Postal Realty Trust, Inc.

Greetings and welcome to the Postal Realty Trust third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Jordan Cooperstein, Vice President of FPNA Capital Markets. Thank you, sir. You may begin your presentation.

Thank you. Good afternoon, everyone, and welcome to the Postal Realty Trust Third Quarter Earnings Conference Call. On the call today, we have Andrew Sodeck, Chief Executive Officer, Jeremy Garber, President, Robert Klein, Chief Financial Officer, 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 include 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, without limitation, those contained in the company's 10-K filed on March 30, 2021, and its other Securities and Exchange Commission filings. The company does not assume and specifically disclaims any obligations 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, and adjusted EBITDA. 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.

Good afternoon, and thank you for joining us today. I'm excited to share another successful quarter of execution on our strategic plan, acquiring accretive assets leased to the Postal Service and delivering stable cash flows from our in-place rents. This quarter, we further strengthened our balance sheet, providing additional financial flexibility to support the company's ongoing growth. As the leading industry consolidator of properties leased to the Postal Service, we continue to source attractive acquisition opportunities. In the third quarter and through November 2nd, we added 74 properties to our portfolio for approximately $37 million, bringing total acquisitions for the year to 199 postal properties for approximately $93 million, on pace to meet or exceed our $100 million target for the year. Since our IPO, we have more than tripled our property count, quadrupled our annualized rental income, and nearly grown our square footage by five times. However, our portfolio still represents under 5% of the square footage leased to the USPS, providing plenty of runway for additional growth. Given our network, reputation as a transaction partner, and our financial flexibility, we remain confident in executing on our strategy. Subsequent to quarter end, we acquired a $15 million, 575,000 square foot mission-critical industrial property in downtown Milwaukee, fully occupied by the Postal Service. Its purchase price represents a cap rate below our targeted range. As we continue to pursue opportunities, we may find other high-quality, mission-critical assets that could be below our targeted range. But we remain confident in our due diligence process that any new assets will add value to our portfolio. I want to reiterate that we operate in a large market that is ripe for consolidation, given it's highly fragmented and largely owned by private individuals. Postal Realty continue to see tremendous interest from potential sellers who understand the value proposition of working with us. With our financial capacity, proven track record, and our ability to offer multiple sources of consideration, we expect to continue to be the natural buyer of assets leased to the Postal Service. The characteristics of postal properties that first enticed us to start investing in these assets decades ago are as relevant as ever. The Postal Service pays their rent, they rarely relocate, and the lease structure allows us to operate these buildings all over the country without the need for any on-site personnel. The USPS has an irreplaceable logistics network and remains critical infrastructure as it supports the ever-growing e-commerce industry and need for last-mile delivery. We have an experienced team, stable and secure cash flows, a proven ability to effectively own and operate properties, and a robust pipeline, all of which supports our confidence to create value for our stakeholders.

I'll now turn the call over to Jerry. Thank you, Andrew. In the third quarter of 2021, we produced a 70% increase in rental income from the third quarter of 2020, reflecting internal growth and acquisitions completed over the past year. As Andrew mentioned, during the third quarter and through November 2nd, we acquired 74 properties, adding 737,000 net leaseable interior square feet to our portfolio, inclusive of 63,000 square feet from 50 last-mile properties, 99,000 square feet from 23 flex properties, and 575,000 square feet from one industrial property. As anticipated, we once again collected 100% of our rents. We effectively manage our lease expirations, and in each of the next three years, leases representing approximately 10% of our total rent remain up for renewal on an annual basis. As stated previously, the USPS gave notice to terminate the lease at our property in East Liverpool, Ohio, and as of September 30, 2021, they have vacated. The East Liverpool property represented less than one-half of a percent of our portfolio's square footage and annualized rent. We are moving forward with marketing the property for lease and evaluating alternatives for the building. As a reminder, over the last 10 plus years, we have maintained a 98% retention rate. This high rate speaks to the need for these buildings, as well as our underwriting process in selecting locations that we determined to be very important to the Postal Service. As the only publicly traded real estate investment trust, primarily focused on properties leased to the USPS, and decades of experience in the postal sector. This deep history provides us with a singular advantage in managing, operating, and acquiring postal assets, and we believe all of these factors will accelerate as we continue to scale. I'll now turn the call over to Rob to walk through our third quarter results and our capital position.

