Yahoo Finance Easterly Government Properties, Inc. (NYSE:DEA) Q1 2024 Earnings Call Transcript
Easterly Government Properties, Inc. (NYSE:DEA) Q1 2024 Earnings Call Transcript April 30, 2024
Easterly Government Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Easterly Government Properties First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session between the company's research analysts and Easterly's management team. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lindsay Winterhalter, Head of Investor Relations. Please go ahead.
Lindsay Winterhalter: Good morning. Before the call begins, please note that certain statements made during this conference call may include statements that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes that its expectations as reflected in any forward-looking statements are reasonable, it can give no assurance that these expectations will be obtained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including without limitation, those contained in the company's most recent Form 10-K filed with the SEC and in its other SEC filings.
The company assumes no obligation to update publicly any forward-looking statements. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, core funds from operations and cash available for distribution. You can find a tabular reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information package on the Investor Relations page of the company's website at ir.easterlyreit.com. I'd now like to turn the conference call over to Darrell Crate, CEO of Easterly Government Properties.
Darrell Crate: Thanks Lindsay, and thank you everyone for joining us. We are pleased with our progress this quarter as we work through opportunities. I'll keep it brief so we can get to Q&A, but I've got three important messages I'd like you all to take away from this call. First, we believe there's a path towards material earnings growth for shareholders, and we're on it. Meghan and Allison will talk to you about the numerous drivers shortly. Second, we know the payout ratio of our dividend is high, but we also believe there is a growth path we can pursue that helps materially close that gap. We are also actively reassessing and managing our expenses. Further, we currently sit with just under $3 billion in rent coming from the U.S. government with a leases that we own today, and if that portfolio were to renew up 10% for 10 years, which are modest assumptions, we'd be collecting nearly $6 billion while facing credit rent from the U.S. government.
We believe we can offer as many dollars as we can to our shareholders, and given the creditworthiness and duration of the cash flows backing our dividends, we remain very comfortable with the periods of higher payout ratio. Third, we occupy a unique place in the broader real estate industry, owning and designing essential infrastructure for the U.S. government's mission-critical agencies. For example, our DEA drug labs enable Homeland Security to trace and stop Sinaloa Cartel activities amid an ongoing increase in drug trafficking crimes. In 2022, fentanyl was responsible for 200 deaths every single day, and over a quarter million of Americans have died from fentanyl overdose since 2018. Let that sink in for a minute. Our facilities bolster the special agents actively combating those figures.
We're not an office read, and this year we're going to continue ensuring that the market understands the breadth of what Easterly offers. This may be boring, but these are the stats that I know you're going to ask. We beat the street and reported $0.29 in core FFO per share, and we sit comfortably at the midpoint of our target leverage of 6.5x to 7.5x. We continue to acquire and develop new facilities in our portfolio. These facilities are not offices for transient commercial use. By focusing on properties leased to government agencies and their [technical difficulty], we've maintained the stability of our cash flow that favorable renewal spreads and seen a robust pipeline of growth opportunities. Earlier this month, we announced the acquisition of an immigration and customs enforcement information technology facility near Dallas, Texas, which enables ICE's Office of Human Capital to modernize its IT systems and bolster its technological capabilities.
The rationale behind this deal is clear. The facility is 95% leased, has a 16.2-year weighted average initial lease term for all three tenancies, and maintains an additional 6,154 square feet available for future leasing as a value-add opportunity. All three factors enhance our cash flows, maintain significant occupancy upsides, and strengthen our definable edge as specialists in mission-critical real estate. This acquisition is in line with the existing properties in our portfolio, such as Federal Emergency Management Agency's Tracy, California, warehouse. FEMA-Tracy is one of eight distribution centers within the United States for emergency response preparedness. Amid the ongoing threats of wildfire and other natural disasters in California, the property helps provide on-the-ground support and crucial supplies capable of mobilizing between 3 to 4 million meals and liters of water that is stored at the facility within 30 minutes.
Our Drug Enforcement Administration Laboratory in Pleasanton, California, serves a similar mission-critical purpose, providing scientific and forensic support to the DEA special agents and other law enforcement personnel who prevent the distribution of deadly drugs like fentanyl into our society, and we store over 35,000 pieces of illegal and oftentimes deadly evidence in that facility each year. Meanwhile, the DEA's approved funding increased over 6% between 2022 and 2023, and its total headcount rose over 4% during the same period to combat the increased manufacture and distribution of controlled substances. As the government strengthens its agencies in maintaining the safety of our country, we continue to fortify their abilities through mission-critical real estate.
