease renewal gives us the opportunity to begin working with the government to determine the scope of work through the buildings TI package, which will allow the FBI to continue their effective operations from our facility for decades to come.

Much like last quarter's FBI Richmond renewal, this is the center of the bull's-eye property, and we were able to earn highly attractive re-leasing spreads on this location. This is another great example of how Easterly's bull's-eye acquisition strategy is a benefit when it comes time for lease renewal conversations with the Federal Government.

To summarize, Easterly has delivered on all fronts in 2019. We have grown the square footage of our portfolio for the accretive acquisition of bull's-eye properties. We have delivered a state-of-the-art laboratory for the FDA. We have maintained the overall age of our portfolio and its remaining lease term. And we have added growth and scale and, with that, diversity to our expanding portfolio. There is a lot to be proud of at Easterly, and I thank you again for your partnership and commitment to our investment thesis.

I will turn the call over to Meghan to discuss the company's quarterly and year-end financial results.

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Meghan G. Baivier, Easterly Government Properties, Inc. - Executive VP, CFO & COO [5]

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Thank you, Bill. Good afternoon, everyone. Easterly's unique portfolio and business strategy allowed us in the fourth quarter and for the year of 2019 to once again post strong earnings results.

As you saw in our earnings release, for the fourth quarter, net income per share on a fully diluted basis was $0.02. FFO per share on a fully diluted basis was $0.30. FFO, as adjusted, per share on a fully diluted basis was $0.31. And our cash available for distribution was $22.4 million.

For the year ended December 31, 2019, net income per share on a fully diluted basis was $0.10. FFO per share on a fully diluted basis was $1.20. FFO, as adjusted, per share on a fully diluted basis was $1.18. And our cash available for distribution was $81.3 million.

To summarize, for the year 2019, we grew FFO per share on a fully diluted basis by 2.5%; FFO, as adjusted, per share on a fully diluted basis by 15%; and CAD by 49%. These are impressive numbers. And as we enter an election year, we believe stable growth from DEA is now more than ever appreciated by our shareholders.

As of December 31, we owned 70 operating properties, comprising approximately 6.5 million square feet of commercial real estate with 2 additional projects totaling 222,000 square feet under development or in design. The weighted average age of our portfolio was 12.8 years. As Bill mentioned, it is through the acquisition of young, mission-critical bull's-eye properties and the delivery of our latest state-of-the-art FDA laboratory project in Alameda, California, that we were able to maintain the relatively young age of our portfolio.

Our portfolio has grown from 62 to 70 properties since this time last year, representing approximately 23% growth in the overall size of the company's portfolio based on square footage. Through added scale, the superior credit quality of our primary tenant and a more diversified stream of cash flows, the company is able to support its growing operations and generate earnings predictability and an attractive dividend yield.

Turning to the balance sheet. At quarter-end, the company had total indebtedness of $908 million with a fully available $450 million line of credit for future acquisitions and development-related expenses. As of December 31, Easterly's net debt-to-total enterprise value was 30.9% and its adjusted net debt-to-annualized quarterly pro forma EBITDA was 6.1x.

As previously mentioned, meaningful progress on our development projects will bring higher levels of reported leverage as we near project completion. Adjusted leverage, in part, neutralizes this leverage drag and at 6.1x demonstrates the strength of the balance sheet and available dry powder as we continue to pursue our target of $200 million of acquisitions in 2020.

In 2019, the company pursued a number of capital markets transactions, which have ensured that our balance sheet remains conservative, and the company continues to have capacity to pursue accretive acquisitions and development opportunities.

In September, the company closed on a private placement of $275 million of unregistered private senior unsecured notes. This transaction further extended the company's liabilities at an attractive fixed rate. All in, the weighted average maturity of these notes was 12.4 years, and the weighted average interest rate was 3.85%. The second entry into the debt private placement market was well received by the investor community and helps fortify strong relationships with our existing and new lenders.

