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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      To                     

Commission file number 001-36834

 

EASTERLY GOVERNMENT PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

 

47-2047728

(State of Incorporation)

 

(IRS Employer Identification No.)

 

 

 

2101 L Street NW, Suite 750, Washington, D.C.

 

20037

(Address of Principal Executive Offices)

 

(Zip Code)

(202) 595-9500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

¨

 

Accelerated Filer

¨

 

 

 

 

 

 

Non-Accelerated Filer

 

x  (Do not check if smaller reporting company)

 

Smaller Reporting Company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

At November 5, 2015, the registrant had 24,168,379 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

 


INDEX TO FINANCIAL STATEMENTS

 

 

Page

Part I: Financial Information

 

 

 

Item 1: Financial Statements:

 

Consolidated Financial Statements

 

 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

1

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)

2

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (unaudited)

3

 

 

Notes to the Consolidated Financial Statements

5

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk

33

 

 

Item 4: Controls and Procedures

33

 

 

Part II: Other Information

 

 

 

Item 1: Legal Proceedings

34

 

 

Item 1A: Risk Factors

34

 

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

Item 3: Defaults Upon Senior Securities

34

 

 

Item 4: Mine Safety Disclosures

34

 

 

Item 5: Other Information

34

 

 

Item 6: Exhibits

34

 

 

Signatures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Easterly Government Properties, Inc.

Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Real estate properties, net

 

$

668,034

 

 

$

 

Real estate investments, at fair value

 

 

 

 

 

267,683

 

Cash and cash equivalents

 

 

4,466

 

 

 

31,437

 

Restricted cash

 

 

1,810

 

 

 

 

Rents receivable

 

 

5,632

 

 

 

 

Accounts receivable

 

 

2,856

 

 

 

 

Deferred financing, net

 

 

2,856

 

 

 

 

Intangible assets, net

 

 

104,657

 

 

 

 

Prepaid expenses and other assets

 

 

2,869

 

 

 

1,385

 

Total assets

 

$

793,180

 

 

$

300,505

 

Liabilities

 

 

 

 

 

 

 

 

Revolving credit facility

 

 

50,167

 

 

 

 

Mortgage notes payable

 

 

68,756

 

 

 

 

Intangible liabilities, net

 

 

39,690

 

 

 

 

Accounts payable and accrued liabilities

 

 

6,982

 

 

 

3,321

 

Total liabilities

 

 

165,595

 

 

 

3,321

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.01, 200,000,000 and 100,000 shares authorized,

   24,168,379 and 1,000 shares issued and outstanding at September 30, 2015 and

   December 31, 2014, respectively

 

 

241

 

 

 

 

Additional paid-in capital

 

 

391,357

 

 

 

1

 

Retained (deficit)

 

 

(1,799

)

 

 

 

Cumulative dividends

 

 

(7,734

)

 

 

 

Total stockholders' equity

 

 

382,065

 

 

 

1

 

Members' capital

 

 

 

 

 

13,336

 

Non-controlling interest

 

 

 

 

 

283,847

 

Non-controlling interest in operating partnership

 

 

245,520

 

 

 

 

Total equity

 

 

627,585

 

 

 

297,184

 

Total liabilities and equity

 

$

793,180

 

 

$

300,505

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


Easterly Government Properties, Inc.

Consolidated Statements of Operations (unaudited)

(Amounts in thousands, except per share amounts)

 

 

 

For the three months ended September 30,

 

 

For the nine months ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

18,126

 

 

$

 

 

$

45,056

 

 

$

 

Tenant reimbursements

 

 

1,689

 

 

 

 

 

 

4,037

 

 

 

 

Other income

 

 

42

 

 

 

 

 

 

111

 

 

 

 

Income from real estate investments

 

 

 

 

 

1,859

 

 

 

 

 

 

4,601

 

Total revenues

 

 

19,857

 

 

 

1,859

 

 

 

49,204

 

 

 

4,601

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

3,838

 

 

 

 

 

 

9,126

 

 

 

 

Real estate taxes

 

 

1,980

 

 

 

 

 

 

4,694

 

 

 

 

Depreciation and amortization

 

 

9,344

 

 

 

 

 

 

23,395

 

 

 

 

Acquisition costs

 

 

235

 

 

 

 

 

 

1,870

 

 

 

 

Formation expenses

 

 

 

 

 

 

 

 

1,666

 

 

 

 

Corporate general and administrative

 

 

2,301

 

 

 

3,318

 

 

 

6,112

 

 

 

4,586

 

Fund general and administrative

 

 

 

 

 

154

 

 

 

75

 

 

 

714

 

Total expenses

 

 

17,698

 

 

 

3,472

 

 

 

46,938

 

 

 

5,300

 

Operating income

 

 

2,159

 

 

 

(1,613

)

 

 

2,266

 

 

 

(699

)

Other (expenses) / income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,341

)

 

 

 

 

 

(3,362

)

 

 

 

Net unrealized gain (loss) on investments

 

 

 

 

 

24,645

 

 

 

(5,122

)

 

 

71,865

 

Net income (loss)

 

 

818

 

 

 

23,032

 

 

 

(6,218

)

 

 

71,166

 

Non-controlling interest in predecessor

 

 

 

 

 

(26,341

)

 

 

 

 

 

(75,830

)

Non-controlling interest in operating partnership

 

 

(320

)

 

 

 

 

 

4,419

 

 

 

 

Net income (loss) available to Easterly Government

   Properties, Inc.