These purpose-built facilities serve as Easterly's definable edge in commercial real estate and continue to be the bedrock of the shareholder value which we deliver. We will continue to pursue accretive deals, and we have no plans to sell buildings in the near future as we work to continue to expand the portfolio with high credit-worthy state and local government agencies and U.S. government-adjacent partners. Frankly, we believe Easterly is well-positioned to continue to provide value to our stockholders by developing and buying more great mission-critical buildings, continuing our strong partnership with the government, and protecting our balance sheet. We are in constant dialogue with the Board and in forward planning mode. In addition to delivering external growth, we are laser-focused on cutting operating costs this year, both of which we believe will aid in our ability to meet or exceed our 2% to 3% core FFO growth trajectory.
We're excited to continue delivering shareholder value and enhancing our portfolio with a foundation of cash flows backed by the full-stack base and credit of the U.S. government. The future remains bright for Easterly in 2024. And now I'll turn the call over to Meghan Baivier, the company's President and COO.
Meghan Baivier: Thanks, Darrell, and good morning. We started off our 2024 by establishing clearly defined goals for the company, and we are on pace to deliver. We believe our government-backed cash flows have been undervalued in the public markets these past few years, and we attribute that to our recent periods of low growth. 2024 is the start of that change. We have launched our growth trajectory with the acquisition of ICE Dallas, delivering strong predictable cash flows and run rate accretion to our shareholders. We see a pipeline of opportunities that we believe will further our ability to meet our stated goals of delivering 2% to 3% core FFO growth year-over-year for years to come. For example, we are pursuing a unique opportunity to serve as lenders and buyers of mission-critical assets that we believe will further change the growth trajectory of this organization.
We look forward to keeping you apprised as this develops. In the meantime, we secured a brand-new bill-to-suit federal courthouse development project in Flagstaff, Arizona for an inaugural 20-year lease term. This important courthouse is expected to house the nation's first-ever Native American female Federal Judge and is expected to be the company's first-ever leased silver net-zero development project. Our in-place portfolio continues to perform as we achieve renewals at meaningful spreads. We renewed DEA Albany for another 17 years, marking the third renewal of this asset while owned by Easterly. You are probably sick of hearing me say it, but once again, this highlights just how far from the office sector we are. As Darrell mentioned, the importance of the work being performed in our buildings cannot be replicated at home, and such a dynamic is apparent in our ongoing renewal discussions.
Allison will go into greater detail, but we believe we are in a period where the duration and creditworthiness of our cash flows, the importance of our real estate, and our defined edge in serving mission-critical assets will accrue to our benefits and separate us from our peers. As we have seen notable names take down their earnings guidance, our beaten hole should stand apart from the crowd. We are excited about the opportunities for growth at Easterly. We see the growth trajectory filling in with new projects that further our mission of serving the government while also delivering attractive returns for shareholders. With that, I will turn the call to Allison.
Allison Marino: Thank you, Meghan. Good morning, everyone. I'm pleased to report the financial results for the first quarter. Both on a fully-diluted basis, net income per share was $0.05 and core FFO per share grew to $0.29. Our cash available for distribution was $25.9 million. Interest rates have certainly been a headwind for the broader real estate market. Easterly included, we seek to minimize interest expense at a time of high underlying rates, be that with a focus towards strategic treasury management or more recently, our ESG goals. We achieved a reduction in the margin spreads under the company's amended senior unsecured credit facility as a result of hitting a predetermined sustainability metric. Easterly also continues to sit comfortably at the midpoint of our target leverage range of 6.5x to 7.5x and maintains ample capacity on our revolver while limiting floating rate debt exposure.
As Darrell and Meghan mentioned, external growth through mission-critical real estate is our primary focus, and we see a market of opportunities ahead. Our ability to manage our upcoming debt maturities, plan for capital needs, and access debt and equity markets is integral to harvesting this growth. At Easterly, we pride ourselves on a portfolio of purpose-built buildings, and we manage that portfolio with a purpose-built team. Our organization is committed to finding operational efficiencies throughout the portfolio, managing expense creep, and releasing at positive spreads. Everyone at the company contributes to furthering the mission of driving value for shareholders. Today, we are maintaining our full-year core FFO per share guidance for 2024 in a range of $1.14 to $1.16, all on a fully diluted basis.
This guidance assumes the closing of VA Jacksonville through the joint venture at its pro-rata acquisition price of $40.9 million later this year, and that we will have $100 million to $110 million of growth development-related investment during 2024. At its midpoint, this sets a path for Easterly to deliver strong core FFO per share earnings growth to shareholders this year. We believe this represents a market-leading risk-adjusted return and charts the course for delivering longstanding growth opportunities for our investors. With that, we thank you for your time this morning and appreciate your partnership. I will now turn the call back to Shannon.
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