Postal Realty Trust, Inc. (PSTL) Q4 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Postal Realty Trust Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Jordan Cooperstein. Please go ahead, sir.

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; Robert Klein, Chief Financial Officer; 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, including, among others, statements related to the COVID-19 pandemic and its effect on our business; the terms and timing of our pending acquisitions and the status of our ongoing negotiations with the postal service. 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. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's 10-K, which will be filed later this week and its other Securities and Exchange Commission filings. The company does not assume and specifically disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures, such as funds 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 measures in the company's earnings release. Additional information may be found on the Investor Relations page of our website. With that, 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's Fourth Quarter 2020 Earnings Call. We hope you are all safe and well and that we can all return to a new normal soon. 2020 was a success for Postal Realty. We more than doubled our revenue and quadrupled our portfolio square footage since our IPO. Over the course of the year, we acquired 261 properties within the USPS Logistics network for over $130 million, exceeding our acquisitions goals for the year. We increased our borrowing capacity under our credit facility and successfully raised $52 million in gross proceeds to support our growth. Just after year-end, given the many accretive opportunities we continue to pursue and to ensure that we are appropriately positioned to further increase the scale of our platform, we successfully raised an additional $57 million in gross proceeds in an oversubscribed offering that broadened our investor base and reloaded the capacity on our credit facility. These accomplishments highlight our access to various sources of capital as well as the stability of our strategy, our platform and the commitment of our team. Across the country, there is a focus on critical infrastructure and the USPS logistics network is an important component of it. We believe that we are proving out the consolidation opportunity of investing in the USPS logistics network. As Postal Realty's platform continues to grow, we are adapting our terminology to appropriately classify our properties within this network. The categories are: Last Mile, which are properties less than 2,500 square feet; Flex, which are properties 2,500 to 50,000 square feet; and Industrial, which are properties with square footage greater than 50,000 square feet. Over the past two quarters, we purchased industrial Postal properties located in Warrendale, Pennsylvania; Topeka, Kansas; and Birmingham, Alabama. Our Flex properties include office, warehouse and retail, with our fourth quarter 2020 acquisition of the Greensboro, North Carolina office building being the largest. Finally, we believe Last Mile is the backbone to the USPS logistics network, and we are focused on these postal properties. These comprise approximately 20% of the postal leased properties and are approximately 20% of our portfolio. The market for postal properties remain highly fragmented, and we are well positioned given our relationship, size and relative cost of capital to continue adding accretive investment opportunities. As the largest owner of Postal properties, we have only aggregated approximately 4% of the total leased Postal property universe. And we've only gotten started. This growth opportunity is further enhanced by the credit quality of our tenant, the United States Postal Service, their demonstrated commitment to renewing in our properties and the universally recognized importance of their logistics network as critical infrastructure for this country. The 2021 acquisition program is off to a strong start, and we continue to evaluate a wide spectrum of opportunities throughout the USPS logistics network. We expect to meet or exceed $100 million of acquisitions within our weighted average cap rate range of 7% to 9%. Let me turn it over to Jeremy to give you an update on leasing, acquisition activity and some other operational initiatives.

Thank you, Andrew. For 2020, our portfolio maintained 100% occupancy, and we collected 100% of our rents. We are in receipt of fully executed leases for all of our 2019 and 2020 holdover properties. We are pleased to share that in January, we received and executed lease renewal for the 135 properties subject to a master lease that was previously set to expire in 2022. The next renewal under this master lease is now February 2027. Together with our other renewals, this leasing activity brings our weighted average lease term to 4 years. We are now working on our 2021 lease expirations, which as of March 15, represent just 4% of our annual rent. As of March 15, our portfolio is 100% occupied and contains 3.3 million of net leasable interior square feet. We had an active fourth quarter with approximately $64 million of acquisitions bringing our 2020 total volume to over $130 million at a weighted average cap rate between 7.5% and 8%. After the close of the fourth quarter and through March 15, we acquired an additional 49 properties for approximately $24 million. From a human capital perspective, we've strengthened the team, adding a number of new team members to our acquisition, finance and accounting teams, while welcoming Robert Klein as our Chief Financial Officer. Rob joins us with extensive corporate finance, capital markets and real estate operations knowledge from his senior leadership positions as the Managing Director in investment banking at Evercore Partners and Managing Partner at Monday Properties, a private real estate owner. With this fortified team, we remain very confident about our prospects to continue our accretive growth and look forward to sharing our progress with you throughout the year. With that, I would like to turn the call over to Rob to discuss our financial results.

