Easterly Government Properties, Inc. (DEA)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our results of operations and financial condition in conjunction with the audited consolidated financial statements and related notes thereto as of December 31, 2024 and 2023 and for the years ended December 31, 2024, 2023 and 2022 and the sections entitled “Risk Factors,” “Forward Looking Statements,” “Business,” and “Properties” contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Annual Report on Form 10-K entitled “Risk Factors” and “Forward Looking Statements.”

Overview

References to “Easterly,” “we,” “our,” “us” and “our company” refer to Easterly Government Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries including Easterly Government Properties LP, a Delaware limited partnership, which we refer to herein as our operating partnership. We present certain financial information and metrics “at Easterly Share,” which is calculated on an entity-by-entity basis. “At Easterly Share” information, which we also refer to as being “at share,” “pro rata,” “our pro rata share” or “our share” is not, and is not intended to be, a presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We are an internally managed real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate over 90% of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration, which we refer to herein as the GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.

We focus primarily on acquiring, developing and managing U.S. Government-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. We may also consider other potential opportunities to add properties to our portfolio, including acquiring properties leased to state and local governments with strong creditworthiness and other opportunities that directly or indirectly support the mission of select government agencies. As of December 31, 2024, we wholly owned 90 operating properties and ten operating properties through an unconsolidated joint venture (the “JV”) in the United States encompassing approximately 9.7 million leased square feet (9.2 million pro rata), including 92 operating properties that were leased primarily to U.S. Government tenant agencies, four operating properties leased to tenant agencies of a U.S. state or local government and three operating properties that were entirely leased to private tenants. As of December 31, 2024, our operating properties were 97% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned two properties under development that we expect will encompass approximately 0.2 million leased square feet upon completion.

Our operating partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of our operating partnership and owned approximately 95.2% of the aggregate limited partnership interests in our operating partnership, which we refer to herein as common units, as of December 31, 2024. We have elected to be taxed as a REIT and believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.

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Acquisitions

On April 12, 2024, we acquired a 129,046 leased square foot U.S. Immigration and Customs Enforcement (“ICE”) facility near Dallas, Texas that has lease expirations ranging from 2032 to 2040.

On May 7, 2024, we acquired a 27,840 leased square foot Homeland Security Investigations (“HSI”) facility in Orlando, Florida with a 15-year lease that does not expire until March 2036.

On May 9, 2024, we acquired a 49,420 leased square foot ICE facility in Orlando, Florida with a 20-year lease that does not expire until August 2040.

On September 4, 2024, we acquired a 99,246 leased square foot Northrop Grumman facility near Dayton, Ohio with a 5-year lease through August 2029.

On October 10, 2024, we acquired a 104,136 leased square foot Northrop Grumman facility in Aurora, Colorado with a 9-year lease through February 2032.

On November 21, 2024, we acquired a 100,000 leased square foot Internal Revenue Service (“IRS”) facility in Ogden, Utah with a 5-year lease through January 2029.

On November 27, 2024, we acquired a 295,253 square foot campus across three assets leased primarily to the Wake County Public School System with a 10-year lease through June 30, 2034.

Investment in unconsolidated real estate venture

On August 29, 2024, the JV acquired a 193,100 square foot Veteran Affairs (“VA”) outpatient facility in Jacksonville, Florida with a 20-year lease that does not expire until October 2043.

Development

On April 4, 2024, we acquired land to develop a 50,777 square foot Federal courthouse in Flagstaff, Arizona. The courthouse will be primarily leased to the GSA for beneficial use of the Judiciary of the U.S. Government (“JUD”) over a 20 year non-cancelable term.

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Results of Operations

Comparison of Results of Operations for the Years Ended December 31, 2024 and December 31, 2023

The financial information presented below summarizes the results of operations of our company for the years ended December 31, 2024 and 2023.

Revenues

Total revenues increased $14.8 million to $302.1 million for the year ended December 31, 2024 compared to $287.2 million for the year ended December 31, 2023.

The $15.7 million increase in Rental income is primarily attributable to the nine operating properties acquired since December 31, 2023 and a full period of operations from the three operating properties acquired during the year ended December 31, 2023.

The $2.4 million decrease in Tenant reimbursements is primarily attributable to a decrease in tenant project reimbursements.

The $0.2 million increase in Asset management income is attributable to the fee earned by us for asset management of the JV from the one property acquired since December 31, 2023 and a full period of operations from the one property acquired during the year ended December 31, 2023.

The $1.3 million increase in Other income is primarily attributable to an increase in interest income from our loan receivable.

Expenses

Total expenses increased by $2.8 million to $225.3 million for the year ended December 31, 2024 compared to $222.5 million for the year ended December 31, 2023.

The $1.8 million decrease in Property operating expenses is primarily attributable to a decrease in tenant reimbursable projects and utility costs across the portfolio partially offset by an increase from the nine operating properties acquired since December 31, 2023 and a full period of operations from the three operating properties acquired during the year ended December 31, 2023.

The $0.5 million increase in Real estate taxes is primarily attributable to the nine operating properties acquired since December 31, 2023 as well as a full period of operations from the three operating properties acquired during the year ended December 31, 2023.

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The $5.0 million increase in Depreciation and amortization is primarily attributable to the nine operating properties acquired since December 31, 2023 as well as a full period of operations from the three operating properties acquired during the year ended December 31, 2023.

The $2.7 million decrease in Corporate and general administrative costs was primarily due to a decrease in employee costs and non-cash compensation.

The $1.5 million increase in Provision for credit losses is primarily due to a construction loan entered into on August 6, 2024 to lend up to $52.1 million to a developer.

Income from unconsolidated real estate venture

The $0.6 million increase in Income from unconsolidated real estate venture is primarily attributable to our pro rata share of operations from the one operating property acquired by the JV since December 31, 2023 and a full period of operations from the one operating property acquired by the JV during the year ended December 31, 2023.

Interest expense, net

Interest expense, net increased by $13.3 million to $62.4 million for the year ended December 31, 2024 compared to $49.2 million for the year ended December 31, 2023. The increase is primarily attributable to the fixed rate, senior unsecured notes entered into during the three months ended June 30, 2024 and September 30, 2024 and higher weighted average interest rates across the Company's borrowings.

Gain on the sale of real estate

For the year ended December 31, 2024, we recognized a Gain on the sale of a land parcel totaling $0.2 million.

Comparison of Results of Operations for the Years Ended December 31, 2023 and December 31, 2022

Information pertaining to fiscal year 2022 was included in our Annual Report on Form 10-K for the year ended December 31, 2023 on page 40 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which was filed with the Securities and Exchange Commission, or SEC, on February 27, 2024.

Liquidity and Capital Resources

We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant improvements, development activities at FDA – Atlanta and JUD – Flagstaff, planned and possible acquisitions of properties, stockholder distributions to maintain our qualification as a REIT, potential repurchases of common stock under our share repurchase program and other capital obligations associated with conducting our business. At December 31, 2024, we had approximately $19.4 million available in cash and cash equivalents, $8.5 million of restricted cash and there was approximately $125.3 million available under our revolving credit facility.

Our primary expected sources of capital are as follows:

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existing cash balances;

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operating cash flow;

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distribution of cash flows from the JV;

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available borrowings under our 2024 revolving credit facility;

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issuance of long-term debt;

•
issuance of equity, including under our ATM Programs (as described below); and

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asset sales.

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Our short-term liquidity requirements consist primarily of funds to pay for the following:

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development and redevelopment activities, including major redevelopment, renovation or expansion programs at FDA – Atlanta, JUD – Flagstaff and other individual properties;

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potential property acquisitions;

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tenant improvements, allowances and leasing costs;

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recurring maintenance and capital expenditures;

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debt repayment requirements;

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commitments to fund advancements through loan receivables;

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corporate and administrative costs;

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interest payments on our outstanding indebtedness;

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interest swap payments;

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distribution payments; and

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repurchases of common stock under our share repurchase program.

Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or required. As of the date of this filing, there were no known commitments or events that would have a material impact on our liquidity.

Equity

Shelf Registration Statement on Form S-3

On February 28, 2024, we filed an automatic universal shelf registration statement on Form S-3 with the SEC, which was deemed automatically effective and provides for the registration of unspecified amounts of securities. However, there can be no assurance that we will be able to complete any such offerings of securities in the future.

ATM Programs

We entered into separate equity distribution agreements on each of December 20, 2019 (the “2019 ATM Program”) and June 22, 2021 (the “2021 ATM Program” and, together with the 2019 ATM Program, the “ATM Programs”) with various financial institutions pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $300.0 million under each ATM Program from time to time in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. Under each of the ATM Programs, we may enter into one or more forward transactions (each, a “forward sale transaction”) under separate master forward sale confirmations and related supplemental confirmations with each of the various financial institutions party to the respective ATM Program for the sale of shares of our common stock on a forward basis.

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The following table sets forth certain information with respect to issuances under the 2019 ATM Program in each fiscal quarter for the year ended December 31, 2024 (amounts in thousands except share amounts):

(1)
Shares issued by us, which were all issued in settlement of forward sale transactions. As of December 31, 2024, we had settled all of our outstanding forward sale transactions under the 2019 ATM Program. We accounted for the forward sale transactions as equity.

No sales of shares of our common stock were made under the 2021 ATM Program during the year ended December 31, 2024.

We used the net proceeds received from such sales for general corporate purposes. As of December 31, 2024, we had approximately $300.0 million of gross sales of our common stock available under the 2021 ATM Program and $15.4 million of gross sales of our common stock available under the 2019 ATM Program.

Share Repurchase Program

On April 28, 2022, our board of directors authorized a share repurchase program whereby we may repurchase up to 4,538,994 shares of our common stock, or approximately 5% of our outstanding shares as of the authorization date. We are not required to purchase shares under the share repurchase program, but may choose to do so in the open market or through privately negotiated transactions at times and amounts based on our evaluation of market conditions and other factors.

No repurchases of shares of our common stock were made under the share repurchase program during the year ended December 31, 2024.

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Debt

Indebtedness Outstanding

The following table sets forth certain information with respect to our outstanding indebtedness as of December 31, 2024 (dollars in thousands):

(1)
The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums.

(2)
The $400.0 million 2024 revolving credit facility (the “2024 revolving credit facility”) had available capacity of $125.3 million at December 31, 2024, which includes an accordion feature that provides us with additional capacity of up to $300.0 million, subject to syndication of the increase and the satisfaction of customary terms and conditions.

(3)
Our 2024 revolving credit facility is subject to one interest rate swap with an effective date of June 23, 2023 and a notional value of $100.0 million, of which $25.5 million is associated with our 2024 revolving credit facility, to effectively fix the interest rate on the $25.5 million at 5.46% annually. The spread over the secured overnight financing rate (“SOFR”) is based on our consolidated leverage ratio, as defined in our 2024 revolving credit facility agreement. Additionally, at December 31, 2024, $249.1 million of amounts outstanding under our 2024 revolving credit facility had a floating rate of 4.31% under USD SOFR with a five day lookback.

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(4)
Our 2024 revolving credit facility has two six-month as-of-right extension options subject to certain conditions and the payment of an extension fee.

(5)
Our 2016 term loan facility (our “2016 term loan facility”) is subject to three interest rate swaps, all with effective dates of December 23, 2024 and an aggregate notional value of $100.0 million, which effectively fixes the interest rate at 5.31% annually. The spread over SOFR is based on our consolidated leverage ratio, as defined in our 2016 term loan facility agreement.

(6)
On January 8, 2025, we entered into the ninth amendment to our senior unsecured term loan agreement, dated as of September 29, 2016, to extend the maturity date of our 2016 term loan facility from January 30, 2025 to January 28, 2028.

(7)
Our 2018 term loan facility (as amended, our “2018 term loan facility”) is subject to two interest rate swaps with effective dates of June 23 and September 29, 2023 and an aggregate notional value of $200.0 million, of which $174.5 million is associated with our 2018 term loan facility, to effectively fix the interest rate on the $174.5 million at 5.23% annually. The spread over SOFR is based on our consolidated leverage ratio, as defined in our 2018 term loan facility agreement.

(8)
Effective interest rates are as follows: USFS II – Albuquerque 3.92%, ICE – Charleston 3.93%, VA – Loma Linda 3.78%, CBP – Savannah 4.12%.

Mortgage Notes Payable

On April 1, 2024, we used $8.4 million of available cash to extinguish the mortgage note obligation on VA – Golden.

On August 6, 2024, we used $51.5 million of available cash to extinguish the mortgage note obligation on USCIS – Kansas City.

2024 Senior Note Agreement

On May 29, 2024, we entered into a master note purchase agreement pursuant to which the Operating Partnership agreed to issue and sell an aggregate of up to $200 million of fixed rate, senior unsecured notes (“Senior Notes”) consisting of (i) 6.56% Series A Senior Notes due May 29, 2033 (“Series A Senior Notes”), in an aggregate principal amount of $150.0 million, and (ii) 6.56% Series B Senior Notes due August 14, 2033 (“Series B Senior Notes”), in an aggregate principal amount of $50.0 million. The Series A Senior Notes were issued on May 29, 2024 and the Series B Senior Notes were issued on August 14, 2024. We, together with various subsidiaries of the Operating Partnership, have guaranteed the Senior Notes.

