Q3 2024 Postal Realty Trust Inc Earnings Call
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Speaker Change: Greetings and welcome to Postal Realty Trust 3rd Quater 2024 earnings conference 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 FPNA Capital Market, please go ahead.
Jordan Cooperstein: Thank you, and good morning everyone. Welcome to Postal Real T-Trust 3rd Quarter 2024, our new conference call.
Jordan Cooperstein: On the call today, we have Andrew Spodek, Chief Executive Officer, Jeremy Garber, President, Robert Klein, Chief Financial Officer, a Matt Graham wine, Chief Accounting Officer.
Jordan Cooperstein: Please note the company may use forward-looking statements on this conference call.
Jordan Cooperstein: which are statements that are not historical facts that 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 1990's.
Jordan Cooperstein: Actual results made different materially from those described in the thoughts of the Constemence, 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 Sankei, and its other securities and exchange commission filings.
Jordan Cooperstein: 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.
Jordan Cooperstein: Additionally, on this conference call, the company may refer to certain AGAP financial measures, such as funds from operations, adjusted funds from operations, adjusted EBITDA, and net debt.
Jordan Cooperstein: 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 Spodek, Chief Executive Officer of Postal Realty Trust.
Andrew Spodek: Good morning and thank you for joining us today.
Andrew Spodek: The third quarter was notable as we made progress on releasing and have improved visibility on same-store cash NOI.
Andrew Spodek: As part of our efforts to streamline the releasing process, we worked collaboratively with the Postal Service and have arrived at a multi-tiered, programmatic approach. Moreover, the Postal Service has devoted more resources towards the lease execution process.
Andrew Spodek: This methodology, coupled with increased resources, has improved the timing of releasing, allowing us to provide same-store NOI figures for 2023 through 2025.
Andrew Spodek: We are already reaping the benefits of this approach. Rents for the 2023 and 2024 leases have already been agreed upon and we are working towards our mutual goal of executing leases before they expire on the 2025 leases and beyond.
Andrew Spodek: These strong same-store figures demonstrate our ability to generate internal growth through marking rents to market, incorporating annual rent escalations in new leases, and achieving operating efficiencies.
Andrew Spodek: The newly executed 2023 and 2024 leases all contain 3% annual rent escalations, which increases the percentage of leases subject to escalations in our portfolio to 21%.
Andrew Spodek: The continued rent growth from these annual escalations provided us with comfort to begin including 10-year terms in certain tiers of our releasing process.
Andrew Spodek: We are excited about this result and the additional visibility this will provide into postal realty's strong internal growth and certainty of cash flows.
Andrew Spodek: Through October 21st, we have completed $64 million in acquisitions for the year and have placed an additional 29 properties totaling $11 million under definitive contracts.
Andrew Spodek: While acquisition volume was a bit lighter during the third quarter, we are still targeting $90 million at or above a 7.5% weighted average cap rate for 2024.
Andrew Spodek: We purchased these properties for $3.6 million. While the two properties are quite different, in each case the buyer approached us, having been attracted to the steady cash flows and strong underlying real estate.
Andrew Spodek: One of them is an urban property located in New York, which we effectively locked in a sales price today that accounts for potential future growth.
Andrew Spodek: The other property is a last mile postal asset in Colorado, where the local owner had interest in acquiring the neighboring parcel to his property. While our goal is to grow earnings by expanding our portfolio, we will continue to explore recycling assets and accretively redeploying the proceeds.
Andrew Spodek: In reference to our balance sheet, last week we announced an amendment to our credit facility which included an additional $50 million commitment to our term loan maturing in 2028. The proceeds from the initial funding were used to pay down our evolving credit facility.
Andrew Spodek: With the vast majority of our revolver undrawn, stable cash flows from a reliable tenant, and exceptional internal growth, we believe postal realty is well-positioned for years to come. I'll now turn the call over to Jeremy.
Jeremy Garber: Thank you Andrew. To reiterate Andrew's sentiments, we made great progress on releasing same-store NOI growth, had our first significant dispositions, and are on track to meet our 2024 acquisitions guidance.
Andrew Spodek: As of October 21st, the company had received 80 fully executed leases representing nearly 55% of the aggregate 2023 expired rent.
Andrew Spodek: The total net lump sum catch-up payment related to the 2023 leases
Andrew Spodek: was approximately 1.4 million dollars.
Andrew Spodek: comprised of $326,000 for leases executed during the second quarter, $971,000 for leases executed during the third quarter, and $78,000 for leases executed during October.
Andrew Spodek: The company received 106 fully executed leases, representing 78% of the aggregate 2024 expired and scheduled to expire rent.
Andrew Spodek: The total net lump sum catch-up payment related to the 2024 leases was approximately $351,000, comprised of
Andrew Spodek: $226,000 for leases executed during the third quarter and $125,000 for leases executed during October.
Speaker Change: As Andrew mentioned, all executed leases were subject to 3% annual rent escalations, and 6% of the portfolio now possesses 10-year leases.
Andrew Spodek: The company acquired 35 properties for $13.3 million at a weighted average cap rate of 7.5% during the third quarter.
Andrew Spodek: This added 106,000 net leaseable interior square feet to our portfolio, inclusive of 29,000 square feet from 20 last mile properties and 77,000 square feet from 15 flex properties.
Andrew Spodek: Subsequent to Quarter End, the company acquired 13 properties for $4.2 million. I'll now turn the call over to Rob to discuss our third quarter financial results.
Rob: Thank you, Jeremy, and thank you everyone for joining us on today's call. For the third quarter, we delivered funds from operations, or FFO, of 24 cents per diluted share and adjusted funds from operations, or AFFO, of 30 cents per diluted share.
Rob: Thanks to our strong partnership with our supportive lenders, we added 50 million dollars of commitments to our term loan maturing in February 2028 and also increased our term loan accordion by 50 million dollars subsequent to quarter end.
Andrew Spodek: At closing, we funded $40 million to our 2028 term loan, leaving $10 million available on a delayed draw basis.
Andrew Spodek: Concurrently with the $40 million funding, we entered into an interest rate swap, fixing the interest rate through the maturity date of the loan at a current rate of 5.37%.
Andrew Spodek: The proceeds were used to repay the revolving credit facility, and after closing, $7 million remained outstanding on the revolver.
Andrew Spodek: The transaction lowers our weighted average interest rate, reduces our exposure to floating rate debt, and gives us plenty of capacity to fund future growth.
Andrew Spodek: Inclusive of the term loan funding and the revolver pay down, our debt outstanding had a weighted average interest rate of 4.4% and no significant near-term maturities.
Andrew Spodek: At the end of the third quarter, net debt to annualized adjusted EBITDA was 5.6 times, which is down from 6.1 times for Q2.
Andrew Spodek: and Jeremy Garber.
Andrew Spodek: During the third quarter and through October 21st, we issued approximately 732,000 shares of common stock through our ATM offering program.
Andrew Spodek: in our operating partnership for total gross proceeds of approximately $14.2 million at an average gross price of $14.41.
Andrew Spodek: Recurring CapEx for Q3 was within our anticipated range at $253,000. Looking forward to Q4, we anticipate the figure to be between $125,000 and $225,000.
Andrew Spodek: Our cash G&A expense guidance for the full year 2024 remains between $9.5 and $9.8 million.
Andrew Spodek: Similar to prior years, we continue to decrease cash G&A as a percentage of revenue on an annual basis.
Andrew Spodek: Our Board of Directors approved a quarterly dividend of $0.24 per share, representing a 1.1% increase from the Q3 2023 dividend.
Andrew Spodek: With the execution of new leases and the strong internal growth they provide, as well as accretive acquisitions, a conservative balance sheet, and significant access to capital, we are well positioned to generate value for our stakeholders through internal and external growth.
Andrew Spodek: That concludes our prepared remarks and we'd like to open the line to take any questions you may have. Operator?
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue.
Speaker Change: 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.
Speaker Change: The first question comes from the line of Anthony Pallon with J.P. Morgan. Please go ahead.
Anthony Pallon: Thanks, good morning. First question is just as it relates to doing these ten year duration deals now, can you talk a bit more about just whether that becomes
Anthony Pallon: a default duration or whether it's just certain assets that USPS is willing to go that length or maybe just talk a bit more about that process.
Speaker Change: Thanks for the question, Tony.
Speaker Change: It's not a default term, it is something that...
Speaker Change: We discussed with the Postal Service that seemed to make a lot of sense, we were happy with the rent growth we saw.
Anthony Pallon: on the 23s and 24s.
Anthony Pallon: We're happy that we received our rent escalations for both those vintages and Also importantly we our goal our mutual goal with the Pulse service is to try to get in front of these leases before they expire So pushing out the term for 10 years seemed to be a good idea given all those factors
Speaker Change: Correct that that is the goal Assuming that it makes sense for us and for the Postal Service based on the rents. We're receiving It's a fluid process and as we negotiate and as we continue to roll through these leases We will update everybody on the percentage of leases that we're doing ten years versus five years, but we think this is a This is a good development for us and for shareholders as well as for the Postal Service
Speaker Change: Okay, and then just my second one it sounded like from your your intro comments that this this really was a Newer way of doing business with them to get these Leases knocked out earlier than maybe what we've been seeing over the last Couple of years and so just remind me is is there any risk that that?
