Does Postal Realty Have A Moat? (NYSE:PSTL)

Open mailbox with letters on rural backgound.

Bet_Noire

This article was co-produced with Wolf Report.

As REIT analysts, it’s always critical for our team to analyze competitive advantages, or “moats”, in order to determine whether a business can deliver the goods.

It’s important for us to always ask whether the company offers a unique value proposition that can protect itself from its competitors.

Today we will take a closer look at Postal Realty Trust (NYSE:PSTL), an interesting REIT with a very specific asset class and tenant.

While this may not be everyone’s cup of tea, we view the company as an appealing play (at the right price) on government-backed operations – one of the things we like investing in.

While some of you may be opposed to this, we remind you that government operations include everything from defense companies – like Easterly Government (DEA) – to schools, to infrastructure – as well as the U.S. mail service.

Let’s look at what this company offers us.

Postal Realty Trust – The Basics

Now, there’s no argument to be made that the legacy postal service and its various branches and operations have gone through extensive changes the past 20-30 years – probably one of the biggest set of changes since the inception of the modern postal service infrastructure.

Postal Realty Trust seeks to pivot and take advantage of the current structure of the way this infrastructure works. They do this by owning a large chunk of real estate used by the postal service, specifically USPS.

This is a massively fragmented market, from a high level. The market is around 280M square feet, with 84M of this being privately-owned real estate.

PSTL owns around 5.1M of this, which comes to about 6% of TAM. Another way of saying that is that there is more than 10x the size of the untapped market, given that the 20 largest owners after PSTL only own 11% combined of the market.

This gives the company the potential to gain a significant market – around double what they currently have (i.e. that is a “moat advantage).

The USPS market when it comes to different classes of real estate is massive – and the company’s market share, at this time, is still relatively small.

Postal Realty Trust market size

PSTL IR

PSTL views itself as uniquely positioned to consolidate this market, based on its long-standing relationships with the industry, and its solid reputation of over 30 years.

Another way of saying that is that PSTL has only managed to stake out 6% of the market in over 30 years – but it has an experienced in-house management and acquisitions team that has managed an 83% of deal flow being internally sourced.

Those are some impressive stats, to be sure.

The other argument to field, usually, is the fact that many investors consider USPS to be somewhat replaceable. We take a different stance.

USPS infrastructure, even with other entrants and peers, is critical both to e-commerce and non-eCommerce solution. Amazon (AMZN), UPS (UPS), FedEx (FDX), and Deutsche Post (OTCPK:DPSGY) all tap into USPS systems and solutions on a daily basis. No one is immune from dependency to the company, which makes the case for anyone supporting the backbone of their logistics a theoretically strong one.

USPS serves 46% of the world’s mail volume, and it serves over 163M unique delivery points. The organization has 31,000 facilities across the US, making it the largest retail distribution network in the country, and one of the largest on earth.

Because of the scope of the organization, this makes it almost impossible to replace. Any entrant will have to overcome significant capital and structural demands before they can even consider tapping into this company as a peer.

Having USPS as its tenant means the company has amazing lease retention. Take a look.

Postal Realty high retention

PSTL IR

Leases aren’t going anywhere.

And these leases come with an average of 5-year term, with various forms of net-lease structures that typically put the responsibility of taxation, utilities, and maintenance on USPS.

Being the government and USPS, leases have not historically allowed for any sort of improvement allowances or free rent upon renewals. These are straight payments for rent and for improvements with no side-stepping.

Also, from a governmental point of view, USPS leases are not subject to annual budgetary appropriations. They’re incredibly inflation-protected, allowing for renewals at market rents, tenant allocation for expense increases, and the fact that there is usually zero arguments or case to be made for USPS building assets or locations as opposed to leasing them.

No, dear subscribers. This sort of deal is attractive.

Postal Realty acquisitions, NOI growth and dividend

PSTL IR

As advocated here, you really don’t need to worry about rent coming in on time when you work with the government. Does the term “too big to fail” mean something here?

This makes, again in theory, a very attractive and safe investment.

That’s also why the company has grown its property count by 340% since IPO, 460% in AFFO, and its ABR by 417%. Most of this increase has been put back into the business, trying to grow as evidenced by the 66% dividend growth rate. However, investors are well-served with the current dividend coming in at a current yield of over 5.7%.

The current company lease expiration schedule is very conservative.

Less than 30% of the current ABR is up for renewals before 2025, with almost 60% at 2026 or later. One of the drawbacks with this REIT is the comparatively short weighted average lease term – only 4 years – but this is explainable by its tenant and the way it operates.

Far more flattering stats can be found in other metrics.

