Prepared remarks
Greetings. Welcome to the Easterly Government Properties Second Quarter 2026 Earnings Conference Call. Operator provided instructions. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cole Bardawill, Director of Investor Relations. Please go ahead.
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 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 separate supplemental information package on the Investor Relations page of the company's website at ir.easterlyreit.com. I would now like to turn the conference call over to Darrell Crate, President and CEO of Easterly Government Properties.
Thanks, Cole. Good morning, everyone. This quarter, we delivered year-over-year core FFO per share growth of 5.4% and as many of you know, this is above our 2% to 3% stated long-term growth target and we are pleased and achieved these results by executing our strategy of growing earnings steadily, allocating capital thoughtfully and improving the quality of the portfolio over time. While the current interest rate environment hasn't improved, driven in part by the volatility of geopolitical conditions that we're currently facing, our business moves forward steadily in periods like this as evidenced by our improved earnings guidance. We own facilities that support essential government missions leased to critical federal agencies high credit state and municipal tenants and defense-related companies. These leases are long duration, impacted primarily by the full facing credit of the U.S. government. We continue to communicate to investors that we are clearly differentiated from traditional office real estate. Many of our facilities include secure, purpose-built environments where sensitive government work is conducted, they are mission-specific, difficult to replicate and essential to the agencies they serve. For example, we recently visited our U.S. District Courthouse in Charleston, South Carolina. The building sits at the city's historic four corners of law physically connected to the adjoining Federal Judicial Center deeply embedded into both the operations of the federal judiciary and the fabric of downtown Charleston, it's a clear example of the tenant stickiness that runs throughout our portfolio, facilities that are integral to the missions they serve and the communities they anchor. Turning to the quarter. The portfolio continues to perform well. Occupancy stood at 98% and our weighted average lease term stands at 9.2 years. Both of these key metrics compare quite favorably to our office REIT peers, and each reflects the quality of our assets, the mission-critical work happening inside them and the durability of the portfolio's cash flows. During the quarter, we closed a new 5-year term loan facility. Allison will cover the details, but I'd note that in a selective lending environment, we executed efficiently and on attractive terms. We view that as a reflection of how lenders see the business, high-quality cash flows derived from government-backed income, supporting a disciplined strong balance sheet. As part of our growth plan, we also continue to have ongoing conversations with the rating agencies and we look forward to updating you on our progress as we work towards an additional investment-grade rating in 2027. Turning to our cost of capital. our shares have performed well year-to-date, and the improvement supports our ability to grow. As our equity continues to re-rate, reflecting the quality and consistent growth of our FFO relative to peers, we will be able to harvest more opportunities across our $1.5 billion pipeline. Even at current levels, we're beginning to see opportunities to fund external growth on an accretive basis. As the stock price improves, more of that pipeline meets our return thresholds. We spent the last several years building this pipeline, and we will hopefully look to begin converting it in the coming quarters. Based on our continued operational performance and successful capital markets execution, we are raising our full year core FFO per share guidance range. The increase reflects the strength of our business and our confidence in delivering another year of steady growth against our stated objectives. We continue to remain focused on disciplined execution prudent capital allocation and creating long-term value for our shareholders. As we look ahead, we couldn't be more excited about the opportunities in front of us. Over the past several years, we've remained focused on executing our strategy, strengthening the portfolio and positioning the company for consistent long-term growth. We're encouraged to see that, that execution increasingly reflected in our market valuation, and we believe we remain in the early innings of unlocking the value embedded within our platform. We appreciate the dedication of our team and the continued support of our tenants and shareholders, and we look forward to building on this momentum through the rest of the year. And with that, I'll turn the call over to Allison.
