Earnings Call Transcript - DEA Q3 2020

Operator, Operator

Greetings, and welcome to Easterly Government Properties' Third Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lindsay Winterhalter, Vice President, Investor Relations. Thank you. You may begin.

Lindsay Winterhalter, Vice President, 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 statements 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, 2019, filed with the SEC on February 25, 2020, and in its other SEC filings and risks 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.

Darrell Crate, Chairman

Thank you, Lindsay. Good morning, everyone, and thank you for joining us in this third quarter conference call. Today, in addition to Lindsay, I'm joined by Bill Trimble, the company's CEO; and Meghan Baivier, the company's CFO and COO. During this period, we've had a significant number of calls and meetings with new investors, particularly those from the international community. So I thought I'd share a frequent question that we receive. Are we an office? Or are we a net lease REIT? For those of you who are new to the call, I'll share the answer. The principles that underpin our business are clearly net lease REIT. We can develop and purchase several hundred million dollars of mission-critical buildings each year to grow earnings. However, there are two factors that make us superior to net lease. The quality of our cash flows and the value of our young buildings to track the growth in replacement cost. First and foremost, our cash flows are based upon the full faith and credit of the U.S. government. You will not find a single U.S. REIT with a better tenant quality than Easterly. Our leases supporting our portfolio are, on average, 10 to 20 years in length, which provides far superior visibility to future cash flows than any traditional REIT. We have extremely high renewal rates at lease expiration due to the build-to-suit, mission-critical nature of our portfolio. Today, our existing leases, each with one role, would equal $4.3 billion of future cash flow that's backed by the full faith and credit of the United States government. Like any net lease, we build shareholder value through a robust acquisition program, coupled with nonspeculative development activity. Given our attractive cost of capital, these activities translate into 2% to 3% FFO growth per year, coupled with a roughly 5% dividend yield. This delivers a 500 to 700 basis point premium to the 10-year treasury. I would observe that the premium we deliver relative to treasuries is near an all-time high. When you take a closer look at what we have built, you will see Easterly is real estate without the drama. A pandemic does not diminish our value, and we are not beholden to one political party, local rent markets, or one geographic area of focus. Added to net lease attributes without volatility, our facilities are purpose built, highly sophisticated government leased facilities designed with SCIF space, secure networks, perimeter fencing, visitor screening, bollards, and a host of other improvements. These features add specific value to our tenants and provide an opportunity for value creation upon release. Further, we've created a portfolio that delivers stability with no single asset representing more than 2.7% of annualized lease income set to expire in the near term. Given that our method of value creation is differentiated from the REIT market, we've done what we can to limit our exposure to index fund price movements by limiting their ownership. I would observe to those of you who are managing two benchmarks, we've consistently performed in line or better with the Russell 1000, with cash flows far less volatile based on the full faith and credit of the United States government. 2020 has been a dramatic year in every sense as the world navigates a pandemic. And here in the United States, we face economic, political, and social unrest. It's often difficult to spot directional changes in history, but it certainly feels like one of those times. Uncertainty extends to the real estate sector in general and the REIT sector, in particular, as investors must make portfolio decisions based on macro and micro factors that have never been more opaque. Ten years ago, we purchased our first FBI building for our new private equity fund that became the first building block of what is today Easterly Government Properties. We have launched into our focused first tranche of government space because we saw a clear opportunity to harness the world’s best credit while also taking advantage of long-duration leases and incredibly high renewal rates. Ten years later, that first FBI still provides a mission-critical home for the San Antonio field office and remains young in its life. The world has gone through many gyrations since 2010, but our story, the government's mission, and our strong and sustainable growth remain the same. We're looking forward to 2021, and we're pleased with the stability and predictability of our platform to create value for shareholders in, of course, the coming year and the decade ahead. Thanks, everyone. And with that, I'll turn the call over to Bill.

William Trimble, CEO

Thanks, Darrell, and good morning. Thank you for joining us for our third quarter earnings call. As the pandemic continues to cripple the American economy, it gives me great pride to report that Easterly is continuing to weather the storm with little to no impact on the company's daily operations and maintains a portfolio where tenants continue to pay 100% of the rental obligations. While we're now eight months into the pandemic with no end date in sight, Easterly continues to work with our government tenants to provide a safe and clean work environment. I want to highlight the incredible job our asset management team has done, keeping our mission-critical facilities open and ready to serve the American people. The unsolicited letters of appreciation we have received from the government make us proud of the job our team is doing every day. In an environment where other office landlords are questioning their long-term strategies due to the economic effects of COVID, I am pleased to report that we remain so highly focused on owning bull's-eye, mission-critical assets leased to the U.S. federal government. The missions, locations, and design of our majority low-rise portfolio provide a safe and sustainable footprint for our enduring portfolio. While the Easterly earnings call may be the most important event of the week to us, I would be remiss if I did not acknowledge the presidential election. As the country is on edge awaiting the election of our next president, I'm pleased to report that the impact on the Easterly portfolio should remain unchanged. Our investors have seen Easterly thrive under both Democratic and Republican administrations as we remain apolitical, owning buildings whose missions transcend the parties' different philosophies. During the last ten years of executing our strategy in the private and now public markets, we have gone through government shutdowns, continuing resolutions, furloughs, debt ceiling negotiations, and are still navigating this historic pandemic. These events often cause concern, but are to be expected. When we created this strategy, it was for this very reason that events in the short term to midterm can cause huge swings in investors' value perceptions. We have been very deliberate in our approach to provide attractive, steady growth with a tenant credit second to none. Turning to our third-quarter performance. Our acquisitions team completed its fifth acquisition of the year, an approximately 76,000 square-foot Federal Bureau of Investigation field office in Mobile, Alabama. Like many of our other FBI field offices, this three-story office building sits on a large multi-acre site and is enhanced by a number of security features, including, but not limited to, perimeter fencing, controlled access, a vehicle repair annex, and future plans for the construction of a visitor screening facility, which will reside on the perimeter of the property. With this acquisition, Easterly now owns 11 of the 56 FBI field offices strategically located throughout the country and remains the single largest private owner of these highly important assets. This was a multiyear acquisition effort, and I congratulate the Easterly team for its ability to navigate a lengthy transactional process and continue to deliver for the company and our shareholders. This effort is reflective of a high-caliber team, led by Andy Pulliam and our Vice Chair, Mike Ibe, who continue to ensure a robust pipeline of actionable opportunities and an exceptional ability to execute. We continue to visit assets in person while following protocols to help ensure the safety of our team and work with third-party providers to complete exacting due diligence and ensure smooth closings. As we approach the end of 2020, we are confident in our ability to deliver on our stated goal of $200 million in acquisitions. Turning to development. Another important milestone was achieved in the third quarter of 2020. Easterly has reached completion and commenced its new 20-year lease at the FDA laboratory in Lenexa, Kansas. Mike Ibe, Mark Bauer, and team are truly talented in this niche market of the development world, and we're able to deliver the state-of-the-art laboratory a quarter ahead of schedule. The FDA Lenexa laboratory is now the newest regional laboratory for this highly important agency within the U.S. government. This also marks the second successful FDA redevelopment project in the Easterly portfolio following the delivery of FDA Alameda in 2019 and preceding the anticipated delivery of FDA Atlanta in the first half of 2023. Turning to leasing updates, our asset management team has remained extremely busy working with GSA and the underlying tenant agencies to renew the lease of the courthouse in Charleston, South Carolina, as well as the SSA office in Dallas, Texas. A new 20-year lease commenced for the Charleston Courthouse effective August 2020 and earned a highly attractive releasing spread, which we believe is customary for bull's-eye renewals. Similarly, the SSA facility in Dallas also renewed for a new 15-year term starting August of 2020. These renewals once again demonstrate the underlying value of these assets as well as the strength of the Easterly team as they successfully navigate a lengthy renewal process with the government. I congratulate the asset management team on a job well done this quarter. Finally, before handing the call over to Meghan, I want to thank all of our capital partners, new and old, for their commitment to the Easterly investment thesis. As I was recently talking with Andy Pulliam, our Head of acquisitions, we realized that just a little under two weeks ago, October 21, marked an important milestone for the company. As Darrell previously mentioned, 10 years ago, on this day, our predecessor company purchased our very first building, the FBI field office in San Antonio, Texas. Ten years later, this remains as important as it did then. Our focus on acquiring bull's-eye assets, our confidence in our re-leasing abilities, our commitment to our U.S. government tenant, and our unparalleled understanding of how to effectively own and operate a federally leased facility. And for those of you that have followed us and remain committed to our thesis, it should serve as no surprise that our investment approach has not changed in the last decade. Thank you again for your time this morning. And with that, I will turn the call over to Meghan to discuss the quarterly financial results and provide guidance for 2020 and 2021.

Meghan Baivier, CFO and COO

Thank you, Bill. Good morning, everyone. It gives me great pleasure to post another strong quarter and continue demonstrating our ability to grow by once again raising our 2020 guidance and issuing strong earnings guidance for 2021. COVID-19 continues to have no material financial impact on the organization, as Easterly received 100% of rental income due from our tenants in the third quarter. Similarly, we still do not expect any material rent collection issues for the fourth quarter and beyond. Turning to our quarterly results for the third quarter. Net income per share on a fully diluted basis was $0.05. FFO per share on a fully diluted basis was $0.31. FFO as adjusted per share on a fully diluted basis was $0.30, and our cash available for distribution was $23 million. As of September 30, we owned 76 operating properties comprising approximately 7 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 remains young at 13.3 years, while the weighted average remaining lease term grew since last quarter to 7.8 years. Given the delivery of FDA Lenexa, the acquisition of young buildings, and the renewal of several leases at our facilities, we have demonstrated the company's ability to continue to generate cash flows with strong visibility for years to come. Turning to the balance sheet. At quarter-end, the company had total indebtedness of approximately $905.1 million with a full $450 million available on our line of credit for future acquisitions and development-related expenses. As of September 30, Easterly's net debt to total enterprise value was 30.4%, and its adjusted net debt to annualized quarterly pro forma EBITDA ratio was a low of 5.6x. In the third quarter of 2020, the company issued approximately 1.5 million shares of its common stock through the company's ATM program at a net weighted average price of $22.72 per share, raising net proceeds to the company of approximately $33.5 million. Approximately 951,000 new shares were from forward sales transactions entered into in prior quarters. Today, the company has approximately 4.6 million shares, which are subject to unsettled forward sale transactions under the company's ATM program. Assuming these shares are physically settled in full at a weighted average initial forward sales price of $25.27 per share, the company expects to receive net proceeds of approximately $116.2 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. Turning to our earnings guidance. Once again, the company is increasing its guidance for 2020 FFO per share on a fully diluted basis to a range of $1.24 to $1.26. The midpoint of this guidance is based on the company completing $200 million of acquisitions and $35 million to $45 million of gross development-related investment in the year, and at the midpoint, represents over 4% growth rate year-over-year. This growth, coupled with a roughly 5% dividend, we believe, provides a highly attractive return to our valued investors, especially when considering the Easterly platform is built on the credit of the U.S. federal government. The company is also issuing 2021 FFO per share on a fully diluted basis guidance in a range of $1.28 to $1.30. The midpoint of this guidance is predicated upon completing $200 million in acquisitions and $25 million in gross development-related investment in 2021. Easterly remains on track to deliver 2% to 3% FFO growth per share year-over-year regardless of macroeconomics, global health, or political uncertainty. It is our goal to remain dependable and provide a constant source of growth for our shareholders. Our strategy and the strength that is provided in today's market stands alone in the public REIT space. We thank you for your commitment to our thesis and appreciate your partnership as we continue to deliver for you. Stay safe, everyone. And with that, I will turn the call back to Rob.

Operator, Operator

Our first question comes from Manny Korchman, with Citi.

Emmanuel Korchman, Analyst

Meghan, just as we think about next year, especially where the stock price is today, how do you think about funding? And with that, is there an opportunity to expand the existing forwards even more as you did in 3Q?

Meghan Baivier, CFO and COO

Yes. Manny, the ATM with forward capability is a very strong tool for us. It works well for just-in-time funding and our pipeline's nature. So you can expect us to continue using that into next year. I didn’t catch the second part; could you repeat that?

Emmanuel Korchman, Analyst

So, look, in 3Q like you made those programs bigger as you had more available proceeds on them than you had the previous quarter. Is that something that you can continue to do? Or maybe I misunderstood what was happening there?

Meghan Baivier, CFO and COO

Oh, sure. In terms of our current position regarding what we can take on, we've experienced strong stock performance throughout the year, especially considering the pandemic backdrop. We successfully raised over $25 million in efficient capital, and we are optimistic about what we have planned. We will likely continue to anticipate our needs for the next two to three quarters, as that seems to be the sensible approach.

Emmanuel Korchman, Analyst

Great. And then just down in Atlanta, could you maybe elaborate on what's causing that delay of a couple of quarters in the development completion there?

William Trimble, CEO

Sure, Manny. It's Bill. I want to emphasize that the federal government has often proven to be an unreliable partner. In all our projects, delays typically arise because the government seeks to add extra features to the buildings, which we are more than willing to accommodate. Considering the current circumstances, an FDA laboratory is one of the most critical assets we can develop. We're open to any changes that enhance the facility's relevance. Ultimately, it's up to the federal government, as they control the process, and we are eager to meet their requirements.

Operator, Operator

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

Michael Carroll, Analyst

Bill, can you give us some color on the investment pipeline today maybe versus six to twelve months ago? Do you expect activity will kind of pick up given the amount of equity in the forward contracts you've outstanding? Or is it really those forward contracts that you did just a way to be more opportunistic?

William Trimble, CEO

I will tell you that we have never seen more opportunities than we're seeing right now, Michael, that's an absolute certainty. And we're very pleased, and that falls across a number of different agencies, a number of different owners, a lot mined by our own team, not on the market. So I think we have the prudent amount of equity that we're raising on a forward basis. It's not speculative. It's based on what we're going to accomplish. And even in this environment, I'm incredibly proud of our team to be able to get this stuff done. But on track and in good shape from a pipeline standpoint.

Michael Carroll, Analyst

Then why is that activity stronger than it has been in years past? Is it just the uncertainty caused by the pandemic as people are looking to monetize their assets that they might not have been able to do that before or wanted to do that before? I guess what's driving that activity higher?

William Trimble, CEO

Yes. I certainly think that will be one of the many reasons that we see. I think it's a source of funds for folks that might have a hotel under development or other areas of real estate that are certainly not as certain as ours. And so we're actually seeing some reach out there. I think you're also seeing that massive VA pipeline that was created during the Obama administration and then into the Trump administration and will continue, a $63 billion program. There's a lot of brand-new 15- and 20-year mission-critical facilities that are being developed. And I think that's going to be out there for quite some time as well. So I think there's a combination, but I think the wind seems to be at our back right now.

Michael Carroll, Analyst

Okay. Great. And then just last question on the FDA Atlanta property, is there any updates on the expected lump sum? And when will those flow in through numbers? Or are we still waiting for the GSA to kind of finalize those plans?

Meghan Baivier, CFO and COO

Yes. We're still waiting for the GSA to complete design for us to be able to give a stronger estimate of what that total cost would be. But we are looking for that lump sum budget to be in and around $100 million.

Operator, Operator

Our next question is from Michael Lewis with Truist Securities.

Michael Lewis, Analyst

Great. I apologize if you already touched on this, but the G&A was the lowest you've had, I think, since 1Q '19, almost about $1 million lower than it had been running over the past four quarters. Was there anything specific to this quarter? And could you speak to kind of the run rate going forward?

Meghan Baivier, CFO and COO

Yes. Michael, you're right. You're picking up on just some seasonality with a very nice professional services expense decline this quarter. Nothing out of the norm, just the combination of those two coming through.

Michael Lewis, Analyst

Okay. So probably a run rate a little higher, more like what we've seen in the last few quarters, if we were going to estimate for next year?

Meghan Baivier, CFO and COO

Yes, perfect.

Michael Lewis, Analyst

Okay. I guess someone had to bring up the election. I won't ask you who you think will win, but I notice that DEA has about five years left on its average lease term, which is 10% of your annual rent. ICE has around five years on average as well, making up about 3%. Are you at all concerned that these or any other agencies might face downsizing, especially if there's a Democratic sweep, given some discussions around these agencies?

William Trimble, CEO

No. I believe both parties are generally in agreement regarding the opioid crisis. I'm not sure who will be quicker to prosecute individuals in that sector. This is a new reality that we've been navigating for quite some time, unfortunately, and both parties seem eager to address the drug issue. We have facilities in nearly every agency, and we thoroughly reviewed the missions and priorities of all agencies. We are satisfied with our portfolio and its positioning. It should not be surprising, as our initial aim was to remain apolitical. Remember, we spent 8 years with one candidate as Vice President and 4 years with the other as President, and we flourished under both administrations.

Michael Lewis, Analyst

Okay. Great. And then last one for me, kind of a bigger picture question. I think it was on your 2Q '18 call. Darrell said you expected the dividend to be at least $0.30 a share by the end of 2020. So I made a note of it in my model. And now that we're here, I'll ask about it. I think it's been obvious for a while that you weren't going to hit that mark. But maybe just give us a little sense of what happened, why you haven't been able to raise the dividend at all since then? And kind of what your expectations for the dividend are going forward over whatever period you're comfortable talking about?

Darrell Crate, Chairman

Yes, Michael, this is Darrell. I'll address that. Our development pipeline is still growing and strong, but it has taken longer to realize results than we anticipated. However, if you consider the run rate of our portfolio, we are very optimistic about our cash flows and their growth. We have also made significant progress in reducing our debt and positioning the business with some additional capital reserves, allowing us to apply leverage as we transition back to normal rates in the coming year or two. We are confident in our consistent growth. As we have mentioned, we expect the Funds From Operations growth to be around 2% steady, and as we proceed with our renewals and bring existing buildings on line, we anticipate seeing dividend increases over time.

Michael Lewis, Analyst

Okay, great. I have one more question regarding the appeal of development compared to acquisitions. With development, you have the potential for good deals that can create some variability in the story you've described. Now that Lenexa is completed, you only have the larger project in Atlanta left. How do you view filling the development pipeline versus allocating that capital primarily for acquisitions?

Darrell Crate, Chairman

I would say that development continues to be a valuable area for us to invest our capital. As we've stated before, our goal is not to become the largest REIT. We are selective in our acquisitions. Over the past few years, the quality of the buildings we've added to our portfolio has never been better. We're focused on providing stable cash flow, which we believe is our key differentiator, supported by the full backing of the U.S. government. With low volatility cash flows that outperform the Russell 1000, we see this as a strong foundation for both equity managers and those managing REIT securities. Looking ahead, we are carefully managing our funds and investing in high-quality, new developments that will greatly benefit our shareholders. Additionally, as we review our existing leases that are set to expire, we have $4.3 billion in cash secured by the federal government. I recall when we first met, that figure was just over $1 billion. We have consistently found higher quality buildings and can confidently project the reliability of these returns for the future.

Operator, Operator

Our next question is from Peter Abramowitz with Jefferies.

Peter Abramowitz, Analyst

I just wanted to ask about the acquisition market. Are you seeing any kind of change in terms of any more or less competition for the bull's-eye assets you're looking at really recently versus the last six or twelve months? And is there any impact from that on pricing either way?

William Trimble, CEO

We really haven't seen any new competitors come into the market. It's the same usual players. And it's certainly gratifying to have the lowest cost of capital in that competition. Really no public competitors at all that we're dealing with, and that's sort of been the same thing since we were in our private equity days. So no, we really haven't seen anybody, especially in those bull's-eye properties.

Peter Abramowitz, Analyst

Sure. Looking at the guidance, the implied range is $0.31 to $0.33 for the fourth quarter, which translates to an increase of 3% to 6.5% compared to this quarter. Is there anything beneath the surface that we should know about that could lead to an increase of $0.01 or possibly up to $0.02?

Meghan Baivier, CFO and COO

Certainly. When considering the changes in the fourth quarter compared to the third quarter, Lenexa is starting earlier than we expected by about a month, and its performance is looking quite strong. Additionally, we have a $200 million acquisition target for the year, which requires $50 million for completion. Achieving that in one quarter is a significant goal based on our current trajectory. Therefore, both of these factors will drive the fourth quarter results.

Operator, Operator

Our next question is from Bill Crow with Raymond James.

William Crow, Analyst

Two questions. On the acquisition front, again, you talked about no new competition. I'm just wondering why that might be because it seems like success kind of brings more competition, and you've delivered on the success part of it. So why aren't we seeing more capital earmarked to your sector?

William Trimble, CEO

I believe that in the public markets, there is limited space available, and if any company were to go public, it would not come as a surprise to us, but we do not expect that to happen. In the private sector, there are several factors at play. Our cost of capital is becoming increasingly attractive each day. Additionally, we have the ability to leverage our relationships in both the debt and equity markets, which makes us a strong competitor against private equity funds. Our deep knowledge of this industry and the extensive groundwork laid since 2009 gives us a significant advantage over newcomers. It seems easier for interested investors, especially those from international markets, to choose to acquire DEA rather than to start a new private equity fund. Lastly, while the government can be a great partner, navigating that relationship can be complex. We have built a robust organization with a talented team, such as Ron Kendall in government affairs and Nick Nimerala in asset management, who bring extensive experience in this sector. This level of expertise would be difficult for anyone else to assemble from scratch.

William Crow, Analyst

Yes. Fair enough. The other question, again, I've covered you for a long time. So I think I know the story, but within other parts of the office, we're certainly seeing a lot of pain related to work from home and the economic downturn and job losses and things like that. I don't anticipate, obviously, any impact on your tenant base from that. But as market rents around the country come under pressure, does that take any ability of yours to push rents on renewals off the table? Or are you in such unique markets that it's just not relevant?

William Trimble, CEO

I'll start and then Meghan can finish. Bill, you certainly understand our situation; it has been a while. Regarding the bull's-eye properties, I have to say I’m not sure how we all ended up in an office to start with. We really represent our own asset class, and Darrell articulated that well in his introduction. You can't conduct IRS work from home, you can't take records out, and the FBI can't operate from their living room. There are many reasons why this physical footprint is essential, including the laboratories and other facilities. For a small portion of our portfolio, which we refer to as more traditional and based on market rent, I’m pleased to report that we managed to renew most of those leases for long terms going forward. I don't anticipate any issues there. While our timing was fortunate, it also worked out well considering many of those properties will remain relevant for a long time. Meghan?

Meghan Baivier, CFO and COO

Yes, with regard to replacement costs, obviously, the financing costs, et cetera, can and likely will on regular office rents put some pressure on utilization as well. But remember, when we approach a renewal of one of our assets, we're not moving right up to what we believe the replacement cost is. We're able to renew with these attractive spreads and be the best alternative to the replacement cost. So we've got some natural built-in cushion there that we expect and are continuing to see buffer our renewal process.

Operator, Operator

Next question is from Merrill Ross with Compass Point.

Merrill Ross, Analyst

I see in the renewals for 2021, there are four buildings that are 20 years old that are clearly described as bull's eye, one is a DEA lab in Dallas, actually three are to the DEA and one is for the FBI. Do you have a preliminary view or have you any conversations to that would allow us to estimate the renewal at replacement cost after 20 years for those buildings or TIs that might be requested by the tenant?

William Trimble, CEO

Well, I'll start, and Meghan can fill you in further. When you look at our laboratory in Dallas, that probably would fall within the most sophisticated facilities that we have. And our team just constructed the most recent DEA laboratory in Pleasanton, California, in the Bay Area, which models our Dallas laboratory. I mean, they're very much the same. And the price on a new one of those facilities is so astronomical that I think we have plenty of room, obviously, to not only get very substantial rent increases in that building, but still be a very attractive option for our government partners compared to building something new. Because basically, if you travel into both the new one and the Dallas as well as if you take our Vista out in California, those laboratories are almost identical. Meghan?

Meghan Baivier, CFO and COO

Yes, Merrill, we're always going to be careful in terms of commenting on in-process renewals. Everything that's up for renewal this year or next year is in process if it hasn't already been completed. But we look forward to sharing with you the outcomes as those progress. Our target of high teens to low 20s, we have expected that to come with, on average, about $25 a foot. That will range from $0 to $50, depending upon a particular asset, but that is the ZIP code that we have performed within, in fact, a little bit light to that, but where we expect renewals to be next year and this year.

Operator, Operator

Our next question is from Manny Korchman with Citi.

Michael Bilerman, Analyst

It's Michael Bilerman here with Manny. Darrell, I wanted to come back to sort of growth and cash flow and congratulations on the 10-year anniversary from buying that original FBI building. But I guess just take a shorter time period. Let's look at the last five years, 2016 to today. Your core earnings and cash flow is flat, relatively flattish. Your gross assets have increased 3x. Now you've delevered over that time, your equity base has grown 4x, but it hasn't translated yet into strong earnings or cash flow growth. And I know you and I over the years have had discussions about what's on the come. The dividend has been flat for the last three years. So can you just sort of step back a little bit and if you're able to project forward, let's say, the next five years, how should investors think about cash flow growth, dividend growth at the expense of just total equity and asset growth?

Darrell Crate, Chairman

Yes, Michael, that’s a great question. We really appreciate the chance to share our perspective. Our goal is not to be a highly volatile REIT with significant fluctuations. Instead, we aim to provide stable real estate with no drama, beginning with the solid backing of the U.S. government. We’ve outlined our intention to grow our funds from operations by 2% to 3% annually. Looking at our growth from 2018 to 2019 and from 2019 to 2020, we’ve managed to achieve slightly over 3% growth. We are also working on reducing our debt, which can potentially add a few cents to our earnings growth if we opted for a more aggressive approach. The feedback we’ve received from investors indicates that delivering consistent growth of 2% to 3%, along with a dividend yield of 4% to 5%, presents a compelling opportunity. When we evaluate our performance against the Russell 1000 and look at our cash flows, it reinforces our aim to provide stability within any portfolio. I believe we can project a growth trajectory of around 2.5% for the next five years. As we bring developments online, the dividend should align with that growth.

Michael Bilerman, Analyst

But shouldn't you be able to generate much, I mean, just given the amount of capital you're putting out and the spread on that capital and then also the embedded leases that you have, you really should be able to put forth a lot better growth than a very, very low-single-digit growth platform?

Darrell Crate, Chairman

I don't know. When I look at it, we have one building with a long-term lease that has a free rent period ending soon. This will definitely increase our cash flow. The spread we're generating compared to 10-year treasury yields is quite attractive. We're not in the ultra-luxury segment of real estate. We're focusing on the stability of government cash flows, and we're providing a strong return to investors. That's what we're aiming for. We're also open to any suggestions on how we can manage the business differently or enhance growth for our shareholders.

Michael Bilerman, Analyst

Coming back to the last three years, I don't think the intent was to have a $0.26 quarterly dividend. And certainly, it just seems that there's something not connecting between all the dots. And I'm not doubting, your business is a great business. It's an attractive business. It just doesn't seem to be flowing into your results as much, and I'm trying to figure out where there's a mismatch between what you're talking about and ultimately, the results.

Darrell Crate, Chairman

Yes, that's a great question. I really appreciate it. PTO has likely been the biggest cash drain. For those who may not know, that refers to a building near Washington, D.C., which is the Patent and Trademark Office. It has some dark fiber connected to their headquarters. When we initially acquired the building, the commercial rates exceeded what we were receiving in our leases. Unfortunately, the submarkets in Washington faced re-leasing before Amazon chose to relocate there. This situation required us to avoid jeopardizing the stability of the building, leading to less revenue growth than we expected and significant free rent concessions. This has impacted the dividend, prompting us to be cautious about how we manage it. However, the upcoming development projects, particularly the FDA lab, promise to be quite profitable, and I believe the dividend will eventually benefit from this growth. We have made efforts to ensure clarity regarding our commitment to deliver FFO growth based on stable cash flows. I would say we'll be opportunistic in the market, and Meghan has done a fantastic job of raising significant proceeds. Looking ahead, we have attractive equity that we can utilize. I believe it's wise to continue deleveraging a bit. If we can show that we are capable of delivering 2% to 3% FFO growth consistently over the next five years, coupled with a balance sheet that allows for more leverage, it will enable us to make significant acquisitions without raising additional equity, which will be very beneficial. As a new public company, our focus has been on maximizing earnings while managing G&A and scaling our business effectively, which we have achieved. Now, as we assess our portfolio, our goal is to provide stable, differentiated earnings without applying excessive pressure to raise capital or defend high leverage levels. This positions us well for the next five years to deliver consistent growth and exceed investor expectations.

Operator, Operator

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Darrell Crate for closing remarks.

Darrell Crate, Chairman

Well, thank you, everyone. Thanks for joining the Easterly Government Properties Third Quarter 2020 Conference Call. We look forward to continuing, again, to deliver stability and growth to shareholders, and we appreciate you joining the call today.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.