IPO Report: Easterly Government Properties (DEA)

Francis Gaskins |

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Easterly Government Properties (DEA) is a newly organized and internally managed Maryland corporation that intends to qualify as a real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions. It is based in Washington, D.C.,

Ten other companies are scheduled to IPO for the week of Feb. 2, 2015. The full IPO calendar is available at IPOpremium.

Manager, Joint-managers: Citigroup, Raymond James, RBC Capital Markets

Co-managers: Piper Jaffray, PNC Capital Markets, SunTrust Robinson Humphrey

End of lockup (180 days): Wednesday, August 5, 2015

End of 25-day quiet period: Tuesday, March 3, 2015

DEA scheduled a $180 million IPO with a market capitalization of $570 million at a price range midpoint of $15 for Friday, Feb. 6, 2015 on NYSE. Priced at $15. SEC Documents

Easterly Government Properties IPO Overview

DEA is a newly organized and internally managed Maryland corporation that intends to qualify as a real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions.

Easterly Government Properties IPO Valuation

Glossary

Per share dilution

.

.

-$0.77

     

-----------------------------------------------------------------------

     

Valuation Ratios

Mrkt Cap (mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

annualizing Sept 9 mos

         

Easterly Government Properties (DEA(

$570

7.9

89.1

0.9

1.1

32%

             

COMPARE with office REITS, rankied by yield

   

Dividend

City Office REIT (CIO)

$200

5.7

-83.3

5.2

17.4

7.3%

Lexington Realty Trust (LXP)

$2,700

4.7

35.5

1.8

1.8

5.9%

Easterly Government Properties (DEA(

$570

7.9

89.1

0.9

1.1

5.5%

Boston Properties (BXP)

$22,010

7.0

50.9

3.8

3.8

1.8%

             

Easterly Government Properties IPO: Conclusion

Neutral

100% leased, only to US government

Growth plan depends on building/acquiring more properties for US gov

Compare office REIT yields:  CIO, 7.3%; LXP, 5.9%; DEA, 5.5%; BXP, 1.8%

Price-to-book discount from others, ratio is .9

Easterly Government Properties Business

DEA is a newly organized and internally managed Maryland corporation that intends to qualify as a real estate investment trust, or REIT, focused primarily on the acquisition, development and management of Class A commercial properties that are leased to U.S. Government agencies that serve essential functions.

DEA generates substantially all of its revenue by leasing its initial portfolio to such agencies through the GSA.

DEA’s objective is to generate attractive risk-adjusted returns for its stockholders over the long term through dividends and capital appreciation.

100% leased

As of September 30, 2014, our properties were 100% leased with a weighted average annualized lease income per leased square foot of $32.48 and a weighted average age of approximately ten years.

 Upon completion of this offering and the formation transactions, DEA will wholly own 29 properties in the United States, including 26 properties that are leased primarily to U.S. Government tenant agencies and three properties that are entirely leased to private tenants, encompassing approximately 2.1 million square feet in the aggregate.

Easterly Government Properties Initial Portfolio

DEA’s initial portfolio consists of 15 properties contributed by the Easterly Funds and 14 properties contributed by Western Devcon.

Easterly Government Properties Growth Plan

DEA focuses on acquiring, developing and managing GSA-leased properties that are essential to supporting the mission of the tenant agency and strive to be a partner of choice for the U.S. Government, working closely with the GSA to meet the needs and objectives of the tenant agency.

DEA identifies U.S. Government agencies that DEA believes to have the most enduring missions, including a range of growing federal agencies such as the Federal Bureau of Investigation and the Drug Enforcement Administration, both of which have, in recent years, been the subject of increased priority in the U.S. Government.

Such agencies require properties with the type of specialized security, technology, communications and other features that increase the likelihood of long-term lease renewal at positive spreads and increase the long-term value of the leased properties to the agency.

DEA then identifies the most critical buildings occupied by these agencies for acquisition or the projects proposed by such agencies for development.

Specifically, for DEA’s acquisition and development pipeline, DEA targets major federal buildings of Class A construction, at least 85% leased to a single U.S. Government agency, including through the GSA, in excess of 40,000 rentable square feet with expansion potential.

Easterly Government Properties Intellectual Property

None mentioned.

Easterly Government Properties Competition

Because of the strong credit quality of its U.S. Government tenant base, DEA faces significant competition for acquisitions of single-tenant U.S. Government-leased properties from many investors, including publicly traded REITs, high net worth individuals, commercial developers, real estate companies and institutional investors.

This competition may require DEA to accept less favorable terms (including higher purchase prices) in order to consummate a particular acquisition.

Additionally, because of the strong credit quality of the U.S Government, as well as the “full faith and credit” support of the long-term leases often executed for build-to-suit development, there is usually significant competition for the award of these leases.

There is no guaranty that DEA will be awarded a lease for which it submits a bid. Leasing rates to the U.S. Government typically are arrived at by projecting the recovery of the costs of construction, anticipated operating expenses, as well as the desired profit, to arrive at the lease rates to be paid over the term of the lease.

DEA’s perception of competition for a particular development may cause DEA to reduce its offered lease rate for such development. If DEA has inaccurately estimated its costs of construction or anticipated operating expenses, among other variables, it is likely that DEA  will have incorrectly priced its lease rates, and it could be materially and adversely affected.

Easterly Government Properties 5% shareholders pre-IPO

USGP II Investor, LP      42.9%  

Easterly Government Properties Dividends

DEA intends to pay regular quarterly distributions to holders of its common stock. DEA intends to pay a pro rata initial distribution with respect to the period commencing on the completion of this offering and ending on the last day of the then current fiscal quarter, based on a rate of $0.21 per share for a full quarter. On an annualized basis, this would be $0.83 per share, or an annual distribution rate of approximately 5.5% based on an assumed initial public offering price at the midpoint of the price range set forth.

Easterly Government Properties Use of Proceeds

DEA expects to receive $180 million from its IPO and use it for the following, mostly to repay debt:

to its operating partnership in exchange for common units. DEA expects its operating partnership to use the net proceeds received from DEA and a portion of the borrowings under the senior unsecured revolving credit facility to repay $272.9 million in outstanding indebtedness and any applicable repayment costs, defeasance costs, settlement of interest rate swap liabilities and other costs and fees associated with such repayments and $1.1 million of costs related to its acquisition of Western Devcon. Exact payment amounts may differ from estimates due to amortization of principal, additional borrowings and incurrence of additional transaction expenses.

 

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Companies

Symbol Name Price Change % Volume
DEA Easterly Government Properties Inc. 20.12 0.38 1.93 172,298

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