Greetings and welcome to Easterly Government Properties Fourth Quarter 2017 Earnings 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 your host, Ms.

Lindsay Winterhalter, Vice President, Investor Relations for Easterly Government Properties. 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 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, 2017, which will be filed with SEC on March 1, 2018, 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’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, Chairman of Easterly Government Properties..

Thank you, Lindsay. Good morning, everyone, and thank you for joining us for the fourth quarter conference call. Today, in addition to Lindsay, I’m joined by Bill Trimble, our CEO; and Meghan Baivier, our CFO and COO.

Easterly continues to strengthen its edge in the sourcing, underwriting and servicing of mission-critical real estate leased to the United States government. We continue to execute on our proven strategy of building a strong portfolio of leased assets that are backed by the full faith and credit of the strongest credit in the world.

Our expanded access to equity in a various debt capital markets supports our proven acquisition strategy and allows us for us to be a leader in the development of premium assets that support the mission of the respective agency. Our goal is to accretively scale our business as we have done in the past.

We believe consistently executing in this way will deliver a very attractive risk-adjusted return opportunity for our shareholders. For example, in 2017, we completed four accretive acquisitions including two larger flagship assets that added meaningful scale to the portfolio.

We’ve grown our development business by adding two new projects, both of which will provide the Company with brand new 20-year lease terms upon completion. We issued equity accretively in the Company’s second successful public offerings since IPO as well as through a newly in place ATM program.

Additionally, we cultivated strong and committed partners in the unsecured private placement and secure mortgage markets, while meaningfully extending the duration of our liabilities and locking in our interest costs. We grew our base, executed our stated strategy and positioned the company for growth.

In all, 2017 has been another strong year for the Company. It gives me great pride to serve as the Chairman. And I would like to thank our team for their hard work and our shareholders for their valuable partnership through the years. We look forward to continuing to generate value in 2018.

And with that, I’ll turn the call over to Bill Trimble to provide colon on the initiatives in Easterly that drive shareholder return..

Thanks, Darrell, and good morning. Thank you for joining us for our fourth quarter earnings call. To echo what Darrell’s previous comments, 2017 was certainly a year of growth for Easterly. Notably, such growth came in the form of four accretive acquisitions.

To start, I would like to discuss the property we’ve acquired over the course of the fourth quarter. I’m very pleased to report the acquisition of the Department of Veterans Affairs Outpatient facility in South Bend, Indiana.

This new state-of-the-art of facility is located just outside of South Bend, Indiana, and is now seeing local veterans on a daily basis. While under contractor for some time during construction, we welcome the highly important mission-critical facility into our growing portfolio in November of 2017.

As a reminder, the VA South Bend Outpatient Clinic is very similar to VA Loma Linda, but on a smaller scale of approximately 86,000 square feet. The outpatient facility is leased to the VA to the initial 15-year term, non-cancellable.

With this acquisition, Easterly now owns two new highly-advanced, Class A, VA outpatient facilities totaling a combine 414,000 square feet of leased space, all backed by the full faith of the U.S. government. Turning to development, we are pleased to announce our third active development project located in Tracy, California.

Easterly has acquired the rights to a lease award for the redevelopment of an approximately 210,000 square foot Federal Emergency Management Agency or FEMA distribution center, won eight regional distribution centers strategically located throughout the country.

The future Tracy location will be a single storey mission-critical facility that sits on just over 19 acres of land and includes land of office space, warehouse and refrigerated space for full time cold storage. This regional center will serve extremely important function of providing supplies and support to U.S. citizens faced with disaster.

This project is currently under construction and Easterly’s development team is working hard towards delivering a final product ready for government occupancy in the fourth quarter of this year. Upon completion, a 20-year non-cancellable lease will commence with the GSA for the beneficial use of FEMA.

With FEMA, Tracy, Easterly is now actively managing the development of approximately 333,000 total square feet. As an update, all three development projects are making meaningful progress. FDA Alameda, a state-of-the-art Class A laboratory and office space is currently under construction.

