Q3 2022 Postal Realty Trust Inc Earnings Call
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Kent.
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Greetings and welcome to.
There's two Realty Trust third quarter.
Earnings call.
At this time, all participants are in listen only mode.
A question answer session will follow the prepared remarks.
As a reminder, this countries is being recorded.
I would not attend the country's energy.
That's what you want it.
Keep your strain vice president of E P and <unk> capital market.
Please go ahead.
Thank you.
Everyone and welcome to the Postal Realty Trust third quarter 2022 earnings conference call on the call today, we have Andrew <unk>, Chief Executive Officer, Jeremy Gardner, President Robert client, Chief Financial Officer, and Matt <unk>, 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 he started looking statements that are covered by the safe Harbor provisions for forward looking statements.
And in the private Securities Litigation Reform Act of 1990 Bucks.
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.
It does not.
Typically any obligation to update any forward looking statements.
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.
Chief Executive Officer of wholesale Realty Trust.
Good morning, and thank you for joining us we're pleased to share that postal royalty had a strong third quarter and we are well positioned to continue executing on our goal of creating and growing shareholder that.
Most of <unk> business model is anchored with stable cash flows supported by our credit tenant and is further enhanced with organic growth from our short term lease duration, which allows for the continual mark to market of rents.
With minimal exposure to variable rates low leverage and no notable debt maturities until 2026, our balance sheet is ideally situated to continue executing our growth strategy.
We continue to consolidate this highly fragmented market, they're sourcing accretive acquisition opportunities, particularly corn last mile and flex properties.
While maintaining our conservative leverage ratios.
In the third quarter, we completed approximately $21 million of acquisition, bringing our year to date volume to $109 million already achieving our target set at the beginning of the year.
As we discussed last quarter.
We have been seeing in the market slowly adjust to macro concerns as cap rates tried to find higher footing to close the gap between buyers and sellers.
In the third quarter, we targeted higher cap rate transaction, which impacted volume relative to prior quarters. This will likely continue into the fourth quarter, and we remain well positioned to capitalize on attractive opportunities as they emerge.
We are the largest owner manager and consolidator of the postal Service's Irreplaceable logistics network. However, we are still in the early innings of our growth story and have plenty of runway ahead.
Our management team has over 30 years, a cycle tested experience and a strong network of relationships built over time, which we believe are meaningful differentiators. We are encouraged by both our internal and external growth initiatives and we will continue to be prudent stewards of capital and deploy it and accretive and appropriate matter to dry.
Growth in this dynamic environment.
I'll now turn the call over to Jeremy to discuss our operating metrics.
Thank you Andrew.
As we like to remind our investors our tenant has historically made all of its rent payments on time throughout all economic environment.
Consistent with quarters past, we collected 100% of our rents in the third quarter.
This predictability of cash flow is a significant differentiator for postal royalties.
In the third quarter of 2022, we produced a 29% increase in rental income from the third quarter of 2021, reflecting a strong existing portfolio as well as contribution from the accretive acquisitions made over the last 12 months, we have maintained a 98, 8% historical weighted average lease re.
Tension rate over the past 10, plus years, which reflects the strategic importance of these properties to book the postal service and the communities they serve.
This high rate continues to validate our due diligence process and identifying locations that are vital to the postal service.
Year to date, we have not received any notices of termination by the postal service.
In the third quarter of 2022, we acquired 66 properties for approximately $21 million, excluding closing costs.
These acquisitions added 170000, net leasable and curious square feet to our portfolio inclusive of 61000 square feet from 41 last small properties and 109000 square feet from 'twenty five flex properties.
Subsequent to quarter end and through October 26, we have acquired seven properties for $5 $9 million.
Placed an additional 10 properties $4 million on the definitive contracts on.
Now I'll turn the call over to Rob to discuss our third quarter 2022 financial results.
Thank you Jeremy and thank you everyone for joining us on today's call.
Touching upon by both Andrew and Jeremy discussed we are pleased to deliver the results of another productive quarter as we remained well positioned to capitalize on external growth opportunities.
For the third quarter, we delivered funds from operations or <unk> of 25 per diluted share.
And adjusted funds from operations or <unk> of <unk> 26 per diluted share.
We have maintained a conservative balance sheet as of September 32022.
We had approximately $189 million of gross debt with a weighted average interest rate of 363% and only $31 million of floating rate debt outstanding on our revolver.
Inclusive of all interest rate hedges, approximately 84% of our debt was at a fixed rate.
And our weighted average maturity was five four years.
As Andrew highlighted earlier on the call we have no notable debt maturities until 2026.
Our liquidity position is strong with $119 million undrawn on our revolver $225 million of accordions on our facilities and approximately $5 million of cash.
For the third quarter 2022, net debt to annualized adjusted EBITDA was five three times and net debt to enterprise value was 34, 6% well below our leverage target to seven times and 40% respectively.
Recurring capex for the third quarter was under four per square foot.
And based on timing of projects, we anticipate it will be closer to $6 per square foot in future quarters, as we continue to invest in our assets.
Cash G&A in Q3 came in below our prior guidance due to cost savings as well as intentionally spreading out some costs into 2023.
