Q2 2021 Postal Realty Trust Inc Earnings Call
Greetings and welcome to Postal Realty Trust incorporated second quarter 2021earnings call. At this time, all participants are in a listen only mode.
A 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 the conference over to your host Jordan Cooperstein, Vice President of F. P N a capital markets.
Thank you good afternoon, everyone and welcome to the postal Realty Trust's second quarter earnings conference call on the call today, we have Andrew <unk>, Chief Executive Officer, Jeremy Gardner, President, Robert Klein, Chief Financial Officer, and Matt, Brad Wine, 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.
Net.
Actual results may differ materially from those described in the forward looking statements and won't 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 30th 2021, and it's the other securities and Exchange Commission.
And filings the company does not assume it specifically disclaims any obligations to update any forward looking statements whether as a result of new information future events or other watch. 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 the 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 it over the call to Andrew <unk> Chief Executive Officer.
Of postal Realty Trust.
Good afternoon, and thank you for joining us today very.
Very happy to once again share with you another quarter of stable cash flows and robust acquisition activity.
We continue to execute on our business plan and our strong second quarter 2021 results reflect the favorable characteristics of our business, including the consistency of our in place rents and the growth we are delivering through our acquisition platform.
We achieved several milestones during the second quarter executing accretive acquisitions, delivering robust rental income growth and continued enhancements to our balance sheet, which will provide financial flexibility to support the company's ongoing growth during.
During the quarter, we completed the acquisition of 71 properties for approximately $30 million, bringing total acquisitions for the first half of the year 2 of 125 postal properties for $56 million or excluding closing costs.
Subsequent to quarter end and through August 3rd we closed on an additional 32 properties for $11 million excluding closed the cost some of which included operating partnership units as part of the consideration the.
The company has another 26 properties totaling approximately $7.6 million on definitive contracts.
We remain confident we will exceed our target of $100 million of acquisitions. This year.
Given cap rate compression across most real estate sectors, including our acquisition targets, we anticipate that our weighted average cap rate range for 2021 will be between 7 and 8%.
Subsequent to quarter end, we further strengthened our capital structure as we entered into a new upsized senior unsecured revolving credit facility and term loan facility, which provide lower pricing and additional flexibility as we continue to grow our platform.
I am pleased to note that reflecting our cash flow growth of our board of directors again raised our dividend to an annualized <unk> 89 per share. This is the eighth consecutive increase to the dividend since the companys IPO in 2019.
Demonstrating our consistently strong results and growth we achieved another milestone in the in the quarter. We are pleased to report that in June. We were included in the Russell 2000 Index..1 of the most widely followed performance benchmarks for emerging companies.
We see tremendous interest from potential sellers as we demonstrate the value proposition, we are creating as we consolidate this industry with our financial capacity and our ability to offer multiple sources of consideration, including operating partnership units. We expect to continue to be the natural buyer of assets leased to the postal service.
We have an experienced team stable and secure cash flows of proven ability to effectively owned and operated properties and our robust pipeline all of which supports our confidence to create incremental value for our stakeholders I will now turn the call over to Jeremy Garber postal president to provide more details on our operating results and portfolio activity.
Thank you Andrew in the second quarter of 2021, we produced 70 per cent growth in rental income from the second quarter of 'twenty 'twenty, reflecting our internal growth and acquisitions completed over the past year as Andrew mentioned, we acquired 71 properties during the quarter, adding approximately.
<unk> 246000, net leasable interior square feet to our portfolio inclusive of 42 of last mile and 29 flex properties.
Included in the milestones achieved during the second quarter is the acquisition of our first property in Hawaii, which expands our owned and managed geographic reach to all 50 states.
As anticipated, we once again collected 100% of our rents.
Subsequent to quarter end, we signed an LOI for renewals on leases that had expired or were scheduled to expire in 2021.
Excluding leases for 4 properties that were acquired in June and July of 2021.
The other line includes 55 leases, representing approximately 118000, net leasable and Terry square feet and $1.3 million in annualized rent. We anticipate these renewals will yield the annual increases in NOI of 2% to 3 per cent.
