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spk03: Welcome to the Easterly Government Properties First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session between the company's research analysts and Easterly's management team. To ask a question during the session, analysts will need to press star 11 on their telephone. They will then hear an automated message advising their hand is raised. 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.
spk31: 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 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 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, 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 the separate supplemental information package on the investor relations page of the company's website at ir.easterlyread.com. I'd now like to turn the conference call over to Daryl Crate, CEO of Easterly Government Properties.
spk14: Thanks, Lindsay, and thank you to everyone for joining us. We are pleased with our progress this quarter as we work through opportunities. I'll keep it brief so we can get to Q&A, but I've got three important messages I'd like you all to take away from this call. First, we believe there's a path towards material earnings growth for shareholders, and we're on it. Megan and Allison will talk to you about the numerous drivers shortly. Second, we know the payout ratio of our dividend is high, but we also believe there is a growth path we can pursue that helps materially close that gap. We are also actively reassessing and managing our expenses. Further, we currently sit with just under $3 billion in rent coming from the U.S. government with the leases that we own today, and if that portfolio were to renew up 10% for 10 years, For modest assumptions, we'd be collecting nearly $6 billion full-facing credit rent from the U.S. government. We believe we can offer as many dollars as we can to our shareholders, and given the creditworthiness and duration of the cash flows backing our dividends, we remain very comfortable with the periods of higher payout ratio. Third, we occupy a unique place in the broader real estate industry. owning and designing essential infrastructure for the U.S. government's mission-critical agencies. For example, our DEA drug labs enable Homeland Security to trace and stop Sinaloa cartel activities amid an ongoing increase in drug trafficking crimes. In 2022, fentanyl was responsible for 200 deaths every single day, and over a quarter million of Americans have died from fentanyl overdose since 2018. Let that sink in for a minute. Our facilities bolster the special agents actively combating those figures. We're not an office REIT, and this year we're going to continue ensuring that the market understands the breadth of what Easterly offers. This may be boring, but these are the stats that I know you're going to ask. We beat the street and reported 29 cents in core FFO per share. and we sit comfortably at the midpoint of our target leverage of six and a half to seven and a half times. We continue to acquire and develop new facilities in our portfolio. These facilities are not offices for transient commercial use. By focusing on properties leased to government agencies and their agencies, we've maintained the stability of our cash flows at favorable renewal spreads and seen a robust pipeline of growth opportunities. Earlier this month, we announced the acquisition of an immigration and customs enforcement information technology facility near Dallas, Texas, which enables ICE's Office of Human Capital to modernize its IT systems and bolster its technological capabilities. The rationale behind this deal is clear. The facility is 95% leased, has a 16.2-year weighted average initial lease term for all three tenancies, and maintains an additional 6,154 square feet available for future leasing as a value-add opportunity. All three factors enhance our cash flows, maintain significant occupancy upside, and strengthen our definable edge as specialists in mission-critical real estate. This acquisition is in line with the existing properties in our portfolio, such as Federal Emergency Management Agency's Tracy, California Warehouse, FEMA Tracy is one of eight distribution centers within the United States for emergency response preparedness. Amid the ongoing threats of wildfire and other natural disasters in California, the property helps provide on-the-ground support and crucial supplies capable of mobilizing between 3 to 4 million meals and liters of water that is stored at the facility within 30 minutes. Our Drug Enforcement Administration Laboratory in Pleasanton, California serves a similar mission-critical purpose, providing scientific and forensic support to the DEA special agents and other law enforcement personnel who prevent the distribution of deadly drugs like fentanyl into our society, and we store over 35,000 pieces of illegal and oftentimes deadly evidence in that facility each year. Meanwhile, the DEA's approved funding increased over 6% between 2022 and 2023, and its total headcount rose over 4% during the same period to combat the increased manufacture and distribution of controlled substances. As the government strengthens its agencies maintaining the safety of our country, we continue to fortify their abilities through mission-critical real estate. These purpose-built facilities serve as Easterly's definable edge in commercial real estate and continue to be the bedrock of the shareholder value which we deliver. We will continue to pursue accretive deals, and we have no plans to sell buildings in the near future as we work to continue to expand the portfolio with high creditworthy state and local government agencies and U.S. government-adjacent partners. Frankly, we believe Easterly is well positioned to continue to provide value to our stockholders by developing and buying more great mission critical buildings, continuing our strong partnership with the government and protecting our balance sheet. We are in constant dialogue with the board and in forward planning mode. In addition to delivering external growth, we are laser focused on cutting operating costs this year, both of which we believe will aid in our ability to meet or exceed our 2% to 3% core FFO growth trajectory. We're excited to continue delivering shareholder value and enhancing our portfolio with a foundation of cash flows backed by the full faith and credit of the U.S. government. The future remains bright for Easterly in 2024, and now I'll turn the call over to Megan Bevere, the company's president and COO.
spk30: Thanks, Daryl, and good morning. We started off our 2024 by establishing clearly defined goals for the company, and we are on pace to deliver. We believe our government-backed cash flows have been undervalued in the public markets these past few years, and we attribute that to our recent periods of low growth. 2024 is the start of that change. We have launched our growth trajectory with the acquisition of ICE Dallas, delivering strong, predictable cash flows and run rate accretion to our shareholders. We see a pipeline of opportunities that we believe will further our ability to meet our stated goals of delivering 2% to 3% core FFO growth year-over-year for years to come. For example, we are pursuing a unique opportunity to serve as lenders and buyers of mission-critical assets that we believe will further change the growth trajectory of this organization. We look forward to keeping you apprised as this develops. In the meantime, we secured a brand new built-to-suit federal courthouse development project in Flagstaff, Arizona for an inaugural 20-year lease term. This important courthouse is expected to house the nation's first-ever Native American female federal judge and is expected to be the company's first-ever LEAP Silver net-zero development project. Our in-place portfolio continues to perform as we achieve renewals at meaningful spreads. We renewed DBA Albany for another 17 years marking the third renewal of this asset while owned by Easterly. You are probably sick of hearing me say it, but once again, this highlights just how far from the office sector we are. As Darrell mentioned, the importance of the work being performed in our buildings cannot be replicated at home, and such a dynamic is apparent in our ongoing renewal discussions. Allison will go into greater detail, but we believe we are in a period where the duration and creditworthiness of our cash flows, the importance of our real estate, and our defined edge in serving mission-critical assets will accrue to our benefits and separate us from our peers. As we have seen notable names take down their earnings guidance, our beaten hold should stand apart from the crowd. We are excited about the opportunities for growth at Easterly. We see the growth trajectory filling in with new projects that further our mission of serving the government while also delivering attractive returns for shareholders. With that, I will turn the call to Allison.
spk32: Thank you, Megan. Good morning, everyone. I'm pleased to report the financial results for the first quarter. Both on a fully diluted basis, net income per share was $0.05 and core FFO per share grew to $0.29. Our cash available for distribution was $25.9 million. Interest rates have certainly been a headwind for the broader real estate market, easterly included. We seek to minimize interest expense at a time of high underlying rates. be that with a focus towards strategic treasury management or, more recently, our ESG goals. We achieved a reduction in the margin spreads under the company's amended senior unsecured credit facility as a result of hitting a predetermined sustainability metric. Easterly also continues to sit comfortably at the midpoint of our target leverage range of 6.5 to 7.5 times and maintains ample capacity on our revolver while limiting floating rate debt exposure. As Daryl and Megan mentioned, external growth through mission-critical real estate is our primary focus, and we see a market of opportunities ahead. Our ability to manage our upcoming debt maturities, plan for capital needs, and access debt and equity markets is integral to harvesting this growth. At Easterly, we pride ourselves on a portfolio of purpose-built buildings, and we manage that portfolio with a purpose-built team. Our organization is committed to finding operational efficiencies throughout the portfolio, managing expense creep and releasing at positive spreads. Everyone at the company contributes to furthering the mission of driving value for shareholders. Today, we are maintaining our full-year core FFO per share guidance for 2024 in a range of $1.14 to $1.16 all on a fully diluted basis. This guidance assumes the closing of VA Jacksonville through the joint venture at its pro-rata acquisition price of $40.9 million later this year, and that we will have $100 to $110 million of growth development-related investment during 2024. At its midpoint, this sets a path for Easterly to deliver strong core FFO per share earnings growth to shareholders this year. We believe this represents a market-leading risk-adjusted return and charts the course for delivering long-standing growth opportunities for our investors. With that, we thank you for your time this morning and appreciate your partnership. I will now turn the call back to Shannon.
spk03: Thank you. As a reminder to the analysts, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from John Kim with BMO Capital Markets. Please proceed with your question.
spk28: Thank you. In your press release, you talked about earnings growth of 2% to 3%. I think that's a little bit lower than what you were targeting back in January. So I was wondering if there was anything that's a headwind to earnings in the near term, whether that's asset sales or known move-outs that you have, or is it simply just the spread investing has become more difficult?
spk14: Yeah, no, thanks for the question. Really appreciate it. You know, at our analyst day, one of the things I shared is that we're on a path to grow 4% for the company, which that's what we're working to pursue every day. I think it became clear in our discussions after analyst day that, you know, Given the environment that we were in, the idea of going out with 4% sounded like we were going to be kind of yelling into the wind, especially as office guidance was continuing to decline. So we modified the expectations to 2% to 3%, which seems like a very reasonable step. And given the things that we're working on, we're going to hit those targets, and we may very well exceed them. And we're working every day to make that happen. So our view on the business today is the same as it was at the beginning of the year. We are going to cut costs to make our numbers. We've got terrific pipeline that continues to build and we're developing properties into the eighth with fantastic facilities that I think will be with the government for many decades. So as that all comes together, we're very excited for the next couple of quarters to be able to lay that out, which is also why, you know, we have some exuberance and optimism, you know, also about our dividend.
spk28: Just following up on that, Daryl, I mean, the interest rate environment has changed since January. I wondered if that played into your outlook at all, as well as there have been recent reports. I think there was one by the PBRB earlier, I guess it was last month, on federal agencies only using 12% of the headquarters space. Is that leading to any pressure to reduce costs among government agencies? I was just wondering, you know, what's changed?
