You've probably heard the term "full faith and credit" before. It refers to the unconditional guarantee or commitment by one entity to back the interest and principal of another entity's debt. Typically, it's used by a government to help lower the borrowing costs of a smaller, less stable government or a government-sponsored agency.
When it comes to the United States government, the phrase "full faith and credit" holds immense value. It is widely accepted that the U.S. government will never default on its loan obligations. This reliability and creditworthiness make the U.S. government the largest employer in the world and the largest office tenant in the U.S.
Today, I want to shed some light on one particular office real estate investment trust (REIT) that deserves more attention: Easterly Government Properties (NYSE:DEA). Despite its impressive track record and unique focus, DEA's shares have experienced a decline of approximately 9% year-to-date.
DEA stands out from other REITs because it is the only internally managed REIT with a specific focus on investing in U.S. government-leased buildings. Its direct peer, Government Properties Income Trust (NYSE:GOV), is an externally advised REIT. Considering the recent decline in DEA's share price, now might be an opportune time to increase exposure or even start a new position.
After all, who wouldn't want to own "a REIT backed by the Full Faith and Credit of the U.S. Government?"
The Essentials
DEA completed its IPO on the NYSE in February 2015, raising $207 million. Since 2010, the company has acquired a total of 48 properties, covering 3.8 million square feet. These properties include 44 leased primarily to U.S. Government tenant agencies, as well as two properties entirely leased to private tenants.
DEA focuses on the acquisition, development, and management of class A commercial properties that are leased to U.S. government agencies through the General Services Administration (GSA). The GSA-leased inventory has grown by 24.0% since 1998, signifying the government's continued expansion of its leased portfolio of assets.
Almost Like A Laddered Bond Portfolio
DEA's portfolio is about 97% backed by the U.S. government, and the General Services Administration has never financially defaulted on a lease throughout its history. Since DEA does not lease to state agencies, there are no risks related to appropriations.
The company's long-term initial lease structures, typically between 10 to 20 years, come with renewal terms of 5 to 10 years. Operating expense increases are reimbursed based on CPI, and the GSA generally covers all property tax increases. DEA thoroughly underwrites each agency and the importance of the building within the agency's hierarchy.
DEA recently made significant acquisitions in the VA (Department of Veterans Affairs) market. These acquisitions include state-of-the-art Class A VA outpatient facilities that comprise a total lease space of 414,000 square feet. The VA is the second-largest federal agency in terms of total appropriations and staffing, providing vital services to approximately 22 million U.S. military veterans.
The Balance Sheet
As of March 31, 2018, DEA had a total indebtedness of $577.9 million. The company's outstanding debt had a weighted average maturity of 7.6 years and a weighted average interest rate of 3.7%. DEA's net debt to total enterprise value was 33.7%, and its net debt to annualized quarterly EBITDA ratio was 6.4x.
To ensure balance sheet strength, Easterly issued 671,666 shares of common stock raising gross proceeds of $13.7 million through the company's ATM program during the first quarter of 2018.
The Latest Earnings Results
For the first quarter, Easterly reported net income of $1.8 million, or $0.03 per share on a fully diluted basis. Funds from operations (FFO) amounted to $16.4 million, or $0.31 per share, while adjusted FFO (AFFO) was $13.7 million, or $0.26 per share.
Easterly's dividend payout ratio is healthy, and given the quality of the portfolio and length of the leases, the dividend payout is considered safe. Forecasted FFO per share growth suggests that Easterly is on track to continue increasing its dividend.
Is There Value?
Easterly shares have experienced a decline of approximately 9% year-to-date. However, this decline does not accurately reflect the quality of income being generated by the government-leased properties. With a dividend yield of 5.3% and an estimated growth rate of 5%, Easterly presents a compelling investment opportunity.
Despite the recent common stock offering, which likely prompted the pullback in share price, DEA is acquiring new buildings and expanding its portfolio. The company's acquisitions include buildings like the historic townhouse with a modern annex in Charleston, SC. This property, along with two adjacent federally-owned buildings, constitutes the federal judicial complex.
In summary, Easterly Government Properties offers investors a unique opportunity to have a stake in a REIT backed by the Full Faith and Credit of the U.S. Government. With a solid track record, a high-quality income stream, and a sound management team, DEA stands out as an attractive investment option. Don't miss your chance to be a part of this success story.
