Greetings and welcome to Easterly Government Properties fourth quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms.

Lindsay Winterhalter, Vice President, Investor Relations for Easterly. Thank you, Ms. Winterhalter. You may now begin..

Good morning. Before the call begins, please note the use of forward-looking statements by the company on this conference call. Statements made on this call may include statements which are not historical facts and are considered forward-looking.

The company intends these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Act Reform of 1995 and is making the statement for the purpose of complying with the Safe Harbor provision.

Although the company believes that its plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable. It can give no assurance that these plan, intentions, expectations or strategies 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 Item 1A Risk Factors of its annual report on Form 10-K for the year ended December 31, 2016 and other SEC filings.

The company assumes no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures, such as 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 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, Chairman of the Board of Easterly Government Properties..

Thanks, Lindsay. Good morning, everyone. Welcome and thank you for joining us for our fourth quarter 2016 earnings call. Today, in addition to Lindsay, I'm joined by Bill Trimble, our CEO, and Meghan Baivier, our CFO and COO. While we began building this portfolio in 2010, this call marks our second-year anniversary as a public company.

I’d like to thank our investors, many of whom have been with us since the IPO, for their support and confidence. I would also like to thank our Board of Directors who have given us sound guidance and are always focused on building long-term value for shareholders, and the people of Easterly Government Properties.

Bill Trimble has built an organization with dedicated skilled professionals in all of the key areas required for our success – acquisition, government relations, asset management, finance and capital formation.

Easterly Government Properties remains the only internally managed public REIT focused on owning properties that are leased solely to the United States federal government. Our growing portfolio is solely sourced from off-market and comprised of young Class A commercial properties.

These properties are the result of a build-to-suitdesign process and are specifically tailored to meet the unique needs of the various tenant agencies in the US federal government.

Our non-cancelable leases are backed by the full faith and credit of the US government and are not subject to annual appropriations, and therefore, provide an extremely stable platform for strong recurrent cash flow year-over-year. We derive additional growth from accretive acquisitions and development. In the fourth quarter of 2016, we did just that.

Bill will go into greater detail on these strong additions to the portfolio later in the call, but to summarize we closed on an FBI field office in Albany, New York and a federal bankruptcy courthouse in South Bend, Indiana. Our pipeline continues to season as well as we become known for our way of operating with intent and certainty with sellers.

We’re also pleased with the development arm of the business as progress continues on our FDA Alameda laboratory project. Again, US government build-to-suitdevelopment projects are great opportunities for the company to achieve premium risk-adjusted returns, while also being an outstanding partner to the US government.

As Easterly’s chairman, I’m most proud of our people. The team continues to demonstrate its definable edge in the sourcing, underwriting and servicing of mission-critical federal government buildings as evidenced by our attractive and stable portfolio of young, fully leased, Class A build-to-suitbuildings located across the country.

We expect to continue executing on our proven strategy by maintaining prudent balance sheet leverage, deploying capital creatively, and continuing to focus on delivering the benefits of scale in our G&A line item to shareholders.

Easterly has a targeted $150 to $200 million of acquisitions as an acquisitions goal for 2017 and you could fully expect to see this target achieved through the addition of properties that both add strength and stability to our portfolio.

For shareholders, through dividends and accretive acquisition, we believe we can responsibly target returns that rival the Russell 2000 for investors on a compounding basis.

Our goal is to deliver a consistent and growing double-digit return to investors, built upon a stable base of cash flows, generated by the full faith and credit of the United States federal government. We want to be the REIT security of choice for investors looking for stability, consistency, and superior cash flow growth over the long-term.

With that, I’ll turn the call over to Bill to provide additional information on developments within Easterly that drive shareholder returns..

Thanks, Darrell. And thanks everyone for joining us this morning. First, I would like to discuss the properties we acquired over the course of the fourth quarter. I’m very pleased to report the acquisition of the fourth and final property we had previously announced as part of Easterly’s first portfolio acquisition since the IPO.

This property, an FBI field office in Albany, New York, serves an incredibly important mission for the US federal government. This field office is one of 56 field offices throughout the entire country and we're delighted Easterly now owns six of these facilities.

These field offices serve as central hubs throughout the United States and help keep Americans safe from threats, both foreign and domestic. We also acquired a federal bankruptcy courthouse located in South Bend, Indiana in the fourth quarter of 2016.

This courthouse serves the Northern District of Indiana and is responsible for handling bankruptcy cases throughout 11 counties. Courts such as these act as specialists within the US District Court and have subject matter jurisdiction over all bankruptcy cases throughout the United States.

Both of these buildings meet Easterly’s target criteria of owning Class A build-to-suitwith enduring missions that are critical to the lawful operation of our country. Turning to development, we are pleased with the strong progress being made of the previously announced FDA laboratory in Alameda, California.