 

$

498

 

 

$

(3,309

)

 

$

(1,799

)

 

$

(4,664

)

Net  income (loss)  available to Easterly Government

   Properties, Inc. per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

 

 

 

 

$

(0.09

)

 

 

 

Diluted

 

$

0.02

 

 

 

 

 

$

(0.09

)

 

 

 

Weighted- average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,141,712

 

 

 

 

 

 

20,516,184

 

 

 

 

Diluted

 

 

25,216,716

 

 

 

 

 

 

20,516,184

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2


Easterly Government Properties, Inc.

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

 

 

For the nine months ended September 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,218

)

 

$

71,166

 

Adjustments to reconcile net income (loss) to net cash provided by (used in)

   operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

23,395

 

 

 

 

Straight line rent

 

 

(165

)

 

 

 

Amortization of above- / below-market leases

 

 

(3,359

)

 

 

 

Amortization of loan premium / discount

 

 

(59

)

 

 

 

Amortization of deferred financing costs

 

 

541

 

 

 

 

Purchase of investments

 

 

 

 

 

(30,316

)

Deposits for potential new investments

 

 

 

 

 

668

 

Contributions to investments

 

 

(257

)

 

 

(1,575

)

Distributions from investments

 

 

 

 

 

5,478

 

Net unrealized gain (loss) on investments

 

 

5,122

 

 

 

(71,865

)

Other

 

 

1,175

 

 

 

 

Net change in:

 

 

 

 

 

 

 

 

Rents receivable

 

 

(4,154

)

 

 

 

Accounts receivable

 

 

(268

)

 

 

 

Prepaid expenses and other assets

 

 

(639

)

 

 

234

 

Accounts payable and accrued liabilities

 

 

3,657

 

 

 

1,341

 

Net cash provided by (used in) operating activities

 

 

18,771

 

 

 

(24,869

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(52,425

)

 

 

 

Cash assumed in formation

 

 

6,187

 

 

 

 

Additions to real estate property

 

 

(256

)

 

 

 

Restricted cash

 

 

(172

)

 

 

 

Net cash (used in) investing activities

 

 

(46,666

)

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of deferred financing costs

 

 

(3,397

)

 

 

 

Issuance of common shares

 

 

193,545

 

 

 

 

Repurchase of initial shares

 

 

(1

)

 

 

 

Proceeds from private placement

 

 

75,638

 

 

 

 

Credit facility draws, net

 

 

50,167

 

 

 

 

Repayments of mortgage payable

 

 

(1,512

)

 

 

 

Debt payoff

 

 

(293,381

)

 

 

 

Dividends and distributions paid

 

 

(12,732

)

 

 

 

Contributions

 

 

 

 

 

65,645

 

Distributions

 

 

(5,441

)

 

 

(11,082

)

Payment of offering costs

 

 

(1,962

)

 

 

 

Net cash provided by financing activities

 

 

924

 

 

 

54,563

 

Net increase (decrease) in cash and cash equivalents

 

 

(26,971

)

 

 

29,694

 

Cash and cash equivalents, beginning of period

 

 

31,437

 

 

 

3,363

 

Cash and cash equivalents, end of period

 

$

4,466

 

 

$

33,057

 

 

3


Easterly Government Properties, Inc.

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

Supplemental disclosure of cash flow information is as follows (amounts in thousands):

 

 

 

For the nine months ended September 30,

 

 

 

2015

 

 

2014

 

Cash paid for interest

 

$

2,733

 

 

$

 

Supplemental disclosure of non - cash information

 

 

 

 

 

 

 

 

Additions to real estate property

 

$

41

 

 

$

 

Other

 

 

 

 

 

342

 

Easterly properties, debt and net assets contributed for shares and common units

 

 

260,687

 

 

 

 

Western Devcon properties and debt contributed for common units

 

 

86,397

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


Easterly Government Properties, Inc.

Notes to the Consolidated Financial Statements

1. Organization and Basis of Presentation

Easterly Government Properties, Inc. (which may be referred to in these financial statements as the “Company,” “we,” “us,” or “our”) is a Maryland corporation that intends to qualify as a real estate investment trust (a “REIT”) under the Internal Revenue Code (the “Code”) commencing with its taxable period ending on December 31, 2015. The operations of the Company are carried on primarily through Easterly Government Properties LP (the “Operating Partnership”) and the wholly owned subsidiaries of the Operating Partnership.

We are an internally managed REIT, focused primarily on the acquisition, development, and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate substantially all of our revenue by leasing our properties to such agencies through the U.S. General Services Administration (the “GSA”). Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.

As of September 30, 2015, we wholly owned 32 properties in the United States, including 29 properties that were leased primarily to U.S. Government tenant agencies and three properties that were entirely leased to private tenants, encompassing approximately 2.3 million square feet in the aggregate. We focus on acquiring, developing, and managing GSA-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the GSA to meet the needs and objectives of the tenant agency.

We were incorporated in Maryland as a corporation on October 9, 2014 and did not have any meaningful operations until the completion of the formation transactions and our initial public offering on February 11, 2015 (the “IPO”). On February 11, 2015, we completed an initial public offering of 13.8 million shares of our common stock at a price to the public of $15.00 per share, including 1.8 million shares sold in connection with the full exercise of the option to purchase additional shares granted to the underwriters, resulting in gross proceeds of $207.0 million. The aggregate net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses payable by the Company, was approximately $191.6 million. The Company contributed the net proceeds from the IPO to the Operating Partnership in exchange for common units representing limited partnership interests in the Operating Partnership (“common units”).

In connection with the IPO, we engaged in certain formation transactions (the “formation transactions”) pursuant to which the Operating Partnership acquired (i) 15 properties previously owned by the Easterly Funds (as defined below) in exchange for 3,308,000 shares of common stock and 8,635,714 common units (ii) 14 properties previously owned by Western Devcon, Inc., a private real estate company and a series of related entities beneficially owned by Michael P. Ibe (collectively, “Western Devcon”), in exchange for 5,759,819 common units and (iii) all of the ownership interests in the management entities (as defined below) in exchange for 1,135,406 common units.

