Postal Realty Trust, Inc. (PSTL) Q4 2019 Earnings Report, Transcript and Summary

Good day. And welcome to the Postal Realty Trust Incorporated Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Blaine Willenborg, Vice President of Business Development and Capital Markets. Please go ahead.

Thank you. Good afternoon, everyone. And welcome to the Postal Realty Trust fourth quarter earnings conference call. On the call today, we have Andrew Spodek, Chief Executive Officer; Jeremy Garber, President; and Matt Brandwein, Chief Accounting Officer. Please note the use of forward-looking statements by the company on this conference call. Statements made on this call may include statements that are not historical facts and are considered forward-looking. The company intends these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is making the statements for purpose of complying with those Safe Harbor provisions. Furthermore, actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks factors that are beyond the company’s control, including without limitation, those contained in the company’s 10-K for the period December 31, 2019 and its other Securities and Exchange Commission filings. The company assumes no obligation to update publicly 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 and adjusted funds from operations. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP numbers in the company’s earnings release and in filings with Securities and Exchange Commission. Additional information can be found on the investor relations page of the company’s Web site at www.postalrealtytrust.com. I will now turn the call over to Andrew Spodek, Chief Executive Officer of Postal Realty Trust.

Good afternoon. And thank you for joining Postal Realty Trust fourth quarter and full year 2019 earnings call. Before discussing our results, we would be remissed if we did not acknowledge the coronavirus pandemic and its impact. We hope that you and your families are safe and healthy. Like much of corporate America, we have imposed a work from home policy to help keep our employees safe and healthy, and to support the government's request to practice social distancing. We are fully functioning and have the infrastructure and technology in place to work remotely for unseen situations such as these. During this time, we have kept our operations running, much like our sole tenant, the Postal Service. However, while many of us have the luxury and flexibility to work from home, the Postal Service does not. This vital government agency is open for business daily, providing uninterrupted mail delivery and critical last mile services. Ironically, during times like these when people are staying at home, we are relying on the postal service even more, and we anticipate that as a result, they may be even busier than usual. Because this comfort in such uncertain times like these we have no interruption and anticipate no interruption, rental revenue given the sole occupant of our properties and that the ultimate payer of rent is the U. S. Government. It is also important to be mindful that the Postal Service has no plan of slowing down. In a press release from a few days ago, the Postal Service stated the following. ''The postal service is an essential service for purposes of compliance with state or municipality shelter in place order, or other social distancing restrictions. The Postal Service delivers medication, social security checks, and is the leading delivery service for online purchases''. The statute that created the Postal Service begins with the following sense. The United States Postal Service shall be operated as a basic and fundamental service provided to the people by the government of the United States, authorized by the constitution, created by an act of Congress and supported by the people. It is this certainty of a recurring revenue stream that served as the impetus for the formation of Postal Realty. As I have shared in the past, our experience with the postal properties goes back several decades. We know that the consistent and stable nature of the business and that the Postal Service pays its rent in good and bad times. Our conviction on the strength of our business model could not be higher, particularly after the dislocation in the value of our shares. In fact, pursuant to my 10b5-1 purchase plan, I have acquired shares in the open market further aligning myself with shareholders. Now turning to 2019 results. 2019 was transformative for Postal Realty Trust. On May 15th, we completed our Initial Public Offering. At the time of our IPO, we own 271 postal properties with approximately 872,000 square feet. Since then we have doubled the number of properties, our square footage and our rental revenue and completed $88 million in acquisitions. To support this growth, we secured $100 million revolving credit facility with $100 million recording option and have already exercised $50 million of that accordion feature. In addition, reflecting on our revenue growth, we raised our dividend twice as our platform has grown. We continue to work toward achieving our targets of $1.2 dividend per common share in unit consistent with what we have communicated in our IPO roadshow. However, it is important to keep in mind that achieving that target provides in our ability to continue to close acquisition. So while we are working hard to move our acquisition program forward, the delays due to the current environment may impact our timing with respect to meeting that target. With that said, our business is constant and stable. The rental stream of our portfolio of postal properties is backed by the credit of the U. S. government, it’s 100% occupied and as a historical 98% lease renewal rate. The sector is highly fragmented with over 16,000 postal properties owned by individual owners, and we believe this presents an attractive opportunity for us over the long term. Our consolidation thesis provides us with the ability to complete cash transaction quickly and efficiently, as well as the ability to provide the use of operating partnership units as a tax deferral currency. Current owners electing OP units benefit from diversification, relief from property management duty and participation in a dividend backed revenue stream secured by an agency of the U. S. government. It should be noted we have successfully used OP units priced at $17 in two of our largest transactions. Though we continue to see accretive acquisition opportunities, we also continue to assess how best to navigate future transactions in the near term given the macro disruption we are seeing in the capital markets. With approximately $30 million of acquisitions completed year-to-date and a pipeline at its largest level in our history, we believe we can significantly grow our earning. However, given the current state of the economy, we will approach growth in a prudent manner. To that point, we expect the majority of our acquisition will be weighted towards the latter part of 2020. Given the credit rating of our only tenants, the U. S. Postal Service, we remain confident about our prospects and look forward to sharing our progress with you as the year progresses. I will now turn the call over to Jeremy to discuss our fourth quarter results.

