2015 Annual Report
Dear Shareholders,
As we look back on our first year as a public company, we cannot be more pleased with our competitive position.
We are the only internally managed public REIT that focuses primarily on United States government leased real
estate. We came to market with a compelling investment proposition – stable cash flows backed by the full faith
and credit of the United States government, paired with an acquisition platform that we believe can deliver
earnings growth commensurate with the Russell 2000 with less risk and volatility. At IPO we owned 29 mission-
critical assets that were less than half the age of the assets owned by our public office peers. By the end of 2015
we had grown our portfolio and income stream materially with the addition of 7 essential GSA properties which
added nearly $12 million to our run rate cash net operating income.
We seek to serve as a partner to the federal government and we believe this strategy enables us to find
ways to facilitate the government’s efficient delivery of its varied missions, while also enhancing returns for
our investors. Our tenants, a majority of which are law enforcement agencies, such as the Federal Bureau of
Investigation, the Drug Enforcement Administration, Immigration and Customs Enforcement, Customs and
Border Protection, as well as the Federal Judiciary, execute enduring missions of
the United States
government. We expect these missions will not go out of favor, no matter who occupies the White House.
The internal team at Easterly has dedicated professionals in the areas of government relations, acquisitions,
asset and property management, who bring unique knowledge and meaningful expertise in originating,
underwriting and servicing our target assets. Through this, we have assembled, and expect to continue to
grow our portfolio of mission-critical buildings.
We target a specific set of buildings that have important attributes, including Class A construction, scale of over
40,000 square feet, an age that is less than 20 years old, and built-to-suit features, increasing the likelihood of
lease renewal. We understand the importance of our facilities in supporting the tenant agencies’ missions,
enabling us to achieve our goal as a constructive and helpful partner to the federal government.
We believe the Easterly team has done an excellent job in 2015 laying the groundwork for continued growth
and expansion in 2016. We kicked off 2016 with the acquisition of the 71,100 square foot Immigration and
Customs Enforcement building in Albuquerque, New Mexico. Our team is strong and we have the resources
and insights to continue executing.
We believe that our financial foundation is strong and that we are well positioned to pursue additional
opportunities in our approximately $700 million pipeline. At the end of 2015 we had approximately $246
million of capacity available on our line of credit and a conservative net debt to total enterprise value of just
25%. The portfolio and strategy that we have carefully crafted is gaining traction in the market and we were
able to produce an 18.4% total return for our shareholders in 2015. We look forward to another strong year
of delivering value to all of our stakeholders.
For more information,
including information required to be provided under applicable law, please see
attached copies of Easterly’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and
Easterly’s 2016 definitive proxy statement.
We would like to express our gratitude to our employees for their continued passion and determination and
to our Board of Directors for their enthusiasm and continued guidance and support. We thank you for your
interest in Easterly and look forward to keeping you abreast of our progress in 2016.
Sincerely,
William C. Trimble, III
Chief Executive Officer and President
Darrell W. Crate
Chairman of the Board
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2015
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the transition period from To
Commission File Number: 001-36834
EASTERLY GOVERNMENT PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
2101 L Street NW, Suite 750
Washington, D.C.
(Address of principal executive offices)
47-2047728
(IRS Employer
Identification No.)
20037
(Zip Code)
Registrant’s telephone number, including area code: (202) 595-9500
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
Title of each class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer (Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO
As of March 2, 2016, there were 24,168,379 of the registrant’s shares of common stock outstanding.
As of June 30, 2015, the aggregate market value of the shares of common stock held by non-affiliates of the registrant was approximately $217.9
million based on the closing sale price of $15.92 as reported on the New York Stock Exchange on June 30, 2015. For this computation, the registrant
has excluded the market value of all shares of common stock reported as beneficially owned by executive officers and directors of the registrant; such
exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the registrant.
Accelerated Filer
Smaller Reporting Company
Portions of the Proxy Statement for the Annual Stockholders’ Meeting (which is scheduled to be held on May 5, 2016) to be filed within 120 days
after the end of the registrant’s fiscal year are incorporated by reference in Part III of this Annual Report on Form 10-K
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Item
Part I.
Financial Information
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part IV.
Item 15.
Exhibits and Financial Statement Schedules
Page
Number
3
8
27
28
31
31
32
34
36
49
49
50
50
50
51
51
51
51
51
52
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). We caution investors that forward-looking statements are based on
management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words
“anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “project”, “result”, “should”, “will”, and similar
expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are
subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and
unknown risks, trends, uncertainties, and factors that are beyond our control. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or
projected. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information,
future events, or otherwise. Accordingly, investors should use caution in relying on forward-looking statements, which are based on
results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from
those expressed or implied by forward-looking statements include, among others, the following:
risks associated with our dependence on the U.S. Government and its agencies for substantially all of our revenues,
including credit risk and risk that the U.S. Government reduces its spending on real estate or that it changes it preference
away from leased properties;
risks associated with ownership and development of real estate;
decreased rental rates or increased vacancy rates;
loss of key personnel;
general volatility of the capital and credit markets and the market price of our common stock;
the risk that the market price of our common stock may be negatively impacted by increased selling activity following the
liquidation of certain private investment funds that contributed assets in our initial public offering;
the risk we may lose one or more major tenants;
failure of acquisitions or development projects to yield anticipated results;
risks associated with actual or threatened terrorist attacks;
intense competition in the real estate market that may limit our ability to attract or retain tenants or re-lease space;
insufficient amounts of insurance or exposure to events that are either uninsured or underinsured;
uncertainties and risks related to adverse weather conditions, natural disasters and climate change;
exposure to liability relating to environmental and health and safety matters;
limited ability to dispose of assets because of the relative illiquidity of real estate investments and the nature of our assets;
exposure to litigation or other claims;
risks associated with breaches of our data security;
risks associated with our indebtedness;
failure to refinance current or future indebtedness on favorable terms, or at all;
failure to meet the restrictive covenants and requirements in our existing and new debt agreements;
fluctuations in interest rates and increased costs to refinance or issue new debt;
risks associated with derivatives or hedging activity; and
risks associated with mortgage debt or unsecured financing or the unavailability thereof, which could make it difficult to
finance or refinance properties and could subject us to foreclosure.
1
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. For further
information on these and other factors that could affect us and the statements contained herein, you should refer to the section below
entitled “Item 1.A Risk Factors.”
2
Item 1. Business
General
PART I
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 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 through the U.S. General Services Administration,
or GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and
capital appreciation.
As of December 31, 2015, we wholly owned 36 properties in the United States, including 33 properties that are leased primarily
to U.S. Government tenant agencies and three properties that are entirely leased to private tenants, encompassing approximately
2.6 million square feet in the aggregate. We focus on acquiring, developing and managing GSA-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
GSA to meet the needs and objectives of the tenant agency.
We were incorporated in Maryland as a corporation on October 9, 2014 and did not have any meaningful operations until the
completion of the formation transactions and our initial public offering on February 11, 2015. In connection with our initial public
offering, we engaged in certain formation transactions, or the formation transactions, pursuant to which our operating partnership
acquired (i) 15 properties previously owned by the Easterly Funds (as defined below), (ii) 14 properties previously owned by Western
Devcon, Inc., a private real estate company, and a series of related entities beneficially owned by Michael P. Ibe, which we refer to
collectively as Western Devcon and (iii) all of the ownership interests in the management entities (as defined below). After our initial
public offering, we acquired two properties in the second quarter of 2015, one property in the third quarter of 2015 and four properties
in the fourth quarter of 2015.
Our predecessor means Easterly Partners, LLC and its consolidated subsidiaries, including (i) all entities or interests in U.S.
Government Properties Income and Growth Fund L.P., U.S. Government Properties Income and Growth Fund REIT, Inc. and the
related feeder and subsidiary entities, which we refer to, collectively, as Easterly Fund I, (ii) all entities or interests in U.S.
Government Properties Income and Growth Fund II, LP, USGP II REIT LP, USGP II (Parallel) Fund, LP and their related feeders and
subsidiary entities, which we refer to, collectively, as Easterly Fund II and, together with Easterly Fund I, we refer to as the Easterly
Funds and (iii) the entities that managed the Easterly Funds, which we refer to as the management entities.
Our operating partnership holds substantially all of our assets and conducts substantially all of our business. We own
approximately 60.9% of the aggregate operating partnership units in our operating partnership. We intend to elect to be taxed as a
REIT and operate in a manner that we believe allows us to qualify as a REIT for federal income tax purposes commencing with our
taxable year ended December 31, 2015.
Since our initial public offering and the formation transactions occurred on February 11, 2015, the results of operations and
financial condition for the entities acquired by us in connection with our initial public offering and related formation transactions are
not included in certain historical financial statements. More specifically, our results of operations and financial condition for the year
ended December 31, 2014 reflect the results of operations and financial condition for our predecessor. Our results of operations for the
year ended December 31, 2015 reflect the results of operation and financial condition for our predecessor together with the entities we
acquired at and after the time of our initial public offering. The results of operations for each of these acquisitions are included in our
consolidated statements of operations only from the date of acquisition.
Our Competitive Strengths
We believe that we distinguish ourselves from other owners and operators of office and other commercial properties, including
properties leased to the U.S. Government, through the following competitive strengths:
High Quality Portfolio Leased to Mission-Critical U.S. Government Agencies. We are the only internally managed
public REIT that focuses primarily on the acquisition, development and management of Class A commercial properties
that are leased to U.S. Government agencies, primarily through the GSA. We wholly own 36 high quality properties in the
United States that are currently 100% leased, including 33 properties leased primarily to U.S. Government tenant
3
agencies. As of December 31, 2015, the weighted average age of our properties was approximately twelve years, and the
weighted average remaining lease term was approximately 7 years. A majority of our properties are leased to U.S.
Government agencies that serve mission-critical functions and are of high importance within the hierarchy of these
agencies. These properties generally meet our investment criteria, which target major federal buildings of Class A
construction that are less than 20 years old, are at least 85% leased to a single U.S. Government agency, are in excess of
40,000 rentable square feet with expansion potential, are in strategic locations to facilitate the tenant agency’s mission,
include build-to-suit features and are focused on environmental sustainability.
U.S. Government Tenant Base with Strong History of Renewal. Our GSA leases are backed by the full faith and credit of
the U.S. Government, are paid for through the Federal Buildings Fund and are not subject to direct federal appropriations.
Furthermore, the GSA has never experienced a financial default. In addition to stable rent payments, our GSA leases
typically have initial total terms of ten to 20 years with renewal leases having terms of five to ten years. GSA leases
governing properties similar to the properties that we target have historically had high renewal rates, which limit
operational risk. We believe that the strong credit quality of our U.S. Government tenant base, our long-term leases, the
likelihood of lease renewal and the high tenant recovery rate for our property-related operating expenses contribute to the
stability of our operating cash flows and expected distributions.
Experienced and Aligned Management Team. Our senior management team has a proven track record of sourcing,
acquiring, developing and managing properties leased to U.S. Government agencies, primarily through the GSA. Our
multidisciplinary team possesses complementary skills and experience that we expect will drive our business and growth
strategies and includes the co-founders of our predecessor and the founder and president of a company specializing in the
development of build-to-suit properties for the GSA. Collectively, our senior management team has been responsible for
the acquisition of an aggregate of approximately 2.0 million square feet of GSA-leased properties and the development of
approximately 1.1 million aggregate square feet of such properties. We believe that our management expertise provides us
with a significant advantage over our competitors when pursuing acquisition opportunities and engaging the GSA in
property development opportunities and by providing us with superior property management and tenant service
capabilities.
Access to Acquisition Opportunities with an Active Pipeline. Our senior management team has an extensive network of
longstanding relationships with owners, specialized developers, leasing brokers, lenders and other participants in the
GSA-leased property market. Our team has been able to leverage these relationships to access a wide variety of sourcing
opportunities, frequently resulting in the acquisition of properties that were not broadly marketed. In addition, we
maintain a proprietary database that tracks approximately 8,500 leases totaling approximately 200 million rentable square
feet and includes substantially every major U.S. Government-leased property that meets our investment criteria as well as
information about the ownership of such properties. We believe that our longstanding industry relationships, coupled with
our proprietary database, improve our ability to source and execute attractive acquisition opportunities. Further, these
factors enable us to effectively initiate transactions with property owners who may not currently be seeking to sell their
property, which we believe gives us a competitive advantage over others bidding in broadly marketed transactions.
Extensive Development Experience with U.S. Government-Leased Properties. Our senior management team has
developed projects comprising approximately 4.2 million square feet, including 37 build-to-suit projects for the GSA as
well as other corporate and government tenants. In the aggregate, our senior management team has developed 20 projects
for the GSA. Development of government projects, particularly build-to-suit projects, requires expertise in GSA
requirements and the needs of tenant agencies. Since 1994, members of our senior management team have developed an
average of approximately 49,000 square feet per year of GSA-leased build-to-suit properties. We believe that our
thorough understanding of the U.S. Government’s procurement processes and standards, our longstanding relationships
with the GSA and other agencies of the U.S. Government, and our differentiated capabilities enables us to continue to
compete effectively for U.S. Government development opportunities.
Value-Enhancing Asset Management. Our management team focuses on the efficient management of our properties and
on improvements to our properties that enhance their value for a tenant agency and improve the likelihood of lease
renewal. We work in close partnership with the GSA and tenant agencies to manage the construction of specialized,
agency-specific design enhancements. These highly tailored build-outs substantially increase the likelihood of the tenant
agency’s renewal and also typically generate a construction management fee paid by the tenant agency to us in the amount
of approximately 15% of the actual cost of construction. We also seek to reduce operating costs at all of our properties,
often by implementing energy efficiency programs that help the U.S. Government achieve its conservation and efficiency
goals. Our asset management team also conducts frequent audits of each of our properties in concert with the GSA and the
tenant agency so as to keep each facility in optimal condition, allowing the tenant agency to better perform its stated
mission and helping to position us as a GSA partner of choice.
4
Growth-Oriented Capital Structure. As of December 31, 2015, we had approximately $83.8 million of mortgage
indebtedness and $154.4 million outstanding under our senior unsecured revolving credit facility for a debt-to-
capitalization ratio of 26.1%. None of our outstanding indebtedness is scheduled to mature until 2019.
Business & Growth Strategies
Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital
appreciation. We pursue the following strategies to achieve these goals:
Pursue attractive acquisition opportunities. We plan to engage in strategic and disciplined acquisitions of properties that
we believe are essential to the mission of select U.S. Government agencies and that, in many cases, contain agency-
specific design enhancements that allow each tenant agency to better satisfy its mission. We expect to target for
acquisition primarily major federal buildings of Class A construction that are less than 20 years old, are at least 85%
leased to a single U.S. Government agency, are in excess of 40,000 rentable square feet with expansion potential, are in
strategic locations to facilitate the tenant agency’s mission, include build-to-suit features and are focused on
environmental sustainability.
Develop Build-to-Suit U.S. Government Properties. We intend to pursue attractive opportunities to develop build-to-suit
properties for use by certain U.S. Government agencies. As U.S. Government agencies expand, they often require
additional space tailored specifically to their needs, which may not be available in the agency’s target market and
therefore require new construction. The GSA typically solicits proposals from private companies to develop and lease
such properties to the agency, rather than developing and owning the property itself. We expect to bid for those property
development opportunities published by the GSA that suit our investment criteria.
Renew Existing Leases at Positive Spreads. We intend to renew leases at our GSA-leased properties at positive spreads
upon expiration. Upon lease renewal, GSA rental rates are typically reset based on a number of factors, including
inflation, the replacement cost of the building at the time of renewal and enhancements to the property since the date of
the prior lease. During the term of a GSA lease, we work in close partnership with the GSA to implement improvements
at our properties to enhance the U.S. Government tenant agency’s ability to perform its stated mission, thereby increasing
the importance of the building to the tenant agency and the probability of an increase in rent upon lease renewal.
Reduce Property-Level Operating Expenses. We intend to manage our properties to increase our income by continuing to
reduce property-level operating costs. We manage our properties in a cost efficient manner so as to eliminate any excess
spending and streamline our operating costs. When we acquire a property, we review all property-level operating
expenditures to determine whether and how the property can be managed more efficiently.
Employees
As of December 31, 2015 we had 25 employees. None of our employees are represented by a collective bargaining agreement.
We believe that our relationship with our employees is good.
Financial Information about Industry Segments
Our principal business is the ownership and operation of Class A commercial properties that are leased to U.S. Government
agencies. We do not distinguish or group our operations on a geographical basis when measuring performance. Accordingly, we
believe we have a single reportable segment for disclosure purposes in accordance with GAAP.
Significant Tenants
Substantially all of our current rents come from U.S. Government tenant agencies, including rents paid through the GSA. As of
December 31, 2015, our U.S. Government tenant agencies accounted for 96.2% of our annualized lease income. For further
information on the composition of our tenant base, see “Item 2: Properties.”
Insurance
We carry comprehensive general liability coverage on all of our properties, with limits of liability customary within the industry to
insure against liability claims and related defense costs. Similarly, we are insured against the risk of direct physical damage in amounts
necessary to reimburse us on a replacement-cost basis for costs incurred to repair or rebuild each property, including loss of rental income
during the reconstruction period. The majority of our property policies include coverage for the perils of flood and earthquake shock with
limits and deductibles customary in the industry and specific to the property. We also generally obtain title insurance policies when
5
acquiring new properties, which insure fee title to our real properties. We currently have coverage for losses incurred in connection with
both domestic and foreign terrorist-related activities. While we do carry commercial general liability insurance, property insurance and
terrorism insurance with respect to our properties, these policies include limits and terms we consider commercially reasonable. There are
certain losses that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in our belief,
economically impractical to maintain such coverage. Should an uninsured loss arise against us, we would be required to use our own
funds to resolve the issue, including litigation costs. We believe the policy specifications and insured limits are adequate given the relative
risk of loss, the cost of the coverage and industry practice and, in the opinion of our management, the properties in our portfolio are
adequately insured.
Competition
We compete with numerous developers, real estate companies and other owners of commercial properties for acquisitions and
pursuing buyers for dispositions. We expect that other real estate investors, including insurance companies, private equity funds,
sovereign wealth funds, pension funds, other REITs and other well-capitalized investors will compete with us to acquire existing
properties and to develop new properties. In addition, U.S. Government tenants are viewed as desirable tenants by other landlords
because of their strong credit profile, and properties leased to U.S. Government tenant agencies often attract many potential buyers.
This competition could increase prices for properties of the type we may pursue and adversely affect our profitability and impede our
growth. In addition, substantially all of our properties face competition for tenants. Some competing properties may be newer, better
located or more attractive to tenants. Competing properties may have lower rates of occupancy than our properties, which may result
in competing owners offering available space at lower rents than we offer at our properties. This competition may affect our ability to
attract and retain tenants, may reduce the rents we are able to charge and could have a material adverse effect on our business,
financial condition and results of operations.
Regulation
Environmental and Related Matters
Under various federal, state or local laws, ordinances and regulations, as a current or former owner or operator of real property,
we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or petroleum products
at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third-party
liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or operator
knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of our
properties may be impacted by contamination arising from current or prior uses of the property or adjacent properties for commercial,
industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous substances or releases from tanks
used to store such materials. We also may be liable for the costs of remediating contamination at off-site disposal or treatment
facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we comply
with environmental laws in doing so. The presence of contamination or the failure to remediate contamination on our properties may
adversely affect our ability to attract or retain tenants and our ability to develop or sell or borrow against those properties.
In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property damage or for
similar reasons. Environmental laws also may create liens on contaminated sites in favor of the U.S. Government for damages and
costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may
impose restrictions on the manner in which that property may be used or how businesses may be operated on that property.
Some of our properties are, and may be adjacent to or near other properties, used for industrial or commercial purposes. These
properties may have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or
toxic substances. Releases from these properties could impact our properties. While certain properties contain or contained uses that
could have or have impacted our properties, we are not aware of any liabilities related to environmental contamination that we believe
will have a material adverse effect on our operations.
In addition, our properties are subject to various federal, state and local environmental and health and safety laws and
regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to
liability. These liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the
potential costs of compliance with such laws and regulations or increase liability for noncompliance. This may result in significant
unanticipated expenditures or may otherwise materially and adversely affect our operations, or those of our tenants, which could in
turn have a material adverse effect on us. We sometimes require our private tenants to comply with environmental and health and
safety laws and regulations and to indemnify us for any related liabilities in our leases with them. But in the event of the bankruptcy or
inability of any of our tenants to satisfy such obligations, we may be required to satisfy such obligations. We are not presently aware
of any instances of material noncompliance with environmental or health and safety laws or regulations at our properties, and we
6
believe that we and/or our tenants have all material permits and approvals necessary under current laws and regulations to operate our
properties.
In recent years, in reaction to the Energy Policy Act of 2005, the U.S. Government has instituted “green lease” policies that
include the “Promotion of Energy Efficiency and Use of Renewable Energy” as one of the factors it considers when leasing property.
In accordance with the U.S. Government’s general policy of preferring energy efficient buildings, the Energy Independence and
Security Act of 2007 allows the GSA to prefer buildings for lease that have received an “Energy Star” label. This label is received by
buildings that reach a specified level of energy efficiency. There are currently four properties in our portfolio that have received the
“Energy Star” label.
The U.S. Government’s “green lease” initiative also permits U.S. Government tenants to require LEED-CI certification in
selecting new premises or renewing leases at existing premises. Obtaining such certification may be costly and time consuming. There
are currently ten properties in our portfolio that have achieved a total of 11 LEED certifications. For more information, see “Item 1.A
Risk Factors.”
With respect to properties we may develop, we may be subject to various local, state and federal statutes, ordinances, rules and
regulations concerning zoning, building design, construction and similar matters, including local regulations that impose restrictive
zoning requirements. In addition, we will be subject to registration and filing requirements in connection with these developments in
certain states and localities in which we operate even if all necessary U.S. Government approvals have been obtained. We may also be
subject to periodic delays or may be precluded entirely from developing properties due to building moratoriums that could be
implemented in the future in certain states in which we intend to operate.
Americans with Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act of 1990, or ADA to the extent that such
properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by
persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe the existing
properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to
address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of
damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to
assess our properties and to make alterations as appropriate in this respect.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and
we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our
periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and stockholder approval of any golden parachute payments not previously approved. We take advantage of certain of
these exemptions, including the exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the
requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved.
In addition, the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition
period provided in the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth
company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
However, we have chosen to “opt out” of this extended transition period, and, as a result, we will comply with new or revised
accounting standards on the relevant dates on which adoption of such standards is required for all public companies that are not
emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting
standards is irrevocable.
We will remain an “emerging growth company” until the earliest to occur of the last day of the fiscal year during which our total
annual revenue equals or exceeds $1 billion (subject to adjustment for inflation); the last day of the fiscal year following the fifth
anniversary of our initial public offering; the date on which we have, during the previous three-year period, issued more than $1
billion in non-convertible debt or the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.
7
REIT Qualification
We intend to elect to be taxed as a REIT, commencing with our taxable year ended December 31, 2015. So long as we qualify
as a REIT, we generally will not be subject to U.S. federal income tax on net taxable income that we distribute annually to our
stockholders. In order to qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among
other things, the real estate qualification of sources of our income, the composition and values of our assets, the amounts we distribute
to our stockholders and the diversity of ownership of our stock. In order to comply with REIT requirements, we may need to forego
otherwise attractive opportunities and limit our expansion opportunities and the manner in which we conduct our operations. See
“Item 1.A Risk Factors.”
Corporate Headquarters
Our principal executive offices are located at 2101 L Street NW, Suite 750 Washington, DC 20037, and our telephone number is
202-595-9500.
Available Information
Our website address is www.easterlyreit.com. Information on our website is not incorporated by reference herein and is not a
part of this Annual Report on Form 10-K. We make available free of charge on our website or provide a link on our website to our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports
are electronically filed with, or furnished to, the SEC. We also make available through our website other reports filed with or
furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under
Section 16(a) of the Exchange Act. To access these filings, go to the “Investor Resources” portion of our “Financial Information” page
on our website, and then click on “SEC Filings.” You may also read and copy any document we file at the SEC’s Public Reference
Room located at 100 F Street, N.E., Washington, DC 20549. Call the SEC at 1-800-SEC-0330 for further information on the public
reference room. In addition, these reports and the other documents we file with the SEC are available at a website maintained by the
SEC at http://www.sec.gov.
Item 1a. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered.
The risks and uncertainties described below are not the only ones that we may face. Additional risks and uncertainties not presently
known to us or that we may currently deem immaterial also may impair our business operations. If any of the following risks occur,
our business, financial condition, operating results and cash flows could be affected adversely.
Risks Related to Real Estate
We depend on the U.S. Government and its agencies for substantially all of our revenues and any failure by the U.S.
Government and its agencies to perform their obligations under their leases or renew their leases upon expiration could have a
material adverse effect on our business, financial condition and results of operations.
Substantially all of our current rents come from U.S. Government tenant agencies, including rents paid through the GSA. As of
December 31, 2015, our U.S. Government tenant agencies accounted for 96.2% of our annualized lease income. We expect that leases
to agencies of the U.S. Government will continue to be the primary source of our revenues for the foreseeable future. Due to such
concentration, any failure by the U.S. Government to perform its obligations under its leases or a failure to renew its leases upon
expiration, could cause interruptions in the receipt of lease revenue or result in vacancies, or both, which would reduce our revenue
until the affected properties are leased, and could decrease the ultimate value of the affected property upon sale and have a material
adverse effect on our business, financial condition and results of operations.
Some of our leases with U.S. Government tenant agencies permit the tenant agency to vacate the property and discontinue
paying rent prior to their lease expiration date.
Some of our leases are currently in the soft-term period of the lease and tenants under such leases have the right to vacate their
space during a specified period before the stated terms of their leases expire. As of December 31, 2015, tenants occupying
approximately 21.3% of our rentable square feet and contributing approximately 21.8% of our annualized lease income currently have
exercisable rights to terminate their leases before the stated soft term of their lease expires. In 2016 and 2017 early termination rights
become exercisable by other tenants who currently occupy an additional approximately 0.9% and 4.5% of our rentable square feet and
contribute an additional approximately 1.0% and 3.5% of our total annualized lease income, respectively. In particular, as of
December 31, 2015, eight tenants had an exercisable right to terminate their lease before the soft term expires, including the lease at
8
our IRS—Fresno property, which accounted for approximately 8.6% of our total annualized lease income. For fiscal policy reasons,
security concerns or other reasons, some or all of our U.S. Government tenant agencies under leases within the soft-term period may
decide to exercise their termination rights before the stated term of their lease expires. Such events, if they were to occur and we were
not able to lease the vacant space to another tenant in a timely manner or at all, could have a material adverse effect on our business,
financial condition and results of operations.
We may be unable to renew leases or lease vacating space on favorable terms or at all as leases expire, which could adversely
affect our business, financial condition and results of operations.
As of December 31, 2015, leases representing approximately 28.0% of our total annualized lease income and approximately 23.6%
of the square footage of the properties in our portfolio will expire by the end of 2019. We may be unable to renew such expiring leases or
our properties may not be released at net effective rental rates equal to or above the current average net effective rental rates.
In addition, when we renew leases or lease to new tenants, especially U.S. Government tenant agencies, we may spend
substantial amounts for leasing commissions, tenant fit-outs or other tenant inducements. As part of our strategy, we may design build-
to-suit property improvements designed to enhance the agency’s mission-critical capabilities. Because these properties have been
designed or physically modified to meet the needs of a particular tenant agency, if the current lease is terminated or not renewed, we
may be required to renovate the property at substantial costs, decrease the rent we intend to charge or provide other concessions in
order to lease the property to another tenant, which could adversely affect our business, financial condition and results of operations.
We are exposed to risks associated with property development and redevelopment, including new developments for anticipated
tenant agencies and build-to-suit renovations for existing tenant agencies.
We intend to engage in development and redevelopment activities with respect to our properties, including build-to-suit
renovations for existing U.S. Government tenant agencies and new developments for anticipated tenant agencies and will be subject to
certain risks, which could adversely affect us, including our financial condition and results of operations. These risks include:
the availability and pricing of financing on favorable terms or at all;
development costs may be higher than anticipated;
cost overruns and untimely completion of construction (including risks beyond our control, such as weather or labor
conditions, or material shortages);
the potential that we may expend funds on and devote management time to projects that we do not complete; and
the inability to complete construction and leasing of a property on schedule, resulting in increased debt service expense
and development and renovation costs.
These risks could result in substantial unanticipated delays or expenses and could prevent the initiation or the completion of
development and renovation activities, any of which could have a material adverse effect on our business, financial condition and
results of operations.
We depend on the members of our senior management team and the loss of any of their services, or an inability to attract and
retain highly qualified personnel, could have a material adverse effect on our business, financial condition and results of
operations.
Our senior management team is comprised of four individuals with experience in identifying, acquiring, developing, financing and
managing U.S. Government-leased assets and has developed long-term relationships across the commercial real estate industry, including
at all levels of the GSA and at numerous government agencies. Each of these individuals brings specialized knowledge and skills in the
GSA-leased property sector. The loss of services of one or more of these members of our senior management team, or our inability to
attract and retain highly qualified personnel, could have a material adverse effect on our business, financial condition and results of
operations and weaken our relationships with lenders, business partners, industry participants, the GSA and U.S. Government agencies.
Unfavorable market and economic conditions in the United States and globally could adversely affect occupancy levels, rental
rates, rent collections, operating expenses and the overall market value of our assets and have a material adverse effect on our
business, financial condition and results of operations.
Unfavorable market conditions in the geographic markets in which we operate and unfavorable economic conditions in the
United States and globally may significantly affect our occupancy levels, rental rates, rent collections, operating expenses, the market
value of our assets and our ability to strategically acquire, dispose of, recapitalize or refinance our properties on economically
9
favorable terms or at all. Our ability to lease our properties at favorable rates may be adversely affected by increases in supply of
office space and is dependent upon overall economic conditions, which are adversely affected by, among other things, job losses and
unemployment levels, recession, stock market volatility and uncertainty about the future. Some of our major expenses, including
mortgage payments and real estate taxes, generally do not decline when related rents decline. Any declines in our occupancy levels,
rental revenues or the values of our buildings would cause us to have less cash available to pay our indebtedness, fund necessary
capital expenditures and to make distributions to our stockholders, which could negatively affect our financial condition and the
market value of our securities. Our business may be affected by the volatility and illiquidity in the financial and credit markets, a
general global economic recession and other market or economic challenges experienced by the real estate industry or the U.S.
economy as a whole.
Our business may also be adversely affected by local economic conditions in the areas in which we operate. Factors that may
affect our occupancy levels, our rental revenues, our net operating income, or NOI, our funds from operations or the value of our
properties include the following, among others:
downturns in global, national, regional and local economic conditions;
possible reduction of the U.S. Government workforce; and
economic conditions that could cause an increase in our operating expenses, such as increases in property taxes (particularly
as a result of increased local, state and national government budget deficits and debt and potentially reduced federal aid to
state and local governments), utilities, insurance, compensation of on-site associates and routine maintenance.
