Description

The United States Postal Service (USPS) leases over 70% of their 32,000 properties to private landlords.  The lease payments are backed by the full faith and credit of the United States Government – in fact, the USPS has never missed a lease payment on its leased properties.  The USPS pays their rent on time, all of the time, through recessions, depressions, and government shut downs.  The USPS provides the United States with irreplaceable infrastructure servicing critical last-mile delivery for e-commerce customers (amazon, UPS, fedex). 

Postal Realty Trust (ticker: PSTL) is the largest owner of USPS properties.  PSTL is executing a scale and public/private arbitrage consolidation thesis in a highly fragmented ~$14bn market.  PSTL is the #1 player with ~5% market share with the next 20 competitors only owning collectively 11% of the market – PSTL’s size, public structure, and management expertise offer significant advantages in rolling up an underappreciated and highly fragmented market.  PSTL owns 1,182 USPS properties (5.1mm sq ft).    PSTL trades for $15 per share, with 23.2mm FDSO for a market cap of $348mm.   PSTL became public in May 2019 via IPO and remains the only publicly listed owner of USPS properties.  

PSTL has significant advantages (size, public structure, and management expertise) that allow it to earn excess returns on capital as it rolls up and institutionalizes an attractive underappreciated market.  There are 32k USPS locations in the United States, 23k of which are leased for $1bn gross annual rent ($14bn market at a 7% cap rate).  PSTL as the leader owns ~5% of the market, with the next 20 competitors combined only owning 11%.  In fact, there are 16,383 different legal entities that own USPS properties.  Most owners are aging and there is a generational shift in ownership – the average owner has owned for ~40 years. 

PSTL has an advantage by targeting long-time owners of single properties that have retained them within their families and face a significant tax liability if sold- it uses its operating partnership units as currency to allow property sellers to defer any potential capital gains taxes.  As the only publicly-listed REIT focused on postal properties, PSTL offers postal property owners a tax-efficient disposition and estate planning option.

Additionally, PSTL has significant scale advantages as the company can acquire and grow property counts without increasing its G&A base of ~20 employees in their corporate headquarters.  Scale also affords PSTL with an advantage in sourcing contracts - for example, as a result of PSTL’s national insurance and roofing contracts, management estimates that they are able to reduce annual property expenses by approximately $0.10 to $0.65 per square foot as compared to postal properties owned by individual owners.   

The CEO’s father started the business in the early 1980’s – aside from knowing what to avoid and what to look for, this experience affords PSTL an additional advantage in sourcing deals as evidenced by the fact that 83% of acquisitions in 2022 were sourced off-market (~75% in 2021).   Additionally, Patrick Donahoe (73rd Postmaster General of the United States Postal Service from 2010-2015) serves as an independent director on the board.  Management and directors collectively own ~13.4% of the fully diluted shares.  Since IPO (May 2019), the CEO has received no cash as a salary – instead receiving Long Term Incentive Plans shares in lieu of a cash salary.  

The United States Postal Service provides strategic and irreplaceable infrastructure to the United States economy.  Amazon built out a logistics network throughout the US utilizing the postal service last mile- they specifically use a product that Postal Service sells called “Parcel Select” (Amazon does all of the pre-sorting of all packages, drops off the packages at a postal service every day at a certain time, and it’s the postal services responsibility to deliver to customer).T here are high barriers to replicating the existing infrastructure (USPS delivers to 163mm delivery points every day) and the current system is a win/win for consumers and e-commerce facilitators (Amazon, UPS, Fedex all rely on this critical infrastructure). Additionally, the rental cost of these properties is de minimis to the USPS.  Operating lease payments represented only 1.7% of the USPS’s total operating expenses in fiscal year 2021.

PSTL purchases US Postal Service properties in the 6-8% cap rate range – and are buying either at (or in most cases below) $150/sq ft which management believes is well below replacement cost for these properties (the post office spends $170-180 per foot when building a new post office).   The leases are structured as modified double net (most of the operational expenses are paid for by the government – including regular maintenance, utilities, property taxes).   In the S1 from the IPO, the company disclosed annual rent increases of ~5.7% per year between 2015 and 2018.  PSTL provides a great inflation hedge as rent increases are typically at or above inflation.  Although the average lease is structured as a 5-year lease, 38% of PSTL’s existing leases renew in the next 3 years which will drive pure cashflow growth through rent increases.  88% of their debt is fixed. 3.48% weighted avg interest rate, WAL of debt is 5.7 years.   PSTL has had 98.9% lease renewal rates over the last 10 years and rent collection rates of 100% - the US Government pays rent on time, every time.

Since this is a roll-up which is tricky to value, I approach valuation from a few different perspectives:

• Annualized the latest quarter, the stock trades at 15.8x MC/AFFO giving this an implied ~6.3% yield.   Rents will be growing faster than funding costs, and rents have historically risen in the 5% range.  Finger in the air you’re probably safely earning 9-11% here (6.3% plus 3-5% organic growth) without any further M&A.  

• IRR is likely higher if you believe in two things:

• The rents are recurring, highly reliable, and backed by the US Government and therefore should command a multiple higher than ~10% implied IRR. 

• Acquisitions are accretive to the stock.  Since IPO, management has acquired $335mm in properties and the market cap has only increased $271mm, so although the stock has stayed flat you own more value per share than when the company was underwritten in May 2019.

• Importantly, your downside is limited.  This shouldn’t trade much lower than 16x AFFO and you have significant downside protection as this is trading well below replacement value.  At IPO, you were paying $88 per square feet.  Today you're paying $73 per square feet. Per management, anything below $150 sq ft (on average) is below replacement cost.   The post office spends $170-180 per foot when building a new post office. 

Putting the above together, you have a situation where there is limited downside (aside from US Tsy yields continuing to soar higher than expected, which is hedgeable extrinsically and also intrinsically by the fact that PSTL will raise rents in line w/ inflation faster than debt reprices), and base case you’re earning 9-11% with some potential upside in that number through multiple expansion and accretive M&A.  

Catalyst

Continued execution, awareness, valuation