Return To Sender: Sell Postal Realty Trust

seekingalpha11-05

PSTL represents a classic value trap with a high payout ratio.FFO has been grown by selling shares in a way that is not accretive for shareholders.The 6.58% dividend yield may look attractive, but it ...

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As of September 25, 2024, the Company had received 162 fully executed new leases from the USPS, representing 2023 and 2024 leases that have expired and are scheduled to expire. The 2023 leases received represent nearly 57% of the aggregate 2023 expired rent and the 2024 leases received represent 51% of the aggregate 2024 expired and scheduled to expire rent. I found it a little strange that they were still in the midst of renegotiating rents from the past and decided to dig a little deeper. Data by YCharts [object HTMLElement] Postal Realty Trust has outperformed the Vanguard Real Estate ETF (VNQ) since the last Federal Open Market Committee meeting announcement of a 50 basis point rate cut on September 18, 2024, but there are a few red flags to consider when examining the fundamentals under the surface. Postal Realty Trust has a Seeking Alpha Quant rating of 2.78 resulting in a HOLD rating in addition to BUY ratings from Wall St sell side analysts as well as Seeking Alpha analysts.  On the dividend safety page, Postal Realty Trust receives a dividend safety grade of F. With a concerningly high payout ratio resulting from excessive dividend raises in 2020 and 2021 overtaking their recent growth in funds from operations, I believe a purchase of Postal Realty Trust would be an example of chasing a high yield that could appear safe based on the tenant credit quality. This looks like a classic value trap and a prudent investor in REITs and income could find much better opportunities. I rate Postal Realty Trust as a SELL and would avoid it until they can prove more consistency in accretive growth to create shareholder value over the long run. Funds From Operations For evaluating REITs, it is important to ignore GAAP earnings per share that can be reflective of asset purchases or sales and instead follow the funds from operations, or FFO, a better reflection of the rental income from a REIT's properties. Data by YCharts [object HTMLElement] Postal Realty Trust has seen consistent growth in funds from operations since 2019 to over $22 million on an annual basis. The problem is that this does not reflect the full picture. After significant growth in 2020 and 2021, Postal Realty Trust has not been able to grow it's FFO per share in any significant way. Data by YCharts This proves that while management has been growing FFO, it has not been done in a way that is accretive for shareholders in recent years. Data by YCharts [object HTMLElement] Selling shares in the open market is not inherently bad for a REIT's shareholders. When properties can be purchased at a high cap rate, specifically higher than the REIT's current dividend yield, management can use the spread between the cap rate and dividend yield to grow funds from operations in a way that creates shareholder value over time. In the latest earnings report, Postal Realty Trust noted that they are acquiring property at an average weighted cap rate of 7.6%. At the current stock price, there is a 1% spread to the dividend yield on those latest acquisitions and these should be adding to free cash flow per share. On the contrary, earlier acquisitions when the stock price was higher in 2022 and 2023 were destructive to value for shareholders. Dividend Growth and Safety Postal Realty Trust currently pays 0.24 per quarter and has been slowly growing its dividend in the last 3 years at an average 3% CAGR. Dividend growth has slowed to 1% when it is evaluated over the trailing twelve months. The 5 year dividend growth rate is over 72%, but that is not reflective of the current situation. In the last twelve months, Postal Realty Trust has paid out dividends in excess of funds from operations reflected in the Seeking Alpha dividend safety grade of F and showing FFO payout ratio of 104%. This should be a red flag for long term investors that even the paltry dividend growth in the last three years is not sustainable. We are more likely to see a dividend cut than a return to double digit dividend growth any time soon. Valuation One way to assess valuation is to compare a relevant metric like the price to funds from operations ratio to relevant peers. I believe COPT Defense Properties (CDP) and Easterly Government Properties (DEA) are the most relevant peers to Postal Realty Trust because all three REITs lease properties to US government agencies. In the table below, I compare the P/FFO multiple from each REIT and their respective valuation metric page on Seeking Alpha for the trailing twelve months.   REIT P/FFO (TTM)   Easterly Government Properties 11.63   Postal Realty Trust 15.57   COPT Defense Properties 12.43   Click to enlarge The average P/FFO multiple for the peer group is 13.21x. When compared to the average of its peers, Postal Realty Trust appears to be roughly 15% overvalued. For a dividend discount model, we value the current dividend yield against it's own 4 year average dividend yield, assessing a REIT's dividend payout against it's own short term historical average.   PSTL Current Yield PSTL 4-year Average Yield Premium/Discount %   6.58% 5.86% 10.95% discount   Click to enlarge According to the dividend discount theory, there is roughly an 11% margin of safety to buy PSTL at the moment. Since I do not see the dividend to be safe or growing significantly, I do not put as much weight in this valuation model. While I find the Chowder Rule to generally be a great starting point for assessing potential future returns for dividend payers, Postal Realty Trust's 5-year dividend growth rate above 72% is not reflective of the potential for dividend growth going forward. Even though both the dividend discount model and Chowder Rule show undervaluation, this is a great example of the classic disclosure that \"past performance is no guarantee of future results.\" I see the overvaluation when compared against peer REITs to be a better reflection of reality. Risks One risk to my sell thesis on Postal Realty Trust would be the renegotiation of past rents due from the United States Postal Service. It is entirely possible that they are able to negotiate higher lease rates for their properties and receive lump sum payments for past due rents that would materially change their past and future funds from operations for the better. This would improve payout ratio metrics as well and make the dividend more sustainable. Another risk would be receiving a higher valuation multiple re-rating from being considered as an industrial/warehouse REIT instead of a part of the office REIT industry categorization. A postal \"office\" is more of a last mile delivery warehouse property than a corporate office property and more akin to the assets owned by Prologis (PLD) or STAG Industrial (STAG) than office properties owned by Orion Net Lease (ONL) or $Vornado Realty Trust(VNO-N)$ (VNO). One could make a legitimate argument that Postal Realty Trust should be valued more similarly to the warehouse owning REITs. Investors Takeaway Postal Realty Trust is expected to report their 3rd quarter earnings after the closing bell on November 4, 2024. Regardless of the results, I would maintain my sell thesis. Positive results showing growth in funds from operation in a meaningful way would need to be followed up with multiple quarters of consistency to build enough trust for me to shift to a HOLD or BUY rating. While there is an element of safety in purchasing a REIT with lease agreements that are implicitly backed by federal and state government agencies, I do not believe there is much value for long term investors in Postal Realty Trust. An incredibly valuable lesson I have learned from following REITs (and studying the methods of other analysts on Seeking Alpha) over the years is to avoid chasing high yields, especially when the dividend payments do not appear to be supported by accretive growth in funds from operations.  I rate Postal Realty Trust as a SELL and would encourage long term investors to find opportunities for income backed by more consistent fundamentals.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481550186"}