Postal Realty (NYSE: PSTL) is a net lease real estate investment trust (REIT). But it has a unique investment approach that sets it apart from its peers. It won't be a great fit for all investors, but the generous 6.2% dividend yield will likely attract a fair amount of attention from those with an income focus.
Here's a quick look at this unusual REIT and why Postal Realty thinks it is well positioned to deal with the inflation that has some investors worried about the net lease sector.
The basics of the model
First, Postal Realty is a net lease REIT. That means that its tenants are responsible for most of the operating costs of the properties they occupy. This in and of itself helps to shield the REIT from the ravages of inflation, since the tenant will bear the brunt of increasing costs for maintenance and taxes, among other things.
Image source: Getty Images.
And, across a large-enough portfolio, a vacancy at any one property shouldn't be a big deal. Postal Realty owns more than 1,300 properties, which is a fairly large holding.
That said, Postal Realty's name hints strongly at its unique positioning within the net lease space. It basically only owns real estate leased to the U.S. Postal Service. That includes both the local post office and larger distribution centers.
To some extent, that means it has just a single tenant, but a highly reliable one. For example, occupancy is currently about 99.7%, and it has a 99% lease retention rate. Diversification is an issue that will likely keep more conservative dividend investors away, but it may not be as big a deal as it at first seems.
Meanwhile, Postal Realty believes there's still material potential for growth. Management breaks the postal market down into three segments: last mile, flex, and industrial. It estimates that it has less than a 6% market share of each segment. And the postal niche is highly fragmented as well, with the top 20 players collectively having just an 11% market share.
The inflation conundrum
That said, inflation is a headwind that has many investors worried about net lease REITs. The sector as a whole tends to favor long lease terms and generally modest yearly rent bumps. That's a drawback when inflation is as high as it has been of late.
For example, industry giant Realty Income has an average remaining lease term of about nine years. But the REIT's same-store rental revenue increased just 1.8% in 2022. So it has locked in long lease terms, but perhaps not a lot of rental growth. This is a pretty common approach in the net lease sector.
Postal Realty takes a different approach to its portfolio. The REIT's average remaining lease term is just three years, with the usual new lease set at five years. That means that a significant amount of its lease portfolio is being renegotiated every single year. Nearly 16% of its properties will be in renewal talks in 2023 alone.
On the one hand, this is a risk because it means that a tenant could walk away sooner rather than later. However, with a retention rate of more than 99%, that doesn't appear to be a big issue. What this means, then, is that Postal Realty can increase its rents to the current market rate more quickly than many other net lease REITs.
During inflationary times, that should help support a higher rate of overall rent growth. In 2022 the figure was 2%; however, all the lease negotiations weren't finalized when earnings got released, so it could move higher.
To be fair, that may not sound like a huge difference from Realty Income, but small numbers can add up over time. It's also worth looking at the numbers at W.P. Carey, which includes inflation-linked rent bumps in 55% of its leases. The REIT's quarterly same-store rent increases have more than doubled from the 1.5% range to over 3% over the past two years. This suggests that there could be additional upside in Postal Realty's numbers.
A growth story
Although the generally short lease terms' impact on rent growth is interesting, the real story here remains growth through acquisition. This is highlighted by the fact that overall rents increased a huge 33% year over year in 2022, mostly thanks to the addition of 320 properties. And yet, for investors worried about inflation, Postal Realty's unique business approach seems to offer additional benefits that might go overlooked if you don't understand a bit more about how it operates.
10 stocks we like better than Postal Realty Trust
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Postal Realty Trust wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of March 8, 2023
Reuben Gregg Brewer has positions in Realty Income and W. P. Carey. The Motley Fool recommends Realty Income and W. P. Carey. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