This facility will house three independent laboratories, two chemistry labs and one microbiology lab. The facility will also include district offices, regional management and district administration and management space. Open investigations will also be housed within the confines of FDA Alameda.

At this time, anticipated lease commencement falls in mid-2019. FDA Lenexa is currently in the design process as we work with GSA and FDA to finalize drawings. We anticipate this facility will include different departments to include the testing of metals, pesticides, various poisons, dietary supplements and micro-toxins.

Like FDA Alameda, FDA Lenexa will be a blend of both laboratory and office space.

Given the sensitivity of the materials being tested in our facilities, there’s a critical importance that these laboratories are built to exact specifications and standards in order to maintain the highest safety measures to the FDA employees that will eventually work in our facilities.

At this time, shelf construction has an anticipated start date of mid-2018 with planned lease commencement in the second half of 2019. I am extremely proud of Mike Ibe and his team for making meaningful strides in building a pipeline of development opportunities that we expect will serve as well for the next several years.

Development opportunities are not only accretive, but they also give us a larger, valuable leases -- excuse me, longer, many being 20 years in duration, which can provide earnings stability and additional opportunities to effectively manage our liabilities. Turning to acquisitions.

Our team is constantly sourcing new, high-quality opportunities that mirror our average portfolio size and help drive FFO growth. In fact, with the recent uptick in interest rates, we’re actually seeing an expansion in future acquisition opportunities, which we expected would occur.

We also expect to see portfolios coming to the market in the near-to-mid future. As a reminder, the type of assets we seek also referred to as our bull's-eye opportunities are usually over 40,000 square feet in size, are leased to a single tenant of the U.S.

federal government and are ultimate result of a design build award where the building was originally constructed for that particular tenant agency. We feel the attributes just described are critical from a re-leasing perspective and help command larger spreads upon lease renewal.

Finally, Easterly is in its long-stated effort to drive towards a 100% annual lease income backed by the full faith and credit of the U.S. government, decided to dispose of a privately leased cosmetics warehouse, known as Parbel of Florida, last quarter.

As you may recall, this is one of three warehouse facilities in the Easterly portfolio leased to a private company and not the United States federal government. We view disposition of this noncore asset as a future source of funds as we continue to find compelling opportunities in our primary field of owning federally leased space.

With the disposition of this noncore asset, Easterly Government Priorities now derives 99% rather than 97% of its annualized lease income from the United States government. Stepping back, I really want to thank our team and board members of Easterly for their effort and dedication to our mission on behalf of shareholders.

Since IPO, we have nearly doubled the size of our portfolio with acquisitions and development projects that are squarely in our target universe. We have maintained the average of the portfolio in age and we’ve matured our capital structure to be well-positioned for changes in the interest rates.

And we have firmly established our reputation as a partner choice to the United States government. As the Company’s CEO, I’m quite proud of all we’ve accomplished in the past year. We thank you for your continued partnership as we charter path for growth in 2018.

With that, 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 review our current portfolio, discuss our fourth quarter and full year results, provide an update on our balance sheet, and share 2018 guidance. Additional details regarding our fourth quarter results can be found in the Company’s fourth quarter earnings release and supplemental information package.

As of December 31st, we owned 46 operating properties, comprising approximately 3.7 million square feet of commercial real estate with an additional 333,000 feet under development.

The weighted average remaining lease term for a portfolio was for seven years, the average age of our portfolio was 12.1 years and our portfolio occupancy remained at a 100%.

In addition, as Bill mentioned earlier on the call, with the disposition of the Parbel of Florida, 99% of our annualized leas income is now backed by the full faith and credit of the United States government. For the fourth quarter, net income per share on a fully diluted basis was $0.03.

FFO per share on a fully diluted basis was $0.32, FFO, as adjusted per share on a fully diluted basis, was $0.27. And our cash available for distribution was $12.1 million. For the full-year, net income per share on a fully diluted basis was $0.11. FFO per share on a fully diluted basis was $1.26.

