Good afternoon, everybody. Appreciate you guys sticking around for us. In order to give you the story about the company, I kind of have to back up and give you the background on myself and my family and how we got here. My father, who owned different types of real estate and was involved in real estate the majority of his life, was approached to buy a small portfolio of postal assets in the early eighties. At the time, he didn't realize, like most people, that the Postal Service even leases any of their assets. He ended up buying that small portfolio and found very early on some of the benefits of ownership. First and foremost, because of the preferential lease structure, you can buy these properties all over the country. We currently own in 49 states.
Number two is that regardless of what's going on in the world, you're going to collect your rent. We collect 100% of our rent, 100% of the time. It doesn't matter if government shutdowns, economic cycle, COVID, et cetera. Number three, which is the largest misconception in postal real estate, is that the Postal Service stays in their building the majority of the time. We've maintained over a 99% retention rate over the past 10+ years. For all those reasons and more, he continued to buy these assets. In the early 2000s, my father semi-retired and I took over the business, kind of institutionalized it, more by nature than by strategy, continued to grow the portfolio a bit more aggressively, became the largest owner of leased assets to the Postal Service. My father passed away in 2016.
About a year after he passed away, I was approached by a banker to create a public company around our portfolio. Never had any desires of standing here in front of you guys, never had any desires of being a public company CEO or anything of the like. Didn't have any investors, owned the properties myself, was very low levered, came to work in a hoodie, never had a business card. I spent about a year or so researching what the opportunity was. I learned a lot about myself, about the business, but more importantly, about the market itself. Sometimes you find when you're in a business and you're just kind of doing it every day, all day, you're focused on that and not necessarily what the market is. Postal 101 is like this. There are about 32,000 facilities throughout the country.
The Postal Service leases 23,000 of them. They pay approximately $1.6 billion in rent for those 23,000 facilities. Anyway you slice it, any margin you want to put on it, it's got to be a $12 billion- $15 billion plus market. Those 23,000 facilities are owned by approximately 17,000 owners. Those owners are for the most part in their sixties to eighties. Those owners have owned their buildings 40 - 50 years and have very little, if any, depreciable basis. It's also interesting to note that that $1.6 billion is only 1.5% of the Postal Service's operating expenses. The backbone of their entire delivery business is 1.5% of their expenses. I realized how fragmented the market is.
I realized, being in this business my entire life, that most of the transactions that happen are typically because families are planning for their children or life events or something of the sort. When I learned about the possibility of what an UPREIT structure is, and I'll explain what that is in a second, I realized that there was a benefit to it for these particular owners. Creating this public real estate investment trust as an UPREIT structure gives us a currency. We're able to exchange people's properties for operating partnership units. Those operating partnership units look and feel like common shares. However, they are not liquid. They're not tradable on the stock exchange, and number two is they don't have voting rights. What the benefit is, is someone can give us their property, we can give back these units.
They do not trigger a capital gains tax, and they do collect a distribution, which is like a dividend. These shares are very flexible and very easy to estate plan. Different than a property, you can divide them up against family members. You can donate them. You could do whatever you want to do with them without triggering tax. When someone passes, they get a stepped up basis and then they can convert them to shares and not trigger capital gains tax. Knowing what I know about this space and being in it as long as I have been, I thought this was going to be a tremendous driver to this thesis. When the bankers took me on our roadshow and I met with investors, everybody told me that REITs always say they're going to use the currency and they very rarely do.
I believe we're different and I think we've proven out that we are. We do 10% - 5% of our deal flow with this currency. We can do a significant amount more, but we usually choose not to. The goal is to grow the company. The goal is to grow the market cap of the company and the liquidity. You can't do that by using these operating partnership units. What it does is it drives a tremendous amount of deal flow to us. We do 75% of our deals off market. I mean properly off market. They don't touch brokers. These are people that are calling us or people that we are calling. That gives us a tremendous opportunity in this market. We went public about six years ago. I seeded the public company with a portion of my personal portfolio.
This was not a monetization for me in any way, shape, or form. I did not take a dollar out of it. I'm the largest shareholder. I own these operating partnership units that I've been speaking about. We seeded it with about 270 properties, and now we are north of 1,850 properties. We buy 200 -3 00 properties a year. This year we've articulated buying at or above a 7.5% cap, which we've done in the first two quarters. First two quarters of the year we bought over $50 million of postal facilities, and we had given guidance of buying between $80 million and $90 million this year. I've adjusted that guidance and now we are going to be at or above that $90 million mark. This past quarter was pretty significant for us. We put up great numbers again, like we have the past few quarters.
