# Easterly Government Properties, Inc.: Form 10-Q for the period ended Jun 30, 2020

- Company: [Easterly Government Properties, Inc.](/companies/dea.md) (CIK 1622194)
- Form: 10-Q
- Filed: 2020-08-04
- Accepted by EDGAR: Aug 4, 2020, 16:01 ET
- Period: 2020-06-30
- Accession: 0001564590-20-036103
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1622194/000156459020036103/dea-10q_20200630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1622194/000156459020036103/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $60.5m | us-gaap:Revenues |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $118.7m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $10.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $22.2m | us-gaap:CostOfGoodsAndServicesSold |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $3.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $5.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.05 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.05 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 76,869,965 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 76,185,277 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $75.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 6 months, 2020-01-01 to 2020-06-30 | $44.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2020-06-30 | $8.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-06-30 | $2.36bn | us-gaap:Assets |
| Total liabilities | at 2020-06-30 | $1.08bn | us-gaap:Liabilities |
| Long-term debt | at 2020-06-30 | $900.5m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2020-06-30 | $1.13bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,858 characters.

#### 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”, “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:*

- *the factors included under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and the factors included under the heading “Risk Factors” in the Company’s 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;*
- *loss of key personnel;*
- *the continuing adverse impact of the novel coronavirus (COVID-19) on the U.S., regional and global economies and our financial condition and results of operations;*
- *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;*
- *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; 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.*

*For a further discussion of these and other factors, see the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, 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 are an internally managed real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate substantially all of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration, or GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.

We focus on acquiring, developing and managing U.S. Government leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. As of June 30, 2020, we wholly owned 74 operating properties in the United States that were 100% leased, including 72 operating properties that were leased primarily to U.S. Government tenant agencies and two operating properties that were entirely leased to private tenants, encompassing approximately 6.9 million square feet in the aggregate. In addition, we wholly owned two properties under development that we expect will encompass approximately 0.2 million square feet upon completion. For purposes of calculating percentage leased, 15,215 square feet at DHA – Aurora were excluded from the denominator, total rentable square feet, as we attributed no value to this space at acquisition.

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 88.4% of the aggregate limited partnership interests in the Operating Partnership, which we refer to herein as common units, as of June 30, 2020. We have elected to be taxed as a REIT and 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.

### Impact of the COVID-19 Pandemic

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

We continue to carefully monitor the COVID-19 pandemic and its potential impact on our business. We are following guidelines established by the Centers for Disease Control and the World Health Organization and orders issued by the state and local governments where we operate. In addition, we have taken a number of precautionary steps to safeguard our business and our employees from COVID-19, including, but not limited to, implementing non-essential travel restrictions and facilitating telecommuting arrangements for our employees. We have taken these precautionary steps while maintaining business continuity so that we can continue to deliver service to and meet the demands of our tenants, including our U.S. Government tenant agencies. Since March 13, 2020, nearly all of our employees have been working remotely, with only certain operationally critical employees working on site.

The operations of many of our U.S. Government tenant agencies are deemed essential. We are working closely with our tenants to follow directions from the various federal government tenant agencies with respect to building operations within our portfolio, and have issued guidance for our vendors and building engineers grounded in applicable federal, state and local guidelines. Whenever we learn of a confirmed case involving an individual known to have been in one of our buildings, we immediately take additional steps in collaboration with our tenants and vendors to disinfect and sanitize the affected spaces and all common areas in the building.

To date, the impact of the COVID-19 pandemic on our business and financial condition has not been significant. Substantially all of our revenue continues to be generated through the receipt of rental payments from U.S. Government tenant agencies, which accounted for 98.4% of our annualized lease income as of June 30, 2020. 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. Notwithstanding the recent volatility in the financial markets, we also believe that our capital structure will continue to provide us with the resources, financial flexibility and the capacity to support the continued growth of our business. Since January 1, 2020, an aggregate of 8,545,415 shares of our common stock have been sold through our March 2019 ATM Program and December 2019 ATM Program (each as described below), including an aggregate of 524,794 shares sold on a forward basis subsequent to the quarter ended June 30, 2020. As of July 31, 2020, there are 3,873,223 shares underlying forward sale transactions that have not yet been settled. Subject to our right to elect net share settlement, the Company expects to physically settle the forward sales transactions between April 2021 and July 2021. As of June 30, 2020, we also had $450.0 available under our $450.0 million senior unsecured revolving credit facility and none of our outstanding indebtedness is scheduled to mature until 2022.

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

### 2020 Activity

### Acquisitions

On January 7, 2020, the Company acquired a 101,285 square foot Defense Health Agency (“DHA”) mission critical facility in Aurora, Colorado. The building was originally constructed in 1998 and renovated in 2018. The facility is 100% leased to the GSA for the beneficial use of the DHA with a lease expiration of April 2034, excluding 15,215 square feet of space to which the Company attributed no value at acquisition.

On March 26, 2020, the Company acquired a 203,269 square foot Federal Bureau of Investigation (“FBI”) and Drug Enforcement Administration (“DEA”) Federal Justice Center in El Paso, Texas. The three-building compound was constructed in stages between the years of 1998 and 2005. The field office is 100% leased to the GSA for the beneficial use of the FBI and DEA with lease expirations of July 2028.

On April 3, 2020, the Company acquired a 79,212 square foot Department of Veteran Affairs (“VA”) outpatient facility in Mobile, Alabama. The building is a build-to-suit clinic completed in 2018. The facility is 100% leased to the GSA pursuant to a 15-year non-cancelable lease which expires in December 2033.

