Afternoon, everyone. Jeff Elliott with Three Part Advisors. Thank you all for joining us. Next presenting company today is Postal Realty. PSTL is the ticker. Here with us today from the company, we have Andrew Spodek, CEO, Jeremy Garber, President, and Jordan Cooperstein, VP of FP&A and.
Capital Markets.
Capital Markets. I always forget that part.
Absolutely.
Yeah. Anyway, Postal Realty is an IR client of ours. If anyone would like a follow-up meeting or call, please reach out to me directly, and we can go ahead and get that scheduled for you. With that, I'll just go ahead and turn it over to Andrew.
Thank you, Jeff. Thank you for joining us. I see some familiar faces. I see some shareholders, and I see some people that we have not met before. I am going to apologize for the people that have heard this, but I am going to go back to the origin of the story just to give you some context. I cannot take credit for the idea of becoming a postal owner. My father started buying post offices in the early 1980s. What he found very early on is what we have proven out to be true, which is that the Postal Service always pays their rent on time, 100% of the rent, 100% of the time. You can own and operate properties throughout the entire country without the need for any on-site personnel at the facilities because of the preferential lease structure.
Most importantly, and the most misunderstood fact is that the postal service very rarely leaves their assets. We've been able to maintain a 99% retention rate over the past 10-plus years through pretty much every economic cycle, through government shutdowns, through COVID, through every administration, through different postmaster generals. Anyway, he continued to grow the portfolio. He semi-retired in the early 2000s, and I took over, institutionalized the business a bit more by nature than by strategy, continued to grow the portfolio a little bit more aggressively, became the largest owner of assets leased to the postal service. My father passed away in 2016. I was approached by an investment banker to create a public company around our portfolio. Never given it any thought, didn't really have any investors, didn't answer to anybody, was very low-levered.
Spent a bunch of time trying to figure out what the opportunity set was, what the market was, whether the public platform was the right way to go. Spent about two years researching, and I learned a lot. Sometimes when you're in a business doing the same thing every day, all day, you're focused on the grind, you're focused on whatever deals are put in front of you, and you don't have the context of the overall market. Just to contextualize what we're talking about, there are 23,000-25,000 leased postal facilities throughout the country. Postal service pays $1.6 billion in rent. It's interesting that that $1.6 billion is only 1.5% of their expense line item. 70-80% is labor, which actually does make sense. There are about 17,000 owners of those 23,000-25,000 facilities. That's how fragmented the market is.
A little more data on what the ownership looks like. Average owner is in their 60s - 80s. Average owner owns their property 40-50 years and has little or no depreciable basis. That $1.6 billion, regardless of what margin you put on it, this has got to be a $12-15 billion market. We are today, by far and away, the largest owner. We own 7% of the market. The next 20 largest owners altogether only own about 11%. So you have 80% of the market that's up for grabs. What you'll find in our presentation, and after I give you this little background, we'll open it up to questions. What you'll find in a lot of our answers, if not all of them, is that our relationship with the postal service is different than the majority of other owners.
It's because of how long we've been doing this. It's because of the size and scale, because of our platform, and because of how we operate these properties. As a result of that, we are able to accomplish things with these buildings that the average owner is not able to do. That was part of my thesis in going public. The other part of the thesis was around the Operating Partnership unit. I understand that not many people in this room are familiar with REITs, so I'm going to give you a little background on what that means. If you create the REIT the way we did, which is with an Up-C structure, it provides you with a currency. That currency is called an Operating Partnership unit or an OP unit.
It gives you a currency that you can exchange for a property and allow the owner of the property to defer their capital gains. As I said, these people have owned these buildings for 40 - 50 years, so they have little or no depreciable basis. They have no shelter for their income. They have no shelter for capital gains. If they are selling their property for $1 million, they are going to be hit with a 20-25% or $200,000-$250,000 capital gains tax hit. If they contribute their property to the public company and take back these Operating Partnership units, they defer their capital gains tax. They get a full $1 million of these Operating Partnership units. They are able to collect a distribution, which equals our dividend, which today is between 6.5-7%.
