Get the thumbs up here. Great. All right. Well, good afternoon, everyone, and thanks for joining us. My name's Tony Paolone. I'm a research analyst at JPMorgan. I cover the real estate space, and it's my pleasure to moderate this panel with management team of Postal Realty Trust this afternoon. I got to tell you, we cover a lot of different parts of this group in the real estate space in my team, and this is truly one of the more interesting stories, I would argue, that's out there at the moment in some of the things they're doing. It's just very unique to what you typically see across major property types in real estate. This should be pretty interesting. Let me introduce the management team. I'm going to guide along some Q&A.
I think for everybody in here, if you have any questions, go ahead and raise your hand, and we'll try to weave those into the discussion. I'm going to start with your left side, and start with Jeremy Garber, who is President of the company, Steve Bakke, who is Chief Financial Officer, and Andrew Spodek, Chief Executive Officer of Postal Realty Trust. Let's get going. Andrew, maybe kick it off. Give us a description of what you do at Postal, the portfolio, and how the business model works.
Sure. Thanks, Tony, and thank you, everybody, for joining. I see some familiar faces in the audience. I'm sorry to bore you with the history that you've all heard before, but for the new faces, I think it's important to frame things. I can't take complete credit for this. My father started buying postal assets in the early 1980s. He also founded a very unique asset class, like Tony does. What he found very early on and what kind of proved out to be true is, number 1, we can own and operate these properties all over the country. We're currently in 49 states, without the need for anybody to be on-site to operate them. Number 2, we collect 100% of our rent 100% of the time. Government shutdowns, every economic cycle, COVID, et cetera, we always collect our rent.
Number three, which is the largest and most misunderstood aspect of this business, is that the Postal Service very rarely moves. Thanks.
Yeah.
We've been able to maintain a 99% retention rate over the past 10-plus years, which has also been similar to our retention rate for the decades prior to that. All of that drove my father to continue to buy in this asset class. He semi-retired in the early 2000s. I took over, kind of institutionalized the business a bit, and continued to grow it somewhat more aggressively. After my father's passing about 10 years ago, I was approached by a banker to create a public company around our portfolio, which we did. We went public about seven years ago. Since that time, we've 10x'd the portfolio, square footage, rental revenue, property count. We got slowed down a bit with COVID. We got slowed down a bit with the rise in interest rates. The baseline of the business has always been the same. The properties are very simple.
They make sense. This is a niche market that we play in that has a relatively large moat around it. We are far and away the ace in the space. We own about 8% of the market, with the next 20 largest owners owning only around 11% or 12%.
Maybe describe, just to contextualize that a bit more, is it just post offices? How much are other types of facilities? How many do you own? What's the average ticket size when you buy these?
Sure. We focus on standalone postal assets. We own close to 2,000 assets today. The average ticket size is around $500,000. It varies by quarter, depending on if we buy a large facility in that particular quarter, but that's the average in general. I think it's probably important just to frame what the postal real estate market actually looks like. There are about 32,000 facilities throughout the country, 23,000 of them are leased. Postal Service pays $1.4 billion in rent for those 23,000 facilities. This is a $12 billion-$15 billion market, depending on what margins you put on it. Interestingly enough, that $1.4 billion is only 1.5% of the Postal Service operating expenses, and that controls the entire backbone of their delivery business.
Interesting. I want to talk more about the market and what you're doing there and your acquisitions, but maybe to give some of this away already, your stock's up like 80% in the last year. What happened? What are some of the things that you've done that you think have really been a catalyst for this?
First and foremost, I don't think the business has changed drastically. I think people are just recognizing what we've told people that we were going to do. I think delivering on the things that we've set out for people is really what's being recognized today. This has always been a stable business. This has always been a business that made sense out of the gate. Our acquisitions have always been accretive out of the gate. What I think really has changed is people recognizing the value add component, the internal growth that we've been able to do with these properties. A large portion of that is the change in the lease structure that we were able to facilitate with the Postal Service. In 2022, we approached the Postal Service about changing what was a five-year fixed lease structure, and we were able to negotiate an annual escalator.
