Now you know what we get to do with our little guitar when we prep for our earnings call.
That was fantastic.
Thank you.
I'm going to ask Billerman to put this—Billerman still does the music between all the things. Nick asked him to do that, and I'm going to somehow get that added.
It was a little of the genre of the Trans-Am flying down the Long Island Expressway just 10 minutes before the commuter rush, so I thought it was appropriate for him.
Really good. Let me read my script. Welcome to Citi's 2025 Global Properties CEO Conference. I'm Brian Quinn with Citi Equity Sales, and we're pleased to have with us Easterly Government Properties and CEO Darrell Crate. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand, or you can go to the liveqa.com and enter code GPC25 to submit questions. Darrell, we'll turn it over to you to introduce your company and team, provide any opening remarks, and we'll start by having you tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
Great. I'm Darrell Crate. I'm the CEO and Head of Easterly Government Properties. Founded the company in 2010 as a private equity real estate business. Ultimately, I worked with the Romney transition team, and I worked with Romney for 10 years. One of the things I learned most about government—and if you ever, as some folks at Verby say, if you ever become the nominee of your political party to be president of the United States, they let you run a shadow government for four or five months—it was very clear to me that government was not a monolith, that there are certain agencies that do the core of what the government does, and then there are other agencies that are either influenced by politics, money, or a whole set of things.
We began underwriting the company and its properties to those core functions that the American people would want their government doing most related to what they expect government to do for them. We ultimately went public in 2015, and we'll talk a little bit about what we do. Joining me to my left, your right, is Allison Marino, who's our CFO. She's fabulous and has been with the company making things happen for a while. Over to my right, your left, is Lindsay Winterhalter, who does investor relations and oversees so many things that we do in each and every day. If you've got any questions, they're also here for you. Maybe the quick overview is why invest in Easterly Government Properties? Very insightful question. What I would say is today, first and foremost, that DOGE and rationalization of expenses in the U.S.
Government favors us fundamentally, and this is a little weedy for the very first thing that we say, but the U.S. government has had a set of models that encourage it to own its properties, and those models are not constructed correctly. We've been talking about this for the better part of a decade with the GSA and with anybody who would listen, and you guys will understand it, which is when the government—for example, they're building an FDA lab in Denver, and there's an analyst in the government who's going in the FDA and then the GSA, and they figure out their program, they put info into this model, and one cell has a little number, which is, "What's the residual value of this building in 20 years?" It seems the assumptions that they make is that they maintain this building in perfect condition for 20 years.
As we all know, and time proves, the government stinks at maintaining its buildings. Today, they have over $80 billion of deferred maintenance in the buildings that they own. Why? It makes perfect sense. It's really not incompetence or lazy or any of the sort of derogatory points. Budgets in the U.S. government for each of the agencies fluctuate. They fluctuate for a whole set of reasons. If you're running the FDA or the VA or you name the agency, and your budget gets cut, what's the first thing you're going to cut on the list? You're not going to replace the roof at the lab. "Oh, we'll push that off another year." You'll put money towards specific mission, making drugs safer, food safer, which makes all the sense in the world in that moment.
Cumulatively, the incentives across government now have this liability of about $80 billion. This DOGE is all going to work its way through, and obviously, everything's happening just a tad faster than the news cycle. When we come out the other side, leasing buildings is the way to go for the U.S. government. As our general counsel would coach me, we are one of the best at doing this. We've been at it. We are specialized at it. We've been doing it for well over a decade, and we're super excited because if you go into our buildings versus a U.S. government-owned building, our buildings are modern. They facilitate mission. They don't get in the way of mission. We're very excited to be a good public-private partner.
As you've seen in press releases, if you're deep in this, the GSA says they're going to move towards public-private partnership. DOGE says we're moving towards a public-private partnership. Folks have said very clearly that leases are the way to go. Fundamentally, we feel like there's a tailwind behind our business. We're super excited that what we do is going to be even more appreciated. We'll talk more about the details as we move forward.
Great. Thanks, Darrell. As kind of a generalist with a basic knowledge of REITs and kind of what's going on in the market, that's different from how I was looking at it. I think it's probably different from how the rest of or how a lot of the community is looking at it, maybe outside of a handful of people really in the weeds. My thought would have been DOGE is cutting a million people or however many million people, and that would lead to reduced space requirements. How do you marry that with the maybe reduced space requirements with the ability for the government to lease additional space?
