Greetings. Welcome to the Easterly Government Properties' Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session between the company's research analysts and Easterly's management team. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lindsay Winterhalter, Head of Investor Relations. Please go ahead.

Good morning. Before the call begins, please note that certain statements made during this conference call may include statements that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes that its expectations as reflected in any forward-looking statements are reasonable, it can give no assurance that these expectations will be obtained 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 the company's most recent Form 10-K filed with the SEC and in its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, core funds from operations, funds from operations as adjusted, 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'd now like to turn the conference call over to Darrell Crate, Chairman of Easterly Government Properties.

Good morning everyone and thank you for joining us for this third quarter conference call. Today, in addition to Lindsay, I'm also joined by Bill Trimble, the company's CEO; and Meghan Baivier, the company's CFO and COO. As we've been discussing for several quarters, the real estate market is in flux, and this uncertainty has created an environment of opportunity for Easterly in 2024 that we intend to capitalize on. Increasing defense needs, onshore technology and bringing and providing public safety are key objectives for the nation. Our mission-critical facilities are needed now more than ever. As the government addresses these needs, there are facilities that need to be built. We are a natural partner to work with developers test with these projects and find ourselves being approached as a known leader in our space. We are differentiated for many REITs and better positioned for this forward environment. Our revenue is incredibly stable and forecastable as we have long-term leases with an average remaining term of over a decade and we have no credit concerns about our very high credit quality tenants. These attributes give us access to capital while others, particularly in the office sector and financing sources to be impaired. While the economy may be slowing and patterns of work may be changing, the world as we see in the headlines each day is becoming less safe. These projects need to be completed, and we can work with developers to own these attractive projects with long-term leases on terms that are favorable to our shareholders now and into the future. And with that, I'll turn the call over to Bill to give further insights into our portfolio.

Thanks Darrell and good morning. Thank you for joining us for our third quarter earnings call. It has been a productive quarter for Easterly. The deal market returned, and we were able to transact on several accretive acquisitions during the quarter and subsequent to quarter end. Easterly through its JV closed on VA Corpus Christi, the nine of 10 assets in the VA portfolio with an initial lease term of 20 years with the United States Federal Government. We are very pleased with the stability of the cash flow brought to our growing portfolio. Further, subsequent to quarter end, we announced the acquisition of our first state government lease deal located in Anaheim, California. This facility is 100% leased by tenant agencies in the state of California, including the Department of Industrial Relations and Employment Development Department. This public-facing facility contains core hearing rooms used for adjudicating workers' compensation plannings as well as training rooms for further employment opportunities. With a weighted average expiration date of January 2034, this facility has been occupied by the State of California since 2009 and recently underwent a renewal exercise process post-pandemic, whereby the tenants demonstrated their continued need for the facility by executing several leases with a weighted average lease term of 10.7 years. As mentioned on the prior call, we have always viewed Easterly as the mechanism to access high-quality cash flows through the lens of real estate with the goal of delivering long-term growth to our shareholders. We have spent a large amount of time expanding on that credit analysis. We learned that the US government is joined by a number of states with very high credit ratings. We also learned long-term leases renewed post-pandemic carry a higher degree of comfort and security, which is a key component of the strategy…

