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EX-32.1 - EX-32.1 - Easterly Government Properties, Inc.dea-ex321_7.htm
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EX-31.1 - EX-31.1 - Easterly Government Properties, Inc.dea-ex311_6.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 March 31, 2017

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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

 

 

 

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

As of May 2, 2017, the registrant had 37,091,430 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 March 31, 2017 (unaudited) and December 31, 2016

1

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (unaudited)

2

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)

3

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)

4

 

 

Notes to the Consolidated Financial Statements

6

 

 

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

15

 

 

   Item 3: Quantitative and Qualitative Disclosures About Market Risk

25

 

 

   Item 4: Controls and Procedures

25

 

 

Part II: Other Information

 

 

 

   Item 1: Legal Proceedings

26

 

 

   Item 1A: Risk Factors

26

 

 

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

26

 

 

   Item 3: Defaults Upon Senior Securities

26

 

 

   Item 4: Mine Safety Disclosures

26

 

 

   Item 5: Other Information

26

 

 

   Item 6: Exhibits

27

 

 

Signatures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Easterly Government Properties, Inc.

Consolidated Balance Sheets

(Amounts in thousands, except share amounts)

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Real estate properties, net

 

$

928,855

 

 

$

901,066

 

Cash and cash equivalents

 

 

5,241

 

 

 

4,845

 

Restricted cash

 

 

2,005

 

 

 

1,646

 

Deposits on acquisitions

 

 

8,750

 

 

 

1,750

 

Rents receivable

 

 

7,913

 

 

 

8,544

 

Accounts receivable

 

 

5,740

 

 

 

5,823

 

Deferred financing, net

 

 

1,652

 

 

 

2,787

 

Intangible assets, net

 

 

111,195

 

 

 

113,795

 

Interest rate swaps

 

 

3,893

 

 

 

3,785

 

Prepaid expenses and other assets

 

 

3,327

 

 

 

1,422

 

Total assets

 

$

1,078,571

 

 

$

1,045,463

 

Liabilities

 

 

 

 

 

 

 

 

Revolving credit facility

 

 

158,167

 

 

 

212,167

 

Term loan facility, net

 

 

99,097

 

 

 

 

Mortgage notes payable, net

 

 

80,054

 

 

 

80,806

 

Intangible liabilities, net

 

 

40,629

 

 

 

41,840

 

Accounts payable and accrued liabilities

 

 

12,622

 

 

 

13,784

 

Total liabilities

 

 

390,569

 

 

 

348,597

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

   36,991,430 and 36,874,810 shares issued and outstanding at March 31, 2017 and

   December 31, 2016, respectively

 

 

370

 

 

 

369

 

Additional paid-in capital

 

 

599,233

 

 

 

596,971

 

Retained earnings

 

 

2,805

 

 

 

1,721

 

Cumulative dividends

 

 

(51,671

)

 

 

(42,794

)

Accumulated other comprehensive income

 

 

3,134

 

 

 

3,038

 

Total stockholders' equity

 

 

553,871

 

 

 

559,305

 

Non-controlling interest in Operating Partnership

 

 

134,131

 

 

 

137,561

 

Total equity

 

 

688,002

 

 

 

696,866

 

Total liabilities and equity

 

$

1,078,571

 

 

$

1,045,463

 

 

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 March 31,

 

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

Rental income

 

$

26,020

 

 

$

21,736

 

Tenant reimbursements

 

 

3,628

 

 

 

2,155

 

Other income

 

 

239

 

 

 

80

 

Total revenues

 

 

29,887

 

 

 

23,971

 

Operating expenses

 

 

 

 

 

 

 

 

Property operating

 

 

6,349

 

 

 

4,333

 

Real estate taxes

 

 

2,735

 

 

 

2,368

 

Depreciation and amortization

 

 

13,060

 

 

 

10,863

 

Acquisition costs

 

 

532

 

 

 

333

 

Corporate general and administrative

 

 

3,444

 

 

 

3,036

 

Total expenses

 

 

26,120

 

 

 

20,933

 

Operating income

 

 

3,767

 

 

 

3,038

 

Other expenses

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,417

)

 

 

(1,929

)

Net income

 

 

1,350

 

 

 

1,109

 

Non-controlling interest in Operating Partnership

 

 

(266

)

 

 

(434

)

Net income available to Easterly Government

   Properties, Inc.

