Feb 24, 2021
Operator
Greetings and welcome to the Easterly Government Properties Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It is now my pleasure to introduce, Lindsay Winterhalter, Vice President, Investor Relations. Thank you.
You may begin. Lindsay Winterhalter: Good morning.
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 and is making the statement 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, they 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, 2020 to be filed with the SEC on February 24, 2021 and in its other SEC filings and risks and uncertainties related to the adverse impact of COVID-19 on the U.S. regional and global economies and the potential adverse impact on the financial condition and results of operation of the Company.
The Company assumes no obligations 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.
Darrell Crate: Thank you, Lindsay. Good morning, 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 are pleased with our results for 2020.
We exceeded our acquisition targets, furthered our development efforts, successfully negotiated our anticipated renewals all in the face of COVID-19 and its myriad of challenges. William Trimble: Thanks, Darrell, and good morning.
Thank you for joining us for our fourth quarter earnings call. I hope everyone on this call is doing well as we enter year two of this pandemic in the United States.
Not hindered by the impact of COVID-19, the acquisitions team was able to exceed guidance and close out another highly successful year with four great additions to the company's growing portfolio in the fourth quarter of 2020. Meghan Baivier: Thank you, Bill.
Good morning, everyone. It gives me great pleasure to post another strong quarter and close out a highly successful year here at Easterly.
As with prior quarters, COVID-19 had no material negative financial impact on the organization as Easterly received a 100% of rental income due from our tenants in the fourth quarter. As of December 31, we owned 79 operating properties, comprising approximately 7.3 million square feet of commercial real estate with one additional development project in design totaling approximately 162,000 square feet.
In 2020, we acquired nine properties and sold one or roughly 33,000 square foot facility in Otay, California. While immaterial to the greater portfolio, we are pleased with the value achieved on sale.
We chose to exit this border asset given the government's changing needs in this region and our focus on keeping our portfolio pristine. Operator: Thank you.
We will now be conducting a question-and-answer session. Our first question comes from the line of John Kim with BMO.
Please proceed with your questions. John Kim: Thanks.
Good morning. It looks like the number of leases and the rent expiring in 2023 has increased from the last quarter, and I'm wondering if this was due to some 2020 expirations that we're just extending into that year.
Meghan Baivier: Yes. The primary driver of that, John, is our GSA lease displaying that lease was extended due 2023.
John Kim: I think there were four leases in total, so I mean whether other extensions or was that part of an acquisition? Meghan Baivier: That was in part, sorry, that's the largest driver of it.
When you look at – let me come back and I'll get you the itemized list of the other 2023, but it's the leases at GSA Chicago, so the SSA and the USBA. John Kim: Bill, in your prepared remarks you characterized the pipeline is incredibly strong as far as your acquisition pipeline.
Can you compare the pipeline today versus perhaps a quarter ago? And since you acquired some recent assets, I think in the low 6% cap rate range, has that expanded your opportunities as far as acquisitions?
William Trimble: Yes. Sure.
Good morning. The reason I said it is that we are seeing a number of opportunities, particularly in the VA space, that are coming online and these are brand new 20-year opportunities.
So there is an increase over what we saw last quarter. So that's why I've mentioned that.
We're also looking at some smaller portfolios that are out there. And so I would say that with the pricing right now in these assets, I think the most important thing for our investors to know is that with our terrific cost of capital, thanks to Meghan and the shareholders of our company, we don't see a great deal of competition when we're looking for some of our pristine properties.
And so I think we have a better opportunity than we've ever had to go out and do accretive acquisitions. And I think it's also pointed, if you look at our most recent acquisitions with long lease terms, important missions, beautiful new buildings.
And so I think from a pipeline standpoint, we've never been more gratified at what we're seeing certainly for the next year. John Kim: And so why the conservatism on the guidance given it's implying a lower amount this year than last year?
William Trimble: Well, I think what you've always seen and I've tried to get this message across is that, there is a certain amount of off market opportunities we have every year and there are certain amount of marketed opportunities. And it really is not in our interest to go out and buy billion dollars of properties one year, pay an incredibly low cap rate because we'd be that elephant in the swimming pool driving the pricing out in front of us and setting a bar for all time, and we don't think is a good value.
So I think you've seen we've been able to hit our numbers, exceed them every year. I think we're the steady-eddy people out there.
When we see an opportunity, we grab it. Something gets marketed, it fits in our bulls-eye, we're going to buy.
So I think that's the important part. I'd rather give you the good news and give you that steady long-term growth rate and go out and flash around in a couple of quarters just to pump earnings or pump the size of our buildings.
So I think we're going to maintain our, I think, very prudent strategy going forward. John Kim: Okay.
Appreciate the color. Thank you.