As we look ahead of our total return profile remains well positioned we have the long and proven history of tenant credit worthiness and the 98% of historical lease renewal rate contributing to stable cash flows. Additionally, we have of well positioned balance sheet further enhanced by new unsecured credit facilities, providing increased.
The Pasadena and flexibility that will allow us to execute on our robust pipeline of the U S. P. S last mile Flex and industrial facilities.
Now I'll turn the call over to Robert Klein, our CFO to walk through our second quarter results and our capital position.
Thank you Jeremy and thank you everyone for joining us from today's call.
I want to reiterate Andrew's comments on our consistency in executing our growth plans, while continuing to strengthen our capital structure.
We remain focused on consolidating this fragmented industry and are taking the right steps to grow our position the.
The second quarter's results reflect this with funds from operations of 25 cents per diluted share and adjusted funds from operations of 26 cents per diluted share.
At June 30, 2021 we had $4.9 million of cash and approximately $116 million of <unk>.
Most debt with the weighted average interest rate of 2.13% comprised of $82.5 million of floating rate debt on our prior credit facility and approximately $33 million of fixed rate mortgages.
At quarter end, our net debt to enterprise value was just under 26% net debt to annualized adjusted EBITDA was 4.8 times and our fixed charge coverage ratio was 8.7 times.
Andrew touched upon subsequent to quarter end, we entered into a new senior unsecured revolving credit facility and term loan facility with bank of Montreal People's United J P. Morgan and truest as joint lead Arrangers and joint book runners.
Other participants, including the Stifel as well as Tristate capital.
The new facility includes the lower pricing grid maturity dates in January of 'twenty, 'twenty, 6 and 20 of 27 from the revolver and term loan respectively accordion features up to $200 million in aggregate and a number of other features that provide flexibility to our operations and capital needs as we continue to grow our platform.
Concurrently we entered into an interest rate swap, having a notional amount of $50 million through January of 'twenty 'twenty 7.
These actions will continue to drive our overall cost of debt lower which will benefit earnings going forward.
Regarding our ATM activity for the 3 months ended June 30 of 'twenty 'twenty..1 we raised approximately $6 million of net proceeds issuing just under 320000 shares of common stock at an average gross sales price of $20.2 per share.
Additionally, we issued approximately 481000 common units in our operating partnership as part of the consideration from properties acquired during the quarter.
Given the ongoing growth of our business, we continue to invest in our platform of people technology and infrastructure to support that growth of.
Our G&A expense for the quarter represents a good approximation of of quarterly run rate for the remainder of 2021we.
We expect the 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.
Our key competitive advantages include our experience in the postal sector platform scalability, and our ability to provide compelling options for sellers, including the use of O P units we remain.
And focused on driving earnings growth and our judicious approach to maintain a conservative balance sheet affords us ready access to capital positioning us to continue to execute on our strategic plan.
This concludes our prepared remarks, operator, we'd like to open the call for questions.
Ladies and gentlemen, we will now conduct a question and answer session.
We would like to ask a question. Please press star 1 on your telephone keypad and of confirmation tone will indicate your line is in the queue. You May press star 2 if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.
Yeah.
Our first question is from Michael Gorman with BTG. Please proceed.
Yeah. Thanks, Good afternoon, Andrew if I could just follow up on your discussion about the pricing in the acquisitions market to the extent that you you talk about the lower cap rate range of the 7 to 8 per cent how much of that is driven by increased pricing at the property level versus maybe some shift in the.
Property type weighting in your acquisition pipeline, if it's leaning more towards the industrial distribution type assets versus it's just the overall you're seeing compression across all property types.
That's a great question Michael Thank you I appreciate it I I believe that it's really all over the board I think that there's been a flight to yield in general and I think there's been a compression not just in our industry, but across the real estate sector.
General.
Uh huh.
That's true.
Oh, sorry in fact of any more questions.
Yes, I'm sorry, Oh.
And then the follow up on that 1 is.
For the increased competition, that's maybe causing the.
The the lower yields.
Where are you seeing most of that competition coming from is it increased institutional interest in the asset type or are you seeing more of the retail buyers starting to aggregate as well.
I don't think it's specifically related to competition.
