Presenting with us next, I'm Jeff Elliott at Three Part Advisors, for any of you that don't know me. Our next presenting company is Electrav ia. I'm sorry, not Electra. That was Electrav ia. Postal Realty, trades under the ticker PSTL. With us here today from the company is Andrew Spodek. He is CEO, and Jordan Cooperstein is Vice President of FP&A and Capital Markets. Postal Realty is a Three Part Advisors client, so if anyone would like a follow-up meeting or call, please reach out to me directly. Happy to help set that up. With that, I'll just turn it over to Andrew.
Thank you, Jeff. Thanks for all of you for joining us. I see some familiar faces and some new faces. For the new faces, for the familiar faces, I'm sorry, I'm going to give a little bit of my story again, which you've heard before. I can't take credit for the investment idea. This was my father's idea. I was born into this business. My father was in different types of real estate and was approached with a small portfolio of postal assets in the early 1980s. Like most of you, he didn't even know the Postal Service leased their assets. And he bought them.
What he found very early on, and we've proven out to be true, actually are the kind of the pillars of how we built this business, was number one, that the Postal Service pays their rent on time, 100% of the rent, 100% of the time. It doesn't matter government shutdowns, COVID, economic cycles, you collect your rent, you don't even need to invoice a tenant. Number two is because of the preferential lease structure, we're able to own and operate these properties all over the country. Currently, we are in 49 states and close to 2,000 properties. Number third, and this is the most common misconception in this business, is that the Postal Service very rarely moves and vacates these properties. Over the past 10-plus years, we've been able to maintain a 99% retention rate.
For all these reasons and more, my father continued to buy these assets. My father semi-retired in 2000. I took over, kind of institutionalized the business a bit, more by nature than by strategy, and continued to grow the company somewhat more aggressively. Became the largest owner of properties leased to the Postal Service. My father passed away about nine years ago. About a year or so after his passing, I was approached by an investment banker to create a public company around our portfolio. I never had any interest in doing this, did not want to be a public company, did not really have any investors, was very low-levered, worked for myself, very nice, simple, quiet business. Spent about a year or so researching what the opportunity set was and learned a lot about myself, about my business, but more importantly, about the Postal real estate market.
Even though I was the largest owner at the time, I didn't realize the context that I was really living in. Postal real estate 101. There are about 32,000 properties throughout the country. Postal Service leases 23,000 of them. Those 23,000 are owned by 17,000-18,000 owners. Average owner is in their 60s- 80s. Average owner owns that property 40-50 years. The Postal Service pays approximately $1.4 billion for those 23,000 buildings. Depending on what margin you put on it and what cap rate you apply, this is somewhere between a $12 billion-$15 billion market. The owners of Postal assets are proud. Again, they've owned it for 40-50 years. They either built these buildings or bought it from the original builder.
What they looked at as being a nest egg for their families, the next generation and the generation after that, for the most part, are more interested in cash than they are in the real estate. Over the years of being in the space, I realized that most of the selling happens because of either life events, someone passing, or estate planning, someone preparing to move the asset to the next generation. I found that creating a platform, a public vehicle like an UpReit, which is what we built, provides you with a currency that no one else really has. That currency is called an operating partnership unit or an OP unit. What it is, is it gives sellers the ability to contribute their property to the public vehicle in exchange for these operating partnership units.
It is a tax-deferred exchange, so they do not have to pay capital gains tax. They have little or no depreciable basis in their assets, so this is a very good thing. It gives them a lot of flexibility to plan these operating partnership units within their family, to give them to their kids and grandkids, church, whatever they would like. I thought this was going to be a big driver of deal flow. This was all a thesis, obviously, before I went public. I was right. We have done 10%-15% of our deal flow with this currency. Most of our deals that we do with this currency, only a portion of it is used. They typically take half cash and half OP units because they need cash for liquidity or to pay down mortgages or something like that.