That was the first time the Postal Service had done it, from my understanding, on a portfolio. It was a major shift in the way that the Postal Service deals with an owner. The following year in 2023, we were able to confirm that and once again get the annual escalator, and we've got it every year since. By the end of 2026, we'll have 53% of our leases with 3% escalators or better. Once we were able to facilitate that, we actually went to the Postal Service and extended our lease duration. So we extended our leases from five years to 10 years. By the end of 2026, we'll have about 45% of our leases with 10-year term. At IPO, we had a three-year WALT. By the end of 2026, we should have about a six-year WALT.
I think that people seeing this internal growth, people recognizing what we're able to do, was a big part in what's going on with the stock. I think that us giving guidance and showing people that this is not something we could do one year, this is something that we've been able to do year-over-year. Our AFFO growth, our same store NOI has been consistent. We've even given guidance for 2027 to show that we're going to be able to continue to provide this.
Yeah, I think you might be the only company with 2027 guidance at this point, so thank you for that. What you did was you extended out your duration, you added more internal growth in that. Now let's get back to your buy box. You'd mentioned a $15 billion TAM.
12.
$12 billion. Okay. How much of that do you realistically see as available to be purchased that you would really want? Maybe start to walk through a little bit the systems, the people, the process you have in place to basically do these very granular transactions.
I think from the $12 billion-$15 billion, what we were probably interested in acquiring is somewhere in the $6 billion-$8 billion range. The deals that we've done in the past are the deals that we're looking to do tomorrow. We're not looking to change our buy box. The underwriting of these properties typically fall into two categories. First and foremost, that the buildings are important to the Postal Service, and that they either need or want to be in that particular facility. We underwrite the real estate. We're able to buy these at or below replacement cost at an average cost of $160 a foot, which I believe is a tremendous value. In terms of the office and staff, I'm very privileged and proud to have the great people that work at the company.
I'll let Jeremy speak to the staffing and the systems and processes that he's put in place.
Thank you.
Sure. We're based in Cedarhurst, Long Island. We have approximately 40 people out in Long Island and spread across accounting, acquisitions, property management, and we continue to work on improving systems and testing different new technologies and trying to make things more efficient. On the acquisition side, we've been buying these types of assets. I think on average, we buy a building every business day. It's a very repeatable, efficient process. Remember, these assets were built according to government specs. Depending on when were built, the 1950s, the 1960s, the 1970s, we're very familiar with these assets no matter where they are. We can easily underwrite closed deals, inspect. We know exactly what the building systems look like. Everything really moves rapidly because of the familiarity with the assets.
Jeremy, Andrew says, you know the assets and you've got the people. You're running that whole thing, and you can underwrite this, and he talked about it being important to the Post Office. How do you determine that?
Again, this is an area that Andrew and his family have been involved in for decades, and because we have daily dialogue with current owners, because we acquire so many assets, the amount of data that we're collecting on a daily basis about these assets, about ownership, we've been collecting for decades. When we talk about what is important to the Postal Service, it is our secret sauce, but it's understanding why they stay in buildings. It could be things like routes, the number of employees in a building, things that people who are not familiar with the space and not engaged in the space wouldn't know to ask and wouldn't appreciate. This is very different than a commercial tenant. It's not about deposits in the bank that you're trying to buy, right?
It's not about, does this drugstore have a drive-through, which makes them more attractive today than maybe in prior iterations. These are unique things to the Postal Service that we gather and understand and have collected for decades.
Yeah. Maybe can you walk us through the economics? What do you make in terms of yields? How do those work over time, and do you have any responsibilities at the asset?
We can talk about the lease structure a little bit, which is, we call them modified double net lease, so they're not triple net. We're responsible for roof and structure. We pay the real estate taxes, and they're reimbursed, and we're also responsible for insurance.
On average, we've been acquiring properties in the mid 7% year one yield range. In the first quarter, it was 7.4%. If you look at our margins, we run around 90% NOI margins if you put aside real estate taxes, which are reimbursed. Additionally, on top of that upfront yield, we drive substantial growth in our properties over time. As Andrew mentioned, we have a proprietary approach to leasing, adding 3% escalators, 10-year leases to our mark-to-market leases as those roll. 33% of our rent rolls between 2027 and 2030, which creates a substantial growth opportunity. If you look historically, we've had 6% same store NOI growth over the last five years because of that mark-to-market, as well as the growing contribution of those annual escalators.
Maybe walk us through what your investments have looked like to date. Remind us what you've guided to for the year, and just how the transaction environment feels for you right now.
This year, to date, we have acquired $35 million of properties. We started the year with $115 million-$125 million guidance, which we increased in the first quarter to $130 million-$140 million. We expect to acquire that in the 7% cap rate range, similar to prior years. We typically acquire last mile facilities that are under 2,500 sq ft, flex facilities that are 2,500 sq ft-50,000 sq ft, or industrial facilities that are larger than 50,000 sq ft. Because of where those industrial facilities have traded in the past few years, we have focused on the smaller two property types. As Jeremy mentioned, we acquire anywhere between 250-300 properties a year on average.
Are there any impediments or things that could be done that could open up that volume even more? Any limitations?
I think that the goal is always to buy properties that we buy at a good value. There are properties over the past few years, given our cost of capital, that we could not be competitive, we could not acquire. Those are properties that we are going to look to acquire today. We've always bought accretively out of the gate, and now our line of accretion with our cost of capital has gotten better. The goal is to increase the funnel and to be able to buy more, but to do it slow and steady and to be prudent stewards of capital, which we always have been.
Yeah. One of the things that's been unique, I think, is that you've pretty consistently have been able to also use your equity in the form of sellers that want to take that back. How prevalent is that to the business model?
I believed pre-IPO that the operating partnership unit was going to be a big driver of deal flow. I was told in a lot of my roadshow meetings that a lot of REITs say they're going to use it, and very rarely do they do it. I believe we've been the exception. We've done 10%-15% of our deal flow with that operating partnership unit currency. I believe that statistic is low because the average operating partnership unit deal still has about a 50% component of cash. I believe that number is actually double. We've seen a pretty decent size demand for that currency. Even when we don't use that currency to close, it drives a lot of deal flow to us. We've pretty consistently done 75% of our deals off-market, and that's properly off-market, not touching a broker.
It's been a pretty impressive tool for us.
All right. Do you ever look at areas outside of deals with the Post Office? Is there a more broad buy box that you consider or include in all of this?
We stick with the Postal Service for the most part. We believe that there's a tremendous runway and a tremendous opportunity. We're buying arguably the best credit tenant. Really, in all the asset classes that I've seen over my life, I haven't seen the opportunity set, the fragmentation that this has, the internal growth that this has, and I believe this is where we should be focused.
When you think about just you didn't have as good access or it was just maybe perhaps a bit too competitive to go to some of these larger facilities. Now your cost of capital has come down. Are there a lot of these still available for you to participate in or purchase? Can we see more of those?
By nature, the Postal Service owns more of their industrial facilities than they rent. The opportunity set on a property volume is significantly smaller than it is in the flex and last mile. I do believe that as our cost of capital gets better, and hopefully as the industrial asset class in general has a pricing correction, we can be more competitive and should be able to acquire some of those assets. It's still not the bread and butter of the business. We still primarily focus on the last mile and flex facilities.
Got it. Maybe Steve, as we've talked about the pipeline to date, your yields, walk us through just the rest of the financing of your balance sheet right now, and also the building blocks to bottom-line earnings growth this year and the next couple of years?
