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Very brief, succinct. I did not know that this REIT (PSTL) was so young. Started operations just in 2019.
Div. pay-out ratio = 96%? That's a red flag, eh? But Morningstar has a crazy number there: pay-out ratio of 653.57. WTF? I own this beast, by the way. Plodding upward since I bought. My own cost basis is still--- barely--- in the red. https://www.stockrover.com/research/insight/summary/quotes/PSTL
REITs don’t (generally I suppose) use GAAP earnings to determine their payouts/quarter successes, etc. Rather, they use FFO/AFFO (Funds From Operation/Adjusted FFO). And per their press release, they achieved 25 cent FFO, and distributed a 23.5 cent distribution. So not quite 100% payout ratio.
YBB will probably chime in with a more-detailed and better written explanation lol (NOT sarcasm!
Funds from operation (FFO) is a measure of cash flow that is calculated simply by taking net income and "backing out" depreciation and amortization. That intuitively makes sense in terms of cash, since depreciation is a bookkeeping figure, not "real" cash that is flowing out of a business' bank account.
Many types of businesses present a non-GAAP (and non-standardized) EBITDA figure to give a "truer" (read: more favorable) picture of income. This is net income after backing out depreciation, amortization, interest and taxes.
Even though EBITDA is focused on income and FFO is focused on cash flow, they look very similar. That's especially true in real estate where depreciation and amortization can constitute the vast majority of tweaks. So if it helps, think of FFO as income without accounting "tricks".
M* says that free cash flow over trailing twelve months was 6.88x net income. (That's a bit higher than the 5x for the third quarter.) Take the 94% payout based on cash flow and multiply by 6.88, and you get roughly the 653.57% payout ratio that M* reports. The small difference is likely due to rounding (95% x 6.88 = 653.6).
Given this huge difference between net income and payouts, one might think that the divs can't all be income. And one would be right. Over the past year, about a third of the divs represented return of capital (lowering your cost basis). I'm not going to venture a guess as to how one comes up with that 1/3 figure; I'm just reporting it from the PSTL filings:
Real estate is unique in that one can "eat" depreciation. This is because land and "improvements" (we may call them homes/houses) tend to increase in value over time. This is unlike most businesses that will eventually die without redeploying depreciation. So, real estate/REITs use cash flows (formally FFO and AFFO). They use P/FFO, P/AFFO as valuation measures instead of P/E.
Improvements may be depreciated but land is never depreciated. Regardless of the business. A farmer may depreciate his silo but not his acreage. I imagine this distinction is for just the reason you describe - land tends to increase in value over time. Though improvements either require maintenance or deteriorate.
From the IRS's FAQ on depreciation:
Can I depreciate the cost of land?
Land can never be depreciated. Since land cannot be depreciated, you need to allocate the original purchase price between land and building. You can use the property tax assessor's values to compute a ratio of the value of the land to the building.
Example:
Ryan bought an office building for $100,000. The property tax statement shows:
Improvements $60,000 75% Land $20,000 25%
Total Value $80,000 100%
Multiply the purchase price ($100,000) by 25% to get a land value of $25,000. You can depreciate your $75,000 basis in the building using the mid-month MACRS tables
Comments
YBB will probably chime in with a more-detailed and better written explanation lol (NOT sarcasm!
Many types of businesses present a non-GAAP (and non-standardized) EBITDA figure to give a "truer" (read: more favorable) picture of income. This is net income after backing out depreciation, amortization, interest and taxes.
Even though EBITDA is focused on income and FFO is focused on cash flow, they look very similar. That's especially true in real estate where depreciation and amortization can constitute the vast majority of tweaks. So if it helps, think of FFO as income without accounting "tricks".
You can see how massive an impact depreciation and amortization have. For PSTL in the third quarter:
net income = $1,150K
deprec,amort = $4,616K
FFO = $5,766K
https://investor.postalrealtytrust.com/Investors/news/news-details/2022/Postal-Realty-Trust-Inc.-Reports-Third-Quarter-2022-Results/default.aspx
M* says that free cash flow over trailing twelve months was 6.88x net income. (That's a bit higher than the 5x for the third quarter.) Take the 94% payout based on cash flow and multiply by 6.88, and you get roughly the 653.57% payout ratio that M* reports. The small difference is likely due to rounding (95% x 6.88 = 653.6).
Given this huge difference between net income and payouts, one might think that the divs can't all be income. And one would be right. Over the past year, about a third of the divs represented return of capital (lowering your cost basis). I'm not going to venture a guess as to how one comes up with that 1/3 figure; I'm just reporting it from the PSTL filings:
https://s29.q4cdn.com/654642337/files/doc_downloads/dividend-tax-information/Dividend-Tax-Treatment-of-2021.pdf
https://s29.q4cdn.com/654642337/files/doc_downloads/dividend-tax-information/Form-8937-2021.pdf (see line 15 for adjustment to cost basis)
https://www.hrblock.com/tax-center/income/investments/nondividend-distributions/
From the IRS's FAQ on depreciation: https://www.irs.gov/pub/irs-regs/depreciation_faqs_v2.pdf