A valuable last-mile logistics network, stable occupancy, and consistent rent growth are among the key factors that make the U.S. Postal Service (USPS) a highly desirable tenant for Postal Realty Trust, Inc. (NYSE: PSTL), the nation’s largest owner and manager of properties leased to the USPS. At the same time, Postal Realty CEO Andrew Spodek has not shied away from recognizing the operational challenges faced by the USPS today. "I think the current uncertainty about the USPS needs to be acknowledged, and we have done that," Spodek says, referring to the impact of the pandemic and policy changes in 2020 that led to serious backlogs in mail delivery. However, Spodek says the long-term outlook for its primary tenant remains favorable. "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."
Postal Realty has leased space to the USPS since the early 1980s. "Our properties are currently 100% occupied and have averaged a 98% retention rate for the past 10 years. Despite the headlines and confusion, the USPS is a creditworthy tenant whose total gross lease payments accounted for less than 2% of its expenses in 2020," Spodek says. Since its IPO in May 2019, Postal Realty has more than doubled property count, tripled annualized rental revenue, and nearly quadrupled owned square footage.
And while COVID-19 led to the loss of almost an entire quarter of acquisitions, the specialty REIT managed to exceed its $100 million acquisition guidance for 2020 by purchasing 261 postal properties for over $130 million, within its targeted weighted 7%-9% average cap rate range. As of March 4, 2021, Postal Realty owned 793 postal properties in 48 states, comprising 3.4 million net-leasable interior square feet. The company also provides fee-based, third-party management services for another 399 properties leased to the USPS.
Equipped with fresh capital from two additional equity raises, the company has increased its quarterly dividend seven consecutive quarters, reduced debt, and already made inroads on its 2021 acquisition goals.
"Our story is simple and straightforward. We’re a high-growth company with a very conservative strategy ... if people take the time to understand our market, they will understand the tremendous opportunity we have," Spodek says.
Tapping Into the Last Mile
A less well-known fact about the USPS is that it owns the largest and most intricate last-mile logistics network in the nation, delivering over 160 million unique points every day except Sunday.
"This network is so valuable because most deliverers tap into it in some way or another," Spodek says, "It’s part of the critical e-commerce infrastructure of the country, and as e-commerce continues to grow, the demand for the USPS logistics network continues to grow with it."
Stephen Manaker, managing director of equity research at Stifel, points to the possibility of future competition from non-USPS delivery networks like Amazon that continue to expand their routes.
"There is a risk, but I don’t see it as significant," he says. "The amount of delivery capacity needed is huge, and no one firm can handle it all—especially deliveries to secondary and tertiary markets. We think the USPS will continue to be needed, and to be a critical part of the network for other private delivery companies."
Spodek describes the market in which it operates as extremely fragmented. He notes that there are more than 25,000 postal properties in the nation that are leased to the USPS, owned by more than 17,000 property investors. The average property investor is older, has three or fewer properties, has owned them for decades, and has little or no depreciable basis left in their property.
There is also a generational shift in ownership taking place that is bringing in different types of owners. "We thought our ability as a REIT to provide a tax deferral by allowing sellers to contribute assets in exchange for partnership units would be a big incentive for private owners, and we were right. That’s what we’re doing," Spodek says.
By contributing their property to Postal Realty’s Operating Partnership (OP), sellers earn a share of the income produced through the company’s portfolio of real estate investments without the hassle of owning, financing, and managing property. "We’ve done some sizable transactions by issuing OP units. Not all transactions close with these units, but offering them drives deal flow," Spodek says.
The USPS leases a variety of types and sizes of property that Postal Realty divides into three categories: last mile (below 2,500 square feet); flex (2,500-50,000 square feet); and, industrial (over 50,000 square feet). Postal Realty buys all three types, focusing on properties that it believes are important to the USPS logistics network.
"When we look at a property, we first try to determine whether or not the USPS wants or needs to be in that property. We’re agnostic to property type and size. However, we have to be able to underwrite the property from a real estate perspective, which includes a weighted average cap rate within the 7%-9% range," Spodek says.
Stifel’s Manaker says Postal Realty’s ability to discern which buildings will continue to be critical to the USPS is what sets it apart. "It’s easy to buy post offices, but to figure out which ones will be in USPS’ plans for the long term is key," he says. "Postal Realty has the knowledge, experience, and ability to do this successfully."
Deep Roots
Although still young as a publicly traded REIT, Postal Realty is a veteran acquirer and manager of postal real estate.
Spodek’s father began buying postal properties in the early 1980s. "At the time, he didn’t even know that the USPS leased most of its buildings," Spodek says. "He bought a few small properties and found early on that the USPS pays its rent on time, through government shutdowns, recessions, and, we now know, through a pandemic."
Spodek grew up accompanying his father on trips to view potential purchases and stepped into a larger role when his father semi-retired. In 2004, he founded and became CEO of Postal Realty’s predecessor, Nationwide Postal Management, Inc. (NPM). NPM continued to buy, lease, and manage postal properties and eventually converted to a REIT.
"We went public not only for the access to a lower cost of capital, but also to take greater advantage of the opportunities to acquire," Spodek says. "The market is so fragmented, and the competition is different for each type of property. Last mile properties are usually locally owned, and larger industrial properties are often owned by more institutional players."
The challenges at hand, Spodek says, are to remain focused and disciplined, to keep net debt to enterprise value below 40%, and maintain net debt to annualized adjusted EBITDA of six to seven times. Thus far in 2021, those challenges are being met. Lease retention has remained at 100% for eight straight quarters, with 100% occupancy, and all of the company’s 2019 and 2020 leases formerly in hold-over status are now under five-year leases.
The REIT also renewed a 135-property master lease early. The master lease, which accounts for nearly 9% of the company’s total square footage, is now set to expire in February 2027, which gives even more visibility into cash flows.
On the capital markets front, a $100 million credit facility was expanded to $150 million with the use of one of the company’s two $50 million accordions early in 2020, and follow-on stock offerings produced $109 million in gross proceeds,, a portion of which was used to repay debt. The REIT also set its 2021 acquisition guidance at $100 million closed on approximately $26 million by the first quarter of 2021.
Jonathan Petersen, equity analyst at Jefferies, says Postal Realty is a "sophisticated, institutional player buying properties that often have room to push the rent a little, and the company is experienced dealing with the USPS…this is a niche product, and understanding the fair market value of a post office is a little difficult."
Plans to Expand
Currently, most of Postal Realty’s properties are in the eastern and southern U.S., reflecting the original roll-out of the USPS network. The USPS lease structure allows Postal Realty to go wherever the deal takes it.
The types of owners who are interested in selling run the gamut. "Some who might not have been interested in selling before now know that we are the natural buyer and can provide a tax efficient way to receive cash flows (though the dividend) and not have the pressure of continuing to operate their property," Spodek says.
For those with portfolios of other asset types that have underperformed, "selling their USPS property can be a good option. Some owners are also doing estate planning, and they find the OP units and dividends helpful," Spodek adds.
Adding to Postal Realty’s positive outlook is a staff that believes in the company’s mission. "We take a significant portion of our compensation in equity, which mirrors that," Spodek says.
And, should unforeseen problems arise with the company’s sole tenant, Postal Realty says it can look to Patrick Donahoe, former Postmaster General and the independent chairman of the board, for insights or counsel.
"This business was built to succeed in good and bad times. We are low leveraged and have a rental stream backed by the full faith and credit of the U.S. government—you can’t ask for better credit quality than that," Spodek says.