Further, in December, the company implemented a new ATM program with $300 million in capacity for future equity raising opportunities. In the fourth quarter, the company issued 1.4 million shares of common stock, raising approximately $32 million in total gross proceeds at a weighted average price of $22.26 per share.

Turning to our earnings guidance. For the 12 months ending December 31, 2019, the company is maintaining its guidance for FFO per share on a fully diluted basis of $1.22 to $1.24. The midpoint of this guidance is based on the company completing $200 million of acquisitions and $40 million to $50 million of gross development-related investment in the year. The midpoint of this 2020 guidance represents approximately 2.5% growth from our 2019 results, in line with our long-term goal of delivering 2% to 3% annual earnings growth to investors.

As mentioned, we believe that long-term, steady growth, paired with a secure, sector-leading dividend is the recipe for consistently improving our cost of capital, and we strive to achieve this combination again in 2020.

As always, thank you for your time and partnership. With that, I will turn the call back to Omar.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Manny Korchman, Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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Meghan or maybe, Bill, if we think about your acquisition pipeline going out from here, how many large or larger portfolios are you looking at rather than one-off assets?

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William C. Trimble, Easterly Government Properties, Inc. - President, CEO & Director [3]

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We've got about $2 billion worth of portfolios. We're looking in various sizes, from quite large to sort of attractive sizes in the $50 million to $150 million. So yes, absolutely, we're taking a hard look at them and especially with the confidence we've seen with the market of late.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [4]

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And just what do you put sort of the success rate on? Is it seller willingness? Is it pricing? Is it quality, though if you're underwriting it, the quality is probably already taken care of?

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William C. Trimble, Easterly Government Properties, Inc. - President, CEO & Director [5]

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I think the quality of the underwriting, I've got to say, with our team is unmatched. I think it's always the quirky -- I don't mean they're quirky, but the nature of our sellers who we've cultivated relationships for almost a decade now. But I think many of them understand that this will be the best exit for the long term, whether it's for many generations to follow and their families through tax protection or maybe it's through saying that maybe this might be a high point in the market for them. Or it might be, in fact, that they're having to enter into renewal conversations with the federal government, and I think they'd rather have us do it than try to do that themselves. So a number of different catalysts. I think it's usually in the eye of the seller that we have to work on.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [6]

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And Bill, just remind me just because I don't remember off the top of my head, but how often have you bought properties that had sort of that shorter lease term remaining where the seller didn't want to or wasn't willing to enter the renegotiations and you guys saw the value creation for doing that?

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William C. Trimble, Easterly Government Properties, Inc. - President, CEO & Director [7]

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I'd say a handful, Manny. The one that sticks out most to me is DEA - Albany, the field office in New York. That's 1 that had 2 years left. And through our team, we're confident of the renewal and saw a 34% increase. And actually, no TIs and no brokerage fees when we turned it over. So we are happy to entertain short-term leases if we are confident of their renewal. We do find, though, that when they get within about 18 months or a year, often the owners will just choose at that point to do it themselves.

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Operator [8]

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(Operator Instructions) Our next question is from Michael Carroll, RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [9]

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I just wanted to touch on, I guess, Darrell's comments in the beginning of the prepared remarks saying that's the company's position to particularly drive accretive growth. Can you put some more color around that? Is that driven by the improved cost of capital? Or are you willing to pursue some of those portfolio transactions that you're talking about with Manny?

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Darrell W. Crate, Easterly Government Properties, Inc. - Chairman of the Board [10]

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Yes. No, I would say it is, of course, our improved cost of capital. But we have, as you know, cultivated portfolios and individuals for quite some time. And the stock price and the attractive interest rate environment basically says it's time to be buying buildings.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [11]

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Okay. So when those portfolio transactions, I guess, do come up, is it with an improved cost of capital that you have? Is it more likely to trade those because you can be a little bit more aggressive on the price? Or is it just still opportunistic waiting for those sellers to reach the conclusion that it's time to sell their portfolio?

