Q1 2022 Postal Realty Trust Inc Earnings Call

May 12, 2022

Good morning, and welcome to the Postal Realty Trust, Inc. First quarter 2022 earnings call.

Good morning and welcome to the Postal Realty Trust Inc. first quarter 2022 earnings call. Participants will be in the Sonole Mode.

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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 <unk>, Chief Executive Officer, Jeremy Gardner, President, Robert Klein, Chief Financial Officer, and Matt Brown, <unk>, Chief Accounting Officer.

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 Spodec, Chief Executive Officer, Jeremy Garber, President, Robert Klein, Chief Financial Officer, and Matt Bramwine, 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.

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.

Forward looking statements are covered by the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1095.

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 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 latest 10-K and its other securities and Exchange Commission filings the company does not assume specifically disclaims.

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 10K and its other securities and exchange commission filings.

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.

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 currently comparable GAAP measures in the company's earnings release.

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 material.

And supplemental materials.

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

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

Good afternoon, and thank you for joining us today poster.

Good afternoon and thank you for joining us today. Poster Realty Trust has had an excellent start to the year as we continue to successfully execute on our postal property consolidation strategy.

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.

This year to date, we have acquired 74 properties for approximately $34 million and have another 123 properties for approximately $40 million under definitive contract.

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.

These properties are within our anticipated weighted average cap rate range of 6 to 8 percent and for the third consecutive year we are on track to comfortably exceed $100 million in acquisition.

And 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.

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 were sourced off market from sellers, who understand the value proposition we offer.

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 us a natural buyer of assets leased to the postal service.

As we have stated, our financial capacity, past performance, and ability to offer multiple sources of consideration, such as operating partnership units, make us the natural buyer of assets, leased to the pulse.

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.

The Pulsar 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.

The Postal Services 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-asuit option.

We believe renewing a lease is a much more attractive economic alternative then moving to a postal built to suit option.

<unk> services created an irreplaceable logistics network that includes critical infrastructure to support the ever growing e-commerce industry and related last mile delivery.

The Pulsar 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.

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.

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

On April six 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.

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 it 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.

During the first quarter, we continue to invest in our company and scale the business through a creative acquisition.

With our experienced team financial acumen and proven track record, we will continue executing on our business strategy.

With our experience 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.

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.

Full 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 the 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.

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.

Our internal growth remains robust and our exposure to expense increases is limited given the nature of our league.

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.

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.

As of today, we have not received any notices of termination, but 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.

We have maintained a 98.8% historical weighted average lease or 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 and identifying locations that we believe are vital to the postal service.

This high rate continues to validate our gurgillgence process in identifying locations that we believe are vital to the Postal Service.

The first quarter of 2022, we acquired 50 properties for approximately $27 million, excluding closing costs. These acquisitions added 879000, net leasable and curious square feet to our portfolio inclusive of 38000 square feet from 28 last small property.

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.

And 142000 square feet from 'twenty to flex properties subsequent to quarter end and through May six 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 exclude.

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 on the definitive contracts, excluding closing costs.

In 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.

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 <unk> of 21 cents per diluted share and adjusted funds from operations or <unk> of 24 cents per diluted share.

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 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%.

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 our revolving credit facility.

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 sulfur plus 10 basis points.

Subsequent to quarter end, we closed on a $75 million delay 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 dollar swap further reducing our exposure to floating rate debt.

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 three nine times, well below our leverage targets of 40% and seven times respectively.

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 leveraged targets of 40% and seven times respect

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.

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-GNA as a percentage of revenue.

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

As we continue to feel the impact from supply chain and increased costs, we anticipate recurring capex to exceed five cents per square foot.

For the 11th consecutive quarter, our board of Directors has approved an increase in our quarterly dividend to <unk> 23 cents, which annualized is to 92 cents per share a four 5% increase from the first quarter 2021 dividend.

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.

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'd like to open the call for questions.

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

We will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

Yeah.

Our first question will come through Sarah Arkle P. T. I E. You mean, not all of it.

