Invest in the Growth of Government

Aug.23.09 | About: Government Properties (GOV)

What is the fastest growth story in the world? China? Clean Energy? No! How about government? With the governments around the world on a reckless path of wealth destruction, an investor should stop and figure out how to profit from this explosive trend. Unlike a business that can disappear that has been around for 100 years, with government, once created - it will never go away. Federal government will never be hurt by recessions or contractions. In fact, when the rest of the economy is hurting, government expands and grows, taking more control over private industry. Right now, government is growing by leaps and bounds.

The good news to this depressing realization is that government is made up of people who need places to work so they can figure out ways to pass more laws and tax more people. As government grows, more and more government employees will need will need places to work. For this reason, we need to find ways to get in the path of this growth and be the landlord offering this ever growing monster space to do their deeds.

I was a landlord for a number of years in my early 20's owning duplexes and 4-plexes in California and Texas. At that age I was constantly worried about tenants not paying their rent, thus placing me in a position to put my family at risk in having to float a number of mortgage payments in addition to my own home. Because of this risk, when I bought a property, I immediately offered the units to the Section 8 housing program. By doing this, I knew I would never have to worry about receiving my rent checks as the payment would come from the Housing Authority, not a tenant. No need to worry about job losses, business failures, divorces, etc. The check would just come in.

In the same way, landlords of the US Government don't have to worry about receiving their checks. Unlike mall operators or strip mall managers whose sales drop with the economy, government landlords will never have to worry about tenants defaulting.

Government Properties Income Trust (NYSE:GOV) is a new REIT that was spun off from debt laden HRPT Properties Trust (HRP) as an attempt to raise cash and pay down debt. Government Properties Income Trust owns properties located throughout the United States leased primarily to the U.S. Government and several state government tenants. As of June 30, 2009, GOV owned 29 properties with 3.3 million square feet.

Currently the market cap based on 21,450,000 outstanding shares is about $471,000,000. This comes out ot about $142 per square foot of rentable space. While not extremely cheap, the fact that the firm is liquid and not leveraged much while the prices of real estate are crashing puts the firm in a great position to be adding properties at current prices. I would much rather own GOV which is entering a depressed real estate market not saddled with debt and leverage, and instead liquid with cash and ready to take advantage of the multiple opportunities that will arise with the commercial property meltdown that is underway. With nearly $500 million in property and only $50 million in debt, and credit lines availability of about $200 million, GOV can leverage their properties up to 50% loan-to-value and buy an additional $400 million worth of properties at these much lower prices. That would nearly double the value of their portfolio without taking on too much risk at 50% LTV. Compared to most REIT's out there, that is a tempting idea.

A very real risk is that government agency's may not renew their leases when they are up. WIth so much available space hitting and about to hit the market, rents and renewals may end up being depressed as landlords all fight for ever decreasing tenants occupancy. While this is a risk for GOV, one can find a little solace in the fact that government is slow moving. It would take quite a lot of effort for government to move. Take their Fresno IRS building where I send my tax payments to for example. A move would not only require massive costs and down time, but would require extra effort for that office to inform millions of tax payers who send money via auot-pay of their new address, and risk delays in tax receipts as mail gets sorted and forwarded to their new address. While possible, GOV has tenants who can not change addresses as easily as ABC Consulting Inc type companies can.

To sum it all up, GOV is a REIT with the best credit tenant in the world, with only about 12% current debt-to-equity, and a management team not wanting to go higher than 50%, massive amounts of liquidity heading into a real estate crash. I like the sound of that.

Disclosure: Napa Wealth Management is long 20,276 shares of GOV at the time of this writing in client accounts