Government Properties Income Trust CEO Discusses Q3 Results

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On Tuesday, Government Properties Income Trust (NYSE:GOV) managed by REIT Management & Research, LLC, a private company that manages public REITs, announced its financial results for the third quarter and the nine months ending September 30, 2012.

Results for the quarter ended September 30, 2012:

The company's normalized funds from operations for the third quarter of 2012 were $25.6 million or $.54 per share, compared to normalized FFO for the quarter that ended September 30, 2011 of $23 million or $.51 per share.

Net income was $11.8 million, or $.25 per share, for the quarter ended September 30, 2012, compared to $11.6 million or $.26 per share for the same quarter last year.

Results for the nine months ended September 30, 2012:

Normalized FFO for the nine months ended September 30, 2012, were $75.1 million or $1.60 per share, compared to normalized FFO of $63.5 million or $1.51 per share for the same period in 2011.

For the first three quarters of 2012, said David Blackman, president and chief operating officer of GOV, FFO were driven mostly by acquisitions. "Since July 1, 2012," he said, "we have acquired or entered into an agreement to acquire nine properties for an aggregate purchase price of $167 million. We also declared a $.43 per share distribution in October, which is a $.01 per share increase in our previously quartered distribution rate." Also, in October, GOV sold 7.5 million common shares in a public offering, raising $167 million in net proceeds, says Blackman.

As of September 30, 2012, GOV owned 82 properties containing 10 million square feet. Properties were 92.4% leased for a weighted average remaining lease term of 5.4 years. The US government remains the largest tenant for the company. Rental income from these tenants and rental income from 10 state government tenants account for almost 94% of the company's aggregate annual rental income.

According to the company's pro forma for the October equity offering, said Blackman, its balance sheet is "conservatively leveraged at 30% of total book capitalization and the company's $550 million unsecured revolving credit facility" gives it adequate funding for more acquisitions and working capital needs.

In answer to a question by Jamie Feldman of Bank of America about GOV's acquisition pipeline during the earnings call, Mark Kleifges, treasurer and chief financial officer said, "Yes, our debt to book capitalization post-equity offering is down 30%, (and) that gives us probably roughly $250 million of acquisition capacity before we bump up against a 40% debt to total book capitalization, so we've got a lot of dry powder, if you will."

During the earnings call, Michael Carroll of RBS asked about the difference between GOV's government and non-government tenants. Blackman responded that while it is true that there is more turnover with non-governmental tenants, they represent a small percentage of space in GOV's buildings.  

When Carroll asked about the non-government tenants lease maturity schedule over the next couple of years, Blackman said that for the remainder of this year, "we have basically six leases that are still subject to expiration or we're working on renewals where they're all government tenants, so we don't have anything really for the rest of this year.

"Next year, we only have about 6.7% of our revenue subject to lease expiration and that is substantially all government tenants. We've got a couple, small non-government tenants, but they tend to be 1000 to 3000-square foot tenants." 

Chris Caton of Morgan Stanley asked about the price differential for GOV acquisitions to which Blackman replied that US government-leased properties with ten-year or greater lease durations tend to have more aggressive cap rates. 

"...we had two acquisitions during the quarter that were kind of mid-sevens for cap rates which is pretty aggressive for us," said Blackman. But the company tries to offset those acquisitions with a couple that have cap rates from eight to the high eights, he said.  Although GOV analyzes the cost of an acquisition relative to the cost of capital, it also looks at acquisitions on a portfolio basis, said Blackman. It looks for an "appropriate yield" across five to ten acquisitions, rather than just one, he said.