Greetings, and welcome to Postal Realty Trust third quarter of 2022 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow the prepared remarks. As a reminder, this conference is being recorded. I would now turn the conference over to your host, Mr. Jordan Cooperstein, Vice President of FP&A, Capital Markets. Please go ahead.
Thank you. Good morning, everyone, and welcome to the Postal Realty Trust third quarter 2022 earnings conference call. On the call today, we have Andrew Spodek, Chief Executive Officer, Jeremy Garber, President, Robert Klein, Chief Financial Officer, and Matt Brandwein, Chief Accounting Officer. Please note the use of forward-looking statements by the company on this conference call. Statements made on this call may include statements that are not historical facts and are considered forward-looking. These forward-looking statements are covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's latest 10-K and its other Securities and Exchange Commission filings.
The company does not assume, and specifically disclaims, any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, adjusted funds from operations, adjusted EBITDA, and net debt. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP measures in the company's earnings release and supplemental materials. With that, I will now turn the call over to Andrew Spodek, Chief Executive Officer of Postal Realty Trust.
Good morning, and thank you for joining us. We are pleased to share that Postal Realty had a strong third quarter, and we are well positioned to continue executing on our goal of creating and growing shareholder value. Postal Realty's business model is anchored with stable cash flows supported by our credit tenant and is further enhanced with organic growth from our short-term lease duration, which allows for the continual mark-to-market of rents. With minimal exposure to variable rates, low leverage, and no notable debt maturities until 2026, our balance sheet is ideally situated to continue executing our growth strategy. We continue to consolidate this highly fragmented market through sourcing accretive acquisition opportunities, particularly core last mile and flex properties, while maintaining our conservative leverage ratios.
In the third quarter, we completed approximately $21 million of acquisitions, bringing our year-to-date value to $109 million, already achieving our target set at the beginning of the year. As we discussed last quarter, we have been seeing the market slowly adjust to macro concerns as cap rates try to find higher footing to close the gap between buyers and sellers. In the third quarter, we targeted higher cap rate transactions, which impacted volume relative to prior quarters. This will likely continue into the fourth quarter, and we remain well positioned to capitalize on attractive opportunities as they emerge. We are the largest owner, manager, and consolidator of the Postal Service's irreplaceable logistics network. However, we are still in the early innings of our growth story and have plenty of runway ahead.
Our management team has over 30 years of cycle-tested experience and a strong network of relationships built over time, which we believe are meaningful differentiators. We are encouraged by both our internal and external growth initiatives and will continue to be prudent stewards of capital and deploy it in accretive and appropriate manner to drive growth in this dynamic environment. I'll now turn the call over to Jeremy to discuss our operating metrics.
Thank you, Andrew. As we like to remind our investors, our tenant has historically made all of its rent payments on time throughout all economic environments. Consistent with quarters past, we collected 100% of our rents in the third quarter. This predictability of cash flow is a significant differentiator for Postal Realty. In the third quarter of 2022, we produced a 29% increase in rental income from the third quarter of 2021, reflecting a strong existing portfolio as well as contributions from the accretive acquisitions made over the last 12 months. We have maintained a 98.8% historical weighted average lease retention rate over the past 10+ years, which reflects the strategic importance of these properties to both the Postal Service and the communities they serve.
This high rate continues to validate our due diligence process in identifying locations that are vital to the Postal Service. Year to date, we have not received any notices of termination by the Postal Service. In the third quarter of 2022, we acquired 66 properties for approximately $21 million, excluding closing costs. These acquisitions added 170,000 net leasable interior square feet to our portfolio, inclusive of 61,000 sq ft from 41 last mile properties and 109,000 sq ft from 25 flex properties. Subsequent to quarter end and through October 26th, we have acquired seven properties for $5.9 million and placed an additional 10 properties, $4 million under definitive contracts. I'll now turn the call over to Rob to discuss our third quarter 2022 financial results.
Thank you, Jeremy, and thank you everyone for joining us on today's call. Touching upon what both Andrew and Jeremy discussed, we are pleased to deliver the results of another productive quarter as we remain well positioned to capitalize on external growth opportunities. For the third quarter, we delivered funds from operations or FFO of $0.25 per diluted share and adjusted funds from operations or AFFO of $0.26 per diluted share. We have maintained a conservative balance sheet, and as of September 30, 2022, we had approximately $189 million of gross debt with a weighted average interest rate of 3.63% and only $31 million of floating rate debt outstanding on our revolver.
Inclusive of all interest rate hedges, approximately 84% of our debt was at a fixed rate, and our weighted average maturity was 5.4 years. As Andrew highlighted earlier on the call, we have no notable debt maturities until 2026. Our liquidity position is strong, with $119 million undrawn on our revolver, $225 million of accordions on our facilities, and approximately $5 million of cash. For the third quarter 2022, net debt to annualized adjusted EBITDA was 5.3x, and net debt to enterprise value was 34.6%, well below our leverage targets of 7x and 40% respectively.