Thank you, Andrew. During the fourth quarter, we closed on 177 properties for approximately $46 million, totaling approximately 448,000 square feet at an average rental rate of $8.95 per square foot. The highlight of these transactions was the acquisition of the 113 property portfolio for $31 million. The portfolio comprises approximately 256,000 net leasable interior square feet and generates a weighted average rent of $9.67 per square foot. This was the first transaction we used OP units for a portion of the purchase price. We issued approximately 824,000 units at $17 per unit. For the year, the company acquired 195 properties for $57 million, excluding closing costs, comprising approximately 557,000 net lease interior square feet with a weighted average rent of $9.11 per square foot. The weighted average cap rate for these acquisitions was within our target range of 7% to 9%. Subsequent to year end, we completed the acquisition of 83 properties for a total consideration of $30 million, of which $8 million of the purchase price was funded with the issuance of approximately 483,000 units at $17 per unit. Moving on to our financial results. FFO for the quarter was $0.06 per share, which includes acquisition related expenses of approximately $444,000. Excluding these acquisition related expenses, our FFO would have been $0.12 per share. AFFO for the quarter was $0.17 per share. Moving on to balance sheet. At December 31, 2019, we had approximately $12.5 million of cash on the balance sheet and approximately $57.2 million in debt. Subsequent to quarter end, we increased our available borrowing capacity to $150 million under our line of credit by exercising $50 million of our accordion. Management's and employees’ alignment with shareholders is stronger than ever. For the year ended 2019, 100% of our employees deferred their cash bonus in exchange for stock along with Andrew and myself. In addition, Andrew has elected to defer 100% of his cash salary and 100% of his cash bonus for 2020, and I have elected to defer 50% of my cash salary and 100% of my cash bonus for 2020. Finally, all of our employees have elected to defer a portion of their annual salary, either in the employee stock purchase plan or the alignment of interest program. We paid a dividend of $0.17 per share on February 28th or $0.68 on an annualized basis. This was 21% increase from our prior dividend. It is our intention to hit our acquisition and our dividend targets in a timely manner. But based on the macroeconomic trends, we anticipate that the timeline maybe longer than initially expected. Given the current environment, it is difficult to forecast the remainder of the current year but we are confident we will be able to execute on our pipeline and grow our earnings. With respect to the metrics in our current portfolio, we own 1.7 million net leasable square feet with a weighted average rental rate of $9.66. We are currently at full occupancy and expect to end the year at full occupancy. With that, I would like to open the call for questions.

Thank you. [Operator instructions] Our first question comes from Rob Stevenson with Janney. Please state your question.

What are you guys thinking in terms of rental rate growth on the 2020 lease expiration at this point?

So in terms of historical perspective, we guided analysts to that 2% annual growth. In 2019, our releasing spreads were somewhere between 11% and 12%. So, that's on a five year. So that fell in line with that 2% rate. And we don't anticipate any changes in terms of our positioning with the postal service and our lease negotiations in terms of changes in that forward-looking 2% annual rate.

