Q2 2024 Postal Realty Trust Inc Earnings Call
Jordan Cooperstein: Greetings and welcome to Postal Realty Trust's second quarter 2024 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 would now like to turn the conference over to your host, Mr. Jordan Cooperstein, Vice President of FP&A Capital Markets. Please go ahead.
Greetings and welcome to postal Realty Trust's second quarter 2024 earnings call. At this time, all participants are in a listen only mode.
Jordan Cooperstein: Question and answer session will follow the prepared remarks 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 F. P. N a capital markets. Please go ahead.
Jordan Cooperstein: Thank you and good afternoon, everyone. Welcome to Postal Realty Trust's second quarter 2024 earnings conference call. On the call today, we have Andrew Spodek, Chief Executive Officer, Jeremy Garber, President, Robert Klein, Chief Financial Officer, and Matt Bramwein, 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. 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.
Speaker Change: Thank you and good afternoon, everyone welcome to postal Realty Trust second quarter 2024 earnings Conference call.
Speaker Change: On the call today, we have Andrew <unk>, Chief Executive Officer, Jeremy Garber, President, Robert Klein, Chief Financial Officer, and Matt Brown, <unk>, 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.
Jordan Cooperstein: 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, 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 disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
Speaker Change: By the Safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1995.
Speaker Change: 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.
Speaker Change: The company does not assume it specifically disclaims any obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
Speaker Change: 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.
Jordan Cooperstein: Additionally, on this conference call, the company may refer to certain non-GAAP financial measures, such as fund-sum operations, adjusted fund-sum 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 said, I will now turn the call over to Andrew Spodek, Chief Executive Officer of Postal Realty Trust.
With that I will now turn the call over to Andrew <unk>, Chief Executive Officer of Postal Realty Trust.
Andrew Spodek: Good afternoon, and thank you for joining us. In the second quarter, we added 70 properties for $28 million at a weighted average cap rate of 7.6%, and 9 properties for $3 million subsequent to quarter end. Funding the majority of our acquisitions on our evolving credit facility and raising over six million dollars of equity. Our execution of the $12.5 million ROFO transaction combined with our year-to-date regular way activity has us in a position to acquire $90 million at or above a 7.5% weighted average cap rate for 2024.
Andrew: Good afternoon, and thank you for joining us in the second quarter. We added 70 properties for $28 million at a weighted average cap rate of seven 6% and nine properties for $3 million subsequent to quarter end funding. The majority of our acquisitions on a revolving credit facility and raising over $6 million of equity.
Andrew: Our execution of the 12 and a half million dollar ROFO transaction combined with our year to date regular way activity has us in a position to acquire $90 million at or above seven 5% weighted average cap rate for 2024.
Andrew Spodek: Thanks to our team's tenacious efforts, we have been successful in continuing to source and acquire attractive postal properties at a high rate of speed, and as interest rate cuts become more likely and the cost of capital improves, we look forward to increasing transaction volume. On the leasing front, we are encouraged by the progress we have made working in partnership with the Postal Service to improve the annual lease renewal process. We are excited to report that we have started to receive fully executed 2023 leases that include 3% annual escalation.
Andrew: Thanks to our teams tenacious efforts, we have been successful continuing to source and acquire attractive postal product pretty accretively and as interest rate cuts become more likely and cost of capital improves we look forward to increasing transaction volume.
Andrew: On the leasing front, we are encouraged by the progress we have made working in partnership with the postal service to improve the annual leasing lease renewal process. We are excited to report that we have started to receive fully executed 2023 leases that include 3% annual escalations pre.
Andrew Spodek: Production for the 2024 leases has also kicked off in earnest. As we have shared, this is a fluid process, and we look forward to providing further details once we conclude negotiations and receive the remaining fully executed leases. I'm also pleased to share that we completed a five-year lease renewal with the only significant non-postal tenant in our portfolio located at our Warrendale, Pennsylvania industrial facility. The tenant is a publicly traded multinational healthcare technology company that has made substantial investments in their space. We achieved a mark-to-market base rent increase of 19% and incorporated a 2.5% annual escalation.
Andrew: Production for the 'twenty 'twenty four leases have also kicked off in earnest.
Andrew: As we have shared this is a fluid process and we look forward to providing further details once we conclude negotiations and received the remaining fully executed leases.
Andrew: I'm also pleased to share that we completed a five year lease renewal with the only significant non postal tenant in our portfolio located at our Warrendale, Pennsylvania industrial facility.
