Greetings, welcome to the Easterly Government Properties First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. Please note this conference is being recorded. I will now turn the conference over to your host Lindsay Winterhalter, Vice President, Investor Relations. You may 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 that are not historical facts and are considered forward-looking. The company intends for these forward-looking statements to be covered by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 and is making these statements for the purpose of complying with those provisions.

Thank you, Lindsay. Good morning everybody and thank you for joining us for this first quarter conference call. Today, in addition to Lindsay, I’m also joined by Bill Trimble, the company’s CEO; and Meghan Baivier the company’s CFO and COO. Easterly continues to consistently execute on its strategy of owning Class A mission-critical facilities leased to the United States federal government. Our story is simple. We seek to own a pristine portfolio of buildings, many built-to-suit, that are occupied by some of the country’s most important tenant agencies. We aspire to be the chosen partner of our tenants to maintain and enhance their facilities to aid in the execution of their missions. We grow our FFO through acquisitions, non-speculative development, and through the renewal of existing assets. Our acquisitions this quarter were consistent with all of these objectives.

Thanks, Darrell, and good morning. Thank you for joining us for our first quarter earnings call. The acquisitions team continued its elevated acquisition phase for the closing of a bullseye portfolio of Class A real estate leased to the United States federal government. The free building, approximately 177,000 square foot portfolio is comprised of some of the government’s most important tenant agencies, including the Federal Bureau of Investigation, the U.S. Attorney’s Office, and the U.S. Immigration and Customs Enforcement Agency. This LEED Certified portfolio is entirely build-to-suit and operating under its first generation lease terms.

Thank you, Bill. Good morning, everyone. It gives me great pleasure to report another strong quarter of demonstrable growth at Easterly. As of prior quarters, COVID-19 had no material negative financial impact on the organization as Easterly received 100% of rental income due from our tenants in the first quarter. As of March 31, we owned 82 operating properties, totaling approximately 7.5 million square feet of commercial real estate, with one additional development project in design comprised of approximately 162,000 square feet. Through the acquisition of newer facilities, the weighted average age of our portfolio remains young at 13.4 years. Successful long-term renewals of existing properties have also allowed us to grow our weighted average remaining lease term to a historic high of 8.6 years. This represents a year-over-year lengthening of our weighted average remaining lease term of 0.9 years. Maintaining a young portfolio age and a long weighted average remaining lease term is reflective of our strategy of owning relatively new built-to-suit assets during missions. This strategy provides us with distinctive future cash flow visibility, which in turn allows us to prudently manage the company’s balance sheet and support our highly accretive acquisition and development project pipeline. Turning to our quarterly results. For the first quarter, net income per share on a fully diluted basis was $0.09. FFO per share on a fully diluted basis was $0.33, up nearly 8.5% year-over-year, a rate we are particularly proud of given the backdrop of a global pandemic. FFO as adjusted per share on a fully diluted basis was $0.31, and our cash available for distribution was $24.4 million. Turning to the balance sheet. At quarter end, the company had total indebtedness of approximately $1 billion with $341 million available on our line of credit for future acquisitions and development related expenses. As of March 31, Easterly’s net debt to total enterprise value was 34%, and its adjusted net debt to annual quarterly pro forma EBITDA ratio was 6.2 times. As previously mentioned, with this low leverage level, numerous sources of available debt capital, access to equity sold on a forward basis, and an attractive cost of equity, we are well-poised to lean into future growth opportunities. In the first quarter of 2021, the company issued approximately 1.56 million shares of its common stock through the company’s ATM program, raising net proceeds to the company of approximately $40 million at a net weighted average price of $25.69 per share. This highly attractive cost of capital delivers meaningful accretion to shareholders. Today, the company has approximately 2.9 million shares, which are subject to unsettled forward sales transactions under the company’s ATM program. Assuming these shares are physically settled in full at a net weighted average initial forward sales price of $24.43 per share, the company expects to receive net proceeds of approximately $72.1 million.

Thank you. Our first question is from Michael Carroll with RBC Capital Markets. Please proceed with your question.

Yes, thanks. Bill or Meghan, can you talk a little bit about the renewals that you completed in the first quarter? I guess what’s the cash lease spread and can you provide color on the base rent and how the tenant improvement (TI) build outs kind of roll into the numbers and the rent streams over the next few quarters?

Good morning, Michael. So as Bill mentioned, there were four renewals in the quarter. The buildings were referred to as Treasury Parkersburg, DEA Bakersfield, ICE Pittsburgh, and DEA Sterling. Those four leases represent an interesting cross-section of the portfolio. We are expecting, like two of them, to have tenant improvement allowances included in the renewal. But we expect, because they’re not completed TIs, an average of approximately 8.5% and the rent spread with an average of $30 to $35 of TI. Treasury Parkersburg and ICE Pittsburgh had no TI budgeted, which brought down the average for the quarter.

Great. And then can you talk to us about the TI budgeted and maybe explain how that rolls into the rent stream? I guess once you build out those spaces, that’s going to add rents to the base rent over the next few quarters and how long will that take to complete those TIs?

Sure. So as I said, Treasury Parkersburg and ICE Pittsburgh don’t have tenant improvement allowances. So those spreads would kick in on day one. We don’t have a perfectly clear crystal ball, but it’s our expectation that in Bakersfield and Sterling, we would also be able to have the tenant improvements completed prior to the commencement of new leases. The Sterling asset will commence in the third quarter of 2022 and Bakersfield in January of 2022. It should provide sufficient time this year.

Okay, great. And then I guess Bill, can you talk a little bit about your FBI field offices? I think you highlighted that there are 12 that Easterly owns today. Does that provide you incremental synergies? What type of advantages does that have, having full field offices?

