Q4 2022 Postal Realty Trust Inc Earnings Call
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Speaker 2: Please, gentlemen, thank you for standing by. Our conference has not begun yet. Once again, thank you for standing by. Our conference has not begun and will begin in just a couple of moments. Thank you.
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Speaker 3: At this time, all participants are in a lesson only mode. A question and answer session will follow the prepared remarks.
Speaker 3: 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 FB&A, Capital Markets. Please go ahead.
Speaker 2: Thank you. Good morning, everyone, and welcome to the Postal Realty Trust, Fourth Quarter and Full Year 2022 Earnings Conference call. On the call today, we have Andrew Spodeck, 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.
Speaker 2: 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 Provision for forward-looking statements contained in the Private Security's Legacy 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 containment companies laid as 10K 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 for operations, adjusted funds for operations, adjusted funds for operations, adjusted funds for the granted EBITDA and net debt. You can find a tabular reconciliation of these non- GAAP financial measures to the most currently comparable GAAP measures .
Speaker 2: to adjust their price expectations.
Speaker 2: We continue to be patient in our approach, setting ourselves up with ample tripowder to take advantage of a creative opportunity to represent themselves going forward.
Speaker 2: As we've highlighted repeatedly over the past year, the conservative and proactive management of our balance sheet puts us in a great position to grow our portfolio with low leverage minimal exposure to variable rates and no notable debt maturity until 2026. We are also demonstrating strong organic growth across our portfolio, which will provide more detail on later in the call. In the second half of the year and most recently the fourth quarter, we transacted at higher caprice. This impacted volume in line with our expectations and the near-term outlook that we previously share.
Speaker 2: robust and the main drivers of our business are unchanged. Irrespective of the hot air interest rate environment.
Speaker 2: With significant capacity for future growth, we are in a very strong position, operationally and financially, to be a positive and attractive opportunities present themselves.
Speaker 2: I'll now turn the call over to Jeremy to discuss our operating metrics. Thank you Andrew. For the full year 2022, the company acquired 320 properties for approximately $123 million, excluding closing costs at a weighted average cap rate of approximately 6.8%.
Speaker 2: These properties comprise 869,000 net-leasable interior square feet and have a weighted average rental rate of $11.10 per leaseable square foot based on rents in place as of December 31st, 2022. In the fourth quarter of 2022, we acquired 54 properties for approximately $29.00.
Speaker 2: As we often remind our investors, our tenant has consistently made all of its rent payments on time throughout all economic periods.
Speaker 2: In keeping with this track record, we collected 100% of our contractual rents in the fourth quarter. This predictability of cash flow remains a significant differentiator for our company. For the full year 2022, we produced a 33% increase in rental income compared to the full year 2021, reflecting contingent growth in our existing portfolio, as well as contributions from the accretive acquisitions made over the last 12 months.
Speaker 4: We have maintained a 99% historical weighted average lease retention rate over the past 10 plus years would reflect the strategic importance of these properties to both 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 this crucial logistics network. We did not receive any notices of termination in 2022. We have maintained a 99% historical weighted average lease retention rate over the past 10 plus years would reflect the strategic importance of these properties.
Speaker 4: While the 2022 lease renewal negotiations are still ongoing, the USPS determined that market rents for the leases in holdover was greater than the rent amount payable under the expired leases and agreed to pass a lump sum catch up payment in recognition of the increase rents due from the date of lease expiration. We will continue to receive these increase rents going forward until new leases on the holdover properties are executed. I'll now turn the call over to Rob to discuss our fourth quarter in full year 2022 financial results. Thank you Jeremy and thank you everyone for joining us on
Speaker 4: For the fourth quarter, we delivered funds from operations or FFO of 27 cents per diluted share and adjusted funds from operations or AFFO of 28 cents. For the full year 2022, we delivered FFO of 96 cents per diluted share and AFFO of a dollar and one cent. The strong fourth quarter earnings numbers are partially related to lower recurring cap X combined with the increased rents and lump sum catch up payments Jeremy just discussed.
Speaker 2: Recurring CapEx for the fourth quarter was 2 cents per square foot, and we anticipated to remain around this level for future quarters. As we find more of our CapEx falling into the non-recurring versus recurring CapEx bucket, we've added additional details to our supplemental on the breakdown of our total CapEx expenditures this quarter and historically.
Speaker 2: As for our guidance last quarter, CAST-GNA for Q4 was relatively in line with Q3. Going forward, we expect CAST-GNA for the full year of 2023 to be approximately 9.4 to 9.9 million, representing an increase of 1 to 1.5 million dollars over 2022.
