Postal Realty Trust Inc

NYSE:PSTL

Earnings Call Analysis

Postal Realty Trust Reports Strong Growth and Strategic Acquisitions

In the third quarter, Postal Realty Trust achieved funds from operations of $0.24 per share and adjusted funds from operations of $0.30 per share. The company is on track for 2024 growth, expecting same-store cash NOI growth of over 4% in 2023, at least 3.25% in 2024, and a minimum of 3% in 2025. The firm completed $64 million in acquisitions this year and targets an additional $90 million at a 7.5% cap rate for next year. Quarterly dividends increased by 1.1%, reflecting confidence in sustained internal growth and efficient asset management.

Strong Performance and Financial Metrics

During the third quarter, Postal Realty Trust reported a funds from operations (FFO) of $0.24 per diluted share and an adjusted funds from operations (AFFO) of $0.30 per diluted share. This robust performance highlights the firm's operational efficiencies and its effective management strategies in a competitive market. The company continues to maintain a solid financial position, having renegotiated terms on their existing debt with an additional $50 million commitment to its term loan due in 2028.

Debt Management and Cost of Capital

The recent financial maneuvers, including an interest rate swap that fixed the loan interest rate at 5.37%, and a resultant lowered weighted average interest rate of 4.4%, have decreased exposure to floating rates. These actions reflect strong financial stewardship amidst an evolving debt landscape and provide sufficient capital to support growth initiatives without significant short-term maturities.

Same-Store Cash NOI Growth Outlook

The management expressed confidence in generating internal growth through strategic leasing. For 2023, they anticipate a same-store cash net operating income (NOI) growth exceeding 4%. Looking ahead, they project a growth of at least 3.25% for 2024 and at least 3% for 2025. This consistent growth is facilitated by a structure that includes 3% annual rent escalations in new leases, improving the stability and predictability of revenue streams.

Acquisitions and Portfolio Expansion

Throughout 2023, Postal Realty has completed $64 million in acquisitions and has another $11 million worth of properties under definitive contracts. They maintain an ambitious goal to achieve at least $90 million in acquisitions for 2024 at a targeted weighted average cap rate of 7.5%. This aggressive investment strategy is a key component of their overall expansion narrative.

Strategic Dispositions and Capital Recycling

The company sold two properties for a total of $6.3 million, achieving an exit cap rate of 4.9%. These sales underscore the management's strategy of capital recycling—selling undervalued assets to reinvest in high-potential opportunities. This approach not only strengthens the balance sheet but is indicative of the company’s focus on long-term value creation.

Increasing Lease Efficiency

Efforts to enhance the re-leasing process with the Postal Service demonstrate managerial effectiveness. Improved lease execution timelines are pivotal in achieving their future growth targets, as evidenced by the 106 executed leases representing approximately 78% of the rents expiring in 2024. The ongoing focus on capturing agreed bonuses further underscores an upward trend in rent growth.

Dividend Increases as Shareholder Value Driver

Postal Realty's Board of Directors approved a quarterly dividend increase of 1.1% to $0.24 per share. This reflects the company’s commitment to returning value to shareholders while pursuing growth strategies in a reinvestment-ready manner. An increasing dividend is often a sign of confidence in ongoing cash flows and operational success.

Market Conditions and Future Outlook

Despite a volatile capital markets environment and shifting interest rates, Postal Realty believes it is positioned strategically for future growth. Management has indicated that while sellers may have differing expectations, the company anticipates further opportunities to expand its portfolio. Their conservative approach balances the need for acquisitions with the imperative to manage cash effectively.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to Postal Realty Trust Third 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.

[Jordan Cooperstein, executive]

Thank you, and good morning, everyone. Welcome to Postal Realty Trust's Third 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 related 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 from 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 today. The third quarter was notable as we made progress on re-leasing and have improved visibility on same-store cash NOI. In addition, we closed on our first significant disposition subsequent to quarter end. As part of our efforts to streamline the re-leasing process, we worked collaboratively with the Postal Service and have arrived at a multitiered programmatic approach. Moreover, the Postal Service has devoted more resources towards the lease execution process.

