This pitch about “Federal Rent Checks” has been circulating for quite a while, and it’s still being mailed out with a July 2018 date under the signature (I got a few questions about it just this week), so I decided to take a second look. And what do you know, there has been a LOT of change in this particular investment being teased since I covered it when those ads started rolling in July. So the ad hasn’t changed, but I have some updates for you anyway.

I’ll leave the original assessment in place, and then provide you some updates at the end.

7/23/18: This ad is one of so many that make me grit my teeth over the “checks” that “everyday Americans” can easily “claim” to receive thousands of dollars a month… they’re all technically true, but they omit so much that I’m sure folks who can’t afford to get sucked into this silliness end up losing money.

So let’s look at those “Federal Rent Checks” today, dear readers — this is a pitch from Money Morning, and I’m sure some readers start salivating as soon as they read the intro:

“Under an IRS directive, millions of Americans can now collect: “FEDERAL RENT CHECKS”

“Please review the following information to see how you could receive $1,795 or more every month!”

And then some language that starts to make it seem like, hey, maybe this crazy idea of me getting free checks could be real!

“You already know that it’s your tax dollars paying for each building and facility being used by the DOJ, CIA, NASA, FDA, Congress, and even the White House.

“At one time or another, citizens like you graciously covered the construction costs.”

Right, so that’s MY White House, yes? I get to charge rent on it! This is starting to sound possible, yes?

Sorry, Not really. Not like you’re thinking. Here’s the next bit:

“Currently, over 100 federal agencies are required by law to pay rent for the properties they occupy.

“This cash is flooding into the Treasury Department, where it’s being stockpiled in the Federal Buildings Fund.

“This year it will have $11.1 billion in it.

“That’s worth repeating…

“It’s an enormous, $11.1 billion pool of money.

“And some very smart Americans have discovered an investment that allows them to tap into a large portion of it.

“Their reward: A hefty monthly check.”

See what they did there? Use an insanely huge number ($11.1 billion) and then talking about a “hefty check.” Which word gets downplayed? Investment.

So yes, this is not a free check you get in the mail because you’re a US citizen and your forefathers helped buy Columbus, Ohio… this is an investment. As you’d expect from, well, an investment newsletter.

Though, of course, the emails introducing the ad don’t use the term “investment” at all… that comes later.

What’s the actual newsletter being peddled? It’s a little complicated, but they’re primarily selling D.R. Barton’s 10-Minute Millionaire Insider, which seems to be focused on technical trading and options as well as on higher-income investments. It’s a relatively low-cost letter, they offer it at $79 for the first two years, but also throw in a one-month trial to Private Briefing, another of their newsletters that after a month will renew at $99… so if you sign up and don’t pay attention or cancel anything, you’ll end up eventually paying $178 a year. You’ll probably see lots of other prices bandied about, they tend to test price points pretty aggressively in different promotions.

This is part of how the email from Mike Ward was worded:

“… it turns out some folks have uncovered an ingenious way to exploit Uncle Sam’s rent situation.

“They’ve figured out how to add their names to a special distribution list.

“This entitles them to collect what we’ve classified as ‘Federal Rent Checks.’

“Around the second week of every month, some Americans are receiving an envelope in the mail with $1,795 in it. We found others collecting over $3,000 and $5,000 every month.”

But yes, as with every single email ad that promises you that you can “enroll” or “sign up” or “put your name on the list” for some particular checks that will come flowing your way… the word they should be using is “invest”.

These checks are returns on your investment, in pretty much every case… as is said so often it sometimes gets ignored, “it takes money to make money.” The person who collects the most rent is the person who owns the biggest chunk of the building.

Still, we think, those checks… maybe they’re really “hefty?” What does “hefty” mean, anyway?

More from the ad:

“I like to refer to them as ‘Federal Rent Checks.’

“And they can be quite large.

“Some folks have been pocketing significant amounts of money…

“Like Mitchell Lorens. He is collecting Federal Rent Checks worth $2,670 a month…”

They show dozens of smiling photos of folks who are collecting these checks, in amounts ranging from about $2,000 a month to well over $100,000 a year, all of which serves to set a baseline in your mind… “hey,” you might be thinking, “even if the lowest amount is $1,795 a month, that ain’t bad!”

Which is true, of course, $1,795 a month is nothing to sneeze at… but that’s not the amount you get if you just “sign up” with one share.

