Postal Realty Trust Inc (PSTL) 2022 Q1 法說會逐字稿

Good morning, and welcome to the Postal Realty Trust, Inc. first-quarter 2022 earnings call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jordan Cooperstein, VP of FP&A and Capital Markets. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to the Postal Realty Trust first-quarter 2022 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 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. 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 latest 10-K 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, adjusted EBITDA, and net debt. You can find a tabular reconciliation of these non-GAAP financial measures to the most concurrently 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. Postal Realty Trust has had an excellent start to the year, as we continue to successfully execute on our postal property consolidation strategy.

This year to date, we have acquired 74 properties for approximately $34 million and have another 123 properties for approximately $40 million under definitive contracts. These properties are within our anticipated weighted average cap rate range of 6% to 8%, and for the third consecutive year, we are on track to comfortably exceed $100 million in acquisitions.

In only a few short years as a public company, we have increased our market share to capture approximately 6% of this highly fragmented market, leaving a significant opportunity to gain considerable additional share in the coming years.

Furthermore, our network of opportunities continues to expand as we are pleased that the majority of our deals are sourced off-market from sellers who understand the value proposition we offer. As we have stated, our financial capacity, past performance, and ability to offer multiple sources of consideration, such as operating partnership units, make up the natural buyer of assets leased to the Postal Service.

The Postal Service has also proven to be an incredibly stable tenant across every economic cycle, backed by the full faith and credit of the United States. They pay their rent on time and rarely relocate. The Postal Service's commitment to their buildings is even more amplified in this inflationary environment, as we believe renewing a lease is a much more attractive economic alternative than moving to a postal built-to-suit option.

The Postal Service has created an irreplaceable logistics network that includes critical infrastructure to support the ever-growing e-commerce industry and related last-mile delivery. Furthermore, we are well positioned to navigate today's inflationary environment with a conservative low-levered balance sheet, favorable lease structure, and, given the typical five-year lease term, our ability to set rents to market.

Together, these factors allow for significant internal growth from our existing portfolio.

On April 6, the Postal Service Reform Act of 2022 was signed into law, which will overhaul the Postal Service's finances and delivery services, further ensuring its continued viability. We are very encouraged by this and believe this law provides even more validation of the critical nature of the Postal Service to America's infrastructure and to our business strategy of aggregating the properties that support these important services for years to come.

During the first quarter, we continued to invest in our company and scale the business through accretive acquisitions. With our experienced team, financial acumen, and proven track record, we will continue executing on our business strategy.

By utilizing our expertise and strong relationships, we will continue to expand our robust pipeline of Postal Service last-mile, flex, and industrial facilities, remain a valuable partner to the Postal Service, and create value for our stakeholders.

I'll now turn this call over to Jeremy.

Thank you, Andrew. For the first quarter of 2022, we produced a 35% increase in revenues from the first quarter of 2021 from our existing portfolio, along with contributions from the accretive acquisitions made over the last 12 months. Our internal growth remains robust, and our exposure to expense increases is limited, given the nature of our leases.

We once again collected 100% of our rents and have effectively managed our lease expirations. Through 2024, we have leases representing 6% to 11% of our total rent on an annual basis up for renewal. As of today, we have not received any notices of termination by the Postal Service.

We have maintained a 98.8% historical weighted average lease retention rate over the past 10-plus years, which displays how important these buildings are to both the Postal Service and the communities they serve. This high rate continues to validate our due diligence process in identifying locations that, we believe, are vital to the Postal Service.

In the first quarter of 2022, we acquired 50 properties for approximately $27 million, excluding closing costs. These acquisitions added 179,000 net leasable interior square feet to our portfolio, inclusive of 38,000 square feet from 28 last-mile properties and 142,000 square feet from 22 flex properties.

Subsequent to quarter-end and through May 6, we have acquired 24 properties for $7 million and placed an additional 123 last-mile and flex properties for approximately $40 million under definitive contracts, excluding closing costs.

I'll now turn the call over to Rob to discuss our first-quarter 2022 financial results.

Thank you, Jeremy. Postal Realty Trust continues to be well positioned to execute on our growth plan. And from the proactive steps we've taken to further strengthen our capital structure, we have the financial flexibility to continue our consolidation strategy.

