All right, I guess we're ready to get started. Hey, everybody. My name is Jon Petersen. I'm with Jefferies. I'm an analyst covering Postal Realty Trust. Really happy to have the team here with us today. Rob Klein, CFO, Andrew Spodek, CEO, Jeremy Garber, COO of Postal. So I got a list of questions here. We're also happy to take questions from the audience, if you guys have any. So please, you know, as you do, you can raise your hand. But first, I think I'm gonna hand it over to Andrew to give us just a quick overview and introduction of Postal Realty.
Sure. Thanks, Jon. Thanks, everybody, for joining us today. For those of you that we've met before, you've heard this. For those of you that haven't, this is the story. So my family and I have been in postal real estate since the 1980s. My father owned all different types of assets, bought a small portfolio of postal assets. At the time, didn't even realize that the Postal Service leased their assets. He bought them, and what he found very early on, and what we've kind of proven out to be true, is, number one, the Postal Service very rarely moves out. That's the largest misconception. We have a 99% retention rate.
Number two is that the Postal Service always pays their rent, and we collect 100% of our rent 100% of the time. Number three is because of the preferential lease structure, we're able to own and operate properties in currently 49 states without the need for any on-site management. Because of this and various other reasons, we continued to grow our portfolio, became the largest owners of postal properties. And about five years ago, a banker approached me with the idea of taking our portfolio public. We did that. I contributed lion's share of my personal assets, became one of the largest shareholders of the company. And I did this because I saw what the opportunity was in front of us.
The Postal Service leases approximately 25,000 facilities. They pay about $1.4 billion in rent, and there's no real large owner aside, aside from us, and there wasn't at the time. Those 25,000 facilities are owned by about 17,000 owners. That's how fragmented the market was. The average owner was in their 60s-80s, owned their building over 40 years, and I realized that there was a tremendous opportunity here. This is a tremendous market. That $1.4 billion, any way you slice it, is a $10 billion-$15 billion market. We own 7% of the market, and the next 20 largest owners, altogether only own about 11%. And so I realized we needed a platform to roll up the space, and that's what we did.
Since going public about five years ago, we've grown the company assets, square footage, and rental revenue by five-6 times, and truly, we've only gotten started. There's a tremendous opportunity in front of us, and that's what we're here to do.
Great. Thank you for that. Maybe we could start with your acquisition sourcing process. Like, how do you find new post offices to buy?
So being in the space as long as we have, most owners know us. We've been a resource to these owners for all this time. Interestingly enough, 75% of our deals are sourced off-market. We have an acquisitions team. We do cold calling, we do mailers, we do education. We have industry experts that work for us that touch all these owners. And even properties that are marketed, we typically get a first look, if not a last look at. We are known by far and away the expert in the space.
Mm-hmm. And I mean, are you, are you competing with anybody in the space? What kind of institutional capital is out there, besides you guys?
So we're the largest, and we're the only public company out there. The competition in the space varies depending on the asset that we're trying to acquire. Most recently, we've been seeing most of the competition actually from local buyers. Owners that live close to their building, there's a pride of ownership, and they're willing to pay tighter cap rates. On a larger institutional asset, or an industrial building, we see the industrial players.
Yeah.
The larger industrial buildings, in general, are not our bread and butter. It's something we look at, and we buy opportunistically, but it's not really what we focus on. We focus on, you know, the flex and last-mile facilities.
Got it. Okay. Maybe just curious, 'cause you guys probably have some good insights on what's happening at the post office. You know, how do you see their strategy evolving in the coming years, and what role does your company play in that?
There's actually a lot of changes going on in the Postal Service. The Postmaster General, currently, is different than the ones that have been sitting in that seat, let's call it three or four generations prior. That's because he came from outside the Postal Service. He's looking at the Postal Service as a business. He's trying to make the company more efficient, and they're investing a tremendous amount of time and effort and capital into modernizing their larger processing plants to try to limit the number of stops that a package or a piece of mail needs to go through in order to get to the end user. This investment should make their logistics network more efficient, and should also make our properties more valuable.
The focus on the larger processing centers makes the last mile and flex facility really be what needs to be used in order to leverage the network and get to the last mile to get to the end user. They're touching, I think it's, 167 million delivery points six days a week-
Right
... which is a virtual monopoly on the last-mile.
