Easterly Government Properties, Inc. (DEA) Q2 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Easterly Government Properties Second Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Meghan Baivier, Executive Vice President, CFO and COO for Easterly Government Properties. Thank you. You may begin.

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 the 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, 2017, filed with the SEC on March 1, 2018 and in its other SEC filings. The Company assumes no obligations to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Additionally, on this conference call, the Company may refer to certain non-GAAP financial measures, such as 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, Chairman of Easterly Government Properties.

Thank you, Meghan. Good morning, everyone and thank you for joining us for the second quarter conference call. Today in addition to Meghan, I am also joined by Bill Trimble, the Company's CEO. Easterly remains the only internally managed public REIT narrowly focused on the acquisition development and servicing of mission-critical real estate leased to United States federal government. Our mission has remained consistent since IPO to provide strong risk adjusted returns for a reliable and growing cash dividend backed by the full faith and credit of the U.S. government. To that end, our effort in the short, medium and long terms are all centered around the stated goal. In the short-term, we're pleased that our team is renewing existing assets and lengthening the overall remaining lease term of the company's portfolio adherence to the bull's-eye strategy has provident itself wise in our ability to achieve strong lease renewal spreads and extend the duration of our cash flows which support our cash available for distribution. In the medium-term, we work to cultivate a robust pipeline of new assets with the goal of accretively scaling and diversifying our portfolio, enhancing the stability and growth of our dividend. I commend the acquisition and development team on their success today and consistently growing the portfolio through the acquisition and development of mission-critical assets backed with the full faith and credit to the U.S. government. Finally in the long term, I congratulate the management team on creating strong capital partners in both the debt and equity market which we hope will continue for many years to come. This partnership has allowed us to achieve a highly competitive cost to capital in both debt and equity which in turn allows us to continue to deploy capital accretively and support the next chapter of our growth enabling us to grow dividend for years to come. Easterly has always been an external growth story driven by acquisitions and development. For that reason, this has been an important quarter for Easterly. We have announced acquisition volume including one of the largest portfolios in our target market we have propelled the company forward in a meaningful way. We have grown our public float by 34% through the completion of a successful follow-on offering. The increase liquidity from the offering puts the company in a position of strength and allows for enough dry powder to execute on future acquisitions and remain flexible in the market. The balance sheet is in a position where we can deploy capital accretively allowing for future growth to remain consistent and true to the fundamentals that were instilled at the time of the IPO. We believe meaningful growth that can be achieved in this manner is our success and one we consistently strive to build upon quarter-after-quarter and year after year. To be clear, our priority as a management team is to deliver a trusted and growing dividend to our investors which is backed by the full faith and credit to the U.S. government. We’re very pleased that all of our efforts and outcomes are delivering on this goal. With that, I'll turn the call over to Bill to discuss the specifics of the quarter and to give an update on the projects we’re engaged and to build shareholder value.

