Postal Realty Trust Inc

NYSE:PSTL

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, greetings, and welcome to the Postal Realty Trust First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jordan Cooperstein, Vice President of FP&A, Capital Markets. Please go ahead, sir.

[Jordan Cooperstein, executive]

Thank you, and good morning, everyone. Welcome to Postal Realty Trust's First Quarter 2024 Earnings Conference Call. On the call today, we have Andrew Spodek, Chief Executive Officer; Jeremy Garber, President; Robert Klein, Chief Financial Officer; and Matt Brandwein, Chief Accounting Officer.

Please note the company may use forward-looking statements on this conference call, which are statements that are not historical facts and are considered forward-looking. These forward-looking statements are covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, but not limited to, those contained in the company's latest 10-K and its other Securities and Exchange Commission filings. The company does not assume and specifically disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds to operations, adjusted funds from operations, adjusted EBITDA and net debt. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP measures in the company's earnings release and supplemental materials.

With that, I will now turn the call over to Andrew Spodek, Chief Executive Officer of Postal Realty Trust.

[Andrew Spodek, executive]

Good morning, and thank you for joining us. I'm pleased that our success in 2023 has continued into the current year. Our first quarter acquisition pace and weighted average cap rate were slightly ahead of the same period last year. We added 29 properties for $19 million at a weighted average cap rate of 7.8%, and our year-to-date activity has us on track to achieve our full year 2024 acquisitions guidance of $80 million at or above a 7.5% weighted average cap rate.

While our transaction market is not immune to the current volatility in interest rates, I believe the postal real estate sellers are less focused on movements in the 10-year treasury as they are in more heavily brokered sectors. I'm encouraged by our active pipeline sourced from existing relationships and many new prospects, some of which we have tracked for many years.

Postal Realty has demonstrated time and again that we remain disciplined in managing our balance sheet to ensure we are well positioned to pursue attractive opportunities as they arise. We raised almost $14 million of equity capital from a combination of common stock and operating partnership unit issuances, keeping our leverage well within our target range while maintaining ample availability on our revolving credit facility.

Despite the uncertainty of the macro environment, our entire team remains focused on what we do best, acquiring postal real estate and improving the cash flow from assets under management. When sellers exchange property for operating partnership units, which they have done every year since our IPO, they are demonstrating that they trust we are the premier owner and operator in this niche space. This currency allows sellers the opportunity to maintain exposure to postal real estate and eliminate the day-to-day responsibilities of property management while deferring the potential taxable gains.

Relationships are the backbone of this business. One of the many ways we stay in front of owners of our target asset is by developing strong, long-lasting connections. Last month, senior members of Postal Realty and I attended the 2024 Annual Association of United States Postal Lessors Conference. I personally have attended this conference for most of my life. It's an opportunity to cultivate new relationships as well as maintain our long-running dialogue with owners.

Due to these efforts, along with many others, roughly 75% of our acquisitions over the past few years have been sourced internally. And as the natural buyer, we believe we see all important assets that come to market. We are confident in both our business and our tenants as we continue to collect 100% of our contractual rents and maintain high retention and occupancy rates, exemplifying the importance of this irreplaceable network.

With no significant near-term debt maturities, predictable cash flows, industry leadership as the largest owner of postal properties and a committed team, we are positioned for a successful 2024. I'll now turn the call over to Jeremy.

[Jeremy Garber, executive]

Thank you, Andrew. The first quarter was business as usual at Postal Realty as we remain focused on acquiring well-utilized attractive last mile and flex postal properties. Our acquisitions during the quarter added 112,000 net leasable interior square feet to our portfolio, inclusive of 26,000 square feet from 16 last mile properties and 86,000 square feet from 13 flex properties. Subsequent to quarter end, the company acquired 6 properties for $4.1 million and placed an additional 11 properties totaling $3.5 million under definitive contracts.

