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    Easterly Government Properties (DEA)

    DEA Q2 2024: 7.25% capital cost drives robust acquisition pipeline

    Reported on Jul 31, 2024 (Before Market Open)
    Pre-Earnings Price$35.25Last close (Jul 30, 2024)
    Post-Earnings Price$35.13Open (Jul 31, 2024)
    Price Change
    $-0.12(-0.34%)

    What went well

    • Low Cost of Capital: The company’s current cost of capital is about 7.25%, which—combined with recent stock appreciation—suggests more accretive investments and improved financing conditions in a maturing market.
    • Robust Growth Pipeline: The team is actively pursuing a significant pipeline of acquisition and development opportunities, positioning the company to capitalize on market improvements as bid-ask spreads narrow.
    • Positive Lease Renewal Outlook: With key tenancies like the FBI in Omaha expected to renew (even if flat) and other renewals anticipated to generate net effective spreads in the high-teens, there is confidence in maintaining stable, attractive cash flows.

    What went wrong

    • Acquisition Pipeline Uncertainty: The Q&A highlighted reliance on a robust acquisition pipeline and current low cost of capital (~7.25%). If market conditions worsen or if execution lags, the reverse could hurt growth prospects.
    • Lease Renewal Risks: The discussion noted that key leases—such as FBI - Omaha—are expected to renew on a flat basis, which may limit rent escalations and impact cash flow stability if other upcoming lease renewals also underperform.
    • Potential Credit Losss and CapEx Pressure: There is caution regarding a pre-lease loan requiring credit loss estimation and higher maintenance CapEx noted during the quarter, both of which could pressure future earnings.

    Q&A Summary

    1. Acquisition Opportunities
      Q: Acquisition prospects & spreads?
      A: Darrell highlighted robust deal flow with narrowing bid-ask spreads, noting a cost of capital around 7.25% and a significantly active pipeline that supports their growth strategy.

    2. Leasing Outlook
      Q: Update on 2024/2025 lease expirations?
      A: Meghan indicated progress on key 2024 leases, particularly with FBI in Omaha, and expressed optimism for 2025 as multiple FBI leases and a courthouse in Aberdeen mature.

    3. Lease Spreads
      Q: Expected lease spread range?
      A: Meghan explained that while the FBI-Omaha renewal is flat due to prospectus requirements, the other leases are targeting high-teens% net effective spreads.

    4. Acquisition Competition
      Q: Impact of competition on pricing?
      A: Meghan noted that with a normalized cost of capital, they expect attractive opportunities at spreads of 50 to 100 basis points, underscoring a competitive market position.

    5. JV Acquisition Timing
      Q: When will JV acquisition close?
      A: Meghan confirmed that the VA – Jacksonville JV is set to close this quarter, marking the final piece of that transaction.

    6. Credit Loss Provision
      Q: Explain credit loss asset adjustment?
      A: Allison clarified that a small pre-lease award loan, while not defaulting, requires ongoing credit loss estimations as per accounting rules until maturity.

    7. Maintenance CapEx
      Q: What is the maintenance CapEx outlook?
      A: Allison mentioned that despite a slight uptick this quarter, the overall maintenance CapEx run rate remains unchanged for the remainder of the year.

    8. Political Impact
      Q: Could election changes impact operations?
      A: Darrell reassured that their strategy centers on non-partisan agencies like VA, FBI, and DEA, making them largely immune to political shifts.

    Analyst Coverage

    Research analysts covering Easterly Government Properties.