Postal Realty Returns To Growth As Interest Expense Normalizes

Company Overview - Postal Realty (NYSE:PSTL) is a market leader in the post office real estate niche, owning over 1600 post office buildings leased to the USPS on 5-year or 10-year terms [1][3] - The company primarily acquires smaller properties, often for under $1 million, which are located throughout the U.S. [3][4] Property and Leasing Characteristics - The properties owned by PSTL are functional and require minimal capital expenditures, with recurring capex at approximately$253,000 quarterly, or about 1.3% of revenues [4] - PSTL enjoys high occupancy rates with a retention rate around 99%, attributed to USPS's mandate to provide consistent service [4][6] - PSTL is the largest player in a fragmented market, owning 6.2 million square feet of post office properties, which allows for negotiating power and the ability to facilitate off-market transactions [5] Growth Outlook - Postal Realty's growth is driven by three main sources: organic rental rate growth, acquisition spreads, and refinancing [7][8] - Organic rental rate growth is currently estimated at just over 3% annually, with recent lease negotiations resulting in longer terms and escalators [9][10] - Acquisition spreads are less predictable, with current debt costs just under 5% and a healthy debt to EBITDA ratio of 5.6X [12][21] - The company has completed $64 million in acquisitions for the year, targeting$90 million in total acquisitions for 2024 at a 7.5% weighted average cap rate [21][22] Financial Performance - The company's AFFO per share has remained relatively flat due to higher interest expenses, which have risen to 25% of NOI [28][30] - Future growth in AFFO/share is projected at about 6%, as interest expenses stabilize and rental rate growth becomes more pronounced [33][32] Management Assessment - Management has been assessed favorably, with a consistent strategy focused on growth within the postal real estate niche and maintaining high occupancy rates [34][36] - The timing of equity issuance has been strategic, with shares issued at prices that support accretive acquisitions [36] Valuation - The consensus AFFO implies a 13X multiple, suggesting slow growth of roughly 2% annually [39][40] - If growth can improve to closer to 6% annually, the company is believed to be significantly undervalued, with a potential valuation of 17X-18X AFFO [41][42] - The company is currently trading at 82% of its net asset value, further supporting the idea of undervaluation [43]