2023-03-15 10:50:37 ET
Summary
- Postal Realty Trust is a niche REIT that owns and operates a large portfolio of properties leased primarily to the United States Postal Service.
- One notable characteristic of the company is their continuous dividend increases. Since their IPO in 2019, the quarterly payout has been increased every single quarter.
- At present, the payout currently yields about 6.4%.
- In addition to an attractive dividend, shares have significant embedded upside potential of about 25%.
Postal Realty Trust (PSTL) is the only publicly traded real estate investment trust ("REIT") focused on properties leased to the United States Postal Service ("USPS").
At present, the company owns over 1,300 properties in 49 states. These properties are 99.7% leased with a weighted average lease term of approximately 3 years. As a share of the total market, PSTL owns about 6% of it, while the next 20 largest portfolio owners combined only own 11%.
This market, therefore, is highly fragmented. This in turn presents an attractive opportunity for PSTL to continue expanding their current footprint, one that has already grown at a compound rate of 88% since their IPO.
And this has been completed in a conservative manner, resulting in a healthy debt profile with adequate coverage ratios.
Presently, shares are trading at the bottom end of their 52-week range, though it's worth noting the range is tight, with less than $5 separating their 52-week highs and lows. The limited volatility in the shares is especially attractive, considering shares come paired with a quarterly dividend that is presently yielding about 6.4%. Even more enticing is the fact that this payout has been increased every single quarter since their IPO. For investors seeking both income and upside, PSTL is one worth new or further initiation.
Recent Performance and Current Portfolio Metrics
At the end of 2022, PSTL's portfolio was 99.7% occupied , in-line with prior periods. For the full fiscal year, they acquired 320 properties for +$123M. Of this total, 54 properties totaling +$20M were acquired during Q4 .
The accretive effect of these acquisitions, in addition to rate growth on existing properties, contributed to a 33% increase in rental income during the year. This carried into overall adjusted funds from operations ("FFO"), which came in at $1.01/share for the full year. This, however, is down 3.8% from last year due to a higher share count in the current year.
For the quarter, PSTL reported AFFO of $0.28/share. The strength during the quarter in relation to prior periods was partly due to lower recurring capital expenditures ("capex"). In addition, they also benefitted from a lump sum catch-up payment from the USPS during Q4.
This lump sum payment was in connection with their ongoing lease renewal negotiations with the USPS. Based on the current lease structure, when a lease expires, the USPS becomes a holdover tenant on a month-to-month basis and typically pays the greater of the estimated market rent or the rent amount under the expired lease.
In this case, the USPS determined that the market rent was greater than the rent payable under the expired lease. As such, they agreed to pay out the lump sum catch up in connection with the increased rents due from expiration.
Looking ahead to 2023, management anticipates total acquisitions to land around +$80M, with a pick-up anticipated in the second half of the year. In addition, recurring capex is expected to be consistent with Q4, which was about $0.02/SF. This is expected to be offset in part by higher cash outlays on general and administrative ("G&A") expenses. But it is worth noting that these expenses as a percentage of total revenues have continued to decline as the company has scaled.
Liquidity and Debt Profile
Through the date of their earnings release, just +$12M was drawn on their +$150M unsecured credit facility. Aside from the outstanding balance on this facility, 94% of their total debt burden was fixed rate. In addition, 91% of their assets were unencumbered by secured debt.
PSTL also benefits from a minimal degree of near-term contractual commitments. Most of their commitments , for example, are due in 2026 and later.
At 5.1x adjusted EBITDA, net debt has remained consistent with the prior two quarters. While it has notably increased from 2021 and early 2022, it is still hovering well below 7x, which is the upper end of their accepted limit.
Supplementing the availability on their revolver is their at-the-market ("ATM") program. During 2022, PSTL raised about +$11.9M of proceeds through this program, with about +$9.1M raised in Q4, alone. In future periods, PSTL can and likely will further utilize this program. At present, the program allows for sales up to +$50M.
Dividend Safety
PSTL's IPO was in 2019. Since then, the company has increased their dividend payout every single quarter. Collectively, that is 14 consecutive quarters of increases.
Most recently, the quarterly payout for Q1FY23 was increased 1.1% over the prior quarter to its present level of $0.2375/share. On a YOY basis, this represents a 4.4% increase from the first quarter of 2022.
For investors, the payout offers an attractive annualized yield of 6.4% at current pricing, assuming the dividend doesn't grow even further from current levels, which appears unlikely, given their track record.
While the continuing increases is certainly a draw to the stock, the payout is bumping up to the higher end of adjusted FFO. For the full fiscal year in 2022, for example, the company generated $1.01/share in AFFO. And during the year, they paid out $0.925/share in dividends. This represents a payout ratio of about 92%.
Assuming both AFFO and the quarterly dividend stay flat in 2023, the payout ratio would be 94%. Given their commitment for continual increases, however, the quarterly payment is likely to increase. And if there are further equity raises, that could put downward pressure on AFFO. Together, that would take the payout ratio even closer to 100%.
At present, the continuity of the payout appears intact. But investors, nevertheless, should place greater scrutiny on the trend in their payout ratio.
Final Thoughts
PSTL generated about +$41M in NOI in 2022 and is generating about +$45M on a forward basis. Based on their current enterprise value, shares are trading at an implied cap rate of over 8%. This seems disconnected, considering their acquisitions are being completed in the 7% range.
Even at the 7% cap rate, shares would still have significant embedded upside potential of 25% from current trading levels. This is not even factoring in their quarterly dividend payment, which has been continuously increased every quarter since their IPO in 2019. For investors, the current payout is providing an annualized yield of 6.4%. This represents a modest spread over current risk-free alternatives.
And in terms of risk, PSTL's operations are well insulated from external market challenges. Their properties are nearly 100% leased to the USPS, a strong federal government-supported credit tenant with a high retention rate. Reoccurring cash flows, therefore, are among the safest and most predictable.
One can point to a slowing acquisition pipeline in 2023 as well as their dilutive equity raises as two potential drawbacks to the stock. While valid and worth tuning in to in future earnings releases, these are unlikely to create material challenges for the company.
In addition, uncertainties on the debt ceiling and the overall fiscal health of the USG could also instill fear in some. On this, one should note that USPS leases are not subject to annual budgetary appropriations. In addition, the USPS' operating lease payments represented less than 2% of their total operating expenses in fiscal 2022. As such, it's highly unlikely for there to be a significant deterioration in current retention rates, which currently are averaging 99%.
All considered, PSTL currently makes for a solid addition as it sits near their 52-week lows at an implied cap rate disconnected with the underlying value of their properties.
For further details see:
Postal Realty Trust: The Dividend Increases Are Regular Like Mail Delivery