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

Explicit Guidance:

• 2026 Core FFO per Share: Raised to a range of $3.08–$3.13, up from the previous $3.07–$3.13 midpoint, driven by the FAA Chicago lease extension offset partially by the early repayment of the $35.6M Bedford loan.
• 2027 Core FFO per Share: Initial guidance introduced at $3.09–$3.17, implying ~1% growth at the midpoint and ~2% at the high end (aligning with the long-term 2–3% target).
• 2027 Investment Assumptions: Midpoint guidance assumes $25M–$50M in gross development-related investment and $50M in wholly-owned acquisitions (excluding potential joint venture upside).

Business-Segment Outlook:

• Lease Rollovers & Terms: Renewals for 2027–2028 target mid-to-high teens net effective rent spread growth; firm terms of 10–15 years are achievable in current market conditions.
• Development Timeline: SDLE Fort Myers project completed (15 months from groundbreaking); US Courthouse in Flagstaff, AZ on track for Q1 2027 completion; US Courthouse in Medford, OR delayed to H1 2028 due to extended government design processes.
• Lease Extension: FAA Chicago facility extended for nine months (six firm term months ending April 20, 2027), providing incremental earnings through that date with the asset remaining under contract for sale post-move.
• Portfolio Quality: Active effort to reduce "soft term" leases; soft term share reduced to 2.3% of ALI at quarter-end (down from 5.2% at 2024 year-end).

Market and Competitive Outlook:

• Capital Markets Environment: Management expects the 10-year Treasury to stabilize in a 4%–5% range rather than reverting to 2%–3%, encouraging sellers to recalibrate price expectations and creating a more active transaction environment.
• Acquisition Pipeline: Maintains an actionable pipeline of ~$1.5B; expects pipeline churn of 30%–35% as seller expectations align with market reality, with potential to accelerate growth if cost of capital improves.
• Development Financing: Anticipates deployment opportunities in the VA outpatient clinic pipeline; currently monitoring cost of capital to identify accretive joint venture and acquisition targets.
• Interest Rate Hedging: Entered into four interest rate swaps at 4.2% (SOFR-based) in late Q3 to cover exposure through most of next year.

Macro / Industry Outlook:

• Credit Rating Strategy: Primary focus on achieving Investment Grade (IG) status; if successful, IG inaugural issuance intended to refinance the Loma Linda loan maturity. If IG is not achieved, debt will be rolled onto the revolver with an expectation of termination thereafter.
• Macroeconomic Backdrop: Acknowledges ongoing geopolitical and macro uncertainty but cites portfolio durability and mission-critical nature of assets as key differentiators against broader market volatility.
• Tenant Stability: Expectations remain that the FAA Chicago tenant will vacate by April 20, 2027; no guidance assumes further extension beyond this firm term.

Strategic Initiatives:

• Cost of Capital: Recalibrating cost of capital downward following treasury moves; aims to use improved terms to accelerate growth via joint ventures and selective acquisitions.
• Balance Sheet De-levering: Net debt to annualized quarterly EBITDA at 7.1x (down from Q2), with a stated goal of achieving target cash leverage range to support investment grade status.
• Dividend Policy: Payout ratio decreased to ~67% (down from 117% in Q3 2023); cash available for distribution (FAD) grew 37% over three years to $32.8M, supporting sustainable dividend growth.
• Brand Refresh: Completed corporate identity refresh to reflect expanded capabilities as a diversified owner, developer, and operator of mission-critical properties.

Risks and Headwinds to Outlook:

• Specific Headwinds (2027): Explicitly incorporated into guidance are the FAA Chicago move-out post-April 2027 and refinancing pressure related to the Loma Linda loan maturity.
• Refinancing Risk: The outcome of the Loma Linda refinancing depends on the achievement of investment grade status; failure to secure IG rating could result in higher borrowing costs or revolver usage.
• Operational Delays: US Courthouse in Medford, OR timeline extended to H1 2028 due to slower-than-planned government design processes.
• Loan Repayment Impact: The early repayment of the Bedford loan ($35.6M) in September removed ~$0.02/share contribution from 2027 expectations.

Management Tone on the Future:

• Confidence Level: High confidence in delivering 2.6% to 3% long-term Core FFO growth, with 2026 performance exceeding the long-term midpoint target (~4% implied).
• Strategic Narrative: Emphasizes a "hard combination" of growing FFO per share while de-levering the balance sheet; views current volatility as an opportunity to deploy capital accretively.
• Discipline: Maintains "disciplined and selective" stance on acquisitions; explicitly states no expectation for FAA Chicago to extend beyond the firm term despite historical extension history.

Miscellaneous:

• Tenant Renewal Specifics: USCIS Lincoln renewal secured for 15 years (10 years firm term); details for the full 2026 renewal cohort will be provided in the year-end earnings call.
• Credit Loss Allowance: FFO exceeded Core FFO this quarter due to a downward adjustment in the credit loss allowance following the Bedford loan repayment.