Concurrent with the IPO, the Company sold an aggregate of 7,033,712 shares of its common stock to the Easterly Funds in a private placement at a price per share of $15.00 without payment of any underwriting fees, discounts or commissions.

Our predecessor (the “Predecessor”) means Easterly Partners, LLC and its consolidated subsidiaries, including (i) all entities or interests in U.S. Government Properties Income and Growth Fund L.P., U.S. Government Properties Income and Growth Fund REIT, Inc. and the related feeder and subsidiary entities (collectively, “Easterly Fund I,”) (ii) all entities or interests in U.S. Government Properties Income and Growth Fund II, LP, USGP II REIT LP, USGP II (Parallel) Fund, LP and their related feeders and subsidiary entities (collectively, “Easterly Fund II” and, together with Easterly Fund I, the “Easterly Funds”) and (iii) the entities that manage the Easterly Funds, (the “management entities”).

All of the Company’s assets and its operations are primarily conducted through the Operating Partnership. The Company is the sole general partner of the Operating Partnership. The Company owned 60.9% of the Operating Partnership’s common units at September 30, 2015 and the remaining 39.1% was owned by the Easterly Funds and certain members of management.

Principle of Combination and Consolidation

The accompanying consolidated financial statements are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company, including Easterly Government Properties TRS, LLC and Easterly Government Services, LLC, and the Operating Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.

Upon completion of the IPO and the related formation transactions, the Company succeeded to the operations of the Predecessor. Prior to the IPO, the Predecessor was under the control of Darrell W. Crate, the Chairman of our Board of Directors.

5


These financial statements reflect the consolidated equity ownership structure of the Company as if the IPO and formation transactions related to the Easterly Funds and management entities had been completed as of January 1, 2014. The formation transactions related to the Easterly Funds and the management entities were accounted for at carryover basis due to the existence of common control.

Prior to the IPO, the Easterly Funds, as controlled by the Predecessor, qualified as investment companies pursuant to ASC 946 Financial Services – Investment Companies and, as a result, the Predecessor’s consolidated financial statements accounted for the Easterly Funds using specialized investment company accounting based on fair value. Subsequent to the IPO, as the properties contributed to us from the Easterly Funds are no longer held by funds that qualify for investment company accounting, we made a shift, in accordance with GAAP, to account for the properties contributed by the Easterly Funds using historical cost accounting instead of investment company accounting, resulting in a significant change in the presentation of our consolidated financial statements following the formation transactions. The contribution of the Western Devcon properties in the formation transactions has been accounted for as a business combination using the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of such contribution.

Due to the timing of the IPO and the formation transactions, the Company’s financial condition as of December 31, 2014 reflects the financial condition of the Company and the Predecessor and the results of operations for the three and nine months ended September 30, 2014 reflect the financial condition and results of operations of the Predecessor. The Company’s financial condition as of September 30, 2015 and results of operations for the nine months ended September 30, 2015 reflect the financial condition and results of operations of the Predecessor combined with the Company for the period prior to February 11, 2015, and the Company’s consolidated results for the period from February 11, 2015 through September 30, 2015.

Interim Financial Information

The information in the Company’s combined consolidated financial statements for the three and nine months ended September 30, 2015 and 2014 is unaudited and at December 31, 2014 is audited. All significant inter-company balances and transactions have been eliminated in consolidation. The accompanying financial statements for the three and nine months ended September 30, 2015 and 2014 and at December 31, 2014 include adjustments based on management’s estimates (consisting of normal and recurring accruals), which the Company considers necessary for a fair presentation of the results for the periods. The financial information should be read in conjunction with the combined consolidated financial statements contained in the Company’s 2014 Annual Report on Form 10-K for the year ended December 31, 2014 and the notes thereto and the final prospectus relating to the IPO, dated February 5, 2015, both of which the Company filed with the Securities and Exchange Commission (the “SEC”). Operating results for the three and nine months ended September 30, 2015 and 2014 are not necessarily indicative of actual operating results for the entire year.

 

 

2. Summary of Significant Accounting Policies

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In light of the significant differences that exist between our basis of accounting subsequent to the IPO (historical cost accounting) and the pre-IPO basis of accounting (investment company accounting), we present the significant accounting policies for both periods below.

a) Significant Accounting Policies for the Company post-IPO

Real Estate Properties

Real estate properties comprise all tangible assets we hold for rent. Real property is recognized at cost less accumulated depreciation. Betterments, major renovations and certain costs directly related to the improvement of real properties are capitalized. Maintenance and repair expenses are charged to expense as incurred.

When we acquire properties, we allocate the purchase price to numerous tangible and intangible components. Our process for determining the allocation to these components requires many estimates and assumptions, including the following: (1) determination of market rental rates; (2) estimation of leasing and tenant improvement costs associated with the remaining term of acquired leases;

6


(3) assumptions used in determining the in-place lease and if-vacant value including the rental rates, period of time that it would take to lease vacant space and estimated tenant improvement and leasing costs; (4) renewal probabilities; and (5) allocation of the if-vacant value between land and building. A change in any of the above key assumptions can materially change not only the presentation of acquired properties in our consolidated financial statements but also our reported results of operations. The allocation to different components affects the following:

 

·

the amount of the purchase price allocated among different categories of assets and liabilities on our consolidated balance sheets; and the amount of costs assigned to individual properties in multiple property acquisitions;

 

·

where the amortization of the components appear over time in our consolidated statements of operations. Allocations to above- and below-market leases are amortized into rental revenue, whereas allocations to most of the other tangible and intangible assets are amortized into depreciation and amortization expense. As a REIT, this is important to us since much of the investment community evaluates our operating performance using non-GAAP measures such as funds from operations, the computation of which includes rental revenue but does not include depreciation and amortization expense; and

 

·

the timing over which the items are recognized as revenue or expense in our consolidated statements of operations. For example, for allocations to the as-if vacant value, the land portion is not depreciated and the building portion is depreciated over a longer period of time than the other components (generally 40 years). Allocations to above- and below-market leases and in-place lease value are amortized over significantly shorter timeframes, and if individual tenants’ leases are terminated early, any unamortized amounts remaining associated with those tenants are written off upon termination. These differences in timing can materially affect our reported results of operations.

