Postal Realty Trust, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts below are in millions unless otherwise noted. The company is a REIT focused on postal properties, leased primarily to the U.S. Postal Service (USPS). At quarter-end it owned 1,166 properties across 49 states and one territory, with approximately 5.0 million net leasable square feet.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $12.7 | $9.4 | $24.7 | $18.3 |
| Income from operations | $2.3 | $1.5 | $3.3 | $2.6 |
| Net income | $1.2 | $0.8 | $1.9 | $0.9 |
| Net income attributable to common stockholders | $1.0 | $0.7 | $1.5 | $0.8 |
| Basic and diluted EPS | $0.04 | $0.04 | $0.06 | $0.04 |
| Operating cash flow | Not separately stated for Q2 | $13.1 | $8.4 |
- Q2 revenue increased 34.7%; rental income rose 35.2%, primarily from acquisitions. For the first half, revenue increased 34.9% and rental income increased 34.5%.
- Q2 operating margin was approximately 17.8%, versus 16.2% a year earlier; first-half operating margin was approximately 13.5%, versus 14.4%. Expenses grew faster than revenue in the first half, including real estate taxes, property costs, general and administrative costs, and depreciation and amortization.
- Q2 net interest expense was $1.3 million, versus $0.8 million; first-half net interest expense was $2.1 million, versus $1.8 million. The company attributed the increase mainly to higher borrowings.
- First-half investing cash outflow was $82.3 million, principally $79.9 million for real estate acquisitions. Financing cash inflow was $68.1 million. Cash was $4.6 million and restricted escrows and reserves were $1.4 million at June 30.
- At June 30, principal debt was $176.1 million ($174.7 million net of deferred financing costs), compared with $96.2 million of principal at December 31, 2021. Total assets were $462.1 million and total equity was $267.7 million.
- The company acquired 200 properties for approximately $84.3 million, including closing costs, in the first half. Its March acquisition of a postal real estate consulting business involved approximately $1.7 million in consideration and generated $1.5 million of goodwill.
Material changes and capital structure
- In May 2022, the company amended its credit facilities, adding a $75 million delayed-draw term loan, replacing LIBOR with SOFR, and providing for a possible 0.02 percentage-point margin reduction upon meeting sustainability targets.
- At June 30, credit-facility borrowings totaled $143 million: $50 million under the 2021 term loan, $75 million under the 2022 term loan, and $18 million under the revolving facility. Secured borrowings were approximately $33.1 million. The company reported compliance with all credit covenants.
- Three swaps with $100 million aggregate notional value fixed the SOFR component on portions of the term loans. A further $25 million forward-starting swap became effective in July 2022. Including swaps, approximately $18 million of debt remained variable-rate at June 30; a 1% SOFR change was estimated to affect annual cash flows by approximately $0.2 million, assuming no change in variable-rate debt.
- Cash dividends paid during the first half were $0.4575 per share or unit. In July, the board declared a $0.2325-per-share dividend, payable August 26, 2022.
Outlook, risks and contingencies
- The filing provides no formal earnings or acquisition guidance. Management expects to fund near-term needs with operating cash flow, cash, credit-facility borrowings, and potentially securities issuance; longer-term needs may also be funded with debt, equity, and property-sale proceeds.
- After quarter-end, the company acquired 16 properties for approximately $4.6 million, excluding closing costs, and had definitive agreements to acquire 36 more for approximately $14.1 million. Most were expected to close in Q3 or Q4, subject to customary conditions; completion is not assured. Credit-facility borrowings were $146 million as of the report date.
- USPS is the company’s principal tenant. Management describes USPS financial and operational stability, demand for postal services, lease renewals, closures or consolidations, and the USPS’s ability to meet its obligations as material business risks. Pennsylvania accounted for 16.1% of first-half rental income.
- At June 30, leases at 29 properties were expired and the USPS remained in holdover occupancy. By August 4, 51 properties, representing approximately $1.9 million in annual contractual rent, were in holdover status. Management anticipated new leases but gave no assurance of renewal or comparable terms.
- Management notes that many leases have fixed annual rent, while landlord costs may rise with inflation. Other identified risks include interest rates, access to capital, acquisition execution, REIT qualification, and broader economic conditions. The filing states the company received 100% of rent in the first half and experienced no material COVID-19 impact.
- Other income included insurance recoveries and rose to $0.7 million for the first half from $0.1 million a year earlier. No property impairments were recorded. The company reported no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether USPS leases, including the 51 holdover leases reported as of August 4, are renewed and on what terms.
- Acquisition closings, purchase consideration, and the effect of future acquisitions on debt, cash flow, and per-share results.
- Current borrowing levels, available revolver capacity, SOFR exposure after swaps, and continuing covenant compliance.
- Whether rent growth and operating efficiencies offset rising property, staffing, and other costs, and whether insurance recoveries are recurring.
- The sustainability of dividends relative to operating cash flow, required REIT distributions, capital needs, and access to external financing.