spk14: I mean, again, not specifically, you know, in our median term outlook. You're absolutely right. The damn yield curve, you know, goes up a little bit. The model that we're creating, and we're so excited. You know, we look at a five-year model all the time, and it gets super annoying, you know, for the... for that yield curve to go up, and it just means we have to work harder or cut costs to make it because we're laying out a path for shareholders. That said, none of it changes the way we work. We are just going to have to dig a little deeper and make it happen, and that's all within our control. There's nothing that seems beyond reach. And to the point about space utilization, We are not seeing that as a dynamic in our buildings and what we're going to do and sort of what Lindsay was referring to. Even though I said I'd be brief, I did go on to a dialogue about fentanyl. We're going to start on our website, instead of putting pretty buildings pictures on the outside, we're going to start showing folks what's on the inside. And what you see there, you'll get an immediate sense that there's no need to reduce the floor plan. From everything from CBP, folks know there's a problem on the border and nobody knows it more than the border patrol people. When you look at the DEA, their budget is growing. The Sinaloa cartel is getting stronger. And we were just out in California with some people who are intensely focused. on making sure the American population stays safer. We've got fentanyl coming from China. That is a serious problem and people in our buildings are working on exactly that. We're talking about facility projects, about moving walls, doing different things that, again, facilitate mission, make sure they have the meeting rooms they need, make sure they have the secure facilities they need, make sure that they have what they can because they come together in these offices to plan and then move on their mission. And making sure that they can do that in a well-maintained building, you know, that has what they need in order to make that happen is what we do every day. And it's how we've built a, you know, we're a good partner with the government. And it's how we believe we've created a definable edge in what we do.
spk17: Appreciate the caller. Thanks.
spk14: Yeah, thank you. Really appreciate it. And look, the more on this call we can get any of these sort of bits of skepticism or, you know, what's in the news, it's super helpful to us because we just, it feels like we play whack-a-mole with, you know, the Department of Education is shrinking, so people think the FBI is shrinking. And, I mean, our investor calls and, you know, investor meetings, it's chronically the question, you know, with regard to work from home, government's shrinking. And then, you know, what's happening in your buildings. And I so wish we had a competitor, you know, direct competitor, so that we could show the good work we're doing. Because, I mean, I've been out aggressively touring buildings. And, you know, we hear again and again. And believe me, the government, you know, it's not like the IRS sends you a nice letter every year and says, thanks for filing your taxes on time. We really appreciate it. But I would say, you know, we are getting compliments from the government. And they are not quick complimenters. about what we're doing and how we're focused on facilitating mission because we watch what they're doing in the facilities and we make suggestions around how we could modify this facility. One, you know, our job, one, is to fight obsolescence. But we do that by deeply understanding their mission and giving them every opportunity to say, hey, we'll move this wall. We'll do this. We'll do that. And would that help you? And the reality is it does. And sometimes that doesn't cost very much money at all. And the government will pay for it. And so when we are able to create the actual plan and say, hey, send us back to headquarters and here's your rationale, those projects can move forward. And so, you know, again, that's how we're helping as a partner. And the more we can have investors and folks who own our portfolio understand what we do each and every day, that's very different than anybody else out there. I think that folks will be proud of what they own and what we're building.
spk34: I didn't expect that.
spk03: Thank you. Our next question comes from Michael Griffin of Citi. Your line is now open.
spk27: Great, thanks. I just wanted to go back to the full year guidance for a second and maybe run through kind of some additional puts and takes. So as I see it, you know, 29 cents in the quarter, a slight beat. Maybe you get some accretion from the ICE deal. You know, how should we think about kind of the cadence of earnings throughout the year and then Also, if you could provide some more color on that ice deal in terms of overall valuation per square foot and anything on the cap rate would be helpful.
spk25: Okay.
spk32: I can start with what our guidance entails and what it comprises of. So, our guidance reflects two to three pennies of same-store improvement and growth in margins of two to three percent. 2 to 3 pennies of G&A savings, and that is offset by 3 to 4 pennies of interest rate headwinds from the 2023 SWAP reprice. And then, Megan, we'll touch a little bit on Dallas.
spk30: Yeah, so Dallas was a little under $26 million. It's a mid-8 cap. You know, at that size and that level of cap rate, we're expecting the run rate accretion of about sort of a penny. And so it is absolutely a piece of our ability to continue to build on our initial guidance and continue, as Daryl said, right, to grow from the state of two to three to the higher end of that range or above that range. It's a building block in that. And as we continue through the year with strong performance in the portfolio, continuing to, you know, meet or beat that expectation that Allison laid out on the same-store NOI as we look at cost structure, is also a place where we could see some upside.
spk26: Great. That's helpful.
spk27: And Megan, maybe sticking with you, obviously external growth is going to be a big part of the story in order to drive earnings going forward. What would you say your weighted average cost of capital is today? And what's the minimum spread you'd need to justify investing in a property? And And is it correct to think about DEA as a spread investor today?
spk30: Yeah. So, Griff, we look at our cost of capital today given an understanding of where we can finance in multiple avenues of the debt market as being in the mid-7s. And, of course, we are looking to be a spread investor to that level. And so acquiring assets in the high 7s to mid-8s. is, you know, very much what we're looking to do, and ICE Dallas is an example of that.
spk27: Yeah, and in terms of maybe debt and equity kind of differential there, is it fair to say, you know, when you're financing a deal, it's half debt, half equity, or, you know, maybe greater to the equity side as opposed to the debt?
spk30: Yeah, I mean, triangulating and looking at debt-equity mixes, even though multiples, yes, you're in that sort of 50%. give or take range as we think about weighted average trusted capital.
spk25: Great. That's it for me. Thanks for the time. Thank you.
spk03: Our next question is from Peter Abramowitz of Jefferies. Please proceed with your question.
spk20: Thanks. Yes, just to dig a little bit more into some of the comments on guidance there that was helpful, but just trying to square that with some of your comments about revisiting your expense structure. Just wondering if you provide some brackets around kind of expense reduction, the impact that has to earnings, whether it's kind of an absolute dollar number or just from a margin perspective what you're sort of targeting.
spk14: Yeah, no, it's a great question. We're a couple months into really just assessing the workflow of all our systems and processes because what we do is a little bit different than other REITs. We are trying to, again, you know, we spend a lot of time talking about the relationship between value and excellence. And we want to be an outstanding partner to the government, but we also want to make sure, you know, that we are executing on that in a way, you know, that has the least burden cost structure possible. And I think we'll see some cost savings in 2025 and beyond. So we don't have a target for what that's going to be, but we're going to find an efficiency point in everything we do, from property management to how we're financing our buildings to how we structure our leases and how we focus on renewals. And that combination, we will find something under each of the rocks that we pick up, and it's a great opportunity with interest rates moving for us to just reassess everything. that we do because, you know, we've had some very nice growth for the almost 10 years since we've been public. We continue to grow every bit of our infrastructure, you know, sort of in a way that we obtain some advantages of scale. But I think, you know, there's more to find. And so we're going to be pursuing that exercise while we're also, you know, I don't mean to make it sound easy. You know, we are going to find high-quality buildings that match what works in our portfolio. that are in the high sevens, mid eights. If we had a cost of capital that was 60 basis points lower, I think it's not unreasonable to say we'd be doing, you know, billion dollar plus of acquisitions because, you know, we're seeing sellers, you know, balance sheet pressures and refinancing. You're starting to see buildings come available. There's one building that, gosh, we loved and was probably a, This seller would not have taken anything less than a 5.5 cap at one point, which is why it was a building that wasn't for us. But we put an offer in that was 150 basis points higher than that, and there's still a conversation to be had. We're seeing the market move in this direction, and it's our acquisitions team's job to find a couple hundred million dollars of buildings that are in that criteria that you know, meet all the criteria of being a spread buyer and, you know, for us to use our advantage and our relationships with the agencies and on the ground in order to get our buildings built and move forward. I mean, I'll give you one example, and I think the iced alice is kind of buried in there, which is, you know, we do have this 6,000 square feet of extra space, and then we call it value add, and we kind of skim through it in the script. But we do a good job at our buildings. And because of that, if there are areas to expand or there's a way to, you know, agencies today are doing more intra-agency task force work than I've ever seen before. So the idea of creating a special facility that's a joint facility or a joint activity space. is a terrific opportunity. Our FDA lab in Atlanta, some of you have come to see it, but I mean, it is an amazing facility. It has plenty of extra room in it. And I think it will be the premier FDA lab in the United States. And with that, there's a significant opportunity to make that a center of excellence within FDA And none of that's, you know, in our underwriting today. So I don't mean to make the growth path sound easy, but I think between, you know, the cost structures that we're talking about and finding, you know, the acquisitions that are accretive on a spread basis will get us into a place where we're delivering some very nice growth.
spk20: Thanks. That's helpful. And then just to touch on, I think you have three expirations remaining to address this year in the portfolio. So Allison laid out, I think, some parameters around what you're expecting from NOI growth for the full year. Just curious if you could touch on potentially the rent roll-up or roll-down there and kind of how you budgeted that into your guidance and what sort of rent assumptions you're assuming to get to your midpoint.
spk30: Yeah, so Peter, we're obviously we're successful at renewing the Albany in the quarter, and we'll speak again about the portfolio at the end of the year. But if I dial back to the expectations that were stated on the fourth quarter call, around the 32 leases that we had renewed, regardless of whether or not the TI had been completed, the, you know, the expected 18 point, excuse me, 18% spread in duration of 17.2 years, right? Albany tucked Tucked in nicely with no material change to that expectation. And then as we look to the rest of 2024, we're very optimistic about the process ongoing at FBI Omaha. We do expect the FBI lease in Portland to be extended through a renewal option, and the rest really drops off to sort of the material levels of leases. But broadly speaking, we remain optimistic about the renewal success within our portfolio and sustained occupancy levels.
spk19: Got it. That's all for me. Thank you.
spk03: Thank you. Our next question is from Aditi Balachandran of RBC. Please proceed with your question.
spk04: Hi. Good morning. Congrats on the Flagstaff development announcement. Just wondering if we get a little more information about that.
spk30: If you could provide it, so I guess there's expected yield the budget when you're expected to break ground things like that Sure So the the new the new award that we were we won is a court federal district in Flagstaff, Arizona It's going to be an estimated project cost just touching 35 million dollars and as you said we're developing into the into the eighth into the eighth there and It's in design today, and it will get underway as we get into the late third, early fourth quarter of this year.
spk25: Great, thanks. Go ahead.
spk03: Our next question comes from the line of Harvey Poppel with PopTech LP. Your line is now open.