Andrew: The tenant is a publicly traded multinational health care technology company that has made substantial investments in their space.
Andrew: We achieve a mark to market base rent increase of 19% and incorporated but two 5% annual escalation.
Andrew Spodek: At Postal Realty, we are committed to investing in our workforce and our local community. For the third year in a row, Postal Realty volunteered at Island Harvest, a leading hunger relief organization with a mission to end hunger and reduce food waste on Long Island. The company looks forward to continuing this tradition of giving back to the community. Postal Realty has a tremendous runway ahead supported by both external growth with the acquisition of new postal properties and internal growth through improvement of cash flows of existing properties through effective leasing and management. We are well positioned for a successful 2024 and beyond, and we'll keep you updated on our progress. I'll now turn the call over to Jeremy.
Andrew: Our postal Realty, we are committed to investing in our workforce and our local community.
Andrew: For the third year in a row postal royalty volunteer at island harvests are leading hunger relief organization with a mission to end hunger in reduce food waste on long Island.
Andrew: The company looks forward to continuing this tradition of giving back to the community.
Speaker Change: Postal Realty has a tremendous runway ahead supported by both external growth with the acquisition of new postal properties and internal growth through improvement of cash flows of existing properties through effective leasing and management, we are well positioned for a successful 2024 and beyond and we'll keep you updated with our progress.
Andrew: I'll now turn the call over to Jeremy.
Jeremy: Thank you Andrew the second quarter was another successful quarter for postal Realty as we acquired well utilized attractive last mile and flex postal properties.
Jeremy Garber: Thank you, Andrew. The second quarter was another successful quarter for Postal Realty as we acquired well-utilized, attractive, last mile, and flex postal property. Our acquisitions during the quarter added 176,000 net leaseable interior square feet to our portfolio, inclusive of 66,000 square feet from 47 last mile properties and 111,000 square feet from 23 flex properties. Subsequent to Quarter End, the company acquired nine properties for $3.4 million and placed an additional 16 properties, totaling $4.7 million, under definitive contract, as stated on prior calls.
Jeremy: Our acquisitions during the quarter added 176000, net leasable in periods square feet to our portfolio inclusive of 66000 square feet from 47 last mile properties, and 111000 square feet from twenty-three flex properties subs.
Speaker Change: Subsequent to quarter end the company acquired nine properties for $3 $4 million and placed an additional 16 properties totaling $4 $7 million under definitive contracts.
Speaker Change: As stated on prior calls the company's business model generates consistent cash flow each quarter as our business remains stable and reliable throughout economic cycles. We have a long runway of opportunity ahead of us and are encouraged by our growth prospects as the largest owner in this space.
Jeremy Garber: The company's business model generates consistent cash flow each quarter, as our business remains stable and reliable throughout economic cycles. We have a long runway of opportunity ahead of us and are encouraged by our growth prospects as the largest owner in this space. We have maintained a 99% historical weighted average lease retention rate over the past 10 plus years, which reflects the strategic importance of these properties to both the Postal Service and the communities they serve. This validates our due diligence process in identifying locations that are vital to this crucial logistics network.
Speaker Change: We have maintained a 99% historical weighted average lease retention rate over the past 10, plus years, which reflects the strategic importance of these properties to both the postal service and the communities they serve.
Speaker Change: This validates our due diligence process and I tend to find locations that are vital to this crucial logistics network.
Jeremy Garber: As Andrew mentioned, we have started to receive fully executed 2023 leases, which represent 32% of the expired rent. With the new rents and 3% annual rent escalations, the company has paid a catch-up payment for the difference between the prior lease rent and the agreed-upon new lease rent. As a result, the company received a net payment of $326,000 from the Postal Service for the leases executed during Q2. We look forward to providing a further update. I'll now turn the call over to Rob to discuss our second quarter 2024 financial results.
Speaker Change: As Andrew mentioned, we have started to receive fully executed 2023 leases, which represents 32% of the expired rent.
Speaker Change: In addition to receiving the executed leases with new rents and 3% annual rent Escalations. The company has paid a catch up payment for the difference between the prior lease rent and the agreed upon new lease rents.
Speaker Change: As a result, the company received a net payment of $326000 from the postal service for the leases executed during Q2, we look forward to providing a further update I'll now turn the call over to Rob to discuss our second quarter 2024 financial results.
