This Office REIT’s Entry Point

 

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I have had an overwhelming feeling that healthcare and hotels reits are the only good entries left. Over the last few months many companies, with good fundamentals have reached high multiples. This has left fewer options on the table, and one of the last groups left has been net lease retail. Since this list has begun to slowly decline, I have found myself starting to weigh the risks over rewards more often and reviewing less popular picks. For example, just last week I picked Spirit Realty Capital, from the net lease group. I picked Spirit Realty because it showed a chance of potentially having a turnaround in the market.

This week, we’ll feature Whitestone, which is another option to the overcrowded shopping center sector. This company displayed some risks that could have some potential negative impact on their stock performance. But, today, I will look at Government Properties Income, an office REIT that is part of our second tier group. That is, for over five years, this company has been distributing the same or increasing stocks without interruption.

chart02During the last twelve months, the Government share price was down, and more recently up. It has an AFFO multiple that has been around 10 while its dividend yield is at 9% making it one of the highest yields. Despite the recent appreciation, this stock still has a 20% upside just from looking at its past performance.

Government Properties, which has been externally managed by the Portnoy family, is currently faced with two main concerns. The most compelling is that a portion of their portfolio is currently expiring in the short and mid-terms. Meaning that over the next two years 26% of this company’s portfolio will expire. In addition, since this is an election year, there will be a certain degree of uncertainty over the projected federal government expenses.

One of the management’s main goals has been to renew as many of their leases as possible, which they accomplished in the Q1. With their new leasing, the profile has improved, as opposed to the same time frame of last year. The occupancy levels have also been steady over the last year.

At the same, though, we are not sure about their debt profile, since those metrics have deteriorated. The ratios between debt to adjusted EBITDA and the total debt to total gross assets have increased. But the deterioration, so far, has been in small increments and has not yet threatened its public debt covenants. The company hold an investment grade rating.

chart03In regards to the elections, the management has yet been able to tell which direction the market will go. As of right now, they have also decided to not outline possible scenarios. With a potential change of party on the horizon, this will certainly cause a splash in the federal government. As a result of this, it will add more uncertainty to the expiring leases.

In conclusion, with so many declining opportunities that are outside the healthcare and hotel realms, Government Properties, with their high dividend yield and decent record, seems to be a good entry point into the market.

Check our previous post on Government Properties.

Source: Government Properties Income T(NYSE:GOV), Spirit Realty Capital, Inc.(NYSE:SRC), Whitestone REIT(NYSE:WSR)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

What’s to Love and Hate about Government Properties?

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Over the past week, we’ve seen the emergence of externally managed REITS in our weekly best performing stocks. Ashford Prime, CorEnergy Infrastructure, Government Properties, Ashford Trust, and New Senior Investment rounded out our top five companies. With the exception of CorEnergy, which is suffering from energy low prices, they have been impacted by activists’ attacks over the past twelve months.

Although Montgomery Bennett, which is from both Ashfords, has developed a negative sentiment from investors recently, the Portnoy family (who runs four REITs in different sectors – Government Properties, Select Income, Senior Housing Properties and Hospitality Properties) took their turn last year, thanks to several controversial moves in terms of corporate governance. In March 2015, the family disarmed a hostile activist by having Government Properties purchase Select Income shares owned by the activist. In June 2015, the Portnoy family made all of their four managed REITs buy stakes in their external advisor, RMR Group. Obviously, the Portnoy family retained voting control over RMR.

I’m not going to assemble all the arguments against externally managed companies here and ignore some of the good facts. As an investor who is aware of my biases, I acknowledge that I have a bias against externally managed companies. I’ve noticed that some other investors have the same thoughts, too, but unlike them, I’m going to go ahead and go over the positive and negative aspects.

For instance, did you know that of the Portnoy family’s managed companies have maintained or increased dividends since their inception? A couple of weeks ago, I featured Senior Housing Properties and mentioned a few of the things I didn’t like about the company. One thing that I do like is that the company has distributed same or growing dividends for the past 16 years. Government Properties has done the same for the past six years.chart02

In fact, Government Properties has been the third best returning REIT stock this year, following CorEnergy’s whopping performance and Seritage Growth’s spike, even though the REIT has a meager yield of 2%. Since it bottomed in February, Government Properties has rallied and is currently trading at 8x FFO, which is still lower than its historical multiples.

Additionally, the company doesn’t seem to show any signs that it cut its dividends in the short term. The dividend yield is currently at 9.5%, but its FFO payout ratio is at a comfortable 71%. The company also holds an investment grade credit rating from Standard & Poor’s, so it has kept its servicing costs under control.

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Finally, Government Properties’ tenants are primarily U.S. federal and state government agencies, which are an unquestionably secure rental income. 93% of their rental income is sourced from the U.S. government, 12 state governments, the United Nations, and two municipal tenants. With 71 properties in 31 states, they are geographically diversified. Although government agencies tend to sign long-term agreements (between 10-20 years), the average remaining term lease is around 5 years. More than 60% of the leases will expire by 2020, but Government is confident they will be able to retain their tenants.

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Regardless, this hasn’t changed my mind. Beside management entrenchment, the other caveat is that by investing with Government, you are exposed to Select Income. Select Income Investment represents about half of Government’s market cap. Last year, about a third of their FFO was sourced from Select Income dividends, so its dependency on its sister company is undeniable.

Source: Government Properties Income T(NYSE:GOV)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

RMR To REITs: Let’s Hold Hands Till The Storm Passes By

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Select Income REIT (NYSE:SIR), Government Properties Income Trust (NYSE:GOV), Senior Housing Properties Trust (NYSE:SNH), Hospitality Properties Trust (NYSE:HPT) — these are all top-yield REITs that have consistently topped the rankings in their respective sub-sectors (Diversified, Industrial/Office, Healthcare, Lodging/Hospitality). If all of them have been managed externally by the same investment manager Reit Management & Research (RMR), per Monday’s announcement, they now own, in aggregate, 48.4 percent of RMR. Though each belongs to a different sector, the four REITs have been more integrated than ever.

After being the target of Lakewood Capital Management, an activist hedge fund, RMR and its REITs have been on the edge. At a presentation to Select Income’s Board of Trustees in January, Lakewood raised serious concerns about the corporate governance and nominated a board member to “provide shareholders a voice.” Since then, Lakewood’s complaints, such as misaligned interests, entrenchment and absence of transparency, have echoed through the markets. RMR and its REITs have become, in effect, poster children for what is wrong in the REIT sector.

After Lakewood’s share of Select Income was purchased last March, the purchase of a significant portion of RMR by the REITs seems to be one more step to stave off activists and to try and fix the misalignment of interests Lakewood had raised. At NAREIT’s REITWeek conference this Tuesday, Select Income COO David Blackman clarified that RMR will become public and that the registration process has been underway. The management agreement between RMR and the REITs has also been extended to a twenty-year term. The RMR purchase raised new concerns regarding transparency and fairness as to the way the buying price was set.

Although this new step should mitigate RMR’s issues, the original owners (Portnoy family) will detain 91.4 percent of the voting rights (for an ownership of 51.6 percent). In addition, discussions over potential conflicts of interest have always taken precedence over the quality of the assets. NorthStar Realty Finance Corp (NYSE:NRF), a top-yield REIT in the Diversified Sector, has experienced an equivalent situation, and the share price continues trading below those of its peers. NorthStar segregated its management off into NorthStar Asset Management Group Inc. (NYSE: NSAM), which went public last year. If it hasn’t been working well for NorthStar, why would the situation with RMR and its REITs be any different?

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Source: Select Income REIT


Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​