Our properties are leased to a limited number of U.S. Government tenant agencies, and a change to any of these agencies’
missions could have a material adverse effect on our business, financial condition and results of operations.
As of December 31, 2015, three of our U.S. Government tenant agencies, the DEA, FBI and IRS, accounted for an aggregate of
approximately 39.8% of our total rentable square feet and an aggregate of approximately 46.0% of our total annualized lease income.
Each U.S. Government agency has its own customs, procedures, culture, needs and mission, which translate into different
requirements for its leased space, and we work with the tenant agency to design and construct specialized, agency-specific
enhancements. In addition, under the terms of our GSA leases, the GSA generally has the right to designate another U.S. Government
agency to occupy all or a portion of the leased property. Therefore, a change in the mission of any one of these agencies, a significant
reduction in the agency’s workforce, a relocation of personnel resources, other internal reorganization or a change in the tenant agency
occupying the leased space, could affect our lease renewal opportunities and have a material adverse effect on our business, financial
condition and results of operations.
We currently have a concentration of properties located in California and are exposed to changes in market conditions and
natural disasters in this state.
Thirteen of our 36 properties are located in California, accounting for approximately 23.6% of our total rentable square feet and
approximately 31.8% of our total annualized lease income as of December 31, 2015. As a result of this concentration, a material
portion of our portfolio may be exposed to the effects of economic and real estate conditions in California markets, such as the supply
of competing properties, general levels of employment and economic activity. In addition, historically, California has been vulnerable
to natural disasters and we are therefore susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and
mudslides. To the extent that weak economic or real estate conditions or natural disasters affect California more severely than other
areas of the country, our business, financial condition and results of operations could be negatively impacted.
We are subject to risks from natural disasters and climate change.
Natural disasters and severe weather such as earthquakes, tornadoes, hurricanes or floods may result in significant damage to
our properties. The extent of our casualty losses and loss in operating income in connection with such events is a function of the
severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a
single catastrophe, such as an earthquake affecting our properties in California, or destructive weather event, such as a tornado
affecting our properties in Nebraska, may have a significant negative effect on our business, financial condition and results of
operations. As a result, our operating and financial results may vary significantly from one period to the next. Our financial results
may be adversely affected by our exposure to losses arising from natural disasters or severe weather. We also are exposed to risks
associated with inclement winter weather, particularly on the Atlantic coast, a region in which some of our properties are located,
including increased need for maintenance and repair of our buildings.
As a result of climate change, we may also experience extreme weather and changes in precipitation and temperature, all of
which may result in physical damage or a decrease in demand for our properties located in the areas affected by these conditions.
10
Should the impact of climate change be material in nature, our financial condition or results of operations would be adversely affected.
In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to
improve the energy efficiency of our existing properties in order to comply with such regulations.
A U.S. Government tenant agency could institute condemnation proceedings against us and seek to take our property, or a
leasehold interest therein, through its power of eminent domain.
A U.S. Government tenant agency could institute condemnation proceedings against us and seek to take our property, or a
leasehold interest therein, through its power of eminent domain. The procedures for settling a dispute with a U.S. Government tenant
or seeking to evict a U.S. Government tenant in default may be costly, time consuming and may divert the attention of management
from the operations of our business as the process requires first appealing to a GSA-assigned officer or through the Civilian Board of
Contract Appeals and ultimately before the U.S. Court of Federal Claims. Furthermore, we may not be able to successfully appeal a
condemnation proceeding brought by a U.S. Government tenant agency which could have a material adverse effect on our business,
financial condition and results of operations.
An increase in the amount of U.S. Government-owned real estate may adversely affect us.
If there is a large increase in the amount of U.S. Government-owned real estate as a consequence of Congress enacting
legislation such as the American Recovery and Reinvestment Act of 2009, which included several billion dollars for construction,
repair and alteration of U.S. Government-owned buildings, certain U.S. Government tenant agencies may relocate from our properties
to U.S. Government-owned real estate at the expiration of their respective leases. Similarly, it may become more difficult for us to
renew our leases with U.S. Government tenant agencies when they expire or to locate additional properties that are leased to U.S.
Government tenant agencies in order to grow our business. Therefore, an increase in the amount of U.S. Government-owned real
estate could have a material adverse effect on our business, financial condition and results of operations.
We may be required to make significant capital expenditures to improve our properties in order to retain and attract tenants,
including U.S. Government tenant agencies.
Under our leases, including our leases with U.S. Government tenant agencies, we retain certain obligations with respect to the
property, including, among other things, the responsibility for maintenance and repair of the property, the provision of adequate
parking, maintenance of common areas, responsibility for capital improvements such as roof replacement and major structural
improvements and compliance with other affirmative covenants in the lease. The expenditure of any sums in connection therewith will
reduce the cash available for distribution and may require us to fund deficits resulting from operating a property. No assurance can be
given that we will have funds available to make such repairs or improvements. If we were to fail to meet these obligations, then the
applicable tenant may abate rent or terminate the applicable lease, which may result in a loss of capital invested in, and anticipated
profits and, in turn, have a material adverse effect on our business, financial condition and results of operations.
Capital and credit market conditions may adversely affect our access to various sources of capital or financing or the cost of
capital, which could impact our business activities, dividends, earnings and common stock price, among other things.
In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital
available to us may be adversely affected. As of December 31, 2015 we had approximately $238.2 million of indebtedness
outstanding, including amounts outstanding under our senior unsecured revolving credit facility, and approximately $245.6 million of
available borrowing capacity under our senior unsecured revolving credit facility. If sufficient sources of external financing are not
available to us on cost effective terms, we could be forced to limit our acquisition, development and renovation activities or take other
actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or paying out a smaller
percentage of our taxable income (subject to the annual distribution requirements applicable to REITs under the Code). To the extent
that we are able or choose to access capital at a higher cost than we have experienced in recent years, as reflected in higher interest
rates for debt financing or a lower stock price for equity financing, our earnings per share and cash flow could be adversely affected.
In addition, the price of common stock may fluctuate significantly or decline in a high interest rate or volatile economic environment.
If economic conditions deteriorate, the ability of lenders to fulfill their obligations under working capital or other credit facilities that
we may have in the future may be adversely impacted.
We may be unable to identify and successfully complete acquisitions and, even if acquisitions are identified and completed, we
may fail to successfully operate acquired properties.
We may be unable to acquire additional properties and grow our business and any acquisitions we make may prove
unsuccessful. Our ability to identify and acquire properties on favorable terms and successfully operate or renovate them may be
exposed to significant risks. Agreements for the acquisition of properties are subject to customary conditions to closing, including
11
completion of due diligence investigations and other conditions that are not within our control that may not be satisfied. In this event,
we may be unable to complete an acquisition after incurring certain acquisition-related costs. In addition, if mortgage debt is
unavailable at reasonable rates, we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all.
We may spend more than budgeted to make necessary improvements or renovations to acquired properties and may not be able to
obtain adequate insurance coverage for new properties. Further, acquired properties may be located in markets where we may face
risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and
unfamiliarity with local governmental and permitting procedures. We may also be unable to integrate new acquisitions into our
existing operations quickly and efficiently, and as a result, our results of operations and financial condition could be adversely
affected. Any delay or failure on our part to identify, negotiate, finance and consummate such acquisitions in a timely manner and on
favorable terms, or operate acquired properties to meet our financial expectations, could impede our growth and have an adverse effect
on us, including our financial condition, results of operations, cash flow and the market value of our securities.
Certain of our properties are leased to private tenants and we may be unable to collect balances due from private tenants that
file for bankruptcy protection.
If a private tenant or lease guarantor files for bankruptcy, we will become a creditor of such entity, but may not be able to collect
all pre-bankruptcy amounts owed by that party. In addition, a tenant that files for bankruptcy protection may terminate its lease with
us under federal law, in which event we would have a general unsecured claim against such tenant that would likely be worth less than
the full amount owed to us for the remainder of the lease term, which could adversely affect our business, financial condition and
results of operations.
Because our principal tenants are agencies of the U.S. Government, our properties have a higher risk of terrorist attack than
similar properties leased to non-governmental tenants.
Terrorist attacks may materially adversely affect our operations, as well as directly or indirectly damage our assets, both
physically and financially. Because our principal tenants are, and are expected to continue to be, agencies of the U.S. Government, our
properties are presumed to have a higher risk of terrorist attack than similar properties that are leased to non-governmental tenants.
Further, some of our properties may be considered “high profile” targets because of the particular U.S. Government tenant (e.g., the
DEA and FBI). Terrorist attacks, to the extent that these properties are uninsured or underinsured, could have a material adverse effect
on our business, financial condition and results of operations.
Competition could limit our ability to acquire attractive investment opportunities and to attract and retain tenants.
We compete with numerous developers, real estate companies and other owners of commercial properties for acquisition and
pursuing buyers for dispositions. We expect that other real estate investors, including insurance companies, private equity funds,
sovereign wealth funds, pension funds, other REITs and other well-capitalized investors will compete with us to acquire existing
properties and to develop new properties. In addition, U.S. Government tenants are viewed as desirable tenants by other landlords
because of their strong credit profile and properties leased to U.S. Government tenant agencies often attract many potential buyers.
This competition could increase prices for properties of the type we may pursue and adversely affect our profitability and impede our
growth. In addition, substantially all of our properties face competition for tenants. Some competing properties may be newer, better
located or more attractive to tenants. Competing properties may have lower rates of occupancy than our properties, which may result
in competing owners offering available space at lower rents than we offer at our properties. This competition may affect our ability to
attract and retain tenants, may reduce the rents we are able to charge and could have a material adverse effect on our business,
financial condition and results of operations.
We may be subject to increased costs of insurance and limitations on coverage, particularly regarding acts of terrorism.
We maintain comprehensive insurance coverage for general liability, property and other risks on all of our properties, including
coverage for acts of terrorism. Future changes in the insurance industry’s risk assessment approach and pricing structure may increase
the cost of insuring our properties and decrease the scope of insurance coverage, either of which could adversely affect our financial
position and operating results. Most of our loan agreements contain customary covenants requiring us to maintain insurance. We may
not be able to obtain an appropriate amount of coverage at reasonable costs, or at all, in the future. In addition, if lenders insist on
greater insurance coverage than we are able to obtain, it could adversely affect our ability to finance or refinance our properties and
execute our growth strategies, which, in turn, could have a material adverse effect on our business, financial condition and results of
operations.
12
We may become subject to liability relating to environmental and health and safety matters, which could have a material
adverse effect on our business, financial condition and results of operations.
Under various federal, state or local laws, ordinances and regulations, as a current or former owner or operator of real property,
we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste or petroleum products
at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages or third-party
liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or operator
knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of our
properties may be impacted by contamination arising from current uses of the property or from adjacent properties used for
commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous substances or releases
from tanks used to store such materials. We also may be liable for the costs of remediating contamination at off-site disposal or
treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we
comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination on our
properties may adversely affect our ability to attract or retain tenants and our ability to develop or sell or borrow against those
properties. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property damage
or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the U.S. Government for damages
and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may
impose restrictions on the manner in which that property may be used or how businesses may be operated on that property.
Some of our properties are, and may be adjacent to or near other properties, used for industrial or commercial purposes. These
properties may have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or
toxic substances. Releases from these properties could impact our properties.
In addition, our properties are subject to various federal, state and local environmental and health and safety laws and
regulations. Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to
liability. These liabilities could affect a commercial tenant’s ability to make rental payments to us. Moreover, changes in laws could
increase the potential costs of compliance with such laws and regulations or increase liability for noncompliance. This may result in
significant unanticipated expenditures or may otherwise adversely affect our operations, or those of our tenants, which could in turn
have an adverse effect on us. As the owner or operator of real property, we may also incur liability based on various building
conditions.
In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues. Indoor air quality
issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological
contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of
adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other
airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the
mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne
contaminants could expose us to liability from our tenants or others if property damage or personal injury occurs.
The costs or liabilities incurred as a result of environmental issues may affect our ability to make distributions to our
stockholders and could have a material adverse effect on our business, financial condition and results of operations.
Our development activities may be subject to risks relating to various local, state and federal statutes, ordinances, rules and
regulations concerning zoning, building design, construction and similar matters, including local regulations that impose
restrictive zoning requirements.
Our development activities may be subject to risks relating to various local, state and federal statutes, ordinances, rules and
regulations concerning zoning, building design, construction and similar matters, including local regulations that impose restrictive
zoning requirements. In addition, we will be subject to registration and filing requirements in connection with these developments in
certain states and localities in which we operate even if all necessary U.S. Government approvals have been obtained. We may also be
subject to periodic delays or may be precluded entirely from developing properties due to building moratoriums that could be
implemented in the future in certain states in which we intend to operate. These risks could result in substantial unanticipated delays or
expenses and, under certain circumstances, could prevent completion of development activities once undertaken.
Real estate investments are relatively illiquid and may limit our flexibility.
Equity real estate investments are relatively illiquid, which may tend to limit our ability to react promptly to changes in
economic or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market
conditions. Our inability to sell our properties on favorable terms or at all could have an adverse effect on our sources of working
13
capital and our ability to satisfy our debt obligations. In addition, real estate can at times be difficult to sell quickly at prices we find
acceptable. The Internal Revenue Code of 1986, as amended, or the Code also imposes restrictions on REITs, which are not applicable
to other types of real estate companies, with respect to the disposition of properties. These potential difficulties in selling real estate in
our markets may limit our ability to change or reduce the properties in our portfolio promptly in response to changes in economic or
other conditions.
Our properties may be subject to impairment charges.
On a quarterly basis, we assess whether there are any indicators that the value of our properties may be impaired. A property’s
value is considered to be impaired only if the estimated aggregate future cash flows (undiscounted and without interest charges) to be
generated by the property are less than the carrying value of the property. In our estimate of cash flows, we consider factors such as
expected future operating income, trends and prospects, the effects of demand, competition and other factors. If we are evaluating the
potential sale of an asset or development alternatives, the undiscounted future cash flows analysis considers the most likely course of
action at the balance sheet date based on current plans, intended holding periods and available market information. We are required to
make subjective assessments as to whether there are impairments in the value of our properties. These assessments may be influenced
by factors beyond our control, such as early vacating by a tenant or damage to properties due to earthquakes, tornadoes, hurricanes and
other natural disasters, fire, civil unrest, terrorist acts or acts of war. These assessments may have a direct impact on our earnings
because recording an impairment charge results in an immediate negative adjustment to earnings. There can be no assurance that we
will not take impairment charges in the future related to the impairment of our properties. Any such impairment could have a material
adverse effect on our business, financial condition and results of operations in the period in which the charge is taken.
We may from time to time be subject to litigation, which could have a material adverse effect on our business, financial
condition and results of operations.
We may be a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or
others to which we may be subject from time to time may result in defense costs, settlements, fines or judgments against us, some of
which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured
could have an adverse impact on our financial position and results of operations. In addition, certain litigation or the resolution of
certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of
operations and cash flow, expose us to increased risks that would be uninsured, or adversely impact our ability to attract officers and
directors.
We may be subject to unknown or contingent liabilities related to properties or businesses that we have acquired or may acquire
in the future, including as part of the formation transactions, for which we may have limited recourse against the sellers.
Assets and entities that we have acquired or may acquire in the future, including as part of the formation transactions, may be
subject to unknown or contingent liabilities for which we may have limited recourse against the sellers. Unknown or contingent
liabilities might include liabilities for clean-up or remediation of environmental conditions, claims of customers, vendors or other
persons dealing with the acquired entities, tax liabilities and other liabilities whether incurred in the ordinary course of business or
otherwise. In the future we may enter into transactions with limited representations and warranties or with representations and
warranties that do not survive the closing of the transactions, in which event we would have no or limited recourse against the sellers
of such properties. While we usually require the sellers to indemnify us with respect to breaches of representations and warranties that
survive, such indemnification is often limited and subject to various materiality thresholds, a significant deductible or an aggregate cap
on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of
their representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities
associated with acquired properties and entities may exceed our expectations, which may adversely affect our business, financial
condition and results of operations. Finally, indemnification agreements between us and the sellers typically provide that the sellers
will retain certain specified liabilities relating to the assets and entities acquired by us.
As part of the formation transactions, we (through contributions to our operating partnership) acquired the properties and assets
from the Easterly Funds and certain other assets from Western Devcon, subject to existing liabilities, some of which may be unknown.
The indemnification periods for bringing claims against breaches of the representations, warranties and covenants made by each of the
Easterly Funds and Western Devcon to us regarding the entities and assets that we acquired has expired. Because many liabilities,
including tax liabilities, may not be identified within such period, we may have no recourse for such liabilities. Any unknown or
unquantifiable liabilities that we have assumed in connection with the formation transactions for which we have no or limited recourse
could adversely affect us.
14
One property is encumbered by a right of first refusal with respect to a sale of the property, which could materially and
adversely affect the timing and terms of any sale of the property.
One property is encumbered by a right of first refusal with respect to a sale of the property, which could materially and
adversely affect the timing and terms of any sale of the property. A right of first refusal encumbers our DEA—Dallas property until
the earlier of January 7, 2025, or the date on which two bona fide third-party sales have occurred for which the right of first refusal has
not been exercised. As a result of this right of first refusal, we may be delayed in our attempt to sell this property if and when any such
disposition is necessary or desirable.
One of our tenants has an option to purchase the property during the term of its lease, which if exercised could have a material
adverse effect on our business, financial condition and results of operations.
Lummus Corporation, the private tenant leasing our property located in Lubbock, Texas has an option to purchase the property
during the term of its lease. The option may first be exercised in August 2018. The purchase price upon the exercise of this option
decreases over the term of the lease, ranging from $4.2 million to $3.0 million. If Lummus Corporation exercises its option to
purchase the property, we would lose the associated rental income, which could have a material adverse effect on our business,
financial condition and results of operations.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of
that technology could harm our business.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic
information and to manage or support a variety of our business processes, including financial transactions and maintenance of records,
which may include confidential information of tenants and lease data. We rely on commercially available systems, software, tools and
monitoring to provide security for processing, transmitting and storing confidential tenant information, such as individually
identifiable information relating to financial accounts. Although we have taken steps to protect the security of the data maintained in
our information systems, it is possible that our security measures will not be able to prevent the systems’ improper functioning, or the
improper disclosure of personally identifiable information such as in the event of cyber attacks. Security breaches, including physical
or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or
unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our
information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and
could materially and adversely affect us.
We may need to borrow funds or dispose of assets to meet our distribution requirements.
We may need to borrow funds or dispose of assets to meet our distribution requirements. In order for us to continue to qualify as
a REIT, we are required to make annual distributions generally equal to at least 90% of our taxable income, computed without regard
to the dividends paid deduction and excluding net capital gain. In addition, as a REIT, we will be subject to U.S. federal income tax to
the extent that we distribute less than 100% of our taxable income (including capital gains) and will be subject to a 4% nondeductible
excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified by the Code.
Under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these
distribution requirements or to avoid or minimize the imposition of tax, and we may need to borrow funds or dispose of assets to make
such distributions, which could have a material adverse effect on our financial condition, results of operations, cash flow and trading
price of our common stock.
Our subsidiaries may be prohibited from making distributions and other payments to us.
All of our properties are owned, and all of our operations are conducted, by our operating partnership and our other subsidiaries.
As a result, we depend on distributions and other payments from our operating partnership and our other subsidiaries in order to
satisfy our financial obligations and make payments to our investors. The ability of our subsidiaries to make such distributions and
other payments depends on their earnings and cash flow and may be subject to statutory or contractual limitations. As an equity
investor in our subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the
claims of their creditors. To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to
any security interest in or other lien on their assets and to any of such subsidiaries’ debt or other obligations that are senior to our
claims.
15
Risks Related to Our Organization and Structure
The ability of stockholders to control our policies and effect a change of control of our company is limited by certain provisions
of our charter and bylaws and by Maryland law.
There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if
some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
Our charter authorizes our board of directors to amend our charter to increase or decrease the aggregate number of authorized
shares of stock, to authorize us to issue additional shares of our common stock or preferred stock and to classify or reclassify unissued
shares of our common stock or preferred stock and thereafter to authorize us to issue such classified or reclassified shares of stock. We
believe these charter provisions will provide us with increased flexibility in structuring possible future financings and acquisitions and
in meeting other needs that might arise. The additional classes or series, as well as the additional authorized shares of our common
stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of
directors does not currently intend to do so, it could authorize us to issue a class or series of stock that could, depending upon the
terms of the particular class or series, delay, defer or prevent a transaction or a change of control of our company that might involve a
premium price for holders of our common stock or that our common stockholders otherwise believe to be in their best interests.
In order to qualify as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or
for five or fewer individuals (as defined in the Code to include certain entities such as private foundations) at any time during the last
half of any taxable year (beginning with our second taxable year as a REIT). In addition, if the owners of 50% or more of certain
entities included in the Easterly Funds that are intended to qualify for taxation as REITs, each of which we refer to as an Easterly Fund
REIT were to own 50% or more in value of our capital stock, we would be treated as a successor to the Easterly Fund REIT, and our
ability to elect REIT status for a certain period would depend on that Easterly Fund REIT’s qualification as a REIT. In order to help us
qualify as a REIT and not be treated as a successor to an Easterly Fund REIT, our charter generally prohibits (A) any person or entity
from actually or being deemed to own by virtue of the applicable constructive ownership provisions of the Code, (i) more than 7.1%
(in value or in number of shares, whichever is more restrictive) of the issued and outstanding shares of any class or series of our stock
or (ii) more than 7.1% in value of the aggregate of the outstanding shares of all classes and series of our stock (the “ownership limits)”
and (B) the owners of 50% or more of an Easterly Fund REIT from owning 50% or more of us, applying certain attribution of
ownership rules. These ownership restrictions may prevent or delay a change in control and, as a result, could adversely affect our
stockholders’ ability to realize a premium for their shares of our common stock. In connection with the formation transactions and the
concurrent private placement, our board of directors has granted waivers from the ownership limit contained in our charter to Michael
P. Ibe, Easterly Fund I and Easterly Fund II to own up to approximately 21%, 22% and 28%, respectively, of our outstanding common
stock in the aggregate.
In addition, certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third
party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the
holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares,
including the Maryland business combination and control share provisions.
As permitted by the MGCL, our board of directors has adopted a resolution exempting any business combinations between us
and any other person or entity from the business combination provisions of the MGCL. Our bylaws provide that this resolution or any
other resolution of our board of directors exempting any business combination from the business combination provisions of the
MGCL may only be revoked, altered or amended, and our board of directors may only adopt any resolution inconsistent with any such
resolution (including an amendment to that bylaw provision), which we refer to as an-opt in to the business combination provisions,
with the affirmative vote of a majority of the votes cast on the matter by holders of outstanding shares of our common stock. In
addition, as permitted by the MGCL, our bylaws contain a provision exempting from the control share acquisition provisions of the
MGCL any and all acquisitions by any person of shares of our stock. This bylaw provision may be amended, which we refer to as an
opt-in to the control share acquisition provisions, only with the affirmative vote of a majority of the votes cast on such an amendment
by holders of outstanding shares of our common stock.
Subtitle 8 of Title 3 of the MGCL permits a board of directors, without stockholder approval and regardless of what is currently
provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote
required to remove a director. We have elected in our charter to be subject to the provision of Subtitle 8 that provides that vacancies
on our board of directors may be filled only by the remaining directors. We have not elected to be subject to any of the other
provisions of Subtitle 8, including the provisions that would permit us to classify our board of directors or increase the vote required to
remove a director without stockholder approval. Moreover, our charter provides that, without the affirmative vote of a majority of the
votes cast on the matter by our stockholders entitled to vote generally in the election of directors, we may not elect to be subject to any
of these additional provisions of Subtitle 8.
16
Such takeover defenses may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying,
deferring or preventing a change in control of us under the circumstances that otherwise could provide our common stockholders with
the opportunity to realize a premium over the then current market price. In addition, the provisions of our charter on the removal of
directors and the advance notice provisions of our bylaws, among others, could delay, defer or prevent a transaction or a change of
control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest.
Each item discussed above may delay, deter or prevent a change in control of our company, even if a proposed transaction is at a
premium over the then-current market price for our common stock. Further, these provisions may apply in instances where some
stockholders consider a transaction beneficial to them. As a result, our stock price may be negatively affected by these provisions.
Certain provisions in the partnership agreement of our operating partnership may delay or prevent acquisitions of us.
Provisions in the partnership agreement of our operating partnership may delay, or make more difficult, acquisitions of us or
changes of our control. These provisions could discourage third parties from making proposals involving an acquisition of us or
change of our control, although some holders of common stock might consider such proposals, if made, desirable. These provisions
include
redemption rights for holders of common units beginning on or about May 11, 2016;
a requirement that we may not be removed as the general partner of our operating partnership without our consent;
transfer restrictions on common units; and
our ability, as general partner, in some cases, to amend the partnership agreement and to cause the operating partnership to
issue units with terms that could delay, defer or prevent a merger or other change of control of us or our operating
partnership without the consent of the limited partners.
In addition, Easterly Government Properties, Inc. may not transfer any of its interest in our operating partnership, withdraw as
general partner of our operating partnership or consummate a fundamental transaction, including mergers, consolidations and sales of
all or substantially all of its assets, subject to certain limited exceptions, without partnership approval, as such term is defined in the
partnership agreement of our operating partnership. Partnership approval is obtained when the sum of (a) the number of common units
issued in the formation transactions and consenting to the transaction that are held by Western Devcon, the Easterly Funds and
Easterly Capital plus (b) the product of (x) the number of common units held by Easterly Government Properties, Inc. and its
subsidiaries multiplied by (y) the percentage of the votes that were cast in favor of the transaction by the holders of shares of our
common stock, exceeds 50% of the aggregate number of common units issued in the formation transactions and common units held by
Easterly Government Properties, Inc. and its subsidiaries outstanding at such time. This right to vote by certain holders of common
units on a transfer or assignment of Easterly Government Properties, Inc.’s interest in our operating partnership, withdrawal as general
partner of our operating partnership and consummation of a fundamental transaction will permanently terminate at such time as we
own more than 85% of the aggregate of (a) the outstanding common units held by us and (b) the common units issued in the formation
transactions that are held by Western Devcon, the Easterly Funds and Easterly Capital, their respective affiliates and direct or indirect
investors. As of December 31, 2015, Western Devcon, the Easterly Funds and Easterly Capital owned an aggregate of approximately
39.1% of the outstanding common units and Easterly Government Properties, Inc. owned approximately 60.9% of the outstanding
common units.
We may decide to change our investment strategy without stockholder approval and acquire and develop properties outside of
our target market, which could have a material adverse effect on our business, financial condition and results of operations.
We may decide to change our investment strategy without stockholder approval and seek to acquire and develop properties that
are not leased to U.S. Government tenant agencies. Any change to our investment strategy, including the making of investments
outside our target market, could have a material adverse effect on our business, financial condition and results of operations.
Our board of directors may change our policies without stockholder approval.
Our policies, including any policies with respect to investments, leverage, financing, growth, debt and capitalization, are
determined by our board of directors or those committees or officers to whom our board of directors may delegate such authority. Our
board of directors also establishes the amount of any dividends or other distributions that we may pay to our stockholders. Our board
of directors or the committees or officers to which such decisions are delegated have the ability to amend or revise these and our other
policies at any time without stockholder vote. Accordingly, our stockholders are not entitled to approve changes in our policies.
17
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your
recourse in the event of actions that you do not believe are in your best interests.
Maryland law provides that a director has no liability in that capacity if he or she satisfies his or her duties to us and our
stockholders. Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for
liability resulting from:
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the
cause of action adjudicated.
In addition, our charter authorizes us to obligate us, and our bylaws require us, to indemnify our directors for actions taken by
them in those capacities to the maximum extent permitted by Maryland law. Our charter and bylaws also authorize us to indemnify
our officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law and indemnification
agreements that we have entered into with our executive officers require us to indemnify such officers for actions taken by them in
those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited
rights against our directors and officers than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of
our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be
limited with respect to directors and may be limited with respect to officers. In addition, we will be obligated to advance the defense
costs incurred by our directors and our executive officers pursuant to indemnification agreements, and may, in the discretion of our
board of directors, advance the defense costs incurred by our officers, our employees and other agents, in connection with legal
proceedings.
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders
of common units, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one
hand, and our operating partnership or any of its partners, on the other. Our directors and officers have duties to our company under
Maryland law in connection with their management of our company. At the same time, we have duties and obligations to our
operating partnership and its limited partners under Delaware law as modified by the partnership agreement of our operating
partnership in connection with the management of our operating partnership as the sole general partner. The limited partners of our
operating partnership expressly acknowledge that the general partner of our operating partnership acts for the benefit of our operating
partnership, the limited partners and our stockholders collectively. When deciding whether to cause our operating partnership to take
or decline to take any actions, the general partner will be under no obligation to give priority to the separate interests of (i) the limited
partners of our operating partnership (including the tax interests of our limited partners, except as provided in a separate written
agreement) or (ii) our stockholders. Nevertheless, the duties and obligations of the general partner of our operating partnership may
come into conflict with the duties of our directors and officers to our company and our stockholders.
Each of Michael P. Ibe, a Director and our Executive Vice President—Development and Acquisitions, the Easterly Funds and
Easterly Capital, LLC, which are all controlled by Darrell W. Crate, our Chairman, own a substantial beneficial interest in our
company on a fully diluted basis and each has the ability to exercise significant influence on our company.
As of December 31, 2015 Michael P. Ibe, a Director and our Executive Vice President—Development and Acquisitions, owned
approximately 14.6% of our outstanding common stock on a fully diluted basis and the Easterly Funds and Easterly Capital, LLC,
which are all controlled by Darrell W. Crate, our Chairman, owned approximately 50.7% of our company’s common stock on a fully
diluted basis. Consequently, Mr. Ibe and the Easterly Funds may be able to significantly influence the outcome of matters submitted
for stockholder action, including the election of our board of directors and approval of significant corporate transactions, including
business combinations, consolidations and mergers. As a result, Mr. Ibe and the Easterly Funds could exercise their influence in a
manner that conflicts with the interests of other stockholders.
If there are deficiencies in our disclosure controls and procedures or internal control over financial reporting, we may be
unable to accurately present our financial statements, which could materially and adversely affect us, including our business,
reputation, results of operations, financial condition or liquidity.
The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial
reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, beginning this year,
Section 404 of the Sarbanes-Oxley Act, or Section 404, requires us to perform system and process evaluation and testing of our
internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial
reporting. As an emerging growth company, we are availing ourselves of the exemption from the requirement that our independent
18
registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404.
