A REIT with Guaranteed Long-Term Business  

You may distrust the government. But it makes for a reliable customer. That’s why one particular REIT should thrive for years to come.
If you are being driven up the wall by government spending, I think I’ve discovered a way you can finally profit from it.
Wouldn’t it be great if you knew the government was going to lease your property for a very long time? Knowing that government historically overspends for just about anything, wouldn’t you be thrilled to know that they’ll probably spend too much on the lease? Most of all, wouldn’t you be thrilled, as the landlord, to know that the government is never going to default on your lease?
If so, then take a look at Government Properties Income Trust (NYSE: GOV), a real estate investment trust (REIT) that owns 71 properties in 32 states, and leases them to government tenants – 37 from the U..S government, 29 state government agencies, and the United Nations. Ninety-three percent of GOV’s annualized rental income is paid by the U.S. government, 11 states, and the UN.
Occupancy is a robust 95.5%, with the weighted-average remaining lease at 4.5 years. It is not a highly leveraged company, with debt-to-book capitalization of only 45%.
The key to this REIT is how much money it can borrow, and if it can collect more in rent than it spends in debt service and operating expenses. In this case, GOV renegotiated its unsecured revolving credit line awhile back from $500 million to $550 million, and it reduced its interest payment from LIBOR + 210 basis points to LIBOR + 150, while extending the maturity out two years to October 2015.
This is an unsecured facility, that just got increased at a lower interest rate for two extra years. That’s how certain the GOV’s lenders are in its business model. And that doesn’t even speak to the recently closed five-year term loan, again unsecured, for $350 million. It carries only $95 million in mortgage payables on the balance sheet and owns everything else outright.
The result is its EBITDA-to-annual-debt service ratio is a huge 7.7x. That means it can easily cover its fantastic high yield of 7.4%.
GOV also has a 36% ownership stake in Select Income REIT (NYSE: SIR). It financed the $689 million purchase last year with an equity raise of $350 million and a 3.75% UNSECURED senior note for the rest.
Select Income is a big player in Hawaiian real estate, where it hold 18 million square feet that are 94% occupied. Land leases are reset every five to 10 years and historically increase dramatically since, of course, Hawaii is a bunch of islands with limited space.
Select Income also pays a 7.5% yield.
SIR doesn’t really have any direct competitors, but looking at the enterprise-value-to-EBITDA ratio of 20, compared to other REITs it seems right in the middle in terms of valuation. Take a look:
Boston Properties (NYSE:BXP): EV-EBITDA = 21
Corporate Office Properties (NYSE:OFC): EV-EBITDA = 17
Piedmont Office Realty Trust, I (NYSE:PDM): EV-EBITDA = 19
The Government Properties Income REIT looks like a winner to me, and given that it’s underfollowed, it likely holds some value. The only possible blip for the company long term is if we get an insanely fiscally responsible government that decides to shut down everything it can. That should happen around the time pigs fly.

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