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spk03: Greetings. Welcome to the Easily Government Properties third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to your host, Lindsay Winterhalter, Vice President of Investor Relations. Please go ahead.
spk00: 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 item 1A, risk factors of this annual report on Form 10-K for the year ended December 31st, 2020, filed with the SEC on February 24th, 2021, and in its other SEC filings, including its Form 10-Q, which we expect will be filed later today, and risks and uncertainties related to the adverse impact of COVID-19 on the U.S. 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 conference call, the company may refer to certain non-GAAP financial measures, such as 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 earning release and separate supplemental information package on the investor relations page of the company's website at ir.easterlyrete.com. I would now like to turn the conference call over to Darrell Crate, Chairman of Easterly Government Properties.
spk05: Thank you, Lindsay. 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 Megan Bevere, the company's CFO and COO. I could not be more pleased with our business progress during the third quarter. We were able to develop all stages of the acquisition pipeline, including identification, negotiation of terms, diligence, and closing. With this morning's announcement, we have exceeded our goal of 300 million in acquisitions for 2021, And as you saw in the release, we increased our guidance for acquisitions to 350 million. This is our second increase to this metric during 2021. And all told, this represents a 75% increase on our original acquisition volume target from one year ago. In addition, we are very well positioned to achieve our acquisition target range of 200 to 300 million for 2022. In addition, We materially improved our competitive position and expanded our executable addressable market or bullseye over the medium term with the announcement of the portfolio purchase side by side with an outstanding joint venture partner. As you may recall, years ago there was a sizable building we were bidding on that was squarely within our bullseye. And while we were highly competitive as a bidder, we lost the auction. Why? We were not able to match the price given the cost of our capital and our speed to close given our scale relative to our competitors. Unequivocally, the building we lost is one that we should have owned. We also realized that there was a universal several billion dollars worth of buildings that could trade over the next 15 years where we could find ourselves at a similar disadvantage. It was clear to us that we needed to solve this issue. We began an effort to find a set of investors who would see value in the enduring nature of our leases, as they are backed by the full faith and credit of the United States government, have a life with several renewals that can reach or exceed 50 years, on sites that will generally see economic development over the coming decades. The ultimate in sleep well at night real estate, or as Bill says, real estate without the drama. We spoke with both domestic and global insurance companies, pension funds, and sovereign wealth funds. What we learned is that the audience that most values our assets are folks who are also responsible for purchasing U.S. Treasury securities, and they see their real estate holdings as part of an expansive global investment effort. While we join our public company shareholders on these calls quarter after quarter and discuss the significant 500-plus basis point premium we offer relative to Treasuries, we came to realize that the public REIT investor's first instinct is not to approach the valuation of our assets with this risk premium in mind. The result of our conversation was to narrow our interactions to several large global organizations that invested with a broader scope of risk and asset types. Ultimately, we found a partner with whom we believe we can creatively and decisively work to harvest the most value and own the sizable assets in the United States' least market, while simultaneously serving the needs of our public REIT investors. This enabled us to deliver the portfolio transaction that we announced two weeks ago, which is an accretive transaction as measured by both FFO and CAD for our shareholders while being competitive in the marketplace for the highest quality assets. It's important to note that the universe of global investors see value in these assets at a sub-five cap rate. While the purchase of this VA portfolio is an attractive addition to our existing assets as measured by duration, quality, scale, and diversification, It more importantly illustrates the model by which we can transact within our total addressable market and positions us at a competitive advantage for the largest pristine assets in our target universe. I compliment the whole organization and our board for their efforts over the last couple years as we work to solve this challenge, and I'm very excited about the expanded capabilities that this new relationship brings to our enterprise. With that, I'll turn the call over to Bill to further describe the activities of the quarter.