On April 30, 2020, the Company acquired a 51,647 square foot VA outpatient facility in Chico, California. The building was originally constructed in 2019. The facility is 100% leased to the GSA pursuant to a 15-year non-cancelable lease which expires in June 2034.

### Operating Properties

As of June 30, 2020, our 74 operating properties were 100% leased with a weighted average annualized lease income per leased square foot of $33.57 and a weighted average age, based on the date of when the property was renovated or built-to-suit, of approximately 13.1 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 operating properties as of June 30, 2020 is set forth in the table below:

| Property Name U.S. Government Leased | Location | Property Type (1) | Tenant Lease Expiration Year (2) | Rentable Square Feet | Annualized Lease Income | Percentage of Total Annualized Lease Income | Annualized Lease Income per Leased Square Foot |
| --- | --- | --- | --- | ---: | ---: | ---: | ---: |
| VA - Loma Linda | Loma Linda, CA | OC | 2036 | 327,614 | $16,277,599 | 7.0% | $49.69 |
| Various GSA - Buffalo (3) | Buffalo, NY | O | 2020 - 2025 | 267,768 | 8,522,663 | 3.6% | 31.83 |
| JSC - Suffolk | Suffolk, VA | O | 2028 | 403,737 | 8,106,829 | 3.5% | 20.08 |
| FBI - Salt Lake | Salt Lake City, UT | O | 2032 | 169,542 | 6,816,845 | 3.0% | 40.21 |
| Various GSA - Portland (4) | Portland, OR | O | 2020 - 2028 | 223,261 | 6,646,648 | 2.9% | 30.16 |
| Various GSA - Chicago (5) | Des Plaines, IL | O | 2020 / 2022 | 232,759 | 6,605,763 | 2.9% | 29.46 |
| IRS - Fresno | Fresno, CA | O | 2033 | 180,481 | 6,476,232 | 2.8% | 35.88 |
| VA - San Jose | San Jose, CA | OC | 2038 | 90,085 | 5,825,450 | 2.5% | 64.67 |
| EPA - Lenexa | Lenexa, KS | O | 2027 | 169,585 | 5,485,256 | 2.4% | 32.35 |
| PTO - Arlington | Arlington, VA | O | 2035 | 190,546 | 5,443,778 | 2.4% | 28.57 |
| FBI - San Antonio | San Antonio, TX | O | 2021 | 148,584 | 5,176,951 | 2.2% | 34.84 |
| FEMA - Tracy | Tracy, CA | W | 2038 | 210,373 | 4,607,609 | 2.0% | 21.90 |
| FDA - Alameda | Alameda, CA | L | 2039 | 69,624 | 4,544,619 | 2.0% | 65.27 |
| FBI - Omaha | Omaha, NE | O | 2024 | 112,196 | 4,539,105 | 2.0% | 40.46 |
| TREAS - Parkersburg | Parkersburg, WV | O | 2021 | 182,500 | 4,426,764 | 1.9% | 24.26 |
| EPA - Kansas City | Kansas City, KS | L | 2023 | 71,979 | 4,235,248 | 1.8% | 58.84 |
| VA - South Bend | Mishawaka, IN | OC | 2032 | 86,363 | 4,036,427 | 1.7% | 46.74 |
| ICE - Charleston (6) | North Charleston, SC | O | 2021 / 2027 | 86,733 | 3,815,284 | 1.7% | 43.99 |
| USCIS - Lincoln | Lincoln, NE | O | 2025 | 137,671 | 3,749,589 | 1.6% | 27.24 |
| FBI / DEA - El Paso | El Paso, TX | O | 2028 | 203,269 | 3,749,467 | 1.6% | 18.45 |
| VA - Mobile | Mobile, AL | OC | 2033 | 79,212 | 3,718,582 | 1.6% | 46.94 |
| FBI - New Orleans | New Orleans, LA | O | 2029 | 137,679 | 3,644,531 | 1.6% | 26.47 |
| FBI - Pittsburgh | Pittsburgh, PA | O | 2027 | 100,054 | 3,623,321 | 1.6% | 36.21 |
| DOT - Lakewood | Lakewood, CO | O | 2024 | 122,225 | 3,481,840 | 1.5% | 28.49 |
| FBI - Birmingham | Birmingham, AL | O | 2020 | 96,278 | 3,261,286 | 1.4% | 33.87 |
| VA - Chico | Chico, CA | OC | 2034 | 51,647 | 3,133,770 | 1.4% | 60.68 |
| OSHA - Sandy | Sandy, UT | L | 2024 | 75,000 | 3,011,090 | 1.3% | 40.15 |
| USFS II - Albuquerque | Albuquerque, NM | O | 2026 | 98,720 | 3,006,955 | 1.3% | 30.46 |
| USCIS - Tustin | Tustin, CA | O | 2034 | 66,818 | 3,004,864 | 1.3% | 44.97 |
| FDA - College Park | College Park, MD | L | 2029 | 80,677 | 2,987,051 | 1.3% | 37.02 |
| USFS I - Albuquerque | Albuquerque, NM | O | 2021 | 92,455 | 2,925,947 | 1.3% | 31.65 |
| DEA - Vista | Vista, CA | L | 2020 | 54,119 | 2,811,893 | 1.2% | 51.96 |
| SSA - Charleston | Charleston, WV | O | 2024 | 110,000 | 2,779,647 | 1.2% | 25.27 |
| FBI - Richmond | Richmond, VA | O | 2041 | 96,607 | 2,776,810 | 1.2% | 28.74 |
| ICE - Albuquerque | Albuquerque, NM | O | 2027 | 71,100 | 2,767,009 | 1.2% | 38.92 |
| JUD - Del Rio | Del Rio, TX | C/O | 2024 | 89,880 | 2,708,959 | 1.2% | 30.14 |
| FBI - Albany | Albany, NY | O | 2035 | 98,184 | 2,695,916 | 1.2% | 27.46 |
| DEA - Pleasanton | Pleasanton, CA | L | 2035 | 42,480 | 2,688,256 | 1.2% | 63.28 |
| VA - Northeast | Northeast | OC | 2034 | 56,330 | 2,685,835 | 1.2% | 47.68 |
| JUD - El Centro | El Centro, CA | C/O | 2034 | 43,345 | 2,651,832 | 1.1% | 61.18 |
| TREAS - Birmingham | Birmingham, AL | O | 2029 | 83,676 | 2,480,269 | 1.1% | 29.64 |
| DEA - Sterling | Sterling, VA | L | 2020 | 49,692 | 2,462,237 | 1.1% | 49.55 |
| DEA - Dallas Lab | Dallas, TX | L | 2021 | 49,723 | 2,442,882 | 1.1% | 49.13 |
| JUD - Charleston | Charleston, SC | C/O | 2020 | 50,888 | 2,408,114 | 1.0% | 47.32 |
| DHA - Aurora (7) | Aurora, CO | O | 2034 | 101,285 | 2,307,291 | 1.0% | 22.78 |
| DEA - Upper Marlboro | Upper Marlboro, MD | L | 2022 | 50,978 | 2,294,520 | 1.0% | 45.01 |
| FBI - Little Rock | Little Rock, AR | O | 2021 | 101,977 | 2,261,585 | 1.0% | 22.18 |
| MEPCOM - Jacksonville | Jacksonville, FL | O | 2025 | 30,000 | 2,204,619 | 1.0% | 73.49 |
| CBP - Savannah | Savannah, GA | L | 2033 | 35,000 | 2,148,399 | 0.9% | 61.38 |
| DOE - Lakewood | Lakewood, CO | O | 2029 | 115,650 | 2,084,275 | 0.9% | 18.02 |
| DEA - Santa Ana | Santa Ana, CA | O | 2024 | 39,905 | 1,875,725 | 0.8% | 47.00 |

