Earnings Call Transcript - DEA Q3 2021

Operator, Operator

Greetings. Welcome to the Easterly Government Properties Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to your host, Lindsay Winterhalter, Vice President of Investor Relations. Please go ahead.

Lindsay Winterhalter, Vice President of Investor Relations

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, 2020, filed with the SEC on February 24, 2021, and in its other SEC filings, including its Form 10-Q, which we expect will be filed later today, and risk and uncertainties related to the adverse impact of COVID-19 on the U.S., regional, and global economies and the potential adverse impact on the financial condition and results of operation of the Company. The Company assumes no obligation 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, funds from operations as adjusted, 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.

Darrell Crate, Chairman

Thank you, Lindsay. Good morning, everyone, and thank you for joining us for the third 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. I could not be more pleased with our business progress during the third quarter. We are able to develop all stages of the acquisition pipeline, including identification, negotiation of terms, diligence, and closing. With this morning’s announcement, we have exceeded our goal of $300 million in acquisitions for 2021. As you saw in the release, we increased our guidance for acquisitions to $350 million. This is our second increase to this metric during 2021, and all told, this represents a 75% increase on our original acquisition volume target from one year ago. Additionally, we are very well positioned to achieve our acquisition target range of $200 million to $300 million for 2022. We materially improved our competitive position and expanded our executable addressable market over the medium term with the announcement of the portfolio purchase alongside an outstanding joint venture partner. As you may recall, years ago, there was a sizable building we were bidding on that was squarely within our bullseye. While we were highly competitive as a bidder, we lost the auction. Why? We were not able to match the price given the cost of our capital and our speed to close, given our scale relative to our competitors. Unequivocally, the building we lost is one that we should have owned. We realized there was a universe of several billion dollars worth of buildings that could trade over the next 15 years where we could find ourselves at a similar disadvantage. Hence, we needed to solve this issue. We began an effort to find a set of investors who would see value in the enduring nature of our leases, as they are backed by the full credit of the United States government. We spoke with both domestic and global insurance companies, pension funds, and sovereign wealth funds. In our discussions, we determined the audience that most values our assets are those responsible for purchasing U.S. Treasury securities, viewing their real estate holdings as part of a broader global investment effort. The result of our conversations was to narrow our interactions to several large global organizations that invest with a broader risk and asset scope. Ultimately, we found a partner with whom we believe we can creatively and decisively work to harvest the most value and own those sizable assets in the United States leased market while simultaneously serving the needs of our public REIT investors. This enabled us to deliver the portfolio transaction that we announced two weeks ago, which is an accretive transaction as measured by both FFO and CAD for our shareholders while being competitive in the marketplace for the highest quality assets. It’s important to note that the universe of global investors sees value in these assets at a sub-5% cap rate. While the purchase of this VA portfolio is an attractive addition to our existing assets as measured by duration, quality, scale, and diversification, it more importantly illustrates the model by which we can transact within our total addressable market and positions us at a competitive advantage for the largest pristine assets in our target sector. I compliment the whole organization and our Board for their efforts over the last couple of years as we worked to solve this challenge, and I’m very excited about the expanded capabilities that this new relationship brings to our enterprise. With that, I’ll turn the call over to Bill to further describe the activities of the quarter.