However, we may no longer avail ourselves of this exemption when we cease to be an emerging growth company. When our
independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting,
the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404
will require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we
implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply
with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting
firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price
of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the
market price of our stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting
could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these
requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an
adverse opinion on our internal controls from our independent registered public accounting firm.
After we are no longer an emerging growth company, or sooner if we choose not to take advantage of certain exemptions set
forth in the JOBS Act, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to hire additional
accounting and financial staff with appropriate public company experience and technical accounting knowledge.
We do not own the Easterly name, but have entered into a license agreement with Easterly Capital, LLC, consenting to our use
of the Easterly logo and name. Use of the name by other parties or the termination of our license agreement may have a
material adverse effect on our business, financial condition and results of operations.
We have entered into a perpetual license agreement with Easterly Capital, pursuant to which it grants us a perpetual, royalty-free
license to use the Easterly logo and the Easterly name and variations thereof, which license is exclusive to business activities
involving properties to be leased to or developed for governmental entities, including properties leased to the GSA. We have a right to
use this logo and name for so long as we are not in breach of the terms of the license agreement. Easterly Capital retains the right to
continue using the Easterly name. We will be unable to preclude Easterly Capital from licensing or transferring the ownership of the
Easterly name to third parties, except in the limited circumstance where our license is exclusive. Consequently, we will be unable to
prevent any damage to goodwill that may occur as a result of the activities of Easterly Capital or others. Furthermore, in the event the
license agreement is terminated, we will be required to change our name and cease using the Easterly name. Any of these events could
disrupt our recognition in the market place, damage any goodwill we may have generated and have a material adverse effect on our
business, financial condition and results of operations.
Risks Related to Our Indebtedness and Financing
We have a substantial amount of indebtedness that may limit our financial and operating activities and may adversely affect our
ability to incur additional debt to fund future needs.
As of December 31, 2015 have approximately $238.2 million of indebtedness outstanding, including amounts outstanding under
our $400.0 million senior unsecured revolving credit facility. Payments of principal and interest on borrowings may leave us with
insufficient cash resources to operate our properties, fully implement our capital expenditure, acquisition and redevelopment activities,
or meet the REIT distribution requirements imposed by the Code. Our level of debt and the limitations imposed on us by our debt
agreements could have significant adverse consequences, including the following:
require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on,
indebtedness, thereby reducing the funds available for other purposes;
make it more difficult for us to borrow additional funds as needed or on favorable terms, which could, among other things,
adversely affect our ability to meet operational needs;
force us to dispose of one or more of our properties, possibly on unfavorable terms (including the possible application of
the 100% tax on income from “prohibited transactions” or in violation of certain covenants to which we may be subject;
subject us to increased sensitivity to interest rate increases;
make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;
limit our ability to withstand competitive pressures;
19
limit our ability to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of
our original indebtedness;
reduce our flexibility in planning for or responding to changing business, industry and economic conditions; or
place us at a competitive disadvantage to competitors that have relatively less debt than we have.
If any one of these events were to occur, our financial condition, results of operations, cash flow and trading price of our
common stock could be adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash
proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.
We may be unable to refinance current or future indebtedness on favorable terms, if at all.
We may be unable to refinance existing debt on terms as favorable as the terms of existing indebtedness, or at all, including as a
result of increases in interest rates or a decline in the value of our portfolio or portions thereof. If principal payments due at maturity
cannot be refinanced, extended or paid with proceeds from other capital transactions, such as new equity capital, our operating cash
flow will not be sufficient in all years to repay all maturing debt. As a result, certain of our other debt may cross default, we may be
forced to postpone capital expenditures necessary for the maintenance of our properties, we may have to dispose of one or more
properties on terms that would otherwise be unacceptable to us or we may be forced to allow the mortgage holder to foreclose on a
property. We also may be forced to limit distributions and may be unable to meet the REIT distribution requirements imposed by the
Code. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on
our financial condition and results of operations and could adversely affect our ability to make distributions to our stockholders.
We may not have sufficient cash flow to meet the required payments of principal and interest on our debt or to pay distributions
on our shares at expected levels.
In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on
our shares at expected levels. In this regard, we note that in order for us to continue to qualify as a REIT, we are required to make
annual distributions generally equal to at least 90% of our taxable income, computed without regard to the dividends paid deduction
and excluding net capital gain. In addition, as a REIT, we will be subject to U.S. federal income tax to the extent that we distribute less
than 100% of our taxable income (including capital gains) and will be subject to a 4% nondeductible excise tax on the amount by
which our distributions in any calendar year are less than a minimum amount specified by the Code. These requirements and
considerations may limit the amount of our cash flow available to meet required principal and interest payments. If we are unable to
make required payments on indebtedness that is secured by a mortgage on our property, the asset may be transferred to the lender with
a resulting loss of income and value to us, including adverse tax consequences related to such a transfer.
Certain of our debt agreements include restrictive covenants, requirements to maintain financial ratios and default provisions,
which could limit our flexibility, our ability to make distributions and require us to repay the indebtedness prior to its maturity.
Certain mortgages on our properties contain customary negative covenants that, among other things, limit our ability, without
the prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage. As of December 31,
2015, we had $83.8 million of combined U.S. property mortgages and other secured debt. Additionally, our debt agreements contain
customary covenants that, among other things, restrict our ability to incur additional indebtedness and, in certain instances, restrict our
ability to engage in material asset sales, mergers, consolidations and acquisitions, and restrict our ability to make capital expenditures.
These debt agreements, in some cases, also subject us to guarantor and liquidity covenants and our future senior unsecured revolving
credit facility will, and other future debt may, require us to maintain various financial ratios. Some of our debt agreements contain
certain cash flow sweep requirements and mandatory escrows, and our property mortgages generally require certain mandatory
prepayments upon disposition of underlying collateral. Early repayment of certain mortgages may be subject to prepayment penalties.
Variable rate debt is subject to interest rate risk that could increase our interest expense, increase the cost to refinance and
increase the cost of issuing new debt.
As of December 31, 2015, we had $170.1 million of outstanding consolidated debt subject to instruments, which bear interest at
variable rates, and we expect that we may also borrow additional money at variable interest rates in the future. Unless we have made
arrangements that hedge against the risk of rising interest rates, increases in interest rates would increase our interest expense under
these instruments, increase the cost of refinancing these instruments or issuing new debt, and adversely affect cash flow and our ability
to service our indebtedness and make distributions to our stockholders, which could adversely affect the market price of our common
stock.
20
Hedging activity may expose us to risks, including the risks that a counterparty will not perform and that the hedge will not
yield the economic benefits we anticipate, which could adversely affect us.
We may, in a manner consistent with our qualification as a REIT, seek to manage our exposure to interest rate volatility by
using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under
these arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate changes. Moreover,
there can be no assurance that our hedging arrangements will qualify for hedge accounting or that our hedging activities will have the
desired beneficial impact on our results of operations. Should we desire to terminate a hedging agreement, there could be significant
costs and cash requirements involved to fulfill our obligation under the hedging agreement. Failure to hedge effectively against
interest rate changes may adversely affect our results of operations.
When a hedging agreement is required under the terms of a mortgage loan, it is often a condition that the hedge counterparty
maintains a specified credit rating. With the current volatility in the financial markets, there is an increased risk that hedge
counterparties could have their credit rating downgraded to a level that would not be acceptable under the loan provisions. If we were
unable to renegotiate the credit rating condition with the lender or find an alternative counterparty with acceptable credit rating, we
could be in default under the loan and the lender could seize that property through foreclosure, which could adversely affect us.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code limit our ability to hedge our liabilities. Generally, income from a hedging transaction we
enter into (i) to manage the risk of interest rate changes with respect to borrowings incurred or to be incurred to acquire or carry real
estate assets, (ii) to manage the risk of currency fluctuations with respect to any item of income or gain (or any property that generates
such income or gain) that constitutes “qualifying income” for purposes of the 75% or 95% gross income tests applicable to REITs or
(iii) for taxable years beginning on or after December 31, 2015, that hedges against transactions described in clauses (i) and (ii) and is
entered into in connection with the extinguishment of debt or sale of property that are being hedged against by the transactions
described in clauses (i) and (ii) and does not constitute “gross income” for purposes of the 75% or 95% gross income tests, provided
that we comply with certain identification requirements pursuant to the applicable sections of the Code and Treasury Regulations. To
the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-
qualifying income for purposes of both gross income tests. As a result of these rules, we may need to limit our use of otherwise
advantageous hedging techniques or implement those hedges through a “Taxable REIT Subsidiary,” or TRS. The use of a TRS could
increase the cost of our hedging activities (because our TRS would be subject to tax on income or gain resulting from hedges entered
into by it) or expose us to greater risks than we would otherwise want to bear. In addition, net losses in any of our TRSs will generally
not provide any tax benefit except for being carried forward for use against future taxable income in the TRSs.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a
property or group of properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness
secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans
for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of
our portfolio of properties. For tax purposes, a foreclosure of any of our properties that is subject to a nonrecourse mortgage loan
would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If
the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income
on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the distribution requirements
applicable to REITs under the Code.
High mortgage rates or unavailability of mortgage debt may make it difficult for us to finance or refinance properties, which
could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place
mortgage debt on properties, we may be unable to refinance the properties when the loans become due, or to refinance on favorable
terms. If interest rates are higher when we refinance our properties, our income could be reduced. If any of these events occur, our
cash flow could be reduced. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to
raise more capital by issuing more stock or by borrowing more money. In addition, payments of principal and interest made to service
our debts may leave us with insufficient cash to make distributions necessary to meet the distribution requirements imposed on REITs
under the Code.
21
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile.
The trading price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our
common stock include:
actual or anticipated variations in our quarterly operating results or dividends;
changes in guidance related to financial performance;
publication of research reports about us or the real estate industry;
increases in market interest rates that lead purchasers of our shares to demand a higher yield;
changes in market valuations of similar companies;
adverse market reaction to any additional debt we incur in the future;
additions or departures of key management personnel;
actions by institutional stockholders;
speculation in the press or investment community;
the realization of any of the other risk factors presented in this report;
the extent of investor interest in our securities;
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities,
including securities issued by other real estate-based companies;
our underlying asset value;
investor confidence in the stock and bond markets, generally;
changes in tax laws;
future equity issuances;
failure to meet guidance related to financial performance;
failure to meet and maintain REIT qualifications; and
general market and economic conditions.
In the past, securities class-action litigation has often been instituted against companies following periods of volatility in the
price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and
resources, which could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our
common stock.
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging
growth companies will make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the
earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1 billion (subject to
adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary our initial public offering, (iii) the date on
which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we
are deemed to be a “large accelerated filer” under the Exchange Act. We are eligible to take advantage of exemptions from various
reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not
limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any
golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because
we rely on certain of these exemptions and benefits under the JOBS Act. If some investors find our common stock less attractive as a
22
result, there may be a less active trading market for our common stock and the market price of our common stock may be more
volatile and decline significantly.
The form, timing or amount of dividend distributions in future periods may vary and be impacted by economic and other
considerations.
The form, timing or amount of dividend distributions will be declared at the discretion of our board of directors and will depend
on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements applicable to REITs
under the Code and other factors as our board of directors may consider relevant.
The market value of our common stock may decline due to the large number of our shares eligible for future sale.
The market value of our common stock could decline as a result of sales of a large number of shares of common stock in the
market or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more
difficult for us to sell shares of common stock in the future at a time and at a price that we deem appropriate.
A significant number of our outstanding shares of common stock are held by Western Devcon, the Easterly Funds and Easterly
Capital, LLC who acquired shares in the formation transactions and the concurrent private placement in connection with our initial
public offering. These shares of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act and
may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the
exemptions contained in Rule 144. Certain of such shares held by Western Devcon, the Easterly Funds and Easterly Capital, LLC
have registration rights pursuant to registration rights agreements that we have entered into with those investors. These related shares
of common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock will be available
for sale or resale, as the case may be. Such sales or resales, or the perception of such sales or resales, could depress the market price
for our common stock. In addition, from and after 15 months following the closing of our initial public offering, limited partners of
our operating partnership, other than us, will have the right to require our operating partnership to redeem part or all of their common
units for cash, based upon the value of an equivalent number of shares of our common stock at the time of the election to redeem, or,
at our election, shares of our common stock on a one-for-one basis.
In addition, future sales of shares of common stock may be dilutive to existing stockholders.
The liquidation of certain private investment funds that contributed assets in our initial public offering could negatively impact
the market price of our shares of common stock.
Until on or about May 11, 2016, Easterly Fund I and Easterly Fund II will remain outstanding as holders of 10,341,712 shares of
common stock and 8,635,714 common units issued in the formation transactions and the concurrent private placement in connection
with our initial public offering, representing 47.8% of outstanding shares of common stock on a fully-diluted basis, as of March 2,
2016. At such time, shares of common stock and common units held by each of Easterly Fund I and Easterly Fund II will be
distributed to investors in Easterly Fund I and Easterly Fund II. In connection with such distribution, certain of our directors and
executive officers may also be entitled to receive additional shares of our common stock and/or common units, based on their
proportionate ownership in Easterly Fund I and Easterly Fund II. If investors in Easterly Fund I and Easterly Fund II, following the
liquidation of such funds, sell, or indicate their intention to sell, substantial amounts of our common stock in the public market, the
trading price of our shares of common stock could decline materially. The perception in the market that these sales may occur could
also cause the trading price of our shares of common stock to decline.
Risks Related to Our Status as a REIT
Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our
common stock.
We intend to elect and to operate in a manner that allows us to qualify as a REIT commencing with our taxable year ended
December 31, 2015. The Code generally requires that a REIT distribute at least 90% of its taxable income (without regard to the
dividends paid deduction and excluding net capital gains) to stockholders annually, and a REIT must pay income tax, including any
applicable alternative minimum tax, at regular corporate rates to the extent that it distributes less than 100% of its taxable income
(including capital gains) in a given year. In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any,
by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net
income and 100% of its undistributed income from prior years. To avoid entity-level U.S. federal income and excise taxes, we
anticipate distributing at least 100% of our taxable income.
23
We believe that we have been and will continue to be owned and organized, and have operated and will operate, in a manner
that allows us to qualify as a REIT commencing with our taxable year ended December 31, 2015. However, we cannot assure you that
we have been and will continue to be owned and organized and have operated and will operate as such. Qualification as a REIT
involves the application of highly technical and complex provisions of the Code as to which there may only be limited judicial and
administrative interpretations and involves the determination of facts and circumstances not entirely within our control. We have not
requested and do not intend to request a ruling from the IRS that we qualify as a REIT. The complexity of these provisions and of the
applicable Treasury Regulations is greater in the case of a REIT that, like us, holds its assets through one or more partnerships.
Moreover, in order to qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of
our assets and our income, the ownership of our outstanding stock, the absence of inherited retained earnings from non-REIT periods
and the amount of our distributions. Our ability to satisfy the asset tests imposed on REITs depends upon our analysis of the
characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we
will not obtain independent appraisals. Our compliance with the REIT gross income and quarterly asset requirements also depends
upon our ability to manage successfully the composition of our gross income and assets on an ongoing basis. Future legislation, new
regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws
with respect to qualification as a REIT for U.S. federal income tax purposes or the U.S. federal income tax consequences of such
qualification. Accordingly, it is possible that we may not meet the requirements for qualification as a REIT.
If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct
distributions to stockholders in computing our taxable income. If we were not entitled to relief under the relevant statutory provisions,
we would also be disqualified from treatment as a REIT for the four subsequent taxable years. If we fail to qualify as a REIT, we
would be subject to entity-level income tax, including any applicable alternative minimum tax, on our taxable income at regular
corporate tax rates. As a result, the amount available for distribution to holders of our common stock would be reduced for the year or
years involved, and we would no longer be required to make distributions. In addition, our failure to qualify as a REIT could impair
our ability to expand our business and raise capital, and adversely affect the value of our common stock.
We may owe certain taxes notwithstanding our qualification as a REIT.
Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property, on
taxable income that we do not distribute to our stockholders, on net income from certain “prohibited transactions,” and on income
from certain activities conducted as a result of foreclosure. We may, in certain circumstances, be required to pay an excise or penalty
tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our
qualification as a REIT. In addition, we may provide services that are not customarily provided by a landlord, hold properties for sale
and engage in other activities (such as a management business) through TRSs and the income of those subsidiaries will be subject to
U.S. federal income tax at regular corporate rates. Furthermore, to the extent that we conduct operations outside of the United States,
our operations would subject us to applicable foreign taxes, regardless of our status as a REIT for U.S. tax purposes.
If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.
We believe our operating partnership qualifies and will continue to qualify as a partnership for U.S. federal income tax
purposes. Assuming that it qualifies as a partnership for U.S. federal income tax purposes, our operating partnership will not be
subject to U.S. federal income tax on its income. Instead, its partners, including us, generally are required to pay tax on their
respective allocable share of our operating partnership’s income. No assurance can be provided, however, that the IRS will not
challenge our operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain
such a challenge. If the IRS were successful in treating our operating partnership as a corporation for U.S. federal income tax
purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, therefore, cease to
qualify as a REIT, and our operating partnership would become subject to U.S. federal, state and local income tax. The payment by
our operating partnership of income tax would reduce significantly the amount of cash available to our partnership to satisfy
obligations to make principal and interest payments on its debt and to make distribution to its partners, including us.
Our acquisition of common units from certain REITs controlled by the Easterly Funds may involve certain tax risks.
After 15 months following our initial public offering on February 11, 2015, we expect that an entity included in the Easterly
Funds that intends to qualify for taxation as a REIT, which we refer to as an Easterly Fund REIT, may tender common units for
redemption and liquidate. If we elect to issue shares of our common stock to acquire the common units tendered by the Easterly Fund
REIT, the acquisition and liquidation may qualify as a tax-deferred corporate reorganization for U.S. federal income tax purposes. In
that case, we would inherit the tax basis of the Easterly Fund REIT in the common units that we acquire. As a result of such a
carryover tax basis, we may be allocated less depreciation, and additional gain on sale, with respect to our properties, than would be
the case if we acquired such common units in a taxable transaction. In addition, if the acquisition of common units from the Easterly
Fund REIT in exchange for shares of our common stock qualified as a tax-deferred reorganization, but the Easterly Fund REIT failed
24
to qualify as a REIT prior to the acquisition, we could be subject to a corporate level tax if we sell properties held by us at the time of
the acquisition of common units from the Easterly Fund REIT in a taxable transaction within five years following the tax deferred
reorganization. The corporate tax applies to the lesser of (i) our gain on such sale, or (ii) that portion of the built-in gain at the time of
the acquisition from the Easterly Fund REIT that is attributable to the common units acquired from such Easterly Fund REIT. Gain
from a sale of such an asset occurring after the five-year period ends would not be subject to this tax. In such circumstances we also
would inherit any undistributed non-REIT earnings and profits of the Easterly Fund REIT, which we would need to distribute by the
end of the year of the acquisition.
Our REIT status may depend on the REIT status of an Easterly Fund REIT.
If the owners of 50% or more of any Easterly Fund REIT were to acquire 50% or more of our stock, we could be deemed a
“successor” to such Easterly Fund REIT for purposes of the REIT rules. Successor treatment would mean that our election to be taxed
as a REIT could be terminated if it were determined that the applicable Easterly Fund REIT had failed to qualify as a REIT for a prior
period. We do not intend to issue stock in exchange for common units held by an Easterly Fund REIT if we believe it could cause us
to be treated as its successor, which may require us to redeem common units for cash when we otherwise would prefer to pay in shares
of our common stock. Our charter contains ownership restrictions that will prevent any overlapping ownership that would cause us to
be a successor of an Easterly Fund REIT, and we intend to enforce such provisions.
Dividends payable by REITs generally do not qualify for reduced tax rates.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals,
trusts and estates generally is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and
therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. The
more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates or are
otherwise sensitive to these lower rates to perceive investments in REITs to be relatively less attractive than investments in the stock
of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common
stock.
A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes, which could reduce the
basis of a stockholder’s investment in shares of our common stock and may trigger taxable gain.
A portion of our distributions may be treated as a return of capital for U.S. federal income tax purposes. As a general matter, a
portion of our distributions will be treated as a return of capital for U.S. federal income tax purposes if the aggregate amount of our
distributions for a year exceeds our current and accumulated earnings and profits for that year. To the extent that a distribution is
treated as a return of capital for U.S. federal income tax purposes, it will reduce a holder’s adjusted tax basis in the holder’s shares,
and to the extent that it exceeds the holder’s adjusted tax basis will be treated as gain resulting from a sale or exchange of such shares.
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or liquidate certain of our
investments.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of
our stock. We may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds
readily available for distribution. Thus, compliance with the REIT requirements may, for instance, hinder our ability to make certain
otherwise attractive investments or undertake other activities that might otherwise be beneficial to us and our stockholders, or may
require us to borrow or liquidate investments in unfavorable market conditions and, therefore, may hinder our investment
performance. As a REIT, at the end of each calendar quarter, at least 75% of the value of our assets must consist of cash, cash items,
U.S. Government securities and qualified “real estate assets.” The remainder of our investments in securities (other than cash, cash
items, U.S. Government securities, securities issued by a TRS and qualified real estate assets) generally cannot include more than 10%
of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one
issuer. In addition, in general, no more than 5% of the value of our total assets (other than cash, cash items, U.S. Government
securities, securities issued by a TRS and qualified real estate assets) can consist of the securities of any one issuer, and no more than
25% (for taxable years beginning before January 1, 2018) or 20% (for taxable years beginning on or after January 1, 2018) of the
value of our total assets can be represented by securities of one or more TRSs. Further, even though for taxable years beginning after
December 31, 2015, debt instruments issued by a publicly traded REIT that are not secured by a mortgage on real property are
qualifying real estate assets, no more than 25% of the value of our total assets can be represented by such assets. After meeting these
requirements at the close of a calendar quarter, if we fail to comply with these requirements at the end of any subsequent calendar
quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions
25
to avoid losing our REIT qualification. As a result, we may be required to liquidate from our portfolio or forego otherwise attractive
investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
We may be subject to a 100% penalty tax on any prohibited transactions that we enter into, or may be required to forego certain
otherwise beneficial opportunities in order to avoid the penalty tax on prohibited transactions.
If we are found to have held, acquired or developed property primarily for sale to customers in the ordinary course of business,
we may be subject to a 100% “prohibited transactions” tax under U.S. federal tax laws on the gain from disposition of the property
unless the disposition qualifies for one or more safe harbor exceptions for properties that have been held by us for at least two years
and satisfy certain additional requirements (or the disposition is made through a TRS and, therefore, is subject to corporate U.S.
federal income tax). Under existing law, whether property is held primarily for sale to customers in the ordinary course of a trade or
business is a question of fact that depends on all the facts and circumstances. We intend to hold, and, to the extent within our control,
to have any joint venture to which our operating partnership is a partner hold, properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, owning, operating and developing the properties, and to make sales of our
properties and other properties acquired subsequent to the date hereof as are consistent with our investment objectives. Based upon our
investment objectives, we believe that overall, our properties should not be considered property held primarily for sale to customers in
the ordinary course of business. However, it may not always be practical for us to comply with one of the safe harbors, and, therefore,
we may be subject to the 100% penalty tax on the gain from dispositions of property if we otherwise are deemed to have held the
property primarily for sale to customers in the ordinary course of business. The potential application of the prohibited transactions tax
could cause us to forego potential dispositions of other property or to forego other opportunities that might otherwise be attractive to
us, or to hold investments or undertake such dispositions or other opportunities through a TRS, which would generally result in
corporate income taxes being incurred.
REIT distribution requirements could adversely affect our liquidity and adversely affect our ability to execute our business plan.
In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to modify our
business plans. Our cash flow from operations may be insufficient to fund required distributions, for example, as a result of
differences in timing between our cash flow, the receipt of income for GAAP purposes and the recognition of income for U.S. federal
income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves, payment of required debt service or
amortization payments, or the need to make additional investments in qualifying real estate assets. The insufficiency of our cash flow
to cover our distribution requirements could require us to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms,
(iii) distribute amounts that would otherwise be invested in future acquisitions or capital expenditures or used for the repayment of
debt, (iv) pay dividends in the form of “taxable stock dividends” or (v) use cash reserves, in order to comply with the REIT
distribution requirements. As a result, compliance with the REIT distribution requirements could adversely affect the market value of
our common stock. The inability of our cash flow to cover our distribution requirements could have an adverse impact on our ability
to raise short and long-term debt or sell equity securities. In addition, if we are compelled to liquidate our assets to repay obligations to
our lenders or make distributions to our stockholders, we may be subject to a 100% tax on any resultant gain if we sell assets that are
treated as property held primarily for sale to customers in the ordinary course of business.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse
consequences to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of
our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we
will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal
income tax at regular corporate rates, as well as state and local taxes, which may have adverse consequences on our total return to our
stockholders.
Our ability to provide certain services to our tenants may be limited by the REIT rules, or may have to be provided through a
TRS.
As a REIT, we generally cannot provide services to our tenants other than those that are customarily provided by landlords, nor
can we derive income from a third party that provides such services. If we forego providing such services to our tenants, we may be at
disadvantage to competitors who are not subject to the same restrictions. However, we can provide such non-customary services to
tenants or share in the revenue from such services if we do so through a TRS, though income earned through the TRS will be subject
to corporate income taxes.
We earn fees from certain tenant improvement services and other non-customary services provided to our tenants. Gross income
from such services generally may only constitute qualifying income for purposes of the 75% and 95% gross income tests to the extent
26
that it is attributable to services provided to our tenants in connection with the entering into or renewal of a lease. In addition, services
provided to our tenants other than in such circumstances might constitute non-customary services. As a result, to the extent that we
provide tenant improvement services to tenants other than in connection with the entering into or renewal of a lease, we provide such
services through a TRS, which is subject to full corporate tax with respect to such income.
Although our use of TRSs may partially mitigate the impact of meeting certain requirements necessary to maintain our
qualification as a REIT, there are limits on our ability to own and engage in transactions with TRSs, and a failure to comply
with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be
qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the
stock will automatically be treated as a TRS. Overall, no more than 25% (for taxable years beginning before January 1, 2018) or 20%
(for taxable years beginning on or after January 1, 2018) of the value of a REIT’s assets may consist of securities of one or more
TRSs. In addition, rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject
to an appropriate level of corporate taxation. Rules also impose a 100% excise tax on certain transactions between a TRS and its
parent REIT that are treated as not being conducted on an arm’s-length basis. We have jointly elected with one subsidiary for such
subsidiary to be treated as a TRS for U.S. federal income tax purposes. This subsidiary and any other TRSs that we form will pay U.S.
federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us but is
not required to be distributed to us. Although we will monitor the aggregate value of the securities of such TRSs and intend to conduct
our affairs so that such securities will represent less than 25% (for taxable years beginning before January 1, 2018) or 20% (for taxable
years beginning on or after January 1, 2018) of the value of our total assets, there can be no assurance that we will be able to comply
with the TRS limitation in all market conditions.
Possible legislative, regulatory or other actions could adversely affect our stockholders and us.
The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive
application) could adversely affect our stockholders or us. In recent years, many such changes have been made and changes are likely
to continue to occur in the future. We cannot predict whether, when, in what form, or with what effective dates, tax laws, regulations
and rulings may be enacted, promulgated or decided, which could result in an increase in our, or our stockholders’, tax liability or
require changes in the manner in which we operate in order to minimize increases in our tax liability. A shortfall in tax revenues for
states and municipalities in which we operate may lead to an increase in the frequency and size of such changes. If such changes
occur, we may be required to pay additional taxes on our assets or income or be subject to additional restrictions. These increased tax
costs could, among other things, adversely affect our financial condition, the results of operations and the amount of cash available for
the payment of dividends.
Stockholders are urged to consult with their own tax advisors with respect to the impact that new legislation may have on their
investment and the status of legislative, regulatory or administrative developments and proposals and their potential effect on their
investment in our shares.
Item 1B. Unresolved Staff Comments
None.
27
Item 2. Properties
We wholly own 36 properties, including 33 properties with approximately 2.4 million rentable square feet that are leased
primarily to U.S. Government tenants and three properties with approximately 0.3 million rentable square feet that are entirely leased
to private tenants. As of December 31, 2015, our properties were 100% leased with a weighted average annualized lease income per
leased square foot of $32.52 and a weighted average age of approximately twelve years. We calculate annualized lease income as
annualized contractual base rent for the last month in a specified period, plus the annualized straight line rent adjustments for the last
month in such period and the annualized expense reimbursements earned by us for the last month in such period.