Tenant improvements are capitalized in real property when we own the improvement. When we are required to provide improvements under the terms of a lease, we need to determine whether the improvements constitute landlord assets or tenant assets. If the improvements are considered landlord assets, we capitalize the cost of the improvements and recognize depreciation expense associated with such improvements over the shorter of the useful life of the assets or the term of the lease and recognize any payments from the tenant as rental revenue over the term of the lease. If the improvements are considered tenant assets, we defer the cost of improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease. Our determination of whether improvements are landlord assets or tenant assets also may affect when we commence revenue recognition in connection with a lease. In determining whether improvements constitute landlord or tenant assets, we consider numerous factors that may require subjective or complex judgments, including: whether the improvements are unique to the tenant or reusable by other tenants; whether the tenant is permitted to alter or remove the improvements without our consent or without compensating us for any lost fair value; whether the ownership of the improvements remains with us or remains with the tenant at the end of the lease term; and whether the economic substance of the lease terms is properly reflected.

Depreciation of an asset begins when it is available for use and is calculated using the straight-line method over the estimated useful lives. Each period, depreciation is charged to expense and credited to the related accumulated depreciation account. A used asset acquired is depreciated over its estimated remaining useful life, not to exceed the life of a new asset. Range of useful lives for depreciable assets are as follows:

 

Category

 

Term 

Buildings

 

40 years

Building improvements

 

5 - 40 years

Tenant improvements

 

Shorter of remaining life of the lease or useful life

Furniture and equipment

 

3 - 7 years

 

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.

Cash and Cash Equivalents

Cash and cash equivalents include all cash and liquid investments that mature three months or less from when they are purchased. Cash equivalents are reported at cost, which approximates fair value. We maintain our cash in bank accounts in amounts

7


that may exceed federally insured limits at times. We have not experienced any losses in these accounts and believe that we are not exposed to significant credit risk because our accounts are deposited with major financial institutions.

Restricted Cash

Restricted cash consists of amounts escrowed for future real estate taxes, insurance, capital expenditures and debt service, as required by certain of our mortgage debt agreements.

Deferred Financing Costs

Deferred financing fees include issuance costs related to borrowings and we amortize those costs over the terms of the related indebtedness. Any unamortized amounts upon early repayment of mortgage notes payable are written off in the period in which repayment occurs. Fully amortized deferred financing fees are removed from the books upon maturity or repayment of the underlying debt. As of September 30, 2015, we recognized $3.4 million in deferred financing costs associated with entering into a $400.0 million senior unsecured revolving credit facility upon completion of the IPO. Additionally, for the three and nine months ended September 30, 2015 we recognized $0.2 million and $0.5 million, respectively, in accumulated amortization associated with the credit facility.

Non-Controlling Interests

Non-controlling interests relate to the common units of the Operating Partnership not owned by the Company. Common units are owned by the limited partners who contributed properties and other assets to the Operating Partnership in exchange for common units. The Company contributed the net proceeds from the IPO to the Operating Partnership in exchange for common units. Fifteen months after the IPO, limited partners of the Operating Partnership, other than the Company, will have the right to require the Operating Partnership to redeem part or all of their common units for cash, based upon the value of an equivalent number of shares of the Company’s common stock at the time of the election to redeem, or, at the Company’s election, shares of the Company’s common stock on a one-for-one basis. Unitholders receive a distribution per unit equivalent to the dividend per share of the Company’s common stock. Pursuant to the consolidation accounting standard with respect to the accounting and reporting for non-controlling interest changes and changes in ownership interest of a subsidiary, changes in parent’s ownership interest when the parent retains controlling interest in the subsidiary should be accounted for as equity transactions. The carrying amount of the non-controlling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary, with the offset to equity attributable to the Company.

Revenue Recognition

Rental income includes base rents paid by each tenant in accordance with its lease agreement conditions. We recognize rental income on a straight-line basis over the lease term of the respective leases. For acquisitions of existing buildings, we recognize rental income from leases already in place coincident with the date of property closing. Lease incentives are recorded as a deferred asset and amortized as a reduction of revenue on a straight-line basis over the respective lease term. Tenant reimbursement income (scheduled rent increases based on increases in real estate taxes, operating expenses and utility usage) is recognized by us in the consolidated statements of operations when earned and when their amounts can be reasonably estimated. Above- and below-market leases are amortized into rental income over the terms of the respective leases.

Income Taxes

We intend to elect and to qualify as a REIT for U.S. federal income tax purposes commencing with the taxable year ending December 31, 2015. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net income that we distribute to our stockholders. To maintain our qualification as a REIT, we are required under the Code to distribute at least 90% of our REIT taxable income (without regard to the deduction for dividends paid and excluding net capital gains) to our stockholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate rates. Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property, and on taxable income that we do not distribute to our stockholders. In addition, we may provide services that are not customarily provided by a landlord, hold properties for sale and engage in other activities (such as a management business) through Taxable REIT Subsidiaries (“TRSs”) and the income of those subsidiaries will be subject to U.S. federal income tax at regular corporate rates. For the period ending September 30, 2015, we did not incur any material tax liability associated with any of the above.