We were also able to adjust our guidance. We were able to adjust our earnings guidance to $1.24 - $1.26 a share, and we were able to update our same-store NOI guidance to 7% - 9%. Putting up 8% year-over-year earnings growth is something that we're very proud of. We've been working very hard at it. A lot of this is the ability to find efficiencies in operating these properties and saving costs. A lot of this is our mark-to-market of our leases, and also what I believe is a proof of concept in our platform and the value of the platform is our ability to get annual escalations in our leases. We're going to open this up to questions. I'm sure you guys have some, but what you'll find in most of the answers is that our answers are different than every other owner.
Our relationship with the Postal Service is different than every other owner. As a result, we've been able to get things that other owners don't have. Most owners have a five-year fixed lease, no escalations. Most owners negotiate with the Postal Service through an intermediary. Currently it's Jones Lang LaSalle, and they pay for the privilege to be able to do that. We don't do that. We don't negotiate through a third party. We do not pay a fee in order to do that. We have a proprietary lease document. We have leases with 3% annual escalations. We have instituted now 10-year leases. When we complete the 2026 leases that are all agreed to, 32% of our portfolio will have 10-year term, and 56% will have 3% annual escalations or better.
Again, proof of concept in our platform and our value and the value creation that we're doing for shareholders and the numbers that we put up this past quarter, I guess, are kind of proof of that. I think that should get us started for some Q&A. Anybody have any questions? Please.
These post office leases terminate if the post office leaves. How do you deal with that?
That's a great question. Luckily, we don't have to deal with it very often. We have a 99.8% retention rate. Over the past six years being public, we've had two vacancies across 1,850 or more properties, one of which we sold vacant at a marginal profit to what we paid for that. The other one is still vacant, accounts for under 10 basis points of income. It's thankfully not really a big concern of mine. In general, in my life of owning postal assets, this has always been not really a major focus of my business. When we do have vacancies, we typically sell them. We've seen them converted very easily to medical offices, banks, pharmacies, hardware stores.
One of the buildings we sold, they built, you know, I think it was six or eight stories of lofts on top of the building because there was a housing need in the area. These buildings by nature are very simple, and they can be converted to pretty much anything. They have three general components. You have a retail section, a small office component, and a warehouse section. Each one of these can be grown or shrunk depending on what the needs of the building are. You should recognize that we're buying these at a very, very good value. It's not just at a cap rate, right? Real estate, at least the way that I was taught, it is really a price per square foot business. It's not a cap rate business. We're buying these $150 - $160 a sq ft and under. That's for land, building, and lease.
If I give this building to the Postal Service as a vanilla box and they had to build it out, it would cost them over $200 a foot just to do the build out. If you look at other, you know, let's call it double or triple net players throughout the country, let's call the low end of the totem pole a FAMILY DOLLAR or DOLLAR GENERAL, you'll typically see those trading between $200 and $300 a foot in the same towns and counties. If you look at pharmacies or bank branches, you'll see those trading anywhere between $400 - $600 a foot. I believe we're buying these at tremendous value. I believe that the cap rate by itself is a good value, 7.5%, on arguably the best credit tenant you're going to find out there. I'm obviously biased. Please. Correct.
When you look at these properties now, the post office has anything from like [400] sq ft situations to 20,000 sq ft, 30,000 sq ft. Is there a level at which you deem it doesn't, you don't care, or do you all believe some of these purchases that were, you know, buildings and maybe worth, you know, $500,000 or $300,000 or something like that?
Yeah, no, we don't care. As long as we believe that the Postal Service needs or wants to be in the building, from our perspective, the purchase price of the property is not that significant. When you're buying the property, there's two underwriting criteria that we go through, right? First is the Postal Service, the specifications, and why we think they need to be in that building. Once we've checked that box, then we're looking at the real estate value. We want to make sure that we're buying this at or below replacement cost. We want to make sure that we're buying this at or below what the market is from a rental perspective and a price per square foot perspective. The size of the property doesn't matter.
What you'll find and what Jordan has put up on the screen is a breakdown of the Postal Service's portfolio as we look at it. The smaller properties are what we refer to as last mile, and we own a piece of that market. The flex is, let's call it the middle size property, 50,000 sq ft and under. Then there's the industrial. The industrial is not really the focus of the bread and butter of our business. We really focus on the last mile and flex. The industrial properties are more opportunistic for us, depending on if we see something that we can buy at a good price where we can add value to it.
When you buy them, do you have a remaining lease?
Usually.
Is your agnosticism whether you guys choose?