Meghan Baivier: Hey, John, just to circle back. The fourth is our new acquisition is Courthouse in Jackson that is technically 2023.
It has an extension option. So I think of it as 2028.
John Kim: Got it. Operator: Thank you.
Our next question comes from the line of Emmanuel Korchman with Citi. Please proceed with your questions.
Emmanuel Korchman: Hey, everyone. Good morning.
Meghan Baivier: Good morning. William Trimble: Hey, Manny.
Emmanuel Korchman: Meghan, question for you. Why – but maybe this is just the timing, why did you choose to allow leverage to sort of ramp up rather than pulling on some of those equity forward to sort of better match from the large acquisitions either the large lines of acquisitions?
Meghan Baivier: Yes. I think, Manny, it keeps – at that low level, we still keep the same flexibility to put, if you will, that insurance on the balance sheet.
It doesn't really change the way we approach 2021 than when we expect to be able to stay well within like at the bottom end of our range. So it's just a small shift up at the end of the quarter, but doesn't really change the outlook for next year.
Emmanuel Korchman: Great. And then, Bill, going back to the acquisition market.
Maybe it would be helpful to the call is if you'd discuss sort of the values that things are transpiring out that you're not buying. So – and then also remind us what your target range is just so we have a better handle on what's going on in the market overall?
William Trimble: Absolutely, and good morning. So this year as I – if you look at sort of a tale two cities we sort of came out an average at 6.25% and we really have traded in a fairly narrow range compared to other real estate since we got into this business back in 2010.
So not a lot of dramatic move. I will say though that when you look at what we are – I think some of the more pristine buildings we bought this year were brand new in some cases with 15-year leases.
We were seeing pricing closer to 6 or slightly below 6 caps. But when you look back at as one of our most beautiful facilities, which is Loma Linda, the VA facility out there that was I think about a 5.82% cap when we bought that property and we didn't have the stock price we had today and it was accretive then.
So I think the bigger takeaway for us is that the market is not moving faster than the attractiveness of our cost of capital. And as long as they're accretive they fit in our bulls-eye and I mean reasonably accretive, not to some immeasurable amount.
I think you're going to see us go out and have a very strong year. Emmanuel Korchman: Maybe in a similar vein, if you think about the development environment you guys have had a few successes.
But I guess the question is, are there less developments happening and you're still going to your share of the pie or somebody else gaining market share on the development side when you end up being take out capital? William Trimble: Well, I think that you've – I'd say that we are seeing opportunities to continue to see opportunities, certainly the FDA laboratory space, so we've won all three.
We hope 10 buildings that will be announced over the next decade. But we were here, Manny, talking to you over the first couple of years, there weren’t any development opportunity.
So it's unique and it really to depends on the federal government to come out with an RFP, which many times are literally decades under consideration. Having said that, I think we do believe that we're going to see pretty much the same course that we've seen over the last three years with hopefully one development a year.
And to your point, we have successfully taken over a couple of other developments that other people were maybe a little over their skis and we did some wonderful accretive transactions there and delivered some amazing properties. So we're looking at every opportunity out there.
I can tell you Mike, Mark and Art are flying around the country and looking at things as we speak. So I'm confident we will continue to be able to deliver for development in the future.
Emmanuel Korchman: Thanks, Bill. Darrell Crate: And Manny, it’s Darrell.
One observation, right, as we're seeing all these stimulus packages come forward and ultimately an infrastructure build, we don't want to get ahead of ourselves. But we are moving into an environment over these next – these sort of two, three, four years, where government will be building and growing and getting larger.
And we certainly stand to be a beneficiary of that trend. Operator: Thank you.
Our next question comes from the line of Peter Abramowitz with Jeffries. Please proceed with your question.
Peter Abramowitz: Yes. Thank you.
Good morning. So you talked about the opportunity for VA assets in the acquisition market.
One thing you had talked about in the past a little bit at the beginning of the pandemic was some multi-type asset owners that you compete with potentially facing liquidity issues, financial distress. How has that kind of segment of the acquisition market shaping up?
Is that something that's still materializing? Or are you still… William Trimble: I think it is – yes, and good morning.
I think that absolutely is an opportunity for us and we're spending certainly all the time – plenty of time being with our friends in the brokerage community, our contacts in our lists making sure that people that have government properties and other more challenged properties and know that we are a – very, very attractive way to exit in a very crisp, quick and hopefully pleasant manner. Peter Abramowitz: Okay.
And has that materialized in a way that was any more or less than what you anticipated that… William Trimble: No, I think it was on track. I won't go into the particular building because I don't want to – as you would talk about the first under that scenarios.
But I think it's been pretty much in line. Peter Abramowitz: Got it.
And then just going under the hood of the 2021 FFO guidance, I know, you disclosed the investment activity, anything from either like a G&A perspective or on the expense side to make a note of? Either that's notable or that changed since you first gave guidance last quarter?
