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. (the “Company”) are qualified in their entirety and should be read in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2016, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the U.S. Securities and Exchange Commission (the “ SEC”) on March 2, 2017 and the consolidated financial statements for the three months ended March 31, 2017, and related notes thereto, included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 filed with the SEC on May 9, 2017.
On June 1, 2017, the Company, through a wholly-owned subsidiary of its operating partnership, Easterly Government Properties LP (the “Operating Partnership”), acquired the Department of Veterans Affairs (VA) Ambulatory Care Center located in Loma Linda, California (“VA – Loma Linda”) by acquiring 100% of the membership interest of WI Loma Linda, LLC from an unrelated third party. VA – Loma Linda is a 327,614 rentable square foot state-of-the-art ambulatory care facility, constructed in 2016 and 100% leased to the Department of Veterans Affairs (“VA”). VA – Loma Linda had an aggregate purchase price of $212.6 million which was funded by a $175.0 million private placement, $26.3 million credit facility draws and cash on hand. Subsequent to closing the Company, through a wholly-owned subsidiary of the Operating Partnership, entered into a $127.5 million mortgage loan secured by VA – Loma Linda and used the proceeds to pay down the Company’s senior unsecured revolving credit facility.
The unaudited pro forma consolidated balance sheet as of March 31, 2017, reflects the financial position of the Company as if the acquisition of VA – Loma Linda had been completed on March 31, 2017. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2016 and the three months ended March 31, 2017 are presented as if the acquisition of VA – Loma Linda by the Company had occurred on May 27, 2016, the date of lease commencement.
In management’s opinion, all adjustments necessary to reflect the acquisition of VA – Loma Linda have been made.
The unaudited pro forma consolidated financial statements as of March 31, 2017 and for the year ended December 31, 2016 and the three months ended March 31, 2017 are not necessarily indicative of what the Company’s actual financial condition would have been at March 31, 2017 or what the Company’s actual results of operations would have been assuming the transactions had occurred as of May 27, 2016, 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 March 31, 2017
(Amounts in thousands, except share amounts)
| | Easterly Government Properties, Inc. | | | VA - Loma Linda | | | Company Pro Forma | |
| | (A) | | | (B) | | | | | |
Assets | | | | | | | | | | | | |
Real estate properties, net | | $ | 928,855 | | | $ | 189,833 | | | $ | 1,118,688 | |
Cash and cash equivalents | | | 5,241 | | | | (5,241 | ) | | | — | |
Restricted cash | | | 2,005 | | | | 1,495 | | | | 3,500 | |
Deposits on acquisitions | | | 8,750 | | | | (7,500 | ) | | | 1,250 | |
Rents receivable | | | 7,913 | | | | — | | | | 7,913 | |
Accounts receivable | | | 5,740 | | | | 330 | | | | 6,070 | |
Deferred financing, net | | | 1,652 | | | | — | | | | 1,652 | |
Intangible assets, net | | | 111,195 | | | | 22,790 | | | | 133,985 | |
Interest rate swaps | | | 3,893 | | | | — | | | | 3,893 | |
Prepaid expenses and other assets | | | 3,327 | | | | 93 | | | | 3,420 | |
Total assets | | $ | 1,078,571 | | | $ | 201,800 | | | $ | 1,280,371 | |
Liabilities | | | | | | | | | | | | |
Revolving credit facility | | | 158,167 | | | | (106,167 | ) | | | 52,000 | |
Term loan facility, net | | | 99,097 | | | | — | | | | 99,097 | |
Notes payable, net | | | — | | | | 173,633 | | | | 173,633 | |
Mortgage notes payable, net | | | 80,054 | | | | 125,487 | | | | 205,541 | |
Intangible liabilities, net | | | 40,629 | | | | — | | | | 40,629 | |
Accounts payable and accrued liabilities | | | 12,622 | | | | 8,847 | | | | 21,469 | |
Total liabilities | | | 390,569 | | | | 201,800 | | | | 592,369 | |
Equity | | | | | | | | | | | | |