Bill Trimble, CEO

Thanks, Darrell, and good morning. Thank you for joining us for our third quarter earnings call. It gives me great pleasure to discuss the specifics of the Company’s most recent acquisition activities. It has been a very productive three months since our last time together. Starting with our activities during the quarter, the acquisitions team continued to add mission-critical bullseye properties with the third quarter acquisition of an approximately 61,000 square-foot Class A facility located in Cleveland, Ohio, that is leased to several key agencies within the U.S. government. This Security Level 3 facility was substantially renovated in 2016 and again in 2021 for the Department of Homeland Security, fulfilling important missions such as investigating criminal organizations and terrorist networks. A portion of the property also serves as Cleveland’s National Weather Service forecast office. The U.S. government has invested significant tenant improvements in this building, whose specialized features include a secured entry and parking, a sally port, a backup generator, and an uninterrupted power supply battery system, all supporting the weighted average potential lease term through June of 2034. Subsequent to quarter-end, Easterly entered into an agreement to acquire a brand-new state-of-the-art 1.2 million square-foot portfolio leased entirely to the Department of Veterans Affairs. With two of the ten assets already acquired, this portfolio is a perfect fit for Easterly and clearly differentiates us from any competitors who may seek to build a portfolio in this niche market of VA leased assets. Through this acquisition, the Company is materially reducing the average age of the portfolio while simultaneously extending its weighted average remaining lease term. With 100% of the portfolio’s annualized lease income backed by the full faith and credit of the U.S. government, Easterly can deliver cash flow growth to shareholders through a strategic joint venture partnership with one of the world’s leading investors. If we assume September 30th profile metrics and a scenario where all ten buildings were acquired and operating, Easterly’s weighted average age would drop 13% from 13.8 years to 12 years; its weighted average remaining lease term would grow nearly 16% from 8.9 years to 10.3 years; and the size of the portfolio would grow by 16% from 7.5 million square feet to 8.7 million square feet. To improve all of these metrics through a single portfolio transaction is very exciting for us at Easterly and we expect it is for our debt and equity partners as well. Also, in the third quarter, we honed our discipline of owning government-leased assets through the strategic disposition of a non-core asset, a privately leased warehouse located in Midland, Georgia. While a quality asset, owning a lease facility that lacks the creditworthiness of the United States government is, by definition, a disposition candidate for Easterly. We have long communicated this asset as a potential source of funds for future acquisitions. With the rolling closings of the remaining eight properties in the VA portfolio between now and 2023, Easterly can put that capital to work while simultaneously strengthening the lease profile of the Company’s portfolio. Subsequent to quarter-end and in addition to the two VA outpatient facilities acquired by the JV, Easterly acquired a nearly 500,000 square-foot facility primarily leased to the United States Citizenship and Immigration Services or USCIS, located in the metropolitan region of Kansas City, Missouri. With the majority of the building leased to USCIS through 2042, the total weighted average lease expiration date for the facility is February 2036. Should all in-place tenant renewal options be exercised, the weighted average lease expiration date for the facility could be as late as January of 2045. Notably, this property serves as USCIS’ National Benefits Center, supporting the processing of applications from all U.S. states and territories for various immigration benefits, including employment authorization, travel, permanent residency, and naturalization. The NBC’s primary function is to prepare the case files for eventual adjudication for more than 85 field offices nationwide. Lastly, just this morning, the Company announced our latest acquisition, not part of the 10 property VA portfolio. Yesterday, Easterly acquired an 80,000 square-foot VA outpatient clinic located in the Midwest region of the United States. VA Midwest is a build-to-suit outpatient clinic that was recently completed in 2021. The state-of-the-art facility is leased to the VA for an initial non-cancelable lease term of 20 years, expiring in May of 2041. This clinic provides a wide range of medical and ancillary services, including, but not limited to, primary care, mental health, audiology, optometry, dermatology, radiology, and prosthetics. To summarize, year-to-date, Easterly has acquired either directly or through the JV, 10 properties for a total pro-rata contractual purchase price of approximately $321.3 million, exceeding its increased $300 million acquisition volume target for the year. Pro forma for these acquisitions, Easterly owns directly or through the JV, 87 properties totaling 8.3 million square feet. As you recall, given the pace of our acquisitions and our clarity of pipeline, we increased our 2021 FFO guidance per share on a fully diluted basis in conjunction with our acquisition volume target by 50% for the year, from $200 million to $300 million. Since our last call, Easterly has either directly or through our pro-rata share of the JV, more than doubled our acquisition volume for the year, identifying a robust pipeline of actionable opportunities that will carry us into 2023. While the acquisitions team has created certainty of pipeline for the next couple of years, we are by no means slowing our pace. The team continues to work hard to identify future single and portfolio opportunities that will deliver growth to our shareholders. Turning to development, we are pleased to report that the government has reached a determination on its new program requirements for the future FDA Atlanta laboratory development project. The GSA and the FDA have spent the last several months working together to ensure maximum benefit from this facility, and we are pleased to once again actively engage with the government and proceed with the redesign process. Given the non-speculative nature of our development projects, the design process is heavily dependent on the government as they customize their specific requirements. After the government determines its functional needs, we collaborate in the design, and the government relies on us to construct the build-out. During build-out, given our expertise in the specialized field, we can accelerate the construction timeline as demonstrated in the case of FDA Lenexa. Turning to leasing updates, our asset management team continues to secure meaningful renewals that lengthen the duration of cash flows. In the third quarter, we renewed the lease at DEA Vista for a 15-year term retroactively applying to November of 2020, which does not expire until November of 2035. We also renewed several key leases at various GSA Buffalo assets, including the approximately 50,000 square foot IRS lease for 10 years and the approximately 111,000 square foot VA lease for 15 years. These renewals, combined with other assets year-to-date, translate into eight successful re-leasing exercises, totaling over 530,000 square feet or 7% of annualized leased income for a weighted average lease term of 16.1 years in 2021. In closing, we at Easterly have been busy since our last call. We have meaningfully and accretively scaled the Company’s portfolio through the acquisition of bullseye assets. We have charted a course for the highest acquisition volume year on record as a public company. We have formed a new joint venture with an experienced global partner, and we have further refined our investment discipline of owning assets primarily backed by the full faith and credit of the U.S. government. With that, I thank you for your time this morning. I’ll turn the call over to Meghan to discuss the quarterly financial results and capital markets executions.