The U.S. workforce is a little over 2 million people. The average attrition rate every year is 7%-8%. As you saw, the DOGE is trying to get people to resign because there are too many people working in the U.S. government. I mean, if you step way back—not way back, because I'm not even that far back. I'm 58, so it's like seven seconds ago before the pandemic. The U.S. government had a budget. Today, that budget's 50—their spending's 53% higher than it was pre-pandemic. When they look around and we talk about, "Oh, my God, it's going to be cut so much," the reality is if we just get back to that pre-pandemic level, it would be one historic goal that they're able to accomplish this. It's really not that big a change in reality.
If we can get our country on a path of fiscal responsibility, that's going to be good for a whole set of reasons that are outside this room. When we look at the number of workers and what they're doing, many of those resignation requests were not to the facilities or the agencies that we regard as our largest tenants, be it nobody in the FDA, the Customs and Border Control, the FBI, and DEA are really allowed to leave under these provisions. Anything that's really law enforcement related because they have just enough people. The CIA is doing just fine, and all of these folks need to keep doing their job. One of the challenges in the rest of government is that there's this thicket of bureaucracy.
Today, to get a green card processed is almost a decade, not because they're spending so much time doing consumer background checks on undocumented people. The concept is just getting that paperwork through the system takes that long, and it's a big mess. Maybe just to give you a little insight, we have innumerable times proposed saving $2 million, $3 million, $4 million on a project to the U.S. government. Our leasing officers say, "This is a great idea. It really would save money." There's no dispute that it would save the government money. What they do say is, "We really can't move forward with this." Why? Because it means we have to go through our procurement process, which involves the OMB, which involves Congress, which involves, which involves, which involves. It's only $3 million- $4 million.
It's not going to get any attention. If it goes through normal process, it's going to take just about three years for it to wind its way through if somebody's actually interested in moving it through the system, just because the technology backbone is so poor and the way government is structured to make decisions is filled with friction. That ends up slipping by, and they say, "You know what? I'd love to save the money, but I have to go ask all those people. Let's just push forward." They do that again and again and again. I'm so hopeful through our DOGE efforts that we're going to be able to sort of pare down that decision-making process.
Back to that FDA lab that I was talking about in Denver, we can build it for them for a third of the cost that they're going to build it for themselves. A third. No BS. No one argues with the dollar amount either. Get this, even today—I know as of last Thursday, the architects are still working on this dumb project, and it makes no sense. We have spent time alerting people. If any of you track this stuff, they set up a hotline, and government workers from all over are mentioning one inefficiency after another. For us, it turns out to be a pretty exciting time because we're a very good landlord to the government, and the American people want the government to work better, faster, and more efficiently.
Have you had direct conversations with Elon Musk and the DOGE team about this and about your views and how they can make this better?
Yeah. They're a very accessible group. Not to get into the specifics, but we have our expert. We have a person from Washington who spent three decades working in the GSA, around the GSA, and with other agencies related to these things. He's been seconded to the GSA. He's going to work there two days a week for about 30 weeks. That's the max that the government will allow you to do without a conflict of interest. Again, running up against a rule. He's going to be very, very helpful in taking the new political people when they all finally get into place and enabling them to put to work, given either you've got to cut the bureaucracy, the process, your process bureaucracy, and be able to move new decision-making processes forward in order to make things work.
He is going to be part of that. We have spent nice time with the folks in the Senate. There is something called a DOGE Caucus that oversees these things. Senator Joni Ernst from Iowa is fantastic, a great representative. She has been championing, focusing on these buildings and is astutely aware of what can happen and how it can be better.
Okay. We have a number of questions on the live Q&A, and so we're just going to start at the top and go through those. Which tenants do you view as most at risk? Is it the labs? Is it another agency?
Do you want to answer some? Because I'm imagining you have to listen to me speak all the time.
Sure. This portfolio has always been designed not to be a political football. As we look to the agencies that underscore our largest exposure, Veterans Administration, DEA, and FBI, these are all things that sort of stand the test of time. This portfolio exposure broadly also serves the American people in the way that you believe your taxpayer dollars should be spent. This is not someone sitting in a cube typing way behind a computer like you or I may do every day. These are people making sure that drugs do not come into this country, that your home is protected, that your rights are protected. We feel broadly, the portfolio has always been designed to be away from commodity office, which says office on the side and outside of the store. What we would argue broadly is this is critical infrastructure to the U.S. government.