Thank Darrell, and good morning. Thank you for joining us for our second quarter earnings call. As Darrell mentioned, the second quarter of 2018 marked a meaningful point in the company's trajectory. We announced the pending acquisition of a 430 million 14 property portfolio of high quality assets that closely mirror the profile of our existing portfolio. To review, this portfolio of 14 assets equates to approximately 1.5 million square feet of rental space. 99% of the 14 property portfolio is leased with a weighted average lease expiration year of 2022. The portfolio is still relatively young with a weighted average age of just 16 years. Of the 14 properties, 79% of the assets were built to suit construction meeting the design and functionality of the building was constructed to meet the specific needs of the underlying tenants. Further, these 14 assets significantly scale the portfolio in an accretive manner and increased Easterly's already strong relationship with the U.S. federal government. With this portfolio, Easterly will now meet the least real estate needs of 31 different U.S. government tenants. This portfolio acquisition is one we've been watching and anticipating since prior to IPO. Simply put, we feel no other potential buyer understands the makeup of this portfolio better than us. For years, we’ve underwritten each asset and monitored the mission in each facility to mitigate against potential obsolescence. We knew this portfolio was focused in a similar manner to our existing portfolio which allows for seamless integration and growth. We are extremely excited to welcome these 14 properties into our growing portfolio and look forward to doing so throughout the remainder of 2018. Our ability to win this portfolio acquisition in a public bidding process highlights many of Easterly strengths that distinguish us from other potential bidders. First, we understand this very niche market of federal leased real estate. We can underwrite each asset appropriately thus enabling us to be very fair buyers in the process. Second, our cost of capital is cheaper than other bidders because of this we were able to purchase this large accretive deal at an attractive cap rate. Finally, we are flexible and dependable buyers. You've heard me mention in the past that there are plenty of reasons that a seller would want to delay a closing because of our flexibility [Technical Difficulty] are all attributes that help this deal ultimately come to fruition. And these are company strengths in which we take great pride. In conjunction with the announcement of this 14 property portfolio acquisition, we also successfully executed a public equity capital offering raising 398.5 million of gross proceeds through an overnight equity offering. This offering further strengthened relationships with existing shareholders and allowed to the initiation of relationships with new equity partners. The deal was extremely well received in the markets and we're grateful for investors confidence and our ability to deploy the capital and drive strong returns for our shareholders. Furthermore, this was also a wonderful opportunity for us to lower our leverage and position the company to be able to execute on acquisition and development opportunities that may present themselves in the future. Turning to the acquisition pipeline, Easterly continues to evaluate opportunities and pursue our pipeline of actionable deals. Our position in the market continues to strengthen but we will still see ample opportunity to grow in this highly fractured market. While the second quarter brought large-scale acquisitions growth, we will not stop seeking to acquire new accretive properties. Turning to development, I'm pleased to report we are making meaningful progress of all three of our development sites. I had the opportunity to observe first-hand the progress being made at the FEMA Tracy and FDA Alameda sites just two weeks ago. And I was very happy to see these projects well underway. Both projects with FEMA Tracy expected to deliver at the end of the third quarter of 2018 and FDA Alameda expected to deliver in the third quarter of 2019. As a reminder, these non-speculative development projects provide for great opportunities to see increased deals on brand new facilities with long-term lease expirations. Under the current timeline, we should expect to see all three development including FDA Lenexa generating cash flows by mid-2020. And from a future development pipeline perspective, I think we can expect to see future opportunities from both FDA and FEMA given the length and importance of these enduring missions. Turning to lease renewals allow me to provide a comprehensive overview of all 2017 and 2018 lease renewals thus far and to speak to upcoming near-term lease expirations for the pending 14 property portfolio acquisition. The 2018 renewals have been a blend of highly specialized bull's-eye properties like DEA Riverside and mission critical but nevertheless more plains in the office space like IRS Fresno. You've heard me say in the past that when there is a bull's-eye property the lease renewal conversation centers around replacement costs. Conversely when you have a more plains in the office space expiring the lease renewal conversation is more focused on what is considered market rent in that region. Just to be clear less than 15% of our properties would be considered plain de novo. With that, I'm pleased to announce the lease renewal of IRS Fresno for a new 15-year term. Given this is not a gun-toting agency and the space while absolutely mission critical, is more generic in nature when we focused on renewal we felt lease term was more important priority to give us flexibility to harvest value and provide enduring stable cash flows for our investors. We're pleased to announce that this lease has been extended to 2033, a 15-year term. While the government's exact amount of TIs are to be determined, we believe that our rent at IRS Fresno will be flat to down 5% renewal at this lease length for a reasonable market rent is a success. We are very excited to continue to provide the necessary housing for such an important mission to United States and we look forward to remaining a partner to the IRS for many years to come. Five other properties with expiration last year and this renewed at an average rental increase in the mid-to-high teens. These include SSA San Diego, DEA San Diego, DEA Riverside, DEA North Highlands and CBP Chula Vista. In addition to this very healthy renewals spreads, we were able to achieve valuable longer-term leases each have been renewed for 10 and 15 year terms thus meaningfully extending our weighted average remaining lease term and allowing us to maintain 100% occupancy with 99% of our lease income derived from the full faith and credit of the US government. Now that Easterly has seen more lease roles and started to establish a lease renewal history you will notice our bull's-eye properties are consistently renewing at meaningfully higher rental rates increase providing for modest internal growth of distributable cash flow. Now with respect to the short-term lease renewals for the pending 14 property portfolio acquisition I would like to reiterate just how comfortable we are with this portfolio. When bidding, the team underwrote each of these properties appropriately with a very strong understanding of the strength of their tenancies. In the coming years as we focus on the portfolios renewals, we will work to continue driving value for extending lease terms and growing our portfolio of U.S. Government cash flows. In closing, before turning the call over to Meghan, let me step back and commend the Easterly team for the success of this first half of 2018. In the past six months, we had either purchased or put under contract approximately $515 million of mission-critical assets leased to the U.S. Federal Government. We have renewed our second largest lease for another 15 year term. We successfully launched the public equity offering that put is in a wonderful shape for future growth. And finally, we have enhanced our balance sheet by amending our credit facility to provide greater borrowing capacity and more favorable interest rates. For Easterly, the efficiencies have never been better, and the opportunities have never been stronger. With that, I will turn the call over to Meghan to discuss the Company's quarterly results.

