DEA Q2 2024: 7.25% capital cost drives robust acquisition pipeline
- 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.
- 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.
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.
Research analysts covering Easterly Government Properties.