Meghan Baivier, CFO and COO

Thank you, Bill. Good morning, everyone. It gives me great pleasure to report another strong quarter and issue earnings guidance for 2022, demonstrating our ability to deliver consistent growth to shareholders. Turning to our quarterly results for the third quarter, net income per share on a fully diluted basis was $0.09. FFO per share on a fully diluted basis was $0.33. FFO as adjusted per share on a fully diluted basis was $0.31, and our cash available for distribution was $26.1 million. As of September 30th, we owned 83 operating properties, comprising approximately 7.5 million square feet of commercial real estate with one additional development project in design, totaling approximately 162,000 square feet. The weighted average age of our portfolio was 13.8 years, and the weighted average remaining lease term was 8.9 years, well matched to the weighted average debt maturity of nearly seven years. As Bill pointed out, these metrics are expected to continue improving through the acquisition of the 10-property VA portfolio announced subsequent to quarter-end. These metrics are core to our strategy as reflected through the acquisition of young buildings and renewal of existing assets for long lease duration. These actions have also demonstrated the Company’s ability to continue to generate cash flow with strong visibility for years to come. Turning to the balance sheet, at quarter-end, the Company had total indebtedness of approximately $1 billion, with ample capacity on our line of credit for future acquisitions and development-related expenses. As of September 30th, Easterly’s net debt to total enterprise value was 33.2%, and its adjusted net debt to annualized quarterly pro forma EBITDA ratio was a low 6.1 times. During the third quarter, Easterly had several notable capital markets events. First, the Company upsized its existing senior unsecured credit facility. The amended and restated credit facility consists of a $450 million revolver and a $200 million term loan facility, up to $50 million of which will be available on a delayed draw basis for up to 364 days post-closing. The revolver includes an accordion feature that allows the Company to request additional lender commitments of up to $250 million for a total amended credit facility capacity of up to $900 million. The revolver will initially mature four years from the closing date in July 2025, with the option to extend the maturity to July 2022. The term loan will mature five years from the closing date in July 2026 and is prepayable without penalty for the entire term of the loan. Borrowings under the revolver will bear interest at a rate of LIBOR plus a spread of 120 to 180 basis points, while the term loan will bear interest at a rate of LIBOR plus a spread of 120 to 170 basis points, depending on the Company’s leverage ratio. Given the Company’s current leverage ratio, the initial spread to LIBOR is set at 125 basis points for the revolver and 120 basis points for the term loan. Of note, the amended credit facility also features a sustainability-linked pricing component, whereby the pricing can improve by 1 basis point if Easterly meets certain sustainability performance targets as determined by an independent third-party evaluation. Coupled with our hiring of a Director of Sustainability, a new role within our organization, it is our expectation that Easterly earns this discounted spread and meaningfully demonstrates our commitment to environmental sustainability and strong corporate citizenship. The second notable event for the quarter ended September 30th was an underwritten public offering of 6.3 million shares of the Company’s common stock sold on a forward basis. This strategic offering executed at a net price to the Company of $21.64 per share has provided Easterly with the funding needed to continue pursuing its acquisition pipeline at levels that are accretive to shareholders. In the third quarter of 2021, the Company issued approximately 2.1 million shares of its common stock through the Company’s ATM program at a net weighted average price of $23.65 per share, raising net proceeds to the Company of approximately $50 million. All shares were from forward sales transactions entered into in prior quarters. Today, the Company has approximately 8.2 million shares which are subject to unsettled forward sales transactions. Assuming these shares are physically settled in full at a weighted average initial forward sales price of $21.71 per share, the Company expects