I think its just general market conditions, you know there are people out there that were never really focused on postal assets and when cap rates of constraining of course, all real estate sectors, whether youre at 10, 31 buyer interest of general real estate buyer in the local market.
When there's a flight to yield and postal properties are trading at higher yield. If you have more competition on any deal it's going to drive that drive the yield down and the cap rates out. So it's not a particular specific answer I think it's just.
All of the the board.
Okay, Great and then last 1 from me and other fruit for you Andrew or for Rob.
On the op units, when you're able to bring those into the equation on the transaction.
Does that provide you a benefit whether it's on the yield side or just on the issue price for the units themselves.
To recognize some of the value that you're providing to the seller in terms of helping them defer their taxable events.
Yeah. So good question.
We price those operating partnership units effectively at market price so.
We've generally done those in some kind of volume weighted average pricing and so they will reflect where the where the stock is at the moment that transaction happens where in the prior days. So the benefit really has been as Andrew has mentioned on prior calls that the the ability to use the operating partnership unit helps to drive some of our.
The interest from sellers.
And sometimes it ends up with the transaction using an LP unit and sometimes it ends up being of cash transaction, but those off per units really ended up with the same yield as the the common stock does.
And so we don't we don't really price of differently.
Okay, great. Thanks, very much guys.
Thank you.
Yeah.
Our next question is from Ed <unk> with high capital markets. Please proceed.
Yeah.
Good afternoon, gentlemen, and thank you for taking my questions.
Just have a couple.
And I guess, if so we have the guidance of 100 million for the year I just wanted to make sure I heard you right Andrew It looks like you might be doing a little bit better than that or at least on pace to do that.
Is that fair.
That is correct okay.
And then just on the debt facilities can you can you talk about is it a $100 million between the floating and and the unsecured or.
So the the the senior facilities can you just give a little more color and specifically on pricing of of both of those as well.
Sure so.
The facility allows for 2 things, we have a revolver of which $150 million is committed and we are of term loan of $50 million as well the $150 million revolver has an accordion, where we could ratchet it up to another $150 million and the term loan as well it has an accordion that could increase.
By $50 million, both of which were executed on a floating rate basis. However, we did enter into swaps to effectively fix the rate on the term loan.
So the pricing at.
At the low end of the grade, which is where we are at the low end of leverage is 150 basis points over LIBOR for the revolver and 145 basis points over for the term loan.
Okay.
Okay and I.
Just then this is just in the side of LIBOR is going away does the does that.
The facility or you go into the sofa or something else when that goes away.
Yeah, so there'll be more details to come but but there is provisions for how the transfer from LIBOR 2 of the surviving right or the replacement rate in 2023 or earlier when that event does happen okay.
Okay.
Well, it's just I mean, the bank I'm surprised the banks are still doing library, because the regulators have been pushing them to get off the library of anyway that was just in the side alright.
I will get back in queue. Thank you gentlemen.
Thank you.
As a reminder, if you would like to ask a question. Please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the queue.
Our next question is from Kevin Stein with Stifel. Please proceed.
Hey, Andrew So I know some the earnings release, you started breaking out the.
The type of assets you have the 525 of last mile 323 of flux in the 4 industrial properties.
I was just wondering how you think about the mix going forward and if you're focused on a particular property type.
Yeah.
Thank you Kevin.
Yeah since since we've gone public we've really attempted to educate the market on the different types of asset classes that the postal service leases.
Breaking it down into those 3 buckets as.
A further explanation of those different types of asset classes.
From our perspective, we're interested in purchasing properties in all 3 of those buckets assuming.
The first and foremost the at the properties or importance of the postal service and their logistics network and that secondly that those properties can be underwritten.
And are at or below what we believe is to be market and the <unk>.
All of that fits into those 2 categories.
We are interested in purchasing and all 3 of those buckets as.
As you know because of the preferential lease structure were able to purchase these properties throughout the entire country.
So we aren't limited by geography either.
Gotcha. Thanks.
Okay.
Our next question comes again from Ed <unk> with <unk> capital markets. Please proceed.
[laughter] Wow Wow, that's correct alright.
Well thanks, Ken.
Rob. This is for you just in your comments on the cash G&A you mentioned the variability I I just want to make sure I understood you correctly. When you talk about variability you're talking about as a percentage of revenues as opposed to.
