What happened
Easterly Government Properties (DEA -0.36%) received a downgrade from Wall Street, reviving concerns about the commercial office property owner's ability to continue to fund its dividend. Shares of Easterly sagged as a result, falling by as much as 6% in Wednesday trading.
So what
Easterly Government Properties (DEA), as the name implies, is a real estate investment trust (REIT) that is focused on leasing to U.S. government customers. REITs have been hit hard this year, and office REITs in particular due to investor fears that a combination of rising interest rates and more flexible working arrangements post-pandemic would eat into margins.
Easterly is no exception, down 28% over the past year.
RBC Capital Markets analyst Michael Carroll believes things could get worse before they get better. The analyst cut Easterly to underperform from sector perform, noting that Easterly trades at a higher multiple than most office REITs yet "has higher leverage, and a weaker growth outlook."
The analyst warned that earnings run rate could trend lower, in part due to the rollover in interest-rate swaps, which could pressure a dividend that currently yields an enticing 7.76%.
Now what
The downgrade comes just a week after DEA raised full-year guidance and said it sees opportunities to expand from here. Chairman Darrell Crate said, "with both the consistency of cash flow from our existing portfolio and the current growth prospects, we look forward to delivering consistent and growing dividends over time to our shareholders."
Of course, those best-laid plans could never come to be if the economy softens. Easterly is valued above other office REITs in part because the government is a pretty reliable bill payer, and investors are wagering that even if there is shrinking demand for office space due to a recession, city hall is likely to remain intact.
If that proves to be true, long-term-focused investors could do well buying into Easterly today.