Thank you, Jeremy, and thank you all for participating this evening. I joined Postal Realty's management team because we all shared the same vision and goal of accelerating the growth of the company with a strong foundation and unique business plan. The opportunity for us to deliver value to existing and new shareholders through the consolidation of a fragmented industry is extraordinary and imminent. I'm honored to be part of the team, excited to contribute to ongoing execution of our strategy, and I look forward to engaging with all of you as we move ahead and grow together. We are pleased to share the results from a strong quarter in which both FFO and AFFO grew substantially on a per diluted share basis as compared to the fourth quarter of 2019. The growth accounts for our common equity raise last July. FFO per share improved to $0.26 per share from $0.06 last year, while AFFO per share grew 56% to $0.28. For the year, FFO was $0.85 per diluted share and AFFO per diluted share was $1. Moving on to the balance sheet. At December 31, 2020, we had $2.2 million of cash and approximately $125 million of gross debt with a weighted average interest rate of 2.4%, comprised of $78 million of floating rate debt on our facility and $47 million of fixed-rate mortgages. The fixed-rate mortgages include a $30.2 million mortgage on the Warrendale distribution facility at a fixed rate of 2.8% for 10 years. Subsequent to year-end, we raised $57 million of gross proceeds in our upsized offering, which was used for acquisitions, repayment of a portion of the outstanding debt on our credit facility and repayment of $13.7 million in mortgages that carried an interest rate of 4.25% as well as other general corporate purposes. As of March 15, we have $67.5 million outstanding on our $150 million credit facility and approximately $33 million of fixed-rate mortgages at a combined weighted average interest rate of approximately 2.2%. Our property cash flows and acquisition activity support our growing AFFO and cash available for distribution. On January 29, 2021, the company declared a quarterly dividend of $0.2175 per share of Class A common stock. The dividend equates to $0.87 per share on an annualized basis and represents the sixth consecutive dividend increase since we went public in May 2019. We are prepared for another year of growth and are well positioned to execute on our strategic plan. This concludes our prepared remarks. Operator, we'd like to open the call for questions.

[Operator Instructions]. Our first question is from Rob Stevenson with Janney.

Can you talk a little bit about the color -- a little bit more color on the first quarter acquisitions? It seems like that the rent per square foot and the cost per square foot was demonstrably lower than what you guys had been acquiring recently. And just wanted to get a read on what was driving that, whether or not it was certain assets, whether or not the leases were well below market, et cetera, and whether or not there's some sort of redevelopment play there?

Rob, this is Andrew. I appreciate the question. The numbers are being skewed by two assets that we purchased in Topeka, Kansas that have very low rents. They're large industrial buildings that would categorize best as warehouses, even though a portion of it is being used for office space. And so the rents are low, the purchase price per square foot was low just because of the size of the assets.

Okay. And then can you remind us what the impediments in the timetable is for potentially bringing in any of the managed assets and the family assets?

Sure. Rob, it's Jeremy. So the seasoning period that created the original restriction for the REIT from acquiring related assets has ended. As you know, we've been managing these assets for many years. We're very familiar with these assets. As of today, we have not been contacted by representatives of the family. But we will let you know as soon as we have any additional information to share.

Our next question is from Jon Petersen with Jefferies.

Maybe just to stick with some of the acquisitions that you've done in 1Q so far. Any color on how pricing is changing cap rates, and maybe motivations behind sellers? Anything evolving as we kind of turn the page into 2021? Interest rates rising, certainly economy reopening, all that kind of stuff. Any of that stuff impacting your ability to acquire properties and the cap rates you're paying?

Jon, this is Andrew. I appreciate the question. We've seen cap rates -- kind of they're constraining in general. It hasn't directly affected our ability to purchase. We're still seeing very strong interest from sellers to sell their properties, and we are continuing to purchase within our weighted average cap rate range of 7% to 9%. We're seeing different motivations from people. This past year was strange for pretty much everybody, and it's changed a lot of people's point of view on their assets, on their liquidity and on their future. And so we're still seeing a lot of inbound calls from sellers that are interested in selling to us.

Got it. That's helpful. And then you guys renewed a lot of the stuff that was in holdover. I wonder if you can give any color on what the leasing spreads look like. And was it -- was there enough volume, I guess, of renewals that we're going to see any meaningful movements in 1Q revenue that we should be aware of?