2024 Revolving Credit Facility

On June 3, 2024, we entered into a credit agreement (the “2024 Credit Agreement”) that provides for the $400.0 million 2024 revolving credit facility which includes an accordion feature that provides us with additional capacity of up to $300.0 million, subject to syndication of the increase and the satisfaction of customary terms and conditions. The 2024 revolving credit facility has an initial four-year term and will mature in June 2028, with two six-month as-of-right extension options, subject to certain conditions and the payment of an extension fee.

Borrowings under the 2024 revolving credit facility will, at the Operating Partnership's option, bear interest at floating rates equal to either (i) a fluctuating rate equal to the sum of (a) the highest of (x) Citibank, N.A.'s base rate, (y) the federal funds effective rate plus 0.50% and (z) the one-month adjusted term SOFR plus 1.00%, plus, in each case, (b) a margin ranging from 0.20% to 0.80% based on our leverage ratio, (ii) the daily simple SOFR plus a credit spread adjustment of 0.10% (the “Adjusted DSS”), or (iii) the term SOFR, plus a credit spread adjustment of 0.10% (the “Term SOFR”), plus, in the case of borrowings bearing interest at Adjusted DSS or Term SOFR, a margin ranging from 1.20% to 1.80% based on our leverage ratio.

2021 Revolving Credit Facility

We are also party to the second amended and restated credit agreement, dated July 23, 2021 (as amended, restated, or otherwise modified from time to time, the “2021 Credit Facility”), which provides for (i) a $450.0 million senior unsecured revolving credit facility (the “2021 revolving credit facility”) and (ii) our 2018 term loan facility.

In connection with the entry into the 2024 Credit Agreement on June 3, 2024, we repaid all amounts outstanding under and terminated the revolver portion of the 2021 Credit Facility, including all unused commitments. Other than the foregoing, the terms of the 2021 Credit Facility remain unchanged and our 2018 term loan portion of the 2021 Credit Facility remains outstanding. We recognized an aggregate $0.3 million loss on debt extinguishment during the twelve months ended December 31, 2024 which is included in Interest expense, net on our Consolidated Statement of Operations.

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Term Loan Facilities

On January 23, 2024, we entered into the seventh amendment to the senior unsecured term loan agreement, dated as of September 29, 2016, that governs our 2016 term loan facility to extend the maturity date of our 2016 term loan facility from March 29, 2024 to January 30, 2025.

On June 3, 2024, we repaid $25.0 million of amounts outstanding under our 2018 term loan facility using available cash derived from the issuance of Series A Senior Notes.

On July 8, 2024, we used $0.5 million of available cash to pay down a portion of our 2018 term loan facility.

On July 15, 2024, we amended the credit agreements governing our 2016 and 2018 term loan facilities to conform certain definitions related to leverage covenants to the provisions of the 2024 Credit Agreement.

On December 23, 2024, we entered into three SOFR-based interest rate swaps with a total notional value of $100.0 million that were designated as cash flow hedges of interest rate risk. The interest rate swaps became effective in December 2024 upon the maturity of our $100.0 million notional value interest rate swap on December 23, 2024. For more information on our interest rate swaps, see Note 7 to the Consolidated Financial Statements.

On January 8, 2025, we entered into the ninth amendment to our senior unsecured term loan agreement, dated as of September 29, 2016, to extend the maturity date of our 2016 term loan facility from January 30, 2025 to January 28, 2028.

See Note 6 to the Consolidated Financial Statements for additional information on our 2024 revolving credit facility, our 2018 term loan facility and our 2016 term loan facility.

Our 2024 revolving credit facility, term loan facilities, notes payable, and mortgage notes payable are subject to ongoing compliance with a number of financial and other covenants. As of December 31, 2024, we were in compliance with all applicable financial covenants.

The chart below details our debt capital structure as of December 31, 2024 (dollars in thousands):

(1)
Our 2016 term loan facility and 2018 term loan facility are swapped to be fixed and as such are included as fixed rate debt in the table above and $25.5 million of the 2024 revolving credit facility.

Material Cash Commitments

The following table shows our material cash commitments as of December 31, 2024:

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(1)
Due to the long-term nature of certain construction and development contracts included in this line, the amounts reported in the table represent our estimate of the timing for the related obligations being paid.

As of December 31, 2024, we have a commitment to fund $52.1 million through a loan receivable that will accrue interest monthly at a fixed market rate of 9.00% per annum. As of December 31, 2024 and the date of this Annual Report on Form 10-K, the outstanding balance of the loan receivable was $35.1 million and $41.4 million, respectively. We expect to fund the remaining commitment through the anticipated maturity of the loan on August 31, 2027, depending on the borrower's election to use the commitments. For a more complete description of the real estate loan receivable, see Note 5 to the Consolidated Financial Statements.

Unconsolidated Real Estate Venture

We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.

As of December 31, 2024, our investment in the JV was $316.5 million. As of December 31, 2024, we committed capital, net of return of over committed capital, to the JV totaling $329.7 million and have a remaining capital commitment of $8.5 million. None of the properties owned by the JV are encumbered by mortgage indebtedness.

Dividend Policy

In order to qualify as a REIT, we are required to distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We anticipate distributing all of our taxable income. We expect to make quarterly distributions to our stockholders in a manner intended to satisfy this requirement. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. It is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions. It is also possible that our board of directors could decide to make required distributions in part by using shares of our common stock.

A summary of dividends declared by the board of directors per share of common stock and per common unit of our operating partnership at the date of record is as follows:

We use long-term investment partnership units in our operating partnership (“LTIP units”), which we refer to herein as LTIP units, as a form of performance-based award and service-based award for annual long-term incentive equity compensation. LTIP units are convertible into common units upon the satisfaction of certain conditions. Prior to the end of the performance period as set forth in the applicable LTIP unit award, holders of performance-based LTIP units are entitled to receive dividends per LTIP unit equal to 10% of the dividend paid per common unit of our operating partnership. After the end of the performance period, the number of LTIP units, both vested and unvested, that LTIP award recipients have earned, if any, are entitled to receive dividends in an amount per LTIP unit equal to dividends, both regular and special, payable per common unit of our operating partnership. Holders of LTIP units that are not subject to the attainment of performance goals are entitled to receive dividends per LTIP unit equal to 100% of the dividend paid per common unit beginning on the grant date.

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Cash Flow

Comparison of Cash Flow for the Years Ended December 31, 2024 and December 31, 2023

The following table sets forth a summary of cash flows for our company for the years ended December 31, 2024 and 2023:

Operating Activities

We generated $162.6 million and $114.5 million of cash from operating activities during the years ended December 31, 2024 and 2023, respectively. Net cash provided by operating activities for the year ended December 31, 2024 included $107.0 million in net cash from rental activities net of expenses, $43.5 million related to the changes in tenant accounts receivables, prepaid expense and other assets, real estate loan interest receivable, deferred revenue associated with operating leases, principal payments on operating lease obligations and accounts payable, accrued expenses and other liabilities and distributions from investment in unconsolidated real estate venture of $12.1 million. Net cash provided by operating activities for the year ended December 31, 2023 included $101.7 million in net cash from rental activities net of expenses, distributions from investment in unconsolidated real estate venture of $10.2 million and $2.6 million related to the changes in tenant accounts receivables, prepaid expense and other assets, deferred revenue associated with operating leases, principal payments on operating lease obligations and accounts payable, accrued expenses and other liabilities.

Investing Activities

We used $409.6 million and $127.0 million in cash for investing activities during the years ended December 31, 2024 and 2023, respectively. Net cash used in investing activities for the year ended December 31, 2024 primarily included $188.1 million in real estate acquisitions and deposits, $116.0 million in additions to development properties, $40.1 million in investment in unconsolidated real estate venture, $35.4 million in additions to operating properties, and $34.2 million in investment in real estate loan receivable, net, offset by $2.2 million in proceeds from sale, net and $2.0 million in distributions from investment in unconsolidated real estate venture. Net cash used in investing activities for the year ended December 31, 2023 primarily included $63.4 million in real estate acquisitions and deposits, $28.1 million in additions to operating properties, $17.8 million in additions to development properties and $17.7 million in investment in unconsolidated real estate venture, offset by $0.1 million in distributions from investment in unconsolidated real estate venture.

Financing Activities

We generated $252.9 million and $17.2 million in cash from financing activities during the years ended December 31, 2024 and 2023, respectively. Net cash generated in financing activities for the year ended December 31, 2024 included $200.0 million in note payable issuances, $195.6 million in net draws under the revolving credit facility, and $71.8 million in gross proceeds from issuance of shares of our common stock offset by $115.9 million in dividends, $64.3 million in mortgage debt repayment, $25.5 million in term loan repayments, $7.9 million in deferred financing costs and $0.9 million in the payment of deferred offering costs. Net cash generated by financing activities for the year ended December 31, 2023 included $86.5 million in gross proceeds from issuance of shares of our common stock, $50.0 million delayed draw on our 2018 term loan and $13.5 million in net draws under the revolving credit facility offset by $112.4 million in dividends, $20.0 million in mortgage debt repayment and $0.4 million in the payment of deferred offering costs.

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Comparison of Cash Flow for the Years Ended December 31, 2023 and December 31, 2022

Information pertaining to fiscal year 2022 was included in our Annual Report on Form 10-K for the year ended December 31, 2023 on page 47 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which was filed with SEC on February 27, 2024.

Non-GAAP Financial Measures

We use and present FFO and Core FFO as supplemental measures of our performance. The summary below describes our use of FFO and Core FFO and provides information regarding why we believe these measures are meaningful supplemental measures of our performance and reconciles these measures from net income, presented in accordance with GAAP.

Funds From Operations and Core Funds From Operations

FFO is a supplemental measure of our performance. We present FFO calculated in accordance with the current National Association of Real Estate Investment Trusts (“Nareit”) definition set forth in the Nareit FFO White Paper – Restatement 2018. FFO includes the REIT’s share of FFO generated by unconsolidated affiliates. In addition, we present Core FFO for certain other adjustments that we believe enhance the comparability of our FFO across periods and to the FFO reported by other publicly traded REITs. FFO is a supplemental performance measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of REITs.

FFO is defined by Nareit as net income (calculated in accordance with GAAP), excluding:

•
Depreciation and amortization related to real estate.

•
Gains and losses from the sale of certain real estate assets.

•
Gains and losses from change in control.

•
Impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.

We present FFO because we consider it an important supplemental measure of our operating performance, and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting results.

We adjust FFO to present Core FFO as an alternative measure of our operating performance, which, when applicable, excludes items which we believe are not representative of ongoing operating results, such as liability management related costs (including losses on extinguishment of debt and modification costs), provision for credit losses, catastrophic event charges, depreciation of non-real estate assets, and the unconsolidated real estate venture’s allocated share of these adjustments. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results. We believe Core FFO more accurately reflects the ongoing operational and financial performance of our core business.

FFO and Core FFO are presented as supplemental financial measures and do not fully represent our operating performance. Other REITs may use different methodologies for calculating FFO and Core FFO or use other definitions of FFO and Core FFO and, accordingly, our presentation of these measures may not be comparable to other REITs. Neither FFO nor Core FFO is intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.

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The following table sets forth a reconciliation of our net income to FFO and Core FFO for the years ended December 31, 2024, 2023, and 2022 (dollars in thousands):

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Factors That May Influence Future Results of Operations

Revenue

Our revenues primarily arise from the rental of space to tenants in our properties and tenant reimbursements, which include reimbursement for operating expenses, which are determined by the base year operating expenses and are subject to reimbursement in subsequent years largely based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Our revenue also includes amounts due from tenants for real estate taxes, projects and other reimbursements. Real estate taxes over the base year are reimbursed by the tenant.

Over 90% of our rental income comes from U.S. Government tenants. We expect that leases to agencies of the U.S. Government will continue to be our primary source of revenues for the foreseeable future. Due to such concentration, adverse events or conditions that affect the U.S. Government could have a more negative effect on our financial condition and operations than if our tenant base was more diverse. However, positive or negative changes in conditions in local markets, such as changes in economic or other conditions, employment rates, local tax and budget conditions, recession, competition for real property investments in these markets, uncertainty about the future and other factors are significantly less likely to impact our overall performance.

Operating Expenses

Our operating expenses generally consist of repairs and maintenance, utilities, roads and grounds, property management fees, insurance, janitorial and other operating expenses. Factors that may impact our ability to control these operating expenses include increases in utilities, increases in third party management expenses, increases in insurance premiums, increases in repair and maintenance costs and expenses related to inclement weather. Additionally, the cost of compliance with zoning and building codes as well as local, state and federal tax laws may impact our expenses. As a public company our annual general and administrative expenses are meaningfully higher due to legal, insurance, accounting, audit and other expenses related to corporate governance, SEC reporting, other compliance matters and the costs of operating as a public company. Increases in costs from any of the foregoing factors may adversely affect our future results and cash flows. Circumstances such as declines in market rental rates or increased competition may cause revenues to decrease, although the expenses of owning and operating a property will not necessarily decline. For certain of our properties, expenses may vary with occupancy, while costs arising from our property investments, interest expense and general maintenance will not be materially reduced even if a property is not fully occupied. As a result, our future cash flow and results of operations may be adversely affected and losses could be incurred if revenues decrease in the future.

