Government Properties has merged with Select Income REIT to form Office Properties Trust (OPI); the combined REIT now has a portfolio of industrial retail space and still owns and operates a considerable portfolio of real estate that is leased to both the federal and state/local governments, explains John Freund, high yield specialist and contributing editor to Bull Market Report.
Office Properties had a strong 3Q19, with revenue of $167 million, for a 58% YoY increase. FFO came in at $1.45, which beat the average market estimate by a nickel. FFO is the key metric of health for a REIT, since it doesn’t include depreciation and amortization, which REITs often manipulate to avoid paying out too much in dividends.
The story with the company right now is consolidation, as Office Properties continues to offload underperforming assets. During 3Q19, Office Properties offloaded a dozen properties totaling more than $300 million in sales.
Since the average occupancy rate for the offloaded properties was a low 71%, this ticked up the total occupancy rate to 93.3%, which is good news. The occupancy rate has been rising all year, and will continue to rise, which will be reflected in FFO.
The current climate of lower interest rates benefits Office Properties. With the economy booming, more businesses and government entities will be leasing out office space, and that helps increase both the rent and the occupancy rate in the long run.
Plus, thanks to the Select Income REIT merger, Office Properties now has exposure to non-government CRE. Industrial space isn’t prone to the kinds of setbacks that traditional retail space is, with Amazon rapidly capturing market share and sending traditional brick-and-mortar retailers out of business.
More and more tech companies are leasing Industrial space to store servers, processors, and other important hardware components, which is why Industrial space is the fastest growing segment of the CRE market.
The stock ended last year in the $30-$40 range, and given the macroeconomic tailwinds and management’s continued disposition of underperforming properties, we are expecting the stock to get back up towards the $40 mark in 2020.
Office Properties also offers a stable dividend, and is reducing its overall leverage by offloading those properties. So we view this stock as a great way to collect 7% per year, while simultaneously capturing expected price appreciation.