Postal Realty Trust Q3 2024 Earnings Report

Postal Realty Trust EPS Results

• Actual EPS: $0.03
• Consensus EPS: $0.26
• Beat/Miss: Missed by -$0.23
• One Year Ago EPS: $0.27

Postal Realty Trust Revenue Results

• Actual Revenue: $19.67 million
• Expected Revenue: $18.49 million
• Beat/Miss: Beat by +$1.18 million
• YoY Revenue Growth: N/A

Postal Realty Trust Announcement Details

• Quarter: Q3 2024
• Date: 11/4/2024
• Time: After Market Closes
• Conference Call Date: Tuesday, November 5, 2024
• Conference Call Time: 9:00AM ET

Postal Realty Trust (NYSE:PSTL) is a real estate investment trust that acquires, owns and manages single-tenant commercial properties net-leased primarily to the United States Postal Service and other government agencies. The trust focuses on facilities that support mail processing, distribution and retail operations, targeting assets that offer long-term, inflation-protected lease structures.

The company’s portfolio includes post offices, distribution centers and mail processing facilities located throughout the contiguous United States. Properties are typically held under triple-net leases, whereby tenants are responsible for property taxes, insurance and maintenance, providing Postal Realty Trust with predictable, recurring rental income.

Founded in 2015 and headquartered in New York, New York, Postal Realty Trust completed its initial public offering in 2016. The company’s management team brings deep experience in net-lease real estate investment, asset management and capital markets, enabling it to identify specialized opportunities within the postal real estate sector.

Postal Realty Trust Q3 2024 Earnings Call Transcript

Key Takeaways

• Now forecasting >4% same-store cash NOI growth for 2023, 3.25% for 2024 and 3% for 2025 thanks to a new multi-tiered re-leasing program and increased annual rent escalations.
• Completed $64 million of acquisitions (with an additional $11 million under contract), maintaining a full-year target of $90 million at above a 7.5% weighted average cap rate, while recycling assets via $6.3 million of dispositions at a 4.9% exit cap rate.
• Amended its credit facility to add $50 million to the term loan (funding $40 million) to repay the revolver, fixing interest at 5.37% and lowering the weighted average debt cost to 4.4%, reducing net debt/EBITDA to 5.6×.
• Delivered Q3 FFO of $0.24 and AFFO of $0.30 per share, issued $14.2 million of equity, and raised the quarterly dividend by 1.1% to $0.24, underscoring confidence in cash flow stability.

Presentation

[Operator]

Greetings and welcome to Postal Realty Trust's third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. 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 and Capital Markets. Please go ahead.

[Jordan Cooperstein, VP of FP&A and Capital Markets at Postal Realty Trust]

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 latest 10-K and its other Securities and Exchange Commission filings.

[Jordan Cooperstein, VP of FP&A and Capital Markets at Postal Realty Trust]

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, CEO at Postal Realty Trust]

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 multi-tiered 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.

[Andrew Spodek, CEO at Postal Realty Trust]

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 marking rents to market, incorporating annual rent escalations in new leases, and achieving operating efficiencies. The newly executed 2023 and 2024 leases all contain 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 rent 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.

[Andrew Spodek, CEO at Postal Realty Trust]

Through October 21st, 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 two properties to two 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 two properties are quite different, in each case, the buyer approached 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.

[Andrew Spodek, CEO at Postal Realty Trust]

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 accretively 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 revolver 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, President at Postal Realty Trust]

Thank you, Andrew. To reiterate Andrew's sentiments, we made great progress on re-leasing, same-store NOI growth, had our first significant dispositions, and are on track to meet our 2024 acquisitions guidance. As of October 21st, the company had received 80 fully executed leases representing nearly 55% of the aggregate 2023 expired rent. 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, $971,000 for leases executed during the third quarter, and $78,000 for leases executed during October. The company received 106 fully executed leases representing 78% of the aggregate 2024 expired and scheduled to expire rent. The total net lump sum 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.

[Jeremy Garber, President at Postal Realty Trust]

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 leasable interior sq ft to our portfolio, inclusive of 29,000 sq ft from 20 last-mile properties and 77,000 sq ft 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, CFO at Postal Realty Trust]

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 million available on a delayed draw 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 after closing, $7 million remained outstanding on the revolver.

[Robert Klein, CFO at Postal Realty Trust]

The transaction lowers our weighted average interest rate, reduces our exposure to floating-rate debt, and gives us plenty of capacity to fund 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 5.6 times, which is down from 6.1 times for Q2. During the third quarter and through October 21st, 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.

[Robert Klein, CFO at Postal Realty Trust]

Our cash G&A expense guidance for the full year 2024 remains between $9.5-$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]

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on the telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we poll for questions. The first question comes from the line of Anthony Paolone with JP Morgan. Please go ahead.