I'm not agnostic. We have to buy it based on whatever the lease term is. If I got to choose, I would buy it the day before the lease expires because I'd like to negotiate the lease as quickly as possible. We're buying and negotiating these leases at significantly better terms and prices than the other owners. You have to understand the demographic of the average postal owner is, I refer to them as mom and pops, right? This is usually the only asset, real estate asset they own aside from their home. This is not being looked at as a business for them. They are normally not pushing very hard on the negotiation of the terms or the price that they're getting in their leases, and they don't know what buttons to press. They don't know how hard to push.
They don't know what the value of the property is. They don't have attorneys or accountants or brokers, don't have market information and the demographics and CoStar and all the resources that we have to know what the market looks like. If I could negotiate the leases the day after I buy it, that's what I would prefer. Normally, it's usually we're buying these on average with a 2-3 year WALT, just because most people don't sell their properties the first year of the lease or the last year. We just end up in that usual range. I'm sorry, sir. Okay. That was good.
The dividend on the operating partnership units, are those qualified dividends?
Are they qualified dividends? They have to be referred to as a distribution and not a dividend, just because of the ownership structure. I believe it's a good question. I've never had that question before. I believe that it is. I'm pretty sure it is, but I can get back to you on that.
You're essentially another group partner. You're getting a K-1 every year for your own in the industry. Also, that's your main key office.
Please.
I mean, we know what the history is. We know that there's a significant amount of pressure for the post office too. You talked a little bit about the alternative, for places that they may not really be seen. If there were a significant push and your concentration on your tenant is significant, that detriment. If you then decide to have a massive cut, I mean, what is the likelihood? I just read that, and I don't know exactly how it's going to work, like Denmark has actually eliminated their own.
Yeah, I'm sorry, but I'm going to challenge and disagree with you on most of what you said. First of all, Denmark is a franchised postal business. The United States is not, right? I've looked at government, I've looked at postal systems outside the United States, and they're not government-backed properties the way that this is. I think that with all due respect, and it's not you, it's most people that hear these headlines or read these headlines, that they're conflating a lot of things. The Postal Service is, I think, the second largest employer in this country. They're a mammoth, major organization, okay? I think they have, I don't know, 600,000- 900,000 employees, okay? There are a tremendous amount of efficiencies that they can find within the organization and that they're looking at. The buildings are just not where they're looking.
The reason why they're not looking is because, number one, from a business standpoint, the last mile or delivering to the American people is their virtual monopoly. It's the bread and butter of their business. If you take some of these facilities out of the logistics network, it makes it more costly to try to get to the end player, right? From a business standpoint, they need this network, this logistics network in order to deliver to their business. When you look at any business, I don't care what business you're looking at and you're trying to find efficiencies, you usually don't look at the 1.5% line item, especially when your largest line item, which is labor, is like 60% - 70%.
If you took some of these buildings out of the network, which I don't think they're going to, if we go with your argument that they would, what would happen is the labor from the surrounding facilities would just go up. It wouldn't be cost-effective for them to shut these buildings down. About 15 years ago, give or take, they did something called the Post Plan. What the Post Plan did, and you guys wouldn't recognize the terminology, but you'll recognize what I'm saying, which is they lowered the hours of some of these buildings, right? Your building went from eight hours to six hours. The reason they did that is by taking the buildings from a quote unquote full-time building to a part-time building, they took out the need for a full-time, fully loaded employee out of the need to operate these buildings, right?
Again, your labor was your largest component. Just lowering the hours of the building took out $500 million a year out of their expenses, year -over -year in perpetuity, which made operating these buildings much more cost-effective. Right? Again, the whole rental for all of the 23,000 buildings is $1.6 billion. Right? They saved $500 million just by lowering the hours. This year alone, they're focused on finding efficiencies in transportation by shortening the amount of routes that they're doing. That savings they're targeting is $3 billion of savings. When you're looking at a company, any company that's doing any business, you try to find the larger line items to find your efficiencies and your savings. To try to close some buildings is not going to move the needle for them. I believe that they need these buildings. Please.
Can I sit down to one parent facility, or is it a huge deal?
Corporate unsecured facility at the parent level. It's not cost-effective or efficient to do individual property debt, even though we can. If there was a reason to on a particular building or group of buildings, that is something that we do look at and think about, but it usually hasn't made a lot of sense. We have a few of them, but in general, it's not our focus. As we continue to grow, we want the flexibility to be able to do bond offerings and other things. You can't, if you're going to put individual mortgages on these properties, you give up that flexibility. You guys want to rock, paper, scissors? I don't know.
Two questions. As I understand it, one of the reasons you're attracted to buyers is because your sellers can do a 1031 exchange. Is that correct?