They avoid the hassles or headaches of ownership, that is, any lease negotiation, any potential vacancy, any capital expense, anything like that. They are able to be an owner of postal, which most of these people are very proud owners of postal assets. I believed that this was always also going to be a big driver of the public company, and it has been. We have done 10%-15% of our deal flow with the use of this currency. More than that, 75% of our deal flow, and we buy about 100-200 properties a year, is off-market. I mean properly off-market, not touching a broker, purely inbound calls from owners or owners that we are reaching out to. A lot of that deal flow is because of this currency. It is also because of our reputation.
It's also because of how long we've been in the space. That currency is very valuable to owners. We don't use it all the time, but it's a very important tool for us. Anyway, for those two reasons, we went public. I seeded the public company with my personal assets. This was not a monetization for me. I took back all of my equity in these Operating Partnership units and stock. We continued to grow the public company. Now we've been public about six years. We've grown the company by over seven times: square footage, rental revenue, property count. What was 270 properties is now close to 1,800 properties. Truthfully, this is a slower pace than I would have liked. We got slowed down with COVID, and we got slowed down the past two years or so with the rise in interest rates.
We've articulated this year to buy $80-$90 million at or above a 7.5% cap, which is accretive out of the gate. What is interesting is the accretion we're able to add through our internal growth by marketing these leases to market and by renegotiating our leases and able to accomplish a 3% annual escalation in our leases. This is one of the biggest examples that I could provide of a proof of concept in the platform. The average owner has a five-year fixed lease, no escalations. We've been able to get 3% or better from 2022 all the way through 2026. Because of this escalation, we've also instituted 10-year leases on a lot of the new leases that we're executing. These are, again, both things that the other owners don't have.
Just as a statistic, when we are finished completing executing our leases through 2026, which are agreed to, 56% of our portfolio will have these escalations. And about 30-some-odd percent will have 10-year leases. This is a tremendous opportunity. This probably gives you 2-plus cents of earnings just in the 3% annual escalations that we've already executed to date. Again, this is all for the benefit of shareholders and shows that this platform has a tremendous value and will continue to show those values as it goes on. I think that should start us off. Is there something that you think I missed?
You want to talk about the postal real estate, how we define them.
Sure.
Give you an idea of what that means.
From IPO, we've been educating the world on what postal real estate looked like. When my father first bought them, he didn't know the Postal Service even leased their assets. Most people don't. There are a lot of assets that they lease. We bucketed them into three different types of properties: Last-mile facilities, which are smaller facilities, 2,500 sq ft and under, which I would think of as a rural facility; Flex facilities, which are 2,500 to 50,000 sq ft; and Industrial facilities, which are larger. Our bread and butter is buying the flex and last-mile facility. The industrial buildings, even though we do look at them, even though we do buy them, it's more opportunistic and episodical. They're pretty expensive on a cap rate basis and a per sq ft basis. We don't find ourselves to be very competitive or to be tremendously value-added.
Therefore, we focus on the flex and last-mile facilities. As I said before, because of the preferential lease structure, we're really able to go where the deal takes us, any geography, any size, any market. Once a deal is presented to us, there are two main underwriting criteria that we look at. First and foremost is whether we believe the postal service either needs to be in that building or wants to be in that building. We're able to determine that because of how long we've been in this business. We've built a proprietary database with many data points that I've put together for decades. Once we've determined that, we underwrite the real estate as it falls within that market. We're buying these on average around $160 a sq ft. For those of you that know anything about real estate, recognize how inexpensive that is.
If you want to compare that on a value basis on a per square foot to other double or triple-net players, whether it's a Family Dollar or Dollar General or anything like it, those are typically trading north of $200 a foot. If you go up to bank branches or pharmacies, they are in the $400-$600 a foot. I would argue that our credit is better. I would argue that our rent collection and retention is better. The way that my father always looked at these was as a government or real estate-backed bond. That is still how we look at it today.
You want to talk about how others harness the network? Amazon, FedEx.
What Jeremy's speaking to is the value of the network itself. There are different ways to look at what we're investing in. There's the real estate, which I just explained, but there's the business itself. Everybody thinks about this in their own way. If you look at it, it's almost like a two-headed animal. You have the government agency part. There's a constitutional right of the American people to universal service that the American people desperately care about and will fight for. You have the political impact when a potential post office is talked about for closure. Those political reasons and government reasons are reasons why a lot of these buildings stay open. There's the business aspect. This is not just about the postal service. We're investing in critical American infrastructure, critical logistics infrastructure. These are nodes on a logistic chain.