We do not anticipate any potential expense related to uncertain tax positions as we closely monitor our REIT compliance, do not have any prohibited transactions related to property sales, and neither the states in which we operate nor our foreign investors subject us to withholding tax requirements.

8


Stock Based Compensation

Prior to the completion of the IPO, our Board of Directors adopted, and our sole stockholder approved, our 2015 Equity Incentive Plan, under which we may grant future cash and equity incentive awards to our executive officers, non-employee directors and eligible employees. See Note 6 (Equity) for further information. The shares issued to officers, employees, and non-employee directors vest over a period of time as determined by the Board of Directors at the date of grant. The Company recognizes compensation expense for non-vested shares granted to officers, employees and non-employee directors on a straight-line basis over the requisite service and/or performance period based upon the fair market value of the shares on the date of grant, as adjusted for forfeitures.

Earnings Per Share of Common Stock Amount

Basic earnings per share is calculated by dividing net income available to Easterly Government Properties Inc. by the weighted-average number of shares of common stock outstanding during the period, excluding the weighted average number of unvested restricted shares. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period plus other potentially dilutive securities such as stock grants or shares that would be issued in the event that common units of the Operating Partnership are redeemed for shares of common stock of the Company. Unvested restricted shares and LTIP units are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share.

Deferred Offering Costs

The Company capitalizes certain legal, accounting and other third party fees that are directly associated with in-process equity financings as other assets until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction to capital. Should the equity financing no longer be considered probable of being consummated, the deferred offering costs would be expensed immediately as a charge to corporate general and administrative expenses in the accompanying combined statement of operations.

Segments

The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. All revenue has been generated in the United States and all tangible assets are held in the United States.

Application of new accounting standards

In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805).  ASU 2015-16 addresses provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period. The guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, calculated as if the accounting had been completed as of the acquisition date and the amounts disclosed either on the face of the financial statements or the notes. This guidance is to be applied prospectively and is effective for fiscal years beginning after December 15, 2015. The Company is currently in the process of evaluating the impact the adoption of ASU 2015-16 will have on the Company’s financial statements.

In April 2015, FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The amortization of these costs will remain under the interest method and will continue to be reported as interest expense. The guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. We have not yet determined the impact, if any, that the adoption of this guidance will have on our consolidated financial statements. In August of 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Subtopic 835-30), which clarified the presentation of debt issuance costs related to credit facility arrangements, given the absence of authoritative guidance within ASU 2015-03. Under ASU 2015-15, debt issuance costs paid to third parties other than the lender related to credit facilities may be presented in the balance sheet as an asset, regardless of whether there are any outstanding borrowings on the credit facility. We have not yet determined the impact, if any, that the adoption of this guidance will have on our consolidated financial statements. 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The guidance modifies the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The guidance does not change the general order in which the consolidation models are applied. A reporting entity that holds an economic interest in, or is

9


otherwise involved with, another legal entity first determines if the variable interest entity model applies, and if so, whether it holds a controlling financial interest under that model. If the entity being evaluated for consolidation is not a variable interest entity, then the voting model should be applied to determine whether the entity should be consolidated by the reporting entity. Key changes to the guidance include, though are not limited to; (i.) limiting the extent to which related party interests are included in the other economic interest criterion to the decision maker’s effective interest holding, (ii.) requiring limited partners of a limited partnership, or the members of a limited liability company that is similar to a limited partnership, to have, at minimum, kick-out or participating rights to demonstrate that the partnership is a voting entity, (iii.) changing the evaluation of whether the equity holders at risk lack decision making rights when decision making is outsourced and (iv.) changing how the economics test is performed. The guidance does not amend the existing disclosure requirements for variable interest entities or voting model entities. The guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. This standard will not have a significant impact as the Company does not have any joint ventures.

b) Significant Accounting Policies of the Company pre-IPO

Real Estate Investments

Real estate investments represent investments in real estate entities that own real estate assets and are stated at the fair value of the net equity interest in the real estate investments as discussed below. Subsequent changes in fair value are recorded as unrealized gains or losses. Upon the disposition of a real estate investment, realized gains and losses are determined by deducting the proceeds received by the Predecessor from the basis of the real estate investment; any previously unrealized gains and losses are reversed.

Distributions from real estate entities are recorded as dividend income when received to the extent distributed from the estimated taxable earnings and profits of the underlying investment vehicle and as a return of capital to the extent not in excess of that amount.

Under investment company accounting, the statements of operations reflect the change in fair value of the real estate investments of the Easterly Funds, prior to the IPO, whether realized or unrealized.

Fair Value of Investments

The fair value of the real estate investments is determined using a fair value hierarchy. The fair value hierarchy is based on the observability of inputs used to measure fair value and requires additional disclosure regarding the fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date (exit price). The fair value of an asset or a liability disregards transaction costs and assumes the asset or liability’s highest and best use. As the investments are in entities that invest in real estate, the estimated values are based on the underlying assets, liabilities, and cash flows of the related properties. The three levels of the fair value hierarchy are described below:

 

Level 1

 

Valuation is based upon quoted prices for identical assets or liabilities in an active market.

 

 

 

Level 2

 

Valuation is based upon observable inputs:

 

 

 

 

 

a)      Quoted prices for similar assets or liabilities in active markets,

 

 

 

 

 

b)      Quoted prices for identical or similar assets or liabilities in not active markets, or

 

 

 

 

 

c)      Model-based valuation techniques for which all significant assumptions are observable in the market.