Information about our properties as of December 31, 2015 is set forth in the table below:
Location
Property Type
Tenant Lease
Expiration
Year (1)
Rentable
Square
Feet
Annualized
Lease
Income
Percentage
of Total
Annualized
Lease
Income
Annualized
Lease
Income per
Leased
Square
Foot
Fresno, CA
Arlington, VA
San Antonio, TX
Omaha, NE
North Charleston,
Office
Office
Office
Office
2018
2019 / 2020 (2)
2021
2024
180,481 $ 7,311,804
189,871 6,443,253
148,584 4,978,027
112,196 4,577,685
Property Name
U.S Government
Leased
IRS - Fresno
PTO - Arlington
FBI - San Antonio
FBI - Omaha
SC
Lakewood, CO
Lincoln, NE
El Centro, CA
Pleasanton, CA
Albuquerque, NM
Vista, CA
Richmond, VA
Del Rio, TX
Albuquerque, NM
Dallas, TX
ICE - Charleston (3)
DOT - Lakewood
USCIS - Lincoln
AOC - El Centro (5)
DEA- Pleasanton
USFS II - Albuquerque
DEA - Vista
FBI - Richmond
AOC - Del Rio (5)
USFS I - Albuquerque
DEA - Dallas Lab
MEPCOM - Jacksonville Jacksonville, FL
Little Rock, AR
FBI - Little Rock
Savannah, GA
CBP - Savannah
Santa Ana, CA
DEA - Santa Ana
Lakewood, CO
DOE - Lakewood
San Diego, CA
ICE - Otay
Dallas, TX
DEA - Dallas
Chula Vista, CA
CBP - Chula Vista
Sacramento, CA
DEA - North Highlands
Sunburst, MT
CBP - Sunburst
Martinsburg, WV
USCG - Martinsburg
AOC - Aberdeen (5)
Aberdeen, MS
Albany, NY
DEA - Albany
DEA - Otay (9)
San Diego, CA
Riverside, CA
DEA - Riverside
Mission Viejo, CA
SSA - Mission Viejo
San Diego, CA
SSA - San Diego
DEA - San Diego
San Diego, CA
Subtotal
Privately Leased
2650 SW 145th Avenue -
Parbel of Florida
5998 Osceola Court -
United Technologies
501 East Hunter Street -
Lummus Corporation
Subtotal
Total / Weighted
Average
Lubbock, TX
Midland, GA
Miramar, FL
Office
Office
Office
Courthouse/Office
Laboratory
Office
Laboratory
Office
Courthouse/Office
Office
Laboratory
Office
Office
Laboratory
Office
Office
Office
Office
Office
Office
Office
Office
Courthouse/Office
Office
Office
Office
Office
Office
Warehouse
2019 / 2027 (4)
2024
2020
2019
2035
2026 (6)
2020
2021
2024
2021 (7)
2021
2025
2021
2033
2024
2029
2017 - 2026 (8)
2021
2018
2017
2028
2027
2025
2025
2017
2017
2020
2017
2016
86,733
3,631,287
122,225 3,345,895
137,671 3,233,441
46,813 3,031,651
42,480 2,782,916
98,720 2,760,931
54,119 2,746,951
96,607 2,720,061
89,880 2,628,626
92,455 2,628,014
49,723 2,355,895
30,000 2,152,165
101,977 2,134,218
35,000 2,105,832
39,905 2,091,508
115,650 2,058,570
52,881 1,784,045
71,827 1,778,023
59,397 1,748,955
37,975 1,712,451
33,000 1,579,754
59,547 1,569,809
46,979 1,453,904
31,976 1,331,405
32,560 1,292,353
34,354 1,276,031
533,173
11,590
429,473
11,743
399,908
16,100
2,371,019 $ 82,608,014
8.6% $
7.5%
5.8%
5.4%
4.2%
3.9%
3.8%
3.5%
3.3%
3.2%
3.2%
3.2%
3.1%
3.1%
2.8%
2.5%
2.5%
2.5%
2.5%
2.4%
2.1%
2.1%
2.0%
2.0%
1.9%
1.8%
1.7%
1.6%
1.5%
1.5%
0.6%
0.5%
0.5%
96.8% $
40.51
33.93
33.50
40.80
41.87
27.37
23.49
64.76
65.51
27.97
50.76
28.16
29.25
28.42
47.38
71.74
20.93
60.17
52.41
17.80
36.07
24.75
29.45
45.09
47.87
26.36
30.95
41.64
39.69
37.14
46.00
36.57
24.84
34.89
20.30
5.44
7.40
10.69
Warehouse/Distribution
Warehouse/Manufacturing
Warehouse/Distribution
2022 (10)
2023 (11)
2028 (12)
81,721
1,658,749
105,641
574,505
1.9%
0.7%
70,078
518,885
257,440 $ 2,752,139
0.6%
3.2% $
2,628,459
$ 85,360,153
100.0%
$
32.52
(1)
(2)
The year of lease expiration does not include renewal options. All leases with renewal options are noted in the following footnotes to this table.
168,468 rentable square feet leased to the PTO will expire on March 31, 2019, and 21,403 rentable square feet leased to the PTO will expire on January 7, 2020.
28
(5)
(3)
(4)
(6)
(7)
(8)
This property is only partially leased to the U.S. Government. LifePoint, Inc. occupies 21,609 rentable square feet.
21,609 rentable square feet leased to LifePoint, Inc. will expire on September 30, 2019, and 65,124 rentable square feet leased to ICE will expire on January 31,
2027.
A portion of this property is occupied by the U.S. Marshals Service to provide security and otherwise support the mission of the Administrative Office of the
Courts. Because of the interrelated nature of the U.S. Marshals Service and the Administrative Office of the Courts, we have not separately addressed occupancy
by the U.S. Marshals Service.
Lease contains one five-year renewal option.
Lease contains one five-year renewal option.
12,644 rentable square feet leased to ICE will expire on May 11, 2017, 11,555 rentable square feet leased to ICE will expire on August 18, 2021, 16,286
rentable square feet leased to ICE will expire on November 27, 2022, 7,434 rentable square feet leased to the DOT will expire on June 4, 2022 and 1,538
rentable square feet leased to the DOA will expire on January 1, 2026.
(9)
ICE occupies 5,813 rentable square feet.
(10) Lease contains three five-year renewal options.
(11) Lease contains three five-year renewal options.
(12) Lease contains two five-year renewal options.
Our assets are located throughout the United States. The following chart sets forth the geographic diversification of our
properties, by market, based on the GSA’s definition of regions, as of December 31, 2015:
Market
Pacific Rim
Greater Southwest
National Capital
The Heartland
Rocky Mountain
Greater Southwest
Southeast Sunbelt
Southeast Sunbelt
Southeast Sunbelt
Greater Southwest
Rocky Mountain
Mid-Atlantic
Southeast Sunbelt
Northeast
Location
State
California
Texas
Virginia
Nebraska
Colorado
New Mexico
Florida
South Carolina
Georgia
Arkansas
Montana
West Virginia
Mississippi
New York
Total / Weighted
Average
Market
Pacific Rim
Greater Southwest(1)
Southeast Sunbelt(1)
National Capital
The Heartland
Rocky Mountain
Mid-Atlantic
Northeast
Total / Weighted
Average
Number of
Properties
Number of
Leases
Rentable
Square Feet
Percentage of
Total Rentable
Square Feet
Percent
Leased
Annualized
Lease
Income
Percentage
of Total
Annualized
Lease Income
13
5
2
2
2
2
2
1
2
1
1
1
1
1
36
13
8
6
2
2
3
1
1
36
17
5
3
2
2
2
2
2
2
1
1
1
1
1
42
17
8
7
3
2
3
1
1
42
620,398
430,092
286,478
249,867
237,875
191,175
111,721
86,733
140,641
101,977
33,000
59,547
46,979
31,976
23.6%
16.4%
10.9%
9.5%
9.0%
7.3%
4.2%
3.3%
5.3%
3.9%
1.3%
2.3%
1.8%
1.2%
99 % $ 27,141,219
100 % 12,259,456
9,163,314
100 %
7,811,126
100 %
5,404,465
100 %
5,388,945
100 %
3,810,914
100 %
3,631,287
100 %
2,680,337
100 %
2,134,218
100 %
1,579,754
100 %
1,569,809
100 %
1,453,904
100 %
1,331,405
100 %
31.8%
14.4%
10.7%
9.2%
6.3%
6.3%
4.5%
4.3%
3.1%
2.5%
1.8%
1.8%
1.7%
1.6%
2,628,459
100.0%
100 % $ 85,360,153
100.0%
620,398
723,244
386,074
286,478
249,867
270,875
59,547
31,976
23.6%
27.5%
14.7%
10.9%
9.5%
10.3%
2.3%
1.2%
99 % $ 27,141,219
100 % 19,782,619
100 % 11,576,442
9,163,314
100 %
7,811,126
100 %
6,984,219
100 %
1,569,809
100 %
1,331,405
100 %
31.8%
23.2%
13.6%
10.7%
9.1%
8.2%
1.8%
1.6%
2,628,459
100.0%
100 % $ 85,360,153
100.0%
(1)
Three properties entirely leased to private tenants are located in the Southeast Sunbelt (two properties) and Greater Southwest regions.
29
Our portfolio has a stable tenant base that is diversified among U.S. Government agencies. Our U.S. Government tenant
agencies include a number of the U.S. Government’s largest and most essential agencies, such as the DEA, FBI and CBP. Our private
tenants are Parbel of Florida, a subsidiary of L’Oreal SA, United Technologies, LifePoint, Inc. and Lummus Corporation. As of
December 31, 2015, our properties were 100% occupied by 19 tenants. The following table provides information about the tenants that
occupied our properties as of December 31, 2015:
Tenant
U.S Government
Drug Enforcement Administration(2) (“DEA”)
Federal Bureau of Investigation (“FBI”)
Internal Revenue Service (“IRS”)
Administrative Office of the U.S. Courts (“AOC”)
Patent and Trademark Office (“PTO”)
Customs and Border Protection (“CBP”)
U.S. Forest Service (“USFS”)
Immigration and Customs Enforcement(2)(3) (“ICE”)
Department of Transportation(3) (“DOT”)
U.S. Citizenship and Immigration Services (“USCIS”)
Military Entrance Processing Command (“MEPCOM”)
Department of Energy (“DOE”)
U.S. Coast Guard (“USCG”)
Social Security Administration (“SSA”)
U.S. Department of Agriculture(3) (“USDA”)
Subtotal
Private Tenants
Parbel of Florida
United Technologies (Pratt & Whitney)
Lummus Corporation
LifePoint, Inc.
Subtotal
Total / Weighted Average
Number
of
Properties
Number
of
Leases
Weighted
Average
Remaining
Lease
Term(1)
Leased
Square
Feet
Percentage
of Leased
Square
Feet
Annualized
Lease
Income
Percentage
of Total
Annualized
Lease
Income
10
4
1
3
1
3
2
2
1
1
1
1
1
2
0
33
1
1
1
0
3
36
10
4
1
3
2
3
2
4
2
1
1
1
1
2
1
38
1
1
1
1
4
42
6.3
6.2
2.9
7.3
3.3
9.2
8.1
8.3
8.3
4.7
9.8
13.9
12.0
3.4
10.0
6.8
6.9
8.0
12.6
3.8
8.5
7.0
405,206
459,364
180,481
183,672
189,871
127,397
191,175
111,422
129,659
137,671
30,000
115,650
59,547
23,333
1,538
2,345,986
15.4 % $ 17,536,715
17.5 % 14,409,991
7,311,804
7,114,181
6,443,253
5,434,541
5,388,945
4,871,185
3,560,790
3,233,441
2,152,165
2,058,570
1,569,809
962,646
48,570
89.4 % $ 82,096,606
6.9 %
7.0 %
7.2 %
4.9 %
7.3 %
4.3 %
4.9 %
5.2 %
1.1 %
4.4 %
2.3 %
0.9 %
0.1 %
20.5%
16.9%
8.6%
8.3%
7.6%
6.4%
6.3%
5.7%
4.2%
3.8%
2.5%
2.4%
1.8%
1.1%
0.1%
96.2%
81,721
105,641
70,078
21,609
279,049
2,625,035
1,658,749
3.1 % $
574,505
4.0 %
518,885
2.7 %
511,408
0.8 %
10.6 % $
3,263,547
100.0 % $ 85,360,153
1.9%
0.7%
0.6%
0.6%
3.8%
100.0%
(1) Weighted based on leased square feet.
(2)
The DEA-Otay property is primarily occupied by the DEA. However, ICE occupies approximately 17.9% of the total leased square footage of the property. The
weighted average remaining lease term, leased square feet, annualized lease income and percentage of total annualized lease income have been adjusted
accordingly.
The ICE-Otay property is primarily occupied by the ICE. However, the DOT and the USDA occupy approximately 15.0% and 3.1% of the total leased square
footage of the property, respectively. The weighted average remaining lease term, leased square feet, annualized lease income and percentage of total annualized
lease income have been adjusted accordingly.
(3)
30
As of December 31, 2015, less than seven percent of our leases, based on square footage and total annualized lease income,
were scheduled to expire before 2018. Certain of our leases are currently in the “soft-term” period of the lease, meaning that the U.S.
Government tenant agency has the right to terminate the lease prior to its stated lease end date. In recent years the GSA has
increasingly entered into leases with “soft-term” periods. We believe that, from the GSA’s perspective, leases with such provisions are
helpful for budgetary purposes. While some of our leases are contractually subject to early termination, we do not believe that our
tenant agencies are likely to terminate these leases early given the build-to-suit features at the properties subject to the leases, the
average age of these properties (approximately 14 years), the mission-critical focus of the properties subject to the leases and the
current level of operations at such properties. The following table sets forth a schedule of lease expirations for leases in place as of
December 31, 2015.
Year of Lease Expiration (1)
Signed leases not
commenced
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Thereafter
Total / Weighted Average
Number of
Leases
Expiring
Square
Footage
Expiring
Percentage of
Portfolio Square
Footage Expiring
Annualized
Lease Income
Expiring
Percentage
of Total
Annualized
Lease Income
Expiring
Annualized Lease
Income per
Leased Square
Foot Expiring
N/A
0
16,100
1
5 129,276
2 239,878
3 236,890
4 224,783
7 572,728
3 105,441
1 105,641
4 364,206
3 108,955
9 521,137
42 2,625,035
N/A
N/A
399,908
0.6% $
4.9% 5,193,435
9.1% 9,060,759
9.0% 9,227,581
8.6% 7,272,296
21.8% 17,010,820
4.0% 2,494,515
574,505
4.0%
13.9% 12,643,714
4.2% 4,937,474
19.9% 16,545,146
100% $85,360,153
N/A
0.5 % $
6.1 %
10.6 %
10.8 %
8.5 %
19.9 %
2.9 %
0.7 %
14.8 %
5.8 %
19.4 %
100.0 % $
N/A
24.84
40.17
37.77
38.95
32.35
29.70
23.66
5.44
34.72
45.32
31.75
32.52
(1) The year of lease expirations is pursuant to current contract terms. Some tenants have the right to vacate their space during a
specified period, or “soft term,” before the stated terms of their leases expire. As of December 31, 2015, eight tenants occupying
approximately 21.3% of our rentable square feet and contributing approximately 21.8% of our annualized lease income have
exercisable rights to terminate their leases before the stated term of their lease expires. In 2016 and 2017 early termination rights
become exercisable by other tenants who currently occupy an additional approximately 0.9% and 4.5% of our rentable square
feet and contribute an additional 1.0% and 3.5% of our annualized lease income, respectively.
Item 3. Legal Proceedings
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.
Item 4. Mine Safety Disclosure
Not applicable.
31
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares of our common stock began trading on the NYSE under the symbol “DEA” on February 6, 2015. Prior to that time there
was no public market for our common stock. The following table sets forth, for the indicated period, the high and low sales prices for
our common stock, as reported on the NYSE:
First Quarter 2015 (February 6, 2015 through March 31, 2015) $
$
Second Quarter 2015
$
Third Quarter 2015
$
Fourth Quarter 2015
High
Low
16.86 $
16.59 $
16.40 $
18.82 $
15.18
15.25
15.25
15.71
We had eight stockholders of record of our common stock as of March 2, 2016. Certain shares are held in “street” name and
accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Distribution Policy
In order to maintain our qualification as a REIT under the Internal Revenue Code, we must distribute at least 90% of our taxable
income to shareholders. We intend to pay regular quarterly distributions to holders of common stock in a manner to satisfy this
requirement. Any distributions we make will be at the discretion of our board of directors and will be dependent upon a number of
factors, including prohibitions or restrictions under financing agreements or applicable law and other factors described herein. We
anticipate distributing all of our taxable income. See Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of
Financial Conditions and Results of Operations,” of this Annual Report on Form 10-K, for information regarding the sources of funds
used for distributions and for a discussion of factors, if any, which may adversely affect our ability to make distributions to our
shareholders.
The following table sets forth quarterly dividends that have been declared by our board of directors on our common stock for the
fiscal year ended December 31, 2015:
For the Three Months Ended:
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
Total 2015
Dividend Per Share
$
Date Paid
March 25, 2016
December 3, 2015
September 3, 2015
June 3, 2015
0.22
0.22
0.21
0.11 (1)
0.76
$
(1)
quarterly cash dividend of $0.11 per share of common stock reflects 49 day period in the quarter ended March 31, 2015 during
which we were a public company
Recent Sales of Unregistered Securities
On October 9, 2014 the Company issued 1,000 shares to its sole stockholder, Darrell W. Crate, for $1,000. The shares were
issued in reliance on the exemption set forth in Section 4(a)(2) of the Securities Act. We used $1,000 of the net proceeds of our initial
public offering to repurchase the shares from Mr. Crate on February 11, 2015.
Concurrently with the completion of our initial public offering on February 11, 2015, we sold an aggregate of 7,033,712 shares
of our common stock to the Easterly Funds in a private placement at a price per share of $15.00 without payment of any underwriting
fees, discounts or commissions. We received proceeds of approximately $105.5 million from the concurrent private placement. The
private placement was made pursuant to the exemption provided under Section 4(a)(2) of the Securities Act and Regulation D
promulgated thereunder.
In connection with the formation transactions on February 11, 2015, each of the Easterly Funds and the owner of the
management entities contributed their interests in their property-owning subsidiaries to our operating partnership in exchange for
3,308,000 shares of common stock and 9,771,120 common units of our operating partnership. Western Devcon contributed its interest
in 14 properties to our operating partnership in exchange for 5,759,819 common units of our operating partnership. On October 21,
2015, we acquired a 42,480 square foot Drug Enforcement Administration regional laboratory in Pleasanton, CA from Western
32
Devcon in exchange for 12,500 common units of our operating partnership. The shares of common stock and common units in our
operating partnership were issued pursuant to the exemption provided under Section 4(a)(2) of the Securities Act and Regulation D
promulgated thereunder.
Use of Proceeds from Registered Securities
On February 5, 2015, the SEC declared effective our Registration Statement on Form S-11 (File No. 333- 201251) in connection
with our initial public offering, pursuant to which we registered and sold 13,800,000 shares of our common stock for an aggregate
offering amount of $207 million. The offering was completed on February 11, 2015. The net proceeds of our initial public offering
were approximately $191.6 million after deducting underwriting discounts and commissions of approximately $13.5 million and
estimated offering expenses of approximately $1.9 million. Citigroup Global Markets Inc., Raymond James & Associates, Inc. and
RBC Capital Markets, LLC acted as joint book-running managers for our initial public offering and as representatives of the
underwriters.
We contributed the net proceeds from the offering and the concurrent private placement to our operating partnership in
exchange for common units and our operating partnership used the net proceeds received from us and a portion of the borrowings
under the senior unsecured revolving credit facility to repay approximately $293.4 million in outstanding indebtedness including
applicable repayment costs, defeasance costs, settlement of interest rate swap liabilities and other costs and fees associated with such
repayments and approximately $1.3 million related to our acquisition of Western Devcon.
Equity Compensation Plan Information
The following table summarizes certain information about our equity compensation plans as of December 31, 2015.
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding
options,
warrants and
rights
Number of securities
remaining
available for future
issuance
under equity
compensation plans
(excluding securities
reflected in
the first column of this
table)
— $
—
— $
—
—
—
465,292
—
465,292
Plan Category
Equity compensation plans approved by
stockholders(1)
Equity compensation plans not approved by
stockholders
Total
(1)
Includes 1,782,000 LTIP units that, upon the satisfaction of certain conditions, may be issued and are convertible into common
units, which may then be redeemed for cash, or at our option, an equal number of shares of common stock, subject to certain
restrictions. Also includes 26,667 shares of restricted common stock. There is no exercise price associated with LTIP units or
the shares of restricted common stock.
Performance Graph
The following performance chart compares the cumulative total stockholder return of DEA’s common stock with the cumulative
total return of the Russell 2000 Index and the cumulative total return of the FTSE NAREIT Equity REITs Index. The FTSE NAREIT
Equity REITs Index represents performance of all publicly-traded US Equity REITs not designated as Timber REITs or Infrastructure
REITs. The chart covers the period from February 6, 2015 through December 31, 2015 and assumed that $100 was invested in our
common stock and in each index on February 6, 2015 and that all dividends were reinvested. The information in this paragraph and
the following performance chart are deemed to be furnished, not filed.
33
Recent Purchases of Equity Securities
None.
Item 6. Selected Financial Data
Prior to our initial public offering on February 11, 2015, the Easterly Funds, as controlled by our predecessor, qualified as
investment companies pursuant to ASC 946 Financial Services – Investment Companies and, as a result, our predecessor’s
consolidated financial statements accounted for the Easterly Funds using investment company accounting based on fair value.
Subsequent to the initial public offering, as the properties contributed to us from the Easterly Funds are no longer held by funds that
qualify for investment company accounting, we made a shift, in accordance with GAAP to account for the properties contributed by
Easterly Funds and Western Devcon using historical cost accounting instead of investment company accounting, resulting in a
significant change in the presentation of our consolidated financial statements following the formation transactions. The contribution
of the investments of the Easterly Funds controlled by our predecessor to our operating partnership pursuant to the formation
transactions is accounted for as transactions among entities under common control.
The contribution of the Western Devcon properties in the formation transactions has been accounted for as a business
combination using the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed
liabilities on the date of such contribution.
The financial information analyzed below summarizes the combined results of operations for both Easterly (for the period
subsequent to the initial public offering of February 11, 2015 through December 31, 2015) and our predecessor for the years ended
December 31, 2015, 2014 and 2013.
Since the information presented below is only a summary, the following should be reviewed in conjunction with the information
contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial
statements and related notes thereto.
34
For the year ended December 31,
2014
2013
2015
64,942 $
6,233
203
—
71,378
13,340
6,983
33,561
2,887
1,666
8,817
75
67,329
4,049
— $
—
—
6,324
6,324
—
—
—
—
—
9,117
819
9,936
(3,612 )
—
—
—
4,006
4,006
—
—
—
—
—
4,281
1,299
5,580
(1,574)
(4,972)
—
(5,122)
(6,045) $
—
40
71,357
67,785 $
—
—
27,641
26,067
2015
For the year ended December 31,
2014
267,683 $
— $
297,184 $
— $
772,007 $
619,894 $
2013
173,099
—
176,684
(Amounts in thousands)
Revenues
Rental income
Tenant reimbursements
Other income
Income from real estate investments
Total revenues
Operating Expenses
Property operating
Real estate taxes
Depreciation and amortization
Acquisition costs
Formation expenses
Corporate general and administrative
Fund general and administrative
Total expenses
Operating income (loss)
Other (expenses) / income
Interest expense
Net realized gain (loss) on investments
Net unrealized gain (loss) on investments
Net income (loss)
Real estate investments, at fair value
Real estate properties, net
Total equity
$
$
$
$
$
35
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, 2015 and 2014 and for the years ended December 31,
2015, 2014 and 2013 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.” As used in this section, “we,” “us,”
and “our” refer to Easterly Government Properties, Inc. and “our predecessor” means Easterly Partners, LLC and its consolidated
subsidiaries; including (i) all entities or interests in U.S. Government Properties Income and Growth Fund L.P., U.S. Government
Properties Income and Growth Fund REIT, Inc. and the related feeder and subsidiary entities, which we refer to, collectively, as
Easterly Fund I, (ii) all entities or interests in U.S. Government Properties Income and Growth Fund II, LP, USGP II REIT LP, USGP
II (Parallel) Fund, LP and their related feeders and subsidiary entities, which we refer to, collectively, as Easterly Fund II, and
together with Easterly Fund I, we refer to as the Easterly Funds and (iii) the entities that managed the Easterly Funds, which we refer
to as the management entities.
Our Company
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 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 through the U.S. General Services Administration,
or GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and
capital appreciation.
As of December 31, 2015, we wholly owned 36 properties in the United States, including 33 properties that are leased primarily
to U.S. Government tenant agencies and three properties that are entirely leased to private tenants, encompassing approximately 2.6
million square feet in the aggregate. We focus on acquiring, developing and managing GSA-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
GSA to meet the needs and objectives of the tenant agency.
We were incorporated in Maryland as a corporation on October 9, 2014 and did not have any meaningful operations until the
completion of the formation transactions and our initial public offering on February 11, 2015. In connection with our initial public
offering, we engaged in certain formation transactions, or the formation transactions, pursuant to which our operating partnership
acquired (i) 15 properties previously owned by the Easterly Funds (as defined below), (ii) 14 properties previously owned by Western
Devcon, Inc., a private real estate company, and a series of related entities beneficially owned by Michael P. Ibe, which we refer to
collectively as Western Devcon and (iii) all of the ownership interests in the management entities (as defined below). After our initial
public offering, we acquired two properties in the second quarter of 2015, one property in the third quarter of 2015 and four properties
in the fourth quarter of 2015.
Our predecessor means Easterly Partners, LLC and its consolidated subsidiaries, including (i) all entities or interests in U.S.
Government Properties Income and Growth Fund L.P., U.S. Government Properties Income and Growth Fund REIT, Inc. and the
related feeder and subsidiary entities, which we refer to, collectively, as Easterly Fund I, (ii) all entities or interests in U.S.
Government Properties Income and Growth Fund II, LP, USGP II REIT LP, USGP II (Parallel) Fund, LP and their related feeders and
subsidiary entities, which we refer to, collectively, as Easterly Fund II and, together with Easterly Fund I, we refer to as the Easterly
Funds and (iii) the entities that managed the Easterly Funds, which we refer to as the management entities.
Our operating partnership holds substantially all of our assets and conducts substantially all of our business. We own
approximately 60.9% of the aggregate operating partnership units in our operating partnership. We intend to elect to be taxed as a
REIT and operate in a manner that we believe allows us to qualify as a REIT for federal income tax purposes commencing with our
taxable year ended December 31, 2015.
Since our initial public offering and the formation transactions occurred on February 11, 2015, the results of operations and
financial condition for the entities acquired by us in connection with our initial public offering and related formation transactions are
not included in certain historical financial statements. More specifically, our results of operations and financial condition for the year
ended December 31, 2014 reflect the results of operations and financial condition for our predecessor. Our results of operations for the
year ended December 31, 2015 reflect the results of operation and financial condition for our predecessor together with the entities we
36
acquired at and after the time of our initial public offering. The results of operations for each of these acquisitions are included in our
consolidated statements of operations only from the date of acquisition.
Financial information analyzed below reflects the audited financial statements as of December 31, 2015, included in the F pages
of this Annual Report on Form 10-K.
Results of Operations
Prior to our initial public offering on February 11, 2015, the Easterly Funds, as controlled by our predecessor, qualified as
investment companies pursuant to ASC 946 Financial Services – Investment Companies and, as a result, our predecessor’s
consolidated financial statements accounted for the Easterly Funds using investment company accounting based on fair value.
Subsequent to our initial public offering, as the properties contributed to us from the Easterly Funds are no longer held by funds that
qualify for investment company accounting, we made a shift, in accordance with GAAP to account for the properties contributed by
Easterly Funds and Western Devcon using historical cost accounting instead of investment company accounting, resulting in a
significant change in the presentation of our consolidated financial statements following the formation transactions. The contribution
of the investments of the Easterly Funds controlled by our predecessor to our operating partnership pursuant to the formation
transactions is accounted for as transactions among entities under common control.
The contribution of the Western Devcon properties in the formation transactions has been accounted for as a business
combination using the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed
liabilities on the date of such contribution.
The financial information analyzed below summarizes the combined results of operations for both Easterly (for the period
subsequent to our initial public offering of February 11, 2015 through December 31, 2015) and our predecessor for the years ended
December 31, 2015, 2014 and 2013.
Comparison of Results of Operations for the Years Ended December 31, 2015 and December 31, 2014
(Amounts in thousands)
Revenues
Rental income
Tenant reimbursements
Other income
Income from real estate investments
Total revenues
Operating Expenses
Property operating
Real estate taxes
Depreciation and amortization
Acquisition costs
Formation expenses
Corporate general and administrative
Fund general and administrative
Total expenses
Operating income (loss)
Other (expenses) / income
For the year ended December 31,
2014
2015
Change
$
64,942 $
6,233
203
—
71,378
13,340
6,983
33,561
2,887
1,666
8,817
75
67,329
4,049
— $
—
—
6,324
6,324
—
—
—
—
—
9,117
819
9,936
(3,612 )
64,942
6,233
203
(6,324)
65,054
13,340
6,983
33,561
2,887
1,666
(300)
(744)
57,393
7,661
Interest expense
Net realized gain (loss) on investments
Net unrealized gain (loss) on investments
Net income (loss)
(4,972)
—
(5,122)
(6,045) $
—
40
71,357
67,785 $
(4,972)
(40)
(76,479)
(73,830)
$
Revenues
Our rental income, tenant reimbursements, and other income for the year ended December 31, 2015 represents income from the
29 properties contributed to us by the Easterly Funds and Western Devcon on February 11, 2015, the two properties acquired in the
second quarter of 2015, the one property acquired in the third quarter of 2015 and the four properties acquired in the fourth quarter of
37
2015. These properties were 100% leased as of December 31, 2015. We earned $59.9 million in rental income attributable to base rent
and recorded a $0.2 million straight-line adjustment for the year ended December 31, 2015. We also recognized $4.9 million of
amortization associated with our above- and below-market leases within rental income for the year ended December 31, 2015. Many
of our tenants are also responsible for a portion of our operating expenses and real estate taxes. This is billed in accordance with each
tenant’s lease. We recognized $6.2 million in tenant reimbursements for the year ended December 31, 2015.
Income from real estate investments for the year ended December 31, 2014 is attributable to distributions from real estate
entities that are recorded as dividend income to the extent distributed from estimated taxable earnings and profits of the underlying
investment vehicle and as a return of capital to the extent not in excess of estimated taxable earnings and profits.
Operating Expenses
Similar to rental income, our property operating expenses, real estate taxes, and depreciation and amortization recognized for the
year ended December 31, 2015, represents expenses incurred from the operations of the properties contributed to us in connection
with the formation transactions, the two properties acquired in the second quarter of 2015, the one property acquired in the third
quarter of 2015 and the four properties acquired in the fourth quarter of 2015.
The Company incurred $2.9 million in acquisition costs during the year ended December 31, 2015 associated with the properties
contributed by Western Devcon in exchange for common units on February 11, 2015 and our acquisition activity. The Company
incurred $1.7 million in formation costs, such as, organizational, legal, and other administrative costs, during the year ended
December 31, 2015, associated with our initial public offering and the contribution of the properties from the Easterly Funds.
Corporate general and administrative costs decreased $0.3 million during the year ended December 31, 2015 compared to year
ended December 31, 2014, due to transaction costs in connection with our initial public offering incurred during the third and fourth
quarter of 2014, offset by an increase in compensation expense during the year ended December 31, 2015 as a result of an increase in
the number of employees and non-cash charges for restricted stock and LTIPs.
Fund general and administrative expenses decreased $0.7 million during the year ended December 31, 2015 compared to the
year ended December 31, 2014 as the Company succeeded to the operations of the predecessor upon completion of our initial public
offering.
Interest Expense
Interest expense for the year ended December 31, 2015 represents the interest incurred on mortgage debt encumbered on five of
our properties and on our senior unsecured revolving credit facility. For the year ended December 31, 2015, we recorded $5.0 million
in interest expense related to our mortgage debt and senior unsecured revolving credit facility. The weighted average interest rate of
the mortgage debt and the senior unsecured revolving credit facility was 4.01% and 1.62%, respectively, for year ended December 31,
2015. In accordance with GAAP, we also recorded amortization of deferred financing fees associated with the senior unsecured
revolving credit facility and mortgage debt encumbered on one of our properties of $0.8 million to interest expense for the year ended
December 31, 2015.
Our predecessor accounted for property level debt through the fair value of their net equity interest in their real estate
investments, and as such, mortgage debt was not recognized on our predecessor’s Consolidated Statements of Assets, Liabilities and
Capital.
Net unrealized gain on investments
The unrealized gain or loss on investments represents the change in fair value of our predecessor’s real estate investments.
During the year ended December 31, 2015 and prior to our initial public offering, our predecessor had recognized a net unrealized loss
of $5.1 million attributable to an increase in the debt valuation to approximate the actual costs to pay-off debt using the proceeds
received from our initial public offering and a portion of borrowings under the senior unsecured revolving credit facility.