Thanks, Darrell, and happy Monday, everyone. I'm pleased to report the financial results for the second quarter of 2026. The underlying growth of the business continues to come through clearly in the numbers. Total revenue for the quarter was $92.4 million, up from $84.2 million in the second quarter of 2025. That's an increase of 10% year-over-year, and it was driven by several factors. The acquisitions and development we've completed over the past 12 months, lease renewals and TI and BAC income coming online. EBITDA grew alongside revenue coming in at $58.4 million for the quarter versus $54.3 million in the second quarter of 2025, approximately 8% growth. And importantly, that growth is reaching the bottom line on a per share basis. For the quarter, net income was $0.07 per share on a fully diluted basis FFO per share was $0.78, up from $0.74 in the prior year. Core FFO per share as well came in at $0.78, up from $0.74 in the prior year. That is approximately 5% growth year-over-year for both metrics. And finally, cash available for distribution for the quarter was approximately $25.8 million. In terms of our active development projects, all three continue to progress nicely. Our FDL lab facility in Fort Myers, Florida, the U.S. Courthouse and Flagstaff, Arizona, and the U.S. Courthouse in Medford, Oregon are all advancing and we're confident these will be high-quality mission-critical additions to the portfolio once delivered. We initially broke ground on our FDL lab facility in August of 2025. And our team and development partners have done an excellent job executing against the construction time line and keeping the project on track with delivery later this year. Our net debt to annualized quarterly EBITDA currently stands at 7.3x, down from the first quarter as we continue to make steady progress towards our deleveraging targets. As our development projects advance, agreed upon lump sum reimbursements will provide a natural source of deleveraging followed by incremental EBITDA growth as projects are delivered and lease revenues commenced. These factors are an important step towards our medium-term leverage objectives and our pursuit of additional investment-grade ratings, which we believe will enhance access to attractively priced debt capital and support future pipeline funding. The term loan was an excellent outcome for the company. We secured a new $200 million facility with a 5-year maturity and the $50 million Accordion feature at pricing that was better than we initially had anticipated for a comparable long-term capital solution. With an initial spread of 130 basis points over SOFR, we believe the financing reflects both the continued strengthening of the business and the quality of the relationships we've built with our lending group. We used the proceeds to pay down our revolving credit facility, which increased our available liquidity and provides additional capacity to fund future growth opportunities. With the successful closing of the term loan during the quarter, we are raising our full year core FFO per share guidance range by $0.01 at the midpoint from $3.09 to $3.10 and resulting in a revised full year range of $3.07 to $3.13. Despite a challenging interest rate environment, our portfolio continues to perform better than expected, supporting confidence in our earnings outlook for the balance of the year. At the midpoint, our guidance assumes that we will have $50 million to $100 million of gross development-related investment during the year and $50 million in wholly-owned acquisitions. We continue to maintain a $1.5 billion acquisition and development pipeline. And with the recent improvement in our share price, we believe we are approaching an inflection point where we can begin to unlock opportunities from that pipeline in a meaningful way over the coming quarters. We remain focused on disciplined capital allocation, maintaining the strength of our tenant relationships and advancing opportunities across our development and acquisition pipeline. Consistent execution in these areas continues to support the resilience of our cash flows and positions us to create long-term value for shareholders. Thank you for your time this morning. We appreciate your partnership and look forward to updating you on our progress. With that, I will now turn the call back to Shannon.
Questions and answers
Operator provided instructions. Our first question comes from the line of Seth Bergey with Citi.
I just wanted to dig in a little bit more on kind of the acquisition pipeline and reaching kind of an inflection point as your share prices have moved upwards, how should we just think about kind of the cadence of maybe starting to unlock some of those opportunities as we move into the back half of the year and into next year?
Yes. I mean, I think, as Allison says, we're really approaching a level where, again, getting dollars put to work at a roughly 100 basis point premium to our cost of capital is achievable. And Seth, as we've spoken, our company is small, so the great news is that it doesn't take much for us to make a material difference. Mike Ibe and Chris Wang have been developing, managing, nurturing and cultivating this $1.5 billion pipeline for the last couple of years as we've continued to execute on our growth strategy successfully. We will find things that are able to pop out of that if a stock price of $24.50 to $25.50 gets us into a nice range where we have some opportunity to work some attractive transactions in '26 and '27. You can start seeing material movement, a couple of hundred million dollars of solid growth. And in '28, '29 and '30, I think we could see very material acquisition volume well in excess of anything we've done historically. So the optimism is bred by what's within our control today and what we know we can execute on to continue to grow. And as we all know, Allison won't let me release 2027 earnings guidance. But as we continue to look to move forward, I'm very confident that we have the resources to continue to deliver our long-term growth target to investors.
