Interview With Easterly Government Properties (Buy Rating Upgrade)

Dear Landlords,

I want to extend a warm welcome to all our new members! We recommend that you start by reading our Welcome Letter by clicking here. It explains why we invest in real estate through REITs and how to get started.  

As a reminder, our most recent "Portfolio Review" was shared with the members of High Yield Landlord on October 4th, 2024, and you can read it by clicking here.

You can also access our three portfolios via Google Sheets by clicking here.

New members can start researching positions marked as Strong Buy and Buy while taking into account the corresponding risk ratings.

If you have any questions or need assistance, please let us know.

==============================

Interview With Easterly Government Properties (Buy Rating Upgrade)

Easterly Government Properties (DEA) is a unique REIT that focuses on net lease properties that are leased to various government agencies. This includes things like FBI headquarters and VA outpatient properties:

This means that most of its rental income is backed by the full faith of the US government and yet, it is still offering a  8% dividend yield. Today, their leases have 10 years left on them on average and therefore, investors can expect to earn consistent and predictable cash flows for a long time to come. 

This makes it very interesting to some investors who see it as a higher yielding alternative to Treasuries with additional inflation protection benefits and the backing of the US government. 

What's not to like about that?

Well, there are a few reasons why we haven't invested in the REIT so far.

Firstly, it has often traded at a premium relative to its net lease peers, despite growing at a slower pace and having more leverage, making it less appealing to us than other net lease REITs like Essential Property Realty Trust (EPRT).

But after EPRT's huge outperformance, this isn't the case anymore and DEA has become one of the cheapest net lease REITs in today's market: 

Data by YCharts

Secondly,  we have found it difficult to assess what's the true exposure to office risk. We understand that its assets have unique characteristics, but they still look like office buildings from the outside and office vacancy rates are today at an all-time high, likely leading to growing competition as its lease expire. 

Bloomberg

Finally, the REIT has a bit more leverage than average, its payout ratio is high, and interest rates have surged in recent years, putting the company at high risk of cutting its dividend, which would likely cause its market sentiment to suffer. 

To learn more about these topics, we reached out to Darrell Crate, CEO of Easterly Government Properties (DEA), and had a conversation over a Zoom call about their assets, balance sheet, future growth prospects, and their dividend. 

We were positively impressed by the case that he made for his company and will consider initiating a position in it in the future as we finish our due diligence. For now, we are upgrading it to a Buy rating following its recent underperformance. 

Here are the main takeaways from our conversations: 

Takeaway #1 - Low Office Risk: