Postal Realty Trust Inc (PSTL) 2023 Q1 法說會逐字稿

Greetings, and welcome to the Postal Realty Trust first-quarter 2023 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jordan Cooperstein, Vice President of Financial Planning and Analysis and Capital Markets. Thank you, sir. You may begin.

Thank you. Good morning, everyone, and welcome to the Postal Realty Trust first-quarter 2023 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 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.

Good morning, and thank you for joining us.

The first quarter marked a solid start to the year. Postal Realty added 39 properties for $17.2 million at a weighted average cap rate of 7.6%, well above the midpoint of our stated target cap rate range of 6% to 8%. As we have previously mentioned, the weighted average cap rate may fluctuate within the 6% to 8% range quarter over quarter, depending on the mix of assets, geography, and market conditions, and the second quarter is trending closer towards the midpoint of the range. There is still a bid-ask spread in our market, and it continues to take time for prospective sellers to adjust their price expectations.

We anticipate that 2023 acquisitions will be in the neighborhood of $80 million as we're optimistic the pace will pick up in the second half of the year. We are remaining patient in our approach in the current environment, continuing to set ourselves up with ample dry powder to transact as accretive opportunities present themselves.

I am pleased to announce that we have agreed to a non-binding LOI for new five-year renewals with the Postal Service for leases that expired in 2022. We appreciate our partnership with the Postal Service and their efforts to address the current inflationary environment. Along with an additional increase to annual rents, we were able to incorporate fixed annual rent escalations of 3.5% to these lease renewals. We look forward to working with the Postal Service to make the renewal process more efficient for the 2023 expirations and beyond.

Real estate markets in the US are navigating a period of elevated uncertainty and change as market participants adjust to the rapid increase in interest rates that occurred over the past year and the potential for lasting structural changes to parts of the market. Against this backdrop, our Board of Directors decided to maintain our dividend, allowing us to reinvest further in the business and continue to bolster our liquidity. The opportunity set in front of us is tremendous, and the main drivers of our business are unchanged and intact.

The Postal Service continues to pay rent on time and maintain long-term occupancy in our properties as evidenced by our 99% historical retention rate. Postal Realty has and will continue to demonstrate attractive internal and external growth while delivering consistent cash flow to investors. We are managing our debt prudently and remain in a very strong position operationally and financially with significant capacity for future growth as we consolidate this highly fragmented market.

I'll now turn the call over to Jeremy to discuss our operating metrics.

Thank you, Andrew.

In the first quarter of 2023, our acquisitions added 121,000 net leasable interior square feet to our portfolio, inclusive of 25,000 square feet from 20 last mile properties and 97,000 square feet from 19 flex properties. Subsequent to quarter end and through April 26, the company acquired 7 properties for $4.5 million and placed an additional 12 properties totaling $3.9 million under definitive contracts.

As we often remind our investors, the Postal Service has consistently made all of its rent payments on time throughout all economic periods. In keeping with this track record, we collected 100% of our contractual rents in the first quarter. This predictability of cash flow remains a significant differentiator for our company. We have maintained a 99% historical weighted average lease retention rate over the past 10-plus years, which reflects the strategic importance of these properties to both the Postal Service and the communities they serve.

This validates our due diligence process in identifying locations that are vital to this crucial logistics network. As Andrew highlighted, we recently signed a non-binding letter of intent for renewals with the Postal Service. The non-binding letter of intent includes lease renewals for 86 properties comprising approximately 285,000 net leasable interior square feet. We are working hard with the Postal Service to execute these renewals in the near future.

I'll now turn the call over to Rob to discuss our first-quarter 2023 financial results.

Thank you, Jeremy, and thank you, everyone, for joining us on today's call.

For the first quarter, we delivered funds from operations or FFO of $0.21 per diluted share and adjusted funds from operations or AFFO of $0.27. Recurring CapEx for the first quarter was $0.02 per square foot, and our guidance remains above $0.02 per square foot on a quarterly basis going forward. Cash G&A expense for Q1 was in line with Q4, and our guidance for the full year of 2023 remains the same, assuming the environment is conducive to making some of the investments deferred from last year.

Noncash G&A should continue to be a higher percentage of total G&A expense when compared to the same quarter in 2022, largely due to employees electing to receive more restricted stock as part of their compensation. Cash G&A as a percentage of revenue is anticipated to decline on an annual basis. Given our agreed-upon non-binding LOI with the Postal Service, we wanted to provide an update to the 2022 same-store cash net operating income growth compared to 2021.

Same-store NOI will increase to 2.2% as compared to the preliminary 2% figure we reported on our last earnings call. We have prudently managed our balance sheet by maintaining low leverage and minimizing our exposure to variable rate debt. At the end of the first quarter of 2023, our debt outstanding had a weighted average interest rate of 3.93% and a weighted average maturity of five years. The company's $150 million senior unsecured revolving credit facility had $17 million outstanding and fixed rate debt comprised 92% of all borrowings.

For the first-quarter 2023, net debt to annualized adjusted EBITDA was 5.5 times, well within our leverage target of below seven times. In the first quarter and through April 26, 2023, the company issued 227,812 shares of common stock through its at-the-market offering program at an average gross price of $15.08 per share, totaling gross proceeds of approximately $3.4 million. Our Board of Directors has decided to maintain a quarterly dividend in the amount of $0.2375 per share.

In this environment, the Board believes it is prudent for the company to retain additional cash flow for future growth to reinvest in the business and to continue to fortify our balance sheet. The Board of Directors will review increases to the dividend on an annual basis. With our industry leadership as the largest owner of postal properties, a well-maintained balance sheet, stable cash flows and strong internal growth, we are well positioned to enhance shareholder value in 2023 and beyond.