In the first quarter of 2022, we delivered funds from operations or FFO of $0.21 per diluted share and adjusted funds from operations or AFFO of $0.24 per diluted share.

We have maintained a conservative balance sheet. And as of March 31, 2022, we had nearly $6 million of cash and $110 million of capacity available on our revolver, with an additional $200 million in accordions on our facility.

We had approximately $122 million of gross debt with a weighted average interest rate of 2.34%. This was comprised of approximately $82 million of fixed-rate debt and $40 million of floating-rate debt outstanding on a revolving credit facility.

Subsequent to quarter-end, we closed on a $75 million delayed draw term loan maturing in February 2028 priced at 145 basis points over SOFR plus 10 basis points. This new term loan was funded with $50 million at closing and has the ability for another $25 million to be drawn.

With the proceeds, we paid down our floating-rate revolver. And concurrent with the closing of the term loan, we executed a $50 million swap, further reducing our exposure to floating-rate debt.

For the first-quarter 2022, net debt to enterprise value was 23%, and net debt to annualized adjusted EBITDA was 3.9 times, well below our leverage targets of 40% and 7 times, respectively.

We continue to invest in our company to scale our business. And as I outlined on our last call, these important investments will mirror the growth in our portfolio as we continue to focus on progression of the ratio of cash G&A as a percentage of revenues.

As we continue to feel the impact from supply chain and increased costs, we anticipate recurring CapEx to exceed $0.05 per square foot.

For the 11th consecutive quarter, our Board of Directors has approved an increase in our quarterly dividend to $0.23, which annualizes to $0.92 per share, a 4.5% increase from the first-quarter 2021 dividend.

As we look ahead, our strong property cash flows, credit tenant, and conservative balance sheet allow us to continue consolidating this highly fragmented industry, pushing our market share higher, even within an inflationary environment.

This concludes our prepared remarks. Operator, we would like to open the call for questions.

(Operator Instructions) Sarah Barcomb, BTIG.

Hi, everyone. This is Sarah Barcomb on behalf of Mike Gorman. So I'd like to talk a little bit about the cap rates. So, you achieved higher cap rates on the deals this year around 7.5%, which is within your target range, but on the higher end.

So can you talk a little bit about the competition that you saw on those deals and the deals you're underwriting currently? And as a follow-up, were there any industrial deals that you looked at and didn't go for pricing reasons or any other color that you can give there?

Sure. Thanks, Sarah. There are a bunch of questions in there, so let me try to hit them all.

So first and foremost, we've tried to explain to everybody that this is really not a quarterly business. We look at this as an annual business and even a multi-year business, right?

We are out there trying to acquire last-mile and flex properties that are important to the Postal Service. We do look at industrial buildings opportunistically, and we do go after them. In general, in Q1, we did not buy an industrial property, but we are looking at them on a regular basis.

There are also not that many of the larger industrial buildings that the Postal Service leases. They own the majority of them. So, the greater universe of leased properties to the Postal Service comprises of the last-mile and flex properties.

We believe that this year, we will still complete the year in the weighted average cap rate range of the 6% to 8% that we laid out to everybody. Thankfully, we're seeing a very strong pipeline. And we look forward to executing on that pipeline and on the deals that we're seeing as prudently and thoughtfully as we possibly can.

Great. And just going off that, of course, as you've said, this business is not a quarterly business. It's more multi-year. With that in mind, as you've highlighted previously, lease payments represent less than 2% of the Postal Service's expenses.

That said, how are you thinking about short-term inflation when you're underwriting? Are there any changes in the conversations you've been having on the lease structure in the current environment, given the pace of inflation? Or is there any color that you can give there that's changed?

Sure. Yeah. I mean, the current inflationary environment is affecting everybody. And it's a conversation everywhere including with the Postal Service. This is something that everybody is trying to deal with. And everybody has the same concerns and the same questions, which is not knowing what the future is going to bring.

This is definitely something that we factor into our lease negotiations. We believe that we're pretty well positioned to deal with an inflationary environment.

