Easterly Government Properties, Inc. Stock

Greetings. Welcome to the Easterly Government Properties Second Quarter 2026 Earnings Conference Call. [Operator Instructions].

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cole Bardawill, Director of Investor Relations. Please go ahead.

Good morning. Before the call begins, please note that certain statements made during this conference call may include statements that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although the company believes that its expectations as reflected in any forward-looking statements are reasonable, it can give no assurance that these expectations will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's most recent Form 10-K filed with the SEC and in other SEC filings.

The company assumes no obligation to update publicly any forward-looking statements. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, core funds from operations and cash available for distribution. You can find a tabular reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information package on the Investor Relations page of the company's website at ir.easterlyreit.com.

I would now like to turn the conference call over to Darrell Crate, President and CEO of Easterly Government Properties.

Thanks, Cole. Good morning, everyone. This quarter, we delivered year-over-year core FFO per share growth of 5.4% and as many of you know, this is above our 2% to 3% stated long-term growth target and we are pleased and achieved these results by executing our strategy of growing earnings steadily, allocating capital thoughtfully and improving the quality of the portfolio over time.

While the current interest rate environment hasn't improved, driven in part by the volatility of geopolitical conditions that we're currently facing, our business moves forward steadily in periods like this as evidenced by our improved earnings guidance. We own facilities that support essential government missions leased to critical federal agencies high credit state and municipal tenants and defense-related companies. These leases are long duration, impacted primarily by the full facing credit of the U.S. government. We continue to communicate to investors that we are clearly differentiated from traditional office real estate.

Many of our facilities include secure, purpose-built environments where sensitive government work is conducted, they are mission-specific, difficult to replicate and essential to the agencies they serve. For example, we recently visited our U.S. District Courthouse in Charleston, South Carolina. The building sits at the city's historic four corners of law physically connected to the adjoining Federal Judicial Center deeply embedded into both the operations of the federal judiciary and the fabric of downtown Charleston, it's a clear example of the tenant stickiness that runs throughout our portfolio, facilities that are integral to the missions they serve and the communities they anchor. Turning to the quarter.

The portfolio continues to perform well. Occupancy stood at 98% and our weighted average lease term stands at 9.2 years. Both of these key metrics compare quite favorably to our office REIT peers, and each reflects the quality of our assets, the mission-critical work happening inside them and the durability of the portfolio's cash flows. During the quarter, we closed a new 5-year term loan facility. Allison will cover the details, but I'd note that in a selective lending environment, we executed efficiently and on attractive terms. We view that as a reflection of how lenders see the business, high-quality cash flows derived from government-backed income, supporting a disciplined strong balance sheet.

As part of our growth plan, we also continue to have ongoing conversations with the rating agencies and we look forward to updating you on our progress as we work towards an additional investment-grade rating in 2027. Turning to our cost of capital. our shares have performed well year-to-date, and the improvement supports our ability to grow. As our equity continues to re-rate, reflecting the quality and consistent growth of our FFO relative to peers, we will be able to harvest more opportunities across our $1.5 billion pipeline. Even at current levels, we're beginning to see opportunities to fund external growth on an accretive basis.

As the stock price improves, more of that pipeline meets our return thresholds. We spent the last several years building this pipeline, and we will hopefully look to begin converting it in the coming quarters. Based on our continued operational performance and successful capital markets execution, we are raising our full year core FFO per share guidance range. The increase reflects the strength of our business and our confidence in delivering another year of steady growth against our stated objectives. We continue to remain focused on disciplined execution prudent capital allocation and creating long-term value for our shareholders.

As we look ahead, we couldn't be more excited about the opportunities in front of us. Over the past several years, we've remained focused on executing our strategy, strengthening the portfolio and positioning the company for consistent long-term growth. We're encouraged to see that, that execution increasingly reflected in our market valuation, and we believe we remain in the early innings of unlocking the value embedded within our platform. We appreciate the dedication of our team and the continued support of our tenants and shareholders, and we look forward to building on this momentum through the rest of the year.

And with that, I'll turn the call over to Allison.

Thanks, Darrell, and happy Monday, everyone. I'm pleased to report the financial results for the second quarter of 2026. The underlying growth of the business continues to come through clearly in the numbers. Total revenue for the quarter was $92.4 million, up from $84.2 million in the second quarter of 2025. That's an increase of 10% year-over-year, and it was driven by several factors. The acquisitions and development we've completed over the past 12 months, lease renewals and TI and BAC income coming online. EBITDA grew alongside revenue coming in at $58.4 million for the quarter versus $54.3 million in the second quarter of 2025, approximately 8% growth.

And importantly, that growth is reaching the bottom line on a per share basis. For the quarter, net income was $0.07 per share on a fully diluted basis FFO per share was $0.78, up from $0.74 in the prior year. Core FFO per share as well came in at $0.78, up from $0.74 in the prior year. That is approximately 5% growth year-over-year for both metrics. And finally, cash available for distribution for the quarter was approximately $25.8 million. In terms of our active development projects, all three continue to progress nicely.

Our FDL lab facility in Fort Myers, Florida, the U.S. Courthouse and Flagstaff, Arizona, and the U.S. Courthouse in Medford, Oregon are all advancing and we're confident these will be high-quality mission-critical additions to the portfolio once delivered. We initially broke ground on our FDL lab facility in August of 2025. And our team and development partners have done an excellent job executing against the construction time line and keeping the project on track with delivery later this year. Our net debt to annualized quarterly EBITDA currently stands at 7.3x, down from the first quarter as we continue to make steady progress towards our deleveraging targets.

As our development projects advance, agreed upon lump sum reimbursements will provide a natural source of deleveraging followed by incremental EBITDA growth as projects are delivered and lease revenues commenced. These factors are an important step towards our medium-term leverage objectives and our pursuit of additional investment-grade ratings, which we believe will enhance access to attractively priced debt capital and support future pipeline funding. The term loan was an excellent outcome for the company. We secured a new $200 million facility with a 5-year maturity and the $50 million Accordion feature at pricing that was better than we initially had anticipated for a comparable long-term capital solution.

With an initial spread of 130 basis points over SOFR, we believe the financing reflects both the continued strengthening of the business and the quality of the relationships we've built with our lending group. We used the proceeds to pay down our revolving credit facility, which increased our available liquidity and provides additional capacity to fund future growth opportunities. With the successful closing of the term loan during the quarter, we are raising our full year core FFO per share guidance range by $0.01 at the midpoint from $3.09 to $3.10 and resulting in a revised full year range of $3.07 to $3.13.

Despite a challenging interest rate environment, our portfolio continues to perform better than expected, supporting confidence in our earnings outlook for the balance of the year. At the midpoint, our guidance assumes that we will have $50 million to $100 million of gross development-related investment during the year and $50 million in wholly-owned acquisitions. We continue to maintain a $1.5 billion acquisition and development pipeline. And with the recent improvement in our share price, we believe we are approaching an inflection point where we can begin to unlock opportunities from that pipeline in a meaningful way over the coming quarters.

We remain focused on disciplined capital allocation, maintaining the strength of our tenant relationships and advancing opportunities across our development and acquisition pipeline. Consistent execution in these areas continues to support the resilience of our cash flows and positions us to create long-term value for shareholders. Thank you for your time this morning. We appreciate your partnership and look forward to updating you on our progress.

With that, I will now turn the call back to Shannon.

[Operator Instructions]. Our first question comes from the line of Seth Bergey with Citi.

I just wanted to dig in a little bit more on kind of the acquisition pipeline and reaching kind of an inflection point as your share prices have moved upwards, how should we just think about kind of the cadence of maybe starting to unlock some of those opportunities as we move into the back half of the year and into next year?

Yes. I mean I think as Allison says, we're really approaching a level where again, getting dollars put to work at a sort of 100 basis point premium to our cost of capital is achievable. And Seth, as we've spoken, I mean, our company is small. So the great news is that -- it doesn't take much for us to be able to make a material difference, and we've been managing Mike Ibe and Chris Wang have been developing, managing, nurturing, cultivating this $1.5 billion pipeline for the last couple of years as we've continued execute on this on our growth strategy successfully.

And we will find things that are able to pop out of that if the stock 2,450 to 2,550 gets us into a nice range where we can -- where we have some opportunity to work some nice transactions at '26, '27. You can start seeing material -- sort of material movement being a couple of hundred million bucks of solid growth. And at the '28, '29, '30, I think we could see very material acquisition volume well in excess of anything that we've done historically. So the optimism is bred by what's within our control today and what we know we can execute on for us to continue to grow forward.

And as we all know, Allison won't let me release 2027 earnings guidance. But as we continue to look to move forward, I'm very confident that we have the resources to continue to deliver our long-term growth target to investors.

And then maybe just a quick follow-up on that. But last quarter, you announced mezzanine financing opportunities. Just of the $1.5 billion, is there any color you can kind of give around kind of maybe some of the size of those deals and then how much would be development opportunities versus acquisitions or any additional mezzanine financing you look to do?

Yes. I think we shared last quarter -- hey, Seth by the way, I think we shared last quarter that the program could grow to be somewhere between $30 million and $50 million. And that is still the target that we were working towards today. Certainly, that pipeline includes additional mezzanine financing opportunities. Many are in the final stages of lease procurement. So our participation in them would be contingent on those lease awards being made.

But as we've shared before, there's another batch of particularly VAs coming off the pipeline, and we expect the acquisition activity there and the mezzanine financing activity there to accelerate over the coming years.

And maybe for some folks who may not be aware, I mean, our mezzanine program, since we announced that as part of our earnings growth strategy, to say we've been flooded with opportunities that would maybe even be an understatement. But our discipline out of those is really just to provide mezzanine financing with developers and folks who we know are trusted and are known to us. and in particular, have buildings that we want to be -- that we want to have as part of our portfolio. So it's a very nice bridge as our cost of capital continues to improve, both on the equity side and the debt side to be close to some projects that we think can be very accretive to the portfolio over the long term.

Our next question is from Michael Lewis of Truth Securities.

So Allison, you didn't mention any need for equity when you talked about getting into your target leverage range. And then Darrell did talk about equity a little on a question about acquisitions. How accretive it would be at certain levels. I was just wondering, how do you think about your cost of equity? Do you look at NAV? Is it really just more of matching it up with acquisitions and making it accretive. How do you kind of value the cost of equity in the stock?

Sure. So it's a few points. I would say, first and foremost, we primarily match equity against acquisition capital. So that timing may not always be a perfect science. As you saw, we raised some equity in Q2. That was to fund the acquisition from Q1. And that equity was raised at a higher price than we underwrote the deal at. So we're really pleased with how that was matched. In terms of the impact of leverage and equity combined, we see a natural deleveraging path with just the development deliveries that we have. And with that, there is not a need to raise additional equity in order to meet those targets that we are mindful of all of our goals in concert with each other, and we will make the best decision, both from an accretion perspective, a leverage perspective and all in relative in relation to NAV as well.

Okay. Great. And then my second question, the Loma Linda mortgage matures next summer $127.5 million at 3.6%. I know it's early, is there any sense of how you'll recapitalize that and maybe what the cost could be?

Sure. So as Darrell has shared and we've shared over a couple of calls, we believe that we are on a path to an investment-grade rating, an investment-grade issuance would be our primary goal in terms of refinancing that mortgage. As you know, we prefer to be an unsecured borrower, so that would make a very attractive cost of capital on an unsecured basis. That being said, and while we won't stand still, we have ample capacity on the revolver now, take it on until we find the most attractive long-term debt capital solution. So that's assuming we don't do anything but stand still, we can certainly take it on the revolver.

Yes. And I think one of the -- as we -- obviously, it's a quarterly conference call. But as we're looking ahead, we've been doing a significant amount of planning around '27, '28, '29, understanding the leases that are going to make a big difference there, trying to get the structure of those leases in a way that we think will be most favored by the public markets. And on the debt side, Allison did a fabulous job getting these term loans in place. But as we look out at our refinancings and we see the opportunities in the debt markets, I think that we are planning well ahead in order to absorb refinance and continue to be on the growth path that we've articulated again, which is a strong 2% to 3% of growth consistently over the long term. And we think we could even step that up if we get our ratings and continue to move forward.

Okay. And then lastly for me, we noticed a little bit higher maintenance CapEx this quarter. So I was just wondering if there was anything like one-off or any reason for that?

No. We had some very fortunate weather in the spring. So as you can imagine, Q1 tends to be a little light with the winter weather. And this quarter was very active in terms of the external-facing projects, things like roofs or parking lot or HVAC equipment that sits exterior to the building. We are still anticipating that our full year general range of $1.50 to $2 a square foot will be the plan for the year, but there's obviously some seasonality in the numbers as well.

Our next question is from John Kim of BMO Capital Markets.

I wanted to ask about your $1.5 million acquisition and development pipeline and how that has evolved from the last time you provided that update. Did the window close on some of these transactions and new one have entered that pool? And if you can maybe comment on the rationale for passing up on some of the opportunities during the quarter.

I mean I think the pipeline continues to remain surprisingly stable given its size. There are seller expectations. I think we're a very good buyer for a bunch of reasons. Many of the folks who own these buildings, the idea of having the opportunity to do some more tax planning with us relative to others I don't think they feel like the market is in a place where they need to sell right now, so there isn't that level of urgency. And we do continue to probably rotate I'm going to say $100 million to $200 million of opportunity within that pipeline within the quarter.

There's one deal that we did end up passing on I think we were in a place. It was a fine building. It wasn't a building that was like a have to have for us and -- it was probably 60 to 75 basis points above our cost of capital. And so we decided to pass on that as we have very strong earnings growth right now. We're positioning ourselves for next year. But we're very excited to continue to execute on what we're identifying with some really terrific opportunities.

And of those potential opportunities that you may close on the next few months or, I guess, for the remainder of the year, can you provide some commentary on what that looks like between GSA and government adjacent assets or maybe more state-level investments? And how much of that is acquisitions versus development opportunities?

Yes. I mean I think we're seeing some GSA assets that we're excited about, and they're sort of at the forefront of what we're doing. Our hope is, again, if we could control the world, we we'd probably do half GSA and half sort of in the alternative bucket as we know. Our goal is to get to 30% of the portfolio being either in state, local or government adjacent. Why is that number important? The number is important because those have escalators of 2% to 3%. So the idea of adding 60 to 90 basis points to our same-store growth rate we think positions the portfolio very nicely relative to peers.

And we believe the stability of our cash flow is the mission-critical nature of our buildings should put us at a premium to those businesses. As I've said on prior calls, our portfolio is outstanding. I mean, of the buildings that we have, the duration of the leases, the quality of the cash flow, the occupancy, the tenancy. And I think what we're really working on is packaging those cash flows in a way, and that means packaging is in obtaining the lowest cost of capital. It means giving a growth rate that's strong to investors.