 

$

1,084

 

 

$

675

 

Net income available to Easterly Government

   Properties, Inc. per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.03

 

Diluted

 

$

0.03

 

 

$

0.03

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

36,891,595

 

 

 

24,141,712

 

Diluted

 

 

39,143,887

 

 

 

25,744,824

 

 

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

2

 


Easterly Government Properties, Inc.

Consolidated Statements of Comprehensive Income

(Amounts in thousands, except share amounts)

 

 

 

For the three months ended March 31,

 

 

 

2017

 

 

2016

 

Net income

 

$

1,350

 

 

$

1,109

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swaps

 

 

108

 

 

 

 

Other comprehensive income

 

 

108

 

 

 

 

Comprehensive income

 

 

1,458

 

 

 

1,109

 

Non-controlling interest in Operating Partnership

 

 

(266

)

 

 

(434

)

Other comprehensive income attributable to non-controlling interest

 

 

(12

)

 

 

 

Comprehensive income attributable to Easterly Government Properties, Inc.

 

$

1,180

 

 

$

675

 

 

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)

 

 

 

For the three months ended March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

1,350

 

 

$

1,109

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,060

 

 

 

10,863

 

Straight line rent

 

 

(143

)

 

 

(12

)

Amortization of above- / below-market leases

 

 

(2,112

)

 

 

(1,698

)

Amortization of unearned revenue

 

 

(27

)

 

 

(23

)

Amortization of loan premium / discount

 

 

(21

)

 

 

(21

)

Amortization of deferred financing costs

 

 

251

 

 

 

216

 

Non-cash compensation

 

 

727

 

 

 

699

 

Net change in:

 

 

 

 

 

 

 

 

Rents receivable

 

 

775

 

 

 

(253

)

Accounts receivable

 

 

83

 

 

 

(912

)

Prepaid expenses and other assets

 

 

(1,905

)

 

 

(964

)

Accounts payable and accrued liabilities

 

 

(1,313

)

 

 

871

 

Net cash provided by operating activities

 

 

10,725

 

 

 

9,875

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(43,968

)

 

 

(34,350

)

Additions to operating properties

 

 

(124

)

 

 

(76

)

Additions to development properties

 

 

(79

)

 

 

 

Restricted cash

 

 

(359

)

 

 

215

 

Net cash (used in) investing activities

 

 

(44,530

)

 

 

(34,211

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of deferred financing costs

 

 

(18

)

 

 

 

Credit facility draws

 

 

65,750

 

 

 

34,000

 

Credit facility repayments

 

 

(119,750

)

 

 

(4,000

)

Term loan draws

 

 

100,000

 

 

 

 

Repayments of mortgage payable

 

 

(732

)

 

 

(703

)

Dividends and distributions paid

 

 

(11,049

)

 

 

(8,757

)

Net cash provided by financing activities

 

 

34,201

 

 

 

20,540

 

Net increase (decrease) in cash and cash equivalents

 

 

396

 

 

 

(3,796

)

Cash and cash equivalents, beginning of period

 

 

4,845

 

 

 

8,176

 

Cash and cash equivalents, end of period

 

$

5,241

 

 

$

4,380

 

 

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

 

4

 


Easterly Government Properties, Inc.