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

(Operator Instructions) Rob Stevenson, Janney.

Andrew, what is needed here to take this from a non-binding LOI to an actual contractual agreement? Is there any dependency here on congress or for funding approval or anything like that?

No. Nothing like that. It's a process thing. It's producing documents, reviewing them, and executing them. There's no approval needed from congress. The Postal Service has the ability to agree to an LOI and to execute leases.

Okay. And I mean, at this point, given your relationship and your conversations with them, is this going to be the road map for '23 and '24, where you have expirations, you continue to get paid, a new agreement is reached formally in the midyear or the following year? Or is something different happened with the '22s that won't be repeated in '23 and '24 and forward at this point?

I think that both parties would like the '23s and beyond to be a more efficient process. And I think we're both committed to working towards that and trying to make that happen.

Okay. And then, Rob, just one question for you. On the debt side, I mean, when you look out today, given what has been happening in the term loan market and the interest rate hedge costs, et cetera, where -- is the line of credit basically the only good source for you on the debt side? Are there other avenues that you're looking at that you think are more attractive or better fit the capital structure? How you sort of characterize that today?

Yes. Thanks. Good question. It is not our only source, but it has been a good and reliable source for us. We still have plenty of room on our revolver. We still have unexercised accordions on both the revolver and the term loan as well. But you have to remember that our market is still open for doing secured mortgages.

We've kind of stayed away from that except for select instances, but that market still exists. It's still available to us. And then, of course, on the equity side, we have a bunch of different options that we've talked about, whether it's regular way common offerings, OP units, ATM, et cetera. So we feel like we're in a very strong capital position on the debt and the equity side.

Where is pricing on the secured side versus your line today?

We haven't investigated the secured market in a little bit so -- and you have to be on that every day because that changes a bunch of volatility in the mortgage market. But we still believe right now that for debt that we believe will stay on the balance sheet for a period of time that it will be more attractive to swap out rates, whether on the revolver or the term loan.

John Kim, BMO Capital Markets.

It's Eric on for John. I appreciate the color on the annual rent escalators of 3.5%. I was just kind of curious, going forward, is this hopefully the new standard? Or is it in the '23 and the '24 and then beyond for the lease expirations?

Yes. So as Andrew touched on the '23 process and how we're looking towards a more efficient conversations, the 2022 has took a lot of things into consideration, including market dynamics, environment, the assets that are rolling, the expiring rents, and we will be looking at the same things for 2023 and beyond.

Okay. That's helpful. And was there any change in duration of the lease or how you guys are thinking about the renewal process there?

No. The renewals on the 2022s were all five years.

Okay. I appreciate that. And then last one for me. Was there any additional rent catch-up payments in the first quarter?

Yes, I'll take that. There was -- it wasn't as substantial as Q4. There was a bit of a stub period depending on kind of when the new rents took place.

Michael Gorman, BTIG.

Andrew, I was just wondering if you could talk for a minute about maybe what other catalysts are out there to help that bid-ask spread compressed. Obviously, in the other markets, we're seeing more pressure from the leverage side of the equation, but I get the sense that there aren't a ton of heavily leveraged sellers in your space. So I'm just curious what else could be the catalyst that helps that kind of remaining spread close over the balance of '23 or maybe as we normalize later this year and into '24.

Thank you. That's a great question. Yes, this is not a very heavily financed space. And so leverage is not typically a driver of motivation for people to sell. The average owner of these postal assets have owned these assets for decades. And so the largest driver is the generational shift in the assets, life events, the instability in the world, in the market, those are typically what drives people to sell.

Okay. Great. That's helpful. And then maybe kind of on that same line, I know you're active on the ATM in the quarter. Maybe just an update on the appetite for OP units as you discussed with some of the sellers, especially if they have a handful of properties versus 1s and 2s?

There's definitely still an appetite for the operating partnership units. We are not always willing to provide them depending on where our stock is trading at that particular moment in time, but there's definitely still an appetite for it. It's still a very good option for families that have no -- little or no depreciable basis left in their property and want to defer their capital gains tax and still collect income. So we believe it will continue to be a very good currency for us.

Okay. Great. And then, Rob, maybe just one last question for you, and I'm sorry if I missed it. But obviously, the Board made the decision on the dividend, which I understand in this environment. How -- I guess, the question is, especially with the new leases coming in, how long can you hold the dividend where it is before you get down to the REIT minimums in terms of payouts?

So that's a good question. Look, we have a substantial amount of return on capital. So I don't think that's a concern in terms of the amount of payout. And remember, we've kept it constant. So we're in a strong position still, and we're total return focused. So we still have a healthy distribution, and we don't have any concerns about maintaining it for REIT rules if that's what you're talking about.

(Operator Instructions) Jon Petersen, Jefferies.

I actually just wanted to follow up on that dividend question. So maybe to kind of ask it another way, if we think about what you guys might do with it over the next few years, are we holding steady for a while here so you can preserve more cash flow? Or do you expect to grow it in line or kind of below where earnings growth is? Like how do you think about what drives dividend increases in the future?

Yes. So I don't think the philosophy has changed. We plan to have this be a covered dividend. We plan to grow it over time. We still have grown it each year since we've been public. I think the Board would like to stand behind that. They're going to continue to review this on an annual basis. So this is dynamic, it's fluid and, yes, the intent is to grow it over time.

Okay. And then I think I missed it, you said it right at the top of the call. What was the cap rate on the acquisitions you did in the first quarter?

7.6%.

7.6%. All right. Great. Nice job. That's all for me.

Mr. Spodek, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you. On behalf of the entire team, I want to thank everyone for their continued support and taking the time to join us today. We look forward to connecting with you over the coming months.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.