Thank you, Bill. Good morning everyone. I am pleased to report that Easterly's portfolio performed solidly in the third quarter, and our balance sheet at quarter end remains strong with leverage below the midpoint of our target range, zero drawn on our revolver and no current floating rate debt exposure. With this backdrop, our focus remains on growing the portfolio with the opportune moment. Turning to our portfolio. For the quarter ended September 30th, we owned 87 operating properties, comprising approximately 8.6 million leased square feet, either wholly-owned or through our joint venture with a weighted average age of 14.5 years and a weighted average remaining lease term of 10.4 years. Through the acquisition of newer buildings and the renewal of key leases for long term, Easterly has been able to maintain its young portfolio age and even grow the weighted average remaining lease term since the third quarter of 2022. Further, during the quarter, Easterly renewed two important leases, one at the DEA facility in Birmingham, Alabama and the other at the courthouse in Del Rio, Texas. Easterly looks forward to continuing to serve as the preferred landlord to the government after these leases commence for terms of 15 years and 17 years, respectively. For the third quarter on a fully diluted basis, net income per share grew to $0.06 and core FFO per share was $0.29. Our cash available for distribution was $24 million. At quarter end, the company had total indebtedness of approximately $1.2 billion at a weighted average interest rate of 4%, a weighted average maturity of five years and with 100% of all outstanding debt fixed at attractive levels. This represents an adjusted net debt to annualized quarterly pro forma EBITDA ratio of 6.7 times, which is below the midpoint of our target range. During…

Thank you. [Operator Instructions] Our first question is from Michael Griffin of Citi. Please proceed with your question.

Hey thanks. On the acquisition pipeline, I'm curious if you can delineate between kind of the Federal agencies that have kind of been your bread and butter versus the state agencies that you're kind of looking to go more into that route? Is one more attractive than the other, or they both have their own kind of benefits?

I think -- good morning. I think that we're seeing plenty of both and have seen plenty of both. And Michael, as I said before, I view the state it's just like having another agency within the Federal government pipeline. So, I think that you see most of the opportunities continuing to come from the Federal side of things.

That's helpful. And then I'm curious if you can just comment on the dividend. I mean I know the payout ratio still remains elevated. How should we think about that maybe on a go-forward basis?

Hi, it's Meghan. It's certainly our experience that our leases provide unique forward planning capabilities. We can look out further than the typical -- certainly the typical office REIT today. we're really at a place today a real opportunity, as Darrell and Bill indicated, and growth can be accretive. Furthermore, our reliabilities are not repricing tomorrow with the with the swaps we put in place earlier this year. So we're very soon to this issue. We'll stay focused on what's best for shareholders, but that's the backdrop today.

Thank you.

Thank you. Our next question comes from John Kim of BMO Capital Markets. Please proceed with your question.

Thank you. Bill, you mentioned on developers in the market needing some kind of assistance or relief that you're able to provide. Are you thinking more on a JV basis or mezzanine financing or potentially taking out the development ones complete?

Well, I think -- and I'll let Meghan fill in the rest. But I think the great news is, is we've been, I think, pretty engaged in seeing some wonderful opportunities certainly within our wheelhouse and what we would consider prime pipeline opportunities. I think you guys have all been bored of hearing me say this for the last five earnings calls, but I think we're finally at the point we're in a situation in the capital markets that we are a very attractive place to partner with especially with these buildings that might be useful to us in the end. And Meghan is -- we've been very busy looking at some opportunities here.

Yes, I think, John, right, there's a myriad of structures that could make sense for Easterly could be accretive to shareholders. I think we're going in with a very open aperture on how to best play in this opportunity.

And what kind of return thresholds are you looking at versus cap rates on recent investments?

Yes, I mean today, obviously, at current levels, we're looking at a cost of capital that's north of 9%. And from a yield perspective, obviously, today can break even in the low level 9%.

Okay. Can you walk us through the yield expectations on your developments? I know it's a little bit unique with the reimbursement. But how should we look at it as far as the yield you're expecting on your $76 million net spend on the development side?

Yes, and we're really pleased to have Atlanta back on track moving job site mobilized, government excited to be on this process with us once again. What I can tell you is that we have worked with the government to ensure that we are back to looking at yields similar to where we underwrote this asset a couple of years ago. So, think of that back into that kind of 100, 150 basis point spread to where that type of asset could be acquired when we underwrote it back in 2019.

The yields would have increased just given the change in interest rates?

Yes, I mean the structure that we're able to underwrite you can hold your economics, but working with the government to improve your economics can get tricky.

