Ben Franklin became America's first postmaster general in the 1770s. More than two centuries later, Postal Realty Trust (PSTL -0.14%) is a stock to consider for investors interested in a new niche in this old business.
This real estate investment trust (REIT), which has been trading publicly for about 2.5 years, is the only publicly traded REIT focused on leasing space to the U.S. Postal Service (USPS). It owns or manages more than 1,300 properties that are leased to the USPS, including post offices and mail sorting facilities.
The company's portfolio has grown dramatically since its May 2019 IPO and it now holds about 5% of the square footage leased to the USPS. The company noted in early November that this situation provides "plenty of runway for additional growth."
But is the stock a buy? While Postal Realty Trust is growing, there's still its debt to consider, and lots of competition for its tenant, too, that potentially could make the sledding tougher in the years to come.
Here are three things to think about while considering if this REIT deserves your stamp of approval in the form of investor cash.
1. The tenant is reliable and self-sufficient
Postal Realty's portfolio is 100% occupied by a tenant that pays the rent and tends to not change addresses very often. As CEO Andrew Spodek told REIT Magazine in September, "The postal service is a government agency that pays its rent on time, rarely moves, and doesn't require the landlord to have on-site property management."
The company's weighted average annual rent for its owned properties was $8.82 per square foot (PSF) as of September, compared to $6.37 for industrial space of all kinds nationwide in November. Nearly half of Postal Realty's leases expire before 2025. Investors should watch to see how that rent PSF figure changes in coming quarters.
While Postal Realty investors are counting on the fortunes of a single tenant -- not much diversification there -- it's hard to imagine, even with all its travails of recent years, that the USPS would go away or even shrink substantially. It's just too essential and visible.
2. The REIT is quickly growing its portfolio
Postal Realty says that since its IPO, it has "more than tripled our property count, quadrupled our annualized rental income and nearly grown our square footage by 5x." In the third quarter of 2021, Postal Realty bought 59 properties for about $19.2 million as it moved toward meeting its goal of $100 million in acquisitions for the second straight year. Those new properties, meanwhile, carried a rental rate of $11.86 PSF, raising the portfolio's average.
3. It is growing its dividend and its debt
Postal Realty's recent quarterly dividend of $0.2250 per share is the ninth in a row since its IPO, giving it a nice yield of 4.9% per share of common stock at the current share price. Funds from operations (FFO), the key measure of REIT profitability, also has been on the rise, from $0.21 per share in the third quarter of 2020 to $0.25 in Q3 2021.
Meanwhile, the company had $122.8 million in net debt with a weighted average interest rate of 2.2% and only $4 million in cash on its balance sheet as of Q3 2021.
Its net debt-to-earnings before interest, taxes, depreciation, and amortization ratio of 4.8 and price/earnings ratio of 127.87 point to this being a leveraged enterprise and expensive stock. Postal Realty sold about $147 million of new stock in 2021 to help raise money for more acquisitions, giving it buying power but adding some shareholder dilution.