That's a good question. From a financing perspective, we've been running the balance sheet low leverage, low 5x debt to EBITDA. I think you could expect that to continue, perhaps even drift a little bit lower given the attractive cost of equity we have today. We look to stay one year or so pre-funded as far as the equity we have on an unsettled forward basis relative to what we see on the horizon as far as acquisitions. If you assume $130 million-$140 million of annual acquisitions, you could expect unsettled forward equity in a similar context to what we had in the first quarter.
If you think about the building blocks of our earnings growth, as Andrew stated, we have a lot of visibility and stability in our top-line growth, which is why we provided a same-store revenue outlook for 2027 during the first quarter of 2026. Tony mentioned, I don't think any other REITs have done that. I think step one of our growth is the internal. Historically, the majority of our growth has come from the mark-to-market opportunity. As we've added escalators to our lease portfolio, those escalators provide stable, visible growth over the 10-year lifetime of those leases. That's building block number one. I think number two is the cash flow we have available to reinvest in properties after dividends are paid. Today, we're guiding toward AFFO of $1.41 per share. We're paying out $0.98 of that in the dividend.
We have $0.42 per share, $0.43 per share of cash flow left over to reinvest or to pay down debt. That's a substantial source of growth for us. It could be 1%-2% of the 6.8% AFFO per share growth we guided for this year. The last piece is the ability to use our now attractive cost of equity to generate upfront yield, in addition to the internal growth and the reinvestment of excess cash flow. Today, our WACC is in the mid to high 5% range versus acquisitions that are 7%-7.5% initial yield. We can drive more meaningful upfront spread as well, which I think you'll start to see become more of a factor in 2027 than 2026.
Got it. I have a question about the occupancy level. I think you guys are 99.6% occupied. You got a few boxes that the post office has vacated. Why do they leave? How often do they leave? Do you have a good pulse of when that's going to happen? I know it's a tiny number. Curious about how you think about that.
The most common reason for the Postal Service to vacate a facility is the size of the facility. Either it's too large or too small for them. Again, the Postal Service, all these facilities are driven by operations and their ability to touch the American people, and that's why they need them. Again, we're investing in the largest, most intricate logistics network in this country, if not in the world. We've had two vacancies. One of them we sold at a marginal profit, which from my perspective is quite a strong statement. Mostly it's difficult to sell a vacant building for a little bit more than you paid for it when it was occupied. The other vacancy is still vacant, but accounts for 10 basis points or something like that of income.
Got it. Tell us a little bit more about just the Post office, and just how critical the facilities network is because we do get headlines from time to time that say, "Post office is losing money. Should we worry about that? How do we think about the importance of the network?
It's a complicated answer. The Postal Service is a complicated entity. I very often refer to it as a two-headed animal, right? One head being the government agency part, the constitutional mandate to provide universal service to the American people. It's the only government touchpoint in all of these towns. It's a right of the American people that is important to them that they're willing to fight for. On the other side is the business aspect. Now, this was never built as a commercial enterprise. This was never built to be profitable. This was built to be a self-sufficient organization that served the American people. It's not given free rein to make money, and so it's very complicated.
I'm very often being asked to opine on the operations of the Postal Service, which is complicated for me because I really have nothing to do with the operations of the Postal Service. What we're investing in is the real estate, and the real estate is fundamental to get to the American people. Those 170 million delivery points that the Postal Service touches six to seven days a week is literally the target market of every online retailer, and they all utilize the Postal Service to get to the American people, as do all delivery service providers. You can't touch the American people in any efficient way without leveraging that network. As package volume has increased over the years, so has the demand for this network.
Right. There were some headlines around Amazon negotiating with the Post Office earlier this year. What happened with that?
The specifics of it, Jeremy Garber follows all these articles, which I'm sure drives him crazy, but the bottom line to it is that a lot of the negotiations with the Postal Service, whether it's with Amazon or any of the delivery service providers, is basically their negotiations happen in the public eye. I don't know why that happens, that's just the way it is. I realize that Amazon is the largest user of the network. I don't know if that user is profitable. I don't know if it's a loss leader. I don't really know, and they don't disclose what their profit is for each one of these accounts. I believe that all of the service providers need to leverage this network, and how they divide up what their capacity is for the delivery is something that's outside of what we understand.
