Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our results of operations and financial condition in conjunction with the audited consolidated financial statements and related notes thereto as of December 31, 2025 and 2024 and for the years ended December 31, 2025, 2024 and 2023 and the sections entitled “Risk Factors,” “Forward Looking Statements,” “Business,” and “Properties” contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Annual Report on Form 10-K entitled “Risk Factors” and “Forward Looking Statements.”
Overview
References to “Easterly,” “we,” “our,” “us” and “our company” refer to Easterly Government Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries including Easterly Government Properties LP, a Delaware limited partnership, which we refer to herein as our operating partnership. We present certain financial information and metrics “at Easterly Share,” which is calculated on an entity-by-entity basis. “At Easterly Share” information, which we also refer to as being “at share,” “pro rata,” “our pro rata share” or “our share” is not, and is not intended to be, a presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
We are an internally managed real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. We generate approximately 90% of our revenue by leasing our properties to such agencies, either directly or through the U.S. General Services Administration, which we refer to herein as the GSA. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation.
We focus primarily on acquiring, developing and managing U.S. Government-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the tenant agency to meet its needs and objectives. We continue to pursue opportunities to add properties to our portfolio, including acquiring properties leased to state and local governments with strong creditworthiness and other opportunities that directly or indirectly support the mission of select government agencies. As of December 31, 2025, we wholly owned 93 operating properties and ten operating properties through an unconsolidated joint venture (the “JV”) in the United States encompassing approximately 10.4 million leased square feet (9.8 million pro rata), including 93 operating properties that were leased primarily to U.S. Government tenant agencies, six operating properties leased to tenant agencies of a U.S. state or local government and four operating properties that were entirely leased to private tenants. As of December 31, 2025, our operating properties were 97% leased. For purposes of calculating percentage leased, we exclude from the denominator total square feet that was unleased and to which we attributed no value at the time of acquisition. In addition, we wholly owned three properties under development that we expect will encompass approximately 0.2 million leased square feet upon completion.
Our operating partnership holds substantially all of our assets and conducts substantially all of our business. We are the sole general partner of our operating partnership and owned approximately 96.6% of the aggregate limited partnership interests in our operating partnership, which we refer to herein as common units, as of December 31, 2025. We have elected to be taxed as a REIT and believe that we have operated and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.
Reverse Stock Split and Reduction in Authorized Shares
On April 28, 2025, we effected a 1-for-2.5 reverse stock split of our issued and outstanding common stock, which reverse stock split was previously approved by our Board of Directors (the “Reverse Stock Split”). As a result, every 2.5 shares of issued and outstanding common stock were consolidated into 1 share. Concurrently with the Reverse Stock Split, our operating partnership completed a corresponding 1-for-2.5 reverse unit split of outstanding common units and LTIP units (the “Reverse Unit Split”). All share and per share amounts, including earnings per share, in these financial statements have been retrospectively adjusted for all periods presented to reflect the Reverse Stock Split. Accordingly, the Reverse Stock Split reduced the number of shares outstanding on April 28, 2025 from 112,263,028 to 44,905,158. On May 8, 2025, we reduced the number of our authorized shares of common stock from 200,000,000 to 80,000,000, in proportion with the 1-for-2.5 Reverse Stock Split effected by us on April 28, 2025. The par
value of the common stock remained unchanged at $0.01 per share following both the Reverse Stock Split and the reduction in authorized shares. For additional information, see Note 9, Note 10 and Note 11 to the Consolidated Financial Statements.
Acquisitions
On April 3, 2025, we acquired a 289,873 square foot facility leased primarily to the District of Columbia Government with a lease through February 2038.
On May 7, 2025, we acquired a 74,549 leased square foot Department of Homeland Security (“DHS”) facility near Burlington, Vermont with a 10-year lease that does not expire until May 2031.
On August 28, 2025, we acquired a 138,125 leased square foot York Space Systems facility in Greenwood Village, Colorado with a 10-year lease through December 2031.
On January 16, 2026, we acquired a 297,713 leased square foot campus consisting of three real estate operating properties near Richmond, Virginia. The assets are leased primarily to the Commonwealth of Virginia and have lease expirations ranging from 2027 to 2036.
Developments
On May 19, 2025, we acquired 100% of the membership interests in an entity that has the sole rights to a development project in Fort Myers, Florida for $1.8 million. On July 2, 2025, in connection with such development rights, we acquired land to develop an approximately 64,000 square foot laboratory for $5.8 million. The laboratory will be primarily leased to the Florida Department of Law Enforcement over a 25-year non-cancelable term.
On June 11, 2025, we acquired land to develop a 40,035 square foot Federal District and Federal Magistrate Courthouse in Medford, Oregon for $1.9 million. The courthouse will be primarily leased to the GSA for beneficial use of the Judiciary of the U.S. Government (“JUD”) over a 20-year non-cancelable term.
Disposition
On September 29, 2025, we sold ICE - Otay, a 52,881 rentable square foot office building located in San Diego, California, to a third party. Net proceeds from the sale of the operating property were approximately $3.5 million and we did not recognize a gain or loss on the sale. We assessed the recoverability of the carrying amount of ICE - Otay upon a change in circumstances and events to sell the property during the third quarter of 2025. The assessment resulted in the remeasurement of ICE - Otay, which was written down to its estimated fair value. Our estimate of the fair value was based on a pending offer to acquire the property. The remeasurement resulted in an impairment loss of $2.5 million, which is included in Impairment loss in our Consolidated Statements of Operations.
Results of Operations
Comparison of Results of Operations for the Years Ended December 31, 2025 and December 31, 2024
The financial information presented below summarizes the results of operations of our company for the years ended December 31, 2025 and 2024.
For the years ended December 31,
(Amounts in thousands)
Change
Revenues
Rental income
Tenant reimbursements
Asset management income
Other income
Total revenues
Expenses
Property operating
Real estate taxes
Depreciation and amortization
Acquisition costs
Corporate general and administrative
Provision for (recovery of) credit losses
Total expenses
Other income (expense)
Income from unconsolidated real estate venture
Interest expense, net
Gain on the sale of real estate
Impairment loss
Net income
Revenues
Total revenues increased $34.0 million to $336.1 million for the year ended December 31, 2025 compared to $302.1 million for the year ended December 31, 2024.
The $32.1 million increase in Rental income is primarily attributable to the three operating properties acquired since December 31, 2024 and a full period of operations from the nine operating properties acquired during the year ended December 31, 2024.
The $0.7 million decrease in Tenant reimbursements is primarily attributable to a decrease in tenant project reimbursements.
The $0.2 million increase in Asset management income is attributable to the fee earned by us for asset management of the JV from a full period of operations from the one property acquired during the year ended December 31, 2024.
The $2.4 million increase in Other income is primarily attributable to an increase in interest income.
Expenses
Total expenses increased by $27.1 million to $252.3 million for the year ended December 31, 2025 compared to $225.3 million for the year ended December 31, 2024.
The $7.3 million increase in Property operating expenses is primarily attributable to the three operating properties acquired since December 31, 2024 as well as a full period of operations from the nine operating properties acquired during the year ended December 31, 2024.
The $3.0 million increase in Real estate taxes is primarily attributable to the three operating properties acquired since December 31, 2024 as well as a full period of operations from the nine operating properties acquired during the year ended December 31, 2024.
The $17.6 million increase in Depreciation and amortization is primarily attributable to the three operating properties acquired since December 31, 2024 as well as a full period of operations from the nine operating properties acquired during the year ended December 31, 2024.
The $1.6 million increase in Corporate and general administrative costs was primarily due to an increase in non-cash compensation.
The $2.0 million decrease in Provision for (recovery of) credit losses is primarily due to a downward adjustment to our credit allowance due to net paydowns of Real estate loan receivable and change in market conditions.
Income from unconsolidated real estate venture
The $0.7 million increase in Income from unconsolidated real estate venture is primarily attributable to our pro rata share of operations from a full period of operations from the one operating property acquired by the JV during the year ended December 31, 2024.
Interest expense, net
Interest expense, net increased by $12.0 million to $74.5 million for the year ended December 31, 2025 compared to $62.4 million for the year ended December 31, 2024. The increase is primarily attributable to the fixed rate senior unsecured notes issued in 2024 and 2025.
Gain on the sale of real estate
For the year ended December 31, 2024, we recognized a Gain on the sale of a land parcel totaling $0.2 million.
Impairment loss
During the twelve months ended December 31, 2025, we recognized an impairment loss totaling $2.5 million for our ICE – Otay property to reduce its carrying value to its estimated fair value. ICE – Otay was a 52,881 rentable square foot office building located in San Diego, California.
Comparison of Results of Operations for the Years Ended December 31, 2024 and December 31, 2023
Information pertaining to fiscal year 2023 was included in our Annual Report on Form 10-K for the year ended December 31, 2024 on page 40 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which was filed with the SEC on February 25, 2025.
Liquidity and Capital Resources
We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant improvements, development activities at JUD – Flagstaff, JUD – Medford and FL – Fort Myers, planned and possible acquisitions of properties, stockholder distributions to maintain our qualification as a REIT, potential repurchases of common stock under our share repurchase program and other capital obligations associated with conducting our business. At December 31, 2025, we had approximately $23.4 million available in cash and cash equivalents, $10.3 million of restricted cash and there was approximately $200.8 million available under our revolving credit facility.
