April 15 is just 11 days away (actually, this year you’ve got until April 18 for your Federal returns — so you’ve got two whole weeks!) That means we’re in the home stretch for advertising copywriters, who only have a brief window remaining when they know you might be anxious about taxes or angry about the amount of tax you paid and therefore primed and ready for a pitch about some secret way to get your taxes back.
We’ve already written about one of those this year — the Oxford Club was hinting last month about a secret “consumer rebate program” for eligible Americans, also tied to the April 18 filing deadline, and now it’s time to take a look at another. This one is about a way to “tax back” the government… what a cozy thought, eh?
Here’s the headline:
“How YOU Can Legally ‘Tax-Back’ The U.S. Government For $1,720 – $6,988 Starting This Tax Season
**Approximate Deadline To Claim Your First ‘Tax Back’ Check: April 22, 2016”
The new teaser ad is from Zachary Scheidt, who’s telling us that we can “tax back” the government and earn huge returns… all we have to do is subscribe to his Lifetime Income Report to learn the secrets.
As those who have seen some of the previous ads for this newsletter know, it’s almost certainly not that simple to “claim your tax back check” by April 22 — but it’s probably not an outright lie, either, Agora’s lawyers are pretty good at making sure there’s a germ of truth in the marketing hype. Just refer back to the highly misleading “Piggyback on Canadian Social Security” ad that we wrote about last year if you want an example (that one was in the ever-popular “make an ordinary investing strategy sound like a hard-to-find secret by giving it a mysterious name” category).
So what is he actually talking about? The ad opens with “investigative” photos of government facilities, showing the “No Trespassing, U.S. Government Property” signs, and he implies that this is the core clue to a “glitch” that lets you “earn real, hold in your hand cash.” Here’s a bit more of the lead-in:
“Many everyday Americans are already claiming what I like to call ‘tax back’ checks — sometimes running into the $1,000s of dollars….
“This isn’t a ‘write-off.’Are you getting our free Daily Update
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“This isn’t a tax credit for installing solar panels on top of your house.
“And this isn’t about starting a home based business… and claiming your children work for you.
“And to be clear, The U.S. government won’t directly pay you this ‘tax back’ cash, and it’s actually not tied in any way to your personal taxes. But, I’ll share the specifics with you in a moment…
“Instead, it’s a simple ‘glitch’ in the system that allows you to earn real, hold in your hand, cash.
“Best of all, this pool of pay-out money is contractually required by the U.S. Internal Revenue Code.”
And then we start to get the feeling that this is just free money!
“As you’re about to see, there’s absolutely no way the government can fix this ‘glitch’ before the next round of ‘tax-back’ checks get cut. (Which, based on my research, could be as soon as April 22nd.)
“The government is way too big and moves way too slow.
“That means… right now… this glitch is there for anyone to act on.
“Get your name on the list and you’ll claim a check.
“It’s as simple as that.
“Even better, there’s nothing illegal or unethical about exploiting this glitch.
“No worrying about an audit. No dealing with lawyers. No sleepless nights worrying you’ve done anything wrong.
“You’re simply claiming back a piece of what’s rightfully yours.”
All you have to do is “get your name on the list?” I knew it, there’s a secret list that people are using all the time to get free stuff, and I’m not on it! That is rightfully mine! Argh!
Oh, wait, it’s an ad. Right. So that’s not actually true. I will put out the guess here that “get your name on the list” means “buy the investment that’s going to generate income.” Not as sexy, but let’s see what else Scheidt says about this “list.”
He spends a few minutes railing about government waste, and about the silly headline-generating government programs we’ve all probably seen trumpeted as reasons the government is incompetent — but by now that’s probably preaching to the choir. Americans are predisposed to consider government to be full of pointless waste (until you try to cut their city’s transportation services, or fire teachers at their kids’ school, or underfund VA hospitals), so it’s easy to generate anger and a “take back what’s mine” feeling… which, naturally, helps sell the newsletter.
