Postal Realty Trust: Lock in that 5% growing yield (NYSE: PSTL)

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Seasoned investors know that market volatility means opportunity, especially when it comes to sustainable businesses that can withstand adversity. It’s even better when those assets pay a steady and growing dividend to help cover day-to-day life. expenses.

This brings me to Postal Realty Trust (NYSE: PSTL), which is currently trading well below its 52-week high of $21.27. This article highlights what makes PSTL an attractive stock to buy during uncertain times, so let’s get started.

PSTL: Lock in that 5% increasing return

Postal Realty Trust is an internally managed REIT that is the largest owner of properties leased to the US Postal Service. It went public in 2019 with a portfolio of 270 properties and quickly expanded its portfolio to 1,004 owned properties and another 397 properties under management. PSTL is also well diversified geographically with properties in 49 states.

PSTL invests in well-located and essential properties ranging from last-mile post offices to the largest distribution facilities. This resulted in a historically high lease retention rate of 98.8%. Renting with the USPS also has the inherent advantage of regular rent control, as evidenced by the fact that 100% of its rent payments are made on time.

PSTL has the advantage of being a big fish in a fragmented market made up mainly of private owners. This translates into attractive capitalization rates on new acquisitions, with a weighted average capitalization rate for 2021 in the range of 7.0 to 7.5%.

PSTL’s strong acquisition pattern continued last year, acquiring 239 properties which contributed to its bottom line. The overall portfolio is also in good health, with an occupancy rate of 99.6%. Rental income increased by 64%, reflecting organic growth and accretive acquisitions.

This allowed PSTL to increase its dividend for the 10th consecutive quarter this year, equivalent to a dividend growth of 4.6% over last year. The dividend also remains covered at a payout ratio of 91%, based on an annualized AFFO/share of $0.25 during the fourth quarter.

Looking ahead, PSTL is well positioned to continue to consolidate the fragmented USPS real estate market, as management estimates that there are more than 17,000 different lessors of USPS leased properties. PSTL properties represent only 5% of the overall USPS market, and the next top 20 portfolio owners combined have only 11% of the market.

PSTL also maintains a strong balance sheet, with a net debt to EBITDA ratio of just 3.3x, and has an attractive cost of capital, with a weighted average interest rate of just 2.4%. This, combined with its forward cost of equity of 5.5%, results in a weighted average cost of capital that is below the 6-8% cap rates that management sees in its current deal pipeline. , resulting in accretive growth.

The risks for PSTL stem from the obvious fact that its operational health is tied to a single tenant. This binary risk is mitigated by the fact that USPS operating lease payments represent only 1.7% of total USPS operating expenses last year. That means the USPS is more likely to look to other places to cut its operating budget before looking to close its properties.

Additionally, PSTL’s leases are well staggered, with only 15.5% of its leases (based on annual rents) expiring until the end of next year, as shown below.

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Expiry of PSTL leases (Investor presentation)

I see value in PSTL at the current price of $17.39 with a forward P/FFO ratio of 17.9, well below many industrial REITs. Analysts expect significant FFO/share growth of 8% later this year and a respectable 12.6% growth next year, and have a consensus Buy rating with an average price target of $21. This translates into a potential total return of 26% over one year, including dividends.

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PSTL Price Targets (Seeking Alpha)

Key takeaway for investors

Postal Realty Trust is a well-positioned REIT that should benefit from continued consolidation in the USPS real estate market. It has a solid balance sheet and an attractive cost of capital, which allows it to pursue its accretive growth. I think PSTL offers an attractive risk/reward ratio at the current price and views it as a buy for income and growth.

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