Yes. Good morning, Michael. I think it does. Now that we’re at 12, the FBI certainly knows who we are. I think we’re very pleased with how we manage their buildings. What I think we’re beginning to see is that there are a number of projects that we’ll do at one building at the government expense that we will then do with another one of our facilities. I think it also smooths out our renewals because I believe they understand that we have a very good handle on what these buildings are worth and what they would cost to develop. I think that’s going to only help us going forward. So, I’m very pleased to have reached this scale; that’s the best group of buildings we can possibly own within the federal government. I believe we have a terrific relationship with the agency, so I’m looking forward to owning more.

Okay, great. And then I guess the last question: Can you talk a little bit about the deals that Mike Ibe is pursuing with the GSA build-to-suit? You highlighted in your prepared remarks that he’s pursuing several, but do you have an expectation on how many GSA build-to-suits you could potentially announce this year?

What I’d say, Michael, is that it really hasn’t changed because you can imagine the federal government moves at a glacial pace when it comes to these opportunities. Nevertheless, I would continue to say that this FDA laboratory program, which was slow during COVID, thankfully, we got everything we needed to get done before the shutdown. I believe we will see some terrific opportunities there, whether it starts in the fall or next winter. They are very expensive buildings, and we have real expertise, especially with Mike and Mark, in delivering for the FDA. I think we’re going to see some more FEMA projects. That’s a very popular agency with the current administration. I think you’re going to see more opportunities there. We’ve been really effective in buying some of these brand-new VA facilities. I think we’re going to see a lot of upside from them as well. All in all, I think yes, we will see some new opportunities and look forward to announcing them. But I think we’re still waiting to get past the COVID world a bit. However, that isn’t going to slow down our team. They’re traveling around, looking at opportunities, and fingers crossed, I believe this will continue to be a strong driver of FFO growth for us into the future.

Okay, great. Thanks for your time.

Our next question is from Merrill Ross with Compass Point. Please proceed with your question.

Hi, good morning. I’m wondering if you can – I mean, you described that you’ve already underwritten the assets that you’re interested in a GSA inventory. So the pace of acquisition or the fulsomeness actionability of your pipeline kind of depends on the sellers being willing to sell. Do you see anything globally that makes people more willing to sell in 2021 or 2022 than you had seen in the previous six years?

Good Morning, Merrill. That’s a great question and I believe the answer is absolutely yes. I think you’ve got a number of factors. First, as you know, most of our buildings are owned by individuals, and it’s no secret that we’re likely to see some sort of change in the capital gains rate. There might be some 1031 exchange changes and many other happenings within the tax code that will prompt a lot of these owners to make that decision sooner rather than later. I think that’s an important factor. Obviously, we are the only group out there that can also offer unions for tax efficiency to these owners, which gives us a big advantage. Additionally, many of these newer facilities were built around 2006-2007, and they’re rolling now. Many of these owners are in their 60s and 70s, and I think they’re going to take advantage of estate planning or whatever it may be to need equity to address some financial pressures. Everything going on out there provides us with a tailwind in this market. And while Meghan will elaborate on this, our attractive cost of capital allows us to make accretive acquisitions. Everyone knows who we are, and we execute very quickly. I’m very excited about what we see out there going forward for this year and I am optimistic about surpassing the $200 million target, which is definitely possible.

Thank you.

Our next question is from Frank Lee with BMO. Please proceed with your question.

Hi, morning everyone. If we annualize the $0.33 you reported in the first quarter, and considering that you could exceed your $200 million acquisitions target, are you talking about the pace of activity so far that could get you to the top end that guidance range or even above it? I am just wondering if there’s anything else we should consider that could be a drag on earnings this year, aside from maybe some more ATM issuances or what prevented you from raising guidance this quarter? Thanks.

Good morning, Frank. I’m obviously very proud of the strong quarter we put out. As we look at the remainder of the year, we continue to work on the pipeline and we’ve never stopped because of the pandemic. So, it’s just the approach I took in terms of seeking approvals for the guidance that we project. At this time, it's our preference to stay with the current range. We look forward to the opportunity to exceed that and hopefully aim for higher levels as the year progresses.

Okay, great. And then just want to touch on the leases that expired in 2020, there were three of them. From last quarter, it looks like two, three were renewed on a shorter-term basis. Just curious what happened with the last lease and your expectations to renew the other two on a longer-term basis?

Yes. So last quarter, those three, one was DEA Vista. One was DEA Birmingham. You’ll note that the GSA, if you’re nearing the end of a renewal process, they can oftentimes get into what's called a holdover position where they’ll just stay in a month-to-month situation while they’re waiting for the paperwork to be signed. Both of those are in that stage; we don’t want to pre-announce any renewals before they happen, but that’s the status of those two. Unfortunately, the third was a very small deli in our Buffalo asset of around 1,100 square feet, and you won’t be able to get one in the future.

Okay. And then still, no additional clarity on timing on the lump sum, right?

That’s correct. It’s still our strong desire, and we do believe we’ll be successful as we were in the past in FDA Lenexa on receiving progress payments from the government, but no finality there yet.

We’re always happy to let the government figure out how they can spend more money with us to build a better building. So we always are patient.

And we have reached the end of the question-and-answer session. I will now turn the call over to Darrell Crate for closing remarks.

Great. Thank you everyone for joining the Easterly Government Properties first quarter 2021 conference call. We appreciate your time this morning, and we look forward to keeping you posted on our developments as we strive to build and enhance our portfolio of pristine assets backed by the full faith and credit of the U.S. government.

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