The postal service has a virtual monopoly on delivery to the last mile. They deliver to 169 million delivery points five or six days a week. Those delivery points are arguably the target market of every online retailer. It could be Amazon. It could be a small seller on Etsy or eBay. Everybody needs to get to the American people as fast as possible. That is usually quickest and most efficiently used by the postal service. Every delivery service provider out there leverages this network in one way or another. Amazon is the proof of that. They built their entire warehouse network around the postal service. The goal was to be able to take their packages from their warehouse.
By the way, many other larger retailers have copied their model and deliver it to the post office before, I do not know, it says around 6:00 A.M. The mail carriers need to deliver that last inch. It just shows the use of the network and the leverage of the network. Not everybody has Amazon, but everybody needs to get and deliver to the American people as quickly as possible. I will now open it up to questions. Focus on particular areas if anybody would like.
You mentioned evaluating a property as to whether or not the post office might close down or not. Do you engage with them at all on, say, you see an area or a property that you think could go away? Do you engage with them at all in recommending or suggesting another location or partner with them in that way?
The way the postal service historically and currently looks at this is they go into a market and they choose a property, a piece of land, not a building. They choose it for various reasons. Usually, it's because of that property's access to local roads and highways and ease of ingress and egress. Then they build a building to their specifications. Interestingly enough, they don't want to go to a large developer. It would be very logical to me that when they rolled out this network in the 1960s and 1970s to go to a Toll Brothers of the like and say, "Can you build me 10,000 buildings?" They didn't do that. They went to the local towns and counties and offered local people the ability to buy, based on an RFP, to build their local post office.
They still do that today. We've helped local towns and cities with their, let's call it, postal issues. We've bought properties from local municipalities. We've engaged in versions of that, but we don't typically build from the ground up. We've bought buildings that needed to be built, but the contracts were already in place. It's a little complicated just because you would have to go into the town. You would have to basically tie up in contract a bunch of properties you think they'd be interested in and then go to the postal service. If not, they're going to the owner of that parcel. It's a little nuanced.
How many of the older buildings need upgrades of some sort? Do you get involved with that at all if you buy the property?
I would argue that most of them need upgrades. The Postal Service is not very good at maintaining their buildings and investing in their buildings. The good news is this is not an expense of the owner. I believe that as time goes on and as the portfolio grows, that is one of the areas of potential profit centers for the company. The buildings that we buy, in general, are not a major focus of the Postal Service. From a maintenance standpoint, they're focused on their larger processing facilities. At some point, I believe that there will be a value in leaning on us and saying, "Listen, you guys own 5,000 buildings. I'd like to paint them all. I'd like to put lighting in all of them.
I'd like to do roofing. That would be another version of a profit center for us because we could execute on that. It would be very, very interesting. Today, we've done that, but it's not very common. Yes?
Yeah. I'm thinking about how fragmented ownership is today. There might be people like your father who still own or maybe small groups.
Yep.
If these are such great properties to have, what are the main reasons for selling?
It's a great question. The main reason for selling is typically either life events, estate planning, or liquidity needs. It's not a very heavily financed space. It's not driven by that. It's typically driven by the family. A lot of these owners are relatively unsophisticated people, especially the smaller ones. They were local contractors or local landowners in a town. They ended up either building the building or owning the building or buying it from the original builder. They assumed that they would pass this building on to their kids. Their kids no longer live close to this town. The kids want cash. They don't want a building. Definitely not a post office. It's not sexy, but it pays the rent. That's usually what happens.
What you find is, and this is what I was getting to in my original thesis, is the larger owners, the people that built 20, 30, 40 buildings in a surrounding town and county, were typically the larger construction companies, were typically a couple of brothers or partners. Those people are in their 80s. The children and grandchildren have these buildings. They're all partners. They have different views of what's supposed to happen. The currency, the Operating Partnership unit, gives you a lot of flexibility because not everybody has to make the same decision. It's a way to disband a partnership or an ownership group in a very nice, elegant way that's very easily estate planned.