About 6+ years ago, we started a public company. We went public. I funded it with a lion's share of my personal assets. This was not a monetization for me. I did not take out a dollar. I took all my equity in stock in these operating partnership units. We started a public company. I think the total enterprise value was about $150 million, 271 properties. We were off to the races. We now currently have an enterprise value of about $900 million, about 2,000 properties in 49 states. We are on track to do $110 million of acquisitions this year at or above a 7.5% cap. Arguably, even though a 10%-15% growth rate of acquisitions is good, it is slower than I would like. It is slower because of where interest rates have been and across the capital have been.
We got slowed down a little bit with COVID. What you find in our company is that even though we're acquiring at a 7.5% cap, which is very good, even though we're acquiring at an average of $160 a square foot and under for the land, the building, and the lease, which again, I think is very good value, what differentiates us to other REITs, and a lot of the things I've said differentiate us just by nature, is that we have an unbelievable internal growth machine. This year, we gave our guidance for same-store NOI numbers of 8.5%-9.5%. We've put up guidance this year for earnings growth year over year of 12%-13%.
A lot of that is not just for efficiencies and things we do, economies of scale, which we do get, and economies we get from our G&A, but it is also because we are able to buy these properties from non-institutional owners that are not really pushing their rents or driving the terms of the Postal Service. We are able to renegotiate these leases, get better rates and better terms from the Postal Service. Most recently, from 2022 to today, we have added annual escalations to our leases. We get 3% annual escalations in our leases. We have 53% of our leases that have these escalations. We have also extended our lease terms. Most other owners get five-year fixed leases. Now we have 37%-38% of our portfolio that has a 10-year term.
The compounding effect of these escalators has helped tremendously in increasing our same-store NOI growth. This is a very simple business. The real estate is simple. The properties are not complicated. They make sense out of the gate. There is no financial engineering. There is nothing complicated about this. We have kept our balance sheet very, very clean. We are low-levered. We are continuing to build and grow this company by buying these assets. I will open the floor to questions. I have to apologize that I have to catch a flight, so I am going to leave at 4:30. I am going to pass it over to Jordan in case I have not answered everybody's questions. Hopefully, I have set the stage to open up questions to anybody. Please.
Who else does what you do?
It's a great question. We are by far and away the largest owner. We own probably somewhere between 8% and 9% of the market. The next 20 largest owners altogether aggregate to about 11% or 12%. There are other people that own Postal assets. There are people that buy them. A lot of the Postal owners in the space are generational. They are not actively acquiring. They just own a portfolio of Postal assets. There are other people that buy these assets.
Public companies?
Nope. We're the only public company.
What's the embedded spread to the existing leases that won't deal with what you're getting for the new ones?
Very common question, which I don't answer. The reason why I don't answer it is because we have one tenant that I'm constantly in fluid negotiations with. I don't speak to my mark-to-market on leases. If you want to spend some time, I'm sure you guys can figure it out. same-store numbers are what they are. Earnings growth is what it is. A little math will get you there.
Is there private equity players in the space? If so, why or why not?
There has been private equity in the space in the past. I want to say we've bought, I think it was either three or four portfolios over the years from private equity that has rolled up some properties and sold to us. There is currently at least one private equity in the space. For those of you who know anything about private equity, they're not long-term owners. They aggregate over some period of time and typically sell out. There's a benefit when you're in a space, especially a niche space like this is, to have institutional knowledge, which we have, obviously. Private equity doesn't do well in those areas in general. From their perspective, buying a Post Office or buying a widget is the same thing. I don't believe it typically works the same in specialized markets like this. I'm sure at some point they'll sell to us.
What's your view when you find out what properties are going to market and you guys can share a role strategy?
The question was about properties coming to market and the roll-up strategy. I should have mentioned this. We do 75% of our deals are off-market. I mean properly off-market. That speaks to our reputation. That speaks to who we are in the space. Again, I've been literally doing this my whole life. There are people that sell to us today that I was in their house when I was 10 years old. Our reputation is important to us. We do an outbound calling effort. Owners know us and call us. That operating partnership unit that I told you was important, I believe, drives a good portion of that to us, even if we end up closing with cash. The 25% that is marketed, we're typically getting a first-to-last look at just because of who we are in the space.
The private equity, you said a competitor. How many properties do they own, are they going to sell to one of your competitors, or do they manufacture to a postal company?
I do not track them that closely, but I would say that they are less than half our size. I do not know who they are going to sell to because they have not sold yet. I would argue that there are, I do not know of another Postal owner that has the ability to buy them or has a cost of capital or the capital to buy them. You never know.
You're saying that [audio disruption]s maybe could go get that from another company and come back?
It's possible. Look, I try not to underestimate people, and I try not to judge people for what they can or cannot do. I would argue strongly that I don't think that there is a need for two public companies in the space. People do things that make no sense all the time, so. Yes, sir.
Have there been any expirations of leases or accounting that were made by the Postal office?
Yes. We have maintained a 99% retention rate over the past 10-plus years. Over the past six-plus years being public, we have had two properties that did not renew, both of which for the same reason, which is the typical reason that they do not renew in a space, which is because of the size of the building or the parking, either it is too big or too small. In those two instances that the Postal Service vacated, one of which we sold within, I want to say, a year at a marginal profit even though it was vacant, which I think speaks to us buying these things at good value. The other one is still vacant. I want to say it is like 20-something basis points of income.
Postal buyings, is that a driver or is that a risk?
Postal.
Buyings.
I don't think it's either. The way that I view this, which is different than most people first hearing the story, is that this is not really about the Postal service, as strange as that sounds. The Postal service is the largest, most intricate logistics network in this country, if not in the world. They have a virtual monopoly on the last mile. From my perspective, the last mile, which 61% of ZIP codes is rural, that last mile is the target market of every online retailer. That last mile is America. From my perspective, we are buying and investing in that infrastructure. That infrastructure is needed. That infrastructure is used by every delivery service provider, DHL, FedEx, UPS, everybody hands off their packages to the Postal service in one way or another. They leverage that network. To me, that's our investment.
I believe that as package volume continues to pick up and as the need for getting to the American people continues, that network is going to be utilized even more. That 169 million delivery points the Postal Service touches six to seven days a week cannot be done without these buildings. That is what we are investing in.
Did you want to hear when the government would shut down because of the red lines?
No. And we do not. The government shut down many times over the past 30 years or so that I have been doing this. Yeah, they do not miss a payment. I do not invoice the tenant. Economic cycles, COVID, government shutdowns. These are not GSA leases. They are not full-service leases. They are not subject to budgetary appropriations. This is the Postal Service. They pay their rent on time. They stay in their buildings 99% of the time. This is the business. It is not sexy, but it works.
What is the base of those?
I would argue that there isn't really a difference. I know that's not the answer you're expecting. You have to think about how this network was built out. The Postal Service went to all these towns, picked a parcel of land that was well located, either on Main and Main or close to Main and Main, that gave them good access to local roads, tolls, highways, et cetera. They built a building. That building was based on the demographics that it was serving. Regardless of the demographics they were serving, it had a very generous land-to-building ratio because it had to have customer parking, employee parking, and Postal vehicle parking. The structure itself was based on the demographics in the area. All of these buildings—I shouldn't say all.
The vast majority of the buildings have a retail component, which we've all seen, PO boxes, the retail area. They have a very small office component. They have a warehouse component and a loading dock. If there was a town of 1,000 people, they had a 1,000 sq ft building making it up. In a town of 3,000 people, they had a 3,000 sq ft Postal office. That's how it worked. The size of it evolved. Now, that's flex and last-mile facilities. Those are the bread and butter of the public company. The larger industrial assets are different. Those are processing centers. Those are warehouses. Those are carrier annexes. Those are typical industrial-type properties. That is not the bread and butter of this public company. We do own some of them. We look at them.
Unless they're accretive, unless they make sense, we're not running after three, four, and five-cap industrial properties. It's not where we add significant value.
Can you talk about the banking relationships you have and how you're utilizing this?
Sure. We have, thankfully, a very strong banking group with big-name banks for a small company. We have Truist and JP Morgan. We have Mizuho and M&T Bank. We have a real banking group. We are built as a multi-billion dollar REIT. Everything about what we do is built in that way, from our auditors to our banking group. That was how we built it from the beginning because that's the way I was only doing this if we were going to try to do this correctly. That's how I viewed it. Our financing is done on a revolver, a corporate unsecured credit facility with very good terms. Jordan can speak to that more if you'd like. We have a very solid banking group. They've been there for us through times where they weren't there for larger companies. Sorry, there was a question. Yeah.
