Postal Realty Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Postal Realty Trust is an internally managed REIT focused on postal properties, primarily leased to the USPS. At quarter-end, it owned 1,232 properties in 49 states and one territory, and managed 397 additional third-party properties through its taxable REIT subsidiary.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $13.8 million | $10.5 million | $38.4 million | $28.8 million |
| Income from operations | $2.9 million | $1.6 million | $6.2 million | $4.2 million |
| Net income | $1.2 million | $0.7 million | $3.0 million | $1.6 million |
| Net income attributable to common stockholders | $0.9 million | $0.5 million | $2.5 million | $1.3 million |
| Basic and diluted EPS | $0.04 | $0.03 | $0.10 | $0.06 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $18.6 million | $13.4 million |
Q3 operating margin was approximately 21.2%, compared with 15.0% a year earlier; nine-month operating margin was approximately 16.2%, compared with 14.6%. These are calculated as income from operations divided by total revenue.
Q3 revenue rose 30.8% and nine-month revenue rose 33.4%, primarily reflecting acquisitions. Operating expenses increased 21.4% in Q3 and 30.9% year to date, including higher property costs, staffing and depreciation. Net interest expense rose to $1.8 million in Q3 and $3.9 million year to date, mainly due to greater borrowing to fund acquisitions.
Balance sheet, cash flow and financing
- At September 30, total assets were $486.3 million, total liabilities $208.2 million, and total equity $278.1 million. Cash was $4.6 million; cash plus restricted escrows and reserves totaled $4.9 million.
- Principal debt was $189.1 million, compared with $96.2 million at December 31, 2021. This comprised $156.0 million under credit facilities and $33.1 million of secured borrowings. Weighted average debt maturity was 5.4 years.
- The credit facilities bear variable rates tied to SOFR. Four swaps totaling $125.0 million hedge the SOFR component of the term loans; approximately $31.0 million of debt remained variable-rate after swaps. A 1 percentage-point move in Adjusted Term SOFR would change annual cash flow by approximately $0.3 million, assuming debt levels are unchanged.
- Nine-month investing cash outflow was $100.0 million, including $96.4 million for real estate acquisitions. Financing provided $79.3 million, including term-loan and revolving-credit borrowings; operating activities provided $18.6 million. Cash and reserves declined $2.1 million over the period.
- The company acquired 266 properties for approximately $105.7 million, including closing costs, during the first nine months. The acquisitions were funded with credit-facility borrowings and OP Units. The company also acquired a postal real estate consulting business for approximately $1.7 million.
Material changes, outlook and risks
- Management provided no specific quantitative earnings or acquisition guidance. It said it expects to meet near-term liquidity needs through operating cash flow, cash, credit-facility borrowings and potential securities issuance, and longer-term needs through operating cash flow, debt, equity and property sales.
- At September 30, leases at 63 properties were expired, with the USPS occupying them as a holdover tenant. By November 2, 72 properties were in holdover status, representing approximately $2.4 million of annual contractual rent. Management anticipated pursuing new leases but gave no assurance of renewal terms or timing.
- The portfolio is highly dependent on the USPS. Management highlighted USPS financial and operational uncertainty, possible facility closures or consolidation, lease renewals, reduced postal-service demand, inflation and rising interest rates as risks. Pennsylvania accounted for 15.4% of nine-month rental income.
- Q3 comprehensive income included $5.4 million of unrealized gains on interest-rate swaps; nine-month unrealized gains were $8.4 million. These gains were recorded in other comprehensive income, not net income. The company expects approximately $2.6 million to be reclassified from accumulated other comprehensive income as a reduction of interest expense over the next 12 months.
- The company declared a $0.235-per-share dividend on October 26, payable November 28, 2022. After quarter-end, it acquired seven properties for approximately $5.9 million and had definitive agreements to acquire 14 more for approximately $5.1 million; completion was not assured.
- Management reported compliance with credit-facility covenants, effective disclosure controls, no material litigation known to management, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- USPS lease renewal outcomes, particularly the holdover properties, rental rates and any changes in USPS facility demand.
- Debt capacity, covenant headroom, floating-rate exposure and the effectiveness and terms of the $125.0 million swap portfolio.
- Acquisition funding, integration and returns, alongside the effect of continued equity issuance and OP Unit issuance on existing holders.
- Cash available for dividends and acquisitions, including how REIT distribution requirements interact with capital needs.
- The scale of USPS and Pennsylvania concentration, and whether reported revenue growth translates into durable cash flow and earnings.