The larger owners that my father and I have tried to buy their portfolios for decades that would not talk to us about price or cap rate are very interested because of this currency and have taken them on a number of transactions over the years. Thank you. Yes?
I was just wondering, geographically, where are you investing in a lot of these buildings?
We go where the deal takes us. What you'll find if you look at a map is that our concentration is predominantly east of the Mississippi. There's a big reason for that because when the Postal Service rolled out this network, they started on the East Coast and went to the West Coast. When they hit the Mississippi, they started building and owning for their own account. I should reference that the Postal Service owns 7,000 or 8,000 buildings. They do not lease those buildings. They own them. As this company grows and as the Postal Service looks at its own balance sheet and its own books, there's, I believe, a possibility at some point that I do not control, but I believe will come, where they may want to do a sale leaseback on those properties.
I believe building this platform and doing what we're doing and being the partner that we are puts us in a pole position if that opportunity does present itself.
Like a lot of outside potential.
Correct.
Are the non-compacts taking your lead and trying to get better longer leases with escalations?
The postal service is not providing longer leases or escalations to other owners. They have asked for them, but they have not gotten them. Most smaller owners are, I'm going to use the word intimidated, even though I do not believe that it is intentionally intimidated. They typically sign and accept whatever leases are presented to them, which is part of the opportunity that we have because we know where there is upside in rent and we are able to negotiate them in a way that most other owners that do not have the confidence and certainty of execution that we have are not able to do.
Why doesn't the IRS just say no to you?
The postal service could say no to me. Yeah. Yeah, yeah. It's all good. It's all good. You're thinking about the IRS for some reason. The postal service has said no to me on many occasions. I'm sure they'll say no to me on many more occasions. I believe that with any negotiation and with any relationship, if you're reasonable in what you're asking for and you can present a business case of why it's not just reasonable, but it's commercially reasonable, it's very difficult for the other party to not consider it. They can still say no. In years past, the postal service has said no. I've asked for escalations in years past. I took the opportunity of the hyperinflationary environment that we were in in 2022 to hold my line in a way that I never held it before.
I made a business case to them that was very hard to refute. I mean, we are owning a lot of properties. The costs of everything are going up. I do not have any increases in my rents. You still want me to maintain these buildings and to replace a roof or do whatever I need to do or pay employees or whatever costs that we all dealt with, the lease needs to reflect it. I very clearly told them that because you have not done this for 50 years is not a good enough reason for me to consider not needing it in my lease.
I get confused with double net, triple net, and all that.
Sure.
Some you just get to check, but it sounds like in some of these you have to make sure the roof is good, etc.
Let me explain that. That's a good question. That's something that I should have spoken to. These are not triple-net leases. These are how we refer to them as a modified double net lease. How I describe them is the owner is responsible for insurance. The owner is responsible for roof and structure. On the majority of these buildings, roof, structure, and building systems. Building systems would mean like the plumbing or wires in the wall, like that kind of thing. Our largest single expense is roofs. The real estate taxes, which would be your largest single expense, is a pass-through expense. It's reimbursed by the postal service. If anybody looks at our financials, you'll see the expense and you'll see the recoup of the money.
Got it. So you still have to do roofs and the electricals?
It's not outlets. It's the wires in the wall, which I don't know how often wires in the wall. I don't know how many of you experience it. It's not usually something that's a terribly large expense.
If the light doesn't work, they don't owe you.
Correct. We do not have to do the normal maintenance and carry of the building, the janitorial, landscaping, snow plowing, the utilities. All the operations of the building is not on us. Majority of the maintenance, CapEx, is not on us. What is also interesting to note, and again, I do not know how many of you are familiar with real estate, but I have described this as a continued occupancy. What that means is if the lease ends today, the next lease starts tomorrow. We do not do any tenant improvements. We do not do any build-outs. We do not give any free rent. We do not pay leasing commissions. What other real estate companies have is they have a gross effective rent and a net effective rent. Our gross and net are the same. That is a big deal. There is no leakage in your income.
When do you replace the roof and who determines when that roof gets replaced?