Thank you, Bill. Today I will review our current portfolio, discuss our second quarter results, provide an update on our balance sheet, and share our modified 2018 guidance. Additional details regarding our second quarter results can be found in the Company's second quarter earnings release and supplemental information package. As of June 30, we are on 47 operating properties comprising of approximately 3.7 million square feet of commercial real estate, with an additional 340,000 square feet under development. The weighted average remaining lease term for our portfolio was 7.7 years, the average age of our portfolio was 12.7 years, and our portfolio occupancy remained at 100%. In addition, 99% of our annualized lease income was backed by the full faith and credit of the United States Government. Pro forma for the recently completed acquisition of VA San Jose, and for the future acquisition of the previously announced 14 property portfolio, Easterly will own 62 operating properties comprising approximately 5.3 million square feet. The pro forma weighted average remaining lease term for our portfolio would be 6.8 years, and the average age of our portfolio would be 13.5 years. For the first quarter, net income per share on a fully diluted basis was $0.03. FFO per share on a fully diluted basis was $0.29, FFO as adjusted per share on a fully diluted basis was $0.25, and our cash available for distribution was $10.9 million. GAAP measures and reconciliations of these non-GAAP measures to GAAP measures have been provided in our supplemental information package. Turning to the balance sheet, at quarter end the Company had total indebtedness of $487.8 million, which was comprised of $100 million outstanding on our 2016 unsecured term loan facility, $175 million of senior unsecured notes and $212.8 million of secured mortgage debt. Availability on our revolving line of credit stood at $450 million, and the Company's $150 million 2018 unsecured term loan facility remained undrawn. As of June 30, Easterly's net debt to total enterprise value was 19.9%, and its net debt to annualized quarterly EBITDA ratio was 3.9x. As previously announced, last week our Board of Directors declared a dividend related to our first quarter of operations of $0.26 per share. This dividend will be paid on September 27, 2018 to shareholders of record on September 13, 2018. For the 12 months ending December 31, 2018, the Company is modifying its guidance of FFO per share on a fully diluted basis to a range of $1.17 to $1.22. This modification is attributable to the anticipated timing of closing of our 14 property portfolio, and the success in upsizing of our June equity offering. This guidance is based on the Company completing the $515 million of acquisitions announced to date this year. The company currently expects to close approximately $175 million of acquisition volume in September, and the remaining $255 million in December of this year. The Company's guidance further assumes $50 million to $75 million of development related investment during 2018. The Company's 2018 FFO guidance is forward-looking and reflects Management's view of current and future market conditions. As our business matures and we began looking to 2019 and beyond, we are going to highlight FFO adjusted in addition to FFO on a fully diluted basis, as we believe this metric will help highlight the economic strength and cash flow generation capability of the underlying portfolio. We're choosing to take the time to do this because with the renewal of significant leases in our portfolio in the coming years, like the specific Bill just discussed there are noncash adjustments related to the amortization of lease related assets and liabilities in our FFO per share on a fully diluted basis metric, which may confuse some investors regarding the cash generating power of the FFO guidance which we have historically provided. Our objective is to deliver growing cash dividend backed by the full faith and credit of the U.S. Government, and we believe the Company's current portfolio and then process development will allow us to deliver on this goal. Moving on to the Company's capital markets activities, the second quarter was marked by two notable events. The first was the completion of an amended and upsized senior unsecured credit facility. In June, the Company replaced its existing senior unsecured revolving credit facility with an amended and upsized credit facility, consisting of a $450 million revolver and a $150 million, five-year delayed-draw senior unsecured term loan. Our total credit facility size is $600 million. The revolver includes an accordion feature that may provide the Company with additional capacity of up to $250 million per total amended credit facility capacity of up to $850 million. The revolver will mature four years from the closing date in June 2022, with two six months as of right extension options available to extend the maturity to June 2023. The term loan will mature five years from the closing date in June 2023, the term loan has a 365 day delayed draw period and is pre-payable without penalty for the entire term of the loan. Firing some of the revolver will bear interest at a rate of LIBOR plus the spread of 125 to 180 basis points, depending on the Company's leverage ratio. The term loan will bear interest at a rate of LIBOR plus the spread of 120 to 175 basis points, depending on the Company's leverage ratio. Given the Company's current leverage ratio, the initial spread to LIBOR is set at 125 basis points and 120 basis points for the revolver and term loan respectively. In addition to the execution of an expanded credit facility, the Company completed an equity offering of 20.7 million shares in conjunction with the announcement of a pending 14 property portfolio acquisition. As Bill mentioned, in June the Company launched an overnight equity offering and successfully raised $398.5 million of gross proceeds through the issuance of 20.7 million shares of its common stock, consisting of 13.7 million shares offered directly by the Company and 7 million shares offered on a forward basis, at a price to the public of $19.25 per share. The Company expects to physically settle the forward sales agreements and receive proceeds subject to certain adjustments from the sale of it shares of common stock upon one or more such physical settlements within approximately six months from the date of the respective supplement relating to the offering. We believe these two activities, the credit facility and the equity offering puts the Company in a very strong competitive position going forward. We look towards the future with excitement as we continue to pursue opportunities which we believe will drive earnings and distributable cash flow into 2019 and 2020. With that, I will now turn the call back to the operator, for questions.