 

 

 

Level 3

 

Valuation is based upon prices or valuation techniques that require assumptions not observable in the market which are significant to the overall fair value measurement. These unobservable inputs reflect the Predecessor’s own estimates about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Valuation techniques include the use of discounted cash flow models, and similar techniques.

 

Non-Controlling Interest

Consolidation addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated capital resulting from operations attributable to the parent and to the non-controlling interest, the changes in a parent’s ownership interest, and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated per ASC 810.

10


Prior to the IPO, all of the partners invested in the Easterly Funds represented a non-controlling interest. In addition, prior to the IPO, a third-party member had invested in Federal Properties, GP, LLC, an entity included within the Predecessor, which also represented a non-controlling interest.

 

 

3. Real Estate and Intangibles

Formation transactions

The contribution of the investments of the Easterly Funds to the Operating Partnership pursuant to the formation transactions is accounted for as transactions among entities under common control. As a result, the fair value of the real estate investments at the time of the formation transactions was deemed the initial cost. Such fair value was allocated to the underlying real estate properties, related intangible assets and liabilities and mortgage debt ascribed to the properties. Refer to Note 5 (Fair Value Measurements) for additional discussion on fair value. Prior to the IPO on February 11, 2015, the Easterly Funds qualified as investment companies pursuant to ASC 946 Financial Services – Investment Companies and, as a result, the Predecessor’s consolidated financial statements accounted for the Easterly Funds using investment company accounting based on fair value. Subsequent to the IPO, as the properties contributed to us from the Easterly Funds are no longer held by funds that qualify for investment company accounting, we made a shift, in accordance with GAAP to account for the properties contributed by the Easterly Funds using historical cost accounting instead of investment company accounting, resulting in a significant change in the presentation of our consolidated financial statements following the formation transactions.

As part of the formation transactions, Western Devcon entered into a contribution agreement with us and the Operating Partnership pursuant to which it contributed its 100% equity interest in each of 14 properties to the Operating Partnership upon completion of the IPO. In exchange for its contribution, Western Devcon received 5,759,819 common units in the Operating Partnership valued at the time of the IPO at $86.4 million. This contribution has been accounted for as a business combination using purchase accounting. The total estimated purchase price, equal to the aggregate value of the Operating Partnership’s common units plus the estimated fair value of debt assumed, was allocated to the net tangible assets and intangible assets based on their estimated fair values as of the completion of the acquisition of the Western Devcon properties.

11


As part of the formation transactions, we acquired the following properties, as set forth in the table below:

 

Property

 

Location

 

Property Type

 

Rentable Square Feet

 

Easterly Portfolio

 

 

 

 

 

 

 

 

IRS - Fresno

 

Fresno, CA

 

Office

 

 

180,481

 

PTO- Arlington

 

Arlington, VA

 

Office

 

 

189,871

 

FBI - San Antonio

 

San Antonio, TX

 

Office

 

 

148,584

 

FBI - Omaha

 

Omaha, NE

 

Office

 

 

112,196

 

ICE - Charleston

 

North Charleston, SC

 

Office

 

 

86,733

 

DOT - Lakewood

 

Lakewood, CO

 

Office

 

 

122,225

 

USFS II - Albuquerque

 

Albuquerque, TX

 

Office

 

 

98,720

 

USFS I - Albuquerque

 

Albuquerque, TX

 

Office

 

 

92,455

 

AOC - Del Rio

 

Del Rio, TX

 

Courthouse/Office

 

 

89,880

 

DEA - Dallas

 

Dallas, TX

 

Office

 

 

71,827

 

DEA - Albany

 

Albany, NY

 

Office

 

 

31,976

 

FBI - Little Rock

 

Little Rock, AR

 

Office

 

 

101,977

 

CBP - Sunburst

 

Sunburst, MT

 

Office

 

 

33,000

 

USCG - Martinsburg

 

Martinsburg, WV

 

Office

 

 

59,547

 

MEPCOM - Jacksonville

 

Jacksonville, FL

 

Office

 

 

30,000

 

 

 

 

 

Total

 

 

1,449,472

 

 

 

 

 

 

 

 

 

 

Western Devcon

 

 

 

 

 

 

 

 

CBP - Savannah

 

Savannah, GA

 

Laboratory

 

 

35,000

 

AOC - El Centro

 

El Centro, TX

 

Courthouse/Office

 

 

46,813

 

DEA - Vista

 

Vista, CA

 

Laboratory

 

 

54,119

 

DEA - Santa Ana

 

Santa Ana, CA

 

Office

 

 

39,905

 

CBP - Chula Vista

 

Chula Vista, CA

 

Office

 

 

59,397

 

DEA - North Highlands

 

Sacramento, CA

 

Office

 

 

37,975

 

DEA - Otay

 

San Diego, CA

 

Office

 

 

32,560

 

DEA - Riverside

 

Riverside, CA

 

Office

 

 

34,354

 

SSA - Mission Viejo

 

Mission Viejo, CA

 

Office

 

 

11,590

 

SSA - San Diego

 

San Diego, CA

 

Office

 

 

11,743

 

DEA - San Diego

 

San Diego, CA

 

Warehouse

 

 

16,100

 

2650 SW 145th Avenue - Parbel of Florida

 

Miramar, FL

 

Warehouse/Distribution

 

 

81,721

 

5998 Osceola Court - United Technologies

 

Midland, GA

 

Manufacturing Warehouse

 

 

105,641

 

501 East Hunter Street - Lummus Corporation

 

Lubbock, TX

 

Distribution

 

 

70,078

 

 

 

 

 

Total

 

 

636,996

 

 

The fair values of the assets acquired and liabilities assumed upon completion of the formation transactions are as follows (dollars in thousands):

 

 

 

Easterly Portfolio

 

 

Western Devcon, Inc.