Yeah.
G&A for the next 2 quarters.
Is that fair.
Yes, it's both I mean, we.
We've given guidance now of this quarter and how it how it shapes up compared to the remaining quarters in the year, but I did want to qualify debt. There is some variability in that ratio and.
And in the G&A, but yeah. It's a good it's a good proxy for looking at the rest of the year right.
Not not the G&A may be absolutely flat dollar for dollar for the next 2 quarters, but the comment really talked about variability as a percentage of revenues as opposed to like moving to achieve material change in G&A in the income statement.
Yes, because there's 2 variables there either of the revenue and then theres the cash G&A and so either 1 of them can move slightly different in any particular quarter, okay, but in general that that ratio is coming down.
Fantastic Okay.
Great.
I'm pretty sure that's all I have alright, thank you gentlemen.
Okay.
Thanks, Ed.
Our next question comes from Jon Petersen with Jefferies. Please proceed.
Great. Thanks.
I was hoping you guys could maybe just talk about how you see inflation impacting your business and how that impacts like the the rent.
The later is the operating expenses, just any high level thoughts on inflation.
Yeah. Good good question.
Through all of the short straw im talking about inflation I guess.
We're constantly monitoring that and I think we have of.
A very conservative balance sheet. So on the on that side of the house I feel pretty comfortable about where we stand our access to capital and now with the proportion of our fixed debt being about 66 per cent of our total debt I feel good about about where we stand there hard to tell how how rents Riyadh.
Correct.
In other asset classes, I think theres, a little bit more correlation to inflation.
And then, particularly then then we may notice but.
Andrew May have more color about how that how that plays out but in general I think we've proven that we can perform and in all types of environments and that our tenant has been resilient and sticky and had very high renewal percentage. So we feel good about the protection of our income.
Thanks, Rob.
I'll add to that as it relates to the leases 1 of the benefits of having <unk>.
<unk> 5 year term leases as debt you have on average around 10% of your leases that role of the year.
And that gives you the ability to reprice those leases depending on how inflation of how the environment is.
And I believe Thats, an advantage that we have that a lot of other.
Let's call it double and Triple net players don't have just because of the duration of their leases. Our average lease term right now is around 4 years and so it gives us really the ability to keep revisiting to see how the inflationary environment.
Okay, Great and then.
Maybe kind of remind us how these lease negotiations out of market branches, Kelly determined like or are.
Are we usually looking at nearby retail properties and logistics type properties that you get the right market, but I'm just trying to think about these lease renewals like how much of leasing spread we potentially see going forward.
At least the market is determined.
On the property basis right. So whether there are retail comps are logistics comps, whether their postal assets or other national or regional retailers or even mom and pop tenants right. We evaluate the market as it does the postal service and we determined what markets.
Alright, that's helpful. That's all from me thanks.
Thank you John.
Yeah.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star 1.
At a confirmation tone will indicate your lines into the queue.
Our next question comes again from the line of Michael Gorman with BTG. Please proceed.
Yes. Thanks, just a quick follow up Robert you talked about the I think you all talked about the index inclusion, which is obviously a good milestone can you maybe just share.
Some of the conversations or some of the progress you've made on investor outreach as the profile of the company has risen and that's the liquidity has increased over the past couple of quarters, just coming in kind of a new asset classes. You are just how that index inclusion has changed the conversations you are having with either existing shareholders or potential.
Future shareholders.
Yeah, I think there was there was really great receptivity from our existing shareholders. They were happy to see the milestone.
With the high growth company. These are these are important milestones for us in 4 of the market to see as we prove our growth story and as we grow the company. So it was good in that respect it increased our volume and therefore, our liquidity in the market as well so another benefit.
Yeah look our discussions have been pretty consistent with investors and I don't think they've changed 1 way or another with that inclusion I think everybody that it had not invested in us has been keeping an eye on us and keeping up to date and the story of that just 1 more notch.
Alright, and our cash for for an accomplishment and to show that the size and the growth of there.
Okay, great. 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 the.
Management for closing remarks.
Thank you.
And behalf of myself and the entire team we want to thank you all for taking the time out of your busy days to join us for.
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.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.