Anthony Pallon: changes with with the election or change in administration or is their process kind of just you know ring fenced and and just should continue the way you you've been doing it
Speaker Change: Yeah, I don't believe that.
Speaker Change: Many thank you for joining us today to talk about politics, how the elections really come into play on these negotiations, the president-general was appointed under Trump, and stayed in position while Biden was in office. Sorry about that.
Anthony Pallon: And so, I don't believe that this is really a concern for our negotiations today or going forward.
Anthony Pallon: Okay, that's all I got. Thank you.
Speaker Change: Thank you. Next question comes from the line of Kibin Kim with Truist Securities. Please go ahead.
Kibin Kim: Thanks, good morning. I was wondering if you can share some more details around the leases and, more specifically, if you can talk about the cash or gap lease spreads that you were able to achieve?
Speaker Change: I'm sorry, could you repeat that? I couldn't hear it very well.
Kibin Kim: If you could talk about the least spread that you were able to achieve.
Speaker Change: So, we have not and do not disclose our leasing spreads, but we do speak to our same-store growth, which we relate to everybody, which we're very, very happy with, you know, 4% for 23, 3.25% for 24, and we even gave a projection of greater than 3% for 25.
Speaker Change: Okay, maybe I can ask it differently then. When you look at that 3%, at least 3% growth projection for 2025, can you help us break down the components of it?
Kibin Kim: We haven't really disclosed that as time goes on and we may give you more color on it but as of now we really don't speak to more detail on it. We have a concentration with one tenant that we're constantly negotiating with and for competitive advantages also it doesn't really make sense to disclose it.
Speaker Change: Okay, understandable. This last question then, is that 3% growth projection for 2025, would you say that's somewhat of a sustainable figure? I wasn't sure if there were some other components I might be dropping it a little bit higher.
Kibin Kim: And so we wanted to give you a projection to give you a line of sight as to where things are going to be and we hope to continue to do that as time goes on and as we get in front of these leases working with the Postal Service.
Speaker Change: Okay. Thank you, guys.
Kibin Kim: Thank you.
Speaker Change: Thank you. Next question comes to the line of Steve Dumansky with Janney, please go ahead.
Speaker Change: and Jeremy Garber.
Steve Dumansky: Thank you. I appreciate that you provided some insight on the two dispositions. Can you just provide more...
Steve Dumansky: I guess more of an update on why they were transacted at such a relatively low blended cap rate and if you see any more of these opportunities in terms of recycling capital going forward.
Speaker Change: I appreciate the question. So.
Speaker Change: These were both reverse inquiries. These were not marketed, these were not deals that we were putting out there for sale. Buyers approached us. In general, we believe that we are undervalued. We think that a lot of the properties that we own have greater value and should be valued at lower cap rates. We were able to achieve.
Speaker Change: A good return, we extracted value from these properties and we're recycling this capital and putting them into other properties that we will extract value out of.
Speaker Change: We will continue to do that as the opportunity presents itself, but in the end, this is a growth company, and our goal is to continue to acquire and grow the company as we have been.
Speaker Change: Thank you, that's all from my side.
Speaker Change: Thank you.
Speaker Change: Thank you. Next question comes from the line of Eric Borden with BMO Capital Markets. Please go ahead.
Eric Borden: the full year target of 90 million. So I guess what's kind of given you confidence to, you know, make or achieve that 90 million guidance as you look to continue to acquire in the fourth quarter? Thank you.
Speaker Change: Thank you. So, you know, as I've stated in the past, this is really not a quarterly business and I know by nature everybody just takes
Speaker Change: what our targets are and applies them by quarter. This quarter was light just by a timing of the transactions and so I'm not concerned.
about hitting our target. I'm very happy with our pipeline. I'm looking forward to our cost of capital going down and be able to increase our pipeline thereafter, but I didn't see a reason to adjust our target because I believe we're going to achieve it.
Speaker Change: And just curious, are buyers readjusting to that higher rate environment or are they still expecting kind of better pricing on their end, you know, just given potential future cuts?
Speaker Change: We haven't seen a significant change in cap rates and sellers' expectation of pricing, but we do see a lot of sellers that are considering selling today that weren't in the market, let's call it a year or so ago. So that's all positive.
Speaker Change: Okay, that's helpful. Thank you very much. That's it for me
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to Andrew Spodek for closing comments.
Andrew Spodek: Thank you. On behalf of the entire team, we want to thank you for your support and taking the time to join us today. And we look forward to connecting with all of you in the coming months.
Speaker Change: Thank you. This concludes our today's teleconference. You may disconnect your lines at this time. Thank you for your participation.