Our primary expected sources of capital are as follows:
existing cash balances;
operating cash flow;
distribution of cash flows from the JV;
available borrowings under our 2024 revolving credit facility;
issuance of long-term debt;
issuance of equity, including under our 2021 ATM Program (as described below); and
asset sales.
Our short-term liquidity requirements consist primarily of funds to pay for the following:
development and redevelopment activities, including major redevelopment, renovation or expansion programs at JUD – Flagstaff, JUD – Medford, FL – Fort Myers and other individual properties;
potential property acquisitions;
tenant improvements, allowances and leasing costs;
recurring maintenance and capital expenditures;
debt repayment requirements;
commitments to fund advancements through loan receivables;
corporate and administrative costs;
interest payments on our outstanding indebtedness;
interest swap payments;
distribution payments; and
potential repurchases of common stock under our share repurchase program.
Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or required. As of the date of this filing, there were no known commitments or events that would have a material impact on our liquidity.
Equity
Shelf Registration Statement on Form S-3
On February 28, 2024, we filed an automatic universal shelf registration statement on Form S-3 with the SEC, which was deemed automatically effective and provides for the registration of unspecified amounts of securities. However, there can be no assurance that we will be able to complete any such offerings of securities in the future.
ATM Programs
We entered into separate equity distribution agreements on each of December 20, 2019 (the “2019 ATM Program”) and June 22, 2021 (the “2021 ATM Program”) with various financial institutions. Pursuant to the 2021 ATM Program, we may issue and sell shares of our common stock having an aggregate offering price of up to $300.0 million from time to time in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. Under the 2021 ATM Program, we may enter into one or more forward transactions (each, a “forward sale transaction”) under separate master forward sale confirmations and related supplemental confirmations with each of the various financial institutions party to the 2021 ATM Program for the sale of shares of our common stock on a forward basis.
The 2019 ATM Program, which also provided for the issuance and sale of shares of our common stock having an aggregate offering price of up to $300.0 million in “at the market” offerings and forward sale transactions, was terminated on April 30, 2025 and there were no issuances under the 2019 ATM Program during the twelve months ended December 31, 2025.
The following table sets forth certain information with respect to issuances under the 2021 ATM Program in each fiscal quarter for the year ended December 31, 2025 (amounts in thousands except share amounts):
2021 ATM Program
For the Three Months Ended:
Number of Shares Issued (1)
Net Proceeds (1)
March 31, 2025 (2)
June 30, 2025 (2)
September 30, 2025
December 31, 2025
Total
Shares issued by us, which were all issued in settlement of forward sale transactions. As of December 31, 2025, we had settled all of our outstanding forward sale transactions under the 2021 ATM Program. We accounted for the forward sale transactions as equity.
Share amounts have been retrospectively adjusted for all periods presented to reflect the Reverse Stock Split.
We used the net proceeds received from such sales for general corporate purposes. As of December 31, 2025 , we had approximately $236.2 million of gross sales of our common stock available under the 2021 ATM Program.
Share Repurchase Program
On April 28, 2022, our board of directors authorized a share repurchase program whereby we may repurchase up to 1,815,597 shares of our common stock (adjusted for the Reverse Stock Split), or approximately 5% of our outstanding shares as of the authorization date. We are not required to purchase shares under the share repurchase program, but may choose to do so in the open market or through privately negotiated transactions at times and amounts based on our evaluation of market conditions and other factors.
No repurchases of shares of our common stock were made under the share repurchase program during the year ended December 31, 2025 .
Debt
Indebtedness Outstanding
The following table sets forth certain information with respect to our outstanding indebtedness as of December 31, 2025 (dollars in thousands):
Principal Outstanding
Interest
Current
Loan
December 31, 2025
Rate (1)(2)
Maturity
Revolving credit facility:
2024 revolving credit facility (3)
S + 145 bps
June 2028 (4)
Total revolving credit facility
Term loan facilities:
2016 term loan facility
January 2028 (6)
2018 term loan facility
August 2028 (8)
Total term loan facilities
Less: Total unamortized deferred financing fees
Total term loan facilities, net
Notes payable:
2017 series A senior notes
May 2027
2017 series B senior notes
May 2029
2017 series C senior notes
May 2032
2019 series A senior notes
September 2029
2019 series B senior notes
September 2031
2019 series C senior notes
September 2034
2021 series A senior notes
October 2028
2021 series B senior notes
October 2030
2024 series A senior notes
May 2033
2024 series B senior notes
August 2033
2025 series A senior notes
March 2030
2025 series B senior notes
August 2033
Total notes payable
Less: Total unamortized deferred financing fees
Total notes payable, net
Mortgage notes payable:
USFS II - Albuquerque
July 2026
ICE - Charleston
January 2027
VA - Loma Linda
July 2027
CBP - Savannah
July 2033
Total mortgage notes payable
Less: Total unamortized deferred financing fees
Less: Total unamortized premium/discount
Total mortgage notes payable, net
Total debt
Effective interest rates are as follows: 2016 term loan facility 5.59%, 2018 term loan facility 5.53%, 2017 series A senior notes 4.15%, 2017 series B senior notes 4.23%, 2017 series C senior notes 4.37%, 2019 series A senior notes 3.82%, 2019 series B senior notes 3.91%, 2019 series C senior notes 4.04%, 2021 series A senior notes 2.74%, 2021 series B senior notes 2.99%, 2024 series A senior notes 6.74%, 2024 series B senior notes 6.73%, 2025 series A senior notes 6.36%, 2025 series B senior notes 6.51%, USFS II – Albuquerque 3.92%, ICE – Charleston 3.93%, VA – Loma Linda 3.78%, CBP – Savannah 4.12%.
