2023-07-19 09:00:05 ET
Summary
- Postal Realty Trust, Inc. is a unique small-cap REIT with only one customer, the United States Postal Service.
- They are the leading consolidator in this fragmented market, owning 6% of the properties leased to the USPS.
- Growth has been rapid since their 2019 IPO, with revenue up 34% and AFFO up 29% in 2022.
- Investors interested in a small-cap REIT with a unique asset class may find the current 6.3% dividend attractive.
Investment Thesis
Postal Realty Trust, Inc. (PSTL) is a unique small cap REIT, with only one customer, the United States Postal Service ((USPS)).
They are the leading consolidator in the extremely fragmented market for properties leased to the USPS, owning about 6% of these properties. PSTL enjoys nearly perfect occupancy and lease renewal rates.
Insider ownership is unusual high (>10%). There are no public REIT competitors.
Growth has been rapid since their 2019 IPO. In 2022 they acquired about 1.4% of the properties and 1.0% of the square feet in the market. Revenue grew 34% and AFFO grew 29% in 2022, although AFFO/share declined 4%.
Investors interested in a small cap REIT with unusual assets may find the current 6.3% dividend attractive.
Introduction
Because PSTL has essentially only one customer (with extremely minor exceptions, ignored here after), we will look at that customer in some detail. We will then look at the origin and investment rationale for PSTL, the current state of play, issues and risks, offer some analysis, discuss valuation, and wrap up with conclusions for investors.
I view annual assessment as the appropriate cadence for most firms, absent dramatic developments. Most of the comparisons we will do are year to year. PSTL's history as a public company only goes back to May 2019, that's the maximum assessment period available.
Andrew Spodek is the CEO of PSTL. In describing ownership and rights, there are multiple references to "Andrew Spodek and affiliates"; for simplification I've dropped the "and affiliates".
Most of the information in this article come from PSTL's 2022 Annual Report , the Q1 2023 Earnings Presentation , the 2023 Proxy Statement , and the USPS Fiscal Year 2022 Annual Report to Congress, and the April 2023 Deliver for America Second Year Progress Report.
The Customer
PSTL leases property to only one customer - the United State Postal Service ((USPS)).
The USPS is an independent agency of the executive branch of the U.S. government. It is intended to be self-funded but has historically run a deficit. A small operating loss was reported in 2022; $78.6 billion revenue vs. operating cost of $79.6 billion.
The April 2022 Postal Service Reform Act (PSRA) relieved USPS of the burden of pre-funding retiree health benefit obligations and established a new health benefits program that is better integrated with Medicare. The PSRA removed $57 billion in liability and reduces future expenses by $48 billion over 10 years. Significant underfunded retirement liabilities remain; the USPS continues lobbying to remove those as well.
The 2022 PSRA requires (with minor exceptions) six day a week mail delivery.
What USPS Delivers
In FY 2022, 635 thousand employees delivered 127 billion pieces of mail to 165 million delivery points. Total volume peaked in 2006 and has since declined by 40%. Over that time, the number of post offices declined only about 4%.
Three segments account for almost all USPS activity (table below).
USPS Market Segments (USPS FY 2022 Annual Report; table by author)
USPS is now primarily a package delivery service, by revenue. First class volume peaked in 2002 and has since declined by 50%. Marketing mail is largely advertising, what most people would call "junk mail". Everything else is 10% of revenue, 3% of pieces, and 6% of weight.
Facilities
The USPS has a very big footprint; they characterize themselves as "the largest physical and logistical infrastructure of any non-military government institution". They operate about 31,100 post offices, stations, branches, and carrier annexes; there are in addition ~ 2,500 additional Contract Postal Units, Community Post Offices, and Village Post Offices.
Most of their facilities are leased (73%), but most of the square feet are owned (69%). They lease 22,951 properties with 89 million square feet, and own 8,484 properties with 195 million square feet. Leases are typically for 5 years.
New USPS construction has been rare, running under 100 properties per year, Disposals are even more unusual at less than 10 per year.
Delivering For America
In March 2021 the USPS launched Delivering for America , an ambitious 10 year strategic plan to substantially improve operations, efficiency, and performance. Goals specifically include best-in-class mail and package sorting and delivery - the USPS acknowledges package delivery is critical to their economic viability.
