Many businesses continue to struggle despite a slowly improving US economy. In such an environment, commercial real estate remains a risky proposition. But by choosing to focus on a single tenant with deep pockets, this real estate investment trust is thriving. –The Editors

Recouping Your Tax Dollars

As anyone who has ever leased out a property knows, a landlord’s biggest headache is collecting the rent check on time. Every landlord inevitably ends up with at least one tenant whose check is always late for one reason or another.

The federal government may have many flaws, but it does pay its bills on time. This reliability has led Government Properties Income Trust (NYSE: GOV), a real estate investment trust (REIT) that owns 53 properties, to rent primarily to Uncle Sam.

As of the end of the third quarter of 2010, 81 percent of the REIT’s annualized rental income was derived from the federal government. Meanwhile, 13 percent of rental income was generated by five different state governments, and 5 percent was collected from banks and small offices.

The unglamorous nature of the business might turn off some investors. But boring, reliable investments are perfect for those seeking income.

Although the REIT’s per share data is lumpy due to the timing of property purchases and a recent share issuance, Government Properties generates more than enough in cash flow to cover its $0.41 quarterly dividend; per share funds from operations are estimated to be $1.92 in 2011.

Additionally, unlike many REITs, Government Properties uses surprisingly little leverage in its business.

As is the case with any REIT, the greatest risk faced by Government Properties is that tenants won’t renew their leases, particularly as the new Republican majority in the US House of Representatives has pledged to slash government spending.

But it’s unlikely that clients such as the FBI, Dept of Justice and Dept of Veterans Affairs will opt to endure the costs and disruptions to work caused by moving locations.

Furthermore, it’s become more difficult to find locations that meet the government’s post-9/11 security requirements, particularly for organizations such as the Defense Intelligence Agency. These factors, and the government’s preference to sign long-term leases, provide Government Properties Income Trust with a reliable revenue stream.

Admittedly, the REIT’s potential for capital appreciation potential is limited. But the more than 6 percent yield remains attractive, as is the growth potential for the REIT’s distributions. Government Properties Income Trust has purchased more than 20 properties that were near full occupancy in 2010, investments that made substantial additions to the REIT’s cash flow.

In August the REIT successfully replaced a $250 million senior secured credit facility with a $500 million senior unsecured credit facility. The agreement includes an option to increase the amount to $1 billion.

Given that most of Government Properties’ deals fall in the $25 million range, that funding opens the door to significant growth opportunities.

–Benjamin Shepherd