Right. Right, right, right. Okay, great. So you talked about the, kind of, their warehouse network. You said you look at it. Like, are there certain types of post office real estate that, like, you want to own and some that you wouldn't own?
Definitely. We see deals on a regular basis that we pass on. Every deal is underwritten, first and foremost, on our belief of what the Postal Service wants or needs. If we don't believe that that particular facility is needed by them, that's not interesting to us. Once it passes that gating factor, then we underwrite the real estate.
Got it. Maybe talk a little more about that. Like, when... In your underwriting process, how do you know- Like, what, what's kinda like the golden post office property, where you're like, "We know they're gonna stay in that one for decades?
So it varies, depending on market. You know, this network was built in the 1960s and 1970s.
Yeah.
It's changed and evolved, and the use of the buildings is actually very easy to be adjusted based on their needs. We have a proprietary database that we've been keeping for decades And we've evolved, and that helps us kinda analyze why one facility in a particular area is more valuable to another. It's really about use case.
Yeah.
You'll see ones that have more routes, you'll see ones that are open more hours, that do more retail, that do more sales, that have more P.O. boxes, that the population is growing. All of that factors into whether we believe the Postal Service needs to be in the space. And then, obviously, we're buying these based on real estate value. And for the most part, are buying these at or below replacement cost, which is one of the things that really helps us with our retention.
Got it. Okay. Can you talk about internal growth in the company? So you guys, I think in your lease renewals that you did last year, you were able to add rent escalators to those leases. Maybe just talk a little more about how a traditional lease is structured and where you're trying to push that forward with current renewals.
Sure. So, a typical postal lease is five-year in term. That's a fixed term. We don't provide any renewal options. In our last lease roll, we were able to accomplish same-store NOI growth of 2.2%, and that was before the 3.5% rent escalator that we were able to get added to the lease. I should note that that rent escalator never existed in the postal universe on a portfolio. It, from my perspective, is proof of concept that this platform has value that wouldn't be able to be extracted without it. If I would've asked for that rent escalator five years ago, I don't believe that they would've been agreeable to it.
As the platform grows, we become a partner to the Postal Service in a way that wasn't there before. I believe opportunities like this rent escalator will continue to arise and hopefully create value for our shareholders.
Is 3.5% the new norm, or is that a reflection of where inflation was at the time?
You know, it's difficult for me to say what the new norm is, in general, let alone in the postal world.
Yeah.
That was a reflection of inflation at the time. What was most important was to set the precedent of getting that in the lease.
Mm-hmm. Yeah.
Now that it's there, my goal would be to keep an escalator in the lease and negotiate it depending on the environment that we're in.
Okay. So as you do that, what is that, that 2.2% same-store NOI growth, does that evolve to a higher number? I mean, you would think it would if you did. But what, what are kind of your goals there, if you have any?
You know, I don't really speak to the goals of our same-store growth.
Yeah. That's fine.
What I can tell you is that we're sitting in a very strong position. We have five-year leases. We're able to mark them to market very, very quickly. We have 99% retention rate. We're collecting our rent. We have arguably the strongest credit tenant. And we're trying to grow our rents as we are able to mark these to market.
Yeah. I think the average reader at this conference would love a 99% retention rate. But I'll ask you the annoying question: What do you do that 1% of the time when they don't renew?
Luckily, I haven't had to deal with it that often.
Yeah.
But we typically put the property out for rent or for sale.
Yeah.
And depending on the needs in that particular area, you're gonna get a different response.
Right. Right. Okay. Okay. Maybe we can talk about, like, just financing this pace of acquisition. So you guys are acquiring about $80 million a year. I guess, how do you, how do you manage those capital requirements, Rob?
Yeah. So, we've had a very simple strategy. We try to keep the business simple. On the equity side, we've been active with our ATM, with operating partnership units as well. In the first quarter, we did about $14 million of capital raise through those two channels. On the debt side, we've generally used our revolver, which is under our credit facility, as an acquisition line, and then, as we believe that that debt is gonna stay longer term, we'll then term it out, swap it out, turn it to fixed rate.