Know what else sells newsletters? The idea of a lottery-like windfall. Here’s a bit more from the ad:
“69 Year-Old New Jersey Man Stands To Tax-Back The Gov’t For $393,794
“I want you to meet a man named ‘Bill Palmer.’
“I’ve changed Bill’s name as to protect his personal information AND keep him out of the spotlight.
“But Bill’s story is so impressive, I’ve got to share it…
“A frugal lawyer, he used to drive a low-cost Subaru to work.
“But when it comes to getting “tax back,” this ex-lawyer is king.
“You see, Bill is set to exploit this ‘tax back’ loophole for as much as $393,794 this spring.”
Oh, man! Wouldn’t $393,794 be a nice payout for you? It would be delightful for me. How do I get it?
Uh oh. There’s more…
“… this is NOT a common example, because he’s an insider, this 69 year old is rightfully on track to collect nearly $400,000 in ‘tax back’ money.
“Now I want something to be very clear…
“I don’t expect that you and I can get that type of ‘tax back’ money.
“Like I said, Bill’s story is an extraordinary example.
“However, I want to make sure you know that this opportunity is 100% REAL. It’s making a lot of money for serious folks. Bill is a prime example of just how much money is at stake. If you collect just 1/100th of Bill, you’d be looking at $4,000 in ‘tax back’ money.”
Dammit. $400,000 sounds a lot more fun than $4,000. But still, I wouldn’t turn down either amount — so how do I get on this list? There’s still not been any mention of this costing me anything, so what could go wrong… right?
Hmmmm…. then the ad gets back to our point about that “No Trespoassing” sign in front of “U.S. Government Property”… is the “secret” about to be revealed?
“The ‘Glitch’ That’s Created Your Ability To ‘Tax Back’ The Government….
“Right now I’m going to blow the whistle on this HUGE opportunity….
“The property you’re looking at does NOT belong to the U.S. government.
“And while at first this may not seem like a big deal – a little white lie on a government sign – it’s the key behind our chance to finally get some payback! ….
“… a similar white lie is happening at government buildings across the country.”
Ah, so now we’re getting to the point. This is where the Thinkolator gets started up, so we can feed in some clues about what this “glitch” really is… more from the ad….
“… just like the first building I showed you… this building also DOES NOT belong to the U.S. Government.
“Instead a private company owns these buildings.
“This private company buys the buildings and simply leases them back to the U.S. Government.
“In the case of the IRS building in Fresno, CA, the government pays this private company annual rents of $8,384,000.
“For the New Jersey Building, the government pays this company $7,362,000 per year in rent.
“And the list goes on and on…
“In fact, the government is leasing buildings like these in 31 out of the 50 states….
“In total, there are at least 69 other properties… filled with 1,000s of government works… that are all privately owned by this single company.
“The IRS… DOJ… Border Protection… Homeland Security… Social Security… DOE… BLM… FDA… National Archives… EPA… DOD… and even the U.S. Postal Service…
“They all lease their buildings from this one private company.”
You’re with us so far? Good, so that means the “secret” is just that you can buy a piece of the company that leases offices to the government. And somehow that’s like getting a “tax back” check, because the dividends that company pays you are enabled by the rent checks the government writes.
Which means, I regret to inform you, that you can’t just “get on the list” … you’d have to buy shares of the landlord company. Here’s how Scheidt finally gets around to “revealing” this glitch:
“Each year you work hard and are forced to pay money to the government in the form of taxes.
“Then, the government turns around and pays a portion of that tax money in rent to this private company I’ve been telling you about…
“And because this company trades on the stock exchange… if you simply buy shares in this little-known company… they’ll pay you a quarterly dividend like clockwork.
“It’s like having a portion of your tax money come right back to you. That’s why I call it a ‘tax-back’ check.”
