Postal Realty Trust Inc (PSTL) 2021 Q1 法說會逐字稿

Greetings and welcome to Postal Realty Trust first-quarter 2021 earnings call. (Operator Instructions) 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 Capital Markets. Please go ahead.

Thank you. Good evening, everyone, and welcome to the Postal Realty Trust first-quarter 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 10-K filed on March 30, 2021, 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 to the most currently comparable GAAP measures in the company's earnings release.

With that, I will now turn the call over to Andrew Spodek, Chief Executive Officer of Postal Realty Trust.

Good evening and thank you for joining Postal Realty Trust's first-quarter 2021 earnings call. We hope you're all safe and well. Building on our strong 2020, we achieved a number of milestones in the first quarter, including the completion of an upsized overnight marketed offering, raising $57 million of gross proceeds and receipt of a renewal for our master lease encompassing 135 properties, extending the maturity date to February 2027.

On the acquisition front, we continue to execute with the completion of approximately $26 million in accretive acquisitions, supported by a meaningfully enhanced capital structure. We remain quite confident about our positioning as we have plenty of financial capacity to continue to expand our platform of US Postal Service Last-Mile, Flex, and Industrial facilities. As has been our experience to date, our portfolio is 100% occupied, and we have collected 100% of our rents.

Our lease renewals, most notably the ones that relate to our master lease for 135 properties, served to enhance our already stable revenue stream. The composite of accretive acquisitions, a historical 98% renewal rate, stable cash flows, and a credit tenant allow us to enhance our total return profile.

We have consecutively raised our dividend since our IPO in 2019 to an annualized $0.88 per share in unit. Our investment activity provides the fuel for our growing dividend. As I mentioned earlier, we completed the acquisition of 54 USPS properties for $25.8 million, excluding closing costs, totaling 686,000 leasable interior square feet. These properties include 36 Last-Mile, 15 Flex, and 3 Industrial facilities.

Quarter-to-date, we closed on an additional 13 properties for $5.4 million, excluding closing costs, including an OP unit deal priced at $18.54 per unit. We have another 52 properties, totaling approximately $18.5 million under definitive contract that also include OP units as part of the consideration.

Looking ahead, our pipeline remains full, and we are finding that the market for postal properties is ripe with opportunities. Given the fortitude of our balance sheet and the financial capacity and our ability to offer multiple sources of consideration, including OP units, we expect to continue to execute and maintain our position as a market leader and a natural buyer of assets with the Postal Service as the tenant.

With an experienced team and a resolve to build on the progress we have made over the past few years, we are optimistic about the year ahead and excited about the consolidation opportunity before us.

I'll now turn the call over to Rob to walk through our results and our capital position.

Thank you, Andrew. And thank you, everyone, for joining us this evening. I echo Andrew's comments that we are now better positioned than ever to actively pursue our growth plans and to continue the consolidation of a fragmented industry. Our key competitive advantages continue to be our platform scalability as evidenced by our earnings as well as our conservative balance sheet continuing to afford us ready access to capital. This quarter's numbers reflect both.

FFO and AFFO grew substantially on a per diluted share basis as compared to the first quarter of 2020. FFO per share improved by 75% at $0.21 per share from $0.12 last year while AFFO per share grew approximately 29% to $0.27. When taking into consideration our January equity raise, this year-over-year improvement truly reflects the accretive nature of our acquisition activity.

Moving on to the balance sheet. At March 31, 2021, we had $3.3 million of cash and approximately $97.8 million of gross debt with a weighted average interest rate of 2.2% comprised of $64.5 million of floating rate debt on our facility and $33.3 million of fixed rate mortgages. At quarter end, our net debt to enterprise value was just under 25%. Net debt to annualized adjusted EBITDA was 4.2 times, and our fixed charge coverage ratio was 7.3 times.

As Andrew mentioned, in January, we raised $57 million of gross proceeds in an upsized offering. Proceeds were used to fund acquisitions, repay a portion of the outstanding debt on our credit facility, and repay $13.7 million in mortgages that carried an interest rate of 4.25%. By retiring these mortgages, we were able to drive our overall cost of debt lower, which will benefit earnings going forward. Our property cash flows and acquisition activity continue to fuel our growing AFFO and cash available for distribution.

On April 30, 2021, the company declared a quarterly dividend of $0.22 per share of Class A common stock. The dividend equates to $0.88 per share on an annualized basis and continues our trend of increasing the dividend in every quarter since we went public in May 2019. We are prepared for another year of growth and are well positioned to execute on our strategic plan.

