The Most Overlooked Income Opportunity in Today’s Market?
Among the rules of life, one is carved in stone: When you make money, part of it goes to taxes.
Now there’s a way for income investors to make it even—by being the landlord of “Uncle Sam.”
You see, the U.S. government is the biggest employer in America, and to house all its employees, it requires a lot of space. While the U.S. government does own some properties, it also needs to rent office space to support its operations. And that has created a major opportunity for income investors.
To be more specific, I’m looking at Easterly Government Properties Inc (NYSE:DEA), a real estate investment trust (REIT) headquartered in Washington, D.C.
Like most of the REITs we cover here at Income Investors, Easterly operates like a landlord. It owns a portfolio of properties and collects rent from the tenants.
What makes DEA stock stand out, though, is who the tenants are. Easterly focuses on the acquisition, development, and management of Class A commercial properties that are leased to the U.S. government.
If you’ve been a landlord yourself, you’d know that finding a good tenant is of utmost importance. Chasing late payments is never fun, and no landlord wants to see their apartment turned into a wreck at the end of the lease term.
By focusing on properties leased to the U.S. government, Easterly Government Properties Inc doesn’t have to worry too much about these problems. The company generates nearly all its revenue by leasing its properties to government agencies through the General Services Administration.
According to its latest investor presentation, around 99% of Easterly’s lease income is backed by “full faith and credit of the U.S. government.” (Source: “Investor Presentation,” Easterly Government Properties Inc, last accessed November 26, 2018.)
Easterly Government Properties Inc: Offering an Oversized Income Stream
When it comes to the landlord business, things don’t get much better than having the government as your major tenant.
And thanks to Easterly’s status as a REIT, shareholders can get a piece of the action, too. This is because REITs are required by law to pay out at least 90% of their profits to investors in the form of dividends. In return, they pay little to no income tax at the corporate level.
Due to Easterly’s pass-through REIT structure, shareholders can collect a stream of dividends that are essentially backed by Uncle Sam.
The payout is quite impressive, too. Easterly Government Properties Inc currently follows a quarterly dividend rate of $0.26 per share. At the current share price, that comes out to an annual yield of 5.9%.
Of course, you can find companies with yields higher than DEA stock. But note that the average dividend yield of all S&P 500 companies stands at less than two percent at the moment.
Therefore, investors purchasing Easterly stock today would be locking in a yield around three times the benchmark’s average. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed November 26, 2018.)
Higher-yielding stocks are generally not the safest bets. But in the case of this landlord, those oversized payouts have actually been rising.
When the company went public in February 2015, its first full-quarter dividend was $0.21 per share. Today, the amount stands at $0.26 per share, representing an increase of 23.8%. (Source: “Dividends,” Easterly Government Properties Inc, last accessed November 26, 2018.)
Running a Rock-Solid Business
We know that past performance does not guarantee future results. But at Easterly Government Properties Inc, the company is well positioned to keep returning cash to investors, due to its high-quality real estate portfolio.
Easterly’s pro-forma portfolio (which includes its pending acquisitions) consists of 64 operating properties totaling 5.5 million rentable square feet. As of September 30, they were 100% leased and had a weighted average remaining lease term of 7.1 years. (Source: “Investor Presentation,” Easterly Government Properties Inc, last accessed November 26, 2018.)
Again, if you’ve been a landlord yourself, you’d know that having a tenant who’s willing to sign a one-year lease agreement would be considered lucky. With a perfect occupancy rate and an average remaining lease term of over seven years, Easterly Government Properties Inc is well positioned to keep earning stable rental income.
The company has also been growing its business through a series of acquisitions. In the third quarter of 2018, Easterly acquired a Department of Veterans Affairs community-based outpatient clinic in San Jose, California.
The facility totaled 90,085 square feet and was completed earlier this year. It is leased to the Department of Veterans Affairs for an initial, non-cancelable lease term of 20 years through February 2038.
Also in the third quarter, Easterly completed the acquisition of eight of the 14 properties in its previously announced portfolio acquisition. This added another 1.03 million square feet to the company’s portfolio.
“This quarter has seen the largest acquisition volume of any single quarter since the Company’s IPO,” remarked Easterly’s Chief Executive Officer William C. Trimble III earlier this month. (Source: “Easterly Government Properties Reports Third Quarter 2018 Results,” Easterly Government Properties Inc, November 5, 2018.)
“We are growing the portfolio in an accretive manner and introducing new, important agencies that help generate stable, recurring cashflows backed by the full faith and credit of the U.S. Government,” he added.
Bottom Line on Easterly Government Properties Inc
By targeting properties occupied by U.S. government agencies with enduring missions, Easterly has built a durable business. Coupled with its generous dividend policy, DEA stock deserves the attention of income investors.