It's creating a tremendous level of cushion in the dividend and giving us that reinvestment opportunity, all of which, I think, should make us comp out relative to peers in a way that gives us a multiple on the stock that can be very attractive to our investors and to potential sellers of building.

And how are you thinking about dispositions as a funding source potentially because they may have re-leasing risk down the road? Or due to the focus on keeping your average portfolio age young versus...

I think it's all of those things. And to be very candid about it. And I know we've sort of -- we've shared this with you a little bit in the past. I mean these last 2, 3 years, Allison, myself the team, Nick Nimerala and the whole asset management team have really cleared up any of the fog or lack of clarity that's around the portfolio. We've got a lot of conviction on where we are. We will look at things on a case-by-case basis. And sometimes we're really working to find efficiencies. So even if we have a high-quality building, but maybe it's a loaner and certain -- and away from the other asset management resources that are really working for us, that might be a reason to sell.

But I don't think -- you're not going to see a significant portfolio turnover for us to go and raise cash to grow. And we continue to work and develop relationships with joint venture partners. So I think we're optimistic that our stock price is going to get into a good place, and we can continue to harvest the pipeline -- that said, pivoting toward the end of this year or the beginning of next year, if we don't -- if that's not going to be the case, we can work on joint ventures with folks with more attractive cost of capital.

Because we are the chosen partner of the U.S. government. We're the largest landlord to the U.S. government. We're working very closely from top to bottom with the GSA and with the other agencies. We understand what they need, and we are helping them become more efficient, and we're working on their most important quality buildings in order to be a good partner. So all of that said, for us to go find money that's either in the U.S. or around the globe, that wants to invest in these very high-quality assets that essentially deliver AA plus rent streams, we're a partner of choice for somebody. So we don't have a concern about not having the cost of capital when we need it in order to grow the company.

And as I said, our company is tiny today. I mean in the -- with it being worth $1 billion to $2 billion to grow that in a way that's competitive to peers does not take a tremendous amount of have sort of good luck for things to low our way. We're still in a place -- in a size where we can control that growth and deliver it to shareholders with consistency.

Our next question is from RJ Milligan of Raymond James.

I just wanted to maybe follow up on the investment pipeline question and maybe ask it a little bit differently. But based on your comments that more things are starting to [ PEs ]. I'm just curious if there's a mix component to that of is it that more development deals are starting to pencil and we should expect if you guys announced more investment activity that we've seen on the development side? Or is it acquisitions? I'm just curious at different levels and different pricing, should we expect a different mix of investment activity?

I think there's nothing that's completely discernible other than there are two dynamics that are happening. One, in the development world, you can see that we're finding these sort of veins of advantage. You see it with courthouses. I mean, we're building one in Flagstaff, we're building one in Medford. We're good at this. We know how to work with the government, we know how to make the process more efficient and courts are prickly animals. So you can develop a definable edge in that space as a developer. Because pleasing the judges, pleasing the various agencies that are in those buildings is a skill.

And so you're seeing an advantage there in Florida. I think that we've done a terrific job with this business. Florida is a fast-growing state. Their law enforcement is important to them. and they have other facilities that need to be built, and we'd be thrilled to be the state of Florida partner in order to do that. On the acquisition side, it's a little trickier. And again, I can't say enough that our small denominator being a smaller company is really our friend because we can continue to find opportunities in buildings where we have an advantage as a buyer because we're a long-term holder of product.

Then what does that mean? That means that if there are buildings that may not be well suited to be flipped in 5 years by an institutional buyer, but they're core to what we do. we're going to be able to get those at an attractive price. And those buildings like that, I mean I've got them in my head, so maybe I'm not describing them with words on the call as clear as I'd like to those buildings pencil for us, where we are, and those are with very high-quality agencies where we have a terrific relationship. And I think that, that puts us in some good stead, and we hope that we can get a couple of those in the next 9 months.

Great. And just a separate question here. Any -- and this is more modeling, but any update on the expected FAA move out expected in October.

So we -- at this point, they will stay through at least the end of the lease term. Their notice provisions have expired. So they will be -- they're definitely through the end of October. We're hoping for a better update on their moving process over the next month or so. These operations aren't always as streamlined in terms of moving as you and I might be moving in our own homes. So we should have an update for you, but they have historically had a bit of a move out on time challenge. So we're optimistic that they may stay a little bit longer, but we don't have anything concrete to share.

So maybe just to punch that right down I would not add additional revenue in your model at this time. We do know they will stay to the end of the term, but we may be able to share some -- it's only -- it's either going to be status quo or we're going to have a little optimism to share with you on our next call.

Our next question is from Michael Carroll of RBC Capital Markets.

Darrell, I wanted to circle back on your comments on your investment pipeline and your -- I guess the ideal mix, I believe you said was 50% GSA type buildings and 50% alternative type assets. I mean can you kind of give us an idea of are the cap rates the same for those type 2 types of buildings? I know the alternatives have the lease bumps or -- how should we think about the pricing ranges of those types of properties?

Yes. No, I mean, it's a great question. It really is case by case. I mean we're looking at some of these development deals with escalators -- and thus, the individual opportunities are complicated. And some of them we have, we can find an advantage and really are excited to get that capital put to work. And then on acquisitions, again, it's finding unique circumstances where our cost of capital gets us to a point where we get a high-quality building. So when I say 50-50, what I mean is we're working on opportunities equally that are acquisition and development, how it actually shakes out in a set of ways doesn't matter. Volume does matter.

Again, our long-term growth targets getting to that 3% number is very important. And we feel like we have the resources not only with the existing portfolio, the lease renewals, all the good work that we have done to get things buffed up and ready and predictable. And in addition to where our cost of capital is today and with regard to this very large pipeline that we continue to navigate, we're going to get to a place where I think our long-term goals are achievable.

Okay. And then circling back to your comments about potentially accessing the JV market if you don't like your -- I guess, if you don't want to issue equity fund some of these deals. Are you in discussions with potential JV type funds that wanted to invest with you guys to buy some of these properties?

Yes. We maintain a series of those relationships, and we've continued to develop them over the last 6 months. As we look forward, I think that we've always had a very large sovereign wealth fund who's been a very good partner but we found some other folks who nicely complement that as we have a broader range of properties that we're interested in, I think we can appeal to a wider range of taste preferences, as we work with folks. And I can say, clearly, we -- I mean, obviously, we've been at this for the better part of 15 years. We are one of the largest in the space, and we are close with -- we understand not only the commercial part of real estate, but how government works.

So if you're a JV partner, and this is exposure that you want in your portfolio, we do make it an easy choice for them. So we'll continue to cultivate those relationships. And also given the order of magnitude of the pipeline that we're developing, we don't need to be a ball-hog about it. We can be a very good partner with some JVs as well as doing things on our own and continue to grow the business in a way that I think is going to be pleasing to investors.

Okay. And with these JV type investments, is it more of a one-off type deal with specific JV partners? Or could you create or would you want to create more of a fund type business to kind of actively grow relationship and buy new assets?

I think a fund is a little sort of more formal, but with the VAs, we had a program with our JV partner, where we ended up putting close to $600 million, $700 million of asset in that entity. And that was a terrific program for them and fill the need and it's something that we do well. So thinking about -- again, I don't think -- when you say one-off that doesn't feel like what's accurate because it's really a waste of everybody's time to build the level of relationships that we're looking to have with JV partners. We're not coming up with a building and like auctioning it off.

These are partners who I think are excited to be in this space, and we want to do something that's fairly programmatic and consistent over time. That also said, to be an investment-grade issuer we would like to have more than $300 million of debt that we're issuing every year. That is also achievable. And in the context of trying to drive volume, especially as cost of capital gets a little bit better. We will weigh all of that as factors in how we decide to execute.

Our next question is from Merrill Ross of Compass Point Research and Trading.

If you had an update on the lease expirations aside from the FAA, I know they're pretty light for this year, but are you starting to look towards next year? And then I guess, a peak in 2028. So you may dilute that with growth but it becomes more meaningful and further out and go. I'm just wondering if any update kind of more in the near term, but are you starting to look towards the intermediate

Yes. Mel, thanks for the question. So we are in the happy stages of procurement for upcoming expirations going through most months of 2027. So procurements have kicked off for many, if not all, and we are actively participating in those. We hope to share a little bit more progress as we get closer to those completions. But we're not expecting anything out of line with our currently forecasted renewal expectations, mid- to high-teens net effective rent growth. about $35 a square foot in TI and B stack on average.

That being said, I know you mentioned that we've got a lot in '28, we're generally about 5% of expirations in any given year. And if you look at 2030, the golden year for all of us, there's like less than 1%. So it's going to be a very happy year to talk about on earnings calls because I don't know we'll talk about, but not only hopefully something else pretty cool. But we're underway and I hope to share some more progress in Q3.

Yes. And then I'd just say, I mean, to put some color around it, Allison has done a tremendous job of putting more organization and discipline around getting these procurements going. It's been a broad executive team effort to work more closely with the government and figure out DOGE was our friend. In this respect because it did open people's eyes to having a more fresh look on how they process things. We have very important buildings to them.

And the reality being they should be renewing these leases. We've done a very good job as a landlord. These are mission-critical facilities. So they shouldn't be -- we shouldn't be wasting a lot of time dickering around with the leases. And getting to a place where we can streamline the process where the American taxpayers are getting a fair deal. Our shareholders are getting fairly compensated for their capital. Everybody from our elected officials to the folks at the agencies to the GSA to us, nobody disagrees with that framework.

And so getting that to move more smoothly has been an effort, and Allison has absolutely done her part with the team internally to post up to the agencies, the government and the elected officials in a way that I think everybody is pleased with how it's going.

Thank you. I would now like to turn the conference back to Darrell Crate, President and CEO of Easterly Government Properties for closing remarks.

Great. Well, thanks, everybody, for joining us for this conference call. We're very pleased with how the portfolio continues to move forward. As you know, we're executing on this long-term growth plan, it is terrific to see the team continue to do their work, and I'd really just like to thank our new shareholders and folks who have been with us for also for quite some time. Thank you for your support and confidence, and we really look forward to continuing to deliver strong growth to you in the coming quarters and years.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Greetings. Welcome to the Easterly Government Properties First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Cole Bardawill, Director of Investor Relations. Please go ahead.

Good morning. Before the call begins, please note that certain statements made during this conference call may include statements that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes that its expectations as reflected in any forward-looking statements are reasonable, it can give no assurance that these expectations will be attained or achieved.

Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's most recent Form 10-K filed with the SEC and in its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements.

Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, core funds from operations and cash available for distribution. You can find a tabular reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information package on the Investor Relations page of the company's website at ir.easterlyreit.com.

I would now like to turn the conference call over to Darrell Crate, President and CEO of Easterly Government Properties.

Thank you. Good morning, everyone. We continue to operate in a market defined by volatility, whether it's interest rates, geopolitical uncertainty or broader capital market disruption. In these environments, investors tend to focus on businesses with durable cash flows, strong tenant credit and disciplined capital allocation. We believe Easterly continues to stand out in each of these areas. .

Our portfolio supports essential government functions that continue regardless of economic cycles or external events. These are facilities tied to critical federal missions, high credit state municipal agencies and select defense-related tenants. The durability of those missions and the strength of those credit relationships continues to provide a stable foundation for our business.

Importantly, we believe our portfolio is often misclassified alongside traditional office real estate. That comparison misses the specialized nature of what we own. From our FBI offices in places like El Paso, New Orleans and Pittsburgh, these facilities include secure classified environments, skiffs and other controlled bases where sensitive law enforcement and intelligence work is conducted. These are highly tailored facilities with support agents that support agency-specific operations and are difficult to replicate. They serve essential functions, benefit from long duration leases and are backed by some of the strongest credit tenants in the world.

Against that backdrop, we remain focused on a straightforward strategy, growing earnings steadily allocating capital thoughtfully and continuing to improve overall portfolio quality over time.

Over the past several years, we've taken deliberate steps to strengthen the company including leadership transitions, resetting the dividend and maintaining additional capital internally. These decisions are not always easy, but they position us to enter 2026 from a position of strength, supporting a robust and sustainable dividend while continuing to deliver consistent earnings growth that outperforms our peers.

Turning to the quarter. Our portfolio continued to perform at a high level occupancy continues to outpace our REIT peers at 97% and weighted average lease terms stood at approximately 9.4 years. These metrics reflect both the quality of our assets and the mission-critical nature of the work taking place inside our buildings.

During the quarter, we also completed our first mezzanine investment tied to the development of a new VA outpatient clinic. This transaction reflects how we are thinking about capital allocation in today's environment. While traditional acquisitions remain central to our long-term growth strategy, we are also identifying adjacent opportunities that can generate attractive current returns while preserving future optionality. This investment is expected to deliver a 12% yield is backed by a committed federal tenant and allows us to remain connected to an asset that may ultimately fit in our long-term ownership strategy. VA facilities represent 1 of our largest portfolio exposures, and that's by design. These assets are highly specialized, tend to be very sticky and are backed by the credit quality of the federal government.

We were recently at our VA Jacksonville facility, and it was filled with veterans receiving the care and services they need, an important reminder that these aren't traditional office buildings, but essential infrastructure supporting critical mission. We also believe that the administration's increased focus on defense spending represents an additional tailwind for the company particularly as it relates to external growth opportunities. As we look to the year ahead, we are encouraged by the strength of our first quarter performance and our ability to raise the low end of guidance. While broader market volatility remains, our priorities remain unchanged: disciplined capital allocation, operational execution and consistent earnings growth. We believe our portfolio offers investors a compelling combination of income stability, long-term growth and exceptional tenant credit quality.

With a lease portfolio that generates a AA+ revenue stream, we look forward to working with the credit agencies on achieving an investment-grade rating in 2027. To wrap up, we're pleased with how the year started. We're growing earnings, maintaining strong occupancy, allocating capital thoughtfully and continuing to improve portfolio quality. We believe that disciplined execution will continue creating long-term value for shareholders. I want to thank our team for their continued focus and execution as well as our tenants and shareholders for their ongoing trust and partnership.

With that, I'll turn the call over to Allison.

Thanks, Darrell, and good morning, everyone. I'm pleased to report the financial results for the first quarter of 2026 on this sunny Monday morning. The underlying growth in the business is clear. Total revenue increased to $91.5 million, up from $78.7 million in the first quarter of 2025, a 16% year-over-year increase. This is driven primarily by acquisitions completed over the last 12 months contractual rent growth and continued lease stability across the portfolio.

EBITDA also grew meaningfully, increasing from $57.3 million from $51 million last year, representing approximately 12% growth, reflecting the expanding earnings power of the platform. Most importantly, that growth continued to translate into higher earnings for shareholders on a per share basis even as we raised capital to support portfolio expansion. On a fully diluted basis, net income per share was $0.03. FFO per share increased to $0.76, up from $0.71, representing approximately 7% growth, while core FFO per share increased to $0.77 from $0.73 or roughly 5.5% growth year-over-year.

Our cash available for distribution was approximately $32.2 million.

In terms of our active development projects, we are on track to meet previously communicated time lines. Our Fort Myers, Florida lab project is expected to complete and commence its lease in the fourth quarter of 2026. That will be followed by the Flagstaff Courthouse in Arizona, which is scheduled to deliver in the first quarter of 2027.

Finally, the Medford Courthouse in Oregon is anticipated to complete during the second half of 2027. The delivery of these development projects are natural delevering points towards our medium-term cash leverage goals as the NOI comes online and any agreed-upon lump sums are received.

Turning to leverage. Our adjusted net debt to annualized quarterly pro forma EBITDA was 7.3x, and as higher during the quarter due primarily to the timing of equity issuance relating to our Commonwealth of Virginia acquisition. Given the share price volatility, the broader markets experienced in the first quarter we elected to defer issuing the majority of that equity, and we expect to complete the issuance by the end of the year. As Darrell mentioned, during the quarter, we completed our first mezzanine loan investment, providing $7 million of financing for the development of a new 120,000 square-foot VA outpatient clinic in Kennewick, Washington. The loan carries an anticipated -- a 12% yield and supports a 20-year firm term lease commitment from the Department of Veterans Affairs with an expected project completion date of October 2028. The transaction is backed by an experienced VA and GSA developer as sponsor who our team has known for decades and Easterly has transacted with multiple times. This allows us the opportunity to acquire the property of on completion as well, and the investment enables us to generate attractive current returns while remaining closely aligned with assets that fit our long-term portfolio strategy.

With the successful closing of the mezzanine loan during the quarter, we are raising the low end of our full year guidance by $0.01 from $3.05 to $3.06, resulting in a revised full year range of $3.06 to $3.12. While performance year-to-date is trending modestly ahead of our initial expectations, we continue to take a disciplined and cautious approach as we evaluate the remainder of the year, particularly given the ongoing volatility in the interest rate and broader equity market environment. At the midpoint, our guidance assumes that we will have $50 million to $100 million of gross development-related investment during the year and $50 million in wholly owned acquisitions.

We continue to maintain a $1.5 billion acquisition and development pipeline, and we are beginning to make meaningful progress on potential transactions that meet our investment criteria and can be executed at a spread to our cost of capital, either independently or through a partnership. We're staying disciplined on capital allocation, focused on retaining our tenants and executing across our development pipeline, all in line with the strategic objectives we have communicated. These are the fundamentals behind Easterly's stable and growing cash flows, and we believe this will drive shareholder vaccine.

Thank you for your time this morning. We appreciate your partnership and look forward to updating you on our progress. With that, I will now turn the call back to Shannon.

[Operator Instructions] Our first question is from Seth Bergey of Citi.

I guess just starting off with the mezzanine lending piece, is the $7 million kind of one-off transaction? Or is there something you would book to kind of do more of? And how should we think about kind of the sizing of that, if that's something that you would kind of think about doing more of in the future?

Yes. I mean, look, it's a terrific way for us to get involved early in a project. And I think we could see ourselves allocating about $30 million to this pipeline, the VA pipeline over the next 4, 5, 6 years is quite significant. There's a set of terrific well-respected developers who really have a knack for building these well. And as you can see, at $7 million, roughly $30 million allocated to this effort would get us involved in 3, 4 projects and which, again, as those buildings are ready to online in 1 to 2 years, I think we're very well positioned for them to become part of the broader portfolio. .

And then it sounds like the size of the pipeline is kind of unchanged at the $1.5 billion. And with the Virginia campus closing, you've kind of hit the acquisition or most of the acquisition guidance for the year. Just how active is that? What kind of catalyst do you think could unlock that acquisition activity? And just trying to think about how conservative that number is?

Yes. I mean look, I think we're very active in working the pipeline. We're also just super judicious about making sure it's accretive, and so as we look at our earnings that we're delivering for shareholders this year, the midpoint of the range is 3% growth, again, which I think is very favorable relative to the REIT sector, especially given our sort of AA+ revenue stream.

And I think things will pop out of that $1.5 billion. We are we are maintaining a very wide funnel on opportunity that are all high quality. And the intent for that wide funnel is for it to then narrow down to some opportunities that given a little bit of our cost of capital challenge with regard to stock price, but as we improve on cost of capital and debt, and we continue to find opportunities, we can do things that are really attractive, accretive, not only to core FFO per share but also accretive to the portfolio in general.

So -- there's a couple of very large development opportunities outside of the VAs that I'm discussing that are in that pipeline, which would be very attractive. And we're -- we have made some relationships with folks that are actually 5, 6, 7 years old. And ultimately, I think we can -- we'll be able to work some things out with each of them. So -- we really -- we want to make sure the promises that we make on this call we can keep. I think that we're delivering strong growth, but we're very optimistic about what this pipeline can produce over the next 1, 2, 3 years. And that is why we're confident in saying that our long-term growth rate for the company is 2% to 3%. And if we're -- as we work with the rating agencies and can achieve an investment-grade rating, that can also lead to our growth targets growing as we basically get debt refinanced over the next 3, 4, 5 years.

Our next question is from John Kim of BMO Capital Markets.

It sounds like you are moving forward with some investments in your acquisition pipeline of [ $1.5 million ]. So I'm just wondering why not update guidance in terms of investment activity. And can you just update us on what kind of spread you're looking for in terms of investment versus cost capital?

John, yes. So we are -- we've thought a lot about whether or not to update guidance, particularly with respect to the acquisition pipeline this quarter. And as Darrell mentioned, we are being conservative as we continue to evaluate near-term opportunities within that pipeline, and would love to update guidance as we are closer to those deals being cooked. That doesn't, I think, reflect at all about what we think we can do. It's just about being super transparent about how near-term opportunities are.

And then the second part, I think we target 100 basis point spread to our cost of capital. Obviously, this mezzanine financing transaction creates like a 600 basis point spread for a fairly nominal investment. So definitely balancing all of the opportunities. Mezz is an example of 1 of the actionable opportunities in our pipeline today. And 1 that, as Darrell mentioned, we'll continue to evaluate as we go forward. I would say, just to reiterate then, targets $150 million to $100 million is our defined range.

And on the mezz book getting to $30 million potentially, is that something that could happen this calendar year? Or if you could just talk about how fast you want to get to that $30 million?

Yes. Over the next 18 months, John, is when we can get that deployed. I mean, we're really -- I think we've delivered some real terrific growth for this year, and I think we're really setting ourselves up for a nice 2027. I'd love to be giving guidance for 2027, but Allison Marino and Cole won't let me. And so we're excited, again, to continue to grow in a way that we think will be pleasing to shareholders.

And are these on projects that you feel comfortable owning? Or do you plan to own some of these assets?

They're great assets. They're great assets. They're. How we're legging our way into them, I think, is very attractive for shareholders. And these are assets that are 7 cap kind assets that that I think given how we're entering in our -- and how we're in the capital structure we can buy attractively.

And this is an area where we really do have a deep underwriting expertise, not just on the financing product itself, but the underlying collateral and the VAC program is 1 that continues to expand. There are 20-plus projects that are coming through various stages of procurement. So we do expect additional opportunities in that space, particularly. So there are other GSA projects coming on as well.

And not to sound too exuberant about it all, but we absolutely understand these assets. And it's worth saying that we're working with folks we've known a long time. We're also very good at developing projects, mission-critical projects and working with the government. I mean we're seeing at our Fort Myers project, that's being run by a terrific group at called [ Seagate ] but just our understanding and perspective on how to move things along with the government, I think it's certainly neutral to accretive with regard to the project. .

We're getting to see how these buildings are built as they will because we do work in collaborative partnership with folks that were mezz-lending to. We're not just like a lender in the cap structure. And we can also make suggestions along the way that can either save costs, we're positioned the building for more attractive operating costs for the next 20 years. And so we're a terrific mezz partner given where the company is today and cost of capital, it's an excellent way for us to get involved in these assets, and we're really excited for the growth that, that means for shareholders over the example of years.

Our next question is from Merrill Ross of Compass Point Research & Trading.

I'm sorry. Was that me? Okay. That sounds dropped out. Okay. So -- and will any of those VA projects be acquired by the JV? Or is that an entity filled? So are these going to be wholly owned?

Great question. And the answer is it could be either. We -- as we talked about, while we do have this very strong pipeline, we also are being more active today with potential JV partners, and we think we have -- we obviously have some excellent long-term relationships there. I think these are fantastic assets. And the degree to which we can afford them and deliver growth to our shareholders. They can be wholly owned.

But that said, if there's an opportunity for us to lend our ability to manage these kinds of facilities in the efficient way that we do that would allow us to buy them through joint venture. We certainly want to capture those economics, but the North Star of all of this is delivering accretion and taking on projects that have that 100 basis point premium to our cost of capital.

And again, when we think about cost of capital, we really do think about it on an accounting basis, looking at sort of stock price and FFO as a cost of equity because that's really what drives FFO accretion. But when you think about the IRRs of our projects, with a dividend of 8% and growth of 2% to 3%, we can also start vectoring into different kinds of cost of equity, but we give very little credit for our future growth in our cost of equity as we allocate it and think about what the spread needs to be to deliver accretion to shareholders. And focusing on that FFO per share growth is the #1 metric for this management team.

Great. And as you look at your pipeline [indiscernible] further distance, is it primarily federal government? Because you said it was outside the VA, there was activity, but is there also activity at the state level because the Florida acquisition or our development is pretty lucrative. So it would be interesting to know the mix.

Yes. We love Florida, we love Florida. Everybody is moving to Florida. Lots of great people are moving to Florida, but there is some -- there are a few criminals in that mix. So they will be building law enforcement facilities in Florida. They're pretty good at law enforcement. The one that we're working on right now that will be actually delivered early crazy as it sounds and on budget, they have 3 or 4 more of those on the dashboard that they need to get built over the next 3 to 5 years. So I think that we're very well positioned to be a good partner in doing that and can probably do it in a way that's very attractive for the taxpayers of Florida, although they pay very little tax and an opportunity for us to do something that's very accretive for shareholders.

And then the broader pipeline, you can think about it in roughly 1/3. So I would say we see about 1/3 of that $1.5 billion being federal third being state and local and 1/3 being government adjacent. And then if you think between the split of regular way, wholly owned joint venture development, mezz financing, it's sort of a mix of all of that with primarily regular way acquisitions as well as development filling that pipeline up.

The team has done just a terrific job of building a toolbox of ways to generate accretion for shareholders. And Allison and her team are really just doing a terrific job on the balance sheet. And I think we'll have some nice things to talk about over the next 6 to 9 months.

I do appreciate the thought of diversity inside the pipeline. .

Our next question is from Michael Carroll of RBC Capital Markets.

I wanted to circle back on the mezz investment. I know you said in a couple of times that you have the ability to potentially acquire these assets at some day in the future. Is there a purchase option related to that, that DEA can exercise to acquire those properties? Or is it just the relationship you get that would allow you to be able to negotiate a price as that gets completed?

No, we have a series of different ways where we have an advantage in the purchase, Allison do you want to...

Yes. We have both a ROFR and a ROFO on that particular deal. And those are mechanisms we look to build into financing arrangements like this as a first look.

Okay. And then when you talk about deferring funding some of these deals, does that mean that you have to be more thoughtful about deploying capital here in the near term until you fund the deals that you announced year-to-date?

What does that mean exactly?

I guess in the call, you said that you deferred raising equity to fund the 1Q '26 acquisitions. And correct me if I'm wrong on that. So like if you're waiting to fund those deals, do you have to like does it make it more difficult to execute on the pipeline because you haven't funded the 1Q deals yet?

Yes. I mean, look, I think it's a really -- it's actually a pretty marginal comment, and it's more toward -- geared toward our debt providers. The idea being that we are going to continue to bring our leverage down over the medium term. We're going to get something that has a 6 handle on it. And even though our leverage modestly ticked up a little bit this quarter, it's not a reflection of a change in our strategy to continue to properly equitize these opportunities. And as we look at some of the tools with regard to mezz and some of these development transactions, I think we're going to find ourselves where we can deliver the growth that we're promising. We can get our leverage in the right place. We're absolutely directionally showing us getting into the right place. And I've said is obtaining an investment-grade rating can lead to 100 to 150 basis points of additional FFO per share growth over the next 5 years.

Okay. Great. And then just last 1 for me. On the available space that you have in your portfolio, like the 3% vacancy, what's the prospects of being a to lease that up? Is some of the space potentially leasable within your portfolio that's currently free?

Yes, crazy enough, yes. I mean this is on the list of all the initiatives and where I'm super proud of the expanded leadership team they are working tirelessly. I mean this FDA lab in Atlanta that we just opened have tens of thousands of square feet that are not leased. The building is fantastic. And all the vacant space that we have now is a space that we underwrote to be vacant when we purchase these buildings or like we're forecasting, obviously, NOI. So a lot of it's a little extra, and we are pursuing that more aggressively than we ever have. And that would also be incremental earnings growth on top of what we've set in our guidance. .

These leases do take pursuing them takes a while with the government. And these can be 6 to 9 months kind of things. But as we look to 2027, I see that mezz debt and the opportunity to get some of this vacant space leased and some things shaking out of our pipeline that are unique for us being how we're positioned to the asset and the needs of the seller can probably come together in a pretty nifty way. So we're excited for the opportunity. We don't know exactly where that's going to all come from. But when you look at the pipeline of opportunities, the tools that we have and the management team's enthusiasm, effort and skill. I think we're really excited for 2027. But we are excited for 2027. I think we are.

Our next question comes from Joe Dickstein of Jefferies.

Darrell, you noted in the opening remarks the intention to achieve an investment-grade credit rating in 2027. Can you just speak to the deleveraging strategy and other metrics you're focusing on to achieve this?

Yes. There's a couple. One, if you just squinted at all, you can see that there are other firms that are quite similar to us, that have a BBB+ rating or BBB, just flat BBB, solid investment grade. Their revenue streams start from a place of being single A- to BBB if you look at the revenue stream that cores into the top of our business, it's basically AA+. So the idea that the revenue comes in is AA+ and then all the things that happen before it gets to a bondholder, is 8 notches lower. That's what it would take for us to receive a noninvestment-grade rating.

I think as we look at the scale of the business, we're in a place that's attractive, probably a little bit on the lower end, and that's a place where that's probably why we have not perceived an investment-grade rating as aggressively as we could have in the past. And if you look at leverage, again, we're in the ZIP code for obtaining an investment-grade rating today, especially when we talk about that differential of us being 5 notches among REITs of sort of similar credit quality. And -- but if we get into the 6s, then as you look at scatter gram of real estate REITs. Again, we're very much in a place. So leverage is probably the only metric that we look at and maybe a little bit on scale, where we wouldn't be BBB. But that said, we're working at all of those things, and we're very committed to behaving like an investment-grade company. We understand what that takes. And we think with [ WALT ] that's almost a decade plus all that AA plus money coming in that we're in a nice spot to be able to harvest that opportunity. But it could take a little time, but we think 2027 is hopefully our year.

