Government Properties Income Trust (NASDAQ:GOV) is not a popular stock.
But maybe it should be.
Yesterday, analysts at FBR Capital announced they are initiating coverage of the government office building lessor with an outperform rating and a $25 price target -- and if anyone knows where Government Properties stock is going, it should be FBR Capital.
According to our data here at Motley Fool CAPS, FBR Capital spends more time following REIT investments than any other type of company on its coverage list. In fact, with more than 50 active recommendations in the sector, FBR's analysts may cover more REITs than anyone in the market -- and with a record of outperforming the market by nearly 1,000 percentage points across its field of coverage, they may be more successful than anyone else, too.
Here, then, are three things you should know about why FBR likes Government Properties stock.
Thing No. 1: 92-72-31
After digging through the filings for Government Properties stock, FBR came to the conclusion that "the market has only recently begun to recognize the value imbedded in this niche office REIT." FBR explains, in a write-up covered by StreetInsider.com yesterday, that Government Properties owns a total of 92 buildings, located on 72 separate properties spread among 31 different states and the District of Columbia.
93% of the income Government Properties collects comes from leasing the 11 million square feet contained in these properties to state and federal agencies and government offices.
Thing No. 2: Your government for lease -- and on sale
FBR values all this real estate at $1.8 billion -- un-depreciated. At the same time, Government Properties stock appears to sell for much less. Most financial information websites (Yahoo! Finance and S&P Global Market Intelligence included) don't give a current market capitalization for the stock. But by multiplying the stock's 71.1 million shares outstanding (per data from S&P Global) by the stock's $21.40 share price, we can arrive at a rough market cap of $1.45 billion for Government Properties stock -- 20% less than the value of its portfolio of government buildings.
Thing No. 3: Property and equity
In addition to its undervalued physical assets, FBR notes that Government Properties stock owns approximately $624 million worth of stock in the Select Income REIT (NYSE: SIR), and a further $36 million worth "of its external manager," The RMR Group Inc. (NASDAQ:RMR).
Real estate, real cheap?
Even accounting for the stock's $1.2 billion in net debt, therefore, the value of the REIT's properties plus its equity interests in related companies comes to nearly $1.3 billion -- not much less than the market capitalization on Government Properties stock. Factor in possible appreciation in the value of the real estate it owns, and the ongoing payments of Government Properties' generous 8.7% dividend yield, and FBR concludes that Government Properties stock is significantly undervalued today, and worth close to 25% more than what the market is currently charging for it -- thus $25 a share.
Is FBR right about that? Given the analyst's track record, I'd say the odds are better than 50-50 that FBR is right about Government Properties stock. But even if it's wrong, there's still that 8.7% dividend yield to fall back on.
For investors today, paying tax rates as high as 39.6%, the chance to get back 8.7% from leasing property back to the government may be the best revenge.