Is there some one or two around the edges? Absolutely. We do not get it right every single time. But 95% of our leases are still in a firm term. We have a weighted average lease term of over 10 years or exactly 10 years. Even if you take out the soft-term portion of that lease, we are still at 8.5 years of WALT, which when you think c apability of cash flows is truly market-leading as we look to our other peers.
Thank you. With deregulation coming, are you confident?
The FEMA warehouse we have in California serves as the preparation site for the big one. Darrell and I can probably.
We could scare you more.
We could scare you more.
If you just think the earthquake in San Francisco's the problem, there's bigger problems out there.
The FEMA warehouse provides emergency response relief for the broader Southern California and western part of the country. It's filled with trailers that house water, food, ration supplies, cots that deliver to communities in need when there is a natural disaster such as the wildfires in California. Not enough caffeine this morning, I fear. Buildings like that, and particularly with the WALT of buildings like that, we do feel like they serve an essential purpose, and they will continue to be mainstays in our portfolio as we look forward.
Again, just going down the list, actually, we'll skip one. 2.2% of your leases are Chicago GSA. What is that? Is that at risk?
Yeah. Various Chicago, it's been called a couple of things, FAA Des Plaines. Various Chicago is a building we bought as part of a larger portfolio about eight years ago. It houses the near-site FAA operations for the Chicago Airport. They may stay. When we bought the building, we were expecting them to stay roughly two and a half years. They have stayed eight and a half. We underwrote it to a 20% cap. It has brought us a 25% IRR over the last eight years. It is certainly a victory lap when we look at our ability to serve the U.S. government and its continuing operations. I think for us, we feel really proud about that building versus feel like it's something we didn't see coming.
Yeah. No, we underwrote it well. This is an example of some of why government isn't working. I mean, they should have been out of there a bunch of years ago. When we bought the building, it's not a facility that supports the agency. I mean, now you read today that they still use floppy disks across the FAA. I mean, it's bananas. Just to give you another insight, and this is no fault of any individual. It's just the morass of bureaucracy. They went to go bid out building a new building. We made an offer to build something in our front yard. The other was actually a better alternative for them. Because of all the administrative and procurement crap that people have to go through, they ended up getting bids, approving it, and then inflation happened. Oh, my God, inflation. What a surprise.
The thing failed. They had to go back and reprocure it and figure things out and stabilize it. That is why it is taking eight years. We are trusting them that they are going to be out in time. I think it could be longer because it is just, I mean, it is so complicated, and they are working with somebody who is not quite in the space. We have all these, it is fine dirt. It is valued. The market value of it is higher, and it is going to be on our balance sheet. That is what it is. Where it is located, it could either be like a truck parking lot, or it could be developed into a self-storage place. We have a bunch of folks who have given us offers, and they are also very excited for the FDA to leave.
12% of the portfolio is build-to-suit government space. What is the alternative use for that space?
A couple of things. One, build-to-suit government space can look very different depending on the agency. Typically, that may look like things like perimeter fencing, setback requirements, the building sitting in the middle of the lot versus right up against the street. Features like that, or even anti-ballistic glass, are still attractive to other users in the market. The glass looks the same like you and I have in our office. It is not so specialized it cannot be released. We have worked with various agencies and private sector tenants. We do have a number of private sector tenants within our portfolio that have taken space in our buildings because of the attractiveness of co-locating your government.
That is one opportunity we would look towards if we were in a releasing opportunity, as would our continued investment into state and local and government-adjacent spaces in terms of our total addressable market.
Got it. Of the 5% of soft leases identified on the call, how much of that expires in 2025 and 2026?
In terms of those soft-term leases, some of those are upcoming expirations as well. We are actively in discussion with the GSA on those leases and their renewals. I certainly understand that the media makes it seem like every lease will get canceled, but that's really just not the truth when it comes to working with the government. When we're talking about something like an FBI, they cannot just pick up and move. Their drug storage, their processing facilities, their vaults, all of that can't be rebuilt in a matter of minutes, nor could it be rebuilt in a matter of years. We do feel like the soft-term portion of those leases really just acts as the mechanism for which the government can enter into a renegotiation with us or another user on a renewal.