Thank you, Jeremy, and thank you everyone for joining us on today's call. Following up on what both Andrew and Jeremy discussed, Postal Realty is well positioned to continue executing on our growth plan and is supported by the steps we took to further strengthen our capital structure. The third quarter's results reflect this with funds from operations of 25 cents per diluted share and adjusted funds from operations of 27 cents per diluted share. We maintain a diversified balance sheet with a mix of fixed and floating rate debt. As of September 30, 2021, We had nearly $4 million of cash and approximately $128 million of gross debt with a weighted average interest rate of 2.2%, comprised of $44.5 million of floating rate debt on our revolving credit facility and approximately $83 million of fixed rate debt. We have consistently remained below our targeted 40% net debt to enterprise value and seven times net debt to annualized adjusted EBITDA. At quarter end, those metrics were 27.2% and 4.8 times respectively. As discussed on our last call, during the third quarter, we entered into a new senior unsecured facility with a revolving line of credit and term loan. The new facility includes a lower pricing grid, maturity dates in January 2026 and 2027 for the revolver and term loan respectively, accordion features up to an additional $200 million in aggregate, and a number of other features that provide greater flexibility to our operations and capital needs as we continue to grow our platform. Additionally, we lowered the interest rates on approximately $2.6 million of fixed rate mortgages. In the third quarter, we continued with our disciplined approach regarding our ATM program and operating partnership unit issuances for a total consideration of approximately $7 million. The multiple sources of capital that we have established provide us with the necessary flexibility to access funding and optimize our financial management. Given the ongoing growth of our business, we continue to invest in our platform of people, technology, and infrastructure. To support these initiatives, our total G&A expense going forward will experience some incremental increases. We will benefit from our scale, and while there may be some variability quarter to quarter, On an annual basis, we expect cash G&A as a percentage of revenues will decline. Furthermore, I'm pleased to note that our board of directors raised our quarterly dividend to 22.5 cents per share. Reflecting our consistent growth, we have raised our dividend every quarter since the company's IPO. As we look ahead, our total return profile remains well-positioned. We have a long and proven history of tenant creditworthiness and a high historical lease retention rate contributing to stable cash flows and a growing dividend. Additionally, we have a well-positioned balance sheet further enhanced by a new unsecured credit facility providing increased capacity and flexibility that will allow us to execute on our robust pipeline of USPS, last mile, flex, and industrial facilities. This concludes our prepared remarks. Operator, we would like to open the call for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation sign will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of John Peterson with Jefferies. You may proceed with your question.

Oh, great. Thanks. So in the fourth quarter, looking at your supplemental, you had an industrial acquisition. I think maybe I didn't quite catch this, but Andrew, I think you said that was a property you guys bought in Milwaukee. If you can give us maybe some more details on what the cap rate is there. And then, you know, I think as we close out the year, it looks like maybe about a third of your acquisitions across two properties in terms of dollar value will be from industrial. I guess as we look into 2022, I mean, how do you think that ratio will change going forward? Thanks. Thanks, John.

So as pretty much everybody knows, in order to buy a large industrial property – It's difficult to buy it within the cap rate range that we had targeted, which is the 7% to 9% range. So this is below the target range. I would say it's in the low sixes. We target properties in all different asset types, whether it's industrial, flex, or last mile, as long as they're important to the postal service. And this is an important asset to the postal service, and we're very happy that we're able to source and acquire it in this past quarter.

