Easterly Government Properties, Inc.: Form 10-Q for the period ended Mar 31, 2024

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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”, “potential”, “project”, “result”, “seek”, “should”, “target”, “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:

• the factors included under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and the factors included under the heading “Risk Factors” in our other public filings;
• 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 its preference away from leased properties;
• risks associated with ownership and development of real estate;
• the risk of decreased rental rates or increased vacancy rates;
• the loss of key personnel;
• general volatility of the capital and credit markets and the market price of our common stock;
• the risk we may lose one or more major tenants;
• difficulties in completing and successfully integrating acquisitions;
• failure of acquisitions or development projects to occur at anticipated levels or yield anticipated results;
• risks associated with actual or threatened terrorist attacks;
• risks associated with our joint venture activities;
• 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, including 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;
• 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; and
• adverse impacts from any future pandemic, epidemic or outbreak of any highly infectious disease on the U.S., regional and global economies and our financial condition and results of operations.

For a further discussion of these and other factors that could affect us and the statements contained herein, see the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, as may be supplemented or amended from time to time.

Overview

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

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

We focus primarily on acquiring, developing and managing U.S. Government-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. We may also consider other potential opportunities to add properties to our portfolio, including acquiring properties leased to state and local governments with strong creditworthiness and other opportunities that directly or indirectly support the mission of select government agencies. As of March 31, 2024, we wholly owned 81 operating properties and nine operating properties through an unconsolidated joint venture (the “JV”) in the United States, encompassing approximately 8.9 million leased square feet (8.4 million pro rata), including 88 operating properties that were leased primarily to U.S. Government tenant agencies, one operating property entirely leased to tenant agencies of a U.S. state government and one operating property that was entirely leased to a private tenant. As of March 31, 2024, our operating properties were 97% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned one property under development that we expect will encompass approximately 0.2 million leased square feet upon completion.

The operating partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of the operating partnership and owned approximately 95.0% of the aggregate limited partnership interests in the operating partnership, which we refer to herein as common units, as of March 31, 2024. We have elected to be taxed as a REIT and believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.

2024 Activity

Acquisitions

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

On April 12, 2024, we acquired a 129,046 leased square foot U.S. Immigration and Customs Enforcement (“ICE”) facility near Dallas, Texas. The building was renovated to suit in 2020. The facility is primarily leased to the GSA for beneficial use of ICE and has lease expirations ranging from 2032 to 2040.

Operating Properties

As of March 31, 2024, our operating properties were 97% leased with a weighted average annualized lease income per leased square foot of $35.99 ($35.66 pro rata) and a weighted average age of approximately 14.8 years based on the date the property was built or renovated-to-suit, where applicable. 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 net expense reimbursements earned by us for the last month in such period.

The table set forth below shows information relating to the properties we owned, or in which we had an ownership interest, at March 31, 2024, and it includes properties held by the JV:

20

Wholly Owned U.S. Government Leased Properties (Cont.)

21

Wholly Owned U.S. Government Leased Properties (Cont.)

(1) OC=Outpatient Clinic; O=Office; C=Courthouse; L=Laboratory; W=Warehouse; D=Distribution.

(2) The year of lease expiration does not include renewal options.

(3) Private tenants occupy 100,081 leased square feet.

(4) Private tenants occupy 36,610 leased square feet.

(5) A state government tenant occupies 14,274 leased square feet.

(6) A private tenant occupies 11,402 leased square feet.

(7) A private tenant occupies 17,373 leased square feet.

(8) A private tenant occupies 5,000 leased square feet.

(9) We own 53.0% of the property through an unconsolidated joint venture.

(10) Asset is subject to a ground lease where we are the lessee.

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. We believe that, from the U.S. Government’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 weighted average age of these properties based on the date the property was built or renovated-to-suit, where applicable (approximately 19.4 years as of March 31, 2024), 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 (including for wholly owned properties and properties held by the JV) as of March 31, 2024:

(1) The year of lease expiration 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 March 31, 2024, 11 tenants occupying approximately 7.1% of our leased square feet and contributing approximately 6.9% of our annualized lease income have exercisable rights to terminate their lease before the stated term of their respective lease expires.

Information about our development property as of March 31, 2024 is set forth in the table below:

(1) L=Laboratory.

Results of Operations

Comparison of Results of Operations for the three months ended March 31, 2024 and 2023

The financial information presented below summarizes our results of operations for the three months ended March 31, 2024 and 2023 (amounts in thousands).

Revenues

Total revenues increased $1.6 million to $72.8 million for the three months ended March 31, 2024 compared to $71.2 million for the three months ended March 31, 2023.

The $2.6 million increase in Rental income is primarily attributable to the three operating properties acquired since March 31, 2023.

