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Participants

Jordan Cooperstein; Vice President, FP&A Capital Markets; Postal Realty Trust Inc

Andrew Spodek; Chief Executive Officer, Director; Postal Realty Trust Inc

Jeremy Garber; President, Treasurer, Secretary; Postal Realty Trust Inc

Robert Klein; Chief Financial Officer; Postal Realty Trust Inc

Anthony Paolone; Analyst; JPMorgan

Steven Dumanski; Analyst; Janney Montgomery Scott

Jon Petersen; Analyst; Jefferies

Presentation

Operator

Ladies and gentlemen, greetings, and welcome to the Postal Realty Trust First Quarter 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 Cooper, Senior Vice President of FP&A capital markets. Please go ahead, sir.

Jordan Cooperstein

Thank you, and good morning, everyone. Welcome to Postal Realty Trust First Quarter 2024 earnings conference call. On the call today, we have Andrew Sodexo, Chief Executive Officer, Jeremy Garber, President, Robert Klein, Chief Financial Officer, and Matt Brandywine, 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 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 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.
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.
With that, I will now turn the call over to Andrew Sportech, Chief Executive Officer of Postal Realty Trust.

Story continues

Andrew Spodek

Good morning and thank you for joining us. I’m pleased that our success in 2023 has continued into the current year. Our first quarter acquisition pace and weighted average cap rate were slightly ahead of the same period last year, we added 29 properties for 19 million at a weighted average cap rate of 7.8%, and our year-to-date activity has us on track to achieve our full year 2024 acquisitions guidance of $80 million at or above a 7.5% weighted average cap rate. While our transaction market is not immune to the current volatility in interest rates. I believe the post the real estate sellers are less focused on movements in the 10-year treasury as they are in more heavily brokered sectors. I’m encouraged by our active pipeline source from existing relationships and many new prospects, some of which we have tracked for many years. Postal Realty has demonstrated time and again that we remain disciplined in managing our balance sheet to ensure we are well positioned to pursue attractive opportunities as they arise.
We raised almost 14 million of equity capital from a combination of common stock and operating partnership unit issuances, keeping our leverage well within our target range while maintaining ample availability on our revolving credit facility.
Despite the uncertainty of the macro environment. Our entire team remains focused on what we do best acquiring coastal real estate and improving the cash flow from assets under management when sellers exchange property for operating partnership units, which they have done every year since our IPO, they are demonstrating that they trust. We are the premier owner and operator in this niche space. This currency allows sellers the opportunity to maintain exposure to both the real estate and eliminate the day-to-day responsibilities of property management while deferring the potential taxable gains.
Relationships are the backbone of this business.
One of the many ways we stay in front of owners of our target asset is by developing strong, long-lasting connections last month, senior members of Postal Realty, and I attended the 2024 annual association of United States Postal lessors conference. I personally have attended this conference for most of my life. It’s an opportunity to cultivate new relationships as well as maintain our long-running dialogue with owners due to these efforts, along with many others, roughly 75% of our acquisitions over the past few years have been sourced internally. And as the natural buyer, we believe we see all important assets that come to market. We are confident in both our business and our tenant as we continue to collect 100% of our contractual rents and maintain high retention and occupancy rates. Exemplifying the importance of this irreplaceable network with no significant near-term debt maturities, predictable cash flows, industry leadership as the largest owner of coastal properties and a committed team, we are positioned for a successful 2024. I’ll now turn the call over to Jeremy.

Jeremy Garber

Thank you, Andrew. The first quarter was business as usual and post the royalty as we remained focused on acquiring well utilized attractive last mile and flex postal properties. Our acquisitions during the quarter added 112,000 net leasable interior square feet to our portfolio, inclusive of 26,000 square feet from 16 last mile properties and 86,000 square feet from 13 flex properties subsequent to quarter end, the Company acquired six properties for $4.1 million and placed an additional 11 properties totaling $3.5 million under definitive contracts. As stated on prior calls, the Company’s business model generates consistent cash flow each quarter. As our business remains stable and reliable through 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. We continue to work hard with the Postal Service to execute the expired leases and hope to provide an update on our next earnings call.
I’ll now turn the call over to Rob to discuss our first quarter 2024 financial results.

Robert Klein

Thank you, Jeremy, and thank you, everyone, for joining us on today’s call. During the first quarter, we raised approximately 14 million of equity and continued to accretively acquire assets. We delivered funds from operations or FFO of $0.2 and adjusted funds from operations or AFFO of $0.25 per diluted share. We’ve maintained low leverage and minimized our exposure to variable rate debt. At the end of the first quarter, our debt outstanding at a weighted average interest rate of 4.22%, a weighted average maturity of four years and no significant debt maturities until 2027. The Company’s 150 million senior unsecured revolving credit facility had $16 million outstanding and fixed rate debt comprised 94% of all borrowings. Net debt to annualized adjusted EBITDA was 5.8 times, well within our target of below seven times. During the first quarter, we issued approximately 576,000 shares of common stock through our ATM offering program at an average price of $14.25 per share, totaling gross proceeds of 8.2 million. Additionally, we issued nearly 412,000 common units in our operating partnership at a price of $14.5 per unit as part of consideration for a portfolio acquisition, recurring CapEx was $150,000 within our anticipated range of 125,000 to $175,000. Looking forward to Q2, we anticipate the figure to be between 150,200 thousand dollars depending on the timing of projects, cash G&A expense came in within our stated range for the first quarter. Just as in prior years. We continue to prioritize decreasing cash G&A as a percentage of revenue on an annual basis. For the full year 2024, we expect total cash G&A expense to be between $9.5 million and 9.8 million. Our Board of Directors has approved a quarterly dividend of $0.24 per share, representing a 1.1% increase from the Q1 2023 dividend during the first quarter, we collected 100% of our contractual rents. 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 as we execute our business plan of acquiring new assets and improving the cash flow from existing properties.
That concludes our prepared remarks. And now we’d like to open the line to take any questions you may have. Operator.

