What Investors Need to Know About the Easterly Government Properties' IPO

The stock market is crammed with a great many real estate investment trusts of every conceivable dimension and size. So much so that an investor could be forgiven for asking if there's really any need for yet another one.

The folks backing Easterly Government Properties certainly think so. This specialty REIT will hit the market in an initial public offering scheduled to take place on Friday. Here are the whats and the whys of the company and its IPO.

Fed by the FedsEasterly's descriptive name gives away its game. It concentrates on providing office space for a raft of federal government agencies. No matter which one is your favorite, the company probably has it as a tenant -- the FBI, DEA, the Coast Guard, and yes, even the Military Entrance Processing Command all occupy its buildings.

The REIT does have a small group (four, to be exact) of private-sector tenants, but this comprises only around 4% of total lease income.

All told, the REIT has 29 properties, 26 of which are leased primarily or exclusively to government agencies. Collectively, as of the end of last September the 29 it brought in nearly $68 million in annual lease income.

A big clientEasterly's niche, although it might not be the most colorful or exciting segment in the market, has some crucial advantages.

A big one is that it allows the REIT to deal with a centralized organization. Easterly lets its properties through the General Services Administration, the arm of the Feds that acts as the real estate intermediary for a great many government bodies. Better, GSA leases are underpinned by the full faith and credit of the government, and according to Easterly the agency has never defaulted on any arrangement.

Which is to be expected. Government entities, it almost goes without saying, don't (typically) go out of business. They also usually conduct their affairs slowly and deliberately, so any landlord that can lock one in as a tenant can be assured of steady and reliable rent income.

There are, naturally, drawbacks to such a business profile. Because it consists of careful and not particularly dynamic entities, the government segment doesn't have the best potential for sharp growth. Additionally, Federal agencies can take forever to reach a decision on an important matter... such as, say, where to rent an office and who from.

How the government can pay YOUSince Easterly is a baby of a company, being formed from predecessor entities only last October, it hasn't yet posted any financials.

Its most direct competitor is a fairly obscure REIT called Government Properties Income Trust . A glance at that company's financials reveals that, in the first nine months of 2014 it grew its total rental income by 11% to $186 million, and its bottom line by 1% to $42 million. That puts its recent net margin at an average 24%.

On the dividend side, the REIT pays a quarterly distribution of $0.43, which at the current share price yields 7.4%.

Those numbers aren't bad at all. So government is a real estate sector that's steady and does pay out. REIT investors looking for something on the steady and reliable end of the sector, then, might well consider buying shares in Easterly.

The Easterly Government Properties IPO will take place on Friday. The REIT's shares will be listed on the New York Stock Exchange under a ticker symbol that matches the acronym of its top Fed tenant -- DEA. Twelve million shares will go on sale at a price of $14-$16 per share. The issue's lead underwriters are Citigroup, Raymond James, and Royal Bank of Canada's RBC Capital Markets.

The article What Investors Need to Know About the Easterly Government Properties' IPO originally appeared on Fool.com.

Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.