Greetings, and welcome to the Easterly Government Properties First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the call over to Lindsay Winterhalter, Vice President, Investor Relations. Please go ahead.

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.

Thank you, Lindsay. Good morning, everyone, and thank you for joining us for this first 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. Before we begin, I want to extend my well wishes for the health and safety of everyone on this call. These are unprecedented times, and we all eagerly await the day when we can meet face-to-face once again. What a quarter it has been? We’ve witnessed the strength of the company’s defensive and differentiated strategy, the virtues of a revenue stream backed by the full faith and credit of the U.S. government are serving investors well. We’ve spent the last five years as a public company, carefully assembling the necessary tools to perform in any business environment. And we’ve achieved scale in our operations, meaningfully diversified and maintained the average length of our leases.

Thanks, Darrell, and good morning. Thank you for joining us for our first quarter earnings call. Given this unique backdrop, I’ll begin with our operations at Easterly in light of the COVID-19 pandemic, and then continue with my more traditional discussion of our quarterly activities. We commenced our work-from-home protocol for our employees on Friday, March the 13th, and thanks to our supper operations and IT staff. We enjoyed a near seamless transition from in-office operations, with efficiency remaining high and morale strong. With just 40 employees company-wide, our leadership team is able to maintain our closeness structure with time to make sure that Easterly team is doing well, their families are staying safe, and they have the support they need during these challenging times. I’m proud of how Easterly has adapted to this change and I applaud our staff for being so ahead of the curve in terms of planning and preparedness. We continue to monitor the effects of social distancing across the region and the country and look forward to returning to our offices soon, but only when it is safe to do so. Our proactive approach extends to our strong commitment toward and partnership with our primary tenant, the U.S. Federal Government. The operations with many of our tenant agencies are deemed essential. And our asset management team has been exceptional in deploying the structured COVID-19 response plan across the portfolio, while also meeting the unique needs of certain properties, as they combat suspected and confirmed COVID cases. Today, there have been 17 suspected cases and three confirmed cases of COVID-19 throughout our entire portfolio. Our team has worked quickly with the government to address these situations as they arise, and we’ll continue to review our response plan to ensure the health and safety of our tenants and our employees. The praise we have received from the GSA and the underlying agencies with respect to our level of service in an expeditious manner is just another example of our differentiated approach towards the U.S. government. These are trying times and Easterly has and will continue to deliver.

Thank you, Bill. Good morning, everyone. Easterly’s unique portfolio of government-leased real estate has once again allowed us to predictably post strong expectations meeting earnings. Like Bill, allow me a moment to discuss Easterly’s operations from a financial standpoint. We are pleased to report the financial impact from COVID-19 on the Easterly rent roll has been de minimis. In the first quarter, uncollected rental income was approximately $1,300, and we do not expect any material rent collection issues for the second quarter and beyond. Turning to our quarterly results. As you saw in our earnings release, for the first quarter, net income per share on a fully diluted basis was $0.02. FFO per share on a fully diluted basis was $0.30, FFO as adjusted per share on a fully diluted basis was $0.29, and our cash available for distribution was $21.8 million. As of March 31, we owned 72 operating properties, comprising approximately 6.8 million square feet of commercial real estate, with two additional projects totaling approximately 222,000 square feet under development or in design. The weighted average age of our portfolio was 13.1 years. Turning to the balance sheet. At quarter-end, the company had total indebtedness of approximately $943 million, with $414 million available on our line of credit for future acquisitions and development-related expenses.

Thank you. We will now be conducting a question-and-answer session. The first question is from Manny Coachmen of Citi. Please go ahead.

Good morning. This is Katy McConnell on for Manny. I was wondering if you could just provide some color on the pricing of deals completed to date and where you stand versus the $200 million guidance for the year? And then maybe talk about how the competitive landscape has changed as you look for additional opportunities?

