...Go. Green means go. All right. Thank you everyone for joining us today. I'm Peter Abramowitz. I'm a senior equity research analyst with the Jefferies research team, covering Easterly Government Properties. And I'm joined today by the executive management team. To my left, closest to furthest, we have Darrell Crate, who is Chief Executive Officer and a board member, Meghan Baivier, who is Chief Operating Officer and President, and then down at the end, Allison Marino, who is Executive Vice President, Chief Financial Officer, and Chief Accounting Officer. So I just wanna go through a very, very quick introduction of the company. Easterly primarily focuses on acquisition, development, and management of Class A commercial properties, leased to the U.S. government and agencies that serve essential U.S. government functions.
Our company generates substantially all of its revenues by leasing properties to such agencies through the GSA. So we're gonna go through some questions here today, kind of an overview of the company, but we can leave it open to the audience as you have questions. If you wanna raise your hand, we'll kind of mix that in as we go along. So, with kind of the introduction out of the way, I gave a little bit of an overview of the company and what you do. I guess from your own eyes, could you give us an overview of the company's strategy, the portfolio, and most importantly, why should investors buy your stock today?
Sure. Yeah, that's a good question. You know, so, Easterly Government Properties, you know, occupies a very unique space, you know, in our industry. You know, we are the, you know, the premier acquirer, developer, and manager of mission-critical facilities for the, for the U.S. government. You know, we, we became public in 2015. Easterly Government Properties is our name. We wanted to give a ticker symbol that would let people know what we do. The Federal Bureau of Investigation is one of our most active agencies, but they wouldn't give us FBI. So then we moved to, you know, the Drug Enforcement Agency, and they would give us DEA, and that continues to be our ticker symbol today. That is meant to say one very important thing, which is we are not office.
We are not office. We are not office. I mean, obviously, we're not multifamily, retail or industrial, but we are definitely not office. You know, if you look inside, you know, our buildings, you're gonna see what looks like life sciences, you're seeing labs, you're seeing people doing mission-critical work. You know, so often we get a question about tenancy, for example. Like, you know, are people working from home? Absolutely not. Like, there is no way you can go, you know, follow the Sinaloa drug cartel, you know, from your, from your game room. You know, you go to our... You know, all of our labs are identifying, many different kinds of synthetic and organic drugs that are out there.
Fentanyl is killing 200 people a day and has killed 250,000 Americans, you know, in the last decade. You know, so when we look at that, we got into this business because we wanted to buy the real estate and sell the credit. And what that means is, you know, we are backed by the full faith and credit of the U.S. government for the majority of the cash that comes into our REIT, and, you know, we believe that gives us a consistent ability to weather storms. Our balance sheet is strong, and we've got, you know, billions of dollars of cash flow. Again, you know, on our leases, it says United States of America.
If we look at our existing portfolio, there's over $6 billion of full faith and credit money that's gonna come into the business. So the reason to invest is stability. We, you know, we're advertising a very nice dividend right now, so you should look forward to that. And the mission criticality of what we do is an enduring mission. Government grows with demographics. You know, the DEA is not going away because of technology. You know, these budgets grow, and as our population grows, we'll find ourselves in a place, you know, where the mission will continue to expand at these facilities.
Thank you for that. And you've talked over time about sort of a 2%-3% long-term growth target in your FFO per share. Could you just sort of walk through the building blocks of that, both internal and external growth?
Yeah. That's like a CFO question to me.
Here you go.
I'll be as loud as I possibly can. I think most of you know that I'm a loud person. So this year, we're gonna continue to ensure that the market understands the breadth of what we have to offer, and the building blocks towards meeting or exceeding this core FFO trajectory are, you know, sort of backended by our 2024 guidance. So our 2024 guidance on a year-over-year basis reflects two to three pennies of core FFO. Two to three pennies of same-store improvement, which is growth in margins, two to three pennies of G&A savings, and offset by two to three pennies of interest rate headwinds. We repriced our swaps in 2023, so 2024 is the first full year effect of those, those rates.
