In this article I would like to thank you - the investor who sold me shares of Government Properties Income Trust (GOV) last week. For a long time I have been waiting for the opportunity to buy them at just over $21 per share and did not succeed.
That is until you were kind enough to sell them to me at that price a few days ago. I do not know why you chose to do that - maybe you need the money, maybe you got scared since you the saw occupancy rate has somewhat decreased or maybe you just have information I do not have. But the way I see it now - you gave me a gift and I want to thank you for it.
GOV is a REIT that invests in properties which are mainly leased to the US government and states.
At June 30, 2012 GOV's portfolio consisted of 74 assets with 9.1 million rentable square feet, of which 52 were leased to the US Government, 18 to state governments, 1 to the United Nations. That represents a growth of 10 assets since June 30, 2011 or 3 assets since December 31, 2011. Assets that have been purchased during 2012 were bought at an average cap rate of 8.4% with a remaining lease period of 10.9 years. Several other assets have been bought after June 30 2012.
While occupancy rate for June 30, 2012 was a respectable 92.2%, it has come down from 96.5% a year ago. Expiring leases for the rest of 2012 and 2013 are expected by management to be renewed at approximately the same rent levels. So not much of a change there as well.
GOV's metrics are appealing:
Portfolio's gross investment value: over $1.5 billion
Total debt: $471 million
FFO per share during 2nd quarter of 2012: $0.52
Current Price to FFO (using 2nd quarter results) ratio: 10.57
As of June 30 2012, most of GOV's credit lines were unused and provide ability to seize opportunities for more assets.
No material debt is scheduled for repayment until 2015.
Contract renewals expected during the next few years: about 24% until 2015, management is already in process of extending the leases ending until end of 2013.
Current dividend yield: 7.64%, dividends have been constantly increased since inception in 2009.
During the last 2 years there was one immaterial insider stock purchase of approximately $67,000.
So, basically you sold me shares of a REIT whose main tenant (65% of income - and expected to rise on future purchases) is the U.S. Government.
I still consider them to be THE best tenant one could ask for: their checks are not expected to bounce; they lease for the long term and will not move to other assets that easily (usually they lease for very long periods of time).
Even if you ignore that, you sold me shares of a REIT with a strong balance sheet, no liquidity issues and a high (and rising) dividend.
Comparison to other REITs:
Government Properties Income Trust
Omega Healthcare Investors, Inc (OHI)
Senior Housing Properties Trust (SNH)
HCP, Inc. (HCP)
Realty Income Corporation (O)
Gross portfolio investment
EBITDA / Interest expenses
FFO per Share (4 times 2nd quarter 2012)
Price / above calculated FFO
The table above lists some basic metrics of my favorite REITs. The data in it is correct as of August 6th. Obviously to reach a go/no-go decision for any stock you need to do some more due diligence, but that raw basic data shows that potentially - GOV is the cheapest of them all:
· When you consider OHI, HCP and SNH you have rather high uncertainty regarding Obama's health reform results. It's true that SNH for example derives most of its revenue from private pay customers, but still the health reform can badly influence them all. With GOV your main uncertainty is contract expirations, but as mentioned above - those are taken care of well in advance by management. Besides, that's a risk you have with any REIT out there.
· GOV has the lowest P/FFO in the table. P/FFO is the ratio to use instead of P/E in REITs. While OHI has a high dividend and O has been paying dividends for years (and raising them year-in year-out) - they are simply more expensive.
· Relatively to the market cap - GOV has relatively high gross portfolio investment and EBITDA/Interest expense and a low total debt.
· GOV has the highest dividend yield, although not necessarily growing the fastest of them all. While Realty Income has raised its dividend for a much longer period of time and pays it monthly - the dividend yield is much lower as it is more expensive. The same applies for HCP.
Last week unexpectedly GOV's share price took a dive and stayed low even after the malfunction on Knight's system was repaired. I took the opportunity and bought some shares since GOV has been on my wish list for some time - it is a cheap, solid and well managed REIT.
Buying shares when they crash is scary, but if you are sure of your analysis - go ahead and seize the opportunity. After all, this is what value investing is all about, isn't it?