EASTERLY GOVERNMENT PROPERTIES Q3 2026 EARNINGS CALL - EASTERLY GOVERNMENT PROPERTIES INC

Financial Performance:

• Total revenue reached $93.6 million in Q3 2026, an 8.7% year-over-year increase from $86.2 million.
• EBITDA grew to $59 million, up 8.9% year-over-year.
• Net income was $0.12 per share (fully diluted).
• Funds from Operations (FFO) per share was $0.79, a 6.8% increase year-over-year.
• Core FFO per share grew 2.6% year-over-year to $0.78, aligning with the long-term target of 2-3%.
• Cash Available for Distribution (CAD) was $32.8 million for the quarter, with a payout ratio of approximately 67%.
• Net debt to annualized quarterly EBITDA stood at 7.1 times, showing improvement toward investment-grade targets.

Guidance and Future Outlook:

• Q3 2026 Core FFO per share guidance raised to $3.08–$3.13, previously $3.07–$3.13.
• 2027 Core FFO per share guidance introduced at $3.09–$3.17 per share, implying ~1% growth at the midpoint and ~2% at the high end relative to 2026.
• 2027 guidance incorporates headwinds from the FAA Chicago vacancy and Loma Linda loan refinancing, while assuming FAA Chicago remains occupied through April 20, 2027.
• Capital allocation for 2027 includes an expected $25–$50 million in gross development investments and approximately $50 million in wholly-owned acquisitions.
• Long-term goal includes achieving an investment-grade credit rating, which would facilitate a lower cost of capital.

Business Segments and Product Lines:

• Portfolio occupancy remains at 98% with a weighted average lease term of 9.2 years.
• Soft term exposure (early termination rates) decreased to 2.3% of ALE in Q3 2026, down from 5.2% at year-end 2024.
• Major renewal secured with USCIS Lincoln: 15-year term including 10 years of firm term.
• FAA Chicago lease extended for nine months (including six months firm term) with current economic terms, moving the projected vacancy to April 2027.
• SDLE laboratory facility in Fort Myers, Florida, completed 15 months after ground breaking; U.S. Courthouse in Flagstaff, Arizona, on track for Q1 2027 completion; Medford, Oregon courthouse expected in H1 2028.
• Acquisition pipeline totals approximately $1.5 billion, with active evaluation of opportunities including VA outpatient clinics.

Market and Competitive Landscape:

• Management notes a shifting market sentiment where sellers are moving from expectations of 10-year Treasuries returning to 2-3% to accepting a 4-5% environment, creating transaction opportunities.
• Easterly maintains a competitive advantage as a large landlord in the mission-critical government real estate sector, offering stability to government-adjacent tenants.
• The company is targeting the government-adjacent tenant market and leveraging its diversified platform of ownership, development, and operations.

Risks and Challenges:

• Macroeconomic volatility, including interest rate fluctuations and geopolitical uncertainty, continues to impact capital deployment and refinancing strategies.
• Specific debt maturity risks include the Loma Linda loan and the potential vacancy of the FAA Chicago facility.
• Development timelines for government projects (e.g., Flagstaff and Medford) face delays due to extended design processes by federal agencies.
• The cost of capital and potential refinancing terms depend on achieving an investment-grade credit rating.

Management Commentary and Tone:

• Management expressed confidence in the business model's resilience and the durability of cash flows amidst a dynamic environment.
• Tone is proactive and strategic, emphasizing discipline in capital allocation and a focus on shareholder value creation.
• CEO Darrell Crate highlighted the company's successful execution in growing earnings while de-levering the balance sheet.
• The company refreshed its brand and logo to reflect its evolved status as a diversified owner and developer.
• Management emphasized a strong partnership with government entities (e.g., GSA) to achieve mutual objectives.

Analyst Questions and Answers:

• Reinvestment of Proceeds: Proceeds from the Bedford loan repayment are expected to be deployed into MEDs (Medicaid/VA) financing opportunities, specifically within the large VA outpatient clinic pipeline.
• Loma Linda Refinancing: Primary strategy involves an investment-grade inaugural issuance; otherwise, the company will utilize the revolver.
• Leasing Expectations: Management anticipates mid-to-high teen net effective rent spreads for 2027-2028 renewals, with typical firm terms of 10-15 years.
• Interest Rate Swaps: Four new interest rate swaps were placed at 4.2% on a SOFR base to cover interest obligations into next year.
• FAA Chicago Extension: Terms remain consistent with the current lease; no future extensions beyond April 2027 are guaranteed or included in guidance.

Other Key Points:

• The company has reduced its reliance on soft terms and improved its credit profile through socializing with rating agencies.
• CAD growth has accelerated, increasing by 37% over the last three years, allowing for a payout ratio significantly below the previous 117% level.
• The 10-year treasury rate movement is prompting a recalibration of the cost of capital, prompting a more selective but active acquisition strategy.
• All significant construction activities for the SDLE facility in Fort Myers were completed in the current month.