In future years, it is driven by internal growth for about 0%-1% and then 1%-2% of external growth through acquisitions. We continue to develop and buy more mission-critical buildings at favorable spreads, continuing our strong partnerships with high creditworthy state and local governments and U.S. government-adjacent partners. The purpose-built facilities in our portfolio serve as Easterly's definable edge in commercial real estate and continue to be the bedrock of shareholder value. We've already taken strides to execute on the strategy in the first half of the year. In April 2024, we announced the acquisition of an Immigration and Customs Enforcement Information Technology facility near Dallas, Texas. This enables ICE's Office of Human Capital to modernize its IT systems and bolster its technological capabilities.
... We also acquired two assets in Orlando, Florida, that serve important functions for the safety and security of our nation. In total, we have acquired three assets at a combined high seven, low eight cap rate, delivering accretion to the company.
Thank you, Allison. We're not gonna sign them?
You're gonna have to yell.
That's fine. We can do that for the rest. Thank you for that, Allison. So, what else you got? So just in terms of kind of the adjustment and expectations around the interest rate environment, may be a little bit different than where we started the year. Now, the expectation is that it's projected to remain elevated for an extended period of time. Can you just touch on against that backdrop, what makes the stability of your cash flow particularly attractive for investors? See you. Yeah, there you go. You're up.
So for over a decade, almost all of that in the public markets at this point, whether it's high interest rate environment, low interest rate environment, our portfolio, you know, has provided shareholders with a stable, predictable cash flow stream. Our core tenant, primarily the U.S. government, now some state and local governments as well, you know, they are not influenced at all by market fluctuations. The leases are designed to insulate NOI and allow the portfolio to weather economic storms. And so the in-place portfolio today really is that keel to the boat, sailboat perhaps. And it provides a stable platform from which we can then grow both through acquisition and development.
Can you really?
Thank you for that. And then just to touch on, you talked about kind of insulation from some of those macro factors. Maybe if we think about it in terms of, you know, broader office environment. Earlier this year, the House approved a bill incentivizing government agencies to either use their office space or have to give it up. So could you discuss how, if at all, that's impacting your business, particularly space requirements through those government agencies?
I'm glad you bring it up. Many of you may not be, you know, familiar with the USE IT Act, you know, which is utilizing space effectively and information, you know, technologies. But the concept here is to send a message to the American people that the government's not wasting your money, and this idea that as people are working from home, well, oh, government's doing its part, you know, to shrink its footprint. This has nothing to do with us, absolutely nothing. You know, we have in our DEA lab in Pleasanton, for example, we have 35,000 pieces of evidence. You know, that is for cases that are currently getting adjudicated. You know, that's that space will be used for that purpose, you know, for a very, very long time.
You know, as I was saying, this is mission-critical work. You know, you can't do it from home, and these facilities are created to actually help, you know, the members of each of these agencies learn how to do their task, execute their task, you know, and execute these mission-critical facilities. In one of our buildings, we have a fuselage of an aircraft. Well, guess what? That's the Air Marshals Office. So, you know, they have a control center, so when you go into the airport, and you, you know, pop your passport in or do whatever you do to check in for a flight, your name is going to this facility.
If you're an evildoer, as George Bush used to say, you know, there's a guy who's gonna pop out of a lounge, who probably has, you know, big muscles and a bag, and, and he's gonna end up on their flight with you. They're monitoring these all across the country, you know, each and every day, and these people come back to Atlanta for training, and they've got a, you know, a gym. They put, dummies on a plane, and they know how to, take care of business if there's any problem on these flights. You know, our leases are 10 and 20 years, so that just evidences the government's commitment, you know, to the mission, to what we're doing.
In each of our facilities, millions of dollars are invested, you know, in the specific work that's there, and the government doesn't have the money to go buy it, you know, build a, a new FBI facility every 10 years. You build them, you know, they work for 40, 60 years, and then their time is over. But if you do the math on that, we're all doing a really great job if we have leases for, for that duration, paying the way they do with the bumps that we receive for these facilities.