Our first question will come from Sarah Barcomb with BTIG. You may now go ahead.

Hi, everyone. This is Sara baack them on behalf of Mike Gorman.

Hi, everyone. This is Sarah Barkham 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%,

So I'd like to talk a little bit about the cap rate.

So you achieved higher cap rates on the deal this year around seven 5%, which is within your target range I'm hiring. So can you talk a little bit about the competition that you saw on those deals and the deals youre underwriting currently and as a follow up where there any industrial.

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?

Ill bet, you looked out and didn't go for for pricing reasons or any other color that you can get there.

Sure. Thanks.

Thanks, Sir they're a bunch of questions in there. So let me let me, let me try to hit them all.

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 we've tried to explain to everybody that this is really not a quarterly business. We we look at this as an annual business and and even a multi year business right. We are we are out there are trying to acquire a last mile and flex properties that are important to the postal service we do.

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.

Do look at industrial buildings Opportunistically.

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.

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. They're also not that many of the larger industrial buildings at the postal service leases they own the majority of them. So the.

They're also not that many of the larger industrial buildings that the Pulse Service leases. They own the majority of them.

Greater universe of leased properties to the postal service comprises of the last mile and flex properties.

greater universe of leased properties to the Postal Service comprises of the last mountain flex properties.

We believe that this year, we will still complete the year and the weighted average cap rate range of 6% to 8% that we laid out to everybody. Thanks, 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.

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 he said you know this business has not accordingly business that's more multiyear.

And just going off that, of course, as you've said, you know, this business is not a quarterly business. It's more multi-year. With that in mind...

With that in mind as you highlighted a previously leased payments represent less than 2%.

As you've highlighted, previously, lease payments represent less than 2% of the Postal Services Exhibition.

Cost of services expenses.

That said how are you thinking about short term inflation, when you're underwriting and are there any changes in the conversations you're having on the lease structure in the current environment.

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?

Given the pace of inflation or is there any color that you can get there that's changed.

Sure Yeah, I mean, the current in place scenario environment is affecting everybody.

Sure, yet, I mean, the current inflationary environment is affecting everybody, and it's a conversation everywhere, including with the Pulso Service.

And it's a conversation everywhere, including with the postal service.

This is something that everybody is trying to deal with them 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.

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 believe that we're 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 and we have leases that are that.

We have favorable lease terms and we have leases that

That role every five years, our weighted average lease term is around four years, and so with that ability to mark to market.

that roll every five years, our weighted average lease term is around four years. And so, with that ability to mark the market,

We believe we're well positioned to go into this inflationary environment.

we believe we're well positioned to go into the Simplation Air Environment.

Great that's it for me.

Thank you.

Again, if you have a question. Please press Star then one our next question will come from Brian Holland and cause aegis capital.

Again, if you have a question, please press star then 1. Our next question will come from Brian Hollenden, goes ages capital. You may now go ahead. Good morning and thank you.

Oh go ahead.

Good morning, and thanks for taking my questions.

Yeah.

The current volatility in the equity markets had any impact on owners of coastal properties being more or less interested in selling their properties.

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?

Yeah.

It's a good question. It's a hard question to answer though you know sellers in general don't always verbalize, our explained what their motivations to selling our but I I I would be very hard pressed to tell you that that's not a factor.

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 constrained.

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 would be very difficult to think that that's not a motion.

And being concerned about inflationary environment and all the things that are going on right now it would be very difficult to 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 so I would tend to agree with you. I just don't know that we're hearing that specifically from sellers.

Okay.

And then just to.

A quick follow up for me you touched on this already but I guess you know.

And then just a quick follow-up for me. You touched on this already, but I guess, you know,

Do you think that the U S. Postal service is willing to accept higher rental rates in light of this kind of persistently higher inflation right.

Do you think that the U.S. Postal Service is willing to accept higher rental rates in light of this kind of persistently higher inflation, or at what point do you think that that conversation could change?

Or at what point do you think that that conversation could change.

You know I think that any tenant regardless of whether it's a government agency or not.

