Greetings. Welcome to Easterly Government Properties First Quarter 2022 Earnings Conference Call. . I will now turn the conference over to 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 this 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 IM1A risk factors of its annual report on form 10K for the year ended December 31st, 2021, which was filed at the FCC on February 28th, 2022 in its quarterly report on form 10Q for the quarter ending March 31st, 2022, to be filed with the FCC on May 3rd, 2022, and in its other FCC filings. And risks and uncertainties related to the adverse impact of COVID-19 on the US, regional and global economies and the potential adverse impact on the financial condition and results of operation of the company. 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 call, the company may refer to certain non-gap financial measures, such as funds from operations, funds from operations as adjusted and cash available for distribution. You can find a tabular reconciliation of these non-gap financial measures to the most comparable gap – current gap numbers in the company's earnings release and separate supplemental information package on the investor relations page of the company's website at ir.easterlyrate.com. I would now like to turn the conference call over to Darrell Crate, Chairman of Easterly Government Properties.

Thank you Lindsay. Good morning and thank you for joining the call. As I look at the call attendance list, I see the recent decline in stock price has attracted some equity generalists in addition to our regular rate cohort. Welcome. Given the audience, let me step back for a moment and speak to how we are viewing this period of rate reorientation in the bond market. Obviously, the market is very concerned and uncertain about how the yield curve will change shape over the coming months and how assets will reprice. What we see today and for the last year is a separation in how our assets are valued by the public market versus the private market. As debt capital becomes more expensive, we believe this disparity will diminish, our competitors for acquisitions will have less access to cheap leverage and development competitors who anticipate cap rate compression will no longer participate in the market. We can imagine that this reduction in purchasing power will push up cap rates and that's a very healthy dynamic we have not seen in years. We're very pleased with our existing portfolio. While some investors are focused on the flat nature of our leases, which is not an optimal headline in a rising rate environment, I observe the quality of our buildings as strong and enduring. The value of these assets is supported by their replacement costs as the alternative for the government upon releasing is to build or redevelop an alternative site. As we've all observed construction costs are accelerating, which translates into elevated NAV for our buildings. The cash flow from that value growth will be realized upon release. In addition, there's a second dynamic that can improve our re-leasing results. Replacement costs will further increase as developers who have been…

Thanks, Darrell and good morning. Thank you for joining us for our first quarter earnings call. Just after the first quarter, we were pleased to add VA Birmingham through our joint venture, the fifth brand new VA facility of our previously announced 10 building portfolio. This mission-critical clinic is approximately 77,000 square feet and provides state-of-the-art care to our veterans through a multitude of important medical functions. Including VA Birmingham, we expect to close on approximately 145 million of this portfolio throughout 2022. In addition, we've seen a strong pipeline of opportunities outside of this joint venture and look forward to announcing additional acquisitions as they take place. I think it's important to look at the current state of the government lease market, as we have seen the 10-year treasury increase by over 100 basis points since we signed the PSA for the VA portfolio last summer. Until recently, our market has been the beneficiary of increased institutional interest for several important reasons. First, private equity understands the unique inflation hedge GSA lease structure that protects us, as landlord, from inflation induced operating cost increases and have gotten more active in the space. Second, while regular office has been challenged with occupancy and long-term post-pandemic space requirements, the US government is back to work and continues to require build-to-suit space to conduct their missions. In our bullseye corner of the vast 550 million square foot US lease market, the government continued to utilize our facilities throughout the crisis. Work from home really was not an option for the FDI, DEA, CBP, FDA, and others, and the laboratories supporting these critical agencies. President Biden announced the return to office for the rest of the US government employees at the State of the Union Address several months ago. On the current market,…

Thank you, Bill. Good morning, everyone. It gives me great pleasure to post another strong quarter. We commenced another strong year here at Easterly. As of March 31st, we own 89 operating properties comprising approximately 8.6 million leased square feet, either wholly owned or through our joint venture, with one additional development project in design totaling, approximately 162,000 square feet. Through the acquisition of newer facilities the weighted average age of our portfolio remains young at 13.9 years. Successful long-term renewals of existing properties have also allowed us to grow our weighted average remaining lease terms to an historic high of 9.8 years. This represents a year-over-year lengthening of our weighted average remaining lease term of 1.2 years. Maintaining a young portfolio age and a long weighted average remaining lease term is reflective of our strategy of owning relatively new built-to-suit assets with enduring missions. This strategy provides this with distinctive future cash flow visibility, which in turn allows us to prudently manage the company's balance sheet and support our highly creative acquisition and development project pipeline. Turning to our first quarter results all on a fully diluted basis, net income per share was 8 cents, FFO per share was 33 cents and FFO as adjusted per share was 31 cents. Our cash available for distribution was 28.8 million. Turning to the balance sheet. At quarter end, the company had total indebtedness of approximately 1.2 billion with approximately 415 million available on our line of credit for future acquisitions and development-related expenses. As of March 31st Easterly's net debt to total enterprise value is 35.9%, and it's adjusted net debt to annualized quarterly EBITDA ratio was 6.7 times. With a weighted average debt maturity of 6 and a half years, a weighted average interest rate of 3.5% and 96% of…

. Our first question is from Manny Corrigan with Citi.