Yes. You mentioned the next 20 years aggregating 89%. Have you guys gone out and acquired as a large 70-digit loans?
Either I misspoke or you didn't hear it right. The next 20 largest owners altogether are about 12%. Right. We have bought large portfolios in the past. Actually, again, before I was public and all this was really just a theory or a thesis, I really thought that some of these larger families would utilize those operating partnership units. And they did. Families that I've been trying to buy from for a very long time that would never talk to me about a purchase price or a cap rate, once I had this currency, they sold to us. It's very valuable. It really is beneficial to them and beneficial to us as well. Sorry.
Can you elaborate on just the mix in your portfolio with leases that have step-ups? I don't know what the rationale is if you have a plug-out.
It's a very easy answer. No rationale. They all have step-ups. Every lease that rolls from 2022 through 2026, which is all the leases we've agreed to, they all have escalators. As the leases roll, we're going to add these annual escalations. The escalations start in year two. Just so I'm clear, year one, you get a step-up to whatever market is. Year two through 10, you get your 3% annual escalators, except for 2022, which we got a 3.5% escalator.
The mix right now with the notes of that, but in terms of the portfolio?
Fifty-three percent of the portfolio has annual escalators. The ones, the 47%, are ones that have not expired and had the opportunity to mark them to market and put my new lease in place, which is part of the opportunity. Please.
In terms of station, is there a change in your estimate that you'll take on more debt?
We'll take on more debt. What we've been doing, and again, if you look at whatever the past couple of quarters are, you'll see we've stayed below five and a half times, even though we've articulated to the world to stay below seven times. We balance our debt and equity. We try to stay low leverage. We try to keep access to dry powder. We try not to put ourselves in a box where you're highly levered and people affect your stock price because of it. Again, like I was telling the gentleman sitting in front, my father really looked at this as a government and real estate-backed bond. This is a conservative company. This is run conservatively. This is not a highly levered portfolio. We've had investors argue to us that because of our retention rate and rent collection, we should juice our returns with leverage.
It's not necessary. Again, the business works out of the gate. Your earnings growth is happening without added leverage. This is just not the way we operate the business.
The 47% that's under that escalator, is it a reasonable assumption that all of those should convert within five years or so? Since our lease is usually three or less throughout the year?
It's a reasonable assumption, but it won't work that way. We have a lease roll schedule in our deck that we can provide you. You can speak to Jordan or someone else about it. It doesn't average out that way. When we buy a building, and even though I've spoken to countless owners that have been doing this for a very long time that I don't believe in renewal options because they're one-sided options for the benefit of the tenant, owners don't listen. They view them as continued occupancy. They think that their asset is worth more by having those options. It just doesn't play out. Some of them have options. We're constantly acquiring. You have to understand we're buying 200-300 buildings a year. Those numbers, they won't play out that way.
I think you went ahead and answered the right one. What's the typical, I mean, once you acquire the property, what's the typical number of years it means? And after that, what's the percentage of lease roll?
What's the percentage?
In leasing the rental?
The typical property that we buy, again, average, has a two to three-year remaining lease term. Because leases are typically five years, most people do not sell in the first or last year of their lease. That is typically what happens. Our WALT was two to three years. Because we have added these 10-year lease terms to our portfolio, now our WALT is somewhere between four and five years. I did answer the question without answering the question, which is we do not provide what our rent increases are. Yeah.
What do you think differently versus the CPI? I think you answered about the CPI.
What about the CPI, I'm sorry?
Do you use manual rates regarding the ahead of time?
I believe that historically, we have beaten the CPI by wide margins. Our escalators are fixed for 3%. They're not based on CPI. The Postal Service, as a government agency, had a very difficult time having variable-rate renewals. I asked for it knowing that they were going to say no, but that was what I originally asked for. I'm sorry to cut this short, but I have to catch a plane. I appreciate everybody's interest and time. Jordan's going to stay. He can answer whatever questions. I hope he'll answer them right. If you'd like to reach out to us, please do. Again, I appreciate your interest. Thank you very much.