spk18: Yes, thank you. Uh, you haven't talked much about the initiative, a new initiative you, uh, previewed, uh, maybe six, nine months ago about going into the state. Uh, property market. Uh, do you have anything to report on that?
spk14: Yeah, I'd say the quick headlines are, you know, we continue to be, um, exploring plenty of opportunities. We've got a robust pipeline. We did buy, um, our one building in Anaheim, California. that is basically adjudicates workers' compensation claims, and it's in a terrific place. And when you look at what is going to be developed in that area by the time the lease terminates, we're very excited about it. We continue to work across states and every week are going through a whole series of opportunities, and I think that will be a real contributor to our earnings, you know, Certainly in 2025, maybe we'll see a little bit of some accretive deals in 2024. They'll be happening probably later, so that won't probably affect this year's guidance. But it's a really significant total addressable market, and we should be able to find some terrific long-term opportunities in this space. Likewise, just to take the opportunity, we've also talked about government adjacencies. This is a place particularly where we have an opportunity to develop buildings for very high credit corporates that are building buildings today because we're onshoring so, you know, new activities in the United States. And in doing so, we're building buildings that are just the buildings that we have, you know, for many of our U.S. government agencies. And it's far easier for folks who have a government contract and may not have worked with government for a significant period of time to come to somebody like us and understand that the building and the facility that will be built will be one that will enable them to meet their obligations under their government contract in a way that is uninhibited.
spk18: One would think that there's got to be pockets in some of the states of small property owners, whether they're structured as REITs or others, that might be acquirable in certain states. Have you seen any opportunities to just acquire a business that might hold several properties in a state?
spk14: Well, I think, yeah. So we call those, you know, in portfolios. And we certainly see plenty of portfolios because in the federal space for the last decade, you know, we've been working with folks who have, you know, material portfolios. We have tracked each one of them. We understand which buildings we'd be most excited about and And we work and cultivate relationships with those folks that sometimes are, you know, are fruitful in six to nine months and sometimes it's three, four, five years. So, you know, you're on to something, which is we're getting to know the folks who develop those buildings or have created a portfolio, learning about the dynamics and really spending a lot of time, you know, going to school on how they get there, what happened, how did it work. and so that we can find the right match for us. We don't want to be hasty in moving to this space, but we know that it's a strong opportunity, not only because we can find very high-quality buildings that satisfy a state's mission, but these leases also have escalators. So my friend Allison here will not get such a hard time for same-store sales. As we start looking to 2026, 27, 28, You know, we can, you know, it would be really nice for us to start the year knowing that we're growing, you know, over one to, you know, somewhere in the range of one to two percent, you know, when we turn the lights on. And, you know, one of the challenges that we've found is that when we exercise a lot of discipline, it was the right thing to do when the market changed abruptly. We found ourselves in a place where we weren't growing and the equity markets don't like that. And so we sort of called it early. I think probably three or four months we stopped buying before other office REITs, which we get bunched with, were talking about it. And I think you're finding us today maybe being a harbinger of good news for some of those folks because we're sorting through lots of opportunities. If we're picky about it, we can find things that are accretive, and that's our job. And as we look forward to the end of the year, beginning of the year, I think we're going to be in a healthy space to announce acquisitions as part of our guidance again and doing all of those things. So we're meeting with lots of folks who own portfolios. If you know of any, send them our way. And we're executing on each of these three lanes of opportunity. And I very much hope in the next 36 months, you know, almost a third of the company is comprised both of adjacent properties, 15% adjacent properties, 15% state and local.
spk23: Thank you very much.
spk14: Thank you.
spk03: Our next question is from Travis Turpin of Seekin Alpha. Please proceed with your question.
spk29: Yes, good morning. I know you guys have talked about the dividend a little bit, but My question was, I know the payout ratio is kind of high right now. Did you guys have a target range that you were targeting and a timeframe for that?
spk14: Yeah, no, no, great question because, um, you know, we obviously, you know, look at the dividend each and every day, Travis and, and, um, and, and we, uh, w we look out and, and, you know, clearly, uh, getting our dividend rate, you know, our dividend below that a hundred percent payout ratio, which is always our goal. Um, and even a little bit lower. is where we want to get to. Maybe just to be very clear about it, we are not interested in cutting our dividend because even though that may create some other pennies of growth in the future, the plans that we have more than offset it. And we're on a path to, in the next 24, 36 months, to be in a place where we're covering our dividend. I hope it's sooner than that. And we've had periods like this where we've had a high payout ratio relative to what the strategy is delivering. But we believe given the stability of our cash flows, delivering that consistent dividend is something we're capable of doing. So as we look out the next two to three years, we should get that solved hopefully sooner. And getting a payout ratio below 100% certainly is the goal.
spk29: Okay, thank you. And my next question is, since you talked about in the next 24 to 36 months with the payout ratio below 100%, I know you guys have talked about buybacks before. Is that something else you're looking at once you get the payout ratio solved and start making a creative acquisition and things like that?
spk14: Yeah, I think that's right. You know what I mean? We really do try and take a corporate finance perspective to what we're doing. And given where the stock price is relative to our opportunities, we see some real opportunity. We imagine that it takes a little time for that to get recognized by investors. But if it isn't, we should be certainly in a mode of generating some capital, even some longer-term capital that could buy back stocks at attractive prices.
spk21: Thank you. That's all I have. Thank you.
spk03: Our next question is from Michael Lewis of Truist Securities. Please proceed with your question.
spk16: Yeah, thank you. You know, you mentioned the 18% rent spreads. You talked a lot about the importance of the work that's happening in your buildings and the way the government's complimenting you on that. And you just mentioned escalators and the leases. You know, what's the portfolio occupancy and the same store NOI and, you know, the specific rent spreads And I think, you know, as you talk about some of the, you know, the organic growth potential, I think, you know, reporting that now might be helpful to help us track, you know, where you are and how you're doing on that goal, on those goals.
spk30: I think, Mike, you know, the point's taken from a steam store perspective. And I think as we continue to pulling our goals around sort of cost realignment, that's a nice opportunity. I think we've historically, given the structure of our leases, we've always talked about how over the arc of time, it seems to run a wide growth sitting in that sort of 50 to 100 basis point range. But as that has the potential to step out of that range, I think the communication to the market of how that is driving outcomes is something we can give or shine further light on.
spk14: I mean, maybe stepping back, Michael, gives just a little perspective on it, which is I think we're not comfortable nailing down a number right now because it might be some false precision. I think for folks who may not be as familiar with the story, our leases are flat until they renew. And we, I think, have done a reasonably good job of staggering out the maturities of leases. So if you were to draw a line through the company for five years, six years, seven years, as we look forward, I think we can feel good about same-store NOI that would be a couple points. And it should match inflation. That's how it should work. The problem is there can be specific circumstances where one building renews in a terrific experience. I mean, we sometimes have 30%, 40% ups. And sometimes, you know, we end up staying flat. And when those happen, it creates this kind of volatility in same store growth. And so as we looked at that at the end of last year and said, you know, this is something that's hard for us to explain to the market. And, you know, the market's kind of, you know, you're as good as your last renewal. You know, it only makes sense for us to, you know, get some leases into the portfolio that do have some escalators in it so that, you know, maybe it's disappointing to say that we're going to have same story and a buy growth of, you know, a half to 1%, you know, or it's going to be, you know, two to 3%, but it's always going to be positive. And, you know, we're, we're in a place where I think that's something we believe, you know, equity markets are going to better understand some of, as I shared on our analyst day is when we began this, you know, the private equity business back in 2010, the overall concept was we were going to get a premium in the market for the high credit rating we have. And that proved to be almost true, but we've never been able to take on the leverage that even the rating agencies think we could take on, given the stability of our cash flows, because Green Street and others, and we look like an extreme outlier on the leverage front. So we're in this place where we have leverage that's in the band of REITs, but we're delivering a much higher stability and credit-worthy cash flow. So that's why moving to a place where that cash flow begins to look more like other REITs, and we're doing what we have a competitive advantage in, which is being a great partner to government and making government facilities that enhance mission. And if we can find that spot on the Venn diagram, And the third, you know, sort of leg of that, you know, being that it's free to, we think we're, you know, it's a reason for getting up every morning. So I know that's a lot, but that's as we think about things for sales, that's where we want to go.
spk16: No, that's good. You know, you talked a lot about, you know, fighting this perception battle and, you know, whether it's trailing four quarters or trailing eight quarters, even, you know, something to kind of show, proof of concept, you know, I think would be helpful at this point. And so that's, you know, that's why I asked about the same story. And I understand with the flat leases and they only, they only mark on expiration and all of that. Yes.
spk14: Totally agree. And I think, you know, we're, we're, we're working very hard to, again, we will, we're going to illustrate a proof of concept here. We're linking together a bunch of quarters. And we also know that if, we can show some more growth. And I think by expanding our total addressable market, that becomes much easier in an accretive way. And we'll still be the best credit tenancy of any REIT out there, but we'll be able to have a cash flow profile that is better understood by folks who are looking at the sector broadly and maybe don't take the time to see our buildings or spend time with us because It's not lost on us that our market cap relative to the whole market cap of all REITs is super tiny. And given that that's the case, you know, we're not the first folks, you know, people look to that we just need to be looking a little bit more like the crowd, continue to not lose what differentiates us. And I think that those take, you know, high integrity action that's all based on substance, you know, to bring that forward. but make sure we're not getting the form wrong so that when people look at us and see us, it's easy to understand the story of what we're bringing forward. But in addition, the numbers, you know, don't require a lot of explaining, you know, relative to other opportunities that folks have to invest in the real estate sector.
spk16: So post kind of one internal growth question. I have one external growth question or release to the, you've already been asked about your cost of capital, the cost of equity specifically, right? So you've You just fielded a question about potential buybacks. I think you said earlier you'll probably do deals roughly 50% equity and 50% debt. You've been able to use the forwards that you entered into a while back. Can you execute your plan at, right now the stock's trading below $11.50 a share. Can you execute your plan and make accretive acquisitions if your stock price is stuck here And the 10-year is, you know, 475.