Makes sense. And then just on investments, acquisition target is still at $50 million. I do understand cost of capital is a constraint, but maybe just to ask more of a direct question. At what share price would you be able to become more active and aggressive on this...

Every little bit of share price will obviously make it easier. And from where we are, we don't want to have a robust call and try and get expectations ahead of where we are. We're really happy with the growth that we're delivering right now. We're going to be very deliberate about making sure 2027 is right on track. And so to set ourselves up to disappoint anybody is not what we want to be doing. So with that said, to just answer your question directly, I mean, '24, '25, '26, '27, as those become very -- the flywheel really gets going for what we do. And if we don't get the support from the capital markets and continue to have this 8% dividend, we can still meet these growth targets. I mean we've built enough tools. We have strong JV partners. So we're going to be able to deliver that value. But of course, with a lower cost of capital, you can -- we're excited. The team is excited and our disposition is to really accelerate the growth of the company, and the team is very aligned in achieving those objectives consistently for a bunch of years.

Our next question is from Michael Lewis of Truist Securities.

Regarding the mezzanine loan investments, is this now like the preferred way to do developments rather than the large cash outlays and the reimbursement later, does it make sense to do more with developers and then you become the takeout on the back end? Should we expect you to do more of that less of the other?

It's a good question. I mean I think it really depends. It depends on the project in that you look at these FDA labs, there's 7 more to be built, and we've built 3 of them, and each 1 has been a better value for the government because they've been terrific collaborators with the same team on each of those 3 buildings, and we're able to get really into stride of how to save money. I mean there's 35,000 miles of pipe and wire and all sorts of things that go into it. And so we kind of figured it out.

That said, I think that we can build the lowest cost FDA labs and highest quality for the U.S. government. So we should be doing exactly that. I think if you look at some of these VAs while we can build them well. There are 1, 2, 3, 4, 5 developers that have done a terrific job in this space. And for us, the idea of competing with 5 quality developers spending the search costs to do it, we might as well let 1 of those high-quality folks win, stand really close to them while they're building the project, and end up -- I think that creates more value for our shareholders.

So when you look at Medford, Oregon or you look at Flagstaff, we're very good at building courthouses. And these are courthouses that are in areas where there was -- this was not a major metropolitan courthouse, where we may have found ourselves with a high-cost competition with 11 other developers. The folks who are running the procurement understood Easterly, understood the value that we deliver. They're in markets where the competition was less familiar with these types of assets, and in those cases, us doing development from start to finish was the way to go. So sorry for all the explanation, but it's really the answer to your question. And it's just about trying to use our expertise to deliver the most value for the shareholders with each of these very high-quality projects. And they're terrific because you end up with a 20-year lease and find yourselves in a place where you really have significant government cash flows for years to come.

No, that's great. And then just lastly for me. You kind of alluded to, I think, a little bit of conservatism maybe in the acquisition guidance and the FFO guidance. If we annualize the first quarter results, it gets you to $3.10 for the year, the midpoint of the range is $3.09. I guess the question is just is that it? Is it just a little bit of conservatism? Or are there any drags through the rest of the year, why you wouldn't have any sequential growth?

Allison?

Yes. So a few things. One, as you can imagine, you've been seen in the markets recently, interest rates are like really wacky right now. I think there's increased short-term volatility that we are seeing with respect to both so far and all of the versions of treasury, we like to play in. So a little bit of our conservatism is really driven by the fact that we need to see if some of that volatility calms down, which would allow us to improve our cost of capital as the year goes on and strategically look to the debt markets to term out the revolver. So that's a big piece of uncertainty. I don't think we sat here 2 months ago and necessarily felt that way. But I don't think we are in poor company today with that concern either. So that's a big piece of the puzzle as we move throughout the remainder of the year. Obviously, as developments come online, timing is a very large piece of what underpins our guidance range. So if earlier in Q4 or the closer to the beginning of Q4, we are able to deliver the FDL lab in Florida, the more improvement in our guidance range you might see. But we're still -- these are the critical 6 months here of being close enough to see it on the horizon and be excited about an opening party but still far enough where there's development risk left. So we will continue to -- as we march closer to that, evaluate this final projection of delivery as well.

Okay. And actually, maybe I'll throw in 1 more since I asked kind of a guidance question about '26, I know you're not going to give guidance for '27. You said you're excited about it. The consensus number for FFO is the same as it is for '26. Is there anything you could say that about the -- what excites you about '27 and the growth potential there?

I mean I think if you look at all the tools that we've created and you look at the opportunity set that we're harvesting, the idea of us being flat next year would make no sense. So that's my point. We have an FAA lab that finally these guys are going to leave. I mean it's been 8 years that they're there. That's a little bit of a drag. But everything else that we're doing from re-leasing the vacant space to mezz debt to harvesting a pipeline. And Allison's got it just right. Look, it's first quarter of 2026. So not fair to look at, but we have more stable cash flows than every other REIT out there. So as we're looking forward, we are feeling a level of optimism. And as things unfold here over the next 6 months, I think that we're going to be able to be very specific about where we're going for the year. But with all these tools and the team really reoriented towards growth, everyone understands what they need to do, and God knows we've said it enough that we're going to grow 2% to 3% a year. We've done it for 2 years now. If we hit the middle of our guidance this year, we're going to be there as well. And we believe that, that's our plan for the next handful of years to grow at that pace.

Okay. I understand, Allison, not once gave guidance a much bigger refi year next year than this year. So if rates and they're more uncertain for next year.

Yes. So that's why we can't give guidance, but I certainly would love to, but Allison Marino won't let.

Thank you. I would now like to turn the conference back to Darrell Crate, President and CEO of Easterly Government Properties for closing remarks.

Great. Really appreciate you joining for this for the conference call as we share our first quarter earnings. We're very excited about, obviously, what we're doing. We're very excited about our growth. And we are -- we really look forward to you paying attention to the company spending some time with us. We appreciate the partnership, and we look forward to getting together at this time in about 3 months.

This concludes today's conference call. Thank you for participating. You may now disconnect.

[Audio Gap]

Use you mic or go to liveqa.com and enter code GPC26 to submit questions. Darrell, we will now turn it over to you to introduce your company and the team, provide any opening remarks and tell the audience the top reasons an investors should buy your stock today, and then we can jump into Q&A.

Thanks, very much [indiscernible]

Can you just tap the button to turn the mic on?

Is that on?

Yes.

Red is on. I didn't know red was good. Okay. Well, we're really glad to be at this conference. Thank you so much.

I would -- at Easterly Government Properties, we're just super excited about what we're building and driving toward. Our guidance this year provides a 3% growth as we've delivered for the last couple of years. So we're a consistent 3% growing firm. Our cash flows are backed majoritively by the full faith and credit of the U.S. government. Our buildings are to mission-critical agencies and facilities that support that mission. Example being at an FBI, they need antiballistic glass. They need setbacks from the road. They need fences that a tractor trailer can't drive through. That is what they need.

Our buildings are young. The weighted average age of the portfolio is about 16 years. A government building lasts 40 to 50 years. When you think about stickiness and renewal, let's go back to this FBI example. Their choice at the end of a 20-year lease is to go build another one somewhere else or stay in our building. And at the end of the day, we look at the replacement cost of the building. We give a nice healthy haircut to that price of like 10% to 15% and the leases renew, and that's terrific for us, and it's terrific for the government.

We're in a -- we've been in a tough space in this -- with regard to headline risk and other issues over the last year. We've had DOGE, we've had government shutdowns and people outside of what we do have a level of uncertainty. I think that's weighed on our stock and on our multiple. As we look forward, though, I can't tell you enough how DOGE is a tailwind and the rethinking of government is a tailwind for the company. Fundamentally, the more the government thinks hard about what it wants to do and save money for taxpayers, the better we are as a partner.

Public-private partnership in this space is what it should be each and every day. We're very good at managing buildings. We're very good at preventing leaks in roofs. We're very good at making sure a building doesn't become obsolete. That's what real estate professionals do.

The government is really good at catching criminals and finding bad food and doing all the things to protect the American people. The way that works though is, why are they not good at fixing leaks in their building? Because the Congress funds these agencies. The agencies are run by the administration. The administration has a set of priorities. Congress tends to not give enough money to agencies for political reasons or whatever else it might be.

So if you're running the FDA, the FBI, the DEA and there's a budget cut, what's the first thing you're going to do? You're not going to cut your program and cut your objectives, you're going to not fix the roof. And so that is why today, we see over $85 billion of deferred maintenance in government buildings. When we look at FDA labs across the country, there are 7 of them that do have leaky roofs. The buildings are awful. That doesn't mean the FDA did a bad job. They're just not good at managing real estate.

We've now built 3 labs for them. They're outstanding and the public-private partnership is really working. And we've been in this business for over a decade and have a real defined advantage and competitive edge relative to others. We have a terrific development pipeline. We're building 2 courthouses, one in Arizona, one in Oregon. We have a law enforcement lab right here in Florida that we're building. All of those are at a yield on cost that's attractive and accretive to us, even with our cost of capital challenges that we have today with the stock price, I think, trading at a 20% discount to office, we can still do these projects in a way that's accretive and be delivering the type of growth, that 2% to 3% that we promised to investors year in and year out, which, again, I think is a very attractive proposition combined with the dividend that today is a little bit over 8%.

So we have a -- if our cost of capital is better, we could have -- be executing on a pipeline that is over $1 billion. We have what we need in order to, again, fulfill our promises to investors, but we're very excited. In times of disruption, our stock has done very well. The best day of our lives was when COVID came out and people know that we are a flight-to-safety, we're an anchor in a portfolio.

And today, as you look at uncertainty in Iran or whatever else it might be coming our way, we're a real safe harbor. And our dividend is, again, very attractive relative to expectations for the equity markets. And we see -- if you look at just multiples and if we just do what we're supposed to do relative to office, there's about 30% of NAV appreciation that folks could imagine to capture, which makes this a very compelling time for us.

Great. Maybe just touching on a few of those points. You talked about kind of 3% FFO growth plan. You've also kind of outlined leverage around 6x. Can you just kind of walk us through kind of the major building blocks of kind of that plan, kind of just what you need to do from a leasing operations perspective and financing to kind of get to that 3% growth and hit that 6x leverage target?

Sure. Let me start off by just talking in broad structure and how we're thinking about that and why we've set those objectives, and then I will turn it over to our fabulous CFO, Allison, to talk about some of the specifics. But broadly, job one is delivering growth to investors. So that is what we will do. We will do that by accretive acquisitions, by lease renewals. We're already fully renewed through 2026, and we're focused on the '27 renewals, which is fantastic.

And we'll continue to have accretive development projects. So once we've satisfied that, then one of the choices we get to make is how do we finance that growth. And that's a mix, obviously, of debt and equity. We will use as much equity as we can to get to that kind of 3% growth level, allowing us to continue to delever. We've come down from the high 7s to just about 7x now, and we'll move into the 6s over time. Why are we going to do that?

Notwithstanding that we have the very best credit cash flow of credit tenancy of anybody in the REIT industry in the United States. We believe getting an investment-grade rating in the next couple of years is very important. The only metric while we think our buildings can handle more leverage than others as our scale grows and as we continue to work with the rating agencies, we're going to continue to see an investment-grade rating being something that we will capture. That will lead about 10% of growth to our FFO over the probably subsequent 5 years from when we get that rating. So the degree to which as we look forward, we anticipate growing 3% a year, add another 200 basis points to that, we really do see ourselves in the next short period of time being a -- getting into that 5% growth space. But there you go, Allison.

Thanks, Darrell. So drilling into some of that a bit more. One of the areas we create the pathway for future core FFO growth is within our development pipeline. It is -- we have 4 -- 3 active projects now. We've just recently completed our landmark $250 million FDA lab in Atlanta, Georgia. It is beautiful. All of the equipment is humming, and we were very excited to complete that project.

In terms of the future pipeline, though, we're looking at yields in the 11s on a yield-to-cost perspective. That creates -- our target spread on a development project is about 150, 100 basis point spread to our cost of capital from a yield perspective. But as you can imagine, an 11% plus development yield definitely creates that room for growth. That particular project will deliver at the end of this year. It's an 18-month build time. So between the investment horizon on that as well as when we're eventually going to create FFO accretion from that is a very short time frame.

Development is actually interesting from a leverage perspective as well because it's a natural delevering point for 2 reasons. So one, obviously, the cash flow and the rents come on. But two, when we're talking specifically about federal development properties, it is the receipt of what we call a lump sum reimbursement. So it's the amount that the government has contributed to the project to increase the overall value of it to build it very specifically for their own use and at the end of the project or at midway points, we receive a cash reimbursement of that amount. So those are natural delevering points as we look to the next 18 to 24 months.

Our current development pipeline is scheduled to wrap up at the end of 2027. So we've got 1 end of this year, 1 mid next year, my gosh, it's 2027 already. That's crazy. And then 1 at the end of next year. So that's a natural delevering place for us to meet those long-term and medium-term objectives.

In terms of drilling into the actual pipeline and what we do on a day-to-day basis versus some of these external growth metrics, in terms of leasing and occupancy and net effective rent, we target mid-90s occupancy rates and renewal rates. I would say we're -- we're at 97% today, but mid-90s is the target. And then on a net effective rent spread, we typically target mid- to high teens in terms of net effective rent.

Our last 2 renewals are 20-year deals. We're able to get typically about 15 to 20 years of WALT when we execute a renewal. So every incremental renewal that we execute allows us to drive incremental growth each year. We have about 5% of our portfolio rolls in any given year. I think that speaks to 2 things. So one, our consistent ability to deliver renewal adjustments and increases to FFO, but also the safety that we don't have a massive here of 20% of the portfolio rolling, right? So it's -- it has a very small amount of risk, but a very consistent amount of upside.

So for us, that's been very important. And then to Darrell's point, I think the debt markets to us remain to be incredibly constructive even if our equity cost of capital has been a bit depressed with headline risk. So while that doesn't necessarily drive leverage, it does help growth overall to look to our debt stack, drive to the cheapest cost of debt capital and really be creative about how we think about the credit and the attractive pieces of these leases being attractive in those markets.

One of the questions that we get from investors so often is, well, we cut our dividend a little over a year ago. And they say, well, why did you do that? And the very simple answer is that we were repositioning the company away from a story of safe cash flows, which is entirely true to a story of growth. And we have since going public when I was Chair of the company, we had a payout ratio that was close to 100%, why is that? Because we can forecast our cash flows farther into the future than almost any other REIT that you're going to meet with today.

And that stability, we thought would translate into dividend, and we thought dividend is what shareholders would like. Turned out when interest rates went up very, very quickly, that led our payout ratio to be 100%. And it was going to take us 2 to 3 years for us to get to a place where, again, we were covering our dividend and continuing to grow. And instead of debating that with REIT investors, we decided to cut the dividend and create growth.