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

 

Supplemental disclosure of cash flow information is as follows:

 

 

 

For the three months ended March 31,

 

 

 

2017

 

 

2016

 

Cash paid for interest

 

$

2,243

 

 

$

1,423

 

Supplemental disclosure of non-cash information

 

 

 

 

 

 

 

 

Additions to operating properties

 

$

102

 

 

$

25

 

Additions to development properties

 

 

92

 

 

 

 

Unrealized gain on interest rate swaps

 

 

108

 

 

 

 

Exchange of Common Units for Shares of Common Stock

 

 

 

 

 

 

 

 

Non-controlling interest in Operating Partnership

 

$

(1,727

)

 

$

 

Common stock

 

 

1

 

 

 

 

Additional paid-in capital

 

 

1,726

 

 

 

 

Total

 

$

 

 

$

 

 

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

5

 


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, 2016, 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, 2016 filed with the U.S. Securities and Exchange Commission (the “ SEC”) on March 2, 2017.

The Company is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code, as amended (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 March 31, 2017, we wholly owned 44 operating properties in the United States, including 41 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 3.2 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.

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 approximately 80.5% of the aggregate limited partnership interests in the Operating Partnership (“common units”) at March 31, 2017. 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.

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 March 31, 2017, and the consolidated results of operations and the consolidated cash flows for the three months ended March 31, 2017. 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 are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

6

 


Recently Adopted Accounting Pronouncements

On January 1, 2017, the Company adopted ASU 2017-01, Business Combinations (Topic 805), which clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. As a result the Company believes most of our future acquisitions of operating properties will qualify as asset acquisitions and third-party transaction costs associated with these acquisitions will be capitalized while internal acquisition costs will continue to be expensed.

On January 1, 2017, the Company adopted 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. The implementation of this update did not have a material impact in our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance when it becomes effective. In July 2015, the FASB deferred by one year the mandatory effective date of ASU 2014-09 from January 1, 2017 to January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. 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. As of March 31, 2017, the Company had a sublease for office space in Washington D.C. expiring in June 2021 and a lease for office space in San Diego, CA expiring in April 2022.  The remaining contractual payments under the Company’s lease and sublease for office space aggregate $2.2 million.  Additionally, ASU 2016-02 will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease.  Under ASU 2016-02, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained will no longer be capitalized as initial direct costs and instead will be expensed as incurred.  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 standard permits the use of either the retrospective or modified retrospective transition method. 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.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  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.

In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial

7

 


asset” and defines the term “in-substance nonfinancial asset.”  This ASU also adds guidance for partial sales of nonfinancial assets.  ASU 2017-05 will be effective at the same time Topic 606, Revenue from Contracts with Customers, is effective.  The Company is in the process of evaluating the impact of this new guidance.

 

 

3. Real Estate and Intangibles

During the three months ended March 31, 2017, we acquired one operating property in an asset acquisition, a 75,000 rentable square foot laboratory located in Sandy, Utah (“OSHA – Sandy”) for an aggregate purchase price of $37.0 million. We allocated the purchase price of the acquisition based on the estimated fair values of the acquired assets and assumed liabilities as follows (dollars in thousands):

 

 

 

Total

 

Real estate

 

 

 

 

Land

 

$

2,361

 

Building

 

 

30,647

 

Acquired tenant improvements

 

 

927

 

Total real estate

 

 

33,935

 

Intangible assets

 

 

 

 

In-place leases

 

 

3,649

 

Acquired leasing commissions

 

 

639

 

Total intangible assets

 

 

4,288

 

Intangible liabilities

 

 

 

 

Below-market leases

 

 

(1,255

)

Total intangible liabilities

 

 

(1,255

)

Purchase price

 

$

36,968

 

 

We did not assume any debt upon acquisition of OSHA – Sandy.  The intangible assets and liabilities of OSHA – Sandy have an amortization period of 6.8 years as of March 31, 2017. During the three months ended March 31, 2017, we included $0.5 million of revenues and $0.2 million of net income in our consolidated statement of operations related to OSHA – Sandy.