So I'll talk to the renewals. Yes, we successfully closed out all of 2019 and 2020. We're not sharing releasing spreads, but we have shared that we expect to see a 2% to 3% annual improvement in NOI on these properties. In terms of any significant impact in Q1, I don't believe we're going to see anything as it relates to the holdover renewals.

Okay. And then just one modeling question. I noticed the straight-line rent adjustment turned positive this quarter, positive, almost $300,000, it's usually negative. Just curious, is there anything one-off to call out there?

Yes. So part of our straight-line includes the reimbursement of rent associated with the holdovers. So certainly, based on the fact that all the holdovers that we mentioned were squared away. That led to an increase in that. Going forward, I would imagine the number would be certainly less than that.

And our next question is from Frank Lee with BMO.

In your presentation, you disclosed 3% of rents are coming from non-U.S. [indiscernible] tenants. Just curious, this is all from tenants from recent industrial acquisitions? And could we expect this percentage to increase over time as you acquire more office flex or industrial assets?

Thanks, Frank. This is Andrew. Yes, that 3% is specifically related to the 2 additional tenants that are in the Warrendale facility that we purchased at the end of last year. We've continued to source and purchase properties that are solely tenanted by the Postal service. We do look at individual transactions that make sense, that do have a secondary tenant. By nature, if we do deals that have a secondary tenant in it, that number will rise, but we don't anticipate it rising very significantly because, again, our focus is the Postal service and properties that they are occupying.

Okay. And then with the recent rise in interest rates, how is this impacting either the pipeline or your view on acquiring industrial or office assets, which so far has been completed at lower cap rates versus your more traditional post office properties?

Thankfully, our cost of capital is pretty low, and we have a very good credit facility. We continue to look at all different asset types that the postal service is interested in being in, right? That's everything from the Last Mile facilities all the way up to the larger industrial properties. We try to underwrite these properties on a property-by-property basis and a deal-by-deal basis. If the property makes sense from a Postal service perspective, if they need and want to be in that facility and we can underwrite it with the understanding that it's at or below replacement cost or at a good value for the real estate in that particular area, then that's a deal that we would like to do. And we'll continue to do that.

[Operator Instructions]. Our next question is from Barry Oxford with D.A. Davidson.

Great. Jeremy, I was looking at the CapEx line, saw that it jumped fairly high from 3Q to 4Q. Is there, one, kind of 1 or 2 buildings behind driving that? Or is that more going to be typical of the CapEx you're going to pay out on a quarterly basis?

This is Rob. Thanks for the question. Yes. So those expenses in Q4 were high based on onetime expenses. And these were related to the holdover leases that were executed that Matt mentioned earlier. Obviously, it's going to vary quarter-by-quarter, given the nature and timing of CapEx and recurring CapEx projects. But there was also a revenue associated with the catch-up rent from those leases as well. So I don't think that, that's something that's going to occur each quarter.

Okay. Great. No, that makes sense. And then a question, I guess, Andrew, when you look at your pipeline, going forward and where your acquisitions are going to occur, are the bulk of those going to still occur in the Last Mile? Or will it be more in the Flex area?

Thanks, Barry. Look, I believe that as we continue to grow and acquire -- this is not a quarterly business. And as the quarters continue to go by, you're going to see certain quarters that are more heavily weighted in Last Mile or Flex or industrial. From our perspective, we are looking at all different asset types within the Postal Services logistics network. And we're looking for properties that they want to be in, that they need to be in that makes sense from a real estate standpoint. We believe that the lion's share of the properties that the Postal Service uses fall within the Flex space. And so by nature, we look within that Flex space as well. But we aren't focused in one particular area. We believe that one of the benefits of owning Postal Realty is that we have these different asset classes, and we're diversified, not just by asset class, but also by region and geography.

Is it fair to say you'll just be opportunistic from quarter-to-quarter?

Yes, that's very fair to say.

Our next question is from Michael Gorman with BTIG.

Andrew, I was wondering just given the relationship that you all have with the USPS, is there any opportunity in the acquisition pipeline to purchase facilities from the USPS itself? Have they shown any interest in selling any of the owned facilities that they have in their portfolio?

Appreciate the question. They have shown an interest in selling their own buildings, but they're only buildings that they're looking to vacate or vacate the majority of the building. Those are properties that we are, by nature, not interested in, buildings that they want to move out of are things that we're -- it's just not our business. And so they have not expressed an interest in selling the buildings that they are currently occupying. When they do, I will let you know.

Got it. That makes sense. And then when you think about the Flex buildings or some of the larger industrial buildings, is there a lower bound for how much the USPS represents in the building that you're willing to go in an acquisition, right? So does it have to make up a certain amount of the building's revenue for it to meet your acquisition criteria?

