Q3 2023 Postal Realty Trust IncEarnings Call

[music].

Greetings and welcome to postal Realty Trust's third quarter 2023 earnings call.

At this time all participants are in a listen only mode.

A question and answer session will follow the prepared remarks.

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host Mr. Jordan Cooperstein, Vice President of our P&A capital markets Welcome Jordon.

Thank you and good morning, everyone welcome to Postal Realty Trust third quarter 2023 earnings Conference call.

On the call today, we have Andrew <unk>, Chief Executive Officer, Jeremy Garber, President, Robert Klein, Chief Financial Officer, and Matt friend Wine, Chief Accounting Officer. Please note that the company may use forward looking statements on this conference call, which are statements that are not historical facts and are considered forward looking.

We're 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 but not limited to those contained in the company's latest 10-K and its other securities and Exchange Commission filings.

The company does not assume and specifically disclaim any obligation to update any forward looking statements, whether as a result of new information future events or otherwise.

Additionally, on this conference call the company may refer to certain non-GAAP financial measures such as funds from operations 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 <unk>, Chief Executive Officer of Postal Realty Trust.

Good morning, and thank you for joining us today.

The third quarter marked another strong period for postal real.

We demonstrated our ability to drive external and internal growth by expanding our asset base and achieving operating efficiencies.

Wired 70 postal properties across the U S. During the quarter at an 8% weighted average cap rate the top of our stated range.

Based on the acquisitions completed through October 20th we have added 153 properties to our portfolio for $58 million continued to work towards our $80 million target and anticipate our full year 2023 weighted average cap rate to be between seven and a quarter and seven and three quarter percent.

The increase in transaction volumes is encouraging and we are optimistic that this will continue through the end of the year.

The high retention and occupancy rates across our portfolio are characteristic of the niche market, we serve where we received 100% of our monthly rent of 100% on time.

This predictability of cash flow is a significant differentiator for postal Realty.

It's important to note that even at the discussion of a government shutdown persists. The postal service is affirmatively stated, they're not only well their facilities remain open but theyre services shall remain uninterrupted.

We continue to be judicious with our deployment of capital.

Our revolving credit facility remains completely undrawn and we've maintained conservative leverage with net debt to annualized adjusted EBITDA at five and a half times.

We have position ourselves optimally to capitalize on attractive opportunities that arise and we are confident they will.

Our team has over 30 years of experience acquiring operating and managing properties from small towns to big cities and everything in between.

Take pride in the operation and management of each asset in our growing portfolio.

The logistics network, we invest in on a daily basis is irreplaceable American infrastructure, enabling the postal service to serve the American people through the 165 million distinct delivery point, they reached five to six days a week.

This unique and niche space has proved its resilience in the past and present economic cycle.

Regardless of whether the U S economy will face a soft landing hard landing or no landing we are exceedingly confident in the strength of our business, our tenants and our opportunity for future growth.

I'll now turn the call over to Jack.

Thank you Andrew.

The third quarter of 2023, we added approximately 165000, net leasable and curious square feet to our portfolio.

So about 63000 square feet from 45 last mile properties, and 102000 square feet from twenty-five flex property.

During the quarter, we received a fully executed 2022 renewals with the postal service.

Working to market expiring rents on 86 properties, while also introducing annual rent escalations to these leases.

Postal service is an exceptional partner to our company our discussions regarding the 2023 lease explorations remain ongoing and we are making progress.

We have maintained a 99% historical weighted average lease retention rate over the past 10, plus years, reflecting the strategic importance of these properties to both the postal service in the communities. They serve I'll now turn the call over to Rob to discuss our third quarter financial results.

Thank you Jeremy and thank you everyone for joining us on today's call. We're pleased to discuss our third quarter financial results.

Funds from operations or <unk> was 25 cents per diluted share and adjusted funds from operations or <unk> was 27 cents per diluted share.

We've continued to manage our balance sheet prudently by maintaining low leverage and minimizing our exposure to variable rate debt.

At the end of the third quarter, our debt outstanding at a weighted average interest rate of 4.04% a weighted average maturity of five years and no notable debt maturities until 2027.

