DEA
#Thanks, <UNK>, and thanks, everyone, for joining us this morning.
First, I would like to discuss the properties we acquired over the course of the fourth quarter.
I'm very pleased to report the acquisition of the fourth and final property we had previously announced as part of Easterly's first portfolio acquisition since the IPO.
This property, an FBI field office in Albany, New York, serves an incredibly important mission for the US federal government.
This field office is one of 56 field offices throughout the entire country and we are delighted Easterly now owns 6 of these facilities.
These field offices service as central hubs throughout the United States and help keep Americans safe from threats, both foreign and domestic.
We also acquired a federal bankruptcy courthouse located in South Bend, Indiana in the fourth-quarter of 2016.
This courthouse serves the northern district of Indiana and is responsible for handling bankruptcy cases throughout 11 counties.
Courts such as these act as specialists within the US district courts and have subject matter jurisdiction over all bankruptcy cases throughout the United States.
Both of these buildings meet Easterly's target criteria of owning Class A build-to-suit properties with enduring missions that are critical to the lawful operation of our country.
Turning to development, we are pleased with the strong progress being made at the previously announced FDA laboratory in Alameda, California.
Easterly has been working hand-in-hand with the General Services Administration and the US Food and Drug Administration through the design process and we continue to expect this approximately 66,000 square foot building to be completed and delivered by mid-2018.
I would like to reiterate that when we engage in federal development opportunities, there is all ready a signed lease in place that typically guarantees an initial lease term of at least 15 to 20 years.
Easterly is not engaged in speculative development.
Further, we enter into a design build contract with experienced general contractors so as to insulate ourselves from any risk of cost overruns.
These risk-mitigating factors, coupled with the opportunity for premium returns, make the opportunities for federal government development quite appealing.
Development remains an attractive source of growth for Easterly.
One major opportunity where we expect to see the strong potential for build-to-suit development and acquisition activity is with the Department of Veterans Affairs, or the VA.
The VA is the second-largest department in terms of total appropriations and staffing, employing nearly 350,000 people, which in turn provides vital services to the approximately 22 million US military veterans living today.
In order to provide health coverage for these 22 million deserving veterans, the VA has over 1,700 healthcare sites, which include both hospitals and outpatient clinics.
In recent years, the VA has begun to undertake a transformation in their healthcare facilities that serve these veterans.
Rather than providing healthcare to veterans in hospital-centered inpatient care facilities, the VA has taken on a roughly estimated $63 billion project to provide new state-of-the-art outpatient care facilities located throughout the country.
These facilities are typically located near major hospital centers and offer a wide range of outpatient services ranging from primary care, specialized care, mental health care and related medical and social support services for veterans in need.
There is now greater alliance on the private sector to develop and own the VA facilities on behalf of the US government.
Leases on these new facilities are very attractive.
They are typically 15 to 20 years in initial length, backed by the full faith and credit of the United States government and can even offer greater flexibility in the lease terms than we typically see in our GSA leases.
Examples of this include greater cost reimbursements and periodic bumps in rent over the term of the lease.
Easterly has been a strong partner with the GSA and we are looking forward to the opportunity to expand that relationship to the VA.
Overall, the VA outpatient facilities are a very exciting prospect for Easterly to expand our bullseye of strategic opportunities and you can fully expect the Easterly team to diligently pursue these types of accretive acquisitions and development projects.
The acquisition team continues to seek real estate opportunities that will provide earnings growth to our shareholders, while also maintaining strict adherence to the set of values we hold ourselves to when sourcing and underwriting buildings.
We pride ourselves on our high standards and we will only acquire buildings that we believe will maintain or elevate that standard.
I am pleased to report that the acquisition pipeline remains robust as we review single facilities as well as multi-facility portfolios as a means of future growth.
To reiterate our stated building requirements, we look for properties that are leased to a single tenant of the US federal government, are build-to-suit and mission critical for that current tenant and are usually over 40,000 square feet in size.
Because the missions being performed in our facilities are so inherently critical to the overall safety, well-being and strength of our country, we believe there is an understanding across party lines that the missions are enduring.
For example, the FBI, having doubled in size since 9/11, has expanded its mission to include cyber terrorism, counter terrorism, all in addition to its primary focus to investigate federal crimes.
We do not see their scope of the mission decreasing.