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

Thank you. (Operator Instructions) Rob Stevenson, Janney.

Good afternoon, guys. Andrew, can you characterize, has there been any change in how the Postal Service is addressing lease roll with you guys under the current administration versus the previous for the 2021 and 2022 lease rolls that you have remaining? Is that anticipated to be done in an orderly time or is that likely to go on essentially extension? How should we be thinking about that as we go over the next, call it, 18 to 20 months?

Hey, Rob. I don't really believe that our leases or pretty much the majority of the leases are being addressed or thought about by the administration. As you know, the total lease amounts account for under 2% of the Postal Services' total expenses. And so I don't believe it rises to the occasion of what they're focused on right now. There has really been no change from our perspective. We are in the process of negotiating the 2021s. We believe that the '21s and '22s will move a lot more efficiently than the '19s and '20s, and we're hopeful to get them done as soon as we can.

And is that likely to be similar to the five years that you did on the master leaseback in January? Is that what the term is that they're basically looking for or are they doing shorter-term stuff?

No. Their typical lease term is five-year fixed in duration.

Okay. And then you guys talked to the release about having some of the $18.5 million under contract via OP units. How much of that should we be expecting in terms of OP units?

The majority of that $18.5 million is in OP units.

Okay. And are you seeing more interest here? Is it just one or two sellers that are motivated by the tax deferral nature? And I assume the stock price being $20-plus here makes issuing OP units more attractive to you, but how would you be thinking about doing it on small deals if somebody came to you with $500,000, $700,000 transaction? Is that too small to do units, not worth the time?

So there are a few questions in there. So first of all, historically, we really haven't offered the ability to do an OP unit transaction to properties of a smaller amount, let's call it $1 million and under. We just did an OP unit transaction that was under $1 million as a test case to see how it went. It actually went smoother than we thought. So it is something that we would consider based on obviously the deal and the terms.

We're seeing a tremendous amount of interest around the ability to contribute their property to the REIT. The people that are calling us are really interested in partnering with us because they understand our relationship with the postal service. They understand what the opportunity set in front of us is and how secure and confident they are in the cash flows and how we operate the properties.

And so these families are entrusting us with their properties, and we're very proud of that. A lot of people that are calling us about these transactions are interested in these units and not all of them actually end up executing with the use of the entire transaction in units or even a portion of it, but it creates a lot of deal flow in a lot of conversations.

Okay. And are you putting any lockups on the OP units?

The standard limited partnership agreement calls for a one-year lockup on OP units. It's more of a tax protection strategy than anything else.

Okay. Thanks, Jeremy. Thanks, guys. Appreciate the time.

Thank you very much, Rob. Appreciate the questions.

Jon Petersen, Jefferies.

Great, thanks. Can you give us a little bit of color on what the leasing spreads were on the master lease agreement renewal? And then also just curious with some more color on these master lease agreements and kind of maybe the history of this one and kind of where they make sense and if, over time, you'll roll up more leases into some of these master lease structures?

Sure, Jon. I appreciate the question. This master lease is really an anomaly within the Postal Services' network of leases. It was created before we purchased the portfolio of properties, and it's unique in the way that it's structured. It's one lease that's governing 135 properties.

The renewal of this lease was a predetermined dollar amount that they exercised. It was on their part to exercise. It wasn't rents we negotiated. There were no terms to be negotiated. And so that's how that lease was structured. I believe that, as this company grows, there is a logic to the efficiency of having a master lease governing a portion of the properties. It's something that will probably be discussed with the Postal Service at some point. Whether or not it will have traction, I can't speak to.

Okay. Got it. And then I guess just in volume of acquisition opportunities out there, maybe just generally what you guys are seeing? But then curious more specifically if you have thoughts on the elimination of 1031 exchange, and I'm sure we're all kind of thinking through this. But how you think that might play out for your opportunities, I guess, before and after a law like that were it to be put in place?

So I think we've spoken about this before. I think the elimination of the 1031 exchange would be a tremendous opportunity for us. There are a lot of people out there that want to defer their capital gains. And as we know, there's a generational shift in the ownership of these assets. And so if the ability for them to defer their capital gains is eliminated through the 1031 law, then contributing to the REIT would be their best alternative. So I believe that our open unit currency would increase in value if that law or that regulation is changed or removed.