Cost of Funds and Interest Rates

We expect future changes in interest rates will impact our overall performance. We manage and may continue to manage our market risk on variable rate debt by entering into interest rate swap agreements or similar instruments, subject to maintaining our qualification as a REIT for U.S. federal income tax purposes. Although we may seek to cost-effectively manage our exposure to future rate increases through such means, a portion of our overall debt may at various times float at then current rates.

Development Activities

As of December 31, 2024, we had two properties under development. We intend to continue to engage in development and redevelopment activities with respect to our properties, including build-to-suit new developments and redevelopments for existing U.S. Government tenant agencies. These development activities may include some risks such as:

•
the availability and timely receipt of zoning and other regulatory approvals;

•
development costs exceeding expectations;

•
cost overruns and untimely completion of construction (including risks beyond our control, such as weather or labor conditions, or material shortages);

•
the inability to complete construction and leasing of a property on schedule, resulting in increased debt service expense and development and redevelopment costs; and

•
the availability and pricing of financing on favorable terms or at all.

Inflation

Substantially all of our leases provide for operating expense escalation. We believe inflationary increases in expenses may be at least partially offset by the contractual expense escalations described above. We do not believe inflation has had a material impact on our historical financial position or results of operations.

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Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base these estimates, judgments, and assumptions on historical experience, current trends, and various other factors that we believe to be reasonable under the circumstances. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements.

Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, which utilize these critical accounting estimates, can be found in Note 2, “Significant Accounting Policies,” of our consolidated financial statements.

Real Estate Properties Acquired

When we acquire properties, we allocate the purchase price to numerous tangible and intangible components. Our process for determining the allocation to these components requires many estimates and assumptions, including the following: (1) determination of market land, rental, discount and capitalization rates; (2) estimation of leasing and tenant improvement costs associated with the remaining term of acquired leases; (3) assumptions used in determining the in-place lease and if-vacant value including the rental rates, period of time that it would take to lease vacant space and estimated tenant improvement and leasing costs; and (4) allocation of the if-vacant value between land and building. A change in any of the above key assumptions can materially change not only the presentation of acquired properties in our consolidated financial statements but also our reported results of operations.

We completed acquisitions of ten wholly owned properties for an aggregate purchase price of $184.9 million during the year ended December 31, 2024. We completed acquisitions of three wholly owned properties for an aggregate purchase price of $63.1 million during the year ended December 31, 2023. These transactions were accounted for as asset acquisitions, and the purchase price of each was allocated based on the relative fair value of the asset acquired and liabilities assumed.

Impairment of Long-Lived Assets

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine whether an asset may be impaired. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value.

In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long-lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.

On a quarterly basis, we assess the recoverability of the carrying amount of our real estate and related intangibles. Our assessment resulted in the remeasurement of ICE – Otay in the third quarter of 2022, which was written down to its estimated fair value and was classified as Level 3 in the fair value hierarchy. Our estimate of the fair value was based on a combination of a pending offer from a third party to acquire the property and a discounted cash flow analysis. We used two significant unobservable inputs in the various scenarios, which were the cash flow discount rate (ranging from 6.25%-9.00%) and average price per square foot of comparable sales in the market ($109.08-$185.90). There is no assurance that we will sell ICE – Otay on the terms proposed or at all. The remeasurement resulted in an impairment loss of $5.5 million, which is included in "Impairment loss" in our Consolidated Statements of Operations for the year ended December 31, 2022.

As of December 31, 2024 and 2023, no impairment related to our long-lived assets was identified.

Impairment of Unconsolidated Real Estate Venture

We account for our investment in the unconsolidated real estate venture under the equity method. Under the equity method of accounting, we initially recognize our investment at cost and subsequently adjust the carrying amount of the investment for our share of the earnings or losses, distributions received, and other-than-temporary impairments.

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Our unconsolidated real estate venture is evaluated for impairment when conditions exist that may indicate that the decrease in the carrying amount of our investment has occurred and is other than temporary. Triggering events or impairment indicators for our unconsolidated real estate venture include, recurring operating losses of an investee, absence of an ability to recover the carrying amount of the investee, the ability of an investee to sustain an earnings capacity, a carrying amount that exceeds the fair value of the investment and that decline in fair value is other-than-temporary. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of investment to its estimated fair value. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgement.

As of December 31, 2024, the carrying amount of our investment in our unconsolidated real estate venture was $316.5 million, or approximately 9.8% of our total assets. As of December 31, 2023, the carrying amount of our investment in our unconsolidated real estate venture was $284.5 million, or approximately 9.9% of our total assets. During the years ended December 31, 2024 and 2023, no other-than-temporary impairment related to our unconsolidated real estate venture was identified.

Loan Receivable and Allowance for Credit Losses

The measurement of expected credit losses under the current expected credit loss (“CECL”) methodology (“ASU 2016-13”) is applicable to our financial assets measured at amortized cost, including loan receivables and certain off-balance sheet credit exposures such as unfunded loan commitments. We adopted this standard on January 1, 2020 and apply this methodology to our loan receivables and off-balance sheet credit exposure. To determine our expected credit losses under CECL, we utilize a probability of default (“PD”) and loss given default (“LGD”) methodology. We determined that we have one portfolio segment and reserve for loan losses on an asset-specific basis. We have a limited history of incurred losses and consequently have elected to employ external data to perform our CECL calculation. Our model's inputs consider a default grade or industry relative default grade associated with the borrower and prospective tenant funding the development to determine an appropriate default risk and allowance for credit loss under the PD and LGD methodology. If a reserve is recorded, the allowance is increased as a provision for credit losses and is decreased by charge-offs when losses are confirmed through the receipt of assets such as cash or via ownership control of the underlying collateral in full. The allowance for loan losses reflects management's estimate of loan losses as of the balance sheet date.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our results of operations and financial condition in conjunction with the audited consolidated financial statements and related notes thereto as of December 31, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021 and the sections entitled “Risk Factors,” “Forward Looking Statements,” “Business,” and “Properties” contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Annual Report on Form 10-K entitled “Risk Factors” and “Forward Looking Statements.”

Overview

References to “Easterly,” “we,” “our,” “us” and “our company” refer to Easterly Government Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries including Easterly Government Properties LP, a Delaware limited partnership, which we refer to herein as our operating partnership. We present certain financial information and metrics “at Easterly Share,” which is calculated on an entity-by-entity basis. “At Easterly Share” information, which we also refer to as being “at share,” “pro rata,” “our pro rata share” or “our share” is not, and is not intended to be, a presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We are an internally managed real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate substantially all of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration, which we refer to herein as the GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.

We focus primarily on acquiring, developing and managing U.S. Government-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. We may also consider other potential opportunities to add properties to our portfolio, including acquiring properties leased to state and local governments with strong creditworthiness and other opportunities that directly or indirectly support the mission of select government agencies. As of December 31, 2023, we wholly owned 81 operating properties and nine operating properties through an unconsolidated joint venture (the “JV”) in the United States encompassing approximately 8.8 million leased square feet (8.3 million pro rata), including 88 operating properties that were leased primarily to U.S. Government tenant agencies, one operating property entirely leased to tenant agencies of a U.S. state government and one operating property that was entirely leased to a private tenant. As of December 31, 2023, our operating properties were 97% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion.

Our operating partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of our operating partnership and owned approximately 93.8% of the aggregate limited partnership interests in our operating partnership, which we refer to herein as common units, as of December 31, 2023. We have elected to be taxed as a REIT and believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.

Acquisitions

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On October 3, 2023, we acquired a 95,273 leased square foot Class A facility located in Anaheim, California. The building was renovated in 2020. The facility is 100% leased by tenant agencies of the state of California for beneficial use of the Employment Development Department and Department of Industrial Relations and has lease expirations ranging from 2033 to 2034.

On October 3, 2023, we acquired a 91,185 leased square foot Department of Homeland Security (“DHS”) facility in Atlanta, Georgia. The building was renovated to suit in 2023. The facility is primarily leased to the GSA for beneficial use of the Customs and Border Protection and Transportation Security Administration agencies and has lease expirations ranging from 2031 to 2038.

On October 19, 2023, we acquired a 35,005 leased square foot Judiciary of the U.S. Government (“JUD”) courthouse in Newport News, Virginia. The building is a build-to-suit courthouse completed in 2008. The facility is leased to the GSA for beneficial use of JUD with a lease expiration of July 2033.

Investment in unconsolidated real estate venture

On October 13, 2021, we formed the JV with a global investor to fund the acquisition of a portfolio of ten properties anticipated to encompass 1,214,165 leased square feet (the “VA Portfolio”) that would be 100% leased to the Veterans Affairs (“VA”). We own a 53.0% interest in the JV, subject to preferred allocations as provided in the JV agreement. During the years ended 2022 and 2021, the JV closed on eight of the ten properties included in the Portfolio Acquisition.

On September 22, 2023, the JV acquired a 69,276 square foot VA outpatient facility located in Corpus Christi, Texas. The building is a build-to-suit property that was completed during 2022. The outpatient facility is leased to the VA and has a lease expiration of November 2042. The facility is the ninth of ten properties to be acquired in the previously announced the VA Portfolio. We anticipate the JV will acquire the tenth and final property in the VA Portfolio in 2024.

Results of Operations

Comparison of Results of Operations for the Years Ended December 31, 2023 and December 31, 2022

The financial information presented below summarizes the results of operations of our company for the years ended December 31, 2023 and 2022.

Revenues

Total revenues decreased $6.4 million to $287.2 million for the year ended December 31, 2023 compared to $293.6 million for the year ended December 31, 2022.

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The $10.6 million decrease in Rental income is primarily attributable to the disposal of ten operating properties during the year ended December 31, 2022 offset by an increase in revenues from the three operating properties acquired since December 31, 2022 and a full period of operations from the three operating properties acquired during the year ended December 31, 2022.

The $3.0 million increase in Tenant reimbursements is primarily attributable to an increase in tenant project reimbursements.

The $0.7 million increase in Asset management income is attributable to the fee earned by us for asset management of the JV from the one property acquired since December 31, 2022 and a full period of operations from the four properties acquired during the year ended December 31, 2022.

The $0.5 million increase in Other income is primarily attributable to an increase in interest income.

Expenses

Total expenses increased by $0.4 million to $222.5 million for the year ended December 31, 2023 compared to $222.1 million for the year ended December 31, 2022.

The $5.2 million increase in Property operating expenses is primarily attributable to an increase in tenant reimbursable projects.

The $0.4 million decrease in Real estate taxes is also primarily attributable to the disposal of ten operating properties during the year ended December 31, 2022, offset by the three operating properties acquired since December 31, 2022 as well as a full period of operations from the three operating properties acquired during the year ended December 31, 2022.

Additionally, the $7.0 million decrease in Depreciation and amortization is primarily attributable to the disposal of ten operating properties during the year ended December 31, 2022 and a decrease in amortization related to fully amortized lease intangibles, offset by three operating properties acquired since December 31, 2022, as well as a full period of operations from the three operating properties acquired during the year ended December 31, 2022.

The $2.3 million increase in Corporate and general administrative costs was primarily due to an increase in employee costs.

Income from unconsolidated real estate venture

The $2.1 million increase in Income from unconsolidated real estate venture is primarily attributable to our pro rata share of operations from the one operating property acquired by the JV since December 31, 2022 and a full period of operations from the four operating properties acquired by the JV during the year ended December 31, 2022.

Interest expense, net

Interest expense, net increased by $1.8 million to $49.2 million for the year ended December 31, 2023 compared to $47.4 million for the year ended December 31, 2022. The increase is primarily attributable to higher weighted average borrowings and interest rates on our swapped term loans.

Gain on the sale of operating properties

In the fourth quarter of 2022, we recognized a Gain on the sale of operating properties totaling $13.6 million which was attributable to the disposition of a portfolio of ten properties. No dispositions were made during the year ended December 31, 2023.

Impairment loss

In the third quarter of 2022, we recognized an impairment loss totaling approximately $5.5 million for our ICE – Otay property and reduced its carrying value to its estimated fair value, which declined due to the changes in expected cash flows related to the

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tenant's lease expiration in 2022. ICE – Otay is a 47,919 rentable square foot office building located in San Diego, California. No impairment charges were incurred during the year ended December 31, 2023.

Comparison of Results of Operations for the Years Ended December 31, 2022 and December 31, 2021

Information pertaining to fiscal year 2021 was included in our Annual Report on Form 10-K for the year ended December 31, 2022 on page 42 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which was filed with the Securities and Exchange Commission, or SEC, on February 28, 2023.

Liquidity and Capital Resources

We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant improvements, development activities at FDA – Atlanta, planned and possible acquisitions of properties, including the final VA Portfolio property through the JV, stockholder distributions to maintain our qualification as a REIT and other capital obligations associated with conducting our business. At December 31, 2023, we had approximately $21.9 million available in cash and cash equivalents and there was approximately $370.9 million available under our revolving credit facility.