FFO, as adjusted per share on a fully diluted basis, was a $1.14. And our cash available for distribution was $45.8 million. GAAP measures and reconciliations of these non-GAAP measures to those GAAP measures have been provided in our supplemental information package. Turning to the balance sheet.

At year-end, the Company had total indebtedness of $579.7 million, which was comprised of $99.8 million outstanding on our unsecured revolving line of credit, $100 million outstanding on our unsecured term loan facility, a $175 million of senior unsecured notes, and $204.9 million of secured mortgage debt.

Availability on our line of credit stood at $300.2 million. As of December 31, 2017, Easterly’s net debt to total enterprise value was 33.4% and its net debt to annualized quarterly EBITDA ratio was 6.4 times, pro forma for our full quarter of operations from VA South Bend.

Our leverage has remained conservative as our total enterprise has grown by 41% in the last year. For the 12 months ending December 31, 2018, the Company is reiterating its guidance of FFO per share on a fully diluted basis in a range of $1.31 to $1.35.

This guidance assumes $350 million of acquisitions and $75 million to a $100 million of development-related investments during 2018. The Company’s 2018 FFO guidance is forward-looking and reflects management’s view of current and future market conditions.

As previously announced, last week, our Board of Directors declared a dividend related to our fourth quarter of operations of $0.26 per share. This dividend will be paid on March 28, 2018, to shareholders of record on March 13, 2018.

Finally, before I turn the call over to the operator for questions, I would like to step back and recap our 2017 corporate finance milestones. In 2017, we grew FFO by 4% while extending the duration of our liabilities and maintaining a well-capitalized balance sheet.

Our average debt maturity has been extended by nearly 3.5 years or 77% to 7.8 years, beyond our average remaining lease term of seven years. Additionally, one year ago our debt structure was 78% floating and today it is 80% fixed rate.

Using the strength of our growing portfolio, we were active in the capital markets to term out our debt, both through the unsecured private placement market and with the secured mortgage on VA Loma Linda.

We raised equity accretively in connection with the announcement of VA Loma Linda and VA South Bend, thus increasing the liquidity of our stock and we commenced an active ATM offering program. It's been a great year for the Company. And we would like to thank our capital providers for their ongoing partnership.

I will now turn the call back to Melissa for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Manny Korchman with Citigroup. Please proceed with your question..

Earlier in the call, you talked about more I guess volume in the marketplace which you had -- which was not unexpected, I think, was your comment.

Have you also seen any changes in pricing, given where rates have been?.

I think that -- I think, Manny -- it's Bill, good morning by the way. I think that pricing is probably going to be shifting at some point as it is at some point going to reflect the changes in interest rates. But right now, we're seeing an increase, certainly a large increase in opportunities and I imagine that will follow next..

We’re capitalizing a way to be able to continue to pursue those opportunities accretively..

Meghan, maybe we'll keep going with you then.

When you look at your capital plan for the year, how much equity or common equity in what form, whether that’s ATM or secondary, do you see in there?.

Sure. So, what I would say is to frame that we intend to continue to keep leverage in that 6 to 7 times range, the higher end being support of our future development opportunities -- our in-place development opportunities. And so, as we think about the capital plan, the goal is to maintain that ratio.

We have all our tools in our toolkit now, and we'd be prepared to use any and all of them..

Great. And last one for me, it looks like your acquisition guidance went up by $100 million at the top-end, but your actual FFO guidance didn't change.

Why is that?.

Yes. So, as Bill said, we're seeing a lot of opportunities, particularly in the current environment, coming loose. We're seeing single assets, small and large portfolio, and primary driver of that is timing, Manny..

Thank you. Our next question comes from the line of Brian Hawthorne with RBC Capital Markets. Please proceed with your question..

Hi.

For the $75 million to $100 million of developments, is that everything that's just commenced? Or are you planning to add more developments throughout the year?.

