Trust traded under ticker PSTL on the New York Stock Exchange. PSTL is a specialized real estate investment trust, or REIT, and the largest owner of properties leased to the United States Postal Service. The company acquires, owns, and manages a nationwide portfolio of postal facilities that support mail processing, distribution, and last-mile delivery operations. With a tenant base primarily backed by the U.S. government, PSTL focuses on generating stable cash flows and long-term shareholder value through property acquisitions and lease growth. On behalf of the company, we have Andrew Spodek, CEO, and Steve Bakke, CFO.
Thank you very much, and thank you all for joining us today. I guess for those that are not familiar with us, let's start with my background and how we got here, because it kind of frames out the story, and frames out the opportunity set. First and foremost, I can't take credit for this. My father had the foresight to buy these assets, or start buying these assets in the early 1980s. At the time, he owned different types of real estate. Never knew or realized that the Postal Service leased their assets. Was brought a small portfolio of them and purchased them, and found out very quickly some of the benefits of owning postal real estate. We frame some of those benefits in these three categories.
First and foremost, is that you can own and operate these properties all over the country without the need for anybody on site to operate them. We are able to go where the deal takes us, and we are agnostic as to geography. Number two is that the Postal Service pays 100% of the rent 100% of the time. It doesn't matter if there's government shutdown or economic cycle or COVID or anything of the like, we always collect our contractual rent. Number three, which is the largest misunderstood aspect of the business, is that the Postal Service stays in their building more often than not. We've been able to maintain a 99% retention rate over the past 10 plus years, and that percentage is relatively consistent over the decades of owning in the space.
For those reasons and more, my father continued to buy and aggregate in the space. He semi-retired in the early 2000s. I took over, kind of institutionalized the business a bit. Continued to grow our asset base somewhat more aggressively. About eight, nine years ago, an investment banker approached me about the opportunity to create a public company around our portfolio. No aspirations of being a public company CEO. Worked for myself and my family. Didn't have any investors, was very low levered. Most of the things that drive you to be public. Spent about a year or so just researching what the opportunity set was, and I learned a lot about myself and my business, but more importantly, about the market that I was living in. Postal real estate 101. There's about 32,000 facilities throughout the country. Postal Service leases 23,000 of them.
They pay $1.4 billion in rent. Let's call it a $12 billion-$15 billion market. Those 23,000 facilities are owned by about 17,000-18,000 owners. That's how fragmented the industry is. It's also interesting to note that $1.4 billion is about 1.5% of the Postal Service's total operating expenses. The backbone of their entire delivery business, what gives them their virtual monopoly on the last mile, what gives them the ability to touch 170 million delivery points six to seven days a week, is only 1.5% of their operating expenses. The fragmentation and the opportunity is part of it, the demographic of ownership was another piece. The average owner is in their 60s-80s. Average owner owns their properties 40-50 years.
I knew that there was going to be a shift in the ownership base, I felt like the public opportunity was there, the operating partnership unit currency that the public company provides was going to be a big driver of deal flow. Again, these people had no shelter for their income, no depreciable basis, and they were estate planning or dealing with the transfer of the asset to the next generation. We've done 10%-15% of our deal flow with this operating partnership unit. I view that statistic as slightly jaded just because the average operating partnership unit transaction we do is done half with cash and half with operating partnership units. I would view that as almost double the 10%-15%. Since going public, I seeded the public company with the lion's share of my personal portfolio.
We have grown the portfolio by 10 x. Asset count, square footage, and rental revenue. We are currently about 8%+ of the market. The next 20 largest owners altogether account for about 11%-12%. Again, very large and fragmented industry. Another piece of my thesis before we went public, again, we're the only public company operating in this space, was that having an institutional owner of these assets was going to change the dynamic facing off against the Postal Service. I didn't know how it was going to play out, I believed there was going to be a benefit to it. We were able to see in the first couple of years some efficiencies in terms of a proprietary lease amendment.
