Afternoon, everyone. Thank you for joining us. I'm Jeff Elliott with Three Part Advisors. Next presenting company today is Postal Realty, PSTL. With us today here from the company, we have Jeremy Gar— I was about to say Garber. Jeremy Garber, he's President. Steve Bakke, CFO, and Jordan Cooperstein, VP of Finance and Capital Markets. Postal is a Three Part Advisors client, and if anyone would like a follow-up meeting or a call with them, please reach out to me directly. I'm happy to set that up. With that, I'll just turn it over to Jeremy.
Thank you, Jeff. We've been coming to these conferences the past few years. We think that Three Part does really an amazing job bringing interesting and unique companies together. We think we really fit that bill. I see some familiar faces in the audience, some people who it looks like we haven't met before. I would ask for your indulgence, those of you who know the history and know the story, and let me spend a few minutes talking about who we are, why we're here. Like many of you, about 10 years ago, I learned that the Postal Service does not own their facilities. Our CEO and his dad, his dad actually started or uncovered these assets in the 1980s and started acquiring assets leased to the Postal Service.
Our CEO took over continuing that strategy in the 2000s, and we joined them as a private company about 10 years ago, helping them institutionalize the business. The Postal Service is a 250-year-old United States. Somewhere in the Constitution, they decided that every American had the right to receive mail, and that's been the driving force behind the Postal Service's mission for 250 years. When you think about the Postal Service, what you're probably thinking about is your local post office, typically located on Main and Main or off Main and Main. The question is, how did all these facilities appear, and why do individuals own them?
Well, in the 1940s, the 1950s, 1960s, when they started building out this portfolio of buildings, the Postal Service, for some reason, decided instead of hiring a master contractor to build facilities all over the country, they were going to every community with an RFP, and anyone could have answered the RFP to build a facility for the Postal Service on a site that they pre-selected in that community, according to specs that they gave the individual who won the RFP. That individual could have been a plumber, could have owned the hardware store, could have known nothing about real estate. They won the bid, and that person built that facility in that community. So you fast-forward today, there are 17,000 owners of approximately 23,000 leased facilities across the country, and it's because of how the Postal Service decided to roll out this network of buildings.
Now, the Postal Service owns 8,500 assets as well. Those are separate from the leased portfolio. And what we saw is that as they were building assets, they started on the East Coast, moving to the West Coast. As they crossed the Mississippi, they started building buildings and owning them as opposed to having local people build these assets for them and lease them back. So again, our strategy as a public company is acquiring these leased assets from this fragmented ownership. And when Andrew and I came to the public markets about seven years ago, it was really about a roll-up strategy, right?
We looked at it and we said, "Wow, look at this completely fragmented market. There's no institutional player here. As a private company, we're the biggest player in a space that nobody's familiar with, and we think there's a tremendous opportunity." So we pitched that to Wall Street, and a few banks agreed to take us public.
And again, it was all about aggregating leases and aggregating buildings, and all the growth was going to be externally driven. A few years into that strategy, what had happened is we hit this sort of inflationary environment where rates went against everybody and your cost of capital really was impacted. So we sat in front of the Postal Service and said, "We need lease renewals that have some type of adjustment, inflationary adjustment, some type of escalator, to allow us to continue to support and maintain these buildings the way that you need them supported." And their response was a government response. "No. This is how things are done here." It took a few rounds of negotiation, and starting in 2022, they agreed to giving us annual escalators in our leases.
And once we got that in 2022, we came back in 2023 and said, "We'd like an annual escalator." From that point on, through 2024, 2025, 2026, and now through 2027, all of our leases that we renew have a 3% escalator. And we've also been able to move from five-year flat leases, which is what most postal landlords have with the Postal Service, we now have 10-year term. So we've completely changed the dynamic of leasing, and what that started to create was this whole internal earnings momentum. And we were surprised that investors and research analysts didn't pick up on it, didn't recognize it. It wasn't reflected on our stock price for years.
About a year ago, which is around the same time that Steve, who I will introduce in a second, joined us, we decided that we really needed to come up with a different way to tell the story to the street so that they could understand that the earnings power and the earnings momentum that we had created was real and sustainable. You can predict it into the future based on all the new lease structures that we put in place. I think when research analysts finally understood what was going on here, it started to resonate with the investor community, and that is why you have seen our stock perform really well over the past year.
I am going to let Steve talk a little bit about his transition to the company, what he saw, what his drivers were, and what he has been able to accomplish over the past year in terms of helping us improve our balance sheet and our positioning in the market. Then, we can go into some Q and A.