While we're on the topic of your tenants and what kind of the core missions of what goes on in your buildings, you've given significant weight to some of the core tenants that make up your portfolio. Could you share more details on some of those agencies, what they do, and any plans to expand tenancies within the portfolio?
Sure. So for starters, right, given the volume, or given American population growth and the continued necessity for contraband enforcement, we see the DEA as an agency that will continue to grow. It's gonna grow its influence on public safety, regardless of recessions, soft landings, hard landings, inflation, work from home trends, other market forces that impact, the broader economy. The DEA's approved funding actually increased over 6% between 2022 and 2023, and its headcount rose over 4% during that same period, primarily to combat the increased manufacture and distribution of controlled substances.
So, you know, our drug analysis labs and secure screening facilities, our DEA district offices, and their agents are all critical in executing the mission of the DEA, and we do expect and look forward to continuing to support their work in our portfolio. The VA is another important area of growth for the United States. There's approximately 16.2 million veterans living today, and there's an increased reliance on veterans receiving medical services from the VA. Mental health being a big component of that delivery of healthcare. Approximately 76% of veterans in active military have some degree of PTSD as a result of their military service. Obviously, an incredibly important need to be supporting through the VA medical system.
The VA actually has developed a new standard of care. It's called the Patient Aligned Care Team, or PACT, and that standard requires a very specific type of facility to be built to exacting construction standards to facilitate the way the VA delivers medical services to veterans. And, you know, the VA is our largest tenant in all of our community-based outpatient clinics, or we call them CBOCs, are constructed to that PACT standard. As the VA continues to grow its CBOC footprint, we expect to grow alongside it.
Thank you, Meghan. Then just to touch on some of your investment verticals here. So last year, you entered the market for state-leased facilities, expanding out from the federal government for the first time. Can you talk more about those as an asset class? Generally, what makes them different from your typical GSA leased assets? What makes them attractive, and sort of the size of the total market opportunity.
So, one of the areas that we've expanded to, and we look for it to be about 15% of our portfolio, is state and local buildings. The first property we acquired is in Anaheim, California. California being a very high creditworthy state. And this facility does workers' compensation adjudication, as well as, you know, workers' compensation training, you know, facility. And what ends up happening there is it's a, it's again, long-term lease, but what makes these state leases attractive is that they have escalators. You know, so that has a nice effect on our FFO and our CAD, you know, over time. You know, these buildings are mission critical to the state's objectives, and we think that can be a nice addition, you know, to the FFO of our REIT. Else again.
On a similar note, sort of a I guess similar but slightly different investment vertical. So to start off this year, you talked about potentially investing in either privately leased or public-private partnerships through mission-critical facilities, sort of up and down the capital stack. Can you give an update on that vertical? What are you seeing in the market for those types of deals? Similar question, what's potentially the market opportunity, and sort of how should investors think about how that impacts the growth trajectory for the company?
Yeah, I mean, that, that's, that second area is working with, you know, private clients, you know, private corporations. Again, those that have a very high credit rating, you know, but they're working with the government, and we call them government adjacent. These are folks who need facilities like the ones we build. You know, example, our FBI facilities have SCIF rooms, you know, which again, you have no ability to eavesdrop on these kinds of rooms. And there are these private corporations, as we begin to onshore various technologies and other activities, that, that these same facilities need to be built.
So it's perfect for these high credit companies to come to us and say, basically: "Build us an FBI headquarters, but we're gonna be using it for, you know, for our own purposes." We'd also like that to be sort of 10%-15% of the overall portfolio. We see about, you know, hundreds of millions of dollars of opportunity in this space, especially, you know, as we are refocusing, you know, the government, you know, post-COVID. And we're very excited for the partnership because, again, our broadly, you know, we're a private-public partnership with the government. When we build our buildings, we keep them in great shape. We can do that more effectively than government can, and they're really good at executing the mission.
We're not so great at interdicting drugs or, you know, or, or stopping, you know, aircraft hijacking. So we'll do our part, they'll do their part, and it'll all work out just fine.
You don't know if you haven't tried.
