Commitment To 10-Year Postal Service Leases Will Provide Future Stability

Key Takeaways

• Long-term leases with the Postal Service and continued rent negotiations are expected to provide stable revenue, supporting margin and earnings growth.
  
• Strategic acquisitions at competitive rates and a stock repurchase program aim to drive external growth and increase earnings per share.
  
• Potential policy changes and rising expenses could threaten revenue and margins, while execution risks and market conditions may affect income stability.

Catalysts

Postal Realty Trust, Inc. (NYSE: PSTL) is an internally managed real estate investment trust that owns properties primarily leased to the United States Postal Service ("USPS").

• The streamlined re-leasing process with the Postal Service is expected to enhance timing and efficiency, allowing for updated same-store cash NOI growth guidance between 4% and 6% in 2025, likely positively impacting revenue.
  
• The commitment of the Postal Service to 10-year leases with 3% annual rent escalations provides stability and future revenue growth, which can enhance net margins and earnings through predictable long-term contracts.
  
• The significant acquisition plan with a slated $80 million to $90 million in properties at competitive cap rates (at or above 7.5%) is expected to drive external growth, potentially increasing revenue and earnings.
  
• The initiation of a $25 million stock repurchase program reflects confidence in the undervaluation of the stock and could improve earnings per share (EPS) by reducing the number of shares outstanding.
  
• The continued focus on lease execution and negotiation of rents for 2026 expirations, with the potential to mark rents to market and implement further contractual rent increases, supports ongoing revenue and earnings growth.

Postal Realty Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Postal Realty Trust's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.3% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $6.3 million (and earnings per share of $0.33) by about March 2028, up from $4.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 101.1x on those 2028 earnings, up from 70.0x today. This future PE is greater than the current PE for the US Office REITs industry at 70.0x.
• Analysts expect the number of shares outstanding to grow by 3.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Postal Realty Trust Future Earnings Per Share Growth

Risks

• The company is continually exposed to various risks and factors beyond its control that could impact actual results, which can affect net margins and earnings.
  
• A potential change in the Postmaster General's policies or a new focus on cost-cutting measures by the Postal Service could threaten revenue stability if they decide to reduce leased facilities or their size.
  
• The internal growth expectations, demonstrated by projected same-store NOI growth, are subject to execution risks; failures in achieving expected outcomes could negatively impact earnings.
  
• Increasing cash G&A expenses projected for 2025 may erode net margins if not accompanied by commensurate revenue growth.
  
• Interest expenses and financial leverage could rise if market conditions worsen or if there are challenges in maintaining favorable lending terms, impacting net income.

Valuation

• The analysts have a consensus price target of $15.719 for Postal Realty Trust based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $107.4 million, earnings will come to $6.3 million, and it would be trading on a PE ratio of 101.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of $14.26, the analyst price target of $15.72 is 9.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.