spk14: Yeah. The answer is yes. It's obviously harder. And that's why, you know, developing in the eights, and I mean, and we mean in the eights, not like 8.01, you know, is very good for us and very accretive, you know, at these levels. Sad part is it takes 24 months to build a building. So, you know, so we feel very good about, you know, that medium-term view. You look at something like ICE Dallas, that's a creative, you know, and we'll find, you know, other similar opportunities like that. And I'm very hopeful that as those get executed, my friend Allison here will take your guidance up a little bit and we'll, you know, be sort of on that path. And, you know, to your point, you know, we'll be showing proof of concept, which is hopefully we have a conference call where we're saying, well, in November, we changed our TAM. Here's the research we did. This is what we've delivered. And, now here's what we're looking to 2025. And I think that's when we're going to start being able to show our results. And we don't want to just blurt it all out right now. So if we had a $13 stock price, this would be a no-brainer, which is a marginal amount relative to where we are. But that kind of motion, one of the things we basically have to make the make the case to folks is that we deserve having a $13 or $14 stock price. And with that, we'll show you the kinds of buildings that we can buy, and we can show you how we're going to grow. And we're fundamentally building the foundation for that story right now. And that's what we're executing on every day. And it's frustrating that the world doesn't move faster, but all we can do is try and be transparent and have people follow along. And at some point, we think we're going to be rewarded for what we're building and doing.
spk16: Is it fair to say you would issue equity at $1,150 if you match it up with an acquisition with an 8.5%?
spk15: Yeah, if it's accretive. Yeah, if it's accretive, sure.
spk14: And when I talk about stock buybacks, it's like if we deliver all this growth out there and find ourselves in a place where the stock is still, what is it, $1,148? then we've got to just look at the world and say, what's going on here? Because I know the quality of what we're bringing forward and the IRRs that we have and compared to everything else that's out there, it's pretty, I don't know, we feel we can make a case that it's very compelling. But we're always interested in points of view around it and all we can do is try and be incredibly transparent about what we're executing on and We are putting quarter to quarter together. We're very pleased with what we're doing. We don't want to sound overenthusiastic, which is why we talk about 2% to 3% instead of a path of 4%, as we've shared with folks. But we're in a transition period. We see great opportunity. We have a definable edge. We can buy very special real estate, and we think we can create a cash flow profile that should be materially valued.
spk16: I was not thinking about 5X, but maybe someday in the future we could talk about that.
spk14: There you go. I appreciate it. Yeah, no, look, and I appreciate the conversation. I think these transcripts are really a terrific opportunity for folks to get to know us who don't have time to get on the conference call because we are a smaller cap REIT, and maybe they'll pick up the paper here in six months and read this transcript and learn a little bit about what we've been doing and working very hard to achieve, and I'm we wouldn't do it if we didn't think we could do it well. Thank you very much. I appreciate it. Yeah, thank you. Thanks for paying attention and following the company.
spk03: Our next question is from Bill Crow of Raymond James. Please proceed with your question.
spk22: Hey, good morning. Just a couple of clarifications. The 7% cost of capital, is that based on today's incremental cost of debt and today's stock price. It just feels like that number is too low. But I just wanted to get clarification.
spk30: Yeah, Bill. Good morning. I think my comment was closer to mid-7s and low-7s. And yes, that is a perspective on where we can issue, again, looking at multiple opportunities in the debt market from the secured to the unsecured right multiple tenors um matt continuing to work to match our assets and our liabilities but also yes an equity an equity price um in and around right twelve dollars uh today okay um so daryl that the asset you referenced that you were that they wanted a five and a half cap right now you're 150 basis points wide of that and they're still talking
spk22: that's still not within the range of spread investing, right? Yeah, no, no, no. You've got to be eight plus, right?
spk14: Yeah, you know, but I mean, hey, you know, they've made it more than halfway, Bill, and it's a pretty snazzy building. So if you can give us a little stock price and they can get a little softer, we're going to have a really, you know, a nine-figure set to deliver that you're going to love.
spk22: Yeah, snazzy building's great, but if you don't have rollover and you're only getting... You know, half a percent a year on rollover, that doesn't really buy you anything, right? It doesn't create value. That's right. 18% average roll doesn't cover inflation when you look at it per year. And that's kind of, I think, the sticking point here.
spk15: Yeah. No, no, no.
spk14: Okay. One thing I just want to say is that, yes, I'm with you. I mean, you and I see eye to eye on the math and the numbers, and no doubt it's also why, again, changing our TAMs so that we can have some profile that makes the cash flow a little bit better because the reality is the inflation that we've had over the last couple of years will be recognized in our cash flow six, seven, eight, nine years from now, which is just too long and it's beyond the horizon of anybody on this call. But the reality is that our buildings are more valuable today because of that than they were a year or two ago. We just don't have the cash flow to prove it yet. And that's why we need some things with escalators in it. And some of the projects that we're working on to develop can be in the eights. And I see ways that we can, you know, again, path to growing 4% is what we're striving to do. We're talking about 2% to 3% regularly, and we're going to get there. And, you know, we can... Any suggestions you have on showing people, you know, how we can get to a, you know, again, like a $13, $14 stock price and be doing a good job, that starts a whole different magnitude of growth for us that you'd see at acquisitions that are far, far, far higher than we've ever, you know, achieved in our history.
spk22: Oh, I understand that. I appreciate that. Two real quick ones. Dallas acquisition. We're in Dallas, is that?
spk25: This is the airport. Yeah.
spk15: I don't have the zip code.
spk30: I don't have the address in front of me either.
spk15: Okay. We'll send it to you, Bill. Okay. If you want to go visit, we've got a bunch of facilities in Dallas that we're really happy to have a business tour.
spk22: I was just out there for the eclipse. Finally, for me, the two non-government tenants that are in that building, what sort of business is that? How many of those tenants exist within the portfolio?
spk30: The vast majority of our tenancy, obviously, is still governmental.
spk15: Four or five tenants that are private. It's very few.
spk30: All nice people. 35% is to the two private tenants, and those are leased through early and late 2032. Perfect.
spk22: Thank you all very much. Appreciate it.
spk14: Oh, thank you, Bill. Really appreciate the effort. And appreciate the direct questions, because I think it's the only way it kind of shows the scaffolding of what we're trying to build. So really appreciate it. It's helpful to have these conversations for investors. Thank you.
spk03: Thank you. As a reminder, to ask a question at this time, please press star 1-1 or your touch-tone telephone. Our next question is from Merrill Ross of Compass Point Research and Trading. Please proceed with your question.
spk24: Merrill Ross. I'm sorry. Hi.
spk36: Here we go. Okay. Hi, Merrill. How are you? I'm wondering how the desire to cover the dividend might be prioritizing your acquisition versus development pipeline, which might be to the detriment of long-term value creation. So you see what I'm saying? Acquiring buildings that have then a higher CapEx budget because they're older, They're not the new builds that you would build. It has implications for the total return and value creation longer than 24 months out. So how is the board looking at the acquisition pipeline and steering you towards covering the dividends?
spk14: Yeah, it's a really, really good question. And it's exactly the conversation that we had at this board meeting. And it's a conversation we're having, you know, nonstop here. Because, you know, by deciding to pay a dividend that's above the payout ratio, you do find yourself in taking on a little bit more leverage, although tiny, you know, that can probably take, you know, a penny or so of recurring growth away from the future. That said, I think we don't, we do see the dividend issue as a short-term issue. The degree to which we didn't think, believe it's a short-term issue in the context of our business, you know, we would reassess it. But as we look at the opportunity to, you know, our development pipeline is very strong. Even where the stock price is today, you know, that leads to some very accretive acquisitions. And we believe that sustaining the dividend today, that the short-term benefit of sustaining the dividend just for consistency is a marginal detractor from future earnings. But given the opportunities that are in front of us, we think those well outweigh it. So we are feeling optimistic about being in growth mode not only from new state and local buildings with escalators to working closely with some government-adjacent partners that can be substantial to the additional development that we're doing. We are very bullish on government real estate as we're going forward. As compared to if you looked 18, 20 months ago, we were in a time where I think it was like batten down the hatches. You know, real estate is uncertain. Interest rates were ratcheting up. And that was a time of, you know, you've got to circle the wagons and you see every, not just us, but, you know, every real estate business fund, you know, was in flux. We find ourselves, again, you know, feeling very optimistic about where we're going, what we're pursuing. We're finding opportunity. And that makes us again, feel that the dividend is a short-term problem. If we didn't have that kind of optimism for where the business is going and what our definable edge in the government space can create, we wouldn't be so close with our dividend. We do need to get our dividend in line with our cash flow. And as long as our friends at the Fed don't take the yield curve up another couple hundred basis points, We feel like things are very in reach for that to be, you know, that we're on a very good path. But you're exactly right. And I think the buildings we're buying also, I just want to make this thing, we're very cognizant of what the CapEx burden is. When we, you know, do the analysis and, you know, I know we've had some conversations with you just about portfolio segmentation and the CapEx that's required and what's required by the government, that's all in our underwriting, you know, as we you know, think about saying something is accretive or not accretive when we announce it.
spk36: Yeah, I think that some guidance regarding the contractual CapEx might help clarify kind of the board's tolerance, you know, to overpay the dividend just because then we would know more about why they're making that decision.
spk11: Yep. That makes sense to me. Yeah.
spk14: And at the end of the day, you know, we are, I mean, just being very direct, I mean, we think about CAD just as much as we think about FFO accretion when we're looking at deals. And there's some deals that are strong on FFO but have some capital requirements, you know, upon acquisition for us to get to a place where over the life of the lease, we're operating the building in a way that optimizes the return that we can achieve. And for some of those buildings, it just means we've got to find a bigger pipeline. We've got to find buildings that don't have that problem today. And that's why when I say if we can get our stock price to $13, $14, there's plenty of opportunities that we're covering that we're either eliminating because of CAD or eliminating because of some some challenge that is brought on by a lower stock price as a REIT is harder. It's just harder. And so it's our job to make the case that we can grow in a way where we deserve a stock price that's there. And when enough investors believe that's true, we'll put ourselves in a position where we can deliver even more growth. And that's about getting the REIT machine started again. And everyone's facing it. It's not peculiar to us, All we can do is talk about what we're doing each and every day to try and make that happen.
spk36: Right. Right. I agree. Thank you.
spk14: Thank you so much, Meryl.
spk03: Thank you. I would now like to turn the conference back to Daryl Crate, Chief Executive Officer of Easterly Government Properties, for closing remarks.
spk14: Well, great. Thank you, everyone, for joining the Easterly Government Properties first quarter 2024 conference call. We look forward to sharing meaningful updates in the coming quarters as we continue to focus on our growth trajectory and set a course to deliver premium risk-adjusted returns for our shareholders. Again, thanks for joining today. And we, again, stay tuned.
