Postal Realty Trust, Inc.

Good afternoon. At this time, I'd like to welcome everyone to the Postal Realty Trust second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I will now turn the call over to Mr. Blaine Willenborg, Vice President of Business Development and Capital Markets. Please begin your conference.

Thank you. Good afternoon, everyone, and welcome to the Postal Realty Trust second quarter earnings conference call. On the call today, we have Andrew Spodek, Chief Executive Officer, Jeremy Garber, President, and Matt Brandwein, Chief Accounting Officer. Please note the use of forward-looking statements by the company on this conference call. Statements made on this call may include statements that are not historical facts and are considered forward-looking, including, among others, statements related to the COVID-19 pandemic and its effects on our business, the terms and timing of our pending acquisitions, and the status of our ongoing negotiations with the Postal Service. These forward-looking statements are covered by the state's 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 without limitations. Those contained in the company's 10-K filed on March 27, 2020 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 and adjusted funds from operations. You can find a tabular reconciliation of these non-GAAP financial measures in the most currently comparable GAAP measures in the company's earnings release and in filings with Securities and Exchange Commission. Additional information will be found on the Investor Relations page of our website. With that, I will now turn the call over to Andrew Spodek, Chief Executive Officer at Postal Realty Trust.

Good afternoon, and thank you for joining Postal Realty Trust's second quarter 2020 earnings call. As the country begins to advance into different phases of reopening, we hope you and your loved ones continue to stay safe. We would also like to thank all the first responders and Postal Service employees for their hard work and commitment since the pandemic began. Our company is currently maintaining an optional work-from-home policy as we want to respect what is best for each of our team members and their safety. I am pleased to report our company produced strong results in the first half of the year. As a team, we've been able to maintain our health and well-being throughout this crisis. In addition to this, the pandemic has not had any impact on our business's stable revenue stream. Our rent collection remain unchanged with receiving 100% of our rents in July as we have every month since our IPO. As a result, we've been able to raise our dividend every quarter. In July, we raised our dividend by 2.5% to 82 cents per share on an annual basis. Our acquisition activity in 2020 has continued to show progress, having closed on approximately 200 properties for approximately $65 million and over 585,000 net leasable interior square feet, all within our stated average cap rate range of 7% to 9%. As we previously communicated, as a result of the pandemic, we proactively and prudently paused our pipeline in the second quarter and took this opportunity to amend our line of credit and successfully completed our first follow-on equity offering. We resumed our acquisition activity in the third quarter, and even with the slowdown, we are on pace to achieve our acquisition goal of $100 million for 2020. Our continued ability to access the capital markets, amend our credit facility, and execute on our acquisition plan in the current environment further highlights the strength of our business model. Having now reported four quarters, it has been extremely rewarding to see our pre-IPO thesis play out firsthand. We welcome our new shareholders that joined us through our first follow-on and thank our initial shareholders for their continued support. We are very much aligned with you. The Board and I are deferring 100% of our cash salaries for 2020 and remain committed to growing shareholder value. I will now turn the call over to Jeremy to discuss our second quarter results.