[Operator Instructions] Our first question comes from line of Manny Korchman with Citigroup. Please proceed with your question.

It's Michael Bilerman here with Manny. I don't know if Darrell, Peter, whether you want to address this but, when you go back to the beginning of 2016, you were basically running at $0.30 of FFO, this quarter you put in $0.29, two and half years, and that's despite the fact that you - and maybe because of the fact you've doubled your share base and more than doubled your asset base. And I keep on hearing you guys talk about accretion. I guess on what point are you actually going to see growth in your underlying earnings? And then how do you start thinking about that level especially given the fact that effectively now for three years you will have no growth?

Super question, Meghan why don't you start and I'll finish.

So, as we focus ultimately, Michael, on distributable cash flow, and it's important to have watch our ability to increase the dividend and continue to pay cash back to our investors. Obviously at the moment, we are in a position post offering where the balance sheet is in great shape and we have capital waiting to be deployed. So as we look out to the remainder of 2018, 2019 and particularly in 2020 as our development comes on board, we're confident with the portfolio's ability to continue to generate greater levels of distributable cash flow by well buyers.

And then, I would say of course it’s a these REITs compared to other businesses without retained earnings, you don't get that compounding growth. But I think certainly since IPO we've done a very nice job stepping in dividend up. We've meaningfully grown the portfolio which leads again too when I was speaking about diversification and stability, we're super proud of that portfolio that we've built in, it's ability to deliver dividends. And we've laid the groundwork with the development that as you know continues to grow and for the opportunities of the new development opportunities that we see on the horizon those can make a meaningful contribution to cash available for distribution. So, as you look out in the model, again we've had a nice dividend increases over time but I certainly see by the - certainly by the end of 2020 quarterly dividends of $0.30 or greater which is - which again if you look over time I think that there's a nice return for shareholders and that really doesn't include us having some nice positive surprises like the large portfolio that we’re able to acquire most recently.

I mean look I think most investors will think about retail in a total return perspective, right and so you look at last year and half year your stock is relatively flat since your earnings have been flat and you've grown the equity base, you’ve doubled your equity base. And so you know at some point, you can increase the payout ratio by increasing dividend but with earnings flat, there is not much a growth which is being reflected a little bit in your stock price. So how should the market think about, and especially when you're committing such new capital raising - you said you wanted a public option you paid the highest price. So, it's easy to accumulate assets, it's harder to make those investments accretively and so - I'm trying to get a sense of you know your mindset when your FFOs basically been flat for three years?