Okay. And then just generally in terms of appetite. Can you quantify, I guess, what your pipeline is in terms of the number of deals that you're looking at right now?

Yes. So as we've articulated, we gave $100 million target for 2021. We are on pace to do that $100 million. The pipeline is, thankfully, very, very strong. We're seeing a lot of good deal flow, a lot of different types of deals and different types of properties. And so we're very confident that we will be able to meet or exceed that $100 million number for this year.

Okay. Great. Thanks, Andrew.

Thank you.

(Operator Instructions) Frank Lee, BMO.

Good afternoon, everyone. Andrew, how should we think about acquisition funding for the remainder of the year? Any thoughts on opportunistically tapping the ATM and to prefund some of the acquisition activity that you're giving your stock's performance?

Hey, Frank. I appreciate the question. I'm actually going to pass this over to Rob to field, if that's okay?

Okay. Yes, it's fine.

Yes. So as you know, we have quite a big tool shed of things we can do here on the equity side. So we've been looking at everything from PATM to the regular way offerings, to OP unit deals, and then our multiple sources of debt. So we are absolutely going to be opportunistic with a healthy mix of any and all of those things.

We're in a very strong position, fortunately, with our balance sheet being in low leverage and lots of room to fund our acquisitions as we see fit. So the answer is, yes, we're going to look at all of those different types of equity to fund as well as the debt that we have available to us.

Okay. Great. And then a question on the Postmaster's strategic plan that was laid out a couple of months ago. Just want to get your thoughts and impact you think this could have on the USPS network?

So we were very happy to hear that the Postmaster General feels that the network of post offices, which is obviously the buildings that we are acquiring, are critical infrastructure, not just to the Postal Service, but to the American people. His plan lays out, not just the importance of it and not just the importance of the retail network, but also the fact that he would like to invest in these buildings, invest in the retail network, invest in the customer experience. And all of this just echoes everything that we've said since we've gone public. And so to hear that from the PMG was very reassuring.

Okay. Great. Thank you.

Ed Groshans, Height Capital Markets.

Good afternoon. Thank you for taking my question. I hope you're all well. Just a follow-on to Frank's question there. Any consideration of going to the bank to expand the accordion option on the debt line or are we still have cushion before we get to consider it? And I guess, what would you -- what factors would come into play that would make you go to the bank to expand it?

Yes. Thanks, Ed. Good question. Currently, we have ample capacity on our facility. We are exploring alternatives to even increase our capacity. That can include things like other sources of debt to pull capital off of the facility. We do have a $50 million additional accordion that we can exercise. I don't think we need to do that just yet, but we do have that in our back pocket. And so at the moment, we don't have a need to expand our debt capacity because we do have enough left to fuel our acquisition pipeline for the year.

Okay. And could you just give us a sense of the properties if you were going to go do some more mortgages. How much capacity do you have that's free from those properties? Is there any? Is there a lot?

We do have capacity, and we do -- we can always choose whether or not we want properties to be counted towards an unencumbered test or if they're encumbered, it's a different test. We have different covenants that are required to be met for our facility. So that's something that we think about all the time.

And as you know, in the fourth quarter, when we bought Warrendale, that was a consideration. And we actually did put a mortgage on that because it made sense with the term, with the size, and with the rate. So we're always thinking about that. But in general, it's a better use of our capital to use our facility. And you can see in the last quarter, first quarter, we actually paid down a few mortgages because we thought it was a better use of our capital to have it on the line and to use equity proceeds from the offering, et cetera, rather than have 4.25% debt outstanding.

Yes. And the Fed's going to help you out for a few years to keep the revolver line cost down.

Exactly. That's right. That's right. As long as we do the right things, we will keep our debt cost down.

Right. So I know -- and Andrew, thank you for answering the question there. $100 million is your target. You're clearly on pace to do $100 million. Do you get the sense like is $100 million sort of like easy to get to at this point? Or do you think you have your work cut out for you, i.e., can we expect that you'll do more than $100 million? And you can answer that the way you want.

So I appreciate the question. Look, the guidance that we've given is $100 million. As the year progresses, we may adjust that guidance. But as of today, that's where we've laid things out.

Okay. I appreciate that. That's all I have. Thank you so much.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Andrew Spodek, CEO, for closing remarks.

Thank you. On behalf of myself and the entire team, thank you all for taking time out of your busy days to join us for 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.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.