Our predecessor recognized a $71.4 million unrealized gain on investment for the year ended December 31, 2014 that was
attributable in part to $8.0 million of appreciation related to the acquisition of two new investments during the year, FBI—Little Rock
and PTO—Arlington, $4.3 million of reduction in principal balance for the non-recourse debt underlying the properties owned by our
predecessor and a $6.9 million reduction in the cost basis of the assets. Distributions in excess of tax basis earnings and profits are
considered a return of capital and reduce the cost basis of the investment. The majority of the remaining change is attributable to
changes in net operating income of the properties as well as changes in market conditions including a decrease in residual
38
capitalization rates and discount rates, which had a positive effect on the fair value of the properties owned by our predecessor for the
year ended December 31, 2014.
Following our initial public offering, we have not had unrealized gains as the accounting for the properties contributed by the
Easterly Funds from the property owning subsidiaries to us in connection with the formation transactions have changed from
investment company accounting to historical cost accounting.
Comparison of Results of Operations for the Years Ended December 31, 2014 and December 31, 2013
The following table summarizes the consolidated historical results of operations of our predecessor for the years ended
December 31, 2014 and 2013.
(Amounts in thousands)
Revenues
Income from real estate investments
Total revenues
Operating Expenses
Corporate general and administrative
Fund general and administrative
Total expenses
Operating income (loss)
Other (expenses) / income
For the year ended December 31,
2013
2014
Change
$
6,324 $
6,324
4,006 $
4,006
2,318
2,318
9,117
819
9,936
(3,612)
4,281
1,299
5,580
(1,574 )
4,836
(480)
4,356
(2,038)
Net realized gain (loss) on investments
Net unrealized gain (loss) on investments
Net income (loss)
40
71,357
67,785 $
—
27,641
26,067 $
40
43,716
41,718
$
Revenues
Income from real estate investments is attributable to distributions from real estate entities that are recorded as dividend income
to the extent distributed from the estimated taxable earnings and profits of the underlying investment vehicle and as a return of capital
to the extent not in excess of estimated taxable earnings and profits. Income from real estate investments increased by $2.3 million, or
57.9%, to $6.3 million for the year ended December 31, 2014 from $4.0 million for the year ended December 31, 2013. Of the $2.3
million increase, $1.5 million was attributable to distributions from four properties that made their first distribution after December 31,
2013: DOT—Lakewood, FBI—Omaha, FBI—Little Rock and PTO—Arlington.
Operating Expenses
Corporate general and administrative consists of employee compensation, professional fees and other administrative costs.
Corporate general and administrative increased by $4.8 million, or 113.0%, to $9.1 million for the year ended December 31, 2014
from $4.3 million for the year ended December 31, 2013. This increase was primarily attributable to a $4.0 million increase in
expenses related to our initial public offering, a $1.5 million increase in compensation expense, which was primarily attributable to a
$1.0 million increase in non-cash compensation expense as well as an increase in the number of employees an overall increase in
compensation, as well as a $0.5 million increase in acquisition expenses associated with the acquisition of the 14 Western Devcon
Properties. This increase was partially offset by a $1.2 million decrease in marketing expense due to the renegotiation of a contract
resulting in a credit received in 2014 from a marketing vendor.
Fund general and administrative includes professional, organizational, insurance and other administration expenses incurred in
connection with the formation and operations of the Easterly Funds and any related entities. Fund general and administrative
decreased by $0.5 million, or 37.0%, to $0.8 million for the years ended December 31, 2014 from $1.3 million for the year ended
December 31, 2013. This decrease was primarily attributable to a $0.5 million decrease in organizational expenses due to the
organization of Easterly Fund II in February 2013. No new funds or entities were organized subsequent to the formation of Easterly
Fund II.
Net unrealized gain on investments
Net unrealized gain on investments consists of the net unrealized appreciation in the fair value of the Easterly Funds’ real estate
investments. The value of the Easterly Funds’ real estate investments are impacted by a variety of factors including changes in
39
existing and projected net operating incomes and cash flows, ongoing capital projects, leasing related expenditures and changes in the
key assumptions used in projecting likely prices achievable through third-party asset sales. These key assumptions, which vary from
property to property and period to period, include indicators such as growth in rental rates, as well as investment factors such as
prevailing and projected investment capitalization and discount rates and likely holding periods. See Note 5 (Fair Value of
Investments) to our predecessor’s consolidated financial statements, provided elsewhere in this Annual Report on Form 10-K for
additional discussion on fair value.
The $71.4 million unrealized gain on investment for the year ended December 31, 2014 was attributable in part to $8.0 million
of appreciation related to the acquisition of two new investments during the year, FBI—Little Rock and PTO—Arlington, $4.3 million
of reduction in principal balance for the non-recourse debt underlying the properties owned by our predecessor and a $6.9 million
reduction in the cost basis of the assets. Distributions in excess of tax basis earnings and profits are considered a return of capital and
reduce the cost basis of the investment. The majority of the remaining change is attributable to changes in net operating income of the
properties as well as changes in market conditions including a decrease in residual capitalization rates and discount rates, which had a
positive effect on the fair value of the properties owned by our predecessor for the year ended December 31, 2014. The $27.6 million
unrealized gain on investment was attributable in part to $9.7 million of appreciation related to the acquisition of five new investments
during 2013, ICE—Charleston, MEPCOM—Jacksonville, USCG—Martinsburg, DOT—Lakewood, and FBI—Omaha, $2.0 million
of reduction in principal balance for the non-recourse debt underlying the properties owned by our predecessor and a $4.0 million
reduction in the cost basis of the assets. Distributions in excess of tax basis earnings and profits are considered a return of capital and
reduce the cost basis of the investment. The majority of the remaining change is attributable to changes in projected net operating
income of the properties as well as changes in market conditions including a decrease in residual capitalization rates and discount
rates, which had a positive effect on the fair value of the properties owned by our predecessor for the year ended December 31, 2013.
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, stockholder distributions to maintain our qualification as a REIT and other capital obligations associated with
conducting our business. At December 31, 2015, we had approximately $8.2 million available in cash and cash equivalents and there
was $245.6 million available under our senior unsecured revolving credit facility.
Our primary expected sources and uses and capital are as follows:
Sources
cash and cash equivalents;
operating cash flow;
available borrowings under our existing revolving credit facility;
secured loans collateralized by individual properties;
issuance of long-term debt;
issuance of equity; and
asset sales.
Uses
Short term:
redevelopments;
tenant improvements allowances and leasing costs;
recurring maintenance capital expenditures;
debt repayment requirements;
corporate and administrative costs; and
distribution payments.
40
Long term:
major redevelopment, renovation or expansion programs at individual properties;
development;
acquisitions; and
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 liquidity.
Initial Public Offering
We completed our initial public offering on February 11, 2015, pursuant to which we registered and sold 13,800,000 shares of
our common stock for an aggregate offering amount of $207.0 million. The net proceeds of our initial public offering were
approximately $191.6 million after deducting underwriting discounts and commissions of approximately $13.5 million and estimated
offering expenses of approximately $1.9 million. Citigroup Global Markets Inc., Raymond James & Associates, Inc. and RBC Capital
Markets, LLC acted as joint book-running managers for our initial public offering and as representatives of the underwriters.
Concurrently with the completion of our initial public offering, we sold an aggregate of 7,033,712 shares of our common stock to the
Easterly Funds in a private placement at a price per share of $15.0 without payment of any underwriting fees, discounts or
commissions. We received proceeds of approximately $105.5 million from the concurrent private placement. In connection with the
formation transactions, each of the Easterly Funds and the owner of the management entities contributed their interests in their
property-owning subsidiaries to our operating partnership in exchange for 3,308,000 shares of common stock and 9,771,120 common
units of our operating partnership. Western Devcon contributed its interest in 14 properties to our operating partnership in exchange
for 5,759,819 common units of our operating partnership.
We contributed the net proceeds from the offering and the concurrent private placement to our operating partnership in
exchange for common units and our operating partnership used the net proceeds received from us and a portion of the borrowings
under the senior unsecured revolving credit facility, described below, to repay approximately $293.4 million in outstanding
indebtedness including applicable repayment costs, defeasance costs, settlement of interest rate swap liabilities and other costs and
fees associated with such repayments and approximately $1.3 million in costs related to our acquisition of Western Devcon.
Senior Unsecured Revolving Credit Facility
Upon the completion of our initial public offering on February 11, 2015 we entered into a $400.0 million senior unsecured
revolving credit facility with Citigroup Capital Markets Inc. Raymond James Bank, N.A. and Royal Bank of Canada, as joint lead
arrangers and joint book running managers and Raymond James Bank, N.A. and Royal Bank of Canada, as co-syndication agents.
This credit facility has an accordion feature that provides us with additional capacity, subject to the satisfaction of customary terms
and conditions, of up to $250.0 million, for a total facility size of not more than $650.0 million. We intend to use the senior unsecured
revolving credit facility to repay indebtedness, fund acquisitions, development and redevelopment opportunities, capital expenditures
and the costs of securing new and renewal leases and provide working capital.
Our operating partnership is the borrower under the senior unsecured revolving credit facility and we and certain of our
subsidiaries that directly own certain of our properties are guarantors under the credit facility. The senior unsecured revolving credit
facility will terminate in approximately three years. In addition, there will be two as-of-right extension options for the senior
unsecured revolving credit facility and each extension option will allow us to extend the senior unsecured revolving credit facility for
an additional six months, in each case subject to certain conditions and the payment of an extension fee.
Our senior unsecured revolving credit facility bears interest, at our option, either at:
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 LIBOR rate plus 1.00% plus (b) a margin ranging from 0.4% to 0.9%, or
a Eurodollar rate equal to a periodic fixed rate equal to LIBOR plus, a margin ranging from 1.4% to 1.9%, in each case
with a margin based on our leverage ratio.
41
Our senior unsecured revolving credit facility also contains certain customary financial covenants, as follows: (i) the maximum
ratio of consolidated total indebtedness to total asset value (each as defined in the agreement) may not exceed 60.0% on any date,
provided that the maximum ratio may be increased to 65.0% for the two consecutive quarters following the date on which a material
acquisition (as defined in the agreement) occurs, (ii) the maximum ratio of consolidated secured indebtedness (as defined in the
agreement) to total asset value may not exceed 40.0% on any date, (iii) the maximum ratio of consolidated secured recourse
indebtedness (as defined in the agreement) to total asset value may not exceed 15% on any date, (iv) the minimum consolidated
tangible net worth (as defined in the agreement) may not, on any date, be less than the sum of an amount equal to 75.0% of our
consolidated tangible net worth as of the closing date of the facility plus an amount equal to 75.0% of the aggregate net cash proceeds
received by us from any offering of our capital stock after the closing date of the facility, (v) the minimum ratio of adjusted
consolidated EBITDA to consolidated fixed charges (each as defined in the agreement) may not be less than 1.50 to 1.00 on any date,
(vi) the maximum ratio of consolidated unsecured indebtedness to unencumbered asset value (each as defined in the agreement) may
not exceed 60% as of any date and (vii) the minimum ratio of adjusted consolidated net operating income from unencumbered assets
(as defined in the agreement) to interest payable on unsecured debt (as determined in accordance with the agreement) shall not be less
than 1.75 to 1.00 on any date. Additionally, under the senior unsecured revolving credit facility, our distributions may not exceed the
greater of (i) 95.0% of our FFO or (ii) the amount required for us to maintain our status as a REIT and avoid the payment of federal or
state income or excise tax.
Our senior unsecured revolving credit facility also includes customary limits on the percentage of our total asset value that may
be invested in unimproved land, unconsolidated joint ventures, redevelopment and development assets (as defined in the agreement),
loans, advances or extensions of credit and investments in mixed used assets and require that we obtain consent for mergers in which
the company is not the surviving entity. These financial and restrictive covenants may limit the investments we may make and our
ability to make distributions. As of December 31, 2015, we were in compliance with all financial and restrictive covenants under our
senior unsecured revolving credit facility.
For the year ended December 31, 2015, the weighted average annual interest rate for borrowings under our revolving credit
facility was 1.62%. As of December 31, 2015, the weighted average interest rate payable on borrowings under our revolving credit
facility was 1.75%. Additionally, as of December 31, 2015 we had $154.4 million outstanding and $245.6 million available under our
senior unsecured revolving credit facility.
Mortgage Debt
The table below presents our mortgage debt obligation at December 31, 2015 (dollars in thousands):
Fixed/Floating
Fixed
Fixed
Fixed
Fixed
Floating
Contractual
Interest Rate
3.40%
4.21%
4.41%
4.46%
LIBOR + 150bps
Property
CBP - Savannah
ICE - Charleston
MEPCOM - Jacksonville
USFS II - Albuquerque
DEA - Pleasanton
Total
Contractual Obligations
Effective
Interest Rate
4.12%
3.93%
3.89%
3.92%
1.80%
Maturity Date
July 2033
Principal Balance
$
January 2027
October 2025
July 2026
October 2023
$
15,580
21,993
12,489
17,477
15,700
83,239
The following table summarizes our contractual obligations as of December 31, 2015 (amounts in thousands);
Mortgage principal and interest
Senior unsecured revolving credit
facility principal and interest
Corporate office lease
Dividend Policy
Total
$ 107,567
2016
Payments due by period
2018
2019
2017
2020
5,853
5,853
5,853
5,852
Thereafter
78,273
5,883
165,241
1,605
3,477
234
3,477
319
3,477
286
154,810
298
—
309
—
159
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
42
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 the board of directors could decide to make
required distributions in part by using shares of our common stock.
Our board of directors declared a dividend for the first quarter of 2015 in the amount of $0.11 per share of common stock and
per common unit of the operating partnership, outstanding to stockholders and common unit holders of record as of the close of
business on May 18, 2015. Our board of directors also declared a dividend for the first quarter of 2015 for each LTIP unit in an
amount equal to 10% of the dividend paid per common unit of our operating partnership. Such dividends were paid on June 3, 2015.
The quarterly cash dividend of $0.11 per share of common stock and common unit reflects the 49 day period in the quarter ended
March 31, 2015 during which we were a public company.
On August 4, 2015, the board of directors declared a dividend for the second quarter of 2015 in the amount of $0.21 per share of
common stock and per common unit of our operating partnership, outstanding to stockholders and common unit holders of record as
of the close of business on August 18, 2015. Our board of directors also declared a dividend for the second quarter of 2015 for each
LTIP unit in an amount equal to 10% of the dividend paid per common unit of our operating partnership. Such dividends were paid
on September 3, 2015.
On November 3, 2015, the board of directors declared a dividend for the third quarter of 2015 in the amount of $0.22 per share
of common stock and per common unit of our operating partnership, outstanding to stockholders and common unit holders of record
as of the close of business on November 17, 2015. Our board of directors also declared a dividend for the third quarter of 2015 for
each LTIP unit in an amount equal to 10% of the dividend paid per common unit of our operating partnership. Such dividends were
paid on December 3, 2015.
On February 26, 2016, the board of directors declared a dividend for the fourth quarter of 2015 in the amount of $0.22 per share
of common stock and per common unit of our operating partnership, outstanding to stockholders and common unit holders of record
as of the close of business on March 10, 2016. Our board of directors also declared a dividend for the fourth quarter of 2015 for each
LTIP unit in an amount equal to 10% of the dividend paid per common unit of our operating partnership. Such dividends are to be
paid on March 25, 2016.
Cash Flow — Our Predecessor
As noted above, following the completion of our initial public offering, our predecessor no longer uses investment company
accounting to account for the assets contributed from the private real estate funds that our predecessor controlled. Instead, we now
account for these assets using historical cost accounting. Moving from investment company accounting to historical cost accounting
has resulted in a significant change in the classification of our cash flows. We indirectly own all of the assets of the Easterly Funds
acquired in the formation transactions and we account for these assets using historical cost accounting. The classification of our cash
flows following the formation transactions differs significantly from, and is not comparable with, the historical classification of our
predecessor’s cash flows. For example, the purchase and sale of investments by the Easterly Funds historically was treated as an
operating activity per investment company accounting and such purchases and sales were shown net of any related mortgage debt
entered into upon acquisition or repaid upon sale. In addition, the net income for our predecessor historically reflected significant
unrealized gains or losses relating to properties owned by these funds. Any unrealized gains or losses are reversed to arrive at net cash
flow provided by or used in operating activities. Gains or losses arising from sales of properties owned by us directly or through our
consolidated subsidiaries are only recognized by us when realized. Once historical cost accounting is applied, the acquisition of
investments and the proceeds of sales are reflected in net cash provided by investing activities.
The following table sets forth a summary of cash flows for our predecessor for the years ended December 31, 2015, 2014 and
2013:
2015
For the year ended December 31,
2014
(amounts in thousands)
2013
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
$
29,950 $
(164,552)
111,341
(22,396 ) $
—
50,470
(44,546)
—
47,189
43
Operating Activities
Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
Cash provided by operating activities for the year was $30.0 million for the year ended December 31, 2015 compared to the
$22.4 million of cash used for operating activities during the year ended December 31, 2015. Net cash provided by operating activities
for the year ended December 31, 2015 included a $30.0 million increase in net cash from rental activities net of expenses. Net cash
used for operating activities for the year ended December 31, 2014 included $30.3 million for net real estate fund investments due to
the purchase of two new investments, PTO — Arlington and FBI — Little Rock, $0.5 million for investments in existing assets, offset
by $7.6 million in distributions from investments. As noted above, activities such as these engaged in directly or through our
consolidated subsidiaries will be reflected as investing activities following the formation transactions.
Year Ended December 31, 2014 Compared with Year Ended December 31, 2013
Our predecessor used $22.4 million of cash for operating activities during the year ended December 31, 2014, a decrease of
$22.1 million compared to the $44.5 million used during the year ended December 31, 2013. Net cash used for operating activities for
the year ended December 31, 2014 included $30.3 million for net real estate fund investments due to the purchase of two new
investments, PTO — Arlington and FBI — Little Rock, $0.5 million for investments in existing assets, offset by $7.6 million in
distributions from investments. Net cash from operating activities for the year ended December 31, 2013 included $46.9 million for
net real estate fund investments due to the acquisition of five new assets, ICE — Charleston, MEPCOM — Jacksonville, USCG —
Martinsburg, DOT — Lakewood, and FBI — Omaha, and $1.2 million for investments in existing assets, offset by $5.4 million in
distributions from investments. As noted above, activities such as these engaged in directly or through our consolidated subsidiaries
will be reflected as investing activities following the formation transactions.
Investing Activities
Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
The company used $164.6 million of cash for investing activities during the year ended December 31, 2015. No cash was
attributed to investing activities during the year ended December 31, 2014. Net cash used for investing activities for the year ended
December 31, 2015 included $170.2 million related to the purchase of seven new properties purchased subsequent to our initial public
offering offset by $6.2 million in cash assumed in formation.
Year Ended December 31, 2014 Compared with Year Ended December 31, 2013
No cash was attributed to investing activities during both the years ended December 31, 2014 and December 31, 2013.
Financing Activities
Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
The company generated $111.3 million in cash provided by financing activities during the year ended December 31, 2015 and
$50.5 million during the twelve months ended December 31, 2014. Net cash provided by financing activities for the twelve months
ended December 31, 2015 includes $193.5 million net proceeds from our initial public offering, $75.6 million of contributions related
to the private placement, and $154.4 million in credit facility draws offset by $293.4 million in debt repayment as part of the
formation transaction, $5.4 million in distributions, $3.5 million in deferred financing costs paid, $21.5 million in dividends and
$2.0 million of offering costs. Additionally, we entered into $15.7 million in mortgage debt upon the acquisition of DEA-Pleasanton
in the fourth quarter of 2015. Net cash provided by financing activities for the year ended December 31, 2014 includes $65.2 million
of contributions from investors in the Easterly Funds, offset by $14.6 million of distributions to investors in the Easterly Funds.
Year Ended December 31, 2014 Compared with Year Ended December 31, 2013
Our predecessor generated $50.5 million of cash from financing activities during the year ended December 31, 2014, an increase
of $3.3 million compared with the $47.2 million generated during the year ended December 31, 2013. Net cash provided by financing
activities for the year ended December 31, 2014 includes $65.2 million of contributions from investors in the Easterly Funds, offset by
$14.6 million of distributions to investors in the Easterly Funds. Net cash provided by financing activities for the year ended
December 31, 2013 includes $55.0 million of contributions, offset by $8.9 million of distributions to investors in the Easterly Funds.
44
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
Funds from Operations, or 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. 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 generally defined by NAREIT as net income (loss), calculated in accordance with GAAP, excluding gains or losses from
sales of property and impairment losses on depreciable real estate, plus real estate depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. 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 acquisition costs, straight-line rent, above-/below-market leases, non-cash interest expense and non-cash
compensation. We may also exclude other items from FFO, as Adjusted that we believe may help investors compare our results.
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
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 three and twelve months
ended December 31, 2015 (in thousands):
Net Income (loss)
Depreciation and amortization
Net unrealized (loss) on investments
Funds From Operations
Adjustments to FFO:
Acquisition costs
Offering costs
Straight-line rent
Above-/below-market leases
Non-cash interest expense
Non-cash compensation
For the three
months ended
For the twelve
months ended
December 31, 2015 December 31, 2015
(6,045 )
173 $
$
33,561
5,122
32,638
10,166
—
10,339
1,017
—
(52)
(1,507)
194
692
10,683 $
2,887
1,666
(217 )
(4,866 )
676
1,867
34,651
Funds from Operations, as Adjusted
$
Factors That May Influence Future Results of Operations
Formation Transactions
While the Easterly Funds, which were controlled by our predecessor, qualify for investment company accounting, following our
initial public offering, we have used historical cost accounting instead of investment company accounting to account for the properties
owned by the Easterly Funds. Moving from investment company accounting to historical cost accounting will result in a significant
change in the presentation of our consolidated financial statements following the formation transactions. Therefore our financial
45
condition and results of operations after our initial public offering differ significantly from, and are not be comparable with, the
historical financial position and results of operations of our predecessor.
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, or urban CPI. Tenant
reimbursements also include amounts due from tenants for real estate taxes 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, including rents paid through the GSA. 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, cleaning and other operating expenses. Factors that may impact our ability to control these operating expenses include
increases in insurance premiums, increases in third party management expenses, 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. In order to limit interest rate risk, we may enter
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
We intend 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.
46
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of December 31, 2015.
Inflation
Substantially all of our leases provide for operating expense escalations. 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 Policies of the Company post-IPO
Real Estate Properties
Real estate properties comprise all tangible assets we hold for rent. Real property is recognized at cost less accumulated
depreciation. Betterments, major renovations and certain costs directly related to the improvement of real properties are capitalized.
Maintenance and repair expenses are charged to expense as incurred.
Depreciation of an asset begins when it is available for use and is calculated using the straight-line method over the estimated
useful lives. Each period, depreciation is charged to expense and credited to the related accumulated depreciation account. A used
asset acquired is depreciated over its estimated remaining useful life, not to exceed the life of a new asset. Range of useful lives for
depreciable assets are as follows:
Category
Buildings
Building improvements
Tenant improvements
Furniture and equipment
Term
40 years
5 - 40 years
Shorter of remaining life of the lease or useful life
3 - 7 years
Tenant improvements are capitalized in real property when we own the improvement. If the improvements are deemed to be
owned by the tenant and we assume its payments (such as an up-front cash payment to the lessee or by assuming the payment or
reimbursement of all or part of those costs) then we recognize the inducements as a deferred lease incentive.
Upon acquisition of real property, we determine the fair value of acquired assets (including land, building, tenant improvements,
above-market leases and in-place lease intangibles) and the assumed liabilities (including below-market leases) in accordance with
ASC 805, Business Combinations and allocate the purchase price based on these fair values. As a result of a business combination,
acquired leases may arise at the acquisition date of the business combination. We recognize acquired leases as intangible assets and/or
liabilities if they arise from contractual or other legal rights, or if not arising from contractual or legal rights, are only recorded by us if
they are capable of being separated from the acquiring entity and thus can be sold, transferred, licensed, rented or exchanged on their
own (whether or not there is an intention to do so). We initially record acquired leases as intangible assets and/or liabilities at their
estimated fair values. If the terms of an operating lease on an acquired business are favorable relative to market terms, we recognize an
intangible asset named “acquired favorable leases.” If the terms of an operating lease on an acquired business are unfavorable relative
to market terms, we recognize an intangible liability named “acquired below or unfavorable market leases.” If there are in-place lease
costs such as lease commissions, real estate taxes, insurances, forgiven rent and tenant improvements on an acquired business, we
recognize an intangible asset named “acquired in-place leases.” The amortization of acquired leases is recognized by us as a reduction
of or increase to rental income, over the terms of the respective leases.
Long-lived assets, such as real property and purchased intangible assets subject to amortization are reviewed for impairment on
a property by property basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. If there is an indication that real property or an intangible asset may be impaired, the impairment test is performed for the
individual asset if the recoverable amount of this asset can be determined individually.
If circumstances require that a long-lived asset or a group of assets is to be tested for possible impairment, we first compare
undiscounted cash flows expected to be generated by an asset or group of assets to the carrying value of the asset or group of assets. If
the carrying value of the long-lived asset or group of assets is not recoverable on an undiscounted cash flow basis, impairment is
recognized to the extent that the carrying value exceeds its fair value.
47
Revenue Recognition
Rental income includes base rents paid by each tenant in accordance with its lease agreement conditions. We recognize rental
income on a straight-line basis over the lease term of the respective leases. For acquisitions of existing buildings, we recognize rental
income from leases already in place coincident with the date of property closing. Lease incentives are recorded as a deferred asset and
amortized as a reduction of revenue on a straight-line basis over the respective lease term. Tenant reimbursement income (scheduled
rent increases based on increases in real estate taxes, operating expenses and utility usage) is recognized by us in the consolidated
statements of operations when earned and when their amounts can be reasonably estimated. Above- and below-market leases are
amortized into rental income over the terms of the respective leases.
Income Taxes
We intend to elect and to qualify as a REIT for U.S. federal income tax purposes commencing with the taxable year ended
December 31, 2015. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net income
that we distribute currently to our stockholders. To maintain our qualification as a REIT, we are required under the Code to distribute
at least 90% of our REIT taxable income (without regard to the deduction for dividends paid and excluding net capital gains) to our
stockholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal
income tax on our taxable income at regular corporate rates. Even if we qualify for taxation as a REIT, we may also be subject to
certain state, local and franchise taxes. Under certain circumstances, U.S. federal income and excise taxes may be due on our
undistributed taxable income.
Emerging Growth Company Status
The JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply
with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private
companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or
revised accounting standards on relevant dates on which adoption of such standards is required for companies that are not emerging
growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying
with new or revised accounting standards is irrevocable.
New Accounting Standards
In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-16, Simplifying the Accounting for
Measurement Period Adjustments (Topic 805). ASU 2015-16 addresses provisional amounts for items in a business combination for
which the accounting is incomplete by the end of the reporting period. The guidance requires that an acquirer recognize adjustments to
provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are
determined, calculated as if the accounting had been completed as of the acquisition date and the amounts disclosed either on the face
of the financial statements or the notes. This guidance is to be applied prospectively and is effective for fiscal years beginning after
December 15, 2015.
In April 2015, FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires that all
costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The
amortization of these costs will remain under the interest method and will continue to be reported as interest expense. In August of
2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-
Credit Arrangements (Subtopic 835-30), which clarified the presentation of debt issuance costs related to credit facility arrangements,
given the absence of authoritative guidance within ASU 2015-03. Under ASU 2015-15, debt issuance costs paid to third parties other
than the lender related to credit facilities may be presented in the balance sheet as an asset, regardless of whether there are any
outstanding borrowings on the credit facility. The guidance is effective for public companies for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been
previously issued. The new guidance will be applied on a retrospective basis. As the guidance is effective for fiscal year, beginning
after December 15, 2015, the Company will implement this guidance, retrospectively, for fiscal years beginning after December 15,
2015. The Company incurred total debt issuance costs of $3.5 million for the year ended December 31, 2015, primarily associated
with entering into a $400.0 million unsecured revolving credit facility.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The guidance modifies the
analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The guidance does
not change the general order in which the consolidation models are applied. A reporting entity that holds an economic interest in, or is
otherwise involved with, another legal entity first determines if the variable interest entity model applies, and if so, whether it holds a
controlling financial interest under that model. If the entity being evaluated for consolidation is not a variable interest entity, then the
voting model should be applied to determine whether the entity should be consolidated by the reporting entity. Key changes to the
48
guidance include, though are not limited to; (i.) limiting the extent to which related party interests are included in the other economic
interest criterion to the decision maker’s effective interest holding, (ii.) requiring limited partners of a limited partnership, or the
members of a limited liability company that is similar to a limited partnership, to have, at minimum, kick-out or participating rights to
demonstrate that the partnership is a voting entity, (iii.) changing the evaluation of whether the equity holders at risk lack decision
making rights when decision making is outsourced and (iv.) changing how the economics test is performed. The guidance does not
amend the existing disclosure requirements for variable interest entities or voting model entities. The guidance is effective for public
companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is
permitted. This standard will not have a significant impact.
Critical Accounting Policies of the Company pre-IPO
Basis of Accounting
Each of the Easterly Funds reflected in the consolidated financial statements of Easterly Partners, LLC qualifies as an
investment company pursuant to ASC 946 and reflects its underlying investments at fair value. Our predecessor’s historical
consolidated financial statements reflect such specialized accounting for the Easterly Funds. Thus, the Easterly Funds’ real estate fund
investments are reflected at fair value on the consolidated statement of assets, liabilities and capital, with unrealized gains and losses
resulting from changes in fair value reflected as a component of change in fair value of real estate fund investments in the consolidated
statements of operations. Following the consummation of our initial public offering on February 11, 2015, the basis of presentation for
the assets that were contributed to us by the Easterly Funds have converted to historical cost accounting.
Our accounting basis for purposes of historical cost accounting will be equal to the fair value of the investments at the
completion of the formation transactions.
Realized and Unrealized Gains, Net
Our predecessor accounts for its private real estate fund investments at fair value (which is predominantly based on the fair
value of the underlying real estate). Realized and net changes in unrealized gains and losses resulting from changes in fair value are
reflected in the accompanying consolidated statements of operations as “Realized and unrealized gains, net.”
The fair value of the investments in real estate held by Easterly Funds is the amount that would be received to sell an asset, or
paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Real estate fund investments
for which observable market prices in active markets do not exist are reported at fair value, using a discounted cash flow analysis. The
amounts determined to be fair value, predominantly based on the fair value of the underlying real estate, incorporate our predecessor’s
own assumptions including appropriate risk adjustments, which involves a significant degree of judgment. The assumptions used in
determining fair value of the underlying real estate include capitalization rates, discount rates, rental rates and interest and inflation
rates, which are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit.
Further, the valuation models encompass a number of uncertainties. For example, a change in the fair value of the investments
resulting from a change in the residual capitalization rate may be partially offset by a change in the discount rate. Due to the absence
of readily determinable fair values and the inherent uncertainty of valuations, the estimated fair values may differ significantly from
values that would have been used had a ready market for the property existed, and the differences could be material.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair
values relevant to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our
indebtedness, which bears interest at both fixed and variable rates. We may manage our market risk on variable rate debt by entering
into swap arrangements to, in effect, fix the rate on all or a portion of the debt for varying periods up to maturity. This in turn, reduces
the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective
when undertaking such arrangements will be to reduce our floating rate exposure and we do not intend to enter into hedging
arrangements for speculative purposes.
As of December 31, 2015, $67.5 million, or 28.4% of our debt, excluding unamortized premiums and discounts, had fixed interest
rates and $170.1 million, or 71.6% had variable interest rates. If market rates of interest on our variable rate debt fluctuate by 25 basis
points, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows, by $0.4 million
annually.
Item 8. Financial Statements and Supplementary Data
This item is included in a separate section at the end of this report beginning on page F-1.
49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls
Evaluation of Disclosure Controls and Procedures
Our management carried out an evaluation required by the 1934 Act, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls
and procedures, as defined in Rule 13a -15(e) of the 1934 Act, as of December 31, 2015. Based on this evaluation our principal
executive officer and principal financial officer concluded that, as of December 31, 2015, our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the
1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to
provide reasonable assurance that such information is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Our management has assessed the effectiveness of our internal control over financial
reporting at December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013 Framework). Based on our
assessment we have concluded that, as of December 31, 2015, our internal control over financial reporting is effective based on those
criteria.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm because
we are an “emerging growth company” as defined in the JOBS Act and are therefore not currently required to comply with the auditor
attestation requirements related to internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended December 31, 2015 that materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable
assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and
procedures or our internal controls over financial reporting will prevent or detect all errors and fraud. Any control system, no matter
how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will
not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Item 9B. Other Information
None.
50
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 will be set forth in our Definitive Proxy Statement for our 2016 Annual Meeting of
Stockholders (which is scheduled to be held on May 5, 2016), to be filed pursuant to Regulation 14A under the Securities and
Exchange Act of 1934, as amended, or our Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by Item 11 will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 will be set forth in our Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 will be set forth in our Proxy Statement and is incorporated herein by reference.
51
Item 15. Exhibits and Financial Statement Schedules
1.
Financial Statements
PART IV
The financial statements listed in the accompanying index to financial statements beginning on page F-1 are filed as a part of
this report.
2.
Financial Statement Schedules
All schedules for which provision is made in Regulation S-X are either not required to be included herein under the related
instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and,
therefore, have been omitted.
3.
Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index on pages 54 and 55 of this report,
which is incorporated by reference herein.
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on March
2, 2016.
SIGNATURES
EASTERLY GOVERNMENT PROPERTIES, INC.
/s/ William C. Trimble, III
By:
Name: William C. Trimble, III
Title: Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ William C. Trimble, III
William C. Trimble, III
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date
March 2, 2016
March 2, 2016
/s/ Alison M. Bernard
Alison M. Bernard
/s/ Darrell W. Crate
Darrell W. Crate
/s/ Michael P. Ibe
Michael P. Ibe
/s/ William H. Binnie
William H. Binnie
/s/ Cynthia A. Fisher
Cynthia A. Fisher
/s/ Emil W. Henry, Jr.
Emil W. Henry, Jr.
/s/ James E. Mead
James E. Mead
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Chairman of the Board of Directors
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
March 2, 2016
Director, Vice Chairman of the Board of
Directors and Executive Vice President—Development
and Acquisitions
Director
Director
Director
Director
53
Exhibit
3.1
EXHIBIT INDEX
Exhibit Description
Amended and Restated Articles of Amendment and Restatement of Easterly Government Properties, Inc. (previously
filed as Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015
and incorporated herein by reference)
3.2
Amended and Restated Bylaws of Easterly Government Properties, Inc. (previously filed as Exhibit 3.2 to Amendment
No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by
reference)
4.1
Specimen Certificate of Common Stock of Easterly Government Properties, Inc. (previously filed as Exhibit 4.1 to
Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein
by reference)
10.1
Amended and Restated Limited Partnership Agreement of Easterly Government Properties LP (previously filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K on February 11, 2015 and incorporated herein by reference)
10.2
First Amendment to the Amended and Restated Agreement of Limited Partnership of Easterly Government Properties
LP, dated May 6, 2015 (previously filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q on August 6,
2015 and incorporated herein by reference)
10.3*
Second Amendment to the Amended and Restated Agreement of Limited Partnership of Easterly Government
Properties LP, dated February 26, 2016
10.4
Registration Rights Agreement among Easterly Government Properties, Inc. and the persons named therein, dated
January 26, 2015 (previously filed as Exhibit 10.2 to Amendment No. 2 to the Company’s Registration Statement on
Form S-11 on January 30, 2015 and incorporated herein by reference)
10.5†
2015 Equity Incentive Plan (previously filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K on
March 30, 2015 and incorporated herein by reference)
10.6†
Form of Indemnification Agreement between Easterly Government Properties, Inc. and each of its Directors and
Executive Officers (previously filed as Exhibit 10.4 to Amendment No. 2 to the Company’s Registration Statement on
Form S-11 on January 30, 2015 and incorporated herein by reference)
10.7
10.8
Contribution Agreement by and among Easterly Government Properties, Inc., Easterly Government Properties LP and
U.S. Government Properties Income & Growth Fund, LP, dated January 26, 2015 (previously filed as Exhibit 10.5 to
Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and incorporated herein
by reference)
Contribution Agreement by and among Easterly Government Properties, Inc., Easterly Government Properties LP and
USGP II Investor, LP, dated January 26, 2015 (previously filed as Exhibit 10.6 to Amendment No. 2 to the Company’s
Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
10.9
Contribution Agreement by and among Easterly Government Properties, Inc., Easterly Government Properties LP and
Easterly Capital, LLC, dated January 26, 2015 (previously filed as Exhibit 10.7 to Amendment No. 3 to the Company’s
Registration Statement on Form S-11 on February 4, 2015 and incorporated herein by reference)
10.10
Contribution Agreement by and among Easterly Government Properties, Inc., Easterly Government Properties LP and
Michael P. Ibe, Courthouse Management, Inc. and Western Devcon, Inc., dated January 26, 2015 (previously filed as
Exhibit 10.8 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and
incorporated herein by reference)
10.11
Form of Tax Protection Agreement by and among Easterly Government Properties, Inc., Easterly Government
Properties LP and Michael P. Ibe (previously filed as Exhibit 10.9 to Amendment No. 2 to the Company’s Registration
Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
10.12†
Employment Agreement by and among Easterly Government Properties Services LLC, Easterly Government Properties,
Inc., Easterly Government Properties LP and William C. Trimble, III, dated January 30, 2015 (previously filed as
Exhibit 10.10 to Amendment No. 2 to the Company’s Registration Statement on Form S-11 on January 30, 2015 and
incorporated herein by reference)
10.13
License Agreement between Easterly Government Properties, Inc. and Easterly Capital, LLC, dated January 26, 2015
54
Exhibit
10.14
(previously filed as Exhibit 10.11 to Amendment No. 3 to the Company’s Registration Statement on Form S-11 on
February 4, 2015 and incorporated herein by reference)
Exhibit Description
Credit Agreement among Easterly Government Properties LP, as Borrower, Easterly Government Properties, Inc., as
Parent Guarantor, and certain subsidiaries of Easterly Government Properties, Inc. from time to time party thereto, as
Guarantors, the initial lenders and the initial issuing banks named therein, Citibank, N.A., as Administrative Agent,
Raymond James Bank, N.A. and Royal Bank of Canada, as Co-Syndication Agents, and Citigroup Global Markets Inc.,
Raymond James Bank, N.A. and RBC Capital Markets, as Joint Lead Arrangers and Joint Book Running Manager,
dated February 11, 2015 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on February
11, 2015 and incorporated herein by reference)
10.15
Share Purchase Agreement by and among Easterly Government Properties, Inc. and the entities listed on Schedule I
thereto, dated January 26, 2015 (previously filed as Exhibit 10.13 to Amendment No. 2 to the Company’s Registration
Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
10.16
Registration Rights Agreement by and among Easterly Government Properties, Inc. and the entities party to the Share
Purchase Agreement, dated January 26, 2015 (previously filed as Exhibit 10.14 to Amendment No. 2 to the Company’s
Registration Statement on Form S-11 on January 30, 2015 and incorporated herein by reference)
10.17†
Director Nomination Agreement by and between Easterly Government Properties, Inc. and Michael P. Ibe, dated
January 26, 2015 (previously filed as Exhibit 10.15 to Amendment No. 2 to the Company’s Registration Statement on
Form S-11 on January 30, 2015 and incorporated herein by reference)
10.18†
Employment Agreement, by and among Easterly Government Properties Services LLC, Easterly Government Properties
LP, Easterly Government Properties, Inc., and Meghan G. Baivier, dated May 12, 2015 (previously filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K on May 13, 2015 and incorporated herein by reference)
10.19
Tax Protection Agreement among Easterly Government Properties LP, West Pleasanton Lab, LLC and Michael P. Ibe,
dated October 21, 2015 (previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q on
November 5, 2015 and incorporated herein by reference)
10.20
Registration Rights Agreement among Easterly Government Properties, Inc. and the persons named therein, dated
October 21, 2015 (previously filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q on November 5,
2015 and incorporated herein by reference)
21.1*
List of Subsidiaries of the Registrant
23.1*
Consent of PricewaterhouseCoopers LLP
31.1*
Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended
31.2*
Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended
32.1**
Certification of Chief Executive Officer and Chief Financial Officer Required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended
101*
The following materials from Easterly Government Properties, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Combined Consolidated
Balance Sheets, (ii) the Combined Consolidated Statements of Operations, (iii) the Combined Consolidated Statements
of Equity, (iv) the Combined Consolidated Statements of Cash Flows and (v) the related notes to these combined
consolidated financial statements
†
*
**
Exhibit is a management contract or compensatory plan or arrangement.
Filed herewith
Furnished herewith
55
INDEX TO FINANCIAL STATEMENTS
Easterly Government Properties, Inc.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Stockholders Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to the Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
Page
F-2
F-3
F-4
F-5
F-6
F-8
S-1
F-1
To the Board of Directors and Stockholders of Easterly Government Properties, Inc.:
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’
equity and of cash flows listed in the index appearing under Item 15(1) present fairly, in all material respects, the financial position of
Easterly Government Properties, Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(2) presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 2, 2016
F-2
Easterly Government Properties, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share amounts)
Assets
Real estate properties, net
Real estate investments, at fair value
Cash and cash equivalents
Restricted cash
Rents receivable
Accounts receivable
Deferred financing, net
Intangible assets, net
Prepaid expenses and other assets
Total assets
Liabilities
Revolving credit facility
Mortgage notes payable
Intangible liabilities, net
Accounts payable and accrued liabilities
Total liabilities
Commitments and contingencies (Note 9)
Equity
Common stock, par value $0.01, 200,000,000 and 100,000 shares authorized,
24,168,379 and 1,000 shares issued and outstanding at December 31, 2015 and
December 31, 2014, respectively
Additional paid-in capital
Retained (deficit)
Cumulative dividends
Total stockholders' equity
Members' capital
Non-controlling interest
Non-controlling interest in operating partnership
Total equity
Total liabilities and equity
December 31, 2015
December 31, 2014
$
$
$
772,007 $
—
8,176
1,736
6,347
2,920
2,767
116,585
1,509
912,047 $
154,417
83,785
44,605
9,346
292,153
241
391,767
(1,694 )
(13,051 )
377,263
—
—
242,631
619,894
912,047 $
—
267,683
31,437
—
—
—
—
—
1,385
300,505
—
—
—
3,321
3,321
—
1
—
—
1
13,336
283,847
—
297,184
300,505
The accompanying notes are an integral part of these consolidated financial statements.
F-3
$
Easterly Government Properties, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Revenues
Rental income
Tenant reimbursements
Other income
Income from real estate investments
Total revenues
Operating expenses
Property operating
Real estate taxes
Depreciation and amortization
Acquisition costs
Formation expenses
Corporate general and administrative
Fund general and administrative
Total expenses
Operating income
Other (expenses) / income
Interest expense, net
Net realized gain (loss) on investments
Net unrealized gain (loss) on investments
Net income (loss)
Non-controlling interest in predecessor
Non-controlling interest in operating partnership
Net income (loss) available to Easterly Government Properties, Inc.
Net income (loss) available to Easterly Government Properties, Inc.
per share:
Basic
Diluted
Weighted- average common shares outstanding
$
$
$
Basic
Diluted
For the year ended December 31,
2014
2013
2015
64,942 $
6,233
203
—
71,378
13,340
6,983
33,561
2,887
1,666
8,817
75
67,329
4,049
(4,972)
—
(5,122)
(6,045)
—
4,351
(1,694) $
(0.08)
(0.08)
21,430,016
21,430,016
— $
—
—
6,324
6,324
—
—
—
—
—
9,117
819
9,936
(3,612)
—
40
71,357
67,785
(65,389)
—
2,396 $
—
—
—
—
—
—
—
4,006
4,006
—
—
—
—
—
4,281
1,299
5,580
(1,574)
—
—
27,641
26,067
(30,381)
—
(4,314)
—
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Easterly Government Properties, Inc.
Consolidated Statements of Stockholders Equity
(Amounts in thousands, except share amounts)
Balance at, December 31, 2012
Contributions from members/
partners
Distributions to members/
partners
Dividend on preferred stock
Members’ capital
Carried interest
Net increase in capital resulting
from operations
Balance at, December 31, 2013
Contributions from members/
partners
Distributions to members/
partners
Dividend on preferred stock
Members’ capital
Carried interest
Purchase of common stock
Net increase in capital resulting
from operations
Balance at December 31, 2014
Distributions
Exchange of members' capital
and non-controlling interests
for OP units and shares
Public Offering
Proceeds of private placement
Contribution of Western Devcon
Properties for OP units
Stock based compensation
Grant of unvested restricted
stock
Buyback of common stock and
retirement
Dividends and distributions paid
Net loss
Allocation of NCI in Operating
Partnership
Balance at December 31, 2015
Common
Shares
Par
Value
$ — $
Additional
Paid-in
Capital
Retained
(deficit)
— $ — $
Distributions in
Excess of
Earnings
— $
Shares
Non-
controlling
Interest in
Operating
Partnership
Member
Capital /
(Deficit)
Non-
controlling
Interests
Total
Equity
— $ (2,006 ) $ 105,434 $103,428
—
— —
—
—
217
54,954 55,171
—
—
—
—
— —
— —
— —
— —
—
—
— —
— —
—
—
—
—
—
—
(7 )
—
—
—
—
917
— 3,349
(8,876)
(16)
—
(3,349)
(8,883)
(16)
917
—
30,381 26,067
— (4,314 )
— (1,844 ) 178,528 176,684
—
— —
—
—
105
65,142 65,247
—
—
—
—
1,000 —
—
1,000 —
—
— —
— —
— —
— —
1 —
— —
1 —
— —
—
—
—
—
—
—
—
—
(28 )
—
—
—
— 2,133
— 10,574
—
—
(14,607) (14,635)
(31)
2,133
—
1
(31)
—
(10,574)
—
— 2,396
65,389 67,785
— 13,336 283,847 297,184
(5,441)
—
(5,432)
(9 )
3,308,000
13,800,000
7,033,712
33 67,312 —
138 191,445 —
70 105,435 —
— 194,530 (12,738 ) (249,137)
—
—
—
— 191,583
(29,278) 75,638
—
(589 )
—
—
—
—
— —
292 —
—
—
86,597
1,575
—
—
— 86,597
1,867
—
26,667 —
— —
—
—
—
—
—
(1,000 ) —
—
—
(1) —
— —
— (1,694)
—
(13,051)
—
—
(8,437 )
(4,351 )
—
—
—
—
(1)
— (21,488)
(6,045)
—
24,168,379 $
— 27,283 —
241 $391,767 $ (1,694) $
—
—
(27,283 )
(13,051) $ 242,631 $ — $
—
—
— $619,894
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Easterly Government Properties, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities
For the year ended December 31,
2014
2013
2015
$
(6,045) $
67,785 $
26,067
Depreciation and amortization
Straight line rent
Amortization of above- / below-market leases
Amortization of loan premium / discount
Amortization of deferred financing costs
Purchase of investments
Deposits for potential new investments
Contributions to investments
Distributions from investments
Net realized gain on investments
Net unrealized (gain) loss on investments
Other
Net change in:
Rents receivable
Accounts receivable
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities
Real estate acquisitions and deposits
Cash assumed in formation
Additions to real estate property
Restricted cash
Net cash (used in) investing activities
Cash flows from financing activities
Payment of deferred financing costs
Issuance of common shares
Repurchase of initial shares
Proceeds from private placement
Credit facility draws, net
Borrowings on mortgage payable
Repayments of mortgage payable
Debt payoff
Dividends and distributions paid
Contributions
Distributions
Payment of offering costs
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
F-6
33,561
(220)
(4,866)
(81)
756
—
—
(257)
—
—
5,122
1,867
(4,868)
(331)
(779)
6,091
29,950
(170,188)
6,187
(453)
(98)
(164,552)
(3,523)
193,545
(1)
75,638
154,417
15,700
(2,163)
(293,381)
(21,488)
—
(5,441)
(1,962)
111,341
(23,261)
31,437
8,176 $
—
—
—
—
—
(30,316)
668
(508)
7,637
(40)
(71,357)
1,768
—
—
630
1,337
(22,396)
—
—
—
—
—
(24)
1
—
—
—
—
—
—
65,247
(14,301)
(453)
50,470
28,074
3,363
31,437 $
—
—
—
—
—
(46,918)
(668)
(1,197)
5,410
—
(27,641)
—
—
—
(374)
775
(44,546)
—
—
—
—
—
—
—
—
—
—
—
—
—
55,171
(7,982)
—
47,189
2,643
720
3,363
Easterly Government Properties, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Supplemental disclosure of cash flow information is as follows (amounts in thousands):
Cash paid for interest
Supplemental disclosure of non - cash information
Additions to real estate property
Deferred offering accrued, not paid
Deferred financing accrued, not paid
Easterly properties, debt and net assets contributed for shares and
common units
Western Devcon properties and debt contributed for common units
$
$
For the year ended December 31,
2014
2013
2015
4,051 $
— $
26 $
—
—
260,687
86,597
— $
676
90
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Easterly Government Properties, Inc.
Notes to the Consolidated Financial Statements
1. Organization and Basis of Presentation
Easterly Government Properties, Inc. (which may be referred to in these financial statements as the “Company,” “we,” “us,” or
“our”) is a Maryland corporation that intends to qualify as a real estate investment trust (a “REIT”) under the Internal Revenue Code
(the “Code”) commencing with its taxable period ended December 31, 2015. The operations of the Company are carried on primarily
through Easterly Government Properties LP (the “Operating Partnership”) and the wholly owned subsidiaries of the Operating
Partnership.
We are an internally managed 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 through the U.S. General Services Administration (the “GSA”). Our objective is to
generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.
As of December 31, 2015, we wholly owned 36 properties in the United States, including 33 properties that were leased
primarily to U.S. Government tenant agencies and three properties that were entirely leased to private tenants, encompassing
approximately 2.6 million square feet in the aggregate. We focus on acquiring, developing, and managing GSA-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 GSA to meet the needs and objectives of the tenant agency.
We were incorporated in Maryland as a corporation on October 9, 2014 and did not have any meaningful operations until the
completion of the formation transactions and our initial public offering on February 11, 2015 (the “IPO”).
On February 11, 2015, we completed an initial public offering of 13.8 million shares of our common stock at a price to the
public of $15.00 per share, including 1.8 million shares sold in connection with the full exercise of the option to purchase additional
shares granted to the underwriters, resulting in gross proceeds of $207.0 million. The aggregate net proceeds to the Company after
deducting underwriting discounts and commissions and offering expenses payable by the Company, was approximately $191.6
million. The Company contributed the net proceeds from the IPO to the Operating Partnership in exchange for common units
representing limited partnership interests in the Operating Partnership (“common units”).
In connection with the IPO, we engaged in certain formation transactions (the “formation transactions”) pursuant to which the
Operating Partnership acquired (i) 15 properties previously owned by the Easterly Funds (as defined below) in exchange for 3,308,000
shares of common stock and 8,635,714 common units (ii) 14 properties previously owned by Western Devcon, Inc., a private real
estate company and a series of related entities beneficially owned by Michael P. Ibe (collectively, “Western Devcon”), in exchange for
5,759,819 common units and (iii) all of the ownership interests in the management entities (as defined below) in exchange for
1,135,406 common units.
Concurrent with the IPO, the Company sold an aggregate of 7,033,712 shares of its common stock to the Easterly Funds in a
private placement at a price per share of $15.00 without payment of any underwriting fees, discounts or commissions.
Our Operating Partnership used the net proceeds received from the offering, private placement and a portion of the borrowings
under the senior unsecured revolving credit facility to repay approximately $293.4 million in outstanding indebtedness including
applicable repayment costs, defeasance costs, settlement of interest rate swap liabilities and other costs and fees associated with such
repayments.
Our predecessor (the “Predecessor”) means Easterly Partners, LLC and its consolidated subsidiaries, including (i) all entities or
interests in U.S. Government Properties Income and Growth Fund L.P., U.S. Government Properties Income and Growth Fund REIT,
Inc. and the related feeder and subsidiary entities (collectively, “Easterly Fund I,”) (ii) all entities or interests in U.S. Government
Properties Income and Growth Fund II, LP, USGP II REIT LP, USGP II (Parallel) Fund, LP and their related feeders and subsidiary
entities (collectively, “Easterly Fund II” and, together with Easterly Fund I, the “Easterly Funds”) and (iii) the entities that managed
the Easterly Funds, (the “management entities”).
All of the Company’s assets and its operations are primarily conducted through the Operating Partnership. The Company is the
sole general partner of the Operating Partnership. The Company owned 60.9% of the Operating Partnership’s common units at
December 31, 2015 and the remaining 39.1% was owned by the Easterly Funds and certain members of management. We 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.
F-8
Principle of Combination and Consolidation
The accompanying consolidated financial statements are presented on the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company,
including Easterly Government Properties TRS, LLC and Easterly Government Services, LLC, and the Operating Partnership. All
significant intercompany balances and transactions have been eliminated in consolidation.
Upon completion of the IPO and the related formation transactions, the Company succeeded to the operations of the
Predecessor. Prior to the IPO, the Predecessor was under the control of Darrell W. Crate, the Chairman of our board of directors.
These financial statements reflect the consolidated equity ownership structure of the Company as if the IPO and formation
transactions related to the Easterly Funds and management entities had been completed as of January 1, 2014. The formation
transactions related to the Easterly Funds and the management entities were accounted for at carryover basis due to the existence of
common control.
Prior to the IPO, the Easterly Funds, as controlled by the Predecessor, qualified as investment companies pursuant to ASC 946
Financial Services – Investment Companies and, as a result, the Predecessor’s consolidated financial statements accounted for the
Easterly Funds using specialized investment company accounting based on fair value. Subsequent to the IPO, as the properties
contributed to us from the Easterly Funds are no longer held by funds that qualify for investment company accounting, we made a
shift, in accordance with GAAP, to account for the properties contributed by the Easterly Funds using historical cost accounting
instead of investment company accounting, resulting in a significant change in the presentation of our consolidated financial
statements following the formation transactions. The contribution of the Western Devcon properties in the formation transactions has
been accounted for as a business combination using the acquisition method of accounting and recognized at the estimated fair value of
acquired assets and assumed liabilities on the date of such contribution.
Due to the timing of the IPO and the formation transactions, the Company’s financial condition as of December 31, 2014
reflects the financial condition of the Company and the Predecessor and the results of operations for the year ended December 31,
2014 and 2013 reflect the financial condition and results of operations of the Predecessor. The Company’s financial condition as of
December 31, 2015 and results of operations for the year ended December 31, 2015 reflect the financial condition and results of
operations of the Predecessor combined with the Company for the period prior to February 11, 2015, and the Company’s consolidated
results for the period from February 11, 2015 through December 31, 2015.
2. Summary of Significant Accounting Policies
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheet and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In light of the significant differences that exist between our basis of accounting subsequent to the IPO (historical cost
accounting) and the pre-IPO basis of accounting (investment company accounting), we present the significant accounting policies for
both periods below.
a) Significant Accounting Policies for the Company post-IPO
Real Estate Properties
Real estate properties comprise all tangible assets we hold for rent. Real property is recognized at cost less accumulated
depreciation. Betterments, major renovations and certain costs directly related to the improvement of real properties are capitalized.
Maintenance and repair expenses are charged to expense as incurred.
F-9
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 rental 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. The allocation to different
components affects the following:
the amount of the purchase price allocated among different categories of assets and liabilities on our consolidated balance
sheets; and the amount of costs assigned to individual properties in multiple property acquisitions;
where the amortization of the components appear over time in our consolidated statements of operations. Allocations to
above- and below-market leases are amortized into rental revenue, whereas allocations to most of the other tangible and
intangible assets are amortized into depreciation and amortization expense. As a REIT, this is important to us since much
of the investment community evaluates our operating performance using non-GAAP measures such as funds from
operations, the computation of which includes rental revenue but does not include depreciation and amortization expense;
and
the timing over which the items are recognized as revenue or expense in our consolidated statements of operations. For
example, for allocations to the as-if vacant value, the land portion is not depreciated and the building portion is
depreciated over a longer period of time than the other components (generally 40 years). Allocations to above- and below-
market leases and in-place lease value are amortized over significantly shorter timeframes, and if individual tenants’
leases are terminated early, any unamortized amounts remaining associated with those tenants are written off upon
termination. These differences in timing can materially affect our reported results of operations.
Tenant improvements are capitalized in real property when we own the improvement. When we are required to provide
improvements under the terms of a lease, we need to determine whether the improvements constitute landlord assets or tenant assets.
If the improvements are considered landlord assets, we capitalize the cost of the improvements and recognize depreciation expense
associated with such improvements over the shorter of the useful life of the assets or the term of the lease and recognize any payments
from the tenant as rental revenue over the term of the lease. If the improvements are considered tenant assets, we defer the cost of
improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease. Our
determination of whether improvements are landlord assets or tenant assets also may affect when we commence revenue recognition
in connection with a lease. In determining whether improvements constitute landlord or tenant assets, we consider numerous factors
that may require subjective or complex judgments, including: whether the improvements are unique to the tenant or reusable by other
tenants; whether the tenant is permitted to alter or remove the improvements without our consent or without compensating us for any
lost fair value; whether the ownership of the improvements remains with us or remains with the tenant at the end of the lease term; and
whether the economic substance of the lease terms is properly reflected.
Depreciation of an asset begins when it is available for use and is calculated using the straight-line method over the estimated
useful lives. Each period, depreciation is charged to expense and credited to the related accumulated depreciation account. A used
asset acquired is depreciated over its estimated remaining useful life, not to exceed the life of a new asset. Range of useful lives for
depreciable assets are as follows:
Category
Buildings
Building improvements
Tenant improvements
Furniture and equipment
Term
40 years
5 - 40 years
Shorter of remaining life of the lease or useful life
3 - 7 years
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 if an impairment loss should be recognized. We determine the amount of any impairment loss
by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial
performance and projected discounted cash flows using standard industry valuation techniques. 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.
F-10
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature three months or less from when they are
purchased. Cash equivalents are reported at cost, which approximates fair value. We maintain our cash in bank accounts in amounts
that may exceed federally insured limits at times. We have not experienced any losses in these accounts and believe that we are not
exposed to significant credit risk because our accounts are deposited with major financial institutions.
Restricted Cash
Restricted cash consists of amounts escrowed for future real estate taxes, insurance, capital expenditures and debt service, as
required by certain of our mortgage debt agreements.
Deferred Financing Costs
Deferred financing fees include issuance costs related to borrowings and we amortize those costs over the terms of the related
indebtedness. Any unamortized amounts upon early repayment of mortgage notes payable are written off in the period in which
repayment occurs. Fully amortized deferred financing fees are removed from the books upon maturity or repayment of the underlying
debt. As of December 31, 2015, we recognized $3.4 million in deferred financing costs associated with entering into a $400.0 million
senior unsecured revolving credit facility upon completion of the IPO and $0.1 million in deferred financing costs associated with
entering into a $15.7 million mortgage loan upon acquisition of DEA - Pleasanton. Additionally, for the year ended December 31,
2015 we recognized $0.8 million in accumulated amortization of these deferred financing costs.
Non-Controlling Interests
Non-controlling interests relate to the common units of the Operating Partnership not owned by the Company. Common units
are owned by the limited partners who contributed properties and other assets to the Operating Partnership in exchange for common
units. The Company contributed the net proceeds from the IPO to the Operating Partnership in exchange for common units. Fifteen
months after the IPO, limited partners of the Operating Partnership, other than the Company, will have the right to require the
Operating Partnership to redeem part or all of their common units for cash, based upon the value of an equivalent number of shares of
the Company’s common stock at the time of the election to redeem, or, at the Company’s election, shares of the Company’s common
stock on a one-for-one basis. Unitholders receive a distribution per unit equivalent to the dividend per share of the Company’s
common stock. Pursuant to the consolidation accounting standard with respect to the accounting and reporting for non-controlling
interest changes and changes in ownership interest of a subsidiary, changes in parent’s ownership interest when the parent retains
controlling interest in the subsidiary should be accounted for as equity transactions. The carrying amount of the non-controlling
interest shall be adjusted to reflect the change in its ownership interest in the subsidiary, with the offset to equity attributable to the
Company.
Revenue Recognition
Rental income includes base rents paid by each tenant in accordance with its lease agreement conditions. We recognize rental
income on a straight-line basis over the lease term of the respective leases. For acquisitions of existing buildings, we recognize rental
income from leases already in place coincident with the date of property closing. Lease incentives are recorded as a deferred asset and
amortized as a reduction of revenue on a straight-line basis over the respective lease term. Tenant reimbursement income (scheduled
rent increases based on increases in real estate taxes, operating expenses and utility usage) is recognized by us in the consolidated
statements of operations when earned and when their amounts can be reasonably estimated. Above- and below-market leases are
amortized into rental income over the terms of the respective leases.