99.7% occupancy. That’s approaching NETSTREIT (NTST) levels. 49 states of activity. The company had no payment shortfall or lease reneges during COVID-19. Another benefit of this tenant. Assets are spread by Last-Mile, Flex, and Industrial properties, with 95%+ in the former two.

Postal Realty portfolio by asset class

PSTL IR

91% of the company’s assets are unencumbered, and PSTL has access to a $150M revolver and plenty of other access to capital at a rate of less than 3.5% at current stats.

The leverage has touched levels of 3.3x, which is absolutely amazing for a REIT, but is now back up to 5.5x as EV has dropped and the company has been investing more.

In terms of fundamentals – market, customers, portfolio, management, dividend, dividend yield and coverage – nothing negative really stands out at an immediate review.

10% of the company’s outstanding equity is owned by management and the board, and 100% of C-suite incentive comp is either in restricted stock or LTIP units, making management very aligned with delivering value to shareholders, and in extension to themselves.

Now, we understand why this company can be viewed as risky – also why we have it as a “spec buy”, not an unspeculative sort of “BUY”.

This is a small business, and the tenant concentration is at a max. Investing in this company is essentially believing in the legacy postal system – and that comes with certain risks and considerations.

However, all-too-often investors overestimate the impact of new entrants and their technologies, when the typical and obviously technological solution to many challenges is utilizing existing infrastructure in almost a turnkey manner.

Just as current E-commerce giants are integrating USPS into their processes. This in no way makes USPS less important, simply a part of other processes. We have seen similar development over here.

The main argument we see for PSTL is simple.

PSTL has been consolidating the USPS asset market for years.

They have done so successfully.

They are far from done – and their reasoning is sound, given that more than 25,000 USPS-leased properties remain “up for grabs” across the nation. This is a $15B market, and PSTL is at the beginning of it.

The company is likely able to continue to do exactly what it has been doing in the past. This makes the business attractive at the right price.

So what is the right price?

PSTL Stock Valuation

“Cheap” is the obvious answer here.

The interesting thing is, the market really hasn’t reacted to the company growing its FFO significantly in 2020, yet again in 2021, and seems to be fairly non-reactive to the company’s current forecasts, beyond trading down since the peak in mid-2021.

It’s not fair to call the company “dirt cheap” here. Any REIT trading at a 17.5x P/FFO multiple is obviously not cheap. The company is getting plenty of allowance for its rock-solid tenant safety, its yield, and some of its growth – but is it enough?

After 2022, it’s likely that the company will continue to see slow growth. The way that it has been growing, it’s unlikely that this growth will be explosive or volatile in any way – low double digits at most based on the company’s ability and pocketbook to execute attractive deals.

We consider it likely that the average FFO growth for this company will stand at between 3 and 8% annually or so. A huge premium shouldn’t, therefore, be attributed to PSTL. This is especially true given its sub-$1B market cap.

We would assign a rough range of 15-20x P/FFO for the company based on its tenant safety and its tapping into essentially recession-resistant cash flows from logistics with extremely low vacancy and an essentially zero chance of non-payment.

Even forecasting PSTL on the basis of a 19-20x P/FFO, still gives us a 15-19% annualized upside based on current FFO trends and forecasts.

PSTL Stock Upside

FAST Graphs

This is very good, given what we’re investing in. At any valuation approaching 15x P/FFO or below, this company should be on your radar despite its non-credit safety and market cap.

Keep in mind, we have done extremely well at iREIT on Alpha by uncovering small cap gems, just like PSTL.

PSTL obviously does not have much coverage, given its limited size and scope. 8 analysts follow the company and give it an average target of $18.90 from a range of $16 to $22, meaning the company is very close to trough valuation targets here.

The average valuation implies an upside of 16.6%. 6 out of 8 analysts are either at a “BUY” or “Outperform” here. (Source: S&P Global).

We at iREIT on Alpha consider Postal Realty a “Spec Buy” and we put it about a buck-and-a-half above the average PT, at around $20.4, implying an upside closer to 20%. Analysts also expect the company to be able to slowly grow its dividend, as well as overall FFO.

PSTL dividend and FFO/Share Forecasts

PSTL Forecasts (TIKE.com + S&P)

We believe it’s fair to say that we should be able to agree that the company’s share price does not currently reflect the NOI/FFO growth the company has been able to deliver, nor the potential growth pathway it may be able to deliver.

Because of this, we view this company as able to deliver alpha going forward – and we would consider it a “BUY”, albeit a speculative one.

PSTL is a buy

iREIT

As always, thank you for the opportunity to be of service.

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