Good morning. Next company presenting is Postal Realty Trust, ticker symbol is PSTL. As the name implies, they are involved with real estate, with post offices across the United States, as I just found out, with the exception of Rhode Island. So 49 of the 50 they have covered. So here this morning to present on behalf of the company is Andrew Spodek. And we have a few other representatives of the company here that can participate in Q&A, if necessary, later on. So with that, I'll turn it over to Andrew.
Thank you. Good morning, everybody, and thank you for joining us. So, as John said, my name is Andrew Spodek. I think it's important to give a little background on myself, to give you context of the company and why we're here. I was kind of born into this business. My father had the foresight to buy postal assets in the early 1980s. What he found very early on, and what we've proven out to be true, are kind of our three pillars. First and foremost, we recognize that the Postal Service pays 100% of their rent 100% of the time. Number two is that the Postal Service very rarely moves.
I know that's a big misconception, but we've been able to maintain a 99+ retention rate over the past 10+ years. Number three is that because of the preferential lease structure, we're able to own and operate these properties, like John said, in 49 states. My father bought a small portfolio of post offices, loved it, continued to buy, continued to grow the company. In the early 2000s, he retired. I took over the operations and management of the business. I kind of created more of an institutional model than he did, not by strategy, just by nature. Continued to grow the company, became one of the largest owners of assets leased to the Postal Service.
In order to understand what that means, I'm going to give you the context of what postal real estate looks like. There are about 32,000 facilities throughout the country. They lease about 25,000 of them. They pay $1.4 billion in rent for those 25,000 facilities, okay? That $1.4 billion, interestingly enough, is only about 1.5% of their total expenses. 1.5% to operate and rent the entire backbone of their logistics business. That $1.4 billion, any way you slice it, is a $12-15 billion market. Those 25,000 facilities are also owned by approximately 17,000 owners. That's how fragmented the market is. It's also important to understand who the owners of these properties are. Most owners probably own their properties between 40- 50 years.
Most owners are in their 60s-80 s, so we continued to aggregate, we continued to grow. About seven years ago, I was approached by a banker to create a public company around our portfolio. Never considered it, never thought of it, didn't really have any investors, was very low leverage. Spent a year or two trying to figure out if this was something that I should actually really consider, and what I realized was the opportunity set was really tremendous. No one had any real foothold into this. It was very fragmented, very inefficient. Average owner is, I refer to them as mom-and-pop owners, somewhat unsophisticated. Weren't really getting the most out of their properties, getting the most out of their returns. We were getting economies of scale on pretty much everything that we do.
What you'll find throughout this is that our relationship with the Postal Service and what we're able to work out with them is different than every other owner, and it flows to the bottom line. I also realized that creating the platform would help me in accomplishing all of this. And I happened to be sitting in the right seat at the right time, and arguably at the right age to be able to do it, because someone was going to roll up the space. And I just felt like I was sitting in the right seat to be able to do it at that time. We went public about five years ago. I seeded the public company with the lion's share of my personal assets. This was not a monetization for me in any way, shape, or form.
I did not take a dollar out of it. I took it all in ownership, in stock and operating partnership units. I also do not take a cash salary. I take all of my compensation in equity. I'm as aligned with shareholders as physically possible, and we went public sub-$100 million, and since that time, we've grown by five or six times. We got slowed down with COVID. We got slowed down the past two years with interest rates, with our cost of capital, but the opportunity set is there. We have been able to accomplish a lot in that time. You know, other companies like us really only have to grow externally with the acquisitions. We've been able to show that we're able to grow internally as well.
Our lease is a proprietary lease that's different than every other owner. We've been able to get the Postal Service to provide annual escalations in our leases, which no other owner with a portfolio is, was able to get. All of this, in addition to the economies of scale we get with our insurance program, with our roofing program, with the operation and management of these properties, really inures to the benefit of the shareholders and will continue as the portfolio grows and as we're able to apply these things to the leases as they expire. Just going back to postal real estate for a second. You know, most people don't even know that the Postal Service leases their assets. My father didn't at the time either.