During the three months ended March 31, 2017, we agreed to acquire a 327,614 rentable square foot Department of Veterans Affairs (“VA”) Ambulatory Care Center located in Loma Linda, California (“VA - Loma Linda”).

During the three months ended March 31, 2017, we incurred $0.5 million of acquisition-related expenses including $0.4 million of internal costs associated with property acquisitions.

Pro Forma Financial Information

We did not have any business combinations during the three months ended March, 31 2017. As such, the unaudited pro forma financial information set forth below presents results for the three months ended March 31, 2016 as if the ICE – Albuquerque acquisition 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 three months ended

 

Proforma (unaudited)

 

March 31, 2016

 

Total rental revenue

 

$

24,342

 

Net income (loss) (1)

 

 

1,214

 

 

 

(1)

The net income for the three months ended March 31, 2016 excludes $0.3 million of property acquisition costs.

 

 

8

 


Consolidated Real Estate and Intangibles

Real estate and intangibles consisted of the following as of March 31, 2017 (dollars in thousands):

 

 

 

Total

 

Real estate properties, net

 

 

 

 

Land

 

$

114,535

 

Building

 

 

815,396

 

Acquired tenant improvements

 

 

40,863

 

Construction in progress

 

 

4,747

 

Accumulated amortization

 

 

(46,686

)

Total Real estate properties, net

 

$

928,855

 

Intangible assets, net

 

 

 

 

In-place leases

 

$

126,310

 

Acquired leasing commissions

 

 

23,823

 

Above market leases

 

 

10,631

 

Accumulated amortization

 

 

(49,569

)

Total Intangible assets, net

 

$

111,195

 

Intangible liabilities, net

 

 

 

 

Below market leases

 

$

(57,753

)

Accumulated amortization

 

 

17,124

 

Total Intangible liabilities, net

 

$

(40,629

)

 

 

4. Debt

At March 31, 2017, our borrowings consisted of the following (dollars in thousands):

 

 

 

Total

 

Revolving credit facility

 

$

158,167

 

Term loan facility, net

 

 

99,097

 

Mortgage notes payable, net

 

 

80,054

 

Total

 

$

337,318

 

 

a. Senior Unsecured Revolving Credit Facility

We have a $400.0 million senior unsecured revolving credit facility (our “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. Our senior unsecured revolving credit facility will terminate on February 11, 2019. Our senior unsecured revolving credit facility includes two as-of-right extension options that allows us, in each case, to extend the senior unsecured revolving credit facility for an additional six months subject to certain conditions and the payment of an extension fee.

As of March 31, 2017, the interest rate payable on borrowings under our senior unsecured revolving credit facility was 2.31%. For the three months ended March 31, 2017 the weighted average annual interest rate for borrowings under our senior unsecured revolving credit facility was 2.18%. As of March 31, 2017, we had $158.2 million outstanding and $241.8 million available under our senior unsecured revolving credit facility. For the three months ended March 31, 2017 we recognized $0.2 million in accumulated amortization of deferred financing costs on our senior unsecured revolving credit facility.

As of March 31, 2017, 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.

b. Senior Unsecured Term Loan Facility, Net

We have a $100.0 million senior unsecured term loan facility (our “senior unsecured term loan facility”), which we entered into on September 29, 2016 and fully drew on March 20, 2017.  Our senior unsecured term loan facility matures on September 29, 2023 and is prepayable without penalty beginning in October 2018.

9

 


We entered into two forward-starting interest rate swaps with an aggregate notional value of $100.0 million to effectively fix the interest rate under our senior unsecured term loan facility at 3.12% annually based on the company’s current leverage ratio. For the three months ended March 31, 2017 we recognized less than $0.1 million in accumulated amortization of deferred financing costs on our senior unsecured term loan facility.