We're a conservative company that's low leverage. We have favorable lease terms, and we have leases that roll every five years. Our weighted average lease term is around four years. And so with that ability to mark-to-market, we believe we're well positioned to go into this inflationary environment.

Great. That's it from me.

Thank you.

(Operator Instructions) Brian Hollenden, Aegis Capital.

Good morning, and thanks for taking my questions. Has the current volatility in the equity markets had any impact on owners of postal properties being more or less interested in selling their properties?

It's a good question. It's a hard question to answer, though. Sellers, in general, don't always verbalize or explain what their motivations to selling are. But I would be very hard-pressed to tell you that that's not a factor.

I think that people, in general, seeing the markets be the way they are and also seeing cap rates constrain and being concerned about inflationary environment and all the things that are going on right now, it will be very difficult to think that that's not a motivating factor.

And so, I would tend to agree with you. I just don't know that we're hearing that specifically from sellers.

And then just a quick follow-up for me. You touched on this already, but do you think the US Postal Service is willing to accept higher rental rates in light of this persistently higher inflation? Or at what point do you think that that conversation could change?

I think that any tenant, regardless of whether it's a government agency or not, has to recognize that inflation exists and has to understand that it factors into what market is. Today is different than it was a year ago or two years ago, right? And the inflation, the way it is today, has to factor into a landlord's rental rate.

And I think that's just the way it works in the real estate industry, in general. And I think most tenants, even though they may not want to pay a higher rent, recognize that it will be factoring into rent.

Thank you.

Thank you.

Ed Groshans, Height Capital.

Good morning, gentlemen, and thank you for taking my call. So Rob, my first question is just to you -- more debt activity, certainly good, good pricing. How much is currently available, given this new transaction?

Yes. So Ed, good morning. We have not disclosed an updated balance sheet post that transaction, but what we did disclose was that we did increase our accordion feature to $75 million. And we did add a $75 million delayed draw term loan, of which we funded $50 million up front. So, there is additional capacity on the extra accordion, and the extra term loan is incremental additional availability of capital under our facility.

Okay. So, the accordion -- that moved from $200 million to $275 million, if I'm not mistaken?

So, it was $150 million on the revolver. And then, it was $50 million on the term loan. That $50 million on the term loan has now gone to $75 million. So, it increased $25 million on the total aggregate accordion.

Okay. All right. And then the $75 million is incremental to all that. Okay. Fantastic.

Right. Correct.

And you had a question about market volatility. I would just throw in there, it would seem that some sellers might be more interested in cash than in equity, given the volatility. And so when I look at that, it looks like Postal can do their transactions via its debt facilities for the balance of this year. I don't want the exact date.

How comfortable are you that you can -- if we get -- let's go on the weird assumption that this volatility lasts through the end of the year and Postal's stock stays below $17. When you -- how (inaudible) is that when you look at next year's acquisition activity from a funding standpoint?

Yes. So, Ed, we manage a very conservative balance sheet, and that's on purpose, so that we can handle all sorts of market conditions, whether debt or equity are favorable or unfavorable. And so, I think we're in a very strong position to fund our pipeline via the methods we have.

And in particular, because we're so low leverage, we can definitely ramp up our leverage. We have the capacity to, not only from the availability of capital from our lenders, but also underneath the ratios that we've talked to the market about of staying below 40% net debt to enterprise value and below 7 times net debt to annualized adjusted EBITDA. At the end of the quarter, those two numbers were about 23% and 3.9 times, so way inside our target numbers.

Yeah. That was -- I was just wondering, because you do -- you have a lot of capacity -- and I don't anticipate market volatility will last forever and things will stabilize at some point -- but I was just -- it does seem like the capacity is there to continue to go forward in that funding deals for a near- to intermediate-term time frame seems doable in the current environment.

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Absolutely. We have no concerns internally at the moment about funding our entire pipeline and the availability of cash to do so.

Okay. And then, Andrew, I'm going to turn this one to you. You talked about the cap rate. The guidance is 6% to 8%. You're doing pretty well there. To some extent, cap rates are a reflection of interest rates, and we've seen interest rates move up fairly significantly in the past few months.

