Greetings, and welcome to Easterly Government Properties’ Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Lindsay Winterhalter, Vice President of Investor Relations. Thank you. 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 the forward-looking statements contained in the Private Securities Litigation Act Reform of 1995, and is making the statement for the purpose of complying with those Safe Harbor provisions.

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 plans, 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 filed with SEC on March 2, 2017 and in its 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 operation 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 web site at ir.easterlyreit.com.

I would now like to turn the conference call over to Darrell Crate, Chairman of the Easterly Government Properties..

Thank you, Lindsay. Good morning everyone. And thanks for joining the second quarter conference call. Today, in addition to Lindsay, I’m joined by Bill Trimble, our CEO; and Meghan Baivier, our CFO and COO. We’re pleased with the company’s performance for the first half of 2017.

We continue to deliver strong and consistent financial results, as well as to make meaningful progress in advancing our strategic goals for the year.

The team continues to apply and enhance its definable edge in identifying, underwriting, and servicing a portfolio of buildings leased to and backed by the full facing credit of the United States Government.

Bill and the team continued to charter path for sustained earnings growth through the successful re-leasing acquiring and developing of mission-critical facilities. Additionally, we have made great progress in advancing our strategic objectives. Easterly has positioned its balance sheet to provide strong support for its growth.

Megan and the team have diversified the sources of capital by cultivating investors in the private placement markets in the sector debt market. This has resulted in the company delivering FFO growth, while also meaningfully extending the duration of its liabilities to just under nine years.

We don't pretend to know the direction of interest rates, but with our liabilities having a longer duration than our leases we are comfortable that any movements and rates will not have a material impact on our enterprise value. We’ve also made strong progress and scaling in the company.

With the purchase of Loma Linda, we grew enterprise value, increased our diversification, and enhanced our posture with the VA, an agency targeted for future development projects. Lastly, Mike and his team have made meaningful strides in building the pipeline of development opportunities that will serve us well for the next several years.

Development opportunities are not only accretive as we add real value to both the government and our shareholders, but they also give us longer valuable leases, many being 20 years in duration, which provides earnings stability and additional opportunities to be opportunistic in managing our liabilities.

We very much look forward to a strong finish to the year and growth in 2018. With that, I’ll turn the call over to bill to provide color on the initiatives in Easterly that drives shareholder return..

Thanks Darrell and good morning. I would like to begin by highlighting the company's achievements in the second quarter of 2017.

We were very pleased to close with 327,000 square-foot Loma Linda California Department of Veterans Affairs and Ambulatory Care Center, which when combined with other properties represents a portfolio of 3.5 million square feet comprised of 45 buildings of which over 97% of its annualized lease income is derived from the full facing credit of the United States Federal Government.

VA Loma Linda is truly a one-of-a-kind premiere asset in the VA Health System located just two miles from the federally owned VA hospital.

This brand new ambulatory care facility, which is the second-largest of its kind in the country sits on a 37 acre campus surrounded by over 2,000 parking spaces and addresses the outpatient needs of the surrounding 72,000 veterans in the region.

The facility employees approximately 500 VA health professionals and provides 50% of VA Loma Linda's outpatient visits for the region. Services provided within the Loma Linda Ambulatory Care Centre include, primary care, women's health, dental imaging, employee health, and blood draw services.

The facility carries an initial 20-year non-cancellable lease with the VA, which will not expire until May 2036. As we mentioned on the first quarter call, Easterly is also under contract to acquire a second VA outpatient facility that is located just outside of South Bend, Indiana and is just finishing up construction.

The VA South Bend outpatient clinic is very similar to VA Loma Linda, but on a smaller scale of 86,000 square feet. This facility is expected to employ 190 VA health professionals and provide outpatient services to the many veterans surrounding the region.

The VA estimate for the facility will see 12,000 patients in its first year of operation, 14,000 patients in its second year of operation, and 16,000 patients in its third year of operation.

The services that are expected to be provided at VA South Bend include, primary care, mental health care, audiology, optometry, radiology, cardiology, pulmonology, podiatry, urology, and gastrointestinal endoscopic.

When construction is complete, which we expect will occur in the third quarter of this year, this outpatient facility will be leased to VA for initial 15 year non-cancelable term.

Once the VA South Bend acquisition is complete, Easterly will own two new state-of-the-art Class A VA outpatient facilities totaling a combined 414,000 square feet of lease space, all backed by the full faith and credit of the US government. These two mission-critical facilities fall within a very important Department of the US government.

