Postal Realty Stock: Inflation-Thumping Specialty REIT Has 20% Upside
November 27, 2023
Why Investors Should Look at PSTL Stock
Many real estate investment trusts (REITs) have faced serious headwinds since the COVID-19 pandemic. During that period, quarantine orders meant some businesses temporarily or permanently shut their doors, which made it difficult for some REITs to pay their bills.
High interest rates are great for raising rents, but they also make borrowing costs higher. One excellent REIT that isn’t fazed by either of these issues is Postal Realty Trust Inc (NYSE:PSTL).
Most people probably aren’t familiar with Postal Realty stock, which might be because it only went public in May 2019. And when it comes to REITs, people are mostly familiar with residential, office, and mortgage REITs.
But the REIT universe is much bigger and more interesting than that. For instance, specialty REITs don’t fit into the typical REIT box. They generate income from niche real estate like billboards, fruit farms, cell towers, casinos, etc.
Postal Realty Trust Inc is even more specialized; it’s the first and only publicly traded REIT that’s focused on properties that are leased to the United States Postal Service (USPS).
The company’s real estate portfolio comprises 1,439 properties across 49 states and one territory (Puerto Rico). Its properties add up to about 5.7 million net leasable interior square feet (equal to about 99 NFL fields). (Source: “Investing in America’s Logistics Market: October 2023,” Postal Realty Trust Inc, last accessed November 21, 2023.)
Although Postal Realty’s property portfolio is large and growing, it only represents about six percent of the real estate that the USPS leases (by total interior square feet).
That market is highly fragmented, with almost 17,000 different property owners leasing real estate to the USPS. Combined, the next 20 largest property owners that lease real estate to the USPS only have about 11% of that market.
To put things in perspective, of the properties that are leased to the USPS, some 92 million square feet are privately owned, while 5.7 million square feet are owned by Postal Realty.
That means there’s plenty of room for Postal Realty Trust Inc to grow its market share. The company currently has a market cap of about $305.0 million, and the critical logistics assets market is estimated to be worth about $15.0 billion.
Now, you might think the postal sector is waning, and on some levels, it is: fewer people are mailing letters and postcards. But the USPS has an irreplaceable logistics network that major corporations like Amazon.com Inc (NASDAQ:AMZN), United Parcel Service, Inc. (NYSE:UPS), and FedEx Corp (NYSE:FDX) tap into every day.
As e-commerce grows, the USPS’s shipping and packaging services have become even more vital for last-mile deliveries. Moreover, with more than 31,000 facilities, the USPS is the largest retail distribution network in the U.S. That would be virtually impossible to replicate.
Furthermore, the USPS is one of the most reliable tenants on the planet. After all, if you can’t trust the USPS to pay its rent, who can you trust? For starters, it’s supported by the federal government. Second, its operating lease payments represent only 1.7% of its total annual operating expenses.
This reliable tenant has been able to keep up with 100% of its rent payments.
In 2020, during the depths of the pandemic, Postal Realty Trust Inc collected 100% of its rent and maintained 100% occupancy. That year, it also acquired 261 postal properties for roughly $130.0 million.
In 2021, the company again collected 100% of its rent, and it purchased 239 properties for $118.0 million. In 2022, it yet again collected 100% of its rent, and it acquired 320 properties for $123.0 million.
Postal Realty Trust Inc Delivered Another Successful Quarter
By all accounts, 2023 has been shaping up to be another wonderful year for Postal Realty Trust.
For the third quarter (ended September 30), Postal Realty Trust announced that its revenues increased by 17% year-over-year to $16.1 million. Its net income climbed in the quarter by 25% to $1.1 million, or $0.04 per share. (Source: “Postal Realty Trust, Inc. Reports Third Quarter 2023 Results,” Postal Realty Trust Inc, October 30, 2023.)
The trust’s third-quarter funds from operations (FFO) were $6.3 million, or $0.25 per share, while its adjusted FFO (AFFO) were $6.9 million, or $0.27 per share.
During the quarter, Postal Realty Trust Inc acquired 70 USPS properties for about $24.0 million, bringing it closer to reaching its 2023 acquisition target of $80.0 million.
Since the end of the third quarter, Postal Realty has acquired five leased properties for $1.3 million. It also had another 15 properties totaling roughly $3.9 million under definitive contracts.
Quarterly Distribution Has Increased 277% Since 2019
As a REIT, Postal Realty Trust Inc is legally required to distribute at least 90% of its taxable income to investors. As a result, PSTL stock is known for its attractive returns. The company has increased its dividends every year since its initial public offering (IPO).
Perhaps more impressively, the trust has raised its dividend for 15 consecutive quarters, from $0.063 per share in July 2019 to $0.2375 per share in February 2023. That’s a gain of 276.98%! (Source: “Dividend History & Tax Information,” Postal Realty Trust Inc, last accessed November 21, 2023.)
Management has held the distribution at $0.2375 per share since then. This works out to a yield of 6.75% (as of this writing), which is more than twice the current U.S. inflation level.
Postal Realty’s dividend is safe, too. It’s easily covered by the company’s third-quarter AFFO of $0.27 per share.
Undervalued Postal Realty Stock Has 20% Upside
Despite Postal Realty Trust Inc reporting solid financial results, 100% rent collections, accretive acquisitions, and a growing liquidity position, PSTL stock’s price has been held down by investor sentiment about the broad REIT industry.
That’s despite REITs generally performing well during periods of high inflation.
In the case of Postal Realty Trust Inc, 100% of its outstanding debt is fixed-rate, it has no notable maturities until 2027, 92% of its assets are unencumbered by secured debt, the weighted average interest rate for its debt is 4.04%, and the weighted average term for its debt is 4.5 years.
Regardless, Postal Realty stock is up by 4.45% over the last month and up by 3.8% year-to-date, but down by 3.5% year-over-year (as of this writing).
Chart courtesy of StockCharts.com
The outlook for PSTL stock is much better, though.
Wall Street analysts have provided a 12-month share-price median estimate of $16.00 and a high estimate of $17.00. This points to potential gains in the range of 13.5% to 20.5%.
The Lowdown on Postal Realty Trust Inc
There’s a lot to like about Postal Realty. As mentioned earlier, it’s the only publicly traded REIT that’s focused on properties that are leased to the USPS. It’s also singularly positioned to consolidate the large, highly fragmented market of leasing real estate to the USPS.
The company’s critical logistics infrastructure helps support, not just the USPS, but also e-commerce and last-mile deliveries.
The USPS has strong federal government support, which helps explain why, during the worst economic crisis of the last 100 years, Postal Realty Trust Inc was able to collect 100% of its rent.
The trust continues to be in a healthy financial position, with plenty of available liquidity to continue expanding its real estate portfolio.
All this should further support Postal Realty stock’s reliable and growing high-yield dividends.
