Postal Realty Trust, Inc. annual report, FY2019

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Postal Realty Trust, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The Company began operations upon its May 17, 2019 IPO and formation transactions; 2019 results combine predecessor results through May 16 with Company results thereafter. Accordingly, comparisons with 2018 are not fully comparable. The filing does not provide a separate fourth-quarter income statement.

Business context

Postal Realty is an internally managed REIT focused on owning and managing properties leased to the U.S. Postal Service (USPS). At year-end, it owned 466 properties in 44 states, totaling approximately 1.4 million square feet; nearly all were leased to the USPS, its single material tenant. It also managed 403 additional USPS-leased properties for affiliated owners. Most leases are modified double-net, with the USPS responsible for utilities, routine maintenance and property-tax reimbursement, while the landlord generally bears insurance, roof and structural costs.

Financial performance and liquidity

  • Revenue: $11.29 million in 2019, up 47% from $7.69 million in 2018. Rental income was $8.87 million, tenant reimbursements $1.31 million and fee and other income $1.11 million. Growth primarily reflected acquired and contributed properties; the periods are not directly comparable.
  • Profitability: Operating income was $68,527, compared with $2.57 million in 2018. Net loss was $1.49 million; net loss attributable to common stockholders was $1.50 million, or $0.30 per share. Higher public-company G&A, depreciation, equity compensation and transaction costs contributed to the decline. The filing reports no separate adjusted earnings or EBITDA figure.
  • Cash flow: Operating cash flow was $2.86 million (2018: $2.73 million); investing cash outflow was $72.65 million, mainly for property acquisitions; financing cash inflow was $82.12 million, including IPO proceeds and revolver borrowings. Year-end cash was $12.48 million, with $0.71 million in escrow and reserves.
  • Debt: Total principal debt was $57.25 million, including $54.0 million drawn on a $100 million revolving facility and approximately $3.25 million of mortgage and seller debt. The revolver matures in September 2023 and bears variable interest; the Company reported compliance with its covenants at year-end. Secured borrowings were $3.21 million net of financing costs.
  • Liquidity: In January 2020, the Company expanded revolver capacity to $150 million through the accordion feature. It borrowed an additional $11 million in January and $3 million in February 2020. Management expected to fund near-term needs with operating cash, cash on hand and facility borrowings, and longer-term needs with operating cash, debt, equity and selected property sales.
  • Margins and distributions: Operating margin was approximately 0.6% and net margin approximately negative 13.2%, calculated from reported 2019 totals. The Company declared and paid $0.203 per share during 2019; a $0.17 fourth-quarter dividend was declared in January 2020 and paid in February.

Material changes and unusual items

  • The May 2019 IPO sold 4.5 million shares at $17.00 each, generating $76.5 million gross proceeds. The Company reported approximately $71.1 million net of underwriting discounts, before $6.4 million of other IPO expenses. It used part of the proceeds to repay approximately $31.7 million of predecessor debt.
  • After the IPO, the Company acquired 195 properties for approximately $57.5 million; its year-end owned portfolio totaled 466 properties. Acquisition spending contributed to the significant increase in real estate assets and investing cash outflow.
  • 2019 included approximately $1.0 million of equity-based compensation, $0.5 million of non-recurring acquisition transaction costs, and a $0.19 million loss on early debt extinguishment. Total G&A rose to $4.85 million from $1.41 million in 2018.
  • As of March 25, 2020, 32 leases were in holdover status, representing $1.1 million of 2019 annual rental revenue. Year-end weighted-average remaining lease term was 2.92 years; scheduled expirations included 20.3% of annualized lease revenue in 2020 and 31.4% in 2022.

Outlook, risks and contingencies

  • Growth: Management described continued acquisition and consolidation as its strategy. Subsequent to year-end, the Company closed acquisitions of 21 properties for approximately $13.5 million and 42 properties for approximately $8.7 million, and acquired 20 additional properties for approximately $8.0 million. It had definitive agreements for 17 more properties totaling approximately $11.5 million, expected to close in the second or third quarter of 2020 subject to customary conditions. These are reported plans and transactions, not earnings guidance; no quantitative operating or earnings guidance is provided.
  • Tenant and lease concentration: Results depend substantially on USPS solvency, operations, lease renewals and demand for post office space. The filing cites USPS debt and substantial unpaid pension and retiree-health obligations, declining mail volumes, competition and potential facility consolidation. Vacated postal properties may be difficult or costly to re-lease or sell.
  • COVID-19: The filing notes that the pandemic and related restrictions could reduce in-person postal activity or disrupt USPS staffing and services; the ultimate effect on the Company was unknown as of filing.
  • Other risks: Variable-rate debt and LIBOR transition, covenant compliance and refinancing, acquisition execution and financing access, lease expirations, geographic concentrations, natural disasters, environmental liabilities, REIT qualification and related-party arrangements are identified risks. Texas, Pennsylvania and Massachusetts represented 10.5%, 10.3% and 9.7% of rental revenue, respectively.
  • Contingencies and controls: Management reported no material litigation and no off-balance-sheet arrangements. The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls were effective; an internal-control audit opinion was not provided under the applicable newly public company transition relief.

Important facts for investors to verify

  • Track USPS lease renewals, holdover resolutions and rent changes, especially the near-term expirations and 2022 concentration.
  • Confirm subsequent acquisition closings, purchase prices, financing sources and resulting dilution from OP units or equity awards.
  • Review revolver borrowings, variable-rate exposure, covenant headroom and the September 2023 maturity against cash generation.
  • Assess the sustainability of the dividend relative to operating cash flow, REIT distribution requirements and capital needs.
  • Evaluate USPS financial and operational developments and the realized effects of COVID-19 on rent collections, leases and property demand.
  • Consider that 2019-versus-2018 results combine different reporting entities and that related-party management fees and office rent are disclosed.