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EX-32.1 - EX-32.1 - Easterly Government Properties, Inc.dea-ex321_176.htm
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EX-31.1 - EX-31.1 - Easterly Government Properties, Inc.dea-ex311_178.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2016

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 650, 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      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      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

 

  (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  

As of November 8, 2016, the registrant had 35,374,810 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, 2016 (unaudited) and December 31, 2015

1

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)

2

 

 

Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)

3

 

 

Notes to the Consolidated Financial Statements

5

 

 

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

15

 

 

   Item 3: Quantitative and Qualitative Disclosures About Market Risk

27

 

 

   Item 4: Controls and Procedures

28

 

 

Part II: Other Information

 

 

 

   Item 1: Legal Proceedings

29

 

 

   Item 1A: Risk Factors

29

 

 

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

29

 

 

   Item 3: Defaults Upon Senior Securities

29

 

 

   Item 4: Mine Safety Disclosures

29

 

 

   Item 5: Other Information

29

 

 

   Item 6: Exhibits

30

 

 

Signatures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Easterly Government Properties, Inc.

Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Real estate properties, net

 

$

880,962

 

 

$

772,007

 

Cash and cash equivalents

 

 

4,358

 

 

 

8,176

 

Restricted cash

 

 

1,432

 

 

 

1,736

 

Deposits on acquisitions

 

 

1,250

 

 

 

 

Rents receivable

 

 

7,464

 

 

 

6,347

 

Accounts receivable

 

 

4,136

 

 

 

2,920

 

Deferred financing, net

 

 

3,007

 

 

 

2,726

 

Intangible assets, net

 

 

116,100

 

 

 

116,585

 

Prepaid expenses and other assets

 

 

1,845

 

 

 

1,509

 

Total assets

 

$

1,020,554

 

 

$

912,006

 

Liabilities

 

 

 

 

 

 

 

 

Revolving credit facility

 

 

206,667

 

 

 

154,417

 

Mortgage notes payable, net

 

 

81,552

 

 

 

83,744

 

Intangible liabilities, net

 

 

41,894

 

 

 

44,605

 

Accounts payable and accrued liabilities

 

 

13,516

 

 

 

9,346

 

Total liabilities

 

 

343,629

 

 

 

292,112

 

Equity

 

 

 

 

 

 

 

 

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

   35,161,192 and 24,168,379 shares issued and outstanding at September 30, 2016 and

   December 31, 2015, respectively.

 

 

352

 

 

 

241

 

Additional paid-in capital

 

 

568,520

 

 

 

391,767

 

Retained (deficit)

 

 

575

 

 

 

(1,694

)

Cumulative dividends

 

 

(33,944

)

 

 

(13,051

)

Total stockholders' equity

 

 

535,503

 

 

 

377,263

 

Non-controlling interest in Operating Partnership

 

 

141,422

 

 

 

242,631

 

Total equity

 

 

676,925

 

 

 

619,894

 

Total liabilities and equity

 

$

1,020,554

 

 

$

912,006

 

 

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 share and per share amounts)

 

 

 

For the three months ended September 30,

 

 

For the nine months ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

24,493

 

 

$

18,126

 

 

$

68,520

 

 

$

45,056

 

Tenant reimbursements

 

 

2,385

 

 

 

1,689

 

 

 

7,016

 

 

 

4,037

 

Other income

 

 

97

 

 

 

42

 

 

 

331

 

 

 

111

 

Total revenues

 

 

26,975

 

 

 

19,857

 

 

 

75,867

 

 

 

49,204

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

5,308

 

 

 

3,838

 

 

 

14,726

 

 

 

9,126

 

Real estate taxes

 

 

2,533

 

 

 

1,980

 

 

 

7,233

 

 

 

4,694

 

Depreciation and amortization

 

 

12,237

 

 

 

9,344

 

 

 

34,174

 

 

 

23,395

 

Acquisition costs

 

 

660

 

 

 

235

 

 

 

1,339

 

 

 

1,870

 

Formation expenses

 

 

 

 

 

 

 

 

 

 

 

1,666

 

Corporate general and administrative

 

 

3,066

 

 

 

2,301

 

 

 