We were able to negotiate directly with the Postal Service and not go through Jones Lang LaSalle, saving us that leasing commission that owners have to pay or are supposed to pay. The biggest shift happened in 2022, when I approached the Postal Service to change their leasing structure. A typical lease structure is five-year fixed, with no escalators. We were living in a hyperinflationary environment, and I approached them about adding escalators to the lease form. They pushed back, as I was expecting them to, it was a commercially reasonable request, and we were able to negotiate an escalator in 2022, a 3.5% annual escalator. First portfolio escalator that existed, first owner of our size or scale that would have anything like this. In 2023, we again got an escalator of 3%. That was solidifying the precedent that we set in 2022.
At that point, I approached the Postal Service about extending our lease term, taking it from five years to 10 years, which they've agreed to. They've done so from 2023 through the end of 2026. By the end of this year, we will have 53% of our leases with 3% annual escalators and about 45% of our leases with 10-year lease term. When we went public, our WALT was about three years, and by the end of this year, it'll be close to six. This shift has helped in a lot of ways. For a guy that has owned these assets their whole life and knows their tenant is going to renew 99% of the time, extending the lease term was not really something I did for me. I did it for investors. I did it to help secure whatever perceived risk or re-leasing risk there was.
Again, extends our WALT and makes our cash flows more secure, but also gives us a lens into the future. What you'll see, if you look at our numbers, that over the past seven years being public, we have been prudent stewards of capital. We have not grown to grow. We really have been picking our opportunities, buying accretively out of the gate, and adding real internal growth that other double and triple net leases cannot provide for. As a result, our same store numbers have been significant. Our AFFO growth has been significant and continues to be. We are able to even give guidance for 2027 earlier this year. Everything about our business has never been stronger, the fundamentals of the business, the balance sheet, and the opportunity set.
Now that our cost of capital has gotten better, from my perspective, the accretion out of the gate has grown, obviously. The opportunity set and ability to buy has grown as well. Very excited about what's to come. I'm excited about where we are today. I'm going to bring up Steve, in case anybody has questions. Like to open up the floor.
When you mentioned that the average age of an owner of the property is up there.
Yep.
I think you said sometimes estate planning.
Correct
might inspire a sale. Are there new entrants in terms of acquiring these properties, or are you the go-to for those transfers or sales?
There are definitely other buyers of postal assets. There are other families that still acquire. There's a PE shop that buys postal assets. There have been PE shops that come into the space over the years. Typically, they sell to us. We are by far and away the largest owner, I would say probably double the size of the next largest owner. Again, if we're 8% and the next 20 largest owners altogether are about 12%, that kind of shows the scale. There are definitely other buyers. Even when there aren't other buyers, sellers always tell me there are. You never know.
Maybe this is a stupid follow-up.
Please
Does the government just not want to be a landlord to itself?
The government owns about 8,000 facilities. Their model, when they rolled it out originally, was somewhat inefficient. They could've gone out to the Toll Brothers or large developers of the world and said, "Go build me thousands of buildings." Instead, they actually went to every local town and county and put an RFP out for someone local to buy and build. That's why it's as fragmented as it is today. I can't tell you that they want to own or don't want to own. I think that in unique situations or in specific situations, they would be happy to own their facilities. I would argue personally, and can't tell you this as a public company statement, that I don't know that they're the best landlords. I think that they're probably better off leasing just from an operational and management standpoint. It's hard to answer.
We're buying a few hundred buildings a year, right? This is a very fast-paced growing company, and the Postal Service is a major real estate organization. To give you one answer on that is not easy. Yes, please.
Question. You've been talk periodically, and maybe it's more in the fore right now, if the Post Office gets privatized, how might that affect you? Would it be a positive, a negative, a neutral if that happened?
I get that question often. At least in the first meeting. The way I typically respond to that question is to ask a question in return, which is, what does privatization mean? The problem is that the headlines that we've all read are really very vague. Privatization as a concept is a very complicated one. This is a government agency. This is a constitutional right of the American people. This is the only government touchpoint in all of these towns. I can't foresee a version of full privatization of the Postal Service as an organization. When I try to play out that scenario, I can't even possibly see it working, right? When you think about postal police, when you think about it being the second largest employer in this country, largest employer of veterans, largest employer of minorities.