Our $150 million senior unsecured revolving credit facility was completely undrawn and 100% of all borrowings were set to fixed rates.

Net debt to annualized adjusted EBITDA ratio was five five times at the end of Q3.

Well within our target of below seven times.

During our last call, we announced that we raised roughly $12 million by entering into forward sales agreements through our ATM program subsequent to the end of the second quarter.

As of October 20th.

We settled these forward sales agreements utilizing the $12 million in proceeds to repay the revolving credit facility and bond acquisition.

Recurring capex for the third quarter was under two cents per square foot at $97000.

As we've discussed in prior quarters, we anticipate the figure for 2023 to be around two cents per square foot.

We expect to complete additional R&M and Capex projects prior to year end and our recurring Capex guidance for the fourth quarter is between 200 and $300000.

Cash G&A expense came in lower than expected during the third quarter as we continue to achieve cost savings and efficiencies throughout 2023.

We do anticipate an uptick in expenses for the fourth quarter and our guidance is between 2.2 and $2 $4 million, reducing our projected 2023 total to between eight eight and $9 million, which is a slight increase over last year.

The projected increase as compared to the third quarter is primarily related to additional hires further investment in technology and the timing of work performed by our third party vendors.

As a reminder, the lower 2023 figures are result of employees electing to receive equity as part of their compensation reduced third party expenses and internal operating efficiencies.

Consistent with our guidance throughout the year 2023 cash G&A as a percentage of revenue will decline on an annual basis.

Our board of directors approved a quarterly dividend of <unk> 20, 375 cents per share representing a one 1% increase from the third quarter 2022 dividend.

Our business model continues to provide investors with stable cash flows through turbulent times in the broader REIT market.

We are exhibiting patience with acquisitions and prudence in the capital markets, which should reassure investors that our business will continue to thrive across all economic cycles.

This concludes our prepared remarks, operator, we'd like to open the call for questions.

Thank you we will.

Now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.

Yeah.

For parts. If you you May press star two if you'd 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.

One moment, please while we poll for questions.

Thank you.

Our first question comes from the line of Eric <unk> with BMO capital markets. Please proceed with your question.

Hey, guys. Good morning out there I know you mentioned that you see.

Lease negotiation process is currently ongoing but I was just hoping that you could tell us kind of what inning youre in in terms of the process and how things are trending to date.

Yeah.

Sure Eric.

As you know.

The process is around an entire year's vintage.

And as you saw through the 2022 renewals. It's a process that takes time, we completed the 2022 renewals received all the fully executed leases and we're encouraged by the 2023 discussions our goal was to come up with a more efficient process.

As we sit here.

You know almost through 2023, we would love to be in a position, where we close out the year with all of our 2023 leases done and and we're hopeful that the process that we have.

<unk> been working towards will allow us to achieve our goals.

Thank you.

That's helpful. And then maybe just on the acquisition funding for the fourth quarter. I know you guys had multiple sources, how should we think about the right mix between.

Cash equity either from the ATM or LP units in that.

Okay.

Yeah. Thanks, Eric.

Rob.

I think that the the story remains the same that we have a lot of tools in our toolbox, we continue to be vigilant on the markets watching where our stock trades to see of ATM is viable and makes sense. We do have our full revolver undrawn. So we have the complete availability.

That and then yes at times, our op unit transactions and we will do though is that there are accretive to the cap rate on those transactions. So we still have the full the full load of things that we can use them as equity and debt as we have in prior quarters.

Thank you and then last one for me if I may.

Just noticed that NOI margins decreased sequentially was there any one time cost in opex for the third quarter that we should be aware of or is <unk>, a good run rate for <unk>.

Yeah. So it wasn't any one time, one time costs that we can point to there's always things that are a cyclical or that happened in the quarter and don't happen in other quarters, but I think part of part of the reason for the margin decline this quarter versus the prior quarters. It was really that while there was an uptick in expenses. There was also some increase in tenant reimbursements.