Recurring CapEx for the third quarter was under $0.04 per square foot, and based on timing of projects, we anticipate it will be closer to $0.06 per sq ft in future quarters as we continue to invest in our assets. Cash G&A in Q3 came in below our prior guidance due to cost savings as well as intentionally spreading out some costs into 2023. Our guidance still remains that cash G&A, as a percentage of revenues, will continue to decline on an annual basis, and we believe Q3 is a good run rate for Q4. Our Board of Directors has approved an increase in our quarterly dividend to $0.235, which annualizes to $0.94 per share, a 4.4% increase from the third quarter 2021 dividend. This continues our history of increasing the dividend every quarter since IPO.
We believe Postal Realty is uniquely positioned for resilience through economic climates, and therefore, we remain confident in our ability to execute our strategy. Our conservative balance sheet, market-tested and experienced management team, predictable cash flows, and a history of 100% rent collections provide a steadfast foundation that will allow us to continue to deliver value for our stakeholders. This concludes our prepared remarks. Operator, we'd like to open the call for questions.
Thank you, sir. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to leave the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Rob Stevenson of Janney.
Good morning, guys. Across all real estate asset classes, it seems like the smaller investors have been the last to realize the prices have changed, and unless facing some sort of event, seem to have pulled the assets back from the market, waiting for debt and everything else to stabilize. You know, given that there's a bunch of smaller players in your business, how are you guys seeing the transaction market today in terms of availability of assets out there relative to past quarters, as well as ability to for the sellers to be reasonable in terms of market pricing?
Hey, Rob. Yeah. As everybody knows, we're kind of living through a very strange time. The assets are available. We're just not seeing sellers change their expectations for where pricing is supposed to be today relative to where it was a couple months ago. We are patiently walking the sellers up, trying to get cap rates to where we want to execute on them. You know, the good news is that we've always bought a different range of different asset types and asset sizes, and we've always stated that the range of cap rates in our asset class is wide. Thankfully, we have the ability to execute at the higher end of our range, which is what we've been trying to do.
Okay. Recent conversations with the Postal Service, how willing are they and their representatives to acknowledge, you know, the inflationary environment and the need for potentially higher rent increases on renewals going forward?
Yeah. Hey, Rob, it's Jeremy. We continue to have productive discussions with USPS on our 68 leases that are expiring in 2022. As we've shared in prior calls, you know, we've been focused on introducing a new concept of an inflationary adjustment. We're confident we'll achieve a result that will allow us to continue to deliver our annual NOI growth of 2%-3%.
Okay. Last one for me. Rob, where is your best source of financing today when you look forward, if, you know, there's a portfolio that comes to market that you guys want to bid on, et cetera? Where are you seeing the best debt availability and pricing for you guys today.
Hey, Rob. It's, I think it's a mix of everything. You know, we're fortunate to have access to capital in multiple ways in the equity markets, you know, through an ATM when active, through regular common offerings and then through operating partnership units. On the debt side, you know, our credit facility is at a good spread, a good rate, has a lot of availability, and we can term things out when the swap rates are attractive or we can keep afloat if we want. As you know, we've really tried to maintain a balance sheet that's higher proportion of fixed rate to be conservative. I feel like we've got access across the board.
As you know, the market's super dynamic, so rates move up and down a lot today, and so does our share price, and so does our pipeline. You know, it's really a day-to-day game and we're lucky to have access to all these sources.
Okay. Thanks, guys. Appreciate the time.
Thank you.
The next question comes from Anthony Paolone of JPMorgan.
Good morning, guys. You have Nahom on the line for Anthony this morning. I guess on my first question, I'm just a little curious if you could speak on acquisitions and I guess current market conditions, if you guys have seen buyers less willing to maybe accept OP units rather opting to trade just for cash instead.
Appreciate the question. We actually see sellers still very interested in the operating partnership unit currency. We haven't been very proactive in using that currency over the past quarter, just given where our stock price was trading. The interest in the currency is still very much there.
Got it. Okay, thanks. I guess given where inflation is, should we expect maybe a drag from the operating expenses the company is responsible for on your properties?
It's a good question, and, you know, look, it's something everybody's facing, whether it's with CapEx or operating expenses. You know, because of the short-term duration of our leases, we do have the ability to mark those rents to market, which overcomes the operating expense increases. You know, net-net, I don't see it being a drag, but it's definitely more challenging than it was in prior years.
Okay. Thanks, guys. Appreciate the time.
Thank you.
The next question comes from John Kim of BMO.
Thanks. Good morning. Year-to-date, you've so far stayed away from acquisitions in industrial. I was wondering if you could talk about pricing. Has it helped, you know, more subdued industrial, lower cap rates versus the other two asset types that you look at?
Yeah. In the current environment, we really haven't been focused on the industrial assets. The market for those assets has been pretty frothy. Even though the cap rates on some of the deals that we have looked at in that particular asset class have moved, they're still at the lower end of the range, if not the lower range. In the current environment, those are not deals that we're looking to do. Thankfully, we've exceeded our target for the year, and we're really not looking to do deals unless it's priced right and unless we believe that it's a good fit for our portfolio in the current environment.