Yeah, it's... I was about to do the headlock. Yeah, absolutely.
So earlier this year, you received an investment-grade credit rating from Kroll. Could you just talk about generally feedback from the rating agencies over the years about your business, your portfolio? And then specifically, they issued a rating, a Triple B, but kinda any feedback they've given to you about what could improve the rating even further.
Our reaffirmed rating from KBRA is reflective of the strong underlying credit quality of our tenant cash flows. Approximately 99% of our annualized lease income comes from government credit, and the rating is supported by leases of mission-critical facilities to government agencies with an enduring mission. The feedback that we receive is positively weighted towards the excellent creditworthiness of our tenancy, favorable lease spreads, and predictability of our cash flows. These are long-term leases, and we look forward to improving our rating in the future through continuing to exceed our growth trajectory, managing operational costs to enhance our portfolio value, and doing more accretive deals.
Thank you. And then, Darrell, you stated up top, repeatedly, that Easterly is not an office REIT, and
We're not.
... To be clear, and should not be classified as an office REIT. So how would you classify Easterly among comparable industry peers? And can you explain this difference a little bit more in depth?
Yeah, no. As I've shared with you publicly and privately, we desperately wish we had a peer, because we are... We're good at what we do, and we care deeply about it. I think we've developed a definable edge in this space. We know how to be a good partner to government, and we're able to, you know, get a very nice return, especially on a risk-adjusted basis, you know, for our shareholders. You know, our facilities are mission-critical. Lindsay's gonna do a fantastic job over the next year. As we, you know, you look at our website, you'll see a bunch of buildings. They look like buildings, but we're gonna start showing you what's inside. So if you wanna know more about fentanyl or all the organic drugs that are out there, we can do that for you.
We can show you, you know, how air marshals get trained. We can work with you on FBI and how, you know, they... You can show you the evidence trucks that they have. So that, you know, not every UPS's truck is delivering packages, in case you didn't know. And all of this, I think, will give people a sense of, you know, the dynamic nature of what's going on in our buildings, and there's no way you're gonna be able to look at our investor presentation by September and say we're office, 'cause we're not an office REIT.
Then, just last week, you announced a $200 million capital raise in the unsecured bond market. Cost on those notes, I believe, with a nine-year term, was 6.56%. Could you just talk more broadly about how you think your cost of capital... In a broader sense, what's the ideal mix of debt and equities you think about funding, particularly your, your external growth prospects, and sort of your, your overall leverage targets?
Balance sheet.
That's a great question because we have certainly been active in the debt markets these past two weeks. First was the execution of senior unsecured notes in the private placement market. We were able to raise $200 million of notes at a spread of 210 basis points, with nine-year maturities. This transaction was extremely well-received in the private placement market and was multiple times oversubscribed, with new and existing investors joining our book. The credit quality of our tenants make the PP market very attractive for bought-in investors and for Easterly as an issuer. As you just saw, just this morning, we announced the recast of our $400 million revolving credit facility. It was a great execution, and we are pleased with the extended lending relationships with key banks like Citi, Jefferies’ partner , Truist, and Wells Fargo.
Through this execution, and combined with the accordion feature, we have ample debt capacity and have extended the maturity of the revolver to June 2029. These two actions extended the company's unsecured weighted average debt maturity by over 25%, which further solidifies our balance sheet and helps us remain focused on executing our growth strategy. To answer your question, we view our cost of capital today as in the mid-7s and increasingly strengthening as our reinvigorated growth strategy begins to resonate in the equity market. We remain comfortable in the 6.5-7.5 range, leverage range today, and we are below that midpoint at 6.9x.
Thank you. And then I have one more, and we will have a few more, a few minutes at the end here to open it up to the audience, if you do have questions. So the dividend is the last one I wanted to ask about here. So it's a topic of frequent discussion, given your payout ratio on CAD is above 100%. How long do you think you can sustain that payout ratio, and potentially, in terms of growing into it, to get it back below 100%, how long should we expect it'll take for that to happen?