On the flip side, if we think that it is shorter-term debt, and we're going to get rid of it at some point, or it's not gonna stay on our balance sheet, we'll finance it out with equity, so either with the operating partnership units, the ATM, you know-
Right
... things along those lines.
Got it. Where, where would you place your cost of debt in the market today?
If it's just on our credit facility, it's probably just south of 6.9%.
Okay.
If you were to swap that out and do five-year debt, which is typically kind of what we've done when we've made it longer term, to match the duration of our leases, that's probably 1 point, maybe 1.25 points cheaper.
Okay. All right.
So in the high fives, let's call it.
High fives. Okay. And then, I guess, where are you guys at with cap rates in the market today, on acquisitions?
So what we've spoken to the market is, we're buying at or above a 7.5 cap. It really varies quarter- by- quarter, deal by deal, depending on what we're buying at that particular time, but our goal is to buy at or above 7.5.
Yeah. How has that changed with the interest rate environment today?
You know, the world changed in 2022, right? Midway through 2022, we had done, I don't know, north of $80 million at a 6.5 cap.
Yeah.
Right? Well on our way to do a $200 million year. And I had to pause everything because interest rates started moving. Today, you know, 2023, we ended the year, let's call it $80 million at a 7.7, right? Cap rates have moved. They haven't moved as much as interest rates. They haven't moved as much as everybody wants them to move, and this is not just a postal thing. This is-
Yeah
... this is a real estate thing. But I, I think that we've done what we're supposed to do, right? We've been prudent with our capital. We've given ourselves and kept access to our credit facility. We fixed our debt. We are sitting here being patient and waiting to be able to capitalize on the opportunities as they present themselves. And we're able to still acquire accretively.
Yeah.
I think we're in a pretty strong position.
Okay
... not as much fun as it is when you can acquire more.
Sounds good. Any questions from the audience? Sure. In the back.
How do you, just given how much inflation has grown in the past few years and the nature of the leases are less fixed today, how do you go about your ability just to grow top line versus, you know, how much OpEx inflation is?
Please.
Yeah. So the question was, in an inflationary environment, how we're increasing our top line, versus the kind of OpEx line that's increasing naturally through inflation. Just for those that couldn't hear it. And look, the beautiful thing about our leases are they're shorter term than maybe the rest of the space. So, you know, these are five-year leases when they're renewed, but our average WALT is about three years. So we have a constant mark-to-market opportunity. And while OpEx may increase each year at a pace, when we then renew these rents and then mark them to market, that significantly outpaces the increase in OpEx that's happened. So while the timing may not be exactly the same, over the period of that lease, the rent will outpace the OpEx, and that's historically what's happened for us.
On the escalators, can you talk about what the time period you're looking at? Is it just the prior year that's rolling off, and is it just inflation that comes with that conversation or are there other elements? And then as we look to this year, we're still waiting, I think, on last year's. What's the general timing for how that conversation goes?
Sure. So, what Andrew is referring to in terms of the, escalators on our leases were, were the leases that we renewed for 2022. Yes, we're, we're still waiting on 2023 leases to be executed. As you can imagine, we face off against a government entity. Things don't necessarily move as quickly as we'd like, so things take time. As Andrew described, we're hopeful that, escalators will be part of our renewal process going forward. We can't confirm that today, but that is our hope, and I think that we're moving in the right direction in terms of the conversations we're having with the Postal Service.
When they talk to all their property managers about these escalators, were you the only folks that got one in that 22 cycle, or are you aware of anybody else that was able to kind of provide your... Yes.
So there's a few questions there. So on a per property basis, I've seen leases, and they provided leases with escalators, usually on larger facilities, much larger facilities, more industrial buildings. I've never seen it on small facilities, and I've never seen it on a portfolio. I don't believe... This is not about 2022; this is in general. They have not provided it. It was quite an accomplishment, and it was there to really, as I was saying, to set a precedent. So I had it in the lease to be able to continue to negotiate as the leases roll.
Yeah. Yeah.
Most of your leases are triple net lease, I assume, and with respect to the escalator, the government has no right to extend. So you're basically in negotiations for a new lease at the end of the fifth year because you don't automatically have to accept their offer or their offer. So built in your negotiation, is this 3.5% increase?