Income Taxes
We intend to elect to be taxed as a REIT and operate in a manner that we believe allows us to qualify as a REIT for federal
income tax purposes commencing with our taxable year ended December 31, 2015. So long as we qualify as a REIT, we generally will
not be subject to U.S. federal income tax on our net income that we distribute to our stockholders. To maintain our qualification as a
REIT, we are required under the Code to distribute at least 90% of our REIT taxable income (without regard to the deduction for
dividends paid and excluding net capital gains) to our stockholders and meet certain other requirements. If we fail to qualify as a REIT
in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate rates. Even if we qualify
as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property, and on taxable income that we
do not distribute to our stockholders. In addition, we may provide services that are not customarily provided by a landlord, hold
properties for sale and engage in other activities (such as a management business) through Taxable REIT Subsidiaries (“TRSs”) and
F-11
the income of those subsidiaries will be subject to U.S. federal income tax at regular corporate rates. For the year ended December 31,
2015, we did not incur any material tax liability associated with any of the above.
We do not anticipate any potential expense related to uncertain tax positions as we closely monitor our REIT compliance, do not
have any prohibited transactions related to property sales, and neither the states in which we operate nor our foreign investors subject
us to withholding tax requirements.
The following table reconciles GAAP net income to taxable income:
Net income (loss)
Book depreciation and amortization
Above/Below market lease amortization
Book/Tax differences on offering and acquisition costs at IPO
Book/Tax differences on unearned rent
Book/Tax differences on stock based compensation
Book/Tax differences on post IPO property acquisition costs
Other book/tax differences, net
Tax depreciation
Loss attributable to non-controlling interest
Loss attributable to predecessor
Taxable income subject to distribution requirements (1)
$
$
For the Year Ended
December 31, 2015
(6,045)
33,483
(4,866)
2,928
2,138
1,867
856
(434)
(16,451)
(7,956)
5,581
11,101
(1) The Company’s distributions are characterized as 85.06% ordinary taxable dividend and $14.94% return of capital.
Stock Based Compensation
Prior to the completion of the IPO, our board of directors adopted, and our sole stockholder approved, our 2015 Equity Incentive
Plan, under which we may grant future cash and equity incentive awards to our executive officers, non-employee directors and eligible
employees. See Note 6 (Equity) for further information. The shares issued to officers, employees, and non-employee directors vest
over a period of time as determined by our board of directors at the date of grant. The Company recognizes compensation expense for
non-vested shares granted to officers, employees and non-employee directors on a straight-line basis over the requisite service and/or
performance period based upon the fair market value of the shares on the date of grant, as adjusted for forfeitures.
On May 6, 2015, our board of directors approved the issuance of 891,000 LTIP units to members of our management team
under our 2015 Equity Incentive Plan. Earned awards (if any) will vest 50% on February 15, 2018 and 50% on February 6, 2019,
subject to our achieving certain absolute and relative total shareholder returns and management’s continued employment. Vesting will
be accelerated in the event of a change in control, termination of employment by us without cause, or termination of employment by
the award recipient for good reason, death, disability or retirement. If there is a change of control prior to February 15, 2018, earned
awards will be calculated based on total shareholder return performance up to the date of the change of control. The LTIP unit awards
(i) are subject to forfeiture to the extent awards are not earned and (ii) prior to the performance measurement date are only entitled to
one-tenth (10%) of the regular quarterly distributions payable on common units. We measure the LTIP unit awards at the fair value
on date of grant. The Company recognizes compensation expense for non-vested units granted to members of our management team,
by tranche, on a straight-line basis over the requisite service and/or performance period based upon the fair market value of the units
on the date of grant, as adjusted for forfeitures.
Earnings Per Share of Common Stock Amount
Basic earnings per share is calculated by dividing net income available to Easterly Government Properties Inc. by the weighted-
average number of shares of common stock outstanding during the period, excluding the weighted average number of unvested
restricted shares. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares of
common stock outstanding during the period plus other potentially dilutive securities such as stock grants or shares that would be
issued in the event that common units of the Operating Partnership are redeemed for shares of common stock of the
Company. Unvested restricted shares and LTIP units are considered participating securities which require the use of the two-class
method for the computation of basic and diluted earnings per share.
F-12
Deferred Offering Costs
The Company capitalizes certain legal, accounting and other third party fees that are directly associated with in-process equity
financings as other assets until such financings are consummated. After consummation of the equity financing, these costs are
recorded as a reduction to capital. Should the equity financing no longer be considered probable of being consummated, the deferred
offering costs would be expensed immediately as a charge to corporate general and administrative expenses in the accompanying
combined statement of operations.
Segments
The Company manages its operations as a single segment for the purposes of assessing performance and making operating
decisions. All revenue has been generated in the United States and all tangible assets are held in the United States.
Application of new accounting standards
In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-16, Simplifying the Accounting for
Measurement Period Adjustments (Topic 805). ASU 2015-16 addresses provisional amounts for items in a business combination for
which the accounting is incomplete by the end of the reporting period. The guidance requires that an acquirer recognize adjustments to
provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are
determined, calculated as if the accounting had been completed as of the acquisition date and the amounts disclosed either on the face
of the financial statements or the notes. This guidance is to be applied prospectively and is effective for fiscal years beginning after
December 15, 2015.
In April 2015, FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires that all
costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The
amortization of these costs will remain under the interest method and will continue to be reported as interest expense. In August of
2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-
Credit Arrangements (Subtopic 835-30), which clarified the presentation of debt issuance costs related to credit facility arrangements,
given the absence of authoritative guidance within ASU 2015-03. Under ASU 2015-15, debt issuance costs paid to third parties other
than the lender related to credit facilities may be presented in the balance sheet as an asset, regardless of whether there are any
outstanding borrowings on the credit facility. The guidance is effective for public companies for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been
previously issued. The new guidance will be applied on a retrospective basis. As the guidance is effective for fiscal year, beginning
after December 15, 2015, the Company will implement this guidance, retrospectively, for fiscal years beginning after December 15,
2015. The Company incurred total debt issuance costs of $3.5 million for the year ended December 31, 2015, primarily associated
with entering into a $400.0 million unsecured revolving credit facility.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The guidance modifies the
analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The guidance does
not change the general order in which the consolidation models are applied. A reporting entity that holds an economic interest in, or is
otherwise involved with, another legal entity first determines if the variable interest entity model applies, and if so, whether it holds a
controlling financial interest under that model. If the entity being evaluated for consolidation is not a variable interest entity, then the
voting model should be applied to determine whether the entity should be consolidated by the reporting entity. Key changes to the
guidance include, though are not limited to; (i.) limiting the extent to which related party interests are included in the other economic
interest criterion to the decision maker’s effective interest holding, (ii.) requiring limited partners of a limited partnership, or the
members of a limited liability company that is similar to a limited partnership, to have, at minimum, kick-out or participating rights to
demonstrate that the partnership is a voting entity, (iii.) changing the evaluation of whether the equity holders at risk lack decision
making rights when decision making is outsourced and (iv.) changing how the economics test is performed. The guidance does not
amend the existing disclosure requirements for variable interest entities or voting model entities. The guidance is effective for public
companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is
permitted. This standard will not have a significant impact.
b) Significant Accounting Policies of the Company pre-IPO
Real Estate Investments
Real estate investments represent investments in real estate entities that own real estate assets and are stated at the fair value of
the net equity interest in the real estate investments as discussed below. Subsequent changes in fair value are recorded as unrealized
gains or losses. Upon the disposition of a real estate investment, realized gains and losses are determined by deducting the proceeds
received by the Predecessor from the basis of the real estate investment; any previously unrealized gains and losses are reversed.
F-13
Distributions from real estate entities are recorded as dividend income when received to the extent distributed from the
estimated taxable earnings and profits of the underlying investment vehicle and as a return of capital to the extent not in excess of that
amount.
Under investment company accounting, the statements of operations reflect the change in fair value of the real estate
investments of the Easterly Funds, prior to the IPO, whether realized or unrealized.
Fair Value of Investments
The fair value of the real estate investments is determined using a fair value hierarchy. The fair value hierarchy is based on the
observability of inputs used to measure fair value and requires additional disclosure regarding the fair value measurements. Fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
marketplace participants at the measurement date (exit price). The fair value of an asset or a liability disregards transaction costs and
assumes the asset or liability’s highest and best use. As the investments are in entities that invest in real estate, the estimated values are
based on the underlying assets, liabilities, and cash flows of the related properties. The three levels of the fair value hierarchy are
described below:
Level 1 Valuation is based upon quoted prices for identical assets or liabilities in an active market.
Level 2 Valuation is based upon observable inputs:
a) Quoted prices for similar assets or liabilities in active markets,
b) Quoted prices for identical or similar assets or liabilities in not active markets, or
c) Model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuation is based upon prices or valuation techniques that require assumptions not observable in the market
which are significant to the overall fair value measurement. These unobservable inputs reflect the Predecessor’s
own estimates about the assumptions that market participants would use in pricing the asset or liability
(including assumptions about risk). Valuation techniques include the use of discounted cash flow models, and
similar techniques.
Non-Controlling Interest
The Company addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than
the parent, the amount of consolidated capital resulting from operations attributable to the parent and to the non-controlling interest,
the changes in a parent’s ownership interest, and the valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated in accordance with ASC 810 “Consolidation”.
Prior to the IPO, all of the partners invested in the Easterly Funds represented a non-controlling interest. In addition, prior to the
IPO, a third-party member had invested in Federal Properties, GP, LLC, an entity included within the Predecessor, which also
represented a non-controlling interest.
3. Real Estate and Intangibles
Formation transactions
The contribution of the investments of the Easterly Funds to the Operating Partnership pursuant to the formation transactions is
accounted for as transactions among entities under common control. As a result, the fair value of the real estate investments at the time
of the formation transactions was deemed the initial cost. Such fair value was allocated to the underlying real estate properties, related
intangible assets and liabilities and mortgage debt ascribed to the properties. Refer to Note 5 (Fair Value Measurements) for additional
discussion on fair value. Prior to the IPO on February 11, 2015, the Easterly Funds qualified as investment companies pursuant to ASC
946 Financial Services – Investment Companies and, as a result, the Predecessor’s consolidated financial statements accounted for the
Easterly Funds using investment company accounting based on fair value. Subsequent to the IPO, as the properties contributed to us
from the Easterly Funds are no longer held by funds that qualify for investment company accounting, we made a shift, in accordance
with GAAP to account for the properties contributed by the Easterly Funds using historical cost accounting instead of investment
company accounting, resulting in a significant change in the presentation of our consolidated financial statements following the
formation transactions.
F-14
As part of the formation transactions, Western Devcon, a private real estate company and a series of related entities beneficially
owned by Michael P. Ibe, entered into a contribution agreement with us and the Operating Partnership pursuant to which it contributed
its 100% equity interest in each of 14 properties to the Operating Partnership upon completion of the IPO. In exchange for its
contribution, Western Devcon received 5,759,819 common units in the Operating Partnership valued at the time of the IPO at $86.4
million. This contribution has been accounted for as a business combination using purchase accounting. The total estimated purchase
price, equal to the aggregate value of the Operating Partnership’s common units plus the estimated fair value of debt assumed, was
allocated to the net tangible assets and intangible assets based on their estimated fair values as of the completion of the acquisition of
the Western Devcon properties.
As part of the formation transactions, we acquired the following properties, as set forth in the table below:
Property
Location
Property Type
Rentable Square Feet
Easterly Portfolio
IRS - Fresno
PTO- Arlington
FBI - San Antonio
FBI - Omaha
ICE - Charleston
DOT - Lakewood
USFS II - Albuquerque
USFS I - Albuquerque
AOC - Del Rio
DEA - Dallas
DEA - Albany
FBI - Little Rock
CBP - Sunburst
USCG - Martinsburg
MEPCOM - Jacksonville
Western Devcon
CBP - Savannah
AOC - El Centro
DEA - Vista
DEA - Santa Ana
CBP - Chula Vista
DEA - North Highlands
DEA - Otay
DEA - Riverside
SSA - Mission Viejo
SSA - San Diego
DEA - San Diego
2650 SW 145th Avenue - Parbel of Florida
5998 Osceola Court - United Technologies
501 East Hunter Street - Lummus Corporation
Fresno, CA
Arlington, VA
San Antonio, TX
Omaha, NE
North Charleston, SC
Lakewood, CO
Albuquerque, NM
Albuquerque, NM
Del Rio, TX
Dallas, TX
Albany, NY
Little Rock, AR
Sunburst, MT
Martinsburg, WV
Jacksonville, FL
Savannah, GA
El Centro, CA
Vista, CA
Santa Ana, CA
Chula Vista, CA
Sacramento, CA
San Diego, CA
Riverside, CA
Mission Viejo, CA
San Diego, CA
San Diego, CA
Miramar, FL
Midland, GA
Lubbock, TX
Office
Office
Office
Office
Office
Office
Office
Office
Courthouse/Office
Office
Office
Office
Office
Office
Office
Total
Laboratory
Courthouse/Office
Laboratory
Office
Office
Office
Office
Office
Office
Office
Warehouse
Warehouse/Distribution
Warehouse/Manufacturing
Warehouse/Distribution
Total
180,481
189,871
148,584
112,196
86,733
122,225
98,720
92,455
89,880
71,827
31,976
101,977
33,000
59,547
30,000
1,449,472
35,000
46,813
54,119
39,905
59,397
37,975
32,560
34,354
11,590
11,743
16,100
81,721
105,641
70,078
636,996
F-15
The fair values of the assets acquired and liabilities assumed upon completion of the formation transactions are as follows
(dollars in thousands):
Real estate
Land
Building
Acquired tenant improvements
Total real estate
Intangible assets
In-place leases
Acquired leasing commissions
Above-market leases
Total intangible assets
Intangible liabilities
Below-market leases
Total intangible liabilities
Debt assumed/ repaid in formation transaction
Net current assets transferred
Net assets acquired
Easterly Portfolio Western Devcon, Inc.
Total
$
$
43,681 $
411,472
27,441
482,594
61,218
11,257
2,644
75,119
(34,383)
(34,383)
(271,622)
8,979
260,687 $
35,573 $
107,424
4,388
147,385
79,254
518,896
31,829
629,979
21,308
4,350
7,763
33,421
82,526
15,607
10,407
108,540
(2,322 )
(2,322 )
(92,087 )
—
86,397 $
(36,705)
(36,705)
(363,709)
8,979
347,084
Post Formation Acquisition Activities
For the period from February 11, 2015 to December 31, 2015, we acquired seven properties, DOE – Lakewood, AOC –
Aberdeen, ICE – Otay, DEA – Pleasanton, USCIS – Lincoln, DEA – Dallas Lab and FBI – Richmond for an aggregate purchase price
of $170.9 million. We allocated the purchase prices of these acquisitions based on the estimated fair values of the acquired assets and
assumed liabilities as follows:
Real estate
Land
Building
Acquired tenant improvements
Total real estate
Intangible assets
In-place leases
Acquired leasing commissions
Above-market leases
Total intangible assets
Intangible liabilities
Below-market leases
Total intangible liabilities
Prepaid expenses and other assets
Contingent consideration
Purchase price
Total
$
$
18,645
136,456
3,037
158,138
21,393
4,628
224
26,245
(13,995 )
(13,995 )
518
170,906
We did not assume any debt upon acquisition of the seven properties. The fair value of the assets acquired and liabilities
assumed in 2015 are preliminary as we continue to finalize their acquisition date fair value determination.
On October 21, 2015, the Company acquired a 42,480 square foot Drug Enforcement Administration regional laboratory in
Pleasanton, CA that was built in 2015 and is leased to the GSA for a 20-year term. The property was acquired from an entity indirectly
owned by Michael P. Ibe, a director and the Company’s Executive Vice President—Development and Acquisitions.
The intangible assets and liabilities have an aggregate weighted average amortization period of 7.34 years as of December 31,
2015.
F-16
For the period of February 11, 2015 to December 31, 2015, we included $71.4 million of revenues and $15.3 million of net
income in our consolidated statement of operations related to the properties contributed or acquired. During year ended December 31,
2015, we incurred $2.9 million of acquisition-related costs associated with the contribution of Western Devcon assets and the
acquisition of DOE – Lakewood, AOC – Aberdeen, ICE – Otay, DEA – Pleasanton, USCIS – Lincoln, DEA – Dallas Lab and FBI –
Richmond and $1.7 million in formation expenses, which include costs associated with the contribution of the investments of the
Easterly Funds.
Pro Forma Financial Information
The unaudited pro forma financial information set forth below presents results for the year ended December 31, 2015 and 2014
as if the formation transactions and the acquisitions of DOE – Lakewood, AOC – Aberdeen, ICE – Otay, DEA – Pleasanton, USCIS –
Lincoln, DEA – Dallas Lab and FBI – Richmond had occurred on January 1, 2014. The pro forma information is not necessarily
indicative of the results that actually would have occurred nor does it intend to indicate future operating results (dollars in thousands):
Proforma (unaudited)
Total rental revenue
Net income (loss) (1)
For the year ended December 31,
2015
2014
$
93,202 $
6,631
93,202
2,078
(1) The net income for the year ended December 31, 2015 excludes $4.6 million of property acquisition and formation costs
incurred in the year ended December 31, 2015. Additionally, the net income for the year ended December 31, 2014 was adjusted
to include these acquisition and formation costs.
Real estate and intangibles consisted of the following as of December 31, 2015 (dollars in thousands):
Real estate
Land
Building
Acquired tenant improvements
Accumulated amortization
Total Real Estate
Intangible assets
In-place leases
Acquired leasing commissions
Above market leases
Accumulated amortization
Total Intangible assets
Intangible liabilities
Below market leases
Accumulated amortization
Total Intangible liabilities
Total
97,899
655,832
34,866
(16,590 )
772,007
103,919
20,235
10,631
(18,200 )
116,585
(50,700 )
6,095
(44,605 )
$
$
$
$
$
$
F-17
The net projected amortization of total intangible assets and intangible liabilities as of December 31, 2015 are as follows (dollars
in thousands):
Intangible assets
2016
2017
2018
2019
2020
Thereafter
Intangible liabilities
2016
2017
2018
2019
2020
Thereafter
Total
22,673
21,307
17,850
13,079
11,412
30,264
116,585
(8,093 )
(7,896 )
(7,531 )
(5,786 )
(5,368 )
(9,931 )
(44,605 )
$
$
4. Debt
At December 31, 2015, our borrowings consisted of the following (dollars in thousands):
Senior unsecured revolving credit facility
Mortgage debt
Total
Total
154,417
83,785
238,202
$
$
a. Senior Unsecured Revolving Credit Facility
Upon the completion of the IPO on February 11, 2015 we entered into a $400.0 million senior unsecured revolving credit
facility with Citigroup Capital Markets Inc., Raymond James Bank, N.A. and Royal Bank of Canada, as joint lead arrangers and joint
book running managers and Raymond James Bank, N.A. and Royal Bank of Canada, as co-syndication agents. This credit facility has
an accordion feature that provides us with additional capacity, subject to the satisfaction of customary terms and conditions, of up to
$250.0 million, for a total facility size of not more than $650.0 million. We intend to use the senior unsecured revolving credit facility
to repay indebtedness, fund acquisitions, development and redevelopment opportunities, capital expenditures and the costs of securing
new and renewal leases and provide working capital.
The Operating Partnership is the borrower under the senior unsecured revolving credit facility and we and certain of our
subsidiaries that directly own certain of our properties are guarantors under the credit facility. The senior unsecured revolving credit
facility will terminate in approximately three years. In addition, there will be two as-of-right extension options for the senior
unsecured revolving credit facility and each extension option will allow us to extend the senior unsecured revolving credit facility for
an additional six months, in each case subject to certain conditions and the payment of an extension fee.
Our senior unsecured revolving credit facility bears interest, at our option, either at:
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 LIBOR rate plus 1.00% plus (b) a margin ranging from 0.4% to 0.9%, or
a Eurodollar rate equal to a periodic fixed rate equal to LIBOR plus, a margin ranging from 1.4% to 1.9%, in each case
with a margin based on our leverage ratio.
Our senior unsecured revolving credit facility also contains certain customary financial covenants, as follows: (i) the maximum
ratio of consolidated total indebtedness to total asset value (each as defined in the agreement) may not exceed 60.0% on any date,
provided that the maximum ratio may be increased to 65.0% for the two consecutive quarters following the date on which a material
F-18
acquisition (as defined in the agreement) occurs, (ii) the maximum ratio of consolidated secured indebtedness (as defined in the
agreement) to total asset value may not exceed 40.0% on any date, (iii) the maximum ratio of consolidated secured recourse
indebtedness (as defined in the agreement) to total asset value may not exceed 15% on any date, (iv) the minimum consolidated
tangible net worth (as defined in the agreement) may not, on any date, be less than the sum of an amount equal to 75.0% of our
consolidated tangible net worth as of the closing date of the facility plus an amount equal to 75.0% of the aggregate net cash proceeds
received by us from any offering of our capital stock after the closing date of the facility, (v) the minimum ratio of adjusted
consolidated EBITDA to consolidated fixed charges (each as defined in the agreement) may not be less than 1.50 to 1.00 on any date,
(vi) the maximum ratio of consolidated unsecured indebtedness to unencumbered asset value (each as defined in the agreement) may
not exceed 60% as of any date and (vii) the minimum ratio of adjusted consolidated net operating income from unencumbered assets
(as defined in the agreement) to interest payable on unsecured debt (as determined in accordance with the agreement) shall not be less
than 1.75 to 1.00 on any date. Additionally, under the revolving credit facility, our distributions may not exceed the greater of
(i) 95.0% of our FFO or (ii) the amount required for us to maintain our status as a REIT and avoid the payment of federal or state
income or excise tax.
Our senior unsecured revolving credit facility also includes customary limits on the percentage of our total asset value that may
be invested in unimproved land, unconsolidated joint ventures, redevelopment and development assets (as defined in the agreement),
loans, advances or extensions of credit and investments in mixed used assets and require that we obtain consent for mergers in which
the company is not the surviving entity. These financial and restrictive covenants may limit the investments we may make and our
ability to make distributions. As of December 31, 2015, we were in compliance with all financial and restrictive covenants under our
senior unsecured revolving credit facility.
As of December 31, 2015, the weighted average interest rate payable on borrowings under our revolving credit facility was
1.75% and the weighted average annual interest rate for borrowings under our revolving credit facility was 1.62% for the year ended
December 31, 2015. As of December 31, 2015, we had $154.4 million outstanding and $245.6 million available under our revolving
credit facility. As of December 31, 2015 the fair value of our revolving credit facility approximated carrying value.
b. Letters of Credit
As of December 31, 2015, the Company had $0.2 million of standby letters of credit. There were no draws against these letters
of credit during the year ended December 31, 2015.
c. Mortgage Debt
As part of the formation transaction, we completed the repayment or defeasance of, and full satisfaction with respect to, $293.4
million of secured nonrecourse mortgage loans.
The fair value of mortgage debt assumed at IPO was determined at the date of the formation transactions by discounting future
contractual principal and interest payments using prevailing market rates at the date of the IPO. Subsequent to IPO we entered into
debt associated with the acquisition of DEA – Pleasanton at fair value.
At December 31, 2015, the fair value of mortgage debt was determined by discounting future contractual principal and interest
payments using prevailing market rates. We deem the fair value measurement of our debt instruments as a Level 3 measurement. At
December 31, 2015 the fair value of our mortgage debt was $82.7 million.
The table below provides a summary of our mortgage debt at December 31, 2015 (dollars in thousands):
Property
CBP - Savannah
ICE - Charleston
MEPCOM - Jacksonville
USFS II - Albuquerque
DEA - Pleasanton
Fixed/Floating
Fixed
Fixed
Fixed
Fixed
Floating
Total
Contractual
Interest
Rate
3.40%
4.21%
4.41%
4.46%
LIBOR + 150bps
Effective
Interest
Rate
4.12%
3.93%
3.89%
3.92%
1.80%
F-19
Principal
Balance
Premium/Discount
Carrying
Value
Maturity
Date
July 2033
January 2027
October 2025
July 2026
October 2023
15,580 $
21,993
12,489
17,477
15,700
$ 83,239 $
(853) $ 14,727
22,396
403
12,812
323
18,150
673
15,700
-
546 $ 83,785
d. Aggregate Debt Maturities
The Company’s aggregate debt maturities based on outstanding principal as of December 31, 2015 are as follows (dollars in
thousands):
2016
2017
2018
2019
2020
Thereafter
Unamortized fair value adjustments
Total
2,857
2,977
3,100
157,647
3,395
67,680
237,656
546
238,202
$
$
5. Fair Value Measurements
All of the Predecessor’s investments are in Limited Partnership, “LP,” or Limited Liability Company, “LLC,” interests for
which there is no ready market. The Predecessor estimates the value of its investments using Level 3 inputs based upon factors such as
operating performance, financial condition, economic and market events. The Predecessor uses a discounted cash flow valuation
technique to estimate the fair value of each of the investments, which is updated at each reporting date by personnel responsible for
the management of each investment and reviewed by senior management at each reporting period. The discounted cash flow technique
requires the Predecessor to estimate cash flows for each investment over the holding period, and is based on the Predecessor’s view of
the foreseeable future. Cash flows are derived from property rental revenue (base rents plus reimbursements) less operating expenses,
real estate taxes and capital and other costs, plus projected sales proceeds in the year of exit if applicable. Property rental revenue is
based on leases currently in place and management’s estimates for future leasing activity, which are based on current market rents for
similar space. Similarly, estimated real estate taxes and operating expenses are based on amounts incurred in the current period plus a
projected growth factor for future periods. Anticipated sales proceeds at the end of an investment’s expected holding period are
determined based on the net cash flow of the investment in the year of exit, divided by a terminal capitalization rate, less estimated
selling costs.
The Predecessor has determined that the unit of account being valued is the net investment in the underlying real estate LLC or
LP interests. Therefore, the Predecessor has estimated the value of its investments considering whether a market participant would
ascribe any value to the debt of the investment. Specific factors that may be considered include whether the market participant could
assume the debt, the interest rate and the remaining term. The unrealized appreciation of the investments includes a loss of $10,666
related to the value of the debt for the year ended December 31, 2014.
Due to the significant judgment involved in valuing each investment, in the absence of a ready market, the estimated value of
the Predecessor’s investments as presented in the accompanying financial statements may differ from the value that would have been
used had a ready market existed, and any differences may be material.
F-20
The following table includes a roll-forward of the amounts of investments classified within Level 3 for the year ended
December 31, 2015 and 2014. The classification of an investment within Level 3 is based upon the significance of the unobservable
inputs to the overall fair value measurement.
Balance at January 1, 2014
Purchase of investments
Contributions to investments
Distributions from investments
Net change in realized appreciation
Net change in unrealized appreciation (depreciation)
Balance at December 31, 2014
Purchase of investments
Contributions to investments
Distributions from investments
Net change in realized appreciation
Net change in unrealized (depreciation) appreciation
Sale of investments to the Operating Partnership
Balance at December 31, 2015
$
$
$
173,099
30,316
508
(7,637)
40
71,357
267,683
-
257
-
-
(5,122)
(262,818)
-
The following table shows quantitative information about unobservable inputs related to the Level 3 fair value measurements as
of December 31, 2014.
Financial Instruments
Real Estate Investments $
Fair Value
Valuation Technique
267,683 Discounted cash flow
Unobservable Inputs
Residual capitalization rates
Discount rates
Interest rates
Ranges
6.46% - 7.98%
6.88% - 8.44%
2.81% - 6.05%
The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of
exit. Changes in discount rates and residual capitalization rates result in increases, or decreases, in the fair values of these investments.
The discount rates encompass, among other things, uncertainties in the valuation model with respect to residual capitalization rates
and the amount of timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the
residual capitalization rate may be partially offset by a change in the discount rate. Significant increases (decreases) in any of these
inputs in isolation would result in a significantly lower (higher) fair value, respectively.
6. Equity
On October 16, 2014, the Company issued 1,000 shares to its sole stockholder, Darrell Crate, for $1,000, which we repurchased
upon the IPO.
On February 11, 2015, we completed an initial public offering of 13.8 million shares of our common stock at a price to the
public of $15.00 per share, including 1.8 million shares sold in connection with the full exercise of the option to purchase additional
shares granted to the underwriters, resulting in gross proceeds of $207.0 million. In connection with the IPO, we engaged in a series of
formation transactions by which we acquired 15 properties previously owned by the Easterly Funds and the ownership interests in the
management entities in exchange for 9,771,120 common units and 3,308,000 shares of common stock. Additionally, in connection
with the IPO, Western Devcon contributed its interest in 14 properties to the Operating Partnership in an exchange for 5,759,819
common units. On October 21, 2015, Western Devcon contributed its interest an additional property, DEA – Pleasanton, to the
Operating Partnership in exchange for 12,500 common units.
Concurrent with the IPO, the Company sold an aggregate of 7,033,712 shares of its common stock to the Easterly Funds in a
private placement at a price per share of $15.00 without payment of any underwriting fees, discounts or commissions.
Prior to the completion of the IPO, our board of directors adopted, and our sole stockholder approved, our 2015 Equity Incentive
Plan, under which we may grant future cash and equity incentive awards to our executive officers, non-employee directors and eligible
employees in order to attract, motivate and retain the talent for which we compete. The 2015 Equity Incentive Plan permits us to make
grants of options, stock appreciation rights, restricted stock units, restricted stock, dividend equivalent rights, cash-based awards,
performance-based awards and other equity-based awards, including LTIP units, or any combination of the foregoing.
F-21
On February 10, 2015, we filed with the SEC a registration statement on Form S-8 covering the shares of our common stock
issuable under the 2015 Equity Incentive Plan. The 2015 Equity Incentive Plan is administered by the compensation committee of our
board of directors. The 2015 Equity Incentive Plan permits the granting of both options to purchase shares of our common stock
intended to qualify as incentive stock options under Section 422 of the Code and options that do not so qualify. The option exercise
price of each option will be determined by our compensation committee but may not be less than 100% of the fair market value of our
common stock on the date of grant. The term of each option will be fixed by our compensation committee and may not exceed ten
years from the grant date. Our compensation committee may also grant awards of restricted stock, restricted stock units, performance
shares or cash-based awards under the 2015 Equity Incentive Plan that are intended to qualify as “performance based compensation”
under Section 162(m) of the Code. Those awards would only vest or become payable upon the attainment of performance goals that
are established by our compensation committee and related to established performance criteria. From and after the time that we
become subject to Section 162(m) of the Code, the maximum award that is intended to qualify as “performance-based compensation”
under Section 162(m) of the Code that may be made to any one employee during any one calendar year period is 2,273,959 shares of
our common stock with respect to stock-based award and $5.0 million with respect to a cash based award.
The shares issued under the 2015 Equity Incentive Plan are authorized but unissued shares or shares that we reacquire. The
shares of our common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to
satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of stock, expire or are
otherwise terminated (other than by exercise) under the 2015 Equity Incentive Plan are added back to the shares available for issuance
under the 2015 Equity Incentive Plan.
We have reserved 2,273,959 shares of our common stock for issuance of awards under the 2015 Equity Incentive Plan,
including 26,667 shares of restricted common stock issued to our non-employee directors at the completion of the IPO, which will vest
upon the anniversary of the date of grant or the next annual stockholder meeting, as applicable.