Okay. Just one final question, a follow-up to Michael on the dividends. Sometimes, REITs have -- are influenced by the capital markets, your stock is yielding 9.7% today, which is a huge spread versus the tenure on a very similar credit. How much does the capital markets and your stock price influence or change the way you view the dividend policy?

I mean, look, just -- I'm not actually sure what the question is. So I think the easiest answer is no, we're not looking to the capital markets to set our dividend policy. As Meghan said, we're on the edge of analyzing terrific opportunity for the company. As you've seen, we have the most forecastable revenue stream of maybe any REIT in the United States. So, the opportunity and Meghan has done such a great job getting our liabilities priced out. We feel like we have plenty of opportunity in order for us to have a terrific return for shareholders. And we think that will be recognized by the capital markets.

Great. Thank you.

Thank you. Our next question is from Bill Crow of Raymond James. Please proceed with your question.

Hey, good morning. Meghan, one for you. How much could you acquire on balance sheet before you hit the upper end of your guardrail for leverage assuming of course no equity issuance?

Sure, I think that's the type of the cap rate environment we're seeing today, right, you're going to be kind of in that $150 million to $200 million range.

Okay. And that's a pretty firm ceiling, I assume, at this point?

We've always been committed to running a BBB profile balance sheet. I think that there's no intent to change that.

Yes, I just like to make a comment, Bill, is that one, and I want to make it very clear that we're differentiated with regard to our access to capital markets today compared to many REITs because of this durability of cash flow. So, when we're looking at leverage and leverage ceilings and talking with debt providers I can't get into specific conversations, but we hear again and again from various sources in the capital markets that given what we're doing and what we're looking to do that these are very financeable projects and our opportunity to take on leverage with comfort with debt providers is very high.

Yes, I think that's absolutely true and especially true in the private market. But I think as a public REIT, you have another contingency out there that would probably not necessarily agree that higher leverage is better at this point. Let me shift over to the leases that were signed in the quarter, the DEA, the courthouse in Del Rio, and then the ones that were signed on the asset acquisitions that extended the length to another, I think, 10 years, what were the economics of that lease old lease rate to new lease rate change?

Yes. So, Bill, we typically try to create full transparency at the end of the year, but we're very proud of the renewals we continue to post post-pandemic and in this typical office backdrop. So, what I would share with you is Birmingham and the Courthouse in Del Rio, are bang on the center of our target range and right around that 20% level on a net effective spread and that's for a 16-year new term.

So, up 20% from the expiring. And what about the ones that were signed prior to the change in ownership?

Are you referring to the Anaheim, Atlanta?

Yes, you mentioned the acquisitions where they're just -- the tenants have just signed a new lease extension. I'm just curious how those economics were.

Yes, I'll have to follow-up with you on that, Bill, and I don't have that on my fingertips.

Okay. All right. And then finally for me, I think you've had a decent sized debt maturity next year. Are there extension options on that, or what are you thinking about from the cost of redoing that debt? I think it's $100-some-odd million.

Yes. So, we've got the two components would be our $100 million term loan with a subset of our bank syndicate and just a little over $50 million mortgage. What I would tell you is we consistently are able to differentiate ourselves with the banks today, while they are all certainly undergoing a lot of deep dives into their office portfolio, right? The thing I consistently hear is no credit issues, top of -- I don't even want to call you office, looking at your position in the market and ability to continue to grow. That's obviously an attractive longer-term relationship. And so I'm very comfortable with our ability to continue to maintain capacity at the banks. And from the perspective of the mortgage, we have capacity on our revolver today, but we'll continue to pull that in and evaluate the whole -- our entire debt structure as we move forward and look at the marginal most attractive place to refi debt. But for -- certainly, we have the capacity to kind of warehouse it on the line.

Are you -- okay. Are you in discussions about those maturities? And you give a sense for how much the interest rates may gap up?

Yes, in conversations on the term loan, expecting consistent spreads there and not looking to refinance the mortgage on that existing asset looking to roll that into the broader context.