You'll notice that the two of those together kind of do decrease margin, even though NOI may not be affected the bottom line NOI. So I think it is probably a good run rate as we noticed expenses going up but also reimbursements increasing as well.

Alright, thanks very much.

Uh huh.

Operator: Anthony Paolone, Robert Stevenson, John Kim, Barry Oxford, Jonathan Petersen, John Kim, Barry Oxford, Jonathan Petersen, John Kim, Barry Oxford, Jonathan Petersen[inaudible] Greetings and welcome to Postal Realties Trust 3rd quarter 2023 earnings call. At this time, all participants are in listen only mode. A question and answer session will follow before the prepared remarks. As a reminder, this conference is being recorded.

Thank you. Our next question comes from the line of Rob Stevenson with Janney. Please proceed with your question.

Good morning, what where is your marginal cost of debt. These days.

So.

On our on our facility on our revolver, we have a rate that's sulfur plus $1 48, because it's $1 50, but we've gotten the two basis point reduction based on some ESG initiatives.

So it's really wherever the term sulfur or daily soap or depending on which all me choose plus that margin plus 10 basis points adjustment when we went to silver.

Okay. So there's not anything that you guys are looking at that would provide you any sort of a cheaper rate over the line at this point that the line's going to be the primary debt financing for acquisitions over in the near term.

So that's the variable rate cost that when you were seeing marginal I was assuming you draw. The line that your marginal cost of debt. Obviously, if were to swap that out the rates would the rates would be lower.

Rates for let's call. It a five year swap are probably somewhere in the in the low sixes at the time at the current time, Okay, and if you guys do the 20 million plus of acquisitions in the fourth quarter would that be your.

Preference to do that or are you going to let that.

Jordan Cooperstein: I would now like to turn the conference over to your host, Mr. Jordan Cooperstein, Vice President of FPNA Capital Markets. Welcome, Jordan. Thank you, and good morning, everyone. Welcome to Postal Realties Trust 3rd quarter 2023 earnings conference call.

Float for a while and see what winds up happening in early 'twenty four in terms of rates.

So if we do use that I think our philosophy remains the same where we we have typically borrowed on our revolver as kind of an acquisition's line and then as we determined that that debt is going to stay on our balance sheet longer term, we tend to swap it out so that it's fixed rates because we're not looking to arbitrage fixed versus floating we'd rather have the fixed cost of debt.

Jordan Cooperstein: 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 company may use forward-looking statements on this conference call, which are 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 Security's Litigation Reform Act of 1995. Actual results may differ materially from those described in the forward-looking statements, and will be affected by a variety of risk and factors that are beyond the company's control, including, but not limited to, those contained in the company's latest 10k and its other securities and exchange commission filings.

And Thats if were going that route obviously, we're monitoring the market as I kind of mentioned to Eric on the prior question, we're monitoring the markets and we do we do each quarter have an ATM active.

And Oprah unit transactions that can be done. So there are other sources and we may use equity just depending on share price cap rates et cetera.

And then Andrew Jeremy How're.

How are you guys thinking about the equity side of the equation at 13 and change where your stocks trading today you did some O P units during the quarter.

Are there big step ups in some of these acquisitions that you think that you can get in the near term to make that work.

Jordan Cooperstein: The company does not assume, and specifically, this claims, 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-gap financial measures, such as funds from operations, adjusted funds from operations, adjusted EBDA, and net debt. You can find a tabular reconciliation of these non-gap financial measures to the most currently comparable gap measures in the company's earnings release and supplemental material.

And acknowledging that your.

Your cap rates are going up on acquisitions are they going up enough to maintain the spread given the cost of capital today.

That's a great question. So we're constantly evaluating what our cost of capital is in relation to what were purchasing.

And as.

As the O P unit.

Conversation, we're getting interest from sellers.

Andrew Spodek: With that, I will now turn the call over to Andrew Spodek, Chief Executive Officer of Postal Realty Trust. Good morning and thank you for joining us today. The third quarter marked another strong period for Postal Realty. We demonstrated our ability to drive external and internal growth by expanding our asset base and achieving operating efficiencies. We acquired 70 postal properties across the U.S, during the quarter at an 8% weighted average cap rate, the top of our stated range.

