Easterly Government Properties, Inc. (NYSE: DEA) is confident that the federal government’s preference for leasing properties will support its business strategy for decades to come.
The government’s shift toward leasing has been evident since the 1960’s and is unlikely to change any time soon, according to Easterly President and CEO William Trimble. In an interview with REIT.com, Trimble noted that during the Nixon administration, the federal government owned about 70 percent of its properties and leased 30 percent.
“That trend is almost completely reversed today, and the government, with its spending restraints, is finding that leasing is a much more efficient and cost-effective way to house the federal workforce. We are very pleased to be in this particular niche,” Trimble said.
Easterly acquires, develops and manages class-A commercial properties that are leased to the government’s mission-critical agencies primarily through the General Services Administration (GSA). (Mission critical agencies include the Federal Bureau of Investigation , the Drug Enforcement Administration, Immigration and Customs Enforcement, and the federal judiciary.) The company focuses on newer, purpose-built space. Its current portfolio contains 30 buildings, all of which are 100 percent leased.
Easterly’s business strategy offers the potential for premium rents, stable occupancy and long-term returns, according to Trimble.
Michael Carroll, analyst at RBC Capital Markets, also sees the potential of the subset targeted by Easterly. “We believe these types of agencies will continue to receive incremental budget appropriations [from the federal government], while others may see more pressure,” he said.
In February, the company raised $207 million through an initial public offering (IPO). With a $400 million credit line and an enterprise value of $700 million to $800 million, “we have the capital to grow 50 percent from where we are today,” said Darrell Crate, Easterly’s chairman.
Large, Fragmented Market
Currently the GSA leases about 200 million square feet on behalf of the federal government. “It’s an extremely large market, but it’s also a very fragmented market in that the largest owner of property holds under 4 percent, so there’s a lot of opportunity,” Trimble said.
Easterly has identified 500 potential acquisition targets worth a total of $20 billion to $22 billion that represent “a unique opportunity to partner with the government and provide strong returns for investors,” Trimble said. In the near term, Easterly is seeking to acquire $75 million to $125 million of buildings a year.
In looking for possible acquisitions, Easterly stresses the importance of the mission of the building and the agency in it, rather than its location, Trimble said. For example, the FBI has 56 regional field offices that carry out the bulk of the agency’s work, according to Trimble, all of which will “still be there in 50 to 60 years.” Easterly currently has three FBI field offices in its portfolio.
GSA-Leased Assets Often Undervalued
While the federal government is the nation’s largest office tenant, GSA-leased properties are often under recognized and undervalued as an asset class, according to Crate.
“We noticed that real estate investors in the four food groups of retail, industrial, multifamily and office didn’t view high-quality single tenants as something that was unique and different. We have had the opportunity to acquire buildings at very attractive prices,” he said.
The company stresses that the GSA has never defaulted on a lease, including during the 2013 government shutdown. That type of stability is key to Easterly’s success going forward, according to Crate.
“The opportunity [for Easterly] to generate double-digit returns for shareholders in a compounded way over a meaningful period of time is ripe,” he said.