As stated on prior calls, the company's business model generates consistent cash flow each quarter as our business remains stable and reliable through economic cycles. We have a long runway of opportunity ahead of us and are encouraged by our growth prospects as the largest owner in this space.

We have maintained a 99% historical weighted average lease retention rate over the past 10-plus years, which reflects the strategic importance of these properties to both the Postal Service and the communities they serve. This validates our due diligence process and identifying locations that are vital to this crucial logistics network.

We continue to work hard with the Postal Service to execute the expired leases and hope to provide an update on our next earnings call. I'll now turn the call over to Rob to discuss our first quarter 2024 financial results.

[Robert Klein, executive]

Thank you, Jeremy, and thank you, everyone, for joining us on today's call. During the first quarter, we raised approximately $14 million of equity and continued to accretively acquire assets. We delivered funds from operations or FFO of $0.20 and adjusted funds from operations or AFFO of $0.25 per diluted share. We have maintained low leverage and minimized our exposure to variable rate debt.

At the end of the first quarter, our debt outstanding had a weighted average interest rate of 4.22%, a weighted average maturity of 4 years and no significant debt maturities until 2027. The company's $150 million senior unsecured revolving credit facility at $16 million outstanding, and fixed rate debt comprised 94% of all borrowings. Net debt to annualized adjusted EBITDA was 5.8x, well within our target of below 7x.

During the first quarter, we issued approximately 576,000 shares of common stock through our ATM offering program at an average price of $14.25 per share, totaling gross proceeds of $8.2 million. Additionally, we issued nearly 412,000 common units in our operating partnership at a price of $14.05 per unit as part of consideration for a portfolio acquisition. Recurring CapEx was $150,000, within our anticipated range of $125,000 to $175,000. Looking forward to Q2, we anticipate the figure to be between $150,000 and $200,000 depending on the timing of projects.

Cash G&A expense came in within our stated range for the first quarter. Just as in prior years, we continue to prioritize decreasing cash G&A as a percentage of revenue on an annual basis. For the full year 2024, we expect total cash G&A expense to be between $9.5 million and $9.8 million.

Our Board of Directors has approved a quarterly dividend of $0.24 per share, representing a 1.1% increase from the Q1 2023 dividend. During the first quarter, we collected 100% of our contractual rents. This predictability of cash flows remains a significant differentiator for our company in addition to our strong operations and proven track record of scaling the business. Thanks to our solid foundation and hard work, we continue to be the market leader in the postal real estate space as we execute our business plan of acquiring new assets and improving the cash flow from existing properties.

That concludes our prepared remarks. And now we'd like to open the line to take any questions you may have. Operator?

[Operator]

[Operator Instructions] Our first question is from the line of Anthony Paolone with JPMorgan.

[Anthony Paolone, analyst]

I guess wondering if you could update us on just how negotiations are coming along with the 90-some-odd holdover leases and whether or not you anticipate new leases with contractual bumps the way you were able to achieve last year and/or step up in starting rents on the new leases.

[Andrew Spodek, executive]

Tony, this is Andrew. I wish I could say that we're completed with the negotiations. This is still a fluid process. We're working very hard with the Postal Service to resolve them and to come to a mutually acceptable solution. Everything is going well, it's just taking longer than what we would have anticipated. And we're working towards getting those annual bumps even though I can't commit to it actually being done until it's completed, and we hope to have a better update for you next quarter.

[Anthony Paolone, analyst]

Do you think, Andrew, that like the process there is changing so that like as we look out into future years, the negotiation and the process could just be a bit faster or smoother? Do you think this will always kind of be, given the counterparty, a tough process?

[Andrew Spodek, executive]

So the answer is that we've had these types of situations in the past over my life of dealing with the Postal Service where it takes longer than anticipated to resolve this. We are currently working with the Postal Service to make it more efficient, so that way in future years, we don't have these issues. And I'm hopeful that we'll get to that place, but I can't commit to it until it's the end result.