24

*U.S. Government Leased (Cont.)*

| Property Name | Location | Property Type (1) | Tenant Lease Expiration Year (2) | Rentable Square Feet | Annualized Lease Income | Percentage of Total Annualized Lease Income | Annualized Lease Income per Leased Square Foot |
| --- | --- | --- | --- | ---: | ---: | ---: | ---: |
| ICE - Otay | San Diego, CA | O | 2022 / 2026 | 52,881 | 1,814,725 | 0.8% | 36.69 |
| NPS - Omaha | Omaha, NE | O | 2024 | 62,772 | 1,767,746 | 0.8% | 28.16 |
| VA - Golden | Golden, CO | O/W | 2026 | 56,753 | 1,743,712 | 0.8% | 30.72 |
| USCG - Martinsburg | Martinsburg, WV | O | 2027 | 59,547 | 1,711,890 | 0.7% | 28.75 |
| DEA - Dallas | Dallas, TX | O | 2021 | 71,827 | 1,678,276 | 0.7% | 23.37 |
| CBP - Sunburst | Sunburst, MT | O | 2028 | 33,000 | 1,615,847 | 0.7% | 48.97 |
| DEA - Otay (8) | San Diego, CA | O | 2020 | 32,560 | 1,541,944 | 0.7% | 47.36 |
| DEA - Birmingham (9) | Birmingham, AL | O | 2020 | 35,616 | 1,510,352 | 0.7% | 42.41 |
| JUD - Aberdeen | Aberdeen, MS | C/O | 2025 | 46,979 | 1,485,961 | 0.6% | 31.63 |
| DEA - North Highlands | Sacramento, CA | O | 2033 | 37,975 | 1,443,342 | 0.6% | 38.01 |
| GSA - Clarksburg | Clarksburg, WV | O | 2024 | 63,750 | 1,439,682 | 0.6% | 22.58 |
| DEA - Albany | Albany, NY | O | 2025 | 31,976 | 1,356,513 | 0.6% | 42.42 |
| DEA - Riverside | Riverside, CA | O | 2032 | 34,354 | 1,246,340 | 0.5% | 36.28 |
| SSA - Dallas | Dallas, TX | O | 2020 | 27,200 | 1,074,520 | 0.5% | 39.50 |
| ICE - Pittsburgh (10) | Pittsburgh, PA | O | 2022 / 2023 | 33,425 | 800,086 | 0.3% | 31.69 |
| VA - Baton Rouge | Baton Rouge, LA | OC | 2024 | 30,000 | 796,498 | 0.3% | 26.55 |
| JUD - South Bend | South Bend, IN | C/O | 2027 | 30,119 | 761,014 | 0.3% | 25.27 |
| DEA - San Diego | San Diego, CA | W | 2032 | 16,100 | 537,427 | 0.2% | 33.38 |
| SSA - Mission Viejo | Mission Viejo, CA | O | 2020 | 11,590 | 473,290 | 0.2% | 40.84 |
| DEA - Bakersfield | Bakersfield, CA | O | 2021 | 9,800 | 370,790 | 0.2% | 37.84 |
| SSA - San Diego | San Diego, CA | O | 2032 | 10,856 | 340,050 | 0.1% | 33.81 |
| Subtotal |  |  |  | 6,725,334 | $229,933,441 | 99.6% | $34.31 |
| **Privately Leased** |  |  |  |  |  |  |  |
| 5998 Osceola Court - United Technologies | Midland, GA | W/M | 2023 | 105,641 | 543,046 | 0.2% | 5.14 |
| 501 East Hunter Street - Lummus Corporation | Lubbock, TX | W/D | 2028 | 70,078 | 409,602 | 0.2% | 5.84 |
| Subtotal |  |  |  | 175,719 | $952,648 | 0.4% | $5.42 |
| Total / Weighted Average |  |  |  | 6,901,053 | $230,886,089 | 100.0% | $33.57 |

