All tenants are not created equal, which is the big story when you consider Easterly Government Properties (DEA -0.26%) and its sizable 7.3% dividend yield. The real estate investment trust (REIT) operates in the office niche, a property type that has seen many dividend cuts. But Easterly's tenants are a bit different than most, and that could make all the difference on the dividend front.
An ugly business
The social distancing and work-from-home trends that arose during the early days of the coronavirus pandemic have wreaked havoc on the office sector. Some of the largest, best-known office REITs have been forced to cut their dividends, including SL Green and Vornado. Easterly hasn't followed suit.
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That said, Easterly's adjusted funds from operations (FFO) payout ratio was 91% in the first quarter. The first takeaway from that payout figure is that the REIT is covering its dividend. However, 91% is a very high number, and investors should probably be thinking about the risk of a dividend cut, given the broader problems in the office sector.
The thing is, Easterly is a bit unique within the office REIT space. Its selective leasing approach could be the difference between holding the line on the dividend and being forced to make a dividend cut.
Working with everyone's uncle
Easterly Government Properties, as its name implies, focuses on leasing to the U.S. government and related entities. In fact, of the 86 properties it owns, only one is leased to a company outside this focus. There are reasons to worry about the heavy reliance on Uncle Sam, given that the REIT basically has just a single tenant. So this is not a risk-free approach.
However, the U.S. government is generally a reliable payer (it can always raise taxes if it needs more money), and in the current environment, that's a clear plus.
Then there's the actual portfolio to consider. Notably, pure office space only makes up around half of Easterly's rents. Roughly 26% comes from what is best considered outpatient medical offices, and another 10% from medical research space, which is basically just a highly specialized office. A category the REIT calls courthouse/office adds another 5% of rents, bringing the total office exposure to more than 90%, though a significant amount is not traditional office. This diversification, particularly given the importance of some of the assets (like a courthouse or medical office property) suggests that the rents will be paid on time.
Backing that fact up is the REIT's high occupancy rate, which sits at an attractive 98%. The average remaining lease term, meanwhile, is roughly 10 years. In other words, there's a pretty good chance that Easterly's tenants will not only keep paying, but will do so for a long time into the future.
That's a strong foundation for the dividend, with the company expecting full-year adjusted FFO to fall between $1.12 and $1.15 in 2023. Given the current quarterly dividend of $0.265 per share, the full-year adjusted FFO payout ratio would be between roughly 92% and 95%. That's high on both sides of the equation, but still affordable.
Not for the faint of heart
Easterly Government Properties is not your run-of-the-mill REIT, given its heavy focus on leasing to the government. As such, it is probably not the best option for risk-averse dividend investors. Add in the high payout ratio, and it is probably also best avoided by investors who want a set-it-and-forget-it type of dividend stock.
However, for more aggressive investors willing to closely track their portfolios, the high yield here could be attractive, as Easterly is getting tarred with the same brush as office REITs with very different customer bases. Just keep an eye on the payout ratio -- dividend risk still rises as the number edges closer to 100%.
