Postal Realty Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company is a REIT focused on postal real estate, primarily leased to the U.S. Postal Service (USPS). At quarter-end it owned 691 postal properties in 47 states; all owned properties were leased to the USPS. It also managed 400 third-party postal properties through its taxable REIT subsidiary. The company held approximately 76.9% of its Operating Partnership.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $6.30 million | $3.01 million | $17.10 million | $7.43 million |
| Operating income (loss) | $0.62 million | $(0.35) million | $0.86 million | $0.44 million |
| Net income (loss) | $(0.02) million | $(0.39) million | $(1.28) million | $(0.42) million |
| Net loss attributable to common stockholders | $(0.02) million | $(0.31) million | $(0.84) million | $(0.70) million |
| Basic and diluted loss per share | $(0.01) | $(0.06) | $(0.18) | $(0.14) |
Q3 revenue increased 109.3% year over year, chiefly from acquired properties; rental income rose 120.8%. Operating expenses increased 69.3%, including higher depreciation and amortization, property taxes, and public-company costs. Net loss narrowed year over year in Q3, while nine-month net loss widened, reflecting higher operating and interest expenses. Nine-month 2019 comparisons include the Predecessor’s pre-IPO results, so they are not fully like-for-like.
Q3 FFO was $2.37 million and AFFO was $2.76 million, both non-GAAP measures. The company changed its AFFO adjustments during 2020; these measures should be considered alongside GAAP results.
Cash, debt and liquidity
- Cash was $7.79 million and restricted escrows/reserves were $0.69 million at September 30, 2020, versus combined cash and reserves of $13.18 million at year-end 2019.
- Nine-month operating cash flow was $5.95 million, investing cash outflow was $61.56 million, and financing cash inflow was $50.91 million. The investing outflow primarily reflected acquisitions.
- Principal debt totaled $65.84 million: $49.0 million drawn on the revolving facility and approximately $16.8 million of secured borrowings. The revolver had $150 million of authorized capacity, a September 2023 maturity, and a rate of LIBOR plus 1.70% at quarter-end. Secured debt was fixed-rate, with a weighted average rate of 4.3%.
- The company reported compliance with credit-facility covenants at quarter-end. It had $52.0 million drawn as of the filing date after a further $3.0 million borrowing on October 30.
- Quarter-end total assets were $199.66 million and total liabilities were $78.52 million. The company raised approximately $49.4 million net in its July follow-on stock offering.
Acquisitions, dividends and material changes
- The company acquired 224 postal properties during the first nine months of 2020 for approximately $68.2 million including transaction costs; 123 properties were acquired in Q3 for approximately $27.6 million. The portfolio grew from 271 properties at the IPO to 691 at September 30, 2020.
- Shares outstanding increased materially following the July offering. The company declared and paid dividends totaling $0.575 per share for the first nine months of 2020; a further $0.215 per-share dividend was declared October 30, payable November 30.
- As of November 11, the company had closed on 14 additional postal properties for approximately $8.0 million and had agreements to acquire 12 more for approximately $10.1 million, subject to customary conditions.
- The company signed a $47.0 million agreement, subject to due diligence and without assurance of closing, for an industrial building in Warrendale, Pennsylvania; the USPS occupies 73% of the property.
Outlook, risks and unusual items
- No formal earnings or financial guidance was provided. Management said it expects to fund liquidity needs through operating cash flow, cash, credit-facility borrowings, mortgage financing, and potential equity or debt issuance; acquisition activity and access to capital remain important to its growth strategy.
- COVID-19 and the USPS’s financial condition, mail volumes, operations, and government support are key uncertainties. Management reported receiving October rent and no rent-concession requests as of the filing date, but said future rent collection and concessions remained uncertain.
- At November 11, leases at 52 properties had expired, with the USPS occupying them as holdover tenant and generating approximately $2.5 million of annualized rent. The company had executed 29 replacement leases; holdover properties were excluded from the revolving facility borrowing base. Renewal terms and timing are not assured.
- The USPS’s revised lease form transfers some additional maintenance obligations to landlords, potentially raising costs. Management believes negotiated rent increases may offset these costs, but this is not assured. The revised lease addendum mitigates some obligations for qualifying leases.
- All property rent is concentrated with one tenant, the USPS. Other material risks include lease non-renewal or vacancy, property illiquidity, reliance on external capital, variable-rate debt and LIBOR transition, debt covenants, REIT qualification and related-party conflicts. A 0.50% change in one-month LIBOR would change annualized cash flow by approximately $245,000, assuming debt levels remain unchanged.
- No impairment charges were recorded in the periods presented, and the company reported no material litigation. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Progress and economics of renewals for the 52 expired leases, including rent spreads, landlord maintenance costs, and borrowing-base effects.
- USPS rent-payment capacity and any effects of changes in USPS finances, service demand, operations, or federal support.
- Available revolver capacity after borrowing-base exclusions, covenant headroom, and the post-quarter increase in borrowings.
- Whether pending acquisitions—including the $47 million industrial-property agreement—close, and their financing, tenant mix, and contribution to earnings.
- Future dilution and distribution obligations in light of equity issuance, OP/LTIP units, and the company’s dividend policy.
- The MD&A table reports Q3 operating income of $616,283, while the financial statements report $616,823; verify the correct figure.