Okay, great. And then in the press release, you guys talked about having 59 leases that have expired or are scheduled to expire. I guess, is there anything to think about there in terms of leases that might be in holdover in terms of negotiations there or maybe some sticking points on renewals?

Hi, John. It's Jeremy Garber. So, as you know, we continue to go through a process with the USPS on lease renewals. We're renewing on annual vintages, so the 2021s are all getting done together. We have an LOI, agreed terms, on all of our 2021, and it just continues to be a processing and documentation. So we don't expect that there will be any issue with them all coming in, you know, hopefully before year end. Okay.

All right, that's all for me. I'll jump back in the queue. Thanks.

Our next question comes from the line of John Kim with BMO. You may proceed with your question.

Thank you. Just wanted to ask about if you could elaborate on the renewal rates that you signed versus expiring, both during the quarter and what you've agreed to for the remainder of the year.

So, as you know, we don't release specific spreads on renewal rates. What we do share with the street is that renewal rates will bring somewhere between 2% and 3% annual NOI into the portfolio. Okay.

I think there was a reference that some of your leases were below market, so I just wanted to see if that was actually brought to a higher rate on renewal.

When we discuss our lease rolls, we discuss it as a portfolio. There are certain rents that are at market, certain rents that are below market. But as the leases are rolling, we're seeing 2% to 3% increases year over year. So on a five-year vintage, it's anywhere between the 10% and 15% NOI increase. Great.

Thank you. With your cost of debt declining and your WAC overall getting more attractive, are you more inclined to do larger industrial acquisitions like you've announced for the fourth quarter?

You know, as I've stated in the past, we kind of go as the deal flow takes us. There will be quarters that may have a higher concentration in industrial or certain quarters may have a higher concentration in flex or last mile. It's really how the deal flow flows, right? I mean, and so... As long as the properties are important to the Postal Service, we don't target or specify any particular asset type or use.

And I realize that you're focused on USPS leases, admission-critical assets for them, but are you open to releasing to other tenants? I know you had one asset that has that ability, but on the industrial side in particular, are there... Is there the opportunity to do that in industrial when you look at acquisition opportunities?

So while we look to acquire single-tenant properties that are solely occupied by the Postal Service, we also look at multi-tenant buildings that have secondary and tertiary tenants in them that are not the Postal Service. Those deals are underwritten and evaluated on the credits. and lease terms of those other tenants. So we do look at those properties. We will continue to look at those properties. And we believe whether it's industrial or otherwise, as long as the secondary tenant is of a credit quality that we are comfortable with, and as long as the lease terms and structure are things that we're comfortable with, those are deals that we will look at. But our mandate and our focus is still on pure play postal.

Great. Thanks for the call, Ed.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad one moment while we poll for questions. Our next question comes from the line of Ed Groshans with High Capital Markets. You may proceed with your question.

I'm on mute. Thank you, gentlemen, for taking my question. So I guess first, Rob, To your end, I think you said the term loan matures in 2027 or is that correct?

Correct.

Okay. So, I was just given where rates are, I just want to get your indication of, you know, would you be willing to or is it possible to extend that maturity out fairly significantly, probably higher than you're paying now, but at what I would deem a relatively low rate. And the reason I ask that is AGO just did $400 million deal to 2051 at 3.6%, and I think that's, so I was just wondering how you think about those opportunities.

Yes, good question. We're always evaluating what type of products are available to us with different maturities, different rates, and the like. We're not at a point yet of a size to issue unsecured bonds like some of the folks you may reference here or other companies you may cover. So we're not looking at that as an option just yet. But, yeah, we're always looking at different terms. And, like, at the moment, you know, that we financed ourselves, we thought it was very appropriate to have debt on our revolving credit facility out to 2026 and then our term loan out to 2027, respectively. We do have some other debt that's a little bit longer term, like our AIG loan, and then some of our other secured financings.