spk10: Thanks, Daryl, and good morning. Thank you for joining us for our third quarter earnings call. It gives me great pleasure to discuss the specifics of the company's most recent acquisition activities. It has been a very productive three months since our last time together. Starting with our activities during the quarter, the acquisitions team continued to add mission-critical bullseye properties with the third quarter acquisition of an approximately 61,000 square foot Class A facility located in Cleveland, Ohio, that is leased to several key agencies within the U.S. government. This Security Level 3 facility was substantially renovated in 2016 and again in 2021 for the Department of Homeland Security and largely fulfills important missions, such as investigating criminal organizations and terrorist networks. A portion of the property also serves as Cleveland's National Weather Service Forecast Office. The U.S. government has invested significant tenant improvements in this building, whose specialized features include a secured entry and parking, a sally port, a backup generator, and an uninterrupted power supply battery system, which all support the weighted average potential lease term through June of 2034. Subsequent to quarter end, easterly, through its JV, entered into an agreement to acquire a brand-new state-of-the-art 1.2 million square foot portfolio leased entirely to the Department of Veterans Affairs. With two of the ten assets already acquired, this portfolio is a perfect fit for Easterly and clearly differentiates us and any of our competitors who may seek to build a portfolio in this niche market of VA leased assets. Through this acquisition, the company is materially reducing the average age of the portfolio, while simultaneously extending its weighted average remaining lease term. And with 100% of the portfolio's annualized lease income backed by the full faith and credit of the U.S. government, Easterly can deliver cash flow growth to shareholders through a strategic joint venture partnership with one of the world's leading investors. If we assume September 30th profile metrics and a scenario where all 10 buildings were acquired and operating on the earlier of its actual lease commencement date, or October 1, 2021, Easterly's weighted average age would drop 13% from 13.8 years to 12 years. Its weighted average remaining lease term would grow nearly 16% from 8.9 years to 10.3 years. And the size of the portfolio would grow by 16% from 7.5 million square feet to 8.7 million square feet. To improve all of these metrics for a single portfolio transaction is very exciting for us at Easterly. And we expect it is for both our debt and equity partners as well. Also in the third quarter, we honed our discipline of owning government leased assets through the strategic disposition of a non-core asset, a privately leased warehouse located in Midland, Georgia. While a quality asset, owning a lease facility that lacks the creditworthiness of the United States government is, by definition, a disposition candidate for Easterly. We have long communicated this asset as a potential source of funds for future acquisitions, and with the rolling closings of the remaining eight properties in the VA portfolio between now and 2023, Easterly is able to put that capital to work while simultaneously strengthening the lease profile of the company's portfolio. Subsequent to quarter end and in addition to the two VA outpatient facilities acquired by the JV, Easterly acquired a nearly 500,000 square foot facility primary leased to the United States Citizenship and Immigration Services, or USCIS, located in the metropolitan region of Kansas City, Missouri. With the majority of the building leased to USCIS through 2042, The total weighted average lease expiration date for the facility is February 2036. Should all in place tenant renewals options be exercised, the weighted average lease expiration date for the facility could be as late as January of 2045. Notably, this property serves as USCIS's National Benefits Center or NBC. which supports the processing of applications from every U.S. state and territory for the different immigration benefits, including the authorization for employment, travel abroad, permanent residency, and naturalization. The NBC's primary function is to prepare the case files for eventual adjudication for more than 85 field offices nationwide. And finally, just this morning, The company announced our latest acquisition, which is not part of the 10-property VA portfolio. Yesterday, Easterly acquired an 80,000-square-foot VA outpatient clinic located in the Midwest region of the United States. VA Midwest is a bill-to-suit outpatient clinic that was recently completed in 2021. The state-of-the-art two Green Globes certified facility is leased to the VA for an initial non-cancelable lease term of 20 years, that does not expire until May of 2041. The outpatient clinic provides a wide range of medical and ancillary services, including, but not limited to, primary care, mental health, audiology, optometry, dermatology, radiology, and prosthetics. To summarize, year to date, Easterly has acquired, either directly or through the JV, 10 properties For a total pro rata contractual purchase price of approximately $321.3 million, exceeding its increased $300 million acquisition volume target for the year, pro forma for these acquisitions easily owns directly or through the JV 87 properties totaling 8.3 million square feet. As you recall, given the pace of our acquisitions and our clarity of pipeline, We increased our 2021 FFO guidance per share on a fully diluted basis in conjunction with increasing our acquisition volume target by 50% for the year from $200 to $300 million. We also spent time in the last call letting you know the team was looking for large opportunities, and we felt confident in our ability to meet or possibly significantly exceed this increased $300 million in acquisition volumes. Since the