What we've done to educate people on what postal real estate looks like is broken into three distinct buckets. Last mile facilities, facilities that are under 2,500 sq ft, flex facilities, which is 2,500 to 50,000, and then industrial buildings, which are the larger facilities. Our bread and butter is on last mile and flex facilities. Industrial, we will buy on an opportunistic basis. We've seen over the past five years, the industrial properties have really prices have gotten very high, and we aren't as competitive in those as we are in the last mile and flex facilities. We've been, on average, doing 200-300 acquisitions a year. That's approximately a deal a business day.
We've created a very simple and efficient process in order to do that type of volume. We've articulated a cap rate for this year, a weighted average cap rate over the course of the year to be north of 7.5%, and our goal is $90 million. We closed about $50 million in the first half of the year, and are on target to hit that $90 million number. If you see in our deck or you've watched any of our talks, you'll see our concentration in these properties mirrors what the Postal Service is, and that is more by nature than by strategy. We kind of go where the deal takes us, and the lease allows for that.
In order for us to underwrite a deal, first and foremost, we need to find that it's important to the Postal Service. We've been doing this for decades. We have a proprietary database to help us understand what that means and looks like, like anybody would with any concentration in any tenant, and then we underwrite the real estate. We're buying these, on average, at or below replacement cost, at or below $150 a foot. Just to give everybody a context of what that dollar means, 'cause it's important, 'cause from my perspective, we're buying value.
If I gave the Postal Service a vanilla box and they had to build it out, it would cost them more than $150 a foot just to build it out, and we're paying that number for the land, the building, and the lease. If you compare us to other double or triple net tenants, lower end of the totem pole, Dollar Generals and Family Dollars, those are paying north of $150 a foot, let's say $200 a foot. Pharmacies and banks could be anywhere between $300-$400, and banks on the higher end, closer to $500. We're buying these properties in the same towns and counties, from my perspective, at a significant value. The story is simple. The buildings are simple.
We do not have to do anything special to make these properties make sense. Again, the lease structure is what it is. Our largest single expense is roofing from a maintenance standpoint and insurance. Real estate taxes is a pass-through expense. Very often, people try to compare us to other government agencies, GSA leases. I would argue that we're nothing similar to them. Those GSA leases may have longer duration, but they have budgetary appropriation termination options. Our leases are five years.
They do not have termination options, and in the environment like we're in today, being able to roll and negotiate your leases every five years is a benefit, and we've shown that to be true, especially when you know your tenant's staying in the building 99% of the time. In addition to that, GSA leases are also full-service leases, so the landlord has full responsibility for janitorial, landscaping, snow plowing. That's not how our leases are structured. We refer to them as a modified double net lease, where the owner is predominantly responsible for roof and structure in the majority of our leases. Real estate taxes, as I was saying, is a pass-through expense, and insurance is an expense borne by us. But we've really insulated ourselves.
Any of you that understand real estate and have seen how insurance costs have risen in the past three, four years, we've built a platform where we've insulated ourself on an insurance basis. We're getting single-digit increases on an annual basis, which has actually been really, really good. I think that should give us the baseline for our conversations. If anybody has questions, we'd like to open up the floor. I'd like to say in addition to myself, I have Robert Klein, our CFO, and I have Jeremy Garber, our President here, in case I'm unable to answer any questions or you want to direct any questions to them specifically. Okay, please.
So, Andrew, I came across your company, looking at your insider purchases in April and May. And so one of the questions was about how are you funding these acquisitions? Is it a combination of debt and equity? 'Cause I noticed you issued a lot of shares over the last five years.
So the question is regarding insider purchases and how we're funding the purchases.
No, the acquisitions.
Acquisitions. Okay. So first of all, and this is a very important thing that I didn't mention, our deal flow is 75% off-market. So our acquisitions, that's an important thing to note that I forgot to mention, and it's important because I've never really come across a real estate market, let alone an entire industry, with that kind of a statement. And these are legitimately off-market deals, where the owners are calling us directly or our outreach to them, where there's no broker involved, this is not marketed. In order to grow and acquire, we have to do a combination of two things: We have to do equity, and we have to do debt.