At December 31, 2025, the USD SOFR with a five day lookback (“SOFR” or “S”) was 3.66%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for each of our $400.0 million senior unsecured revolving credit facility(the “2024 revolving credit facility”), our $200.0 million senior unsecured term loan facility (as amended,
our “2018 term loan facility”) and our $100.0 million senior unsecured term loan facility (as amended, our “2016 term loan facility”) is based on our consolidated leverage ratio, as set forth in the respective loan agreements.
Our 2024 revolving credit facility had available capacity of $200.8 million at December 31, 2025, in addition to an accordion feature that provides us with additional capacity of up to $300.0 million, subject to syndication of the increase and the satisfaction of customary terms and conditions.
Our 2024 revolving credit facility has two six-month as-of-right extension options subject to certain conditions and the payment of an extension fee.
Our 2016 term loan facility is subject to three interest rate swaps with effective dates of December 23, 2024 and a notional value of $100.0 million, which effectively fixes the interest rate at 5.31% annually. The spread over SOFR is based on our consolidated leverage ratio, as defined in our 2016 term loan facility agreement.
Our 2016 term loan facility has two one-year as-of-right extension options subject to certain conditions and the payment of an extension fee.
Our 2018 term loan facility is subject to three interest rate swaps, one of which has an effective date of March 24, 2025 and the remaining two have an effective date of June 30, 2025. The three swaps have an aggregate notional value of $200.0 million, which effectively fix the interest rate at 5.09% annually. The spread over SOFR is based on our consolidated leverage ratio, as defined in our 2018 term loan facility agreement.
Our 2018 term loan facility has two one-year as-of-right extension options subject to certain conditions and the payment of an extension fee.
We entered into two $50.0 million treasury lock agreements to fix the Treasury rate of our 2025 series B senior notes. For a more complete description of the treasury lock agreements, see Note 7 Derivatives and Hedging Activities.
2016 Term Loan Facility
On January 8, 2025, we entered into the ninth amendment to our senior unsecured term loan agreement, dated as of September 29, 2016, to extend the maturity date of our 2016 term loan facility from January 30, 2025 to January 28, 2028. Additionally, the ninth amendment increased the capacity limit on the accordion feature from $150.0 million to $250.0 million.
Effective September 30, 2025, we entered into the tenth amendment to our senior unsecured term loan agreement, dated as of September 29, 2016, to remove the minimum consolidated tangible net worth financial covenant.
2025 Senior Note Agreement
On March 20, 2025, we entered into a master note purchase agreement pursuant to which the Operating Partnership agreed to issue and sell an aggregate of up to $125 million of fixed rate, senior unsecured notes (“Senior Notes”) consisting of (i) 6.13% 2025 Series A Senior Notes due March 20, 2030 (“2025 series A senior notes”), in an aggregate principal amount of $25.0 million, and (ii) 6.33% 2025 Series B Senior Notes due March 20, 2032 (“2025 series B senior notes”), in an aggregate principal amount of $100.0 million. The Senior Notes were issued on March 20, 2025. We, together with various subsidiaries of the Operating Partnership, have guaranteed the 2025 series A senior notes and the series B senior notes.
2018 Term Loan Facility
On August 21, 2025, we entered into a fifth amendment to our second amended and restated credit agreement, dated as of July 23, 2021, to extend the maturity date of our 2018 term loan facility from July 23, 2026 to August 21, 2028 and upsize lender commitment from $174.5 million to $200.0 million. Further, we may exercise, at our discretion, two one-year extension options, subject to certain conditions. Lastly, the term loan amendment also removes the minimum consolidated tangible net worth financial covenant and includes an accordion feature that provides the Company with additional capacity, subject to the satisfaction of customary terms and conditions, of up to $100.0 million. In connection with the extension, we recognized an aggregate $0.1 million loss on debt extinguishment during the twelve months ended December 31, 2025, which is included in Interest expense, net on our Consolidated Statements of Operations.
