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REITs that Rely on the Government

06/22/2016 9:00 am EST

Focus: REITS

Tim Plaehn

Investment Research Analyst, Investors Alley

Backed by strong contracts from the most reliable customer in the world -- the US government – these two can be counted on for income no matter where the market moves, states Tim Plaehn, editor of Investors Alley.

While we may argue about the correct size of the government, almost everyone agrees that they would like to have the US government as a customer; it has a AAA credit rating and prints its own the money.

One way for investors to get a safe income from government spending is to own REITs that own properties leased to federal and state governments. Indeed, these two are pure-plays on government spending.
Government Properties Income Trust (GOV) owns the largest amount of property leased to the government. The company owns 72 properties with 11 million square feet.

Of the total lease portfolio, 64.6% is to the federal government and 28.2% is to state (22.9%) and other governmental entities.

GOV has an investment grade credit rating and has paid regular dividends since going public in 2009. The biggest risk is that 26% of the company’s rental income comes from leases expiring over the next two years.

Management expects to renew the “vast majority” of this expiring rent, but the risk is out there.

On the positive side, the current $0.43 quarterly dividend is just 69% of the current FFO per share run rate. GOV has not increased its dividend since late 2012 and the shares currently yield 8.6%.

Easterly Government Properties (DEA) is a new player in the government property business. This REIT launched into the market with a February 2015 IPO.

DEA currently has all 37 of its properties leased to federal government agencies. The average remaining lease term is seven years and the company has only 6% of its leases coming up for renewal in the next two years.

Easterly wants to be a growth-focused REIT with the goal of buying newer buildings that are already leased or will be leased by a government agency upon completion of the purchase.

Since it is a young company, investors must wait and see if management can generate a growing FFO per share cash stream. DEA shares currently yield 4.7%.

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By Tim Plaehn, Editor of Investors Alley

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