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How Should You Analyze REIT Stock Easterly Government Properties Inc (NYSE:DEA)?

Easterly Government Properties Inc is a US$1.3b small-cap, real estate investment trust (REIT) based in Washington, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of DEA is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess DEA.

View our latest analysis for Easterly Government Properties

REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of DEA’s daily operations. For DEA, its FFO of US$49m makes up 53% of its gross profit, which means over a third of its earnings are high-quality and recurring.

NYSE:DEA Historical Debt October 30th 18

In order to understand whether DEA has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take DEA to pay off its debt using its income from its main business activities, and gives us an insight into DEA’s ability to service its borrowings. With a ratio of 8.5%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take DEA 11.7 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

Next, interest coverage ratio shows how many times DEA’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 2.88x, DEA is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at DEA’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In DEA’s case its P/FFO is 25.44x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, Easterly Government Properties offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in DEA, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for DEA’s future growth? Take a look at our free research report of analyst consensus for DEA’s outlook.
  2. Valuation: What is DEA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DEA is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.