Absolutely. Good morning to you. So basically, DHA – Aurora, our first purchase is $14 million. Our FBI/DEA/El Paso joint facility was $38.7 million. Our VA - Mobile was $39.5 million, and the VA - Chico was $33.1 million, which totals to $124.7 million, which for – on our way to $200 million, I’d say, we’re in an awfully good start since last time I checked, we won’t get to the year for a couple of half year way through the year for a couple of months and we continue to see plenty of opportunities. I think the landscape in our market, in many ways, remains the same. I think there’s an additional opportunity now in that some of the sellers and we’re familiar with absolutely every one of them. And I tell you hats off to our acquisitions team who are really dialing all day long and talking to our friends that own these buildings. There are a number of owners that also have other properties that are not in the government space, including hotel developments and as such. And I think that we’re going to see some opportunities as some of these developer – regional developers take advantage of being able to sell those properties to us in an expeditious manner and build cash reserves for other opportunities. So from that standpoint, I think, we have a bright pipeline this year, and we will continue to execute on it.

Okay, great. Thanks.

The next question is from Michael Carroll of RBC Capital Markets. Please go ahead.

Yes, thanks. Bill, just kind of off of those last comments, and I know it seems like there are some opportunities for some more single asset-type transactions. I mean, what about the portfolios? I know, those are harder to predict, but are those owners more willing to sell some of their properties and derisk during this type of environment? Or are they still holding pact?

Hey, Michael, good morning. I think it’s the same there really, but you can be assured that we’re calling the owners of the smaller portfolios and the larger portfolios. And obviously, from an M&A standpoint, we think we’re in a terrific position with our cost of capital right now to move forward. Having said that, I think, naturally, things are not moving quite as quickly today and people are still triaging their own situations. So I would say, all in all, it’s pretty much a steady state there. But just to – my message would be that I have a positive outlook on what we’ll be able to accomplish in the pipeline this year.

Okay. And then on the single assets like how much big – I mean, is that a – how much bigger is the pipeline today, given these increased opportunities? Is there a way to kind of quantify that?

No, I mean, I’d tell you, we’ve – since 2010, have we just – solely us, but we’ve stuck with $700 million out there that we think is a good number to be familiar with. And the $200 million is obviously based on what we’re pretty darn sure we can execute on. So I will just say that we are busy trying to exceed that number, and we have in many years, we can’t guarantee that sort of thing. But that’s certainly our preference, is to put the throttle forward when we’re looking to situate them with our cost of capital in this particular time.

Okay. And then on the near-term lease expirations that are coming due, is there, I guess, any delay in those? And is there a risk that some of those leases go into holdover? Or is the government still, I guess, working as typically we would expect, and is the activity is kind of in line of where it has been historically.

Hey, Michael, this is Meghan. The GSA is proven to be very efficient from working from home. So we are in touch with lease contracting officers and leasing activity, in general, is progressing and moving forward.

Okay, great. And then I guess, last question for me is, how should we think about the settlement of those forward equity commitments? I know you typically have 12 months to close those. I mean, should we kind of straight line that? Are you going to assume that you close those as more deals kind of come through?

Yes. Michael, that’s going to be used for, if you will, just-in-time funding around deals being closed.

Okay, great. Thank you.

The next question is from Peter Abramowitz of Jefferies. Please go ahead.

Hi, thank you. Just wanted to get your thoughts on kind of long-term in a recessionary environment, obviously, for kind of more traditional real estate assets, you would typically expect some cap rate expansion now, being kind of in the niche market that you guys are in. What are your thoughts on kind of how cap rates could potentially move, just given everything that the economy is facing?

Good morning. I’d tell you, having done this since 2000, started looking at this in 2009, it’s been really quite incredible how little cap rates have moved through various events that we’ve seen since over a decade ago. The scarcity of the buildings, which is an advantage we have, because we know all the buildings out there, I think, is mostly the driving factor. We’ve been very careful not to, as we said, become the elephant in the swimming pool and start driving pricing up too much in front of us. And you will continue to see a really disciplined approach from us for long-term growth. Having said that, in this market today, we’re really seeing the same sorts of cap rates last year. And into the first quarter, most of those cap rates have been into that sort of low to mid-6 area. Obviously, when you’re looking at some of the most pristine properties and let’s take a brand-new FBI with a 15 or 20-year lease or maybe even one of our new FDA laboratories, which we were fortunate enough to build ourselves and have over 7 yield on, those sorts of facilities are going to be down below 6, maybe 5.9, 5.8. And I think they’ve always been there. Obviously, with our current cost of capital, even they could be attractive for $0.01 per share for our shareholders. So I think you’re going to see us maintain and hold a disciplined approach. But I think you might also see us occasionally go out and get some pristine properties that not only build our average lease term, but continue to drive us towards the center of the bullseye and quality for the portfolio as long, obviously, as it’s accretive and a lot is accretive at our current cost of capital.

Sure. Okay. Thank you. That’s helpful. And then just one more kind of given the shifting priorities for federal spending, does that – do you think that at all impacts kind of the concentration of different agencies that are in the portfolio? Do you see that having any impact on just the mix of tenant exposure from government agencies moving forward?

No, I think that – I think consumer is the largest employer in the world and largest office tenant in the United States. The Federal Government does not seem to be pulling back on their expenditures right now. And, in fact, I think we might see more opportunities going forward. Is government seems to be poised to – has grown substantially during this period of time? I think, we can only be beneficiaries of that. Obviously, our portfolio has really been sort of targeted at about three dozen agencies that we believe whether we have Republican or Democrat in office, we’ll do just fine and weather any storm. But I mean, I think our – if you look at our FEMA facilities, you go to the FDA laboratories that we’re building, there’s 10 more to go. I don’t see really the Federal Government cutting back on the new FDA laboratories. I don’t see the Federal Government cutting back on the VA outpatient clinics that are providing an incredible amount of service right now to our veterans, 22 million men and women. And so, the FBI has certainly got a lot going on. So I think the Federal Government is going to be a good place to be and it’s certainly a certain place to be for the foreseeable future. And I think they’re leaning into development projects going forward.

All right. That’s it for me. Thank you.

The next question is from Bill Crow of Raymond James. Please go ahead.

Great. Good morning, everybody. Any change in the buyer pool out there that you’re competing against? I’m just curious whether this period is knocking folks out or was – whether it’s actually shifting more people into a more defensive mode and looking for this longer-term net lease like structure?

Good morning, Bill.

Good morning.

It’s hard to tell exactly what’s happened. I will tell you that we have won every single building and some have been obviously off-market that we’ve wanted to do this year. So from our standpoint, it’s been clear sailing. There were rumors at the beginning of March that others were going to think about getting into the government space, because it was such a safe place to be. That has not happened. I think the daunting task of dealing with the Federal Government, if you don’t have people that have been trained, you don’t have the verticals, you don’t have the government operations team. And certainly, the databases and the knowledge, we’ve seen that just completely that was just a quick flash and did not occur. So I think from that standpoint, certainly, from a cost of capital, our friends who are in the private area of the GSA acquisitions, I think, do not have as strong a cost of capital right now. So from our standpoint, we’ve got the green light, we’re going to be prudent and we’re going to execute. But we have not seen a big change in the landscape.

I appreciate that. What are you seeing on re-leasing spreads?

Hey, Bill, this is Meghan. The dynamic around how we approach re-leasing and what drives our re-leasing spreads really has not been impacted by this pandemic. And so the dynamic around the fact that the replacement cost of the asset remains the high watermark for these conversations really hasn’t shifted. And our re-leasing, if you will, processes stay on track in line with that expectation.

All right. Thanks, Meghan. One more for you…

Sure.

…given the cost of capital today, do you find yourself leaning more into equity on a relative basis? Or are you trying to maintain your debt equity balance as it has been historically? What are your thoughts there?

Yes. So, obviously, like the way we’re positioned today, but as we continue to build into the year and lean into the $200 million-plus type goals in terms of acquisitions, that is absolutely an opportunity for us to continue to use equity to delever the balance sheet, while still delivering on earnings expectations. So that is a dynamic you can expect us to take advantage of as we move through the year.

Yep. Okay. Thank you. I appreciate it.

Thank you.

This concludes the question-and-answer session. I would like to turn the floor back over to Darrell Crate for closing comments.

Great. Well, thank you, everyone, for joining the Easterly Government first quarter 2020 conference call. While the company will not miss a beat because of COVID, we all look forward to the end of quarantine and being together with colleagues and investors soon, and we wish everybody good health.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.