Okay. I mean, that hit my news feed, and 3.6 out to 2051 is a pretty good rate. And I understand that you're not a big issuer, and so you can't tap the markets maybe for maybe something you're considering. But I don't know what your banking group, how competitive they could be on something longer. to lock in the low rate. That's it. Um, Andrew, you mentioned the East Liverpool asset and the closure there. Um, is that the only one that closed this year or whether you, yes, that's terminated and vacated.

Um, yeah, we, we, they turned over possession at the end of September. Uh, so we've had a little over a month. All right.

So you, you said you're marketing for lease and, um, and other opportunities. Do you plan to hold it?

You know, I think it's too early to tell. We need to give it an opportunity to see what happens in the local market there.

We're weighing all of our options. Okay. It would just seem like, you know, your comments, you want to stay focused on U.S. post office, primarily single-tenant. given that they vacated this spot, that that would not be aligned with the strategy?

No. Again, this is more of a re-tenanting of a postal asset. Again, it's under half of a percent of our total revenue. But now that we got the property back, we're going to go down the road to see what our options are.

Okay. And you did address this a little bit on the industrial properties issue. Is there an industrial property that can get you a cap rate above seven, or is that unlikely?

We have bought industrial properties above seven, but in the current environment, especially given how cap rates have constrained throughout the entire industry, it's not an to find regardless of what your tenancy is and so as much as we would love to buy all of our properties above a seven there are certain property types and classes especially in more urban areas that is very difficult to source okay and the 575 square feet you know the other properties that you bought had above seven were they of a similar size several hundred thousand square feet Yeah, there were. There were two buildings that were, but most industrial properties typically trade at lower capitalization rates.

Okay. And I know we touched on this during the last quarter, but the last quarter there was a whole discussion of competition and compression and cap rates. And can you just talk about what you're seeing in the market now relative to competition and cap rates?

Sure. The conversation last quarter wasn't really about the competition. I think it was more about the compression in cap rates in general. And this is not specific to postal assets. This is just, I think, the way that things are going. There's a flight to yield, and people are having a difficult time finding, you know, real estate with credit tenants that have any great yield. And so that's just compressing the market in general. We're still seeing that. We're still able to buy assets in our capitalization rate range. We are still hopeful to end the year off in the range that we had articulated, which is the 7% to 8% range. But as the year continues, if there are other opportunities that are larger, the lower cap rate, but that are good, significant properties, we will attempt to pursue them.

Okay. Okay. And it seems like, if I'm not mistaken, there was about 50 properties were last mile, and there does seem to be a pretty good pipeline in last mile properties out there. Is that fairly accurate?

Yes, there is a good pipeline of last mile facilities as well as flex facilities, and we continue to pursue all of those opportunities as long as they make sense from an underwriting perspective as well as from a postal perspective.

Fantastic. Thank you for taking my questions and look forward to continued success.

Thank you very much, Ed. I appreciate the time.

Our next question comes from the line of Michael Gorman with BTIG. You may proceed with your question.

Yeah, thanks. Good evening. I just have a quick follow-up, Rob. I apologize if I missed it. I heard the conversation about GNA on a go-forward, which certainly makes sense as the platform grows through acquisitions. I'm just curious if there are particular areas of the infrastructure that are going to be targets for the higher GNA. Is it adding to acquisition underwriting? Are there particular areas that you're going to look to grow with the GNA, or is it just kind of across the platform?

It's across the platform. We're going to continue to invest across the platform of people, technology, infrastructure, and in order to support those initiatives, as I kind of mentioned, we'll experience some incremental expense increase, but we'll continue to scale and cash G&A as a percentage of revenues should decline on an annual basis.

Okay, great. Thanks for the clarification.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Andrew Spodek for closing remarks.

Thank you. On behalf of myself and the entire team, I'd like to thank you all for taking the time to join us on this call today. We hope that everyone is staying safe and healthy, and we look forward to connecting with you over the next coming months. Have a good evening.

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