Postal Realty Trust (NYSE:PSTL) owns properties that are primarily leased to the U.S. Postal Service (“USPS”). At the end of March 31, 2023, the company owned over 1,300 properties located in 49 states and one U.S. territory.
Not much has changed since my prior update on the stock. Shares are essentially flat since then as well. This compares unfavorably to a 6% gain in the broader S&P (SPY) over the same period.
For investors seeking a low volatility addition to their portfolio with bond-like income payments, I continue to view PSTL as a worthy holding. In addition to a reoccurring dividend payout yielding nearly 6.5%, shares offer prospective investors upside potential of about 15%.
Current Portfolio Metrics
PSTL continues to maintain near-full occupancy levels of nearly 100%. In addition, all rents remain current as of their most recent earnings release.
Looking ahead, the company does have a higher degree of expirations to address. 15.8%, 10.4%, and 14.9% of annualized contractual rent, for example, is set to expire in 2023, 2024, and 2025, respectively. This does increase the risk profile of the portfolio.
But it’s worth noting that their top tenant, the USPS, is unlikely to walk away from their lease agreements. This is evidenced by their 99% historical average lease retention rate. In addition, from a practicality standpoint, renewing is simply a more attractive economic alternative than moving to an alternative build-to-suit option.
And as a follow-up to an outstanding item from their Q4 release, which revealed that PSTL was currently in ongoing negotiations with the USPS over a lease that had expired in 2022, management noted that they were able to execute on a non-binding letter of intent (“LOI”) subsequent to quarter end on that renewal.
During Q1, PSTL acquired 39 properties at a weighted average cap rate of 7.6%. This cap pricing is well above the midpoint of their targeted range of between 6% and 8%.
And subsequent to quarter end, the company acquired another seven properties for a total purchase price of +$4.5M and placed another 12 properties under definitive contracts.
While they did receive favorable pricing in Q1, management does expect their acquisition rate to track closer to their targeted range for Q2.
And looking ahead, management still expects to complete approximately +$80M in acquisitions in 2023, with a stronger pace in the second half of the year.
Liquidity And Debt Profile
PSTL currently operates on a leverage ratio, as measured by their multiple of net debt to total enterprise value, of 5.5x. This remains below their targeted ceiling of 7x.
In addition, the company continues to maintain strong coverage ratios of 4.7x and 4.5x of their interest and fixed charges, respectively.
The maturity schedule is also favorable, with limited near-term maturities. And until then, their total debt burden carries a weighted rate of below 4% and is primarily fixed-rate, save the +$17M outstanding on their revolving credit facility, which has about +$130M available, as well as an unexercised accordion feature.
Their at-the-market (“ATM”) program provides another readily available funding source, though at the expense of growth in funds from operations (“FFO”). In the current quarter, the program was utilized for the issuance of 228K of common stock at an average price of about $15/share, slightly above the level where shares currently trade.
PSTL had been known for consistently increasing their dividend every quarter since their IPO in 2019.
The streak, however, ended in the current quarter, following the Board decision to maintain at current levels. While this puts an end to one streak, it’s worth noting that the dividend will still be higher from an annual perspective.
The increases were certainly one draw to the stock, but as pointed out in my prior update, it also stretched their payout ratio into the upper limits of acceptability, especially since AFFO growth is constrained, to an extent, by continued share dilution.
Though some would view the pause as a negative, I see it as prudent given current operating dynamics.
PSTL’s overall portfolio metrics remained little changed from the end of 2022. At quarter end, the portfolio was 99.7% occupied and all rents were current. In addition, additional properties were acquired during the quarter at favorable pricing that came in at cap rates ahead of their targeted range.
Updates were also provided regarding the status of their renewal negotiations with the USPS for leases that had expired in 2022. These were ongoing at the end of Q4 and through the first quarter of the year.
But subsequent to quarter end, the company executed a non-binding LOI for a renewal term of five years with annual escalations of 3.5%. This is positive news, especially since the process of moving from a non-binding LOI to an actual contractual agreement can be completed without any dependency on Congress.
In addition, the renewal enabled PSTL to provide a favorable revision upwards in same-store cash net operating income to 2.2% from 2% stated previously.
And with regards to Congressional action, it’s worth continued reiteration that USPS’ leases are not subject to annual budgetary appropriations. Additionally, their lease payments represent just a small share of their total operating expenses. As such, any worries concerning the current state of debt ceiling discussions would, in my view, be considered overdone.
Another notable update provided on their earnings release is that the Board decided to hold the dividend at its current payout for the quarter. While this would not be headline worthy for most companies, it is for PSTL, considering the quarterly payout had been previously increased every quarter since their IPO in 2019.
While the current pause does break the trend of continuous quarterly increases, the payout would still be higher from an annual perspective. And in hindsight, the pause is, indeed, a prudent decision. In my previous update on the stock, I noted that the payout ratio was approaching the upper limits from a safety standpoint.
The pause, then, prevents the ratio from creeping even higher. It also enables them to preserve cash in the current uncertain environment. And at a yield of just under 6.5%, I view the payout as attractive for investors seeking bond-like income payments.
At an implied cap rate of about 8%, shares also have some embedded upside. In the current quarter, the company was acquiring properties at a 7.6% rate, which is above their targeted range of 6% to 8%. Assuming the value of their properties are comparable to those they are acquiring, shares would have implied upside of about 15% at an assumed 7.5% cap.
Combined with the dividend payout, I view this as attractive in the current market environment. As such, I am maintaining a “buy” rating on PSTL stock.