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Darrell W. Crate, Easterly Government Properties, Inc. - Chairman of the Board [12]

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Yes. I mean -- and you more than anyone knows how disciplined we are in our underwriting and how we think about cost of capital, IRR and how we can think about growth. But in our market, I mean, again, just finding another 5 to 7 basis points in a cap rate can make all the difference.

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Michael Albert Carroll, RBC Capital Markets, Research Division - Analyst [13]

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Okay. Great. And then just finally for me. Can you talk a little bit about some of the GSA build-to-suit opportunities? I know you announced a few with the FDA labs over the past few years. I guess what's the timing of the Atlanta project? And is there any more on tap that we could underwrite coming in sometime this year?

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William C. Trimble, Easterly Government Properties, Inc. - President, CEO & Director [14]

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Yes. I mean I think that you're going to see Atlanta, which is, by the way, a really exciting project, and we're thrilled to be part of it, that's going to be delivering closer to the 2023 time frame. But there's also -- as I remind folks, there are 13 FDA laboratories, and there are a number of them in play. So I would expect that they'd be announcing a new project probably every year in that area. We are aware of some FBI opportunities out there, and Mike Ibe has been right on all of those as well. And so I think from a standpoint of what do we feel like we see, we are seeing more opportunities than we have in the last 5 years for development.

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Operator [15]

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Our next question is from Jon Petersen at Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - SVP & Equity Analyst [16]

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Oh, great. I also wanted to kind of dive in on Darrell's comments on driving accretive growth, more acquisition opportunities. I'm curious how you think about balancing your strong cost of capital, especially your strong stock price, between driving accretive growth and then also shoring up the balance sheet. So you kind of have a lower leverage profile maybe when the stock price isn't favorable. And I can't imagine you guys are going to issue equity to pay down debt, but maybe another way to think about it is, when you think about acquisitions going forward, how should we think about the breakdown in funding between how much equity you'll raise through the ATM and how much debt you'll issue?

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Darrell W. Crate, Easterly Government Properties, Inc. - Chairman of the Board [17]

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Yes. I mean there's a -- again, the market will present the assets that the market presents. And of course, we'll be vigilant about finding those assets that are in the bull's-eye that can be most accretive. There's no doubt that creating a little dry powder on the liability side of the balance sheet is helpful because we can't control the timing of when the best buildings become available, but we can certainly prepare ourselves to be ready.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - SVP & Equity Analyst [18]

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Okay. And then curious, any progress on working towards an investment-grade credit rating?

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Meghan G. Baivier, Easterly Government Properties, Inc. - Executive VP, CFO & COO [19]

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Every day, we really guide ourselves in the balance sheet with keeping an investment-grade profile. And so when the time is right and the scale is appropriate, we've got great receptivity in the private placement market, but we think that would be an easy transition.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - SVP & Equity Analyst [20]

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Okay. And then sorry, one more balance sheet question. Just curious on the duration of your debt outstanding right now. I'm kind of looking at the 30-year treasury trading at an all-time low. I think it's at 1.79% right now. Curious if you think about pushing out the duration at all on some of your debt? Or just how you think about how to manage that.

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Meghan G. Baivier, Easterly Government Properties, Inc. - Executive VP, CFO & COO [21]

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Yes. So we have historically tried to keep it well matched between assets and liabilities. It's something we do think about a lot and talk about, but it does get harder to believe that we're given a lot of credit for extending past kind of the 7-, 8-year ZIP Code where we are today. So we think that's appropriate for the profile of the portfolio. We may be opportunistic here and there, but we like the position today.

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Operator [22]

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We have reached the end of the question-and-answer session, and I will now turn the call back over to Darrell Crate for closing remarks.

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Darrell W. Crate, Easterly Government Properties, Inc. - Chairman of the Board [23]

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Great. Thank you, everybody, for joining the Easterly Government Properties Fourth Quarter 2019 Conference Call. We appreciate your time, and we look forward to keeping you posted on all of our work as we strive to build a portfolio of pristine assets backed by the full faith and credit of the U.S. government.

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Operator [24]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.