Earning passive income is one of the keys to becoming financially independent. Once your income from passive activities exceeds your expenses, you can stop actively working to earn money.
However, passive income must be sustainable for you to remain financially independent. Those who want to make sure their passive income is on a solid footing should look Eastern Government Properties (NYSE: DEA). The real estate investment company (REITs) is focused on leasing mission-critical properties to the U.S. government. With its rental income backed by the full confidence and credit of the US government, this REIT should have no problem paying its dividend going forward.
Take security to another level
Several REITs own properties that are leased to US government agencies. The federal government is the largest employer in the world and the largest office tenant in the country. Also, the government is among the highest quality tenants because they always pay their rent. This makes government leased real estate one of the safest investments.
Easterly Government Properties takes U.S. government security as a tenant one step further. This REIT office focuses on leasing high-quality space to mission-critical government agencies. This triple focus on the agency (growth and importance), the mission (essential and requires specialized space) and the building (strategic location and bespoke design) further enhances the long-term security of its rental income.
Currently, Easterly Government Properties owns 89 properties with 8.6 million square feet of space that are 99% leased with a weighted average remaining lease term of 9.7 years. The REIT’s properties include offices (67% of its leased square feet), VA Outpatient (15%), laboratories (7%), courthouses/offices (4%) and others (including the warehouse and manufacturing) (7%). The leases on these buildings will provide the company with $2.6 billion in rental income over their term, backed by the full confidence and credit of the US government.
This rock-solid rental income provides ample support for Easterly’s 5.6% –giving a dividend. The REIT further enhances its dividend security with a healthy balance sheet and a sustainable dividend payout ratio below 80% of its FFO.
Layering additional steady revenue streams
Easterly’s existing portfolio should provide the REIT with constantly increasing rental income. Its lease structure incorporates inflation adjustments to cover higher property taxes and operating expenses. Meanwhile, there is upside potential for additional rental income upon renewal. Given the critical nature of properties built to meet the needs of its tenants, Easterly may increase rents upon renewal at higher rates based on market prices or the higher replacement cost of the building.
The REIT has two other growth engines: acquisitions and development. Easterly has a long history of acquiring mission-critical properties from select government agencies. For example, he recently purchased an FBI field office in Tampa from another REIT office. Highwoods Properties (NYSE:HIW) for $70.4 million. Highwoods built this property specifically for the FBI in 2005, which signed a long-term lease renewal in 2020. The agreement will help Highwoods repay debt used to purchase a portfolio of office buildings last year while providing Easterly with another high quality government building. . The REIT also recently acquired a custom-built warehouse leased from 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 joint venture recently purchased its sixth property under this agreement.
Easterly will also selectively develop purpose-built properties for the US government. It is currently building a lab for the FDA in Atlanta which it is expected to complete by the second quarter of 2024. It will serve as one of 13 regional FDA labs.
Rising rental income from its existing portfolio and additional rental flows from new properties should enable Easterly to pay a steadily increasing dividend. Easterly raised its dividend last year, one of many increases it has granted to investors over the years. The REIT also recently authorized the repurchase of up to 5% of its outstanding shares. A declining stock count means it will pay future dividends on fewer stocks, further improving its payout.
A bond-like investment with rising equities
Since Easterly’s focus on owning mission-critical government buildings allows it to generate bond-like income, it can pay an attractive dividend, with a current yield of over 5%. The REIT also offers some upside potential through its growing rental income, acquisitions and development projects, further supporting its dividend. These factors make Easterly a potentially attractive option for investors looking for a low-risk passive income stream.
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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Easterly Government Properties. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.