So there's a few questions there. First of all, I don't describe these buildings as triple net. I describe them as a modified double net, because the majority of them, the owner is responsible for roof, structure, and insurance. Yeah, for some reason, government has an issue self-insuring and reimbursing for insurance, so that's a cost that we have to bear. We've actually done an amazing job at keeping our insurance costs very, very low, with single-digit increases, over the past couple of years, just because of our size and scale and how we operate our properties. So that was the first part of your question. There are some owners that provide renewal options. I've historically not done that. I viewed it as a one-sided option.
I don't like to provide one-sided options in general. But more importantly than that, when you know your tenant is staying in the building 99% of the time. You want to renegotiate your lease as often as possible. And that's what we do.
Just to circle back, on the insurance question, that's structural insurance, fire, fire-
Property casualty.
Property casualty, including liability?
Correct.
Someone trips on the sidewalk, that's your problem?
Correct.
Thank you.
Pleasure.
Okay. Sure. Yeah.
Can you go at all on the lease canoes and, yeah, just the right of first offer on some properties, there is your interest as well as the insider transactions we've seen over the past few days with stock?
Of course.
So, just to make sure I heard the first question, you asked about the right of first offer transaction and some insider transactions. So I'll address the right of first offer. So as Andrew described, we were a family office for decades before we came to the public markets. Andrew and his family have been acquiring assets. Andrew contributed the lion's share of his assets to structure this first offering in May of 2019. His family, his mom, was not part of that original transaction. For related party and accounting and SEC, it was a cleaner transaction to come to market just with Andrew's portfolio. So she gave the REIT a right of first offer on the portfolio that we continue to manage today.
So there's about 250 assets that were part of his mom's portfolio that the REIT gets paid to manage, and the ROFO is at their discretion. So, as it turns out, just last week, they. We closed on a transaction for 36 properties of that original 250. The ROFO they hold, they came to us, they had another transaction that they were working on that they wanted to put through on an exchange. So, we quickly got ourselves together. Remember, we manage these properties day-to-day. We know these assets very well. We were able to diligence and put together a transaction and deliver it in an opportune time. So that's the ROFO side of the transaction.
As Andrew described, he's our single largest shareholder because he didn't monetize when he formed this REIT. He took back shares in OP units and has been and still remains the largest investor in the REIT. I think Andrew is as vested as any CEO can be, and when you see insider transactions, it's Andrew saying, "I don't like where my stock is. I'm gonna keep investing in this business.
So I have a 10b5-1 plan that's out in the market that allows me to buy. There are certain toggles and restrictions as to how much or little I can buy, and that's what you see in the market.
Great. Oh, yeah, sir, go ahead.
Asset management, you mentioned about the ROFO locations. You guys, you guys do that. I think last year we talked a little bit about you possibly exploring looking at more facilities. How has that initiative gone?
It's a plan. It was always a plan from the very beginning. There are two pieces to it that have held us back from doing it. First is the management and operation, and facing off against the full service is one of the largest motivating factors for people to sell. And so if you take that pressure away from them, even though you create and incubated a deal flow, you take away their motivation to sell. Number two is, as a company, we've been really trying to focus and see what we can do to make the operations and management of these properties more efficient. And so we've been working with technology and third-party outsource providers to try to do that.
And so if we were going to provide management. Management is typically a losing business, or at least a break-even business. It's not really a profit center. We would be doing it just to bring more buildings under our umbrella, again, as an incubator deal flow. But we'd want to make our operations as efficient as possible before we did that.
So when you guys are out... Oh, go ahead. Yeah.
Can you just, go through the capital allocation in terms of issuance of stock, just given where stock trades in this year? Your aspirations are currently moving forward.
Sure. The question was about capital allocation and how we think about that. So we are fortunate to have many tools at our disposal. We talked about it a little bit earlier with, on the equity side, the kinda using common equity, and we've done that through larger scale offerings, when the timing's been right. But generally, we've been using the ATM over the past couple of years. For us, it's a very efficient way to fund our acquisitions, 'cause it matched funds, and our average transaction size is quite small, you know, roughly $500,000 per transaction. And so the ATM allows us to almost perfectly match fund in that respect. So that's been something we've leaned on over the past, you know, couple of years.