And they reiterate many of the arguments that are often made about the special “checks” you can receive if you only join this newsletter and “sign up” … how it’s better than Social Security because there are “no restrictions” on who can “sign up” … but what they really do is keep punching that hot button (for anyone who’s close to retirement) and mentioning those monthly checks.

“‘Federal Rent Checks’ are issued around the second week of every month, January through December.

“And by implementing a simple strategy, you can collect them every month!

“Brad Thomas served as an advisory board member for President Trump’s original campaign.

“He compared the ‘Federal Rent Checks’ that folks like John, Bonnie, Simon, Al, and Lindy are collecting to printing money.

“Money you can count on, because it’s backed by the full faith and credit of the United States.”

So that’s enough of my huffing and puffing about the language in the ad… this is an investment they’re teasing, so what is the investment?

It’s all about government buildings — or, more specifically, the buildings that are leased by the government. Naturally, like any other business, when the government needs more office space they have to rent it — they do occasionally buy buildings, but more often the government does what it always does… rent instead of buy, because that makes the current financials look better.

And as governments have become more and more strapped, both on the federal level and in states and municipalities, they’ve actually sold more properties and leased them back to give a bit of a one-time cash infusion… just like a corporation might when they’re trying to make their books look better and become more “asset light.”

So how do you profit from that? Here’s what the ad says…

“Altogether, the U.S. Government is legally required to pay rent for 9,600 federal buildings this year…..

“And there is a way for you to receive a “Federal Rent Check” every month from these “private agencies.”

“It takes about 10 minutes to set up.

“You can even use your cell phone to get started!

“Depending on your investment…

“Each of your ‘Federal Rent Checks’ could initially be made out for $1,795.

“But over time those checks could be worth much, much more.

“And that’s because…

“The longer you are on the distribution list… The bigger your Federal Rent Checks can grow!”

So how does one “claim a coveted spot on the distribution list for federal rent checks?”

I’m afraid it’s just as simple as you’re imagining: You buy shares of a Real Estate Investment Trust that owns government buildings, then collect your dividends… it’s those dividend payments that D.R. Barton is calling “Federal Rent Checks.” And the “special strategy” he cites is… buying more than one such investment, because then your dividend checks come more regularly (most REITs still pay their dividends quarterly, but if you own a bunch of them you might time it to get a check every few weeks).

For those who are unaware, REITs are Real Estate Investment Trusts — they trade just like regular companies on the stock exchange, but they are pass-through businesses when it comes to taxes — they don’t pay corporate taxes, and in exchange for that tax exemption they’re required to pass through at least 90% of their income to shareholders in the form of dividends (with the assumption being that you’ll pay taxes on those dividends, so the tax does eventually get paid).

And yes, for most REITs the dividend payments will increase over time — that’s one of the major appeals of real estate investment, rents increase over time with inflation, so if the company manages its buying and selling well and doesn’t pay too much in overhead costs, they can increase the dividend as they raise rents.

Barton even says that…

“Down the Road You Could Be Paid an Enormous Lump Sum to Transfer the Rights to Your Federal Rent Checks.

“It’s easy to find someone to pay a pretty penny to take over your spot on the distribution list. I’ll show you how.”

No trick there… if you want to “transfer your rights” to receive these dividends, you just sell the stock. If it’s worth more when you want to “transfer” in the future, then you’ve made some money (REITS do not only go up in price, of course, just like stocks do not only go up… so you could lose money, too).

So which ones specifically are being talked about? Well, there are a bunch of REITs that have occasional government tenants, mostly office REITs (the government, after all, is nothing if not a major employer of buildings full of office workers), but there are just two who are really focused entirely on being “Uncle Sam’s Landlord” (OK, they rent space to local and state governments, too… but mostly the Feds). The one that is most often teased is Government Properties Income Trust (GOV), and the smaller upstart is Easterly Government Properties (DEA).

And not a lot has changed about the story for these two over the past few years that GOV has been relentlessly teased by one newsletter or another (it was pitched for a long time as a way to earn monthly checks from a “little known Social Security contract,” since the Social Security Administration is one of its larger tenants), but it has also been touted as a way to “earn an extra $1,003 in benefits” or “tax back the government”.