Speaker 2: This is assuming the environment is conducive to make some of the internal investments deferred from last year. We continue to expect cash GNA as a percentage of revenue to decline on an annual basis. In order to provide additional transparency, we're quantifying our internal growth through same-store cash net operating income. Reflecting properties under our ownership as of December 31, 2020, same-store NOI increased 2% when comparing the full year of 2022 to the full year of 2021.
Speaker 2: While negotiations remain ongoing, this is based on the USPS's most recently determined market rent for the 2022 lease renewals. Once we have executed these leases with the Postal Service, we will provide an update with the finalized figure. At the end of fourth quarter of 2022, the entirety of our debt outstanding was set to fixed rates at a weighted average interest rate of 3.74 percent and a weighted average maturity of 5.5 years. At year end, the $150 million senior unsecured revolving credit facility was completely undrawn and as of February 21st, 2023.
Speaker 2: had only 12 million outstanding. For the fourth quarter 2022, net debt to annualize adjusted EBITDA was 5.1 times, and net debt to enterprise value was 35.7%. Within our leverage targets of below 7 times and 40% respectively. Given the significant shift in interest rates over the past year, we have prudently managed our balance sheet by maintaining low leverage and minimizing our exposure to variable rate debt. Through our at the market program, we issued 523,909 shares of common stock and 63,629 common units in our operating partnership as part of the consideration for property acquired during the quarter at an average gross price of $15.47 for approximately $9.1 million of gross proceeds. Our board of directors has approved the quarterly dividend.
Speaker 3: question Q. You may press star 2 if you would like to remove your question from the Q.
Speaker 3: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions.
Speaker 3: Our first question comes from the line of Rob Stevenson from Janine Montgomery Scott.
Speaker 2: Good morning, guys. Jeremy, you were talking about the, or I guess it was Rob, it was the same store NOI of 2% in 2022. Is there any reason given the size of the portfolio and how changes acquisition polls being added to that in subsequent years aren't really going to change it as much given that you're much bigger now? Is there any reason to believe that that 2%?
Speaker 4: You know, just isn't a good run rate for the foreseeable future. Thanks Rob. So at this moment we're not giving guidance going forward. We're not completed on the same store NOI. Stat, this is based on the USPS latest rental. And so we look forward to giving a finalized number. And at that point we can talk about what run rates and guidance may look like.
Speaker 4: Okay. And then is the 30 basis points of vacancy, are those totally vacant assets, or do you have some partially occupied assets at this point? So we only have one asset that's vacant and that's a very minimal portion of the rent. It's about 0.3% of our square footage and roughly 0.3 of our annualized rent percent. And what's the plans for that is that something that you're going to self vacant and move on, you're going to try to lease it up as something else. And then if you did that, would you hold it or would you sell it? If it's not least of the postal service. So right now we are, we have that property out for lease. We're attempting to lease the property, but haven't.
Speaker 4: had a tremendous amount of success, which is why it's still vacant. The market is not terrific in that particular area, but thankfully it's a small property. It's not terribly big concern of ours. With that being said, depending on who the tenant is, that ends up leasing it, we'll determine whether we decide to keep it or sell it. Okay, all right, thanks guys. Appreciate the time.
Speaker 4: had a tremendous amount of success, which is why it's still vacant. The market is not terrific in that particular area, but thankfully it's a small property, it's not terribly big concern of ours. With that being said, depending on who the tenant is, that ends up leasing it, we'll determine whether we decide to keep it or sell it. Okay, all right, thanks guys, appreciate the time. Thank you. Thanks Rob.
Speaker 4: Thank you. Our next question comes on the line of Eric Bowden from BMO Capital Marketing. Please go ahead. Hey guys, good morning. I was just hoping if we could go to the rent resets and the catch up payments. I was hoping if you could help quantify the one-time catch up payment and kind of what's the impact or the boost going forward. Yeah, so we've accounted for roughly $430,000 of non-sum payment in Q4 of 22. We can't really quantify yet until we complete our negotiations what the further impact it will be, but so far that's been the impact in Q4.
Speaker 4: Okay, that's helpful. And then on the 22 least explorations and the 23 least explorations, what's the, what's the asset class mix there? And then just kind of thinking about the rent reset. Can we assume, you know, a similar rent per square foot to the, to the acquisitions completed in, in 4Q and the current quarterly to date?
Speaker 4: So in terms of the asset class mix, 22, I believe, is all last mile in Flex Facilities, while 23 has, I believe, an industrial property in there. And typically our role is mostly Flex properties because that's the largest asset class that we have in our portfolio.
Speaker 4: As it relates to comparing the price per square foot to acquisitions, I wouldn't correlate them. Every asset really has to speak to the market that it's in, and depending on where we're buying assets, we'll translate into what the price per square foot is for.