You know, I think that any tenant, regardless of whether it's a government agency or not, has to recognize that inflation exists, right, 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...

Has to recognize that inflation exist right and 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 and the inflation. The way. It is today has to factor into our landlords 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 Ron.

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.

Our next question will come from Ed Christian.

Our next question will come from Ed Groeschens with the High Capital. You may now go ahead.

You May now go ahead.

Good morning, gentlemen, and thank you for taking my call.

Good morning gentlemen and thank you for taking my call.

I guess so Rob My first question is just to you.

I guess, so Rob, my first question is just to you, more debt activity, certainly good pricing. How much is currently available given this new transaction? Yes.

More debt activity are certainly good good pricing.

How much is currently available given this new transaction.

Yeah, So so ed good morning.

We have not disclosed and updated balance sheet post that transaction, but what we did disclose was that we did increase our our accordion feature to $75 million and we did add a $75 million delayed draw term loan of which we funded $50 million upfront. So.

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 upfront. 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 for

There is additional capacity on the 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 to 275, if I'm not mistaken.

Okay, so the accordion that moved from 200 to 275, if I'm not mistaken?

So it was 158 it was $1 50 on the revolver and then it was 50 on the term loan that 50 on the term loan is now gone to 75, so it increased $25 million and the total aggregate accordion.

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

Alright, and then the 75 is incremental to all of that okay fantastic.

Okay. All right. And then the 75 is incremental to all that. Okay. Fantastic. All right. Correct. And you had a question about market volatility. I guess I would just throw in there with team that some sellers might be more interested in cash than in equity given the volatility.

So Rex and and you had a question about market volatility.

I guess I would just throw in there it would seem that some sellers might be more interested in cash than an equity given the volatility and so.

When I look at that.

It looks like postal.

You know, it looks like Postal can do their transactions via its debt facilities for the balance of this year.

Ken do their transactions.

Its debt facilities for the balance of this year.

Okay.

I don't want the exact date.

How comfortable are you that you can if.

How comfortable are you that you can – let's go on the weird assumption that this volatility lasts through the end of the year and postals stock stays below $17.

If we get let's go onto weird assumption that this volatility last through the end of the year.

And postal stock stays below $17.

When you.

I guess, how Nelson is that when you look at next year's acquisition activity from a funding standpoint.

I guess how nellisome is that when you look at next year's acquisition activity from a funding standpoint?

Yeah, So and 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 or 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 are so low levered.

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. You know, at the end of the quarter, those two numbers,

We can 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 seven times net debt to annualized adjusted EBITDA at the end of the quarter, though.

Those two numbers.

We're.

um, were, um,

We're at about 23% and three nine times, so way inside our target numbers.

We're both 23% and 3.9 times, so way inside our target.

Yes.

I was just wondering could you do you have a lot of capacity and and I don't anticipate market volatility will last forever and things things will stabilize at some point, but I was just.

I was just wondering, because you have a lot of capacity and I don't anticipate market volatility will last forever and things will stabilize at some point, but 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.

Does it seem like the capacity is there to continue to go forward in that funding deals.

Sure.

A near to intermediate term timeframe seems.

Doable in the current environment.

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

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

And then and then Andrew I'm going to turn this one to you you talked about the cap rate the guidance of six to eight you're doing pretty well there.

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 that is being reflected in the cap rates I E and in past calls you talked about you know more players coming in there's more competition in this space and that puts some downward pressure on cap rates.

Is there any indication as you're going into the market that that is being reflected in the cap rates, i.e. in past calls you talked about, you know, more players coming in, there's more competition in this space and that puts them 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?

Not that not that that's alleviated, but have you seen any modest relief and that given the change in interest rates.

In general our postal real estate lags the general real estate market. It always has.

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

And I said I think that that's that's true here here as well.

We saw over the past year, a compression in cap rates and I think everybody saw it.

Think today, we're seeing more the cap rates stabilize that actually move as a result of the interest rate moves, but I do believe that that's coming we just havent seen it directly yet.

Right, Alright, and that I mean that that is if we're looking forward that that would be a positive if the high rates.