9,154

 

 

 

6,112

 

Fund general and administrative

 

 

 

 

 

 

 

 

 

 

 

75

 

Total expenses

 

 

23,804

 

 

 

17,698

 

 

 

66,626

 

 

 

46,938

 

Operating income

 

 

3,171

 

 

 

2,159

 

 

 

9,241

 

 

 

2,266

 

Other (expenses) / income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,043

)

 

 

(1,341

)

 

 

(5,967

)

 

 

(3,362

)

Net unrealized (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

(5,122

)

Net income (loss)

 

 

1,128

 

 

 

818

 

 

 

3,274

 

 

 

(6,218

)

Non-controlling interest in Operating Partnership

 

 

(233

)

 

 

(320

)

 

 

(1,005

)

 

 

4,419

 

Net income (loss) available to Easterly Government

   Properties, Inc.

 

$

895

 

 

$

498

 

 

$

2,269

 

 

$

(1,799

)

Net income (loss)  available to Easterly Government

   Properties, Inc. per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.02

 

 

$

0.02

 

 

$

0.08

 

 

$

(0.09

)

Diluted

 

$

0.02

 

 

$

0.02

 

 

$

0.07

 

 

$

(0.09

)

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34,967,482

 

 

 

24,141,712

 

 

 

28,886,697

 

 

 

20,516,184

 

Diluted

 

 

36,904,564

 

 

 

25,216,716

 

 

 

30,722,389

 

 

 

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,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,274

 

 

$

(6,218

)

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

   operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

34,174

 

 

 

23,395

 

Straight line rent

 

 

(17

)

 

 

(165

)

Amortization of above- / below-market leases

 

 

(5,225

)

 

 

(3,359

)

Amortization of unearned revenue

 

 

(77

)

 

 

 

Amortization of loan premium / discount

 

 

(64

)

 

 

(59

)

Amortization of deferred financing costs

 

 

649

 

 

 

541

 

Contributions to investments

 

 

 

 

 

(257

)

Net unrealized loss on investments

 

 

 

 

 

5,122

 

Non-cash compensation

 

 

2,164

 

 

 

1,175

 

Net change in:

 

 

 

 

 

 

 

 

Rents receivable

 

 

(940

)

 

 

(4,154

)

Accounts receivable

 

 

(1,216

)

 

 

(268

)

Prepaid expenses and other assets

 

 

(336

)

 

 

(639

)

Accounts payable and accrued liabilities

 

 

3,840

 

 

 

3,657

 

Net cash provided by operating activities

 

 

36,226

 

 

 

18,771

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(140,403

)

 

 

(52,425

)

Cash assumed in formation

 

 

 

 

 

6,187

 

Additions to operating properties

 

 

(664

)

 

 

(256

)

Additions to development properties

 

 

(145

)

 

 

 

Restricted cash

 

 

304

 

 

 

(172

)

Net cash (used in) investing activities

 

 

(140,908

)

 

 

(46,666

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of deferred financing costs

 

 

(848

)

 

 

(3,397

)

Issuance of shares of common stock

 

 

84,943

 

 

 

193,545

 

Repurchase of initial shares

 

 

 

 

 

(1

)

Proceeds from private placement

 

 

 

 

 

75,638

 

Credit facility draws, net

 

 

52,250

 

 

 

50,167

 

Repayments of mortgage payable

 

 

(2,131

)

 

 

(1,512

)

Debt payoff

 

 

 

 

 

(293,381

)

Dividends and distributions paid

 

 

(29,245

)

 

 

(12,732

)

Distributions

 

 

 

 

 

(5,441

)

Payment of offering costs

 

 

(4,105

)

 

 

(1,962

)

Net cash provided by financing activities

 

 

100,864

 

 

 

924

 

Net (decrease) in cash and cash equivalents

 

 

(3,818

)

 

 

(26,971

)

Cash and cash equivalents, beginning of period

 

 

8,176

 

 

 

31,437

 

Cash and cash equivalents, end of period

 

$

4,358

 

 

$

4,466

 

 

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

 

3

 


Easterly Government Properties, Inc.