Common stock, par value $0.01, 200,000,000 shares authorized, 36,991,430 shares issued and outstanding at March 31, 2017. | | | 370 | | | | — | | | | 370 | |
Additional paid-in capital | | | 599,233 | | | | — | | | | 599,233 | |
Retained earnings | | | 2,805 | | | | — | | | | 2,805 | |
Cumulative dividends | | | (51,671 | ) | | | — | | | | (51,671 | ) |
Accumulated other comprehensive income | | | 3,134 | | | | — | | | | 3,134 | |
Total stockholders' equity | | | 553,871 | | | | — | | | | 553,871 | |
Non-controlling interest in Operating Partnership | | | 134,131 | | | | — | | | | 134,131 | |
Total equity | | | 688,002 | | | | — | | | | 688,002 | |
Total liabilities and equity | | $ | 1,078,571 | | | $ | 201,800 | | | $ | 1,280,371 | |
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 Three Months Ended March 31, 2017
(Amounts in thousands, except share and per share amounts)
| | Easterly Government Properties, Inc. | | | VA - Loma Linda | | | Other Adjustments | | | | | Company Pro Forma | |
| | (AA) | | | (BB) | | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 26,020 | | | $ | 3,653 | | | $ | — | | | | | $ | 29,673 | |
Tenant reimbursements | | | 3,628 | | | | 95 | | | | — | | | | | | 3,723 | |
Other income | | | 239 | | | | 3 | | | | — | | | | | | 242 | |
Total revenues | | | 29,887 | | | | 3,751 | | | | — | | | | | | 33,638 | |
Operating expenses | | | | | | | | | | | | | | | | | | |
Property operating | | | 6,349 | | | | 339 | | | | — | | | | | | 6,688 | |
Real estate taxes | | | 2,735 | | | | 413 | | | | — | | | | | | 3,148 | |
Depreciation and amortization | | | 13,060 | | | | — | | | | 1,405 | | | (CC) | | | 14,465 | |
Acquisition costs | | | 532 | | | | — | | | | — | | | | | | 532 | |
Corporate general and administrative | | | 3,444 | | | | — | | | | — | | | | | | 3,444 | |
Total expenses | | | 26,120 | | | | 752 | | | | 1,405 | | | | | | 28,277 | |
Operating income | | | 3,767 | | | | 2,999 | | | | (1,405 | ) | | | | | 5,361 | |
Other (expenses) / income | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | (2,417 | ) | | | — | | | | (2,334 | ) | | (DD) | | | (4,751 | ) |
Net income (loss) | | | 1,350 | | | | 2,999 | | | | (3,739 | ) | | | | | 610 | |
Non-controlling interest in Operating Partnership | | | (266 | ) | | | — | | | | 146 | | | (EE) | | | (120 | ) |
Net income (loss) available to Easterly Government Properties, Inc. | | $ | 1,084 | | | $ | 2,999 | | | $ | (3,593 | ) | | | | $ | 490 | |
Net income (loss) available to Easterly Government Properties, Inc. per share: | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.03 | | | | | | | | | | | | | $ | 0.01 | |
Diluted | | $ | 0.03 | | | | | | | | | | | | | $ | 0.01 | |
Weighted-average common shares outstanding | | | | | | | | | | | | | | | | | | |
Basic | | | 36,891,595 | | | | | | | | | | | | | | 36,891,595 | |
Diluted | | | 39,143,887 | | | | | | | | | | | | | | 39,143,887 | |
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, 2016
(Amounts in thousands, except share and per share amounts)
| | Easterly Government Properties, Inc. | | | VA - Loma Linda* | | | Other Adjustments | | | | | Company Pro Forma | |
| | (AA) | | | (BB) | | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 93,364 | | | $ | 8,720 | | | $ | — | | | | | $ | 102,084 | |
Tenant reimbursements | | | 10,647 | | | | 368 | | | | — | | | | | | 11,015 | |
Other income | | | 607 | | | | 28 | | | | — | | | | | | 635 | |
Total revenues | | | 104,618 | | | | 9,116 | | | | — | | | | | | 113,734 | |
Operating expenses | | | | | | | | | | | | | | | | | | |
Property operating | | | 21,078 | | | | 837 | | | | — | | | | | | 21,915 | |
Real estate taxes | | | 9,896 | | | | 1,005 | | | | — | | | | | | 10,901 | |
Depreciation and amortization | | | 46,643 | | | | — | | | | 3,356 | | | (CC) | | | 49,999 | |
Acquisition costs | | | 1,798 | | | | — | | | | — | | | | | | 1,798 | |
Corporate general and administrative | | | 12,289 | | | | — | | | | — | | | | | | 12,289 | |
Total expenses | | | 91,704 | | | | 1,842 | | | | 3,356 | | | | | | 96,902 | |