Right. And so our mindset is again the cash that comes out of the REIT again back full faith and credit by the U.S. government. You know we look today you know the yield is 5.25 or higher essentially on whether government revenues. So, we all know that we look in the market and we look at other REITs and you know who am I to tell you - how to think about REITs. But I would say, scale does matter and scale equals diversification. So we have the highest credit tenant of any REIT that you cover or any REIT that's out there and that stability cash flow should be the highest valued cash flow that’s in the REIT world. Why has it not been know most highly valued? Well scale's probably a pretty big factor. So our mindset again accounting anomalies aside and Meghan can spend time with you and Manny going through why FFO and FFO as adjusted as we do lease renewals, you know those numbers FFO flattens out, FFO is adjusted gross and we're looking at substantial we're not increasing our payout ratio of CAD, we're actually increasing the real CAD that's coming out of the portfolio. So when we look at CAD growth for next year and into 2020, it's substantial and so we - our mindset is to have consistently growing dividends full faith and credit of the U.S. government obviously our REIT is not a government bond but I don't know how many basis points are reasonable for our yield to be above the seven year treasury. But we certainly see that over time, you know that back half should shrink and as long as we keep delivering what is kind of single digit low double digit growth in dividend and hopefully stock price, that should put us in those kind of the top 10% of return drivers for REIT investors.

Your $0.25 this quarter then adjusted FFO $0.27 are being in 2016. So when you measured on FFO adjusted FFO fairly there's been no growth. And I think that you can go through the protection of leases and things like that and governments at the end of day, your net lease REIT that your entire job is putting a capital and raising capital, ultimately you have to underlying seeing growth, and I'm just trying to understand at what point will estimate start going up rather than going down, is that 2018 is it 2020 because at this point right all you've seen is numbers go the other way?

Well, again I'm not going to get what our guidance is next year for next year. But I mean we all have the models. I think, again giving you the indication that we’re going to have dividends that are better $0.30 or higher per quarter within one to two years is certainly valuable, and I would say - so they have it. I mean, and remember our leases are not one where the - our leases over time should keep up with inflation. But the value of our REIT, you know I'd say you said in a cheeky way, you know we buy the real estate and sell the credit and that is we - the stability of our cash flow and full faith and credit going out 5, 10, 15 years we think is valuable and it was way we brought this REIT to the public in 2015, because it was a unique offering relative to the others that were out there.

Our next question comes from the line of Michael Lewis with SunTrust Robinson Humphrey. Please proceed with your question.

My first question probably for Meghan, you ended 2Q with $150 million of cash. You've got the delayed portion of the equity offering, you don't have debt maturities for years. What do you think is your runway or investment capacity after taking down the rest of the portfolio acquisition to make additional investments before you think you have to come back to the equity market?

I appreciate the question, Michael it's important point. And as I look at the capacity of the balance sheet given where leverage is today and where we've stated for quarters now are equilibrium comfort level and that's six to seven times. Now you have ability to have $250 million to $300 million of total asset capacity is the right number to that portfolio.

And I guess a follow up to that. I mean how do you think about - this quarter you took the upsized equity offering, is it the ATM a little bit. How do you kind of balance the timing of taking equity when you could get it or when it's attractive versus come into the market with a deal when you need it and kind of managing that near term for any solution?

So as we approach the equity markets on the - with the announcement of portfolio, the balancing factor was not only ensuring that we're financing the short-term but making sure that we were ability or have the ability to take equity to given the strength of the offering to provide that excess liquidity but also ensure that we were able to maintain the dividend as we spoke to Michael about before and look to grow it over time into the next year or two.

The 250 to 300 million that's a lot of capacity to take and I guess helps to explain that solution. I mean, listening to your conversation with Michael that dividend growth is, I mean I'll do the math in my head I guess, 20% dividend growth over you see here - let's call it on the long end, but you know I'll come back to that offline. Let me ask just two more quick ones. Bill did a good job of going through the leases coming up for exploration in the portfolio you acquired. You've got three coming up in 2018, two in 2019, is there any reason to believe anybody would move out or downsize?

No, I think we're very confident in our tenants and I think we're still very good. I think we've executed where we said we would certainly within the bull's eye section. So we continue to work through. I will say that the government is always an interesting partner to negotiate with but in the end we have the same goals and I think we've proven we're able to keep them in our building.

And then just last one for me, the portfolio acquisition. Is there anything in that pool of properties that maybe you know is Fresno on the bull's eye or maybe something that multi-tenant that might be in the near term disposition or do you think can you hold all this for the long term?