So which company is it this time around? Well, there are a couple real estate firms that specialize in renting to federal, state and local governments (as there are real estate firms that specialize in almost anything you could imagine — public storage, medical office buildings, shopping malls, etc.). Do we get any more clues as to which company it is Scheidt is hinting at?
“Add up all 68 properties and you’ll find $241,453,000 in total rent payments… coming from the U.S. Government… and going into the pockets of this private company.
“That makes this company the SINGLE LARGEST landlord to the U.S. government….
“The Single Best Income Opportunity For 2016
“As good as it’ll feel holding your “tax-back” check in your hand…
“There’s the ‘glitch’ that not many folks know… that makes the whole opportunity even better.
“Because being this type of landlord is such a lucrative business, the government demanded something from this company in return.
“This landlord company, BY LAW, must distribute at least 90 percent of its “taxable income” in the form of “tax back” checks.”
OK, so that’s not a glitch — that is simply a way of saying that this company is a Real Estate Investment Trust (REIT). Probably almost all of you have heard of this, and it’s not a secret or sneaky glitch from the tax code, it’s the result of an intentional move to make commercial real estate more accessible to individual investors. REITs were first created under President Eisenhower in 1960 and have become pretty popular over the past 30 years or so as a way for individual investors to generate income from real estate ownership.
The “glitch” that Scheidt refers to is intentional, it is the part that makes this type of security work as an investment — if real estate companies were taxed at the corporate level they wouldn’t have much income to distribute… so instead, they’re pass-through entities that don’t pay corporate taxes as long as they distribute at least 90% of what would be their taxable income to their shareholders in the form of dividends. The taxes still get paid, but they get paid as individual income taxes by shareholders instead of as corporate taxes by the company (these dividends don’t qualify for the lower tax rates that dividends sometimes enjoy — they’re fully taxable income, like the coupon payments you’d get from a bond). Unless you hold your REIT shares in a Roth IRA that will never be taxed, then I suppose it could be a bit of a “glitch” (I like to hold my REITs in a Roth when I can, partly for that reason). The government did not require this particular company to be a REIT or to pay dividends just because it owns government buildings.
So… which REIT is it that Lifetime Income Report is touting?
Well, we get one further clue — the “annual payout schedule” that Scheidt includes toward the ad, which includes examples that indicate you can buy 100 shares and get “Tax-back income” of $172, or 10,000 shares and get tax-back income of $17,200. And I’ll give the copywriters some credit for that, since these kinds of ads don’t usually say anything about the fact that the $172,000 payout hinted at requires you to own 100,000 shares… though they still don’t put it on context by sharing the actual cash investment that would be required to buy those 100, 10,000 or whatever number of shares and get your “tax-back income”.
So who is it? Thinkolator sez this is Government Properties Income Trust (GOV), which is indeed a REIT that owns mostly government-leased office space, and which does pay an annual dividend of $1.72 per share (divided into quarterly payments).
Which is actually an unusually high dividend — that’s a 9.5% yield at the current $18 share price, so it would indeed cost you $1,800 to earn an annual dividend of $172. Which ain’t bad.
But most REITs, particularly those that are closest to being in a similar business, have yields that are less than half as high as GOV’s — Columbia Propert (CXP) yields a little over 5%, SL Green (SLG) 3% and Boston Properties (BXP) just 2%. There aren’t many comparable publicly traded REITs right now, but there are some similar unlisted private real estate trusts (including one owned by Mighty Morphin Power Rangers creator Haim Saban, and several others owned by hedge funds or wealthy individuals, like the several National Government Properties funds).
The other large publicly traded REITs that have some significant government exposure, like Boston Properties (BXP) or Vornado (VNO) or Washington REIT (WRE), do so by virtue of their geographic focus in the DC area, which is, understandably, the most concentrated government leasing area. And the one real “pure play” competitor I know of, Easterly Government Properties (DEA), is much, much smaller, is more of a startup “growth REIT” that’s trying to build up a portfolio, and has only been public for about a year (GOV has been public since 2009).