Is there any indication as you're going into the market that that is being reflected in the cap rates? In past calls, you talked about more players coming in. There's more competition in this space, and that has put some downward pressure on the cap rates. Not that that's alleviated, but have you seen any modest relief in that, given the change in interest rates?

In general, postal real estate lags the general real estate market. It always has, and I think that that's true here as well. We saw, over the past year, a compression in caps rates. And I think everybody saw it. I think today, we're seeing more -- the cap rates stabilized than actually moved as a result of the interest rate moves. But I do believe that that's coming. We just haven't seen it directly yet.

Right. All right. And that -- I mean, that is -- if we're looking forward that, that would be a positive if the high rates at least, at a minimum, stabilize, if not, start to see some widening in the cap rates.

Agree.

Yeah. Okay. And then -- and I'm not sure. Maybe I'll toss this one to you, Jeremy, on the -- so the government loves to run on CPI. Inflation is high. You do five-year leases.

I know we're probably not going to look at today's current inflation and embed that in the pricing for the five-year leases. But how -- with the Post Office discussions, how are we looking at -- when we're pricing these new leases, what are folks starting to talk about for inflation for like years, three through five? And how does that impact pricing?

So, this is Andrew. I think I'll take this answer.

Okay.

I think it's a difficult question to answer because no one really knows what inflation is going to be in years, three through five, right? And it's a difficult thing to price in.

The good news is that because our leases are five years in duration, that you always have the ability to mark them to market when they roll, right? And with the retention rates that we have and the Postal Service's, let's call it, commitment to these buildings and these towns, it's not something that we've had to worry about in the past and it's not something I'm really that concerned about going forward.

All right. Maybe I'll ask a little different about -- for the leases that are coming up for renewal or have come up for renewal in the past few months, with the elevated inflation, can you give us a sense of how much the lift has been in the rental rate for the next five-year period?

What I can say is this: if we've been getting 2% to 3% NOI increases year over year, our goal is to be able to continue to keep those 2% to 3% annual NOI increases -- so, 10% to 15% on a five-year roll.

Fantastic. I appreciate that, Andrew. Thank you. All right. That's my questions.

Thank you.

Jon Petersen, Jefferies.

Well, great. Thank you. Appreciate the time.

Andrew, I was curious about the government's push or just the general societal push towards ESG and sustainability and what impacts that might be having on your business. We saw some news articles over the last few months that the Biden administration wants them to push -- wants the Post Office to push to all electric vehicles, and they're pushing back.

So I'm just curious what your conversations are like as a landlord to the Post Office and what role you play in reducing energy consumption and everything along that topic?

It's a very relevant question, and the conversations within the Postal Service are definitely happening now.

We're a partner to the Postal Service. We're here to assist them in any way we can. But the implementation of anything like this is really more something that's borne by them and driven by them than it is by us. They're responsible for the utilities. They're responsible for a lot of the things that we're talking about as it relates to the buildings themselves.

We're here to assist in any way we can. We're here to partner with them in any way that we can. But I think at the moment, I think they're trying to figure out how to roll out these initiatives throughout their network. Once they figure that out, if they like our assistance or if there's a way for us to partner with them, we are in constant communication with them about this. And we have to wait for them to decide how this will play out throughout their logistics network.

Okay. Great. And then maybe a question on -- or for Jeremy on -- or sorry, for Rob, on your balance sheet. Just curious in the debt markets with spreads widening out on unsecured debt, is secured debt or the credit facility looking more attractive -- or term loans -- in terms of funding incremental growth?

Yeah. So we still think our facility is quite attractive. With our cost of capital on the debt side, it's a very good use of capital to be drawn on our revolver, terming out over time. So, we still like that as a cost of capital. But we do continually survey the secured debt market, looking at mortgages, surveying that land. But at the moment, there's still a little bit of a gap, where it's less expensive and certainly more flexible to be using our revolver and term loans to fund our growth.

Okay. All right. That's great. That's all for me. Thank you.

Thanks, Jon.

(Operator Instructions) It appears there are no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Andrew Spodek for any closing remarks.

Thank you. On behalf of myself and the entire team, we want to thank everybody for taking the time to join us for this call today. We look forward to connecting with you at Nareit and over the coming months.

Have a great day, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may not disconnect.