The real estate sector underperformed in 2023, with Real Estate Investment Trusts (REITs) being hammered hard as rising rates suppressed their profitability and their overall growth prospects. One of our favorite REITs, Easterly Government Properties (DEA), saw its share price fall by more than 14% -- but moving into 2024, we believe it presents a beneficial setup for the stock to outperform, writes Nikolaos Sismanis, analyst at The Sure Passive Income Newsletter.
We believe this is due to two factors: 1) The company’s unique qualities during an uncertain market environment and 2) The company’s 8.6% recent dividend yield, which should significantly contribute to returns and drive upside once the Fed starts cutting rates.
Regarding Easterly Government’s qualities, this REIT is like no other, as it specializes in providing mission-critical properties to various US government agencies. Boasting a robust portfolio of 89 operational properties across the United States, the company’s primary lessees include prestigious entities such as the Federal Bureau of Investigation (FBI), the US Department of Veterans Affairs (VA), the Defense Health Agency (DHA), the Environmental Protection Agency (EPA), and the US Citizenship & Immigration Services (USCIS).
What truly sets Easterly Government apart is the staggering assurance its tenant base provides to investors — the full faith and credit of the US government firmly secure an overwhelming 98.5% of its annualized lease income. This makes for a fantastic moat, with the unwavering support of Uncle Sam serving as the key differentiator from typical REITs, like commercial, industrial, or residential ones.
The fact the company has consistently posted a near-100% occupancy ratio since its IPO exemplifies resilience. The mission-critical nature of its properties is further highlighted by the agencies’ preference for long-term leases, resulting in an impressive weighted average remaining lease term of 10.4 years. This combination of full occupancy and multi-year lease structures not only enhances predictability but also contributes to the consistent coverage of the company’s high-yielding dividend.
Speaking of which, Easterly Government’s 8.6% recent yield is sufficiently supported by its underlying FFO generation. We expect the company will achieve FFO/share of $1.16, adequately covering the annual dividend rate of $1.06. Besides the substantial tangible returns provided by the dividend, we believe its high yield is likely to drive increased investor interest in the stock once the Fed starts cutting rates in 2024. This could translate to significant share price gains as the market will likely re-rate the stock.