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

Supplemental disclosure of cash flow information is as follows:

 

 

 

For the nine months ended September 30,

 

 

 

2016

 

 

2015

 

Cash paid for interest

 

$

5,531

 

 

$

2,733

 

Supplemental disclosure of non-cash information

 

 

 

 

 

 

 

 

Additions to operating properties

 

$

174

 

 

$

41

 

Additions to development properties

 

 

18

 

 

 

 

Financing costs accrued, not paid

 

 

78

 

 

 

 

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

 

Exchange of Common Units for Shares of Common Stock

 

 

 

 

 

 

 

 

Non-controlling interest in Operating Partnership

 

$

(96,578

)

 

$

 

Common stock

 

 

64

 

 

 

 

Additional paid-in capital

 

 

96,514

 

 

 

 

Total

 

$

 

 

$

 

 

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

The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2015, and related notes thereto, included in the Annual Report on Form 10-K of Easterly Government Properties, Inc. (which may be referred to in these financial statements as the “Company,” “we,” “us,” or “our”) for the year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission (the “ SEC”) on March 2, 2016.

The Company is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code (the “Code”) commencing with its taxable year ended 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, 2016, we wholly owned 41 operating properties in the United States, including 38 operating properties that were leased primarily to U.S. Government tenant agencies and three operating properties that were entirely leased to private tenants, encompassing approximately 3.0 million square feet in the aggregate. In addition, we wholly owned one property under development encompassing approximately 0.1 million square feet. 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 (as defined below) 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 Operating Partnership used the net proceeds received from the offering, private placement and a portion of the borrowings under a $400.0 million senior unsecured revolving credit facility (our “senior unsecured revolving credit facility”) to repay approximately $293.4 million in outstanding indebtedness including applicable repayment costs, defeasance costs, settlement of interest rate swap liabilities and other costs and fees associated with such repayments.

Our predecessor (the “Predecessor”) means Easterly Partners, LLC and its consolidated subsidiaries prior to the IPO and the formation transactions, 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 managed the Easterly Funds (the “management entities”).

5

 


Our Operating Partnership holds substantially all of our assets and conducts substantially all our business. The Company is the sole general partner of the Operating Partnership. The Company owned 79.1% of the Operating Partnership’s common units at September 30, 2016. We believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S federal income tax purposes commencing with our taxable year ended December 31, 2015.

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, 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 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.

These financial statements reflect the consolidated equity ownership structure of the Company as if the IPO and the 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, 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 December 31, 2015.

Basis of Presentation

The condensed consolidated financial statements included herein are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the consolidated financial position of the Company at September 30, 2016, and the consolidated results of operations and the consolidated cash flows for the three and nine months ended September 30, 2016 and 2015. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

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.

 

 

2. Summary of Significant Accounting Policies

The significant accounting policies used in the preparation of the Company’s condensed consolidated financial statements, both pre-IPO and post-IPO, are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Recently Adopted Accounting Pronouncements

On January 1, 2016, the Company adopted accounting guidance under Accounting Standards Codification (ASC) Topic 810, "Consolidation,” modifying the analysis it must perform to determine whether it should consolidate certain types of legal entities. The guidance does not amend the existing disclosure requirements for variable interest entities (“VIEs”) or voting interest model entities.  The guidance, however, modified the requirements to qualify under the voting interest model. Under the revised guidance, the

6

 


Operating Partnership will be a variable interest entity of the Company. As the Operating Partnership is already consolidated in the balance sheets of the Company, the identification of this entity as a variable interest entity has no impact on the consolidated financial statements of the Company.  There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption.  In addition, there were no other voting interest entities under prior existing guidance determined to be variable interest entities under the revised guidance.

On January 1, 2016, the Company adopted and retrospectively applied Accounting Standards Update (ASU) 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” As a result all debt issuance costs paid to third parties, other than the lender, incurred to issue mortgage debt are presented on the balance sheet as a direct deduction from the carrying value.  Debt issuance costs related to our senior unsecured revolving credit facility will continue to be presented as an asset on the balance sheet. Debt issuance costs related to our senior unsecured term loan facility (as defined below) will be presented as an asset on the balance sheet until a draw is made, at which time the debt issuance costs will be a direct deduction from the carrying value.