Just by having a lower payout ratio, it creates a little bit more growth in this business. And I think we're really pleased that we've positioned ourselves this way as you can see that REIT companies are being rewarded for growth now and the ability to deliver what we think is above-consensus growth rate for office is a really exciting time for the company.

And then just kind of on the kind of same-store NOI growth piece. Can you talk about kind of your preference for state versus federal and kind of the differences in the lease structure to kind of grow that long-term same-store NOI growth rate?

I mean, when Allison and I assume the responsibilities of running the company day-to-day, one of the things that we looked at is what would make -- what satisfies investor demands, what makes what we do most appealing to our shareholders. And to that point, same-store sales growth continues to be an important metric in this industry. So to conform with that, we decided to move toward 30% of our portfolio being in state and local and what we call government adjacent. These are buildings that look exactly like what we do for the federal government. Many of them either work directly with the federal government or emulating some of the mission that federal government does in their own state.

Our facilities have the same look and feel. But the great news for that 30% of our portfolio is that they have escalators like a commercial lease. So in very simple math, if 30% of our portfolio has 2% bumps in it, that's 60 basis points of same-store sales growth that we'll have year in and year out. That little nudge, while it may not sound like much, is quite differentiating with regard to positioning the company to have a growth rate that's very competitive to others so that then when you look at the stability of our cash flows that are underneath it, I think we become not only compelling on a peer-to-peer basis, but we're very compelling, even more compelling on a risk-adjusted basis.

And then just the new GSA administrator was put -- confirmed in December and several of the top kind of tenant agencies face budget pressure. You mentioned in your opening comments, the $85 billion of deferred maintenance and government buildings. How do you kind of weigh kind of the budgetary pressures and the deferred CapEx, both in terms of risk and opportunity? And just to tie that in with a question from the audience that asks, how will the continued small government policy impact the pipeline to be delivered in the next 3 years? Could those potentially be canceled?

Yes. To the last question, no. If anything, government does need to reposition its facilities in a way that, again, facilitates mission. There is nobody better, and I'm so grateful to Ed Forst who if folks don't know him, has stepped into government. I mean this is just such an American Patriot story. I mean he was the Chief Administrative Officer at Goldman Sachs. He ran Cushman & Wakefield. He is somebody who understands real estate, understands capitalism, understands capital markets, understands financing and is bringing many of those skills to a leadership position in the government.

This should be no surprise to anybody that the bureaucrats in our government are terrific at making -- crazy enough, not making long-term mistakes and moving things in a deliberate way forward, bringing in this influence of Ed Forst in order to direct those resources of government in order to be more efficient for taxpayers is just a blessing. And for us, being a public-private partner to help him in his mission to satisfy and bring fantastic facilities so the government can do their work is exactly what we can do.

For all the points that I was making earlier, we will keep buildings in better shape. We will not let deferred maintenance pile up, and that will allow our -- the men and women who serve American people to do their job in a better way. So we really complement Ed's desire to step into government and do this work, and we're very excited to be the partner of the evolving GSA under his leadership.

How do you think that will kind of translate kind of over the medium term? Will that present more development opportunities? Will the government look to sell more assets? Will that provide more kind of acquisition opportunities? Just kind of overall framing what that means for DEA?

I think big picture is they've got to get out of the buildings that have a ton of deferred maintenance or they've got to decide how they're going to recast them to be doing something that's mission-critical. So they will figure that out. Most of that will be in Washington, and most of that will have nothing to do with us. We don't own any facilities in Washington because we like to stay close to the mission.

That said, as we look forward, there are 7 FDA labs that need to be built. There are a number of Veterans Administration day facilities that need to be built. So we're very excited about the pipeline as we work to have, again, protect the food, the drugs and the consumables that Americans have and also protect our veterans and give them the medical care that they deserve.

With their stated goals, the government's portfolio is about 450 million square feet across the United States and 150 million square feet of that is leased. So it is our belief that, that will flip the other direction. So leased will account for about 300 million square feet and owned will account for about 150 million, right? So they're never going to lease the White House. I think we can all acknowledge that part or the capital building or large landmarks.

However, when we talk about deferred maintenance, it's really about their stated goals of reducing cost for the American taxpayer, and this is the way forward. We all wouldn't be at a real estate conference talking about REITs if we didn't all believe a leased alternative is the right one. So I think the government is just 2 decades late to that decision-making process. And it might take them a decade more to trade out of owned and into leased, but we are certainly their preferred partner as we look to opportunities with them.

And then you just delivered the FDA lab in Atlanta. You have 2 courthouses in the development pipeline and a law enforcement building as well. Is there a specific type of facility that you think presents the best expansion opportunity?

I think we have a special secret sauce, particularly on labs and court houses. If you look to our historical development pipeline, that's really where we shine. Building a lab is a very technical endeavor, particularly with the U.S. government or with state and local governments. I think you could continue to see us work in those 2 spaces. So for us, working with the government is about underwriting to the mission, not necessarily just labs and courthouses. Those are 2 we feel are very sticky. But we would continue to evaluate all mission-critical opportunities in the market for those where we can drive a spread to our cost of capital.

And then just maybe switching gears a little bit. Can you just talk about kind of -- or provide an update on kind of the planning around the Chicago FAA asset and what's kind of embedded there in guidance?

Sure. So many of you have heard us tell the story before, but that is probably the best performing asset investment we've ever made. I think it's returned like a 25% IRR when we bought it for $6 million, however many years ago. So we do intend for that tenant to move out at the end of their lease term. Will they stay an extra 3 months? Probably. They are already 6 years plus past our expectations on vacating.

We do expect them ultimately to leave, and we are in discussions on a sale of that building when it becomes vacant. So for us, that's already in the works. in terms of what's embedded in guidance, we are expecting them at the end of this year, no later than and anything else would be gravy for '27.

And then just looking ahead to kind of the 2027 lease expirations, there's EPA, FBI, U.S. courts, Coast Guard and 2 ICE leases. How are you kind of approaching kind of renewal discussions? And kind of what are your expectations around renewals versus vacates there?

So in terms of the 2027 portfolio, I would say, on average, the government would start procurement anywhere from 18 to 24 months in advance. So we are in, I would say, preliminary stages on most of '27, but some of the later leases in '27 have not sort of come up for air yet with those tenant agencies. We're not expecting any adverse outcomes there. They're all moving along sort of in accordance with our typical expectations. And then those stats that I mentioned earlier like mid- to high teens net effective rent spreads. Renewal terms are typically about 10 to 20 years. That's about what we would expect for those as well.

And then is there any incremental kind of TIs that go in on renewals or space reconfigurations to kind of bring those buildings just up to date?

Some may have TI packages, as you can imagine, how you work changes over the course of 20 years. So a really good example is a building that we renewed 3 years ago now. They converted an old fingerprinting lab to a digital photography evidence lab. So that's a good example of where the technology they were using 10 years ago doesn't suit them today, and that's sort of what they will tend to do in a TI build-out or a TI reconfiguration. But it's not some scrap of the whole building. They'll replace some desks, they'll think about equipment, things like that.

And then just kind of pivoting to kind of back to some of the external growth, but more on the acquisitions, kind of I think you've talked about a $1.5 billion kind of acquisition pipeline. Can you just break down kind of where those sit today in terms of what stage they're in kind of under contract LOI, preliminary discussions. And I guess just you mentioned in the opening comments, kind of an 11% yield is kind of where you're seeing those assets trade. Just given the durability of the cash flows, kind of why have you seen kind of pricing change there at all? Or any change in kind of competition for kind of those opportunities?

Maybe just to broadly say, as we -- where we are today is that we feel very comfortable that the pipeline we have with the cost of capital that we have can meet the growth objectives that we've articulated to investors. That 1.5 -- when our cost of capital is where it is, digesting -- the funnel is very shallow in that as you look at $1.5 billion of deals, it takes very few of those to actually help us achieve our growth objectives, but we have to be just tenacious about working through that pipeline of opportunities with folks who would like to sell us their building, but finding ways -- finding those buildings that can meet our cost of capital and be accretive.

What does that mean? That means in most cases, when we're going to be winning acquisitions, and we will, you've got a seller who is for reasons that are not about top ticking the market. So example, if in our most recent transaction, there was a set of private equity investors who bought a building, quickly repositioned it. And we were able to buy it at a price that gave them a very attractive IRR, but that IRR enabled them to go raise additional funds in the real estate business.

So our speed and certainty of execution were deeply valued in that transaction, and that led to us having something that was accretive. Now there are probably 10 more deals -- if our stock is at $32, there are 10 more deals that we could have done because we could meet seller expectations. So I just want to be so clear that we are working through our pipeline. We have the number of deals that we have to look at that are appropriate for us relative to those that will be successful with this cost of capital is fewer, but we've created a pipeline that's large enough to support that and meet our growth objectives.

When we look at the pipeline, I'd say a little bit more than half of it is development-related opportunities. You have a lot of merchant developers who are winning deals with the government. And then we can be a fantastic partner with our balance sheet and experience in order to help them along the way. We'll certainly be working with partners to put components of capital structure into these deals, maybe a little mezzanine debt in order to get involved in the deal, and then that will give us an ability and an inside sensibility on what we're willing to pay for it when the building is ultimately completed or when it's stabilized a year later.

So it's a really exciting time, and we're an outstanding partner for a lot of folks who are in this space. And we believe all in all in that, that leads us to have what -- notwithstanding the work that we're doing, reasonably conservative growth objectives that will provide consistency and stability of cash flow to investors over time.

You kind of mentioned there the kind of getting into the debt stack with the mezzanine piece. And you've also kind of touched on your equity cost of capital. Would you look to do kind of additional JV opportunities? Or I think in the past, you've kind of mentioned relationships with sovereign wealth. Just kind of how do you think about that as you think about overall sources of capital?

Yes. I think -- yes, it's a great point. Yes, we do have 2 significant partners that are sovereign wealth-esque in what they do. We will be working with them, again, to be a good partner and work on some of our largest transactions that we're working on in order to move things forward. That can be a way that is, of course, very accretive for our shareholders, terrific for our sovereign wealth partner and provides us the ability to have even more diversification and digest some of these larger deals that may be, given our cost of capital today, a little bit outside of our range.

And then I guess just how do you -- you have the target of kind of getting to investment grade. But just given the kind of increased availability of that cost of capital and just the equity cost of capital kind of not being where you want it, how do you kind of balance choosing either kind of the JV opportunity or issuing kind of equity at a cost of capital?

It's all just about FFO accretion, I mean, in everything that we do. So we're telling investors that we're going to grow FFO 2% to 3% for as far as the eye can see. That's what we're working to do every day. We believe that we can consistently do that. Our cost of capital should improve. Comps would say that's true. And hopefully, we'll be in a place where that accelerating momentum will help us delever faster and we'll get to a place where we can get even cheaper cost of capital. And that's really what these REIT machines are meant to do. And we've created a competitive advantage in this space for well over a decade.

But we are the preferred partner of the U.S. government and of agencies across the board, and we should be able to bring that value to our shareholders and translate into attractive appreciation in our stock price.

And then you kind of mentioned the $500 million on -- of the merchant development projects with the government and being able to kind of step in as a capital partner there. How are you seeing the kind of competitive landscape evolve as you kind of compete for those deals?

Look, it's -- this is a little slice of the world. And what you don't see our large development firms just decide to randomly enter this space. Most of the folks that we work with and most of the folks who are winning these deals have been in and around this space for decades.

We understand the business. We can be a great partner. And with one partner that we're working with right now on the development project, as we had lunch last week, and they were very clear to say we've never taken outside capital before. We love working with you. You understand this business, you're value-add, we think about things the same way. And that's a terrific testimony. So I think as we're competing with others, our money is greener than other folks. I think we will have an opportunity to pick some fantastic deals, and we really just don't need that many given the size of the company in order to make a material difference for our shareholders.

And then one of the questions we're kind of asking every company and maybe also tie it into kind of the landscape of the federal government. But how do you -- what's your mix of like build, buy or partner and AI? How do you decide which solutions your company would build versus buy? And then just overall, how do you think about AI kind of changing the office landscape for government?

I think for us, we are -- AI is terrific for our business, I think, in a whole set of ways. Some of what you're seeing in office more broadly is folks fear that AI is going to reduce workforces and reduce tenancy. That is not going to happen in our space. AI is not going to go out and capture criminals or be able to do the work that's being done in our facilities.

I'd also say that when you think about AI, not to get into a big lecture about this with a minute and 5 seconds left, but there's sort of horizontal AI, think of Salesforce, right, they are providing a service and being an AI-native company where you're using AI in your vertical to create value, you've got to be a niche -- sort of a niche business and one that has sort of deep knowledge. That's us. We have more GSA leases. We've negotiated more GSA problems than anybody out there.

Our AI related to what to do and our productivity to find it in this space will be better than anybody else. We are a technology-forward as a company. So I think we're going to realize some benefits over time from that, none of which is in our guidance today. And I think that we're going to be able to do a better job optimizing with the government and helping them using AI to solve some of their problems, and they're quite receptive to that. And so we see AI is a terrific example.

We already have agents doing work each and every day through Copilot and other things. Our financials are coming together with a rapid pace, and we find ourselves in a place where AI is really our friend and really giving us time to get our work done and build our competitive advantage.

Great. Thank you so much.

Thank you.

Greetings. Welcome to the Easterly Government Properties Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cole Bardawill, Director of Investor Relations. Please go ahead.

Good morning. Before the call begins, please note that certain statements made during this conference call may include statements that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes that expectations as reflected in any forward-looking statements are reasonable, it can give no assurance that these expectations will be attained or achieved. .

Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control. including, without limitation, those contained in the company's most recent Form 10-K filed with the SEC and in its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, core funds from operations and cash elbow for distribution. You can find a tabular reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information package on the Investor Relations page of the company's website at ir.easterlyreit.com.

I'd now like to turn the conference call over to Darrell Crate, President and CEO of Easterly Government Properties.

Thank you, Cole, and good morning, everyone. In 2025, Easterly continued to execute on our stated strategy. This year represents another year of delivering 2% to 3% core FFO per share growth, reinforcing that our strategy is not only durable, but repeatable. Over the past 2 years, we've remained focused on steady earnings growth, driven by our government-related cash flows, disciplined capital allocation and additional diversification while facing difficult external conditions. .

Importantly, this momentum extends beyond 2025. The midpoint of our current 2026 guidance reflects our third year in a row of at least 2% to 3% core FFO per share growth demonstrating both the embedded growth in our portfolio and the visibility created by our long-term leases and high credit quality. As we enter 2026, our strategic priorities remain unchanged and continue to guide our approach to disciplined growth and portfolio enhancement. One, core FFO growth per share of 2% to 3% annually, number two, increasing same-store performance through thoughtful diversification in the state, local and high-credit government adjacent tenancy, and three, executing value-creating development opportunities into high credit stabilized assets.