So nothing that you've acquired that has 2020 renewal on it as a wildly under market leased or something like that that would wind up on a portfolio that would wind up pushing those numbers higher?

No.

What is the, looking today the acquisition capacity going forward and how you guys are thinking about the incremental $50 million that you pulled down on the revolver, what type of conditions are on that? And if I'm doing the math correctly, you guys have about $71 million of debt under the $150 million line of credit right now?

So the facility originally was put in place at $100 million with the $100 million accordion. We exercised $50 million of the accordion just to put ourselves in a position to get ourselves set up for the pipeline. You're right. There are covenants in place with the facility terms are filed in public. There are covenants in place that restrict our ability to borrow over certain leverage ratios and certain covenants. And so as we continue to add properties to the borrowing base, we increase the facility and expand the facility. As of today, there's $71 million drawn down and we have, with additional facility flexibility, cash on hand, the ability to put mortgages in place, we think that we have enough availability in terms of liquidity to continue to fund our acquisitions as we look forward.

Just want to clarify something. We currently have $68 million on our line and we have $3 million in mortgages out there, nothing substantial. I just want to clarify that.

So $70 million available essentially, or $80 available right under the line of credit then, I mean, from a practical standpoint, how are you guys thinking about, in this environment, how high you're willing to take the leverage of the company even on a temporary basis? I mean, on one hand you've got a very, very stable tenant that's not likely to experience any disruption in rent payments. But on the other hand, this probably isn't the environment to go 70% leverage. How are you guys sort of balancing that as you think about how much more capital you'd want to put to work in the current environment?

So in the current environment, it's not just us, everybody needs to be cautious and careful and prudent in what they're doing. And to that end, we've pushed off, the closings we have in the pipeline and are being cautious with the deals that we're moving forward with and the pricing that we're moving forward with. And we plan to continue to do that, especially through this current crisis and going forward.

And then last one for me, Andrew, what's the board's current thought on dividend policy? Meaning in this environment, do you hold the dividend at this sort of $0.17 level until you hit a point where you are forced to raise it. Do you still go forward with incremental dividend raises as you continue to acquire properties and closed on $30 million in the first quarter here? What's the debate level at the board in terms of the dividend policy?

So I can't speak for the board. But what I can say is that the goal was to continue to acquire properties and grow the dividends while we're growing our revenue. That was the goal pre-IPO, that is the goal post IPO and that is the goal today. The current environment that we're living with is unprecedented. And we all hope that this ends as quickly as possible for everybody. And so similar to my prior answer, we all have to be cautious and calculated in how we move forward. But as we very clearly recognized, the Postal Service and the credit of our tenant is unmatched and we are very secure in collecting our rents and relying on that cash flow. And so if we are able to continue to do what we've been doing on acquired properties that are backed by the Postal Service and the U. S. government as revenue grows, I am hopeful to grow our dividend as well.

Our next question comes from Jeremy Metz with BMO. Please state your question.

Andrew, I was just hoping you can expand a little deeper on the investment market. Obviously, on one hand you talked about the post office being added durable payer, these are small deals that don't involve mortgage financing. You tend to see private markets move a lot slower than what we see in public markets and stocks here and equity. So I’m just trying to figure out how much it is, whatever color you can give us on what was in the pipeline, what’s the market look, how much sellers pulling back versus previous and year end pulling back as has pricing move. Any color would be helpful. Thanks.

So the pipeline is a more robust than we've ever seen it. Sellers are very interested in having conversations and discussing the prospects of selling to us, both for cash and they're considering the idea of taking units as well. In the current environment, and I don't think that this is specific to postal. I think that everybody has taken pause. I think that people have taken pause and reflected on their lives and their business and everything. But with that being said, the pipeline and everybody we're talking to is still interested in doing their transaction. People are just not interested in acting and reacting today. And I think that that's a common feeling and thought that carries over to a lot of different markets.

And in terms of, you put out there the 11 million if you have, I mean, putting that out there, what sort of risks do you see in getting that close? Are those far enough along that you really don't see much risk in that? I know it's not a lot. But just how should we think about potentially that falling up?

I'm sorry, I didn't understand. I didn't hear your question about the risk. Can you just repeat that for me please?