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

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

(3) Private tenants occupy 15,374 rentable square feet.

(4) Private tenants occupy 49,544 rentable square feet.

(5) Private tenants occupy 2,987 rentable square feet.

(6) A private tenant occupies 21,609 rentable square feet.

(7) 15,215 square feet at DHA – Aurora were excluded from total rentable square feet as the Company attributed no value to this space at acquisition.

(8) ICE occupies 5,813 rentable square feet.

(9) The ATF occupies 8,680 rentable square feet.

(10) A private tenant occupies 3,854 rentable square feet.

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 15.5 years as of June 30, 2020), 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 June 30, 2020:

| Year of Lease Expiration (1) | 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 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| 2020 | 16 | 647,380 | 9.4% | $24,339,339 | 10.5% | $37.60 |
| 2021 | 12 | 834,588 | 12.1% | 24,881,316 | 10.8% | 29.81 |
| 2022 | 7 | 124,523 | 1.8% | 4,835,037 | 2.1% | 38.83 |
| 2023 | 8 | 226,956 | 3.3% | 6,276,093 | 2.7% | 27.65 |
| 2024 | 10 | 727,374 | 10.6% | 23,031,097 | 10.0% | 31.66 |
| 2025 | 11 | 369,119 | 5.4% | 12,476,337 | 5.4% | 33.80 |
| 2026 | 3 | 157,011 | 2.3% | 4,807,312 | 2.1% | 30.62 |
| 2027 | 6 | 495,529 | 7.2% | 17,554,882 | 7.6% | 35.43 |
| 2028 | 8 | 783,003 | 11.4% | 16,081,277 | 7.0% | 20.54 |
| 2029 | 4 | 417,682 | 6.1% | 11,196,126 | 4.8% | 26.81 |
| Thereafter | 22 | 2,094,024 | 30.4% | 85,407,273 | 37.0% | 40.79 |
| Total / Weighted Average | 107 | 6,877,189 | 100.0% | $230,886,089 | 100.0% | $33.57 |

(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 June 30, 2020, 18 tenants occupying approximately 4.5% of our rentable square feet and contributing approximately 4.0% 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 properties as of June 30, 2020 is set forth in the table below:

| Property Name | Location | Tenant | Property Type (1) | Lease Term |  | Estimated Rentable Square Feet |
| --- | --- | --- | --- | --- | ---: | ---: |
| FDA - Atlanta | Atlanta, GA | Food and Drug Administration | L | 20-year |  | 162,000 |
| FDA - Lenexa | Lenexa, KS | Food and Drug Administration | L | 20-year | (2) | 59,690 |
| Total |  |  |  |  |  | 221,690 |

(1) L=Laboratory.

(2) The 20-year lease term includes a firm term of 15 years and a soft term of five years.

### Results of Operations

### Comparison of Results of Operations for the three months ended June 30, 2020 and 2019

The financial information presented below summarizes the results of operations of the Company for the three months ended June 30, 2020 and 2019 (amounts in thousands).

| Revenues | For the three months ended June 30, 2020 | 2019 | Change |
| --- | ---: | ---: | ---: |
| Rental income | $59,550 | $50,513 | $9,037 |
| Tenant reimbursements | 435 | 1,655 | (1,220) |
| Other income | 541 | 581 | (40) |
| Total revenues | 60,526 | 52,749 | 7,777 |
| Expenses |  |  |  |
| Property operating | 10,915 | 10,934 | (19) |
| Real estate taxes | 6,617 | 5,465 | 1,152 |
| Depreciation and amortization | 23,654 | 22,967 | 687 |
| Acquisition costs | 668 | 452 | 216 |
| Corporate general and administrative | 5,505 | 4,667 | 838 |
| Total expenses | 47,359 | 44,485 | 2,874 |
| Other income (expense) |  |  |  |
| Interest expense | (9,004) | (8,018) | (986) |
| Gain on sale of operating property | — | 6,245 | (6,245) |
| Net income | $4,163 | $6,491 | $(2,328) |

### Revenues

Total revenues consist primarily of rental income from our properties, tenant reimbursements for real estate taxes and certain other expenses, and project management income.

Total revenues increased by $7.8 million to $60.5 million for the three months ended June 30, 2020 compared to $52.7 million for the three months ended June 30, 2019. The increase is primarily attributable to an increase of $8.6 million of revenues from the seven operating properties acquired and one development property placed in service since June 30, 2019, as well as a full period of operations from the two operating properties acquired during the three months ended June 30, 2019, offset by one property disposed of in the second quarter of 2019. This increase is further offset by a $1.3 million decrease in tenant project reimbursements and the associated project management income.