The plan includes a $40 billion capital investment supporting rationalized facilities (about $8 billion), and an upgraded and largely (eventually entirely) electric vehicle fleet.
USPS is rationalizing and standardizing what they describe as a "legacy network of nonstandard, outdated, and often poorly located processing facilities", which includes 427 middle-mile facilities and 1,088 service hubs which transport mail and packages to delivery units.
The new facilities will be Regional Processing and Distribution Centers (RPDCs), Local Processing Centers (LPCs), and Sorting and Delivery Centers (S&DCs).
RPDCs will provide centralizing area processing in a single new or redesigned building. RPDCs are large, up to ~ 1 million square feet, and will include state of the art mail and package handling equipment.
LPCs connect RPDCs to delivery operations, and sort letter and flat mail to carrier routes, and transport mail downstream from RPDCs toward delivery. LPCs will leverage existing sites.
There are currently ~ 19,000 Delivery Units, the place where the carrier picks up the mail for delivery, and what most of us think of as our local post office. Many of these, particularly in urban areas, will be consolidated into Sorting and Delivery Centers. These S&DC facilities will include both new and repurposed buildings. The first new S&DCS has opened, and 100 new locations are under consideration.
In addition to processing facilities, their goals include a "modern, transformed network of retail Post Offices".
What the USPS terms "Retail and PO Box Operations" are not expected to change at current retail locations. USPS is "investing in and redesigning our retail locations to make them modern, welcoming go-to destinations", with increased emphasis on property conditions and employee amenities at new and existing facilities.
The USPS specifically claims that as the S&DCs roll out, no current post offices will close . Some employees and observers are skeptical.
In April 2023 the USPS published their Second Year Progress Report describing their progress implementing the Delivering For American ten year strategic plan. This report confirms that the USPS views "delivering more packages to more American households and businesses is the key to future success".
Since the Deliver for America program launched, 249 new package sorting machines have been installed in 2021 and 2022. More are coming.
Another goal is an "electric fleet by 2035". In February 2023, USPS ordered 14,000 electric vehicles charging stations from three suppliers in contracts worth $260 million combined. USPS expects to install the charging stations at 75 or more Sorting & Delivery Centers, Vehicle Maintenance Facilities, and other facilities, over the next year, begin in the third quarter of fiscal 2023. Up to 41,000 charging stations may eventually be installed.
The requirements for electric power and parking for an all-electric delivery fleet is a primary driver to consolidate carrier routes delivery from retail post offices to larger S&DCs.
In a May 2023 update , the USPS noted that six S&DCs have been completed, with 18 more to be launched this year. USPS plans a network of 490 S&DCs consolidating carrier activity from 4,000 to 8,000 local delivery units; that would mean 20-40% of current delivery units would no longer have a delivery function.
USPS plans ~ 60 Regional Processing & Distribution Centers (RPDCs) and ~ 160-180 Local Processing Centers (LPCs). Current plans are that 45 of the RPDCs will be in existing postal facilities, and the other 15 will be new facilities.
The Postal Realty Trust Story
As a public company, PSTL is less than five years old, but its origins go back to the 1980s.
PSTL grew out of a family real estate business, with Leonard Spodek owning dozens of apartments buildings in New York City in the 1980's. He began buying postal properties in the early 1980's and fully shifted investment focus from apartments during the 90's. In 2004, his son Andrew Spodek founded and became CEO of Postal Realty’s predecessor, family owned Nationwide Postal Management, Inc. Those assets formed the basis for PSTL, which was listed on the NYSE in May 2019, with an initial public offering price of $17.
PSTL CEO Andrew Spodek explains the origins of the company in this December 2020 Nareit interview . Among the key attractions of the post property business, the tenant always pays the rent, they very rarely move, and there is no requirement for employees to be on-site.
PSTL Today
Today PSTL is a small cap (~$350 million market cap) internally managed REIT headquartered in Cedarhurst, N.Y., in the New York City metro area. They have 42 employees.
Its principal business is to acquire and manage properties leased to the USPS. PSTL is the largest owner and manager of such properties.