Perfect. Thank you all.

Thank you.

Thank you. Our next question is from Aditi Balachandran of RBC Capital Markets. Please proceed with your question.

Hi, good morning. I know, Bill, you kind of touched on this in your prepared remarks. But I guess, can you go into a little more color about your outlook for, I guess, the next one or two years? And what types of deals you're looking to target?

Absolutely. I think it's important to note that we had a nice slow run, and we took advantage of it over the summer. We saw some great opportunities for accretive transactions. And I think we've been very consistent in saying we're not interested in doing things that aren't accretive. Right now, the market, I think, slightly shocked by recent increases in interest rates or on the sellers I think they've gone back into their holes in hiding for a little bit, but I'm sure they'll be right back out soon like they were before. But I think the next several years, you're going to see just what Darrell and I were discussing, which we're going to see some incredible development opportunities. I'm quite sure of that. I think we're going to continue to see some accretive opportunities primarily federal, and I think some interesting state ones as well. So, I think the one thing you can expect is that we're going to see some opportunities. We're going to do them accretively. And I think that the buildings that we buy will continue to inure to our benefit and we'll be right in the middle of the bull's eye.

Got it. And I guess just how different are development cap rates from acquisition cap rates and assuming the development cap rates are much higher, but just for an idea?

Well, I think we've got two things metering in there. We obviously want to be accretive from our cost of capital on one standpoint. And obviously, we realize the risk inherent in development and we need a premium for that as well. And I think we've always done that. And the great news is anything we're going to do. Obviously, we'll be a signed lease, and we'll have something at the end and fabulous building. So I think from that standpoint, it has always been the most, I think, best -- and the highest and best use of our capital.

Great. Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Peter Abramowitz of Jefferies. Please proceed with your question.

Thank you. And apologize team if I missed this stuff. But could you just talk about what the going-in yields were for the wholly-owned acquisitions both the federally leased and the state agency leased?

Good morning Peter. And I think you're going to see that pretty close to ACAP [ph] across the board on those -- which certainly at the time was accretive when we raised the capital to do it.

Got you. And there wasn't much of a difference there in terms of--

Not particularly. No, no.

Okay. Got you. And then just a question on the Anaheim asset. So it is your Department of Industrial Relations and Employment Development department. Can you just talk a little bit more about actually what goes on in this facility, specifically kind of what you say here about training rooms for furthering the employment opportunities.

Yes, they're adjudicating. So, think of it as almost a court that's going on, that's specialized activity for these compensation claims. So, that's one that we looked at hard and realized that, that is something that is certainly not going to be going away anytime in the future, and we were particularly gratified to see the renewal close pandemic in this. And I think you're going to see that common thread in every building that we buy, is that there is a real need for this mission, and it has been verified after the pandemic. So, I think that's probably a new attribute that we're going to demand in our bull's eye.

Okay. I guess I was a little more curious in the second part of that training rooms for furthering employment opportunities. I guess, could you give more -- a little more color on that part of what goes on with the asset and what makes it kind of remote work resistant.

Well, if you're doing it, I think that they like to bring the folks in. It's a public facility, and they're helping these folks out that obviously are in a situation in the California certainly is probably at the leading edge of making sure that everybody gets the maximum help from the state in these situations. So, I've not sat in that room, Peter. We can join. You come out with me. We can [Indiscernible], cheery on it, but I think it's -- from my all indications, it is an ongoing mission and an important one to the State of California.

Got you. That’s helpful. Thank you.

Thank you. I would now like to turn the conference back to Darrell Craig, Chairman of Easterly Government Properties for closing remarks.

Thank you, everyone, for joining the Easterly Government Properties' third quarter 2023 conference call. I'd like to thank our investors and stakeholders for their continued support and trust in our company. We value your confidence and we're committed to delivering sustained long-term success to our shareholders.

This concludes today's conference call. Thank you for participating. You may now disconnect.