Our primary expected sources of capital are as follows:

•
cash and cash equivalents;

•
operating cash flow;

•
distribution of cash flows from the JV;

•
available borrowings under our revolving credit facility;

•
issuance of long-term debt;

•
issuance of equity, including under our ATM Programs (as described below); and

•
asset sales.

Our short-term liquidity requirements consist primarily of funds to pay for the following:

•
development and redevelopment activities, including major redevelopment, renovation or expansion programs at FDA – Atlanta and other individual properties;

•
property acquisitions under contract, including our JV share of the remaining Portfolio Acquisition properties;

•
tenant improvements allowances and leasing costs;

•
recurring maintenance and capital expenditures;

•
debt repayment requirements;

•
corporate and administrative costs;

•
interest payments on our outstanding indebtedness;

•
interest swap payments;

•
distribution payments; and

•
repurchases of common stock under our share repurchase program.

Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or required. As of the date of this filing, there were no known commitments or events that would have a material impact on our liquidity.

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Equity

Shelf Registration Statement on Form S-3

We expect to file an automatic universal shelf registration statement on Form S-3 with the SEC following the filing of this Annual Report on Form 10-K. The registration statement will be deemed automatically effective and provide for the registration of unspecified amounts of securities. However, there can be no assurance that we will be able to complete any offerings of securities in the future under such registration statement, once filed.

Offering of Common Stock on a Forward Basis

On August 11, 2021, we completed an underwritten public offering of 6,300,000 shares of common stock offered on a forward basis. In connection with the offering, we also entered into separate forward sale agreements with each of the forward purchasers (the “Forward Sales Agreements”), pursuant to which the forward purchasers borrowed and sold to the underwriters an aggregate of 6,300,000 shares of our common stock. On December 28, 2021, we issued 3,991,000 shares of our common stock for net proceeds of $85.0 million, which shares were issued in partial settlement of the Forward Sales Agreements entered into in connection with the underwritten public offering. During the three months ended March 31, 2023, we issued 2,309,000 shares of common stock under the Forward Sale Agreements and received net cash proceeds of approximately $46.8 million. As of December 31, 2023, all shares of common stock under the Forward Sales Agreements had been issued and settled.

ATM Programs

We entered into separate equity distribution agreements on each of December 20, 2019 (the “2019 ATM Program”) and June 22, 2021 (the “2021 ATM Program” and, together with the 2019 ATM Program, the “ATM Programs”) with various financial institutions pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $300.0 million under each ATM Program from time to time in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. Under each of the ATM Programs, we may enter into one or more forward transactions (each, a “forward sale transaction”) under separate master forward sale confirmations and related supplemental confirmations with each of the various financial institutions party to the respective ATM Program for the sale of shares of our common stock on a forward basis.

The following table sets forth certain information with respect to issuances under the 2019 ATM Program in each fiscal quarter for the year ended December 31, 2023 (amounts in thousands except share amounts):

(1)
Shares issued by us, which were all issued in settlement of forward sales transactions. Additionally, as of December 31, 2023, we had entered into a forward sales transaction under the 2019 ATM Program for the sale of an additional 500,000 shares of our common stock that have not yet been settled. Subject to our right to elect net share settlement, we expect to physically settle the forward sales transaction by December 2024, the maturity date, as set forth in the applicable forward sale transaction placement notice. Assuming the forward sales transaction is physically settled in full utilizing a net weighted average initial forward sales price of $13.52 per share, we expect to receive net proceeds of approximately $6.8 million, after deducting offering costs, subject to adjustments in accordance with the applicable forward sale transaction. We accounted for the forward sale transactions as equity.

No sales of shares of our common stock were made under the 2021 ATM Program during the year ended December 31, 2023.

We used the net proceeds received from such sales for general corporate purposes. As of December 31, 2023, we had approximately $300.0 million of gross sales of our common stock available under the 2021 ATM Program and $80.6 million of gross sales of our common stock available under the 2019 ATM Program.

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Share Repurchase Program

On April 28, 2022, our board of directors authorized a share repurchase program whereby we may repurchase up to 4,538,994 shares of our common stock, or approximately 5% of our outstanding shares as of the authorization date. We are not required to purchase shares under the share repurchase program, but may choose to do so in the open market or through privately negotiated transactions at times and amounts based on our evaluation of market conditions and other factors.

No repurchases of shares of our common stock were made under the share repurchase program during the year ended December 31, 2023.

Debt

Indebtedness Outstanding

The following table sets forth certain information with respect to our outstanding indebtedness as of December 31, 2023 (dollars in thousands):

(1)
At December 31, 2023, the USD SOFR with a five day lookback (“S”) was 5.31%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for each of our $450.0 million senior unsecured revolving credit facility (our “revolving credit facility”), our $200.0 million senior unsecured term loan facility (as amended, our “2018 term loan

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facility”) and our $100.0 million senior unsecured term loan facility (our “2016 term loan facility”) is based on our consolidated leverage ratio, as set forth in the respective loan agreements.

(2)
Our revolving credit facility had available capacity of $370.9 million at December 31, 2023, with an accordion feature that permits us to request additional lender commitments for up to $250.0 million of additional capacity, subject to the satisfaction of customary terms and conditions.

(3)
Our revolving credit facility has two six-month as-of-right extension options subject to certain conditions and the payment of an extension fee.

(4)
Entered into one interest rate swap with an effective date of September 29, 2023 with a notional value of $100.0 million to effectively fix the interest rate at 5.05% annually, based on our consolidated leverage ratio, as defined in our 2016 term loan facility agreement.

(5)
On January 23, 2024, we entered into the seventh amendment to the 2016 term loan facility agreement to extend the maturity date of the loan to January 30, 2025.

(6)
Entered into two interest rate swaps with an effective date of June 23, 2023 with an aggregate notional value of $200.0 million to effectively fix the interest rate at 5.39% annually, based on our consolidated leverage ratio, as defined in our 2018 term loan facility agreement.

(7)
Effective interest rates are as follows: VA – Golden 5.03%, USFS II – Albuquerque 3.92%, ICE – Charleston 3.93%, VA – Loma Linda 3.78%, CBP – Savannah 4.12%, USCIS – Kansas City 2.05%.

On January 26, 2023, we used $15.7 million of available cash to extinguish the mortgage note obligation on DEA – Pleasanton.

On February 3, 2023, we entered into three SOFR-based interest rate swaps each with a notional value of $100.0 million that were designated as cash flow hedges of interest rate risk. Two of the interest rate swaps, with an aggregate notional value of $200.0 million, became effective in June 2023. The third swap, with a notional value of $100.0 million, became effective in September 2023. For more information on our interest rate swaps, see Note 6 to the Consolidated Financial Statements.

On May 30, 2023, we entered into the third amendment to our second amended and restated credit agreement, dated as of July 23, 2021, and into the sixth amendment to our senior unsecured term loan agreement, dated as of September 29, 2016. These amendments added a daily simple SOFR-based option to the term SOFR-based floating interest rate option as a benchmark rate for borrowings denominated in U.S. dollars for all purposes under the credit and term loan agreements, including, in each case, a credit spread adjustment of 0.10%.

On July 20, 2023, we exercised in full the $50.0 million delayed draw option on our 2018 term loan facility, increasing our 2018 term loan facility commitments from $150.0 million to $200.0 million, and transferred $50.0 million of our interest rate swap with a notional value of $100.0 million from our revolving credit facility to the $50.0 million delayed draw.

On January 2, 2024, the margin spreads under our credit facility agreement were reduced by 1 basis point as a result of achieving our sustainability metric percentage.

On January 23, 2024, we entered into the seventh amendment to our senior unsecured term loan agreement, dated as of September 29, 2016, to extend the maturity date of our 2016 term loan facility from March 29, 2024 to January 30, 2025.

See Note 5 to the Consolidated Financial Statements for additional information on our revolving credit facility, our 2018 term loan facility and our 2016 term loan facility.

Our revolving credit facility, term loan facilities, notes payable, and mortgage notes payable are subject to ongoing compliance with a number of financial and other covenants. As of December 31, 2023, we were in compliance with all applicable financial covenants.

The chart below details our debt capital structure as of December 31, 2023 (dollars in thousands):

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(1)
Our 2016 term loan facility and 2018 term loan facility are swapped to be fixed and as such are included as fixed rate debt in the table above.

Material Cash Commitments

The following table shows our material cash commitments as of December 31, 2023:

(1)
Due to the long-term nature of certain construction and development contracts included in this line, the amounts reported in the table represent our estimate of the timing for the related obligations being paid.

Additionally, we have a commitment to fund $5.0 million of advancements through a loan receivable. These commitments are expected to be funded over the next year and are dependent upon the borrower’s election to use the commitments.

Unconsolidated Real Estate Venture

We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.

As of December 31, 2023, our investment in the JV was $284.5 million. As of December 31, 2023, we committed capital, net of return of over committed capital, to the JV totaling $291.7 million and have a remaining capital commitment of $46.6 million. None of the properties owned by the JV are encumbered by mortgage indebtedness.

Dividend Policy

In order to qualify as a REIT, we are required to distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We anticipate distributing all of our taxable income. We expect to make quarterly distributions to our stockholders in a manner intended to satisfy this requirement. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. It is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions. It is also possible that our board of directors could decide to make required distributions in part by using shares of our common stock.

A summary of dividends declared by the board of directors per share of common stock and per common unit of our operating partnership at the date of record is as follows:

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We use long-term investment partnership units in our operating partnership, which we refer to herein as LTIP units, as a form of performance-based award and service-based award for annual long-term incentive equity compensation. LTIP units are convertible into common units upon the satisfaction of certain conditions. Prior to the end of the performance period as set forth in the applicable LTIP unit award, holders of performance-based LTIP units are entitled to receive dividends per LTIP unit equal to 10% of the dividend paid per common unit of our operating partnership. After the end of the performance period, the number of LTIP units, both vested and unvested, that LTIP award recipients have earned, if any, are entitled to receive dividends in an amount per LTIP unit equal to dividends, both regular and special, payable per common unit of our operating partnership. Holders of LTIP units that are not subject to the attainment of performance goals are entitled to receive dividends per LTIP unit equal to 100% of the dividend paid per common unit beginning on the grant date.

Cash Flow

Comparison of Cash Flow for the Years Ended December 31, 2023 and December 31, 2022

The following table sets forth a summary of cash flows for our company for the years ended December 31, 2023 and 2022:

Operating Activities

We generated $114.5 million and $125.9 million of cash from operating activities during the years ended December 31, 2023 and 2022, respectively. Net cash provided by operating activities for the year ended December 31, 2023 included $101.7 million in net cash from rental activities net of expenses, distributions from investment in unconsolidated real estate venture of $10.2 million and $2.6 million related to the changes in tenant accounts receivables, prepaid expense and other assets, deferred revenue associated with operating leases, principal payments on operating lease obligations and accounts payable, accrued expenses and other liabilities. Net cash provided by operating activities for the year ended December 31, 2022 included $121.4 million in net cash from rental activities net of expenses and distributions from investment in unconsolidated real estate venture of $6.4 million offset by $1.9 million related to the changes in tenant accounts receivables, prepaid expense and other assets, deferred revenue associated with operating leases, principal payments on operating lease obligations and accounts payable, accrued expenses and other liabilities.

Investing Activities

We used $127.0 million and $69.1 million in cash for investing activities during the years ended December 31, 2023 and 2022, respectively. Net cash used in investing activities for the year ended December 31, 2023 primarily included $63.4 million in real estate acquisitions and deposits, $28.1 million in additions to operating properties, $17.8 million in additions to development properties and $17.7 million in investment in unconsolidated real estate venture, offset by $0.1 million in distributions from investment in unconsolidated real estate venture. Net cash used in investing activities for the year ended December 31, 2022 primarily included $143.8 million in investment in unconsolidated real estate venture, $93.7 million in real estate acquisitions and deposits, $22.6 million in additions to operating properties and $12.4 million in additions to development properties, offset by $202.4 million in proceeds from sale of operating properties, net and $1.0 million in distributions from investment in unconsolidated real estate venture.

Financing Activities

We generated $17.2 million and used $59.7 million in cash from financing activities during the years ended December 31, 2023 and 2022, respectively. Net cash generated in financing activities for the year ended December 31, 2023 included $112.4 million in dividends, $20.0 million in mortgage debt repayment and $0.4 million in payment of deferred offering costs offset by $86.5 million in gross proceeds from issuance of shares of our common stock, $50.0 million delayed draw on our 2018 term loan and $13.5 million in net draws under the revolving credit facility. Net cash used by financing activities for the year ended December 31, 2022 included $109.2 million in dividends, $10.9 million in mortgage debt repayment, and $0.1 million in payment of deferred offering costs offset by $51.0 million in net draws under the revolving credit facility and $9.5 million in gross proceeds from issuance of shares of our common stock.

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Comparison of Cash Flow for the Years Ended December 31, 2022 and December 31, 2021

Information pertaining to fiscal year 2021 was included in our Annual Report on Form 10-K for the year ended December 31, 2022 on page 49 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which was filed with SEC on February 28, 2023.