So there aren’t many direct comparisons, but GOV is still looking pretty cheap with that near-10% yield. Why is that?
Well, part of the problem is likely the lack of per-share growth — you pay more for a dividend that’s growing than you do for a dividend that’s stagnant, and GOV hasn’t raised their quarterly payout since 2012. The REIT itself has grown revenue and cash flow pretty nicely over the past five years, but that growth was funded by new share offerings and debt, which dilutes the per-share impact.
And it looks like the Funds from Operations per share have fallen as well — they had a few good years coming out of the 2009 collapse, with FFO growing in the $1.50-$2+ range per share, and the stock grew accordingly, but for some reason FFO per share took a big tumble late in 2015. And that’s really when GOV started to be a lousy stock, as it gave up on several years of fairly flat performance and 7% yield and started falling.
I noted that last Fall, when the stock had fallen and it was being teased by Briton Ryle of The Wealth Advisory as a way to “legally tap the coffers of the IRS” — back then it carried an 11% yield, but the same worries were there about the lack of dividend growth. The same temptation was there as well, since it would stand to reason that the government should be a pretty good tenant — government never gets much smaller, except for small pockets and projects, and their checks always clear.
So what’s the issue, other than the fact that it’s not really a growth business right now so shouldn’t be valued as if the dividend is going to double over the next decade? Well, there are a few basic concerns — some big picture, some more specific.
First is the potential of rising interest rates, which is a perceived problem for most REITs — they almost all borrow money to help finance acquisitions, and as rates rise they’ll have to pay higher interest on that debt and compete, as income investments, with safer investments (like bonds) that become more attractive as their coupon payments grow higher. REITs in general do fairly well through interest rate hiking cycles, but that’s generally because such cycles come with economic growth and inflation and rents can keep up with the inflation rate. GOV may be less flexible than some REITs because many of their leases have 10-20 year terms or longer and don’t necessarily have inflation protection (rents rise, if at all, in specific bumps over time, not based on inflation).
Still, they should be pretty stable, right? They do not have big exposure to companies that could go bankrupt, and though there is some concentration in their portfolio it is with agencies that presumably are never going to shrink, like the Internal Revenue Service and Customs and Immigration, which between them make up about 20% of GOV’s rental income.
How about lease renewals? Are there big expirations coming due that might not renew? GOV says no, they expect less than 1% of their annualized rent to be “at risk of vacating or downsizing” over the next two years… though they are in a fairly important multi-year renewal cycle, since more than 60% of their square footage is up for renewal by 2020. So there is some risk there, particularly as the federal government has been focused on shrinking the amount of office space per employee.
Big debt maturities coming soon? Not really, their average debt maturity and their average remaining lease term are both the same, about four years, and the next really big debt maturity is in 2019… the next few years are not particularly worrisome, and overall coverage seems reasonable (total debt is about 6X EBITDA).
GOV also owns a huge stake in another REIT outside of the government properties segment, they own about 25 million shares of Select Income REIT (SIR), which is a net lease REIT that leases whole buildings to single tenants. SIR pays them a dividend of about $50 million a year. GOV reported a big asset impairment charge of about $200 million last year, and it could be that was mostly or entirely from the falling share price of SIR (I haven’t checked the filings on that).
And that, then, is where perhaps the biggest problem with GOV arises. Why did they buy Select Income REIT? Well, it looks like it was because their external managers, who also manage SIR, wanted them to. That doesn’t smell so good.
REITs aren’t all the same — some are self-managed, meaning that they have employees who run the trust and operate the properties and decide which properties to buy and sell, while others are externally managed, meaning that a real estate management company effectively manages the real estate portfolio and the operations of the buildings for the trust, which itself doesn’t have a lot of staff.
Being externally managed doesn’t necessarily mean a REIT is a worse investment — but it brings in some extra risks, particularly if the external manager is doing things like having one of their REITs buy shares of one of their other REITs, and sometimes (not always) the operating costs are higher.