I think it's so important if you step back and look. I mean, we started this business. It wasn't sort of thrust upon us with a portfolio that we were working out. We looked at the U.S. government and said, "Where can we be a good partner? Where can we be a good landlord?" That led us to a set of decisions and thinking carefully about how our portfolio was underwritten. Will there be a couple of leases that go into transition just because? Of course, this is the real estate business. When we look at what we do, we feel great about our portfolio relative to other public REITs. Another example, just to talk about underwriting, there was a company called GOV, and they were looking to do some things. We looked at their portfolio. They had about 90 buildings.
There were only two that met our underwriting criteria in that company. I do not mean to sound virtuous or righteous or anything else. It is just we drew a box, and we try to live within that box. The great news is that how we looked at it is now sort of consistent with business principles and hoping that government can kind of be as efficient as possible.
Do you track actual utilization of the portfolio, as in kind of how many people are coming in?
Yeah. I mean, as best as we can. I mean, we've got a terrific asset management group. And so we will go look and count cars. We see how the building's working. We've got engineers in our buildings. The FBI doesn't let us do swipes or all the things you'd think about in office. It's just different. An example, another way to think about many of our facilities is that they need facility space. I'd sort of make an analogy to think about it as a Broadway theater in some set of ways, right? It's how many hours a day is it vacant? A bunch. Does it need to be the size that it is? You bet. Because if you show up at 7:00, it's full.
When the president was, when there was an assassination attempt in Butler, Pennsylvania, our FBI facility in Pittsburgh was packed to the gills. Some people were saying, "Well, maybe we need these regional, given the force that's here, maybe we need these regional headquarters to be a little larger." That is the conversation that happens. This is the point that Allison was referencing about the FEMA Tracy warehouse. DOGE and the president, I mean, I won't speak for them, but they're not upset with FEMA with regard to the stocking of the warehouse, the 80 tractor trailers that are filled with good potable water and food that has not expired, that within 20 minutes can be dispatched from that facility.
They're upset at the thicketed bureaucracy that's at the top of FEMA that really didn't treat people in North Carolina terribly well, that half screwed it up when there was Katrina and wasn't able really to cut through red tape. That's where FEMA can really is subject to a fair amount of criticism. When we look at our facilities, I mean, you need these facilities to do the work. You don't want to end up on the day where the government has to do a critical function, and it just doesn't have the workspace, the secure space, all the sort of features and fit that they need in order to accomplish their task well.
Go ahead.
Ladies first. Yes, ladies first.
Could you speak into the microphone, please?
Our best sort of proxy for this information is electrical and utility consumption. We did a study looking at our three key tenancies: the DEA, the FBI, and the VA, and looking at their utility consumption pre and post-COVID as a proxy. We've obviously made energy improvements to these buildings, but it's in a 1% margin pre and post-COVID. When you really think about what the buildings are doing, particularly for those, these have fairly significant investments in technology, meaning the lab equipment is what's driving the utility consumption and the mission of the building. Those pieces of technology really never stopped running. The lab always had the ability to social distance. Even during COVID, within two weeks, our buildings are back to what we would have expected from a use and a physical occupancy perspective.
Particularly now with return to work, they're even more packed to the gills than they have been before.
Yeah. The GSA has about 36 million sq ft in Washington, D.C., owned buildings. If they start selling off these assets, is there any pressure your building might experience from a cap rate widening perspective? Yeah. No, it's a great question. There's a couple. Do you work for our company? Because it's a perfect question. I'd say, one, we don't own any buildings in Washington, D.C. for exactly this reason. The D.C. space, D.C. office is really a shuffle space for government. I think there is a challenge there. One of the recommendations we've made to the government, and they have shared with us a list of buildings that are targeted to be turned into private sector buildings. It's a reasonably wise plan. What we've said is be patient.
You really got to think about what DC absorption is and think about how you're going to roll these projects onto the market. One of the things, I won't mention who asked us to value them, but they went to some folks you would know. Basically, they've had a null set on valuation for exactly what you're speaking to, which is any one building of value might be able to be determined. For all of the buildings, it's materially less. I think the government has learned a little bit. I bought, when I was in my late twenties, I bought a fancy car from the U.S. government because they had this—we've got time.