Yes and no. The operating partnership units look and feel like a 1031 exchange. Sellers are attracted to us because we can offer them a currency like that. Yeah.
As an individual owner, do I get a dividend check or a Schedule K-1?
You get a K-1. If you did an operating partnership unit transaction, if you're a shareholder in the public company and you buy shares like we all do, then you would get a dividend.
I thought some of the return is because of depreciation.
You're right. Yes, you're absolutely right. Because we pay more in dividends than we have to, based on the REIT rules, the people that own our shares get a significant tax benefit. Last year, I'm a shareholder, so I got, and we, all the shareholders got, 30% of our dividends were a return of capital and weren't taxed. That net is a tremendous value to people that care about taxes, to your return of income. I'm sorry.
I may have answered this. Sorry, I came in. Do you have an idea of where you would like to be as far as share of the market in five or ten years from now, and then how much that would cost to get there in terms of the lease and current terms of what that would mean for our shareholders?
I'm going to try to answer the question, and you'll tell me, you know, it's not exactly your answer, but if we look at this as a $12 billion - $15 billion market, if I was looking at it today, I only want to own eight to nine of it. Right? That to me is what I'm targeting. I'm a firm believer in once we get to, let's call it the $1 billion- $3 billion area, that the whole world changes for us from a cost of capital standpoint. When we were building this, I interviewed a bunch of people for board positions and very smart, sophisticated, unbelievably experienced people in different areas. One of the people that I interviewed was a former CFO of a REIT, with a simple CARS, C-A-R-S. It was a roll-up of car dealerships and very successful.
What he taught me was that at a certain point in their life cycle, when the banks recognized how low his default rate was, which is, I mean, his default rate was worse than what ours is, but his cost of capital got so inexpensive that he was getting 100-year amortization on his borrowing that he was able to actually lend money, okay, and make his lending sometimes more profitable than his acquisitions. The reason why I'm saying this is because as we continue to grow and build this platform the way that we are, I believe that that's going to be recognized by people and our cost of capital is going to be low and our multiple is going to be high. As a result of that, our ability to buy will drastically change. Right? We're pushing a boulder up a mountain now because we're a very small company.
We knew that going into it. Arguably COVID and rise in interest rates have slowed us down significantly. We should be double the size that we are today, and we would be if both those things didn't happen. I think that if we were, we'd be able to move at a much faster pace than we are today, and we'd be able to accomplish aggregating that a larger scale of the market. I think that my answer today is going to be different than my answer is going to be in a year or two, I guess, is what I'm trying to say.
A couple of questions. First one, wonders do you analyze through the profile of an asset with wires, one versus today in the financial asset. Second piece, other shareholders, at least the end period, see him and the other OP units and other.
Yes.
Any other feelings or anything else?
Nope. The only fee, the only difference, just to be clear, because I like to be as transparent as I possibly can, when this public vehicle was formed, I contributed a significant amount of properties and a significant amount of money, in operating partnership units. What I gave myself was the ability to vote my economic interest. If you were a postal owner and you contributed your properties today and took back operating partnership units, you wouldn't have the ability to vote. I gave myself the ability to vote. That's all I gave myself. No super voting, no extra powers, no multiples of anything, just the ability to vote my economic interest that I was committing to the public company. That's the only difference. Sorry, I just wanted to clarify, the profile of the property that we would have bought in 2021 or 2022 or today is similar.
The difference is because my cost of capital is different, I can't buy deals at, let's call it a 6% cap when I could have bought it then. Right? If you look at the first half of 2022, because interest rates started moving, let's call it March of 2022 or around there, the first half of 2022, we did about $80 million at a 6.5% cap, give or take. Today we're doing, let's call it $80 million, $90 million for the year at north of a 7.5% cap. The 6.5% out of the gate is dilutive today. The 7.5% is accretive today. We're constantly weighing our line of accretion and what we can buy and what we can't buy. The profile of the property, from the specifications of what we're trying to buy, hasn't really changed.
It's just our ability to buy and limiting what we can buy based on cap rate and cost of capital. I think I answered that.
One nuance, please. Buying the same quality at the 100 basis point.
It's a good question. I'm going to answer it. The quality is the same, okay? I'm going to explain how we did it. What you'll find is for 2022, prior to that, I was able to buy larger portfolios or larger properties. Now, or since then, the larger owners, more sophisticated owners or larger portfolios weren't willing to adjust their prices. What I did was I did more deals and more single asset deals as opposed to portfolios because I knew I could negotiate those better. It's not the assets, it's just the amount of work. Please.
