Greetings, and welcome to the Easterly Government Properties Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lindsay Winterhalter, Vice President, Investor Relations. 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, 2018, which will be filed with the SEC on February 28, 2019, and 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, Lindsay. Good morning, everyone, and thank you for joining us for this fourth quarter conference call. Today, in addition to Lindsay, I’m joined by Bill Trimble, the company’s CEO; and Meghan Baivier, the company’s CFO and COO. We’re very pleased with the accomplishments of 2018. While we delivered a strong dividend to shareholders, we also materially advanced many of our long-term strategic goals. As we shared at the beginning of the year, our goal is to scale the portfolio, while adhering to our discipline of all deals being accretive. While much of our work was realized at the end of the year, run rate NOI increased by 32%. We’re now in a position operationally, where we can achieve significant growth without a commensurate increase in overhead costs, as you expect from a REIT that has achieved scale. As you’ll recall, scale is important, because it gave us the platform to bid credibly on the pipeline of development projects that are forecast over the next decade. We are pleased to have developed a cadence of delivering a project a year with FEMA - Tracy in 2018, FDA - Alameda in 2019, FDA - Lenexa in 2020. Development is the most accretive way to deploy our capital. Through development, we have the greatest opportunity to add value to the government in assisting them through a facility designed to accomplish their mission. This partnership with the government continues to grow as we work together and develop even greater insights into their needs. Further, our acquisition engine continues to deliver. As we grow the number of high-quality buildings we can source and acquire remains reasonably constant. We’re very intentional about not lowering the quality bar to increase acquisition volume. However, our scale has positioned us to be able to acquire larger portfolios…

Thanks, Darrell, and good morning. Thank you for joining us for our fourth quarter earnings call. As Darrell mentioned, 2018 was a year of significant growth for Easterly. In 2018, we successfully closed on 15 properties, 11 of which came from the 14-property portfolio, accretively growing our portfolio by nearly 40%, while maintaining true to our bull’s-eye acquisition strategy. Subsequent to year-end, we also closed on the remaining three portfolio properties. As a reminder, this portfolio had a combined acquisition value of $430 million and is comprised of high-quality assets that closely mirror the profile of our existing portfolio. The acquired portfolio consists of approximately 1.5 million square feet of rentable space, 99% of which is leased with a weighted average lease expiration year of 2022. Additionally, 79% of the assets are build-to-suit construction, meaning the design and functionality of the building was constructed to meet the specific needs of the underlying tenants. In total, we completed 15 acquisitions for a combined value of $410 million, encompassing 1.4 million square feet of space. We expanded our tenant base to welcome important mission-critical agencies, such as the U.S. Department of the Treasury and the Federal Emergency Management Agency or FEMA. Further, we increased our weighted average remaining lease term over the course of 2018. Our acquisition volume and remaining pipeline has never been more robust. We are constantly vetting opportunities to ensure the overall quality of our portfolio remains strong. Similarly, acquisitions like VA - Golden, DEA - Upper Marlboro and Treasury - Birmingham highlights the company’s continued ability to source and execute on accretive, marketed, as well as unmarketed one-off transactions. Turning to development. Our team continues to make meaningful progress at our two active development sites, FDA Alameda and FDA Lenexa. Mike Ibe, Vice Chairman and Head of Acquisitions…

Thank you, Bill. Today, I will review our current portfolio, discuss our fourth quarter and year-end results, provide an update on our balance sheet and Capital Markets activities and discuss our 2019 guidance. Additional details regarding our fourth quarter and year-end results can be found in the company’s fourth quarter earnings release and supplemental information package. The GAAP measures and reconciliations of non-GAAP measures discussed on this call to GAAP measures have been provided in our supplemental information package. As of December 31, we owned 62 operating properties, comprising approximately 5.3 million square feet of commercial real estate with two additional properties totaling 129,000 square feet under development. The weighted average remaining lease term for our portfolio was 7.6 years. Despite a whole year having passed, that is longer by more than half a year from where we stood at year-end 2018 impressive. In addition to growing the duration of our assets, the average age of our portfolio has defied the passage of time and remains young at 12.5 years. Our portfolio occupancy remained at 100%. And finally, 99% of our annualized lease income continues to be backed by the full faith and credit of the United States Government. For the fourth quarter, net income per share on a fully diluted basis was $0.01. FFO per share on a fully diluted basis was $0.31, FFO as adjusted per share on a fully diluted basis was $0.29, and our cash available for distribution was $17.1 million. For the year ended December 31, 2018, net income per share on a fully diluted basis was $0.11, FFO per share on a fully diluted basis was $1.17, FFO as adjusted per share on a fully diluted basis was $1.03, and our cash available for distribution was $54.9 million. Underlying these financial results was tremendous…

Great. Thank you, everyone.

Jerry, I’ll turn it back to you.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] The first question is from Manny Korchman, Citigroup. Please go ahead, sir.

Hey, good morning, everyone. It’s Jill Sawyer here with Manny. Bill, going back to the 2019 robust pipeline, could you give us more color on the pipeline, maybe split into single acquisition portfolios and developments?