time of our last call, Easterly has, either directly or through our pro-rata share of the JV, more than doubled our acquisition volume for the year and identified a robust pipeline of actionable opportunities that will carry us into 2023. And while the acquisitions team has created certainty of pipeline for the next couple of years, we are by no means slowing our pace. The team continues to work hard to identify future single and portfolio opportunities that will deliver growth to our shareholders. Turning to development, we are pleased to report that the government has reached a determination on its new program requirements for the future FDA Atlanta Laboratory Development Project. The GSA and the FDA had spent the past several months working together to ensure maximum benefit from this facility, and we are pleased to once again actively engage with the government and proceed with the redesign process. Given the non-speculative nature of our development projects, The design process is heavily dependent on the government as they customize their specific requirements. After the government determines its functional needs, we work collaboratively, and the design and the government then relies on us to construct the build-out. During build-out, given our expertise in the specialized field, we have the ability to accelerate the construction timeline, as was demonstrated in the case of FDA Lenexa. Turning to leasing updates, our asset management team continues to secure meaningful renewals that lengthen the duration of cash flows. In the third quarter, we renewed the lease at DEA Vista for a 15-year term that retroactively applies to November of 2020 and does not expire until November of 2035. We also renewed several key leases at various GSA Buffalo assets, including the approximately 50,000-square-foot IRS lease for 10 years and the approximately 111,000-square-foot VA lease for 15 years. These renewals, combined with the other assets year-to-date, translate into eight successful re-leasing exercises totaling over 530,000 square feet, or 7% of annualized leased income for a weighted average lease term of 16.1 years in 2021. In closing, we at Easterly have been busy since the time of our last call. We have meaningfully and accretively scaled the company's portfolio through the acquisition of Bullseye Assets. We have charted a course for the highest acquisition volume year on record as a public company. We have formed a new joint venture with an experienced global partner, and we have even further refined our investment discipline of owning assets primarily backed by the full faith and credit of the U.S. government. With that, I thank you for your time this morning. I will turn the call over to Megan to discuss the quarterly financial results and capital markets executions.
spk04: Thank you, Bill. Good morning, everyone. It gives me great pleasure to post another strong quarter and issue earnings guidance for 2022, demonstrative of our ability to deliver consistent growth to shareholders. Turning to our quarterly results for the third quarter, net income per share on a fully diluted basis was $0.09, FFO per share on a fully diluted basis was $0.33, FFO as adjusted per share on a fully diluted basis was $0.31, and our cash available for distribution was $26.1 million. As of September 30th, we owned 83 operating properties comprising approximately 7.5 million square feet of commercial real estate with one additional development project in design totaling approximately 162,000 square feet. The weighted average age of our portfolio was 13.8 years, and the weighted average remaining lease term was 8.9 years. Well matched, I'd like to point out, to the weighted average debt maturity of nearly seven years. As Bill pointed out, these metrics are expected to continue improving through the acquisition of the 10-property VA portfolio announced subsequent to quarter end. These metrics are core to our strategy as reflected through the acquisition of young buildings and renewal of existing assets for long lease durations. These actions have also demonstrated the company's ability to continue to generate cash flow with strong visibility for years to come. Turning to the balance sheet, at quarter end, the company had total indebtedness of approximately $1 billion, with ample capacity in our line of credit for future acquisitions and development-related expenses. As of September 30th, Easterly's net debt to total enterprise value was 33.2%, and its adjusted net debt to annualized quarterly pro forma EBITDA ratio was a low 6.1 times. During the third quarter, Easterly had a number of notable capital markets events. First, the company upsized its existing senior unsecured credit facility. The amended and restated credit facility consists of a $450 million revolver and a $200 million term loan facility, up to $50 million of which will be available on a delayed draw basis for up to 364 days post-closing. The revolver includes an accordion feature that allows the company to request additional lender commitments of up to $250 million for a total amended credit facility capacity of up to $900 million. The revolver will initially mature four years from the closing date in July 2025 with the option to extend the maturity to July 2026. The term loan will mature five years from the closing date in July 2026. The term loan is repayable without penalty for the entire term of the loan. Borrowings under the revolver will bear interest at a rate of LIBOR plus a spread of 120 to 180 basis points, and the term loan will bear interest at a rate of LIBOR plus a spread of 120 to 170 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 bps for the revolver and 120 basis points for the term loan. Of note, the amended credit facility also features a sustainability-linked pricing component, whereby the pricing can improve by one basis point if easterly meets certain sustainability performance targets as determined by an independent third-party evaluation. Coupled