spk03: This concludes today's conference call. Thank you for participating.
spk25: You may now disconnect. Hello. Bye. Thank you. Thank you. Thank you.
spk03: Welcome to the Easterly Government Properties first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session between the company's research analysts and Easterly's management team. To ask a question during the session, analysts will need to press star 11 on their telephone. They will then hear an automated message advising their hand is raised. 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.
spk31: 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 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 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, 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 the separate supplemental information package on the investor relations page of the company's website at ir.easterlyread.com. I'd now like to turn the conference call over to Daryl Crate, CEO of Easterly Government Properties.
spk14: Thanks, Lindsay, and thank you to everyone for joining us. We are pleased with our progress this quarter as we work through opportunities. I'll keep it brief so we can get to Q&A, but I've got three important messages I'd like you all to take away from this call. First, we believe there's a path towards material earnings growth for shareholders, and we're on it. Megan and Allison will talk to you about the numerous drivers shortly. Second, we know the payout ratio of our dividend is high, but we also believe there is a growth path we can pursue that helps materially close that gap. We are also actively reassessing and managing our expenses. Further, we currently sit with just under $3 billion in rent coming from the U.S. government with the leases that we own today, and if that portfolio were to renew up 10% for 10 years, For modest assumptions, we'd be collecting nearly $6 billion of full-facing credit rent from the U.S. government. We believe we can offer as many dollars as we can to our shareholders, and given the creditworthiness and duration of the cash flows backing our dividends, we remain very comfortable with the periods of higher payout ratio. Third, we occupy a unique place in the broader real estate industry. owning and designing essential infrastructure for the U.S. government's mission-critical agencies. For example, our DEA drug labs enable Homeland Security to trace and stop Sinaloa cartel activities amid an ongoing increase in drug trafficking crimes. In 2022, fentanyl was responsible for 200 deaths every single day, and over a quarter million of Americans have died from fentanyl overdose since 2018. Let that sink in for a minute. Our facilities bolster the special agents actively combating those figures. We're not an office read, and this year we're going to continue ensuring that the market understands the breadth of what Easterly offers. This may be boring, but these are the stats that I know you're going to ask. We beat the street and reported 29 cents in core FFO per share. and we sit comfortably at the midpoint of our target leverage of six and a half to seven and a half times. We continue to acquire and develop new facilities in our portfolio. These facilities are not offices for transient commercial use. By focusing on properties leased to government agencies and their . We've maintained the stability of our cash flows at favorable renewal spreads and seen a robust pipeline of growth opportunities. Earlier this month, we announced the acquisition of an immigration and customs enforcement information technology facility near Dallas, Texas, which enables ICE's Office of Human Capital to modernize its IT systems and bolster its technological capabilities. The rationale behind this deal is clear. The facility is 95% leased, has a 16.2-year weighted average initial lease term for all three tenancies, and maintains an additional 6,154 square feet available for future leasing as a value-add opportunity. All three factors enhance our cash flows, maintain significant occupancy upside, and strengthen our definable edge as specialists in mission-critical real estate. This acquisition is in line with the existing properties in our portfolio, such as Federal Emergency Management Agency's Tracy, California Warehouse, FEMA Tracy is one of eight distribution centers within the United States for emergency response preparedness. Amid the ongoing threats of wildfire and other natural disasters in California, the property helps provide on-the-ground support and crucial supplies capable of mobilizing between 3 to 4 million meals and liters of water that is stored at the facility within 30 minutes. Our Drug Enforcement Administration Laboratory in Pleasanton, California serves a similar mission-critical purpose, providing scientific and forensic support to the DEA special agents and other law enforcement personnel who prevent the distribution of deadly drugs like fentanyl into our society, and we store over 35,000 pieces of illegal and oftentimes deadly evidence in that facility each year. Meanwhile, the DEA's approved funding increased over 6% between 2022 and 2023, and its total headcount rose over 4% during the same period to combat the increased manufacture and distribution of controlled substances. As the government strengthens its agencies maintaining the safety of our country, we continue to fortify their abilities through mission-critical real estate. These purpose-built facilities serve as Easterly's definable edge in commercial real estate and continue to be the bedrock of the shareholder value which we deliver. We will continue to pursue accretive deals, and we have no plans to sell buildings in the near future as we work to continue to expand the portfolio with high credit-worthy state and local government agencies and U.S. government-adjacent partners. Frankly, we believe Easterly is well positioned to continue to provide value to our stockholders by developing and buying more great mission critical buildings, continuing our strong partnership with the government and protecting our balance sheet. We are in constant dialogue with the board and in forward planning mode. In addition to delivering external growth, we are laser focused on cutting operating costs this year, both of which we believe will aid in our ability to meet or exceed our 2% to 3% core FFO growth trajectory. We're excited to continue delivering shareholder value and enhancing our portfolio with a foundation of cash flows backed by the full faith and credit of the U.S. government. The future remains bright for Easterly in 2024, and now I'll turn the call over to Megan Bevere, the company's president and COO.
spk30: Thanks, Daryl, and good morning. We started off our 2024 by establishing clearly defined goals for the company, and we are on pace to deliver. We believe our government-backed cash flows have been undervalued in the public markets these past few years, and we attribute that to our recent periods of low growth. 2024 is the start of that change. We have launched our growth trajectory with the acquisition of ICE Dallas, delivering strong, predictable cash flows and run rate accretion to our shareholders. We see a pipeline of opportunities that we believe will further our ability to meet our stated goals of delivering 2% to 3% core FFO growth year-over-year for years to come. For example, we are pursuing a unique opportunity to serve as lenders and buyers of mission-critical assets that we believe will further change the growth trajectory of this organization. We look forward to keeping you apprised as this develops. In the meantime, we secured a brand new bill-to-suit federal courthouse development project in Flagstaff, Arizona for an inaugural 20-year lease term. This important courthouse is expected to house the nation's first-ever Native American female federal judge and is expected to be the company's first-ever lease silver net zero development project. Our in-place portfolio continues to perform as we achieve renewals at meaningful spreads. We renewed DBA Albany for another 17 years marking the third renewal of this asset while owned by Easterly. You are probably sick of hearing me say it, but once again, this highlights just how far from the office sector we are. As Darrell mentioned, the importance of the work being performed in our buildings cannot be replicated at home, and such a dynamic is apparent in our ongoing renewal discussions. Allison will go into greater detail, but we believe we are in a period where the duration and creditworthiness of our cash flows, the importance of our real estate, and our defined edge in serving mission-critical assets will accrue to our benefits and separate us from our peers. As we have seen notable names take down their earnings guidance, our beaten whole should stand apart from the crowd. We are excited about the opportunities for growth at Easterly. We see the growth trajectory filling in with new projects that further our mission of serving the government while also delivering attractive returns for shareholders. With that, I will turn the call to Alison.
spk32: Thank you, Megan. Good morning, everyone. I'm pleased to report the financial results for the first quarter. Both on a fully diluted basis, net income per share was $0.05 and core FFO per share grew to $0.29. Our cash available for distribution was $25.9 million. Interest rates have certainly been a headwind for the broader real estate market, easterly included. We seek to minimize interest expense at a time of high underlying rates. be that with a focus towards strategic treasury management or, more recently, our ESG goals. We achieved a reduction in the margin spreads under the company's amended senior unsecured credit facility as a result of hitting a predetermined sustainability metric. Easterly also continues to sit comfortably at the midpoint of our target leverage range of 6.5 to 7.5 times and maintains ample capacity on our revolver while limiting floating rate debt exposure. As Daryl and Megan mentioned, external growth through mission-critical real estate is our primary focus, and we see a market of opportunities ahead. Our ability to manage our upcoming debt maturities, plan for capital needs, and access debt and equity markets is integral to harvesting this growth. At Easterly, we pride ourselves on a portfolio of purpose-built buildings, and we manage that portfolio with a purpose-built team. Our organization is committed to finding operational efficiencies throughout the portfolio, managing expense creep and releasing at positive spreads. Everyone at the company contributes to furthering the mission of driving value for shareholders. Today, we are maintaining our full-year core FFO per share guidance for 2024 in a range of $1.14 to $1.16 all on a fully diluted basis. This guidance assumes the closing of VA Jacksonville through the joint venture at its pro-rata acquisition price of $40.9 million later this year, and that we will have $100 to $110 million of growth development-related investment during 2024. At its midpoint, this sets a path for Easterleaf to deliver strong core FFO per share earnings growth to shareholders this year. We believe this represents a market-leading risk-adjusted return and charts the course for delivering long-standing growth opportunities for our investors. With that, we thank you for your time this morning and appreciate your partnership. I will now turn the call back to Shannon.
spk03: Thank you. As a reminder to the analysts, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from John Kim with BMO Capital Markets. Please proceed with your question.
spk28: Thank you. In your press release, you talked about earnings growth of 2% to 3%. I think that's a little bit lower than what you were targeting back in January. So I was wondering if there was anything that's a headwind to earnings in the near term, whether that's asset sales or known move-outs that you have, or is it simply just the spread investing has become more difficult?
spk14: Yeah, no, thanks for the question. Really appreciate it. You know, at our analyst day, one of the things I shared is that we're on a path to grow 4% for the company, which that's what we're working to pursue every day. I think it became clear in our discussions after analyst day that, you know, Given the environment that we were in, the idea of going out with 4% sounded like we were going to be kind of yelling into the wind, especially as office guidance was continuing to decline. So we modified the expectations to 2% to 3%, which seems like a very reasonable step. And given the things that we're working on, we're going to hit those targets, and we may very well exceed them. And we're working every day to make that happen. So our view on the business today is the same as it was at the beginning of the year. We are going to cut costs to make our numbers. We've got terrific pipeline that continues to build. And we're developing properties into the eighth with fantastic facilities that I think will be with the government for many decades. So as that all comes together, we're very excited for the next couple quarters to be able to lay that out, which is also why, you know, we have some exuberance and optimism, you know, also about our dividend.
spk28: Just following up on that, Daryl, I mean, the interest rate environment has changed since January. I wondered if that played into your outlook at all, as well as there have been recent reports. I think there was one by the PBRB earlier. I guess it was last month. on federal agencies only using 12% of the headquarters space. Is that leading to any pressure to reduce costs among government agencies? I was just wondering, you know, what's changed?
spk14: I mean, again, not specifically, you know, in our median term outlook. You're absolutely right. The damn yield curve, you know, goes up a little bit. The model that we're creating, and we're so excited. You know, we look at a five-year model all the time, and it gets super annoying, you know, for the... for that yield curve to go up. And it just means we have to work harder or cut costs to make it because we're laying out a path for shareholders. That said, none of it kind of changes the way we work. We are just going to have to dig a little deeper and make it happen. And that's all within our control. There's nothing that sort of seems beyond reach. And to the point about space utilization, We are not seeing that as a dynamic in our buildings and what we're going to do and sort of what Lindsay was referring to. Even though I said I'd be brief, I did go on to a dialogue about fentanyl. We're going to start on our website, instead of putting pretty buildings, pictures on the outside, we're going to start showing folks what's on the inside. And what you see there, you'll get an immediate sense that there's no need to reduce the floor plan. From everything from CBP, folks know there's a problem on the border and nobody knows it more than the border patrol people. When you look at the DEA, their budget is growing. The Sinaloa cartel is getting stronger. And we were just out in California with some people who are intensely focused on making sure the American population stays safer. We've got fentanyl coming from China. That is a serious problem. And people in our buildings are working on exactly that. We're talking about facility projects, about moving walls, doing different things that, again, facilitate mission, make sure they have the meeting rooms they need, make sure they have the secure facilities they need, make sure that they have what they can because they come together in these offices to plan and then move on their mission. And making sure that they can do that in a well-maintained building, you know, that has what they need in order to make that happen is what we do every day. And it's how we've built a, you know, we're a good partner with the government. And it's how we believe we've created a definable edge in what we do.
spk17: Appreciate the caller. Thanks.
spk14: Yeah, thank you. Really appreciate it. And look, the more on this call we can get any of these sort of bits of skepticism or, you it's super helpful to us because we just it feels like we play whack-a-mole with you know the Department of Education is shrinking so people think the FBI is shrinking and I mean our investor calls and you know investor meetings it's it's chronically the question you know with regard to work from home governments shrinking and then you know what's happening in your buildings and I so wish we had a competitor, you know, direct competitor so that we could show the good work we're doing because, I mean, I've been out touring, aggressively touring buildings and, you know, we hear again and again, and believe me, the government, you know, it's not like the IRS sends you a nice letter every year, says, thanks for filing your taxes on time. We really appreciate it. But I would say, you know, we are getting compliments from the government and they are not quick complimenters about what we're doing and how we're focused on facilitating mission because We watch what they're doing in the facilities and we make suggestions around how we could modify this facility. One, you know, our job, one, is to fight obsolescence. But we do that by deeply understanding their mission and giving them every opportunity to say, hey, we'll move this wall. We'll do this. We'll do that. And would that help you? And the reality is it does. And sometimes that doesn't cost very much money at all. And the government will pay for it. And so when we are able to create the actual plan and say, hey, send this back to headquarters and here's your rationale, those projects can move forward. And so, you know, again, that's how we're helping as a partner. And the more we can have investors and folks who own our portfolio understand what we do each and every day, that's very different than anybody else out there. I think that folks will be proud of what they own and what we're building.
spk34: I didn't expect that.
spk03: Thank you. Our next question comes from Michael Griffin of Citi. Your line is now open.
spk27: Great, thanks. I just wanted to go back to the full year guidance for a second and maybe run through kind of some additional puts and takes. So as I see it, you know, 29 cents in the quarter, a slight beat, maybe you get some accretion from the ICE deal. You know, how should we think about kind of the cadence of earnings throughout the year and then Also, if you could provide some more color on that ice deal in terms of overall valuation per square foot and anything on the cap rate would be helpful.
spk25: Okay.
spk32: I can start with what our guidance entails and what it comprises of. So, our guidance reflects two to three pennies of same-store improvement and growth in margins of two to three percent. 2 to 3 pennies of G&A savings, and that is offset by 3 to 4 pennies of interest rate headwinds from the 2023 SWAP reprice. And then, Megan, we'll touch a little bit on Dallas.
spk30: Yeah. So, Dallas was a little under $26 million. It's a mid-8 cap. You know, at that size and that level of cap rate, we're expecting the run rate accretion of about a third of a penny. And so it is absolutely a piece of our ability to continue to build on our initial guidance and continue, as Daryl said, right, to grow from the state of two to three to the higher end of that range or above that range. It's a building block in that. And as we continue through the year with strong performance in the portfolio, continuing to, you know, meet or beat that expectation that Allison laid out on the same-store NOI as we look at cost structure, is also a place where we could see some upside.
spk26: Great. That's helpful.
spk27: And Megan, maybe sticking with you, obviously external growth is going to be a big part of the story in order to drive earnings going forward. What would you say your weighted average cost of capital is today? And what's the minimum spread you'd need to justify investing in a property? And And is it correct to think about DEA as a spread investor today?
spk30: Yeah. So, Griff, we look at our cost of capital today given an understanding of where we can finance in multiple avenues of the debt market as being in the mid-7s. And, of course, we are looking to be a spread investor to that level. And so acquiring assets in the high 7s to mid-8s. is, you know, very much what we're looking to do, and ICE Dallas is an example of that.
spk27: Yeah, and in terms of maybe debt and equity kind of differential there, is it fair to say, you know, when you're financing a deal, it's half debt, half equity, or, you know, maybe greater to the equity side as opposed to the debt?
spk30: Yeah, I mean, triangulating and looking at debt equity mixes, even though multiples, yes, you're in that sort of 50%. give or take range as we think about weighted average trusted capital.
spk25: Great. That's it for me. Thanks for the time. Thank you.
spk03: Our next question is from Peter Abramowitz of Jefferies. Please proceed with your question.
spk20: Thanks. Yes, just to dig a little bit more into some of the comments on guidance there that was helpful, but just trying to square that with some of your comments about revisiting your expense structure. Just wondering if you provide some brackets around kind of expense reduction, the impact that has to earnings, whether it's kind of an absolute dollar number or just from a margin perspective, what you're sort of targeting.
spk14: Yeah, no, it's a great question. We're a couple months into really just assessing the workflow of all our systems and processes because what we do is a little bit different than other REITs. So We are trying to, again, you know, we spend a lot of time talking about the relationship between value and excellence. And we want to be an outstanding partner to the government, but we also want to make sure, you know, that we are executing on that in a way, you know, that has the least burden cost structure possible. And I think we'll see some cost savings in 2025 and beyond. So we don't have a target for what that's going to be, but we're going to find an efficiency point in everything we do, from property management to how we're financing our buildings to how we structure our leases and how we focus on renewals. And that combination, we will find something under each of the rocks that we pick up, and it's a great opportunity with interest rates moving for us to just reassess everything that we do because, you know, we've had some very nice growth for the almost 10 years since we've been public. We continue to grow every bit of our infrastructure, you know, sort of in a way that we obtain some advantages of scale. But I think, you know, there's more to find. And so we're going to be pursuing that exercise while we're also, you know, I don't mean to make it sound easy. You know, we are going to find high-quality buildings that match what works in our portfolio. that are in the high sevens, mid eights. If we had a cost of capital that was 60 basis points lower, I think it's not unreasonable to say we'd be doing, you know, billion dollar plus of acquisitions because, you know, we're seeing sellers, you know, balance sheet pressures and refinancing. You're starting to see buildings come available. There's one building that, gosh, we loved and was probably a, This seller would not have taken anything less than a 5.5 cap at one point, which is why it was a building that wasn't for us. But we put an offer in that was 150 basis points higher than that, and there's still a conversation to be had. We're seeing the market move in this direction, and it's our acquisitions team's job to find a couple hundred million dollars of buildings that are in that criteria that you know, meet all the criteria of being a spread buyer and, you know, for us to use our advantage and our relationships with the agencies and on the ground in order to get our buildings built and move forward. I mean, I'll give you one example, and I think the ice palace is kind of buried in there, which is, you know, we do have this 6,000 square feet of extra space, and then we call it value-add, and we kind of skim through it in the script. But we do a good job at our buildings, and because of that, if there are areas to expand or there's a way to, you know, agencies today are doing more intra-agency task force work than I've ever seen before. So the idea of creating a special facility that's a joint facility or a joint activity space, is a terrific opportunity. Our FDA lab in Atlanta, some of you have come to see it, but I mean, it is an amazing facility. It has plenty of extra room in it. And I think it will be the premier FDA lab in the United States. And with that, there's a significant opportunity to make that a center of excellence within FDA And none of that's, you know, in our underwriting today. So I don't mean to make the growth path sound easy, but I think between, you know, the cost structures that we're talking about and finding, you know, the acquisitions that are accretive on a spread basis will get us into a place where we're delivering some very nice growth.
spk20: Thanks. That's helpful. And then just to touch on, I think you have three expirations remaining to address this year in the portfolio. So Allison laid out, I think, some parameters around what you're expecting from NOI growth for the full year. Just curious if you could touch on potentially the rent roll-up or roll-down there and kind of how you budgeted that into your guidance and what sort of rent assumptions you're assuming to get to your midpoint.
spk30: Yeah, so Peter, we're obviously, we're successful at renewing the Albany in the quarter, and we'll speak again about the portfolio at the end of the year, but if I dial back to the expectations that were stated on the fourth quarter call, around the 32 leases that we had renewed, regardless of whether or not the TI had been completed, the expected 18 point, excuse me, 18% spread in duration of 17.2 years, right? Albany tucked Tucked in nicely with no material change to that expectation. And then as we look to the rest of 2024, we're very optimistic about the process ongoing at FBI Omaha. We do expect the FBI lease in Portland to be extended through a renewal option, and the rest really drops off to sort of the material levels of leases. But broadly speaking, we remain optimistic about the renewal success within our portfolio and sustained occupancy levels.
spk19: Got it. That's all for me. Thank you.
spk03: Thank you. Our next question is from Aditi Balachandran of RBC. Please proceed with your question.
spk04: Hi. Good morning. Congrats on the Flagstaff development announcement. Just wondering if we get a little more information about that.
spk30: If you could provide it, so I guess there's expected yield the budget when you're expected to break ground things like that Sure So the the new the new award that we were we won is a court federal district in Flagstaff, Arizona It's going to be an estimated project cost just touching thirty five million dollars and as we said we're developing into the into the eighth into the eighth there and It's in design today, and it will get underway as we get into the late third, early fourth quarter of this year.
spk25: Great, thanks.
spk03: Go ahead. Our next question comes from the line of Harvey Poppel with PopTechLP. Your line is now open.
