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DEA - Easterly Government Properties


thepupil
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Easterly Government Properties came public in early 2015 at ~$15 / share. With divvies re-invested, the stock has returned 11.7% / year since it's IPO (5.3% price appreciation, rest from divvies). The company currently yields 4.9%.

 

http://s23.q4cdn.com/455376602/files/doc_presentations/2021/03/210225-Q4-2020-Investor-Presentation_Citi-Conference-(final).pdf

 

Since its IPO / initial seed assets of ~2mm square feet, the company has grown to 7.3mm sf / 80 buildings, the vast majority of which are leased for term to agencies of the United States Government, and therefore backed by the full faith and credit of Uncle Sam (99% of lease income is from the feds). Initial lease terms are 10-20 years with 5-10 year options thereafter. During the lease term there are pass throughs to account for inflation.

 

The company has grown through equity issuance.

 

2015: IPO

2016: Priced at $18/share

2017: Priced at $19/share

2018: Priced at $19.25/share

2019/2020/2021: At the money offerings ranging from $22-$24.50 / share.

 

I get that out of the way to say that this REIT has grown from a $415mm equity / $900mm EV to a $1.9B market cap / $3.0 billion EV via issuance and that there's a lot of path dependence here with respect to capital allocation and value creation on a per share basis. Share count has gone from 22 million to 82 million. The bearish interpretation is that management are empire builders and are only interested in getting bigger. The bullish interpretation is that Easterly has built the second largest landlord to the federal government and is creating a platform of increasing scale/value beyond the brick and mortar that will get better as it gets bigger (cost of capital advantage, relationships with GSA, built to suit/development partnerships/capabilities, etc). I do not yet know which interpretation is correct and I imagine it may be a bit of both.

 

They've spent about $2.4 billion on the buildings (current fully diluted EV is $3.0 billion) and NOI after G&A is ~$150 million, so one is paying a 5.0% cap rate for the property portfolio. Debt is quite low at 30% of EV / 6.0x, particularly in the context of the non-existent credit risk, 8 year weighted average lease term, and low building age (13 years)

 

This is neither a re-opening play, nor is it an (organic) growth story, it is down by about a 1/3 from its post covid peak of $30 (where it briefly spiked in a flight to safety). It appears to trade in sympathy with interest rates which makes sense as its "kind of an office REIT/kind of a net lease REIT".

 

I do not have a position as I think management and capital allocation are the biggest question marks.

 

The key variable on attractiveness is the expected renewal rate. If that's as high as DEA says it will be, then you basically own a portfolio of TIPs at a high real/nominal yield (less management's cut). My gut is that renewal rates will be very high particular for newer build to suit buildngs (like a VA outpatient facility or a lab), but there's obviously some tail risk at every renewal because you could just end up with an empty building at the end of our 10 years or whatever and you paid a big premium for the tenant quality.

 

I flag it because I think it could get interesting if duration continues to sell-off, pending any work that mgt aren't complete crooks.

 

At first glance, it appears to me that the portfolio quality is getting better (longer duration, more custom/build to suit (more likely to renew, I presume) vs commodity office) with each year. As they gain scale, I could see them becoming a pretty strong investment grade issuer over time and a self-reinforcing NAV premium developing (maybe).

 

On the flip side, RMR had a a REIT like this (GOV), that didn't generate much value, but that was an externally managed RMR REIT. Hard to underwrite the customer concentration risk, lol.

 

 

 

 

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