If you’re going to be a landlord, then it’s crucial to find good tenants — ones that will never bounce a check, always pay on time and stick around for the long-term.
I’ve found a company that rents to the absolute most dependable tenant you can find: The U.S. Government.
You see, although Uncle Sam owns nearly 10,000 buildings, he’s also the nation’s largest renter.[ad#Google Adsense 336×280-IA]And as it turns out, renting to the government is quite profitable.
Think about it… Government tenants tend to stay in the same office for decades without moving around, and they don’t bounce rent checks.
That’s why I like Government Properties Trust (NYSE: GOV) so much.
As a top landlord to Uncle Sam, this real estate investment trust (or REIT) throws off ample cash flow, translating into a rock-solid 10% dividend yield for investors who buy the stock today.
That’s a lot of reward for very little risk.
The company leases office buildings to well-funded government agencies such as the Department of Defense, the Social Security Administration, the Internal Revenue Service, the Department of Justice, the Department of Energy, the Department of Homeland Security, the Food and Drug Administration (FDA), and the Centers for Disease Control (CDC).
Other property owners might struggle with vacant, unused buildings when renters go out of business. But I don’t see that happening here. From every dollar of rental income, 93 cents is paid by federal and state governments and the United Nations — just 7 cents comes from non-government renters.
Government Properties leases more than 10 million square feet spread across 69 properties located in 31 states. And business is good. Its portfolio of properties has a vacancy rate of around 5% — and this tends to be more stable in any economic climate compared to commercial office buildings, which saw a spike in the vacancy rate up to the 18% to 20% range when the U.S. economy slowed in 1987, 1991, 2002 and 2009.
As I mentioned earlier, government tenants tend to stick around. In the most recent quarter, the average lease renewal for one of GOV’s properties was for a term of 20 years. Looking at the expiration schedule, less than 7% of the firm’s space will be up for renewal in 2015, with an average remaining lease term of 4.9 years.
Plenty Of Room For Reliable Growth
With government spending under pressure recently, it’s fair to wonder if GOV might start to see government tenants consolidate into fewer office spaces. But the company did not see a meaningful impact on its properties during the worst of the “sequester,” since its focus on buildings in Washington D.C. tend to be for crucial government offices.
To be sure, the government’s need for office space is likely to remain stable. It isn’t expected to grow much in coming years. Yet Government Properties manages to find paths to grow anyway, as it acquires more buildings that already house government tenants. That explains why revenues shot up from around $80 million in 2009 to more than $250 million by 2014.
According to the General Services Administration (which is charged with the oversight of federal government buildings), Uncle Sam leases 5,000 properties — less than 5% of that space belongs to GOV. And thanks to already-locked-in cash flows from Uncle Sam, GOV can borrow at low interest rates and fund further acquisitions of government-leased properties.
In the meantime, Government Properties should be able to maintain the robust dividend. Over the past three years it has generated net profit margins in excess of 20% — that provides plenty of room for both new acquisitions and dividends.
That said, don’t expect the dividend to grow at a fast pace. GOV periodically raises fresh capital through secondary share offerings, which means that the share count often rises almost as fast as net income.
Roughly 10% of profits are retained each year to fatten up the balance sheet, while the other 90% supports the dividend. That payout ratio means management can preserve the dividend even if profits take a modest dip in any given year.
You can find other REITs with stronger growth prospects, but as a good rule of thumb, the greater the prospective growth, the smaller the dividend yield. The typical REIT sports a dividend yield of around 4%. That’s less than half GOV’s yield.
Investors can find 10% dividend yields if they look hard enough, but they’d be hard-pressed to find another one with such low chances of a dividend cut.
Those looking for high yields and safety should look into Government Properties. There may be a few dips in the share price now and then, but the sky-high yield the stock sports right now should cushion any short-term pullback.
— Nathan Slaughter[ad#sa-income]
Source: Street Authority