In this last quarter, where REITs have been trading, honestly, our stock price was not in favor, and we didn't want to issue shares, and we funded mostly with debt. But we try to keep our balance sheet relatively clean. We try to give ourselves our ability to buy with our accordion, with full access to our accordion or the majority of it, so we don't have an issue acquiring. At any given time, there's a balance between 60 and 40 of debt and equity. Going back to the structure of this and why the opportunity really made sense at the given time, I didn't touch on the structure of the company, right? So we built this as an UPREIT.
I don't know how many of you are familiar with REITs, but UPREITs give you the ability to have your own currency, and this was very important. Most people know what a 1031 exchange is. I think people are fairly familiar with that, where it gives people the ability to sell their real estate asset, buy another real estate asset, and defer their capital gains tax. This UPREIT structure gives you a similar benefit, right? You take your property that most of these owners, again, have owned the properties for 40 or 50 years, do not have any depreciable basis left in their property, and are paying a lot of income tax, and would pay a lot of capital gains tax.
And they give themselves the ability to contribute the property to the REIT and take back operating partnership units. These operating partnership units look and act like common shares, with the exception of two things: number one is they're not liquid, and number two is they don't have voting rights. But they defer their capital gains tax, they collect a dividend, and they're able to estate plan their assets. This has been a very important piece of the puzzle for us. It appeals to a lot of owners, especially at this demographic. What we found is the next generation doesn't wanna own the asset, they'd rather have the cash.
And so this gives owners the ability to give some people cash, give some people units, and then at a certain point, they convert those operating partnership units to shares. That triggers your capital gains tax, and makes it liquid. Our acquisitions, we use this more than most. When we were going on our roadshow, and I had the thesis of this public company, I very much believe that these operating partnership units as currency would be a big driver of our success. And most of the investors we met with told me that a lot of REITs say it, and very rarely do REITs actually use it. We've proven out true that, you know, 10%-15% of our deal flow, we use these operating partnership units.
And a lot of deals that come in from sellers, they're interested in these operating partnership units, and sometimes we convert those deals to cash. So very long answer to your story, but I wanna fill in gaps because not everybody understands the structure and how we're utilizing it. But Rob's done a great job at keeping a balance of low leverage, giving ourselves the ability to continue to acquire using our at-the-market program, where we issue shares, operating partnership units, and debt.
I have a follow-up question. So the operating partnership units, do they get a dividend that's similar to, public shareholders or?
They're the same. They don't call them a dividend, they call it a distribution, but it's the same. Yeah. It's taxed differently, because some of it's return of capital, but the dollar amount's the same. The yield is the same.
Can you give us an update on your industrial assets? As you said, you haven't acquired there for a while, happy with that, given the cap rates. But is that a place where you need to be longer term? And can you also give us an update on what the REIT looks like in the next couple of years?
Sure. So I don't know that it's a place that I need to be, that we need to be. We would like to acquire more industrial properties, but really, it's only if the price is right and if the property is right. I think we've shown that we're not growing for growth's sake. We're not actively acquiring dilutive assets or assets that are not beneficial to the portfolio just for the sake of growing, and that very much applies to the industrial assets. We would like to continue to acquire them. We do look at them, we do bid on them when we think there's a possibility of us buying them, and they're interesting to us.
But very often, it doesn't make sense to get into the final rounds at the prices that these things are trading at. It just doesn't. We have a handful of these industrial assets. Some of them are rolling sooner, the larger of which are not gonna be rolling for another year or so. Each one of them, like every asset, has a unique story, and it's part of our special sauce of understanding the tenant and their use of the properties. One of the assets, which is just interesting, is in Kansas. It's a roll that's happening now or soon, and everybody that would look at this asset would look at it as a warehouse. That's what it looked like from the outside.
What we knew was that this asset was very important to the Postal Service for a very unique reason. It was called Central Repair Facility. Okay? It wasn't labeled as such, but again, knowing your tenant, you understand how they're using their buildings. Any piece of equipment throughout the entire United States, Guam, and Puerto Rico, if it needs to be repaired in any way, shape, or form, has to be shipped to Kansas to be repaired. Don't ask me why Kansas, I have no idea. But this all happens in this warehouse, or in these two warehouses, actually. If there's, you know, anything that needs to be done to this equipment, this is where it is. Now, that's important for a lot of reasons, but there's institutional property in...