On January 1, 2016, the Company adopted ASU 2015 – 16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805), which addresses provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period. The implementation of this update did not have an impact in our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In August 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.  ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016, with early adoption permitted.  The Company is in the process of evaluating the impact of this new guidance.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in the same manner as operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share-based payment transactions. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016.  The Company is in the process of evaluating the impact of this new guidance.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which provides classification guidance for certain cash receipts and cash payments including payment of debt extinguishment costs, settlement of zero-coupon debt instruments, insurance claim payments and distributions from equity method investees.  The standard is effective on January 1, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.

 

 

7

 


3. Real Estate and Intangibles

During the nine months ended September 30, 2016, we acquired five operating properties, ICE – Albuquerque, NPS – Omaha, DEA – Birmingham, FBI – Birmingham and EPA – Kansas City for an aggregate purchase price of $129.4 million. We allocated the purchase price of these acquisitions based on the estimated fair values of the acquired assets and assumed liabilities as follows (dollars in thousands):

 

 

 

Total

 

Real estate

 

 

 

 

Land

 

$

6,576

 

Building

 

 

104,064

 

Acquired tenant improvements

 

 

4,897

 

Total real estate

 

 

115,537

 

Intangible assets

 

 

 

 

In-place leases

 

 

14,840

 

Acquired leasing commissions

 

 

2,599

 

Total intangible assets

 

 

17,439

 

Intangible liabilities

 

 

 

 

Below-market leases

 

 

(3,573

)

Total intangible liabilities

 

 

(3,573

)

Purchase price

 

$

129,403

 

 

We did not assume any debt upon acquisition of the five operating properties.  The fair value of the assets acquired and liabilities assumed in 2016 are preliminary as we continue to finalize their acquisition date fair value determination.

The intangible assets and liabilities of the acquired properties have an aggregate weighted average amortization period of 6.73 years as of September 30, 2016.

During the nine months ended September 30, 2016, we included $4.6 million of revenues and $1.5 million of net income in our consolidated statement of operations related to the operating properties acquired. During the nine months ended September 30, 2016, we incurred $1.3 million of acquisition-related costs associated with the property acquisitions.

Pro Forma Financial Information

The unaudited pro forma financial information set forth below presents results for the nine months ended September 30, 2016 and 2015 as if the formation transactions and the acquisitions of DOE – Lakewood, AOC – Aberdeen, ICE – Otay, DEA – Pleasanton, USCIS – Lincoln, DEA – Dallas Lab and FBI – Richmond had occurred on January 1, 2014 and the ICE – Albuquerque, NPS – Omaha, DEA – Birmingham, FBI – Birmingham and EPA – Kansas City acquisitions had occurred on January 1, 2015. 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)

 

2016

 

 

2015

 

Total rental revenue

 

$

81,197

 

 

$

79,447

 

Net income (loss) (1)

 

 

5,219

 

 

 

5,367

 

 

 

(1)

The net income for the nine months ended September 30, 2016 excludes $1.3 million of property acquisition costs. Additionally, the net income for the nine months ended September 30, 2015 was adjusted to include these acquisition costs and exclude the $3.5 million of property acquisition and formation costs incurred during the nine months ended September 30, 2015.

 

 

8

 


In addition to the above operating property acquisitions, we acquired one property, FDA – Alameda, in an asset acquisition during the nine months ended September 30, 2016.

Real estate and intangibles consisted of the following as of September 30, 2016 (dollars in thousands):

 

 

 

Total

 

Real estate properties, net

 

 

 

 

Land

 

$

109,912

 

Building

 

 

760,668

 

Acquired tenant improvements

 

 

39,762

 

Construction in progress

 

 

4,516

 

Accumulated amortization

 

 

(33,896

)

Total Real estate properties, net

 

$

880,962

 

Intangible assets, net

 

 

 

 

In-place leases

 

$

118,759

 

Acquired leasing commissions

 

 

22,835

 

Above market leases

 

 

10,631

 

Accumulated amortization

 

 

(36,125

)

Total Intangible assets, net

 

$

116,100

 

Intangible liabilities, net

 

 

 

 

Below market leases

 

$

(54,272

)

Accumulated amortization

 

 

12,378

 

Total Intangible liabilities, net

 

$

(41,894

)

 

 

4. Debt

At September 30, 2016, our borrowings consisted of the following (dollars in thousands):

 

 

 

Total

 

Revolving credit facility

 

$

206,667

 

Mortgage notes payable, net

 

 

81,552

 

Total

 

$

288,219

 

 

a. Senior Unsecured Revolving Credit Facility

We have a $400.0 million senior unsecured revolving credit facility with 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.

As of September 30, 2016, the interest rate payable on borrowings under our senior unsecured revolving credit facility was 1.93%. For the nine months ended September 30, 2016 the weighted average annual interest rate for borrowings under our senior unsecured revolving credit facility was 1.86%. As of September 30, 2016, we had $206.7 million outstanding and $193.3 million available under our senior unsecured revolving credit facility and recognized $0.6 million in accumulated amortization of deferred financing costs.

As of September 30, 2016, the carrying value of our senior unsecured revolving credit facility approximated fair value. In determining the fair value we considered the short term maturity and variable interest rate. We deem the fair value of our senior unsecured revolving credit facility as a Level 3 measurement.

9

 


b. Mortgage Notes Payable, Net

The table below provides a summary of our mortgage debt which is collateralized by the underlying real estate at September 30, 2016 (dollars in thousands):

 

Property

 

Fixed/

Floating

 

Contractual

Interest

Rate

 

 

Effective

Interest

Rate

 

 

Maturity

Date

 

Principal

Balance

 

 

Premium/

Discount

 

 

Deferred

Financing

 

 

Carrying

Value

 

CBP - Savannah

 

Fixed

 

 

3.40

%

 

 

4.12

%

 

July 2033

 

$

15,078

 

 

$

(795

)

 

$

 

 

$

14,283

 

ICE - Charleston

 

Fixed

 

 

4.21

%

 

 

3.93

%

 

January 2027

 

 

21,194

 

 

 

368

 

 

 

 

 

 

21,562

 

MEPCOM - Jacksonville

 

Fixed

 

 

4.41

%

 

 

3.89

%

 

October 2025

 

 

11,872

 

 

 

286

 

 

 

 

 

 

12,158

 

USFS II - Albuquerque

 

Fixed

 

 

4.46

%

 

 

3.92

%

 

July 2026

 

 

17,264

 

 

 

622

 

 

 

 

 

 

17,886

 

DEA - Pleasanton

 

Floating

 

LIBOR + 150bps

 

 

 

1.80

%

 

October 2023

 

 

15,700

 

 

 

 

 

 

(37

)

 

 

15,663

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

81,108

 

 

$

481

 

 

$

(37

)

 

$

81,552

 

 

At September 30, 2016, the fair value of our mortgage debt was determined by discounting future contractual principal and interest payments using prevailing market rates. We deem the fair value measurement of our debt instruments as a Level 3 measurement. At September 30, 2016 the fair value of our mortgage debt was $83.4 million.

c. Senior Unsecured Term Loan Facility

On September 29, 2016, we entered into a $100.0 million senior unsecured term loan facility (our “senior unsecured term loan facility”) with PNC Bank, National Association, as administrative agent, U.S. Bank National Association and SunTrust Bank, as syndication agents, PNC Capital Markets LLC, U.S. Bank National Association and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners.  

The Operating Partnership is the borrower under our senior unsecured term loan facility and we and certain of our subsidiaries that directly own certain of our properties are guarantors under the term loan facility. The senior unsecured term loan facility matures on September 29, 2023, has a 180-day delayed draw period, and is prepayable without penalty beginning in October 2018.  