This strategy is designed to balance growth and durability and build a portfolio that performs consistently regardless of the economic or policy backdrop. Easterly's portfolio is comprised of mission-critical government facilities, including courthouses, public health laboratories, law enforcement offices and secure administrative buildings. These assets are purpose-built, long term leased and integral to the ongoing operations of federal, state and municipal agencies. The durability of our tenant's mission independent of political or economic cycles, support stable, predictable cash flows and underpins our ability to generate consistent long-term earnings growth.

As demand for secure, modern government facilities continues to increase across all levels of government, we believe our portfolio and our platform are well positioned to meet the demand. We recently visited our Veterans Affairs and federal law enforcement facilities in Florida. And it was powerful to see firsthand how busy these buildings are as they truly support mission-critical work. From Homeland security investigation teams to the doctors and staff caring for our nation's veterans, the level of activity underscores the essential or properties play. It reinforces our commitment to providing high-quality environments that support these dedicated public servants and the important missions they carry out.

Turning to specifics of the quarter. we continue to demonstrate the durability of our platform anchored by high portfolio occupancy and strong long-standing relationships across a broad range of government agencies. Demand for our mission-critical facilities remains resilient, supporting stable cash flows and predictable operating performance. We remain highly disciplined in our capital allocation maintaining a strong balance sheet and a significant financial flexibility while prioritizing investments that enhance long-term value.

Our portfolio continues to perform at a very high level with occupancy near historical highs at 97% and weighted average lease terms of roughly a decade. This performance reflects the durability of our tenant base and reinforces the strength of our mission-critical strategy. On the acquisition front, I'm pleased to share that subsequent to quarter end, we completed the acquisition of a 3 asset portfolio by the Commonwealth of Virginia. The long-term nature of the leases and built-in rent growth added another layer of durable cash flow to the portfolio. and Allison will walk through the details in her remarks. We like partnering with state agencies because the credit quality is comparable to federal tenants given the essential nature of the services they provide and the stability of their funding. State leases often include contractual rent escalations, which provides built-in growth and enhances long-term cash flow visibility.

Our development pipeline remains active with key projects progressing well. We continue to see accretive opportunities that meet our standards for credit quality, mission alignment and durable returns. Looking ahead to 2026, recent federal developments, specifically those are in the rearview mirror and did not change how our portfolio performs or how we operate the business. At the midpoint, we are guiding to approximately 3% core FFO per share growth in 2026. Ongoing federal real estate discussions continue to highlight a long-standing reality, many government agencies are best served by focusing their time, their resources and their expertise on mission execution rather than real estate ownership. Managing and modernizing specialized facilities can be complex and requires consistent attention. We excel at both of these capabilities.

Easterly was built to support agencies in addressing this need. As a private sector partner, we deploy capital to provide modern mission-critical infrastructure that supports agency operations allowing our tenants to remain focused on their core missions. Importantly, this dynamic continues to drive a strong and expanding growth pipeline for Easterly, as agencies increasingly look to us for their -- to be their long-term partner to recapitalize and modernize essential facilities at scale. Against this backdrop, our acquisitions team has built a high-quality, robust pipeline that supports consistent capital deployment at returns in excess of 100 basis points over our weighted average cost of capital.

This disciplined approach to underwriting and execution underpins durable long-term growth. We continue to focus on improving our cost of capital with leverage, an important part of that effort. Cash leverage trending lower again this quarter as we move toward a more conventional profile with a medium-term objective of approximately 6x. We believe this will structurally support lower funding costs while preserving our ability to pursue accretive growth in excess of our target range.

To wrap up, we're delivering on the strategy we laid out, delivering long-term core FFO growth of 2% to 3% and advancing a robust acquisition and development pipeline while deepening our relationships across federal, state and local agencies that we serve and strengthening the balance sheet as we move forward toward our medium-term leverage objective without sacrificing growth. All while staying true to our mission of providing modern mission-critical facilities for the agencies we serve.

I want to thank the entire Easterly team for their continued focus, discipline and commitment to execution, which underpins everything we deliver to our tenants and our shareholders. We also appreciate the trust and partnership of our tenants and investors as we move forward with confidence with clear visibility into our goals. At our core, we're built to support the mission, ensuring the essential work of our talent tenants can continue seamlessly today and for years to come.

Now I would also like to take a moment to applaud the appointment of Ed Forest as administrator of the GSA that was recently confirmed by the Senate, and Ed brings decades of private sector experience and first-class business acumen to the physician, having held meaningful senior leadership roles at both Cushman Wakefield and Goldman Sachs. We look forward to working with the new administrator who we believe is the right person to take on the important responsibilities of GSA. We're looking forward to collaborating with Mr. Force and his team as we seek to maximize value for both our shareholders and the American people.

And with that, I'll turn the call over to Allison Marino, our Chief Financial Officer.

Thanks, Darrell, and good morning, everyone. I'm pleased to report the financial results for the fourth quarter and full year 2025. For the quarter, both on a fully diluted basis, net income per share was $0.10, and core FFO per share grew by nearly 6% year-over-year to $0.77. Our cash available for distribution was $29.1 million, reflecting steady operational performance. For the year, both on a fully diluted basis, net income per share was $0.29 and core FFO per share grew by nearly 3% year-over-year to $2.99. Our full year cash available for distribution was $118.8 million.

As Darrell highlighted, these results demonstrate continued execution on our stated strategy, including delivering 2% to 3% core FFO per share growth and advancing our leverage and capital structure objectives. During the quarter, we successfully extended the lease at FBI Knoxville and subsequent to quarter end, we executed a long-term renewal on FBI San Antonio. With the majority of our 2026 renewals already completed, we've begun to shift our focus towards 2027.

As of December 31, 2025, we have renewed 38 leases since our IPO. Of that 38, 27 are renewals for which there was no associated renewal TI work or renewal TI work has been completed and accepted by the government. The other are our renewals with pending TI projects. This combined 2.6 million square feet across 38 renewals includes PTO Arlington, IRS Fresno and various smaller leases in Buffalo. When we exclude these assets, the average rent spread achieved on the remaining renewals is anticipated to be 14%, including an estimated amount of $37.14 a square foot of TI utilized by the government.

The weighted average total renewal term for these leases was 15.7 years. While we've shared specific details, we believe this is a good proxy for how we think about renewals going forward. [indiscernible] portfolio also continues to progress in line with expectations. We broke ground in the third quarter on state Crime lab in Fort Myers, Florida, and construction is advancing as planned with delivery targeted for the fourth quarter of 2026. Our U.S. courthouse project in Flagstaff, Arizona, is currently under construction and progressing well with delivery expected in the first quarter of 2027.

In addition, we commenced construction in the fourth quarter on the previously announced U.S. Courthouse in Medford, Oregon, which is scheduled for delivery in the second half of 2027. All 3 represent 200,000 rentable square feet that will deliver high credit cash flows. Our largest project to date, the FDA Atlanta facility was completed and formally delivered to the government on December 15. As of December 31, 2025, we had received $138.1 million in lump sum reimbursements relating to the project. And since then, we have received an additional $12.6 million earlier this week and expect approximately another $3 million in the next few months.

Our current net debt to annualized quarterly EBITDA, which we refer to as cash leverage stands at 7.5x. We expect remaining reimbursements to drive additional improvement, bringing cash leverage below this level. As Darrell noted, this represents an important step in our continued progress towards our medium-term leverage objectives and reflects disciplined execution across both development and balance sheet management. We think this is an important step as we continue to work towards additional investment-grade ratings which we believe will position us to attractively access well-priced debt capital and unlock pipeline value over the medium term.

On the acquisition front, we completed the acquisition of a 3 asset portfolio in Virginia for $44.5 million, totaling approximately 298,000 square feet. The Commonwealth of Virginia occupies the majority of the portfolio under long-dated leases with 2.5% annual rent escalations and a weighted average lease term of 7.5 years. Full staff supports stable and growing cash flows. This acquisition was completed at a going in cash cap rate of approximately 11%, which is in excess of our cost of capital and immediately accretive. The high cap rate is largely attributable to a motivated sellers seeking to redeploy capital, creating an opportunity to acquire the assets at an attractive yield despite the strong tenancy. Our all-cash bid and ability to execute also really swung in our favor.

Given where our cost capital is, our acquisitions team is tasked with sorting through many deals to find high-quality assets that meet our underwriting criteria and return objectives. They have probably risen to the challenge with this asset. As Darrell mentioned, we continue to favor partnerships with state governments, given their strong credit profiles, often comparable to the federal government and lease structures that typically include built-in rent growth providing long-term visibility into cash flows. Overall, this transaction reflects our disciplined approach to capital allocation, deploying capital where we see attractive risk-adjusted returns and supports our ability to drive consistent long-term growth.

Turning to guidance. We are maintaining our full year core FFO per share guidance range for 2026 of $3.05 to $3.12. This comes out to approximately 3% core FFO per share growth at the midpoint, which is just above the higher end of our stated 2% to 3% core FFO per share growth target. Our growth rate in 2026 is supported by the delivery of FDA Atlanta, successes on our 2025 and 2026 renewal execution, sustained operational efficiencies and our Cox Road acquisition. At the midpoint, the guidance assumes we will have $50 million to $100 million of gross development-related investment during the year and $50 million in wholly-owned acquisitions.

While our acquisition guidance remains unchanged. Given our $1.5 billion pipeline, we are monitoring the market for attractive opportunities where we can acquire our spread to our cost of capital. We remain focused on disciplined capital management, tenant retention and execution across our development pipeline, and we continue to deliver across the strategic objectives we've outlined. Together, these fundamentals underpin Easterly's ability to generate stable, growing cash flows, which we will believe -- which we believe will translate to increasing shareholder value.

Thank you for your time this morning. We appreciate your partnership and look forward to updating you on our progress. With that, I will now turn the call back to Shannon.

[Operator Instructions] Our first question is from Seth Berge of Citi.

I guess just to start off on the acquisition guidance. It would remain kind of unchanged. Doing the bridging -- after doing the Virginia acquisition, can you just kind of touch on the $1.5 billion pipeline that you see and kind of touch on if anything kind of in that pipeline is more near term or where you are in various stages and evaluating those opportunities.

Yes. Thanks for the question. As we look to '26, we have a level of optimism, but it's early in the year. And as Allison said, our team, again, is sorting through a significant number of transactions in our pipeline. I think the market is in a place where buyers with our reliability and quality, have an edge. And so we're going to be searching for assets that, again, give us a strong spread to our cost of capital. And we don't want to be speculating as we get to the beginning of the year. But again, I feel from the company's perspective that we have our balance sheet in great shape that our acquisitions and development teams are moving at full speed, and we're really excited to see how this year comes forward, and particularly as we focus all of our energy on 2027 in an opportunity to continue to deliver the growth that we're bringing forward. .

And then maybe just a follow-up. I know 1 of your strategic objectives is to kind of continue to grow same-store NOI growth with the confirmation of the new GSA administrator, have you had any conversations around -- I think some of their stated objectives are around just increasing government efficiency with owning versus leasing. Have you had any conversations about the way they think about leases in terms of changing kind of any of the lease structures that would make it potentially more attractive relative to kind of the state and local agency kind of partnerships that you're looking at as you think about acquisitions?

Yes, I think that's an insightful observation. Again, the new administrator just joined. We did get an opportunity to spend a little time with him. And I believe that the government, as they look forward, thinks about efficiency and also understanding the cost in the capital markets and understanding public-private partnership. So I'm excited to see how that evolves as we move through this year and next.

[Operator Instructions] Our next question is from Michael Lewis of Truth Securities.

My first question is about the Virginia acquisition, right? So obviously, a high cap rate. I saw there's at least 1 lease expiration in 2027, I don't know if maybe that increased the risk profile. Could you talk about the apreation schedule a little bit kind of a little bit more about the assets?

Sure. So the Commonwealth of Virginia is the largest tenant across 2 different buildings. Combined, it's over 50% of the asset in total, and those have an expiration of 2034 and 2036. So those are very long dated in terms of the overall asset profile. The 2027 expiration that you see is just like 2,000 feet. So it is very immaterial. It's on there for our disclosure purposes, but we're not worried about that at all.

Okay. Got you. And then you talked a lot about the leasing successes you've had, at the end of 3Q, '25, the portfolio was 97% leased. I was wondering if that's still the case? And should we expect that, that will still be the case at the end of '26 or do you have any known move-outs or move-ins?

I would say we're consistent with what we've always shared, which we expect mid -- like mid-90s occupancy rates. That's our goal. In terms of the 2027 expirations, particularly, they have just kicked off procurement. As you can imagine, they start about 18 to 24 months in advance, but those are progressing nicely and we have no concerns.

Okay. And then just lastly for me, this is more of a big picture maybe for Darrell. You mentioned about putting dose in the rearview mirror. Now I think we can talk about the budgets and the funding. So I'll blame copilot or Google. I just like quickly through a bunch of your tenants to look for funding changes, right? So the VA is your largest tenant. It's obviously going to have a big increase, which is great. As I went through more, right, the FBI, $1 billion COG, the VA $200 million COG, [indiscernible] we can put aside, maybe talk about separately, the FDA, a small cut, the IRS $1 billion, the EPA, $4 billion, the forest service $2 billion, Department of Agriculture, $6 billion, right? So maybe it's not dose or maybe it's a remnant from Dose, but some of these surprised me and it sounded like a lot of cuts across agencies. I just wondered if there was a bigger picture thing to talk about here with what's going on. I know you're shifting your tenant profile a little bit to where the opportunities are. But anything to say about the budget and what -- maybe what the government's priorities are?.

Yes. No, no. I think it's a really great question. And I'd sort of echo back to some of our comments when Dog began, which is the more efficient government is, the more government from top to bottom sees that real estate ownership is a public-private partnership. And that absolutely favors us. I wasn't trying to gloss anything in the prior quarters. I mean Dose is a tailwind for the company in the medium to long term. In the short term, we've had these headline risks. The what's Dog going to mean or government shutdown, are you going to get your rent these are headlines, but the durability, quality of our portfolio and underwriting to mission-critical assets is an enduring strategy. .

And each of those cuts that I think that you see are where there is waste and in some cases, fraud. And I -- when we look at the priorities around real estate, what we're sorting is mission-critical work. The government in every building that we've been visiting for the last bunch of months is seeing employees return to work. there is attrition. They're letting folks leave. They're finding and using technology to create greater efficiency. And you see every agency that we're close with looking around and again, trying not cutting mission, but very focused on delivering mission more efficiently for the American people.

They want to cut the deficit. And believe me, there's plenty of government for them to find. And I think they're doing a pretty darn good job at moving that forward. So for us, it's an exciting time. And with each of our agencies, they look at our buildings, how they're maintained in how they support the mission, and we have incredibly happy tenants on the ground and they, of course, share that with Washington. I think also with the size of our balance sheet relative to some of the mom-and-pop owners of these buildings, we're able to act with clarity and confidence fight obsolescence.