From my perspective, I'm really focused on buying properties that are occupied by the Postal Service. The secondary and tertiary tenants are really not my motivation. If the deal makes sense, and the property is occupied by the Postal Service is important to them and we can underwrite it and make it make sense from a real estate standpoint, then we will pursue that opportunity. But it's really not what we're focused on. It's really not what we're driving towards. We want to stick with the single-tenant sole occupancy of the Postal Service.

Got it. And then one last one for me. I noticed in the debt summary. It's a small number, but the seller financing in there, I hadn't thought that before. I assume that was something similar to an OP unit structure where it was on the seller's end that they wanted to keep the financing stake in the building. And if that's the case, are you seeing increased requests for that kind of financing holdover or OP unit structure in your deal discussions?

Sure. So that was driven by the seller. It is not a very common structure. I have done it in the past. It's not something that we advertise that we do. But if a seller is motivated by doing something like that, because they want to replicate their cash flow, they don't want to pay capital gains or for whatever other tax purposes that they're looking for, it's something that we will accommodate. And we did. And it made sense for the transaction. From the OP unit standpoint, we are seeing interest from sellers in doing a transaction using the OP unit currency. We see interest in conversations. Sometimes those deals end up being done with OP units and sometimes they end up being cash, but they're a good driver of deal flow. And we believe that we'll continue to see that kind of interest.

[Operator Instructions]. And our next question is from Ed Groshans Height Capital Markets.

I have a couple of questions, but first one, I just want to start off with the holdover. It seems like the holdover lease has had an impact on the CapEx, they had an impact on the straight lines. Can you talk about holdover leases? Like is that something we should expect going forward? And then when they resolve, do these type impacts on the financial statements?

Ed, this is Andrew. We are very happy that the 2019s and '20s are behind us. We believe a lot of that backlog had to do with the new lease document that was put in place. We're hoping that now the documentation is behind us. That the movement of the 2021s and 2022 leases will move much more efficiently. And so we're hoping that, that backlog won't continue and won't be a recurring issue.

Great. And then it sounds like the USPS isn't renewing their lease documents. That's a once in a while event as something that happens consistently then. So your efficiency statement, we should expect that going forward -- okay.

Yes. The rollout of this new lease document throughout their portfolio was -- is not something that happens very often. And I don't believe we'll see a major lease document change for some time.

And then I just want to briefly touch on general and administrative expenses. They were down a little bit quarter-over-quarter. I guess the expectation was that would be in line. Could you just set our expectations of what to look for in 2021?

Sure. This is Rob. Thanks, Ed, for the question. So when we started IPO, we had a heavy load of G&A. However, as we've grown, G&A as a percentage of revenue, has decreased. And we believe you'll continue to see revenue growth outpace incremental G&A increases, and the ratio each year of those will continue to come down. We have, as you know, a substantial amount of executive compensation that's paid in equity-based comp. And so the metric we generally look at is our cash G&A as a percentage of revenue.

Okay. All right. And then just to touch on dividends, right? Certainly, it's growing and 6 consecutive raises is good. It seems that as Postal has access to the market and is opportune in attracting capital that's put a little bit of pressure on the growth. So can you just talk about expectations with the dividend? And is there a point where maybe the raises start to impede dividend growth?

Sure. So look, our goal is to increase the dividend each quarter as we grow AFFO and to keep the dividend covered. We have a history of increasing our dividend consecutively for the past 6 quarters. And just to throw some stats out there, we've achieved about a 28% increase year-over-year and 55% since the Q3 '19 dividend. So as of the market close today, our current dividend yield is approximately 5.5%. But I did want to address one thing that I know came up some time ago, which I know we've discussed $1.02 per share and 6% dividend yields in the past. However, these are no longer our targets nor should they be viewed as a maximum or even a cap on future dividends.

Fantastic, and I appreciate that as well. All right. And then -- and you did bring it up, as my last point in the question, just on paying dividends from cash flow, I did know when you did the last offering you talked about that the uses could be for dividends. And in today's quarterly report talks about could be used for dividends. But the focus really is to cover dividends from AFFO. Is that still correct?

That's correct. Yes.

[Operator Instructions]. And we have reached the end of the question-and-answer session. I will now turn the call over to the CEO, Andrew Spodek, for closing remarks.

On behalf of Jeremy, Rob, myself and the entire team, thank you all for joining us today. We really appreciate it.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.