DEA
#Good morning.
Before the call begins, please note the use of forward-looking statements by the company on this conference call.
Statements made on this call may include statements, which are not historical facts, and are considered forward-looking.
The company intends these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Act Reform of 1995, and is making this statement for the purpose of complying with those Safe Harbor provisions.
Although the company believes that its plans, intentions, expectations, strategies and prospects, as reflected in or suggested by those forward-looking statements, are reasonable, it can give no assurance that these plans, intentions, expectations or strategies will be attained or achieved.
Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in Item 1A Risk Factors of its annual report on Form 10-K for the year ended December 31, 2016, filed with SEC on March 2, 2017 and its other SEC filings.
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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\xe2\x80\x99s website at ir.
easterlyreit.com.
I would now like to turn the conference call over to <UNK> <UNK>, Chairman of the Easterly Government Properties.
Thanks, <UNK> and good morning.
I would like to begin by highlighting the company's achievements in the first quarter of 2017.
We were very pleased to acquire the 75,000 square-foot Sandy, Utah Occupational Safety and Health Administration laboratory, which when combined with our other properties, represents a portfolio of 44 buildings with over 97% of its annualized lease income, derived from the full faith and credit of the United States federal government.
OSHA, Sandy, well represents our focused investment discipline.
This state-of-the-art laboratory serves the entire country by providing the analysis of a multitude of chemicals, and maintaining OSHA's online chemical sampling information database.
This facility is 1 of 3 locations nationwide, which also houses the Directorate of technical support and emergency management for OSHA, an important division with provides specialized technical support to the broader OSHA mission.
True to Easterly's philosophy this laboratory's mission is critical in the hierarchy of the tenant agency.
Easterly's announcement in the first quarter of its pending acquisitions of 2 VA outpatient clinics marks the company's entry into an important new market, which it's been following for several years.
The acquisition of these 2 new state-of-the-art Class A VA outpatient facilities totals to combined 414,000 square feet of leased space, all backed by the full faith and credit of the U.S. government.
The first facility is located in Loma Linda, California and is a one-of-a-kind premiere asset in the VA health system.
Located just 2 miles from the federally-owned VA Hospital, this brand-new 327,000 square-foot ambulatory care facility sits on a 37-acre campus, is surrounded by over 2,000 parking spaces and addresses the outpatient medical needs of the surrounding 72,000 veterans in the region.
The facility will employ approximately 500 VA health professionals and provide 50% of VA Loma Linda's outpatient visits for the region.
Services provided within the Loma Linda ambulatory care Center include; primary care, women's health, dental, imaging, employee health and blood draw services.
The facility carries an initial 20-year noncancelable lease with the VA, which will not expire until May of 2036.
The VA Loma Linda acquisition is expected to close in the second quarter of 2017.
The second VA outpatient facility is located just outside of South Bend, Indiana, and is currently under construction.
The VA South Bend Outpatient Clinic is very similar to VA Loma Linda, but on a smaller scale on 86,000 square feet.
This facility will employ 190 VA professionals, and also provides outpatient services to the many veterans surrounding the region.
The VA estimates the facility will see 12,000 patients in its first year of operation, 14,000 patients in its second year of operation and 16,000 patients in its third year of operation.
The services that be will provided at VA South Bend include: Primary care, mental health care, audiology, optometry, radiology, cardiology, pulmonology, podiatry, urology and gastrointestinal endoscopy.
When construction is completed, which we expect will occur in the third quarter of this year, this outpatient facility will be leased to the VA for an initial 15-year noncancelable term.
The VA South Bend acquisition is expected to close in the third quarter of 2017.
Both of these properties just described, squarely fall into Easterly's VA acquisition and development targets.
These are mission-critical facilities within a highly important department of the U.S. government.
These leases are backed by the full faith and credit of the U.S. government and are not subject to cancellation and carry long, stable lease terms, which result in a steady cash flow and superior risk-adjusted returns for our shareholders.
Also of note, pro forma for the addition of these announced pending VA acquisitions, Easterly key portfolio performance metrics are substantially enhanced.
Easterly's average portfolio age will decrease from 12.9 years to 11.6 years.
Further, the remaining lease duration of the portfolio will increase from 5.7 to 7.1 years.
These are highly attractive metrics for the company's portfolio, which continues to grow through the addition of accretive deals that fit within the previously mentioned bull's eye target universe.
Turning to development.
Our team remains active in responding to all opportunities to develop brand-new, nonspeculative, Class A facilities, on behalf of the federal government with long attractive lease terms.
Yesterday, Easterly was pleased to announce the lease award for the development of the 52,870 square-foot FDA laboratory in Lenexa, Kansas, just outside of Kansas City.
This exciting project, which will be led by Mike Ivy and his team, will be a relocation of the current Kansas City district laboratory, 1 of 13 critical laboratories for the FDA, located strategically throughout the country.
This brand-new state-of-the-art facility will be approximately 40% larger than the lab it is replacing, and will feature highly specialized and specific design features and functionality for the needs of the FDA for decades to come.
The laboratory will be fully equipped to perform the chemical analysis of food and drugs, regulated by the agency, which heavily contribute to the FDA's overarching mission of protecting and promoting the health and safety of the American public.
This is a wonderful opportunity for the company to deepen its relationship with the U.S. government, now marking 2 active development projects with the GSA for the beneficial use of the FDA.
Additionally, our asset management and development teams are currently engaged in a number of value added projects to our existing portfolio.
There are currently 15 mission enhancing projects underway for a combined total of roughly $4.7 million, fully funded by the government, which aid our tenants in their ability to perform mission, while also keeping our already young built buildings updated.
An example of a current government funded improvement project can be found in our ICE field office in Charleston, South Carolina.
At ICE Charleston the government is pursuing a $2 million-plus facility upgrade to reconfigure existing space to allow both ICE and DEA law enforcement to collaborate and function more efficiently in their joint mission of investigating those in violation of federal laws.
Our current acquisition pipeline is strong, as we continue to pursue opportunities to accretively grow the Easterly's portfolio for our shareholders.
These acquisitions fall within what we refer to as the bull's eye of our target market.
To reiterate, our target market includes buildings leased to a single tenant of the U.S. federal government, are often the result of a design-build award and are usually over 40,000 square feet in size.
If we find a building that meets these criteria, we then underwrite the agency and the hierarchy of mission of the perspective building before performing the traditional underwriting.
We continue to see opportunities that are actionable in the near to midterm and will maintain our rigorous underwriting standards, targeting 100% renewal for this class of federally leased buildings.
I'll now turn it over to <UNK> for discussion of the quarterly results and earnings guidance.
Thank you, Bill.
Today, I will touch upon our current portfolio, discuss our first quarter results, provide an update on our balance sheet, review our 2017 guidance and cover this quarter's capital markets activity.
Additional details regarding our first quarter results can be found in the company's first quarter earnings release and supplemental information package.
As of March 31, we owned 44 operating properties, comprising nearly 3.2 million square feet of commercial real estate.
The weighted average lease term for the portfolio was 5.7 years, the average age of our portfolio was 12.9 years, and our portfolio occupancy remains at 100%.
In addition, 97.4% of our lease revenue is backed by the full faith and credit of the United States government.
For the first quarter, FFO per share on a fully diluted basis was $0.31.
FFO as adjusted per share on a fully diluted basis was $0.30 and our cash available for distribution was $12.2 million.
GAAP measures and reconciliations to GAAP measures have been provided in our supplemental information package.
For the 12-months ending December 31, 2017, the company is reiterating its guidance for FFO of $1.25 to a $1.29 per share on a fully diluted basis.
This guidance assumes acquisitions of $350 million in 2017 including the OSHA Sandy acquisition completed in the first quarter, the announced VA Loma Linda acquisition with an anticipated closing date in the first quarter of 2017 as well as the announced VA South Bend acquisition with an anticipated closing date in the first quarter of 2017.
This guidance does not contemplate any dispositions.
This guidance is forward-looking and reflects management's view of current and future market conditions.
The company's actual results may differ materially from this guidance.
Turning to the balance sheet.
At quarter end, the company had total indebtedness of $337.8 million, which was comprised of $158.2 million outstanding on our unsecured revolving line of credit, $100 million outstanding on our unsecured term loan facility and $79.7 million of mortgage debt.
Availability on our line of credit stood at $241.8 million.
In terms of leverage, net debt to total enterprise value was 26.8% and net debt to annualized EBITDA was 4.9x.
On March 27, 2017, the company successfully completed a public offering of 4.3 million shares of its common stock, all offered in connection with forward sales agreements at a price to the public of $19 per share.
The forward purchasers also granted underwriters a 30-day option to purchase up to an additional 645,000 shares at the public offering price, which was exercised in full.
The company expects to physically settle the forward sales agreements and receive proceeds, subject to certain adjustments, within approximately 6 months from the date to the prospective supplement relating to the offering.
Assuming the forward sales are physically settled in full, net proceeds to the company is expected to be approximately $90 million.
Finally, as previously announced last week our Board of Directors declared a dividend related to our first quarter of operations of $0.25 per share.
This dividend will be paid on June 29, 2017, to shareholders of record on June 14.
I will now turn the call back to the operator for questions.
Good morning, Manny and Jill.
First of all basically since we went public, there have only been 2 opportunities for build-to-suit projects within the GSA space that we would actually be interested in completing.
And I'm pleased to announce that we won both awards.
So basically, if it's in the bull's eye, we don't make the determination on the development opportunity.
If it's in the bull's eye, it could be the FDA, it could be Secret Service or any of the mission-critical agencies that we think are important.
So that's a bit random, but I will say, that certainly with Mike Ivy and his development team's expertise, it's probably not surprising after you've engaged to build 1 FDA labs that they see the sort of work and the sort of background experience you've had that they probably look towards you to do others.
The VA opportunities, I've already discussed, and those were 2 wonderful opportunities, one much larger than the other.
But we think that the VA is an area that we've certainly been looking at for the last several years, and we're very happy to be able to get these 2 properties signed up.
I think that it's probably no secret that the current administration is very much in favor of what we ---+ the moniker being gun toting agencies.
So you think of the FBI, the DEA, ICE, CBP, the federal courts, that make up over 62% of our portfolio.
So I think that they are certainly in favor now.
Obviously, there's some agencies that are not as much in favor.
But again, they're going to continue to exist, they're just going to be different priorities going forward.
We are very pleased to have our particular EPA laboratory based in Kansas, by the way an all Republican state, because it's mission is enduring and is actually more ---+ will actually endure past the current administration's tenure, not that we take a position on who's in Federal office.
But I think we're looking for long-term enduring missions of the agencies.
And we believe every single building we have in our portfolio certainly fits that to a T.
Absolutely.
I'm happy to announce that we have renewed SSA Kearny Mesa, and which is a very small property, not in our bull's eye, but we have renewed that for the next 10 years firm, and 15 with the soft term at the end at basically the current rent amount, which we would expect as ---+ the smaller nonbull's-eye properties to renew.
I'm also happy to announce that we have renewed ICE Otay, actually we have just combined 3 leases that were expiring under different years and moved them all back to 11/27/22 so you might see that reflected, we're very pleased there.
No cash changes on the rent, but obviously, the government realizing that this is a long-term place for them to operate from, and it is the second busiest border crossing in California.
On our noncore assets, we've said in the past, that all of these, we believe, are terrific properties, but also sources of funds as we drive ---+ we're I think 97.5% full faith and credit now, as we drive to 100%.
So when we see opportunities come up, we will move those properties out of the portfolio.
And as we purchase portfolios in the future, there will be, occasionally, buildings that are either noncore or not in our bull's eye, and obviously we'll want to move those out at some point accretively for our shareholders.
Well, I think that ---+ let's just take it in a reverse order.
The United States Forest Service is actually ---+ this is its operational headquarters.
They've got 198 million acres.
I don't think they're just going to open up the fences and eliminate one of the greatest resources the United States has.
So we're not particularly worried about that one.
In fact it's actually gaining employees as other, older facilities are being consolidated into it.
But I will say, that we don't look just the next lease term, we're looking 2 lease terms out.
And when you're sort at 11 with these new acquisitions, 11 and some years old and the average tenancy in these buildings is over 40 years, I will be all set for this conversation about 10 or 15 years from now.
But correct, as buildings do get older, we will constantly look and make sure that we can see a lot of runway for their mission, for a particular building, that they're meeting mission, but luckily, and not so luckily, that is not a problem today.
<UNK>, I'd say that there's no changes at all.
It's just the VA is just like adding FBI or DEA or another of the federal courts to our set of opportunities.
We're looking at lots of opportunities in the GSA, and you'd expect most opportunities, in the end, to be the GSA, because it's a much larger universe.
However, I will say, that as we mentioned, the federal government is on a 10-year $63 billion program to update and build new VA facilities for our $22 million veterans out there.
So certainly, as we drive towards new buildings, there are going to be more opportunities than usual within the VA space.
And we've tried to figure out the sizing of that and that's probably ---+ those opportunities, we figure, expands our bull's eyes from 500 to 550, and perhaps, $3 billion to $4 billion worth of opportunities there.
But I think you're going to see a fairly consistent path going forward.
I think that ---+ certainly, there will be opportunities there.
We would love to develop some VA's.
I will tell you that it's a very competitive market, as you can imagine.
And we will see ---+ with our team led by Mike Ivy, I can think of no better person to be able to take advantage of winning some of those awards.
But I'd also like to get back to the fact that we've said that we're going to sort of do 10% to 15%, max being sort of 15%, of our entire portfolio and development.
I will say it is an incredibly accretive, attractive opportunity for us whether it be in VA or in mission-critical GSA facilities, as we are usually getting brand-new, 15 to 20 year, full faith and credit leases on buildings that are squarely in the middle of our bull's eye.
We will have built them.
We certainly know the quality our team puts forward with our wonderful design build contractors out there.
So little risk and a lot of upside.
Yes, Mike, as we've shared in the past, we're very comfortable with leverage levels for full faith and credit U.S. Government cash flows, as ours is in the 40% to 50% range, which would regulate to 6x to 7x EBITDA.
So with the addition of these 2 new VAs and the duration they bring to the asset side of the portfolio, continue to be comfortable with those leverage levels.