At year-end 2022, PSTL had net investments of ~ $460 million in 1,286 properties, in 49 states. The properties provided ~ 5.3 million net interior square feet, were 99.7% occupied, and had a remaining lease term of ~ three years. The largest geographic concentration was 15.1% of rental income in Pennsylvania, reduced from 18.3% in 2021. See the map below. A complete list of properties is here .
PSTL reports their properties in three classes: Last Mile under 2,500 SF, Flex between 2,500 to 50,000 SF, and Industrial over 50,000 SF. The slide below from the Q1 Earning Presentation shows the status as of 27 April 2023. While Last mile accounts for 63% of the properties, Flex accounts for 64% of the revenue
The leases are typically modified double-net leases: the USPS is responsible for utilities, routine maintenance, and property taxes; PSTL is responsible for insurance, roof, and structure. The scheduled expiration of the leases is detailed below.
Given typical 5 year lease terms, the drop-off in leases in 2028 is not surprising. The increased square footage in 2025-2027 probably represents their few large properties (more later on this.)
PSTL also manages an additional 397 properties owned by Mr. Spodek. PSTL has the right of first offer to purchase 250 of the 397 managed properties.
Management
There are five members of the Board of Directors. Additional detail is available in the 2023 Stockholders Meeting Proxy . While they all have impressive experience, I'll comment on two.
Mr. Donahoe is a 39 year veteran of the USPS, retiring as Postmaster General in 2015.
Mr. Spodek has over 20 years of experience exclusively focused on investing in and managing post office properties. At 47, he is young enough to reasonably be expected to lead PSTL for another 15 years.
Performance
PSTL has been growing steadily since its IPO, investing about $120 million a year, and adding ~275 properties.
In March 2022, the PSTL acquired a postal real estate consulting business for $1.7 million.
AFFO was $10.0 million, or $1.00 per share in 2020, $18.2 million, or $1.05 per diluted share, in 2021, $23.5 million, or $1.01 per diluted share in 2022.
Net debt to adjusted EBITDA ~ 5.5.
Some key results for 2022 vs. 2021:
- Revenue increased 34%
- AFFO increased 29%, but AFFO/share decrease 4%
- G&A increased 23%
- G&A / revenue declined from 26.5% to 24.5%
- Rental income was 96% of revenue in 2022 and in 2021
- Consolidated principal indebtedness increased from $96 in 2021 to $198 million in 2022.
- Dividend rate increased 4%; from $0.885 in 2021 to $0.925 in 2022
Who Actually Owns the Business
Answering this question is more complex for PSTL than the typical REIT. There are two key points, in round numbers:
- the common shareholders actually own only about 80% of the assets
- Mr. Spodek has an unusually large ownership interest, let's say >10%
PSTL is the sole general partner of the Operating Partnership which directly or indirectly owns the properties. The Operating Partnership issues common unit "OP Units", and a Long Term Incentive Plan Units "LTIP Units", which are normally included in the aggregate OP Unit count.
PSTL issues Class A common shares, which are publicly traded. There is also a non-traded Class B stock, about which more below.
As of 31 December 2022, PSTL owned ~ 81% of the outstanding OP Units in the Operating Partnership; i.e. a controlling interest.
The non-controlling interests (typically individuals, but in any case, not PSTL) owned ~ 19% or the outstanding OP Units, consisting of 4.1 million OP Units and 537 thousand LTIP Units on 31 December 2022.
As of 14 April 2023, Mr. Spodek owned about 40% of this 19%.
Both the number of outstanding OP Units and LTIP Units typically increase each year. For instance, on 31 December 2021, the non-controlling interest was 3.4 million OP Units and 375 thousand LTIP Units.
LTIP Units were/are primarily issued to the CEO and Board in connection with the IPO and/or in place of cash compensation for salary and director's compensation.
OP Units may be issued in connection with property acquisitions when both the seller and PSTL agree. About 831 thousand OP Units were issued in 2021, and 661 thousand OP Units in 2022.
Class B Voting Equivalency shares have 50 votes per share ; all shares of Voting Equivalency stock are held by Mr. Spodek. No public market exists for Class B shares or OP Units. Class B shares are convertible to Class A shares on a 1:1 basis at any time.
OP Units and LTIP Units are redeemable for cash or, at PSTL option, shares of Class A common stock on a one-for-one basis.
If all the outstanding OP and LTIP Units were converted to Class A common, the share count would increase by ~ 25%; the current and readily visible Class A shareholders really own only ~ 80% of the company.
The Proxy reports ownership above 5% and of directors and executive officer as of 14 April 2023:
In the table above, an asterisk denotes an amount less than 1%. OP Units include LTIP Units. On that date, 19.9 million shares of Class A common stock, 27,206 shares of Voting Equivalency stock, 4.1 million OP Units (other than OP Units to be held by PSTL), and 842 thousand LTIP units were outstanding.
It's notable that the executive officers (Spodek, Garber, Klein) have elected to receive a significant fraction of their compensation in stock; Mr. Spodek has received 100% of his base salary and bonuses in stock since the IPO. The amount awarded is increased if the recipient chooses a longer vesting period; all have chosen the longest available term - 8 year cliff vesting.
Potential Property Acquisitions
The ownership of the properties leased to the USPS is very fragmented, spread among 17,000 owners. About 16,000 owners only own one property .
Many of these owners have held their properties for decades. In addition to the standard benefits of a property sale, there are in addition potentially attractive tax and estate planning advantages to a property owner who contributes his property to the Operating Partnership in exchange for OP Units.
The Association of United States Postal Lessors (AUSPL) is an organization supporting the interest of individuals who lease property to the USPS.
Risks
The usual boilerplate list of risks is enumerated in the Annual Report. All of the risks below are included (USPS related risks for example are discussed in detail (page 6-8), there are a few issues that deserve comment.
USPS
Although the USPS is the sole customer of PSTL, the USPS has been and, in many ways, still is the archetype of a low risk customer. This may be changing.
The USPS is nominally an independent agency with no taxpayer funding, but in practice this lack of taxpayer support seems more theoretical than real. While Congress may act only grudgingly, the $57 billion liability forgiven in 2022 suggests they will indeed act.
The USPS recognized the growing importance of package delivery, and a strategic plan to sustain a competitive package delivery function is being implemented. Six day a week mail delivery is also now mandated.
Related to real estate specifically, the USPS will own essentially all the ~ 60 very large and specialized Regional Processing and Distribution Centers and the ~ 490 Sorting and Distribution Centers.
Post Office consolidation has been very slow for a decade, but that has the potential to change at the local level. Indeed, it appears that many local post offices will evolve to a Retail Post Office and PO Box Operation, i.e. counter service and a set of PO Boxes. These facilities would have no delivery function other than to their PO Boxes, no sorting function, no carrier employees, and presumably no electric mail delivery trucks.
Current plans are to consolidate carriers from 4,000 or more delivery units. With no carrier employees in the building, it's not hard to imagine that some of these facilities might eventually be consolidated and closed, current USPS claims to the contrary. Some PSTL properties might be at risk.
There may eventually be a higher minimum standard for appearance, maintenance, and amenities in retail post office facilities, although this appears to be a goal rather than a contract requirement at this point. This could eventually require upgrades to some PSTL properties.
Probably the largest risk for PSTL is the fate of their 5 industrial properties.
For example, the 431,000 SF Warrendale, Pennsylvania property acquired in December 2020 for $47 million. This facility houses one of only 12 privately-owned USPS processing and distribution centers over 300,000 square feet in the entire country.
There is a lengthy and detailed third party assessment from June 2023 of the Delivering for America transformation here . Heavily unionized postal workers are not entirely happy about the changes. It's probably going to be at least several more years before it becomes clear how this will all play out.
Potential Conflicts of Interest
Founder and CEO Andrew Spodek effectively controls > 10% of the of the stock.
He also owns 397 other properties which the company manages and might acquire in the future.
There are provisions in the company charter and Operating Partnership agreement that might delay or prevent a change of control transaction.
This degree of ownership is unusual in a public company. Using a sports analogy, Mr. Spodek might be considered a player-coach-owner.
There are a lot of opportunities for a conflict of interest to arise.