The $1.1 million decrease in Tenant reimbursements is primarily attributable to a decrease in tenant project reimbursements.

The less than $0.1 million increase in Asset management income is primarily attributable to the fee earned by us for asset management of the JV from the one property acquired since March 31, 2023.

The less than $0.1 million increase in Other income is primarily attributable to an increase in interest income offset by a decrease in project overhead income from our tenant reimbursable projects.

Expenses

Total expenses decreased $0.7 million to $55.5 million for the three months ended March 31, 2024 compared to $56.2 million for the three months ended March 31, 2023.

The $1.3 million decrease in Property operating expenses is primarily attributable to a decrease in tenant reimbursable projects.

The $0.8 million increase in Real estate taxes is primarily attributable to the three operating properties acquired since March 31, 2023 as well as an increase in real estate taxes across our portfolio.

The $0.7 million increase in Depreciation and amortization is primarily attributable to the three operating properties acquired since March 31, 2023.

The $0.8 million decrease in Corporate general and administrative is primarily due to a decrease in employee services and amortization on stock-based compensation.

Income from unconsolidated real estate venture

The less than $0.1 million increase in Income from unconsolidated real estate venture is primarily attributable to our pro rata share of operations from the one operating property acquired by the JV since March 31, 2023.

Interest expense, net

The $1.8 million increase in Interest expense, net is primarily attributable to higher weighted average borrowings and interest rates on our swapped term loans.

Liquidity and Capital Resources

We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant improvements, development activities at FDA – Atlanta, planned and possible acquisitions of properties, including the one remaining property in the portfolio of ten properties anticipated to be acquired through the JV (the “VA Portfolio”), stockholder distributions to maintain our qualification as a REIT, potential repurchases of common stock under our share repurchase program and other capital obligations associated with conducting our business. At March 31, 2024, we had approximately $56.1 million available in cash and cash equivalents and there was approximately $305.4 million available under our revolving credit facility.

Our primary expected sources of capital are as follows:

• cash and cash equivalents;
• operating cash flow;
• distribution of cash flows from the JV;
• available borrowings under our revolving credit facility;
• issuance of long-term debt;
• issuance of equity, including under our ATM Programs (as described below); and
• asset sales.

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

• development and redevelopment activities, including major redevelopment, renovation or expansion programs at FDA - Atlanta and other individual properties;
• property acquisitions under contract, including our pro rata share of the one remaining VA Portfolio property;
• tenant improvements, allowances and leasing costs;
• recurring maintenance and capital expenditures;
• debt repayment requirements;
• corporate and administrative costs;
• interest payments on our outstanding indebtedness;
• interest swap payments;
• distribution payments; and
• potential repurchases of common stock under our share repurchase program.

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

Equity

ATM Programs

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

As of March 31, 2024, we had forward sales transactions outstanding under the 2019 ATM Program for the sale of 589,647 shares of our common stock that had not yet been settled.

On April 10, 2024, we settled the 589,647 shares under our 2019 ATM Program and received $7.9 million of net proceeds. We accounted for the forward sale transactions as equity.

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

As of March 31, 2024, we had approximately $300.0 million of gross sales of our common stock available under the 2021 ATM Program and $79.3 million of gross sales of common stock available under the 2019 ATM Program.

Share Repurchase Program

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

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

Debt

Indebtedness Outstanding

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

(1) At March 31, 2024, the USD SOFR with a five day lookback (“S”) was 5.31%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for each of our $450.0 million senior unsecured revolving credit facility (our “revolving credit facility”), our $200.0 million senior unsecured term loan facility (as amended, our “2018 term loan facility”) and our $100.0 million senior unsecured term loan facility (our “2016 term loan facility”) is based on our consolidated leverage ratio, as set forth in the respective loan agreements.

(2) Our revolving credit facility had available capacity of $305.4 million at March 31, 2024 with an accordion feature that permits us to request additional lender commitments for up to $250.0 million of additional capacity, subject to the satisfaction of customary terms and conditions.

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

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

(5) Our 2018 term loan facility is subject to two interest rate swaps with an effective date of June 23, 2023 and an aggregate notional value of $200.0 million, which effectively fixes the interest rate at 5.38% annually, based on our consolidated leverage ratio, as defined in our 2018 term loan facility agreement.

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

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

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

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

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

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

The chart below details our debt capital structure as of March 31, 2024 (dollar amounts in thousands):

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

Material Cash Commitments

During the three months ended March 31, 2024, there were no material changes to the cash commitment information presented in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023.

Unconsolidated Real Estate Venture

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

As of March 31, 2024, we had invested $282.9 million in the JV. As of March 31, 2024, we had committed capital, net of return of over committed capital, to the JV totaling $292.8 million and had a remaining capital commitment of $46.6 million. None of the properties owned by the JV are encumbered by mortgage indebtedness.

