Easterly Government Properties, Inc. Q3 FY2026 earnings call

• Portfolio Performance: The portfolio ended the quarter 98% leased with a weighted average lease term of 9.2 years. Soft term exposure was reduced to 2.3% of Annual Lease Income (ALI), down from 5.2% at year-end 2024.
• Lease Renewals: Successfully renewed the USCIS Lincoln lease for 15 years (with 10 years firm term). Actively managing 2027 expirations to further reduce soft terms.
• FAA Chicago Extension: Secured a nine-month extension (including six months of firm term) for the FAA Chicago facility, providing incremental earnings in 2026 and 2027 while the asset remains under contract for sale upon vacancy.
• Development Pipeline: Completed construction at the SDLE laboratory facility in Fort Myers, Florida (delivered in 15 months). The U.S. Courthouse in Flagstaff, Arizona is on track for completion in Q1 2027. The Medford, Oregon courthouse is delayed to H1 2028 due to government design processes.
• Acquisitions & Capital Deployment: Maintaining a ~$1.5 billion acquisition pipeline. Recalibrating cost of capital expectations due to Treasury yield movements; remaining disciplined and selective to ensure risk-adjusted returns.
• Credit Profile: Progressing toward investment-grade credit rating goals. Work with rating agencies continues to socialize the differentiated credit profile, aiming to lower the cost of capital and accelerate growth.
• Brand Refresh: Introduced a new logo and brand identity to reflect the company’s evolution into a diversified owner, developer, and operator serving federal, state, local governments, and government-adjacent tenants.

The company reported Total Revenue of $93.6 million for Q3 2026, an 8.7% year-over-year increase from $86.2 million in Q3 2025, driven by acquisitions, development completions, lease renewals, and tenant improvement/tenant reimbursement income. EBITDA grew to $59 million (up 8.9% YoY from $54.2 million). Net Income was $0.12 per diluted share. Funds From Operations (FFO) per share reached $0.79 (up from $0.74), representing 6.8% growth. Core FFO per share was $0.78 (up from $0.76), reflecting 2.6% growth, which aligns with the long-term target. Cash Available for Distribution was approximately $32.8 million.

• 2026 Core FFO Guidance Raised: Low end raised to $3.08–$3.13 per share (previously $3.07–$3.13). Increase driven by the FAA Chicago lease extension, partially offset by early repayment of the $35.6 million Bedford Construction Loan.
• 2027 Core FFO Guidance Introduced: Initial full-year guidance set at $3.09–$3.17 per share. Midpoint implies ~1% growth over 2026 midpoint; high end implies ~2% growth (low end of long-term target).
• 2027 Headwinds: Outlook incorporates pressure from the FAA Chicago move-out and refinancing needs related to the Loma Linda loan maturity.
• Capital Expenditure Assumptions: Assumes $25–50 million in gross development-related investment and approximately $50 million in wholly-owned acquisitions during 2027.
• Long-Term Growth: On track to exceed the 2–3% long-term core FFO per share growth objective in 2026, with guidance midpoint implying ~4% growth.

• Refinancing Risk: Maturity of the Loma Linda loan creates refinancing pressure in 2027; success depends on achieving investment-grade status or utilizing revolving credit facilities.
• Tenant Vacancy Risk: Potential vacancy at the FAA Chicago facility after April 2027; current guidance assumes occupancy only through the firm term extension.
• Macroeconomic Uncertainty: Geopolitical instability and interest rate volatility impact capital deployment timing and seller expectations.
• Construction Delays: The Medford, Oregon courthouse project timeline extended to H1 2028 due to slower-than-planned government design processes.

Q: Analyst asked about reinvesting proceeds from the Bedford loan repayment and refinancing plans for the Loma Linda maturity.

A: Management stated that if investment-grade status is achieved, they intend to use inaugural issuances to address the Loma Linda maturity, which would be accretive but not included in current guidance. Otherwise, it will be rolled onto the revolver. Regarding Bedford proceeds, management highlighted strong opportunities in VA outpatient clinic mezzanine financing across the country as a primary redeployment avenue.

Q: Analyst inquired about renewal leasing spreads and effective rental growth expectations for 2027-2028.

A: Management reaffirmed expectations for mid-to-high teens net effective rent spreads, significantly outpacing peers, with minimal TI capital deployed (~$35 on average) during renewals. They aim for 10-15 year terms, noting that the recent USCIS Lincoln renewal secured 10 years of firm term within a 15-year total lease.

Q: Analyst asked if the macro environment and Treasury yields are changing capital deployment strategies.

A: CEO noted that sellers are adjusting price expectations as they accept a 4-5% Treasury environment, creating more accretive transaction opportunities. He emphasized that despite past challenges, the company has grown cash available for distribution by 37% over three years and maintained a $1.5 billion pipeline, positioning them to accelerate growth if capital costs improve.

Q: Analyst questioned the likelihood of further extensions beyond the FAA Chicago firm term and the economics of the current extension.

A: Management acknowledged the possibility of further extension but clarified that guidance assumes vacancy after April 2027. The current nine-month extension holds existing economic terms, providing stability without committing to long-term occupancy beyond the firm period.