Our guidance still remains that cash G&A as a percentage of revenues will continue to decline on an annual basis.
And we believe Q3 is a good run rate for Q4.
Our board of Directors has approved an increase in our quarterly dividend to <unk>, $23.05, which annualized to 94 per share.
<unk>, 4% increase from the third quarter 2021 dividend.
This continues our history of increasing the dividend every quarter since IPO.
We believe postal Realty is uniquely positioned for resilience through economic climate and therefore, we remain confident in our ability to execute our strategy.
Our conservative balance sheet market tested an experienced management team predictable cash flows and a history of 100% rent collections provide a steadfast foundation that will allow us to continue to deliver value for our stakeholders.
This concludes our prepared remarks, operator, we'd like to open the call for questions.
Thank you Ken.
Ladies and gentlemen, we will now be conducting a question and answer session.
Competition is phase one so let me kind of on key pad.
Tim will indicate your line is in the question queue.
You May proceed.
If you could talk to lead the question Ken.
All participants using speaker equipment it may.
Be necessary to pick up your handset before pressing disc jockeys.
Our first question comes from Rob Stevenson of Janney.
Good morning, guys.
Across all real estate asset classes. It seems like the smaller investors have been the last to realize the prices have changed and then less facing some sort of event seemed to pull the assets back from the market waiting for that.
Els is stabilized.
Given that Theres, a bunch of smaller players in your business. How are you guys seeing the transaction market today in terms of availability of assets out there relative to past quarters as well as ability to for the sellers to be reasonable in terms of market pricing.
Hey, Rob.
Yes, so as everybody knows we're kind of living through a very strange time.
The assets are available, we're just not seeing sellers changed their expectations for where pricing is supposed to be today relative to where it was a couple of months ago and so we are.
Patiently walking the sellers up trying to get cap rates.
Where we want to execute on them. The good news is that we've always bought a different range of different asset types and asset sizes, and we've always stated that the range of cap rates in our asset class is wide and so thankfully we have the ability to execute.
At the higher end of our range, which is what we've been trying to do.
Okay and then.
Recent conversations with the postal service, how willing are they and their.
Representatives.
Acknowledge.
Deflationary environment and the need for potentially higher rent increases on renewals going forward.
Yeah, Hey, Rob it's Jeremy.
We continue to have productive discussions with the USPS on our 68 leases that are expiring in 2022.
And as we've shared in prior calls we've been focused on introducing a new concept of an inflationary adjustment.
Confident we will achieve a result that will allow us to continue to deliver our annual annual NOI growth.
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Okay, and then last one for me, Rob where is your best.
Cost of financing today, when you look forward if there.
There is a portfolio that comes to market that you guys won a bid et cetera, where are you seeing the best.
That availability and pricing for you guys today.
Hey, Rob so it's.
I think the mix of everything we're fortunate to have access to capital in multiple ways in the equity markets through an ATM when active the regular common offerings and then through operating partnership units and.
And on the debt side, our credit facility is that a good spread a good rate has a lot of availability and we can turn things out when the swap rates are are attractive or we can keep a florida, we want but as you know we've really tried to maintain a balance sheet that higher proportion of fixed rate.
To be conservative so I feel like we've got access across the board and as you know the market Super dynamic so rates move up and down.
Okay, and so does our share price.
It is.
Our pipeline so.
It's really a day to day game and we're lucky to have access to all of these sources.
Okay. Thanks, guys I appreciate the time.
Thank you.
Okay.
The next question comes from Tony.
J P Morgan.
Good morning, guys do you have a novel one to one for Tony This morning.
I guess on my first question I'm, just a little curious if you could speak on acquisitions.
And I guess current market conditions that you guys have seen buyers are less willing to maybe accept op units.
Rather opting to trade rather just for cash instead.
I appreciate the question so.
We actually see sellers still very interested in the operating partnership unit currency, we haven't been.
Very proactive in using that currency.
Over the past quarter, just given where our stock price was trading but the interest in the currency is still very much there.
Got it okay. Thanks and.
I guess, given where inflation is should we expect maybe a drag from the operating expenses.
He is responsible for on your properties.
It's a good question and.
Look it's something everybody's facing whether it's with with capex or operating expenses, but because of the short term duration of our leases. We do have the ability to mark those rents to market, which overcomes the operating expense increases so.
Net net I don't I don't see it being a drag, but it's definitely more challenging than it was in prior years.
Okay. Thanks, guys I appreciate the time.
Thank you.
The next question comes from John Kim of BMO.
Thanks, Good morning.
Year to date so far.
Away from acquisition and industrial I was wondering if you could talk about pricing.
Has it helped.
More steadied industrial lower cap rate versus the other.
Okay.
Yes, so in the current environment, we really havent been focused on the industrial assets the market before.
For those assets.
Has been pretty frothy, and even though the cap rates on some of the deals that we have looked at in that in that particular asset class have moved there still.
At the lower end of the range, if not below our range and in the current environment those or not deals that.
We're looking to do <unk>.
Thankfully we have.