### Expenses

Total expenses increased by $2.9 million to $47.4 million for the three months ended June 30, 2020 compared to $44.5 million for the three months ended June 30, 2019. The increase is primarily attributable to an increase of $5.4 million in property operating expenses, real estate taxes, and depreciation and amortization associated with the seven operating properties acquired and one development property placed in service since June 30, 2019, as well as a full period of operations from the two operating properties acquired during the three months ended June 30, 2019, offset by one property disposed of in the second quarter of 2019. The increase is further offset by a $2.3 million decrease in depreciation related to the timing of intangible amortization, and a $1.2 million decrease in expenses associated with tenant project reimbursements. Acquisition costs and corporate general and administrative costs also increased by $1.1 million, primarily due to an increase in employee costs.

### Interest Expense

Interest expense increased by $1.0 million to $9.0 million for the three months ended June 30, 2020 compared to $8.0 million for the three months ended June 30, 2019. The increase is primarily due to additional interest expense of $2.6 million attributable to the $275.0 million of fixed rate, senior unsecured notes issued in the third quarter of 2019. This increase is offset by a $1.8 million decrease in interest owed on our revolving credit facility primarily due to a decrease in the weighted average interest rate from 3.76% and weighted average borrowings of $239.5 million during the three months ended June 30, 2019 to a weighted average interest rate of 1.87% and weighted average borrowings of $71.5 million during the three months ended June 30, 2020.

### Gain on the sale of operating property

On May 8, 2019, we sold CBP – Chula Vista to a third party. Net proceeds from the sale of operating property were approximately $19.9 million and we recognized a full gain on the sale of operating property of approximately $6.2 million for the three months ended June 30, 2019.

### Comparison of Results of Operations for the six months ended June 30, 2020 and 2019

The financial information presented below summarizes the results of operations of the Company for the six months ended June 30, 2020 and 2019 (amounts in thousands).

| Revenues | For the six months ended June 30, 2020 | 2019 | Change |
| --- | ---: | ---: | ---: |
| Rental income | $116,133 | $99,001 | $17,132 |
| Tenant reimbursements | 1,587 | 3,239 | (1,652) |
| Other income | 1,024 | 1,116 | (92) |
| Total revenues | 118,744 | 103,356 | 15,388 |
| Expenses |  |  |  |
| Property operating | 22,173 | 20,897 | 1,276 |
| Real estate taxes | 13,179 | 11,220 | 1,959 |
| Depreciation and amortization | 47,210 | 45,418 | 1,792 |
| Acquisition costs | 1,206 | 922 | 284 |
| Corporate general and administrative | 10,988 | 8,984 | 2,004 |
| Total expenses | 94,756 | 87,441 | 7,315 |
| Other income (expense) |  |  |  |
| Interest expense | (17,907) | (16,150) | (1,757) |
| Gain on sale of operating property | — | 6,245 | (6,245) |
| Net income | $6,081 | $6,010 | $71 |

### Revenues

Total revenues consist primarily of rental income from our properties, tenant reimbursements for real estate taxes and certain other expenses, and project management income.

Total revenues increased by $15.4 million to $118.7 million for the six months ended June 30, 2020 compared to $103.4 million for the six months ended June 30, 2019. The increase is primarily attributable to an increase of $17.1 million of revenues from the seven operating properties acquired and one development property placed in service since June 30, 2019, as well as a full period of operations from the five operating properties acquired during the six months ended June 30, 2019, offset by one property disposed of in the second quarter of 2019. This increase is further offset by a $1.7 million decrease in tenant project reimbursements and the associated project management income.

### Expenses

Total expenses increased by $7.3 million to $94.8 million for the six months ended June 30, 2020 compared to $87.4 million for the six months ended June 30, 2019. The increase is primarily attributable to an increase of $10.6 million in property operating expenses, real estate taxes, and depreciation and amortization associated with the seven operating properties acquired and one development property placed in service since June 30, 2019, as well as a full period of operations from the five operating properties acquired during the six months ended June 30, 2019, offset by one property disposed of in the second quarter of 2019. The increase is further offset by a $4.0 million decrease in depreciation related to the timing of intangible amortization, and a $1.6 million decrease in expenses associated with tenant project reimbursements. Acquisition costs and corporate general and administrative costs also increased by $2.3 million, primarily due to an increase in employee costs.

### Interest Expense

Interest expense increased by $1.8 million to $17.9 million for the six months ended June 30, 2020 compared to $16.2 million for the six months ended June 30, 2019. The increase is primarily due to additional interest expense of $5.3 million attributable to the $275.0 million of fixed rate, senior unsecured notes issued in the third quarter of 2019. This increase is offset by a $3.9 million decrease in interest owed on our revolving credit facility primarily due to a decrease in the weighted average interest rate from 3.76% and weighted average borrowings of $240.6 million during the six months ended June 30, 2019 to a weighted average interest rate of 1.96% and weighted average borrowings of $40.6 million during the six months ended June 30, 2020.

### Gain on the sale of operating property

On May 8, 2019, we sold CBP – Chula Vista to a third party. Net proceeds from the sale of operating property were approximately $19.9 million and we recognized a full gain on the sale of operating property of approximately $6.2 million for the six months ended June 30, 2019.

### 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 June 30, 2020, we had $8.9 million available in cash and cash equivalents and there was $450.0 million available under our revolving credit facility.