This is what I said back in December of 2017 when I wrote about GOV following a Personal Finance teaser pitch:

“This one has a super-high yield (about 9% now), but I’ve never really liked it. It’s nice to have great tenants, and the government always pays its rent on time, but GOV has never been able to meaningfully improve their performance on a per-share basis, and has no ability to raise the dividend (they’re more likely to need to cut it, unless they sell properties to generate more cash flow — the dividend is much higher than their FFO per share). I still prefer Easterly Government Properties (DEA), which is a smaller and similar company with a much nicer income statement and a lower (but slowly growing and more sustainable) dividend, though I don’t own either.”

Really, the only thing that has really changed in recent years is the share price — in the past three years the price of GOV has dropped 14%, and the price of DEA has risen 23%. GOV pays a very high dividend but has not been able to raise the dividend in many years, and DEA pays a lower but rising dividend, so the total return has been positive for both — GOV has returned 11% in three years including the dividend, DEA 43%.

(That was the story in July… nine months later, not so much — from that same July 2015 start date GOV has now lost 43%, including dividends, and DEA’s total return is down to a positive 37%).

But now it’s time to step in with our March, 2019 update… because it’s not GOV anymore, it’s OPI. Government Properties Income Trust (GOV) merged with another REIT that is also externally managed by the RMR Group, Select Income REIT (SIR), and changed its name — the company is now Office Properties Income Trust (OPI), and the shares were consolidated 4:1 (meaning that if you owned 100 shares of GOV last year that has now become 25 shares of the new company). All of this happened right at the close of 2018, so the year started fresh with this new company and new share structure.

Back near the time this ad was first written last year, by the way, you could take “one Alexander Hamilton and one George Washington” and buy a share, as teased, meaning a single share was close to $11 for a while. A further match for the clues, but that doesn’t help so much — you would have exchanged four of those shares you bought for $11 each, if you bought near what seemed for a while like the bottom, so your effective cost is $44 per share now, and those shares now change hands at $28.

GOV was always promoted on the basis of the safety of having government tenants, and the unusually high dividend yield that the shares gave you for much of the past several years, often in the 8-11% range, which is high for a “traditional” property-owning REIT (most of the super high-yield REITs these days are actually highly levered mortgage REITs that own portfolios of mortgage bonds, not actual buildings, and are largely interest rate-arbitrage investments).

So what’s the story now that it’s OPI? Let’s take a fresh look…

As of the last quarter, there was no sign of acceleration or improvement in operations that I could see. The lease renewals in that quarter were at lower rates than the tenants had previously been paying (7.8% lower), and the occupancy was 91%, which was also down a little bit (from 93.3% a year ago).

The financials are going to be dramatically colored by the merger and by asset sales for the next year or so — GOV had bought a competing company back in 2017 as well, and part of the plan to deleverage from that acquisition involved a sustained period of selling properties, which is still happening… and the SIR merger also led to putting 34 properties up for sale so far this year. The financing in recent quarters also got pretty confusing, with GOV selling the SIR shares it owned back in October in an underwritten public offering that they used to pay down some debt (selling the SIR shares was part of acquiring SIR, in effect, which sounds dumb but I guess generated some cash).

Here’s what the CFO of OPI said about the merger when it was originally announced:

“This transaction addresses a number of the challenges that GOV has been facing, including a high dividend payout ratio, a concentration of near term lease expirations and a high tenant concentration. We believe GOV shareholders will benefit from this transaction by having a well covered dividend set to a long term sustainable level, extending and better laddering the lease expiration schedule, increasing scale and enhancing diversification. OPI also plans to sell assets post closing to further strengthen its credit metrics.”

And here’s what Select Income’s CEO said:

“GOV, SIR and ILPT have complicated ownership structures, with GOV as SIR’s largest shareholder and SIR as the controlling shareholder of ILPT. This transaction will eliminate the cross ownership and increase ILPT’s public common share float, which may benefit SIR shareholders who receive a distribution of ILPT shares. Further, OPI will have increased scale, greater diversification and a broader investment strategy, which we believe will create a leading national office REIT focused on buildings leased to single tenants and high credit quality tenants like government entities.”

I read those statements and came to this (perhaps too cynical) conclusion about the back story: “We had to find a way to cut our unsustainable dividend and diversify away from having just government tenants, and the silliness of the cross-ownership of all these RMR REITs got so bad that we couldn’t even figure out what was going on from the inside.”

It was that high dividend yield that attracted investors, I’m sure, despite the weak-to-flat share price performance (there are lots of folks who will buy a 8-12% dividend payer and be delighted with those recurring dividend payments, even if the total return is abysmal), and that’s no longer available… which is probably the primary reason for the dramatic fall in the share price since last summer.

The new dividend was started at 55 cents per share, which is a dividend cut of about 2/3 from the distribution GOV had been paying. Here’s a summary of what the payout was like for shareholders last year, and what it will be like now:

If you had bought 100 shares of GOV last summer at, say, $15 a share (that’s about what it was when we first covered this ad in July), that would be an investment of $1,500 and you’d receive $43 per quarter in dividends (43 cents per quarter, $1.72 per year per share, a huge yield of 11%)… those 100 shares turned into 25 shares of OPI, today worth a total of about $700 (at $28/share), and you will now be receiving 55 cents per quarter, or $2.20 per year in dividends. That looks on the face of it like an impressive amount per share compared to last year, but you have only 25 shares now so the quarterly cash received is down from $43 to $13.75. The current dividend yield, for people buying today, is still pretty huge at 7.8%… but for folks who bought GOV last summer their yield on the cost they paid for their shares is now down to 3.6% ($55 per year on a $1,500 investment). I imagine the folks who bought this for income back then are probably pretty mad.

They have done what they set out to do, though, in terms of resetting the dividend to a sustainable level… they just weren’t all that clear in announcing what a massive cut that would be. So the positive spin is that they’re no longer paying out essentially all of their cash flow (sometimes more) as dividends… and though they still have a huge amount of debt, some of which they’ll be paying down this year as they sell more properties, the reset does give them a lot more breathing room on cash flow. They might even start to grow the dividend from this much lower level, which could attract a new group of investors (the dividend had previously been flat for years, since they couldn’t afford to raise it).

The question is what the business looks like going forward. Things have gotten a little bit worse operationally, in terms of vacancies and lease renewal rates, and the recent trend has been the government trying to cut office costs somewhat or consolidate its offices, which has been something of a drag, but we don’t really know what will happen in the future. They have about 11% of their lease income due for renewal this year, which is a little on the big side but not dramatically so. And I haven’t seen an overall breakdown of the tenants, but the merger with SIR brought in a lot of non-government tenants to diversify things a bit — so at least 25% of the tenant base is now private, neither state or federal government, though a lot of the tenants are large companies who can presumably pay their rent just fine (Northrup Grumman, F5, Noble Energy, Bank of America, PNC Bank, Allstate are a few).

As of the last quarter, they were losing quite a bit of money but big chunks of that had to do with the SIR merger and with their shareholding in their manager, RMR… their normalized funds from operations (FFO), which is one way they express the earnings power of their actual properties, was $1.56 per share for the fourth quarter (assuming the combined company), or $1.03 if you include the incentive management fee that SIR owed to RMR (and which OPI did pay following the merger). They have given no guidance for 2019 that I’ve seen, but for that one quarter then that means they’re paying out only about half of FFO as a dividend (55 cents/quarter). That’s likely to be easily sustainable if the core of the business continues to perform OK.

And we probably shouldn’t annualize that odd number, but if we did then their normalized FFO for a year now would be around $4 per share, roughly half of 2018’s level, and that would mean the stock is trading at about 7X “normalized FFO”. Not to be counted on as a real number, since “normalized” is a very squishy term for a company that’s going through this huge upheaval with mergers and asset sales, but it gives some context to the valuation relative to the rental income they receive, and provides a little bit of confidence.

The other little oddity here, if you’re interested in researching OPI, is that they’re externally managed — their management is provided by the RMR Group (which is also publicly traded, ticker RMR) in exchange for that management/incentive fee. That’s not entirely unusual — externally managed REITs just pay a management fee instead of having employees — SIR was also a RMR-managed REIT.

I’d generally prefer to own a REIT whose management team is entirely focused on making that REIT specifically successful, rather than an externally managed REIT which shares leadership with a handful of other real estate companies… and really, when you look at the past performance you can see where the value has accrued — not to the folks who own the properties and collect those “Federal Rent checks”, but to the company that manages those REITs.