to receive net proceeds of approximately $178 million. With these unsettled forward sales, Easterly is very well poised to continue funding our acquisition and development pipeline just in time at a highly attractive cost of capital. Subsequent to quarter-end, Easterly issued the previously announced $250 million principal amount of fixed-rate senior unsecured notes. The notes were issued and sold in two tranches: Series A senior notes in the amount of $50 million with a seven-year maturity and Series B notes for the upsized amount of $200 million with a nine-year maturity. Together, the weighted average maturity of these notes is 8.6 years, and the weighted average interest rate is 2.84%. Raising long-term unsecured debt at such an attractive weighted average rate and maturity is an extremely powerful tool in generating value for shareholders. Finally, in connection with the VA portfolio announced subsequent to quarter-end, Easterly has entered into a joint venture with a leading global investor, which serves as the investment vehicle for this anticipated 1.2 million square foot portfolio. Easterly’s JV partner will retain a 47% stake while Easterly will retain a 53% stake in the JV. Easterly will also receive asset management fees from the JV partner and will be responsible for the day-to-day management of the properties. We believe this relationship with our new JV partner demonstrates a global interest in the strength and stability of the U.S. government cash flows that underpin Easterly’s credit quality. We are excited by the partnership and look forward to a strong, mutually beneficial relationship for many years to come. Turning to re-leasing, as Bill previously mentioned, we continue to make progress in working through our pipeline of upcoming lease expirations. With the successful execution at DEA Vista and two sizable leases within various GSA Buffalo, we now have approximately 243,000 square feet and five leases up for renewal through the end of 2021. With a large percentage of the renewal work now behind us, we are actively discussing all properties at this time with the GSA. We feel good about the long-term mission and tenancy of these upcoming expirations, and we will keep you apprised of future renewals in the coming quarters. Regarding our earnings guidance: during the quarter ended June 30th, the Company increased its guidance for 2021 FFO per share on a fully diluted basis to a range of $1.30 to $1.32. Reflective, in part, of our increased actionable acquisition pipeline, the midpoint of this guidance was predicated upon completing an enhanced $350 million in acquisitions, an increase from our previously stated $300 million in acquisitions and up to $25 million in gross development-related investment in 2021. Today, the Company is maintaining this increased guidance, and at its midpoint, Easterly remains on track to continue a record of steady FFO growth year-over-year. At the midpoint of our 2021 guidance, we expect to achieve a 3.8% CAGR in FFO per share over the last three years. When coupled with our recently increased dividend of $0.265 per share, which generates a run rate dividend yield of 5% based on our quarter-end stock rate, we are proud to be in a position to continue delivering attractive total returns to our shareholders. The Company is also issuing 2022 FFO per share on a fully diluted basis guidance in a range of $1.34 to $1.36. This guidance is predicated upon completing $200 million to $300 million in acquisitions, including acquisitions through the JV at the Company’s pro-rata share of the contractual purchase price and up to $25 million in gross development-related investment in 2022. Easterly remains on track to deliver steady FFO growth per share year-over-year as our goal to remain dependable and provide a constant source of growth for our shareholders. To echo Bill and Darrell’s sentiment, we’re excited by the events that have transpired since our last earnings call. We have raised equity at attractive levels to match our forecasted record-breaking acquisition volume. We have fortified the balance sheet with debt issued at attractive rates with long-dated maturities. We have formed a lasting relationship with a preferred global investor in the Company’s first-ever joint venture, and we’ve charted a course for future growth through the introduction of our 2022 earnings guidance. With that, we thank you for your commitment to our investment thesis and appreciate your partnership. I will now turn the call back to Maria.

Operator, Operator

Our first question comes from Emmanuel Korchman with Citi.

Emmanuel Korchman, Analyst

Hey. Good morning, everyone. Just thinking about the acquisition guidance for 2022. Could you quantify how much of that is contractual, or at least planned under the JV versus new targeted acquisitions outside of what sort of we already know about?

Meghan Baivier, CFO and COO

Sure. So, as we continue to work on closing the VA portfolio, we are placing that guidance assuming $50 million of pro-rata acquisition volume falls into next year.

Emmanuel Korchman, Analyst

So, $50 million of the $200 million to $300 million JV and then $250 million of fresh acquisitions at the $300 million?

Meghan Baivier, CFO and COO

Yes.

Emmanuel Korchman, Analyst

So, when does the rest of the JV close? Because I was under the impression you haven’t closed that much, and there was only one deal that was slated for 2023. So, what am I missing in terms of volume?

Meghan Baivier, CFO and COO

Look, the messaging is that our important messaging is that our target is $250 million without that joint venture. That joint venture was done at levels that are accretive to FFO. But whether they fall at the tail end of this year or they slide into next year, the messaging is really about deals in addition to that as those will be the primary drivers of FFO growth. Remember, the VA portfolio is accretive to FFO, but really a driver of CAD.

Bill Trimble, CEO

Yes. I’d say, Manny, that as we mentioned in previous calls, we are exploring some very interesting portfolios, but the timing is always uncertain. However, it's the key properties we are focusing on that have given us the confidence to provide strong guidance for next year’s pipeline. If everything goes well, those portfolios will likely be a top priority.

Operator, Operator

Our next question is from Michael Carroll with RBC Capital Markets.

Michael Carroll, Analyst

Yes. I just want to go back to Manny’s question real quick. How much of the joint venture do you still have to close? Is it roughly just over $300 million of your share that still needs to be closed within that portfolio?

Meghan Baivier, CFO and COO

That’s correct, Mike.

Michael Carroll, Analyst

And can you help us understand when will that close? It sounds like a majority of it is going to close in 2022.

Meghan Baivier, CFO and COO

Yes. So, what we’ve said, right, is we expect all but the final total purchase price of $100 million to fall by the end of the second quarter next year. I think, we don’t encourage you to get caught up as these are development properties in the perfect timing of when they will close. The point is whether they are able to close at the end of this year or at the beginning of next year is that we’re targeting $250 million, in addition to that.

Michael Carroll, Analyst

In addition to the JV closing?

Meghan Baivier, CFO and COO

Correct.

Bill Trimble, CEO

Yes, we cannot emphasize enough that our business is steady. We are delivering a dividend yield of 5%, and we are experiencing annual growth in FFO of 3% to 4%, as we have shown over the last three years. Our regular acquisition activity ranges from $200 million to $300 million each year. We believe that the reliable cash flows from the government, growing at a steady pace, present an appealing investment opportunity. The portfolios and one-off value-creating activities we anticipate over the next decade will significantly exceed our core business. It is crucial to understand that our joint venture partner has enabled us to acquire these portfolios in a way that marginally enhances FFO. This is highly advantageous for CAD. Most importantly, we are acquiring substantial, high-quality assets in the U.S. government lease market. As we continue to strengthen our competitive advantage compared to others in that sector, it allows us to do just that. It is worth noting that global investors see these assets at a sub-5% cap rate, which starkly contrasts with the overall cap rate that our company is currently assigned in the public markets.

Michael Carroll, Analyst

And then, how do you plan on growing the joint venture? I’m assuming that there are other portfolios that you would want to do in the JV. Should we assume that larger portfolio deals could be put in the joint venture, and then these one-off smaller transactions will be completed on the balance sheet?

Bill Trimble, CEO

Well, no, it’s not really that simple. It’s that there are these large portfolios where we will go to this joint venture partner, and we’ll use the joint venture appropriately. It’s early days. We think they’re fantastic. They are very astute real estate investors. We have a clear understanding of their objectives and what we can deliver. Our steady-state business is delivering that $200 million to $300 million of acquisitions a year. Having that FFO growth, is a dividend yield of 5% with 3% to 4% growth. Then, as these large deals come forward, we couldn’t be more excited to have our joint venture partner work with us to craft the transaction that helps us meet public shareholder demands for return on capital while allowing us to grow our dividends.

Michael Carroll, Analyst

Okay. And then, can you talk a little about the asset sales? I know you had one small one completed, post quarter end. Is there a plan to sell the other privately leased properties? Are you marketing those for sale or is this one that was just complete? It was just an opportunistic transaction as someone came out to you and said they wanted to buy it?

Bill Trimble, CEO

Yes. Great question. I think, we’ve said probably since we first met you and we went public that these non-government core assets were always available for sale. In this case, it was just a good time to transact that sale and we did. The answer is absolutely. Those other properties would be viewed as a source of funds for new opportunities going forward. We’re always looking to execute it at an accretive value for our shareholders. The operations are terrific assets, and they would be for sale at any moment if we saw the right pricing on it.

Michael Carroll, Analyst

Okay. And then, there's one small asset that’s in there. I don’t want to put too much stress because it’s super small, but it looks like the lease expires within the next six months. What’s the plan with that specific asset? Like, are we sharing hope?

Meghan Baivier, CFO and COO

Yes. I mean, Mike, you’re asking about a net of a lease, but that lease could certainly not get renewed. But, it’s de minimis, not even worth our time on an earnings call.

Operator, Operator

Our next question is from John Kim with BMO Capital Markets.

John Kim, Analyst

Thank you. Bill, in your prepared remarks, you talked about a number of renewals that you’ve done on the leasing side. Were those all '21 or were some of those '22 expirations? And then, can you talk about what the leasing spread was on those renewals?

Bill Trimble, CEO

Thank you, and good morning. I’ll hand that over to Meghan. She’s got it right in front of her.

Meghan Baivier, CFO and COO

Yes. Sure. The two IRS lease and the VA lease in Buffalo were renewed in the quarter, as well as DEA Vista, which had been in what we call holdover. One was in 2021 and the other one as well in 2021. So, just those three leases. As we said, we’ve always got renewals that are impacting different years. Some have tenant improvements that we have insight into. Some are developing our insights. We’re going to continue to talk about renewals annually as we started last year, and look forward to doing that on our next quarter call.

John Kim, Analyst

What was the leasing spread?

Meghan Baivier, CFO and COO

Yes. So, John, we talk about leasing spreads within the portfolio on an annual basis. So, we’re going to continue that track record as we come out next quarter.

John Kim, Analyst

Okay. So, just at the end of the year, you’re just going to renew what happened during the year?

Meghan Baivier, CFO and COO

Exactly.

John Kim, Analyst

I know you don’t report same-store NOI, but looking at operating expenses this quarter, it was up 6% sequentially, which was higher than the revenue growth. Is that a good run rate going forward on expenses? And can you just comment on the inflationary impact on some of those items?

Meghan Baivier, CFO and COO

Yes. I encourage everyone to remember that we have a tenant reimbursement line item in our revenue that relates to projects we will perform for the GSA during the lease term. There’s an equal offsetting amount in our property operating expenses, as we finance the project and the government reimburses us. When you think about operating expenses to operate the property, you need to peel out the tenant reimbursement amount from OpEx. If you peel that out, I think you would see very consistent NOI margin year-to-date year-over-year. Remember, CPI is obviously something we’re aware of. We have the benefit of our OpEx basis in our leases, which will also grow with CPI, nearing 5% to 6% this year. We feel well insulated.

John Kim, Analyst

There’s typically a lag between reimbursements and the OpEx?

Meghan Baivier, CFO and COO

No. It’s an annual drop.

John Kim, Analyst

Okay. And just a final question for me. What are you expecting as far as cap rates for 2022? I think part of it is the mix of what you do JV versus on-balance sheet. But generally, are you expecting cap rates to continue to trend down?

Bill Trimble, CEO

Yes. I think it’s sort of a tale of two cities. For our $250 million outside of the JV, I think we’ll be consistent with what we’ve seen this year. We’ve seen lots of opportunities ranging anywhere from a 5% to 6% up to north of a 6%. The market continues to be robust, and I think we’ll do a great job mining those opportunities. They’ve come in a little bit this year, but there’s also another set of buildings, and Darrell talked about this, that are in the pristine 15-20 year brand new facilities. Those properties are trading at 5.25, 5.40, and in some cases, lower. We have the opportunity to enhance our portfolio with those acquisitions. Think of it as a tale of two cities: one barely accretive but doing wonders for our CAD and overall enterprise value, and the other, the real driver of growth and FFO.

Operator, Operator

Our next question is with Manny Korchman with Citi.

Emmanuel Korchman, Analyst

Hey. I’m going to come back to acquisitions because I know I’m not the only one confused by this. So, you have $300 million left to close with the JV assets. Your guidance for this year includes another, call it, $25 million to $30 million of acquisitions to close. Your guidance next year includes $50 million to close. When in our model should we include the $200 million to $225 million piece of the JV to close? Is that early ‘23 because it might close by the end of ‘22 and you’re being conservative, or am I just completely missing something here?

Meghan Baivier, CFO and COO

Yes. So, you’re not missing something other than the real takeaway, which is we’re obviously trying to guide to an appropriate level next year, so people can think about where to build last point, where FFO drivers will go versus the assets like we’re doing in the joint venture. There’s a base assumption that $50 million of pro-rata purchase prices will fall in that amount. Obviously, the remainder would be in this year. But whether it falls into this year or sneaks into next year and warrants some different total acquisition volume is something that we’re going to continue to telegraph to you all as we do close the other development properties. Timing is never perfect, but I think you’ve got what you need from an earnings perspective to model out next year. Whether something is in December or January, we’ll let you know when we know.

Darrell Crate, Chairman

Perhaps just to clarify again, these assets are going to close but from an earnings driving perspective, the accretion of the assets is what’s consistent with our guidance. As these development projects are uncertain to be done this year, next year, 2023, it has a marginal effect on FFO. However, there will be a CAD effect, which will be the news that we get as these things do close. I hope that’s helpful.

Emmanuel Korchman, Analyst

It is, Darrell. Thank you. And then, in terms of the management fee, is that contractual to this set of assets or to the JV itself? So, if you were to do another deal with the same partner, would that be at the same fee, or would that just be renegotiated based on what you’re buying and the structure?

Darrell Crate, Chairman

I think the intent is we did this deal and all parties are happy, so this is a blueprint for where we go in the future.

Operator, Operator

Our next question is from Merrill Ross with Compass Point.

Merrill Ross, Analyst

Hi. Good morning. A question on the Kansas City Property Summit Tech Center. From the look in the GSA leases, it seems that the government lease is about 67% or two-thirds of that property. I’d be interested in what the shadow rating is on the remaining tenants, if any? And what are the characteristics of those private leases? Do they piggyback on the GSA lease essentially? I assume there are companies that have some synergies with the…

Bill Trimble, CEO

Good morning, Merrill. Thank you for asking. Those are mostly local hospitals and healthcare organizations. They are not necessarily piggybacking with the GSA, but they are wonderful tenants, and their expiries are way down the line. The building overall is absolutely terrific, with an amazing mission for the federal government portion, and we’re very pleased with the private tenants in the building. One of the great things is you get bumps with private tenants, so we’re excited about that. A rare thing for us.

Operator, Operator

Our next question is with Michael Carroll from RBC Capital Markets.

Michael Carroll, Analyst

Yes. Thanks. I guess, Darrell, you’re talking about this, the JV transaction is going to be more accretive to CAD than it is to FFO? I mean, I guess, first, did I hear that correctly? And why is that? Does the GAAP rents come in later than the cash rents, or how should we think about that?

Meghan Baivier, CFO and COO

No. That’s all about young assets with minimal CapEx requirements. So, while you can experience less accretion on the FFO line item, it’s CAD yield that is accretive to our overall average CAD yield.

Darrell Crate, Chairman

Yes.

Operator, Operator

It appears that there are no further questions. I would like to now turn the call back over to Darrell Crate for closing remarks.

Darrell Crate, Chairman

Thank you, everyone, for joining the Easterly Government Properties third quarter 2021 conference call. We appreciate your time. We’ll continue to work hard to deliver strong risk-adjusted returns for our shareholders in the year to come. Thanks so much.

Operator, Operator

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.