When it comes to GOV’s manager, specifically, that’s a firm called the RMR Group (RMR). Last year, the various REITS managed by this particular management company, RMR, decided to buy out about half of RMR as a group and sign 20-year advisory agreements. So GOV will not be ditching their external manager anytime soon… and there isn’t much evidence that this external manager is creating a lot of shareholder value — their four REITs (HPT, SNH, GOV and SIR) have all done significantly worse than the average REIT over the past five years in terms of total return (that means “dividends included”). SIR has not been around as long, but SIR and HPT are the only two that have come close to the performance of the average REIT (as measured by the Vanguard REIT index, ticker VNQ) — both are within 10-20% of that benchmark, the other two, GOV and SNH, have done far worse.
RMR shares were spun out by those four REITs who bought out their management company last year, so shareholders would have received a little taste of owning the management company — but it is a very little taste, for every hundred shares of GOV, for example, you would have received one share of RMR. That’s currently worth about $24 a share after trading at about $12 after the spinoff late last Fall, so it would have provided a little effective boost for your dividend if you had sold the RMR shares that were spun out to you (though RMR shares have doubled since the spinout, so holding them would have worked better). Indeed, perhaps it’s illustrative of the concerns that REIT investors have about these four RMR-managed REITs that RMR shares are up almost 70% this year while GOV is up 17%.
So what are we left with? Do we worry about GOV’s management and the fact that they were stuck with an investment in SIR and in a long-term management contract with a manager who has failed to generate any growth over five years? Or do we just accept that they have a disliked manager and perhaps that makes them a contrarian investment with some appeal? That will have to be your call, I’m afraid. Personally, though I haven’t fully researched the idea yet my initial research makes me think Easterly Government Properties (DEA) is a bit more appealing, partly because it has had some insider buying lately and has been able to grow FFO per share — but they’re still in the growth phase, have just started building up debt and buying buildings, and the yield is not nearly so high (currently yields a little less than 5%)… and they might also be a little bit more steady, one benefit of their newness is that have almost no lease maturities coming over the next few years.
Government Properties Trust (GOV) is a non-growing REIT, and management has emphasized their conservative nature (as in this presentation from February). They haven’t grown the portfolio much in recent years because, they say, of the competition for properties… they’ve even sold a few properties as those have become less attractive (no long-term renewal likely, etc.), which seems nice and sober, but they do also have quite a bit of debt. They have tenants with very good credit, and should never be faced with a bankruptcy or eviction… but they also can’t jack up rents easily, and some of their properties, while they’re not super-specialized like shopping malls or hospitals, are not necessarily easy or lucrative to rent to non-government office tenants if their primary tenants don’t renew. And things are not likely to be different anytime soon, because their outside manager is under contract for 20 years… so, whaddya think? Does this near-10% yield and great tenants have some appeal, or do the negatives outweigh that yield? Let us know with a comment below.
P.S. I didn’t mention that the April 22 date also does match GOV, even though I’d quibble with it being characterized as a “claim date for a tax-back payment” — that’s likely to be the next ex-dividend date for GOV’s quarterly dividend (the last one was January 22, looks to me like they haven’t officially announced the next quarter’s payout yet). That would be the date by which you have to own the shares to collect the dividend for the first quarter of 2016, which will probably continue to be 43 cents per share.
And GOV’s dividends have actually been a bit more tax-efficient than many REITs — for 2015, 37% of the dividend was classified as “return of capital”, meaning, to be a little bit snarky about it, that their income wasn’t sufficient to cover the payout so they sent you back some of your own money (and you don’t have to pay taxes immediately on return of capital, it just reduces your cost basis). By way of comparison, DEA’s “return of capital” portion of the dividend was 15%, and WRE’s was 21%. REITs generally announce that tax treatment for their dividends in January, so you can check it for others as well if you’re curious — for many REITs it will be zero, with the dividend fully covered by income or capital gains.
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