For a more complete description of the JV, see Note 4 to the Consolidated Financial Statements.

Dividend Policy

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

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

(1) Prior to the end of the performance period as set forth in the applicable LTIP unit award, holders of performance-based LTIP units are entitled to receive dividends per LTIP unit equal to 10% of the dividend paid per common unit. After the end of the performance period, the number of LTIP units, both vested and unvested, that LTIP award recipients have earned, if any, are entitled to receive dividends in an amount per LTIP unit equal to dividends, both regular and special, payable per common unit. Holders of LTIP units that are not subject to the attainment of performance goals are entitled to receive dividends per LTIP unit equal to 100% of the dividend paid per common unit beginning on the grant date.

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 operating expenses that are passed through to our tenants and by contractual rent increases. We do not believe inflation has had a material impact on our historical financial position or results of operations.

Cash Flows

The following table sets forth a summary of cash flows for the three months ended March 31, 2024 and 2023 (amounts in thousands):

Operating Activities

We generated $23.9 million and $21.6 million of cash from operating activities during the three months ended March 31, 2024 and 2023, respectively. Net cash provided by operating activities for the three months ended March 31, 2024 includes $26.0 million in net cash from rental activities net of expenses, $3.1 million related to distributions from investment in unconsolidated real estate venture, offset by $5.2 million related to the change in tenant accounts receivable, prepaid expenses and other assets, deferred revenue associated with operating leases, principal payments on operating lease obligations, and accounts payable, accrued expenses and other liabilities. Net cash provided by operating activities for the three months ended March 31, 2023 includes $25.6 million in net cash from rental activities net of expenses, $2.2 million related to distributions from investment in unconsolidated real estate venture, offset by $6.1 million related to the change in tenant accounts receivable, prepaid expenses and other assets, deferred revenue associated with operating leases, principal payments on operating lease obligations, and accounts payable, accrued expenses and other liabilities.

Investing Activities

We used $24.9 million and $10.6 million in cash for investing activities during the three months ended March 31, 2024 and 2023, respectively. Net cash used in investing activities for the three months ended March 31, 2024 includes $12.9 million in additions to development properties, $7.9 million in additions to operating properties, $3.4 million in investment in loan receivable and $0.6 million in real estate acquisitions and deposits. Net cash used in investing activities for the three months ended March 31, 2023 includes $7.8 million in additions to operating properties and $2.9 million in additions to development properties, offset by $0.1 million in real estate acquisitions and deposits.

Financing Activities

We generated $35.2 million and used $7.9 million in cash from financing activities during the three months ended March 31, 2024 and 2023, respectively. Net cash generated in financing activities for the three months ended March 31, 2024 includes $65.5 million in net draws under our revolving credit facility, offset by $28.7 million in dividend payments, $1.1 million in mortgage notes payable repayment, $0.4 million in deferred financing costs and $0.2 million in the payment of offering costs. Net cash used by financing activities for the three months ended March 31, 2023 includes $27.5 million in dividend payments, $16.7 million in mortgage notes payable repayment, $16.0 million in net pay downs under our revolving credit facility and $0.1 million in the payment of offering costs, offset by $52.4 million in gross proceeds from issuance of shares of our common stock.

Non-GAAP Financial Measures

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

Funds From Operations and Core Funds From Operations

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

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

• Depreciation and amortization related to real estate.
• Gains and losses from the sale of certain real estate assets.
• Gains and losses from change in control.
• Impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.

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

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

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

The following table sets forth a reconciliation of our net income to FFO and Core FFO for the three months ended March 31, 2024 and 2023 (amounts in thousands):

Critical Accounting Estimates

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

Our Annual Report on Form 10-K for the year ended December 31, 2023 contains a discussion of our significant accounting policies, which utilize relevant critical accounting estimates. During the three months ended March 31, 2024, there were no material changes to the discussion of our significant accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2023.

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 manage and may continue to 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 is to reduce our floating rate exposure and we do not intend to enter into hedging arrangements for speculative purposes. For more information on our interest rate swaps, see Note 6 to the Consolidated Financial Statements.

As of March 31, 2024, $1.2 billion, or 89.4% of our debt, excluding unamortized premiums and discounts, had fixed interest rates and $144.5 million, or 10.6%, had variable interest rates based on SOFR. If market rates of interest on our variable rate debt fluctuate by 25 basis points, our interest expense would increase or decrease, depending on rate movement, by $0.4 million annually.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by the Exchange 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) and Rule 15d-15 of the Exchange Act, as of March 31, 2024. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2024, 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 Exchange 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023.