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Top Picks 2017: Easterly Government Properties

01/20/2017 7:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

My Top Pick for 2017 for conservative income investors is a small cap REIT formed in 2011 by a group of executives with an average of 25 years of commercial real estate management experience, explains Tim Plaehn, editor of The Dividend Hunter.

Easterly Government Properties (DEA) went public with a February 2015 IPO. At the time of the IPO, Easterly owned 29 properties that were 100% leased, with 26 leased by federal agencies.

Management's goal is to acquire properties to lease to government agencies. Criteria include buying buildings that are less than 20 years old (the average government facility is almost 50 years old) and put them on 10 to 20 year leases with built in rent increases.

The General Services Administration (GSA) sets up almost all government leases and is moving the federal government away from owned facilities.

GSA leased square footage has grown by 29% since 1998 with owned asset size staying flat over the same period.

Leasing to the GSA takes a high level of expertise to work through the government contracting process.
DEA’s goal is to acquire $75 million to $125 million of properties per year to the portfolio to lease to government agencies.

With a current enterprise value of about $850 million, that target equates to 10% to 15% annual growth. Since the IPO the DEA portfolio has grown to 41 properties.

Cash flow per share growth can come from a combination or acquisitions and increasing the financial leverage in the company. Dividends should grow at a 10% plus annual rate.

My expectations are that the combination of long-term government guaranteed leases with an attractive growth profile will catch the attention of investors as Easterly builds a track record.

This level of growth plus safety could result in the market pushing the share price up and the yield down. If the yield goes to less than 4% we would see a mid-$20's share price. Currently, DEA yields 4.8%.

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Editor's Note: Tim's Plaehn's Top Pick for aggressive investors last year was Archrock (AROC), which returned 98% in 2016, including dividends. His conservative Top Pick last year — Reaves Utility Income Fund (UTG) — also produced a strong 29.5% total return.  

Tim now explains, "Archrock was chosen at a time when there were a lot of severely beaten down energy midstream stocks. The stock has had its run and profits should be taken. Meanwhile, UTG remains an attractive income investment.

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