Postal Realty Trust Targets Record Acquisitions as Lease Renewals Drive Growth

Lease renewals are strengthening growth: Postal Realty has shifted renewed leases from five-year flat terms to 10-year agreements with 3% annual escalators. Annual rent growth now covers 45% of the portfolio through 2026, while 2027 same-store cash revenue growth is projected at 6.5%.

Acquisition guidance was raised to a record $150 million from $120 million, supported by about $50 million in available equity and leverage of 4.6 times debt to EBITDA.

The company is targeting immediately accretive purchases, primarily of last-mile and flex postal facilities.

Postal Realty is retaining more cash to improve financial flexibility: Its AFFO payout ratio has declined from 100% at its IPO to 70%, with a goal of 65%. Management expects retained cash flow to contribute about 2% to annual AFFO-per-share growth next year.

Postal Realty Trust NYSE: PSTL highlighted its strategy of acquiring U.S. Postal Service-leased properties, renewing leases at higher rates and expanding the share of its portfolio with annual rent escalators during a presentation at a Three Part Advisors conference.

President Jeremy Garber said the company operates in a fragmented market created by the Postal Service’s historical approach to building its real estate network. Rather than centrally developing facilities, the Postal Service issued local requests for proposals in communities, resulting in approximately 17,000 owners of roughly 23,000 leased postal facilities nationwide, Garber said. The Postal Service also owns about 8,500 properties.

Postal Realty’s strategy is to aggregate leased postal properties from that fragmented ownership base. Garber said the company was already the largest player in the niche as a private company before entering public markets roughly seven years ago.

Garber said rising inflation and interest rates prompted the company to seek lease structures that would support property maintenance and improve its economics. Beginning in 2022, the Postal Service agreed to annual escalators on renewed leases, according to Garber. The company subsequently moved from five-year flat leases to 10-year terms with 3% annual rent escalators on renewals.

“We’ve completely changed the dynamic of leasing,” Garber said, adding that the revised lease structures have created internal earnings momentum that management believes investors have increasingly recognized.

Chief Financial Officer Steve Bakke, who joined the company about a year ago, said he initially viewed the concentration of a single tenant and the approaching expiration of roughly 30% of lease revenue as potential risks. After reviewing the business, however, he said the expiring leases represented an opportunity to reset rents and extend lease terms. Bakke said 45% of the portfolio now has annual rental growth through 2026, compared with no annual escalators in 2022. He said the company’s outlook for 2027 same-store cash revenue growth is 6.5%, with about three-quarters of that projected growth coming from mark-to-market activity and renewals and the remaining 25% from annual escalators.

Bakke said Postal Realty paid out 100% of adjusted funds from operations, or AFFO, as dividends at the time of its initial public offering. As of the second quarter, the payout ratio had declined to 70% of AFFO. The company aims to reduce that ratio to 65%, Bakke said. Retained cash flow is expected to add about 2% to annual AFFO-per-share growth next year, according to the CFO.