I can't imagine the knockdown effect of the privatization of this as a government agency, just like I couldn't see it if they privatized the DMV or Social Security. I wouldn't understand how that would play out. I could see privatization of aspects of the business like transportation or shipping or certain pieces of it to get economies of scale. I also wouldn't necessarily see that very likely. The only possibility in the hypothetical situation of privatization would be an Amazon, because they're the only company of any size and scale that could live with the restrictions and obligations that would come with taking over this organization. I would argue that the Postal Service is a better credit than Amazon, but I'm sure people in this room would argue that Amazon may be better credit. Either way, I don't think it changes much.
In the end, the baseline of this business, even though people focus on the Postal Service, if you get past the Postal Service as a headline and you think about, like I was referring to, the largest and most intricate logistics network, not necessarily just in this country, in the world. You look at mail volume is not what it used to be and will never be, and it will continue to decline, but package volume has taken over in a significant way. If you look at every online retailer, the American people is their target market, and you can't get to the American people without the Postal Service. Just can't. Not in any efficient way. That's why every delivery service provider uses it and leverages it to get to the American people to get to that last mile.
If the people in this room couldn't get whatever they order online in a day or two, they're searching other sites to try to figure out a way to do it. That's where the Postal Service adds value, and that's what we're buying. It's critical American infrastructure, but it's critical logistics and distribution infrastructure, and that's what this is. These buildings are needed regardless. That's the way I see it at least.
Yeah. That was a great answer.
I've been practicing.
Yeah. You guys for sure.
Please.
In terms of the valuation that you guys are buying at, I haven't been totally on top of this. To the extent that the valuations have gone up, which I don't know if they have, your cost of capital has gone down. Has that extended to acquiring as well? Like you guys have to pay a multiple to the lower cap rates?
No. Okay, first of all, I was brought up in a real estate business. As a result, the way that I was taught to buy is not on cap rate. Everybody talks about cap rates, but the reality is it comes down to the buildings themselves and the land, the building, and the lease. If you look at us and you compare us to other double or triple-net players, national and regionally, you'll see that we're paying a price per sq ft significantly below what they are, right? We're buying an average between $160 and $180 a sq ft. That's a very low basis. Our cap rate for this year is probably going to be a 7 cap or better. Our cost basis for our capital costs have gone down by over 100 basis points.
The spread is significantly greater than it was, let's call it a year ago. That line of accretion is still significantly better than it was, even if I go down on my cap rate by 20 basis points or 30 basis points or something along those lines.
The value of the, or some set of value, what you're paying has not kept up with your cost of capital.
No, my cost of capital has increasingly gotten better, in relation to the cap rates that I'm paying. That's before internal growth. Again, you have to understand, most other people that you would comp us on in this double or triple-net space is a coupon. If they're buying a 7 cap, that's what they're collecting, right? If they have an escalator on the best day, it's 1.5%. We're buying in the, let's call it 7 cap or better. We're adding significant internal growth, adding that 3% escalator. It's a different formula. The value add that we're proposing is significantly outsized to what those other players are. I would say we're more akin to a small bay industrial business than we are into a double or triple net.
If private equity firms start getting more involved, larger private equity firms, just another place to put capital, would you foresee that being potentially problematic in terms of valuations?
First, you have to deal with the moat around the business. There are a few of them. The reason why larger private equity hasn't come into the space is because our average deal size is half a million dollars. Unless the larger private equity firms can buy a platform of some value, let's call it $2 billion, $1 billion-$3 billion, whatever it is to build the business off of, it's a difficult business to start. Aside from the institutional knowledge and all the expertise playing in a niche space like we are, relationship with the Postal Service, et cetera, the cost of the average deal is a barrier just by itself.
If private equity wasn't getting involved, I guess your portfolio would be the one that's big enough to make sense for them, right?
You would think, yeah.
I was going to go back quickly to.
Please
This cost of capital question. It's an important one because, as Andrew pointed out, historically, the vast majority of the growth we've generated has come internally through that mark to market and through the annual escalations. In recent years, we've grown our earnings more rapidly than our dividend, so we've had some retained cash flow to redeploy. This also generated growth. The improvement in our cost of equity, in particular, has added a new leg to our growth tool, which is that upfront accretion we can earn with our weighted average cost of capital below 6, acquiring assets in the 7% range.