As of March 31, 2017, the carrying value of our senior unsecured term loan facility approximated fair value. In determining the fair value we considered the variable interest rate. We deem the fair value of our senior unsecured term loan facility as a Level 3 measurement.

c. Mortgage Notes Payable, Net

The table below provides a summary of our mortgage debt which is collateralized by the underlying real estate at March 31, 2017 (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

 

$

14,736

 

 

$

(758

)

 

$

 

 

$

13,978

 

ICE - Charleston

 

Fixed

 

 

4.21

%

 

 

3.93

%

 

January 2027

 

 

20,647

 

 

 

346

 

 

 

 

 

 

20,993

 

MEPCOM - Jacksonville

 

Fixed

 

 

4.41

%

 

 

3.89

%

 

October 2025

 

 

11,449

 

 

 

263

 

 

 

 

 

 

11,712

 

USFS II - Albuquerque

 

Fixed

 

 

4.46

%

 

 

3.92

%

 

July 2026

 

 

17,118

 

 

 

588

 

 

 

 

 

 

17,706

 

DEA - Pleasanton

 

Floating

 

LIBOR + 150bps

 

 

 

1.80

%

 

October 2023

 

 

15,700

 

 

 

 

 

 

(35

)

 

 

15,665

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

79,650

 

 

$

439

 

 

$

(35

)

 

$

80,054

 

 

At March 31, 2017, 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 mortgage debt instruments as a Level 3 measurement. At March 31, 2017 the fair value of our mortgage debt was $78.9 million.

 

 

5. Derivatives and Hedging Activities

As of March 31, 2017, the Company had two outstanding forward-starting interest rate swaps with an aggregate notional value of $100.0 million that were designated as cash flow hedges. The forward swaps have an effective date of March 29, 2017 and extend until the maturity of the term loan on September 29, 2023. The forward swaps will effectively fix the interest rate under our senior unsecured term loan facility at 3.12% annually based on the company’s current leverage ratio and a variable interest rate of one-month LIBOR.

Cash Flow Hedges of Interest Rate Risk

As of March 31, 2017, our forward swaps were classified as an asset on our consolidated balance sheet at $3.9 million. The effective portion of changes in the fair value of derivatives designated and qualified as cash flow hedges is recorded in accumulated other comprehensive income and will be reclassified to interest expense in the period that the hedged forecasted transactions affects earnings on the Company’s variable rate debt.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings into interest expense.  For the three months ended March 31, 2017 the amount of unrealized gain recognized in accumulated other comprehensive income on interest rate swaps was $0.1 million and the amount of gain reclassified from accumulated other comprehensive income into interest expense was less than $0.1 million.  Additionally, during the three months ended March 31, 2017, there was no ineffectiveness.

The Company estimates that approximately $0.2 million will be reclassified from accumulated other comprehensive income as an increase to interest expense over the next 12 months.

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.  As of March 31, 2017, the Company did not have any derivatives in a net liability position.

 

 

10

 


6. Fair Value Measurements

Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The standards also establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of us.  Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.  The hierarchy of these inputs is broken down into three levels: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Categorization within the valuation hierarchy is based upon the lowest level of input that is most significant to the fair value measurement.

Recurring fair value measurements

The fair values of our interest rate swaps are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities in such interest rates.   While the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties.  The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of March 31, 2017 were classified as Level 2 of the fair value hierarchy.  

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets and accounts payable and accrued expenses are reasonable estimates of fair values because of the short maturities of these instruments. For our disclosure of debt fair values in Note 4, we estimated the fair value of our unsecured senior revolving credit facility based on quoted market interest rates (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments included scheduled principal and interest payments.  Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgement.  Settlement at such fair value amounts may not be possible and may not be prudent management decision.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

 

 

As of March 31, 2017

 

Balance Sheet Line Item

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swaps - Asset

 

$

 

 

$

3,893

 

 

$

 

 

11

 


 

7. Equity

The following table summarizes the changes in our stockholders’ equity for the three months ended March 31, 2017 and 2016 (dollars in thousands):

 

 

 

Shares

 

 

