Uncle Sam as tenant? Two stocks with government exposure – Part II

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While it is not directly investing in the government per se as you won’t have any direct ownership in it (luckily), I’ve found two stocks that are operating in the name of it. I am not talking about defense companies where governments are the sole customers (individuals don’t buy tanks). There are two high-yielding REITs with several government agencies as their tenants. Are they worth a look? Part two.

Summary and key takeaways from today’s Weekly
– Postal Realty Trust on the surface looks more promising and financially stable than last week’s REIT.
– Its tenant is even mainly operating in the private sector and there are possibilities to grow.
– However, the tenant is financially not in good shape, to put it mildly.

Last week, in part one of this series about investing in stocks with close ties to the government, I discussed Easterly Government Properties (ISIN: US27616P1030, Ticker: DEA) which is serving several different governmental agencies as a landlord.

You can find this weekly here.

In brief, the result was that despite favorably looking landlord-tenant numbers, especially the long average lease maturities, the stock has been performing really badly. It is sitting around its all-time low because it has an over-levered balance sheet and too close debt maturities. At the same time, cash flows (per share and in total) are declining and only close to where they’ve been almost ten years ago.

The dividend for me is in danger.

This week we have again a REIT in front of us.

This time, though, the company’s financials are not an issue. Debt is much less of a problem. Also, the area of operation is different. Despite the tenant being a “governmental company”, the business is active in the private sector and in a mission critical area.

So I asked myself the question whether this second REIT could deliver a reliable combination of growth and dividends with a favorable risk / reward profile.

source: F. Muhammad on Pixabay

Today, I will put not so well-known Postal Realty Trust (ISIN: US73757R1023, Ticker: PSTL), a way smaller company by market capitalization, under the microscope to answer these questions.

At least and in contrast to Eastern Government Properties (which I discussed here), this second REIT has exposure to private sector activities which I personally do prefer much more.

Is this a reason to view the stock of PSTL as higher quality?

I will also discuss valuation and risks.

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Reliable dividends from the mailman?

By investing in PSTL one is investing in America’s logistics network.

At first sight, this reads not only way more interesting compared to governmental office buildings leased to agencies. It also promises to be a higher growth area.

PSTL is the only publicly traded REIT focused on properties which are leased to the USPS – the United States Postal Service. USPS is more than just a legacy physical mail deliverer – a business in decline. It is a key logistics company operating in the promising area of parcel distributions and thus e-commerce.

While the company USPS belongs to the government, it is actually operating not exclusively, but to a large extent in the private sector.

When we look at PSTL’s investor presentation, we see several interesting and promising aspects.

source: PSTL investor presentation (see here)

First of all, PSTL is operating in a highly fragmented sector where many mom and pop shops are active. This means, there’s lots of potential to consolidate this sector by acquiring smaller pieces, not seldom at more attractive prices than would be the case by buying out public competitors.

As the only REIT specialized in this area, despite its not so big market cap of just 400 mn. USD, PSTL is enjoying many scale advantages. With more size not only their fix costs are better spread and diluted, likewise its financing options become more attractive while single entities remain in disadvantage.

PSTL says that they have only a market share of 6%.

And the 20 largest portfolio owners have only 11% combined. So you see that this is a highly fragmented market, indeed, offering lots of potential to grow inorganically.

We can check this box.

source: PSTL investor presentation (see here)

Second, and like it is the case with Easterly, we are having a tenant where lease renewals are rather not a problem, because USPS won’t change locations often. Occupancy historically has been reliably high with close to 100%.

Nothing to complain about here.

However, unlike with Easterly, PSTL has much earlier expiring leases with more than 70% being due for renewal over the next four years.

Is this good or bad?

It depends.

source: PSTL Q4 2023 supplemental (see here)

It can be seen as a positive. And this is how management does see it, indeed.

Due to lease expirations being more near-term, cost increases can be passed quicker to the tenant via rent hikes. This of course has its limitations, but USPS as a mission critical entity won’t move out due to higher rents.

99% of leases are being prolonged.

USPS has been a tenant with 100% contractual rent payments. Not every REIT can claim the same, but here reliability is given. Backed by the government, this has worked out so far in the past.

As operating lease payments represent only a marginal 1.5% of total costs, we can assume that this is not the first position where efficiency programs would be applied, because the effect is simply too low.

There are other much higher cost factors, as we’ll see soon.

source: PSTL Q4 2023 supplemental (see here)

With its vast network and physical presence, we can conclude that despite having one tenant only, PSTL’s exposure is pretty diversified.

Even in the event of a few single closures of USPS’ sites.

source: PSTL investor presentation (see here)

PSTL has only been a publicly traded REIT since 2019, but it has been active in its role for more than 30 years already.

What I’ve found likewise interesting is the following chart about the competitive strengths of USPS.

source: PSTL investor presentation (see here)

Also of interest is that the founder, Andrew Spodek is the fifth largest shareholder with 3.6% of stock. At least, that’s a bonus point.

With this, let’s have a look at PSTL’s balance sheet. Net debt to EBITDA is 5.6x. While I do read often that such a figure is on the conservative side, personally for me with a higher risk sensitivity, I tend to view it as good or okay-ish only.

But conservative would be well below 5x for me to have less risks. There are not many REITs with net debt of less than 5x EBTIDA, but there are a few. Certainly, I do not want to see numbers much above 5x. However, the overall debt level is not everything that counts. Debt maturities and ideally no variable debt are also aspects to check.

