Easterly Government Properties, Inc. (DEA) Earnings Call Transcript

Greetings. Welcome to the Easterly Government Properties Third Quarter 2026 Earnings Conference Call. [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, Cole Bardawill, Director of Investor Relations. Please go ahead.

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 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 the company's most recent Form 10-K filed with the SEC and in 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 would now like to turn the conference call over to Darrell Crate, President and CEO of Easterly Government Properties.

Thanks, Cole. Good morning, everyone. This quarter, we delivered year-over-year core FFO per share growth of 2.6%, in line with our 2% to 3% stated long-term growth target. We continue to execute our strategy by growing earnings steadily, allocating capital thoughtfully and improving the quality of our portfolio over time. We've been operating in a dynamic geopolitical and interest rate environment for several quarters now. Throughout that period, the durability of our portfolio and the consistency of our cash flows have continued to demonstrate the resilience of our business model and position us to perform well relative to the broader REIT market. Easterly remains focused on delivering consistent annual growth in core FFO per share. In 2026, we're on track to exceed our long-term 2% to 3% growth objective, with the midpoint of guidance implying approximately 4% growth. As we look ahead to 2027, we remain committed to generating sustainable earnings growth while continuing to delever the balance sheet, a combination we believe will drive long-term shareholder value. You may have noticed that we've refreshed our brand and introduced a new logo. Over the past several years, Easterly has expanded its capabilities, broadened its investment opportunities and strengthened its platform. Today, we're a diversified owner, developer and operator of mission-critical properties serving federal, state and local government, as well as the government adjacent tenants. Our new identity reflects the company we have become and the opportunities we see ahead. Turning to the quarter. Our portfolio continues to perform well, ending the period 98% leased with a weighted average lease term of 9.2 years. These metrics underscore the durability of our portfolio and the essential missions supported across our buildings. Our asset management team did an excellent job closing out our 2026 lease rollovers with the renewal of USCIS Lincoln. With our 2026 renewals behind us, the team has already turned its attention to our 2027 expirations and is actively engaged in those discussions. That includes continuing to reduce the share of our portfolio [ with soft term ], and Allison will update you on that in a moment. In addition, we're able to extend the lease at our FAA Chicago facility for an additional 9 months, including 6 months of firm term. As we've discussed previously, the government occasionally requires additional time to transition out of the facility, and this extension is expected to provide incremental earnings in both 2026 and 2027. We still expect the tenant to vacate the property, and the asset remains under contract for sale upon move out. Lastly, our acquisitions team remains active as we evaluate opportunities across our approximately $1.5 billion pipeline. With the recent sharp move in the 10-year treasury, we are recalibrating our cost of capital, and we remain disciplined and selective, focused on opportunities where we can create value and generate attractive risk-adjusted returns for shareholders. I want to take a moment and thank Mike Ibe, Chris Wang and the entire acquisition team for continuing to keep that pipeline actionable. As we see our cost of capital improve over time, that work positions us to meaningfully accelerate our growth. On the joint venture front, we continue to talk with partners. We believe we have a definable edge in this government real estate space. As one of the largest landlords in the sector, we bring many benefits as a partner to those looking for this kind of exposure. I'll leave it to Allison to discuss our 2026 and 2027 guidance, but we're pleased with this year's performance to date and the momentum we've built across the business. As we look ahead to 2027, we're focused on continuing to execute against our strategy and delivering growth within our long-term target ranges. While the geopolitical and macroeconomic backdrop remains uncertain, we believe the durability of our portfolio and the mission-critical nature of our assets we own position us well to navigate a wide range of operating environments. I also want to thank Allison, who's been working with our team and the rating agencies to socialize our differentiated credit profile. That work matters as we pursue our investment-grade goal. We want to thank our team for the great execution so far this year. We would also like to thank our tenants and our shareholders as we partner with them to hit our goals for 2026 and 2027 as well. Now with that, I'll turn the call over to Allison.