[Anthony Paloone, Executive Director and Senior Analyst at J.P. Morgan]

Thanks. Good morning. 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 it's just certain assets that the USPS is willing to go that length, or maybe just talk a bit more about that process?

[Andrew Spodek, CEO at Postal Realty Trust]

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 2023s and 2024s. We're happy that we received rent escalations for both those vintages. And also importantly, our goal, our mutual goal with the Postal Service is to try to get in front of these leases before they expire. So pushing out the term for 10 years seemed to be a good idea given all those factors.

[Anthony Paloone, Executive Director and Senior Analyst at J.P. Morgan]

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

[Andrew Spodek, CEO at Postal Realty Trust]

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 five years. But we think this is a good development for us and for shareholders as well as for the Postal Service.

[Anthony Paloone, Executive Director and Senior Analyst at J.P. Morgan]

Okay. And then just my second one, it sounded 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 bifurcated and just should continue the way you've been doing it?

[Andrew Spodek, CEO at Postal Realty Trust]

Yeah. I don't believe that politics or the election really come into play on these lease negotiations. The Postmaster General was appointed under Trump and stayed in position while Biden was in office. Sorry about that. And so I don't believe that this is really a concern for our negotiations today or going forward.

[Anthony Paloone, Executive Director and Senior Analyst at J.P. Morgan]

Okay. Sorry about that. Thank you.

[Andrew Spodek, CEO at Postal Realty Trust]

Thanks, Tony.

[Operator]

Thank you. Next question comes from the line of Ki Bin Kim with Truist Securities. Please go ahead.

[Ki Bin Kim, Head of Investor Relation at Lineage]

Thanks. Good morning. 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, CEO at Postal Realty Trust]

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

[Ki Bin Kim, Head of Investor Relation at Lineage]

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

[Andrew Spodek, CEO at Postal Realty Trust]

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 2023, 3.25% for 2024, and we even gave a projection of greater than 3% for 2025.

[Ki Bin Kim, Head of Investor Relation at Lineage]

Okay. Maybe I can ask it a different way then. When you look at that 3%, at least 3% growth projection for 2025, can you help us break down the components of it?

[Andrew Spodek, CEO at Postal Realty Trust]

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, Head of Investor Relation at Lineage]

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 that might be driving it a little bit higher.

[Andrew Spodek, CEO at Postal Realty Trust]

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 a 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 working with the Postal Service.

[Ki Bin Kim, Head of Investor Relation at Lineage]

Okay. Thank you, guys.

[Andrew Spodek, CEO at Postal Realty Trust]

Thank you.

[Operator]

Thank you. Next question comes from the line of Steve Dumanski with Janney. Please go ahead.

[Steven Dumanski, Research Associate at JANNEY MONTGOMERY SCOTT LLC]

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

[Andrew Spodek, CEO at Postal Realty Trust]

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 approached us. 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 are recycling this capital and putting them into other properties that we will extract 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 been.

[Steven Dumanski, Research Associate at JANNEY MONTGOMERY SCOTT LLC]

Thank you. That's all from my side.

[Andrew Spodek, CEO at Postal Realty Trust]

Thank you.

[Operator]

Thank you. Next question comes from the line of Eric Borden with BMO Capital Markets. Please go ahead.

[Eric Borden, VP and Equity Research Analyst at BMO Capital Markets]

Hey, good morning, everyone. 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 given you confidence to achieve that $90 million guidance as you look to continue to acquire in the fourth quarter? Thank you.

[Andrew Spodek, CEO at Postal Realty Trust]

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 a quarter. This quarter was light just by a 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 thereafter, but I didn't see a reason to adjust our target because I believe we're going to achieve it.

[Eric Borden, VP and Equity Research Analyst at BMO Capital Markets]

That's helpful. And then maybe just on the cap rate environment, just given the 10-year still remains volatile today post the Fed cutting rates. 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 cuts?

[Andrew Spodek, CEO at Postal Realty Trust]

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 all positive.

[Eric Borden, VP and Equity Research Analyst at BMO Capital Markets]

Okay. That's helpful. Thank you very much. That's it for me.

[Andrew Spodek, CEO at Postal Realty Trust]

Thank you.

[Operator]

Thank you. A reminder to all the participants that you may press Star and 1 to ask a question. Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to Andrew Spodek for closing comments.

[Andrew Spodek, CEO at Postal Realty Trust]

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.

Participants

Executives

• Andrew Spodek, CEO
• Jordan Cooperstein, VP of FP&A and Capital Markets
• Robert Klein, CFO
• Jeremy Garber, President

Analysts

• Steven Dumanski, Research Associate at JANNEY MONTGOMERY SCOTT LLC
• Anthony Paloone, Executive Director and Senior Analyst at J.P. Morgan
• Ki Bin Kim, Head of Investor Relation at Lineage
• Eric Borden, VP and Equity Research Analyst at BMO Capital Markets