with our hiring of a director of sustainability, a new role within our organization, it is our expectation that easterly earns this discounted spread and meaningfully demonstrates our commitment to environmental sustainability and strong corporate citizenship. The second notable event for the quarter ended September 30th was an underwritten public offering of 6.3 million shares of the company's common stock sold on a forward basis. This strategic offering executed a net price to the company of $21.64 per share has provided Easterly with funding needed to continue pursuing its acquisition pipeline at levels that are accretive to shareholders. In the third quarter of 2021, The company issued approximately 2.1 million shares of its common stock through the company's ATM programs at a net weighted average price of $23.65 per share, raising that proceeds to the company of approximately $50 million. All shares were from forward sales transactions entered into in prior quarters. Today, the company has approximately 8.2 million shares, which are subject to unsettled forward sales transactions. Assuming these shares are physically settled and full at a weighted average initial forward sales price of $21.71 per share, the company expects to receive net proceeds of approximately $178 million. With these unsettled forward sales, EastJuly is very well poised to continue funding our acquisition and development pipeline just in time at a highly attractive cost of capital. Subsequent to quarter N, Easterly issued the previously announced $250 million principal amount of fixed-rate senior unsecured notes. The notes were issued and sold in two tranches, Series A senior notes in the amount of $50 million with a seven-year maturity, and Series B notes in the upsized amount of $200 million with a nine-year maturity. Together, the weighted average maturity of these notes is 8.6 years, and the weighted average interest rate is 2.84%. Raising long-term unsecured debt at such an attractive weighted average rate and maturity is an extremely powerful tool in generating value for shareholders. Finally, in connection with the VA portfolio announced subsequent to quarter end, Easterly has entered into a joint venture with a leading global investor, which serves as the investment vehicle for this brand-new anticipated 1.2 million square foot portfolio. Easterly's JV partner will retain a 47% stake, and Easterly will retain a 53% stake in the JV. Easterly will also receive asset management fees from the JV partner and will be responsible for the day-to-day management of the properties. This relationship with our new JV partner, we believe, demonstrates a global interest in the strength and stability of the U.S. government cash flows that underpin Easterly's credit quality. We are excited by the partnership and look forward to a strong, mutually beneficial relationship for many years to come. Turning to re-leasing, as Bill previously mentioned, we continue to make progress in working through our pipeline of upcoming lease expirations. With a successful execution at DEA Vista and two of the more sizable leases within various GSA , we now have approximately 243,000 square feet and five leases up for renewal through the end of 2021. With a large percentage of the renewal work now behind us, we continue to make meaningful progress with the GSA and are in active discussions regarding all properties at this time. We continue to feel good about the long-term mission and tendency of these upcoming explorations, and we'll keep you apprised of future renewals in the coming quarters. Turning to our earnings guidance, as you recall, during the quarter ended June 30th, the company increased its guidance for 2021 FFO per share on a fully diluted basis to a range of $1.30 to $1.32. Reflected in part of our increased actionable acquisition pipeline, The midpoint of this guidance was predicated upon completing an enhanced $350 million in acquisitions, an increase from our previously stated $300 million in acquisitions, and up to $25 million in growth development-related investment in 2021. Today, the company is maintaining this increased guidance and at its midpoint, Easterly remains on track to continue our record of steady FFO growth year over year. At the midpoint of our 2021 guidance, we are expected to achieve a 3.8% CAGR in FFO per share over the last three years. When coupled with our recently increased dividend of 26.5 cents per share, which generates a run rate dividend yield of 5% based on our quarter end stock price, we are proud to be in a position to continue to deliver attractive total returns to our shareholders. The company is also issuing 2022 FFO per share on a fully diluted basis guidance in a range of $1.34 to $1.36. This guidance is predicated upon completing 200 to 300 million in acquisitions, including acquisitions through the JV at the company's pro-rata share of the contractual purchase price, and up to $25 million in growth development-related investment in 2022. Easterly remains on track to deliver its steady FFO growth for share year over year. It is our goal to remain dependable and provide a constant source of growth for our shareholders. To echo Bill and Daryl's sentiments, we're excited by the events that have transpired since our last earnings call. We have raised equity at attractive levels to match our forecasted record-breaking acquisition volume. We have fortified the balance sheet with debt issued at attractive rates with long-dated maturities. We have formed a lasting relationship with a preferred global investor in the company's first-ever joint venture. And we've charted a course for future growth through the introduction of our 2022 earnings guidance. With that, we thank you for your commitment to our investment thesis and appreciate your partnership. I will now turn the call back to Maria.
spk03: At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Emmanuel Kortman with CIDI. Please proceed with your question.
