Business context and reporting period
Postal Realty Trust, Inc. filed this Form 10-Q for the quarter ended March 31, 2019. The company itself had no operations before its May 17, 2019 IPO and formation transactions; the quarterly operating results below are for its accounting predecessor, Nationwide Postal and Affiliates Predecessor. At March 31, the predecessor owned 190 postal properties in 33 states, all leased to the U.S. Postal Service (USPS). After the May transactions, the company reported a portfolio of 271 USPS-leased properties in 41 states and third-party management services for 404 additional USPS-leased properties.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $2.016 million | $1.913 million |
| Operating income | $657,339 | $503,663 |
| Net income | $257,076 | $94,463 |
| Operating cash flow | $517,313 | $722,058 |
| Investing cash flow | $(656,960) | $(380,477) |
Revenue increased 5.4% and net income increased 172.1% year over year. Rent income rose 8.3%, primarily due to property acquisitions; tenant reimbursements rose 10.0%, including from higher property taxes. Fee and other income declined 10.3%, mainly due to lower management fees. Operating expenses declined 3.6%, with lower general and administrative expenses partly offset by higher taxes and property operating costs. Interest expense declined 6.3% as debt principal was paid down.
At March 31, predecessor assets were $35.96 million, including $394,217 cash and $600,053 in restricted cash and reserves. Mortgage debt was $34.73 million principal ($34.51 million net of deferred financing costs); total liabilities were $40.76 million and equity was a deficit of $4.80 million. Operating cash flow fell 28.4%, primarily due to timing of payables and accrued expenses. Investing outflow increased mainly due to property acquisitions and capital improvements. Postal Realty Trust’s own March 31 balance sheet showed only $1,000 cash and $1,000 total assets, and does not reflect the subsequent IPO or formation transactions.
Material changes and subsequent events
On May 17, 2019, the company sold 4.5 million Class A shares at $17 per share, raising $76.5 million gross and approximately $71.1 million net before other offering expenses. It used about $31.7 million of IPO proceeds to repay predecessor debt. At June 26, the company reported approximately $11.2 million cash and $2.9 million debt outstanding, all fixed-rate, with a 4.4% weighted average interest rate. The IPO and formation transactions included issuance of OP units and shares to the former owners, and a $26.9 million cash purchase of interests in 81 post office properties.
In June, the company agreed to acquire three postal properties for approximately $4.4 million, with closing expected in the third quarter subject to customary conditions. The board declared a prorated dividend of $0.063 per common share for the period from the IPO closing through June 30, payable July 31 to holders of record July 9.
Outlook, risks and unusual items
Management expected to meet near-term liquidity needs with cash, operating cash flow and remaining IPO proceeds, and anticipated putting a revolving credit facility in place in the second half of 2019. Longer-term funding needs, including acquisitions and debt repayment, may require operating cash flow, borrowings, future debt or equity financings, or property sales; access to capital is not assured. The company intends to qualify as a REIT beginning with its short taxable year ending December 31, 2019, which generally requires distributing at least 90% of REIT taxable income.
The USPS is the sole tenant, creating substantial exposure to its financial and operational stability, lease renewals, and changes in postal-service demand or leasing practices. Other stated risks include property costs and taxes, interest rates, financing access, acquisition execution, real estate conditions, and maintaining REIT qualification. Management reported no material litigation. A previously identified material weakness in internal control over financial reporting was being addressed through process reviews, additional accounting resources and enhanced review procedures; management said remediation would not be considered complete until controls had operated effectively for an additional period. Disclosure controls were assessed as effective at quarter-end.
The predecessor reported $707,920 of unrecognized tax benefits, including interest and penalties. The Q1 results are predecessor results and are not necessarily indicative of full-year or post-IPO performance. The company adopted Topic 606 in 2019 with no cumulative retained-earnings adjustment; it was still evaluating the potential effects of lease-accounting changes expected to apply from January 1, 2020.
Important facts for investors to verify
- How the post-IPO portfolio, property-level occupancy and lease terms compare with the predecessor’s historical results; all owned properties were USPS-leased.
- Whether the planned revolving credit facility was completed, and the company’s subsequent cash, debt, interest costs and acquisition funding.
- Closing and financing of the three announced acquisitions, and the effects of related-party formation transactions.
- Progress in remediating the material weakness and compliance with REIT requirements, including distribution obligations.
- USPS financial condition, lease renewal or termination risks, and the company’s exposure to property taxes and other unreimbursed costs.