Thank you, Jeremy. It is actually a great transition, talking about the improvements made in the business over the last five years. I got the call about this opportunity a year ago. I remember pulling open the supplemental and looking at it with my REIT-focused vision. I have been in REITs my entire career, first as a research analyst, then as an investor at a hedge fund and a mutual fund, and then more recently at a corporate. I said, "Well, there is one tenant. It is a strong tenant, U.S. Postal Service, but still, it is one tenant." Additionally, I noticed around 30% of the lease revenue was expiring in the next few years. I said, "Ooh, that is kind of risky. You have one tenant, and you have a lot of the leases expiring soon."
I had a view of skepticism, but as I peeled back the onion, it kind of reminds me of what Charlie Munger says about inverting everything. I realized as I talked with Andrew and Jeremy that much of the power of this business model is the opportunity presented by that 30% of leases that expire in the next few years. We have a very unique approach to negotiating those rents with the U.S. Postal Service, and we have something that no other landlord in the Postal Service space has, which is 10-year leases with 3% annual escalators. As we mark these leases to market, we are creating a substantial amount of value for our shareholders by doing that. The approach we are taking with U.S. Postal is offering a substantial amount of value for them.
It is a very unique win-win situation for us, for our landlords, and for our shareholders. As I learned more about the opportunity, I got excited because I said, "This is a really powerful, differentiated business model within real estate." We can provide outsized returns with less risk than many other real estate platforms offer. I thought there was a massive opportunity to help Jeremy and Andrew spread the word and tell investors who, especially on the REIT side, may have forgotten about the Postal Realty platform, that IPO'd as a very small company, and had grown substantially since IPO. I got here, and we have really made it a focus to meet with existing and new investors. I think it is reflected in the performance of the stock over the last year, that more and more investors are appreciating the power of this platform.
We are in a place today where we have, for the first time in a few years, I think since we emerged from COVID and rates rose, we are in a position where we have a multi-pronged growth strategy. We not only have the mark-to-markets of leases that we have been effectuating for a number of years, we have a growing presence of these 3% annual escalators. In 2022, we had no annual escalators. As we move to 2026, 45% of our portfolio today has that annual growth, which is a great base to start from. When we IPO'd, we were paying out 100% of our cash flow in dividends. Today, that is around 70%. That excess cash we can deploy adds about 2% per year to our annual growth. It builds on that base of the annual escalators.
The last piece is a better cost of capital than we have had since 2020, 2021 timeframe. We are not only getting the internal growth, but every dollar we deploy is meaningfully adding to our AFFO per share in 2026 and beyond. I will spend a few minutes touching on balance sheet. One of the things that really excited me about the company was I saw eye to eye with Jeremy and Andrew on how the balance sheet should be structured. Going back to when they were a private company, it has always operated with low leverage and well-laddered maturity schedule. We have continued that today. We have operated most of the company's life in the low 5x debt-to-EBITDA range. We had a 7x debt-to-EBITDA target when we came public to give us flexibility. We updated that most recently to 5.5x pr below.
In actuality today, we are running at 4.6 x. In addition to a low levered balance sheet, we have around $50 million of equity that we have raised, not yet in our share count, that we can draw down as we seek to acquire properties. The beauty of that balance sheet structure is that regardless of what happens in the capital markets environment and the stock market over the next year, we have the capital we need to execute our business plan. We are in a very strong position to, regardless of what happens, we can capitalize on opportunities as they come across our vision. With that, I will hand it back to Jeremy.
Maybe I will touch on a couple of more things and then we could turn it into some Q and A. We could talk about the types of assets, because what I described earlier is what everyone recognizes as their local post office. The Postal Service has all different types of assets, and we sort of divide them into three buckets when we are looking at acquiring assets. We are calling them last mile, we are calling them flex, and we are calling them industrial. We are agnostic. We are going to buy assets that they lease anywhere in the country, any asset type. The three different buckets just represent sort of building size. Last mile is what we all call our local post office. It is typically 500- 2,000 sq ft. A flex facility is probably in a more metro or suburban neighborhood.
That facility may be somewhere between 2,000 and 50,000 sq ft.
And then we call anything over 50,000 sq ft industrial. Since our IPO, again, we have purchased all types of assets. The Postal Service network, they own more of their industrial type assets, their processing centers, their distribution centers, their sorting centers. So there aren't as many of those types of assets for us to acquire. But we have. And we are open to pursuing those types of assets at the right valuation. But our bread and butter is really in the buying, what we call last mile and flex assets. I think it is also important to recognize, the Postal Service, we all see headlines. The Postal Service is an operation that loses money every quarter. It loses money every quarter because it is self-funded. It is not part of the government budget process. It doesn't receive budget appropriations from the federal government.