I’d say - I think first of all, we have - we've done written as I mentioned this portfolio for literally years. It was one of the ones that would have gotten us - just to go public. So I think we're very familiar and very happy with the building in that portfolio. You are correct, there are several multi-tenant buildings. However I think they are some of strongest buildings in the portfolio. And while, you know we've always bought BMWs for example, Mercedes makes a good model as well. And so if you look at Buffalo you look at Portland and you look at Charleston, we think that these are enduring and actually frankly Parkersburg as well. We think we've got really enduring missions in these properties. And however I will tell you that overall and we try to do this we tried to be a 100% federal leased and we try to be as close to the bulls-eye as possible going forward. So if we see opportunities we think that we need to make a shift we’ll will certainly do it and I think we will do it decisively. However right now we’re very pleased with the portfolio.

And this is Darrell as we've mentioned maybe last conference call there are a series of portfolios that are out there. And strongest complements to Bill since the IPO we have continued to the still and focus and really kind of push our bets on to the bull's-eye. And there are many I mean as anyone who runs these REITs knows you at the analyst community particularly there are plenty of properties you could kind of pick up along the way that are at higher cap rate or you could rationalize the part of your strategy. And we've been defined as much by the deals that we don't do that you have come to see. So as we move forward and looked to other portfolios there certain will be very high-quality buildings that are attractive, but may not be in our bull's-eye. And I think as we concentrate to a greater and greater degree on bull's-eye properties and the dynamics that we best understand around those properties that's will be our focus over the next five to 10 years.

[Operator Instructions] Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.

Bill, can you talk a little bit about what you're seeing on the investment markets what type of deals are currently tracking. And I noticed that your guidance doesn't really assume many more incremental investments is that because you're working to complete this large portfolio transaction or do you think that there's other deals that you could potentially complete before year-end?

While a couple things and good morning I think that it’s not a ministry. We are in the eighth month of the year. So and I just want to make the analyst realize that we got to make sure we put them all in the different quarters correctly. This portfolio is taking a fair amount of our time, but that doesn't mean that we’re slowing down in any way on what we’re seeing out there. Even if we were to buy something absolutely terrific at the end of the year its obviously not going to be working for us until next year so I think that’s an important point to put out there. But I think from a quality standpoint, we continue to see wonderful opportunities individually. We're seeing small portfolios and as Darrell mentioned we’re also seeing large portfolio opportunities. I think that the increase in interest rates as I have said before is actually given us more opportunities going forward as these sellers. And I remind you there really about 500 GSA properties and 50 VA properties we know where every single one of them are. And these owners cost of capital are different than ours and as interest rates increase. I think so many of the conversations and in some cases we’ve been having for years will come to fruition as these owners realize that Easterly is probably a better home for these properties we’ll probably going to be more successful renewing them as they come up for renewal. We have a wonderful team of folks that can do that and have great relationships that we really provide a lot of extra value there. So from our standpoint I think everything is steady as she goes with probably a positive bias on what we were seeing for opportunities.

And then Meghan can you talk a little bit about the leverage truck is going forward. I know the recent offerings have probably reduced you below the long-term target range. Is 6 to 7 a still goal and are you comparable near that seven times would you prefer to stay near the low end of that expectation?

Nothing has changed from our perspective there Michael six to seven times this draw comfortable range, development and timing of divestment as we discussed particularly. With the portion of the development budgets that is lump sum can push us towards the higher end or towards that seven times where we’re comfortable because that for a temporary period of time.

And then regards - it’s Darrell, I'd just lay on top of that. With these very successful lease renewal. When you look at these 10 and 15-year terms I entirely get to six to seven times is the right range and that’s the expectation, but as we said again and again and again. The quality of our cash flows is higher than other folks out there. In theory they should be more leverageable, but we govern our leverage ratio. So that we stay within the pack among REITs but that said our leverage even if we were to get to that seven times level is and even more creditworthy supported seven times then it ever has been in our history.

And can you give more details on the recent renewal that see the IRS is there any capital that you committed to that lease or any free rent associated with it?

With regard to Fresno there is one month of free rent and renewal and we’re working with the government to finalize their TI requirements and we would expect to capital in the $2 million to $5 million range.

And then finally from me, the PTO lease that comes due soon I think in the supplement it says 2019/2020 is there two lease expirations with that asset?