Hey, good morning. That is in support of the three developments that we’ve announced, FDA Alameda, FDA Lenexa and FEMA, Tracy..

But, I would add to that. We're always looking at development opportunities that are right in our target group or what we call the bull’s-eye.

So, we’ve never forecasted development activity in earnings, just not prudent because these projects can take longer to work through bid and get formulated, but we certainly have a pipeline of opportunities that we’re bidding on and we're hopeful, of course, that those are awarded to us sooner rather than later..

Are those more of those the build-to-suits?.

That’s what we do..

Okay. And then last one for me, the lease expirations, I know last call, you said you didn't expect them all to renew.

Has there been any change to that?.

No, there really hasn’t. I wish I could discuss the leases that we think in the final stages. But, as you recall, we did announce the SSA San Diego as well as the DEA San Diego warehouse which had a very nice accretive uptake on its ramp. But we look forward to announcing further re-leasing as soon as we are notified ourselves..

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

Thank you. It seems like everybody is reading right off my list of questions. But I have a couple of more. Back to the question about the acquisition guidance up and the FFO not, it sounds like that’s timing related.

I was going to guess cost of capital, right, because it sounds like you don’t think that equity’s cost prohibited rate here, but the stock price obviously is down, you’re not alone in that respect. And of course interest rates are up.

So, my question really is about the cost of capital and how that impacts you guys and kind of filters into your guidance?.

I mean, clearly, the markets will be what markets will be. And we have -- what we’re indicating in our guidance is that acquisition volume is up, opportunities are up, pipeline is more robust. It is just not prudent for us to up our guidance and be trying to amplify expectations in a time where REIT prices and stock prices are moving, so.

But as always has been our pledge is that everything that we do is accretive to the shareholders, we feel very good about where the stock price is today. Meghan has done an unbelievable job of giving us access to the different debt capital markets in addition to continuing to build strong relationships with shareholders.

And we believe that shareholders very much understand exactly what we do. As we moved our portfolio to 99% full faith and credit of the U.S. government, we continue to execute on our strategy in our bull’s-eye, and it’s very clear to investors, the value proposition.

So, as we bring, what’s in our guidance and maybe even extraordinary portfolios to the market or in development opportunity, we believe that they will continue to be well received..

Thanks. And then, just my second question.

The comfort level with the amount of opportunities for you to go ahead and raise the guidance a $100 million, is there anything identified and within that guidance are you kind of -- are you expecting to do a portfolio in 2018?.

I think our large portfolios or small portfolios that will probably be in the market soon or later on during the year and obviously we are going to be a major player and the best equipped player to do the underwriting and to be what we believe the best cost of capital to take advantage of those opportunities..

And again, I think it’s silly for us to try and amp up expectations. It’s just our job to deliver. What you hear in our comments is that we’ve spent three years building this Company from launching in the public markets to having plentiful access to capital.

Again, and I’ll say, our liabilities are longer duration than our leases, which is an enviable position to be in, as folks are thinking about interest rates, all of that was in mind for there to be big opportunities that would emerge, like you saw this last year Loma Linda that is a significant asset; it’s a premium asset; it’s a - and I think it’s a bigger, better scale, higher quality than anything folks imagined in the IPO that we’d be acquiring in such a short order.

We’ve positioned ourselves for locking good fortune, and I hope it comes forward. But again, it doesn't benefit us at all to be raising guidance or pumping up people's expectations about what we intend to do. We’ve been very deliberate about just bringing things forward, and we continue to want to be positioned that way with our investors..

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your questions..

On the acquisition front, how large a portfolio do you think you could get your arms around? We're talking about….

It just depends on the size. I think we’ve proven in the past that we can -- when we did the combination of Western -- Western Devcon portfolio, that was 14 buildings that were done in less than a quarter with the underwriting.

So whatever may appear out there, I think we will be well positioned to analyze it and if it comes and it's accretive, we’ll buy it..

Do you anticipate that a portfolio transaction would be priced at higher or lower cap rate than your one-off deals?.

