9%-Yield Easterly Government Properties Stock Poised to Rebound
May 1, 2024
Why Beaten-Down DEA Stock Could Be Set to Surge
The real estate investment trust (REIT) industry has been one of the hardest-hit sectors since the Federal Reserve began raising and holding interest rates at decade highs.
Investors have had concerns that tenants of REITS wouldn’t be able to pay their rent, or that they could default. Moreover, high interest rates make it more expensive for REITs to borrow capital and service their debt, which cuts into their profits and cash flow.
It looks like REITs could be on the rebound, though, due to expectations that the Federal Reserve will begin cutting interest rates when it meets in June or July. Some REITs are already starting to enjoy a pre-interest-rate-cut bump.
One REIT stock that has taken a hit along with the broader sector, but which hasn’t had any problems with its tenants, is Easterly Government Properties Inc (NYSE:DEA).
The reason the REIT was able to sail through the COVID-19 pandemic and unprecedented interest rate hikes? The U.S. Government is its biggest tenant. And if you can’t trust Uncle Sam to pay the rent, who can you trust?
Easterly Government Properties acquires, develops, and manages commercial properties that it leases to various government agencies.
As of December 31, 2023, 97.4% of Easterly Government Properties’ real estate was leased out and 97% of its lease income was backed by the U.S. Government. As a result, it hasn’t had a problem collecting rent from its tenants. (Source: “Investor Presentation: March 2024,” Easterly Government Properties Inc, last accessed April 24, 2024.)
Since its inception, the REIT has grown its real estate portfolio from 2.1 million leased square feet and 29 properties to 8.8 million leased square feet and 90 operating properties spread across the country.
The REIT’s portfolio includes more than one type of real estate. As of the end of 2023, office buildings made up the bulk of Easterly Government Properties’ portfolio (51%). The company also owns Veterans Affairs (VA) outpatient clinics (26% of its portfolio), labs (nine percent), courthouses/legal offices (five percent), and properties classified as “other” (nine percent).
Some of the U.S. Government agencies that pay rent to Easterly Government Properties are the Department of Defense (DoD), the Department of Veterans Affairs, Customs and Border Protection, the Federal Bureau of Investigation (FBI), the Food and Drug Administration (FDA), the Internal Revenue Service (IRS), the Judiciary of the U.S., the National Archives & Records Administration, the National Park Services, and the U.S. Attorney’s Office. (Source: “Properties,” Easterly Government Properties Inc, last accessed April 24, 2024.)
Keep in mind that government tenants tend to remain in place significantly longer than tenants from the private sector. A typical lease for one of Easterly Government Properties’ sites has an initial term of 10 to 20 years and a renewal term of five to 10 years. Having tenants that are willing to sign long-term leases adds stability to the company’s business.
There’s plenty of room for Easterly Government Properties Inc to grow, too. The largest owners of federally leased assets own approximately 26.1% in aggregate, with no single landlord owning more than 5.4% of the properties.
It’s tracking an estimated $700.0 million+ worth of properties and actively evaluating about $250.0 million worth of properties.
Note that leasing to the U.S. Government has a high barrier to entry. The DoD or FBI aren’t going to lease properties from just anybody. A company that wants to become a landlord to Uncle Sam needs to have access to a substantial amount of capital and knowledge of the procurement processes, protocols, and culture—as well as proven experience in acquiring, developing, and managing government properties.
2023 Another Successful Year for Easterly Government Properties Inc
For the fourth quarter of 2023, Easterly Government Properties reported net income of $4.8 million, or $0.04 per diluted share. Its fourth-quarter core funds from operations (FFO) were $30.1 million, or $0.28 per diluted share. (Source: “Easterly Government Properties Reports Fourth Quarter And Full Year 2023 Results,” Easterly Government Properties Inc, February 27, 2024.)
During the quarter, the company acquired three properties totaling 221,463 leased square feet with a weighted average remaining lease term of 9.7 years. Key tenants of those properties include the U.S. Department of Homeland Security (DHS), the State of California, and the U.S. Judiciary.
The REIT’s full-year 2023 net income was $21.1 million, or $0.20 per diluted share, while its full-year core FFO was $120.1 million, or $1.14 per diluted share.
During the year, Easterly Government Properties Inc completed its acquisition of four properties for an aggregate pro rata contractual purchase price of about $80.4 million. It also renewed 390,330 leased square feet of its portfolio for a weighted average lease term of 16.4 years.
Commenting on the results, Darrell Crate, Government Properties’ CEO, said, “Mission-critical buildings are essential to the work U.S. Government agencies do every single day. Easterly has a definable edge in servicing our core tenants, and we remain focused on increasing our position in the public markets in 2024 and beyond.” (Source: Ibid.)
Management Maintains Quarterly Payout of $0.265 Per Share
With 97% of its annualized lease income backed by the U.S. Government, Easterly Government Properties’ cash flow is secure. That’s one big reason why the REIT is able to provide investors with safe, growing dividends. (Source: “Easterly Government Properties Announces Quarterly Dividend,” Easterly Government Properties Inc, February 22, 2024.)
In March, Easterly Government Properties stock paid quarterly dividends of $0.265 per share. As of this writing, that translates to a yield of 8.93%.
The company has raised its dividend seven times since it went public in 2015. It held DEA stock’s payout at $0.26 per share throughout the pandemic and raised it to $0.265 in August 2021. Easterly Government has held its dividend at that level since then. (Source: “Dividends,” Easterly Government Properties Inc, last accessed April 24, 2024.)
When will it resume raising its quarterly distributions? Probably after the Federal Reserve makes substantial cuts to its interest rates. That would make borrowing cheaper and help juice the company’s earnings.
Although Easterly Government Properties Inc has been reporting solid financial results, its earnings growth has slipped over the last two years because of high interest rates and acquisitions. In 2022, its net income increased by 4.5%, but in 2023, its net income fell by 41%.
Things are looking up, though. Analysts expect the company’s earnings per share (EPS) to increase to $0.27 in 2024 before pulling back slightly to $0.25 in 2025. That would still be a marked improvement from its EPS of $0.20 in 2023. (Source: “Easterly Government Properties, Inc. (DEA),” Yahoo! Finance, last accessed April 24, 2024.)
That’s probably why analysts are increasingly bullish on Easterly Government Properties stock. They’ve provided a 12-month share-price target of $13.00 per share. That points to potential growth of 10.5%. Analysts could update their forecasts for DEA stock once the Fed announces its first interest rate cut.
Easterly Government Properties stock’s price has been underperforming the market lately. As of this writing, it’s down by 10% since the start of the year and down by roughly eight percent over the last 12 months.
Chart courtesy of StockCharts.com
The Lowdown on Easterly Government Properties Inc
Easterly Government Properties is a great REIT with a rock-solid tenant base; almost all of its lease income is backed by the U.S. Government. As a result, the company doesn’t have a problem getting its tenants to pay their rent.
This provides the REIT with reliable cash flow, which allows it to make accretive acquisitions and target opportunistic developments.
There’s lot of room for Easterly Government Properties Inc to grow. The federal government rents more real estate than it owns, and given its budget constraints, chances are good that the U.S. Government will continue to increase the amount of assets it leases. That’s something Easterly Government Properties is happy to accommodate.
While Easterly Government Properties Inc’s earnings and stock price have been facing headwinds due to the high interest rate environment, this should change by midyear when the Fed is expected to announce its first interest rate cut of this cycle.