This is Michael Griffin on for Manny. I'm curious, you know, you mentioned the share buyback program, kind of, how are you balancing capital for acquisitions versus the buyback program sort of going forward in the near term?

Sure. I think it's – you know, it's, it's a fantastic tool as we – as we sit here looking at the stock today to be responsive to what the remainder of 2022 brings, be it an opportunity to recycle capital or to – to continue to address the strength of our balance sheet. It's – it's going to allow us the flexibility we need in the coming year.

Great. And on those future acquisitions that you mentioned, do you see them as more attractive in wholly-owned versus in any future joint ventures?

Well, I think that it certainly depends on the particular asset. We've mentioned before that there's a bit of a tale of 2 cities. While all of the assets have certainly increased in value rather remarkably over the last 12 to 18 months, we're seeing a real premium put on those longer-.term assets, those 15 to 20 year think brand new clinic. Think FBIs, where I think we're seeing a lot of international interests. We're seeing a lot of private equity interests and those pricing are pricing, you know, 25, 50 basis points inside the other side, which would be a wonderful opportunity for our JV. We have a very long-term perspective on the value of these assets. On the other side of the equation, and you know, we see interest there as well, but those would probably be bought individually by us. So – and they don't really conflict with each other, which is certainly very healthy.

Our next question is from Michael Carroll with RBC Capital Markets.

I wonder if you could provide some color on overall private market valuations. I know, I think Darrell said in his prepared remarks that you expect cap rates to trend higher. But then you also said that your private market valuations or NAV's for your portfolio has increased fairly meaningfully over the past 12 to 18 months. I mean, how do we coordinate between those 2? What's – is cap rates going higher? Are they going lower? Or how should we think about that?

Let me start. And maybe Darrell can follow. I think, you know, you're in a transition moment. So several things are happening at once. There is a huge demand, certainly for all of our assets in the bullseye category. They are the occupied office asset. They're understood. I think we've done a great job explaining it to the world over the last 7 years of being public and they continue to draw a lot of attention. But at the same time we've seen the industrial world and other areas you're very familiar with, Mike, are beginning to make the turn as they reflect a change in trying to fight the FED, which in the long term, I think is never a successful endeavor. So, we're seeing both things happening at the same time, but you can be assured from our standpoint that we're going to be careful. We're very – we're very focused on being NAV accretive here at Easterly and in making sure we have the finest assets. So, we're looking at all sorts of different options in this particular market and not going to go out there and get crazy but continue to try to do the best for our shareholders.

Yes. I mean, I – and you know, we don't have a crystal ball, but one of the things that we know is true that so much capital is just flooded into real estate, broadly high quality assets and – and lesser sort of uniform, you know, lower scale assets or assets that are a little different. The cap rate compression among all of those just got tighter and tighter and tighter. And so as we look forward, I think there's a couple things that we see. There will be dispersion, you know, of, GSA leases among agency, among sides. And I think that's more opportunity for us to – to find value.

And then can you probably quantify where are the cap rates today for the types of assets in the bullseye that you're looking at and have they started to move higher yet? I mean, have you seen that when you're – when you're bidding on deals?

No, I think we're at 5.25. And you know, I think our entire portfolio would probably trade under that right now, just to give you an idea. So, it's – it's an interesting time.

Okay, great. And then with the – the stock repurchase program, how aggressive, I mean, can you be pursuing that? Are you willing to – to increase, leverage to – to pursue some of your buybacks? I guess, how should we think about that?

Sure. So I think, you know, the tool, like I said, is meant to be responsive to multiple potential paths that we could take, be it, you know, returning the balance sheet in line post some recycling capital or interimly as we recycle capital. But you're right, Matt – Mike, you know, at 6.7 times, the turn of leverage, I don't think would – we've never believed would disrupt the ability of this cash flow to perform. And, obviously, a turn is...

Yes, no, the rating agencies and others would view that as a solid investment grade balance sheet. So I think we have a lot of flexibility.

And then would you pursue some asset sales? I know you kind of talked a little bit about capital recycling. Is that the plan is kind of being more aggressive for doing asset sales and then using that – those proceeds to buy back stock? Is that how we should think about it?

I think that's a great question. And I think that's another tool in our toolkit and – and, you know, obviously I think we see a lot of folks that understand the value of all of our assets and we're constantly looking at all of them. We do love our children. But you know, there's different buildings we have in the portfolio. We're always trying to drive to our particular bullseye and – and we have stayed very constant on that. We have a number of buildings we purchased a bunch of years ago that have been an incredible return to our investors at this point. And we've got a geographic footprint all over the country, and maybe there are some spots that are more difficult for us to service than others. So everything's on the table and you can expect us to do whatever we do very prudently and best thing for shareholders.

We have reached the end of our question and answer session. I would like to turn the conference back over to Darrell for closing comments.

Great. Thank you everyone for joining the Easterly Government Properties First Quarter 2022 Conference Call. We appreciate your time and we'll continue to work hard to deliver strong risk-adjusted returns for our shareholders for the years to come.

Thank you. This does conclude to today's conference. You may disconnect your lines at this time and thank you for your participation.