Postal Realty Trust, Inc. (PSTL) Q2 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to Postal Realty Trust, Inc. Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jordan Cooperstein, Vice President of FP&A, Capital Markets. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to the Postal Realty Trust Second Quarter 2022 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. 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 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. 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 the 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.

Good morning, and thank you for joining us today. We have to share that Postal Realty had a very productive and successful quarter, completing $55.1 million of acquisitions comprised of our core last-mile and flex targets while maintaining our conservative leverage ratios, closing the quarter at 5.5x net debt to annualized adjusted EBITDA. During the first half of this year, we accretively deployed the proceeds from the capital raise completed in November. We continue to use our market-leading vantage point to capitalize on this highly fragmented market. This has put us ahead of our historical cadence for the first half of the year as we have completed approximately $87 million of acquisitions and have an additional $14 million under definitive contracts. As we had previously communicated, alongside the broader real estate industry, we had seen some cap rate compression and the weighted average cap rate for these properties was in the 6% to 7% range. More recently, the market is adjusting. Cap rates are starting to rise and the mix of assets and acquisition volumes will determine where in the 6% to 7% range we complete the year. The total addressable market of Postal Service leased assets is significant, and our network of opportunities continue to expand. As the industry leader with a dominant market share and over 30 years of experience, we have been deliberate and consistent in our approach. We are well positioned and laser-focused on continuing to execute on our goal of creating shareholder value by realizing organic growth in our in-place portfolio and consolidating this market. The Postal Service's irreplaceable logistics network adds to their resilience and, in turn, our unique position as the largest owner, manager and consolidator of properties leased to the Postal Service. We are pleased with the high volume of attractive acquisitions already completed year-to-date. We are encouraged by the continued growth in our pipeline and the cap rate expansion we are starting to see in our market and will continue to be thoughtful and prudent as we allow buyers and sellers to adjust to the current environment and cap rates. Most importantly, we have the balance sheet and the team ready to execute where appropriate. Postal Realty Trust is well positioned to navigate today's inflationary environment with a conservative balance sheet, a favorable lease structure and average lease duration and our ability to drive growth throughout all market cycles. We will continue to be active and employ a disciplined approach to acquisitions. I'll now turn the call over to Jeremy to discuss our operating metrics.

Thank you, Andrew. As a reminder, our tenant has historically made 100% of its rent payments on time through all economic environments. This predictability of cash flow is a significant differentiator for Postal Realty. Consistent with quarters past, we collected 100% of our rents in the second quarter. The typical USPS 5-year lease presents an opportunity to mark our rents to market on an ongoing basis, which can fuel robust internal growth. We have maintained a 98.8% 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 high rate continues to validate our due diligence process in identifying locations that are important to the Postal Service. Year-to-date, we have not received any notices of termination by the Postal Service. In the second quarter of 2022, we acquired 150 properties for approximately $55 million, excluding closing costs. These acquisitions added 378,000 net leasable interior square feet to our portfolio, inclusive of 141,000 square feet from 111 last-mile properties and 237,000 square feet from 39 flex properties. Subsequent to quarter end and through July 29, we have acquired 16 properties for $4.6 million and placed an additional 36 last-mile and flex properties for approximately $14 million under definitive contracts, excluding closing costs. For the second quarter of 2022, we produced a 35% increase in revenues from the second quarter of 2021. This reflects sustained strong collections from our existing portfolio along with contributions from the accretive acquisitions made over the last 12 months. I'll now turn the call over to Rob to discuss our second quarter 2022 financial results.

Thank you, Jeremy. Postal Realty Trust continues to be well positioned to execute on our growth plan, and from the proactive steps we have taken to further strengthen our capital structure, we have the financial flexibility to continue our consolidation strategy. In the second quarter of 2022, we delivered funds from operations, or FFO, of $0.23 per diluted share and adjusted funds from operations, or AFFO, of $0.24 per diluted share. As discussed on last quarter's earnings call, in April, we closed on a $75 million delayed draw term loan maturing in February 2028 priced at 145 basis points over SOFR plus 10 basis points. This new term loan was funded with $50 million at closing, and we subsequently drew the remaining $25 million. The proceeds of both draws were primarily used to pay down our floating rate revolver. Concurrent with each draw on the term loan, we executed a $50 million swap and a $25 million swap, further reducing our exposure to floating rate debt. We have maintained a conservative balance sheet, and as of June 30, 2022, we had approximately $5 million of cash and ample capacity available on our revolver with an additional $225 million in accordions on our facilities. We had approximately $176 million of gross debt with a weighted average interest rate of 3.42%. This was comprised of approximately $158 million of fixed-rate debt and $18 million of floating-rate debt outstanding on our revolver. Inclusive of all interest rate and forward hedges, approximately 90% of our debt was at a fixed rate, and our weighted average maturity was 5.8 years. For the second quarter 2022, net debt to enterprise value was 33%, and net debt to annualized adjusted EBITDA was 5.5x, well below our leverage targets of 40% and 7x, respectively. We continue to invest in our company to scale our business while being mindful of the current macroeconomic environment. We have made investments in our people and infrastructure, deepening our competitive moat and remain committed to our growth strategy, but we will be judicious in the timing of additional G&A investment. As I outlined in our last call, these important investments will mirror the growth in our portfolio as we continue to focus on progression of the ratio of cash G&A as a percentage of revenues. As such, the cash G&A figure for the second quarter should serve as a reasonable quarterly run rate for the remaining quarters of 2022. While this quarter resulted in recurring CapEx of approximately $0.05 per square foot, we anticipate it will exceed $0.06 per square foot for the foreseeable future as we continue to feel the impact from supply chain and increased costs. As in prior quarters, our Board of Directors has improved an increase in our quarterly dividend to $0.2325, which annualizes to $0.93 per share, a 4.5% increase from the second quarter 2021 dividend. As we look ahead, our predictable property cash flows, reliable tenant and conservative balance sheet, coupled with our disciplined strategy for growth will allow us to continue consolidating this highly fragmented industry. Operator, we'd like to open the call for questions.

