DEA - Easterly Government: One Of The Safest ~8% Yields Amongst REITs

2023-12-25 10:00:00 ET

Summary

• Easterly Government's 7.9% dividend yield is one of the most secure high yields in the REIT sector.
• The company's unique positioning with the U.S. government as its sole tenant provides stability and insulates it from common challenges faced by traditional office REITs.
• Easterly Government's long-term leases, inflation protection, and resilient performance make it an attractive choice for investors seeking income and potential appreciation.

Easterly Government (DEA) currently boasts an impressive 7.9%-yielding dividend. Despite the substantial yield and the challenges that REITs are navigating amidst heightened interest rates, I believe that Easterly Government's dividend stands as one of the most secure high yields within the sector.

I believe this is due to Easterly Government's one-of-a-kind qualities that should keep translating to robust cash flows for the office REIT. Let's take a deeper look!

What Sets DEA Apart Amongst REITs?

When researching the realm of REITs, one will encounter various sub-sector distinctions. Among the commonly recognized categories are retail, office, industrial, and residential REITs. Beyond these mainstream types, some specialty REITs focus on distinctive asset classes, such as data center REITs or cell tower REITs. However, several names are trading in the public markets, even within these specialized niches.

Easterly Government completely stands out, in my view, despite technically being categorized as an "office" REIT. While it does own and lease what can fairly be described as office spaces, these properties and their underlying utilization have nothing to do with traditional office spaces.

If you are not familiar with Easterly Government, it basically provides mission-critical properties to various U.S. government agencies. With a portfolio of 90 operational properties in the United States, leased primarily to agencies like the FBI, the Department of Veterans Affairs, the Defense Health Agency, the Environmental Protection Agency, and the U.S. Citizenship & Immigration Services, an overwhelming 99% of its annualized lease income is backed by the full faith and credit of the U.S. government.

The significant advantage of having the U.S. government as the sole tenant creates a robust fortress for Easterly Government. What distinguishes it from run-of-the-mill REITs is the unwavering faith and credit of Uncle Sam. The U.S. government is globally recognized by the global markets as (one of) the most dependable creditor(s), having never defaulted on its commitments. Therefore, Easterly Government technically faces negligible counterparty risk.

Do you remember how office REITs were decimated during the COVID-19 pandemic by sharply declining occupancy rates due to remote working swiftly becoming the norm? In fact, office REITs still struggle from the aftermath of the pandemic, with occupancy rates remaining very low and many facing heavy refinancing issues. Well, Easterly Government's occupancy remained at or very close to 100% over the same period, as it has been throughout its whole history in the public markets (IPOed in 2015) without exceptions.

The explanation is simple: The agencies leasing properties from Easterly Government play an integral role in vital government operations and national security, ensuring the company enjoys zero vacancy risk at all times. The mission-critical nature of its properties is further stressed by agencies seeking long-term leases, which is evident in the REIT's weighted average remaining lease term of 10.4 years.

Constant lease renewals have ensured that Easterly Government's forward-looking contracted backlog remains exceptionally long. It's also worth noting that the company is to be protected from the eroding impact of inflation over such prolonged leases due to the underlying rent structures that management has signed, ensuring that Easterly rent collection rises along with inflation. Its GSA leases include an OpEx base, which grows with inflation, protecting against a NOI margin compression over time.

With a consistently high occupancy rate and advantageous terms secured in its extended leases, the REIT enjoys exceptional predictability in cash flow. This not only empowers the company to strategically plan its future investments but also ensures a well-structured dividend trajectory for years to come. Notably, the company's acquisition pipeline has consistently demonstrated resilience in the midst of market fluctuations, contributing to steady dividend growth that is consistently well-covered.

Why Is DEA's 7.9%-Yielding Dividend Attractive?

In my view, Easterly Government's 7.9%-yielding dividend presents a compelling high-income opportunity mainly due to the underlying traits I just mentioned. I believe that the unique benefits that come from having Uncle Sam as your sole tenant include excessively long leases with inflation-linked rent hikes, virtually no counter-party risk, and no vacancy risk due to their mission-critical nature. These qualities should allow the company to maintain and keep raising the dividend at the most prudent pace, ensuring its long-term viability.

The rising-rates environment of the past couple of years serves as a useful example. It illustrates how Easterly Government's unique qualities, through which the company has managed to achieve very favorable terms with creditors, have essentially insulated it from the rather tough real estate environment.

In particular, Easterly Government's exceptional attributes have earned favor among creditors. The company boasts a remarkable debt profile , securing virtually all its debt at a favorable weighted average rate of 4% and a weighted average maturity period of 5 years. Amidst widespread interest rate increases, which have led to substantial spikes in interest expenses for most REITs in recent quarters, Easterly Government demonstrated resilience. In Q3, the company's interest expenses not only bucked the trend but declined by 2.4% to a commendable $12.0 million. On a nine-month basis, they also remained very stable.

In the face of a challenging year for REITs, particularly those focused on office spaces, Easterly Government stands poised to deliver impressive results that comfortably cover its underlying dividend. Wall Street anticipates a robust FFO/share of $1.14 , surpassing the annualized dividend rate of $1.06.

Beyond its attractive and well-covered dividend, Easterly Government's substantial dividend yield positions it as an enticing choice for investors, especially when interest rates begin to ease.

The stock holds strong potential for appreciation as REIT yields decline in such a scenario. This trend has already been initiated to some extent; following the Fed hinting at potential rate cuts in their December meeting (or at least what the market seems to have perceived), shares experienced a notable rebound.

Takeaway

Overall, Easterly Government's 7.9% dividend yield stands out as a secure high yield in the REIT sector. The company's unique positioning, with the U.S. government as its sole tenant, provides unparalleled stability and insulates it from common challenges faced by traditional office REITs.

With a robust portfolio, long-term leases, and inflation protection, Easterly Government demonstrates impressive cash flow visibility. During a challenging real estate environment and rising interest rates, the company's resilient performance and well-covered dividend make it, in my view, an attractive choice for investors seeking both income and potential appreciation.

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