spk18: Yes, thank you. You haven't talked much about the initiative, new initiative you previewed maybe six, nine months ago about going into the state property market. Do you have anything to report on that?
spk14: Yeah, I'd say the quick headlines are, you know, we continue to be exploring plenty of opportunities. We've got a robust pipeline. We did buy our one building in Anaheim, California. that basically adjudicates workers' compensation claims, and it's in a terrific place. And when you look at what is going to be developed in that area by the time the lease terminates, we're very excited about it. We continue to work across states and every week are going through a whole series of opportunities, and I think that will be a real contributor to our earnings. Certainly in 2025, maybe we'll see a little bit of some accretive deals in 2024. They'll be happening probably later, so that won't probably affect this year's guidance. But it's a really significant total addressable market, and we should be able to find some terrific long-term opportunities in this space. Likewise, just to take the opportunity, we've also talked about government adjacencies. This is a place particularly where we have an opportunity to develop buildings for very high-credit corporates that are building buildings today because we're onshoring new activities in the United States. And in doing so, we're building buildings that are just the buildings that we have for many of our U.S. government agencies. And it's far easier for folks who have a government contract and may not have worked with government for a significant period of time to come to somebody like us and understand that the building and the facility that will be built will be one that will enable them to meet their obligations under their government contract in a way that is uninhibited.
spk18: One would think that there's got to be pockets in some of the states of small property owners, whether they're structured as REITs or others, that might be acquirable in certain states. Have you seen any opportunities to just acquire a business that might hold several properties in a state?
spk14: Well, I think, yeah. So we call those in portfolios, and we certainly see plenty of portfolios because in the federal space for the last decade, we've been working with folks who have material portfolios. We have tracked each one of them. We understand which buildings we'd be most excited about and And we work and cultivate relationships with those folks that sometimes are, you know, are fruitful in six to nine months and sometimes it's three, four, five years. So, you know, you're on to something, which is we're getting to know the folks who develop those buildings or have created a portfolio, learning about the dynamics and really spending a lot of time, you know, going to school on how they get there, what happened, how did it work. and so that we can find the right match for us. We don't want to be hasty in moving to this space, but we know that it's a strong opportunity, not only because we can find very high-quality buildings that satisfy a state's mission, but these leases also have escalators. So my friend Allison here will not get such a hard time for same-store sales. As we start looking to 2026, 27, 28, You know, we can, you know, it would be really nice for us to start the year knowing that we're growing, you know, over one to, you know, somewhere in the range of one to two percent, you know, when we turn the lights on. And, you know, one of the challenges that we've found is that when we exercise a lot of discipline, it was the right thing to do when the market changed abruptly. We found ourselves in a place where we weren't growing and the equity markets don't like that. And so we sort of called it early. I think probably three or four months we stopped buying before other office sort of REITs, which we get bunched with, were talking about it. And I think you're finding us today maybe being a harbinger of good news for some of those folks because we're sorting through lots of opportunities. If we're picky about it, we can find things that are accretive, and that's our job. And as we look forward to the end of the year, beginning of the year, I think we're going to be in a healthy space to announce acquisitions as part of our guidance again and doing all of those things. So we're meeting with lots of folks who own portfolios. If you know of any, send them our way. And we're executing on each of these three lanes of opportunity. And I very much hope in the next 36 months, you know, almost a third of the company is comprised both of adjacent properties, 15% adjacent properties, 15% state and local.
spk23: Thank you very much.
spk14: Thank you.
spk03: Our next question is from Travis Turpin of Seekin Alpha. Please proceed with your question.
spk29: Yes, good morning. I know you guys have talked about the dividend a little bit, but My question was, I know the payout ratio is kind of high right now. Did you guys have a target range that you were targeting and a timeframe for that?
spk14: Yeah, no, no, great question. Because, you know, we obviously, you know, look at the dividend each and every day, Travis. And we look out and, you know, clearly getting our dividend, you know, our dividend below that 100% payout ratio, which is always our goal, and even a little bit lower. is where we want to get to. Maybe just to be very clear about it, we are not interested in cutting our dividend because even though that may create some other pennies of growth in the future, the plans that we have more than offset it. And we're on a path to, in the next 24, 36 months, to be in a place where we're covering our dividend. I hope it's sooner than that. And we've had periods like this where we've had a high payout ratio relative to what the strategy is delivering. But we believe given the stability of our cash flows, delivering that consistent dividend is something we're capable of doing. So as we look out the next two to three years, we should get that solved hopefully sooner. And getting a payout ratio below 100% certainly is the goal.
spk29: Okay, thank you. And my next question is, since you talked about in the next 24 to 36 months with the payout ratio below 100%, I know you guys have talked about buybacks before. Is that something else you're looking at once you get the payout ratio solved and start making a creative acquisition and things like that?
spk14: Yeah, I think that's right. I mean, we really do try and take a corporate finance perspective to what we're doing. And given where the stock price is relative to our opportunities, we see some real opportunity. We imagine that it takes a little time for that to get recognized by investors. But if it isn't, we should be certainly in a mode of generating some capital, even some longer-term capital that could buy back stocks at attractive prices.
spk21: Thank you. That's all I have. Thank you.
spk03: Our next question is from Michael Lewis of Truist Securities. Please proceed with your question.
spk16: Thank you. You mentioned the 18% rent spreads. You talked a lot about the importance of the work that's happening in your buildings and the way the government's complimenting you on that. You just mentioned escalators and the leases. What's the portfolio occupancy and the same store NOI and the specific rent spreads And I think, you know, as you talk about some of the, you know, the organic growth potential, I think, you know, reporting that now might be helpful to help us track, you know, where you are and how you're doing on that goal, on those goals.
spk30: I think, Mike, you know, the point's taken from a steam store perspective. And I think as we continue to pulling our goals around sort of cost realignment, you know, that's a nice opportunity. I think we've historically, given the structure of our leases, right, we've always talked about how over the arc of time seems to run a wide growth sitting in that sort of 50 to 100 basis point range. But as that has the potential to step out of that range, I think the communication to the market of how that is driving outcomes is something we can give or shine further light on.
spk14: I mean, maybe stepping back, Michael, gives just a little perspective on it, which is I think we're not comfortable nailing down a number right now because it might be some false precision. I think for folks who may not be as familiar with the story, our leases are flat until they renew. And we, I think, have done a reasonably good job of staggering out the maturities of leases. So if you were to draw a line through the company for five years, six years, seven years, as we look forward, I think we can feel good about same-store NOI that would be a couple points. And it should match inflation. That's how it should work. The problem is there can be specific circumstances where one building renews in a terrific experience. I mean, we sometimes have 30%, 40% ups. And sometimes, you know, we end up staying flat. And when those happen, it creates this kind of volatility in same store growth. And so as we looked at that at the end of last year and said, you know, this is something that's hard for us to explain to the market. And, you know, the market's kind of, you know, you're as good as your last renewal. You know, it only makes sense for us to, you know, get some leases into the portfolio that do have some escalators in it so that, you know, maybe it's disappointing to say that we're going to have same story and a high growth of, you know, a half to 1%, you know, or it's going to be, you know, two to 3%, but it's always going to be positive. And, you know, we're in a place where I think that's something we believe, you know, equity markets are going to, you know, better understand. Some of it, as I shared on our analyst day, is when we began this, you know, the private equity business back in 2010, the overall concept was we were going to get a premium in the market for the high credit rating we have. And that proved to be almost true, but we've never been able to take on the leverage that even the rating agencies think we could take on, given the stability of our cash flows, because Green Street and others, and we look like an extreme outlier on the leverage front. So we're in this place where we have leverage that's in the band of REITs, but we're delivering a much higher stability and credit-worthy cash flow. So that's why moving to a place where that cash flow begins to look more like other REITs and we're doing what we have a competitive advantage in, which is being a great partner to government and making government facilities that enhance mission. And if we can find that spot on the Venn diagram, And the third, you know, sort of leg of that, you know, being that it's a creative, we think we're, you know, it's a reason for getting up every morning. So I know that's a lot, but that's as we think about things for sales, that's where we want to go.
spk16: No, that's good. You know, you talked a lot about, you know, fighting this perception battle and, you know, whether it's trailing four quarters or trailing eight quarters, even, you know, something to kind of show, proof of concept, you know, I think would be helpful at this point. And so that, you know, if I asked about the same sort of lie, I understand what the flat leases and they only, they only mark on expiration and all of that. Yes.
spk14: Totally agree. And I think, you know, we're, we're, we're working very hard to, again, we will, we're going to illustrate a proof of concept here. We're linking together a bunch of quarters. And we also know that if, we can show some more growth. And I think by expanding our total addressable market, that becomes much easier in an accretive way. And we'll still be the best credit tenancy of any REIT out there, but we'll be able to have a cash flow profile that is better understood by folks who are looking at the sector broadly and maybe don't take the time to see our buildings or spend time with us because It's not lost on us that our market cap relative to the whole market cap of all REITs is super tiny. And given that that's the case, we're not the first folks people look to, that we just need to be looking a little bit more like the crowd, continue to not lose what differentiates us. And I think that those take high integrity action that's all based on substance to bring that forward. but make sure we're not getting the form wrong so that when people look at us and see us, it's easy to understand the story of what we're bringing forward. But in addition, the numbers, you know, don't require a lot of explaining, you know, relative to other opportunities that folks have to invest in the real estate sector.
spk16: So that was kind of one internal growth question. I have one external growth question that relates to the, you've already been asked about your cost of capital, the cost of equity specifically, right? So you've You just fielded a question about potential buybacks. I think you said earlier, you'll probably do deals, you know, roughly 50% equity and 50% debt. You've been able to use the forwards that you entered into a while back. Yeah. You know, can you execute your plan at, right now the stock's trading below $11.50 a share. You know, can you execute your plan and make accretive acquisitions if your stock price is stuck here? And the 10-year is, you know, 475.