This methodology, coupled with increased resources has improved the timing of re-leasing, allowing us to provide same-store NOI figures for 2023 through 2025. We are already reaping the benefits of this approach. Rents for the 2023 and 2024 leases have already been agreed upon, and we are working towards our mutual goal of executing leases before they expire on the 2025 leases and beyond. We expect 2023 same-store cash NOI growth to be greater than 4%. Also, we project 2024 to be at least 3.25%, and we anticipate at least 3% growth in 2025. These strong same-store figures demonstrate our ability to generate internal growth through marketing rents to market, incorporating annual rent escalations in new leases and achieving operating efficiencies.

The newly executed 2023 and 2024 leases all contained 3% annual rent escalations, which increases the percentage of leases subject to escalations in our portfolio to 21%. The continued rent growth from these annual escalations provided us with comfort to begin including 10-year terms in certain tiers of our re-leasing process. We are excited about this result and the additional visibility this will provide into Postal Realty's strong cash flows.

Through October 21, we have completed $64 million in acquisitions for the year and have placed an additional 29 properties totaling $11 million under definitive contracts, while acquisition volume was a bit lighter during the third quarter. We are still targeting $90 million at or above a 7.5% weighted average cap rate for 2024.

Additionally, in October, the company sold 2 properties to 2 independent parties for a combined sale price of $6.3 million, representing a weighted average exit cap rate of 4.9%. We purchased these properties for $3.6 million. While the 2 properties are quite different in each case, the buyer approach us having been attracted to the steady cash flows and strong underlying real estate. One of them is an urban property located in New York, which we effectively locked in a sales price today that accounts for potential future growth.

The other property is a last-mile postal asset in Colorado, where the local owner had interest in acquiring the neighboring parcel to his property. While our goal is to grow earnings by expanding our portfolio, we will continue to explore recycling assets and [ redeploying ] the proceeds. In reference to our balance sheet, last week, we announced an amendment to our credit facility, which included an additional $50 million commitment to our term loan maturing in 2028. The proceeds from the initial funding were used to pay down our revolving credit facility. With the vast majority of our undrawn stable cash flows from a reliable tenant and exceptional internal growth, we believe Postal Realty is well positioned for years to come.

I'll now turn the call over to Jeremy.

[Jeremy Garber, executive]

Thank you, Andrew. To reiterate Andrew's sentiments, we may progress on releasing same-store NOI growth had our first significant dispositions and are on track to meet our 2024 acquisitions guidance. As of October 21, the company had received AD fully executed leases representing nearly 55% of the aggregate 2023 expired right. The total net lump sum catch-up payment related to the 2023 leases was approximately $1.4 million comprised of $326,000 for leases executed during the second quarter, $971 for leases executed during the third quarter and $70,000 for leases executed during October.

The company received 106 fully executed leases, representing 78% of the aggregate 2024 expired and scheduled to expired rent. The total net lump some catch-up payment related to the 2024 leases was approximately $351,000 comprised of $226,000 for leases executed during the third quarter and $125, 000 for leases executed during October. As Andrew mentioned, all executed leases were subject to 3% annual rent escalations and 6% of the portfolio now possesses 10-year leases. The company acquired 35 properties for $13.3 million at a weighted average cap rate of 7.5% during the third quarter. This added 106,000 net lease in voluntary square feet to our portfolio inclusive of 29,000 square feet from 20 last mile properties and 77,000 square feet from 15 flex properties. Subsequent to quarter end, the company acquired 13 properties for $4.2 million.

I'll now turn the call over to Rob to discuss our third quarter financial results.

[Robert Klein, executive]

Thank you, Jeremy, and thank you, everyone, for joining us on today's call. For the third quarter, we delivered funds from operations or FFO of $0.24 per diluted share and adjusted funds from operations or AFFO of $0.30 per diluted share. Thanks to our strong partnership with our supportive lenders, we added $50 million of commitments to our term loan maturing in February 2028 and also increased our term loan accordion by $50 million subsequent to quarter end.