To be fair, some of those REITs managed by RMR have been close to average over the past few years, as illustrated by this chart, compared to the Vanguard REIT Index ETF (VNQ), but most of them have done dramatically worse than the average REIT… and it makes me squint a little bit when I see how much better that external manager has done, even now that RMR shares have come down sharply since last year (that’s total return for RMR in light blue, OPI in orange, HPT in red, SNH in green, ILPT in purple and the mortgage REIT TRMT in navy — the Vanguard REIT index ETF, VNQ, is pink):

I’d have a hard time getting excited about either Easterly Government Properties, the remaining “mostly government tenants” competitor, or OPI these days… but there is something to be said for the value of the “reset” of the company, the much lower dividend and the deleveraging they’re planning to finish up as they sell a lot of buildings this year, so I can see the potential that they could start to become a growth REIT late in 2019 or in the coming few years, growing the dividend again and looking for accretive acquisitions. It seems likely that they’ll keep focusing on large buildings with single tenants, so that will be mostly government and huge corporate clients, which should make the default rate on their leases pretty low… though those huge tenants probably also have a lot of bargaining power for the properties that aren’t Class-A city center buildings.

So it’s still not a situation I love, these RMR REITs give me a bad taste in the back of my mouth, but at this price I’ll keep an eye on OPI and will probably look into it more to try to figure out what their financials are likely to look like once they get “normalized” in a couple quarters, this is the first time I’ve looked at the stock in years and conclude that it’s valued at a level where I could take it seriously — a sustainable 7.8% dividend that might be able to grow is a lot better than a risky 11% one.

I do always like to refer back to those “checks” they cite in these ads and do the math, to illustrate what kind of investment they’re talking about — they say that you can start collecting “as much as $1,795 per month”, and I’m pretty sure that’s the lowest number they cite for ongoing “checks”. What kind of investment would be required for that?

Well, last summer I figured that if you were just talking about buying GOV shares, which are very high-yielding (and therefore the easiest way to boost that “check” amount, relatively speaking), their dividend was 43 cents per quarter, per share. That’s per quarter, not per month, so if you want to get $1,795 per month you’d need to get a quarterly dividend of $5,385. If we round down a little bit, then to receive a quarterly dividend of roughly $5,300 you would have needed to own about 12,500 shares of GOV. At $15.68 per share today, that would cost you about $196,000. A fairly steep investment for those who are tempted by the overhyped promises of a $79 newsletter.

Today that story is, of course, a little different. To get $1,795 per month from OPI dividends you’d have to buy about 9,600 shares of OPI. At the current price, that would cost you about $270,000.

Certainly it’s true that REITs can compound their earnings, and you might turn a smaller position than that into a meaningful stream of income over many years — particularly if you don’t take your dividends in cash but instead let the dividends reinvest and buy more shares, increasing your stake… but there’s no magic to it other than the mathematical magic of compounding, which works best when it is allowed to work undisturbed for a long period of time.

It takes time and a relatively steady stock for that to work, as we can easily see an example of in this very company — folks who went into GOV shares a year ago hoping for that compounding would have had their plans dashed by the 50%+ drop in the value of GOV shares as they merged and became OPI and slashed the dividend. And there are external impacts from things like tenant bankruptcies (probably not the US government, but they are trying to shrink their office footprint), or from rising interest rates (which can increase costs for borrowers like REITs, and also make bonds relatively more appealing than REIT shares for some investors).

But it is, at least, quite a bit cheaper than it has been for most of the past decade… so that’s something. Of course, I said the same thing last July — it was cheaper than it had been in a long time back then, too… which didn’t mean it couldn’t get cheaper.

My sense is that this painful reset in OPI shares is almost entirely dividend-driven. The stock has been bought by shareholders for the high yield for a long time, and I’m guessing that it will start to find buyers again now that it is falling enough to become a high yielder again at this much lower dividend… and the valuation certainly looks better than it did a year ago, with a more sustainable dividend payout ratio, though that doesn’t mean I’m sure it’s done declining. I come away thinking it’s worth watching and considering after this “reset,” though, which is more than I could have said a year ago.

Your mileage may vary, of course, and I’m sure some of you have looked at these stocks before — perhaps you even own them. What do you think? Getting cheap enough to buy OPI here? Like that yield now that the dividend is more sustainable? Think things will start looking up for the government building owners, or office REITs in general? Let us know with a comment below (we’ve left the original comments from the first version of this story attached).