We determine it. What we do is one of the things that I did when I took over the management of the company.
You're a little more than you get.
I do not know if my father's pretty anal. I do not know about anal. What I did was, and what my father did and what most other postal owners do, which is logical, is if your roof has a problem, you call a local roofer. What most postal owners get as a result of that is a local guy in a pickup truck and a bucket of tar. That is the result that they get. I have always looked at this as a portfolio, not as individual assets. What I did was I called manufacturers and I said, "Listen, I have got 500 buildings. Now we have got 1,750 buildings." I was like, "These are the amount of roofs I have.
I'd like to work out what I refer to as a Master Contract on a price per sq ft basis. Now what I do is instead of calling a local roofer, I call Duralast or Firestone or GAF or whatever you want to call. They then send out a roofer for me. I know a bit about roofing just by doing this, but what you'll find is that manufacturers actually rate their roofers. There are preferred roofers based on the scoring that they get when they install. They send out their top-tier roofers. They give us a price on the roof. I get a Manufacturer's Warranty on the roof. The manufacturer inspects the roof, makes sure there aren't any mistakes. I have a roof for 20-30 years. We systematically roll out a replacement program over the course of our portfolio, depending on the age, useful life, etc.
Yeah. So you do not just wait until you get lots of trips?
It depends, actually. Sometimes we will. An example where we're not getting where there's, let's call it a lease rolling in three or four years, even if the roof arguably needs to be replaced, I may wait till the lease rolls. Most of the time, it's more systematic. Correct.
One or two times when they're going to cut a shed at a roof.
Right. I should speak to that also, which is in six years, started with 271 properties. We're now north of 1,750 properties. We've had two vacancies. Again, 99% retention rate. One of the properties we've sold, made a marginal profit on it, even though it was vacant. We do not deal with vacancies very often, but we often get the question, what happens to these buildings when they do go vacant? These buildings are very, as I was saying, well located. They have very good land-to-building ratios because of the amount of parking they require. We've seen them be bank branches or pharmacies, law offices, doctor's offices, hardware stores. They're very easily converted buildings. Luckily, we do not have to deal with it very often.
How often do you fit it into the postal office hour?
No.
How often, when you're fitting out lease, how many people are you fitting in?
The honest answer is I don't know. The answer that I'm always told is that there's another buyer, no matter whether there is or not. You never know the truth. No matter what transaction you're looking at, I'm sure that everybody's dealt with this in their life, whether it's a home or something. There's someone else bidding against you, but they like you better for some particular reason. We get that all the time. It's hard to know the answer.
What percent of the property do you end up with that you're bidding on?
The nuance to that question is in the bidding. We close a very high percentage of the deals we get into contract on. Deals that we start bidding on, we do not always continue until the end. That is why the answer is not such a simple one. While we are bidding on a property, in competitive cases where I think I am really bidding against somebody, I will strategically start diligence during the bidding process to see how much I really want the building. I do not always complete the bidding process. When it is a very competitively bid deal, I do not usually bid. Sorry, it is not a specific answer, but.
What percent do you start and finish?
Oh, vast majority, 80% plus.
If you start in the process, 80% plus.
Right. The number will skew based on dollars. I'm going to say that because you're asking a specific question, and I want to be clear. On industrial assets, I may start a bidding process knowing there's a good likelihood I'm not going to finish it, but want to stay in the mix. You know what I'm saying? The numbers will skew drastically if I'm trying to at least keep my finger on the pulse of an industrial property that I know once my bidding is, like, chances are I'm not going to buy it.
How many will you buy a year on average?
We buy 200-300 buildings a year.
You're expanding the portfolio by 12% a year?
The past two years is 200. The year before that was 300. Right? It depends how you look at it. The numbers are not drastically off.
On average, how many do you buy when you buy this portfolio?
What do you mean?
It is worth $100.
Oh, sorry. Got it. Got it. So what you'll find is, and it's interesting, I was just talking to Jordan about this earlier today. In 2022, first half of 2022, before interest rates really started moving, we did about $80 million just in the first half of the year. I canceled more deals midway through that year than I've ever canceled in my life, which was the smart move. If you look at the first half of 2022 and 2021 as an example, what you'll find is there were a higher percentage of larger portfolios and larger deals. Once interest rates started to move, I focused more on the smaller portfolios and single buildings because I was able to move cap rates more. I had more control over moving. Right? So cap rates for 2021 ended a year, these guys can correct me, 6.5% cap.
