Summary
- Postal Realty Trust is a fast-growing REIT that's focused on owning mission-critical USPS properties.
- It carries a strong balance sheet and recently raised its dividend by 4.4%.
- The stock currently trades near its 52-week low, resulting in potentially strong long-term returns.
Plenty of REITs remain well off their 52-week highs, as it appears that this sector has been written off by many investors due to higher interest rates. This broad stroke has even impacted REITs with mission-critical properties such as Postal Realty Trust ( PSTL ), pushing up its dividend yield to 6.3%. In this article, I highlight why PSTL is attractively valued while trading close to its 52-week low for potentially strong returns.
Why PSTL?
Postal Realty Trust is an internally-managed REIT that's the largest owner of properties leased to the U.S. Postal Service. It became public in 2019 with a portfolio of 270 properties and has rapidly grown its portfolio to 1,232 owned properties and another 397 properties under management across 49 states.
PSTL's acquisition strategy is rather straightforward as it targets mission critical properties operated by the US Postal Service, an organization that prides itself on delivering mail in rail, sleet, and snow. This includes essential last mile, flex, and industrial properties. Their essential nature is reflected by the very high occupancy rate. As shown below, PSTL has maintained very high occupancy since IPO with it never falling below 99.6%.
Meanwhile, PSTL continues its robust acquisition strategy, having acquired 273 properties in the first 10 months of 2022, with another 10 properties under definitive contracts towards as of November. This hasn't yet translated to bottom line growth, however, as FFO per share was flat YoY at $0.25 during the third quarter.
I don't find that to be a concern, however, as PSTL is still a small REIT with under $400 million equity market cap. I would expect for accretion to show up over time, as PSTL is able to spread its corporate overhead and operating costs over a larger property base.
Risks to PSTL, of course, include its outsized exposure to just one entity. However, the USPS is probably one of the safest entities to invest in, and this is reflected by the 98.8% historical weighted average lease retention rate that PSTL has enjoyed over the past 10-plus years. Moreover, PSTL has just 8.5% and 11.6% of its leases maturing this year and next before rising to 17% and 20% in 2025 and 2026.
Looking forward, PSTL has plenty of opportunities to consolidate USPS properties, as it's the largest institutional player in a space that's highly fragmented with small private owners. This is supported by management comments on its growth runway during the last conference call :
We are the largest owner, manager and consolidator of the Postal Services’ Irreplaceable Logistics Network. However, we are still in the early innings of our growth story and have plenty of runway ahead.
Our management team has over 30 years of cycle-tested experience and a strong network of relationships built over time, which we believe are meaningful differentiators. We are encouraged by both our internal and external growth initiatives and will continue to be prudent stewards of capital and deploy it in accretive and appropriate manner to drive growth in this dynamic environment.
This growth strategy is supported by a strong balance sheet with a net debt to EBITDA ratio of 5.3x, sitting below the 6.0x level generally regarded as safe for REITs. It also has a strong fixed charge coverage ratio of 5.2x. Moreover, 83% of PSTL's debt is floating rate and it has no notable debt maturities until 2026 while carrying an attractively low weighted average interest rate of 3.6%.
Notably, PSTL recently raised its quarterly dividend by 4.4% to $0.235 per share. This equates to a 90% dividend to AFFO payout ratio. While this appears to be somewhat elevated, it's balanced by the steady recurring income stream from its underlying properties. Plus, this results in a 6.3% dividend yield and could attract more investors after inflation concerns ease. This could attract more investors and raise the share price, thereby lowering PSTL's cost of equity for future acquisitions.
Lastly, I find PSTL to be attractive at the current price of $14.97, sitting close to its 52-week low of $14.14, and with a forward P/FFO of 16.2. Given the quality of PSTL's underlying property base, I would expect PSTL to trade in a long-term P/FFO range between 18 and 20x. Analysts have a consensus Buy rating on PSTL with an average price target of $18, translating to a potential one-year 26% total return.
Investor Takeaway
Postal Realty is an attractive small cap REIT with a unique niche in USPS properties, and has been painted with a broad brush, as its share price sits close to its 52-week lows. It has a long growth runway ahead, supported by a strong balance sheet and an experienced management team. Lastly, investors seeking to participate in this growth get paid a handsome 6.3% yield with potential for capital appreciation.
For further details see:
Postal Realty Delivers 6% Yield In Rain, Sleet, And Snow