Question and Answer Session

Operator

(Operator Instructions) Anthony Paolone, JP Morgan.

Anthony Paolone

Great, thanks and good morning. I’m just wondering if you could update us on just how negotiations are coming along with the 90 some odd holdover leases and whether or not you anticipate new leases with contractual bumps through the way you were able to achieve last year and or step-up in starting rents on the new leases?

Andrew Spodek

Hey, Tony, this is Andrew. I wish I could say that were completed with the negotiations. This is still a fluid process. We’re working very hard with the ball service to to resolve them and to come to on a mutually acceptable solution. Everything is going well. It’s just taking longer than what we would have anticipated and we’re working towards getting those Avenue bumps even I can’t commit to it actually being done until it’s completed, and we hope to have a better update for you next quarter.

Anthony Paolone

Do you think, Andrew, that like the process there is changing to that, like as we look out into future years on the negotiations and the process, could you just be a bit faster smoother, do you think this will always kind of be a a given the counterparty, a tough process?

Andrew Spodek

So the answer is that we’ve had these type of situations in the past over over my life of dealing with the all service where it takes longer than anticipated to resolve this. We are currently working with sponsors to make it more efficient. So that way, in future years, we don’t have these issues, and I’m hopeful that we’ll get to that place. But I can’t commit to it until it’s been resolved.
But regardless we’ve been collecting our rents, we will continue to collect our rents when when we do resolve that, they do pay the difference in the rents that we negotiated and when the leases had expired. And so it’s just a matter of trying to complete them as quickly as possible.

Anthony Paolone

Okay. And then just last one for me. You mentioned the CapEx in the quarter and also what you anticipated for 2Q. But if you get these are holdover leases over the finish line, do you anticipate like in the back half of the year having to spend anything incremental that would come along with that process that would be outside of that kind of hundred, CAD200,000 range that you outlined for the quarter?

Robert Klein

Yes.
Thanks, Tony.
This is Rob. I don’t we don’t anticipate that the guidance changes based on acquisitions or on re-leasing really in the near term. So now that guidance will hold the next quarter. We’ll come forward with with the guidance for future quarters.

Anthony Paolone

Okay.
Got it.
Thank you.
Thank you.

Operator

(Operator Instructions) Steven Dumanski, Janney Montgomery Scott.

Steven Dumanski

Thank you. I know that the state of the transaction market was addressed earlier in the opening comments. So I just wanted to get more insight with the overall macroenvironment. How motivated are potential sellers currently? And where do you project an increase or decrease in the velocity of the acquisition pipeline going forward?

Andrew Spodek

I appreciate the question. Sellers are maybe motivated, but they’re not motivated to the extent that they are adjusting their cap rates across the entire market. We’re still having to deal with sellers on a deal-by-deal basis to tried to adjust cap rates to two inch them up to places where we want to acquire them in an accretive way, um, I am hopeful that the velocity of deals will pick up and we are able to adjust our guidance as the year progresses. But as of right now, we’re maintaining our guidance of $80 million for the year.

Steven Dumanski

Thank you, Andrew. That’s very helpful. And just another one regarding, I guess more of the macro environment is the higher for longer interest rate environment and the pullback in bank financing impacting the ability for a small owner to refinance postal assets when their current debt expires or is having the USPS. and the lease still still the golden ticket essentially.

Andrew Spodek

So the postal real estate market, at least on the flex and last-mile facilities is not a very heavily finance space. With that being said, if sellers do have mortgages that are coming due, they’re able to refinance them. But obviously at a much higher rate. And so while that would normally be a motivating factor for people to consider selling because it’s not a heavily financed space, it’s not typically a major driver of deal flow

Steven Dumanski

Got it. Thank you. That’s very helpful. I appreciate.

Operator

(Operator Instructions) Jon Petersen, Jefferies.

Jon Petersen

Hey, good morning, guys. I wanted to you could you remind us what percent of your portfolio has annual escalators built in where you expect that number to trend over the next as you renew all these leases over the next few years?

Jeremy Garber

Yes, John, it’s Jeremy. It was the entire vintage of 2022 leases that expire that year put an escalator in place and we’re working on deals 40 threes and going forward right now.
Yes.
So is the expectation is these are typically five-year leases.

Jon Petersen

So if we fast-forward four years in the future is the expectation you guys have that 100% of the portfolio will have annual escalators or will there be kind of friction in future years in getting that in there now that inflation is coming down a bit?

Jeremy Garber

Yes, I think it’s a fluid kind of come conversation that really depends on inflation and the cost to operate the properties. And so I can’t commit to all of future leases having an escalator. But when it’s appropriate, that’s definitely something that we will be negotiating for.

Jon Petersen

Got it.
Okay.
That’s helpful context. That’s all for me. Think it.

Jordan Cooperstein

Thanks.
Thanks.

Operator

Thank you. As there are no further questions, I now hand the conference over to Andreas Burak for his closing comments.

Andrew Spodek

Andrew, on behalf of the entire team, we thank you for your support and taking the time to join us today. We’re confident in our business model and the opportunity on the specialized market. The fundamentals of the business remain strong, and we look forward to what the future brings.
Let’s connect in the upcoming months Thank you again for your time.

Operator

Thank you.
The conference of Postal Realty Trust has now concluded. Thank you for your participation. You may now disconnect your line.