<unk> exceeded our target for the year and we're really not looking to do deals unless it's priced right and unless we believe that it's a good fit for our portfolio in the current environment.
In this current environment our portfolio premiums.
There or.
Our per ton is trading now.
On par with individual asset sales or.
Actually that guest counts.
So in general the larger owners.
Or the most more sophisticated sellers are the owners of larger assets are.
At least we've seen less willing to adjust.
To the current environment. So those those assets in those portfolios are typically trading at the lower end of our range.
Okay.
And the final question.
Got it.
Thanks.
On this.
Impact of inflation.
I guess you were saying that you are talking about some kind of inflation adjustment potential and lease renewals coming up but also maintained 2% to 3% organic growth.
I was just wondering if there was a potential for there to be upside in that rental number.
Two more than offset inflationary pressures on the expense side.
As we go through our lease renewals, we spend time reviewing markets in comp.
They're trying to achieve on a lease rate rates that allow us to overcome the current environment. The inflationary adjustment is just an additional element that we're trying to introduce here just given how.
Things have really ramped up.
Over the past call it.
Year and a half.
That's why we're confident we're going to achieve an adjustment over market rents, which will allow us as I described to continue to deliver the NOI growth that we've historically delivered.
And would that be CPI based on local.
Geography or would it be.
Okay.
Once again, if there's any more details you can share.
Yeah at the moment.
Conversation with USPS is live we haven't agreed on how the adjustment is going to work.
So I don't have any more information to give you at the moment.
Okay.
You very much.
Thank you.
Yeah.
The next question comes from Barry, Oxford with County is.
Great I know you guys don't want to give too much more information on the adjustments.
Inflation adjustment leases, but typically doesn't the government want kind of a flat rate for five years and so if you were to have an inflationary adjustment do you think that that rate might move year to year or would you do some sort of kind of blended rates. So it would be fixed for five years.
Yeah again, Barry it's Jeremy.
Brian historically that had been five year flat leases.
I think we're probably going to achieve a similar outcome.
With that adjustment embedded but again.
We havent concluded the conversations and they continue to be fluid. So as soon as we have.
The definitive agreement, we will share that.
Okay, great Great and another quick question on the G&A line item as far as how we should think about that.
G&A was a little lower not a lot lower but a little lower here in <unk> versus <unk>, how should we think X.
Noncash comp how should we think.
About G&A going forward into 'twenty three.
Okay very good good question and I think.
I alluded to it in the prepared remarks that we believe that Q3 is a good run rate for Q4 in that respect, but I think your question is more about kind of how does this how does this roll forward.
Alright.
So earlier this year, we had given some guidance that our cash G&A was projected to increase by $2 million to $5 million based.
Based on where we've reported that guidance I've, given the new projected probably closer to an increase of $1 5 million over last year.
So that puts us 500000 to $1 million lighter than our initial guidance earlier this year for 2022.
And some of Thats due to reduction of expenses in 'twenty, two but most of it really projected to be spent throughout 2023 as long as the environment is conducive to it.
Got it okay. Thanks, Thanks for that color, that's all I have guys.
Alright, Thanks Baer.
Yep.
The next question comes from Jon Peterson of Jefferies.
Great. Thank you I think Rob earlier, you were asked about.
Potential sources of capital and you mentioned the ATM when that's open to you. So maybe if we could talk about that from two different angles like at today's market pricing like what is the stock price.
Stock price do you have to see where equity or ATM issuance makes sense to do acquisitions or maybe looking at it the opposite way, where the cap rates need to move to.
To make today's stock price makes sense in terms of new ATM issuance.
Yes, as you know, we always want our stock price to be higher and the higher the more attractive, but we it's a content analysis, we do of where our pipeline is and when we issue equity when we use that we're looking for it to be accretive to our acquisition pipeline and the use of capital and so it's dynamic but even at today's prices.
The guidance that Andrew is given for kind of where cap rates are and where we've executed we can still do acquisitions in an accretive manner.
Okay got it.
And then maybe if I could just on the G&A anything Rob in your prepared remarks, you mentioned you spread some G&A costs into 2023 can you give us just some more details on what some of those costs were that you spent into 'twenty three.
Okay.
Earlier this year, we had talked about some of the increase this year being related to some projects internally infrastructure.
<unk> hired et cetera, it's a little bit of all of that.
And that gets pushed to next year, it's a blend a blend of that and some of these <unk>.
Projects that were using to harness information and to really improve ourselves internally. We've done some of that this year and there's some of it that we were planning to do next year.
Okay, Alright, that's great. Thank you so much.
Thanks.
We have a follow up question from Ralph This is Steve.
<unk> of Janney.
Yes.
Hi, my questions have been answered thank you.
Yeah.
Thank you that does bring us to an accretion and answer session I would now like to turn the conference.
Back to you Mr. Andrew Slack.
Thank you.
On behalf of myself and the entire team. Thank you all for your continued support and for taking the time to join US today, we look forward to connecting with you over the coming months.
Have a great day everybody.
Thank you.
Ladies and gentlemen that concludes today's teleconference. Thank you for your participation and you may now disconnect your lines.
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