At closing, we funded $40 million to our 2028 term loan, leaving 10 level on a daily basis. Concurrently with the $40 million funding, we entered into an interest rate swap, fixing the interest rate through the maturity date of the loan at a current rate of 5.37%. The proceeds were used to repay the revolving credit facility and [ uplosing ] $7 million remained outstanding on the revolver. The transaction lowers our weighted average interest rate, reduces our exposure to floating rate debt and gives us plenty of capacity to fund the future growth. Inclusive of the term loan funding and the revolver paydown, our debt outstanding had a weighted average interest rate of 4.4% and no significant near-term maturities.

At the end of the third quarter, net debt to annualized adjusted EBITDA was 5.6x, which is down from 6.1x for Q2. During the third quarter and through October 21, we issued approximately $732,000 shares of common stock through our ATM offering program and 252,000 common units in our operating partnership for total gross proceeds of approximately $14.2 million at an average gross price of $14.41. Recurring CapEx for Q3 was within our anticipated range at $253,000.

Looking forward to Q4, we anticipate the figure to be between $125,000 and $225,000. Our cash G&A expense for the full year of 2024 remains between $9.5 million and $9.8 million. Similar to prior years, we continue to decrease cash G&A as a percentage of revenue on an annual basis. Our Board of Directors approved a quarterly dividend of $0.24 per share, representing a 1.1% increase from the Q3 2023 dividend.

With the execution of new leases and the strong internal growth they provide as well as accretive acquisitions a conservative balance sheet and significant access to capital, we are well positioned to generate value for our stakeholders through internal and external growth. That concludes our prepared remarks, and we'd like to open the line to take any questions you may have. Operator?

[Operator]

[Operator Instructions] The first question comes from the line of Anthony Paolone with JPMorgan.

[Anthony Paolone, analyst]

First question is just as it relates to doing these 10-year duration deals now, can you talk a bit more about just whether that becomes a default duration or whether that is just certain assets that USPS is willing to go that length? Or maybe just talk a bit more about that process.

[Andrew Spodek, executive]

Sure. Thanks for the question, Tony. So it's not a default term. It is something that we discussed with the Postal Service that seemed to make a lot of sense. We were happy with the rent growth we saw on the '23s and '24s. We're happy that we received our rent escalations for both those vintages. And also importantly, we -- our goal, our mutual goal with the Post Service is to try to get in front of these leases before they expire. So pushing out the term for 10 years seems to be a good idea given all those factors.

[Anthony Paolone, analyst]

Okay. But it's something as we start to look to next year, do you think you can maybe do more along those lines like it doesn't have to just be of 5 years at this point, like we could see more duration in the portfolio?

[Andrew Spodek, executive]

Correct. That is the goal, assuming that it makes sense for us and for the Postal Service based on the rents we're receiving, it's a fluid process. And as we negotiate and as we continue to roll through these leases, we will update everybody on the percentage of leases that we're doing 10 years versus 5 years. But we think this is a good development for us and for shareholders as well as for the Post Service.

[Anthony Paolone, analyst]

Okay. And then just my second one on like from your intro comments that this really was a newer way of doing business with them to get these leases knocked out earlier than maybe what we've been seeing over the last couple of years. And so just remind me, is there any risk that, that changes with the election or change in administration? Or is their process kind of just bring [indiscernible] and just should continue the way you've been doing it?

[Andrew Spodek, executive]

Yes, I don't believe that politics or the election really common to play on these lease negotiations. The deposit in general was funded under front and stayed in position while buying an office -- sorry about that. And so I don't believe that this is really a concern for our negotiations today or going forward.

[Operator]

Next question comes from the line of Ki Bin Kim with Truist Securities.

