Government Properties Income Trust Dividend Safety Analysis: Higher Yield Brings Higher Risk

| About: Government Properties (GOV)


Government Properties Income Trust is offering nearly 7% dividend yield.

2013 AFFO dividend payout ratio was over 100%.

If the dividend gets increased in the near-term, it will likely only be by 1 cent.

Government Properties Income Trust (NYSE:GOV) is a real estate investment trust which owns properties primarily leased to the government. GOV owns 68 properties, 49 of which are leased to the U.S. Government, 16 to state governments and one to the United Nations.

There are a number of benefits of being a landlord to Uncle Sam. The US government is the nation's largest renter, it will likely never bounce a rent check, and it tends to lease for the long-term. Even though GOV enjoys such a reliable and sound renter of its properties, the stock still yields nearly 7%.

Using our REIT dividend safety analysis, lets see how safe that juicy dividend really is.

Note: AFFO calculation was based off of 2013 funds from operations [FFO] minus recurring capital expenditures

For 2013, GOV had an adjusted funds from operations [AFFO] dividend payout ratio above 100%. This means that the funds from operations minus recurring capital expenditures was not enough to cover the total dividends paid during 2013. Going forward, GOV will need to reduce its CapEx costs or increase its FFO in order to bring the AFFO payout ratio to a safer level. The high payout ratio is likely why management has kept the quarterly dividend payment at 43 cents for the past six quarters. If there is a dividend raise announced in the near future, it will likely be just 1 cent based on the current AFFO payout ratio.

GOV has achieved a strong occupancy rate and has increased that rate vs. that of 2012. The company also did well to manage through the recent government spending cuts. For those investors willing to take on a little more risk in order to cash in on a high yield may wish to look further into GOV, but those looking for a safer pick may want to wait until the AFFO payout ratio comes down to a more comfortable level.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The 4% Portfolio Retirement Service has made no recommendations on GOV.