Operating income | | | 12,914 | | | | 7,274 | | | | (3,356 | ) | | | | | 16,832 | |
Other (expenses) / income | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | (8,177 | ) | | | — | | | | (5,571 | ) | | (DD) | | | (13,748 | ) |
Net income (loss) | | | 4,737 | | | | 7,274 | | | | (8,927 | ) | | | | | 3,084 | |
Non-controlling interest in Operating Partnership | | | (1,322 | ) | | | — | | | | 461 | | | (EE) | | | (861 | ) |
Net income (loss) available to Easterly Government Properties, Inc. | | $ | 3,415 | | | $ | 7,274 | | | $ | (8,466 | ) | | | | $ | 2,223 | |
Net income (loss) available to Easterly Government Properties, Inc. per share: | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.11 | | | | | | | | | | | | | $ | 0.07 | |
Diluted | | $ | 0.10 | | | | | | | | | | | | | $ | 0.07 | |
Weighted-average common shares outstanding | | | | | | | | | | | | | | | | | | |
Basic | | | 30,645,279 | | | | | | | | | | | | | | 30,645,279 | |
Diluted | | | 32,372,538 | | | | | | | | | | | | | | 32,372,538 | |
* The VA - Loma Linda lease commenced on May 27, 2016, upon completion of construction. As such the statement of revenues and certain expenses for the period ended December 31, 2016 reflects operations for the period from May 27, 2016, the date of commencement of the lease, through December 31, 2016.
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 March 31, 2017 are as follows:
(A) | Reflects the unaudited consolidated balance sheet of Easterly Government Properties, Inc. as of March 31, 2017. |
(B) | Reflects the acquisition of VA – Loma Linda which closed on June 1, 2017. This acquisition was funded by a $127.5 million mortgage loan net of $2.0 million in deferred financing fees, $175.0 million private placement net of $1.4 million in deferred financing fees and cash on hand with $106.2 million of such aggregate proceeds used to pay down the Company’s senior unsecured revolving credit facility. 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 | | $ | 12,476 | |
Building | | | 177,357 | |
Total Real estate properties, net | | $ | 189,833 | |
Intangible assets, net | | | | |
In-place leases | | $ | 14,027 | |
Acquired leasing commissions | | | 8,763 | |
Total Intangible assets, net | | $ | 22,790 | |
2. | Adjustments to the Unaudited Pro Forma Consolidated Statements of Operations |
The adjustments to the unaudited pro forma consolidated statements of operations for the three months ended March 31, 2017 and for the year ended December 31, 2016 are as follows:
(AA) | Reflects the historical results of Easterly Government Properties, Inc. for the three months ended March 31, 2017 (unaudited) and year ended December 31, 2016, respectively. |
(BB) | Reflects the statement of revenues and certain expenses of VA – Loma Linda for the three months ended March 31, 2017 (unaudited) and period ended December 31, 2016, respectively. |
(CC) | The pro forma adjustment for depreciation expense is based on the Company’s basis in the assets that would have been recorded assuming VA – Loma Linda was acquired on May 27, 2016, the date of lease commencement. 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. |
(DD) | Reflects the additional estimated interest expense assuming VA – Loma Linda was acquired on May 27, 2016, the date of lease commencement. The table below provides a summary of interest bearing debt used to finance VA – Loma Linda: |
| | Fixed/ Floating | | Interest Rate | | | Principal Balance | |
Notes payable, net | | | | | | | | | | |
Series A | | Fixed | | | 4.05 | % | | $ | 95,000 | |
Series B | | Fixed | | | 4.15 | % | | $ | 50,000 | |
Series C | | Fixed | | | 4.30 | % | | $ | 30,000 | |
Mortgage notes payable, net | | Fixed | | | 3.59 | % | | $ | 127,500 | |
Revolving credit facility | | Floating | | | 2.31 | % | | $ | (106,167 | ) |
(EE) | Non-controlling interest in Operating Partnership is adjusted based on the additional pro forma earnings due to the acquisition of VA – Loma Linda. |
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