And if the government continues to want to build partnerships and create efficiency, we're incredibly well positioned to do exactly that. So that's really the backdrop for the observation.

Thank you. I would now like to turn the conference back to Darrell Crate, President and CEO of Easterly Government Properties for closing remarks.

Great. Well, thanks, everyone, for joining the Easterly Government Properties call here for the fourth quarter. We're very excited about 2026. We appreciate your confidence, your trust, focusing on the company, and we're very excited for the developments in the quarters to come. .

This concludes today's conference call. Thank you for participating. You may now disconnect.

Greetings. Welcome to Easterly Government Properties Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Allison Marino, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning. Before the call begins, please note that certain statements made during this conference call may include statements that are not historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes that its expectations as reflected in any forward-looking statements are reasonable, it can give no assurance that these expectations will be attained or achieved. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including without limitation, those contained in the company's most recent Form 10-K filed with the SEC and in its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements.

Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, core funds from operations and cash available for distribution. You can find a tabular reconciliation of these non-GAAP financial measures to the most comparable current GAAP numbers in the company's earnings release and separate supplemental information package on the Investor Relations page of the company's website at ir.easterlyreit.com.

I would now like to turn the conference call over to Darrell Crate, President and CEO of Easterly Government Properties.

Thanks, Allison, and good morning, everyone. As we report our third quarter results, it comes at a time when the federal government remains partially closed. For most companies, that kind of disruption would be concerning. For Easterly history offers important perspective.

What is important to understand is that a shutdown is part of the Kabuki theater related to budget negotiations. Our investors should be comfortable that the government will not default on our leases because that would be tantamount to defaulting on the U.S. treasury obligation. We are highly confident they will find a way to avoid that as they did with each of the previous 21 shutdowns.

As we enter the final stretch of 2025, I'm pleased to share that Easterly continues to execute against the growth strategy our leadership team embarked upon last year, a disciplined plan centered on three long-term priorities.

One is growing core FFO by 2% to 3% annually. The second is increasing same-store performance through thoughtful diversification into state and local, and high credit government adjacent tenancy. And third, continued execution on value-creating development opportunities where we can create portfolio-enhancing improvements to weighted average lease terms and building age. This strategy is designed to balance growth and durability, and to build a portfolio that performs consistently regardless of the economic or policy backdrop. The third quarter is another example of that approach in action.

At the core of our business is a portfolio of essential facilities where government work truly happens. Immigration facilities, courthouses, public health laboratories, law enforcement offices and secure administrative buildings. These are not speculative assets. They are long leased, purpose-built and vital to the functioning of our nation. Our tenants' missions endure across administrations and cycles. That endurance is the foundation of Easterly's ability to deliver consistent compounding growth over time. As demand for secure modernized government facilities continues to expand with population growth at federal, state and municipal levels, we remain uniquely positioned to serve that need.

Now turning to the specifics of the quarter. We delivered strong operating performance, maintained high portfolio occupancy, strengthened relationships across agencies, and refined our balance sheet with a prudent and disciplined approach to capital deployment. We are pleased to deliver 3% core FFO growth from 2024 to the midpoint of our guidance range for '25. That was driven by growth from acquisitions, strong renewal execution and prudent portfolio management. Our portfolio occupancy remains near historical highs at 97%, and a weighted average lease term of approximately 10 years, underscoring the durability of our tenancy and the strength of our mission-critical focus.

Our most recent acquisition of the York Space Systems headquarters in Colorado positions us nicely towards our stated goal, a 15% government adjacent exposure, and reflects the demand for specialized facilities supporting the U.S. Defense and Space partners. Our development pipeline remains very active with major projects progressing nicely. We continue to identify accretive opportunities that meet our standards for credit quality, mission alignment and durable returns.

The acquisition team has built one of the most robust pipelines in our company's history, allowing us to be highly selective with an eye to deploying capital in excess of 100 basis points to our weighted average cost. The team's leadership in sourcing, underwriting and executing accretive opportunities has been exceptional. The work they're doing today will support growth well into the next decade.

We are intently focused on improving our cost of capital. While we believe we will unlock further opportunities in our acquisition and development pipeline, one of the ways we seek to improve our cost of capital, both debt and equity, is leverage optimization. While Easterly's portfolio of long-term high credit leases is capable of sustaining higher leverage levels than other REIT peers, we recognize that comparability with that broader REIT universe matters. To that effect, we are targeting a medium-term cash leverage goal of 6x. This is a decline to our historical cash leverage results, which have been 7 to 8x. This shifts to a more conventional leverage, target enhances investor comparability, and together with improved funding access, sets Easterly on a clear path towards structurally lower capital costs. We believe we can deliver this expectation while also meeting our attractive growth objectives.

As Allison will detail, we have already made progress on this front this quarter. As we close the third quarter, I want to recognize the collective effort of everyone at Easterly. We're thankful for the trust and partnership of our tenants, our employees and our shareholders. And we're confident in our strategy, encouraged by the progress we've made and energized by the opportunities ahead. As we enter the final quarter of 2025, our priorities remain very clear. Continue executing on our development and acquisition pipeline, advance our cost of capital and leverage initiatives, and deepen our relationships across the federal, state and local agencies we serve. Easterly's mission remains simple. To deliver essential real estate that keeps government moving and our nation secure.

And with that, I'll turn our call over to Alison Marino, our Chief Financial Officer.

Thanks, Darrell, and good morning, again, everyone. I am pleased to report the financial results for the third quarter.

Both on a fully diluted basis, net income per share was $0.03, and core FFO per share grew to $0.76, slightly above expectations. Our cash available for distribution was $29.3 million, reflecting steady operational performance. During the quarter, we successfully extended the lease at USCIS Lincoln and executed a long-term renewal at VA - Golden. We continue to make progress on the remainder of our 2025 and 2026 renewals, and more broadly, we continue to find the government to be in a specially constructive partner, and the concerns relating to DOGE in our mission-critical portfolio over loan.

Our development pipeline is making exciting progress. In August, we broke ground on the previously announced state Crime Lab in Fort Myers, Florida, and we are on track for our fourth quarter 2026 delivery. As a reminder, our growth into mission-critical leases not only diversifies our portfolio, but also increases our weighted average lease term. While U.S. government leases are limited to 20 years, state governments can lease for as long as 40 years, attractively are increasing our WALT to strong credit tenancy.

Our largest development project in the company's history, FDA Atlanta, is nearing the finish line, and we expect the government to accept the premises and the lease to commence in December of this year. Notably, at FDA Atlanta, we received a third progress payment on the lump sum reimbursement during the quarter. The receipt of $102 million meaningfully reduced cash leverage from 7.9x to 7.6 for the quarter. We expect that cash leverage will further improve upon the project's completion to below 7.5x. Echoing Darrell's comments, this is an important step in reducing cash leverage and furtherance of our medium-term leverage goals.

On the debt capital front, Easterly continues to be a creditworthy borrower reflected in our successful recast and upsize of our 2018 senior unsecured term loan from $174.5 million to $200 million, as well as the new accordion feature added to that loan. Further in October, KBRA reaffirmed Easterly's investment-grade rating with a stable outlook. We also continue to work towards receiving additional investment-grade ratings, which we will believe will position us to healthily tap the public bond markets, securing access to debt capital at attractive levels allows us to unlock pipeline value in the medium term.

Turning to guidance. We are narrowing our full year core FFO per share guidance range for 2025 to $2.98 to $3.02 on a fully diluted basis. This range is consistent with our stated goal of 2% to 3% annual core FFO growth, and at its midpoint reflects strong 3% growth over 2024. For 2026, we are issuing full year core FFO per share guidance in the range of $3.05 to $3.12. This guidance range implies a growth rate in our stated 2% to 3% range, supported by the delivery of FDA Atlanta, successes of 2025 renewal execution, sustained operational efficiencies and continued expansion of the portfolio through acquisitions. At the midpoint, this guidance assumes that we will have $50 million to $100 million of gross development-related investment during the year, and $50 million in wholly-owned acquisitions. We can see ourselves achieving the upper end of this range and executing on $400 million of acquisitions, given our $1.5 billion pipeline, and the spread we can create to our cost of capital.

We remain focused and disciplined in capital management, tenant retention and execution across our development pipeline. These fundamentals underpin Easterly's ability to generate stable growing cash flows and long-term shareholder value. Thank you for your time this morning. We appreciate your partnership and look forward to updating you on our progress.

With that, I will now turn the call back to Shannon.

[Operator Instructions] Our first question is from Seth Bergey with Citi.

I just wanted to ask about the Flagstaff warehouse completion. It looks like the date got pushed out on 2 quarters. Just could you talk a little bit about what's happening there?

Yes. So the government continues to work through the design of that courthouse. They're balancing 3 or 4 agencies in the building that collaborate on the space design, and we are expecting that they will finalize the lump sum and the TI project in total in 2026, which would then naturally push the ultimate delivery. But that is not unexpected, and we think the new date is certainly achievable.

Great. And then just a second one. I think on -- you kind of target 100 to 150 basis points of spread on development of your cost of capital. But issue equity kind of below at least consensus NAV. Can you just talk about your overall thoughts on capital allocation? And have you considered other sources of funding for development?

Yes. I mean I think broadly, we -- there's two ways we sort of think about cost of equity. I mean, broadly, there's -- think about it as FFO cost of equity. Essentially, our estimate next year, divided by the share price, and we look at our debt cost in the sort of 5.5% to 6% range. All of that gets you to a cost of -- weighted average cost of capital while we delever and do all those good things, of -- in the high 9s.

When we also just think about our cost of equity relative to peers and real estate risk, you look at our dividend plus growth, or there's a whole set of other ways to think about it, but those vector into a cost of equity that's somewhere between 8% and 8.5%. So we believe that we can be developing at 100 basis points to the upper end to that FFO range. And we're able to do that just because we've learned how to do this very well, specifically with the agencies that we're close to. But we also -- it's not lost on us that we believe that's adding considerable real value to the overall enterprise and the long-term value of the portfolio.

That further said, we have some strong relationships with large sovereign wealth fund and some other partners. They value this long WALT in a significant way, and add values that are sort of well below all the NAV kinds of conversation. So there, that's also -- that could end up being a more attractive way to go while we're in this interim period, where the stock price starts to become more comparable to office and net lease peers, which would materially reduce our cost of capital and get us -- sort of, again, get us closer to on an FFO basis, or FFO cost of equity. Quite similar to the cost of equity that we look at with the sort of more simple metrics of dividend plus growth.

Our next question comes from the line of Michael Lewis with Truist Securities.

My first question, I wanted to ask about the $50 million acquisition guidance for '26. I think that's a little lower than you've typically done in the past. I'm guessing that's not a reflection of the opportunity set, the investment opportunity set. Is it more constrained by the cost of capital and what you were just talking about? Or maybe give us some [indiscernible] on that?

It's a great point. I mean the -- I think given our cost of capital and what we've heard is, hey, there might be some challenges with your cost of capital. How are you ever going to get acquisitions done? We are hoping for some mean reversion as we continue to deliver consistently on this 2% to 3%. As I said this last year, we're delivering 3% growth. We're going to -- we're looking to next year, and again, we're going to be squarely in that 2% to 3% range, possibly with some upside.

So as folks tune into that message and we get away from the dividend cut, and the reverse split, and those other things that where people wonder if DOGE or the headline risk is going to get in our way, we imagine we're going to get that kind of mean reversion. That all said, as we move forward, the range that we have for next year really only requires us to get $50 million done. So we're trying to send a message, which is we are right on track for the growth that people want while doing something that's well below what we've done before.

I mean even with our cost of capital this year, which we did a very nice job finding some terrific buildings like York and others, we were able to deliver what's been almost $200 million of acquisitions with a cost of capital that stinks, quite frankly, and we can continue to deliver growth. So I think we've set a pretty low expectation. We don't want folks to think that we're not going to make the 2% to 3% growth because cost of capital could get in our way. And I would say with $50 million of acquisitions and the strength of the pipeline that is $1.5 billion. If our acquisition team hasn't already identified that $50 million that gets us to the right place, I would be very, very, very surprised.

So it's meant to be a low bar. It's meant for people to accept the guidance that we're putting forward, and we're very excited to continue to deliver on that in 2026.

Okay. Great. And then it looks like you sold the property in the third quarter. Is it possible that dispositions could become part of this getting down to your leverage target?

And also related to the leverage target, what does that mean for development starts? Obviously, development, you put money out now, it impacts your leverage. You don't get the cash flow until later. So your thoughts on those two pieces, dispositions and also what that means for development?

Sure. I think we probably need a little kick from interest rates in order for dispositions to lead to any leverage reduction. I think when we look forward to the sort of medium term 6x. Again, we stepped back and we looked at net lease peers. We look at office. Our job is to run a portfolio of mission-critical assets, and we're doing that well, but it's also our job as we try to manage that portfolio in this public vehicle that we should be delivering people what they want and looking what they're paying for other organizations.

And -- and so as we think about -- as we think about what we're executing, we find ourselves in a place where we would like to get our leverage in line with those peers. And in that case, our stock should be materially higher than it is right now. That said, we think we can continue to bring in acquisitions, move towards that -- move towards that lower leverage state. And I think that as we think about development and moving forward, we will try to work towards that lower leverage. We could use some external partners and JVs in order to make that more possible. But it's -- we really just need to be working with shareholders who are supportive of the company, and be delivering on the metrics that they need to feel good about what we're doing, and using our pipeline and all the work that we've done with agencies to deliver value for shareholders.

Okay. And then one last one for me. Just to put a bow on your comments about the government shutdown. Does that lead to delays, delays in leasing and just slow things down? And is there any threat to any agencies, you think, from this process?

In the first part, it absolutely slows things down a bit. I mean in that -- folks are working less. I don't see that's any diminution in value of the portfolio, and there will be a quick catch up. And I'd also say, post this sort of newer environment of working with the government, where they are thinking about efficiency, they are working more closely with us and other private partners in order to make things work. So while the government is shut, we're still doing our good work for the government and moving things along, and we're excited for them to come back online.

I don't think the shutdown threatens any particular agency. Maybe some things get recrafted over time in the spirit of efficiency. But the big dials as you know are making sure entitlement programs are getting organized. Health care, you're going to see a lot of movement on that as we get into this next year. None of which has really very much to do with us. And as we focus on mission-critical, that means law enforcement, that is drugs, that is all the things that keep Americans safe. So we find our agencies today more than ever to be enthusiastic about what they're doing moving forward. And for the agencies that we work with in the main, they are they are showing up at work doing their job and feeling the support of the government and their mission.

Our next question is from Michael Carroll of RBC Capital Markets.