Thanks, Darrell, and good morning, everyone. I'm pleased to begin with reporting the financial results for the third quarter of 2026. The underlying growth of the business continues to come through clearly in the numbers. Total revenue for the quarter was $93.6 million, up from $86.2 million in the third quarter of 2025. That's an increase of 8.7% year-over-year, and it was driven by several factors: the acquisitions and development we've completed over the last 12 months, lease renewals and [ TISC ] income coming online. EBITDA grew alongside revenue, coming in at $59 million for the quarter versus $54.2 million in the third quarter of 2025, approximately 8.9% growth. And importantly, that growth continues to reach bottom line on a per share basis. For the quarter, net income was $0.12 per share on a fully diluted basis. FFO per share was $0.79, up from $0.74 in the prior year, and that is approximately 6.8% year-over-year growth. FFO exceeds core FFO this quarter because of the downward adjustment to our credit loss allowance in the Bedford loan repayments. And core FFO per share as well came in at $0.78, up from $0.76 in the prior year. That is approximately 2.6% growth year-over-year. And finally, cash available for distribution for the quarter was approximately $32.8 million. As Darrell noted, our asset management team did an excellent job closing out our 2026 lease flow over with the renewal of USCIS Lincoln, a 15-year lease with 10 years in firm terms. On soft terms, we've continued to reduce the percentage of our portfolio with early termination rates, which stood at 2.3% of [ AOI ] at quarter end, down from 5.2% of AOI at year-end 2024. Turning to development. We are pleased to announce that all significant construction activities were completed at our FDLE laboratory facility in Fort Myers, Florida this month. Having broken ground on the project in August of 2025, we're extremely proud of the execution by both our internal team and development partners in delivering the facility in [ 13 months ]. Looking ahead, our development pipeline continues to progress as expected. Construction of the U.S. Courthouse in Flagstaff, Arizona remains on track for completion in the first quarter of 2027, while our U.S. Courthouse project in Medford, Oregon is now expected to be completed during the first half of 2028. The timing reflects the government's design projects with various agencies, which is taking a bit longer than planned. On leverage, as of quarter end, our net debt to annualized quarterly EBITDA stood at 7.1x. This metric improved from second quarter and reflects our continued progress towards our target cash leverage range. We believe this progress positions the company well as we look forward to 2027 and our goal of achieving an [ additional ] investment-grade credit rating. We are growing FFO per share and delevering at the same time. That is a hard combination to deliver, and I am proud of what our team has accomplished so far. Turning to guidance. We are raising the low end of our 2026 core FFO per share guidance. Our new range is $3.08 to $3.13 per share compared with $3.07 and $3.13 previously. The increase is primarily driven by the execution of a 9-month lease extension at FAA Chicago, which includes 6 months of firm term and provides additional earnings contribution in both 2026 and '27. This benefit is partially offset by the early repayment in September of our $35.6 million Bedford construction loan ahead of its August '27 maturity date. That loan contributed approximately $0.02 per share to our 2027 expectations, and we used the proceeds from the repayment to reduce outstanding borrowings on our revolving credit facility. For 2027, we are introducing initial full year core FFO per share guidance of $3.09 to $3.17 per share. At the midpoint, that implies roughly 1% growth over our 2026 midpoint and the high end implies roughly 2%, the low end of our long-term target. [ To ] headwinds that are incorporated into our 2027 outlook, the FAA Chicago move out and the refinancing-related pressure largely driven by the maturity of our [indiscernible] loan. Our guidance assumes that FAA Chicago remains occupied through the current firm term, which extends through April 20, 2027. At the midpoint, our guidance contemplates between $25 million and $50 million of growth development-related investment during the year. And in addition, our guidance assumes approximately $50 million of wholly owned acquisitions during 2027. As the year progresses, we would imagine there to be additional upside from acquisitions, and we will continue to pursue opportunities where we can deploy capital accretively while maintaining our disciplined underwriting standards. Through consistent execution over the course of the year, we believe we can build on this guidance. We remain focused on executing against our long-term growth strategy, achieving our targeted leverage levels, maintaining strong tenant relationships and allocating capital in a disciplined manner. Continued execution in these areas supports the resilience of our cash flows and enhances our ability to create long-term value for shareholders. Thank you for your time this morning. We appreciate your partnership and look forward to updating you on our progress. With that, I will now turn the call back to Shannon.

[Operator Instructions] Our first question comes from John Kim of BMO Capital Markets.

I just wanted to follow up on guidance for next year. I know you walked through some of the headwinds, which include the Bedford loan repayments, the [ LoMolindum ] refinancing and [ H ] kind of move out. But on the first couple of items, the loan repayment, how quickly do you think you can reinvest some of those proceeds back into [ meds ]? I think before you talked about having a pretty steady [ med ] program. And on the [ Nomoline ] loan maturity, how do you plan to revamp that debt?

Sure. So maybe we'll start with [ Melinda ] because that's, I think, a very simple answer. At this moment, we intend, should we be successful in the investment grade ratings process to use an investment-grade inaugural issuance to address that maturity. If not, we will put it on the revolver and term in out using [ for 2 ] money like we have in the past. But our primary goal, as we've shared most recently, is investment grade.

But our guidance is to put it on the revolver today. So the degree to which we get an investment-grade rating, and we're able to do those issuances, we -- that would be worth some earnings accretion. And that is our goal, but it's not in our guidance.

And then for Bedford, I think we continue to see opportunity within the [ most ] financing space. We -- as we've shared before, the VA outpatient clinic pipeline that's coming off the conveyor belt from the Veterans Administration is quite large at this time. And we're seeing opportunities across the country for projects like that where we can continue to deploy mezzanine capital.

I was wondering also if you could discuss your expectations for renewal leasing spreads? I think last call, you mentioned your mid to high teens and net effective level growth. And I wanted to see if that's what you believe you can accomplish?

Yes. I think that is still and continues to be our expectation with respect to upcoming 2027 and 2028 renewals. I think we're pushing for as much firm term as we can get. 10 to 15 tends to be about what a renewal is achievable under these days, but that's a few years [indiscernible] there. And then mid- to high teens to your point, net effective rent spread typically, which is significantly outpaced those markets from peers, we are only at $35 of TI capital deployed across renewals on average.

It was breaking up a little bit, but did you mention the '26 USCIS Lincoln renewal as well?

We will share the class of renewals for 2026 as a group in the year-end earnings call, as we historically have, but that is 10 years of firm term, 15 years total.