Postal Realty Trust, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2020; filed August 13, 2020. Postal Realty is an internally managed REIT focused on owning and managing properties leased to the U.S. Postal Service (USPS). At quarter-end it owned 568 postal properties in 47 states, all leased to the USPS, and managed another 400 properties for third parties. The portfolio is therefore highly dependent on one tenant.
Comparisons with 2019 require care: the Company began operations after its May 17, 2019 IPO, and 2019 results combine predecessor activity with post-IPO results, while 2020 reflects the Company’s consolidated operations.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $5.60 million | $2.41 million | $10.80 million | $4.42 million |
| Operating income | $0.43 million | $0.13 million | $0.25 million | $0.79 million |
| Operating margin | 7.8% | 5.5% | 2.3% | 17.9% |
| Net loss | $0.23 million | $0.29 million | $1.26 million | $0.03 million |
| Net loss per share | $0.05 | $0.08 | $0.19 | $0.08 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $3.21 million | $0.86 million |
Q2 revenue rose 133% year over year, mainly from properties acquired since the IPO. For the first half, operating expenses increased faster than revenue, and operating income fell 69% to $0.25 million. Higher depreciation and amortization, general and administrative costs, and interest expense contributed to the first-half net loss. Q2 FFO was $1.93 million and AFFO was $2.18 million; both are non-GAAP measures and the Company changed its AFFO capital-expenditure policy beginning in Q2 2020.
First-half investing cash outflow was $34.27 million, primarily for acquisitions; financing provided $23.48 million. Cash was $4.90 million and escrow/reserves were $0.71 million at June 30, versus $12.48 million of cash at year-end 2019. Total assets were $170.51 million and equity was $74.54 million.
Principal debt was $84.34 million at June 30: $67.47 million drawn on the revolving credit facility and approximately $16.87 million of secured borrowings. The facility had $150 million of authorized commitments, subject to borrowing-base and other conditions, and matured in September 2023. The Company reported compliance with its debt covenants. The revolver was variable-rate; a 0.50 percentage-point LIBOR movement was estimated to change annual cash flow by approximately $337,000. Most secured borrowings carried fixed rates, with a weighted average rate of 4.3%.
Material changes and notable items
- Acquired 102 properties during the first half for total purchase consideration, including transaction costs, of approximately $41.1 million. Real estate properties, net, increased to $149.87 million from $111.77 million at December 31, 2019.
- At June 30, 43 properties had expired leases and were occupied by the USPS as holdover tenants. By August 11, the count was 55 properties, representing approximately $2.4 million in annualized rent; the USPS had not vacated them, and holdover rent had been received.
- The USPS adopted a revised lease form shifting some additional maintenance obligations to landlords, including components of plumbing and electrical systems. Management anticipated higher operating and leasing costs, potentially offset by rent increases, but no definitive renewal documentation had been completed for the holdover properties as of the filing date.
- Dividends paid were $0.37 per share in the first half. A $0.205-per-share dividend was declared July 30, payable August 31.
Outlook, risks, and subsequent events
Management gave no quantified earnings or revenue guidance. It described ongoing acquisition opportunities and expected most of approximately $3.7 million of acquisitions under definitive agreements as of August 11 to close in Q3, subject to customary conditions. After quarter-end, the Company acquired 98 properties for approximately $23.4 million.
The Company cited uncertainty from COVID-19, including potential effects on USPS finances, postal-service demand, rent collection, and acquisition activity. It had received July rent and no concession requests as of the filing, but said future collections and concessions remained uncertain. The USPS’s financial condition and policy changes are material risks; the filing discussed potential mail-volume declines and the USPS’s projected funding shortfall.
On July 20, the Company completed a follow-on offering of approximately 4.02 million shares at $13 per share, generating about $49.4 million in net proceeds before estimated other expenses. It used approximately $42 million of proceeds to reduce revolver borrowings on July 24. As of August 11, revolver borrowings were $39.5 million.
Other disclosed items include $0.5 million of unrecognized tax benefits, with a corresponding indemnification asset; no impairment charges in the periods presented; and no litigation management believed would materially affect the Company. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether the USPS renews expired leases, on what rent and maintenance terms, and whether any holdover locations are vacated.
- The realized landlord cost and rent impact of the USPS’s revised lease form, including any broker commissions.
- USPS financial health and the effects of COVID-19, mail-volume trends, and USPS operational or leadership changes on property demand and rent payments.
- Availability under the credit facility after borrowing-base exclusions, covenant compliance, and the Company’s debt and interest-rate exposure.
- Acquisition closings, funding needs, and whether operating cash generation supports dividends and continued portfolio growth.
- Comparability of reported periods and non-GAAP FFO/AFFO, including the Q2 2020 change in AFFO treatment of certain capital improvements.