To take operating partnership units and we don't always say, yes, it's opportunistic for us.

The currency is very valuable.

And it brings in deal flow, but we're not really so happy with where our stock price is today and so we're not doing that many transactions with the use of it as a currency today.

Okay. Thanks, guys appreciate the time.

Thank you.

Yes.

Andrew Spodek: Based on the acquisitions completed through October 20th, we have added 153 properties to our portfolio for $58 million. Continue to work towards our $80 million target and anticipate our full year 2023 weighted average cap rate to be between seven and a quarter and seven and three quarter percent. The increase in transaction volumes is encouraging and we are optimistic that this will continue through the end of the year. The high retention and occupancy rates across our portfolio are characteristic of the niche market we serve where we receive 100% of our monthly rent, 100% on time.

Thank you. Our next question comes from the line of Keybanc Keybanc, Ken with true Securities. Please proceed with your question.

Thank you good morning.

Going back to the topic of the lease renewals in that process you know how would you describe.

The kind of key hurdle is that the fact that youre dealing with a kind of a large much larger bureaucratic entity or is it really just trying to negotiate the right rental rate I'm just curious any kind of color you can provide.

Sure. This is Andrew so I think in general it's it's complicated to negotiate you know a 102 hundred leases at one given time right.

Andrew Spodek: This predictability of cash flow is a significant differentiator for Postal Realty. It's important to note that even as discussion of a government shutdown persists, the Postal Service has affirmatively stated that not only will their facilities remain open but their services shall remain uninterrupted. We continue to be judicious with our deployment of capital. Our revolving credit facility remains completely undrawn and we've maintained conservative leverage with net debt to annualize adjusted ebbs at five and a half times.

Pending on how many we have rolling in that particular year.

Dealing with the government agency adds a layer of complication to it analyzing each individual properties market.

What the rates are in negotiating that adds another layer to it. So I think it's just the process of going through it.

I don't think Theres, a particular hurdle that specific to it.

Andrew Spodek: We have positioned ourselves optimally to capitalize on attractive opportunity that arrives and we are confident they will. Our team has over 30 years of experience acquiring operating and managing properties from small towns to big cities and everything in between. We take pride in the operation and management of each asset in our growing portfolio. The logistics network we invest in on a daily basis is irreplaceable American infrastructure enabling the Postal Service to serve the American people through the 165 million distinct delivery points they reach five to six days a week. This unique and niche space has proved its resilience in the past and present economic cycle.

Okay and in terms of G&A, you know any kind of ballpark.

Idea of what we can expect going forward.

Last year I mean, this year compared to last year Genie went up about $2 million is that something that's reasonable to expect next year.

So we haven't given guidance for next year, we plan to do that in the next quarter.

But but no. We don't we don't believe that some of the onetime increases more will be recurring in the coming years will be increase shouldn't be as large, but we will give you guidance in the next quarter as to how 'twenty four is going to look.

Okay. Thank you.

Andrew Spodek: Regardless of whether the US economy will face a soft landing hard landing or no landing, we are exceedingly confident in the strength of our business, our tenant and our opportunity for future growth.

Thank you.

A reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Yeah.

Jeremy Garber: I'll now turn the call over to Jeremy. Thank you, Andrew. In the third quarter of 2023, we added approximately 165,000 net leaseable interior square feet to our portfolio, inclusive of 63,000 square feet from 45 last mile properties and 102,000 square feet from 25 flex properties.

Thank you. Our next question comes from the line of Keybanc, Ken with Jewish Securities. Please proceed with your question.

Yes that was a quick turnaround.

Just a quick question on the acquisition [laughter] acquisition yields I didn't want to hung up the call.

Yeah, I guess, where would you peg.