[Ki Bin Kim, analyst]

I was wondering if you can share some more details around the leases. And more specifically, if you can talk about the cash or cap lease spreads that you were able to achieve?

[Andrew Spodek, executive]

I'm sorry, can you repeat that? I couldn't hear very, very well.

[Ki Bin Kim, analyst]

If you can talk about the lease spreads that you were able to achieve?

[Andrew Spodek, executive]

So we have not and do not disclose our leasing spreads, but we do speak to our same-store growth, which we relate to everybody, which we're very, very happy with, 4% for '23, 3.25% for '24 and we even gave a projection of greater than 3% for '25.

[Ki Bin Kim, analyst]

Okay. Maybe I can ask it a different way then. When you look at the 3% -- at least 3% growth projection for '25, can you help us break down the components of it?

[Andrew Spodek, executive]

We haven't really disclosed that as time goes on, and we may give you more color on it. But as of now, we really don't speak to more detail on it. We have a concentration with one tenant that we're constantly negotiating with and for competitive advantages, also it doesn't really make sense to disclose it.

[Ki Bin Kim, analyst]

Okay. Understandable. Just last question then. Is that 3% growth projection for 2025. Would you say that's somewhat of a sustainable figure? I wasn't sure if there were some other components might be driving it a little bit higher.

[Andrew Spodek, executive]

So there are a lot of different components that go into setting the same store number. It's not just about rent growth. It's also about the expenses of the company and the efficiencies that we can get in operating these properties. And so we wanted to give you projection, to give you a line of sight as to where things are going to be. And we hope to continue to do that as time goes on and as we get in front of these leases of working with the Post Service.

[Operator]

The next question comes from the line of Steven Dumanski with Janney.

[Steven Dumanski, analyst]

I appreciate you provided some insight on the 2 dispositions. Can you just provide more, I guess, more of an update on why they were transacted at such a relatively reblended cap rate? And if you see any more of these opportunities in terms of recycling capital going forward.

[Andrew Spodek, executive]

I appreciate the question. So these were both reverse inquiries. These were not marketed. These were not deals that we were putting out there for sale. Buyers approach us. Like in general, we believe that we are undervalued. We think that a lot of the properties that we own have greater value and should be valued at lower cap rates. We were able to achieve a good return. We extracted value from these properties and we're recycling this capital and putting them into other properties that we will attract value out of. We will continue to do that as the opportunity presents itself. But in the end, this is a growth company. And our goal is to continue to acquire and grow the company as we have.

[Operator]

Next question comes from the line of Eric Borden with BMO Capital Markets.

[Eric Borden, analyst]

Maybe just starting with the acquisition environment. You noted that 3Q volumes were lighter than expected, but you still maintained the full year target of $90 million. So I guess what's kind of giving you confidence to achieve that $90 million guidance as you look to continue to acquire in the fourth quarter?

[Andrew Spodek, executive]

Thank you. So as I've stated in the past, this is really not a quarterly business. And I know by nature, everybody just takes what our targets are and applies them by the quarter. This quarter was like just timing of the transactions. And so I'm not concerned about hitting our target. I'm very happy with our pipeline. I'm looking forward to our cost of capital going down and be able to increase our pipeline there after, but I didn't see a reason to adjust our target because I believe we're going to achieve it.

[Eric Borden, analyst]

That's helpful. And then maybe just on the cap rate environment, given the 10 years still remains volatile today post the Fed cutting rate. And just curious, are buyers readjusting to that higher rate environment? Or are they still expecting kind of better pricing on their end just given potential future costs?

[Andrew Spodek, executive]

We haven't seen a significant change in cap rates and sellers' expectation of pricing. But we do see a lot of sellers that are considering selling today that weren't in the market, let's call it, a year or so ago. So that's a positive.

[Operator]

Thank you. [Operator Instructions] Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Andrew Spodek for closing comments.

[Andrew Spodek, executive]

Thank you. On behalf of the entire team, we want to thank you for your support and taking the time to join us today, and we look forward to connecting with all of you in the coming months.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.