What happened was they stole—when they seized goods, what they were doing was taking cars from drug dealers and basically putting them up so they would have all of the little spider convertibles. Then one day, just one day, they'd sell them all. What do you think they sold for? These are $100,000 cars that sold for $6,000, $7,000. Insane, right? Instead of rolling them out, they finally, when eBay happened, it took them two years to get it figured out. I love cars, and I build cars to get through college. It was one of those things where I think they've learned the lesson, but we'll see. Government real estate, the buildings also that they do want to get rid of in Washington, it is hard to understand what they're going to do. They're not a natural for residential.
They're in an area that would be fine for residential, and you can imagine it. Some of them are just a pile of rocks. The demo costs are going to be enormous. We'll see what happens. God knows we have enough museums in Washington we don't need anymore, so.
Great. Can you talk a little more about the government-adjacent opportunities and what those might look like?
Yeah. I mean, at the end of the day, for us, when we look at our portfolio, one of the ways that we've—this is just a portfolio construction corporate finance issue. One of the things we get criticized for is comping as a net lease company towards same-store sales. It's one of the ways to do the analysis. For us, we can identify a set of either government-adjacent or these state and local leases that are very high credit, that are sort of longer term. Those leases provide escalators like you'd see in a normal lease.
If we can get 30% of our portfolio to have these kinds of escalations, it puts a 60-70 basis point tailwind to our same-store growth, which when you look at what we're doing today, we're on a path starting in 2023 that we're going to grow the core FFO of the company 2%-3% a year. We're on track to do exactly that. That's the earnings that we delivered last year. That's the midpoint of our guidance this year. We have a strategy to execute on it.
As we're moving forward, and then if we can, over these next couple of years, build in that kind of same-store growth, you can see that we can start to get into that 3%-4% growth rate, which if you comp us relative to net lease peers with that kind of growth rate, I think with our better credit quality, the value proposition to shareholders is very strong. That's what we're executing on.
[Charles].
It's a great question. When we look at long-term government leases, we are seeing high sixes bump against seven. The bid-ask is just wider because it really comes down to financial distress among other frictions among a seller. Do they need to sell it now? How quickly do they need to sell it? DOGE has obviously caused a little bit of an air pocket, and it's creating cap rates to, I think, flex towards a little bit the higher end. When we look at developing some products right now, either for state and federal, we can see cap rates that get to the nines of all things. One of the real benefits and competitive dynamics in our space as a developer is that banks have stepped away in a set of ways from being able to finance 90 cents on the dollar on a project.
They're looking for a lot more equity from developers. Because of the very, very high credit quality of our tenant leases, developers with six nickels in their pocket could get into a development project, finance almost all of it with the government. That was a tough competitor. Now that a balance sheet matters and you've got to actually think about return on capital, we're finding a lot of those people have been vaporized from the market. We're seeing some development returns that can be really attractive. We can develop things into the eights and the nines and then end up with a 20-year term lease.
Great. Just a quick one on leverage. With leverage currently at seven times net debt to EBITDA, how do you see that trending? Would you be able to take that higher if opportunities arise?
Yeah. We have historically operated in the six and a half to seven and a half range. We're really comfortable in that range. We'd probably stay around the midpoint. As we look to development deals, one of the unique things about the way the government runs in non-speculative development is the lump sum component, meaning the amount the government reimburses you for work above the TRFS. That can create a temporary effect of leverage, raising it a little bit. When the lump sum is returned, leverage returns back to a normal state. When we think about operating in that range, we're taking in all the factors that we have at our disposal, the long-term nature of our cash flows, the forecastability of the leases we have, and our intentions about development.
Yeah. We're not concerned about leverage, especially as we look at the credit quality. And we've got over $3 billion of cash that's coming into the company on our existing leases.
Great. Thanks. With one minute left, unless anyone else has a quick one, we'll get into rapid fires, which, oh goodness, have not changed in the past couple of years other than the year. What will net effective rent growth for office, the office sector overall, not your company, be in 2026?
We'll say 1%.
Will the office sector have more, fewer, or the same number of public companies a year from now? Great. Thanks, Darrell.
That's it?
That's it. I told you, Tuesday haven't changed. You should know these by now.
This is a withering activity. Okay.
Great.
We're going to come up with something else. Thank you, everyone, for spending a little time. Thanks for focusing on the company. Thanks for learning a little bit about what we do. We're always available to be helpful.
Thanks, Darrell.