Government Properties Income Trust: Exceptional Value After Sell-Off

| About: Government Properties (GOV)

Government Properties Income Trust (NYSE:GOV) is a REIT that invests in properties that are exclusively leased to the US government and states. GOV currently has 64 properties, of which 12 are leased to the following states: California, Maryland, Massachusetts, Minnesota and South Carolina. GOV currently has about 7.6 million rentable square feet.

The recent volatility in the markets have hit GOV hard and talks of government spending cuts has caused sharp selling in the stock, dropping almost 23% from its highs. GOV is currently trading at 21.97 at the time of this writing.


The leases in contract have an average of 4 years until expiration with a majority of the leases renewed by GOV's government tenants. The current occupancy rate is 96.5% leased. Many of GOV's properties are leased to large divisions of the government, which would make it very costly to relocate. In the most recent six months, GOV executed 15 leases for 45,438 square feet for an average lease term of 5 years.

GOV also realizes the opportunity in the current market and instead of liquidating assets, it is aggressively acquiring additional properties. GOV recently acquired a property in Quincy, MA with 92,549 rentable square feet, two office properties located in Woodlawn, MD with 182,561 rentable square feet and purchased, or is in contract to purchase, an additional 11 office buildings. This shows the current management's strong confidence that this is a great opportunity to acquire strong properties to compliment the company's portfolio. Previous acquisitions have proved accretive to earnings and I believe that these future purchases will prove the same.

GOV recently raised $157 million to pay down debt and acquire additional properties. I believe that the recent sell-off in GOV is undervaluing the earnings potential that the current acquisitions in the pipeline will create once completed. GOV has paid down a lot of its debt and in many cases opted to acquire assets with cash instead of debt. I believe this is so that management is able to provide a safe dividend while minimizing lender rollover risk in these uncertain times.


There is risk to the dividend if the occupancy rate were to decrease from the current 96.5%. Some government tenants do have the option to terminate their lease agreements early. I feel that the scenario is unlikely to cause a large increase in the vacancy rate.

The current dividend is currently about 60% covered by earnings. I believe that even if rental occupancy were to be impacted with an additional 3% increase in vacancy, GOV should be able to pay at least $1 in dividends to shareholders.

GOV will likely suffer if the economy were to experience a prolonged economic downturn. A prolonged downturn may affect GOV's ability to acquire new tenants, as well as its ability to negotiate favorable lease rates.


I believe that GOV is providing exceptional value at these levels, paying out a 7.65% dividend. The US government is a solid tenant, especially when you compare those yields to the current 20 year bond yielding approximately 2.25%. Regardless of the recent credit downgrade from Standard and Poor's, I believe that the government is more than capable of paying its lease obligations.

GOV is looking to retest lows which haven't been tested since its IPO. The best part is that the lower GOV gets, the more compelling the value opportunity. Why is that? Management has stated several times that its goal is to maintain a safe stable dividend for its investors and I believe that the company will follow through on that.

GOV has potential for capital appreciation as well once the economy starts to stabilize. I believe that GOV will outperform other REIT classes due to its ability to provide above-average cap rates by acquiring properties at aggressive prices with cash instead of debt. Many REITs got in trouble when they were unable to roll over their debt and were forced to deleverage. GOV also has access to a 500 million credit line if needed, which puts it in a strong liquidity position. This doesn't include the 170 million raised in a recent offering.

GOV sports a $18 book value and has an interest expense coverage of almost 8X. I love investing in solid REITs after hard sell-offs because I love being able to buy into solid assets and get paid to wait for my appreciation.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOV over the next 72 hours.

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