Non-GAAP Financial Measures

We use and present FFO and Core FFO as supplemental measures of our performance. The summary below describes our use of FFO and Core FFO and provides information regarding why we believe these measures are meaningful supplemental measures of our performance and reconciles these measures from net income, presented in accordance with GAAP.

Funds From Operations and Core Funds From Operations

FFO is a supplemental measure of our performance. We present FFO calculated in accordance with the current National Association of Real Estate Investment Trusts (“Nareit”) definition set forth in the Nareit FFO White Paper – Restatement 2018. FFO includes the REIT’s share of FFO generated by unconsolidated affiliates. In addition, we present Core FFO for certain other adjustments that we believe enhance the comparability of our FFO across periods and to the FFO reported by other publicly traded REITs. FFO is a supplemental performance measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of REITs.

FFO is defined by Nareit as net income (calculated in accordance with GAAP), excluding:

•
Depreciation and amortization related to real estate.

•
Gains and losses from the sale of certain real estate assets.

•
Gains and losses from change in control.

•
Impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.

We present FFO because we consider it an important supplemental measure of our operating performance, and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting results.

We adjust FFO to present Core FFO as an alternative measure of our operating performance, which, when applicable, excludes items which we believe are not representative of ongoing operating results, such as liability management related costs (including losses on extinguishment of debt and modification costs), catastrophic event charges, depreciation of non-real estate assets, and the unconsolidated real estate venture’s allocated share of these adjustments. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results. We believe Core FFO more accurately reflects the ongoing operational and financial performance of our core business.

FFO and Core FFO are presented as supplemental financial measures and do not fully represent our operating performance. Other REITs may use different methodologies for calculating FFO and Core FFO or use other definitions of FFO and Core FFO and, accordingly, our presentation of these measures may not be comparable to other REITs. Neither FFO nor Core FFO is intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.

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The following table sets forth a reconciliation of our net income to FFO and Core FFO for the years ended December 31, 2023, 2022, and 2021 (dollars in thousands):

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Factors That May Influence Future Results of Operations

Revenue

Our revenues primarily arise from the rental of space to tenants in our properties and tenant reimbursements, which include reimbursement for operating expenses, which are determined by the base year operating expenses and are subject to reimbursement in subsequent years based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Our revenue also includes amounts due from tenants for real estate taxes, projects and other reimbursements. Real estate taxes over the base year are reimbursed by the tenant.

Substantially all of our rental income comes from U.S. Government tenants. We expect that leases to agencies of the U.S. Government will continue to be our primary source of revenues for the foreseeable future. Due to such concentration, adverse events or conditions that affect the U.S. Government could have a more negative effect on our financial condition and operations than if our tenant base was more diverse. However, positive or negative changes in conditions in local markets, such as changes in economic or other conditions, employment rates, local tax and budget conditions, recession, competition for real property investments in these markets, uncertainty about the future and other factors are significantly less likely to impact our overall performance.

Operating Expenses

Our operating expenses generally consist of repairs and maintenance, utilities, roads and grounds, property management fees, insurance, janitorial and other operating expenses. Factors that may impact our ability to control these operating expenses include increases in utilities, increases in third party management expenses, increases in insurance premiums, increases in repair and maintenance costs and expenses related to inclement weather. Additionally, the cost of compliance with zoning and building codes as well as local, state and federal tax laws may impact our expenses. As a public company our annual general and administrative expenses are meaningfully higher due to legal, insurance, accounting, audit and other expenses related to corporate governance, SEC reporting, other compliance matters and the costs of operating as a public company. Increases in costs from any of the foregoing factors may adversely affect our future results and cash flows. Circumstances such as declines in market rental rates or increased competition may cause revenues to decrease, although the expenses of owning and operating a property will not necessarily decline. For certain of our properties, expenses may vary with occupancy, while costs arising from our property investments, interest expense and general maintenance will not be materially reduced even if a property is not fully occupied. As a result, our future cash flow and results of operations may be adversely affected and losses could be incurred if revenues decrease in the future.

Cost of Funds and Interest Rates

We expect future changes in interest rates will impact our overall performance. We manage and may continue to manage our market risk on variable rate debt by entering into interest rate swap agreements or similar instruments, subject to maintaining our qualification as a REIT for U.S. federal income tax purposes. Although we may seek to cost-effectively manage our exposure to future rate increases through such means, a portion of our overall debt may at various times float at then current rates.

Development Activities

As of December 31, 2023, we had one property under development. We intend to continue to engage in development and redevelopment activities with respect to our properties, including build-to-suit new developments and redevelopments for existing U.S. Government tenant agencies. These development activities may include some risks such as:

•
the availability and timely receipt of zoning and other regulatory approvals;

•
development costs exceeding expectations;

•
cost overruns and untimely completion of construction (including risks beyond our control, such as weather or labor conditions, or material shortages);

•
the inability to complete construction and leasing of a property on schedule, resulting in increased debt service expense and development and redevelopment costs; and

•
the availability and pricing of financing on favorable terms or at all.

Inflation

Substantially all of our leases provide for operating expense escalation. We believe inflationary increases in expenses may be at least partially offset by the contractual expense escalations described above. We do not believe inflation has had a material impact on our historical financial position or results of operations.

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Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base these estimates, judgments, and assumptions on historical experience, current trends, and various other factors that we believe to be reasonable under the circumstances. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements.

Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, which utilize these critical accounting estimates, can be found in Note 2, “Significant Accounting Policies,” of our consolidated financial statements.

Real Estate Properties Acquired

When we acquire properties, we allocate the purchase price to numerous tangible and intangible components. Our process for determining the allocation to these components requires many estimates and assumptions, including the following: (1) determination of market land, rental, discount and capitalization rates; (2) estimation of leasing and tenant improvement costs associated with the remaining term of acquired leases; (3) assumptions used in determining the in-place lease and if-vacant value including the rental rates, period of time that it would take to lease vacant space and estimated tenant improvement and leasing costs; and (4) allocation of the if-vacant value between land and building. A change in any of the above key assumptions can materially change not only the presentation of acquired properties in our consolidated financial statements but also our reported results of operations.

We completed acquisitions of three wholly owned properties for an aggregate purchase price of $63.1 million during the year ended December 31, 2023. We completed acquisitions of three wholly owned properties for an aggregate purchase price of $108.1 million during the year ended December 31, 2022. These transactions were accounted for as asset acquisitions, and the purchase price of each was allocated based on the relative fair value of the asset acquired and liabilities assumed.

Impairment of Long-Lived Assets

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine whether an asset may be impaired. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value.

In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long-lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.

On a quarterly basis, we assess the recoverability of the carrying amount of our real estate and related intangibles. Our assessment resulted in the remeasurement of ICE – Otay in the third quarter of 2022, which was written down to its estimated fair value and was classified as Level 3 in the fair value hierarchy. Our estimate of the fair value was based on a combination of a pending offer from a third party to acquire the property and a discounted cash flow analysis. We used two significant unobservable inputs in the various scenarios, which were the cash flow discount rate (ranging from 6.25%-9.00%) and average price per square foot of comparable sales in the market ($109.08-$185.90). There is no assurance that we will sell ICE – Otay on the terms proposed or at all. The remeasurement resulted in an impairment loss of $5.5 million, which is included in "Impairment loss" in our Consolidated Statements of Operations.

As of December 31, 2023, no impairment related to our long-lived assets was identified.

Impairment of Unconsolidated Real Estate Venture

We account for our investment in the unconsolidated real estate venture under the equity method. Under the equity method of accounting, we initially recognize our investment at cost and subsequently adjust the carrying amount of the investment for our share of the earnings or losses, distributions received, and other-than-temporary impairments.

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Our unconsolidated real estate venture is evaluated for impairment when conditions exist that may indicate that the decrease in the carrying amount of our investment has occurred and is other than temporary. Triggering events or impairment indicators for our unconsolidated real estate venture include, recurring operating losses of an investee, absence of an ability to recover the carrying amount of the investee, the ability of an investee to sustain an earnings capacity, a carrying amount that exceeds the fair value of the investment and that decline in fair value is other-than-temporary. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of investment to its estimated fair value. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgement.

As of December 31, 2023, the carrying amount of our investment in our unconsolidated real estate venture was $284.5 million, or approximately 9.9% of our total assets. As of December 31, 2022, the carrying amount of our investment in our unconsolidated real estate venture was $271.6 million, or approximately 9.6% of our total assets. During the year ended December 31, 2023 and 2022, no other-than-temporary impairment related to our unconsolidated real estate venture was identified.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our results of operations and financial condition in conjunction with the audited consolidated financial statements and related notes thereto as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020 and the sections entitled “Risk Factors,” “Forward Looking Statements,” “Business,” and “Properties” contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Annual Report on Form 10-K entitled “Risk Factors” and “Forward Looking Statements.”

Overview

References to “Easterly,” “we,” “our,” “us” and “our company” refer to Easterly Government Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries including Easterly Government Properties LP, a Delaware limited partnership, which we refer to herein as our operating partnership. We present certain financial information and metrics “at Easterly Share,” which is calculated on an entity-by-entity basis. “At Easterly Share” information, which we also refer to as being “at share,” “pro rata,” “our pro rata share” or “our share” is not, and is not intended to be, a presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We are an internally managed real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate substantially all of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration, which we refer to herein as the GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.

We focus on acquiring, developing and managing U.S. Government-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. As of December 31, 2022, we wholly owned 78 operating properties and eight operating properties through an unconsolidated joint venture (the “JV”) in the United States encompassing approximately 8.7 million leased square feet (8.2 million pro rata), including 85 operating properties that were leased primarily to U.S. Government tenant agencies and one operating property that was entirely leased to a private tenant. As of December 31, 2022, our operating properties were 99% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion.

Our operating partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of our operating partnership and owned approximately 88.3% of the aggregate limited partnership interests in our operating partnership, which we refer to herein as common units, as of December 31, 2022. We have elected to be taxed as a REIT and believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.

Acquisitions

On May 10, 2022, we acquired a 161,730 leased square foot National Archives and Record Administration (“NARA”) federal records center in Broomfield, Colorado. The building is a build-to-suit warehouse completed in 2012. The facility is leased to the GSA for beneficial use of the NARA with a lease expiration of May 2032.

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On May 18, 2022, we acquired a 138,000 leased square foot Federal Bureau of Investigation (“FBI”) field office in Tampa, Florida. The building is a build-to suit property completed in 2005. The facility is leased to the GSA for beneficial use of the FBI with a lease expiration of November 2040.

On August 23, 2022, we acquired a 28,900 leased square foot Judiciary of the U.S. District ("JUD") courthouse in Council Bluffs, Iowa. The building is a build-to-suit facility completed in 2021. The facility is leased to the GSA for beneficial use of the JUD with a lease expiration of December 2041.

Dispositions

On October 12, 2022, we entered into a second amended purchase and sale agreement with a third party to dispose of a portfolio of ten properties totaling approximately 668,000 leased square feet (the “Disposition Portfolio Properties”). We completed the sale of nine of the Disposition Portfolio Properties on October 27, 2022, including: DHA – Aurora, HRSA – Baton Rouge, VA – Baton Rouge, FDA – College Park, MEPCOM – Jacksonville, DOE – Lakewood, ICE – Pittsburgh, OSHA – Sandy, and CBP – Sunburst. On December 28, 2022, we closed on DOI – Billings, the last of the Disposition Portfolio Properties. Net proceeds from the sale of the Disposition Portfolio Properties were approximately $202.4 million and we recognized a gain on the sale of the Disposition Portfolio Properties of approximately $13.6 million for the year ended December 31, 2022.

Investment in unconsolidated real estate venture

On October 13, 2021, we formed the JV with a global investor to fund the acquisition of a portfolio of ten properties anticipated to encompass 1,214,165 leased square feet (the “Portfolio Acquisition”). We own a 53.0% interest in the JV, subject to preferred allocations as provided in the JV agreement. During 2021, the JV closed on four of the ten properties included in the Portfolio Acquisition.

On April 1, 2022, the JV acquired a 77,128 square foot Veterans Affairs (“VA”) outpatient facility located in Birmingham, Alabama. The building is a build-to-suit property that was completed during 2021. The outpatient facility is leased to the VA and has a lease expiration of October 2041.

On May 20, 2022, the JV acquired a 76,882 square foot VA outpatient facility located in Marietta, Georgia. The building is a build-to-suit property that was completed during 2021. The outpatient facility is leased to the VA and has a lease expiration of December 2041.

On July 14, 2022, the JV acquired a 67,793 square foot VA outpatient facility located in Columbus, Georgia. The building is a build-to-suit property that was completed during 2022. The outpatient facility is leased to the VA and has a lease expiration of January 2042.

On November 22, 2022, the JV acquired a 257,294 square foot VA outpatient facility located in Phoenix, Arizona. The building is a build-to-suit property that was completed during 2022. The outpatient facility is leased to the VA and has a lease expiration of February 2042.

We expect the JV to close on the two remaining properties in the Portfolio Acquisition during 2023.

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Results of Operations

Comparison of Results of Operations for the Years Ended December 31, 2022 and December 31, 2021

The financial information presented below summarizes the results of operations of our company for the years ended December 31, 2022 and 2021.

