Office Properties Income Trust: A 7.2% Yield Backed by “Uncle Sam”
March 4, 2019
Is This Payout Safe?
Each spring, I write a big check to “Uncle Sam.” Wouldn’t it be nice to get a little bit of that money back?
I know what you’re thinking: Rob, we pay the feds. It usually doesn’t work the other way around. But actually, you can start collecting money from the U.S. government.
Office Properties Income Trust (NASDAQ:OPI) owns one of the largest collections of government office buildings in the country. Management buys properties, rents them out to tenants, and passes the income onto investors. The partnership’s largest renters include agencies like the Internal Revenue Service and U.S. Citizenship and Immigration Services.
That steady income has translated into a 7.2% yield for unitholders. But can such a high distribution be safe? Let’s dig into the financials.
Office Properties Income cranks out ample cash flow. Last year the firm generated $7.95 per unit in fund flows from operations. This metric represents a common measure of profitability in the real estate business.
Over the same period, management paid out $6.88 per unit in distributions. That comes out to a payout ratio of 87%.
Generally, I like to see companies pay out 90% or less of their cash flow out to shareholders as dividends. So Office Properties Income’s payout ratio stands at the upper end of my comfort zone. But given the recession-proof nature of government spending, OPI unitholders have little to worry about.
The conservatism extends to the balance sheet, too.
OPI has a modest debt load and a manageable debt maturity profile. By our calculations, the business generates more than $2.80 in adjusted earnings before interest, taxes, depreciation, and amortization for every dollar paid out in interest.
More importantly, management has locked in most of that debt at today’s low interest rates. Out of every dollar borrowed, $0.83 is fixed-rate debt. So even if yields keep rising, financing costs won’t take a bite out of profits.
The big risk here? Bond yields.
Because they generate reliable income, traders often treat partnerships like Office Properties Income as bond substitutes. So if interest rates rise, investors will often dump their units for safer returns elsewhere.
That explains why OPI units have plunged so much in value in recent months. It doesn’t reflect a problem in the underlying business. Traders, however, now demand higher yields because they can earn better returns in the bond market.
For OPI stockholders, a lower unit price won’t have an impact on their income stream. In fact, I would view any sell-off from rising interest rates as an opportunity. Still, it’s a risk to be aware of.
Regardless, Office Properties Income Trust’s 7.2% yield looks safe.