spk09: Hey, good morning, everyone. Just thinking about the acquisition guidance for 2022, could you quantify how much of that is contractual or at least planned under the JV versus... new targeted acquisitions outside of what sort of we already know about.
spk04: Sure. So, obviously, as we continue to work on closing the VA portfolio, we are facing that guidance, assuming 50 million of pro rata acquisition volume falls into next year.
spk07: So $50 million of the $200 million to $300 million JV and then $250 million of fresh acquisitions at the $300 million.
spk09: So when does the rest of the JV close? Because I was under the impression it would close that much and there was only one deal that was slated for 2023. So what am I missing in terms of volume?
spk04: I think the important messaging is that our target is $250 million. without that joint venture. And as we know, that joint venture was done at levels that are accretive to FFO. But whether they fall at the tail end of this year or they slide into next year, the messaging is really about deals in addition to that, as those will be the primary drivers of FFO growth. Remember, the VA portfolio is accretive to FFO, but really a driver of CADD.
spk09: And then, Bill, in your quoted statement in the press release, you talked about a large identified pipeline. If we were to sort of categorize that into single asset deals versus portfolios, are there more portfolios you're looking at now versus in the past, or is the mix the same? Just give us some more flavor on that identified pipeline.
spk10: Yeah, I'd say, Manny, that, you know, as we mentioned in previous calls, we are looking at some really interesting portfolios out there, but the timing is never certain. But I think that, as always, it's the ones and twos, the bullseye properties that we're looking at that gave us the confidence to issue that strong guidance for next year's pipeline. So I think that portfolios would probably be on top of that if that worked out. Great. Thanks very much.
spk03: Yep. Our next question is from Michael Carroll with RC Capital Markets. Please proceed with your questions.
spk06: Yeah, I just want to go back to Damani's question real quick. How much of the joint venture do you still have to close? Is it roughly just over $300 million of your share that still needs to be closed within that portfolio?
spk04: That's correct, Mike.
spk06: And can you help us understand when will that close? It sounds like the majority of it is going to close in 2022.
spk04: Yeah, so what we've said, right, is we expect – all but the final on a total purchase price, right, of $100 million to fall by the end of the second quarter next year. I think we don't encourage you to get caught up as these are development properties in the perfect timing of when they will close. The point is whether they are able to close in the end of this year or at the beginning of next year is that we're going to do a target of $250 million in addition to that.
spk06: In addition to the JV closing?
spk04: Correct.
spk06: Yeah. Okay.
spk05: Okay, great.
spk04: $15 million is the underlying assumption there.
spk05: Yeah, I think we can't say it enough, that our steady business, I mean, we've got a business that's delivering a dividend yield of 5%. You know, as Megan said, you know, we're growing between 3% and 4% a year in FFO, as we've demonstrated over the last three years. Our steady state turn-the-crank business is $200 million to $300 million of acquisitions a year. You know, it's our belief, you know, that the full faith and credit cash flows of the government growing at a steady pace is a very attractive, you know, investment proposition. And these portfolios and sort of these one-off value-creating activities, which I think can be many, you know, over this next decade, are really in excess of, you know, sort of that base core business. And I think it's so important to realize that You know, the joint venture partner enabled us to go out and buy these portfolios in a way that it is marginally accretive to FFO. It's very attractive to CAD. And what's most important is that we're owning, you know, these very large, most pristine assets, you know, in the U.S. government lease market. As we continue to dominate and continue to build our, you know, our competitive advantage relative to others in that space, this enables us to do just that. And I can't say enough that, you know, global investors who are across a broad set of assets see these assets at a sub-five cap, which is in stark contrast, you know, to the overall cap rate, you know, that our enterprise is granted in the public markets today.
spk06: And then how do you plan on growing the joint venture down the road? I'm assuming that there's other portfolios that you would want to do in the JV. I mean, should we assume that larger – Billions, billions of dollars. So should we assume that larger portfolio deals could be put in the joint venture and then these one-off smaller transactions will be completed on a balance sheet?
spk05: Well, no, it's not really that simple. It's that there are – There are these large portfolios where we will go to this joint venture partner and we'll use the joint venture appropriately. And, you know, it's early days. We think they're fantastic. I think they're very astute real estate investors. And I think we have a clear understanding of their objectives and what, you know, and what we can deliver. So, again, our steady state business is going to be delivering that $200 million to $300 million of acquisitions a year. Having that FFO growth, you know, that is, you know, dividend yield 5% with a, you know, 3 to 4% growth on top of it. And then as these very large deals come forward, we couldn't be more excited to have our joint venture partner work with us to craft a transaction that helps us meet public shareholder, public REIT shareholder, you know, demands for return on capital. while also allowing us to grow our dividends.
