Easternly Government Properties stock (NYSE:DEA) recently hit record lows, causing the dividend yield to rise to a whopping 9.6%. With a portfolio of 89 dedicated properties leased to major U.S. agencies such as the FBI, DEA, ICE and FDA, among others, Easterly Government is a unique REIT in the industry. While the prevailing macroeconomic challenges justify the stock’s continued decline, the REIT’s unique qualities should continue to provide strong returns for investors. Therefore, I am optimistic about the stock.
What are the unique qualities of Easternly Government?
Before we talk about Easterly Government’s dividend, it’s important to recognize the special qualities that set this company apart. These characteristics play a critical role in shaping the company’s prospects, including the quality of its dividends.
For those unfamiliar with Easterly Government, the company specializes in providing mission-critical real estate to various U.S. government agencies. As previously mentioned, the company owns 89 operational properties across the United States, leased primarily to agencies such as the Federal Bureau of Investigation (FBI), the U.S. Department of Veterans Affairs (VA), the Defense Health Agency (DHA), and the Environmental Protection Agency (EPA) and the US Citizenship & Immigration Services (USCIS).
As a result, an incredible 98.5% of annual lease revenue is backed by the full faith and credit of the U.S. Government.
The immense benefits of having the US government as the sole tenant create a huge moat. Easterly Government’s key differentiator from typical real estate investment trusts (REITs) is Uncle Sam’s unwavering faith and creditworthiness. The US government is considered one of the most reliable creditors in the world and has never fulfilled its obligations. The REIT is therefore generally not exposed to counterparty risk.
Additionally, it is safe to say that the agencies to which the Easternly Government leases its properties will never go away, regardless of the underlying conditions. They are fundamental to vital operations and national security. This means that in addition to the counterparty risk, the company also has no vacancy risk.
These arguments are highlighted by the fact that Easterly Government has consistently maintained near 100% occupancy since its IPO, underscoring the resilience of its operations. The mission-critical nature of its properties is also evident in agencies opting for long-term leases, as evidenced by Easterly Government’s impressive weighted average remaining lease term of 10.4 years. With full occupancy and exceptional rental agreements, the company demonstrates remarkable predictability and superior cash flow quality.
Finally, as a pioneer in its niche sector, the company has acquired extensive knowledge of the complicated acquisition process, protocols and organizational culture of the General Services Administration (GSA). Management not only understands the complexity of tasks and the hierarchical structures of rental agencies, but has also built unique relationships. This and the high barriers to entry into the GSA sector further strengthen the company’s competitive advantage and general stability.
With a yield of 9.6%, how safe is Easterly Government’s dividend?
With shares of Easterly Government plummeting in recent months, it’s no wonder investors are questioning the safety of the stock’s high 9.6% dividend yield. Well, in my opinion, the company’s dividend is quite safe, backed by the unique qualities discussed earlier. The stock’s high yield on Wall Street is likely a response to concerns that increased interest rates could hurt growth prospects, leading to an emphasis on yield over dividends.
However, there is something important to note here: Easternly Government’s exceptional qualities have found favor with creditors, with 97.7% of its debts locked in at advantageous interest rates and with extended maturities. Despite widespread interest rate hikes, the company’s interest expense rose just 2% in the second quarter. For comparison, most REITs saw peaks between 30% and 100% during this period. Still, increased interest rates may pose a hurdle to the company’s growth prospects by discouraging additional financing.
Another factor hurting Easterly Government’s growth prospects is the durability of its long-term leases. Although they contain minor periodic adjustments, the long term of these leases – often spanning a decade or more – limits the Company’s ability to review and renegotiate the terms for an extended period of time. When opting for extended leases, the company prioritized greater security and predictability, but at the expense of growth opportunities in lease payments.
In the meantime, however, it should not be a problem for the Easternly government to cover the current payout levels. The annual dividend of $1.06 should remain covered by core operating funds per share (FFO/share, a cash flow measure used by REITs), of which management expects a range of 1.13 for fiscal 2023 up to 1.15 US dollars expected.
Is DEA Stock a Buy According to Analysts?
On Wall Street, Easterly Government has a consensus rating of “Hold” based on one Buy, one Hold, and two Sells assigned in the last three months. At $14.25, the average DEA stock forecast implies an upside potential of 26%.
In summary, Easterly Government Properties represents a compelling high-yield opportunity in the real estate sector. The Company’s mission-critical real estate, leased to U.S. government agencies and secured by the full faith and credit of the U.S. Government, provides an unparalleled protective barrier, protecting the Company from counterparty and vacancy risks.
With near 100% occupancy, impressive lease terms and extensive knowledge of the intricacies of GSA, Easterly Government has demonstrated its resilience and competitive advantage.
The safety of Easterly Government’s 9.6% dividend yield is underpinned by these characteristics and favorable credit terms. While concerns about interest rate hikes could hurt growth prospects, the company’s ability to cover its dividends should remain solid. This means that income-oriented investors should find the right stock for their needs.
Source : www.tipranks.com