Help me understand how your ownership interests are rising out of the property share on the previous fifth. Several components of this. Do the owners now of the operating partnership units have the right to vote? Do the other shareholders have the right? What do the other shareholders and the owner do?
Common shareholders have the ability to vote because when you buy a common share in a company, you're able to vote. The operating partnership units do not have the ability to vote. No, this has nothing to do with me. It's a legal structure. It's a legal structure because they have to be limited partners. This is about creating the UPREIT structure. It's not something that I dreamt up.
Okay, we are almost done with pure play.
Almost. No, no, those are post offices. This is pure play postal. I contribute, yeah, I contributed postal assets to this. Just to be clear, I contributed, I don't remember how many, 200, whatever, post offices that I owned personally. I did not take any cash out. I took all of my ownership in operating partnership units and stock. To be even further clear, I haven't taken any cash compensation from this company since we went public. I take all of my compensation in equity. I am as aligned with shareholders as I believe you could possibly be. If anybody has an idea of how to be more aligned, I'd love to hear it. Yes, this is a pure play postal. We do have a couple of secondary tenants, which is what I thought you were going to talk about, but it's not big. Pleasure.
[audio distortion] are good common shares.
They can, but once they do, they trigger their capital gains tax.
On the year old, they deserve their capital impacts. If they convert after one year, then they crystallize.
What most of these families do is before it's crystallized, they hold it. They estate plan it. They wait for someone to pass away. Once that person passes away, they get a stepped up basis, and then that conversion doesn't trigger a tax. They can't do that with real estate. If they do a 1031 exchange, you have to maintain that partnership. What I've found in my life doing this is the people that owned larger portfolios, right? The Postal went to all these towns and gave local people the ability to build or own their post office, which was very nice, very inefficient, but nice. The larger construction companies started building them not just in their town, but in the surrounding towns. What you find is these construction companies typically had more than one partner, whether they were a couple of brothers or just partners.
Now the next generation had multiple children, and now these people don't want to be partners with each other. If you do a 1031 exchange into a new property, these people are still partners. This provides a very elegant way to divide that up. Some people can take operating partnership units, some people can take cash, some people can convert, some people can't, and everybody can make their own decision, and you're not tied together.
To be 100% clear, the operating partnership units and the common stock are purchased through as per dividends and on the renewal. If there is a better use, are you explicitly going to try to do something other, or do you have to renew it with the [Postal Service]?
You're asking a legal question, and I'll give you the legal answer that I understand it. I'm not an attorney, but I'll give you the legal answer. You're not legally obligated to renew them, but you are also legally not able to evict them. What does that mean? It means you don't have to sign a new lease if you don't want to, but you also can't make them leave the building. They're allowed to stay in your building, and you can fight them over what the rent is, but because, and this is not a Postal t hing, this is any government agency thing, you cannot evict a government agency legally. There are properties that we own that have higher and better uses. We do not try to evict the Postal Service. We typically look at these as government or real estate backed bonds.
We try to maximize our cash flow and keep the Postal in it. At the end of the day, if they want to move out, we have some real estate value and we have some higher and better use. That's how we've typically looked at it.
Similarly, again, maybe one is in [Prince Gorn], and what's the target with the leverage that you put in for the equity? What are you expecting to get?
We don't look at leverage return in general. The percentage that we buy of debt and equity is really dependent on what's going on at any given time in our stock price and in our portfolio in general. We balance that. What you'll find is from Q1 to Q2, we were able to buy $36 million of acquisitions and keep our leverage relatively neutral. There are times that we'll ramp up leverage depending on where we are. It really depends on what our options are at that time.
I mean, you talk about, like, when you talk about the 7.5% cap, that's the rate that you buy. In the pure return, what do you think is the point in the rate of return on Postal being fair?
I don't, you're asking for a leverage return answer, and I think the target return is your dividend, right? You're investing in the company and you're getting, let's call it a 6.25% or whatever it is, return on your investment in the stock. My return on the company is nothing to do with leverage from my perspective. I'm going to change your question a little bit, okay? I think the way to look at the return is to look at the same-store NOI numbers that I just spoke about that are 7% - 9%. What that's going to tell you is that I'm buying a 7.5% or better cap rate, but I'm stabilizing after I'm marking to market and renewing the leases at a much higher return. We haven't provided that number, but any of you that want to back into that number, you'll see it's significantly higher than 7.5%.
Can you repeat the number? You said 30? How much lease has escalators? About 30%?
56% has 3% escalators, and 32% have 10-year leases. When we're completed the 2026 leases.
Only renewal leases have escalators?
Correct. We'll continue to go up. That's the goal. That's the plan. Anything else? Thank you, everybody. I really appreciate it.