Easterly Government Properties (DEA) is an internally managed REIT with a focus on the acquisition, development, and management of properties that are leased to U.S. Government agencies, explains Ben Reynolds, editor of Top 10 REITs.
Nearly all the properties of the trust are leased to U.S. Government agencies, such as the FBI, IRS, and DEA. The REIT was founded in 2011 as Easterly Partners. It then changed its name to Easterly Government Properties and had its IPO in early 2015.
As the U.S. Government is a highly reliable tenant, Easterly has a rock-solid business model, with an impressive occupancy of 100%. It has thus proven to be immune throughout the coronavirus crisis.
While other REITs have been severely hurt by the pandemic, Easterly grew its funds from operations (FFO) per share by 5% in 2020 and by 4% in 2021, to new all-time highs.
In the second quarter of 2022, Easterly posted FFO per share of $0.33. Notably, the trust has posted the same FFO per share for five consecutive quarters. Management reiterated its guidance for FFO per share of $1.34 to $1.36 in 2022.
Easterly has a short corporate history but it is safe to conclude that the trust is immune to recessions, as its tenant, the U.S. Government, is as reliable as possible financially.
The trust is well aware of this and thus it has chosen to operate with a high leverage ratio (Net Debt to EBITDA) of 7.2. The cash flows of Easterly are so reliable and predictable that analysts have not been wrong by more than $0.01 in each of the last 21 quarters.
Easterly kept its dividend flat during 2018-2020 and has raised it at a slow pace throughout its short history. Nevertheless, it is now offering a 5.7% dividend, with a payout ratio of 79%, which is in line with the historical average of the trust. Given the rock-solid business model of Easterly, we consider its dividend safe.
The merits of leasing its properties to the U.S. Government are obvious. On the other hand, Easterly cannot grow at a fast pace, as it cannot raise its rent rates too quickly. This is clearly reflected in the 4% average annual growth rate of the FFO per share of the trust over the last five years. Nevertheless, the consistent growth record and the resilience of Easterly should not be disregarded.
Based on expected 2022 FFO per share of $1.34, Easterly trades for a price-to-FFO ratio (P/FFO) of 14.0. Our fair value estimate for this REIT is a P/FFO of 18.6. An expanding P/FFO multiple could boost shareholder returns by 5.9% per year. We also expect annual FFO per share growth of 3.3%, while Easterly has a 5.7% dividend yield. All together, we expect total returns of 13.5% per year over the next five years.