I think it depends..

Yes..

There is no clear answer. I mean, obviously, these are -- and maybe different than other REITs, most -- as you know, most of our sellers are, believe it or not, individuals, folks, who finance these things in the private market. So, they all need a tailored solution to what we buy, how we buy it, what we’re going to do with it.

And so that’s why we just try to keep it simple and say, our pledge is to be accretive. We've stated one of our key strategic goals to scale this business.

It’s not lost on us that REITs have larger scale, attract lower cost of capital where -- again -- range of cost of capital that we think is very attractive relative to the opportunities that are present in the market. So, we can sustain ourselves this way as far as the eye can see from -- but we think there is more.

And so, we will pursue -- we have the manpower, the skill, the expertise in order to digest really anything of any size and we want to be able to do that in an accretive way and just as we’ve done in the past..

Great. Two other questions here. On the latest development deal that you announced, you said there was a refrigerated storage section. And it sounds like a little bit more of a complex warehouse distribution center.

Will you be responsible for ownership and maintenance of the equipment? How is that structured within the lease terms?.

Actually, it’d probably one of our least sophisticated buildings in the development right now when you're running laboratories, which are dealing with, I mean incredible systems for air handling, different waters filtration and so on and so forth. So, this is -- so it would not be particularly complex.

Obviously, we have top-rated engineers who can handle that and property managers, so it -- there'll be normal course..

Okay. And finally, I think you've got 18%, 19% of your rents rolling through ‘19. It's really the first opportunity for us to see the spreads on re-leasing them. You've had great success historically. If you just kind of look in aggregate, just remind us on what sort of rent roll-ups we should expect to see over the next year or so..

Well, I think as we’ve said in the past, obviously in our bull’s-eye properties and those are the build-to-suit opportunities. We expect to see sort of in the high-teens and that’s what we have delivered in that area.

As you are in let in more plain vanilla office space, they’re going to have probably closer to the market sort of roles, which we have said in the past. But, I will say that as far as we know, everything is on track and doing well. And we look forward to announcing the re-leasing when it occurs..

Thank you. [Operator Instructions] Our next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question..

Great, thanks. Question on the FEMA - Tracy development and just kind of how we should -- as we’re kind of building our models, how we should be thinking about that? So, it’s a redevelopment opportunity.

I guess I’m curious if there is any NOI being received on it now or kind of in the near-term, is it a drag and it comes back on line in the second half of 2018.

I’m just trying to think about what the impact is to earnings over 2018 on that project typically?.

Yes. Hey, good morning, Jon. So, FEMA - Tracy currently under development would not generate rental revenue and NOI, until it does come on line. But, obviously, the project is not speculative in any way, though. So, we will be financing it through 2018 and it will cash flow, commencing late in 2018..

I guess can you give -- I mean you didn’t give an acquisition price, but can you give us any kind of understanding how much can the breakdown is, how much you paid upfront versus how much is left to spend on the property?.

The total project currently we would expect to be in the range of $45 million. And as we acquired it already in process, we put approximately $15 million to date in 2018..

Got it.

And can you remind us when the FDA lab in Lenexa comes on line?.

Lenexa, that would be the back half of 2019..

2019? Okay. And then just one other quick question on your income statement, I noticed that real estate taxes were up about $1 million sequentially.

Is there anything onetime in there unique?.

No, there is nothing unique in that occasionally. Recall that it’s typically an equal offsetting reimbursement and when we may have the true-up in the real estate taxes in a particular quarter, but no there is nothing out of the normal there..

Thank you. Mr. Crate, there are no further questions. At this time, I’ll turn the floor back to you for any closing final comments..

Great, thanks. And thank you everyone for joining Easterly Government Properties fourth quarter call. We obviously appreciate your interest and you support. And we look forward to continuing to build a very high-quality portfolio of leases backed by the full faith and credit of the U.S.

government in our effort to deliver strong compounding returns to shareholders going forward. Thanks very much..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..