But regardless, we've been collecting our rents. We will continue to collect our rents. When we do resolve it, they do pay the difference in the rents that we negotiated and when the leases had expired. And so it's just a matter of trying to complete them as quickly as possible.

[Anthony Paolone, analyst]

Okay. And then just last one for me. You mentioned the CapEx in the quarter and also what you anticipated for 2Q. But if you get these holdover leases over the finish line, do you anticipate like in the back half of the year having to spend anything incremental that would come along with that process that would be outside of that, kind of $100,000, $200,000 range that you outlined for the quarter?

[Robert Klein, executive]

Yes. Thanks, Tony. This is Rob. I don't -- we don't anticipate that the guidance changes based on acquisitions or on releasing really in the near term. So that guidance will hold. Then next quarter, we'll come forward with the guidance for future quarters.

[Operator]

[Operator Instructions] Our next question comes from the line of Steven Dumanski with Janney Montgomery Scott.

[Steven Dumanski, analyst]

I know that the state of the transaction market was addressed earlier in the opening comments. So I just wanted to get more insight. With the overall macro environment, how motivated are potential sellers currently? And what do you project, an increase or a decrease in the velocity of the acquisition pipeline going forward?

[Andrew Spodek, executive]

I appreciate the question. Sellers are maybe motivated, but they're not motivated to the extent that they are adjusting their cap rates across the entire market. We're still having to deal with sellers on a deal-by-deal basis to try to adjust cap rates to inch them up to places where we want to acquire them in an accretive way. I am hopeful that the velocity of deals will pick up, and we are able to adjust our guidance as the year progresses. But as of right now, we're maintaining our guidance of $80 million for the year.

[Steven Dumanski, analyst]

That was very helpful. And just another one regarding, I guess, more on the macro environment. Is the higher-for-longer interest rate environment and the pullback in bank financing impacting the ability for a small owner to refinance postal assets when their current debt expires? Or is having the USPS in the lease still the golden ticket essentially?

[Andrew Spodek, executive]

So the postal real estate market, at least on the flex and last mile facilities is not a very heavily financed space. With that being said, if sellers do have mortgages that are coming due, they're able to refinance them, but obviously at a much higher rate. And so while that would normally be a motivating factor for people to consider selling, because it's not a heavily financed space, it's not typically a major driver of deal flow.

[Operator]

[Operator Instructions] Our next question is from the line of Jon Petersen with Jefferies.

[Jonathan Petersen, analyst]

Could you remind us what percent of your portfolio has annual escalators built in and where you expect that number to trend over the next -- as you renew all these leases over the next few years?

[Jeremy Garber, executive]

Yes, Jon. It's Jeremy. It was the entire vintage of 2022 leases that expire that we put an escalator in place.

[Andrew Spodek, executive]

And we're working on deals [indiscernible] and going forward right now.

[Jonathan Petersen, analyst]

Yes. So is the expectation -- because these are typically 5-year leases. So if we fast forward 4 years in the future, is the expectation you guys have that 100% of the portfolio will have annual escalators? Or will there be kind of friction in future years and getting that in there now that inflation is coming down a bit?

[Andrew Spodek, executive]

Yes. I think it's a fluid kind of conversation that really depends on inflation and the cost to operate the properties. And so I can't commit to all of the future leases having an escalator. But when it's appropriate, that's definitely something that we will be negotiating for.

[Operator]

Thank you. As there are no further questions, I now hand the conference over to Andrew Spodek for his closing comments. Andrew?

[Andrew Spodek, executive]

On behalf of the entire team, we thank you for your support and taking the time to join us today. We're confident in our business model and the opportunity in the specialized market. The fundamentals of the business remain strong, and we look forward to what the future brings. Let's connect in the upcoming months. Thank you again for your time.

[Operator]

Thank you. The conference of Postal Realty Trust has now concluded. Thank you for your participation. You may now disconnect your lines.