Revenues

Total revenues increased $18.7 million to $293.6 million for the year ended December 31, 2022 compared to $274.9 million for the year ended December 31, 2021.

The $17.1 million increase in Rental income is primarily attributable to an increase in revenues from the three operating properties acquired since December 31, 2021, favorable lease renewals and a full period of operations from the eight operating properties acquired during the year ended December 31, 2021, offset by a decrease in revenues attributable to the disposal of ten operating properties since December 31, 2021 and the disposal of two operating properties during the year ended December 31, 2021.

The $0.7 million increase in Tenant reimbursements is primarily attributable to an increase in tenant project reimbursements.

The $1.3 million increase in Asset management income is attributable to the fee earned by us for asset management of the JV from the four properties acquired since December 31, 2021 and a full period of operations from the four properties acquired during the year ended December 31, 2021.

The $0.4 million decrease in Other income is primarily attributable to a decrease in parking and interest income.

Expenses

Total expenses increased by $18.2 million to $222.1 million for the year ended December 31, 2022 compared to $203.8 million for the year ended December 31, 2021.

The $10.1 million increase in Property operating expenses is primarily attributable to an increase in property operating expenses associated with the three operating properties acquired since December 31, 2021 and a full period of operations from the eight operating properties acquired during the year ended December 31, 2021, offset by a decrease in expense attributable to the disposal of ten operating properties since December 31, 2021 and the disposal of two operating properties during the year ended December 31, 2021.

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The $0.5 million increase in Real estate taxes is also primarily attributable to the three operating properties acquired since December 31, 2021 as well as a full period of operations from the eight operating properties acquired during the year ended December 31, 2021.

Additionally, the $7.0 million increase in Depreciation and amortization is primarily attributable to the three operating properties acquired since December 31, 2021, as well as a full period of operations from the eight operating properties acquired during the year ended December 31, 2021, offset by a decrease in amortization related to fully amortized lease intangibles.

The $1.3 million increase in Corporate and general administrative costs was primarily due to an increase in employee costs.

Income from unconsolidated real estate venture

On October 13, 2021, we formed the JV to fund the acquisition of a portfolio of ten properties in which we own a 53.0% interest. The $3.1 million increase in Income from unconsolidated real estate venture is attributable to our pro rata share of operations from the four operating properties acquired by the JV since December 31, 2021 and a full period of operations from the four operating properties acquired by the JV during the year ended December 31, 2021.

Interest expense, net

Interest expense, net increased by $8.7 million to $47.4 million for the year ended December 31, 2022 compared to $38.6 million for the year ended December 31, 2021. The increase is primarily related to issuances of $250.0 million of outstanding fixed rate, senior unsecured notes in 2021.

Gain on the sale of operating properties

Gain on the sale of operating properties increased by $12.3 million to a $13.6 million gain for the year ended December 31, 2022 compared to a $1.3 million gain for the year ended December 31, 2021. The gain on the sale of operating properties in 2021 of $1.3 million was due to the sale of SSA – Mission Viejo in the second quarter of 2021 and United Technologies – Midland in the third quarter of 2021. Gain on the sale of operating properties in 2022 of $13.6 million was due to the sale of the Portfolio Disposition Properties in the fourth quarter of 2022.

Impairment loss

In the third quarter of 2022, we recognized an impairment loss totaling approximately $5.5 million for our ICE – Otay property and reduced its carrying value to its estimated fair value, which declined due to the changes in expected cash flows related to the existing tenant's lease expiration in 2022. ICE – Otay is a 47,919 rentable square foot office building located in San Diego, California.

Comparison of Results of Operations for the Years Ended December 31, 2021 and December 31, 2020

Information pertaining to fiscal year 2020 was included in our Annual Report on Form 10-K for the year ended December 31, 2021 on page 37 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations”, which was filed with the Securities and Exchange Commission, or SEC, on February 28, 2022.

Liquidity and Capital Resources

We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant improvements, planned and possible acquisitions of properties, including the remaining Portfolio Acquisition properties through the JV, stockholder distributions to maintain our qualification as a REIT and other capital obligations associated with conducting our business. At December 31, 2022, we had approximately $17.3 million available in cash and cash equivalents and there was approximately $384.4 million available under our revolving credit facility.

Our primary expected sources of capital are as follows:

•
cash and cash equivalents;

•
operating cash flow;

•
distribution of cash flows from the JV;

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•
available borrowings under our revolving credit facility;

•
issuance of long-term debt;

•
issuance of equity, including under our ATM Programs (as described below); and

•
asset sales.

Our short-term liquidity requirements consist primarily of funds to pay for the following:

•
development and redevelopment activities, including major redevelopment, renovation or expansion programs at individual properties;

•
property acquisitions under contract, including our JV share of the remaining Portfolio Acquisition properties;

•
tenant improvements allowances and leasing costs;

•
recurring maintenance and capital expenditures;

•
debt repayment requirements;

•
corporate and administrative costs;

•
interest payments on our outstanding indebtedness;

•
interest swap payments;

•
distribution payments; and

•
repurchases of common stock under our share repurchase program.

Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or required. As of the date of this filing, there were no known commitments or events that would have a material impact on our liquidity.

Equity

Shelf Registration Statement on Form S-3

On February 25, 2021, we filed an automatic universal shelf registration statement on Form S-3 with the SEC, which was deemed automatically effective and which provides for the registration of unspecified amounts of securities. However, there can be no assurance that we will be able to complete any such offerings of securities in the future.

Offering of Common Stock on a Forward Basis

On August 11, 2021, we and the operating partnership completed an underwritten public offering of 6,300,000 shares of common stock offered on a forward basis. In connection with the offering, we also entered into separate forward sale agreements with each of the forward purchasers (the “Forward Sales Agreements”), pursuant to which the forward purchasers borrowed and sold to the underwriters an aggregate of 6,300,000 shares of our common stock. On December 28, 2021, we issued 3,991,000 shares of our common stock for net proceeds of $85.0 million, which shares were issued in partial settlement of the Forward Sales Agreements entered into in connection with the underwritten public offering. No shares were issued during the year ended December 31, 2022. We expect to physically settle the remaining Forward Sales Agreements and receive proceeds, subject to certain adjustments, from the sale of those shares of common stock upon one or more such physical settlements. During the year ended December 31, 2022, we extended the date by which settlement of the Forward Sales Agreements will occur to August 14, 2023. Although we expect to settle the Forward Sales Agreements entirely by the physical delivery of shares of our common stock for cash proceeds, we may also elect to cash or net-share settle all or a portion of our obligations under the Forward Sales Agreements, in which case, we may receive, or may owe, cash or shares of our common stock from or to the forward purchasers. The Forward Sales Agreements provide for an initial forward price of $21.64 per share, subject to certain adjustments pursuant to the terms of each of the Forward Sales Agreements. The Forward Sales Agreements are subject to early termination or settlement under certain circumstances.

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ATM Programs

We entered into separate equity distribution agreements on each of December 20, 2019 (the “2019 ATM Program”) and June 22, 2021 (the “2021 ATM Program” and, together with the 2019 ATM Program, the “ATM Programs”) with various financial institutions pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $300.0 million under each ATM Program from time to time in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. Under each of the ATM Programs, we may enter into one or more forward transactions (each, a “forward sale transaction”) under separate master forward sale confirmations and related supplemental confirmations with each of the various financial institutions party to the respective ATM Program for the sale of shares of our common stock on a forward basis.

The following table sets forth certain information with respect to issuances under the 2019 ATM Program in each fiscal quarter for the year ended December 31, 2022 (amounts in thousands except share amounts):

(1)
Shares issued by us, which were all issued in settlement of forward sales transactions. Additionally, as of December 31, 2022 we had entered into forward sales transactions under the 2019 ATM Program for the sale of an additional 1,950,000 shares of our common stock that have not yet been settled. Subject to our right to elect net share settlement, we expect to physically settle the forward sales transactions by the maturity dates set forth in each applicable forward sale transaction placement notice, which dates range from June 2023 to January 2024. Assuming the forward sales transactions are physically settled in full utilizing a net weighted average initial forward sales price of $21.82 per share, we expect to receive net proceeds of approximately $42.6 million, after deducting offering costs, subject to adjustments in accordance with the applicable forward sale transaction. We accounted for the forward sale transactions as equity.

No sales of shares of our common stock were made under the 2021 ATM Program during the year ended December 31, 2022.

We used the net proceeds received from such sales for general corporate purposes. As of December 31, 2022, we had approximately $300.0 million of gross sales of our common stock available under the 2021 ATM Program and $87.4 million of gross sales of our common stock available under the 2019 ATM Program.

Share Repurchase Program

On April 28, 2022, our board of directors authorized a share repurchase program whereby we may repurchase up to 4,538,994 shares of our common stock, or approximately 5% of our outstanding shares as of the authorization date. We are not required to purchase shares under the share repurchase program, but may choose to do so in the open market or through privately negotiated transactions at times and amounts based on our evaluation of market conditions and other factors.

No repurchases of shares of our common stock were made under the share repurchase program during the year ended December 31, 2022.

Contribution of Property for Common Units

On May 10, 2022, we acquired NARA – Broomfield for which we issued, as partial consideration, 827,791 common units. The issuance of common units was effected in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act.

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Debt

Indebtedness Outstanding

The following table sets forth certain information with respect to our outstanding indebtedness as of December 31, 2022 (dollars in thousands):

(1)
At December 31, 2022 the one-month SOFR (“S”) was 4.36% and the one-month LIBOR ("L") was 4.39%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for each of our revolving credit facility, our 2018 term loan facility and our 2016 term loan facility (each as defined below) is based on our consolidated leverage ratio, as set forth in the respective loan agreements.

(2)
Our revolving credit facility had available capacity of $384.4 million at December 31, 2022, with an accordion feature that permits us to request additional lender commitments for up to $250.0 million of additional capacity, subject to the satisfaction of customary terms and conditions.

(3)
Our revolving credit facility has two six-month as-of-right extension options subject to certain conditions and the payment of an extension fee.

(4)
Our 2018 term loan facility has undrawn capacity up to $50.0 million of which is available during a delayed draw period.

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(5)
Entered into two interest rate swaps with an effective date of March 29, 2017 with an aggregate notional value of $100.0 million to effectively fix the interest rate at 2.82% annually, based on our consolidated leverage ratio, as defined in our 2016 term loan facility agreement. We transitioned the two interest rate swaps from LIBOR to SOFR effective November 29, 2022.

(6)
Entered into four interest rate swaps with an effective date of December 13, 2018 with an aggregate notional value of $150.0 million to effectively fix the interest rate at 3.98% annually, based on our consolidated leverage ratio, as defined in our 2018 term loan facility agreement. We transitioned the four interest rate swaps from LIBOR to SOFR effective December 23, 2022.

(7)
Effective interest rates are as follows: DEA – Pleasanton 1.80%, VA – Golden 5.03%, USFS II – Albuquerque 3.92%, ICE – Charleston 3.93%, VA – Loma Linda 3.78%, CBP – Savannah 4.12%, USCIS – Kansas City 2.05%.

(8)
On January 26, 2023, we used $15.7 million of available cash to extinguish the $15.7 million mortgage note obligation on DEA – Pleasanton.

On February 3, 2023, we entered three SOFR-based interest rate swaps each with a notional value of $100.0 million that were designated as cash flow hedges of interest rate risk. These interest rate swaps will become effective as our existing swaps mature in June and September 2023 and will mature in 2024 and 2025.

Our revolving credit facility, term loan facilities, notes payable, and mortgage notes payable are subject to ongoing compliance with a number of financial and other covenants. As of December 31, 2022, we were in compliance with all applicable financial covenants.

The chart below details our debt capital structure as of December 31, 2022 (dollars in thousands):

(1)
Our 2016 term loan facility and 2018 term loan facility are swapped to be fixed and as such are included as fixed rate debt in the table above

Senior Unsecured Credit Facility and 2016 Term Loan Facility

We are parties to a second amended and restated senior credit agreement, which provides for a senior unsecured credit facility with a total borrowing capacity of $650.0 million, consisting of two components: (i) a $450.0 million revolving credit facility, which we refer to as the revolving credit facility, and (ii) a $200.0 million term loan facility, which we refer to as the 2018 term loan facility, up to $50.0 million of which will be available for a delayed draw period. The revolving credit facility also includes an accordion feature that will provide us with additional capacity, subject to the satisfaction of customary terms and conditions, of up to $250.0 million. We also have a $100.0 million senior unsecured term loan facility, which we refer to as the 2016 term loan facility.

On July 22, 2022, we entered into the first amendment to our second amended and restated senior credit agreement, pursuant to which we extended the deadline for the $50.0 million delayed draw portion of the 2018 term loan facility to July 24, 2023 (from July 22, 2022).

On November 23, 2022, we entered into a second amendment to our second amended and restated senior credit agreement and on November 29, 2022, we entered into a fifth amendment to our senior unsecured term loan agreement (together, the “LIBOR-transition amendments”).

The LIBOR-transition amendments replaced the LIBOR-based floating interest rate option with a term SOFR-based floating interest rate option as a benchmark rate for borrowings denominated in U.S. dollars for all purposes under our revolving credit facility, our 2018 term loan facility and our 2016 term loan facility, including a credit spread adjustment of 0.10%. Other than the foregoing, the material terms of our revolving credit facility, our 2018 term loan facility and our 2016 term loan facility remain unchanged.