2024 Revolving Credit Facility
Effective September 2, 2025, we amended the credit agreement governing our 2024 revolving credit facility to remove the minimum consolidated tangible net worth financial covenant.
See Note 6 to the Consolidated Financial Statements for additional information on our 2024 revolving credit facility, our 2018 term loan facility and our 2016 term loan facility.
Our 2024 revolving credit facility, term loan facilities, notes payable, and mortgage notes payable are subject to ongoing compliance with a number of financial and other covenants. As of December 31, 2025, we were in compliance with all applicable financial covenants.
The chart below details our debt capital structure as of December 31, 2025 (dollars in thousands):
Debt Capital Structure
December 31, 2025
Total principal outstanding
Weighted average maturity
4.2 years
Weighted average interest rate
% Variable debt
% Fixed debt (1)
% Secured debt
Our 2016 term loan facility and 2018 term loan facility are swapped to be fixed and as such are included as fixed rate debt in the table above.
Material Cash Commitments
The following table shows our material cash commitments as of December 31, 2025 :
Payments due by period
Total
Thereafter
Mortgage principal and interest
Revolving credit facility
principal and interest
Term loan facilities
principal and interest
Senior unsecured notes payable
principal and interest
Development property obligations (1)
Total
Due to the long-term nature of certain construction and development contracts included in this line, the amounts reported in the table represent our estimate of the timing for the related obligations being paid.
On April 1, 2025, the borrower of the real estate loan receivable paid off approximately $15.0 million of the outstanding balance of the loan reducing our total commitment. As of both December 31, 2025 and the date of this Annual Report on Form 10-K, the outstanding balance of the loan receivable was $35.6 million and our remaining obligation to fund was $0.4 million. We expect to fund the remaining commitment through the anticipated maturity of the loan on August 31, 2027, depending on the borrower's election to use the commitments. For a more complete description of the real estate loan receivable, see Note 5 to the Consolidated Financial Statements.
Unconsolidated Real Estate Venture
We consolidate entities in which we have a controlling interest or are the primary beneficiary in a variable interest entity. From time to time, we may have off-balance sheet unconsolidated real estate ventures and other unconsolidated arrangements with varying structures.
As of December 31, 2025, our investment in the JV was $304.7 million. As of December 31, 2025, we committed capital, net of return of over committed capital, to the JV totaling $329.7 million and have a remaining capital commitment of $8.5 million. None of the properties owned by the JV are encumbered by mortgage indebtedness.
Dividend Policy
In order to qualify as a REIT, we are required to distribute to our stockholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We anticipate distributing all of our taxable income. We expect to make quarterly distributions to our stockholders in a manner intended to satisfy this requirement. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. It is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions. It is also possible that our board of directors could decide to make required distributions in part by using shares of our common stock.
A summary of dividends declared by the board of directors per share of common stock and per common unit (as adjusted to reflect the Reverse Stock Split and Reverse Unit Split) of our operating partnership at the date of record is as follows:
Quarter
Declaration Date
Record Date
Pay Date
Dividend
April 9, 2025
May 5, 2025
May 17, 2025
July 30, 2025
August 13, 2025
August 25, 2025
October 23, 2025
November 7, 2025
November 20, 2025
February 18, 2026
March 5, 2026
March 19, 2026
We use long-term investment partnership units in our operating partnership (“LTIP units”), which we refer to herein as LTIP units, as a form of performance-based award and service-based award for annual long-term incentive equity compensation. LTIP units are convertible into common units upon the satisfaction of certain conditions. Prior to the end of the performance period as set forth in the applicable LTIP unit award, holders of performance-based LTIP units are entitled to receive dividends per LTIP unit equal to 10% of the dividend paid per common unit of our operating partnership. After the end of the performance period, the number of LTIP units, both vested and unvested, that LTIP award recipients have earned, if any, are entitled to receive dividends in an amount per LTIP unit equal to dividends, both regular and special, payable per common unit of our operating partnership. Holders of LTIP units that are not subject to the attainment of performance goals are entitled to receive dividends per LTIP unit equal to 100% of the dividend paid per common unit beginning on the grant date.