Meghan Baivier: Hey, Peter. No, I would say there's been no quarter-over-quarter change in expectation, there is no quarter-over-quarter change in guidance.
I think you can – obviously, we haven't been on planes visiting assets this year. So we're going to need to consider that in our G&A as you think about this year versus next year.
But we have always found operating leverage on that line as we've continued to grow in a way over time. And you can expect the same in 2021.
Peter Abramowitz: Got it. That's helpful.
Okay. That's it for me.
Thank you. Operator: Thank you.
Our next question comes from the line of Michael Lewis with Truist. Please proceed with your questions.
Michael Lewis: Great. Thank you.
I have two questions about the disposition. I realized it was small.
Maybe I'll just ask the first one first. Could you just talk a little about what happened there?
It looks like that the tenant didn't renew and then you sold. I saw you put a loss on the income statement.
Could you just talk about what happened there and then maybe a little bit about the pricing or the return of the IRR on that investment if you could? Meghan Baivier: Yes.
So maybe in the reverse order, Mike, we're really pleased with the value that we got on that asset. That was an asset that was contributed as part of the portfolio at IPO.
So it has allocated a value at that time. We're happy to be moving on and focused on maintaining this pristine portfolio and growing the rest of the portfolio.
Michael Lewis: Okay. The reason I asked the question is because I think when you – in your prepared remarks, when you talk about it, you mentioned in terms of priorities.
Change in government priorities is really one of the only significant risks that you guys seem to have. Is there anything else related to that?
In other words, the government is changing their priority that may impact other properties in your portfolio or anything you see on that topic? William Trimble: Well, I mean, I think if you look at government priorities, I'd say much bigger pictures are EPA, which we have some amazing assets there and they're going to be the recipient.
And I think of a heck of a lot of large – it has going forward over the next bunch of years and we're very excited about that. And I will say as an owner of a car that has not had a nick on it since 2010, getting one tiny scratch behind the left tire has finally relieved me to be able to drive that car faster, not worry about it.
I’ve set it up for many years. And it's always nice when one of your 10 smallest – it's one of your 10 smallest assets and one of your oldest.
And we moved on, we got a good pricing. So up we go and keeping this pristine or chugging down the highway.
Michael Lewis: Okay. I understand it was small.
I just wanted to make sure there wasn't anything related to that thing that could be bigger picture. And then just lastly for me.
This is a bigger picture question. The interest rates are still obviously very low, but the treasury has started to pick up.
I was just wondering – Darrell described this model of 2% to 3% growth, you've got a 4.5% deal. If we see interest rates continue to creep up, does that seems kind of your playbook at all, the way you look at the growth rate, the view of acquisitions versus development or do you think, rates would impact the asset values and require development yields to maybe you described that higher.
But any thoughts on that as the interest rate environment changes, does it change your playbook at all? William Trimble: Yes.
I mean, there's a couple of things. If interest rates are changing materially over the interim period, cap rates are also going to go up.
And so these continued to be sort of the most pristine assets that have again consistent cash flow over long periods of time. I think we also benefit from just on the margin.
I mean, close to 30% of our leases will be renewing in the next four years compared to a portfolio that has many, many 20-year leases and we'll see many more. So I think keeping up with inflation that portfolio is positioned in a nice way for that to happen.
And so we find ourselves in a place where also given our cost of capital and given what we're seeing in the market. And as we’re sort of broadcasting a level of a little elevated optimism as we look forward, the opportunity for us to accrete and grow the portfolio faster is well within our reach.
So we're emerging from COVID-19 with – I think, a very good relationship with the government, a favorable environment with the government, a capital environment that works for us in a competitive position relative to other buyers that is very strong. Michael Lewis: Great.
Thank you. Operator: Thank you.
Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your questions.
William Crow: Thanks. Good morning.
Let me just maybe more directly asking the question that was just posed. You have no known or expected move outs over the next couple of years, is that the right way to think about it?
William Trimble: Yes. Absolutely.
Darrell Crate: Hey, and just to say it again. This one building that we sold it was allocated a value – a tiny building allocated a value during a formation transaction and there is a bunch of tensions, push and pulls with regard to bringing parties together, taking a company public, we may have over allocated a bit because today you look at that building and this was fair value.
And so there is really even though there is some – it's running through the books in a certain way, there is nothing about that that feels surprising, different or unanticipated from our perspective. William Crow: Got it.
Okay. And then I apologize if I missed this earlier, but from the acquisition front, any prospective portfolio deals out there that we should consider?
William Trimble: Well, I mean they're out there, but I'm certainly not going to announce it on this phone call. But there are plenty of opportunities out there and you can rest assure that we're mining through as many as we can and are confident that we're going to end up with some wonderful opportunities over the next few years.
