In This Government REIT, Investors Can Trust

TheStreet.com

NEW YORK (TheStreet) -- While longer-term rates like the 10-year Treasury bond "soar" (yes, I'm being facetious) to shocking levels like 2.45%, the market is giving dividend-hungry investors a long-awaited chance to capture higher yields on REITS with quality tenants.

One that stands out and is "on sale" is Government Properties Income Trust . The name alone suggests that this real estate investment trust has tenants that have the power to print money when they need to pay the rent.

As of March 31, Government Properties owned $1.7 billion in office properties, comprising 10 million square feet in 31 states and Washington D.C. The company says that about 75% of its rental income comes from properties leased to the U.S. government.

In addition, 21% of its rental income is paid by state governments and 4% by the United Nations.

The dividend at Thursday's closing share price of $23.36 translates to a 7.36% yield, well above the average REIT yield. Plus, government tenants have a historically high renewal rate with an average occupancy of 26 years.

Government Properties Income Trust is managed by Reit Management & Research LLC, a private company founded in 1986 to manage public investments in real estate. As of March 31, RMR managed a large portfolio of publicly owned real estate in North America, including 1,700 properties in 46 states; Washington, D.C.; Puerto Rico; and Ontario, Canada.

Governtment Properties has a buy rating from TheStreet Ratings which commented on the REIT on Thursday: "The company's strengths can be seen in multiple areas, such as its robust revenue growth, reasonable valuation levels, expanding profit margins, good cash flow from operations and compelling growth in net income. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Looking at Government Properties' one-year price chart helps demonstrate why its shares now look tempting, closing on Thursday at $23.46. I've included the Free Cash Flow Yield line to illustrate how steady that metric has been. The stock price is approaching the lows of last November.

GOV Chart
GOV data by YCharts

TheStreet's Research Report stated the following:

  • GOV's revenue growth has slightly outpaced the industry average of 12.0%. Since the same quarter one year prior, revenues rose by 15.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share
  • 35.90% is the gross profit margin for GOVERNMENT PPTYS INCOME TR which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 42.80% significantly outperformed against the industry average.
  • Net operating cash flow has slightly increased to $29.65 million or 1.15% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -16.35%.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 89.3% when compared to the same quarter one year prior, rising from $13.06 million to $24.73 million.

This is a buyer's market for other top-rated REITs. I'm also fond of health care REITs with long-term histories of raising dividends. One such example is HCP Inc. .

HCP is the first health care REIT selected to be a member of the S&P 500, and the only REIT in the S&P 500 Dividend Aristocrats Index following 28 consecutive years of dividend increases.

Still, HCP fell over 5% on Thursday to a 52-week low of $41.54, driving the yield-to-price to a scrumptious 5.05%. Analysts' one-year target stock price estimate is nearly $52. That suggests that now is the time to focus on blue-chip REITs.

(I also suggest the following from Brad Thomas, a fellow contributor to TheStreet.com: Time to Focus On Blue-Chip REITs.)

At the time of publication the author is long shares of both Governtment Properties and HCP.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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