Exhibit 99.2
Easterly Government Properties, Inc.
Introduction to the Unaudited Pro Forma Consolidated Financial Statements
The unaudited pro forma consolidated financial statements (including notes thereto) of Easterly Government Properties, Inc. (together with its consolidated subsidiaries, the “Company”) are qualified in their entirety and should be read in conjunction with the historical financial statements included elsewhere.
During 2016 the Company acquired the Government Properties Portfolio from an unrelated third party. The Government Properties Portfolio consists of four properties with an aggregate 302,057 square feet, 100% leased to the U.S. Government through the General Services Administration (“GSA”). The acquisition of DEA – Birmingham, EPA – Kansas City, and FBI – Birmingham closed on July 1, 2016 and the acquisition of FBI – Albany closed on November 22, 2016. The Government Properties Portfolio had an aggregate purchase price of $96.9 million which was funded by issuing 4,300,170 shares of the Company’s common stock with a fair value of $77.4 million, a $14.0 million draw on the Company’s senior unsecured revolving credit facility, and $5.5 million in cash on hand.
The unaudited pro forma consolidated balance sheet as of September 30, 2016, reflects the financial position of the Company as if the acquisition of the Government Properties Portfolio had been completed on September 30, 2016. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2015 and the nine months ended September 30, 2016 are presented as if the acquisition of the Government Properties Portfolio by the Company had occurred on February 11, 2015, the date of the Company’s initial public offering.
In management’s opinion, all adjustments necessary to reflect the acquisition of the Government Properties Portfolio have been made. The unaudited pro forma consolidated statements of operations should be read in conjunction with the historical financial statements and notes thereto of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 2, 2016 and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed with the Securities and Exchange Commission on November 8, 2016.
The unaudited pro forma consolidated financial statements as of September 30, 2016 and for the year ended December 31, 2015 and the nine months ended September 30, 2016 are not necessarily indicative of what the Company’s actual financial condition would have been at September 30, 2016 or what the Company’s actual results of operations would have been assuming the transactions had occurred as of February 11, 2015, nor do they purport to represent our financial condition or results of operation for future periods.
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Easterly Government Properties, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
As of September 30, 2016
(Amounts in thousands, except share amounts)
| | Easterly Government Properties, Inc. | | | Government Properties Portfolio | | | Company Pro Forma | |
| | (A) | | | (B) | | | | | |
Assets | | | | | | | | | | | | |
Real estate properties, net | | $ | 880,962 | | | $ | 18,539 | | | $ | 899,501 | |
Cash and cash equivalents | | | 4,358 | | | | (4,358 | ) | | | — | |
Restricted cash | | | 1,432 | | | | — | | | | 1,432 | |
Deposits on acquisitions | | | 1,250 | | | | (500 | ) | | | 750 | |
Rents receivable | | | 7,464 | | | | — | | | | 7,464 | |
Accounts receivable | | | 4,136 | | | | — | | | | 4,136 | |
Deferred financing, net | | | 3,007 | | | | — | | | | 3,007 | |
Intangible assets, net | | | 116,100 | | | | 3,071 | | | | 119,171 | |
Prepaid expenses and other assets | | | 1,845 | | | | — | | | | 1,845 | |
Total assets | | $ | 1,020,554 | | | $ | 16,752 | | | $ | 1,037,306 | |
Liabilities | | | | | | | | | | | | |
Revolving credit facility | | | 206,667 | | | | 14,000 | | | | 220,667 | |
Mortgage notes payable, net | | | 81,552 | | | | — | | | | 81,552 | |
Intangible liabilities, net | | | 41,894 | | | | 1,918 | | | | 43,812 | |
Accounts payable and accrued liabilities | | | 13,516 | | | | 834 | | | | 14,350 | |
Total liabilities | | | 343,629 | | | | 16,752 | | | | 360,381 | |
Equity | | | | | | | | | | | | |
Common stock, par value $0.01, 200,000,000 shares authorized, 35,161,192 shares issued and outstanding at September 30, 2016. | | | 352 | | | | — | | | | 352 | |
Additional paid-in capital | | | 568,520 | | | | — | | | | 568,520 | |
Retained (deficit) | | | 575 | | | | — | | | | 575 | |
Cumulative dividends | | | (33,944 | ) | | | — | | | | (33,944 | ) |
Total stockholders' equity | | | 535,503 | | | | — | | | | 535,503 | |
Non-controlling interest in Operating Partnership | | | 141,422 | | | | — | | | | 141,422 | |
Total equity | | | 676,925 | | | | — | | | | 676,925 | |
Total liabilities and equity | | $ | 1,020,554 | | | $ | 16,752 | | | $ | 1,037,306 | |
The accompanying notes are an integral part of these consolidated financial statements.