Yes, there is two portion in the property actually Fed owns the first floor and then we have two different. So we as a retail section Obama, I know you visited with us and there is two different sections within Gulf and Middle East of PTO that is ongoing, but we do expect that we will renew that property and that really come about fruition in January of 2020, I think over the next lease we own.

Our next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question.

So just one question, you guys talked earlier about potential for dispositions in rental order non-core properties does. I was curious specifically the IRS Fresno and you put a 15 year lease on that property. I think you can remind us how old of the building that is or is that you know now as it has a 15-year lease on it if that’s something that is prime to be sold and reinvest that capital somewhere else?

It’s a 2003 build and it was build basically for the IRS and Fresno which is one of the 10 supercenters you should know in the United States. And it handles compliance for nine states including California. So incredibly port mission it’s actually getting upgrade within the IRS to handle some other fraud stuff as well. That’s the thing that is so important to point out. Not only do we get a 15-year lease with the federal government, I don’t know how many people on this call will be here when I announced and it's renewed for another 15 years, 13 years from now. But I would welcome you then but the deal is these buildings have incredible value with these long-term leases. And anything over 10 years, just to be reflected with the very high valuation right now. So of course we’re going take the opportunity over the three or four years to decide as to whether we think that IRS’ mission is continue to be as important. How this fiscal leads into it but that’s the wonderful thing about getting these longer-term expansions. It gives us a lot of flexibility and a lot of value for shareholders.

I got a follow up and hear you guys talked about the value or I guess the impacts in your stock price of gaining scale. I guess there was scale - do you kind of get to the point where you can move to capital recycling rather than needing to come to market and issue more equity?

I mean it is - as we look to total assets of somewhere between $2 billion and $3 billion, we will certainly be at a place where we think strategically we have the scale to provide the diversification and strong stability for this portfolio. You already hear it though in some of our saying and super smart question around the flexibility that’s inherent in these 15 year leases. You've heard that what we've learned right when we step back and what have we learned since 2010 is it the bull's-eye strategy for us works. The insights that we have into those buildings, the ability to harvest value again very hard to get a rent growth in the types of leases that we have with the U.S. government. However, with the bull's-eye properties you can see we've been extremely successful. We look to our plain-vanilla property so obviously our strategy on the margin is to get a longer term lease and give us the flexibility to the degree to which we want to do still what we’re doing around the bull's-eye. The area the target that we set up and always known best. We’re positioned ourselves for that option and Meghan sensed such a fantastic job financing these buildings that the real opportunity to remain flexible and recycle capital whenever there's an opportunity to again concentrate on the bull's-eye where we find the greatest value for shareholders will certainly be an opportunity for us.

And I apologize if you guy always have this but speaking about Meghan and financing, the delayed draw - not the delay draw the kind of deferred equity that you guys have. Can you remind us how we should be thinking about when you pull that down throughout the rest of the year?

$7 million, six months to settle that, you can expect this to settle that at the very end of this year, December timeframe.

Our next question is a follow-up from the line of Manny Korchman with Citigroup. Please proceed with your question.

Can you talk a little bit about dividend coverage? You're running about $0.26 today, whatever metric you want to use, dividend in - you look at $0.29 of FFO, $0.25 of FFO as adjusted, and let's call it $0.22 of CAD adding back the acquisition costs and the principal amortization. So, your payout ratio is 90% of FFO over 100% of FFO adjusted, and 120% of your cash available for distribution. Again, adding back the acquisition cost and the principal amortization. How is that sustainable and not too high of a payout ratio?

Obviously we've been scaling, we've been in this period - a bit of a period of transition and there's been some anomalies and timing and how acquisitions comes through. But when you look at these renewals, this portfolio that we're purchasing in September and in December as we look forward, we - our intent is to dividend that obviously reserving for capital and what else we need to do in order to renew leases and keep our buildings in top shape, but to be dividend out 95% to 100% of that cash that's available for distribution. When I talked about $0.30 a quarter in 2020, the thought was on 95% to 100% and that is - that's the way to my stories. I would encourage the analysts to all - if you look at that CAD and work their models backwards, maybe we could do a better job communicating NOI, I don't know. It's crazy to me with the stability of our cash flows but we can miss a number and I would say that I really encourage folks to tweak their model and let's talk about CAD between here and 2020 and work it backwards. Because as we renew these leases and anomaly of the accounting of when we went public, there are above and below market leases, which maybe as a little different, to Michael Bilerman's fantastic point, FFO is not going to be the metric, that actually indicates to investors our growth. As you know, we're kind of private equity people and we focus on cash and cash returns. And that's we're just going to keep talking cash, cash, cash, dividend, dividend, dividend, get the money into our investors hands and I'd encourage everybody to look at $0.30 of CAD or greater in fourth quarter of 2020, and we'll help people in working backwards either on these calls, but we have non-material things to share, we'll certainly share them in conversations with any investor who wishes to give us a ring.