Common

Stock

Par

Value

 

 

Additional

Paid-in

Capital

 

 

Retained Earnings

(Deficit)

 

 

Cumulative Dividends

 

 

Accumulated Other Comprehensive Income

 

 

Non-

controlling

Interest in

Operating

Partnership

 

 

Total

Equity

 

Three months ended March 31, 2017

 

Balance at December 31, 2016

 

 

36,874,810

 

 

$

369

 

 

$

596,971

 

 

$

1,721

 

 

$

(42,794

)

 

$

3,038

 

 

$

137,561

 

 

$

696,866

 

Stock based compensation

 

 

 

 

 

 

 

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

653

 

 

 

727

 

Dividends and distributions paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,877

)

 

 

 

 

 

(2,172

)

 

 

(11,049

)

Grant of unvested restricted stock

 

 

2,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of common units for

   shares of common stock

 

 

113,928

 

 

 

1

 

 

 

1,726

 

 

 

 

 

 

 

 

 

 

 

 

(1,727

)

 

 

 

Unrealized gain on interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96

 

 

 

12

 

 

 

108

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

1,084

 

 

 

 

 

 

 

 

 

266

 

 

 

1,350

 

Allocation of non-controlling interest

   in Operating Partnership

 

 

 

 

 

 

 

 

 

462

 

 

 

 

 

 

 

 

 

 

 

 

(462

)

 

 

 

Balance at March 31, 2017

 

 

36,991,430

 

 

$

370

 

 

$

599,233

 

 

$

2,805

 

 

$

(51,671

)

 

$

3,134

 

 

$

134,131

 

 

$

688,002

 

Three months ended March 31, 2016

 

Balance at December 31, 2015

 

 

24,168,379

 

 

$

241

 

 

$

391,767

 

 

$

(1,694

)

 

$

(13,051

)

 

$

 

 

$

242,631

 

 

$

619,894

 

Stock based compensation

 

 

 

 

 

 

 

 

 

81

 

 

 

 

 

 

 

 

 

 

 

 

618

 

 

 

699

 

Dividends and distributions paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,317

)

 

 

 

 

 

(3,440

)

 

 

(8,757

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

675

 

 

 

 

 

 

 

 

 

434

 

 

 

1,109

 

Allocation of non-controlling interest

   in Operating Partnership

 

 

 

 

 

 

 

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

(332

)

 

 

 

Balance at March 31, 2016

 

 

24,168,379

 

 

$

241

 

 

$

392,180

 

 

$

(1,019

)

 

$

(18,368

)

 

$

 

 

$

239,911

 

 

$

612,945

 

On March 8, 2017, the Company issued an aggregate of 2,692 shares of restricted common stock to certain employees pursuant to our 2015 Equity Incentive Plan. The restricted common stock grants will vest upon the second anniversary of the grant date so long as the grantee remains an employee of the Company on such date.

A summary of our shares of restricted common stock and long-term incentive plan units in the Operating Partnership (“LTIP units”) awards at March 31, 2017 is as follows:

 

 

 

Restricted Shares

 

 

Restricted Shares Weighted Average Grant Date Fair Value

 

 

LTIP Units

 

 

LTIP Units Weighted Average Grant Date Fair Value

 

Outstanding, December 31, 2016

 

 

16,128

 

 

$

18.60

 

 

 

926,000

 

 

$

8.91

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

2,692

 

 

 

19.79

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, March 31, 2017

 

 

18,820

 

 

$

18.77

 

 

 

926,000

 

 

$

8.91

 

We recognized $0.7 million in compensation expense related to the restricted common stock and the LTIP unit awards for the three months ended March 31, 2017.  As of March 31, 2017, unrecognized compensation expense for both awards was $3.5 million, which will be amortized over the vesting period.

We valued our non-vested restricted share award issued in 2017 at the grant date fair value, which was the market price of our shares of common stock.