Cash Flow
Comparison of Cash Flow for the Years Ended December 31, 2025 and December 31, 2024
The following table sets forth a summary of cash flows for our company for the years ended December 31, 2025 and 2024:
For the years ended December 31,
Change
(Amounts in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating Activities
We generated $259.2 million and $162.6 million of cash from operating activities during the years ended December 31, 2025 and 2024, respectively. Net cash provided by operating activities for the year ended December 31, 2025 included $125.2 million in net cash from rental activities net of expenses, $115.4 million related to the changes in tenant accounts receivables, prepaid expense and other assets, real estate loan interest receivable, deferred revenue associated with operating leases, principal payments on operating lease obligations and accounts payable, accrued expenses and other liabilities and distributions from investment in unconsolidated real estate venture of $18.6 million. Net cash provided by operating activities for the year ended December 31, 2024 included $107.0 million in net cash from rental activities net of expenses, $43.5 million related to the changes in tenant accounts receivables, prepaid expense and other assets, real estate loan interest receivable, deferred revenue associated with operating leases, principal payments on operating lease obligations and accounts payable, accrued expenses and other liabilities and distributions from investment in unconsolidated real estate venture of $12.1 million.
Investing Activities
We used $285.3 million and $409.6 million in cash for investing activities during the years ended December 31, 2025 and 2024, respectively. Net cash used in investing activities for the year ended December 31, 2025 primarily included $180.0 million in real estate acquisitions and deposits, $76.6 million in additions to development properties, $34.1 million in additions to operating
properties and $14.3 million in investment in real estate loan receivable, net, offset by $16.2 million in repayments of real estate loan receivable and $3.5 million in proceeds from sale, net. Net cash used in investing activities for the year ended December 31, 2024 primarily included $188.1 million in real estate acquisitions and deposits, $116.0 million in additions to development properties, $40.1 million in investment in unconsolidated real estate venture, $35.4 million in additions to operating properties, and $34.2 million in investment in real estate loan receivable, net, offset by $2.2 million in proceeds from sale, net and $2.0 million in distributions from investment in unconsolidated real estate venture.
Financing Activities
We generated $31.9 million and $252.9 million in cash from financing activities during the years ended December 31, 2025 and 2024, respectively. Net cash generated in financing activities for the year ended December 31, 2025 included $125.0 million in note payable issuances, $63.6 million in gross proceeds from issuance of shares of our common stock and $25.5 million in term loan proceeds offset by $94.6 million in dividends, $75.5 million in net paydowns under the revolving credit facility, $4.9 million in deferred financing costs, $4.6 million in mortgage debt repayment, $1.9 million in treasury lock settlement and $0.7 million in the payment of deferred offering costs. Net cash generated by financing activities for the year ended December 31, 2024 included $200.0 million in note payable issuances, $195.6 million in net draws under the revolving credit facility, and $71.8 million in gross proceeds from issuance of shares of our common stock offset by $115.9 million in dividends, $64.3 million in mortgage debt repayment, $25.5 million in term loan repayments, $7.9 million in deferred financing costs and $0.9 million in the payment of deferred offering costs.
Comparison of Cash Flow for the Years Ended December 31, 2024 and December 31, 2023
Information pertaining to fiscal year 2023 was included in our Annual Report on Form 10-K for the year ended December 31, 2024 on page 47 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which was filed with SEC on February 25, 2025.
Non-GAAP Financial Measures
We use and present FFO and Core FFO as supplemental measures of our performance. The summary below describes our use of FFO and Core FFO and provides information regarding why we believe these measures are meaningful supplemental measures of our performance and reconciles these measures from net income, presented in accordance with GAAP.
Funds From Operations and Core Funds From Operations
FFO is a supplemental measure of our performance. We present FFO calculated in accordance with the current National Association of Real Estate Investment Trusts (“Nareit”) definition set forth in the Nareit FFO White Paper – Restatement 2018. FFO includes the REIT’s share of FFO generated by unconsolidated affiliates. In addition, we present Core FFO for certain other adjustments that we believe enhance the comparability of our FFO across periods and to the FFO reported by other publicly traded REITs. FFO is a supplemental performance measure that is commonly used in the real estate industry to assist investors and analysts in comparing results of REITs.
FFO is defined by Nareit as net income (calculated in accordance with GAAP), excluding:
Depreciation and amortization related to real estate.
Gains and losses from the sale of certain real estate assets.
Gains and losses from change in control.
Impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.
We present FFO because we consider it an important supplemental measure of our operating performance, and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting results.
We adjust FFO to present Core FFO as an alternative measure of our operating performance, which, when applicable, excludes items which we believe are not representative of ongoing operating results, such as liability management related costs (including losses on extinguishment of debt and modification costs), provision for (recovery of) credit losses, catastrophic event charges, depreciation of non-real estate assets, and the unconsolidated real estate venture’s allocated share of these adjustments. In future periods, we may also exclude other items from Core FFO that we believe may help investors compare our results. We believe Core FFO more accurately reflects the ongoing operational and financial performance of our core business.
