Easterly Government Properties Stock Price Got Far Too Cheap

Core Viewpoint - Easterly Government Properties, Inc. (DEA) is undervalued with a current enterprise value of $2.825 billion against$3.389 billion in rent owed by the U.S. Government, presenting a favorable risk/reward outlook for investors [1][2]. Group 1: Valuation and Market Performance - DEA's stock has significantly declined from a trading multiple of 20X funds from operations (FFO) five years ago to a current multiple of approximately 10X, with the stock price dropping from the mid-$20s to$11.77 [4][6]. - The decline in DEA's stock price is attributed to its classification as an office REIT, which has faced challenges in the post-pandemic environment, despite DEA's fundamentals remaining strong [7][10]. Group 2: Dividend Yield and Financial Health - DEA offers a 9% dividend yield, which is perceived as high risk due to a cash available for distribution (CAD) payout ratio exceeding 100% [31][32]. - The company reported quarterly dividends of 26.5 cents per share, totaling $28.7 million, with core FFO of$32.2 million covering dividends but not CAD of $25.1 million [34][36]. Group 3: Growth Outlook and Risks - DEA's growth outlook includes a return to FFO/share growth in 2024 and strong guidance for 2025, with projected core FFO in the range of$1.17 to $1.21 [15][29]. - The Department of Government Efficiency (DOGE) initiative poses a risk to DEA, as it may lead to reduced demand for government-leased properties, although the impact is expected to be minimal [16][23][29]. Group 4: Property Quality and Tenant Credit - DEA's properties are characterized by high quality and long lease terms, with a weighted average remaining lease term greater than 10 years, which provides stability against potential government spending cuts [25][28]. - Nearly 100% of DEA's tenants have the highest credit rating, primarily from the U.S. Government, enhancing the reliability of its revenue stream [28][29]. Group 5: Future Projections and Value Proposition - The company anticipates achieving full CAD coverage of its current dividend level within 24 months through rent escalators and accretive acquisitions [37][38]. - DEA is viewed as a classic value stock, trading at multiples appropriate for a high-risk company, but with fundamentals suggesting a potential for significant stock appreciation, estimated at roughly 50% above current prices [27][44].