In fact it is the second-largest Department in the federal government in terms of total appropriation and staffing because these leases are done under the delegation of GSA leasing authority while rent payments are made by the VA, GSA and its federal buildings funds serve as the guarantor of the VA's monetary obligations, and as a reminder the federal buildings fund is not subject to direct appropriations.

For these reasons you can expect to see the company continues to target these select newly constructed VA outpatient facilities located throughout the country. Turning to development.

In the second quarter, our company announced a lease award for the development of a 52,870 square foot Food and Drug Administration laboratory in Lenexa, Kansas, located just outside of Kansas City.

This exciting project which will be led by Mike Ibe and his team will be a relocation of the current Kansas City District Laboratory, one of 13 critical laboratories for the FDA located strategically throughout the country.

This brand-new state-of-the-art facility will be approximately 40% larger than the lab it is replacing, and will feature highly specialized and specific design features and functionalities for the needs of the FDA for decades to come.

The laboratory will be fully equipped to perform the chemical analysis of food and drugs regulated by the agency, which heavily contributes to the FDAs overarching mission of protecting and promoting the health and safety of the American public.

Joined by our currently under construction 66,000 square foot FDA laboratory in Alameda, California the company is deepening its relationship with the US government now marking two active development projects with the GSA for the beneficial use of the Food and Drug Administration.

Our acquisition and development teams are constantly sourcing new high quality opportunities that mirror our average portfolio buildings size, as well as larger facilities that we would feel will be value announcing addition to the portfolio and drive FFO growth.

We have a strong pipeline of accretive bulls-eye opportunities in the $20 million to $40 million range and have identified properties of larger scale as well. As was demonstrated with the VA Loma Linda acquisition, the large-scale buildings, while still accretive provide important scale of the company.

Facilities of this type also provide greater visibility through agencies that advance our relationship and future standing for development projects. Using this enhanced visibility, our team also remains active in responding to mission-critical bulls-eye built-to-suit opportunities for the US Government.

These non-speculative Class A facilities carry attractive lease terms with a stable and dependable cash flow backed by the full facing credit of the US Government. Turning to asset management, we are pleased to announce our team has renewed our lease at the DEA secure evidence storage facility located in San Diego California.

Folks in this call have likely heard me talk about our acquisition and development market, which we’ve referred to as the bulls-eye, but please allow me to spend a little time talking about the importance of the bulls-eye from re-leasing perspective.

To reiterate, our target market includes buildings leased to a single tenant of the US Federal Government. They are often the result of a design build award and are usually over 40,000 square feet in size.

If the building of this nature is occupied by the right tenant fulfilling the right mission and meets the traditional real estate underwriting requirements then we will evaluate the potential acquisition. From a re-leasing perspective, all of the elements just mentioned are of critical importance.

Now, turning to the details of this quarter's renewal, we are pleased to report that this facility has been renewed for another 15-year ten-year firm term. Our asset management team negotiated lease renewal with the GSA and achieved an estimated 25% increase.

This renewal spread matches our previously stated belief that mission-critical build-to-suit facilities like this should receive lease renewals in the high teens to low-20s. Finally, our asset management team is currently working on a number of value added projects to our existing portfolio.

Easterly is actively engaged in 14 tenant funding projects valued at roughly $3 million, with an additional $2 million in contemplated projects, currently in discussion with the various tenant agencies.

An example of a current government funded improvement project can be found in our United States Forest Service headquarters in Albuquerque, New Mexico. Here the forest service is looking to align and consolidate functions into our two buildings, co-located alongside one another.

The team is working with a regional architect to facilitate the design and reconfiguration of this facility. The tenant anticipates another 50 to 100 new government employees will be relocated to our buildings, which will be achieved through shrinking workstation sizes and rearranging some of the locations of the key functions for greater efficiency.

While still on the design stage, this project is estimated to cost roughly $450,000 fully funded by the government and will take place over the course of the next six to eight months. Thank you all for your time this morning, I will now turn the call over to Meghan for a discussion of the quarterly results and earnings guidance..

Thank you, Bill. Today, I will touch upon our current portfolio, discuss our second quarter results, provide an update on our balance sheet, review our earnings guidance, and cover this quarter’s capital markets activity.

Additional details regarding our second quarter results can be found in the company's second quarter earnings release and supplemental information package. As of June 30, we owned 45 operating properties comprising approximately $3.5 million square feet of commercial real estate.

The weighted average remaining lease term for our portfolio was 6.8 years, the average age of our portfolio was 12.1 years, and our portfolio occupancy remained at 100%. In addition, over 97% of our annualized lease income is backed by the full facing credit of the United States Government.