#### Our primary expected sources of capital are as follows:

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

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

- development and redevelopment activities, including major redevelopment, renovation or expansion programs at individual properties;
- property acquisitions under contract;
- 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; and
- distribution payments.

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

On each of March 4, 2019 and December 20, 2019, we entered into separate equity distribution agreements with each of Citigroup Global Markets Inc., BMO Capital Markets Corp., BTIG, LLC, Capital One Securities, Inc., Jefferies LLC, Raymond James & Associates, Inc., RBC Capital Markets, LLC, SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC, pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $200.0 million and $300.0 million, respectively, from time to time, which we refer to herein as the ATM Programs, in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. The ATM Programs implemented on March 4, 2019 and December 20, 2019 are referred to as the “March 2019 ATM Program” and “December 2019 ATM Program” respectively.

Under each of the ATM Programs, we may also enter into one or more forward transactions under separate master forward sale confirmations and related supplemental confirmations with each of Citibank, N.A., Bank of Montreal, Jefferies LLC, Raymond James & Associates, Inc., Royal Bank of Canada and Wells Fargo Bank, National Association, for the sale of shares of our common stock on a forward basis.

The following table sets forth certain information with respect to sales made under each of the ATM Programs as of June 30, 2020 (amounts in thousands, except share amounts):

| For the Three Months Ended: | March 2019 ATM Program Number of Shares Sold(1) | Net Proceeds(1) | December 2019 ATM Program Number of Shares Sold(1) | Net Proceeds(1) |
| --- | ---: | ---: | ---: | ---: |
| March 31, 2020 | 200,000 | $4,835 | — | $— |
| June 30, 2020 | 3,920,992 | 88,939 | 551,200 | 14,455 |
| Total | 4,120,992 | $93,774 | 551,200 | $14,455 |

(1) As of June 30, 2020, we had entered into forward sales transactions under the March 2019 ATM Program and December 2019 ATM program for the sale of an additional 3,348,429 shares of our common stock that have not yet been settled. Subject to our right to elect net share settlement, we expect to physically settle the forward sales transactions by the maturity dates set forth in each applicable forward sale transaction placement notice, which dates range from April 2021 to June 2021. Assuming the forward sales transactions are physically settled in full utilizing a net weighted average initial forward sales price of $25.99 per share, we expect to receive net proceeds of approximately $87.0 million, after deducting offering costs, subject to adjustments in accordance with the applicable forward sale transaction. We accounted for the forward sale agreements as equity.

We have used the net proceeds received from such sales for general corporate purposes. As of June 30, 2020, we had approximately $204.4 million of gross sales of our common stock available under the December 2019 ATM Program and no remaining availability under the March 2019 ATM Program.

#### Contribution of Property for Common Units

On March 26, 2020, we acquired FBI / DEA – El Paso for which we paid, as partial consideration, 870,730 common units. The issuance of the common units was effected in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act. In connection with this acquisition, we entered into a tax protection agreement, under which we agreed to indemnify the contributors for any taxes incurred as a result of a taxable sale of such property for a period of four years. We also agreed in the tax protection agreement with the contributors to use the “traditional method” of making allocation under Section 704(c) of the Internal Revenue Code of 1986, as amended, for the four-year period.

### Debt

The following table sets forth certain information with respect to our outstanding indebtedness as of June 30, 2020 (amounts in thousands):

| Loan Revolving credit facility: | Principal Outstanding June 30, 2020 | Interest Rate (1) | Current Maturity |
| --- | ---: | --- | --- |
| Revolving credit facility (2) | $— | L + 130bps | June 2022 (3) |
| **Total revolving credit facility** | — |  |  |
| **Term loan facilities:** |  |  |  |
| 2016 term loan facility | 100,000 | 2.67% (4) | March 2024 |
| 2018 term loan facility | 150,000 | 3.96% (5) | June 2023 |
| Total term loan facilities | 250,000 |  |  |
| Less: Total unamortized deferred financing fees | (1,216) |  |  |
| **Total term loan facilities, net** | **248,784** |  |  |
| **Senior unsecured notes payable:** |  |  |  |
| 2017 series A senior notes | 95,000 | 4.05% | May 2027 |
| 2017 series B senior notes | 50,000 | 4.15% | May 2029 |
| 2017 series C senior notes | 30,000 | 4.30% | May 2032 |
| 2019 series A senior notes | 85,000 | 3.73% | September 2029 |
| 2019 series B senior notes | 100,000 | 3.83% | September 2031 |
| 2019 series C senior notes | 90,000 | 3.98% | September 2034 |
| Total notes payable | 450,000 |  |  |
| Less: Total unamortized deferred financing fees | (2,952) |  |  |
| **Total notes payable, net** | **447,048** |  |  |
| **Mortgage notes payable:** |  |  |  |
| DEA – Pleasanton | 15,700 | L + 150bps (6) | October 2023 |
| VA – Golden | 9,096 | 5.00% (6) | April 2024 |
| MEPCOM – Jacksonville | 8,457 | 4.41% (6) | October 2025 |
| USFS II – Albuquerque | 16,086 | 4.46% (6) | July 2026 |
| ICE – Charleston | 16,792 | 4.21% (6) | January 2027 |
| VA – Loma Linda | 127,500 | 3.59% (6) | July 2027 |
| CBP – Savannah | 12,376 | 3.40% (6) | July 2033 |
| Total mortgage notes payable | **206,007** |  |  |
| Less: Total unamortized deferred financing fees | (1,542) |  |  |
| Less: Total unamortized premium/discount | 159 |  |  |
| **Total mortgage notes payable, net** | **204,624** |  |  |
| **Total debt** | **$900,456** |  |  |

(1) At June 30, 2020, the one-month LIBOR (“L”) was 0.16%. 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 the $450.0 million senior unsecured revolving credit facility, which we refer to herein as our revolving credit facility, the $150.0 million senior unsecured term loan facility, which we refer to herein as our 2018 term loan facility, and the $100.0 million senior unsecured term loan facility, which we refer to herein as our 2016 term loan facility, is based on the Company’s consolidated leverage ratio, as defined in the respective loan agreements.