Jeremy Garber: During the quarter, we received the fully executed 2022 renewals with the Postal Service, marking to market, firing rents on 86 properties, while also introducing annual rent escalations to these leases. The Postal Service is an exceptional partner to our company. Our discussions regarding the 2023 lease aspirations remain ongoing and we are making progress. We have maintained a 99% historical weighted average lease retention rate over the past 10 plus years, reflecting the strategic importance of these properties to both the Postal Service and the communities they serve.

A seller expectation is to just kind of new cost of capital environment.

Have they kind of fully embraced it and realize what's happening to that Youtube buyers like yourselves and it hurts me ever increased cost of capital and what do you think <unk>.

Cap rates, Kevin kind of drift too as we look forward.

It's a great question and I wish I had a great answer.

You know, we do a tremendous amount of volume.

So every seller's expectation.

Expectation is very different.

And actually every seller's asset is very different right and so this particular quarter our team did very well.

Robert Klein: I'll now turn the call over to Rob to discuss out third quarter financial results. Thank you, Jeremy, and thank you everyone for joining us on today's call. We're pleased to discuss our third quarter of financial results. Funds from operations, or FFO, was 25 cents per diluted share, and adjusted funds from operations, or AFFO, was 27 cents per diluted share. We've continued to manage our balance sheet prudently by maintaining low leverage and minimizing our exposure to variable rate debt.

Closing out the quarter around an eight cap.

But that was really because of the mix of assets that we bought within the quarter.

You know from the first half of last year, where we closed out a six and a half cap to where we are today, but let's call. It a seven five to eight cap that's a big move but this is not a market shift we're still having to negotiate to get these cap rates on an individual deal basis.

Robert Klein: At the end of the third quarter, our debt outstanding had a weighted average interest rate of 4.04 percent, a weighted average maturity of five years, and no notable debt maturity until 2027. Our $150 million senior unsecured revolving credit facility was completely undrawn and 100 percent of all borrowings were set to fix rates. Net debt to annualize adjusted EBITDA ratio was 5.5 times at the end of Q3, well within our target of below seven times.

We're hoping that next quarter is going to be a seven and a half or higher.

I don't want anybody to expect this eight cap quarter to be a change in the market itself, but we're working on getting the best pricing that we possibly can.

We're taking into account our cost of capital as we do those deals can I tell you that the sellers recognize.

The cost of capital shifts if they all recognizing it theyre not voicing it to us they are still saying that they want their price, which I guess is part as part of again.

Okay. Thank you.

Robert Klein: During our last call, we announced that we raised roughly $12 million by entering into forward sales agreements through our ATM program subsequent to the end of the second quarter. As of October 20th, we settled these forward sales utilizing the $12 million in pro-seeds to repay the revolving credit facility and fund acquisition. Recurring CAPEX for the third quarter was under two cents per square foot at $97,000. As we discussed in prior quarters, we anticipate the figure for 2023 to be around two cents per square foot.

Thank you.

Thank you.

Our next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question.

Great. Thanks, Good morning, guys I'm just curious if there's any I don't know maybe updated trends on where youre seeing the post office, making investments today, especially as it relates to your business I know in the past we've talked about them upgrading their fleet of trucks or I don't know, if theres different store designs or or things like that that we should be.

[noise] aware I'm just curious if there's any any trends in that regard that that are impacting your business that we should be aware of.

Robert Klein: We expect to complete additional R&M and CAPEX projects prior to your end, and our recurring CAPEX guidance for the fourth quarter is between $200 and $300,000. Cash G&A expense came in lower than expected during the third quarter, as we continue to achieve cost savings and efficiencies throughout 2023. We do anticipate an uptake in expenses for the fourth quarter, and our guidance is between $2.2 and $2.4 million, reducing our projected 2023 total to between $8.8 and $9 million, which is a slight increase over last year.

So I believe that there are trends, but I don't know that it's directly impacting our business. They have been investing heavily in their own facilities and the monetization of those facilities.

Which is a good thing for the operations of their business.

No that it's directly impacting our property so.

Okay, Alright, that's alright. Thank you that's all I got.

Thank you.

Thank you. Our next question comes from the line of Tony Polak with J P. Morgan. Please proceed with your question.