For the second quarter, FFO per share on a fully diluted basis was $0.31. FFO was adjusted per share on a fully diluted basis was $0.29, and our cash available for distribution was $11.4 million. GAAP measures and reconciliation to GAAP measures have been provided in our supplemental information package.

For the 12 months ending December 31, 2017 the company is reiterating its guidance for FFO $1.25 to $1.29 per share on a fully diluted basis.

This guidance assumes acquisitions of $350 million in 2017, including the OSHA Sandy acquisition completed in the first quarter of 2017, the VA Loma Linda acquisition completed in the second quarter of 2017, as well as the announced VA South Bend acquisition with an anticipated closing date in the third quarter of 2017 and does not contemplate any dispositions.

This guidance is forward-looking and reflects management's view of current and future market conditions. The company's actual results may differ materially from this guidance.

Turning to the balance sheet, at quarter-end the company had total indebtedness of $549.4 million, which was comprised of $68 million outstanding on our unsecured revolving line of credit, $100 million outstanding on our unsecured term loan facility, $175 million of senior unsecured notes, and $206.4 million of mortgage debt.

Availability on our line of credit stood at $332 million. As of June 30 and pro forma for the full physical settlement of our outstanding forward equity sales agreements and a full quarter of operations from VA Loma Linda Easterly's net debt to total enterprise value was 30.2%, and its net debt to annualized quarterly EBITDA ratio was 5.6 times.

On May 31, 2017, the company announced the completion of $175 million private placement of senior unsecured notes. The fixed rate notes were issued in three tranches, $95 million with an interest rate of 4.45% maturing in May 2027.

$50 million with an interest rate of 4.15%, maturing in May 2029, and $30 million with an interest rate of 4.3%, maturing in may 2032. The weighted average maturity of the notes at June 30 was 11.3 years and the weighted average interest rate is 4.12%.

Further on June 29, the company announced the closing of $127.5 million 3.59% fixed interest only mortgage financing on the Department of Veterans Affairs Ambulatory Care facility in Loma Linda, California. This 10-year non-amortizing loan matures in June 2027.

These two capital market activities meaningfully extended the average maturity of the company's liabilities and shifted its ratio of fixed versus floating rate debt. At June 30 the weighted average maturity of the company's debt was 8.7 years and its debt was 85% fixed and 15% floating.

The company believes the strength of the execution on both its private placement senior notes and the VA Loma Linda mortgage speaks to the superiority of the company's portfolio and the high credit quality of its underlying tenant, the US government.

Finally, as previously announced last week, our board of directors a dividend related to our second quarter of operations of $0.25 per share. This dividend will be paid on September 28, 2017 to shareholders of record on September 30, 2017. I will now turn the call back to the operator for questions..

Thank you. [Operator Instructions] First question comes from the line of Manny Korchman with Citi. Please proceed with your question..

Hi good morning everyone. It is Jill Sawyer here with Manny.

I’m just wondering your read on the FBI scrapping plans to build their headquarters, and how you’re approaching discussions in viewing the likelihood of the bureau renewing their upcoming expirations in your portfolio?.

Sure, good morning. First of all it is Bill Trimble. It was not surprising the headquarters got changed. I think the temperature was getting a little hot in Washington with the various groups that were even perhaps related to the President on the construction of the project.

This is a project that will go through, eventually, and that’s the headquarters as the existing Hoover building is basically a 1960s, as you facility downtown and it’s a very expensive several billion-dollar project going forward.

We view this actually as a positive for our portfolio as it only means that new state-of-the-art FBI facilities are going to be a housing the current FBI folks for literally generations to come. The first one that’s up for us is the FBI facility in Albany next year.

We have a terrific relationship with SEC and all the folks in that facility and are confident in its renewal. And so we believe that as they continue to plan to build the new headquarters facility, it’s only going to remove resources from the FBI, if they ever wanted to move some of their field offices.

So, I think they stay in place, not a surprise to us..

Okay, great. Thanks for that.

And just one more from me, also your preliminary read on the GSA's newly appointed Public Building Service Commissioner, Dan Mathews?.

Yes basically Dan has been a longtime hill staffer with 20-year career in the house T&I committee, which basically oversees everything we do. I think with his terrific background he is going to be quite a depth at working with Congress and I think he's going to get through GSA perspectives projects quickly and efficiently, including leases.

His focuses are government utilization rates, something he’s been I think very much the centre of, which is basically square feet per person, and the disposal of underutilized federally owned properties, which they have lots of and an abundance of, and a lot of spaces throughout the United States.

In other words, leasing is the most efficient form going forward, and I think he's a real believer than that.