(2) Our revolving credit facility had available capacity of $450.0 million at June 30, 2020 with an accordion feature that permits us to request additional lender commitments for up to $250.0 million of additional capacity, subject to the satisfaction of customary terms and conditions.

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

(4) Entered into two interest rate swaps with an effective date of March 29, 2017 with an aggregate notional value of $100.0 million to effectively fix the interest rate at 2.67% annually, based on the Company’s consolidated leverage ratio, as defined in our 2016 term loan facility agreement.

(5) Entered into four interest rate swaps with an effective date of December 13, 2018 with an aggregate notional value of $150.0 million to effectively fix the interest rate at 3.96% annually, based on the Company’s consolidated leverage ratio, as defined in our 2018 term loan facility agreement.

(6) Effective interest rates are as follows: DEA – Pleasanton 1.80%, VA – Golden 5.03%, MEPCOM – Jacksonville 3.89%, USFS II Albuquerque 3.92%, ICE – Charleston 3.93%, VA – Loma Linda 3.78%, CBP – Savannah 4.12%.

Our revolving credit facility, term loan facilities, senior unsecured notes payable, and mortgage notes payable are subject to ongoing compliance with a number of financial and other covenants. As of June 30, 2020, we were in compliance with all applicable financial covenants.

The chart below details our debt capital structure as of June 30, 2020 (dollar amounts in thousands):

| Debt Capital Structure | June 30, 2020 |
| --- | ---: |
| Total principal outstanding | $906,007 |
| Weighted average maturity | 7.6 years |
| Weighted average interest rate | 3.7% |
| % Variable debt | 1.7% |
| % Fixed debt (1) | 98.3% |
| % Secured debt | 22.8% |

(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.

### 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:

| Quarter | Declaration Date | Record Date | Payment Date | Dividend (1) |
| --- | --- | --- | --- | ---: |
| Q1 2020 | April 29, 2020 | May 14, 2020 | June 25, 2020 | $0.26 |
| Q2 2020 | July 29, 2020 | August 13, 2020 | September 11, 2020 | $0.26 |

(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.

### Off-balance Sheet Arrangements

We had no material off-balance sheet arrangements as of June 30, 2020.

### 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 six months ended June 30, 2020 and 2019 (amounts in thousands):

| Net cash (used in) provided by: | For the six months ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Operating activities | $75,594 | $38,433 |
| Investing activities | (139,586) | (273,638) |
| Financing activities | 61,860 | 239,021 |

### Operating Activities

The Company generated $75.6 million and $38.4 million of cash from operating activities during the six months ended June 30, 2020 and 2019, respectively. Net cash provided by operating activities for the six months ended June 30, 2020 includes $50.7 million in net cash from rental activities net of expenses and $24.9 million related to the change in rents receivable, accounts receivable, prepaid expenses and other assets, deferred revenue associated with operating leases, and accounts payable, accrued expenses and other liabilities. Net cash provided by operating activities for the six months ended June 30, 2019 includes a $42.3 million increase in net cash from rental activities net of expenses, offset by $3.9 million related to the change in rents receivable, accounts receivable, prepaid expenses and other assets, deferred revenue associated with operating leases, and accounts payable, accrued expenses and other liabilities.

### Investing Activities

The Company used $139.6 million and $273.6 million in cash for investing activities during the six months ended June 30, 2020 and 2019, respectively. Net cash used in investing activities for the six months ended June 30, 2020 includes $101.4 million in real estate acquisitions, $29.3 million in additions to development properties and $8.8 million in additions to operating properties. Net cash used in investing activities for the six months ended June 30, 2019 includes $257.6 million in real estate acquisitions, $33.8 million in additions to development properties and $2.2 million in additions to operating properties, offset by $19.9 million in proceeds from the sale of CBP – Chula Vista in the second quarter of 2019.

### Financing Activities

The Company generated $61.9 million and $239.0 million in cash from financing activities during the six months ended June 30, 2020 and 2019, respectively. Net cash generated by financing activities for the six months ended June 30, 2020 includes $116.5 million in draws under our revolving credit facility and $109.3 million in gross proceeds from issuances of shares of our common stock, offset by $116.5 million in net pay downs under our revolving credit facility, $44.4 million in dividend payments, $1.7 million in mortgage notes payable repayment and $1.3 million in payment of offering costs. Net cash generated by financing activities for the six months ended June 30, 2019 includes $287.0 million in draws under our revolving credit facility and $158.1 million in gross proceeds from issuances of shares of our common stock, offset by $159.8 million in net pay downs under our revolving credit facility, $38.7 million in dividend payments, $5.9 million in payment of offering costs and $1.7 million in mortgage notes payable repayment.

### 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 set forth in the Nareit FFO White Paper – Restatement 2018. In addition, we present FFO, as Adjusted for certain other adjustments that we believe enhance the comparability of our FFO across periods and to the FFO reported by other publicly traded REITs. FFO is a supplemental performance measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of REITs.