Robert Klein: The projected increase as compared to the third quarter is primarily related to additional hires, further investment in technology, and the timing of work performed by our third party vendors. As a reminder, the lower 2023 figures are result of employees electing to receive equity as part of their compensation, reduce third party expenses, and internal operating efficiencies. Consistent with our guidance throughout the year, 2023 cash G&A as a percentage of revenue will decline on an annual basis.

Okay.

Good morning, guys you have no home on the line for Tony This morning.

And congrats on executing the 2022 leases with <unk> with the USPS.

With the two 5% escalators I guess going forward are you negotiating similar types of leases with the USPS and is that yeah.

Yeah, maybe causing some of that some of the holdup in renewals.

As Andrew referenced.

This is a process you know the.

The number of leases that were going through on an annual basis.

Robert Klein: Our Board of Directors approved the quarterly dividend of 23.75 cents per share, representing a 1.1 percent increase from the third quarter 2022 dividend. Our business model continues to provide investors with stable cash flows through turbulent times in the broader REIT market.

Illuminate and facing off with the postal service and the back and forth just take some time and we've been we've been at this for many many years. This has been the experience over the history and right now we're more focused on developing with them a more efficient process. So we don't have to go through this.

Robert Klein: We are exhibiting patience with acquisitions and prudence in the capital markets, which should reassure investors that our business will continue to thrive across all This concludes our prepared remarks.

This year in year out.

Our goal is to achieve the best outcome for our shareholders on any type of a lease renewal and so that's where we are today and again our goal is to try to bring this to a head as soon as we can.

Operator: Operator, we'd like to open the call for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation to will indicate that your line is in the question. If you may press star two, if you'd 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 start keys. One moment please while we pull for questions. Thank you.

Got it. Thank you that's it for me.

Thank you.

At the end of our question and answer session and I would like to turn the floor back over to CEO, Andrew <unk> for closing comments.

Thanks on behalf of the entire team. Thank you for your continued support and taking the time to join us today.

Eric Borden: Our first question comes on the line of Eric Borden with BMO Capital Markets. Please proceed with your question. I know you mentioned that the least negotiation process is currently ongoing, but I was just hoping that you could tell us kind of what inning you're in in terms of the process and how things are trending to date. As you know, the process is around an entire year's vintage, and as you saw through the 2022 renewals, it's a process that takes time. We completed the 2022 renewals received all the fully executed leases, and we're encouraged by the 2023 discussions. Our goal was to come up with a more efficient process.

We look forward to connecting with you over the next coming months. Thank you again.

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

[music].

Hum.

Yeah.

Hum.

Yeah.

Andrew Spodek: You know, as we sit here, you know, almost through 2023, we would love to be in a position where we close out the year with all of our 2023 leases done, and we're hopeful that the process that we have been working towards will allow us to achieve our goals. Thank you. That's helpful.

[music].

Yeah.

Robert Klein: And then maybe just on acquisition funding for the fourth quarter, I know you guys have multiple sources. You know, how should we think about the right mix between cash, equity, either from the ATM or OP units and debt? Yeah, thanks Eric. This is Rob. I think that the story remains the same that we have a lot of tools in our toolbox. We continue to be vigilant on the markets watching where our stock trades to see if ATM is viable and make sense.

Yeah.

[music].

Yeah.

Yeah.

Hum.

Hum.

[music].

Robert Klein: We do have our full revolver on drawn, so we have the complete availability of that. And then yes, at times there are OP unit transactions, and we'll do those as they're creative to the cap rate of those transactions. So we still have the full, the full load of things that we can use as equity and debt as we have in prior quarters. Thank you.

Hum.

Hum.

[music].

Okay.

[music].

Eric Borden: And that's one for me.

Robert Klein: If I may, I just noticed that NOI margins decreased sequentially. Was there any one time cost and op-ax for the third quarter that we should be aware of or is 3Q a good run rate for 4Q? Yeah, so there wasn't any one time, one time cost that we can point to. There's always things that are cyclical or that happen in a quarter and don't happen in other quarters. But I think part of the reason for the margin decline this quarter versus the prior quarters was really that while there was an uptick and expenses, there was also some increase in tenant reimbursements.

Hum.

[music].

Hum.

Uh-huh.

[music].

Okay.

[music].

Robert Klein: And you'll notice that the two of those together kind of do decrease margin, even though NOI may not be affected the bottom line NOI. So I think it is probably a good run rate as we notice expenses going up but also reimbursements increasing, as well.

Eric Borden: Alright, thanks very much.

Operator: Thank you.

Rob Stevenson: Our next question comes from the line of Rob Stevenson with Janie. Please proceed with your question. Good morning. Rob, we're in your marginal cost of debt these days. So on our, on our facility on our revolver, you know, we have a rate that's so far plus 148, because it's 150, but we've gotten the two basis point reduction based on some ESG initiatives. So it's really wherever the, you know, the term so far, or daily so far, depending on which one we choose, plus that margin, plus the 10 basis points adjustment when we went so far.

Rob Stevenson: Okay, so there's not anything that you guys are looking at that would provide you any sort of cheaper rate over the line at this point that that's, that the line's going to be the primary debt financing for acquisitions over in the near term. So that's the variable rate cost. And, you know, when you're saying marginal, I was assuming you draw on the line, that's your marginal cost of debt. Obviously, for to swap that out, the rates would, the rates would be lower.

Rob Stevenson: You know, the rates for, let's call it a five year swap or probably somewhere in the, in the low sixes at the time, at the current time. Okay. And if you guys do the 20 million plus of acquisitions in the fourth quarter, would that be your preference to do that? Or are you going to let that, you know, float for a while and see what winds up happening in early 24 in terms of rates?

Rob Stevenson: So if we do use debt, I think our philosophy remains the same where we, we have typically borrowed on a revolver as kind of an acquisitions line. And then as we determine that that debt is going to stay in our balance sheet longer term, we tend to swap it out so that there's fixed rates because we're not looking to arbitrage fixed versus floating, we'd rather have a fixed cost of debt. And that's if we're going in the debt route.

Rob Stevenson: Obviously, we're monitoring the markets as I kind of mentioned to Eric on the prior question, we're monitoring the markets and we do, you know, we do each quarter have an ATM active and an OPU to transactions that can be done. So there are other sources and we may use equity just depending on share price, cap rate, etc. Okay.

Andrew Spodek: And then Andrew Jeremy, how are you guys thinking about the equity side of the equation at 13 and change where you're stocks trading? Today you did some OPU units during the quarter. Are there, you know, big step ups in some of these acquisitions that you think that you can get in the near term to make that work? And I acknowledging that your cap rates are going up on acquisitions. Are they going up enough to maintain the spread given the cost of capital today?

Andrew Spodek: That's a great question. So we're constantly evaluating what our cost of capital is in relation to what we're purchasing. And as the OPU unit conversation, we're getting interest from sellers to take operating partnership units and we we don't always say yes. It's opportunistic for us. The currency is very valuable and it brings in deal flow, but we're not really so happy with where our stock prices today. And so we're not doing that many transactions with the use of it as a currency today.

Rob Stevenson: Thank you guys, appreciate the time.

Operator: Thank you.

Ki Kim: Our next question comes from a line of keeping Kim with Jewish securities. Please proceed with your question. Thank you.

Andrew Spodek: Good morning. Just going back to the topic of the least renewals and that process, you know, how would you describe the kind of key hurdle? Is it the fact that you're dealing with a large, much larger bureaucratic entity, or is it really just trying to negotiate the right rental rate, just because any kind of color you can provide? Sure. The tips is Andrew. So I think in general, it's complicated to negotiate, you know, 100 to 100 releases at one given time, right?

Andrew Spodek: Depending on how many we have rolling in that particular year. Dealing with a government agency adds a layer of co-application to it, analyzing, you know, each individual property's market and what the rates are and negotiating that adds another layer to it. So I think it's just the process of going through it. I don't think there's a particular hurdle that's specific to it. Okay.

Robert Klein: And in terms of GNA, you know, any kind of ballpark idea of what we can expect going forward, I think last year, I mean this year compared to last year, GNA went up about two million. Is that something that's reasonable to expect next year? So we haven't given guidance for next year.

Robert Klein: We plan to do that in the next quarter. But no, we don't believe that some of the one time increases will be recurring in the coming year. So the increase shouldn't be large. But we will give you guidance in the next quarter as to how 24 is going to look.

Ki Kim: Okay.

Operator: Thank you.

Operator: As a reminder, if you would like to ask a question, please press star one on your telephone keypad.

Operator: Thank you.

Ki Kim: Our next question comes from the line of key bin Kim, what's your securities? Please proceed with your question. Yeah, that was a quick turn around. Just a quick question on the acquisition, acquisition yields. I didn't want to hog up the call, you know, I guess where would you peg a seller expectations to this kind of new costful capital environment? Have they kind of fully embraced it and realized what's happening to such as to buyers like yourself in terms of their increased cost of capital? And what do you think cap rates can kind of drift to as we look forward?

Andrew Spodek: It's a great question and I wish I had a great answer. You know, we do a tremendous amount of volume and so every seller's expectation is very different. And actually every seller's asset is very different, right? And so this particular quarter our team did very well, you know, closing out the quarter around an eight cap. But that was really because of the mix of assets that we bought with in the quarter.

Andrew Spodek: You know, from the first half of last year, where we closed out a six and a half cap to, you know, where we are today. Let's call it a seven and a half to eight cap. That's a big move. But this is not a market shift. We're still having to negotiate to get these cap rates on an individual deal basis. We're hoping that next quarter is going to be a seven and a half or higher.

Andrew Spodek: I don't want anybody to expect this eight cap quarter to be a change in the market itself. But we're working on getting the best pricing that we possibly can. And we're taking into account our cost of capital as we do those deals. Can I tell you that the sellers recognize the cost of capital shift? If they all recognize it, they're not voicing it to us. They're still saying that they want their price, which I guess is part is part of the game.

Ki Kim: Okay, thank you.

Operator: Thank you.

John Peterson: Our next question comes in the line of John Peterson with Jeffries. Please proceed with your question. Great, thanks. Come on, guys. I'm just curious if there's any, I don't know, maybe updated trends on where you're seeing the post office make investments today, especially as it relates to your business. I know in the past we talked about them upgrading their fleet of trucks or, I don't know if there's different store designs or things like that that we should be aware of. I just curious if there's any trends in that regard that are impacting your business that we should be aware of.

Andrew Spodek: So I believe that there are trends, but I don't know that it's directly impacting our business. They have been investing heavily in their own facilities and the modernization of those facilities, which is a good thing for the operations of their business. I don't know that it's directly impacting our property. Okay, all right. Thank you. That's all you got. Thank you.

Tony Paloan: Our next question comes in the line of Tony Paloan with JP Morgan. Please proceed with your question.

Robert Klein: Good morning, guys. You have not home on the line for Tony this morning. I have to cross on executing the 2022 leases with the USPS with the 3.5% escalators. I guess going forward, are you negotiating similar types of leases with the USPS and is that, you know, maybe causing some of the some of the hold up in renewals? As Andrew referenced, this is a process. You know, the number of leases that we're going through on an annual basis is voluminous and facing off with the Postal Service and the back and forth just takes some time.

Robert Klein: And, you know, we've been we've been at this for many, many years. This has been the experience over the history and right now we're more focused on developing with them a more efficient process. So we don't have to go through this year and year out. You know, our goal is to achieve the best outcome for our shareholders on any type of lease renewal. And so that's where we are today. And again, our goal is to try to bring this to a head as soon as we can. We got it. Thank you. That's it for me. Thank you.

Operator: We have reached the end of our question and answer session.

Andrew Spodek: And I would like to turn the floor back over to CEO Andrew Spodek for closing comments. Thanks. On behalf of the entire team, thank you for your continued support and taking the time to join us today. We look forward to connecting with you over the next coming months. Thank you again. Thank you.

Operator: This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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