I think basically his presence with the public building service, which of course is the division of the GSA that we’re concerned with, pretty much maintains what we’d say perennial drumbeat from its prior Republican and Democratic administrations, basically on continuing to move towards a more efficient and economic operating stands going forward, which would very much comport with what DEA is looking to do..

Great, thanks Bill..

Sure..

Our next question comes from the line of Michael Lewis with SunTrust. Please proceed with your question..

Good morning. Thank you.

It looks like you’ve got about, so you have three DEA leases set to expire this year, it sounds like maybe you already addressed the one in San Diego, and then four expirations next year, including the IRS and Fresno, which is fairly large, is there anybody in this group this year or next year that you think may not renew and then also is there anybody there that stands out from a mark-to-market perspective outside of that, that normal range that you gave earlier?.

I'm going to make it simple, no..

No, on both?.

Yes. We are very much bulls-eye properties and of course we’re already in discussions on all of these properties and we’re very sanguine about their renewal..

Okay and then on the acquisition guidance, correct me if I am wrong here, it looks like if you add up this three that are basically locked in after you close the third quarter one, it doesn't quite add up to the 350s, so are you assuming another acquisition in there this year, and then how highly variable do you think that guidance is, where you put a range out there, but would you say the odds are being over under that range or highly variable or you have pretty good visibility at this point?.

Michael, I’ll let Meghan go through the numbers, but I can tell you we have a very robust pipeline and as you've seen since, basically even in our private equity days we like to deliver consistent growth through accretive acquisitions, and also opportunistic development obviously no risk as we don’t do it unless we have the property already signed for, but I will say that we are very confident that there will be terrific announcements of terrific properties continuing from years to come.

We don't go to sleep just because it’s August and we are looking forward to some great announcements in the future..

Michael you are correct on your question that there is obviously some additional acquisitions assumed in the remainder of the 350 for this year in addition to the three that we’ve either completed or announced..

Okay.

I have just one more, no dispositions and guidance obviously, you don't need any, obviously with the funding you have, but I'm curious when you think it might be the right time to sell some of these non-core properties that cost of capital may or may not be attractive, but for example you have this cosmetics company I think expiring in Florida in the next few months, do you sell, We Are Sharing Hope and Pratt & Whitney now while they still have 4 years to 7 years left on the lease or do you feel comfortable kind of being patient there?.

Well, I think it’s a great question, obviously it’s something we have thought of since we took on our first part of a portfolio non-GSA bulls-eye properties, so of course we are looking at ways to drive our portfolio to 100% full facing credit, I think we are 97.5, I’m sorry about the 2.5, but I think one of my jobs is to make sure we can do that in an efficient way, but I think that is a good idea and I think if it’s something we will be looking forward to executing on certainly in the months and years to come to drive it towards 100%..

Thanks guys..

Our next question comes from the line of Paul Puryear with Raymond James. Please proceed with your question..

Hi, thank you good morning.

A couple of questions, Bill I would like to have your comments on what’s taking place in Washington generally and is all the turmoil affecting any of the other agencies that you are targeting?.

I would say that there is so much turmoil that there isn’t turmoil. I mean if that makes sense. I am not an expert, we see 24/7 news talking about some issues I think in Washington right now. I think from a standpoint of the GSA however we’re seeing I think some very steady hands on the helm.

Certainly the regional GSA headquarters, which we deal with mostly on the non-perspective leases are continuing to sail on and we aren’t seeing any issues, obviously we’ve been, we want to - new development awards and they continue to move on track.

We are not obviously looking to expand any exposure to non-gun toting agencies, I think it is fair or unless that agency in the specific hierarchy of mission of that building has such an overriding reason that we want to own it that we will.

So, we’re really keeping to our netting, but from our standpoint, things seem to be getting done and being executed and so we don't see any problems at this point..

Are you seeing any one else get into this market against you, any other sources of capital coming into buy these assets?.

Not particularly. We don't see anybody from the public side at all. From a standpoint of a larger elephant trophy hiding size properties, obviously you are dealing with an international clientele as well.

I mean it is no mystery what these properties are worth to international buyers sovereign wealth funds and insurance companies, some of the larger ones the VA Loma Linda's, but from a standpoint of a middle market where we spend most of our time and frankly most of our pipeline resides there are several private equity players that depend on whether they've raised capital whether they’re doing their job from an acquisition standpoint we will occasionally see.

On the lower end of the side, so I'm thinking like $10 million to $15 million you’re going to see more syndicators and we don't tend to really metal in that area, particularly.

