Postal Realty Trust Inc: Ultra-High-Yielding REIT Increases Dividend
July 26, 2024
PSTL Stock Has 6 Years of Increasing Dividends
Rising interest rates are not great for real estate investment trusts (REITs) because they increase the cost of borrowing and eat into profit margins. And REITs borrow a lot of money to grow their operations. High interest rates and inflation also make it difficult for tenants to pay their rent. That isn’t the case with Postal Realty Trust Inc (NYSE:PSTL).
Postal Realty Trust is the first and only publicly traded REIT that focuses on properties leased to the United States Postal Service (USPS). (Source: “2024 Nariet REITweek Investor Presentation,” Postal Realty Trust Inc, June 2, 2024.)
The company’s diversified real estate portfolio is comprised of 1,543 properties across 49 states and one territory with approximately six million net leasable interior square feet (equal to 104 NFL fields). The company’s owned portfolio is 99.6% occupied, with a weighted average rental rate of $9.47 per leasable square foot.
It’s always growing, too. The company’s portfolio is big, but it only accounts for roughly six percent of the leased market. There are nearly 17,000 different lessors of property leased to the USPS.
The next 20 largest portfolios combined only own around 11% of the market. To put that into perspective, 92 million square feet are privately owned, while six million square feet are owned by Postal Realty Trust.
In the first quarter of 2024 alone, the company acquired 29 USPS properties for approximately $18.5 million.
And who wouldn’t want a reliable tenant like the USPS?
Aside from being quiet, the USPS is also a reliable tenant, with 100% of its contractual rent payments collected. That includes the 2020 COVID-19 crisis period.
Admittedly, you might think mail is going the way of the dodo bird, but the USPS is home to critical infrastructure that supports e-commerce and last-mile delivery. Companies like Amazon.com Inc, United Parcel Service, Inc., FedEx Corp, and DHL Group tap into the USPS’s logistics network every day.
And for good reason. With 31,000+ facilities and almost 167 million unique delivery points, the USPS represents the largest retail distribution network in the U.S.
Moreover, 44% of the world’s mail volume is processed and delivered by the USPS. This helps explain why its Parcel Select service has expanded at a compound annual growth rate of 17.4% since 2013.
Momentum Carries into 2024
Momentum from 2023 has carried into 2024. Postal Realty Trust announced that its revenue increased 14% year over year to $17.2 million. Net income slipped to $206,000, or a loss of $0.01 per share. (Source: “Postal Realty Trust, Inc. Reports First Quarter 2024 Results,” Postal Realty Trust Inc, May 7, 2024.)
Funds from operations (FFO) increased to $5.5 million, or $0.20 per share. Adjusted FFO grew to $6.9 million, or $0.25 per share.
Commenting on the first-quarter results, Andrew Spodek, Postal Realty Trust’s chief executive officer, said, “I am pleased with our Company’s performance in the first quarter of 2024 as our success in 2023 continued into the current year.
“While transaction volumes continue to be lighter in 2024, we added 29 new properties to our portfolio during the quarter for $18.5 million at a weighted average capitalization rate of 7.8%. This puts us on track to achieve our full year acquisition guidance of $80 million at or above a 7.5% weighted average capitalization rate.”
Quarterly Dividend Raised to $0.24 Per Share
As a REIT, Postal Realty Trust is legally required to distribute at least 90% of its taxable income to investors.
Not only is this REIT known for its attractive return profile, but it has also increased its dividend every year since its 2019 initial public offering. (Source: “Dividend History & Tax Information,” Postal Realty Trust Inc, last accessed July 16, 2024.)
That only tells part of the story. More impressively, Postal Realty actually raised its dividend for 15 consecutive quarters, from $0.063 per share in July 2019 to $0.2375 per share in February 2023. The REIT increased its dividend to $0.24 per share at the start of 2024, maintaining it at that level since then.
This works out to an annual distribution of $0.96 per share, for a current yield of 6.76%. That dividend payout is safe, too, easily covered by the company’s third-quarter adjusted FFO of $0.25 per share.
Outlook for PSTL Stock Remains Solid
One would think that solid financial results, 100% rent collections, and a growing portfolio would lead to big share price gains, but it actually hasn’t. Postal Realty stock has, for the most part, been held down by broader sentiment about the REIT industry.
Before the start of July, PSTL stock was down 7.5% year to date.
Since the start of July though, Postal Realty stock has rallied an impressive 6.9%.
Why the big moves?
No definitive reason. The company hasn’t released anything.
On the plus side, economic data show that the economy is cooling, with steady retail sales, suggesting that it isn’t likely to tip into a recession. As a result, the market is only pricing in an economic slowdown.
The widely monitored labor data released on July 5 showed the U.S. job growth slowed to 206,000 jobs, while the unemployment rate inched up to a 2.5-year high of 4.1%, and wage gains slowed. (Source: “Employment Situation Summary,” U.S. Bureau of Labor Statistics, July 5, 2024.)
A cooling economy increases the chances of an interest-rate cut, with the odds of an easing in September jumping to 79% from 66% before the data was released. A rate cut means that borrowing becomes a little cheaper, which should improve profitability. (Source: “Nasdaq, S&P 500 hit record highs as payrolls data raises rate cut hopes,” Reuters, July 5, 2024.)
Analysts at Citi have predicted that the Federal Reserve could cut interest rates by 200 basis points, or two percent, over its next eight meetings, through the summer of 2025. That would take interest rates down from a range of 5.25% to 5.5% to a range of 3.25% to 3.5%. (Source: “Citi: Fed Could Cut Interest Rates By 200 Points Through 2025,” OilPrice, July 8, 2024.)
This might explain why PSTL stock has done well since the start of July.
Will it be able to hold onto those gains?
Big jumps like that tend to result in short-term profit-taking, but time will tell.
Regardless, the outlook for Postal Realty stock is solid, with Wall Street analysts providing a 12-month median share price target range of $15.00 to $16.00 per share. This points to potential gains in the range of 8.7% to 12.2%.
Chart courtesy of StockCharts.com
The Lowdown on Postal Realty Trust Inc
As the only publicly traded REIT focused on properties leased to the USPS, Postal Realty Trust Inc. is well positioned to consolidate the large, highly fragmented market.
The company has a strong balance sheet and large and growing real estate portfolio, and it has collected 100% of its rent. Thanks to Postal Realty’s reliable tenant, it does not have to provide for improvement allowances or free rent when it renews leases. USPS leases are also not subject to annual budget appropriations.
Postal Realty’s leases are also protected from inflation. The five-year lease durations allow for the chance for renewal at market rates, tenants are responsible for a portion of expense increases, most lease renewals include annual rent escalations, and renewing a lease is a lot more economical than moving to a postal build-to-suit option.
Taken together, these dynamics provide Postal Realty Trust Inc with a reliable income stream, which helps support its reliable and growing high-yield dividend.