FFO and Core FFO are presented as supplemental financial measures and do not fully represent our operating performance. Other REITs may use different methodologies for calculating FFO and Core FFO or use other definitions of FFO and Core FFO and, accordingly, our presentation of these measures may not be comparable to other REITs. Neither FFO nor Core FFO is intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for purposes of evaluating our financial condition, results of operations and cash flows.
The following table sets forth a reconciliation of our net income to FFO and Core FFO for the years ended December 31, 2025, 2024, and 2023 (dollars in thousands):
For the years ended December 31,
Net income
Depreciation of real estate assets
Gain on sale of operating property
Impairment loss
Unconsolidated real estate venture allocated share of above adjustments
FFO
Adjustments to FFO:
Loss on extinguishment of debt
Provision for (recovery of) credit losses
Natural disaster event expense, net of recovery
Depreciation of non-real estate assets
Unconsolidated real estate venture allocated share of above adjustments
Core FFO
Factors That May Influence Future Results of Operations
Revenue
Our revenues primarily arise from the rental of space to tenants in our properties and tenant reimbursements, which include reimbursement for operating expenses, which are determined by the base year operating expenses and are subject to reimbursement in subsequent years largely based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Our revenue also includes amounts due from tenants for real estate taxes, projects and other reimbursements. Real estate taxes over the base year are reimbursed by the tenant.
Approximately 90% of our rental income comes from U.S. Government tenants. We expect that leases to agencies of the U.S. Government will continue to be our primary source of revenues for the foreseeable future. Due to such concentration, adverse events or conditions that affect the U.S. Government could have a more negative effect on our financial condition and operations than if our tenant base was more diverse. However, positive or negative changes in conditions in local markets, such as changes in economic or other conditions, employment rates, local tax and budget conditions, recession, competition for real property investments in these markets, uncertainty about the future and other factors are significantly less likely to impact our overall performance.
Operating Expenses
Our operating expenses generally consist of repairs and maintenance, utilities, roads and grounds, property management fees, insurance, janitorial and other operating expenses. Factors that may impact our ability to control these operating expenses include increases in utilities, increases in third party management expenses, increases in insurance premiums, increases in repair and maintenance costs and expenses related to inclement weather. Additionally, the cost of compliance with zoning and building codes as well as local, state and federal tax laws may impact our expenses. As a public company our annual general and administrative expenses are meaningfully higher due to legal, insurance, accounting, audit and other expenses related to corporate governance, SEC reporting, other compliance matters and the costs of operating as a public company. Increases in costs from any of the foregoing factors may adversely affect our future results and cash flows. Circumstances such as declines in market rental rates or increased competition may cause revenues to decrease, although the expenses of owning and operating a property will not necessarily decline. For certain of our properties, expenses may vary with occupancy, while costs arising from our property investments, interest expense and general maintenance will not be materially reduced even if a property is not fully occupied. As a result, our future cash flow and results of operations may be adversely affected and could be incurred if revenues decrease in the future.
Cost of Funds and Interest Rates
We expect future changes in interest rates will impact our overall performance. We manage and may continue to manage our market risk on variable rate debt by entering into interest rate swap agreements or similar instruments, subject to maintaining our qualification as a REIT for U.S. federal income tax purposes. Although we may seek to cost-effectively manage our exposure to future rate increases through such means, a portion of our overall debt may at various times float at then current rates.
Development Activities
As of December 31, 2025, we had three properties under development. We intend to continue to engage in development and redevelopment activities with respect to our properties, including build-to-suit new developments and redevelopments for existing U.S. Government tenant agencies. These development activities may include some risks such as:
the availability and timely receipt of zoning and other regulatory approvals;
development costs exceeding expectations;
cost overruns and untimely completion of construction (including risks beyond our control, such as weather or labor conditions, or material shortages);
the inability to complete construction and leasing of a property on schedule, resulting in increased debt service expense and development and redevelopment costs; and
the availability and pricing of financing on favorable terms or at all.
Inflation
Substantially all of our leases provide for operating expense escalation. We believe inflationary increases in expenses may be at least partially offset by the contractual expense escalations described above. We do not believe inflation has had a material impact on our historical financial position or results of operations.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base these estimates, judgments, and assumptions on historical experience, current trends, and various other factors that we believe to be reasonable under the circumstances. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements.
Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, which utilize these critical accounting estimates, can be found in Note 2, “Significant Accounting Policies,” of our consolidated financial statements.