Yeah. So, so our payout ratio, I mean, you know, sort of going back, when we went public, our payout ratio was close to 100%. You know, the idea that we had such a high payout ratio relative to the industry has always been an indicator of the durability and stability of our cash flow. So we've had times in our history where, where we're below 100, times above 100. You know, with the repricing of some liabilities and swaps, you know, like, like has affected, you know, all of real estate, our payout ratio is higher today. Given the robustness of our pipeline, how we're continuing to grow, and how we're building, you know, we, we think that that dividend payout ratio will get below 100%, you know, within 24-36 months, if not sooner.
We're very excited to give people such a nice return while they watch us, you know, do the work, you know, that we're looking to do. How's that?
Any other questions? All right, so we do, we do have a few minutes left here. I'd like to open it up to the audience. Just raise your hand, and someone should be able. Do we have someone to bring around the microphone? I guess not.
You came in.
Okay. Jared.
Look at you, Jared.
Thank you.
Huh?
Back there.
There you go. Thank you for the private placement.
Turn it on.
Oh, no, we're not an office REIT.
Sorry. Yeah. Considering you're not an office REIT, and considering, you know, obviously, your number one source of revenue is the U.S. government, I just wanted to-
... see why you think that the stock is, you know, underperformed, considering all those factors. I know obviously, interest rates and REITs are generally not the flavor of the month right now, but is there any other reason why you think the stock hasn't performed as it should, considering?
Yeah, no, I mean, I think there's, you know, just concerns about growth. You know, because, you know, during this, you know, this bit of period, when all of real estate was repricing, our leases are flat. So accordingly, you know, if you want to be skeptical when you're modeling the company, you can see that it could take four, five, six years, you know, for our dividend to get to a place where our payout ratio covers it. You know, we've been insistent, you know, explaining to folks that we are putting the company on an FFO growth path of 3%. The management team is very incented to do it. We're gonna cut costs, to make it happen. And, that's what we're doing for the next three to five years.
That is a different approach, you know, than we've had in prior years, so there's a shift. People will slowly develop conviction over time, you know, as we continue to do that. Our earnings this year, I'm allowed to say it, are, you know, will sort of be on that trajectory. And, you know, as we look to next year, Peter's model will tell you they're gonna be on that trajectory, and I hope. And going forward, you know, the sources of that are, again, you know, we can do expense control, which is within our capability.
This opportunity, as we bring on accretive acquisitions, as Allison was saying, you know, we've already acquired three buildings this year, which is a bunch, you know, in our space and has already led to us increasing guidance by another $0.01. And then with the development opportunities, you know, we'll make money on financing them with developers until they get delivered, you know, which will start to happen in 2026 and 2027. But we have yet to, you know, get those figured out, get shovels in the ground, do all this work, but the pipeline's large and large enough where we feel very comfortable that we're gonna be able to, you know, get to meet or exceed the objective that we've set for ourselves. But I don't think people see it yet.
This is also a sector... I mean, I've worked in financial services and real- in a whole set of ways. This sector, you gotta show it to people very clearly a couple times before they believe it's true. So I don't know if that means there's been decades of people promising things that they didn't deliver in the REIT industry, I don't know. But we find ourselves in a place where this is the trajectory, we're explaining how we do it, and I think as people see it, I think it's great news that people have a fantastic dividend, you know, while they start to see that FFO catch up, which then makes the CAD catch up, and that will certainly accelerate the stock price.
I mean, I look at it today and say, "You can get paid 8%-9% to hold on to it. The company should certainly appreciate 30%." And I don't think it's arrogant to say it. I mean, you know, there's—that's just reversion to the mean. If you look at our growth relative to the other growth, you know, without any a sort of assessment for, you know, risk-adjusted return. So basically, you're getting 20% a year to own the stock for the next three years. It's what I'm committed to do for folks, and we're really excited to develop a cadre of folks who are gonna be excited 36 months from now, because they had full faith and credit of the U.S. government behind them, and they were earning a, you know, double digit, you know, 20% return.