I don't know if I missed something you want to add.
No, I think it's important to point out that there's a new Postmaster General who took the reins in the past year, and what he immediately understood is that the last mile is their monopoly. The last mile is what every other logistics player is trying to get access to. He describes it as the crown jewel of the Postal Service. He talks publicly about the entire returns opportunity that no one is focused on. As it relates to the Amazons and the DHLs and the UPSs of the world.
They have no choice. In order for them to engage with customers, in order for them to deliver to the American people, they drop off pre-sorted pallets at your local post office. If any of you drive around at 6:00 a.m. in the morning, you'll see in the back of your post office an 18-wheeler truck from FedEx, DHL, UPS, or Amazon. They're there because the Postal Service takes it to the door. If they arrive there before 6:00 a.m., the Postal Service guarantees that they'll be pushed out that day. All the news and all the headlines about contract negotiations, Amazon just extended their 5-year contract. DHL announced last week that they're extending their contract. UPS, at the end of 2025, canceled that contract.
Within nine months, they were back at the table renegotiating a new contract because what they recognized is they have no choice. They need the Postal Service.
That's helpful. I didn't actually know that they took the pallets to the Post Office, and the Post Office actually takes it from there. Okay. Interesting. I'm going to open it up. If there's any questions, please. We've got one here.
Okay. My question is, the Post Office has had a perennial loss situation because, as explained, the public service, not a profit business, but it seems, I don't know if it's getting any better, but they're constantly struggling. How does it affect the rate you get for your rental and the security of getting your rental every week? The financial problems that the Post Office has.
I guess it comes back to the fact that to rent these buildings is only 1.5% of their expenses, right? It's nothing. It's a line item. It's a small line item. I would argue that it's the most important line item in their business because without this distribution network, they can't do their business. I don't believe that their financial issues directly affect me because if anybody was looking to find efficiencies in their business or looking to cut costs, they're not looking to do it in the 1.5% line item. I do believe as a government agency, as most of them, there are efficiencies to be found, but the majority of them would probably be in the labor line item.
Labor is like 70-plus % of their expenses, but that's a very complicated one, and it's a political hot button because they're, I think it's the second-largest employer, largest employer of minorities, largest employer of veterans, and so it's something that most people haven't been wanting to take on.
Question over here.
AFFO growth's been outpacing dividends per share growth for a couple of years now. I'm just curious how you're thinking about that. Of course, you talked about sort of the gap, the AFFO versus dividend, how about REIT requirement versus are there any sort of REIT structure that's going to push you to have to grow the dividend a little bit?
Absolutely, there are limitations. We have to pay out a particular amount of our net income in order to maintain REIT status. It is a board-level decision, but the board has been aligned with the view that, to the extent possible, we retain as much as we can while continuing to grow the dividend at a measured pace.
We have a number of quarters before we would have to hit that REIT guideline.
Okay. Thank you.
All right. Anything else from the audience? Okay.
You mentioned that you cover the roof and insurance. Could you color in anything else you guys are responsible for actually managing the property's assets?
It varies by lease, but the vast majority of the portfolio is roof structure insurance and something they refer to as building systems, which I refer to as the plumbing or the wires inside the walls. Majority of the costs of operating the building are not significant. Our largest single expense is roof, and second to insurance.
You include that when Stevie mentioned the 90% margin.
Correct
This modified double net, that 10% of revenue basically covers all of this.
Correct.
Got it. This has been super helpful. We have room for one more if there is. We'll wrap it up here and I want to thank all of you for attending and thank you very much to the management.
Thank you, Tony.
Thank you, team for doing this.
Thank you.
Appreciate it.
Thank you very much.
Thank you so much. Thank you very much.
Appreciate it.