Real Estate Properties Acquired
When we acquire real estate properties, we allocate the purchase price to numerous tangible and intangible components. The fair value of the acquired assets and assumed liabilities is estimated using future cash flow models. Our process for determining the allocation to these components requires many estimates and assumptions, including the following: (1) determination of market land, rental, discount and capitalization rates; (2) estimation of leasing and tenant improvement costs associated with the remaining term of acquired leases; (3) assumptions used in determining the in-place lease and if-vacant value including the rental rates, period of time that it would take to lease vacant space and estimated tenant improvement and leasing costs; and (4) allocation of the if-vacant value between land and building. A change in any of the above key assumptions can materially change not only the presentation of acquired properties in our consolidated financial statements but also our reported results of operations.
We completed acquisitions of three wholly owned operating properties for an aggregate purchase price of $169.9 million during the year ended December 31, 2025. We completed acquisitions of nine wholly owned operating properties for an aggregate purchase price of $184.9 million during the year ended December 31, 2024. These transactions were accounted for as asset acquisitions, and the purchase price of each was allocated based on the relative fair value of the asset acquired and liabilities assumed.
Impairment of Long-Lived Assets
We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long-lived assets. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine whether an asset may be impaired. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value.
In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining lives of our long-lived assets. If we change our estimate of the remaining lives, we allocate the carrying value of the affected assets over their revised remaining lives.
On a quarterly basis, we assess the recoverability of the carrying amount of our real estate and related intangibles. Our assessment resulted in the remeasurement of ICE – Otay in the third quarter of 2025, which was written down to its estimated fair value. Our estimate of the fair value was based on a pending offer from a third party to acquire the property. The remeasurement resulted in an impairment loss of $2.5 million, which is included in "Impairment loss" in our Consolidated Statements of Operations for the year ended December 31, 2025.
As of December 31, 2024, no impairment related to our long-lived assets was identified.
Impairment of Unconsolidated Real Estate Venture
We account for our investment in the unconsolidated real estate venture under the equity method. Under the equity method of accounting, we initially recognize our investment at cost and subsequently adjust the carrying amount of the investment for our share of the earnings or losses, distributions received, and other-than-temporary impairments.
Our unconsolidated real estate venture is evaluated for impairment when conditions exist that may indicate that the decrease in the carrying amount of our investment has occurred and is other than temporary. Triggering events or impairment indicators for our unconsolidated real estate venture include, recurring operating losses of an investee, absence of an ability to recover the carrying amount of the investee, the ability of an investee to sustain an earnings capacity, a carrying amount that exceeds the fair value of the investment and that decline in fair value is other-than-temporary. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of investment to its estimated fair value. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgement.
As of December 31, 2025, the carrying amount of our investment in our unconsolidated real estate venture was $304.7 million, or approximately 9.0% of our total assets. As of December 31, 2024, the carrying amount of our investment in our unconsolidated real estate venture was $316.5 million, or approximately 9.8% of our total assets. During the years ended December 31, 2025 and 2024, no other-than-temporary impairment related to our unconsolidated real estate venture was identified.
Loan Receivable and Allowance for Credit Losses
The measurement of expected credit losses under the current expected credit loss (“CECL”) methodology (“ASU 2016-13”) is applicable to our financial assets measured at amortized cost, including loan receivables and certain off-balance sheet credit exposures such as unfunded loan commitments. We adopted this standard on January 1, 2020 and apply this methodology to our loan receivables and off-balance sheet credit exposure. To determine our expected credit losses under CECL, we utilize a probability of default (“PD”) and loss given default (“LGD”) methodology. We determined that we have one portfolio segment and reserve for loan losses on an asset-specific basis. We have a limited history of incurred losses and consequently have elected to employ external data to perform our CECL calculation. Our model's inputs consider a default grade or industry relative default grade associated with the borrower and prospective tenant funding the development to determine an appropriate risk and allowance for credit under the PD and LGD methodology. If a reserve is recorded, the allowance is increased as a provision for credit and is decreased by charge-offs when are confirmed through the receipt of assets such as cash or via ownership control of the underlying collateral in full. The allowance for loan reflects management's estimate of loan as of the balance sheet date.
Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and variable rates. We manage and may continue to manage our market risk on variable rate debt by entering into swap arrangements to, in effect, fix the rate on all or a portion of the debt for varying periods up to maturity. This in turn, reduces the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when undertaking such arrangements will be to reduce our floating rate exposure and we do not intend to enter into hedging arrangements for speculative purposes.
As of December 31, 2025, $1.5 billion, or 88.1% of our debt, excluding unamortized premiums and discounts, had fixed interest rates or rates effectively fixed through interest rate swaps and $199.1 million, or 11.9%, had variable interest rates based on SOFR. If market rates of interest on our variable rate debt fluctuate by 25 basis points, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows, by $0.5 million annually.
Item 8. Financial Statement s and Supplementary Data
This item is included in a separate section at the end of this report beginning on page F-1.