 

 

Total

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

43,681

 

 

$

35,573

 

 

$

79,254

 

Building

 

 

411,472

 

 

 

107,424

 

 

 

518,896

 

Acquired tenant improvements

 

 

27,441

 

 

 

4,388

 

 

 

31,829

 

Total real estate

 

 

482,594

 

 

 

147,385

 

 

 

629,979

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

In-place leases

 

 

61,218

 

 

 

21,308

 

 

 

82,526

 

Acquired leasing commissions

 

 

11,257

 

 

 

4,350

 

 

 

15,607

 

Above-market leases

 

 

2,644

 

 

 

7,763

 

 

 

10,407

 

Total intangible assets

 

 

75,119

 

 

 

33,421

 

 

 

108,540

 

Intangible liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Below-market leases

 

 

(34,383

)

 

 

(2,322

)

 

 

(36,705

)

Total intangible liabilities

 

 

(34,383

)

 

 

(2,322

)

 

 

(36,705

)

Debt assumed

 

 

(271,622

)

 

 

(92,087

)

 

 

(363,709

)

Net current assets transferred

 

 

8,979

 

 

 

 

 

 

8,979

 

Net assets acquired

 

$

260,687

 

 

$

86,397

 

 

$

347,084

 

12


 

Post Formation Acquisition Activities

For the period from February 11, 2015 to September 30, 2015, we acquired three properties, DOE – Lakewood, AOC – Aberdeen, and ICE – Otay for an aggregate purchase price of $50.9 million. We allocated the purchase prices of these acquisitions based on the estimated fair values of the acquired assets and assumed liabilities as follows:

 

 

 

Total

 

Real estate

 

 

 

 

Land

 

$

4,776

 

Building

 

 

43,767

 

Acquired tenant improvements

 

 

759

 

Total real estate

 

 

49,302

 

Intangible assets

 

 

 

 

In-place leases

 

 

7,060

 

Acquired leasing commissions

 

 

1,736

 

Above-market leases

 

 

48

 

Total intangible assets

 

 

8,844

 

Intangible liabilities

 

 

 

 

Below-market leases

 

 

(7,221

)

Total intangible liabilities

 

 

(7,221

)

Purchase price

 

$

50,925

 

 

We did not assume any debt upon acquisition of the three properties.  The fair value of the assets acquired and liabilities assumed in 2015 are preliminary as we continue to finalize their acquisition date fair value determination.

The intangible assets and liabilities have an aggregate weighted average amortization period of 7.38 years as of September 30, 2015.

For the period of February 11, 2015 to September 30, 2015, we included $49.2 million of revenues and $10.4 million of net income in our consolidated statement of operations related to the properties contributed or acquired. During the nine months ended September 30, 2015, we incurred $1.9 million of acquisition-related costs associated with the contribution of Western Devcon assets and the acquisition of DOE – Lakewood, AOC – Aberdeen and ICE – Otay and $1.7 million in formation expenses, which include costs associated with the contribution of the investments of the Easterly Funds.

Pro Forma Financial Information

The unaudited pro forma financial information set forth below presents results for the nine months ended September 30, 2015 and 2014 as if the formation transactions and the acquisitions of DOE – Lakewood,  AOC – Aberdeen and ICE – Otay had occurred on January 1, 2014. The pro forma information is not necessarily indicative of the results that actually would have occurred nor does it intend to indicate future operating results (dollars in thousands):

 

 

 

For the nine months ended September 30,

 

Proforma (unaudited)

 

2015

 

 

2014

 

Total rental revenue

 

$

60,356

 

 

$

60,356

 

Net income (loss) (1)

 

 

3,760

 

 

 

224

 

 

 

(1)

The net income for the nine months ended September 30, 2015 excludes $3.5 million of property acquisition and formation costs incurred in the nine months ended September 30, 2015. Additionally, the net income for the nine months ended September 30, 2014 was adjusted to include these acquisition and formation costs.

 

 

13


Real estate and intangibles consisted of the following as of September 30, 2015 (dollars in thousands):

 

 

 

Total

 

Real estate

 

 

 

 

Land

 

$

84,030

 

Building

 

 

562,961

 

Acquired tenant improvements

 

 

32,588

 

Accumulated amortization

 

 

(11,545

)

Total Real Estate

 

$

668,034

 

Intangible assets

 

 

 

 

In-place leases

 

$

89,586

 

Acquired leasing commissions

 

 

17,343

 

Above market leases

 

 

10,454

 

Accumulated amortization

 

 

(12,726

)

Total Intangible assets

 

$

104,657

 

Intangible liabilities

 

 

 

 

Below market leases

 

$

(43,926

)

Accumulated amortization

 

 

4,236

 

Total Intangible liabilities

 

$

(39,690

)

 

The net projected amortization of total intangible assets and intangible liabilities as of September 30, 2015 are as follows (dollars in thousands):

 

 

 

Total

 

 

 

 

 

 

Intangible assets

 

 

 

 

2015

 

 

5,263

 

2016

 

 

20,020

 

2017

 

 

18,603

 

2018

 

 

15,199

 

2019

 

 

10,427

 

Thereafter

 

 

35,145

 

 

 

$

104,657

 

Intangible liabilities

 

 

 

 

2015

 

 

(1,733

)

2016

 

 

(6,812

)

2017

 

 

(6,614

)

2018

 

 

(6,249

)

2019

 

 

(4,504

)

Thereafter

 

 

(13,778

)

 

 

$

(39,690

)

 

 

4. Debt

At September 30, 2015, our borrowings consisted of the following (dollars in thousands):

