Intrinsic value of Government Properties Income Trust - GOV

Previous Close

$18.85

  Intrinsic Value

$2.43

stock screener

  Rating & Target

str. sell

-87%

Previous close

$18.85

 
Intrinsic value

$2.43

 
Up/down potential

-87%

 
Rating

str. sell

Our model is not good at valuating stocks of financial companies, such as GOV.

We calculate the intrinsic value of GOV stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  3.61
  9.40
  8.96
  8.56
  8.21
  7.89
  7.60
  7.34
  7.10
  6.89
  6.70
  6.53
  6.38
  6.24
  6.12
  6.01
  5.91
  5.82
  5.73
  5.66
  5.59
  5.53
  5.48
  5.43
  5.39
  5.35
  5.32
  5.28
  5.26
  5.23
  5.21
Revenue, $m
  258
  282
  308
  334
  361
  390
  419
  450
  482
  515
  550
  586
  623
  662
  703
  745
  789
  835
  883
  933
  985
  1,039
  1,096
  1,156
  1,218
  1,283
  1,351
  1,423
  1,498
  1,576
  1,658
Variable operating expenses, $m
 
  208
  226
  246
  266
  287
  309
  331
  355
  379
  405
  431
  459
  487
  517
  548
  581
  614
  650
  686
  725
  765
  807
  851
  897
  944
  995
  1,047
  1,102
  1,160
  1,220
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  191
  208
  226
  246
  266
  287
  309
  331
  355
  379
  405
  431
  459
  487
  517
  548
  581
  614
  650
  686
  725
  765
  807
  851
  897
  944
  995
  1,047
  1,102
  1,160
  1,220
Operating income, $m
  67
  75
  81
  88
  95
  103
  111
  119
  127
  136
  145
  155
  165
  175
  186
  197
  208
  220
  233
  246
  260
  274
  289
  305
  322
  339
  357
  376
  395
  416
  438
EBITDA, $m
  138
  152
  166
  180
  195
  210
  226
  242
  260
  278
  296
  316
  336
  357
  378
  401
  425
  450
  475
  502
  530
  560
  590
  622
  656
  691
  728
  766
  807
  849
  893
Interest expense (income), $m
  41
  49
  53
  58
  63
  69
  74
  80
  86
  92
  99
  106
  113
  120
  128
  136
  144
  153
  162
  171
  181
  191
  202
  213
  225
  237
  249
  263
  277
  292
  307
Earnings before tax, $m
  23
  26
  28
  30
  32
  34
  36
  39
  41
  44
  46
  49
  52
  55
  58
  61
  64
  68
  71
  75
  79
  83
  88
  92
  97
  102
  107
  113
  119
  125
  131
Tax expense, $m
  0
  7
  8
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
  15
  16
  16
  17
  18
  19
  20
  21
  23
  24
  25
  26
  28
  29
  30
  32
  34
  35
Net income, $m
  58
  19
  20
  22
  23
  25
  27
  28
  30
  32
  34
  36
  38
  40
  42
  44
  47
  49
  52
  55
  58
  61
  64
  67
  71
  75
  78
  82
  87
  91
  96

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  30
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  2,385
  2,566
  2,796
  3,035
  3,284
  3,543
  3,813
  4,092
  4,383
  4,685
  5,000
  5,326
  5,666
  6,020
  6,388
  6,772
  7,172
  7,589
  8,024
  8,478
  8,952
  9,448
  9,966
  10,507
  11,074
  11,666
  12,286
  12,936
  13,615
  14,328
  15,074
Adjusted assets (=assets-cash), $m
  2,355
  2,566
  2,796
  3,035
  3,284
  3,543
  3,813
  4,092
  4,383
  4,685
  5,000
  5,326
  5,666
  6,020
  6,388
  6,772
  7,172
  7,589
  8,024
  8,478
  8,952
  9,448
  9,966
  10,507
  11,074
  11,666
  12,286
  12,936
  13,615
  14,328
  15,074
Revenue / Adjusted assets
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
  0.110
Average production assets, $m
  1,516
  1,659
  1,807
  1,962
  2,123
  2,290
  2,464
  2,645
  2,833
  3,028
  3,231
  3,443
  3,662
  3,891
  4,129
  4,377
  4,636
  4,905
  5,186
  5,480
  5,786
  6,107
  6,441
  6,791
  7,158
  7,541
  7,941
  8,361
  8,800
  9,261
  9,743
Working capital, $m
  0
  -33
  -36
  -39
  -42
  -45
  -49
  -52
  -56
  -60
  -64
  -68
  -72
  -77
  -82
  -86
  -92
  -97
  -102
  -108
  -114
  -121
  -127
  -134
  -141
  -149
  -157
  -165
  -174
  -183
  -192
Total debt, $m
  1,392
  1,523
  1,664
  1,812
  1,965
  2,125
  2,291
  2,463
  2,642
  2,828
  3,022
  3,223
  3,432
  3,650
  3,877
  4,113
  4,360
  4,617
  4,885
  5,164
  5,457
  5,762
  6,081
  6,414
  6,763
  7,128
  7,510
  7,910
  8,329
  8,768
  9,227
Total liabilities, $m
  1,450
  1,581
  1,722
  1,870
  2,023
  2,183
  2,349
  2,521
  2,700
  2,886
  3,080
  3,281
  3,490
  3,708
  3,935
  4,171
  4,418
  4,675
  4,943
  5,222
  5,515
  5,820
  6,139
  6,472
  6,821
  7,186
  7,568
  7,968
  8,387
  8,826
  9,285
Total equity, $m
  935
  985
  1,074
  1,166
  1,261
  1,361
  1,464
  1,572
  1,683
  1,799
  1,920
  2,045
  2,176
  2,312
  2,453
  2,600
  2,754
  2,914
  3,081
  3,256
  3,438
  3,628
  3,827
  4,035
  4,252
  4,480
  4,718
  4,967
  5,228
  5,502
  5,788
Total liabilities and equity, $m
  2,385
  2,566
  2,796
  3,036
  3,284
  3,544
  3,813
  4,093
  4,383
  4,685
  5,000
  5,326
  5,666
  6,020
  6,388
  6,771
  7,172
  7,589
  8,024
  8,478
  8,953
  9,448
  9,966
  10,507
  11,073
  11,666
  12,286
  12,935
  13,615
  14,328
  15,073
Debt-to-equity ratio
  1.489
  1.550
  1.550
  1.550
  1.560
  1.560
  1.560
  1.570
  1.570
  1.570
  1.570
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.590
  1.590
  1.590
  1.590
  1.590
  1.590
  1.590
  1.590
  1.590
  1.590
  1.590
  1.590
  1.590
Adjusted equity ratio
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384
  0.384

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  58
  19
  20
  22
  23
  25
  27
  28
  30
  32
  34
  36
  38
  40
  42
  44
  47
  49
  52
  55
  58
  61
  64
  67
  71
  75
  78
  82
  87
  91
  96
Depreciation, amort., depletion, $m
  71
  78
  84
  92
  99
  107
  115
  124
  132
  142
  151
  161
  171
  182
  193
  205
  217
  229
  242
  256
  270
  285
  301
  317
  334
  352
  371
  391
  411
  433
  455
Funds from operations, $m
  119
  96
  105
  114
  123
  132
  142
  152
  162
  173
  185
  197
  209
  222
  235
  249
  264
  279
  294
  311
  328
  346
  365
  385
  405
  427
  449
  473
  498
  524
  551
Change in working capital, $m
  -5
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
Cash from operations, $m
  124
  99
  108
  117
  126
  135
  145
  155
  166
  177
  189
  201
  213
  226
  240
  254
  269
  284
  300
  317
  334
  353
  372
  392
  413
  434
  457
  481
  506
  533
  560
Maintenance CAPEX, $m
  0
  -71
  -78
  -84
  -92
  -99
  -107
  -115
  -124
  -132
  -142
  -151
  -161
  -171
  -182
  -193
  -205
  -217
  -229
  -242
  -256
  -270
  -285
  -301
  -317
  -334
  -352
  -371
  -391
  -411
  -433
New CAPEX, $m
  -233
  -143
  -149
  -155
  -161
  -167
  -174
  -181
  -188
  -195
  -203
  -211
  -220
  -229
  -238
  -248
  -259
  -270
  -281
  -294
  -307
  -320
  -335
  -350
  -366
  -383
  -401
  -420
  -439
  -460
  -482
Cash from investing activities, $m
  -215
  -214
  -227
  -239
  -253
  -266
  -281
  -296
  -312
  -327
  -345
  -362
  -381
  -400
  -420
  -441
  -464
  -487
  -510
  -536
  -563
  -590
  -620
  -651
  -683
  -717
  -753
  -791
  -830
  -871
  -915
Free cash flow, $m
  -91
  -114
  -118
  -123
  -127
  -131
  -136
  -141
  -145
  -151
  -156
  -161
  -167
  -174
  -180
  -187
  -194
  -202
  -210
  -219
  -228
  -238
  -248
  -259
  -271
  -283
  -296
  -309
  -324
  -339
  -355
Issuance/(repayment) of debt, $m
  245
  131
  142
  147
  153
  160
  166
  172
  179
  186
  194
  201
  209
  218
  227
  236
  246
  257
  268
  280
  292
  305
  319
  334
  349
  365
  382
  400
  419
  439
  460
Issuance/(repurchase) of shares, $m
  0
  61
  68
  70
  72
  75
  77
  79
  82
  84
  87
  90
  93
  96
  99
  103
  107
  111
  115
  119
  124
  129
  135
  141
  147
  153
  160
  167
  175
  183
  191
Cash from financing (excl. dividends), $m  
  234
  192
  210
  217
  225
  235
  243
  251
  261
  270
  281
  291
  302
  314
  326
  339
  353
  368
  383
  399
  416
  434
  454
  475
  496
  518
  542
  567
  594
  622
  651
Total cash flow (excl. dividends), $m
  143
  78
  91
  95
  99
  103
  107
  111
  115
  120
  125
  130
  135
  140
  146
  152
  159
  165
  173
  180
  188
  197
  205
  215
  225
  235
  246
  257
  270
  282
  296
Retained Cash Flow (-), $m
  22
  -80
  -88
  -92
  -96
  -99
  -103
  -107
  -112
  -116
  -121
  -125
  -131
  -136
  -141
  -147
  -154
  -160
  -167
  -174
  -182
  -190
  -199
  -208
  -217
  -228
  -238
  -249
  -261
  -273
  -286
Prev. year cash balance distribution, $m
 
  30
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  28
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  7
  7
  7
  7
  8
  8
  9
  9
  9
Discount rate, %
 
  9.70
  10.19
  10.69
  11.23
  11.79
  12.38
  13.00
  13.65
  14.33
  15.05
  15.80
  16.59
  17.42
  18.29
  19.21
  20.17
  21.17
  22.23
  23.34
  24.51
  25.74
  27.02
  28.38
  29.79
  31.28
  32.85
  34.49
  36.21
  38.03
  39.93
PV of cash for distribution, $m
 
  25
  2
  2
  2
  2
  2
  1
  1
  1
  1
  1
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  96.6
  93.3
  90.2
  87.4
  84.9
  82.4
  80.2
  78.1
  76.1
  74.3
  72.5
  70.9
  69.3
  67.8
  66.4
  65.0
  63.7
  62.4
  61.2
  60.0
  58.8
  57.7
  56.7
  55.6
  54.6
  53.6
  52.7
  51.7
  50.8
  49.9

Government Properties Income Trust is a real estate investment trust (REIT). The Company operates through two segments: ownership of properties that are primarily leased to government tenants and its equity method investment in Select Income REIT (SIR). The Company's properties are located in areas, including Alabama, Arizona, California, Colorado, District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Hampshire, New Jersey and New Mexico. As of December 31, 2016, the Company owned 73 properties (95 buildings). As of December 31, 2016, the Company's properties were located in 31 states and the District of Columbia, and contained approximately 11.4 million rentable square feet.

FINANCIAL RATIOS  of  Government Properties Income Trust (GOV)

Valuation Ratios
P/E Ratio 23.1
Price to Sales 5.2
Price to Book 1.4
Price to Tangible Book
Price to Cash Flow 10.8
Price to Free Cash Flow -12.3
Growth Rates
Sales Growth Rate 3.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 1126.3%
Cap. Spend. - 3 Yr. Gr. Rate 11.4%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 148.9%
Total Debt to Equity 148.9%
Interest Coverage 2
Management Effectiveness
Return On Assets 4.3%
Ret/ On Assets - 3 Yr. Avg. 0.2%
Return On Total Capital 2.6%
Ret/ On T. Cap. - 3 Yr. Avg. -1.3%
Return On Equity 6.1%
Return On Equity - 3 Yr. Avg. -2.5%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 67.1%
Gross Margin - 3 Yr. Avg. 68.3%
EBITDA Margin 52.3%
EBITDA Margin - 3 Yr. Avg. 18%
Operating Margin 26%
Oper. Margin - 3 Yr. Avg. 26.8%
Pre-Tax Margin 8.9%
Pre-Tax Margin - 3 Yr. Avg. -22%
Net Profit Margin 22.5%
Net Profit Margin - 3 Yr. Avg. -13%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 210.3%

GOV stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the GOV stock intrinsic value calculation we used $258 million for the last fiscal year's total revenue generated by Government Properties Income Trust. The default revenue input number comes from 2016 income statement of Government Properties Income Trust. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our GOV stock valuation model: a) initial revenue growth rate of 9.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9.7%, whose default value for GOV is calculated based on our internal credit rating of Government Properties Income Trust, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Government Properties Income Trust.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of GOV stock the variable cost ratio is equal to 73.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for GOV stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Government Properties Income Trust.

Corporate tax rate of 27% is the nominal tax rate for Government Properties Income Trust. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the GOV stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for GOV are equal to 587.6%.

Life of production assets of 21.4 years is the average useful life of capital assets used in Government Properties Income Trust operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for GOV is equal to -11.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $935 million for Government Properties Income Trust - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 96.048 million for Government Properties Income Trust is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Government Properties Income Trust at the current share price and the inputted number of shares is $1.8 billion.

RELATED COMPANIES Price Int.Val. Rating
RMR RMR Group Cl A 56.65 85.63  str.buy
SIR Select Income 25.37 5.78  str.sell
HIW Highwoods Prop 51.46 5.18  str.sell
NRE NorthStar Real 14.20 2.62  str.sell
LXP Lexington Real 10.56 1.45  str.sell
DEA Easterly Gover 20.82 3.59  str.sell
VNO Vornado Realty 76.60 13.68  str.sell
CLI Mack-Cali Real 22.32 4.24  str.sell
EQC Equity Commonw 30.17 17.54  sell

COMPANY NEWS

▶ First Potomac shareholders vote to approve acquisition by Government Properties   [Sep-26-17 01:10PM  American City Business Journals]
▶ Government Properties Income Trust reports 2Q results   [Aug-01-17 10:54PM  Associated Press]
▶ First Potomac cutting more than half of staff ahead of acquisition   [03:06PM  American City Business Journals]
▶ First Potomac to be acquired by Government Properties for $1.4B   [09:37AM  American City Business Journals]
▶ First Potomac to be acquired by Government Properties for $1.4B   [09:25AM  American City Business Journals]
▶ Stock futures point to attempted rebound   [09:12AM  MarketWatch]
Financial statements of GOV
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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