They have to support themselves just with the sale of mail and packages. But they are also handcuffed because they are required to deliver to 170 million delivery points, six or seven days a week. They have to go to every one of your homes. They have no choice. And that requirement is the reason that no other service provider is interested in going to every single delivery point every day. And it is why every other provider harnesses the Postal Service to get to your homes. So you may get Amazon packages delivered by your mail carrier because Amazon, DHL, UPS, they all have contracts with the Postal Service for last mile access.
If you live in suburban communities, what you will find sometimes is if you drive around early in the morning, you will see an 18-wheeler Amazon truck, or an 18-wheeler UPS truck, or FedEx truck, or UPS truck parked in the back of your local postal facility, unloading pallets that are pre-sorted and that your local mail carrier is going to deliver to your home. That is how all these other providers access the last mile. The last mile is the most critical piece of the Postal Service's network. That is our bread and butter. That is what we buy all day, every day. I think also important to recognize is that the Postal Service, their total expense line is around $80 billion a year. 70% of that is labor, around 15% of that is transportation, and 1.5% of their total expenses are leasing facilities.
When they go through their income statement, their balance sheet, and they are trying to figure out, "All right, we need to find somewhere to cut, save money, rationalize expenses," they do not even get to our line item. There is a lot more that they can do on the labor and transportation side before anyone is highlighting that they spend 1.5% of their expenses to service the entire country and every person in this country. I think those are important things to recognize as well. I think with that, we can open up to any questions people may have. Steve and I are here to, and Jordan here to address anything maybe on your mind. In the back. Yeah. The question is asking specifically how our CEO is compensated.
The response is it is not how our CEO is compensated, it is how most of us in senior management choose to be compensated. We are all entitled to cash salaries, cash bonuses, and then we all have incentive plans to deliver earnings to investors that are typically equity-based. We are all choosing to take everything in equity. Andrew takes 100% of all of his compensation in equity because he is 100% aligned with shareholders. He is choosing to risk everything to help build and invest in this business. Myself, Steve, we take the lion's share of almost all of our compensation in equity form. We are not taking cash bonuses, we take stock. We are as aligned as management as we can be. Insiders at Postal Realty own about 13%-14% of the float. That goes for our board as well.
We do not have one board member who takes any type of cash compensation. They all choose to take all of their compensation in stock. Once people have stopped asking about whether the Postal Service is going to go out of business, the next thing people want to know is how well do we do when we negotiate with the Postal Service to renew our leases. I will tell you that because I have one tenant who dials into every earnings call that I have, since we went public, we do not publicly share how well we are doing negotiating with them. The last thing you want to do is poke them in the eye in a public setting. Steve can talk to how you can sort of unpack how well we are doing. We are doing well. It is a meaningful component of our growth and our earnings.
Yeah. To Jeremy's point, we have been fortunate enough to be able to provide 2027, next year's same store cash revenue growth outlook of 6.5%. Just to give you a sense of the composition of where that growth is coming from. About three quarters of that is the mark-to-market, and to a lesser extent, some of these renewals that are taking place, and then 25% is the annual escalator.
We're not avoiding the question, it's just not something that shareholders. Most shareholders agree it's not worth poking the bear because I'm in constant lease negotiations with this tenant, and I want them to feel like they're winning. The dividend. I'll give you a little history and then Steve could take you to the present. We came to the markets as a microcap, and our bankers basically advised us that the only type of shareholders that would be interested in purchasing our shares in the IPO and thereafter would be retail investors who need to get paid for taking the risk on this small cap opportunity. We came out of the box as a public company with a very high dividend relative to our earnings. We were paying out 100% of our earnings in the form of a dividend.
As you can imagine, retained earnings are the biggest, or can be the biggest driver of growth because that's capital that I can deploy and generate return. Over the course of the past seven years, we've been able to grow our dividend every year, but grow it at a pace where we are retaining earnings, and so our payout ratio has come down, but our dividend has increased on an annual basis. I'll let Steve talk about dividend policy and what that looks like today.
Yeah. So to Jeremy's point, started out paying 100% of our AFFO in dividend. As of the second quarter, we're down to paying out 70% of our AFFO in dividend. It's a meaningful driver of growth. It'll add 2% in our estimation to our AFFO per share growth for next year. As we move forward, there will become a day where our dividend will have to track the growth of our AFFO per share in order for us to maintain in line with REIT requirements that force us to pay out 90% of our net income in the form of a dividend. We're at a 70% payout, like I said, we'd like to get down to a 65% payout.
If you assume we've been growing around 6% AFFO per year, if we have another year of only growing the dividend at 1%, we'll be right in line with that payout ratio that we're looking for. The reason I'll say we've targeted the 65% payout ratio is in conversations with the rating agencies and bond investors, we feel like there is a meaningful benefit we can achieve on our cost of debt by bringing our payout ratio down, along with the other disciplined ways that we are operating our balance sheet, which will effectuate in a lower cost of capital, even more competitiveness acquiring assets, and more day one accretion that we can generate from acquiring those assets.
