Income from Government Properties

04/03/2015 7:00 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

This month, we’re going back to income investing basics with a quality REIT, buying one that owns properties and leases them to federal and state governments, explains Briton Ryle, editor of The Wealth Advisory.

Obviously, government isn’t going to disappear, so we view this REIT—Government Properties Income Trust (GOV)—as a very stable long-term income investment.

The REIT owns over 11 million square feet of office property in Washington, DC and 31 states. Its 72 properties are valued at $1.9 billion and generated $251 million in revenue over the last 12 months. Revenue has grown ~10% for the last three years.

69% of revenue comes from the federal government, 20% comes from state government, and the rest is divided between non-government entities and the United Nations.

Of course, there are pros and cons to leasing to government agencies. On the negative side, the constant budget fights in Congress over the last few years have impacted the length of leases that Government Properties signs.

The company typically leases for ten to 20 years and then renews in five-year increments. But because Congress has been unable to pass a budget since 2008, the length of renewals has shortened to three to five years.

It appears that this uncertainty has weighed in the stock price. Its all time highs were achieved above $26 a share back in early 2011. That was right when the congressional budget fights began and the stock dropped to $20.

Meanwhile, Government Properties pays a very nice $1.72 per share in annual dividends. That works out to 7.6%. Cash flow from operations in 2014 was $130 million, which covers the dividend.

Growth is expected to be flat in 2015, so we are not looking for a dividend hike anytime soon. That said, we do feel there is upside to current growth expectations. The company might make more acquisitions and it might boost its occupancy rates.

In addition, institutional ownership from the likes of BlackRock, Invesco, and Vanguard is comforting. We rate Government Properties Income Trust a buy under $23. Our 12-month price target is $28.

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