Earning passive income is one of the keys to becoming finically independent. Once your income from passive activities exceeds your expenses, you can stop actively working to make money.
However, the passive income needs to be sustainable for you to stay financially independent. Those wanting to ensure their passive income is on a firm foundation should look at Easterly Government Properties (DEA +0.27%). The real estate investment trust (REIT) focuses on leasing mission-critical properties to the U.S. government. With its rental income backed by the full faith and credit of the U.S. government, this REIT should have no problem paying its dividend in the future.
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Taking security to another level
Several REITs own buildings leased to U.S. government agencies. The Federal government is the largest employer globally and the largest office tenant in the country. Further, the government is among the highest quality tenants because it always pays its rent. That makes government-leased real estate some of the safest investments.
Easterly Government Properties takes the safety of the U.S. government as a tenant even further. This office REIT focuses on leasing high-quality space to mission-critical government agencies. This three-pronged focus on the agency (growth and importance), mission (core and requires specialized space), and building (strategic location and built-to-suit design) further enhance the long-term security of its rental income.
Currently, Easterly Government Properties owns 89 properties with 8.6 million square feet of space that's 99% leased with an average weighted remaining lease term of 9.7 years. The REIT's properties include office (67% of its leased square feet), VA Outpatient (15%), lab (7%), courthouse/office (4%), and other (including warehouse and manufacturing) (7%). Leases on these buildings will supply the company with $2.6 billion of rental income over their term, backed by the full faith and credit of the U.S. government.
That rock-solid rental income provides ample support for Easterly's 5.6%-yielding dividend. The REIT further enhances its dividend safety with a healthy balance sheet and a sustainable dividend payout ratio of less than 80% of its FFO.
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Key Data Points
Layering in additional streams of stable income
Easterly's existing portfolio should provide the REIT with steadily rising rental income. The structure of its rental contracts features inflation-linked adjustments to cover higher real estate taxes and operating expenses. Meanwhile, there's additional rental income upside potential upon renewal. Given the mission-critical nature of properties built to suit the needs of its tenants, Easterly can raise rents upon renewal to higher rates based on market prices or the higher replacement cost of the building.
The REIT has two other growth drivers: Acquisitions and development. Easterly has a long history of acquiring properties essential to the mission of select government agencies. For example, it recently purchased an FBI field office in Tampa from fellow office REIT Highwoods Properties (HIW +1.63%) for $70.4 million. Highwoods built that property specifically for the FBI in 2005, which signed a long-term lease renewal in 2020. The deal will help Highwoods pay down debt used to buy a portfolio of office properties last year while supplying Easterly with another high-quality government building. The REIT also recently acquired a build-to-suite warehouse leased to the Natural Archives and Records Administration.
Meanwhile, the REIT formed a joint venture last year to acquire 10 properties leased to the VA on a rolling basis through the end of next year. The JV recently purchased its sixth property as part of that deal.
Easterly will also selectively develop purpose-built properties for the U.S. government. It's currently building a lab for the FDA in Atlanta that it should complete by the second quarter of 2024. It will serve as one of 13 regional labs for the FDA.
Rising rental income from its existing portfolio and additional rental streams from new properties should enable Easterly to pay a steadily rising dividend. Easterly increased its dividend last year, one of several raises it has given investors over the years. The REIT also recently authorized a buyback of up to 5% of its outstanding shares. A falling share count means it will pay future dividends across fewer shares, further enhancing its payout.
A bond-like investment with equity upside
Because Easterly's focus on owning mission-critical government buildings enables it to generate bond-like income, it can pay an attractive dividend, currently yielding over 5%. The REIT also offers some upside potential from its growing rental revenues, acquisitions, and development projects, further supporting its dividend. These factors make Easterly a potentially attractive option for investors seeking a lower-risk passive income stream.
