Postal Realty Trust (NYSE: PSTL) : stocks

Postal Realty Belief (NYSE: PSTL), a REIT, calls itself the nation’s largest proprietor and supervisor of properties leased to the US Postal Service (USPS) with 852 owned properties and 399 managed properties totaling 3.6 million owned sq. toes and 1.7 million managed sq. toes. As of the top of Q1-21, PSTL’s owned portfolio was 100% occupied.

PSTL leases its properties practically completely to the USPS with most leases being modified double-net leases, whereby the tenant (USPS) is liable for utilities, routine upkeep, and the reimbursement of property taxes and the owner (PSTL) is liable for insurance coverage, roof, and construction.

PSTL’s owned portfolio is cut up throughout final mile (< 2,500 SF), flex (2,500 – 5,000 SF), and industrial (> 50,000 SF) and as of Could 4, 2021, cut up as a share of SF 19.8%, 50.8%, and 29.4%, respectively. At yesterday’s (July 15) shut of $18.65/share, PSTL had an enterprise worth of $399 million, together with $98 million in debt and $4 million in money (utilizing Q1-21 stability sheet objects).

HERE’S WHY I LIKE THE STOCK

Q1-21 property internet working earnings (NOI) of $6.9 million (annualized to $27.6 million) interprets to a 6.9% cap charge
Q1-21 AFFO of $4.3 million (annualized to $17.2 million) interprets to a 17.9x P/AFFO a number of
Dividend yield of 4.7%
Mortgage to worth of 23%

Evaluate the above to a different government-only REIT – Easterly Authorities Properties (NYSE: DEA). Whereas DEA has publicity to greater than only one authorities company, they’re buying and selling at a 6.0% cap charge, 18.1x P/AFFO a number of, 4.7% dividend yield, and 32.9% mortgage to worth.

Whereas this may increasingly not look like PSTL has an excessive amount of room to run, contemplate a sum of the components on their owned portfolio. Everyone knows that the commercial sector has been on a tear not too long ago and is the following massive factor since sliced bread due to COVID and e-commerce acceleration, and many others. PSTL’s 1.0 million sq. toes of commercial property produced $4.5 million in annualized lease as of Could 4, 2021. I’ll assume that this portion of the portfolio is triple-net (i.e., $4.5 million annualized lease = $4.5 million NOI) since that’s how industrial properties are likely to lease. Industrial REIT comps commerce at a median 4.2% cap charge (observe: the most important comp Prologis trades at 2.7%!), that means the commercial portfolio inside PSTL must be price about $107 million.

Again to sum of the components: contemplating the above, at yesterday’s value, you’re shopping for the remainder of the PSTL portfolio of final mile and flex properties totaling 2.6 million sq. toes and producing $23.1 million NOI for $292 million or a 7.9% cap charge. If this have been valued on the similar 6.0% cap as DEA, that’s an upside to PSTL of 30%.

Another nice factors – PSTL was simply included within the Russell 2000 and administration appears to be extraordinarily invested. The CEO, Andrew Spodek, has been investing in USPS properties for 20 years and sits on the board of administrators of the Affiliation of United States Postal Lessors. Spodek is the most important particular person investor proudly owning 5.8% of the corporate. He additionally personally ensures nearly $3 million in PSTL’s indebtedness.

RISKS

I absolutely perceive that PSTL’s single-tenant publicity is a danger. I perceive that PSTL’s weighted common lease time period remaining being solely 4 years additional compounds that danger. Nevertheless, contemplate this:

USPS made 100% of lease funds on time all through the COVID-19 pandemic
PSTL historic lease retention charge (going again to 2011) has been 98.4%
USPS lease funds in fiscal yr 2020 totaled roughly $1.4 billion, representing only one.7% of the USPS’s whole working bills so value slicing applications on the USPS are unlikely to have a look at actual property first

I additionally don’t love that almost all of PSTL leases are double-net as a substitute of triple-net.

The dividend AFFO payout ratio can be reasonably excessive at 84% so there’s not a lot room for the dividend to extend barring any elementary modifications.

HERE’S WHY I REALLY LIKE THE STOCK

Bear in mind how I made a distinction between PSTL owned and managed properties? The 399 managed properties are additionally USPS-leased properties, however they’re owned by the CEO’s household. The managed property rely doesn’t appear to be rising so I’m not so apprehensive about conflicts of curiosity between the CEO’s private vs. PSTL acquisition pipeline.

PSTL is an internally managed REIT with $10.3 million in annualized basic & administrative bills and 34 staff. This appears unhealthy by itself and begs the query why they don’t transfer to an externally managed construction since their G&A is nearly 1/third of gross lease collections – far more than an exterior supervisor would cost (3-5% of collections). PSTL’s double-net lease construction doesn’t justify this. Whereas double-net requires extra administration than triple-net, contemplate that PSTL solely had $372,000 in capital enhancements in Q1 so it’s not like they’re busy round the clock managing development tasks.

Clearly, a part of the G&A could be allotted to the managed portfolio, however PSTL solely collects an annualized $1.5 million in administration charges from the CEO’s private portfolio. Which means that PSTL collects $3,750/yr/managed property in administration charges however spends $10,400/yr/owned property on G&A bills.

Whereas the CEO is closely invested in PSTL, I don’t suppose he’s completely aligned with shareholders’ pursuits. It looks like at worst, he’s utilizing PSTL to subsidize his private portfolio and at greatest, he’s OK with a bloated and inefficient company construction. Look no additional than PSTL’s very energetic Instagram web page to see an instance of an pointless G&A expense. Not even PSTL’s behemoth REIT friends like Prologis, Realty Revenue, WP Carey have Instagram pages.

So this sounds fairly horrible. Why do you actually just like the inventory?

As a result of this makes PSTL an ideal take-over candidate for bigger industrial or diversified REIT friends or another institutional actual property investor.

The place else can an investor purchase a 3.6 million sq. foot distribution/final mile community of actual property with places in all 50 states that’s 100% occupied and picked up 100% of rents by COVID at a near-7 cap? Nowhere.

Should you don’t wish to guess on an acquisition… Bear in mind how I stated that PSTL was simply included within the Russell 2000? That is giving PSTL much more consideration. That is unhealthy information for the CEO since extra consideration = extra strain on efficiency and extra questions on his completely inefficient overhead construction. The highest 10 institutional holders in PSTL personal over 45% of the corporate. These establishments see the identical numbers we see and should be asking themselves (and administration) the identical questions we’re asking. This could in the end – whether or not there’s an activist marketing campaign or not – create sufficient strain on PSTL to basically reshape their overhead construction and unlock important money circulate for debt paydown, acquisitions, and/or dividend will increase.

This isn’t monetary recommendation. I similar to the inventory. My place: 800 shares.

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