Tax Protection Agreement
PSTL has a potential $17.7 million liability in the form of a tax protection agreement . To quote from page 25 of the 2023 Proxy:
We entered into tax protection agreements that provide benefits to Mr. Spodek. Pursuant to the tax protection agreements, it is anticipated that the total amount of taxable built in gain on the protected contributed properties and other assets will be approximately $24.4 million. Such indemnification obligations could result in aggregate payments by us to Mr. Spodek of up to $17.7 million.
This is fully disclosed, but some investors may not have fully assessed the liability. To provide a sense of scale, $17.7 million is ~ 5% of the current market cap.
Key Personnel
This is in many ways a small business in a specialized market, with significant dependence on the expertise, experience, and relationships provided by a small number of critical people - Spodek, Garber, and Klein.
Analysis
A few points to consider.
1. Long term, the total addressable market for PSTL - in leased USPS facilities - is likely to shrink, perhaps materially depending on how consolidation plays out. A decade of acquiring 1% of the market per year might leave them with a 20% market position and a billion dollar plus market cap. Moving the needle will be increasingly difficult.
2. With regard to processing center consolidation, the parallels to the airline hub and spoke model are obvious. USPS management at least believes they are compelling, and it's seems likely that will happen. Competition will likely demand it. FedEx Corporation (NYSE: FDX ) for example is building multiple ~ 500,000 SF sorting centers for their ground packages.
I would not be surprised to see the 5 industrial properties PSTL now owns sold in the next year or two. Worst case, USPS doesn't renew the leases, and the properties are divested for other industrial uses.
3. For local postal facility consolidation, the details are going to matter.
I grew up in a small town; a county seat, 8,000 people, one post office. There is another similar sized town six miles away, also with one post office. While I could see carriers being consolidates into one of these, I think it is unlikely that either facility will close.
I now live in a much larger town, with two post offices less than two miles apart. I could easily see the older and smaller one being completely closed.
4. As more Post Office locations end carrier operations and become "Retail and PO Box Operations", one might begin to wonder about much they differ from the ~ 5,000 UPS Store locations. A 100% franchised subsidiary of United Parcel Service, Inc. (NYSE: UPS ), these locations provide shipping, packing, printing, personal and business PO Boxes, passport photos, and other services, including delivery lockers in some locations. We might see some innovation in this area.
5. I am confident that PSTL management is extremely aware of all this. They have a very large personal stake in successfully navigating these changes.
Valuation
Total return since the IPO is positive, but only about half the Vanguard VNQ real estate index ETF. Current valuation doesn't appear elevated relative to other REITs.
Wall Street has an average Buy rating with a $16.56 price target.
We can also look at the stock price over its public company history. With the exception of the March 2020 Covid, the low seems to bounce off a price near $14.
The Seeking Alpha Quant rating is not enthusiastic, with a poor Valuation grade.
Investor Takeaway
PSTL is unique. A small cap REIT, public for less than five years, it has only one customer - the USPS. The leading consolidator in the extremely fragmented leased USPS facility market, it now owns about 6% of leased USPS facilities, and is increasing that share by about 1% year. They have averaged more than one property acquisition per working day since the IPO.
Acquisition cap rates are attractive, targeting and achieving 6-8%. Debt is reasonable.
Management is deeply experienced and has an unusually high (> 10%) and complicated ownership stake.
Very much in growth mode, revenue grew 34% and AFFO grew 29% in 2022, although AFFO/share decreased about 4%. G&A is high but declined a bit in 2022 and should decline further as size increases.
The current $0.95 dividend (~ 6.3% at current prices) appears safe. Dividend growth has been rapid since the IPO, but per the Q1 earnings call, it will not be increased this year.
The biggest risks are probably associated with the ongoing evolution of the USPS, which could eventually lead to closing some facilities.
The current price ~ $15 is perhaps 10% below fair value. For an investor looking for REIT diversification by cap size and market, I'd view it as a reasonable but not compelling buy here. I would rate it a Buy under the Seeking Alpha system, although a patient investor might wait for price with a little higher margin of safety.
Personally, I bought a full position in May 2023 at $14.80, and have had an additional limit order open for some time at $14.00 that would increase that position by 20%.
For further details see:
Postal Realty Trust: A Growing Small Cap With Unique Assets