As a reminder, these buildings were new on average 94% of the time and we will continue to focus our acquisition and development efforts on these mission-critical properties located in the center of our bullseye.
Our acquisition activities are an important component of our earnings growth strategy, delivering properties to both elevate the portfolio, while also providing immediate accretion to earnings as our mission.
To give you some visibility of the depth and discipline of this effort, we are defined by the attractive deals we do, but we are also defined by the deals we don't do.
In the fourth quarter, we passed on $100 million of opportunities of seemingly reasonable candidates for acquisition.
However, upon further review, those opportunities fell short of our stated acquisition criteria.
As we have matured as a company in experience and resources, I am pleased with the opportunity the acquisition growth initiative will to deliver to shareholders over time.
Turning to our existing portfolio, our asset management team currently has 15 active projects to improve the everyday performance and functionality of our properties for the government tenants.
An example of such a project can be found at the FBI field office in Richmond, Virginia, which is currently working with our asset management team to build a brand-new emergency operations center located within our building.
This center, once complete, will allow multiple law enforcement agencies to collaborate in a highly technical 24/7 facility, which will provide around-the-clock emergency preparedness and response to high profile incidents that require the partnership and support from various arms of the law enforcement community.
A facility of this type is extremely important to the mission of the FBI and directly contributes to the overall safety and well-being of the American people.
Not only does a project like this create tremendous value for our shareholders by ensuring continued satisfaction, mission support and strong relationships for years and decades to come, but as a Company, we feel extremely gratified that we are in a position to help deliver a project that will ultimately contribute to the increased security and well-being of our country.
With that, I will now turn it over to <UNK> for a discussion of the quarterly and annual results as well as our 2017 earnings guide.
Thank you, <UNK>.
Today, I will touch upon our current portfolio, discuss our fourth-quarter and full-year 2016 results, provide an update on our balance sheet, and review our 2017 guidance.
Additional details regarding our fourth-quarter and full-year 2016 results can be found in the Company's fourth-quarter earnings release and supplemental information package, which is on the Easterly website at ir.
easterlyreit.com.
As of December 31, we owned 43 operating properties comprising nearly 3.1 million square feet of commercial real estate.
The weighted average lease term for the portfolio was 5.9 years, the average age of our portfolio was 12.7 years, and our portfolio occupancy remained at 100%.
In addition, 97% of our annualized leased income was backed by the full faith and credit of the United States government.
For the fourth quarter, FFO per share on a fully diluted basis was $0.31, up 19% year over year.
FFO as adjusted per share on the fully diluted basis was $0.30 and our cash available for distributions was $11.7 million.
For the full year, FFO per share on a fully diluted basis was $1.21, up 16.5% year over year.
FFO as adjusted per share on a fully diluted basis was $1.17 and our cash available for distribution was $43.7 million.
Descriptions of these non-GAAP measures and reconciliations to GAAP measures have been provided in our supplemental information package.
Turning to the balance sheet.
At year end, we had total debt of $292.5 million and leverage was 23.8% in terms of net debt to total enterprise value or 4.5 times annualized fourth-quarter EBITDA.
Despite material acquisition growth in 2016, our leverage is measured by net debt to total enterprise value compared favorably to a year ago.
We continue to be capitalized well to pursue our stated acquisition goals.
Recall that at the end of the third quarter, the Company entered into a $100 million seven-year unsecured term loan facility with a 180-day delay-draw period.
Early in the fourth quarter, we subsequently entered into forward-starting interest rate flush to effectively fix the interest rate on future drawdowns under the term loan facility at a rate of 3.12% annually based on the Company's current leverage ratio.
As of December 31, 2016 on a pro forma basis, fully drawing the term loan and using all of the proceeds to repay a portion of the borrowings on the Company's revolving credit facility, the Company's weighted average debt maturity would be six years, in line with its weighted average remaining lease terms and the Company's percentage of fixed-rate debt would be 56%.
Additionally, the Company would have $288 million of availability on its $400 million revolving line of credit.
This is ample capacity for the Company to exceed is accretive acquisition program for 2017 and support the following guidance.
For the 12 months ending December 31, 2017, the Company is establishing guidance for FFO per share on a fully diluted basis of $1.24 to $1.28 per share.
This guidance assumes our previously stated range of $150 million to $200 million of acquisitions in 2017, including the recently announced OSHA Sandy acquisition and does not contemplate any dispositions.