Robert Klein: Thank you, Jeremy, and thank you everyone for joining us on today's call. For the second quarter, we delivered Funds from Operations, or FFO, of $0.23 and Adjusted Funds from Operations, or AFFO, of $0.26 per diluted share. At the end of the quarter, our debt outstanding had a weighted average interest rate of 4.48%, a weighted average maturity of three years, and no significant near-term debt maturity. The company's $150 million senior unsecured revolving credit facility had $42 million outstanding, and fixed rate debt comprised 85% of all borrowings.
Rob: Thank you Jeremy and thank you everyone for joining us on today's call for the second quarter, we delivered funds from operations or <unk> of 23, <unk> and adjusted funds from operations or a F O up 26 cents per diluted share.
Rob: At the end of the quarter, our debt outstanding had a weighted average interest rate of 4.48% a weighted average maturity of three years and no significant near term debt maturities.
Rob: The company is $150 million senior unsecured revolving credit facility had $42 million outstanding in fixed rate debt comprised 85% of all borrowings.
Robert Klein: Net debt to annualized adjusted EBITDA was 6.1 times, still well within our target of below seven times. During the second quarter and subsequent to quarter end, we issued approximately 365,000 shares of common stock through our ATM offering program and 62,000 common units in our operating partnership for total gross proceeds of approximately $6.1 million at an average gross price of $14.35. Recurring CAFX was $135,000, slightly below our anticipated range due to the timing of some projects.
Speaker Change: Net debt to annualized adjusted EBITDA was six one times still well within our target of below seven times.
Rob: During the second quarter and subsequent to quarter end, we issued approximately 365000 shares of common stock through our ATM offering program and 62000 common units in our operating partnership for total gross proceeds of approximately $6 $1 million at an average gross price of $14.
Rob: And 35 cents.
Rob: Recurring capex was $135000 slightly below our anticipated range due to timing of some projects.
Robert Klein: Looking forward to Q3, we anticipate the figure to be between $250,000 and $350,000. Our cash G&A expense guidance for the full year 2024 remains between $9.5 million and $9.8 million. Just as in prior years, we continue to prioritize decreasing cash GNA as a percentage of revenue on an annual basis. Our Board of Directors approved a quarterly dividend of 24 cents per share, representing a 1.1% increase from the Q2 2023 dividend. We continue to collect 100% of our contractual rents during the second quarter.
Rob: Looking forward to Q3, we anticipate the figure to be between 250000 and $350000.
Rob: Our cash G&A expense guidance for the full year 2024 remains between $9 5 million and $9 $8 million.
Rob: Just as in prior years, we continue to prioritize decreasing cash G&A as a percentage of revenue on an annual basis.
Speaker Change: Our board of directors approved a quarterly dividend of <unk> 24 per share representing one 1% increase from the Q2 2023 dividend.
Rob: We continue to collect 100% of our contractual rents during the second quarter.
Robert Klein: This predictability of cash flows remains a significant differentiator for our company in addition to our strong operations and proven track record of scaling the business. Thanks to our solid foundation and hard work, we continue to be the market leader in the postal real estate space. That concludes our prepared remarks, and we'd like to open the line to take any questions you may have.
Rob: This predictability of cash flows remains a significant differentiator for our company. In addition to our strong operations and proven track record of scaling the business.
Speaker Change: Thanks to our solid foundation and hard work, we continue to be the market leader in the postal real estate space.
Rob: That concludes our prepared remarks, and we'd like to open the line to take any questions you may have operator.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star, then 2.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two alright.
Speaker Change: Our first question comes from Eric <unk> with BMO capital markets. Please go ahead.
Eric Borden: Hey, good afternoon, everyone. It sounds like you're making really good progress on the 2023 lease expirations, with, you know, a majority now addressed. Can you just remind us how much of your AVR will be tied to 3% annual bumps going forward?
Speaker Change: Hey, good afternoon, everyone.
Speaker Change: It sounds like you are making really good progress on the 2023 lease exploration.
Speaker Change: You know a majority of now address can you just remind us how much of your ABR will be tied to 3% annual bumps going forward.
Jeremy Garber: Hi, this is Jeremy. As you know, this is a fluid process. We're really happy with how things have been progressing. Until we have final leases in hand, we can't talk about actual results. So what we're talking about today are the 2023 leases that have been received and have the 3% escalation.
Speaker Change: Yeah, Hi, this is Jeremy.
Speaker Change: As you know this is a fluid process, we're really happy with how things have been progressing until we have final leases in hand, we can talk to our actual results. So what we're talking to today is the 2023 leases that had been received and have the 3% escalations.
Eric Borden: Okay, maybe I should have worded that better, but on the 2022s and the 23s that are now addressed, how much of the ABR is tied to the 3% bump?
Speaker Change: Okay.
Speaker Change: Maybe I should have worded that better but on the 2020 twos in the 'twenty threes that are now address how much of the ABR is tied to 3% bumps.
Jeremy Garber: So of total rent, 13% of our total rent is tied to 2022 and 2023 leases received with escalations.
Speaker Change: So our total rent 13% of our total rent is tied to 2022 and 2023 leases received with Escalations.
Eric Borden: And then one for Rob here, with leverage at 6.1 times, how much are you letting leverage drift before you potentially take it out with equity or pay it down with cash or any other solution here, and then how are you thinking about the capital allocation mix for the remainder of the year?
Speaker Change: Okay I appreciate that.
Speaker Change: And then one for Rob here.
Rob: With leverage at six one times, how how high are you letting leverage drift before.
Rob: You took you potentially take it out with equity or pay down with cash or any other solution here or just and then how are you thinking about a capital allocation mix for the remainder of the year.
Robert Klein: Yeah, good question. So, look, first and foremost, we're making sure that we're raising capital in an accretive manner for the acquisitions that we're doing, and we've been successful with that historically and this year in particular as well. You know, last quarter, we were a little heavier on debt than some prior quarters, given where the capital markets were, and it was more advantageous to be borrowing versus raising equity, although, you know, we did raise a little over $6 million, $6.1 million through equity in Q2 and subsequent to the quarter.
Speaker Change: Yeah. Good question. So look the first and foremost, we're making sure that we're raising capital in an accretive manner to the acquisitions that we're doing.
Rob: We've been successful with that historically in this year in particular as well.
Rob: Last quarter, we were a little heavier on debt than than some prior quarters, given where the capital markets were and it was more advantageous to be borrowing versus raising equity, although we did raise.
Rob: A little over $6 million, despite $1 million through equity.
Robert Klein: So, you know, look, this is a constant monitoring of the market, and we're watching every day and seeing what makes the most sense, you know, if we're going to raise capital through debt or through equity. But the good news is we're well below our target of staying below seven times. So, we've got a lot of runway below that target, but we do intend to be monitoring the equity markets and, you know, accessing them and the operating partnership units as it makes sense.
Rob: In Q2 and subsequent to the quarter. So you know look this is a constant monitoring of the market and were watching every day and seeing what makes the most sense you know if we're going to raise capital through debt or through equity, but the good news is we're well below our target of staying below seven times. So we've got a lot of runway below that target.
Rob: We do intend to be monitoring the equity markets and at <unk>.
Rob: Accessing them and the operating partnership units as as it makes sense.
Speaker Change: Alright, thanks, very much I appreciate the time.
Eric Borden: All right, thanks very much. I appreciate the time.
Operator: Thank you. Yes. Our next question comes from Anthony Paolone with J.P. Morgan. Please go ahead. Thank you.
Rob: Thank you. Our next question comes from Anthony <unk> with J P. Morgan. Please go ahead.
Rob: [laughter].
Nahom Tesfazghi: Hey guys, you have Nahom on for Tony right now. Just a quick one for me. For the 2023 leases that include the 3% annual escalator, is there any difference between those and the 2022 vintage that got renewed at the 3.5% clip?
Anthony: Hey, guys you have no home entrepreneur Ah Tony right now just a quick one for me.
Anthony: For the 23 or the 2023 leases that include that's 3% annual rent escalator or is there any difference between those into 2022 vintage that got renewed at a 3.5% clip.
Nahom Tesfazghi: Are you talking about the contents of the lease?
Speaker Change: When you refer to a difference you're talking about the contents of the lease.
Nahom Tesfazghi: Yeah, I guess I'm just trying to figure out why these were executed at 3% escalators and the ones previously were at 3.5%.
Speaker Change: Yeah, I guess I'm, just trying to figure out why these were executed at 3% escalators and the ones previously were at three 5%.
Andrew Spodek: Hey Tony, this is Andrew. So I think that at any given time, you have to take into account what's going on. So when we executed that three and a half percent versus where we are today, the inflationary environment has changed. But I think it's important to recognize that, number one, I think the 3% is a very good outcome, and we're very pleased with achieving it, especially since before 2022, you know, lease escalations were not even part of the picture.
Rob: Hey, Tony This is Andrew so I think that at any given time you have to take into account what's going on so when we executed that three 5% versus where we are today. The inflationary environment has changed but I think it's important to recognize that number one I think the 3% is a very good outcome and we're very pleased with.
Speaker Change: With achieving it especially.
Speaker Change: Especially since before 2022 lease Escalations, where we're not even part of the picture.
Speaker Change: But.
Andrew Spodek: In part, any lease role has two components. One is the mark to market as the lease rolls, and the other is the escalation that we were able to achieve. And the combination of the two is really what we're trying to get to. And we're very happy with our results, and we're looking forward to hopefully when we receive the rest of the 2023s, which we're hoping will be in short order to give you a more complete update on what we were able to achieve in that bid.
Speaker Change: In part of any lease roll there are two components. One is the mark to market as the lease rolls and the other is the escalation that we were able to achieve in the combination of the two is really what we're trying to get to.
Speaker Change: And we're very happy with our results and we're looking forward to hopefully when we received the rest of the 2020 threes, which we're hoping will be in short order to give you a more wholesome update on what we're able to achieve in that in that vintage.
Nahom Tesfazghi: Got it. Thank you. And I guess Andrew spoke to this a little bit earlier, but what can we expect with regard to timing for the leases that are set to expire in 2024? Maybe without giving exact dates, do you think it'll be along the same lines as the 2022 and 2023 vintages?
Speaker Change: Got it thank you and I guess, Andrew spoke to this a little bit earlier, but.
Speaker Change: What can we expect with regards to timing for the leases that are <unk>.
Speaker Change: Higher in 'twenty, four maybe without giving you.
Speaker Change: You know exact dates do you think it'll be a longest blind says.
Speaker Change: The 2022 and 2023 vintages.
Andrew Spodek: No, our
Andrew Spodek: No, our hopes are that they will get done relatively quickly. Look, this is not within our control.
Speaker Change: No our our hopes are that they get done relatively quickly.
Speaker Change: Look this is not within our control. This is mostly on the postal service.
Andrew Spodek: This is mostly on the Postal Service. I'm happy that they've, you know, assigned a new group of people to try to accelerate the movement of these documents. But we're hoping that the 23 gets completed shortly and the 24 shortly thereafter.
Dave: I'm happy that Dave.
Dave: Assigned a new group of people to try to accelerate the movement of these documents.
Dave: But we're hoping that the 23 gets completed shortly and the 24 shortly thereafter.
Speaker Change: Got it thank you.
Speaker Change: Thank you.
Operator: And the next question comes from Steven. Dumanski with Janney, please go ahead.
Steven: Question comes from Steven.
Steven Domanski: Domanski with Janney. Please go ahead.
Steven Dumanski: Yes, good afternoon. Can you please provide more insight on your projected CapEx spend for the year? Also, would this figure consist of TI that can be potentially passed through to the USPS?
Steven Domanski: Yes. Good afternoon can you. Please provide more insight on your projected capex spend for the year also with this figure consists of T. I that can be potentially pass through to the U S. P. S.
Steven: Yeah.
Robert Klein: Hey Steven, good to hear from you. So we gave guidance for our recurring capex for next quarter, which will be $250,000 to $350,000. And look, you know, this is all dependent on the timing of projects and the like. But regarding your question about TI, so it's one of the beautiful things about our relationship with the USPS and how the lease works is that there is no TI associated with the leases. So there is nothing to pass through or for us to incur upon a renewal.
Speaker Change: Hey, Stephen good to hear from you. So we gave guidance for our recurring Capex for next quarter, which will be 250000 to 350000.
Steven Dumanski: Got it. Thank you. That's all for me. That's very helpful.
Speaker Change: And look this is all dependent on timing of projects and the like but regarding your question about Ti. So it's one of the beautiful things about our relationship with the USPS and how the lease works that there is not ti associated with the leases. So there is nothing to pass through or for us to incur upon our renewals.
Speaker Change: Got it. Thank you that's all for me that's very helpful.
Speaker Change: Thank you.
Andrew Spodek: This concludes our question and answer session. I would like to turn the conference back over to Andrew Sodek for any closing remarks.
Andrew <unk>: This concludes our question and answer session I would like to turn the conference back over to Andrew <unk> for any closing remarks.
Andrew Spodek: Thank you. On behalf of the entire team, we'd like to thank you for your support and taking the time to join us today. We look forward to connecting with you in the coming months. Have a great evening.
Andrew: Thank you on behalf of the entire team we'd like to thank you for your support and taking the time to join US today. We look forward to next thing with you in the upcoming months have a great evening.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.