[Operator Instructions] We have our first question from the line up, Rob Stevenson with Janney.

Can you talk about -- a little bit about the marketplace today in terms of how much product is coming to market and where pricing expectation is from sellers at this point? Have they -- you talked a little bit about waiting and such. But is there still a good volume of product coming, and it's just a matter of waiting out the price? Or are you starting to see any changes in volume, et cetera?

Yes. So the marketplace is very fluid. We are watching cap rates continue to expand. As I've mentioned before, we typically lag general real estate, but we are seeing that movement, and we are watching it. There is a disconnect between buyers and sellers that I think everybody throughout the real estate industry is feeling and seeing. But the pipeline is robust, and we're seeing a tremendous amount of sellers interested in selling.

Okay. And then I guess the other question for me, what are the conversations like with the Postal Service and their representatives these days in terms of terms? Given it's a government entity and a little -- probably a little slower to react than other people, how much are they acknowledging the level of inflation and all the other stuff that's inherent in the market real estate leases for your typical Taco Bells and other sort of stuff? How much of that are they recognizing as you try to negotiate lease terms going forward here? Are they still sticking to where they've been in the past? Are they acknowledging that today is a different day than it's been for the last 5, 10 years, et cetera? How are those conversations these days with the tenant?

Yes. There's no real change in structure. They're still negotiating 5-year term, which, as you know, gives us the opportunity to mark our rents to market on an ongoing basis. And they're very much aware of inflation. It is a dialogue that we are having and a solve that we're all looking to work through as we work through the 2022 and 2023 lease renewals.

We have next question from the line of Jon Petersen with Jefferies.

Okay. Yes, maybe I could pick up on that last question on kind of lease renewals and inflation. I mean, can you give us any indication of how successful you have been in pushing higher rents? And I guess, just for modeling purposes, as we think through the balance of this year and into next year, like should we assume higher leasing spreads than what you've achieved historically?

Yes. Again, Jon, our goal is to make sure that we capture the current environment in our re-leasing spreads. As you know, we've been successful in the past in negotiations with the Postal Service around lease renewals. And as I stated, they're well aware of the current environment. We're in constant dialogue with them, and we're confident that we'll be able to achieve something that captures the current environment.

Okay. Might try to capture some more multiyear guidance from you guys. On the G&A side, Rob, thanks for the color on where we should expect G&A for the balance of the year. Just thinking about the scale of your business right now and your opportunities, as we think over the next few years, is there any reason to expect additional outsized G&A growth? Or are you guys feeling comfortable with your infrastructure right now to be able to scale up?

Yes, thanks. Good question. We feel very comfortable that we've done some things this year to really prepare ourselves to scale in the future. So while there will be growth in G&A, I don't foresee an outsized growth like there was this year over last year.

Okay. And then finally, I know you guys have addressed this a little bit, but I would assume the bid-ask spread between buyers and sellers has widened out. I know Rob kind of asked about this a little bit, but you had a great acquisition quarter. It seems like a lot of that was front-end loaded because a lot of that you actually announced last quarter. I mean, is it fair to assume that kind of given the volatility in the market, there's maybe a little bit less opportunities here in the near term and maybe 2Q is kind of the high quarter of the year in terms of acquisition volume?

It really depends on how the market reacts. We're seeing things move relatively quickly. We are seeking to pursue deals at the midpoint of our range. The deals are out there. It's getting sellers to recognize that cap rates have moved, and they have to readjust their pricing. We have the people and the team and the platform in place to execute on it. It's just about that disconnect or that price match correcting itself.

[Operator Instructions] You have next question from the line of John Kim with BMO Capital Markets.

It's Eric on for John. Just a quick one on the pipeline. You guys closed a sizable amount of acquisitions in the quarter. I was just kind of curious how much of the REAC acquisition kind of played into the large acquisition quarter?

It's a great question. REAC has been very helpful in pretty much everything that we do here. I can't speak to a particular dollar amount that was attributable to REAC, and we don't break things out in that way. What I can tell you is that last year, we did 3/4 of our deal flow off market, and bringing REAC on board and the relationships they have in the owner community is just helping continue to source deals and close deals off market. And their relationships help the deals come into the pipeline and help them move as smoothly as possible. So they've been very, very helpful. I just can't attribute a particular dollar amount to them. But the pipeline is as strong as it's ever been and we're looking forward to closing out a great 2022.

I appreciate that. And then on the pipeline, are you guys seeing deals being retraded in the market given the tightening of the bid-ask spread?

We have. We've seen a tremendous amount of deals being retraded and deals that come back to us as a result of that, but it's still a very, very strange environment. And even with that retrading, they still -- the cap rate still need to move.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I'd like to turn the call back to Andrew Spodek for closing remarks. Over to you, sir.

Thank you. On behalf of myself and the entire team, thank you all for taking the time to join us for this call today. We look forward to connecting with you over the coming months.

Thank you very much, sir. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.