Obviously, most of what we report on is the ones in twos belt that we've been working on which provides the most pristine assets and we're also very excited about that so. Darrell Crate: Bill, as you know, I mean, from early days and I think this is a conversation you and I had even before we were public, we very much want to broadcast stability consistency.
Our guidance for this year is just right. Bill was alluding to our acquisitions can be lumpy.
So there is no way we want our deal team to feel pressure to buy a building that we wouldn't buy because we need to make a consensus estimate that's out there. With that all said, as you step back, I mean COVID is tough to get deals done.
And so as – and I'm really proud of the team and how that they were able to execute and exceed those expectations. As you know at the beginning of 2020, we throttled those expectations back a bit understanding the environment, but it's not hard to imagine that given the context of the Biden administration, given the context of some potential sort of pent-up demand as vaccines get out there and as the world opens up, it's going to be easier for us.
And so we're not going to be pigs about it, but we're going to continue to build a pristine portfolio, we are going to do it in a nice way, but it's going to – we're going to feel a little more wind at our back than we have in the past. William Crow: Understood.
We'll keep the cart firmly be behind the horse from a modeling perspective. Thanks for your time guys.
William Trimble: Thank you. Operator: Thank you.
Our next question comes from the line of Michael Carroll with RBC. Please proceed with your questions.
Michael Carroll: Yes. Thanks.
I want to talk a little bit on the acquisition activity, and I think Bill in your comments or maybe in one of the questions, you kind of said that there is some single asset acquisitions you're looking at in smaller portfolio deals. I mean, did I hear that correctly?
And if so, can you talk a little bit about those smaller portfolio deals that just two to three asset type portfolio? William Trimble: You’re absolutely right which you've heard of, but there are only 550 buildings out there.
So even though we are all friends on this phone call, I don't think I'm going to tell you whether I'm in negotiations to do, and who we're going to do them with, but I have seen more opportunities to do those negotiations and I have seen it all. Michael Carroll: Okay.
No, I guess those portfolio transaction, is that a smaller portfolio or larger portfolio that you don't want to talk about? I guess, just kind of is it...
William Trimble: I'm not going to tell you what we're going to buy. The next week as I'm sure we can drive that rate to unbelievable levels, but let's just say that we're confident that we're going to do our number of this year and just like last year, we're going to try to exceed it and it's going to be with great buildings and it's going to be any mix of bulls-eye portfolio mission critical facilities.
Michael Carroll: Okay. And then on the development side, and I know that you've won a number of at the FDA labs.
I mean what's the pace of those FDA labs? I mean there you expect another one that will come out RFP here shortly that you could potentially win or what's – what are their thinking behind us?
Meghan Baivier: We're comfortable that FDA Atlanta will be the next FDA lab delivered and they will – they can only handle for one or two of these at a time. And so there – we expect there to be a pipeline subsequent to that, but well we're going on Atlanta first and foremost.
Darrell Crate: I mean, taxpayers, you got to feel great about the government and how they are ruling this out. They have a terrific team.
We've enjoyed working with them on each of these projects. I mean, when you look ahead to 2030 – 2035, the FDA will have revamped all these labs that will happen.
So is that going to happen this year or next year, I don't know, but we are very well positioned for an opportunity that could exceed everybody's expectations for our development opportunity over the next 10 years. William Trimble: And I think it's only natural.
When you see the COVID was there, it was difficult for the government to get around to a lot of these facilities. Luckily, not likely, I mean Mike and his team has done a terrific job.
We're already in place in Atlanta. So we were able to do the planning and we already have the building before this happened.
So it didn't particularly slow us down. But having said that, now that hopefully these folks will be getting vaccines and travel will resume for the government, didn't slow our travel down to see these, but it did for them.
But they're going to get more things in order and hopefully we'll see some more activity there. Michael Carroll: Okay.
And then I know the FDA has been pretty active with these new builds, is there any other agency that you're looking at that's also been active, I mean, the VA similarly active out there right now? William Trimble: VA is very active and we think that FEMA is going to be active and there are a few facilities with the FBI that need to be replaced.
And so from that standpoint, we've probably seen more agencies out there looking to do some building that we have for quite some time. Michael Carroll: Okay.
Great. Thank you.
William Trimble: Thank you. Operator: Thank you.
There are no further questions at this time. I would like to turn the call back over to Darrell Crate for any closing comments.
Darrell Crate: Well, thank you very much for joining us for this fourth quarter conference call. We very much look forward to delivering strong results in 2021 and we appreciate your interest, focus and we really look forward to the year that is ahead.
Operator: Thank you for your participation. This does conclude today's teleconference.
You may disconnect your lines at this time. Have a great day.