So, I think firstly you said it's about $11 million or so you have in the pipeline currently, that still is too close. So I'm just wondering how far along are those? There are risks to those, how should we think about the risk of maybe those fallout or don't close versus those are pretty well baked? You obviously have the capacity to close those with what you have underlining in cash. So how should we think about the risk that that pipeline there the $11 million?

Yes, so that $11 million, those are definitive contracts, those are pretty well going to close, it was just about the timing of the closings that we pushed on further into the quarter. So, there is no risk from our perspective of them not closing.

Our next question comes from Craig Kucera with Wunderlich Securities. Please state your question.

Thank you. B. Riley. I wanted to know with the acquisitions that you're looking to close later this year, the $11.5 million. Do either of those have any OP units potentially as part of the transaction?

No, those are cash transactions.

And I appreciated the color on you guys taking stock in lieu of cash. But can you tell us kind of how we should think about the split of G&A this next year kind of taking that commentary into account. I mean, I think you're running in about $6 million cash G&A on a run rate basis this quarter. Is that fair to say? And how should we think about the non-cash component next year?

At this moment in time, we're kind of pushing pause on providing guidance to G&A, it's just based on everything that's going on. Once we kind of get an idea of where things shake out, we'll make sure that we provide an update.

Our final question comes from Ben Zucker with Aegis Capital. Please state your question.

I just wanted to quickly touch on the financing strategy going forward. Is it kind of your intention to post closing these properties, you throw them up on your credit facility? And then eventually at some point, you lock it down with a long-term permanent fixed cost mortgage. And I'm sure what you can tell I'm getting at there is if that is the strategy. Do you think that's something you might look to accelerate throughout 2020 right now and take advantage of maybe the favorable interest rate environment there?

Absolutely, we are in conversations and exploring sort of every avenue given the markets. We have some existing mortgages on the book. We are in touch with a number of providers looking at fixed term. We have some turnkey assets and portfolio assets that it makes sense to potentially put mortgages on. And yes, the model to-date has been used the facility to fund and I think that we're going to take a view towards looking at both fixed term and facility as we roll forward in this environment.

Was there any contemplation of getting approval for a potential share repurchase program? And I mean, I understand you guys are in growth mode, so buying back their own stock certainly going to counter towards that goal sometimes, but just given where the stock is trading now and that the pipeline might be delayed and was there any conversation at the board level about buyback in addition to the insider purchases, which have obviously been a good thing to see.

Yes, we did recently have a Board meeting. We've seen a lot of, I guess, news around the corporate buyback and how people are reacting to that. We really didn't have any discussion around that at the Board level. I think we're trying to be thoughtful and prudent in terms of our liquidity. And we also believe that any price activity and pressure on the stock is a short-term event. I think, hopefully as we put out our earnings and our analysts start or have the ability now to start telling or retelling our story that the market will appreciate the fact that we have a credit tenant with 98% retention rate, rent continue to come in. We just received all of our rents yesterday for March. So, we don't see any risk in the revenue line and now this is just a function of either when the capital markets open or when the sort of pipeline continues to expand in terms of our opportunity.

Yes, I guess that definitely feels like the kind of market where having a little bit of excess [liquidity] that probably doesn't hurt right now. I heard your comments about the virus causing potentially some delays and that the pipeline might skew towards the back half of 2020 but kind of notwithstanding that. Do you think this kind of economic shock kind of could further motivate people to who own these post offices to seek some kind of liquidity event and reach out to you guys and start a conversation that maybe wasn't there beforehand?

I think that that's very possible. But in these times as we're living through them, it's too early to actually see if that's what happened. I think in general, when people live through events like these days, they reassess their life and how they want to deal with these properties. And so, when the average age of these post offices is, let's call it, in the 70s or 80s. This is something that probably will be thought about at home and this may be an event that would trigger some opportunities for the company. But most importantly, I want you to just be safe and stay healthy.

Absolutely, I appreciate that, and that's it for me. I know we'll follow up offline. But just want to congrats again. I think you guys are one of the few real estate operators who have full occupancy today and have full paying tenants.

Thank you. I appreciate everybody calling in and taking the time to listen to our earnings call.

Thank you. That concludes today's conference. All parties may disconnect. Have a good day.