spk14: Yeah. The answer is yes. It's obviously harder. And that's why, you know, developing in the eights, and I mean, and we mean in the eights, not like 8.01, you know, is very good for us and very accretive, you know, at these levels. Sad part is it takes 24 months to build a building. So, you know, so we feel very good about, you know, that medium-term view. You look at something like ICE Dallas, that's accretive, you know, and we'll find, you know, other similar opportunities like that. And I'm very hopeful that as those get executed, my friend Allison here will take your guidance up a little bit and we'll, you know, be sort of on that path. And, you know, to your point, you know, we'll be showing proof of concept, which is hopefully we have a conference call where we're saying, well, in November, we changed our TAM. Here's the research we did. This is what we've delivered. And, Now, here's what we're looking to 2025. And I think that's when we're going to start being able to show our results. And we don't want to just flirt it all out, you know, right now. So, if we had a $13 stock price, this would be a no-brainer. And, I mean, which is a marginal amount relative to where we are. But that kind of motion, you know, one of the things we basically have to make the – make the case to folks is that we deserve having a $13 or $14 stock price. And with that, we'll show you the kinds of buildings that we can buy, and we can show you how we're going to grow. And we're fundamentally building the foundation for that story right now. And that's what we're executing on every day. And it's frustrating that the world doesn't move faster, but all we can do is try and be transparent and have people follow along. And at some point, we think we're going to be rewarded for what we're building and doing.
spk16: Is it fair to say you would issue equity at $1,150 if you match it up with an acquisition with an 8.5%?
spk15: Yeah, if it's accretive. Yeah, if it's accretive, sure.
spk14: And when I talk about stock buybacks, it's like if we deliver all this growth out there and find ourselves in a place where the stock is still, what is it, $1,148? then we've got to just look at the world and say, what's going on here? Because I know the quality of what we're bringing forward and the IRRs that we have and compare it to everything else that's out there. I don't know. We feel we can make a case that it's very compelling. But we're always interested in points of view around it. And all we can do is try and be incredibly transparent about what we're executing on and We are putting quarter to quarter together. We're very pleased with what we're doing. We don't want to sound overenthusiastic, which is why we talk about 2% to 3% instead of a path of 4%, as we've shared with folks. But we're in a transition period. We see great opportunity. We have a definable edge. We can buy very special real estate, and we think we can create a cash flow profile that should be materially valued.
spk16: I was not thinking about 5X, but maybe someday in the future we could talk about that.
spk14: There you go. I appreciate it. Yeah, no, look, and I appreciate the conversation. I think these transcripts are really a terrific opportunity for folks to get to know us who don't have time to get on the conference call because we are a smaller cap REIT, and maybe they'll pick up the paper here in six months and read this transcript and learn a little bit about what we've been doing and working very hard to achieve, and I'm we wouldn't do it if we didn't think we could do it well. Thank you very much. I appreciate it. Yeah, thank you. Thanks for paying attention and following the company.
spk03: Our next question is from Bill Crow of Raymond James. Please proceed with your question.
spk22: Hey, good morning. Just a couple of clarifications. The 7% cost of capital, is that based on today's incremental cost of debt and today's stock price. It just feels like that number is too low. But I just wanted to get clarification.
spk30: Yeah, Bill. Good morning. I think my comment was closer to mid-sevenths and low-sevenths. And yes, that is a perspective on where we can issue, again, looking at multiple opportunities in the debt market from the secured to the unsecured, right, multiple tenors, continuing to work to match our assets and our liabilities, but also, yes, an equity price in and around, right, $12 today.
spk22: Okay. So, Daryl, the asset you referenced that you were – that they wanted a five-and-a-half cap rate, and now you're 150 basis points wide of that, and they're still talking – that's still not within the range of spread investing, right? Yeah, no, no, no. You've got to be eight plus, right?
spk14: Yeah, you know, but I mean, hey, you know, they've made it more than halfway, Bill, and it's a pretty snazzy building. Yeah, I agree with you. If you can give us a little stock price and they can get a little softer, we're going to have a really, you know, a nine-figure set to deliver that you're going to love.
spk22: Yeah, snazzy building's great, but if you don't have rollover and you're only getting... You know, half a percent a year on rollover, that doesn't really buy you anything, right? It doesn't create value. That's right. 18% average roll doesn't cover inflation when you look at it per year. And that's kind of, I think, the sticking point here.
spk15: Yeah, no, no, no. Okay.
spk14: One thing I just want to say is that, yes, I'm with you. I mean, you and I see eye to eye on the math and the numbers, and no doubt it's also, you know, why, again, you know, changing our TAMs so that we can have some profile that makes the cash flow a little bit better because the reality is the inflation that we've had over the last couple of years will be recognized in our cash flow six, seven, eight, nine years from now, which is just too long and it's beyond the horizon of anybody on this call. But the reality is that our buildings are more valuable today because of that than they were a year or two ago. We just don't have the cash flow to prove it yet. And that's why we need some things with escalators in it. And some of the projects that we're working on to develop can be in the eights. And I see ways that we can, you know, again, path to growing 4% is what we're striving to do. We're talking about 2% to 3% regularly, and we're going to get there. And, you know, we can... Any suggestions you have on showing people, you know, how we can get to a, you know, again, like a $13, $14 stock price and be doing a good job, that starts a whole different magnitude of growth for us that you'd see at acquisitions that are far, far, far higher than we've ever, you know, achieved in our history.
spk22: Oh, I understand that. I appreciate that. Two real quick ones. Dallas acquisition. We're in Dallas, is that?
spk25: This is the airport. Yeah.
spk15: I don't have the zip code.
spk30: I don't have the address in front of me, either.
spk15: Okay. We'll send it to you, Bill. Okay. If you want to go visit, we've got a bunch of facilities in Dallas that we're really happy to have a business tour.
spk22: I was just out there for the eclipse. Finally, for me, the two non-government tenants that are in that building, what sort of business is that? How many of those tenants exist within the portfolio?
spk30: The vast majority of our tenancy, obviously, is still government.
spk15: Four or five tenants that are private. It's very few.
spk30: All nice people. 35% is to the two private tenants, and those are leased through early and late 2032. 2032, perfect.
spk22: Thank you all very much. Appreciate it.
spk14: Oh, thank you, Bill. Really appreciate the effort and appreciate the direct questions because I think it's the only way it kind of shows the scaffolding of what we're trying to build. So really appreciate it. It's helpful to have these conversations for investors. Thank you.
spk03: Thank you. As a reminder, to ask a question at this time, please press star 1-1 or your touch-tone telephone. Our next question is from Meryl Ross of Compass Point Research and Trading. Please proceed with your question.
spk24: Meryl Ross. I'm sorry. Meryl?
spk36: Hi. Here we go. Okay. Hi, Meryl. How are you? I'm wondering how the desire to cover the dividend might be prioritizing your acquisition versus development pipeline, which might be to the detriment of long-term value creation. So you see what I'm saying? Acquiring buildings that have then a higher CapEx budget because they're older, They're not the new builds that you would build. It has implications for the total return and value creation longer than 24 months out. So how is the board looking at the acquisition pipeline and steering you towards covering the dividends?
spk14: Yeah, it's a really, really good question. And it's exactly the conversation that we had at this board meeting. And it's a conversation we're having, you know, nonstop here. Because, you know, by deciding to pay a dividend that's above the payout ratio, you do find yourself in taking on a little bit more leverage, although tiny, you know, that can probably take, you know, a penny or so of recurring growth away from the future. That said, I think we don't, we do see the dividend issue as a short-term issue. The degree to which we didn't think, believe it's a short-term issue in the context of our business, you know, we would reassess it. But as we look at the opportunity to, you know, our development pipeline is very strong. Even where the stock price is today, you know, that leads to some very accretive acquisitions. And we believe that sustaining the dividend for today, that the short-term benefit of sustaining the dividend just for consistency is a marginal detractor from future earnings. But given the opportunities that are in front of us, we think those well outweigh it. So we are feeling optimistic about being in growth mode. not only from new state and local buildings with escalators to working closely with some government-adjacent partners that can be substantial to the additional development that we're doing. We are very bullish on government real estate as we're going forward. As compared to if you looked 18, 20 months ago, we were in a time where I think it was like batting down the hatches. You know, real estate is uncertain. Interest rates were ratcheting up. And that was a time of, you know, you've got to circle the wagons and you see every, not just us, but, you know, every real estate business fund, you know, was in flux. We find ourselves, again, you know, feeling very optimistic about where we're going, what we're pursuing. We're finding opportunity. And that makes us again, feel that the dividend is a short-term problem. If we didn't have that kind of optimism for where the business is going and what our definable edge in the government space can create, we wouldn't be so close with our dividend. We do need to get our dividend in line with our cash flow. And as long as our friends at the Fed don't take the yield curve up another couple hundred basis points, We feel like things are very in reach for that to be, you know, that we're on a very good path. But you're exactly right. And I think the buildings we're buying also, I just want to make this thing, we're very cognizant of what the CapEx burden is. When we, you know, do the analysis and, you know, I know we've had some conversations with you just about portfolio segmentation and the CapEx that's required and what's required by the government, that's all in our underwriting, you know, as we think about saying something is accretive or not accretive when we announce it.
spk36: Yeah, I think that some guidance regarding the contractual CapEx might help clarify kind of the board's tolerance, you know, to overpay the dividend just because then we would know more about why they're making that decision.
spk11: Yep. That makes sense to me. Yeah.
spk14: And at the end of the day, we are just being very direct. We think about CAD just as much as we think about FFO accretion when we're looking at deals. And there's some deals that are strong on FFO but have some capital requirements upon acquisition for us to get to a place where over the life of the lease, we're operating the building in a way that optimizes the return that we can achieve. And for some of those buildings, it just means we've got to find a bigger pipeline. We've got to find buildings that don't have that problem today. And that's why when I say if we can get our stock price to $13, $14, there's plenty of opportunities that we're covering that we're either eliminating because of CAD or eliminating because of some some challenge that is brought on by a lower stock price as a REIT is harder. It's just harder. And so it's our job to make the case that we can grow in a way where we deserve a stock price that's there. And when enough investors believe that's true, we'll put ourselves in a position where we can deliver even more growth. And that's about getting the REIT machine started again. And everyone's facing it. It's not peculiar to us, but it All we can do is talk about what we're doing each and every day to try and make that happen.
spk36: Right. I agree. Thank you.
spk14: Thank you so much, Meryl.
spk03: Thank you. I would now like to turn the conference back to Daryl Crate, Chief Executive Officer of Easterly Government Properties, for closing remarks.
spk14: Well, great. Thank you, everyone, for joining the Easterly Government Properties First Quarter 2024 Conference Call. We look forward to sharing meaningful updates in the coming quarters as we continue to focus on our growth trajectory and set a course to deliver premium risk-adjusted returns for our shareholders. Again, thanks for joining today. And we, again, stay tuned.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect.
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