So, that $0.30 you're looking at, inclusive of acquisition cost of amortization so this quarter would be $0.19 I gave you little bit of benefit of the doubt that those are non, while they're cash items they're more debt oriented and capitalized typically to with acquisition. So, when you're talking 95% to 100%, are you comparing 19 going to 30 or you're comparing to only $0.02 going to $0.30, and again your payout of $0.26…

Our reporting cap - Michael.

Already disclosed Meghan. We're already riding in 8-k [indiscernible].

We'll take your points taken up on through the nature of amortization when we think about that, that's going to be perpetual of the business. So, we're talking about CAD goes back.

You want to grow from $0.19 a quarter to $0.30 by 2020? I mean I think having the building blocks of getting there, it would be -

Let's do in Analyst Day. I don't know what we need to do.

I don't know you have that growth in 2019 and 2020 from what you have in place today. It just seems like an awful large amount of…

It's not coming from FFO growth, let's just be simply clear because as these leases roll.

We can certainly work through the amount - but obviously we’ve got the equity in there for an acquisition that we do not have any cash flow from yet. We have not closed any of those buildings, so, if you're looking at our quarter, [indiscernible].

Remember, we just tipped on a ton of shares and the way we sourced, we could put a ton of money to work, and we think accretively for investors. Obviously I think we've been deliberate about how we put our hand on the throttle since we've been public. And we were very mindful again of looking out and understanding where our dividend capacity is and we do this through this offering, we're deliberate about the amount of capital that we're able to take time and we can put to work and making sure we can be on a very clear path around the dividend. So, I think some of the numbers may seem strange this quarter, but we'll certainly see as we can move through the end of the year and into next year how we get to this $0.30 or greater by the end of 2020.

And you're talking about 60% growth, right? Which is - down, but not way down too much for the equity, right? Your equity was late and in the back half of the year you're running about $0.30 based on your guidance? Which should drop down to the same $0.19, $0.20 on CAD, so growing from that level to $0.30 by the end of 2022 just seems like a pretty strong growth rate that we need more details behind it.

We got to give you those. So, let's just make sure during the analyst day or [indiscernible] or whatever else we need to do, we can do a webinar or all those fancy things that we can to do communicate because we do have to get analyst models synced up with what's going on with the company, and I am entirely empathetic that a big portfolio and an equity raise is - it can make the numbers tough to track and there's nothing gargantuan when I talked about $0.30 fourth quarter of 2020. I mean it is what we've got in place plus just doing our day jobs. So, that is - so again, let's figure it out. We - Meghan remains open, her line is open and we're happy to work this stuff and get the information out to investors.

Our next question is another follow-up from the line of Michael Carroll with RBC Capital Market. Please proceed with your question.

Meghan or Bill, can you talk a little bit about the lease spreads you expect over the next two years, and then I know Loma Linda has a pretty big ramp on bulk, so when does that come in and how big is that ramp up again?

I think the renewal spreads are going to be consistent, what we've said is depending whether they're plain vanilla or whether they're rum. Bull eye gun toting sort of properties. So, again sort of high teens for those bull's-eye properties and plain vanilla is going to be very much in line with the market. So, I think that's probably what we'll see there. Loma Linda is bump, Meghan –

And it's in the first quarter of 2019.

And how much is that?

30%.

30% increase.

Mr. Crate, there are no further questions at this time. I'll turn the floor back to you for any final comments.

Great, thanks everyone for joining the Easterly Government Properties' second quarter 2018 conference call. We appreciate your continued support and we strive to provide strong risk adjusted returns to our shareholders, the dividend growth and we look forward to getting together now or on the next conference call. All the best.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.