Small real estate investment trusts (REITs) can be exciting to own because their tiny portfolios can be expanded very quickly. And, as new properties are added, the top and bottom lines, as well as dividends, can be grown quickly too. That's the story behind Postal Realty Trust (PSTL 2.15%) today. Add in a relatively large 5.5% yield, and there's even more to like. But don't jump in before you consider this very big problem.
A small start
Postal Realty Trust held its initial public offering (IPO) in May 2019. At the time it owned 270 properties. By the end of the first quarter of 2022, the REIT had increased the size of its portfolio to just over 1,000 owned locations and nearly 400 that it manages on behalf of others. That's huge, even impressive, growth.
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Along the way it has increased the dividend from $0.14 per share per quarter to $0.275. That's an increase of 96% in basically just a few years. It's easy to see why investors might be attracted to the REIT, particularly since it still offers a fat 5.5% dividend yield despite the growth it has achieved. To put that figure into perspective, the S&P 500 Index yields a scant 1.3% and the average REIT, as measured by the Vanguard Real Estate Index ETF, has a relatively miserly 2.2% yield.
Before you jump on board, however, take a deep breath and think about the REIT just a little bit more. There's a major problem here that isn't going away anytime soon.
You are what you own
Postal Realty Trust's name says a lot about the REIT, which is focused on owning post offices. Management proudly boasts that it believes it is the "nation's largest owner and manager of properties leases to the USPS." On the surface that sounds like a good thing, since post offices are a long-term staple of American life. Or are they?
The internet has drastically changed the way people communicate, from sending emails rather than physical letters to advertising online instead of reaching customers through mailed advertisements. For example, mail volume peaked in 2006 at just over 213 billion pieces, but has since fallen to just 129 billion in 2021, according to Statistica. That's a nearly 40% drop. While package volume has picked up thanks to online shopping, there's material competition in the package space and it's not clear that the U.S. Postal Service is going to be a long-term winner against aggressive players like Amazon.
Post offices don't stay open in perpetuity -- they get shut down when there's not sufficient reason to keep them open. Historically that has meant closing locations in small towns, but with the U.S. Post Office bleeding red ink, there's no reason to believe that more closings aren't on the way. In fact, a reasonable person might think that, in larger areas, there could be cost savings in merging nearby post offices. In other words, Postal Realty's business may not be as strong over the long term or have as much growth opportunity as some investors believe. Postal Realty Trust clearly sees the trends here and has significant exposure to larger facilities, but there are still material risks in a business model that relies so heavily on the money-losing U.S. Postal Service.
Other options
If that big picture headwind isn't an issue for you (there are still a lot of post offices around), then by all means buy Postal Realty Trust. However, it's worth noting that you can buy globally diversified REIT W.P. Carey, with its 5.4% yield, today. And that yield is backed by over two decades of annual dividend increases. For most investors, and particularly conservative ones, that should be far more attractive than Postal Realty and its young, untested, and perhaps not so advantaged business model.