Darrell, can you provide some bigger picture trends, I guess, how to achieve this 6x cash flow leverage. I know you kind of mentioned a little bit throughout this call. But is that going to be through, a more like, joint venture sales to kind of achieve that? Or can you kind of describe what are some of the levers you can pull to get to that number?

Sure. I think working with joint venture partners is probably the least important, but it's absolutely an avenue that we can pursue. I think first and foremost, these development projects that we're putting in place are very attractive. We've -- as we see the FDA Atlanta is going to be coming online at the end of the year, and that's certainly going to start adding to our EBITDA, and we're going to get another lump sum payment. So that's going to take us down closer between 7 and 7.5x.

And as we look forward to these other development projects that we're moving, we will basically financially structure them so that we get to a cost of capital that is about 100 basis points above what we believe the cost of capital to be, by looking into the market and all the metrics that we've articulated. And then we will lever them less when we have return that's in excess of that amount. And we believe -- and we do have a very robust pipeline, and our team continues to do a terrific job moving those things forward.

And I think that as we find it, if we set our goal at 100 basis points above cost of capital for our projects, we're going to find ourselves nicely delevering over the next 24 to 36 months.

Okay. Is that the time frame of the medium-term goal of 2% to 3%?

Yes, I think so. Yes. And again, I don't view the 6% as -- our #1 priority is to grow 2% to 3% a year consistently and be known as a grower that's in that space. That said, our target is going to be 6x. We're not going to take a direct line there, but we want investors to understand that that's what we're marching towards. That's a very important priority for us. And I know when we sit here in 3 to 4 years, we're going to be a lot closer to 6% than we are today. And I think that, that's going to be comparable to -- you're going to look at net lease peers, and you're going to look at office peers, and we're going to compare very favorably, especially when you think about the strength of our tenancy credit and the WALT that's in the portfolio.

And we certainly get that feedback from large possible joint venture partners today, and we are hopeful that the public markets, especially as large REIT funds and others, as money sort of comes back to real estate rather than being in outflows. We're a very -- we're a terrific anchor for folks' portfolios with our sort of new mission of making sure the company is growing at those levels.

And is that trend kind of reflected in your 2026 guidance kind of overequitizing some acquisitions and development expenditures?

Yes. I mean, my expectation would be that leverage is going to be -- will be lower at the end of '26 than it is at the beginning. I think we should have a 6 handle within something on the end of it. And we're going to continue to report on our leverage in this way. As I said, it's not going to be a straight line, but we're -- we're going to absolutely be driving towards growing the business, hitting that kind of 3% target, which is at the upper end of the range, and making sure we're getting the leverage down so that folks don't consider it a concern for the company.

I mean we've always been of the mindset and especially in the private markets that these assets, given the term of the lease and given the strength of the tendency that they can handle a lot more leverage. But it's also just clear to us in the public markets when you -- when we -- when the leadership team got together 24 months ago, and we laid out a strategy, it became clear to us that growing 3% a year is a very good target. If we're delivering 2%, we are right in the ZIP code of where we need to be. We think that growing same-store sales and getting that to be better over the sort of the medium term is also important. So that's why we moved into a place where we have great scale which is state, local and government adjacency.

Those are all those mission-critical facilities, or just like the facilities that we manage today and we know how to do that very well. But the great news is, once we finally get 30% of our portfolio to have those types of leases with bumps, we start the year with 60 basis points of growth as opposed to 0, in a flat lease environment, waiting for renewals. So I think with lease renewals plus same-store sales, we sort of get ourselves 100 basis points of growth as we look forward over the next 10 years. And then if we're rewarded and supported by shareholders, adding another 2% to 3% of growth on top of that eventually, with leverage levels that are attractive, seems to be the model in the space that investors are willing to reward, and we think we can get there and achieve it.

We talked to investors for a long time about covering our dividend and the capital markets didn't support it, and we held on to our dividend for a little while, knowing that our portfolio could grow into it. But our portfolio doesn't reprice as fast as -- certainly storage or many other areas of real estate. And we looked at ourselves and said, we're going to gut it out for a couple of years here. And we're going to cover our dividend, and that's all going to be good. But that's not what the capital markets want.

So it's important for us to do what we do well, which is supporting these mission-critical agencies. But likewise, making sure that the metrics when somebody comes to learn about Easterly Government Properties and what we're doing, that they don't have any allergy to the stats that they're starting with. And I think the more that they take the time to then do the work and understand the portfolio of the business and what we're trying to do and our years of expertise doing this, that they'll be pretty pleased for it to be part of their portfolio over the longer term.

Our next question is from Merrill Ross with Compass Point Research & Trading.

I wanted to ask a few questions about York, and then I had a separate question about mix. Remind us what the total investment was for York, what the CapEx rate is going in? And maybe a little bit about York's history of government contracts and renewals, just to get a sense of the ongoing nature of their contracts with the federal government. And how this property is essential to their mission as you often described your federal portfolio being?

Sure. So the acquisition price on that asset was $29 million and the cap rate was in the low 11s. That definitely reflects the fundamentals of the overall Denver market and a motivated seller. So that's what I would share in terms of cap rate compared to some of our others.

In terms of the building itself, so this functions as their company headquarters. It's kind of a fascinating building. They have a clean room in the first floor where they construct satellites and other items for their government contracts. So it's unique, right? When you think about the work that goes into fulfilling a government contract, this is very practical, but also very strategic for them.

Our partnership with the U.S. government goes back years. They are a very trusted partner in terms of their overall contract base. The work that they do in the Aeronautics and Defense industry is very integral to their overall business success, and I think they have been quite successful over the years.

And Merrill, we spent a bunch of time with management and other folks. The talent base that supports their business in and around the Colorado area is profound, deep and enduring. So the ability for them to move is difficult. They love the building. And I think we're -- we're excited about the lease that we have in place, and I think we're even more excited for renewal when that time comes, far in the future.

I would just observe that in your supplement, you say that 88% of your lease income is from federal government. And then so the rest is 12%. And I'm just curious how -- and you're trying to meet your 3% goal, and your leverage goal. What do you see that mix moving toward, maybe in the longer term in the next 6 months? But where are you going with that?

Sure. So we have a goal of 70% GSA or federal exposure, a 15% state and local, and another 15% in that adjacent space. So we're definitely on the lookout for our sourcing opportunities where we can continue to grow the state and local and adjacent exposure in the portfolio, while still being able to acquire high credit mission-critical U.S. government properties as well.

So I think this year was very demonstrative of how we're going to achieve that. So you saw us acquire DC Plaza and an adjacent building with the York Space Systems. But you've also -- we've also acquired DHS Burlington, which is a government asset as well. So it's a good example of how we'll continue to do all of it. But the state and local and adjacent space is certainly an area where we can create more growth because of these escalators that Darrell is talking about.

Right. Do you see, as a result, DOGE, the GSA is considering other forms of leases other than their standard contract?

I think the GSA is willing to entertain discussions around a more modern lease structure. Escalators is a very good example of that. So in our most recent short-term renewal at USFS in Albuquerque, we were successful in embedding lease escalators into that renewal. So for us, I think that's a really good example of where we -- the GSA is evolving. And the GSA is becoming more modern in its leasing practices. And particularly as the government's desire to lease versus own expands, that is an area that we believe that they'll become more competitive.

Our next question is from John Kim of BMO Capital Markets.

Darrell, at early last year, you provided a new strategy at your Analyst Day and you talked about delivering 4% growth in earnings consistently. And with that came some higher leverage, which I think made sense given the high credit nature of your tenancy. Today, it seems like you're focusing -- going back to the 2% to 3% growth with lower leverage. What's changed in the last few months and why the change in strategy?

Yes. So I think we've never set 4% as the promise in target, but we're certainly, that's our stretch goal. I mean our job is to set some expectations and obviously, work on exceeding them. So that -- we've always stated sort of 2% to 3% is the right -- is a growth rate that should give us a cost of capital that's attractive. We hit 3% this year.

As Allison is mentioning, our guidance for next year actually has 4% of growth at the upper end of the range. I think to get there, if we are having $300 million to $400 million of acquisitions, which does not seem implausible to me. We can start getting to those 4% rates. What I just don't want to do is set expectations that are too high, and then we feel like we've tripled the growth rate of the company, but we're still failing in the eyes of our investors.

Today, at $22, I think that 3% is a very attractive alternative. I mean our dividend plus growth is in the mid 11s, which given the stability of the company is really strong. So we just don't want to be able to get out in front of ourselves. That said, and as you know, I know you well know, if our stock was $28 to $32, we could grow a lot faster. And if our stock price was anywhere near our net lease peers, we could grow even faster still.

The pipeline, I mean, I didn't say it lightly, and it's no BS in our script that the pipeline, that our acquisitions team with the addition of Chris Wang and Mike Ibe, a fantastic team, developing a broad range of development and acquisition opportunities. I mean the idea that we can put a couple of hundred million dollars to work, I think, so effectively with the cost of equity that's high is a real shout out to them. And if we had a cost of equity that was more in line with what comps would show, I think we can start achieving growth rates that are even higher.

But so hopefully, that just gives you context. I feel better about the company today than I did a year ago and a year ago, I felt better about the company than I did a year before that. And so the team is terrific. The pipeline is outstanding. I think as we march towards getting an investment-grade rating that will -- at some point, we will be a terrific healthy issuer of investment-grade debt, which will take our cost of capital down another 50 to 100 basis points. And I think that we'll be delivering an earnings -- set of metrics to the market where investors will be pleased for this to be an anchor for the portfolio. And an opportunity for compounding IRRs over many years.

So to summarize, your line of thinking now is getting lower leverage with more moderate growth will lead to a better cost of capital?

I think that's right. But my growth objective is really -- they really are unchanging in that I think that we are growing very nicely, but getting to lower leverage seems to be -- when I look at -- and again, we spend 90% of our time focused on working with the U.S. government, building our portfolio, and doing our job in real estate world.

But when you look at the comps, you have to wonder why with our growth rate, and why with our dividend, and why would our -- the strength of tenancy, why is our stock at $22? It just doesn't make sense. And when I look at the comps, I think our growth rate is right in line. We're certainly at the upper end of office. We're a little -- 100 basis points below net lease peers. If we were in line with office, our stock would be $28 to $32. If we were in line with net lease peers, it would be $36. And the only thing that I can see is that our leverage level on a cash basis continues to be higher than the other folks.

And I can also imagine that when we reverse split our stock and cut our dividend, those are generally not signs of portfolio health. But what became clear is that the capital markets weren't supporting that our portfolio could grow into our dividend. So it was time to husband resources where -- that -- obviously, it's a lot easier to manage the growth in the company with a lower dividend. And back when we cut our dividend, we were saying 2% to 3%. I think, as I said, maybe, I know, to you that getting closer to 3%, it's a lot easier when you have retained earnings in the company. And so we're in a place where I think we're poised for significant growth and a little support from the capital markets would go an awfully long way to accelerating that growth.

Okay. And then on your '26 guidance it came in below consensus. You've had some highly accretive acquisitions this year that we thought would boost earnings. Can you talk about some of the headwinds in '26? I mean it looks like you have some dispositions lined up just based on the impairment that you recorded this quarter? And maybe you want to talk about the cap rate on some of the asset sales?

Yes. So I mean, we don't have any decisions, but I'll let Allison -- why don't you just talk a little bit about the model. And again, I think in our minds, I -- we don't -- I think if we put a 10% growth rate on the company, the stock price wouldn't change. I mean, I think we need to get people -- I think we need to build a base of shareholders, and we try to be very transparent about what we're building. And I think the cash flow stream that we're creating is one that's very valuable.

And the idea of putting high expectations out there that we can exceed is not going to benefit us. So that said, I think we're promising to shareholders something that is way more attractive than the $22 stock price. But Allison, why don't you just talk about '26 and what we're going to do?

Sure. So at its midpoint '26 guidance is roughly an $0.08 increase over the midpoint of '25. And if we look at how that sort of $0.08 comes to be -- you're right. There is absolutely some growth from 2025 accretive acquisitions that occurred. But largely, the largest acquisition we did in 2025 was completed in very early April. So there's only about 1/4 of delta, NOI delta, from that particular property year-over-year that's going to increase 2026.

So as we look to sort of the $0.08 mark, what I would share with you is that it's predominantly FDA Atlanta. FDA Atlanta has been a very accretive opportunity for us to drive earnings growth. So that represents a very large portion of that $0.08. We are expecting some same-store growth. We typically target about up 0 to 100 basis points. That's inclusive of leases renewing as well as the commencement of TI and BSAC rents throughout other already executed leases. And then that is offset by some increases in G&A.

If you remember, when Bill retired, we accelerated all of the vesting of his existing awards. So this will be the first year we step into a run rate, noncash comp number.

Okay. So no dispositions as part of that guidance?

There are no dispositions expected for 2026.

Final question for me -- sorry for asking so many, but -- you weathered a number of government shutdowns in the past. I think you said in the prior calls, going back many years that there was enough to pay for 30 days of a government shutdown. I'm wondering if that's still the case? Or do you expect to have an accounts receivable balance at this?

Yes, you had a great question. Thanks for asking. Because just to be super specific, I mean, all of leases are funded for 6 months plus in the government already. And the point being that as you're seeing, the administration and Congress are moving money around to meet sets of obligations that are ongoing. In our leases, right at the bottom, it says United States of America, full stop. It's not some subsidiary. It's not an agency. It's the same thing it says on your dollar bill, and it's the same thing as it does on a U.S. Treasury. So if they don't send us our money, that is a default, and you will see that on the front page of every financial newspaper on the planet Earth. And I think that they're going to find the money to continue to pay bonds, T-bills and our rent. And it would be very surprising to not.

And that's why I think government shut downs are serious business, but I also call it Kabuki theater because it is a negotiating tool that's partisan right now. And the -- each party has got a better idea on how to run the government, and that's fine. But they are going to pay their bills and the country is not going to stop moving. So we're very sanguine about the shutdown. And as we've also seen, we can't wait for the headline risk related to that to go away so that we can, again, talk about one less thing related to our strong portfolio and get on our growth path and deliver some fabulous returns to shareholders over the next 5 to 10 years.

Anything else? I mean, seriously, we love to hear the criticism because I think that we -- your questions, because we want to make sure that -- and I really appreciate you asking all the questions, John, because we want to be very specific with investors about what are any perceived challenges in the model. Because we are very proud of the portfolio, and we're proud of the growth that we're delivering.

Thank you. I would now like to turn the conference back to Darrell Crate, President and CEO of Easterly Government Properties for closing remarks.

Great. Well, thanks, everybody, for joining us on our third quarter conference call. We very much look forward to talking to you as the year ends, and we begin 2026. We're -- and I appreciate the robust conversation. We are excited to continue to rebuild the shareholder base and again, deliver growth, deliver strong dividends and deliver an enduring portfolio that keeps America safe. All the best.

This concludes today's conference call. Thank you for participating. You may now disconnect.