2020 has been a very difficult year for most REITs. The popular Vanguard REIT ETF (VNQ) is still down double digits this year. Retail, commercial, and lodging REITs have been hit the hardest as COVID lockdowns have led to a decline in rental revenue. However, there are a few niche segments of the REIT industry that have been almost entirely unimpacted by the crisis. One of which is Postal Realty Trust (PSTL).
PSTL is one of the most unique REITs on the market. The company has one tenant, the U.S. Postal Service and, currently, owns about 700 properties and 3.9M sqft of postal properties. These properties are all over the country and have a 100% occupancy rate. PSTL is a relatively new REIT that was launched last year and, as you can see below, has had roughly flat performance since inception:
The REIT declined during the temporary liquidity crisis in March but quickly rebounded. It is essentially non-impacted by COVID or by changes in economic conditions and has been buying properties at a fast pace. It, currently, has a 5.5% dividend yield, which is higher than that of most REITs today despite its lower economic risk factors.
Postal Realty’s Unique Risks
Postal Realty has different risks than most REITs do, it is by no means a riskless investment. The first and most important being a decline in the U.S. Postal Service. This has been a particular issue this year since there has been growing political tension surrounding Postal Service funding. The Postal Service usually does not receive direct money from the government but is indirectly supported through subsidies.
That said, USPS had been in a difficult financial position due to over a decade of losses stemming from a decline in volumes. The U.S. Treasury recently gave the Service a loan that will keep it afloat through at least mid-2021. USPS also recently raised its rates during the remainder of the Q4 season in order to meet the demand for online shopping and mail-in ballots.
Many are concerned that USPS will be shut down due to its lack of funding; however, this seems generally unlikely as there is immense political pressure to keep it afloat. Additionally, USPS is still the dominant domestic courier service, all it needs to do is improve efficiency and possibly raise rates.
The Unique Value of Postal Properties
There has been a slight decrease in retail post office locations over the past decade, but the recent shift back toward suburbanization may save many of the small-town Post Office branches that have been struggling. There has not been a decline in demand for packages, but a decline in population in many rural and suburban communities which has harmed USPS. This shift appears to be reversing.
Even still, many of PSTL’s properties are beautiful older classic brick buildings. If some branches are closed, these properties could be repurposed in a manner that may actually make them more profitable. There would be a temporary decline in lease revenue, but the buildings will likely always remain cornerstone properties in many towns.
In my opinion, many REIT investors focus a bit too much on profit levels and not enough on property quality. PSTL’s properties have solid profits but, more importantly, have an immense historical value that is nearly priceless.
PSTL Is Trading Above Fair-Value
PSTL’s 5.5% dividend yield is higher than the average REIT and I would argue PSTL’s dividend is likely to be more stable than most. The REIT’s dividend is covered as it has a forward “P/FFO” of 20X which means it should receive 5% of its value in funds from operations per year.
Fortunately, most of its properties were acquired very recently which means the company’s book value is likely very close to its net asset value since there has been little impact from depreciation. This is currently roughly $9 per share which is about 40% below its current price.
This does not necessarily mean that PSTL will decline in value toward the $9-11 range. It has a dividend that is higher than most REITs and is likely fully-covered on a forward basis. PSTL also has a steady revenue stream and owns many unique properties. That said, the REIT is certainly not undervalued as it is almost certainly trading well-above the net value of its assets. This is usually the case for low-risk REITs.
The Bottom Line
Overall, PSTL is a generally attractive long-term “buy and hold” investment. It will not make you rich but will likely offer decent and stable dividends. Most importantly, its returns are likely to be uncorrelated with that of most other equities and REITs since it has limited economic risk and is in a very niche sector. To me, this is an extremely attractive quality that offsets its higher valuation.
I would not necessarily say I am “bullish” on PSTL since it is trading at or above its fair value, but I do believe the REIT is a worthwhile investment for investors looking to diversify their income stream and gain exposure to unique assets with historical value.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PSTL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Would buy if its price falls to $12 or below