So that's what we're focused on, and that's the roadmap that we've laid out, and we're sharing it with you today, and if you buy the stock, the stock price might go up. So there you go. And, and honestly, you know, if we get to a place where the stock, even at... It's crazy to even say this, like $14-$15.
Mm-hmm.
All the different stuff we're doing just becomes massively more accretive. And so we're bringing the growth and the cost cutting forward, and hopefully, as we continue to show people what we bring forward, they'll reward us with the stock, which creates the flywheel of the REIT machine, you know, to work in a way that's pretty rewarding to investors. We have one up here.
Yeah.
Sorry, this might be hard to summarize, but I was just wondering, you alluded to it earlier, about your leases with the government. What's the structure? How long are they, whether they are-
Oh, yeah.
That kind of stuff.
You wanna do leases?
Yeah, sure. So, post at the development point, leases are typically 15-20 years in term. Our leases do tend to renew as well, kind of in that high teens from a duration perspective. Our leases are double net, or people might refer to it as modified gross. We have operating expense bases, we have real estate tax bases. Increases in real estate taxes are passed through to the government, so we don't own that risk, if you will, on rising real estate taxes. And that operating expense base, which today, importantly, is well matched to our actual operating expenses, right? Accretes with CPI every year, no caps. So that's sort of that recipe for NOI insurance in the lease over time.
So you might have a 15-year lease, and then your tenant has the option to renew another 15 years?
The tenant, it won't be necessarily in the form of an option, but when they come to look to renew that lease, the dynamic at play is around replacement costs, given the types of assets we have. The FBI's, we're famous for saying, can't move across the street. It would need to have another purpose-built facility built for it. And you'll note, right, construction cost increases over the last 15-20 years have been sizable, and a wind at the back of the dynamic that drives our renewal spread outcomes. And it's not about what market rents are in Omaha, Nebraska, when we're working on renewing the FBI in Omaha, right? It's about the cost to replace that FBI in Omaha.
Thank you.
Yeah.
...to kind of the effect that you guys think will have on the upcoming election, like if any, with respect to the business? And then does that really, like, I can appreciate the stable cash flow, but what keeps you up at night with respect to the business?
Yeah. We picked agencies, you know, that really aren't influenced by, you know, Republicans or Democrats. No one's gonna put the--some people might be angry at the FBI, but they're not gonna put them out of business. You know, the DEA's the same thing. We look at the agencies, mostly the folks who carry the guns, you know, they will continue to, you know, have enduring missions and, yeah, and their budgets, you know, continue to grow even faster than our population growth. I think the thing that, you know, we get very focused on just looking at long-term trends and making sure that we're getting aligned with the agencies that are growing the fastest.
It's very easy to get lulled into some complacency in our business 'cause it does, you know, evolve at a glacial speed. So we really do have to spend a lot of time, as we do, you know, on the Hill, working with the agencies in specific and understanding where they're going, understand how we're missioning, you know, continue to be very savvy about the way we can build these facilities, so that we keep that, you know, growing that definable edge. With FDA, they're building 10 labs across the country. We've been awarded the first three, so we're three out of three. In government speak, sometimes, you know, that's a, that's very rare because, you know, the other guys are like: "Well, is this a rigged situation?
You know, don't you need to award it to somebody else?" The reality is, we're getting so good at building these labs, it's very hard for anybody to, you know, match us on cost. And, and if we can keep building that definable edge over time, we're gonna see that we're able to, you know, deliver, more for our shareholders. And also, I mean, you go through our buildings, you don't feel like you're in a government building. They're well-maintained, and, you know, in exceptional shape, and, and our folks are every day coming up with new ways, you know, suggesting to the agency, you know, on how they can, you know, better execute the mission. That can be as simple as moving a wall or, you know, expanding lab space, you know, wherever there's congestion.
We have a good deal with the government. When they need to make a change in our building, they pay for it, and we manage it, but it really, they care about mission efficiency, and that's what we deliver as a good private partner. Okay.
Seeing the red light, so-
I see it.
I think we're out of time.
Okay.
Thank you.
Thanks, everyone, for your interest.