[audio distortion]. Thankfully, I get to spend, from the senior management team, the most amount of time in Washington, D.C. I meet with our Congressman and Senator from every county, state pretty often. I was there for three days, three weeks ago, two days the week before that. I went to an oversight hearing of the Postal Service the week before that.
My tentacles are deep. I meet with unions, the postal unions. I meet with anyone who's touching the Postal Service because clearly we have a vested interest in knowing as much as we can, because they're our lifeblood. I think this Postmaster is interesting. I think he is gaining the respect of Congress and the administration, whereas his predecessor had a very toxic relationship with them. Yeah, he's been talking about appropriations. We haven't heard that word since the 1970s, and I think it's appropriate. I think it's likely where we end up, meaning they sit today as an independent agency, so they don't have any budget appropriation. Congress is asking them to play a role that they can't fulfill, right? They can't fulfill the universal service obligation without losing a ton of money.
All the Postal Service is saying, this Postmaster is actually, I think it just makes a lot of sense. I don't know why it took so long for us to get here. He's saying, "Let's say it costs us $6 billion a year to fulfill the universal service obligation. That means if you want me to go to every rural community in the country, because no one else is going there, let's say that's a $6 billion cost." Okay. Find $6 billion in the annual budget, and we're good. I think from my discussions and my meetings, I think there's a lot of momentum there on that conversation, whereas it's never been a topic before. I don't think we're going to see anything. We're coming into an election. I don't think we're going to see anything, and we're in the middle of a war.
I don't know if anyone Yeah. It's not top of mind, the Postal Service, but everyone gives me the time and attention and is supportive. This is bipartisan. It doesn't matter whether you're Democrat or Republican, what administration you served in. Everybody supports the Postal Service because at the end of the day, every Congressman and Senator knows. If anything is happening in a post office in any of their communities, it's the number one call into their congressional offices. When I come visit offices, they're like, "Oh, post office. Yeah, we get calls about our post offices every day." People just call their congressmen when they didn't get their mail for three days. They all know that failing the communities to service them through the Postal Service means potentially no votes. I think there is a ton of support for the Postal Service.
I think it's going to be some time before we see action, but I think it's going to come. If we go back to the slide that we opened on, there's a massive TAM here, right? This is a $15 billion market, a niche market. We own about 2,000 MSFs, about 8% of the market. The next 20 owners own about 2,500, or 11%. I mean, 80% of this market is available. Do I want to own $15 billion? No. Let's say I want to own $7.5 billion. This year, we raised our guidance from originally in the beginning of the year saying we could see us buying $120 million. We just gave guidance saying we're going to buy $150 million. $150 million is going to be our biggest year in seven years in terms of total acquisitions.
It'll take me many years to acquire all that TAM that exists out there. What are the governors in terms of, all right, why can't you buy $1 billion this year? Buy $150 million. Some of the governors around your cost of capital, right? We're disciplined investors, and we're standing alongside of our shareholders. Everything we look at, we want to make sure it's day one accretive and it's going to be additive in terms of earning growth over the next five years. Andrew and I, we didn't decide to do this on a whim. We didn't decide to do this because we wanted to be public company executives. We decided to do this because we said there's a massive opportunity there and it's ripe for a public company structure. We don't have a gun to our heads.
There are so many companies that come to the market and grow for the sake of growth because they think that's the only way they're going to survive and that's the only way they're going to achieve success. Never been our approach, right? When times are tough and when we were all going through this COVID period, inflationary environment, we just kept our heads down and did what we said we were going to do. We're going to go out, acquire assets that are important to the Postal Service. We're going to renegotiate those leases. We're going to get mark-to-markets. We're going to get escalators. We're going to grow earnings year in, year out. We're not in a rush.
Everyone's like, "Oh, you're not going to get anyone's attention until you're a billion-dollar market cap." Okay, we're almost there, and if it took me another five years, we'd also be okay with that. But everything is about being thoughtful and intentional, and every asset we buy has to really have an impact to the portfolio. So it's just about the way we move. There's tons of pipeline to do right now. Sometimes we get asked, "Is it because you don't have enough people or you need to change the process?" No. It's just a function of where is my cost of capital today, and clearly, the move in stock price has helped that, so that's why we keep raising our guidance. But it's really about being intentional and sticking to our knitting. Listen, we really appreciate everyone showing up today.
We thank Three Part Advisors for being a great host. As I said, we enjoy coming to these conferences. We meet amazing new investors and potential shareholders, and we look forward to the next event. Thank you.