Postal Realty Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; filed November 12, 2019. The company completed its IPO and formation transactions on May 17, 2019. Q3 2019 reflects the post-IPO company, while Q3 2018 reflects its predecessor. The nine-month 2019 results combine predecessor results through May 16 with company results thereafter, so comparisons are not fully like-for-like.
Business context
Postal Realty owns and manages postal properties, principally leased to the U.S. Postal Service (USPS), and also manages properties for third parties. At September 30, 2019, it owned 289 properties in 43 states and managed an additional 403 properties. All owned properties were leased to the USPS, apart from a de minimis non-postal tenant.
Financial performance and position
| Metric | Q3 2019 | Nine months 2019 |
|---|---|---|
| Total revenue | $3.01 million | $7.43 million |
| Operating income (loss) | $(0.35) million | $0.44 million |
| Net income (loss) | $(0.39) million | $(0.42) million |
| Net loss attributable to common stockholders; loss per share | $(0.31) million; $(0.06) | $(0.70) million; $(0.14) |
- Revenue mix: Q3 rent income was $2.39 million, tenant reimbursements $0.34 million, and fee and other income $0.28 million. Rental income and reimbursements accounted for about 90.7% of Q3 revenue.
- Expenses and margins: Q3 operating expenses were $3.35 million, including $1.21 million general and administrative expense, $0.39 million equity-based compensation, and $1.07 million depreciation and amortization. Operating loss was approximately 11.5% of revenue; net loss approximately 13.0%.
- Cash flow: For the nine months, operating cash flow was $2.10 million, investing cash flow was $(39.44) million, and financing cash flow was $48.06 million. Cash and restricted cash ended at $11.58 million, including $10.97 million unrestricted cash.
- Debt and liquidity: Total debt was $20.27 million at quarter-end, including $17.0 million drawn on a new $100 million revolving facility maturing September 2023 and approximately $3.27 million of secured borrowings. The facility permits an accordion increase to $200 million, subject to conditions. Secured debt was fixed-rate at quarter-end; the revolver was priced at LIBOR plus 170 basis points. The company reported compliance with facility covenants.
- Equity and distributions: IPO net proceeds were approximately $71.1 million before $6.4 million of other IPO expenses; proceeds helped repay about $31.7 million of predecessor debt. The board declared a $0.14-per-share and unit dividend after quarter-end, payable December 2, 2019.
- Non-GAAP measures: Q3 FFO was $0.67 million and AFFO was $0.98 million. These company-defined measures are not substitutes for GAAP results and may not be comparable with other REITs.
Material changes versus prior comparable periods
- Q3 revenue increased 58.8% year over year, primarily due to 81 properties added in the formation transactions and 18 acquired during Q3. Rent income rose 68.4% and tenant reimbursements 55.2%.
- Q3 operating expenses rose 186.3%; G&A increased 327.5% and equity compensation added $0.39 million, reflecting public-company costs and IPO-related awards. Depreciation and amortization increased 132.9% with the larger portfolio.
- Q3 net results shifted from predecessor net income of $0.50 million in 2018 to a $0.39 million loss in 2019. Lower interest expense, following debt repayment at the IPO, partly offset higher expenses.
- For the nine months, revenue rose 29.7%, while operating income fell 77.3% and net income shifted from $0.92 million to a $0.42 million loss. Higher public-company G&A, equity compensation, and a $0.19 million debt-extinguishment loss contributed. The mixed predecessor/company reporting periods limit comparability.
Outlook, risks, contingencies, and unusual items
- Outlook and acquisitions: No formal earnings guidance was provided. Management described continuing acquisition opportunities. After quarter-end, the company borrowed another $20 million under its revolver and acquired 77 USPS-leased properties for about $17.3 million. As of November 11, it had definitive agreements to acquire another 98 properties for about $27.6 million, subject to customary closing conditions.
- Concentration and lease exposure: The business is substantially dependent on the USPS’s financial and operational stability. Management cited USPS funding and mandated-obligation pressures, as well as risks from lease defaults, termination or non-renewal, postal-service demand changes, and rent and vacancy trends. Owned leases had an average remaining term of about three years at September 30, 2019; maturities extend through January 2028.
- Capital and REIT risks: Growth and liquidity depend on access to debt and equity markets. REIT qualification generally requires distributions of at least 90% of REIT taxable income, which can constrain retained cash. Failure to qualify could result in corporate taxation and loss of REIT status for four subsequent taxable years, absent relief.
- Related parties: Management agreements and the office lease involve entities affiliated with the CEO; the company also owed a CEO affiliate $0.5 million at quarter-end, due on demand and non-interest-bearing.
- Unusual items and contingencies: Nine-month results include a $0.19 million loss on early extinguishment of debt. The company reported $0.52 million of unrecognized tax benefits with a corresponding indemnification asset. Management reported no material litigation and no off-balance-sheet arrangements.
- Controls: Disclosure controls were deemed effective. The company continued remediation of a previously identified material weakness in internal control over financial reporting; management had tested new controls but had not yet considered the weakness remediated.
Important facts for investors to verify
- Confirm acquisition closings, funding sources, and resulting leverage, including the 98-property agreement pipeline.
- Track USPS tenant credit and lease renewal, termination, and expiration exposure; verify the actual remaining lease profile and rent escalations.
- Assess recurring public-company, compensation, and property costs against rent growth and cash generated from operations.
- Review revolver availability, pricing, covenant headroom, secured-loan terms, and debt maturities; distinguish quarter-end borrowings from subsequent draws.
- Monitor REIT qualification and distribution requirements, related-party arrangements, and progress toward remediation of the material weakness.
- Interpret year-over-year results with care because the IPO and formation transactions changed the reporting entity and comparison base.