The LIBOR transition amendments relate to the replacement of the reference rate only in accordance with Accounting Standards Codification 848 - Reference Rate Reform. There were no other changes to the swaps or hedged interest payments including no change to principal/notional, maturity date, floor, prepayment feature, or any other change that impacts the timing or amount of cash flows.

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See Note 5 to the Consolidated Financial Statements for additional information on our revolving credit facility, our 2018 term loan facility and our 2016 term loan facility.

Mortgage Note Payoffs

On October 27, 2022, we used $5.8 million of proceeds from the sale of the Disposition Portfolio Properties to extinguish the $5.8 million mortgage note obligation on MEPCOM – Jacksonville.

On January 26, 2023, we used $15.7 million of available cash to extinguish the $15.7 million mortgage note obligation on DEA – Pleasanton.

Material Cash Commitments

The following table shows our material cash commitments as of December 31, 2022:

(1)
Due to the long-term nature of certain construction and development contracts included in this line, the amounts reported in the table represent our estimate of the timing for the related obligations being paid.

Unconsolidated Real Estate Venture

We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.

As of December 31, 2022, our investment in the JV was $271.6 million. As of December 31, 2022, we committed capital, net of return of over committed capital, to the JV totaling $274.1 million and have a remaining capital commitment of $64.2 million. None of the properties owned by the JV are encumbered by mortgage indebtedness.

Portfolio Disposition

On October 27, 2022, we completed the sale of nine of the ten Disposition Portfolio Properties. Concurrent with closing, proceeds from the sale were used to extinguish the mortgage debt at MEPCOM – Jacksonville. On December 28, 2022, we closed on the final Disposition Portfolio Property, DOI – Billings. During the three months ended December 31, 2022, we used proceeds to pay down amounts outstanding under our revolving credit facility.

For a more complete description of the Disposition Portfolio Properties, see “Overview – Dispositions” above.

Dividend Policy

In order to qualify as a REIT, we are required to distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We anticipate distributing all of our taxable income. We expect to make quarterly distributions to our stockholders in a manner intended to satisfy this requirement. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. It is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur

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additional indebtedness in order to make required distributions. It is also possible that our board of directors could decide to make required distributions in part by using shares of our common stock.

A summary of dividends declared by the board of directors per share of common stock and per common unit of our operating partnership at the date of record is as follows:

We use long-term investment partnership units in our operating partnership, which we refer to herein as LTIP units, as a form of performance-based award and service-based award for annual long-term incentive equity compensation. LTIP units are convertible into common units upon the satisfaction of certain conditions. Prior to the end of the performance period as set forth in the applicable LTIP unit award, holders of performance-based LTIP units are entitled to receive dividends per LTIP unit equal to 10% of the dividend paid per common unit of our operating partnership. After the end of the performance period, the number of LTIP units, both vested and unvested, that LTIP award recipients have earned, if any, are entitled to receive dividends in an amount per LTIP unit equal to dividends, both regular and special, payable per common unit of our operating partnership. Holders of LTIP units that are not subject to the attainment of performance goals are entitled to receive dividends per LTIP unit equal to 100% of the dividend paid per common unit beginning on the grant date.

Cash Flow

Comparison of Cash Flow for the Years Ended December 31, 2022 and December 31, 2021

The following table sets forth a summary of cash flows for our company for the years ended December 31, 2022 and 2021:

Operating Activities

We generated $125.9 million and $118.3 million of cash from operating activities during the years ended December 31, 2022 and 2021, respectively. Net cash provided by operating activities for the year ended December 31, 2022 included $121.4 million in net cash from rental activities net of expenses and distributions from investment in unconsolidated real estate venture of $6.4 million offset by $1.9 million related to the changes in tenant accounts receivables, prepaid expense and other assets, deferred revenue associated with operating leases, principal payments on operating lease obligations and accounts payable, accrued expenses and other liabilities. Net cash provided by operating activities for the year ended December 31, 2021 included $116.4 million in net cash from rental activities net of expenses and $2.0 million related to the changes in tenant accounts receivables, prepaid expense and other assets, deferred revenue associated with operating leases, principal payments on operating lease obligations and accounts payable, accrued expenses and other liabilities.

Investing Activities

We used $69.1 million and $363.0 million in cash for investing activities during the years ended December 31, 2022 and 2021, respectively. Net cash used in investing activities for the year ended December 31, 2022 primarily included $143.8 million in investment in unconsolidated real estate venture, $93.7 million in real estate acquisitions and deposits, $22.6 million in additions to operating properties and $12.4 million in additions to development properties, offset by $202.4 million in proceeds from sale of operating properties, net and $1.0 million in distributions from investment in unconsolidated real estate venture. Net cash used in investing activities for the year ended December 31, 2021 primarily included $214.7 million in real estate acquisitions, $131.6 million in investment in unconsolidated real estate venture, $17.9 million in additions to operating properties and $6.2 million in additions to development properties, offset by $7.3 million in proceeds from sale of operating properties, net.

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Financing Activities

We used $59.7 million and generated $250.2 million in cash from financing activities during the years ended December 31, 2022 and 2021, respectively. Net cash used in financing activities for the year ended December 31, 2022 included $109.2 million in dividends, $10.9 million in mortgage debt repayment, and $0.1 million in payment of deferred offering costs offset by $51.0 million in net draws under the revolving credit facility and $9.5 million in gross proceeds from issuance of shares of our common stock. Net cash provided by financing activities for the year ended December 31, 2021 included $250.0 million in gross proceeds from the issuance of our senior unsecured notes and $175.9 million in gross proceeds from issuance of shares of our common stock, offset by $100.0 million in dividends, $64.8 million in net paydowns under the revolving credit facility, $5.3 million in deferred financing costs, $4.2 million in mortgage debt repayment, and $1.5 million in payment of deferred offering costs.

Comparison of Cash Flow for the Years Ended December 31, 2021 and December 31, 2020

Information pertaining to fiscal year 2020 was included in our Annual Report on Form 10-K for the year ended December 31, 2021 on page 46 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which was filed with SEC on February 28, 2022.

Non-GAAP Financial Measures

We use and present Funds From Operations, or FFO, and FFO, as Adjusted as supplemental measures of our performance. The summary below describes our use of FFO and FFO, as Adjusted, provides information regarding why we believe these measures are meaningful supplemental measures of our performance and reconciles these measures from net income (loss), presented in accordance with GAAP.

Funds From Operations and Funds From Operations, as Adjusted

FFO is a supplemental measure of our performance. We present FFO calculated in accordance with the current National Association of Real Estate Investment Trusts, or Nareit, definition set forth in the Nareit FFO White Paper – Restatement 2018. FFO includes the REIT’s share of FFO generated by unconsolidated affiliates. In addition, we present FFO, as Adjusted for certain other adjustments that we believe enhance the comparability of our FFO across periods and to the FFO reported by other publicly traded REITs. FFO is a supplemental performance measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of REITs.

FFO is defined by Nareit as net income, (calculated in accordance with GAAP), excluding:

•
Depreciation and amortization related to real estate.

•
Gains and losses from the sale of certain real estate assets.

•
Gains and losses from change in control.

•
Impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.

We present FFO because we consider it an important supplemental measure of our operating performance, and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting results.

We adjust FFO to present FFO, as Adjusted as an alternative measure of our operating performance, which, when applicable, excludes the impact of losses on extinguishment of debt, depreciation of non-real estate assets, acquisition costs, straight-line rent and other non-cash adjustments, amortization of deferred revenue (which results from landlord assets funded by tenants), non-cash interest expense, non-cash compensation, amortization of above-/below-market leases, and the unconsolidated real estate venture’s allocated share of these adjustments. By excluding these income and expense items from FFO, as Adjusted, we believe we provide useful information as these items have no cash impact. In addition, by excluding acquisition related costs we believe FFO, as Adjusted provides useful information that is comparable across periods and more accurately reflects the operating performance of our properties.

FFO and FFO, as Adjusted are presented as supplemental financial measures and do not fully represent our operating performance. Other REITs may use different methodologies for calculating FFO and FFO, as Adjusted or use other definitions of FFO and FFO, as Adjusted and, accordingly, our presentation of these measures may not be comparable to other REITs. Neither FFO nor

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FFO, as Adjusted is intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.

The following table sets forth a reconciliation of our net income to FFO and FFO, as Adjusted for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands):

Factors That May Influence Future Results of Operations

Revenue

Our revenues primarily arise from the rental of space to tenants in our properties and tenant reimbursements, which include reimbursement for operating expenses, which are determined by the base year operating expenses and are subject to reimbursement in subsequent years based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Our revenue also includes amounts due from tenants for real estate taxes, projects and other reimbursements. Real estate taxes over the base year are reimbursed by the tenant.

Substantially all of our rental income comes from U.S. Government tenants. We expect that leases to agencies of the U.S. Government will continue to be our primary source of revenues for the foreseeable future. Due to such concentration, adverse events or conditions that affect the U.S. Government could have a more negative effect on our financial condition and operations than if our tenant base was more diverse. However, positive or negative changes in conditions in local markets, such as changes in economic or other conditions, employment rates, local tax and budget conditions, recession, competition for real property investments in these markets, uncertainty about the future and other factors are significantly less likely to impact our overall performance.

Operating Expenses

Our operating expenses generally consist of repairs and maintenance, utilities, roads and grounds, property management fees, insurance, janitorial and other operating expenses. Factors that may impact our ability to control these operating expenses include increases in utilities, increases in third party management expenses, increases in insurance premiums, increases in repair and maintenance costs and expenses related to inclement weather. Additionally, the cost of compliance with zoning and building codes as well as local, state and federal tax laws may impact our expenses. As a public company our annual general and administrative expenses are meaningfully higher due to legal, insurance, accounting, audit and other expenses related to corporate governance, SEC reporting, other compliance matters and the costs of operating as a public company. Increases in costs from any of the foregoing factors may adversely affect our future results and cash flows. Circumstances such as declines in market rental rates or increased competition may cause revenues to decrease, although the expenses of owning and operating a property will not necessarily decline. For certain of our properties, expenses may vary with occupancy, while costs arising from our property investments, interest expense and general maintenance will not be materially reduced even if a property is not fully occupied. As a result, our future cash flow and results of operations may be adversely affected and losses could be incurred if revenues decrease in the future.

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Cost of Funds and Interest Rates

We expect future changes in interest rates will impact our overall performance. We manage and may continue to manage our market risk on variable rate debt by entering into interest rate swap agreements or similar instruments, subject to maintaining our qualification as a REIT for U.S. federal income tax purposes. Although we may seek to cost-effectively manage our exposure to future rate increases through such means, a portion of our overall debt may at various times float at then current rates.

Development Activities

As of December 31, 2022, we had one property under development. We intend to continue to engage in development and redevelopment activities with respect to our properties, including build-to-suit new developments and redevelopments for existing U.S. Government tenant agencies. These development activities may include some risks such as:

•
the availability and timely receipt of zoning and other regulatory approvals;

•
development costs exceeding expectations;

•
cost overruns and untimely completion of construction (including risks beyond our control, such as weather or labor conditions, or material shortages);

•
the inability to complete construction and leasing of a property on schedule, resulting in increased debt service expense and development and redevelopment costs; and

•
the availability and pricing of financing on favorable terms or at all.

Inflation

Substantially all of our leases provide for operating expense escalation. We believe inflationary increases in expenses may be at least partially offset by the contractual expense escalations described above. We do not believe inflation has had a material impact on our historical financial position or results of operations.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base these estimates, judgments, and assumptions on historical experience, current trends, and various other factors that we believe to be reasonable under the circumstances. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements.

Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, which utilize these critical accounting estimates, can be found in Note 2, “Significant Accounting Policies,” of our consolidated financial statements.

Real Estate Properties Acquired

When we acquire properties, we allocate the purchase price to numerous tangible and intangible components. Our process for determining the allocation to these components requires many estimates and assumptions, including the following: (1) determination of market land, rental, discount and capitalization rates; (2) estimation of leasing and tenant improvement costs associated with the remaining term of acquired leases; (3) assumptions used in determining the in-place lease and if-vacant value including the rental rates, period of time that it would take to lease vacant space and estimated tenant improvement and leasing costs; (4) renewal probabilities; and (5) allocation of the if-vacant value between land and building. A change in any of the above key assumptions can materially change not only the presentation of acquired properties in our consolidated financial statements but also our reported results of operations.

We completed acquisitions of three wholly owned properties for an aggregate purchase price of $108.1 million during the year ended December 31, 2022. We completed acquisitions of eight wholly owned properties for an aggregate purchase price of $287.6 million during the year ended December 31, 2021. These transactions were accounted for as asset acquisitions, and the purchase price of each was allocated based on the relative fair value of the asset acquired and liabilities assumed.

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Impairment of Long-Lived Assets

We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine whether an asset may be impaired. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgement. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value.

In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long-lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.