On March 27, 2017, we completed an underwritten public offering of an aggregate of 4,945,000 shares of common stock, including 645,000 shares sold pursuant the underwriters exercise in full of their option to purchase additional shares.  The shares were offered on a forward basis in connection with certain forward sales agreements entered into with certain financial institutions, acting as forward purchasers.  Pursuant to the forward sales agreements, the forward purchasers borrowed and the forward sellers, acting as agents for the forward purchasers, sold an aggregate of 4,945,000 shares in the public offering.  We did not initially receive any proceeds from the sale of shares of our common stock by the forward sellers in the public offering, but expect to receive gross proceeds of approximately $94.0 million upon full physical settlement of the forward sales agreements, which we expect will occur no later than September 27, 2017. The Company will account for the forward share agreements as equity.

12

 


In connection with the liquidation of certain private investment funds that contributed assets in our initial public offering, we issued 113,928 shares of our common stock between January 1, 2017 and March 31, 2017 upon the redemption of 113,928 common units in accordance with the terms of the partnership agreement of the Operating Partnership.

On May 3, 2017, our board of directors declared a dividend for the first quarter of 2017 in the amount of $0.25 per share of common stock and per common unit outstanding to stockholders and common unit holders of record as of the close of business on June 14, 2017.  Our board of directors also declared a dividend for the first quarter of 2017 for each LTIP unit in an amount equal to 10% of the dividend paid per common unit.  Such dividends are to be paid on June 29, 2017.

On March 3, 2017, we entered into separate equity distribution agreements with each of Citigroup Global Markets Inc., BTIG, LLC, Jefferies LLC, Raymond James & Associates, Inc., RBC Capital Markets, LLC and SunTrust Robinson Humphrey, Inc. (collectively, the “managers”), pursuant to which we may issue and sell the shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through the managers, acting as sales agents and/or principals. The sales of shares of our common stock, under the equity distribution agreements may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. To date, no sales have been made under the program.

 

 

8. Earnings Per Share

Basic earnings or loss per share of common stock (“EPS”) is calculated by dividing net income attributable to common stockholders by the weighted average shares of common stock outstanding for the periods presented. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented. Unvested restricted shares, LTIP units and forward sales agreements shares are considered participating securities, which require the use of the two-class method for the computation of basic and diluted earnings per share. The following table sets forth the computation of the Company’s basic and diluted earnings per share of common stock for the three months ended March 31, 2017 and 2016 (amounts in thousands, except per share amounts):

 

 

 

For the three months ended March 31,

 

 

 

2017

 

 

2016

 

Numerator

 

 

 

 

 

 

 

 

Net income

 

$

1,350

 

 

$

1,109

 

Less: Non-controlling interest in Operating Partnership

 

 

(266

)

 

 

(434

)

Net income available to Easterly Government

   Properties, Inc.

 

 

1,084

 

 

 

675

 

Less: Dividends on participating securities

 

 

(26

)

 

 

(26

)

Net income available to common stockholders

 

$

1,058

 

 

$

649

 

Denominator for basic EPS

 

 

36,891,595

 

 

 

24,141,712

 

Dilutive effect of share-based compensation awards

 

 

11,815

 

 

 

22,842

 

Dilutive effect of LTIP units

 

 

1,818,392

 

 

 

1,580,270

 

Dilutive effect of forward sales agreements shares

 

 

422,085

 

 

 

 

Denominator for diluted EPS

 

 

39,143,887

 

 

 

25,744,824

 

Basic EPS

 

$

0.03

 

 

$

0.03

 

Diluted EPS

 

$

0.03

 

 

$

0.03

 

 

 

9. Operating Leases

Our rental properties are subject to generally non-cancelable operating leases generating future minimum contractual rent payments due from tenants. As of March 31, 2017, future non-cancelable minimum contractual rent payments are as follows (dollars in thousands):

 

 

 

Payments due by period

 

 

 

Total

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

Operating Leases