I'll ask another one.
Please.
The more the volume, like moves towards packages versus just.
small pieces of mail, is there a risk that over time the size of the buildings you guys are buying just doesn't work anymore for the Postal Service? Or at that point do they say, "Okay, now it's time to move to Amazon?
It's a hard question to answer because I think it's a case-by-case basis. I'm sure that there will be buildings that, depending on the volume of packages going to that particular area, they may outgrow a building, potentially. Again, I don't know the answer because every building needs to speak for itself. The Amazon thing, the constitutional right of the American people is important. Amazon is and has been the leader in this space, and they probably will continue to be. The reality is that the world is not around Amazon, right? There's small resellers on eBay or Etsy, there's Kohl's, there's Walmart, there's a million other people out there that need to get to the American people, right? Those 170 million delivery points. What Jeremy would say is that 61% of zip codes is rural. That's America.
We're all sitting here in Manhattan, and maybe some of us are from Chicago or L.A. or whatever the story is, but the reality of the situation is that this is not America. The target market of these online retailers is America. That's where the Postal Service shines, and that's the competitive advantage and the virtual monopoly that they have. That's, by the way, why we don't really focus in very urban areas. Our bread and butter are the last mile and flex facilities. That's predominantly what we buy. We do go after some larger industrial buildings if we can be competitive and our cost of capital is good enough for it to make it accretive out of the gate. We think, again, all these properties need to be critical to the Postal Service's operations.
We don't look in the urban areas because I don't think the Postal Service has a competitive advantage there. I don't think they have the stickiness. The 99% retention rate speaks to how much they need to be in these buildings.
Is there ever a case where the Postal Service doesn't renew a lease or these assets are repurposed?
Yes.
You own so much all over the place and you look for opportunities to do other things with them over time.
I get that question also. There's two sides to that question. First of all, we are here to own, operate Postal assets. My father taught me at a pretty young age that this is like a government- or real estate-backed bond, and that's how you treat it, that's how you look at it. There are assets that we buy that would theoretically have a higher and better use, which is what I think you're referring to.
Right.
That's not our business. Let's call it the gravy at the end of the train as opposed to the train. We do have assets that have higher and better value than used by the Postal Service. I've never quantified it. You don't have to be a genius that when you go and buy a Postal asset that is a building surrounded by a parking lot, a single-story building, and everything around it is multi-story, it doesn't have parking. Obviously, there's value there. In general, a person is not allowed legally to evict a government agency, any government agency.
We've actually bought facilities from developers with that in mind and were unable to evict the Postal Service, and as a result, sold to us because they realized that the Postal Service is not going anywhere. At the end of the day, if they do vacate, there is a value.
If the lease term is up and you don't want to renew the lease, the post office can just tell you, "We're not going to leave.
Yes, you can just negotiate what the rent is for that time. They're not allowed to stay there without paying rent. You're also not allowed to make them leave. It's a delicate line, but yeah. When the Postal Service has left, which is very rare, we've seen these buildings repositioned to a lot of other things because of where they're located, because of the land-to-building ratio, because of how simple the buildings are. We've seen them turn into banks and hardware stores and medical office buildings. One of the buildings we sold a number of years ago, they actually built lofts on top of it because there was a housing need downtown. These are very simple buildings that can be repositioned to a lot of things. It's just not a focus of our business.
Just going back to the question I asked about-
Please
Volume and Amazon, which I guess is kind of like a draconian downside scenario, but it sounds like you wouldn't be so upset if the Post Office moved out of a few buildings in certain areas and that could be redeveloped or sold to someone who wants to develop it.
I believe I go back to the fundamentals of real estate, which is, again, what my father taught me, which is the money you make in real estate is how you buy it, not how you sell it. If you buy it right, which I believe we are, you're usually not afraid to sell it. We've had two vacancies since we're public. One of them I sold vacant at a marginal profit. I don't know if any of you guys are real estate people, but being able to sell an asset vacant for a marginal profit over what you paid for it with a tenant in place is not an easy thing to do. It goes back to buying at the right value. Okay. Well, I appreciate your time and interest. Thank you for coming.