Thank you, Andrew, and thank you all for joining us this evening. Turning to our financial results, We reported a GAAP net loss of approximately $150,000 in the quarter. FFO for the quarter was 23 cents per share, which includes acquisition-related expenses of approximately $50,000. ASFO for the quarter was 26 cents per share. Moving on to the balance sheet, at June 30, 2020, we had $4.9 million of cash and $84.3 million of debt. During the quarter, we amended our credit facility to allow additional properties to be eligible to the borrowing base and increased the advance rate on our properties from 50% to 60%. We also entered into two mortgages during the second quarter. The first closed in April and was for $4.5 million on 13 properties. The second closed in June for $9.2 million on 22 properties. Both mortgages carry a fixed Thank you for joining us. The proceeds from the offering were $52.2 million and were used to pay down a portion of our line of credit and to acquire additional properties. We estimate that the combination of additional capacity on our line of credit and our equity raise offers us in excess of $100 million of acquisition capacity before consideration for any OP unit transactions. After the close of the second quarter, we acquired an additional $23.4 million of assets. The acquisitions were comprised of 98 buildings with approximately 250,000 interior net leaseable square feet. We currently have $3.7 million in definitive agreements, the majority of which are expected to close by the end of the third quarter. As Andrew shared, we are on pace to reach our $100 million acquisition target for this year. Our property cash flows and acquisition activity provide the fuel for our quarterly dividend. On July 30th, the Board declared a quarterly dividend of 20.5 cents for the second quarter, which equates to 82 cents per share annually, or a 2.5% increase. This is our second dividend increase in 2020 and our fifth dividend increase since our May 2019 IPO. I wanted to take this opportunity to provide some additional color on our business As we have now been public for a year. As Andrew mentioned earlier, on July 20th, we closed on our first follow-on equity offering, where we sold 4,021,840 common shares, bringing our total shares in OP units outstanding to 12,355,084, and our weighted average shares in units outstanding for the quarter to approximately 11.5 million. Let me turn now to an update on leasing. As we have previously shared, the Postal Service rolled out a new lease form that we have been negotiating. We have a letter of intent on 80 of 90 properties with lease expirations in 2020 or prior. Of the 10 remaining expirations, six are from new acquisitions this year. We are working diligently with the USPS to get all of these resolved by the end of the year. We would like to provide additional perspective on our rental revenue, which increased 8% from last quarter to $4.6 million. For the 19 properties acquired in the second quarter, the partial quarter rent was $155,000 and would have been $220,000 if all the transactions closed on April 1st. Tenant reimbursements comprised of real estate tax reimbursements were approximately $653,000 for the quarter. This line item will typically increase in tandem with our real estate tax expense because the majority of our leases require reimbursement for real estate taxes. Through acquisitions, we have inherited properties that do not provide for the reimbursement of taxes. Currently, this equates to a $45,000 quarterly mismatch of tax reimbursement. As we continue to acquire, there may be properties where the taxes are not reimbursed. As these leases roll, we are hopeful to be able to adjust the lease terms for tax reimbursement. With respect to fee and other income, the majority comes from our property management income, VRTRS. This line item may vary because of one-time other income items. In the second quarter, this line item included an incremental $50,000 from an insurance claim that we do not expect to recur. Moving to expenses, total expenses in the quarter were $5.2 million versus $5.4 million for the prior quarter. G&A in the quarter was $1.9 million as compared to $2.3 million for the prior quarter. Our G&A is comprised of three components, and we think it is important to understand each. The first is what we call recurring G&A that includes our salaries, bonuses, benefits, rent, and other public company costs. This does not include incremental professional fees related to substantial growth in our portfolio. We anticipate this to be relatively flat for each of Q3 and Q4. The second component is our equity-based compensation, which for the second quarter was approximately $535,000.00. We anticipate this figure will be in the range of approximately $550,000 to approximately $600,000 for each of Q3 and Q4. Finally, the last component, which can vary based on our transactional activity, are expenses associated with acquisitions. In the quarter, those costs were approximately $50,000. We believe that for modeling purposes, $100,000 to $150,000 is appropriate for each of Q3 and Q4. Interest expense in the quarter was approximately $660,000, down 20.7% from the first quarter of 2020, due to interest rate declines and a decrease in our unused fee. This figure includes our line of credit and interest, our unused fee, our fixed mortgage interest, and our non-cash financing costs. Our recurring CapEx for the quarter increased in Q2 2020, and we expect it to continue to go up as we acquire more properties. This quarter, it was approximately $125,000, or 28 cents per square foot, on an annualized basis. We believe this additional detail provides a more refined framework for how we are currently looking at the business for the remainder of the year. As we approach 2021, we may update some of these items as our business progresses in its second year of operation. I will now turn it back to Andrew for some closing remarks.

The Postal Service remains as resilient as ever through the current crisis. They deliver medications, Social Security checks, and other necessities and is the leading last-mile delivery service for online purchases, proving to be a key essential business. We have received all rents for our 100% occupied portfolio. Recently, there have been numerous news stories around the Postal Service, mostly surrounding their balance sheet and cash flow issues. We understand that articles such as these can raise questions, and we want to provide perspective on two main points. The first is the critical importance of the network of facilities to the delivery industry and the American people. The Postal Service is currently the third largest employer in the United States, employing over 600,000 people and delivering to 160 million delivery points every day.

The Postal Service has development in capital markets. Please begin your conference.

Thank you. Good afternoon, everyone, and welcome to the Postal Realty Trust Second Quarter Earnings Conference Call. On the call today, we have Andrew Spodek, Chief Executive Officer, Jeremy Garber, President, and Matt Brandwein, Chief Accounting Officer. Please note the use of forward-looking statements by the company on this conference call. may include statements that are not historical facts and are considered forward-looking, including, among others, statements related to the COVID-19 pandemic and its effects on our business, the terms and timing of our pending acquisitions, and the status of our ongoing negotiations with the Postal Service. These forward-looking statements are covered by the State 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 without limitations. Those contained in the company's 10-K filed on March 27, 2020, 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 and adjusted funds from operations. You can find a tabular reconciliation of these non-GAAP financial measures in the most currently comparable GAAP measures in the company's earnings release and in filings with Securities and Exchange Commission. Additional information will be found on the Investor Relations page of our website. With that, I will now turn the call over to Andrew Spodek, Chief Executive Officer at Post Realty Trust.

Good afternoon and thank you for joining Postal Realty Trust's second quarter 2020 earnings call. As the country begins to advance into different phases of reopening, we hope you and your loved ones continue to stay safe. We would also like to thank all the first responders and postal service employees for their hard work and commitment since the pandemic began. Our company is currently maintaining an optional work-from-home policy as we want to respect what is best for each of our team members and their safety. I am pleased to report our company produced strong results in the first half of the year. As a team, we've been able to maintain our health and well-being throughout this crisis. In addition to this, the pandemic has not had any impact on our business's stable revenue stream. Our rent collection remained unchanged with receiving 100% of our rents in July as we have every month since our IPO. As a result, we've been able to raise our dividend every quarter. In July, we raised our dividend by 2.5% to 82 cents per share on an annual basis. Our acquisition activity in 2020 has continued to show progress, having closed on approximately 200 properties for approximately $65 million and over 585,000 net leasable interior square feet, all within our stated average cap rate range of 7% to 9%. As we previously communicated, as a result of the pandemic, we proactively and prudently paused our pipeline in the second quarter and took this opportunity to amend our line of credit and successfully completed our first follow-on equity offering. We resumed our acquisition activity in the third quarter, and even with the slowdown, we are on pace to achieve our acquisition goal of $100 million for 2020. Our continued ability to access the capital markets, amend our credit facility, and execute on our acquisition plan in the current environment further highlights the strength of our business model. Having now reported four quarters, it has been extremely rewarding to see our pre-IPO thesis play out firsthand. We welcome our new shareholders that joined us through our first follow-on and thank our initial shareholders for their continued support. We are very much aligned with you. The Board and I are deferring 100% of our cash salaries for 2020. I'll turn it over to Matt to comment on the filings.

We didn't see a flurry, so I'll let Matt comment.

Hi, this is Matt. I'm not aware of any filings that were coming across this morning.

Well, it said SEC release, SEC correspondence. It seemed like it was mainly dealing with registration statements, and it looked like on the Edgar system or whatever, there was like six of them or whatever this morning, and so around 9 or 5 a.m. So I was just curious as to what was prompting that. I'll follow up offline if that's easier.

Yeah, let's do that if you don't mind.

Okay. Thanks, guys. Appreciate it.

Thanks. Thanks, Rob.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Michael Gorman with BTIG. Please proceed with your question.

Yeah, thanks. Good evening. Andrew, maybe just to follow up on the acquisition pipeline and the OP units specifically, obviously the capital markets have been pretty choppy. Can you just talk about your appetite for OP unit deals here? Obviously the stocks moved up pretty nicely from the offering price versus the seller appetites for OP units in the conversations that you're having.

So the OP unit currency... is very valuable to certain families, which are very typical in the postal space. The owner that's owned their assets for decades have very little or no depreciable basis and no shelter of their income. And a sale would trigger a big capital gain. And so we continue to have a lot of interest in using those units for currency, but These transactions are typically complicated with various family members involved with different motivations and different things, and so they're not as quick and efficient as everybody would like. We do have an appetite to do those transactions, and we believe the owner and seller community does have an appetite as well.

Okay, and then maybe just sticking with the acquisitions, can you speak to the 98 that you closed after the quarter end? has a bit of a smaller footprint than the deals that you've done year-to-date or than the existing portfolio. Understanding there's the thematic aspect, do you guys look at or how does gross interior square footage play a role in your underwriting or as you think about the construction of the portfolio?

