'Sucker Yield' Is The Horse, Baby Bonds Another Source

Many investors have asked us about potential options instead of the REIT or what to do with funds allocated to the REIT.

Summary

  • Many investors have asked us about potential options instead of the REIT or what to do with funds allocated to the REIT.
  • In 2016, GOV issued a 5.875% baby bond due in May 2046.
  • The bottom line is that while we are cautious on the common shares, we recommend the baby bonds due to their place in the capital structure, covenant protection and relatively.

This idea was discussed in more depth with members of my private investing community, REIT Beat. Become a member today

We recently wrote a note explaining our opinion on Government Properties Income Trust (GOV), where we cautioned investors about reaching for yield with the common stock. As a result, many investors have asked us about potential options instead of the REIT or what to do with funds allocated to the REIT.

One of the first things that came to us was staying invested in the REIT, but going up the capital structure into the baby bonds. We have recommended the baby bonds to our Intelligent REIT Investor subscribers as part of the preferred portfolio (despite the fact they are not preferred stock) and thought it might be a good time to revisit the issue.

Government Properties Income Trust (GOV) is a REIT which owns properties leased primarily to the U.S. government and state governments located throughout the United States. The majority of their properties are office buildings. As of September 30, 2017, GOV also owned 24.9 million common shares, or approximately 27.8% of the then outstanding common shares, of Select Income REIT (SIR), a REIT which owns properties that are primarily leased to single tenants.

In 2016, GOV issued a 5.875% baby bond due in May 2046. For those unfamiliar with the term, a baby bond is typically senior unsecured debt that is issued in denominations of $25 par rather than the typical $1000 par. This issue is not differentiated from GOV’s outstanding $1,000 par bonds and is pari passu (equal) with them.

Details of the issue are:

The prospectus can be found here, the term sheet here and the indenture here.

One advantage that REIT bonds have is financial covenants – a rarity for investment grade issues – which help protect investors by limiting the amount of debt a REIT can incur.

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