So I really would say, really no change and of course the overriding thing is basically 85% of what we’ve purchased has been purchased from the actual developer owner of the property. So we are doing it of the market..

Terrific, thank you..

Thank you..

Our next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question..

Great, thanks. On the FPA labs you obviously had the one in Lenexa, Kansas going up right now.

I’m curious, I think they have 12 or 13 or 14 labs in different districts across the country, can you just talk about kind of the greater opportunities there to help the FDA develop new labs and I don't know if there’s certain markets where that’s more of a new near-term opportunity than others?.

Sure, I will say that, the first one of the construction is in the Bay Area, which is the Alameda laboratory. The second one that we were just awarded is Lenexa. And they are incredibly important facilities for the FDA.

I would say that ahead of development Mike Ibe who has a tremendous decades long career in building not only secure build-to-suite facilities, but particular expertise in the laboratory space that is not lost on the government and so I think we’re very attractive partner of choice when it comes to these high end laboratories, and so you can be rest assured that we will be out there as RFPs are issued as some of those other laboratories need to be refreshed or changed or hopefully new, you will see Mike Ibe and his incredible team obviously bidding on those projects, and so I do think that is an opportunity going forward, yes..

Okay.

And then obviously the current administration is really big on controlling immigration and increasing board of control agent, border patrol agents, talk about the opportunity there, I know you have some in your portfolio, but we have 5,000, 10,000 more border patrol agents, does that create any opportunities for Easterly or not really because they are kind of [indiscernible]?.

Sure, I mean, I guess it is not lost on - the business is up at CBP and so we tend to concentrate more on the facilities off of the border, so that we’re not seeing the wild swings as you could have one administration and a lot of people on the next administration cutbacks or sort of more in the headquarters range, but having said that, we do have an important CBP facility on the northern border on the only 24 hour crossing in Montana and connects basically Los Angeles, Salt Lake City with Edmonton and Calgary.

So that facility is obviously working hard. We want to make sure that if we were ever to do a new one or to buy an existing property that there will be no problems with not being able to expand that property.

So, I would say it is terrific from a standpoint as these gun toting agencies are being fully funded as we’ve mentioned before 63% of our properties fall within that zone.

So, I think you are going to see more asset management projects, projects where the federal government is enhancing our facilities at their cost going forward, but opportunity is always abound and our development team will look at something if we think there is going to be like a 20 or 30 year mission for that building..

Okay great, that's all from me..

[Operator Instructions] Our next question comes from the line of Michael Carroll with RBC. Please proceed with your question..

Yes, thanks.

Bill, sorry if I missed this, but can you give us some additional color on the renovation project in Albuquerque that you are kind of mentioning, is this going to just be expanding the building and do you have an idea of what the expected budget of that project will be?.

Yes, as mentioned, I think that facility is, just to refresh everybody on these two buildings, they are gorgeous, they were built-to-suite two facilities located in one of the most handsome office parks in Albuquerque, New Mexico and it serves as the national operation centre for the forest service, which basically handles 198 million acres of land, so really important.

Surrounding those facilities were a number of smaller leased assets, including the facility that handles all the firefighting budgeting and so forth that control for the company.

What we’ve seen with our facility is there is going to be no change Michael to the actual footprint of either one of the buildings, but the space utilization is going to go up, and as I mentioned it’s about a $450,000 project going forward, but we’re seeing these sorts of things, especially in our newer buildings and again they do have that room for expansion, which we think are important.

As we go forward that’s why we have, I think one of - certainly the youngest portfolio out there, which we think is really important. So, these buildings will be able to serve the mission and expanding mission of these agencies for decades to come..

And then is the tenant making that investment into those properties?.

Yes..

Okay, can you give us an update on the VA type properties that you’re tracking out there right now, so anything in the marketplace that is really interesting that you would expand an exposure or you think you are done for a while after the Loma Linda and the South Bend acquisitions?.

Well, I think we’ve said $3 billion or $4 billion of opportunities and 50 properties, so we have got 48 left Michael, we will get busy on it.

So, not only in development, but also in acquisition, basically we’ve seen a real sort of watershed event as this new $62 billion tenure project with a VA to refresh enhance and develop new facilities through our 22 million servicemen and women can be properly taken care of, and so this whole new initiative is basically bearing a lot of fruit.

We’re looking at a lot of opportunities there as well and again that goes back to why we’re so confident in our pipeline going forward..

Okay great, thank you..

Thank you..

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments..

Great, thank you very much everyone for joining the Easterly Government Properties on our second quarter 2017 earnings call. We look forward to discussing the second half of 2017 and delivering strong results for the coming year and years to come..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..