And not to leave out the obvious, we remain confident in our team's ability to renew the portfolio of leases which roll in 2017.
Our asset management and government teams are continually focused on ensuring that we remain a partner of choice to the US government as we manage the properties we own and performing diligence on newly acquired properties to ensure they're part of the enduring mission of the US federal government.
Finally, as previously announced this week, our Board of Directors declared a dividend related to our fourth-quarter of operations of $0.24 per share.
This dividend will be paid on March 22 to shareholders of record on March 7.
I will now turn the call back to the operator for questions.
Sure, <UNK>.
And I want to be careful, but I think in one case, we did not see a second renewal for the building.
We are not only are looking towards the next renewal of the property, but as you know, our buildings are basically 12 years old and our competitors are north of 24 to 25 years old.
But, we like to see two lease roles at least going into the future before we are going to feel confident to buy that property.
That's a great question.
As you know, we really do stay in touch with them and that's a big part of my job day in and day out and I would say that I think sellers we're seeing, one of the reasons we gave prior guidance for the size of our pipeline that we were going to act on this year is because we are seeing more opportunities from sellers.
I don't think that necessarily has to do as much with the recent election as with the fact that I think that they feel that they can realize some terrific value here and, interestingly, they are also seeing, with the uptick in interest rates, a lot of the prepayment on some of their long-term debt is more attractive at this point to pay down, so we are actually seeing an expansion in our pipeline.
I will start off with saying that we are obviously actively involved on a large portion of our portfolio.
We feel externally confident in the renewal of every single one of those leases in 2017 and 2018 and we are actively working on a number of them right now.
Obviously, depending on the particular building and the mission criticality, the build-to-suit features that will, and the length of the initial lease term, that will have an effect on the lease renewal spread.
But I think were feeling very confident across-the-board.
I think that when we started this firm in [a private] world back in 2009, we were very focused on buying buildings that, whether there was a Republican or a Democrat in office, that these were mission-critical facilities that I think we would all agree both parties that they had a long-term mission within the federal government.
So, I guess I'm very glad that we did take that tack at that point and over 62% of our properties right now are leased to, what we call, gun toting agencies in the federal courts.
I think we're going to see an expansion in probably some of the projects in our immigrations and customs enforcement, customs and border patrol, US federal courts on the border.
I could go on and on, but I think from our standpoint, we're beginning to see a nice tailwind in some of those opportunities.
<UNK>, as you know, our long-term goals are obviously to build a portfolio that is 100% focus on the US federal government.
So the triple net price at these tenant properties, while there's nothing to disclose, are always potential opportunities for ways to recycle capital.
I think that certainly since we have been in the market and defined an institutional asset class, there were more people aware of the properties today than there were certainly in 2009 and 2010.
Having said that, in the market that we are in, the middle market, we are not seeing a great increase in competition, either from public or private players at this time.
That is a straight acquisition number, <UNK>.
No.
So, we have announced FDA, Alameda, and that project, as we said, is expected to deliver in 2018.
Construction will be underway throughout the back half of this year and the beginning of next year and that is taken into consideration.
But, I would say, <UNK>, today more than ever, we feel like the development opportunity is a robust opportunity for growth for our business.
As these agencies continue to re-adjust missions and as we have spoken over the last eight to nine years, we have not seen significant development projects coming out of the US government.
You can see renewed focus on the Veterans Administration and some of these other gun toting agencies.
There will be needs for additional housing to support mission and we think we are always positioning ourselves to be the partner of choice to the United States government in helping them satisfy those missions.
Well, I think one thing, <UNK>, that's interesting is that GAO reported in 2015 that the federal new construct VA projects.
So, these are the ones that they did themselves.
We are seeing cost overruns from 66% to 427% and delays of 18 to 86 months.
And I think what you are seeing there is a realization, like they had in the GSA sector, that the private sector is the most cost-efficient, most effective and preferred way to house these particular missions.
The VA, which is now, I think under terrific leadership, has bipartisan support, has now really figured out they understand what they need and how they are going to serve the veterans going forward and it is really the focus on the outpatient side of things.
I think the answer is yes, it is a department that has, I think, gotten its act together.
It understands what it's mission is and I would say that the same message would've been in the Obama administration as the Trump.
In fact, they have the same person running the veterans today.
So, I think there is more opportunity going forward.