Easterly has been working hand-in-hand with the General Services Administration and the US Food and Drug Administration through the design process and we continue to expect this approximately 66,000 square-foot building to be completed and delivered by mid-2018.

I would like to reiterate that when we engage in federal development opportunities, there's already a signed lease in place that typically guarantees an initial lease term of at least 15 to 20 years. Easterly is not engaged in speculative development.

Further, we enter into design build contract with experienced general contractors, so as to insulate ourselves from any risk of cost overruns. These risk mitigating factors, coupled with the opportunity for premium returns, make the opportunities for federal government development quite appealing.

Development remains an attractive source of growth for Easterly. One major opportunity where we expect to see the strong potential for build-to-suit development and acquisition activity is with the Department of Veterans Affairs or the VA.

The VA is the second-largest department in terms of total appropriations and staffing, employing nearly 350,000 people, which in turn provides vital services to be approximately 22 million US military veterans living today.

In order to provide health coverage for these 22 million deserving veterans, the VA has over 1,700 healthcare sites, which include both hospitals and outpatient clinics. In recent years, the VA has begun to undertake a transformation in their healthcare facilities that serve these veterans.

Rather than providing health care to veterans in hospital centered in-patient care facilities, the VA has taken on a roughly estimated $63 billion project to provide new state-of-the-art outpatient care facilities located throughout the country.

These facilities are typically located near major hospital centers and offer a wide range of outpatient services, ranging from primary care, specialized care, mental health care and related medical and social support services for veterans in need.

There is now greater reliance on the private sector to develop and own VA facilities on behalf of the US government. Leases on these new facilities are very attractive.

They’re typically 15 to 20 years in initially, backed by the full faith and credit of the United States government, and can even offer greater flexibility in the lease terms than we typically see in our GSA leases. Examples of this include, greater cost reimbursements and periodic bumps in rent over the term of the lease.

Easterly has been a strong partner with the GSA and we’re looking forward to the opportunity to expand that relationship to the VA.

Overall, VA outpatient facilities are a very exciting prospect for Easterly to expand our bull's eye of strategic opportunities and you can fully expect the Easterly team to diligently pursue these types of accretive acquisition and development projects.

The acquisition team continues to seek real estate opportunities that will provide earnings growth to our shareholders, while also maintaining strict adherence to the set of values we hold ourselves to when sourcing and underwriting buildings.

We pride ourselves on our high standards and we will only acquire buildings that we believe will maintain or elevate that standard. I'm pleased to report that the acquisition pipeline remains robust as we review single facilities as well as multi-facility portfolios as a means of future growth.

To reiterate our stated building requirements, we will look for properties that are leased to a single tenant of the US federal government, are build-to-suit and mission critical for that current tenant and are usually over 40,000 square feet in size.

Because the missions being performed in our facilities are so inherently critical to the overall safety, well-being and strength of our country, we believe there is an understanding across party lines that the missions are enduring.

For example, the FBI, having doubled in size since 9/11, has expanded its mission to include cyber terrorism, counterterrorism, all in addition to its primary focus to investigate federal crimes. We do not see their scope of mission decreasing.

As a reminder, these buildings renew on average 94% of the time and we will continue to focus our acquisition and development efforts on these mission-critical properties located in the center of our bull’s eye.

Our acquisition activities are an important component of our earnings growth strategy, delivering properties that both elevate the portfolio, while also providing immediate accretion to earnings is our mission.

To give you some visibility to the depth and discipline of this effort, we are defined by the attractive deals we do, but we’re also defined by the deals we don't do. In the fourth quarter, we passed on $100 million of opportunities of seemingly reasonable candidates for acquisition.

However, upon further review, those opportunities fell short of our stated acquisition criteria. As we have matured as a company and experience in resources, I'm pleased with the opportunity the acquisition growth initiative will deliver to shareholders over time.

Turning to our existing portfolio, our asset management team currently has 15 active projects to improve the everyday performance and functionality of our properties for our government tenant.

An example of such a project can be found at the FBI field office in Richmond, Virginia, which is currently working with our asset management team to build a brand-new emergency operation center located within our building.

This center, once weekly, will allow multiple law-enforcement agencies to collaborate in a highly technical 24/7 facility which will provide round-the-clock emergency preparedness and response to high profile incidents that require the partnership and support from various arms of the law enforcement community.

A facility of this type is extremely important to the mission of the FBI and directly contributes to the overall safety and well-being of the American people.

Not only does a project like this create tremendous value for our shareholders by ensuring continued tenant satisfaction, mission support and strong relationships for years and decades to come, but as a company we feel extremely gratified that we are in a position to help deliver a project that will ultimately contribute to an increased security and well-being of our country.

With that, I'll now turn it over to Meghan for a discussion of the quarterly and annual results as well as our 2017 earnings guidance..

Thank you, Bill. Today, I will touch upon our current portfolio, discuss our fourth quarter and full year 2016 results, provide an update on our balance sheet and review our 2017 guidance.

Additional details regarding our fourth-quarter and full-year 2016 results can be found in the company’s fourth quarter earnings release and supplemental information package, which is on the Easterly at ir.easterlyreit.com. As of December 31, we owned 43 operating properties, comprising nearly 3.1 million square feet of commercial real estate.

The weighted average lease term for the portfolio was 5.9 years, the average age of our portfolio was 12.7 years, and our portfolio occupancy remained at a 100%. In addition, 97% of our annualized lease income was backed by the full faith and credit of the United States government.

For the fourth quarter, FFO per share on a fully diluted basis was $0.31, up 19% year-over-year. FFO as adjusted per share on a fully diluted basis was $0.30 and our cash available for distribution was $11.7 million. For the full year, FFO per share on a fully diluted basis was $1.21, up 16.5% year-over-year.

FFO as adjusted per share on a fully diluted was $1.17 and our cash available for distribution was $43.7 million. Descriptions of these non-GAAP measures and reconciliation to GAAP measures have been provided in our supplemental information package.

Turning to the balance sheet, at year-end, we had total debt of $292.5 million and leverage was 23.8% in terms of net debt to total enterprise value or 4.5 times annualized fourth quarter EBITDA. Despite material acquisition growth in 2016, our leverage as measured by net debt to total enterprise value compared favorably to a year ago.

We continue to be capitalized well to pursue our stated acquisition goals. Recall that at the end of the third quarter, the company entered into a $100 million, seven-year, unsecured term loan facility, with a 180-day delay draw period.

Early in the fourth quarter, we subsequently entered into forward starting interest-rate swaps to effectively fix the interest rate on future drawdowns under the term loan facility at a rate of 3.12% annually based on the company’s current leverage ratio.

As of December 31, 2016, on a pro forma basis, fully drawing the term loan and using all of the proceeds to repay a portion of the borrowing from the company’s revolving credit facility, the company’s weighted average debt maturity would be six years, in line with its weighted average remaining lease term and the company’s percentage of fixed rate debt would be 56%.

Additionally, the company would have $288 million of availability on its $400 million revolving line of credit. There’s ample capacity for the company to exceed its accretive acquisition program for 2017 and support the following guidance.

For 12 months ending December 31, 2017, the company is establishing guidance for FFO per share on a fully diluted basis of $1.24 to $1.28 per share. This guidance assumes our previous stated range of $150 million to $200 million of acquisitions in 2017, including the recently announced OSHA Sandy acquisition and does not contemplate any disposition.

And not to leave out the obvious, we remain confident in our team's ability to renew the portfolio of leases which roll in 2017.

Our asset management and government teams are continually focused on ensuring that we remain a partner of choice to the US government as we manage the properties we own and performing diligence on new acquired properties to ensure they’re part of the enduring mission of the US federal government.

Finally, as previously announced this week, our Board of Directors declared a dividend related to our fourth quarter of operations of $0.24. This dividend will be paid on March 22nd to shareholders of record on March 7. I’ll now turn the call back to the operator for questions..

Thank you. [Operator Instructions] Our first question is from Manny Korchman of Citi. Please go ahead..

Hey. Good morning, everyone.

Bill, going back to your comment on you being defined on what you didn't buy, can you just give us an idea of why you didn't buy the assets that you mentioned? You said that they fell short, but could you be more specific as to what that implies?.

Sure, Manny. And I want to be careful. But I think, in one case, we did not see a second renewal for the build. We not only are look towards the next renewal of the property, but, as you know, our buildings are basically 12 years old and our competitors are sort of north of 24 to 25 years old.

We’d like to see two lease rolls at least going into the future before we’re going to feel confident to buy that property..

Got it.

And then maybe sticking to a similar sort of question, have you seen any changes in seller trends, especially since election? Are people trying to get out of properties faster? Are other people trying to hold on to them longer? Do they see better renewal prospects? How are sellers feeling in this market right now?.

It’s a great question. As you know, we really do stay in touch with them and that’s a big part of my job day in, day out. And I would say that I think sellers – we’re seeing – one of the reasons we sort of gave prior guidance for the size of our pipeline that we’re going to act on this year is because we’re seeing more opportunities from sellers.

I don't think that necessarily has to do as much with the recent election as with the fact that I think that they feel that they can realize some terrific value here. And, interestingly, they are also seeing, with the uptick in interest rates, a lot of prepayment on some of their long-term debt as more attractive at this point to pay down.

So, we’re actually seeing an expansion in our pipeline..

Great. That was it for me. Thank you..