spk06: Okay, and then can you talk a little bit about your asset sales? I know you had one small one completed, I guess, post-quarter end. I mean, is there a plan to sell the other privately leased properties? And are you marketing those for sale, or is this one that was just complete, was just kind of an opportunistic type transaction that someone came out to you and said they wanted to buy it?
spk10: Yeah, great question. I think we've said probably since we met you first and we went public that these non-government core assets were always available for sale. In this case, it was just a good time to transact that sale, and we did. And the answer is absolutely. Those other properties would be viewed as a source of funds for new opportunities going forward. And we're always looking, you know, if we can execute it at a creative level, value for our shareholders will do it. The other properties are terrific, property basically, and would be for sale at any moment if we saw the right pricing on it.
spk06: Okay. And then there's one small asset that's in there. So I don't want to put too much stress on it because it's super small, but it looks like the lease expires within the next six months. I mean, what's the plan with that specific asset? Like we are sharing hope?
spk04: Yeah, I mean, Mike, you're asking about a net of a lease, but that lease could certainly not get renewed. But it's not even worth our time on an earnings call. But yes, it's a small private sector lease in our Charleston asset.
spk07: Okay, great. Thank you.
spk03: Our next question is from John Kim with BMO Capital Markets. Please proceed with your question.
spk07: Thank you.
spk09: Bill, in your prepared remarks, you talked about a number of renewals that you've done on the leasing side. Were those all 21 or were some of those 22 expirations? And then can you talk about what the leasing spread was on those renewals?
spk10: I'll hand that. Thank you. And good morning. I'll hand that over to Megan. She's got it right in front of her.
spk04: Sure. Sure. So, obviously, the two, the IRS lease and the VA lease in Buffalo were renewed in a quarter, as well as DEA VISTA. DEA VISTA had been in what we call holdovers, and then the other two were, one was in 2021, and the other one as well in 2021. Just those three leases. And, you know, John, as we said, we've always got renewals that are impacting different years. Some have tenant improvements that we have insight into. Some are developing our insights. So we're going to continue to talk about renewals annually as we started last year and look forward to doing that on our next quarter call.
spk07: What was the leasing spread?
spk04: Yeah. So, John, we talk about leasing spreads within the portfolio on an annual basis. We're going to continue that track record as we come out next quarter.
spk07: Okay. So, just at the end of the year, you're just going to renew what happened during the year? Exactly. I know you don't report same store NOI, but
spk09: looking at operating expenses this quarter, it was up 6% sequentially, which was higher than the revenue growth. Is that a good run rate going forward on expenses? And can you just comment on the inflationary impact on some of those items?
spk04: Yeah. So I encourage everyone to remember that we have a tenant reimbursement line item in our revenue that relates to the projects that we will perform for the GSA during the term of a lease. There's an equal offsetting amount in our property operating expenses as we obviously finance the project and then the government reimburses us. So, when you're thinking about operating expenses to truly operate the property, you need to peel out that tenant reimbursement amount from OPEX. And so, if you were to do that, John, I think you would see very, you know, very consistent NOI margin year to date, year over year. And look, CPI is obviously something we're aware of. We have the benefit of our OPEX basis in our leases, which will also grow with CPI, nearing 5 to 6 percent this year. And so, we feel well insulated.
spk09: there's typically a lag between reimbursements and the outbacks?
spk04: No. It's an annual trip.
spk07: Okay. And just a final question for you.
spk09: What are you expecting as far as cap rates for 2022? I think part of it is the mix of what you do JV versus on balance sheet, but generally are you expecting cap rates to continue to trend down?
spk10: Yeah, I think it's sort of a tale of two cities, which, you know, when we're looking at our $250 million outside of the JV, I think we'll be consistent with what we've seen this year. We've seen lots of opportunities ranging from anywhere from sort of a 5-6 up to north of a 6 cap. And so that market continues to be robust, and I think we'll do a great job mining those opportunities. Yes, they've come in a little bit this year, but I think also at the same time, if you look at what we purchased this year, For the most part, they've been very long-term leases with bullseye sorts of properties, you know, pointing to that National Weather Service headquarters that we purchased earlier this year. But there's also another set of buildings, and Daryl talked about this, that are in the pristine, you know, 15-, 20-year brand-new sorts of facilities. And those properties are trading at a 5.25%, 5.40%, and in some cases lower. And now we have the opportunity to go ahead and enhance our portfolio with those acquisitions. So think of sort of, as I mentioned, the tale of two cities, one barely accretive, but doing wonders for our CAD, doing wonders for our metrics, and wonders for our overall enterprise value. And the other one, the real driver of growth and FFL.