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Easterly Government Properties, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2016
(Amounts in thousands, except share and per share amounts)
| | Easterly Government Properties, Inc. | | | Government Properties Portfolio | | | Other Adjustments | | | | | Company Pro Forma | |
| | (AA) | | | (BB) | | | | | | | | | (II) | |
Revenues | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 68,520 | | | $ | 4,845 | | | $ | 985 | | | (DD) | | $ | 74,350 | |
Tenant reimbursements | | | 7,016 | | | | 815 | | | | — | | | | | | 7,831 | |
Other income | | | 331 | | | | — | | | | — | | | | | | 331 | |
Total revenues | | | 75,867 | | | | 5,660 | | | | 985 | | | | | | 82,512 | |
Operating expenses | | | | | | | | | | | | | | | | | | |
Property operating | | | 14,726 | | | | 1,171 | | | | — | | | | | | 15,897 | |
Real estate taxes | | | 7,233 | | | | 718 | | | | — | | | | | | 7,951 | |
Depreciation and amortization | | | 34,174 | | | | — | | | | 3,603 | | | (EE) | | | 37,777 | |
Acquisition costs | | | 1,339 | | | | — | | | | (203 | ) | | (FF) | | | 1,136 | |
Corporate general and administrative | | | 9,154 | | | | — | | | | — | | | | | | 9,154 | |
Total expenses | | | 66,626 | | | | 1,889 | | | | 3,400 | | | | | | 71,915 | |
Operating income | | | 9,241 | | | | 3,771 | | | | (2,415 | ) | | | | | 10,597 | |
Other (expenses) / income | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | (5,967 | ) | | | — | | | | (203 | ) | | (GG) | | | (6,170 | ) |
Net income (loss) | | | 3,274 | | | | 3,771 | | | | (2,618 | ) | | | | | 4,427 | |
Non-controlling interest in Operating Partnership | | | (1,005 | ) | | | — | | | | (278 | ) | | (HH) | | | (1,283 | ) |
Net income (loss) available to Easterly Government Properties, Inc. | | $ | 2,269 | | | $ | 3,771 | | | $ | (2,896 | ) | | | | $ | 3,144 | |
Net income (loss) available to Easterly Government Properties, Inc. per share: | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.08 | | | | | | | | | | | | | $ | 0.10 | |
Diluted | | $ | 0.07 | | | | | | | | | | | | | $ | 0.09 | |
Weighted-average common shares outstanding | | | | | | | | | | | | | | | | | | |
Basic | | | 28,886,697 | | | | | | | | | | | | | | 31,366,357 | |
Diluted | | | 30,722,389 | | | | | | | | | | | | | | 33,202,049 | |
The accompanying notes are an integral part of these consolidated financial statements.
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Easterly Government Properties, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2015
(Amounts in thousands, except share and per share amounts)
| | Easterly Government Properties, Inc. | | | Government Properties Portfolio | | | Other Adjustments | | | | | Company Pro Forma | |
| | (AA) | | | (CC) | | | | | | | | | (II) | |
Revenues | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 64,942 | | | $ | 7,924 | | | $ | 1,330 | | | (DD) | | $ | 74,196 | |
Tenant reimbursements | | | 6,233 | | | | 1,135 | | | | — | | | | | | 7,368 | |
Other income | | | 203 | | | | — | | | | — | | | | | | 203 | |
Total revenues | | | 71,378 | | | | 9,059 | | | | 1,330 | | | | | | 81,767 | |
Operating expenses | | | | | | | | | | | | | | | | | | |
Property operating | | | 13,340 | | | | 1,697 | | | | — | | | | | | 15,037 | |
Real estate taxes | | | 6,983 | | | | 1,053 | | | | — | | | | | | 8,036 | |
Depreciation and amortization | | | 33,561 | | | | — | | | | 5,467 | | | (EE) | | | 39,028 | |
Acquisition costs | | | 2,887 | | | | — | | | | — | | | | | | 2,887 | |
Formation expenses | | | 1,666 | | | | — | | | | — | | | | | | 1,666 | |
Corporate general and administrative | | | 8,817 | | | | — | | | | — | | | | | | 8,817 | |
Fund general and administrative | | | 75 | | | | — | | | | — | | | | | | 75 | |
Total expenses | | | 67,329 | | | | 2,750 | | | | 5,467 | | | | | | 75,546 | |
Operating income | | | 4,049 | | | | 6,309 | | | | (4,137 | ) | | | | | 6,221 | |
Other (expenses) / income | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | (4,972 | ) | | | — | | | | (240 | ) | | (GG) | | | (5,212 | ) |
Net unrealized (loss) on investments | | | (5,122 | ) | | | — | | | | — | | | | | | (5,122 | ) |
Net income (loss) | | | (6,045 | ) | | | 6,309 | | | | (4,377 | ) | | | | | (4,113 | ) |
Non-controlling interest in Operating Partnership | | | 4,351 | | | | — | | | | (700 | ) | | (HH) | | | 3,651 | |
Net income (loss) available to Easterly Government Properties, Inc. | | $ | (1,694 | ) | | $ | 6,309 | | | $ | (5,077 | ) | | | | $ | (462 | ) |
Net income (loss) available to Easterly Government Properties, Inc. per share: | | | | | | | | | | | | | | | | | | |
Basic | | $ | (0.08 | ) | | | | | | | | | | | | $ | (0.02 | ) |
Diluted | | $ | (0.08 | ) | | | | | | | | | | | | $ | (0.02 | ) |
Weighted-average common shares outstanding | | | | | | | | | | | | | | | | | | |
Basic | | | 21,430,016 | | | | | | | | | | | | | | 25,247,153 | |
Diluted | | | 21,430,016 | | | | | | | | | | | | | | 25,247,153 | |
The accompanying notes are an integral part of these consolidated financial statements.