Almost all of the debt has fixed rates and unlike with Easterly, debt maturities are more into the future, even with no serious near-term maturities around the corner.

PSTL scores well in this discipline.

source: PSTL investor presentation (see here)

However, what comes in 2027 and 2028 is not peanuts.

With a current cash flow of a smidgen below 30 mn. USD, this is a lot to be refinanced. The question will be at what interest rates.

But we have three years until we arrive there.

For now, PSTL has been growing revenues, cash flows and its dividend reliably, since it has gone public.

source: PSTL investor presentation (see here)

Below, you can see that cash flow per share and dividends (current yield 6.8%) apiece have grown over time, proving good execution so far with not too much dilution.

Share count has grown 4x since the IPO.

However, revenues at the same time went up by almost 7x and cash flows by 10x so that results per share have increased more than total share count. This is a point many tend to overlook.

I would say this reads far better than what we have seen with Easterly.

source: TIKR

Looking at the chart and seeing the stock of PSTL not too far from its all-time lows – just like is the case with Easterly – might be somewhat of a surprise.

Of course, the first plausible reason is higher interest rates and thus cost of debt for refinancing. But I am not so sure that this is the only explanation.

source: Seeking Alpha (see here)

While PSTL’s stock looks slightly better, being 20% or so off the lows, the commonality is that the high has been with the peak of interest rates in 2021.

Basically, higher cost of debt is a topic which also PSTL wasn’t able to circumvent.

Looking at the last quarterly figures, we can see that despite growing the top line, this has not translated into a higher bottom line – due to a mix of higher interest expenses, a higher share count (and more dilutive equity raises) as well as higher investments.

source: PSTL Q4 2023 supplemental (see here)

I think that this should be more of a temporary sideways move until rent income increases due to acquisitions and rent hikes. As seen above, 15% are due for renewal in 2024 alone.

So, if we are having a company of a certain quality level (PSTL) with manageable debt, growth prospects and even a founder at the steering wheel – why haven’t I made this an idea for a member-exclusive report?

I am not fully convinced.

Two things do not work out. One is solvable, the other rather not.

source: Elias on Pixabay

Looking from several perspectives, I do not see a sign of urgency to strike here.

First, the valuation is still too high for me. I miss the margin of safety. PSTL has a price to FFO of 15x which definitely is not low and a first indicator for a rather fair valuation. With an enterprise value of 610 mn. USD, it even trades for a 21x multiple to operating cash flow. The price to tangle book value is 1.4x.

These are multiples for a (slightly) growing company.

Fair valuation is debatable, but it is not tempting enough. One could argue with a growing business, but I honestly think that growth will be not so easy to reignite. It might work to a certain extent on the leasing renewal site, but inorganic growth should be subdued due to higher cost of debt.

Second, the thing that disturbs me the most is the financial health of USPS.

And with it comes the dependency on the government to inject financial aids – and not little! Already ongoing discussions without an agreement could be good enough to shake through the REIT, as REITs are typically not having huge cash positions just to sit out any turbulences.

Saying USPS is not a profitable company is quite an understatement, yet, even close to a compliment. While the continued dependence on the administration should not be such a surprise and as written above rental payments are only 1.5% of all costs for USPS, I was shocked to see the following numbers.

One of the headline sentences of the press release regarding their results is: “Continued need for Administrative action to help achieve financial stability“.

But how much?

USPS does publish an annual report, even though shorter than those of public companies.

Let’s start with the profit and loss statement.

source: USPS annual report 2023, p. 29 (see here)

Sales have been flattish over the last three years. Okay, maybe.

But they are producing heavy operating losses. Almost 5 bn. USD in 2021 and 7 bn. USD in 2023. In 2022, there is a huge surplus, but not due to strong execution.

The footnote reads the following:

4 Represents the one-time non-cash benefit due to the reversal of $57.0 billion for past due retiree health benefit obligations that were canceled by the enactment of the PSRA in FY 2022.

source: USPS annual report 2023 (see here)

57 bn. USD of retire health benefit obligations have been canceled, respectively taken of USPS’s books. This is a non-cash action, but it’s a good precursor for what we can expect from the balance sheet (columns are from left to right: 2023, 2022 and 2021).

This thing will need huge financial help.

source: USPS annual report 2023, p. 29 (see here)

We can see that this company is more a pension and healthcare liability with an attached postal service to it. I haven’t understood what miraculously happened to the 57 bn. USD of “retiree health benefits”, but they’re of the books.

Nonetheless, there remains lots of unfunded liabilities as you can see.

While it is rather likely that government will bail this thing out and PSTL should rather not be affected as it causes only marginal costs for USPS, I do not have such a great gut feeling. It cannot be ruled out that USPS runs out of cash while the government debates how to save it – this would certainly directly affect PSTL.

This is a too high risk for me and good enough to pass on it.

I think, I’ll keep watching this company, but for now – no thank you!

My latest idea for all my members has a completely different profile.

It is a deep value turnaround story in the making with a real option of a buyout. The market currently sees the stock as slowly dying. In my report, however, I lay out some arguments why this likely is not the case and why the potential for a surprise is to the upside.


Postal Realty Trust on the surface looks more promising and financially stable than last week’s REIT.

Its tenant is even mainly operating in the private sector and there are possibilities to grow.

However, the tenant is financially not in good shape, to put it mildly.

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