We are constantly monitoring the market, seeing where our share price is, seeing where our cap rates are, and making decisions at those points as to whether we draw on our revolver to fund an acquisition that way or to use equity. In some cases, we're using operating partnership units. You know, historically, it's been roughly 10% of our volume's been done that way. It's an attractive way for a seller to be brought to us and for us to transact. So it's a bit of a kind of day-by-day review of the markets and seeing where our acquisition volume is, as to how we choose whether we're going debt or equity. But we're always keeping in mind that we want to stay low leveraged. So our target is to stay below 7 times. We're well inside that.
When we last reported, we were at 5.8 times. So, sorry, that's net debt to annualized Adjusted EBITDA. So we have that in mind in the background, but in the interim, you know, we may be heavier in one quarter in debt and heavier in one quarter in equity. It's all really just a constant monitoring of the markets and doing what's most efficient while keeping leverage in mind.
Did I see another hand over here? Oh, I saw one in the corner of my eye. Can I ask about OP units? Just, are they— Do you think they're more attractive to sellers today, as everybody's kind of unsure of value, any more than they have been in the past?
It really varies, and it really varies on the personality of the seller and what they're trying to sell for more, more than anything else. What we've found since IPO is that even if we don't close with the use of the operating partnership unit as a currency, it drives a tremendous amount of deal flow to us-
Yeah
... and a lot of sellers that are interested in the concept. A lot of these owners are relatively unsophisticated.
Yeah.
Even though it's interesting to them, once they speak to an accountant, if they have one,
Yeah.
It sometimes falls off.
So what's kind of the hit—like, what percent of deals like start with that on the table, and then how many actually like end with OP units?
You know, I don't track that-
Okay
... because a lot of people that call in, it's not, it's not just they call in once, and all of a sudden it becomes a deal. These are kind of longer relationship.
Right.
People call on a regular basis just to talk about things so-
Yeah.
It's not as simple as that. Most people that do operating partnership units that we offer it to, that we really think are serious, are families with larger portfolios, where they're a little more sophisticated. They have, partners or family members that they don't want to be partners with anymore. The structure is very flexible and very easy for them. And so it really works for family dynamics or partnerships that built a portfolio of properties.
Got it. Let me pick one of my last... We'll make this one of the last questions, unless there's any questions from the audience. But maybe just talk about your dividend policy, and what you guys expect to do going forward. I know for a while, out of the IPO gate, it was a small bump every quarter. What are the thoughts on the dividend going forward?
Yeah. So, look, the board ultimately decides that policy. But in general, we have, we've been increasing that dividend every year. I think the plan is to continue that, but we're also making sure that our earnings will cover it. We want it to be a covered dividend on AFFO.
Right.
It has been historically. Plan is to continue that and to continue to grow the dividend as we grow earnings.
Yeah.
and so the board reviews this annually, and again, the intent is to keep it growing. But, you know, as a bit of a marketing piece, I mean, our, our dividend sits north of 7% right now, which I think is unbelievably attractive for a-
Right
... high growth, low leverage, high quality tenanted business.
Yep, yep. Very good. Any other questions? I think we'll wrap up there. Sure, one more.
Question on the industrial portfolio. You mentioned how the group is different. There's a lot of different types of buyers there. Not suggesting at all that this is the market to be looking to take this to market, but is industrial strategic part of the portfolio long term? Or would there be an openness to selling a handful of different developments, to move on from that piece?
So I think that having key industrial assets that the Postal Service leases as part of the portfolio is a good idea. I think that especially a company of our size that wants to grow, to shed those assets at this time, probably short term may make sense, long term probably wouldn't. The reality is that you know, the industrial properties that we look at and we see, some of them are very interesting. It's just that particular asset class got very frothy very quickly over the past couple of years. And we've been very cognizant not to buy just for buying's sake, and not to chase properties that either are not accretive or that we can't add value to. And so there are assets out there that we would like to buy.
I don't think selling, you know, the handful of our assets today, unless I can trade them into something that I could add more value to. You know, we don't have the need for the money. Our leverage is not high. There's no real reason to do that. And conceptually, as long as we think those properties are valuable to the postal service and are yielding well, which they are, it doesn't seem like that is something we could do today. But it is something that we do think about.
Great. All right. Well, thank you, guys. Really appreciate your time.
Thank you.
Thank you.
Thanks.