Thank you. The next question is from Michael Carroll of RBC Capital Markets. Please go ahead..

Hi. This is Brian Hawthorne filling in for Michael. My first question is about the expirations. It looks like your expirations are ticking up over the next year or two.

Can you talk – are you in discussions with them for renewals and can you kind of talk about the cash lease spreads we could expect?.

I’ll start off with saying that we are obviously actively involved, while not a large portion of our portfolio. We feel extremely confident in the renewal of every single one of those leases in 2017 and 2018 and we’re actively working on a number of them right now.

Obviously, depending on the particular building and the mission criticality, the build-to-suit features that will – and the length of the initial lease term, that will have an effect on the lease renewal spread. But I think we’re feeling very confident across the board..

Sure, okay.

And just with the new administration, is that going to affect how you guys think about deploying capital at all?.

I think that when we started this firm in the private world back in 2009, we were very focused on buying buildings that whether there was a Republican or a Democrat in office that these were mission-critical facilities that I think we’d all agree, both parties, that they have a long-term mission within the federal government.

So, I guess, I am very glad that we did take that tack at that point and over 62% of our properties right now are leased to what we call gun toting agencies and the federal courts.

I think we’re going to see an expansion in probably some of the projects in our Immigrations and Customs Enforcement, Customs and Border Patrol, US federal courts on the border. I could go on and on. But I think from our standpoint, we’re beginning to see a nice tailwind in some of those opportunities..

Sure. Okay. That's it for me. Thank you..

Thank you. The next question is from Patrice Chen of Jefferies. Please go ahead..

Hi, guys. Just a couple from me. I noticed that your 2017 guidance includes no dispositions.

Would you say there are any properties that are in the current portfolio that you might identify as likely to sell?.

Patrice, as you know, our long-term goals are, obviously, to build a portfolio that is 100% focused on the US federal government. So, the triple net price of these properties, while there’s nothing to disclose, are always potential opportunities for ways to recycle capital..

Got it. Okay.

Have you seen any change in demand for GSA-leased properties which might be diving cap rates up or down?.

I think that certainly since we’ve been in the market and defined an institutionalized class, more people are aware of the properties today than they were certainly in 2009 2010. But having said that, in the market that we’re in, the middle market, we're not seeing a great increase in competition either from public or private players at this time..

Okay, great. Thanks. That's helpful. And that's it for me. Thanks..

Thank you. The next questions is from Manny Korchman of Citi. Please go ahead..

Just a follow-up for me.

In terms of the guidance, does the acquisition number also include developments or is that a straight acquisition number?.

That’s a straight acquisition number, Manny..

Are you not assuming any developments or are you just not talking about them at the time?.

No. So, we’ve announced FBI Alameda and that project, as we said, is expected to deliver in 2018. So, construction will be underway throughout the back half of this year and the beginning of next year. And that is taken into consideration..

I would say, Manny, today more than ever, we feel like the development opportunity is a robust opportunity for growth for our business. As these agencies continue to readjust mission and as we’ve spoken over the last eight to nine years, we have not seen a significant development of projects coming out of the US government.

You can see renewed focus on the Veterans Administration and some of these other gun-toting agencies, there will be needs for additional housing to support mission and we think we are always positioning ourselves to be the partner of choice to the United States government, in helping satisfy those missions..

In terms of the VA discussion, both earlier and you just brought it up again, is there something that has changed from your perspective that now you are more open to doing those deals or is it strictly a matter of the government now being more focused and providing more opportunity in that space?.

Well, I think, one thing, Manny, that’s interesting is the GAO report in 2015, the federal new construct VA projects, so these are the ones that they did themselves, we’re seeing cost overruns from 66% to 427% and delays of 18 to 86 months.

And I think what you're seeing there is a realization, like they had in the GSA sector, that the private sector is the most cost-efficient, most effective and preferred way to house these particular missions.

The VA, which is now I think under terrific leadership, has bipartisan support, has really figured out – they understand what they need and how they’re going to serve the veterans going forward. And it's really the focus on the outpatient side of things. So, I think the answer is yes.

It is a department that has, I think, gotten its act together, it understands what its mission is. And I would say that the same message would've been in the Obama administration as the Trump. In fact, they have the same person running the veterans today. So, I think there is more opportunity going forward..

Just to be clear, Manny, moving VA into our bull's eye is what we’re communicating and we stand ready to be a good partner to the US government as they continue to improve the service to America’s veterans..

Thanks, everyone..

[Operator Instructions]. Okay, we have no further questions in queue at this time. I would like to turn the conference back over to management for closing remarks..

Great. Thank you, everyone, for joining Easterly Government Properties today in our 2016 earnings call. We look forward to 2017 and delivering strong results for the coming year and years to come..

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation..