DEA Q3 2024: Guides 2-3% Core FFO Growth on $1.5B Pipeline
- Robust Pipeline and Accretive Acquisitions: Management highlighted a $1.5 billion pipeline with numerous accretive opportunities, including government-adjacent assets that can be acquired at a 50–100 basis point spread over their cost of capital.
- Stable Lease Renewals and Favorable Rent Spreads: The team successfully completed all significant 2024 lease renewals and forecasts mid- to high-teens net effective rent spreads for 2025, supporting steady cash flows and future revenue growth.
- Attractive Cost of Capital and Leverage Management: With a cost of debt in the low 6s and overall cost of capital in the low 7s, coupled with a balanced 50-50 debt and equity approach, the company is well-positioned to execute its acquisition strategy and drive its 2–3% core FFO growth guidance.
- Acquisition Execution Risk: The company’s growth strategy relies heavily on executing a robust acquisition pipeline that can be inherently “lumpy.” If market dislocations or integration issues delay or reduce acquisitions, the anticipated core FFO growth might not materialize as planned.
- Exposure to Political and Lease Uncertainties: Although management dismissed concerns regarding potential political risks—for example, questions on the Aurora asset in relation to possible government realignment—such uncertainties could impact lease renewals and long‐term tenant stability.
- Dependence on Favorable Financing Conditions: The strategy assumes continued access to low-cost debt in the comfortable 6.5% to 7.5% leverage range. Any shifts in the cost of capital or tightening of debt markets could erode the intended spread between acquisition cap rates and cost of capital, adversely affecting returns.
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2025 Guidance
Q: What drives 2025 growth and leverage?
A: Management emphasized a pipeline-driven strategy with $90M–$300M in acquisitions and leveraging strong property NOI to deliver 2–3% core FFO growth, while maintaining a comfortable leverage range around 6.5%–7.5%. -
Leverage Metrics
Q: What leverage and cost spreads are expected?
A: They noted a stable overall cost of capital in the low 7s, with new debt in the low 6s and targeting deals with yields in the high 7s–8%, ensuring spreads of 50–100 basis points. -
Lease Outlook
Q: What is the update on lease renewals and spreads?
A: Management confirmed that all significant 2024 leases were renewed and they expect net effective rent spreads to remain in the mid- to high-teens for 2025. -
Buyer Competition
Q: Are private buyers affecting deal flow?
A: They stressed that private buyer participation has largely evaporated, easing competitive pressures and enhancing access to attractive debt financing. -
Pipeline Composition
Q: What comprises the $1.5B pipeline?
A: The pipeline is robust and mainly consists of individual assets, with only a couple of small portfolios, and no mega-sized portfolios under consideration. -
G&A Expense
Q: Why did G&A expenses drop this quarter?
A: The decrease was driven by a voluntary resignation that resulted in forfeited equity awards; management expects run-rate G&A to remain flat going forward. -
Credit Loss Provision
Q: What is behind credit loss provision fluctuations?
A: It is an accounting construct that is updated quarterly based on loss estimates rather than actual defaults. -
Development Loan
Q: How does the development loan fit into the pipeline?
A: Management views it as a smart use of capital to support developers, with an attractive return during the lending period and potential future portfolio acquisition.
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