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

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

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

We adjust FFO to present FFO, as Adjusted as an alternative measure of our operating performance, which, when applicable, excludes the impact of acquisition costs, straight-line rent, amortization of above-/below-market leases, amortization of deferred revenue (which results from landlord assets funded by tenants), non-cash interest expense, non-cash compensation and other non-cash items. By excluding these income and expense items from FFO, as Adjusted, we believe we provide useful information as these items have no cash impact. In addition, by excluding acquisition related costs we believe FFO, as Adjusted provides useful information that is comparable across periods and more accurately reflects the operating performance of our properties. Certain prior year amounts have been updated to conform to the current year FFO, as Adjusted definition.

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 six months ended June 30, 2020 and 2019 (amounts in thousands):

|  | For the three months ended June 30, 2020 | 2019 | For the six months ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $4,163 | $6,491 | $6,081 | $6,010 |
| Depreciation and amortization | 23,654 | 22,967 | 47,210 | 45,418 |
| Gain on sale of operating property | — | (6,245) | — | (6,245) |
| FFO | 27,817 | 23,213 | 53,291 | 45,183 |
| Adjustments to FFO: |  |  |  |  |
| Acquisition costs | 668 | 452 | 1,206 | 922 |
| Straight-line rent and other non-cash adjustments | (620) | (592) | (1,329) | (1,566) |
| Amortization of above-/below-market leases | (1,527) | (1,515) | (3,048) | (3,244) |
| Amortization of deferred revenue | (697) | (67) | (1,394) | (134) |
| Non-cash interest expense | 360 | 323 | 718 | 645 |
| Non-cash compensation | 1,021 | 697 | 2,021 | 1,431 |
| FFO, as Adjusted | $27,022 | $22,511 | $51,465 | $43,237 |

34

## Market risk

As filed, 2,292 characters.

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.

As of June 30, 2020, $890.3 million, or 98.3% of our debt, excluding unamortized premiums and discounts, had fixed interest rates and $15.7 million, or 1.7% 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 less than $0.1 million annually.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee, or the ARRC, has proposed that the Secured Overnight Financing Rate, or SOFR, is the rate that best represents the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. The ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company intends to monitor the developments with respect to the scheduled phasing out of LIBOR after 2021 and work with its lenders to ensure such transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

## Controls and procedures

As filed, 1,391 characters.

#### 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 June 30, 2020. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2020, 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 June 30, 2020 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 5,405 characters.

The following risk factor supplements the risk factors described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, and should be read in conjunction with the other risk factors presented in the Annual Report on Form 10-K.

***The outbreak of the novel coronavirus, or COVID-19, has caused, and could continue to cause, severe disruptions in the United States, regional and global economies and could have a material adverse effect on our business, financial condition and results of operations.***

The COVID-19 pandemic has caused significant disruptions to the United States and global economy and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases of the virus are identified, many countries, including the United States, have reacted by instituting quarantines, restrictions on travel and mandatory closures of businesses. Certain states and cities, including where we own properties and/or have development sites, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue.

The extent to which the COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of such pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic may adversely affect our business, financial condition and results of operations, and may have the effect of heightening many of the risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019, including:

- failure by the U.S. Government to perform its obligations under to us under our leases in a timely manner, or at all, or a failure to renew its leases upon expiration, on terms that we find acceptable or at all, which could cause interruptions or delays in the receipt of rental payments;
- the disruptive impact on federal personnel resources, which could hinder our ability to renew expiring leases, initiate or complete tenant agency build-out and construction projects and otherwise interfere with our ongoing partnership with the U.S. Government;
- disruptions in the supply of materials or products or the inability of contractors to perform on a timely basis or at all, which could result in our failure to meet development milestones set forth in any applicable lease agreements, cause delays in completing ongoing or future construction, development or re-development projects and/or increase the costs of ongoing or future construction, development or re-development projects;
- reduced economic activity impacting the businesses, financial condition and liquidity of our private tenants, which has caused, and could continue to cause, one or more of our private tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations or the impact of current and future efforts by state, local, federal and industry groups, such as a rent freeze for private tenants or a suspension of a landlord’s ability to enforce evictions, which could affect our ability to collect rent or enforce remedies for the failure to pay rent;
- severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which could make it difficult for us to access debt and equity capital on attractive terms, or at all, impact our ability to acquire, recapitalize or refinance properties on economically favorable terms, or at all and affect our ability to fund our operations or address maturing liabilities on a timely basis;
- a general decline in business activity and demand for real estate transactions, which could adversely affect our ability or desire to continue growing our portfolio of properties;
- the likelihood that the impact of COVID-19 could result in an event or change in circumstances that results in an impairment charge in the value of one or more of our properties, which would result in an immediately negative adjustment to our earnings and could have a material adverse effect on our business, financial conditions and results of operations in the period in which the charge is taken;
- uncertainty as to whether business interruption, loss of rental income and/or other associated expenses related to our operations across our portfolio will be covered by our insurance policies, which may increase unreimbursed liabilities; and
- the potential negative impact on the health of our personnel, including our senior management team, particularly if a significant number of our employees or key members of our senior management are impacted, which could result in a deterioration in our ability to ensure business continuity during a disruption.

Filed Aug 4, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-036103. Last ingested by Listed: Oct 26, 2026, 16:31 ET. No prices; not investment advice.