That of all the people that know how to repair all this, they need to be in this area now. They have a few hundred employees working out of this building, and so we aggressively went after buying these buildings. And we know that they need to be here, and so the role is interesting because of that, right? And this is how we look at most of our buildings, understanding what their need or want to be in this facility or how important it is, is critical. Have a follow-up question? If not, I was going to add something.
I was just going to ask that, you know, do you feel like you don't need to be there, or does it make sense to liquidate and reinvest back into,
That's something that we've been talking about more recently than before. The truth is, we can dispose of assets and sell them at a profit from where we purchased them, and it is something that we are talking about on a regular basis, and it would be about recycling capital, less so than the need to sell it, right? These assets are good assets. We want to own them, right? And if this company is going to grow, which it will, you don't want to dispose of assets unless there's a need to, right? Unless you want to lower your leverage, or unless you want to recycle the capital into something, right? The goal is to grow the business, to double and triple the size of the business.
And the only way to do that is to continue to acquire. But opportunistically, we are looking at selling some of our assets. Just to speak for a minute, another point that I didn't get to was the importance of what we're buying, right? Everybody thinks about these as post offices. These are not just post offices. We're investing in the largest and most intricate logistics network in this country, okay? The Postal Service touches 167 million delivery points, six days a week. It's important for a lot of reasons, but in today's world, where most people in this room are buying things, and our families are buying things online, you can't get to the American people without plugging into this network. And I'm saying that as a fact.
Everybody, every delivery service provider, every online retailer, leverages the Postal Service's network in one way or another. They have to. They can't touch the American people as quickly as they need to without doing so, which means that all of these buildings just become more and more valuable as we became more reliant on online purchases. The future of the Postal Service, the present of the Postal Service is packages. It's not mail, and that's what we're buying, and that's what we're investing in. Anybody else? Please.
Thank you.
No, please. Sorry.
All right, so the lease renegotiations have been a big issue for you in the last couple of years. I think last year, you kind of finished that group-
Mm-hmm
... sometime around in the fall. Just kind of curious, can you, does it feel like we'll probably see the same sort of process this year in terms of timing?
So the lease negotiations, I wouldn't describe them as an issue. It felt that way because it was delayed, but the Postal Service is still a government agency, right? We look at it as a business, but it still operates as a large, bureaucratic government agency, and they don't move quickly, especially when you want to make changes, and that's what we've been doing. Like I was saying earlier, you know, in 2022, I held my line very, very strongly because I wanted an escalation. I didn't want more rent; I wanted an escalation, and it's important, it was important to set that precedent, and we did. Again, no other owner is able to do that or has been able to do that, before or since.
On the 2023 roll, it was very important for us to hold that precedent and explain to the Postal Service that even if the escalation amount, at the time it was 3.5%, even if it needs to be adjusted, given the current environment, it should be in the lease document, and we were able to execute that. For 2023, we have a 3% annual escalation. Now, again, context is everything, right, so no other postal owner has this. If you look at triple net lease REITs, okay, or triple net assets, right, they have 1.5%, maybe 2% on a good day. We have 3%, right, so I wouldn't categorize this as an issue. I would categorize it as a really huge win for us.
And this is going to really trickle down to the bottom line and, and will show internal growth that is, I believe everyone's going to be very, very happy with. You know, all of this is really a proof of concept for me, right? There's no other postal REIT out there. There's no one like us, right? We are the largest owner. We own 7% of that market that I was telling you about. The next 20 largest owners altogether only own about 11%, okay? As we grow this platform, as we continue to aggregate these properties, opportunities like this will present themselves, and that's really what this is about, right? So we have two, 2,000 buildings under our umbrella. We're able to get these annual escalations as we grow.
I'm hopeful that more opportunities like this will come, and we'll be able to grow shareholder value when they do. But the short answer is we're hoping to wrap up the 2023s in the next coming months. This is more lease production than anything else. We can't control their lease production or when they send leases back. But I believe you're going to be very happy with our results. I know that we are. And the documentation will come as they do, but should be by the end of the year. Again, sorry for the long answers, but there are some faces in the room that I don't recognize. I'm just trying to fill in some gaps.