Easterly Government Properties, Inc. Q3 FY2025 earnings call

• Federal government partial shutdown: Easterly is confident the government won't default on leases as it's tantamount to defaulting on a US treasury obligation, and shutdowns are part of budget negotiation kabuki theater. - Growth strategy: Centered on three long-term priorities - growing core FFO by 2% to 3% annually, increasing same-store performance through diversification into state and local and high-credit government adjacent tenancy, and continued execution on value-creating development opportunities. - Third quarter performance: Strong operating performance, maintained high portfolio occupancy, strengthened relationships across agencies, and refined balance sheet. - Development pipeline: Active, with projects like the State Crime Lab in Fort Myers, Florida breaking ground in August and FDA Atlanta nearing completion. - Capital management: Targeting medium-term cash leverage goal of six times, already made progress in reducing cash leverage with projects like FDA Atlanta, and continues to be a creditworthy borrower with successful debt recasts and rating reaffirmations.

The core of Easterly's business is a portfolio of essential government facilities. In the third quarter, they delivered 3% core FFO growth from 2024 to the midpoint of the 2025 guidance range. The portfolio occupancy remains near historical highs at 97% with a weighted average lease term of approximately ten years. The acquisition of the York Space Systems headquarters in Colorado was a key event, with an acquisition price of $29 million and a cap rate in the low elevens. Revenue contribution: 88% of lease income is from the federal government, with the remaining 12% from other sources.

• 2025: Narrowed full-year core FFO per share guidance range to $2.98 to $3.2 on a fully diluted basis, consistent with 2% to 3% annual core FFO growth. - 2026: Issued full-year core FFO per share guidance in a range of $3.05 to $3.12, implying growth in the 2% to 3% range. Midpoint assumes $50 million to $100 million of gross development-related investment and $50 million in wholly owned acquisitions, with potential to achieve upper end of range and execute $400 million of acquisitions.

• Federal government partial shutdown: Could slow things down a bit, but Easterly is confident the government will find a way to avoid default on leases as it has in previous shutdowns. The risk is related to potential delays in leasing and other operations during the shutdown, but the portfolio's mission-critical nature mitigates major threats.

Q: Seth Bergey asked about the FLACSAF warehouse completion date being pushed out.

A: Allison Marino said the government is working through the design balancing multiple agencies, expecting to finalize the lump sum and TI project in 2026, and the new date is achievable.

Q: Michael Lewis asked about the $50 million acquisition guidance for 2026.

A: Darrell Crate said it's meant to be a low bar as the team is on track for growth, with a strong pipeline and ability to deliver growth despite the guidance range, and the $1.5 billion pipeline makes it likely to find the $50 million needed.

Q: Michael Lewis asked about dispositions and leverage target impact on development starts.

A: Darrell Crate said need a kick from interest rates for dispositions to lead to leverage reduction, aims to get leverage in line with net lease peers, and may use external partners and JVs for development while working towards lower leverage.

Q: Michael Lewis asked about government shutdown impact on leasing and agencies.

A: Darrell Crate said it slows things down a bit but doesn't diminish portfolio value, and the government is still doing good work and will come back online, with no threat to specific agencies.

Q: Michael Carroll asked about achieving 6x cash flow leverage.

A: Darrell Crate said development projects are attractive, will financially structure them to get to a cost of capital 100 basis points above, and will delever over 24 to 36 months, with the goal to get leverage closer to six times and be comparable to net lease peers.

Q: Merrill Raw asked about York acquisition details and mix moving.

A: Allison Marino said York acquisition price was $29 million with a low elevens cap rate, and Easterly aims to move towards 70% federal exposure, 15% state and local, and 15% non-adjacent space in the portfolio.

Q: John Kim asked about strategy change.

A: Darrell Crate said the line of thinking is that getting lower leverage with more moderate growth will lead to better cost of capital, and the team is confident in the pipeline and poised for growth with improved capital markets support.

Q: John Kim asked about 2026 guidance headwinds.

A: Allison Marino said 2026 guidance is impacted by factors like FDA Atlanta being a large accretive opportunity, same store growth, and offset by increases in G&A due to noncash comp, with no dispositions expected for 2026.

Q: John Kim asked about government shutdown and accounts receivable.

A: Darrell Crate said leases are funded for six months plus, and the government will find money to pay rent as defaulting is not an option, with shutdowns being partisan kabuki theater.