And then maybe just a quick follow-up on that. But last quarter, you announced mezzanine financing opportunities. Just of the $1.5 billion, is there any color you can kind of give around kind of maybe some of the size of those deals and then how much would be development opportunities versus acquisitions or any additional mezzanine financing you look to do?
Yes. Hey Seth, I think we shared last quarter that the program could grow to somewhere between $30 million and $50 million, and that is still the target we are working toward today. The pipeline includes additional mezzanine financing opportunities; many are in the final stages of lease procurement, so our participation would be contingent on those lease awards being made. As we've shared before, another batch of VAs is coming off the pipeline, and we expect acquisition activity and mezzanine financing activity there to accelerate over the coming years.
And maybe for some who are not aware, since we announced our mezzanine program as part of our earnings growth strategy, we've been flooded with opportunities, which might even be an understatement. But we remain disciplined: we provide mezzanine financing only with developers and partners we know and trust, and particularly for buildings we want to include in our portfolio. It's a useful bridge as our cost of capital improves on both the equity and debt sides, allowing us to be close to projects we believe will be accretive to the portfolio over the long term.
Our next question is from Michael Lewis of Truth Securities.
So Allison, you didn't mention any need for equity when you talked about getting into your target leverage range. And then Darrell did talk about equity a little on a question about acquisitions. How accretive it would be at certain levels. I was just wondering, how do you think about your cost of equity? Do you look at NAV? Is it really just more of matching it up with acquisitions and making it accretive. How do you kind of value the cost of equity in the stock?
Sure. So it's a few points. I would say, first and foremost, we primarily match equity against acquisition capital. So that timing may not always be a perfect science. As you saw, we raised some equity in Q2. That was to fund the acquisition from Q1. And that equity was raised at a higher price than we underwrote the deal at. So we're really pleased with how that was matched. In terms of the impact of leverage and equity combined, we see a natural deleveraging path with just the development deliveries that we have. And with that, there is not a need to raise additional equity in order to meet those targets that we are mindful of all of our goals in concert with each other, and we will make the best decision, both from an accretion perspective, a leverage perspective and all in relative in relation to NAV as well.
Okay. Great. And then my second question, the Loma Linda mortgage matures next summer $127.5 million at 3.6%. I know it's early, is there any sense of how you'll recapitalize that and maybe what the cost could be?
Sure. So as Darrell has shared and we've shared over a couple of calls, we believe that we are on a path to an investment-grade rating, an investment-grade issuance would be our primary goal in terms of refinancing that mortgage. As you know, we prefer to be an unsecured borrower, so that would make a very attractive cost of capital on an unsecured basis. That being said, and while we won't stand still, we have ample capacity on the revolver now, take it on until we find the most attractive long-term debt capital solution. So that's assuming we don't do anything but stand still, we can certainly take it on the revolver.
Yes. I think one of the points, as we said, is that although this is a quarterly conference call, as we look ahead we've been doing a significant amount of planning around 2027, 2028 and 2029, understanding the leases that will make a big difference then and structuring those leases in a way we think will be most favored by the public markets. On the debt side, Allison did a fabulous job getting these term loans in place. As we look to our refinancings and see opportunities in the debt markets, we are planning well ahead to absorb refinancing and to remain on the growth path we've articulated, which is a steady 2% to 3% growth over the long term. We think we could even step that up if we improve our ratings and continue to move forward.
Okay. And then lastly for me, we noticed a little bit higher maintenance CapEx this quarter. So I was just wondering if there was anything like one-off or any reason for that?