This year, I'm hoping to end north of a 7.5% cap. I did the same thing last year. You wanted to move your cap rates up by, let's call it, 100 basis points. The larger players, larger portfolios, they did not care. I could not get them to the table in that way. I focused on doing more transactions, smaller portfolios, less deals. Today, I'm still in that frame. What you found today is post-election conversations have picked up. People still have not really moved their cap rates a lot, but those larger portfolio owners are considering it more.
You have a 12% growth rate, 3% pricing. What's pricing on the average per unit?
7.5% cap is what it is. Oh, dollars? $500,000. $500,000 is, I think, our average.
Your annual CPI increase is every year.
3%. Annual increase. I'm sorry.
Portfolio was the average.
3%.
Oh, so it is 3%.
It's 3%. We got in 2022, I was able to get 3.5%, but everything since then is 3%. Yeah.
12% growth, 3% inflation, 7.5% cap rate. What do you think the appropriate level is?
We do not speak to it. Everybody asks a question of that. We do not disclose it. Yes.
Do you have a sweet spot in terms of urban versus small-town population size? I mean, are there certain places where you get the attractive cap rates? I mean, do you also have a really reliable 10?
It's a great question. The answer is yes, but it's nuanced. I have a sweet spot in that I want to balance. Right? The reality is the sweet spot is in that area. If you think about postal properties in general, right, say there are 10 post offices within 10 mi. Right? There are specific post offices that I want to own within those 10 mi, but it's not I want to own a 1,000 sq ft building in this area of Oklahoma. Do you follow what I'm saying? It's in the context of that market. It's not in the context of the portfolio. If you look at our portfolio, you'll see our ownership percentage in, let's say, Flex or Last Mile is also similar percentage-wise to the postal services portfolio within that same area.
Right. If there is one in one of the 10 in that area, what is it that you like about that?
Typically, there are stats about that building. Now, I'm talking postal, not real estate, right? I could very easily think that it's a great postal-spec building that they want to be in, but the price could be three times what the market is, and I'm not buying it. From a postal-spec building, it could be carriers, routes, P.O. boxes, revenue, employees, in addition to demographics and just general things that people look at in real estate. If you owned pharmacies or banks, right, you would know what those metrics are for those types of tenancies and which buildings, an average deposit above $5 million, an average deposit, you would know what the metrics are. It's the same thing for postal. Yes.
We talked about what we get from transactional fee average. How much time does one spend?
What we find is average WALT on a transaction that we're buying is two to three years. People don't typically sell right after they execute a lease, and they don't typically sell in the last year of the lease. From our perspective, if we could choose when they would sell to us, I would want it the day before the lease expires so I can negotiate it myself.
We talked about the economic model, if you will. We've been talking about the 7% cap rate that you do. What do you finance that at? How is that going to grow? Finance it more? More for the equity company?
What we've articulated to the world is north of a 7.5% cap. What we do is we balance our debt and our equity. We do a mix of the two, depending on what's going on in the world, depending on what our leverage rates are, depending on where our stock is. We use various tools to be able to do that. We have a corporate-level unsecured credit facility, which is how we pay for most things. We draw down on that credit facility. Depending on where our leverage is, sometimes we'll use an ATM and issue shares at the market program, which is fairly common. Sometimes we'll use the operating partnership unit, which is also fairly common. Once we get to a certain place on our credit facility, we then term that amount out and lock in the rate.
What you'll see today is 90-something percent of our portfolio is fixed-rate debt. I think our average debt is under 5%. New debt that we're taking on our credit facility is somewhere between 5.5-6%. That's typically how it works. I should also tell you that, again, as a proof of concept, we've sold two assets in the past six months. It was a reverse inquiry. They called us to buy it. We bought those assets. Let's call it north of an 8% cap, sold it at south of a 5% cap. The fundamentals of this business are very, very simple and very, very strong. It is unique. It is not terribly sexy, but it works. Thank you. Anything else? Thank you.