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Easterly Government Properties, Inc.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
1. | Adjustments to the Unaudited Pro Forma Consolidated Balance Sheet |
The adjustments to the unaudited pro forma consolidated balance sheet as of September 30, 2016 are as follows:
(A) | Reflects the unaudited consolidated balance sheet of Easterly Government Properties, Inc. as of September 30, 2016. This balance includes the acquisitions of three properties in the Government Properties Portfolio, DEA – Birmingham, EPA – Kansas City, and FBI – Birmingham, that closed on July 1, 2016. |
(B) | Reflects the acquisition of FBI – Albany, the final acquisition in the Government Properties Portfolio, which closed on November 22, 2016. This acquisition was funded using $14.0 million from the Company’s senior unsecured revolving credit facility and cash on hand. The following pro forma adjustments are necessary to reflect the initial allocation of the estimated purchase price of this acquisition. The allocation of purchase price shown in the table below is based on the Company’s best estimate and is subject to change based on the final determination of the fair value of assets and liabilities acquired. |
Real estate properties, net | | | | |
Land | | $ | 1,411 | |
Building | | | 17,128 | |
Total Real estate properties, net | | $ | 18,539 | |
Intangible assets, net | | | | |
In-place leases | | $ | 2,968 | |
Acquired leasing commissions | | | 103 | |
Total Intangible assets, net | | $ | 3,071 | |
Intangible liabilities, net | | | | |
Below market leases | | $ | (1,918 | ) |
Total Intangible liabilities, net | | $ | (1,918 | ) |
2. | Adjustments to the Unaudited Pro Forma Consolidated Statements of Operations |
The adjustments to the unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2016 and for the year ended December 31, 2015 are as follows:
(AA) | Reflects the historical results of Easterly Government Properties, Inc. for the nine months ended September 30, 2016 (unaudited) and year ended December 31, 2015, respectively. |
(BB) | Reflects the combined statements of revenues and certain expenses of the Government Properties Portfolio for the nine months ended September 30, 2016 (unaudited). The nine months ended September 30, 2016 includes the operations for DEA – Birmingham, EPA – Kansas City, and FBI – Birmingham for the period from January 1, 2016 through June 30, 2016 and the operations of FBI – Albany for the period from January 1, 2016 through September 30, 2016. Operations for DEA – Birmingham, EPA – Kansas City, and FBI – Birmingham for the period from July 1, 2016 through September 30, 2016 are included in the Easterly Government Properties, Inc. Quarterly Report on Form 10-Q for the period ended September 30, 2016 filed with the Securities and Exchange Commission on November 8, 2016. |
(CC) | Reflects the combined statements of revenues and certain expenses of the Government Properties Portfolio for the year ended December 31, 2015 prorated assuming the Government Properties Portfolio was acquired on February 11, 2015, the date of the Company’s initial public offering. |
(DD) | The pro forma adjustment for rental income represents straight-line rent adjustments and above/below market lease amortization assuming the Government Properties Portfolio was acquired on February 11, 2015, the date of the Company’s initial public offering. |
(EE) | The pro forma adjustment for depreciation expense is based on the Company’s basis in the assets that would have been recorded assuming the Government Properties Portfolio was acquired on February 11, 2015, the date of the initial public offering. Depreciation and amortization amounts were determined in accordance with the Company’s policies and are based on management’s evaluation of the estimated useful lives of the properties and intangibles. The amounts allocated to buildings are depreciated over 40 years. The amounts allocated to lease intangibles are amortized over the remaining life of the related leases. |
(FF) | Historical external property acquisition expenses directly attributable to the Government Properties Portfolio have been excluded from the pro forma consolidated statement of operations because they are nonrecurring costs directly attributable to the acquisitions. |
(GG) | Reflects the additional estimated interest expense on the Company’s senior unsecured revolving credit facility assuming the Government Properties Portfolio was acquired on February 11, 2015, the date of the initial public offering. |
(HH) | Non-controlling interest in Operating Partnership is adjusted based on the additional pro forma earnings and the shares outstanding due to the acquisition of the Portfolio. |
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(II) | The pro forma weighted average common shares outstanding are calculated as if 4,300,170 shares of the primary equity offering used to purchase the Government Properties Portfolio in June 2016 had occurred on February 11, 2015, the date of the Company’s initial public offering. |
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