No. We had some very fortunate weather in the spring. So as you can imagine, Q1 tends to be a little light with the winter weather. And this quarter was very active in terms of the external-facing projects, things like roofs or parking lot or HVAC equipment that sits exterior to the building. We are still anticipating that our full year general range of $1.50 to $2 a square foot will be the plan for the year, but there's obviously some seasonality in the numbers as well.
Our next question is from John Kim of BMO Capital Markets.
I wanted to ask about your $1.5 billion acquisition and development pipeline and how that has evolved from the last time you provided that update. Did the window close on some of these transactions and new one have entered that pool? And if you can maybe comment on the rationale for passing up on some of the opportunities during the quarter.
I think the pipeline has remained surprisingly stable given its size. Sellers have expectations, and we are an attractive buyer for several reasons. Many building owners value the chance to do additional tax planning with us and don't feel the market compels them to sell now, so there isn't much urgency. We continue to rotate roughly $100 million to $200 million of opportunities through the pipeline each quarter. We did pass on one deal that was a fine building but not a must-have and was priced about 60 to 75 basis points above our cost of capital. Given our strong earnings growth and our positioning for next year, we chose to pass. We're excited to keep executing on the attractive opportunities we are identifying.
And of those potential opportunities that you may close on the next few months or, I guess, for the remainder of the year, can you provide some commentary on what that looks like between GSA and government adjacent assets or maybe more state-level investments? And how much of that is acquisitions versus development opportunities?
Yes. I mean I think we're seeing some GSA assets that we're excited about, and they're sort of at the forefront of what we're doing. Our hope is, again, if we could control the world, we we'd probably do half GSA and half sort of in the alternative bucket as we know. Our goal is to get to 30% of the portfolio being either in state, local or government adjacent. Why is that number important? The number is important because those have escalators of 2% to 3%. So the idea of adding 60 to 90 basis points to our same-store growth rate we think positions the portfolio very nicely relative to peers. And we believe the stability of our cash flow is the mission-critical nature of our buildings should put us at a premium to those businesses. As I've said on prior calls, our portfolio is outstanding. I mean, of the buildings that we have, the duration of the leases, the quality of the cash flow, the occupancy, the tenancy. And I think what we're really working on is packaging those cash flows in a way, and that means packaging is in obtaining the lowest cost of capital. It means giving a growth rate that's strong to investors. It's creating a tremendous level of cushion in the dividend and giving us that reinvestment opportunity, all of which, I think, should make us comp out relative to peers in a way that gives us a multiple on the stock that can be very attractive to our investors and to potential sellers of building.
And how are you thinking about dispositions as a funding source potentially because they may have re-leasing risk down the road? Or due to the focus on keeping your average portfolio age young versus...
I think it's all of those things. To be very candid, I know we've shared this with you a little bit in the past. The last two or three years, Allison, myself, Nick Nimerala and the whole asset management team have really cleared up any of the fog or lack of clarity around the portfolio. We have a lot of conviction on where we are. We will look at things on a case-by-case basis, and sometimes we're really working to find efficiencies. So even if we have a high-quality building, if it's a loaner located away from the other asset management resources that are really working for us, that might be a reason to sell. But I don't think you're going to see significant portfolio turnover for us just to raise cash to grow. We continue to work and develop relationships with joint venture partners. We are optimistic that our stock price will get to a good place and we can continue to harvest the pipeline. That said, pivoting toward the end of this year or the beginning of next year, if that's not the case we can pursue joint ventures with partners who have a more attractive cost of capital. We are the chosen partner of the U.S. government and the largest landlord to the U.S. government. We're working closely from top to bottom with the GSA and other agencies. We understand what they need, we are helping them become more efficient, and we're working on their most important quality buildings to be a good partner. Given that, when we go find capital in the U.S. or around the globe to invest in these very high-quality assets that essentially deliver AA-plus rent streams, we are a partner of choice. We are not concerned about having access to capital when we need it to grow the company. As I said, our company is small today; with a market value of roughly $1 billion to $2 billion, growing in a way that is competitive with peers does not require a tremendous amount of luck. We're still at a size where we can control that growth and deliver it to shareholders with consistency.