All right, I mean, that is, you know, if we're looking forward, that would be a positive if the high rate

At least at a minimum stabilize if not start to see some widening in cap rates.

You know, at least at a minimum, stabilize if not start to see some widening in the capric.

Agreed.

Okay and then.

Okay, and then, and I'm not sure, maybe I'll toss this one to you, Jeremy, on the.

And I'm not sure maybe maybe I'll toss this one to you Jeremy on the <unk>.

So the government loves to write on CPI inflation is high you do five year leases.

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.

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 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?

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 I'll take this answer I 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.

So, this is Andrew, I think I'll take this answer. 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 difficult thing to price it.

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 in with the retention rates that we have in the postal services, let's call. It commitment to these buildings in these towns.

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 Services, 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.

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.

Alright, maybe I'll ask it a little different about it for the leases that are coming up for renewal or have come up for renewal in the past few months with the elevated inflation.

All right, maybe I'll ask it a little different about it, so 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.

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 if we've been getting 2% to 3% NOI increases year over year. We are our goal is to be able to continue to keep those 2% to 3% annual NOI increases so 10% to 15% on a five on a five year rule.

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 alright, that's my questions.

Fantastic. I appreciate that, Andrew. Thank you. Alright, that's my questions.

Thank you.

Okay.

Our next question will come from Jon Petersen with Jefferies. You May now go ahead.

Our next question will come from John Peterson with Jeffries. You may now go ahead.

Oh, great. Thank you I 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.

Great, thank you. Appreciate the time. Andrew, you know, I was curious about the government's push or just the general societal push towards, you know, ESG and sustainability and what impacts that might be having on your business. You know, we saw some news articles over the and we saw some news articles over the last couple of years, and we saw some news articles over the last couple of years, and we saw some news articles over the last couple of years,

A few months that the by the administration wants them to push once the post office to pushed all electric vehicles, and they're kind of pushing back. So I'm just kind of curious what your conversations are like as a landlord.

few months that the Biden administration wants them to push once the post office to push to all electric vehicles and they're kind of pushing back. So I'm just kind of curious what your conversations are like as a landlord to the post office and kind of what role you play in kind of reducing energy consumption and kind of everything

The post office and kind of what role you play in.

And kind of reducing energy consumption and kind of.

Everything kind of along that topic.

It's a very relevant question.

It's a very relevant question and the conversations within the Pulse of Service are definitely happening now. We are a partner to the Pulse of Service. We're here to assist them in any way we can.

And the conversations with Wickes and the postal service are definitely happening now.

We are a partner to the postal service, we're here to assist them in any way we can.

But.

The implementation of of anything like this is really more something that's borne by them and driven by them than it is by us.

The implementation of anything like this is

really more something that's born by them and driven by them than it is by us.

They are responsible for the utilities. They are responsible for a lot of the things that we're talking about as it relates to the buildings that itself. We're here to assist in any way you can we're here to partner with them in any way we can.

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 don't, they're not going to be able to do that.

But I think at the moment I think theyre 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.

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 kind of decide how this will play out throughout their logistics network.

And we have to wait for them to kind of decide how this will play out throughout their their logistics network.

Okay, Great and then.

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

Maybe a question on for Jeremy on Oh, sorry for Rob on.

On your on your balance sheet, just curious on the on and the debt markets with spreads kind of widening out on unsecured debt is.

As secured debt or the credit facility, you're kind of looking more attractive or term loans.

A funding incremental growth.

Yeah. So we still think our facility is quite attractive.

Yeah, so we still think our facility is quite attractive, you know, with our

With our 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 is still you know a little bit of a gap where it.

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, John .

It's less expensive and certainly more flexible to be using our revolver and term loans to fund our growth. Okay. Alright, that's great. That's all for me. Thank you.

Thanks, John .

Yeah.

Again, if you have a question. Please press Star then one.

It appears there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Andrew <unk> for any closing remarks.

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 Spodak 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.

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 Navery and over the coming months.

Have a great day everyone.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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