 

 

 

 

Total

 

Senior unsecured revolving credit facility

 

$

50,167

 

Mortgage debt

 

 

68,756

 

Total

 

$

118,923

 

 

a. Senior Unsecured Revolving Credit Facility

Upon the completion of the IPO on February 11, 2015 we entered into a $400.0 million senior unsecured revolving credit facility with Raymond James Bank, N.A. and Royal Bank of Canada, as co-syndication agents and Citigroup Capital Markets Inc.,

14


Raymond James Bank, N.A. and Royal Bank of Canada, as joint lead arrangers and joint book running managers. This credit facility has an accordion feature that provides us with additional capacity, subject to the satisfaction of customary terms and conditions, of up to $250.0 million, for a total facility size of not more than $650.0 million. We intend to use the senior unsecured revolving credit facility to repay indebtedness, fund acquisitions, development and redevelopment opportunities, capital expenditures and the costs of securing new and renewal leases and provide working capital.

The Operating Partnership is the borrower under the senior unsecured revolving credit facility and we and certain of our subsidiaries that directly own certain of our properties are guarantors under the credit facility. The senior unsecured revolving credit facility will terminate in approximately four years. In addition, there will be two extension options for the senior unsecured revolving credit facility and each extension option will allow us to extend the senior unsecured revolving credit facility for an additional six months, in each case if certain conditions are satisfied.

Our senior unsecured revolving credit facility bears interest, at our option, either at:

 

·

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 LIBOR rate plus 1.00% plus (b) a margin ranging from 0.4% to 0.9%, or

 

·

a Eurodollar rate equal to a periodic fixed rate equal to LIBOR plus, a margin ranging from 1.4% to 1.9%, in each case with a margin based on our leverage ratio.

Our senior unsecured revolving credit facility also contains certain customary financial covenants, as follows: (i) the maximum ratio of consolidated total indebtedness to total asset value (each as defined in the agreement) may not exceed 60.0% on any date, provided that the maximum ratio may be increased to 65.0% for the two consecutive quarters following the date on which a material acquisition (as defined in the agreement) occurs, (ii) the maximum ratio of consolidated secured indebtedness (as defined in the agreement) to total asset value may not exceed 40.0% on any date, (iii) the maximum ratio of consolidated secured recourse indebtedness (as defined in the agreement) to total asset value may not exceed 15% on any date, (iv) the minimum consolidated tangible net worth (as defined in the agreement) may not, on any date, be less than the sum of an amount equal to 75.0% of our consolidated tangible net worth as of the closing date of the facility plus an amount equal to 75.0% of the aggregate net cash proceeds received by us from any offering of our capital stock after the closing date of the facility, (v) the minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges (each as defined in the agreement) may not be less than 1.50 to 1.00 on any date, (vi) the maximum ratio of consolidated unsecured indebtedness to unencumbered asset value (each as defined in the agreement) may not exceed 60% as of any date and (vii) the minimum ratio of adjusted consolidated net operating income from unencumbered assets (as defined in the agreement) to interest payable on unsecured debt (as determined in accordance with the agreement) shall not be less than 1.75 to 1.00 on any date. Additionally, under the revolving credit facility, our distributions may not exceed the greater of (i) 95.0% of our FFO or (ii) the amount required for us to maintain our status as a REIT and avoid the payment of federal or state income or excise tax.

Our senior unsecured revolving credit facility also includes customary limits on the percentage of our total asset value that may be invested in unimproved land, unconsolidated joint ventures, redevelopment and development assets (as defined in the agreement), loans, advances or extensions of credit and investments in mixed used assets and require that we obtain consent for mergers in which the company is not the surviving entity. These financial and restrictive covenants may limit the investments we may make and our ability to make distributions. As of September 30, 2015, we were in compliance with all financial and restrictive covenants under our senior unsecured revolving credit facility.

As of September 30, 2015, the interest rate payable on borrowings under our revolving credit facility was 1.61% and the weighted average annual interest rate for borrowings under our revolving credit facility was 1.60% and 1.59% for three and nine months ended September 30, 2015, respectively. As of September 30, 2015, we had $50.2 million outstanding and $349.8 million available under our revolving credit facility.

b. Letters of Credit

As of September 30, 2015, the Company had $0.2 million of standby letters of credit.  There were no draws against these letters of credit during the nine months ended September 30, 2015.

c. Mortgage Debt

As part of the formation transaction, we completed the repayment or defeasance of, and full satisfaction of our obligations with respect to, $293.4 million of secured nonrecourse mortgage loans.

The fair value of our mortgage debt was determined at the date of the formation transactions by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the date of the IPO. At September 30, 2015, the carrying amount approximated the estimated fair value of the Company’s debt instruments net of any

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amortization of the notes premium or discount. The table below provides a summary of our mortgage debt at September 30, 2015 (dollars in thousands):

 

Property

 

Fixed/Floating

 

Contractual

Interest

Rate

 

 

Effective

Interest

Rate

 

 

Maturity

Date

 

Principal

Balance

 

 

Premium/Discount

 

 

Carrying

Value

 

CBP - Savannah

 

Fixed

 

 

3.40

%

 

 

4.12

%

 

July 2033

 

$

15,745

 

 

$

(872

)

 

$

14,873

 

ICE - Charleston

 

Fixed

 

 

4.21

%

 

 

3.93

%

 

January 2027

 

 

22,253

 

 

 

415

 

 

 

22,668

 

MEPCOM - Jacksonville

 

Fixed

 

 

4.41

%

 

 

3.89

%

 

October 2025

 

 

12,690

 

 

 

335

 

 

 

13,025

 

USFS II - Albuquerque

 

Fixed