On May 6, 2015, the Board approved the issuance of 891,000 LTIP Units of limited partnership interest in the Operating
Partnership to members of management under a long-term incentive plan. Earned awards (if any) will vest 50% on February 15, 2018
and 50% on February 6, 2019, subject to the Company achieving certain absolute and relative total shareholder returns and
management’s continued employment. Vesting will be accelerated in the event of a change in control, termination of employment by
the Company without cause, or termination of employment by the award recipient for good reason, death, disability or retirement. If
there is a change of control prior to February 15, 2018, earned awards will be calculated based on total shareholder return performance
up to the date of the change of control. The LTIP unit awards (i) are subject to forfeiture to the extent awards are not earned and (ii)
prior to the performance measurement date are only entitled to one-tenth (10%) of the regular quarterly distributions payable on
common units. The Company measures the LTIP Unit awards at the fair value on date of grant.
A summary of our non-vested common share awards at December 31, 2015 is as follows:
Outstanding December 31, 2014
Vested
Granted
Forfeited
Outstanding, December 31, 2015
Restricted
Shares
—
—
26,667
—
26,667
$
Restricted Shares
Weighted average
grant date fair value
$
—
—
15.00
—
15.00
LTIP Units
Weighted average
grant date fair
value
LTIP Units
— $
—
891,000
—
891,000
$
—
—
8.67
—
8.67
We recognized $1.9 million in compensation expense related to the restricted common stock and the LTIP Unit awards for the
year ended December 31, 2015. As of December 31, 2015 unrecognized compensation expense for both awards was $6.3 million.
We valued our non-vested restricted share award issued in 2015 at the grant date fair value, which was the market price of our
common shares.
For the LTIP unit awards issued in 2015, we used a Monte Carlo Simulation (risk-neutral approach) to determine the number of
shares that may be issued pursuant to the award. We utilized a risk-free rate of 0.9%, derived from the Treasury note yield as of the
grant date. Since the Company has a limited amount of operating history, the expected volatility assumption of 18.3% was derived
from the observed historical volatility of the common stock prices of a select group of peer companies within the REIT industry.
Based on the selected dividend yields of guideline companies and expected dividend levels, we utilized an expected dividend yield of
5.5%.
F-22
The weighted average grant date fair value of the restricted shares and LTIP units issued in 2015 were $15.00 and $8.67,
respectively. As of December 31, 2015, no shares had vested.
No additional shares of common stock or options were issued under the 2015 Equity Incentive Plan as of December 31, 2015.
All shares of our common stock issued to the Easterly Funds as a part of the IPO, the formation transactions and the concurrent private
placement will be eligible for future sale and certain of such shares held by holders of shares of our common stock and holders of
common units in our operating partnership (other than the Company and its affiliates) will have registration rights pursuant to
registration rights agreements that we have entered into with those investors. On October 21, 2015, the Company also entered into a
registration rights agreement pursuant to which Mr. Ibe will have the right to cause the Company to register with the SEC the resale or
primary issuance of the shares of common stock that Mr. Ibe or his affiliates may receive in exchange for the common units received
in the DEA – Pleasanton acquisition and facilitate the offering and sale of such shares.
Our board of directors declared a dividend for the first quarter of 2015 in the amount of $0.11 per share of common stock and
per common unit of the operating partnership, outstanding to stockholders and common unit holders of record as of the close of
business on May 18, 2015. Our board of directors also declared a dividend for the first quarter of 2015 for each LTIP unit in an
amount equal to 10% of the dividend paid per common unit of our operating partnership. The quarterly cash dividend of $0.11 per
share of common stock and common unit reflects the 49 day period in the quarter ended March 31, 2015 during which we were a
public company. Such dividends were paid on June 3, 2015.
On August 4, 2015, our board of directors declared a dividend for the second quarter of 2015 in the amount of $0.21 per share of
common stock and per common unit of our operating partnership, outstanding to stockholders and common unit holders of record as
of the close of business on August 18, 2015. Our board of directors also declared a dividend for the second quarter of 2015 for each
LTIP unit in an amount equal to 10% of the dividend paid per common unit of our operating partnership. Such dividends were paid
on September 3, 2015.
On November 3, 2015, our board of directors declared a dividend for the third quarter of 2015 in the amount of $0.22 per share
of common stock and per common unit of our operating partnership, outstanding to stockholders and common unit holders of record
as of the close of business on November 17, 2015. Our board of directors also declared a dividend for the third quarter of 2015 for
each LTIP unit in an amount equal to 10% of the dividend paid per common unit of our operating partnership. Such dividends were
paid on December 3, 2015.
On February 26, 2016, our board of directors declared a dividend for the fourth quarter of 2015 in the amount of $0.22 per share
of common stock and per common unit of our operating partnership, outstanding to stockholders and common unit holders of record
as of the close of business on March 10, 2016. Our board of directors also declared a dividend for the fourth quarter of 2015 for each
LTIP unit in an amount equal to 10% of the dividend paid per common unit of our operating partnership. Such dividends are to be
paid on March 25, 2016.
F-23
7. Earnings Per Share
Basic earnings or loss per share of common stock (“EPS”) is calculated by dividing net income or loss attributable to common
stockholders by the weighted average shares of common stock outstanding for the periods presented. Diluted EPS is computed after
adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented.
Unvested restricted shares and LTIP units are considered participating securities which require the use of the two-class method for the
computation of basic and diluted earnings per share. The following table sets for the computation of the Company’s basic and diluted
earnings per share of common stock for the year ended December 31, 2015 (amounts in thousands, except per share amounts):
For the year ended
December 31, 2015
Numerator
Net income (loss)
$
Less: Non-controlling interest in predecessor
Less: Non-controlling interest in operating
partnership
Net income (loss) available to Easterly Government
Properties, Inc.
Less: Dividends on participating securities
Net income (loss) available to common stockholders
$
Denominator for basic EPS
Dilutive effect of share-based compensation awards
Dilutive effect of LTIP units
Denominator for basic and diluted EPS
Basic EPS
Diluted EPS
$
$
(6,045 )
—
4,351
(1,694 )
(63 )
(1,757 )
21,430,016
—
—
21,430,016
(0.08 )
(0.08 )
8. Operating Leases
Our rental properties are subject to generally non-cancelable operating leases generating future minimum contractual rent
payments due from tenants. As of December 31, 2015, future non-cancelable minimum contractual rent payments are as follows
(dollars in thousands):
Operating Leases
Minimum lease payments
$ 475,607
61,643
60,552
58,026
52,189
46,451
196,746
Total
2016
Payments due by period
2018
2019
2017
2020
Thereafter
The Company’s consolidated properties were 100% occupied by 19 tenants at December 31, 2015. We recognized $59.9
million in rental income attributable to base rent for the year ended December 31, 2015 and recorded a straight-line adjustment of $0.2
million for year ended December 31, 2015. We also recognized $4.9 million in rental income attributable to the amortization of our
above- and below-market leases for the year ended December 31, 2015.
9. Commitments and Contingencies
a) Operating Leases
We lease 4,731 square feet of office space in Washington, D.C. under an operating lease agreement that commenced February
2012 and expires in March 2016. Upon completion of the IPO, we became responsible for monthly rental payments. In October of
2015 we entered into a sublease agreement for 5,682 square feet of office space in Washington, D.C. with an estimated
commencement date of February 2016 and expiration date of June 2021.
We also lease 5,752 square feet of office space in San Diego, CA under an operating lease that commenced February 2015 and
expires in April 2017.
F-24
Rent expense incurred under the terms of the corporate office leases, was $0.4 million, $0.3 million and $0.2 million for years
ended December 31, 2015, 2014 and 2013, respectively. Future minimum rental payments under the Company’s corporate office
leases as of December 31, 2015 are summarized as follows (amounts in thousands):
Corporate office leases
Minimum lease payments
$
1,605
234
319
286
298
309
159
Total
2016
Payments due by period
2018
2019
2017
2020
Thereafter
b) Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state, and local governments. The
Company’s compliance with existing laws has not had a material adverse effect on its financial condition and results of operations,
and the Company does not believe it will have a material adverse effect in the future. However, the Company cannot predict the
impact of unforeseen environmental contingencies or new or changed laws or regulations on its current properties or on properties that
the Company may acquire.
c) Tax Protection Agreements
Concurrent with the completion of the IPO, the Company also entered into a tax protection agreement with Michael P. Ibe, a
director and our Executive Vice President — Development and Acquisitions, under which we agreed to indemnify Mr. Ibe for any
taxes incurred as a result of a taxable sale of the properties contributed by Western Devcon in the formation transactions for a period
of eight years after the closing of the IPO and the formation transactions. The Company also agreed in the tax protection agreement
with Mr. Ibe to use the “traditional method” of making allocations under Section 704(c) of the Code for the eight-year period.
On October 21, 2015, the Company entered into a second tax protection agreement with Mr. Ibe, under which the Company
agreed to indemnify Mr. Ibe for any taxes incurred as a result of a taxable sale of the DEA – Pleasanton property for a period of eight
years after the closing of the acquisition and to offer Mr. Ibe and certain affiliates of Mr. Ibe the opportunity to guarantee, in the
aggregate, up to approximately $15.7 million of indebtedness of the Operating Partnership for two years following the contribution of
the DEA – Pleasanton property and up to approximately $7.2 million of indebtedness thereafter until the eighth anniversary of the
closing of the acquisition, subject to certain conditions. The Company also agreed in the tax protection agreement with Mr. Ibe to use
the “traditional method” of making allocations under Section 704(c) of the Code for the eight-year period.
10. Concentrations Risk
Concentrations of credit risk arise for the Company when multiple tenants of the Company are engaged in similar business
activities, are located in the same geographic region or have similar economic features that impact in a similar manner their ability to
meet contractual obligations, including those to the Company. The Company regularly monitors its tenant base to assess potential
concentrations of credit risk.
As stated in Note 1 above, the Company leases commercial space to the U.S. Government through the GSA or other federal
agencies or nongovernmental tenants. At December 31, 2015, the GSA and other federal agency accounted for approximately 96.2%
of rental income and non-governmental tenants accounted for the remaining approximately 3.8%.
Thirteen of our 36 properties are located in California, accounting for approximately 23.6% of our total rentable square feet and
approximately 31.8% of our total annualized lease income as of December 31, 2015. To the extent that weak economic or real estate
conditions or natural disasters affect California more severely than other areas of the country, our business, financial condition and
results of operations could be negatively impacted.
11. Related Party
Since the completion of the IPO, we were responsible for reimbursing Easterly Capital $0.3 million for a portion of rent and
office expense at their Beverly, MA office and for the services of certain employees during the year ended December 31, 2015.
Additionally, during the year ended December 31, 2015, Western Devcon was responsible for reimbursing us $0.3 million for certain
costs that we paid on their behalf.
F-25
12. Subsequent Events
For its consolidated financial statements as of December 31, 2015, the Company evaluated subsequent events and noted the
following significant events in addition to the dividends declared by our board of directors for the fourth quarter of 2015 (see Note 6)
On February 17, 2016 the Company acquired a 71,100 square foot property located in Albuquerque, New Mexico. The building
was constructed in 2011 and is 100% leased to the GSA and occupied by Immigration and Customs Enforcement under a 15-year
lease that expires in January 2027.
13. Selected Quarterly Financial Data (unaudited)
The following is a summary of our unaudited quarterly results of operations for 2015.
First Quarter
Second Quarter Third Quarter
Total revenues
Net income (loss) available to Easterly Government
Properties, Inc.
Net income (loss) available to Easterly Government
Properties, Inc. per share (basic and diluted)
$
10,091 $
19,256 $
19,857 $
Fourth Quarter
22,174
(2,885)
588
498
$
(0.22)
$
0.02
$
0.02
$
105
—
F-26
e
t
a
D
d
e
r
i
u
q
c
A
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
2
1
/
1
1
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
2
/
0
1
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
7
/
2
1
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
/
2
1
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
/
4
5
1
0
2
/
1
1
/
9
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
7
1
/
6
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
5
1
0
2
/
1
1
/
2
l
a
n
i
g
i
r
O
n
o
i
t
c
u
r
t
s
n
o
C
)
s
(
e
t
a
D
3
0
0
2
9
0
0
2
7
0
0
2
9
0
0
2
2
1
0
2
/
4
9
9
1
4
0
0
2
5
0
0
2
4
0
0
2
5
1
0
2
1
1
0
2
2
0
0
2
1
0
0
2
4
0
0
2
/
2
9
9
1
6
0
0
2
1
0
0
2
0
1
0
2
1
0
0
2
3
1
0
2
4
0
0
2
9
9
9
1
1
0
0
2
1
0
0
2
8
9
9
1
2
0
0
2
7
0
0
2
8
0
0
2
5
0
0
2
4
0
0
2
7
9
9
1
7
9
9
1
5
0
0
2
3
0
0
2
9
9
9
1
7
0
0
2
4
1
0
2
3
1
0
2
d
e
t
a
l
u
m
u
c
c
A
)
4
(
n
o
i
t
a
i
c
e
r
p
e
D
)
3
(
l
a
t
o
T
d
n
a
s
g
n
i
d
l
i
u
B
s
t
n
e
m
e
v
o
r
p
m
I
3
6
8
9
1
9
6
2
1
9
6
5
3
0
1
6
7
8
4
3
5
1
5
1
9
7
0
3
6
1
5
3
0
5
2
3
5
0
7
2
0
4
3
3
4
3
5
2
1
9
1
4
6
6
1
5
9
2
5
9
3
1
4
2
6
9
1
6
5
2
1
6
2
2
5
2
1
9
2
8
0
5
5
4
2
7
5
0
3
0
3
7
,
1
1
4
6
,
1
6
3
3
,
1
1
2
2
,
1
$
5
4
8
,
9
6
6
5
8
,
8
5
4
0
9
,
2
5
9
3
0
,
6
4
5
5
9
,
5
3
6
8
3
,
4
3
8
3
6
,
8
2
4
5
8
,
1
2
4
2
6
,
6
2
6
5
9
,
0
3
1
5
0
,
8
2
2
7
9
,
6
2
9
1
9
,
0
3
7
2
7
,
6
2
1
0
6
,
6
2
9
5
1
,
9
1
6
1
6
,
1
2
0
2
9
,
3
1
3
5
0
,
5
1
7
1
6
,
9
1
2
3
5
,
4
1
7
7
5
,
5
1
9
2
8
,
3
1
3
0
8
,
0
1
0
2
0
,
5
1
7
4
6
,
1
1
1
9
1
,
5
1
5
4
3
,
3
1
3
5
7
,
8
8
6
7
,
8
4
4
1
,
3
4
5
2
,
3
0
7
5
,
3
4
9
5
,
1
1
5
6
3
,
3
3
1
5
,
1
$
6
4
3
,
8
6
6
0
5
,
4
4
9
5
1
,
9
4
4
0
4
,
1
4
2
9
9
,
4
3
5
6
8
,
2
3
8
2
3
,
6
2
0
7
7
,
0
2
9
5
8
,
0
2
1
1
6
,
8
2
3
5
0
,
4
2
1
3
9
,
3
2
9
0
7
,
0
3
2
2
8
,
3
2
8
4
8
,
3
2
7
2
6
,
6
1
8
3
3
,
9
1
0
0
7
,
0
1
0
4
6
,
8
0
4
2
,
8
1
0
8
2
,
2
1
2
7
5
,
4
1
7
9
4
,
7
9
6
3
,
9
5
5
4
,
9
0
2
3
,
3
1
4
4
0
,
4
1
4
4
5
,
1
1
0
7
7
,
6
9
7
3
,
7
0
9
6
,
1
1
8
4
,
2
0
1
5
7
1
4
,
9
0
5
6
,
1
2
7
9
$
5
4
7
,
3
5
3
6
,
4
3
6
9
1
2
5
,
1
0
1
3
,
2
4
8
0
,
1
5
6
7
,
5
5
4
3
,
2
8
9
9
,
3
1
4
0
,
3
0
1
2
5
0
9
,
2
3
5
7
,
2
2
3
5
,
2
8
7
2
,
2
0
2
2
,
3
3
1
4
,
6
7
7
3
,
1
2
5
2
,
2
5
0
0
,
1
2
3
3
,
6
4
3
4
,
1
0
0
7
,
1
2
9
1
,
2
7
4
1
,
1
1
0
8
,
1
3
8
9
,
1
9
8
3
,
1
4
5
4
,
1
3
7
7
0
6
0
,
3
7
7
1
,
2
5
1
7
,
1
1
4
5
d
n
a
L
0
5
3
,
4
1
9
9
4
,
1
$
s
t
s
o
C
d
e
z
i
l
a
t
i
p
a
C
t
n
e
u
q
e
s
b
u
S
n
o
i
t
i
s
i
u
q
c
A
o
t
d
n
a
s
g
n
i
d
l
i
u
B
s
t
n
e
m
e
v
o
r
p
m
I
7
3
4
6
6
5
8
5
—
—
5
—
—
—
—
3
3
8
1
—
6
0
2
3
1
5
6
3
—
6
2
6
2
—
6
2
2
3
—
—
5
1
1
2
—
—
—
—
—
—
$
9
0
3
,
8
6
2
4
4
,
4
4
3
5
1
,
9
4
9
1
3
,
1
4
7
8
9
,
4
3
5
6
8
,
2
3
8
2
3
,
6
2
5
6
7
,
0
2
9
5
8
,
0
2
1
1
6
,
8
2
3
5
0
,
4
2
1
3
9
,
3
2
6
7
6
,
0
3
4
0
8
,
3
2
8
4
8
,
3
2
1
2
6
,
6
1
8
1
3
,
9
1
7
8
6
,
0
1
5
3
6
,
8
4
0
2
,
8
1
0
8
2
,
2
1
6
4
5
,
4
1
1
7
4
,
7
9
6
3
,
9
3
2
4
,
9
4
9
2
,
3
1
4
4
0
,
4
1
4
4
5
,
1
1
5
5
7
,
6
8
5
3
,
7
0
9
6
,
1
1
8
4
,
2
0
1
5
7
1
4
,
9
0
5
6
,
1
2
7
9
$
5
4
7
,
3
5
3
6
,
4
3
6
9
1
2
5
,
1
0
1
3
,
2
4
8
0
,
1
5
6
7
,
5
5
4
3
,
2
8
9
9
,
3
1
4
0
,
3
0
1
2
5
0
9
,
2
3
5
7
,
2
2
3
5
,
2
8
7
2
,
2
0
2
2
,
3
3
1
4
,
6
7
7
3
,
1
2
5
2
,
2
5
0
0
,
1
2
3
3
,
6
4
3
4
,
1
0
0
7
,
1
2
9
1
,
2
7
4
1
,
1
1
0
8
,
1
3
8
9
,
1
9
8
3
,
1
4
5
4
,
1
3
7
7
0
6
0
,
3
7
7
1
,
2
5
1
7
,
1
1
4
5
d
n
a
L
0
5
3
,
4
1
9
9
4
,
1
$
d
o
i
r
e
P
f
o
e
s
o
l
C
t
a
d
e
i
r
r
a
c
t
n
u
o
m
a
t
s
o
C
y
n
a
p
m
o
C
o
t
t
s
o
C
l
a
i
t
i
n
I
—
—
—
0
0
7
,
5
1
0
5
1
,
8
1
—
—
—
—
—
—
2
1
8
,
2
1
7
2
7
,
4
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
)
2
(
s
e
c
n
a
r
b
m
u
c
n
E
—
—
—
—
$
n
o
i
t
a
c
o
L
A
C
,
o
n
s
e
r
F
A
V
,
n
o
t
g
n
i
l
r
A
X
T
,
o
i
n
o
t
n
A
n
a
S
E
N
,
a
h
a
m
O
6
9
3
,
2
2
C
S
,
n
o
t
s
e
l
r
a
h
C
h
t
r
o
N
n
o
i
t
a
i
c
e
r
p
e
D
d
e
t
a
l
u
m
u
c
c
A
d
n
a
e
t
a
t
s
E
l
a
e
R
-
I
I
I
e
l
u
d
e
h
c
S
.
c
n
I
,
s
e
i
t
r
e
p
o
r
P
t
n
e
m
n
r
e
v
o
G
y
l
r
e
t
s
a
E
)
s
d
n
a
s
u
o
h
t
n
i
s
t
n
u
o
m
A
(
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
O
C
,
d
o
o
w
e
k
a
L
E
N
,
n
l
o
c
n
i
L
A
C
,
o
r
t
n
e
C
l
E
A
C
,
n
o
t
n
a
s
a
e
l
P
)
M
N
,
e
u
q
r
e
u
q
u
b
l
A
)
O
(
e
u
q
r
e
u
q
u
b
l
A
-
I
I
S
F
S
U
A
C
,
a
t
s
i
V
A
V
,
d
n
o
m
h
c
i
R
X
T
,
o
i
R
l
e
D
)
)
O
(
d
n
o
m
h
c
i
R
-
I
B
F
)
L
(
a
t
s
i
V
-
A
E
D
O
C
/
(
o
i
R
l
e
D
-
C
O
A
M
N
,
e
u
q
r
e
u
q
u
b
l
A
)
O
(
e
u
q
r
e
u
q
u
b
l
A
-
I
S
F
S
U
X
T
,
s
a
l
l
a
D
L
F
,
e
l
l
i
v
n
o
s
k
c
a
J
R
A
,
k
c
o
R
e
l
t
t
i
L
A
G
,
h
a
n
n
a
v
a
S
A
C
,
a
n
A
a
t
n
a
S
O
C
,
d
o
o
w
e
k
a
L
A
C
,
o
g
e
i
D
n
a
S
X
T
,
s
a
l
l
a
D
A
C
,
a
t
s
i
V
a
l
u
h
C
A
C
,
o
t
n
e
m
a
r
c
a
S
V
W
,
g
r
u
b
s
n
i
t
r
a
M
T
M
,
t
s
r
u
b
n
u
S
S
M
,
n
e
e
d
r
e
b
A
Y
N
,
y
n
a
b
l
A
A
C
,
e
d
i
s
r
e
v
i
R
A
C
,
o
g
e
i
D
n
a
S
)
O
(
e
l
l
i
v
n
o
s
k
c
a
J
-
M
O
C
P
E
M
)
L
(
b
a
L
s
a
l
l
a
D
-
A
E
D
)
O
(
k
c
o
R
e
l
t
t
i
L
-
I
B
F
)
L
(
h
a
n
n
a
v
a
S
-
P
B
C
)
O
(
a
n
A
a
t
n
a
S
-
A
E
D
)
O
(
d
o
o
w
e
k
a
L
-
E
O
D
)
O
(
s
a
l
l
a
D
-
A
E
D
)
O
(
y
a
t
O
-
E
C
I
)
O
(
s
d
n
a
l
h
g
i
H
h
t
r
o
N
-
A
E
D
)
O
(
g
r
u
b
s
n
i
t
r
a
M
-
G
C
S
U
)
O
(
a
t
s
i
V
a
l
u
h
C
-
P
B
C
)
O
(
t
s
r
u
b
n
u
S
-
P
B
C
)
O
C
/
(
n
e
e
d
r
e
b
A
)
O
(
e
d
i
s
r
e
v
i
R
)
O
(
y
n
a
b
l
A
)
O
(
y
a
t
O
-
C
O
A
-
-
-
A
E
D
A
E
D
A
E
D
A
C
,
o
j
e
i
V
n
o
i
s
s
i
M
)
O
(
o
j
e
i
V
n
o
i
s
s
i
M
-
A
S
S
A
C
,
o
g
e
i
D
n
a
S
A
C
,
o
g
e
i
D
n
a
S
L
F
,
r
a
m
a
r
i
M
A
G
,
d
n
a
l
d
i
M
)
-
e
u
n
e
v
A
h
t
5
4
1
W
S
0
5
6
2
)
W
(
o
g
e
i
D
n
a
S
-
A
E
D
)
O
(
o
g
e
i
D
n
a
S
-
A
S
S
)
/
D
W
(
a
d
i
r
o
l
F
f
o
l
e
b
r
a
P
/
M
W
(
-
t
r
u
o
C
a
l
o
e
c
s
O
8
9
9
5
s
e
i
g
o
l
o
n
h
c
e
T
d
e
t
i
n
U
X
T
,
k
c
o
b
b
u
L
-
t
e
e
r
t
S
r
e
t
n
u
H
t
s
a
E
1
0
5
)
O
(
o
i
n
o
t
n
A
n
a
S
-
I
B
F
)
O
(
n
o
t
g
n
i
l
r
A
-
O
T
P
)
O
(
n
o
t
s
e
l
r
a
h
C
-
E
C
I
)
O
(
d
o
o
w
e
k
a
L
-
T
O
D
)
O
(
n
l
o
c
n
i
L
-
S
I
C
S
U
)
O
(
a
h
a
m
O
-
I
B
F
)
1
(
e
p
y
T
&
y
t
r
e
p
o
r
P
)
O
(
o
n
s
e
r
F
-
S
R
I
O
C
/
(
o
r
t
n
e
C
l
E
-
C
O
A
)
L
(
n
o
t
n
a
s
a
e
l
P
-
A
E
D
1
2
3
4
5
6
7
8
9
0
1
1
1
2
1
3
1
4
1
5
1
6
1
7
1
8
1
9
1
0
2
1
2
2
2
3
2
4
2
5
2
6
2
7
2
8
2
9
2
0
3
1
3
2
3
3
3
4
3
5
3
6
3
S-1
)
1
(
)
2
(
)
3
(
0
9
5
,
6
1
$
7
9
5
,
8
8
7
$
8
9
6
,
0
9
6
$
9
9
8
,
7
9
$
9
7
4
$
9
1
2
,
0
9
6
$
9
9
8
,
7
9
$
5
8
7
,
3
8
$
)
/
D
W
(
n
o
i
t
a
r
o
p
r
o
C
s
u
m
m
u
L
5
6
2
,
7
4
6
$
y
l
e
t
a
m
i
x
o
r
p
p
a
s
i
s
e
s
o
p
r
u
p
x
a
t
e
m
o
c
n
i
l
a
r
e
d
e
f
r
o
f
t
s
o
c
e
t
a
g
e
r
g
g
A
.
s
e
l
b
i
g
n
a
t
n
i
e
t
a
t
s
e
l
a
e
r
f
o
e
u
l
a
v
s
e
d
u
l
c
x
E
g
n
i
r
u
t
c
a
f
u
n
a
M
=
M
;
n
o
i
t
u
b
i
r
t
s
i
D
=
D
;
e
s
u
o
h
e
r
a
W
=
W
;
y
r
o
t
a
r
o
b
a
L
=
L
;
e
s
u
o
h
t
r
u
o
C
=
C
;
e
c
i
f
f
O
=
O
.
s
t
n
e
m
t
s
u
j
d
a
e
u
l
a
v
r
i
a
f
e
h
t
f
o
e
c
n
a
l
a
b
d
e
z
i
t
r
o
m
a
n
u
e
h
t
s
e
d
u
l
c
n
I
s
r
a
e
y
0
4
o
t
5
m
o
r
f
e
g
n
a
r
s
t
e
s
s
a
r
u
o
f
o
s
e
v
i
l
d
e
t
a
m
i
t
s
e
e
h
T
.
s
t
e
s
s
a
e
h
t
f
o
s
e
v
i
l
l
u
f
e
s
u
d
e
t
a
m
i
t
s
e
e
h
t
r
e
v
o
s
i
s
a
b
e
n
i
l
-
t
h
g
i
a
r
t
s
a
n
o
d
e
t
u
p
m
o
c
s
i
y
t
r
e
p
o
r
p
l
a
t
n
e
r
f
o
n
o
i
t
a
i
c
e
r
p
e
D
)
4
(
.
e
s
a
e
l
g
n
i
y
l
r
e
d
n
u
e
h
t
f
o
m
r
e
t
e
h
t
o
t
r
o
:
n
o
i
t
a
i
c
e
r
p
e
d
d
e
t
a
l
u
m
u
c
c
a
d
n
a
s
e
i
t
r
e
p
o
r
p
e
t
a
t
s
e
l
a
e
r
f
o
t
n
u
o
m
a
g
n
i
y
r
r
a
c
e
h
t
f
o
s
i
s
y
l
a
n
A
—
0
9
5
,
6
1
0
9
5
,
6
1
—
7
9
5
,
8
8
7
7
9
5
,
8
8
7
d
e
t
a
l
u
m
u
c
c
A
n
o
i
t
a
i
c
e
r
p
e
D
e
t
a
t
s
E
l
a
e
R
s
e
i
t
r
e
p
o
r
P
4
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
e
c
n
a
l
a
B
s
n
o
i
t
i
d
d
A
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
a
e
c
n
a
l
a
B
S-2
Board of Directors
Executive Officers
Darrell W. Crate
Chairman of the Board of Directors
William C. Trimble, III
Chief Executive Officer and President
Michael P. Ibe
Executive Vice President and Vice Chairman of
the Board of Directors
Michael P. Ibe
Executive Vice President and Vice Chairman of
the Board of Directors
William C. Trimble, III
Chief Executive Officer and President
William H. Binnie
Director
Cynthia A. Fisher
Director
Emil W. Henry, Jr.
Director
James E. Mead
Director
Corporate Headquarters
2101 L Street, NW
Suite 650
Washington, DC 20037
(202) 595-9500
http://www.easterlyreit.com
Independent Auditors
Pricewaterhouse Coopers LLP
Boston, MA 02210
Forward-looking Statements
Meghan G. Baivier
Executive Vice President and Chief Financial &
Operating Officer
Alison M. Bernard
Executive Vice President and Chief Accounting
Officer
Ron E. Kendall
Executive Vice President, Government Relations
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Annual Meeting
Monday, May 09, 2016
1:00 pm Eastern Time
2101 L Street, NW
Suite 650
Washington, DC 20037
We make statements in this letter that are considered “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, which are usually identified by the use of words such as
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and
variations of such words or similar expressions. We intend these forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of
1995 and are including this statement in this Supplemental Information Package for purposes of complying with
those safe harbor provisions. These forward-looking statements reflect our current views about our plans,
intentions, expectations, strategies and prospects, which are based on the information currently available to us
and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and
prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no
assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore, actual
results may differ materially from those described in the forward-looking statements and will be affected by a
variety of risks and factors that are beyond our control including, without limitation, those risks and uncertainties
detailed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2015, filed with the
Securities and Exchange Commission on March 2, 2016. In addition, our anticipated qualification as a real estate
investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code
of 1986, or the Code, and depends on our ability to meet the various requirements imposed by the Code through
actual operating results, distribution levels and diversity of stock ownership. We assume no obligation to update
publicly any forward looking statements, whether as a result of new information, future events or otherwise.
Easterly Government Properties, Inc.
(NYSE: DEA)
2101 L Street, NW
Suite 650
Washington, DC 20037
(202) 595-9500
http://www.easterlyreit.com