On a quarterly basis, we assess the recoverability of the carrying amount of our real estate and related intangibles. Our assessment resulted in the remeasurement of ICE – Otay in the third quarter of 2022, which was written down to its estimated fair value and was classified as Level 3 in the fair value hierarchy. Our estimate of the fair value was based on a combination of a pending offer from a third party to acquire the property and a discounted cash flow analysis. We used two significant unobservable inputs in the various scenarios, which were the cash flow discount rate (ranging from 6.25%-9.00%) and average price per square foot of comparable sales in the market ($109.08-$185.90). There is no assurance that we will sell ICE – Otay on the terms proposed or at all. The remeasurement resulted in an impairment loss of $5.5 million, which is included in "Impairment loss" in our Consolidated Statements of Operations.

As of December 31, 2021, no impairment related to our long-lived assets was identified.

Impairment of Unconsolidated Real Estate Venture

We account for our investment in the unconsolidated real estate venture under the equity method. Under the equity method of accounting, we initially recognize our investment at cost and subsequently adjust the carrying amount of the investment for our share of the earnings or losses, distributions received, and other-than-temporary impairments.

Our unconsolidated real estate venture is evaluated for impairment when conditions exist that may indicate that the decrease in the carrying amount of our investment has occurred and is other than temporary. Triggering events or impairment indicators for our unconsolidated real estate venture include, recurring operating losses of an investee, absence of an ability to recover the carrying amount of the investee, the ability of an investee to sustain an earnings capacity and a carrying amount that exceeds the fair value of the investment. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of investment to its estimated fair value. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgement.

As of December 31, 2022, the carrying amount of our investment in our unconsolidated real estate venture was $271.6 million, or approximately 9.6% of our total assets. As of December 31, 2021, the carrying amount of our investment in our unconsolidated real estate venture was $131.8 million, or approximately 4.7% of our total assets. During the year ended December 31, 2022 and 2021, no other-than-temporary impairment related to our unconsolidated real estate venture was identified.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our results of operations and financial condition in conjunction with the audited consolidated financial statements and related notes thereto as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 and the sections entitled “Risk Factors,” “Forward Looking Statements,” “Business,” and “Properties” contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Annual Report on Form 10-K entitled “Risk Factors” and “Forward Looking Statements.”

Overview

References to “Easterly,” “we,” “our,” “us” and “our company” refer to Easterly Government Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries including Easterly Government Properties LP, a Delaware limited partnership, which we refer to herein as our operating partnership. We present certain financial information and metrics “at Easterly Share,” which is calculated on an entity-by-entity basis.  “At Easterly Share” information, which we also refer to as being “at share,” “pro rata,” “our pro rata share” or “our share” is not, and is not intended to be, a presentation in accordance with GAAP.

We are an internally managed real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate substantially all of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration, which we refer to herein as the GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.

We focus on acquiring, developing and managing U.S. Government-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. As of December 31, 2021, we wholly owned 85 operating properties and four operating properties through an unconsolidated joint venture in the United States encompassing approximately 8.6 million leased square feet (8.4 million pro rata), including 88 operating properties that were leased primarily to U.S. Government tenant agencies and one operating property that was entirely leased to a private tenant. As of December 31, 2021, our operating properties were 99% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion.

Our operating partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of our operating partnership and owned approximately 89.0% of the aggregate limited partnership interests in our operating partnership, which we refer to herein as common units, as of December 31, 2021. We have elected to be taxed as a REIT and believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.

Acquisitions

On March 17, 2021, we acquired a 99,130 leased square foot Federal Bureau of Investigation (“FBI”) field office in Knoxville, Tennessee. The building is a built-to-suit property completed in 2010. The facility is leased to the GSA for beneficial use of the FBI with a lease expiration of August 2025.

On March 17, 2021, we acquired a 60,000 leased square foot U.S Attorney’s Office (“USAO”) facility in Louisville, Kentucky. The building is a built-to-suit property completed in 2011. The facility is leased to the GSA for beneficial use of the USAO with a lease expiration of December 2031.

On March 17, 2021, we acquired a 17,420 square foot U.S Immigration and Customs Enforcement (“ICE”) office in Louisville, Kentucky. The building is a built-to-suit office facility completed in 2011. The facility is leased to the GSA for beneficial use of ICE which expired in May 2021 and is in holdover as of December 31, 2021.

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On April 22, 2021, we acquired a 43,600 square foot U.S. Attorney’s Office (“USAO”) in Springfield, Illinois. The building is a build-to-suit property completed in 2002. The facility is leased to the GSA for beneficial use of the USAO with a lease expiration of March 2038.

On May 20, 2021, we acquired a 94,378 square foot National Weather Service Facility (“NWS”) in Kansas City, Missouri. The building was originally constructed in 1998 and substantially renovated in 2020. The facility is leased to the GSA for beneficial use of the NWS with a lease expiration of December 2038.

On July 22, 2021, we acquired a 61,384 square foot U.S. Department of Homeland Security facility in Cleveland, Ohio. The building was originally constructed in 1981 and substantially renovated in 2016 and 2021. The facility is primarily leased to the GSA for beneficial use of ICE and the NWS and has lease expirations ranging from August 2031 to September 2040.

On October 14, 2021, we acquired a 489,316 leased square foot U.S. Citizenship and Immigration Services (“USCIS”) facility in Kansas City, Missouri. The building was substantially renovated-to-suit in 1999. The facility is primarily leased to the GSA for beneficial use of the USCIS and has lease expirations ranging from 2024 to 2042. In conjunction with the acquisition, we assumed $51.5 million of mortgage notes payable.

On November 1, 2021, we acquired an 80,000 square foot Department of Veteran Affairs (“VA”) facility located in the Midwest United States. The building is a build-to-suit property that was completed during 2021. The facility is leased to the VA and has a lease expiration of May 2041.

Dispositions

On June 4, 2021, we sold SSA – Mission Viejo to a third party. Net proceeds from the sale of operating property were approximately $3.3 million and we recognized a gain on the sale of operating property of approximately $0.5 million for the year ended December 31, 2021.

On September 28, 2021, we sold United Technologies Midland to a third party. Net proceeds from the sale of operating property were approximately $4.0 million and we recognized a gain on the sale of operating property of approximately $0.8 million for the year ended December 31, 2021.

Investment in unconsolidated real estate venture

On October 13, 2021, we formed a new JV with a global investor (the “JV Partner”) to fund the acquisition of a portfolio of ten properties anticipated to encompass 1,214,165 leased square feet (the “Portfolio Acquisition”). We own a 53.0% interest in the JV, subject to preferred allocations as provided in the JV agreement, and will act as manager of the Portfolio Acquisition properties, with customary rights and obligations, and will receive asset management fees and a promote interest.

The JV will serve as the vehicle for the Portfolio Acquisition and was assigned the rights of the purchase and sale agreement entered into by our operating partnership on September 30, 2021. The aggregate contractual purchase price for the Portfolio Acquisition is $635.6 million and the portfolio is 100% leased to the VA with a weighted average lease term of 19.6 years. As of December 31, 2021, the JV had closed on four of the ten properties included in the Portfolio Acquisition.

On October 13, 2021, the JV acquired a 31,062 square foot VA field office located in Lenexa, Kansas. The building is a build-to-suit property that was completed during 2021. The facility is leased to the VA and has a lease expiration of May 2041.

On October 13, 2021, the JV acquired a 120,916 square foot VA field office located in Lubbock, Texas. The building is a build-to-suit property that was completed during 2020. The facility is leased to the VA and has a lease expiration of December 2040.

On November 17, 2021, the JV acquired a 94,566 square foot VA field office located in Chattanooga, Tennessee. The building is a build-to-suit property that was completed during 2020. The facility is leased to the VA and has a lease expiration of November 2035.

On December 22, 2021, the JV acquired a 226,148 square foot VA field office located in San Antonio, Texas. The building is a build-to-suit property that was completed during 2021. The facility is leased to the VA and has a lease expiration of August 2041.

We expect the JV to close on the remaining Portfolio Acquisition during 2022 and 2023.

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Impact of the COVID-19 Pandemic

The novel coronavirus, or COVID-19, pandemic, has caused and continues to cause significant disruptions to the U.S., regional and global economies and has contributed to significant volatility and negative pressure in financial markets.

We continue to carefully monitor the COVID-19 pandemic, including the emergence of new variants, and its potential impact on our business. We are following guidelines established by the Centers for Disease Control and the World Health Organization and orders issued by the state and local governments where we operate. In addition, we have taken a number of precautionary steps to safeguard our business and our employees from the COVID-19 pandemic, including, but not limited to, implementing non-essential travel restrictions when necessary and facilitating telecommuting arrangements for our employees. We have taken these precautionary steps while maintaining business continuity so that we can continue to deliver service to and meet the demands of our tenants, including our U.S. Government tenant agencies.

To date, the impact of the COVID-19 pandemic on our business and financial condition has not been significant. The future impact of the COVID-19 pandemic on our operations and financial condition will, however, depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.  See “Item 1A Risk Factors” for a discussion of the potential adverse impact of the COVID-19 pandemic on our business, results of operations and financial condition.

Financial information analyzed below reflects the audited financial statements as of December 31, 2021, included in the F pages of this Annual Report on Form 10-K.

Results of Operations

Comparison of Results of Operations for the Years Ended December 31, 2021 and December 31, 2020

The financial information presented below summarizes the results of operations of our company for the years ended December 31, 2021 and 2020.

Revenues

Total revenues increased $29.8 million to $274.9 million for the year ended December 31, 2021 compared to $245.1 million for the year ended December 31, 2020.

The $29.3 million increase in Rental income is primarily attributable to an increase in revenues from the eight operating properties acquired since December 31, 2020, favorable lease renewals, a full period of operations from the nine operating properties acquired and one development property placed in service during the year ended December 31, 2020, offset by a decrease in revenues

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attributable to the disposal of two operating properties since December 31, 2020 and the disposal of one operating property during the year ended December 31, 2020.

The $0.7 million increase in Tenant reimbursements are primarily attributable to an increase in tenant project reimbursements.

The $0.3 million decrease in Other income is primarily attributable to a decrease in parking and interest income.

The $0.1 million increase in Asset management income is attributable to the fee earned by the Company for asset management of the JV.

Expenses

Total expenses increased by $11.8 million to $203.8 million for the year ended December 31, 2021 compared to $192.1 million for the year ended December 31, 2020.

The $8.3 million increase in Property operating expenses is primarily attributable to an increase in property operating expenses associated with the eight operating properties acquired since December 31, 2020, a full period of operations from the nine operating properties acquired and one development property placed in service during the year ended December 31, 2020 and an increase in expenses associated with internal asset management costs.

The $3.3 million increase in Real estate taxes is also primarily attributable to the eight operating properties acquired since December 31, 2020 as well as a full period of operations from the nine operating properties acquired and one development property placed in service during the year ended December 31, 2020.

Additionally, the $2.5 million decrease in Depreciation and amortization is primarily attributable to a decrease in amortization related to fully amortized lease intangibles offset by the eight operating properties acquired since December 31, 2020, as well as a full period of operations from the nine operating properties acquired and one development property placed in service during the year ended December 31, 2020.

The $2.9 million increase in Corporate and general administrative costs was primarily due to an increase in employee costs.

Income from unconsolidated real estate venture

On October 13, 2021, the Company formed a new JV to fund the acquisition of a portfolio of ten properties in which the Company owns a 53.0% interest. The increase in Income from unconsolidated real estate venture is attributable to the Company’s pro rata share of operations from properties acquired by the JV in the fourth quarter of 2021.

Interest Expense

Interest expense increased by $3.2 million to $38.6 million for the year ended December 31, 2021 compared to $35.5 million for the year ended December 31, 2020.  The increase is primarily related to issuances of our 2021 series unsecured senior notes (as described below) and a decrease in capitalized interest on our development projects resulting from the completion of FDA – Lenexa in the third quarter of 2020.

Gain (Loss) on the sale of operating properties

Gain (loss) on the sale of operating properties increased by $5.3 million to a $1.3 million gain for the year ended December 31, 2021 compared to a $4.0 million loss for the year ended December 31, 2020.  Loss on the sale of operating properties in 2020 of $4.0 million was due to the sale of DEA – Otay in the fourth quarter of 2020.  The gain on the sale of operating properties in 2021 of $1.3 million was due to the sale of SSA – Mission Viejo in the second quarter of 2021 and United Technologies – Midland in the third quarter of 2021.

Comparison of Results of Operations for the Years Ended December 31, 2020 and December 31, 2019

Information pertaining to fiscal year 2019 was included in our Annual Report on Form 10-K for the year ended December 31, 2020 on page 35 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Position and Results of Operations”, which was filed with the Securities and Exchange Commission, or SEC, on February 24, 2021.

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Liquidity and Capital Resources

We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant improvements, planned and possible acquisitions of properties, including the remaining Portfolio Acquisition properties through the JV, stockholder distributions to maintain our qualification as a REIT and other capital obligations associated with conducting our business. At December 31, 2021, we had approximately $11.1 million available in cash and cash equivalents and there was $435.5 million available under our revolving credit facility.

Our primary expected sources of capital are as follows:

Our short-term liquidity requirements consist primarily of funds to pay for the following: