How to Collect Reverse Income Tax Payouts Four Times a Year

Q2 2013 Oxford Communiqué Investor Report: How to Collect Reverse Income Tax Payouts Four Times a Year By Chris Mathai, Research Team, The Oxford Club NOTE: The Oxford Club is not a broker, dealer or licensed investment advisor. No person listed here should be considered as permitted to engage in rendering personalized investment, legal or other professional advice as an agent of The Oxford Club. The Oxford Club does not receive any compensation for these services. Additionally, any individual services rendered to The Oxford Club members by those mentioned are considered completely separate from and outside the scope of services offered by The Oxford Club. Therefore if you choose to contact anyone listed here, such contact, as well as, any resulting relationship, is strictly between you and the Pillar One service. 105 West Monument Street Baltimore, Maryland 21201 410.864.1751

Regardless of your politics, there s one thing we are all witnessing For better or worse (I say worse), our federal government is getting bigger. The trend has been in place for several decades but has really kicked into high gear over the last 12 years. Our current president Barrack Obama and his immediate predecessor George W. Bush both rode into Washington advocating smaller government. Neither stuck to the plan Bush left the White House having overseen the biggest federal budget expansion since Franklin Delano Roosevelt seven decades ago. As a result, Mr. Bush was the first president in history to implement budgets that crossed the $2 trillion a year mark. However, Bush now looks like an underachiever. President Obama has presided over the most rapid growth in government this country has ever seen when measured by budget expenditures. 1 Federal spending during Obama s reign has totaled between $3.5 trillion and $3.6 trillion in each of the past four years. And 2012 marked the fourth year in a row with an annual budget deficit of more than $1 trillion. Looking forward, the federal budget authorizes $3.8 trillion in spending for 2013 and could conceivably exceed $4 trillion depending on the final tab for social assistance programs and costs related to exiting Afghanistan. Regardless of this year s final tally, not since World War II when the nation mobilized to fight an overseas war against the Axis powers and recover from the Great Depression has government spending played as large a role in the economy as it does today. Basically, we ve had in the past twelve years an unending growth in government and ever higher increases in the level of spending. Growing hand-in-hand with the additional spending is the physical infrastructure of our government. More people on the payroll means more office space needed to house them. And one company in particular is benefiting from this need It s what we ve dubbed our Reverse Income Tax Fund. 1 www.usgovernmentspending.com 2

Collecting $700,000-a-Month Income From the IRS From Just One Investment Despite collecting trillions in tax revenue from around the country every year, the IRS (and dozens of other government agencies, for that matter) doesn t own the buildings it works in. Rather, it rents the vast majority of its properties. Government Properties Income Trust (NYSE: GOV), one of the largest owners of government leased space, is happy to accommodate them. Government Properties Income Trust GOV for short is a Real Estate Investment Trust (REIT) that owns commercial properties majority leased to government tenants. GOV has a huge $1.7 billion investment portfolio that currently includes 84 properties in 32 states and Washington D.C. containing 10.2 million square feet of rentable space. The client list includes 34 U.S. government agencies, 27 state government agencies and the United Nations. 94% of its annualized rental income is paid by the U.S. Government, 10 state governments and the United Nations. 2 And one of the trust s biggest tenants is the (seemingly ever-expanding) Internal Revenue Service. GOV has dozens of leases with the IRS at buildings around the country. Here s just one example Last December, the IRS renewed its lease on the building it rents from GOV in Fresno, California. The terms of the lease were not fully disclosed... But it is public information that the lease is for more than $8 million a year. And it is a 10-year lease ending in late 2021. Interestingly, according to public documents, the lease does not provide an early termination right by the tenant prior to the lease expiration in late 2021. So the IRS is locked in for 10 years paying roughly $700,000 a month in rent on that building. A 10-year lease with no right of early termination would be tough for a normal business. But the IRS is no normal business. It will be here a decade and a century from now. Your business may succeed or fail... but the government s tax collection business the Internal 2 www.govreit.com 3

Revenue Service will certainly live on. Being the IRS s landlord has its benefits. However, as its client list indicates, GOV is an equal opportunity landlord. It takes in money from all sorts of federal, state and international agencies. I m From GOV and I m Here to Help You The Federal Government is by far GOV s largest tenant by annualized rental income and was responsible for approximately 71.7% of annualized rental income as of December 31, 2012. The IRS is GOV s biggest single agency tenant (measured by square footage). The next-biggest tenant is U.S. Customs & Immigration. These two make up over 20% of GOV s rental income. The next biggest in terms of rental income is the Department of Justice. And as of December 31, 2012, 92.7% of GOV s rentable square feet were leased. Importantly, none of these businesses are going to go out of business. You really don t need to worry about getting paid. But it gets better: GOV pays no income taxes on the rent it earns... You see, GOV, because it s a REIT, has a special tax status where it doesn t have to pay income taxes on its rent. Instead, it passes along nearly all the rent it earns to you in the form of dividends. The law requires GOV to forward at least 90% of all profits directly to you. As long as it does that it can keep this special tax status. So right now, GOV is paying out a dividend of nearly 7%. Think about that dividend for a minute... Banks are paying under one-half percent. Five year CDs return 1.5%. And ten year treasuries paying under 2% aren t much better. With inflation at 1.6%, you re barely breaking even if not actually losing money. And yet with remarkably low risk, our Reverse Tax Fund is generating yields 230% higher than the average dividend paying DJIA stock And a stunning 358% higher return than Treasuries. Better yet, these payout rates are steadily marching higher and with as few as 1,000 shares, you could automatically start collecting $1,720 or more every year. 4

Government Spending Winds up in Your Hands (for Once) Most ordinary businesses suffer from a common Achilles heel: There s no certainty to the cash flow. Not in this case As a landlord, you ll never find a better tenant than the U.S. government, and certainly none more perfect than the IRS. This tenant can t run out of money. GOV, acting as the landlord, is collecting millions in regular rent payments on these government leases month after month for years to come. And as it does, it will be passing most of that right along to you. This is the closest thing you ll ever find to taking candy from a baby. And not only does GOV enjoy having the U.S. government as the source of 94% of its income But it can also circle on the calendar the exact dates it s going to get paid for literally decades to come. That s because the IRS and other government agencies typically agree to lease terms for 10 to 20 years and with extensions or renewals for an additional 5 to 10 years. 3 In other words: Income keeps coming in month after month as if on automatic pilot. Payments you don t have to worry about: they always show up. And as mentioned earlier, the federal government isn t getting any smaller... quite the opposite. In fact, due to Obamacare which predominantly goes into effect on January 1, 2014 the IRS is further expanding its ranks. The Internal Revenue Service is in the process of hiring thousands of new staff members to handle the penalty tax and dozens (47 different provisions according to a recent GAO study) of other compliance issues of the new healthcare plan. (It s important not to understate the Government Expansion Has Been Good for GOV (Revenue - $Millions) $300 FY2009 FY2010 FY2011 FY2012 FY2013 E FY2014 E FY2015 E $250 $200 $150 $100 3 GOV Investor s Presentation, February 2013 5

federal government s role in the size and expansion of state and local governments. The stimulus gave tens of billions of federal dollars to the states in order to prevent cutbacks and/or allow for increases in the number of state and local workers.) Obviously, thousands of new agents and additional employees mean thousands of new offices. GOV is happy to assist them and has been increasing its available retail space to accommodate the expansion. Case in point: It added thirteen new income properties to the portfolio in 2012 at an average cap rate of 8.2%. (The cap rate is the annual return on an investment building from your rent after expenses. In short, it is the rent after expenses divided by the building s cost. It is the most commonly quoted figure in rental real estate.) 4 The higher the cap rate the more income there is to distribute to you. Long Term Tenants = Long Term Income Again, these tenants aren t going anywhere literally. First of all, there are hundreds of leases spread out across the country. Second, the leases are with reliable government clients. And thirdly, the leases are long term. (Just 8.8% of these contracts expire in 2013, and only 3.3% in 2014. More than half of the leases expire in 2017 or later.) Not only is the government entrenched and growing, but it couldn t get out of some of these leases even if it wanted to (like the IRS lease in Fresno). GOV also protects itself by building in inflation adjustments and property tax adjustments if either of those get out of line. In other words, GOV has it covered. Take for example, a recent lease deal the company struck in Stockton, California. It s a building that s 100%-leased to the Department of Immigration and Customs Enforcement. The remaining lease term is 14.7 years. And the important cap rate number is 8.8%. This Stockton deal is similar to dozens of other deals GOV has settled on over the years. Since its initial public offering in 2009, GOV has acquired nearly a billion dollars worth of property, at an average cap rate of 8.7%. It has done a great job of locking up 8%-plus returns through its long-term leases. It owns buildings all over the USA, from Tampa to San Diego to Washington, DC. 5 4 Government Properties Income Trust 2012 Annual Report 6

Nearly 100% percent of the trusts revenues are recurring. It doesn t have to do anything extra or special to earn them from year to year. So it can pay out hefty dividends to you... for years. Last year, the trust paid a total dividend of $1.69, versus $1.67 in 2011, and is expected to pay $1.72 this year for a current yield of 6.8%. Investing in GOV allows you to safely get paid 6-8% interest from the government for years and still have upside potential. Getting a piece of GOV, our Reverse Income Tax Fund, could be the smartest incomegenerating move you ll ever make And give you some small satisfaction that the IRS is finally paying you something. Action to Take: Buy Government Properties Income Trust (NYSE: GOV) at market. Use our customary 25% trailing stop to protect your principal and your profits. 7

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