Speaker 4: that particular building and translating that to an entire portfolio that is dispersed throughout the country is not very good correlation. Okay, that's helpful. And then maybe just last one on the capital aisle, because allocation side, you have multiple lovers, you have the full line of credit, the leverage is reduced.
Speaker 4: You can issue OP and hit the ATM where you think it's reasonable. How should we think about funding acquisitions in the mix for 2023? That's a good question. I feel like we're in a very fortunate position where all the things you mentioned.
Speaker 4: and some other sources are available. So we're constantly scanning the capital markets to figure out the best source of capital while keeping leverage in consideration and cost the capital as well. So yeah, we're constantly looking at the ATM and offering markets, OPUs, and it's our great source for us to attract sales sellers and at times transact with those sellers as well. And as you correctly mentioned, our facility is mostly undrawn, only 12 million drawn as of February 21. So we have all those access to capital. We'll continue to use what is the most efficient for us and again, keeping ourselves in a low leverage position.
Speaker 3: We always have dry powder and we can always be going after the acquisitions we think are attractive. Thanks guys. Thank you. Thank you. Our next question comes from the line of Anthony Paoloan from J.B. Morgan. Please go ahead.
Speaker 5: Great, thank you and good morning. I guess related to the holdover leases, will there be 97, I guess, new individual leases or will some of these be combined and maybe one or more leases that are all, you know, on the same length, what will happen here?
Speaker 4: Yeah, I mean our process is renewal of individual leases. We try to go to renewal process for an entire year's vintage, but they're each stand alone individual leases that get renewed.
Speaker 5: Okay, and if we take these out, it seems like another eight or so percent expiring in 23. Should we anticipate the same sort of accumulation of holdover, at least for a while, and then sort of a big batch of these getting done at some point later in the year into even 24. Like, how should we just think about the process going forward?
Speaker 4: differently to make it a little more efficient and productive. And so my hopes are that you can work with the Pulse Service to change some things and get these resolved quicker and better.
Speaker 5: Okay, and then just last one, you'd mentioned the 6.8% cap rates on the 2022 transactions for the full year. Just any additional color in terms of where those sit more recently. I know Mix is a factor, but the world's changed a bit as well over the last year. Here.
Speaker 4: Yeah, the world has changed and I'm hoping it's continuing to change. We are doing everything we can to push up cap, push up cap rate as much as possible. Cellars are not moving as quickly as we'd like them to, but we are targeting the midpoint of our range. So our range is quoted to be...
Speaker 3: please press star 1. Our next question comes from the line of Barry Oxford from Collius. Please go ahead.
Speaker 6: Great, thanks guys. Just to build on the Lump Sum catch up, is that going to be kind of 1Q and 2Q and then we wouldn't see the catch ups like in 3 and 4Q from a modeling standpoint or is this one of these look very, we're still kind of working through it. We don't know if it's going to be just 1 and 2 or whether it's going to take, you know, 4Q.
Speaker 7: Yeah, good question Barry. So as we stated, we are still in negotiations to finalize the rent. If those rents are higher than the rents that are currently being paid, then there will be another lump sum payment. I can't tell you the timing of it because it depends on a variety of factors and you know, either when the lease is executed or when there's a determination of that new rent.
Speaker 6: to sort of move your lease structure to kind of, for lack of a better word, inflation adjusted, and you've been having conversations. How are those conversations going right now, as of today? These conversations are still ongoing. It's relatively fluid. The Postal Service, like everybody else in the world today, recognizes how prevalent inflation is.
Speaker 6: Everybody speaks about it and hears about it every day and the Postal Service is dealing with it in a great degree on its labor contracts. So it's something we all recognize and we're trying to factor into the lease. Okay, great, great. And then on the acquisition side, if they're, you know, with the 80 million,
Speaker 6: I think you guys can do more than that. But is the holding back of the guidance in the 80 million range, you're seeing a lot of product but you just don't like the pricing or is it also a combination of you're not seeing a lot of product? So the good news is the opportunity is still there. Everything that we set out, pre-IPO and everything we've done to date still holds true. The problem today is the disconnect between fires, us and the sellers, right? They haven't adjusted their pricing.
Speaker 7: investment in their own business. There was that build it got through last year that gave them some funding. There's been talk of infrastructure investments. I'm just curious if we see any of that kind of coming your way in terms of redevelopment opportunities. Like should we be expecting, I guess, more investment by them in their real estate over the next few years than we've seen over the last few years? Yeah, interesting. They just put out a release, I think, yesterday that they're moving forward with awards to modernize an electric flight.
Speaker 1: Thanks.
Speaker 3: Thank you. Ladies and gentlemen, if you wish to ask a question, please press star 1. Ladies and gentlemen, since there are no further questions, I would now hand over the the conference to Andrew.
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