Meet Uncle Sam’s High-Yielding Landlord
The U.S. federal government has 1.8 million civilian employees. Add in postal workers, and that number swells to 2.5 million. The government also owns a lot of land — about 30% of the country, in fact — but in addition to Grand Teton National Park and the Aberdeen Proving Grounds it also needs office space for its workforce, which is not only large but growing: During the past decade, the government’s payroll grew by more than +50%, from $10.0 billion in 1998 to $15.4 billion in 2008.
The government’s spending priorities are largely immune to economic cycles, so Washington doesn’t have the same money problems that businesses and individuals have. It doesn’t have to cut staff or spending when times get tough. (As it turns out, the opposite is usually true.)
So the good news is that the government can always find money. The bad news is that it often finds it in your pocket. In addition to its power to tax, the government can and does also borrow a tremendous amount of cash from a seemingly endless supply of lenders.
The bottom line is that one way or another Uncle Sam always pays all his bills — no matter how large — on time every time.
This makes the government a very good tenant. Government Properties Income Trust (NYSE: GOV) is a real-estate investment trust that owns 30 office properties comprising 3.6 million square-feet. Twenty-five of these properties are leased to the U.S. government; four more are leased to states. These properties are located in 15 states and the District of Columbia.
The $500 million company is fairly new, having been spun off in June from HRPT Properties Trust (NYSE: HRP), which still owns 46.3% of the company. GOV’s shares have appreciated +15% from their debut at $20.
Because Government Properties Income Trust is organized as an investment trust, it must pay 90% of its taxable earnings to shareholders. The company now pays $1.60 per year in dividends in four quarterly distributions of $0.40. Its first dividend was higher to account for several weeks of operations in the second quarter. The next dividend of $0.40 will be paid at the end of January. At current prices, the company yields about 7%.
Government Properties Income Trust can easily afford these payments. For the first nine months of the year, revenue increased +4.2%, to $58.3 million. Funds from operations (used by REITs to measure performance) decreased -6.5%, to $32.0 million. The decrease was largely due to increased interest expense from a revolving loan, of which $65 million of $250 million has been used, as of the most-recent filing.
In August, Government Properties Income Trust bought an industrial property for about $18 million, a purchase it funded with cash and by drawing on its credit line. The company plans to fund further acquisitions with some of its remaining $185 million credit facility. It’s looking for new properties that generate positive cash flow.
Going forward, Government Properties Income Trust believes that the rapid growth of government will increase its demand for space. It has also said that budgetary pressure on government entities means they will lease space rather than build or buy space outright.
While individuals and businesses can find it tough to pay the rent, the government, with its endless supply of funds, won’t. And its landlord, Government Properties Income Trust, will benefit from having the most reliable tenant in the world. A 7% yield doesn’t come any safer, or easier.
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