Make Uncle Sam Pay You

If you were a landlord, what kind of tenant would you want?

More than anything else, you’d want a tenant who would stay put for a long time, and have no trouble at all paying higher rents as the years went by.

You’d also want a tenant that never had any credit problems. You’d like to be able to tell your creditors that you have really great tenants, so they should give you a break on loan fees and interest rates.  You’re a better credit risk, you’d like to tell them, because you have better tenants.

The tenant you’d want in your offices would be someone like, say... for example... the U.S. Government. 

Uncle Sam’s finances, though they make the news every day, are never really in question, due solely to the fact that it can tax us into penury if it so chooses. (I believe the power to tax and get away with it goes by the euphemistic moniker of “the full faith and credit of the U.S. government.”) 

The 2006 Federal Budget says, “The Government has sovereign powers. These powers will allow the Government to meet its present obligations and those that are anticipated from future operations.”  It goes on to say, “Private financial markets clearly recognize this reality. The Federal Government’s implicit credit rating is among the best in the world.”

In other words, the U.S. Government will raise taxes – and keep raising them – as high as it needs to pay for itself.

I can hardly think of a better way to make Uncle Sam pay you back than to knock on his door once a month and demand the rent... and that’s exactly why I’ve recommended Real Estate Shareholder readers buy shares of a little-known company that’s in the very enviable position of being a large landlord to Uncle Sam. 

The U.S. government is this company’s largest single tenant.  Uncle Sam occupies over 5 million square feet of its office space, over 10% of its total square footage. U.S. Government rent payments account for nearly 15% of its rent revenue. 

According to a recent report by CB Richard Ellis, downtown Washington’s 7.7% vacancy rate in office buildings is the lowest in the nation – and below the 10% level where landlords can usually hike rents.

After the government, perhaps you’d want to rent to a tenant whose business is always in demand, no matter what.  It should also be a service or product that people are generally willing to pay up for... something important enough that money is not the primary concern.  Something like medical-related businesses.

Think about it. Do you shop around for the cheapest doctor? I don’t. I want the one who graduated at the top of his class, and he and I can work out the finances later. Taken as a group, medical tenants also account for roughly 18% of this company’s annualized rental income, as of September 30, 2005. 

If you’re going to rely on two businesses as the source of 32% of your income, government and medicine are good, safe choices. 

Whether its government, medical or whatever, the main thing a good landlord looks for is a tenant with high credit quality, who can sign a long-term lease. Just like when you and I want to rent an apartment, the landlord does a credit check, and you must be willing to sign a one-year lease.  This company’s occupancy rates are in the 90% range and more stable than most other office building owners. 

As you can see, this company’s occupancy rates are high, and they’ll stay high for years to come... but it really just boils down to this...

Do you think the U.S. Government is going to get smaller? I doubt it. And do you think the Government is ever going to pick up and move across the country to a cheaper location such as Boise, or Omaha? I seriously doubt that will ever happen either.

So what better investment could there be over the next 10 years than collecting steady rent checks from the Government? It’s about as good a deal as you can find in the investment world.

If you want to be scared and look at big, meaningless macro numbers about nationwide real estate “trends,” that’s your choice.  But if you want to be landlord to Uncle Sam and a host of other blue-chip, high credit quality tenants, then you’ll want to put some money in this stock.

Good Investing,

Dan Ferris