Government Properties Income Trust (GOV) is a REIT that invests in properties which are mainly leased to the US government and states.
GOV owns 64 properties with 7.6 million rentable square feet in 27 states. 94% of its annualized rental income is paid by the US government (74%), 6 states (14%) and the United Nations (6%). GOV has a 96.5% occupancy rate and the weighted average remaining lease term is approximately 4 years. GOV has a conservative balance sheet, with successful debt management at 34% Debt to Book ratio and a 7.9 EBITDA to interest expense ratio. GOV's FFO per share for the first half of 2011 was $1. Assuming FFO per share of $2 for the whole year (I actually expect more due to aggressive purchase of assets during the year), current stock price implies FFO multiple of 11.8. Just for comparison, based on the last quarter available results:
- Realty Income Corp. (O) has FFO multiple of 17.44
- Senior Housing Properties Trust (SNH) has FFO multiple of 12.95
- Equity Residential (EQR) has FFO multiple of 23.31
- Boston Properties, Inc. (BXP) has FFO multiple of 19.48
At current levels GOV yields a 7.1% dividend which has grown 5% since the IPO about 2 years ago.
Recently GOV's price took a hit, and after the market's correction in the last few days is trading about 15% below its 52 week high.
Insider transactions: Immaterial. There has only been one transaction, a purchase of $67,000 by one of the directors.
I like GOV for quite a few reasons
- In spite of the recent US credit downgrade, for me the US government remains the best tenant I could think of. I cannot imagine its check bouncing.
- Government tenants have a history of remaining in the same location for long periods of time. Statistics show they will stay in place for an average of 10-20 years + extensions.
- Growth: GOV has been on a purchasing streak which has more than doubled its asset portfolio since its IPO from approximately $500 million to $1.27 billion (before depreciation). The rental income grew during the first half of 2011 by 64.3% to $81 million compared to the first half of 2010, NOI grew by 54.4% to $51 million. During 2011 GOV continued to take advantage of the weak real-estate market and bought more assets with an average cap rate of 7.9%. I like it that the management buys at low levels, leaving room for capital appreciation, combined with higher rent income and dividends in the future.
- GOV took advantage of the market's interest rate and refinanced its credit facility. It has recently announced that it has amended and increased its existing $500 million unsecured revolving credit facility to $550 million, and reduced the interest rate. The credit facility will mature on October 2015 instead of 2013. That move shows the bank's confidence in the business as well as management's intention to reduce costs and buy more assets in this beaten real-estate market.
- FFO, NOI and NAV parameters indicate convenient valuation with room for a nice upside, although not steal levels.
- On July 25th, 2011, GOV issued 6,500,000 shares at $25.4 per share. Current price is $23.69.
- Did anyone mention over 7% dividend yield while we wait for the real estate market to heal?
Nobody can tell if the real estate market has hit the bottom or will find it in the future. However, GOV seems to be well managed and is taking advantage of the current market situation in order to create future value for its shareholders, both by aggressively strengthening its asset portfolio when the market is beaten down and by improving its debt terms.
Probably one of the most important issues is that even in these volatile-credit-crunched times, the banks provide improved credit terms for GOV, showing their confidence in the solid business model. I expect to see capital appreciation down the road and will be paid hefty dividends while I wait for that. In my opinion while GOV's current price is not a steal, it does seems to be a good entry point.