Our next question is from RJ Milligan of Raymond James.
I just wanted to maybe follow up on the investment pipeline question and maybe ask it a little bit differently. But based on your comments that more things are starting to pick up. I'm just curious if there's a mix component to that of is it that more development deals are starting to pencil and we should expect if you guys announced more investment activity that we've seen on the development side? Or is it acquisitions? I'm just curious at different levels and different pricing, should we expect a different mix of investment activity?
I think there's nothing that's completely discernible other than there are two dynamics that are happening. One, in the development world, you can see that we're finding these sort of veins of advantage. You see it with courthouses. I mean, we're building one in Flagstaff, we're building one in Medford. We're good at this. We know how to work with the government, we know how to make the process more efficient and courts are prickly animals. So you can develop a definable edge in that space as a developer. Because pleasing the judges, pleasing the various agencies that are in those buildings is a skill. And so you're seeing an advantage there in Florida. I think that we've done a terrific job with this business. Florida is a fast-growing state. Their law enforcement is important to them. and they have other facilities that need to be built, and we'd be thrilled to be the state of Florida partner in order to do that. On the acquisition side, it's a little trickier. And again, I can't say enough that our small denominator being a smaller company is really our friend because we can continue to find opportunities in buildings where we have an advantage as a buyer because we're a long-term holder of product. Then what does that mean? That means that if there are buildings that may not be well suited to be flipped in 5 years by an institutional buyer, but they're core to what we do. we're going to be able to get those at an attractive price. And those buildings like that, I mean I've got them in my head, so maybe I'm not describing them with words on the call as clear as I'd like to those buildings pencil for us, where we are, and those are with very high-quality agencies where we have a terrific relationship. And I think that, that puts us in some good stead, and we hope that we can get a couple of those in the next 9 months.
Great. Just a separate question: and this is more for modeling, but do you have any update on the expected FAA move-out in October?
So at this point, they will stay through at least the end of the lease term. Their notice provisions have expired, so they're definitely through the end of October. We're hoping for a better update on their moving process over the next month or so. These operations aren't always as streamlined as when you and I move in our own homes. We should have an update for you, but they have historically had some challenges moving out on time. We're optimistic they may stay a little longer, but we don't have anything concrete to share.
So to be clear, I would not add additional revenue to your model at this time. We do know they will remain through the end of the term, but on our next call we may be able to report either that things are status quo or that we have a bit more optimism to share.
Our next question is from Michael Carroll of RBC Capital Markets.
Darrell, I wanted to circle back on your comments on your investment pipeline and, I guess, the ideal mix. I believe you said it was 50% GSA-type buildings and 50% alternative assets. Can you give us an idea whether the cap rates are the same for those two types of buildings? I know the alternatives have lease bumps, so how should we think about the pricing ranges for those types of properties?
Yes. No, I mean, it's a great question. It really is case by case. I mean we're looking at some of these development deals with escalators, and thus the individual opportunities are complicated. And some of them we have, we can find an advantage and really are excited to get that capital put to work. And then on acquisitions, again, it's finding unique circumstances where our cost of capital gets us to a point where we get a high-quality building. So when I say 50-50, what I mean is we're working on opportunities equally that are acquisition and development; how it actually shakes out in a set of ways doesn't matter. Volume does matter. Again, our long-term growth targets getting to that 3% number is very important. And we feel like we have the resources not only with the existing portfolio, the lease renewals, all the good work that we have done to get things buffed up and ready and predictable. And in addition to where our cost of capital is today and with regard to this very large pipeline that we continue to navigate, we're going to get to a place where I think our long-term goals are achievable.
Okay. Circling back to your comments about potentially accessing the JV market if you don't want to issue equity to fund some of these deals: are you in discussions with potential joint venture funds that want to invest with you to buy some of these properties?
Yes. We maintain a series of those relationships, and we've continued to develop them over the last 6 months. As we look forward, I think that we've always had a very large sovereign wealth fund who's been a very good partner, but we found some other folks who nicely complement that. As we have a broader range of properties that we're interested in, I think we can appeal to a wider range of taste preferences as we work with folks. And I can say, clearly, I mean, obviously, we've been at this for the better part of 15 years. We are one of the largest in the space, and we are close with them and we understand not only the commercial part of real estate, but how government works. So if you're a JV partner and this is exposure that you want in your portfolio, we do make it an easy choice for them. So we'll continue to cultivate those relationships. And also, given the order of magnitude of the pipeline that we're developing, we don't need to be a ball-hog about it. We can be a very good partner with some JVs as well as doing things on our own and continue to grow the business in a way that I think is going to be pleasing to investors.
Okay. And with these JV type investments, is it more of a one-off type deal with specific JV partners? Or could you create or would you want to create more of a fund type business to kind of actively grow relationship and buy new assets?
I think a fund is a bit more formal, but with the VAs we had a program with our JV partner where we ended up putting close to $600 million to $700 million of assets in that entity. That was a terrific program for them and filled the need, and it's something we do well. So thinking about it again, I don't think when you say one-off that feels accurate, because it's really a waste of everybody's time to build the level of relationships we're looking to have with JV partners. We're not coming up with a building and auctioning it off. These are partners who I think are excited to be in this space, and we want to do something fairly programmatic and consistent over time. That said, to be an investment-grade issuer we would like to have more than $300 million of debt that we're issuing every year. That is achievable. In the context of trying to drive volume, especially as the cost of capital gets a bit better, we will weigh all of that as factors in how we decide to execute.
Our next question is from Merrill Ross of Compass Point Research and Trading.
If you had an update on the lease expirations aside from the FAA, I know they're pretty light for this year, but are you starting to look towards next year? And then I guess, a peak in 2028. So you may dilute that with growth but it becomes more meaningful and further out and go. I'm just wondering if any update kind of more in the near term, but are you starting to look towards the intermediate
Yes. Mel, thanks for the question. So we are in the happy stages of procurement for upcoming expirations going through most months of 2027. So procurements have kicked off for many, if not all, and we are actively participating in those. We hope to share a little bit more progress as we get closer to those completions. But we're not expecting anything out of line with our currently forecasted renewal expectations, mid- to high-teens net effective rent growth. about $35 a square foot in TI and B stack on average. That being said, I know you mentioned that we've got a lot in '28, we're generally about 5% of expirations in any given year. And if you look at 2030, the golden year for all of us, there's like less than 1%. So it's going to be a very happy year to talk about on earnings calls because I don't know we'll talk about, but not only hopefully something else pretty cool. But we're underway and I hope to share some more progress in Q3.
Yes. To put some color around it, Allison has done a tremendous job bringing more organization and discipline to getting these procurements moving. It has been a broad executive team effort to work more closely with the government and to help agencies see that they are our partners in this, which opened their eyes to a fresher way of processing things. These buildings are very important to them, and they should be renewing these leases. We have done a very good job as a landlord; these are mission-critical facilities, so we shouldn't be wasting time haggling over the leases. Getting to a streamlined process where American taxpayers get a fair deal and our shareholders are fairly compensated for their capital is the right framework, and nobody from elected officials to agency staff to the GSA to us disagrees with it. Moving that forward more smoothly has taken effort, and Allison and her team have absolutely done their part in engaging the agencies, the government, and elected officials in a way that I think everyone is pleased with.
I would now like to turn the conference back to Darrell Crate, President and CEO of Easterly Government Properties for closing remarks.
Great. Well, thanks, everybody, for joining us for this conference call. We're very pleased with how the portfolio continues to move forward. As you know, we're executing on this long-term growth plan, it is terrific to see the team continue to do their work, and I'd really just like to thank our new shareholders and folks who have been with us for also for quite some time. Thank you for your support and confidence, and we really look forward to continuing to deliver strong growth to you in the coming quarters and years.
This concludes today's conference call. Thank you for participating. You may now disconnect.