spk07: Appreciate the color. Thank you.
spk03: Our next question is with Manny Korchman with Citi. Please proceed with your question.
spk09: Hey, I'm going to come back to acquisitions because I know I'm not the only one confused by this. So you have $300 million left to close with JV assets. Your guidance of this year includes another call $25 to $30 million of acquisitions to close. Your guidance next year includes $50 million to close. So when in our model should we include the $200 to $225 million piece of the JV to close? Is that early 23 because it might close by the end of 22 and you're being conservative, or am I just completely missing something here?
spk04: Yeah. So, you're not missing something other than the real takeaway, which is, you know, we're obviously trying to guide to an appropriate level next year so people can think about where to build last point, right, where real will FFO drivers will go versus the assets like we're doing in the joint venture. So there's a base assumption that $50 million of pro rata purchase price is in that amount. If that's the case, obviously the remainder would be in this year. But whether it falls into this year or sneaks into next year and would warrant some different total acquisition volume next year is something that... You know, we're going to continue to telegraph to you all as we do close these development properties. Timing is never perfect, but I think you've got what you need from an earnings perspective to model out next year. You know, whether something's in December or January, we'll let you know when we know.
spk05: I mean, maybe just to say it again, which is these assets are going to close, but for an earnings, from an earnings driving perspective, uh the accretion of the assets is what's consistent with our guidance so um you know there as these development projects were uncertain what will what will be done this year next year 2023 it has a marginal effect on uh on sfo um however you know there will be a cat effect and i think that will be the the news that we get as these things as these things do close i hope that's helpful
spk09: It is, Al. Thank you. And then in terms of the management fee, is that contractual to this set of assets or to the JV itself? So if you were to do another deal with the same partner, would that be at the same fee or would that be renegotiated based on what you're buying and structure, et cetera?
spk05: I mean, I think the intent is we did this deal and all parties are happy. So I think it's a blueprint for where we go in the future.
spk08: Thanks, all. Thanks.
spk03: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Meryl Ross with CompassPoint. Please proceed with your question.
spk01: Hi. Good morning. A question on the Kansas City Properties Summit Tech Center. From the records in the GSA leases, it seems that the government lease is about 67% or two-thirds of that property. So I'd be interested in what the shadow rating is on the remaining tenants, if any, and what are the characteristics of those private leases? Do they piggyback on the GSA lease essentially? I assume they're companies that have some synergies with the private leases.
spk10: Good morning, Marilyn. Thank you for asking. Those are mostly local hospitals, health care organizations. They are not necessarily piggyback with the GSA, but I think they're wonderful tenants and are the x-rays way on down the line. So I think the overall building is absolutely terrific. Obviously an amazing mission for the federal government portion, and we're very pleased with the private tenants. in the building, and one of the great things is you get bumps with private tenants, so we're excited about that. A rare thing for us.
spk01: Right, exactly. Thank you.
spk10: Thank you.
spk03: Our next question is with Michael Carroll from RBC Capital Markets. Please proceed with your question.
spk06: Yeah, thanks. I guess, Daryl, you're talking about the JV transaction is going to be more creative to CAD than it is to FFO. I mean, I guess first, did I hear that correctly? And why is that? Does the gap rents, does that come in later than the cash rents? Or how should we think about that?
spk04: No, that's all about young assets with de minimis capex requirements, de minimis capex requirements. So while you can experience less, you know, less accretion on the FFO line, its CAD yield is accreted to our overall average CAD yield.
spk06: OK, so it's more related to the CAPEX side of things than it relates to anything else.
spk08: OK, thanks. Thanks.
spk03: It appears that there are no further questions. I would like to now turn the call back over to Daryl Crate for closing remarks.
spk05: Thank you everyone for joining the easterly government properties third quarter. 2021 conference call. We appreciate your time and we'll continue to work hard to deliver strong risk-adjusted returns for our shareholders in the year to come. Thanks so much.
spk03: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
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