Borrowings under our senior unsecured term loan facility will bear interest at floating rates equal to, at our option, either (1) a fluctuating rate equal to the sum of (a) the highest of (x) PNC Bank, National Association’s base rate, (y) the federal funds open rate plus 0.50% and (z) the daily Eurodollar rate plus 1.00% plus (b) a margin ranging from 0.7% to 1.35%, or (2) a Eurodollar rate equal to a periodic fixed rate equal to LIBOR plus, a margin ranging from 1.7% to 2.35%, in each case with a margin based on our leverage ratio. Based on our current leverage ratio, borrowings under our senior unsecured term loan facility will have an initial interest rate of LIBOR plus 170 basis points. We may prepay our senior unsecured term loan facility in whole or in part, subject to (i) customary costs, if any, of breaking LIBOR and, (ii) payment of a prepayment penalty equal to 2.0% of the principal balance being repaid during the first 12 months of our senior unsecured term loan facility and 1.0% of the principal balance being repaid during the following 12 months.

Our senior unsecured term loan facility also contains certain customary covenants, including but not limited to financial covenants that require us to maintain maximum ratios of consolidated total indebtedness, consolidated secured indebtedness and consolidated secured recourse indebtedness to total asset value, minimum consolidated tangible net worth and a minimum consolidated fixed charge ratio.

As of September 30, 2016 we have not drawn funds under our senior unsecured term loan facility.

 

10

 


 

5. Equity

The following table summarizes the changes in our stockholders’ equity for the nine months ended September 30, 2016 and 2015 (dollars in thousands):

 

 

 

Shares

 

 

Common

Stock

Par

Value

 

 

Additional

Paid-in

Capital

 

 

Retained

(Deficit)

 

 

Distributions in Excess of Earnings

 

 

Non-

controlling

Interest in

Operating

Partnership

 

 

Member

Capital/

(Deficit)

 

 

Non-

controlling

Interests

 

 

Total

Equity

 

Nine months ended September 30, 2016

 

Balance at December 31, 2015

 

 

24,168,379

 

 

$

241

 

 

$

391,767

 

 

$

(1,694

)

 

$

(13,051

)

 

$

242,631

 

 

$

 

 

$

 

 

$

619,894

 

Stock based compensation

 

 

 

 

 

 

 

 

 

221

 

 

 

 

 

 

 

 

 

1,943

 

 

 

 

 

 

 

 

 

2,164

 

Dividends and distributions paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,893

)

 

 

(8,352

)

 

 

 

 

 

 

 

 

(29,245

)

Grant of unvested restricted stock

 

 

16,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of common units for

   shares of common stock

 

 

6,257,640

 

 

 

64

 

 

 

96,514

 

 

 

 

 

 

 

 

 

(96,578

)

 

 

 

 

 

 

 

 

 

Public offering

 

 

4,719,045

 

 

 

47

 

 

 

80,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80,838

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

2,269

 

 

 

 

 

 

1,005

 

 

 

 

 

 

 

 

 

3,274

 

Allocation of non-controlling

   interest in Operating

   Partnership

 

 

 

 

 

 

 

 

 

(773

)

 

 

 

 

 

 

 

 

773

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2016

 

 

35,161,192

 

 

$

352

 

 

$

568,520

 

 

$

575

 

 

$

(33,944

)

 

$

141,422

 

 

$

 

 

$

 

 

$

676,925

 

Nine months ended September 30, 2015

 

Balance at December 31, 2014

 

 

1,000

 

 

$

 

 

$

1

 

 

$

 

 

$

 

 

$

 

 

$

13,336

 

 

$

283,847

 

 

$

297,184

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

(5,432

)

 

 

(5,441

)

Exchange of members’ capital

   and non-controlling interests

   for common units and shares of

   common stock

 

 

3,308,000

 

 

 

33

 

 

 

67,312

 

 

 

 

 

 

 

 

 

194,530

 

 

 

(12,738

)

 

 

(249,137

)

 

 

 

Public offering

 

 

13,800,000

 

 

 

138

 

 

 

191,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

191,583

 

Proceeds of private placement

 

 

7,033,712

 

 

 

70

 

 

 

105,435

 

 

 

 

 

 

 

 

 

 

 

 

(589

)

 

 

(29,278

)

 

 

75,638

 

Contribution of Western Devcon

   properties for common units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86,397

 

 

 

 

 

 

 

 

 

86,397

 

Stock based compensation

 

 

 

 

 

 

 

 

 

209

 

 

 

 

 

 

 

 

 

966

 

 

 

 

 

 

 

 

 

1,175

 

Grant of unvested restricted stock

 

 

26,667