In this current environment, are portfolio premiums still there or are portfolios trading now, on par with individual asset sales or even potentially at a discount?
In general, the larger owners, or the more sophisticated sellers or the owners of larger assets are, at least we've seen, less willing to adjust to the current environment. Those assets and those portfolios are typically trading at the lower end of our range.
Okay. My final question, I know you've talked about it a couple different times, but on this impact of inflation, I guess you were saying that you're talking about some kind of inflation adjustment potential in lease renewals coming up, but also maintain your 2%-3% organic growth. I was just wondering if there was a potential for there to be upside in that rental number to more than offset inflationary pressures on the expense side.
You know, as we go through our lease renewals, we spend time reviewing markets and comps and trying to achieve on a lease rate rates that allow us to overcome the current environment. The inflationary adjustment is just an additional element that we're trying to introduce here, just given how things have really ramped up over the past, you know, call it year and a half. So that's why we're confident we're going to achieve an adjustment over market rents, which will allow us, as I described, to continue to deliver the NOI growth that we've historically delivered.
Would that be CPI based on local geography, or would it be capped? Just want to know if there's any more detail you could share.
Yeah. At the moment, that conversation with USPS is live. We haven't agreed on how the adjustment is going to work. I don't have any more information to give you at the moment.
Thank you very much.
Thank you.
The next question comes from Barry Oxford of Colliers.
Great. I know you guys don't wanna give too much more information on the adjustments, inflation adjustment leases, but typically, doesn't the government want kind of a flat rate for five years? If you were to have an inflationary adjustment, do you think that that rate might move year- to- year? Or would you do some sort of kind of blended rate so it would be fixed for five years?
Yeah, again, Barry, it's Jeremy. You're right. Historically, these have been five-year flat leases. You know, I think we're probably going to achieve a similar outcome with that adjustment embedded. But again, you know, we haven't concluded the conversations, and they continue to be fluid. So as soon as we have a definitive agreement, we will share that.
Okay. Great. Another quick question on the G&A line item as far as how we should think about that. G&A was a little lower, not a lot lower, but a little lower here in 3Q versus 2Q. How should we think about G&A ex non-cash comp going forward into 2023?
Hey, Barry. Good question. I think I alluded to it in the prepared remarks that, you know, we believe that Q3 is a good run rate for Q4 in that respect. I think your question is more about kind of how does this roll forward? You know, earlier this year.
Right.
Yeah. Earlier this year, we had given some guidance that our cash G&A was projected to increase by $2.5 million. Based on where we've reported and based on that guidance I've given, the new projection is probably closer to an increase of $1.5 million over last year. That puts us $500,000-$1 million lighter than our initial guidance earlier this year for 2022. And some of that's due to reduction of expenses in 2022, but most of it's really projected to be spent throughout 2023 as long as the environment is conducive to it.
Got it. Okay. Thanks for that color. That's all I have, guys.
Thanks. Thanks, Barry.
Yep.
The next question comes from Jon Petersen of Jefferies.
Great. Thank you. I think, Rob, earlier you were asked about, you know, potential sources of capital, and you mentioned the ATM, you know, when that's open to you. Maybe if we could talk about that from two different angles. Like, you know, at today's market pricing, like, what kind of stock price do you have to see where equity or ATM issuance makes sense to do acquisitions? Or maybe looking at it the opposite way, you know, where do cap rates need to move to make today's stock price make sense in terms of new ATM issuance?
Yeah. As you know, we always want our stock price to be higher, and the higher, the more attractive. It's a constant analysis we do of where our pipeline is. You know, when we issue equity, when we use debt, we're looking for it to be accretive to our acquisition pipeline and the use of capital. That's dynamic, but even at today's prices, and the guidance that Andrew's given for kind of where cap rates are and where we've executed, we can still do acquisitions in an accretive manner.
Okay, got it. Maybe if I could just, you know, on the G&A, I think, Rob, in your prepared remarks, you mentioned you spread some G&A costs into 2023. Can you give us just some more details on what some of those costs were that you spread into 2023?
You know, earlier this year, we had talked about, you know, some of the increase this year being related to some projects internally, infrastructure, IT, some hires, etc. It's a little bit of all of that, you know, that gets pushed next year. It's a blend of that, you know, and some of these projects that we're using to harness information and to really improve ourselves internally. We've done some of that this year, and there's some of it that we're planning to do next year.
Okay. All right. That's great. Thank you so much.
Mm-hmm.
Thanks.
We have a follow-up question from Rob Stevenson of Janney.
My questions have been answered. Thank you.
Thank you. That does bring us to end of our question and answer session. I would now like to turn the conference over back to Mr. Andrew Spodek for closing remarks.
Thank you. On behalf of myself and the entire team, thank you all for your continued support and for taking the time to join us today. We look forward to connecting with you over the coming months. Have a great day, everybody.
Thank you. Ladies and gentlemen, that concludes today's teleconference. Thank you for your participation, and you may now disconnect your lines.