Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Easterly Government Properties, Inc. is a US$1.4b small-cap, real estate investment trust (REIT) based in Washington, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess DEA.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much DEA actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For DEA, its FFO of US$63m makes up 56% of its gross profit, which means the majority of its earnings are high-quality and recurring.
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 8.2%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take DEA 12 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 2.74x, 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 22.55x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Easterly Government Properties can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for DEA:
- 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.
- 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.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.