Yes. I think that, first of all, we’ve always, I think, almost since our founding, have had about $700 million in what I call our active pipeline, and then we try to keep a couple of hundred million dollars much more near-term, and that’s been fairly consistent. We saw it begin to turn up last year and I think that was a factor due to interest rates and actually a lot of the initial 15-year lease terms on these buildings, because there’s a huge boom in federal build-to-suit construction prior to the market turned down in 2018. So those properties are beginning to roll. Our guidance is based on single acquisitions, not on large portfolios. There are a number of wonderful opportunities, billions of dollars in the large portfolio universe, but they do take a long time. And there are a number of factors that have to come into play in order to execute on those. So from our standpoint, I think, it’s fairly constant. And we’ve got a terrific pipeline for this year and hopefully are already filling up in some ways for next year as well.

Great. And on a similar subject, do you think the government shutdown, past or a potential shutdown in the future has any impact on the transaction markets, for example, maybe scares away some of the buyers?

I would say, no. I think that we’ve seen a pretty strong market. I don’t think that either party probably is too interested in doing another shutdown here in the near future. But we can – as Darrell mentioned, we consistently got checked through the whole period of time. Obviously, there are some minor inconveniences, but we really didn’t see any impact from a sales or situation or an operating situation in those properties.

Okay, great. That’s it for me. Thank you.

The next question is from Michael Carroll, RBC Capital Markets. Please go ahead, sir.

Yes, thanks. Bill, can you talk a little bit about those large portfolio transactions? I know that you’ve previously highlighted that there are a number that are in the market. Do these portfolios typically trade? Do you think that they will trade in 2019? And if they do, I guess, what type of valuation are you looking at? Is that something that you could potentially pursue, or is that something that’s going to come out to have a valuation that you’ll probably be on the sidelines for now?

Well, first of all – good morning, Michael. Second of all, I – I’m not going to comment on what we’re going to do this year specifically with portfolios. But I think that we have proven certainly with our last acquisition of the 14-building portfolio that was right in our bull’s-eye and very attractive on almost every metric we could think of. There are not so many portfolios I’d like to describe them. We probably have many friends in the phone today, but they are known by us and we’re in active discussions with them. But I think that you can view the $200 million that we put out there is pretty much the bread and butter concentrated in bull’s-eye ones and twos that we’ve executed on the past. If something comes along, that is accretive and fits our bull’s-eye, of course, we’ll take a look at.

Okay, great. And then, I guess, Darrell made some comments about developments on how those generate some pretty attractive returns for you. And can you talk a little bit about what you’re seeing out there? Is there any new development projects that you think you can start pursuing in 2019, or should we still expect that you’re just going to be completing the stuff that you’ve already pretty broken ground on?

Yes. I mean, as I said in my comments, we really – we’ve created this cadence of a project a year, that’s indicative of the government sort of loosening the rents on facility – a new facility development. We’re very well-positioned to win our fair share of those developments and that’s what we’re anticipating going forward. Again, why we scale the company with so that we could be in a position to take on some of the larger projects that are coming down the pipeline. And we will report to you if we have some good news.

Okay, great. And then, I guess, finally, Meghan, could you talk a little bit about how we should be modeling G&A? I know that you’ve had a lot of properties. You’ve scaled up G&A recently. Has that pretty much done? I mean, when you pursue these $200 million of acquisition, should we be expecting a bigger G&A increase in 2019, too?

Yes. So, Mike, you’re right, we didn’t scale up for the digestion of – excuse me, the 14-property portfolio. So when I look to 2019 implicit in our view of guidance is organizational growth, that is far more restrained than NOI growth.

Okay, great. Thank you.

[Operator Instructions] We have a question from Merrill Ross, Boenning Incorporated. Please go ahead.

Hi, good morning and thank you. In the lease expiry in 2019, will there be examples of renewals on bull’s-eye properties that can provide further evidence of the value of the future organic growth implied in leasing spreads?

Good morning. Absolutely will be my answer, yes.

Great. It’s helpful to have these indicators of that future value, I think?

Yes. Merrill, as we work with the government to finalize the terms, particularly around tenant improvements associated with these and [ph] as we look forward to sharing with you details on the outcomes.

Thank you.

The next question is from Jon Petersen, Jefferies. Please go ahead, sir.

Great. Thanks. Can you remind us on the equity offering you did last year? There were 7 million shares on a forward basis. Have you settled any of those so far? How – and kind of what’s the timing on what we should expect there? And then maybe more high-level, how should we think about leverage on a debt to EBITDA basis trending throughout 2019?

Yes. Hey, Jon. No, as of today, we have not settled that forward contract. We are looking to sort of time that to ensure that our balance sheet maintains in check in that 6 to 7 times range and would certainly be at the low-end of that upon settlement of the equity. And as we go through the year, the tools in our toolkit, if you will, to help match fund acquisition should allow us to continue to maintain consistent leverage in the midpoint of that range with a potential slight uptick as we near the end of the Alameda development and we await for the long-term reimbursement.

What’s the end date upon which you have to draw down those 7 million shares?

We have until June 21st of this year.

Okay. And then just looking at AFFO adjustments, I mean, do you have any large CapEx needs, tenant improvements or leasing commissions or anything like that we should be thinking about with some of your renewals this year?

Yes. So as we look out to the portfolio on a maintenance capital perspective, we see expected needs in that range of our previously stated kind of $1 to $1.50 per square foot range.

All right. Thank you.

There are no further questions at this time. I’d like to turn the floor back over to Mr. Darrell Crate for closing comments. Please go ahead, sir.

We appreciate you joining the Easterly Government Properties fourth quarter 2018 conference call. The company is growing on a foundation of premier assets backed by the full faith and credit of the U.S. Government, and we appreciate your continued partnership and look forward to speaking with you all again soon.

This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.