Postal Realty Trust NYSE: PSTL highlighted its strategy of acquiring U.S. Postal Service-leased properties, renewing leases at higher rates and expanding the share of its portfolio with annual rent escalators during a presentation at a Three Part Advisors conference.
President Jeremy Garber said the company operates in a fragmented market created by the Postal Service’s historical approach to building its real estate network. Rather than centrally developing facilities, the Postal Service issued local requests for proposals in communities, resulting in approximately 17,000 owners of roughly 23,000 leased postal facilities nationwide, Garber said. The Postal Service also owns about 8,500 properties.
Postal Realty’s strategy is to aggregate leased postal properties from that fragmented ownership base. Garber said the company was already the largest player in the niche as a private company before entering public markets roughly seven years ago.
Lease Renewals Shift Growth Profile
Garber said rising inflation and interest rates prompted the company to seek lease structures that would support property maintenance and improve its economics. Beginning in 2022, the Postal Service agreed to annual escalators on renewed leases, according to Garber. The company subsequently moved from five-year flat leases to 10-year terms with 3% annual rent escalators on renewals.
“We’ve completely changed the dynamic of leasing,” Garber said, adding that the revised lease structures have created internal earnings momentum that management believes investors have increasingly recognized.
Chief Financial Officer Steve Bakke, who joined the company about a year ago, said he initially viewed the concentration of a single tenant and the approaching expiration of roughly 30% of lease revenue as potential risks. After reviewing the business, however, he said the expiring leases represented an opportunity to reset rents and extend lease terms.
Bakke said 45% of the portfolio now has annual rental growth through 2026, compared with no annual escalators in 2022. He said the company’s outlook for 2027 same-store cash revenue growth is 6.5%, with about three-quarters of that projected growth coming from mark-to-market activity and renewals and the remaining 25% from annual escalators.
Capital Allocation and Balance Sheet
Management also emphasized its lower dividend payout ratio and balance-sheet flexibility. Bakke said Postal Realty paid out 100% of adjusted funds from operations, or AFFO, as dividends at the time of its initial public offering. As of the second quarter, the payout ratio had declined to 70% of AFFO.
The company aims to reduce that ratio to 65%, Bakke said. Retained cash flow is expected to add about 2% to annual AFFO-per-share growth next year, according to the CFO. Management believes a lower payout ratio could also improve the company’s borrowing costs in discussions with rating agencies and bond investors.
Postal Realty has generally operated with debt-to-EBITDA in the low-5-times range, Bakke said. The company recently updated its leverage target to 5.5 times or below and was operating at 4.6 times at the time of the presentation. Bakke added that the company has about $50 million of previously raised equity available to draw down for acquisitions.
“Regardless of what happens in the capital markets environment and the stock market over the next year, we have the capital we need to execute our business plan,” Bakke said.
Acquisition Pipeline and Postal Network
Garber said the company categorizes its potential acquisitions into last-mile, flex and industrial assets. Last-mile facilities, such as local post offices, typically range from 500 to 2,000 square feet. Flex properties range from 2,000 to 50,000 square feet, while larger facilities are categorized as industrial.
The company’s primary focus is on last-mile and flex assets, though it remains open to acquiring industrial postal properties at appropriate valuations. Garber said the Postal Service owns more of its industrial network, including processing, distribution and sorting centers, leaving fewer such assets available for acquisition.
Garber described the Postal Service’s last-mile network as critical because other carriers use Postal Service contracts to reach delivery points across the country. He said the Postal Service is required to serve approximately 170 million delivery points six or seven days per week.
- Postal Realty owns about 2,000 postal facilities, representing roughly 8% of the market, according to Garber.
- The next 20 owners collectively own about 2,500 properties, or approximately 11% of the market.
- Garber estimated the total addressable market at about $15 billion.
The company increased its acquisition guidance to $150 million from an initial expectation of $120 million for the year. Garber said the updated outlook would represent Postal Realty’s largest acquisition year in seven years.
He said acquisition volume remains governed by the company’s cost of capital and underwriting discipline, with management seeking purchases that are immediately accretive and contribute to earnings growth over the following five years.
Garber also said the Postal Service’s leasing expense represents about 1.5% of its approximately $80 billion in annual expenses, compared with about 70% for labor and roughly 15% for transportation. He said management believes the agency has more significant cost-management priorities than leased facilities.
On governance and alignment, Garber said the company’s CEO takes all compensation in equity and that senior management generally takes most of its compensation in stock rather than cash bonuses. Insiders own approximately 13% to 14% of the company’s float, he said, while directors also elect to receive stock rather than cash compensation.
About Postal Realty Trust (NYSE:PSTL)
Postal Realty Trust is a real estate investment trust that acquires, owns and manages single-tenant commercial properties net-leased primarily to the United States Postal Service and other government agencies. The trust focuses on facilities that support mail processing, distribution and retail operations, targeting assets that offer long-term, inflation-protected lease structures.
The company’s portfolio includes post offices, distribution centers and mail processing facilities located throughout the contiguous United States.
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