So every deal has to speak for itself, and we evaluate and underwrite each deal very very specifically. And so I don't think that there was anything terribly different as it relates to the portfolios that we closed this quarter than the quarters prior. Sometimes just by nature, if there's a group of buildings that were built or owned by a particular family or owner, They may be similar in size or have a concentration in a particular state because that's where the owners were based. But when you look at it overall, they fall within our general parameters.

Okay, great. And then maybe, Jeremy, one last one on the mortgages that were done in the quarter, both at the same interest rate. Were there any other differences in terms of the LTVs equivalent or –

I'll turn it over to Matt to comment on the filings. We didn't see a flurry, so I'll let Matt comment.

Hi, this is Matt. I'm not aware of any filings that were coming across this morning as it relates to... Well, it said SEC release, SEC correspondence.

It seemed like it was mainly dealing with registration statements, and it looked like on... on the EDGAR system or whatever. There was like six of them or whatever this morning, and so around 9.05 a.m. So I was just curious as to what was prompting that. I'd follow up offline if that's easier.

Yeah, let's do that if you don't mind.

Okay. Thanks, guys. Appreciate it.

Thanks. Thanks, Rob.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Michael Gorman with BTIG. Please proceed with your question.

Yeah, thanks. Good evening. Andrew, maybe just to follow up on the acquisition pipeline and the OP units specifically, obviously the capital markets have been pretty choppy. Can you just talk about your appetite for OP unit deals here? Obviously, the stocks moved up pretty nicely from the offering price. versus the seller appetites for OP units in the conversations that you're having?

So the OP unit currency is very valuable to certain families, which are very typical in the postal space. The owner that's owned their assets for decades have very little or no depreciable basis and no shelter of their income, and a sale would trigger a big capital gain. and so we continue to have a lot of interest in using those units for currency but these transactions are typically complicated with various family members involved with different motivations and different things and so they're not as quick and efficient as everybody would like. We do have an appetite to do those transactions and we believe the owner and seller community does have an appetite as well.

Okay, and then maybe just sticking with the acquisitions, can you speak to the 98 that you closed after the quarter end has a bit of a smaller footprint than the deals that you've done year-to-date or than the existing portfolio? Understanding there's the thematic aspect, do you guys look at or how does gross interior square footage play a role in your underwriting or as you think about the construction of the portfolio?

So every deal has to speak for itself. And we evaluate and underwrite each deal very, very specifically. And so I don't think that there was anything terribly different as it relates to the portfolios that we closed this quarter than the quarters prior. Sometimes just by nature, if there's a group of buildings that Thank you very much.

Okay, great. And then maybe, Jeremy, one last one on the mortgages that were done in the quarter, both at the same interest rate. Were there any other differences in terms? Were the LTVs equivalent or anything different between the two mortgages, the one in April and the one in June?

No, they're with the same provider. The Postal Service is still a government agency. This is still a relatively new process for them. and for us, and so there's quality control on all ends, and so this just doesn't happen as quickly as we would all like it to.

Okay. And I guess while we wait for Jeremy, I guess do you have any thoughts on what's been termed as sort of the Friday night massacre that occurred last Friday at the post office where a number of senior level officials were let go? Your thoughts currently on what's going on?

So, in general, I try not to apply on the Postal Service and the way they operate their business. What I do believe is that when a new Postmaster General comes in, they have their own ideas and thoughts on what needs to be changed, and typically that translates into employment changes. I'm very hopeful and confident that the new Postmaster General will be looking at the Postal Service as a business and try to effectuate changes to make it better for the American people. He's a person that comes from the private sector and has experience in the logistics business, and hopefully that vantage point will be helpful once he applies it to the Postal Service. More than that, I can't speak to the particular people that were let go or why they were.

That's my last question. Jeremy, if you don't have it, I can circle back later this evening.

I do. So the value of the leases and holdover currently is around $2.4 million. Okay, great. Thanks, guys.

An annual rent. Right.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Spodek for any final comments.

On behalf of Jeremy and myself and the entire Postal Realty Trust team, we just want to thank you for joining us today. We hope everyone out there is safe and healthy during these unprecedented times.

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