Earnings Call Transcript - PSTL Q2 2021

Operator, Operator

Greetings and welcome to Postal Realty Trust Incorporated Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jordan Cooperstein, Vice President of FP&A, Capital Markets.

Jordan Cooperstein, Vice President of FP&A, Capital Markets

Thank you. Good evening everyone and welcome to the Postal Realty Trust second quarter earnings conference call. On the call today we have Andrew Spodek, Chief Executive Officer; Jeremy Garber, President; Robert Klein, Chief Financial Officer; and Matt Brandwein, Chief Accounting Officer. Please note the use of forward-looking statements by the company on this conference call. Statements made on this call may include statements that are not historical facts and are considered forward-looking. These forward-looking statements are covered by the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's 10-K filed on March 30, 2021 and its other Securities and Exchange Commission filings. The company does not assume and specifically disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, on this conference call, the company may refer to certain non-GAAP financial measures such as funds from operations, adjusted funds from operations and adjusted EBITDA. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP measures in the company's earnings release and supplemental materials. With that, I will now turn over the call to Andrew Spodek, Chief Executive Officer of Postal Realty Trust.

Andrew Spodek, CEO

Good afternoon, and thank you for joining us today. I am very happy to once again share with you another quarter of stable cash flows and robust acquisition activity. We continue to execute on our business plan and our strong second quarter 2021 results reflect the favorable characteristics of our business, including the consistency of our in-place rents and the growth we are delivering through our acquisition platform. We achieved several milestones during the second quarter, executing accretive acquisitions, delivering robust rental income growth, and continued enhancements to our balance sheet, which will provide financial flexibility to support the company's ongoing growth. During the quarter, we completed the acquisition of 71 properties for approximately $30 million, bringing total acquisitions for the first half of the year to 125 Postal properties for $56 million, all excluding closing costs. Subsequent to quarter end and through August 3, we closed on an additional 32 properties for $11 million, excluding closing costs, some of which included operating partnership units as part of the consideration. The company has another 26 properties totaling approximately $7.6 million on definitive contracts. We remain confident we will exceed our target of $100 million of acquisitions this year. Given cap rate compression across most real estate sectors, including our acquisition targets, we anticipate that our weighted average cap rate range for 2021 will be between 7% and 8%. Subsequent to quarter end, we further strengthened our capital structure as we entered into a new senior unsecured revolving credit facility and term loan facility, which provides lower pricing and additional flexibility as we continue to grow our platform. I'm pleased to note that reflecting our cash flow growth, our Board of Directors again raised our dividend to an annualized $0.89 per share. This is the eighth consecutive increase to the dividend since the company's IPO in 2019. Demonstrating our consistently strong results and growth, we achieved another milestone in the quarter. We are pleased to report that in June, we were included in the Russell 2000 Index, one of the most widely followed performance benchmarks for emerging companies. We see tremendous interest from potential sellers as we demonstrate the value proposition we are creating as we consolidate this industry. With our financial capacity and our ability to offer multiple sources of consideration, including operating partnership units, we expect to continue to be the natural buyer of assets leased to the Postal Service. We have an experienced team, stable and secure cash flows, a proven ability to effectively own and operate properties, and a robust pipeline, all of which supports our confidence to create incremental value for our stakeholders. I'll now turn the call over to Jeremy Garber, Postal's President to provide more details on our operating results and portfolio activity.

Jeremy Garber, President

Thank you, Andrew. In the second quarter of 2021, we produced 70% growth in rental income from the second quarter of 2020, reflecting our internal growth and acquisitions completed over the past year. As Andrew mentioned, we acquired 71 properties during the quarter, adding approximately 246,000 net leasable interior square feet to our portfolio, inclusive of 42 last mile and 29 select properties. Included in the milestones achieved during the second quarter is the acquisition of our first property in Hawaii, which expands our owned and managed geographic reach to all 50 states. As anticipated, we once again collected 100% of our rents. Subsequent to quarter end, we signed an LOI for renewals on leases that had expired or were scheduled to expire in 2021, excluding leases for four properties that were acquired in June and July of 2021. The LOI includes 55 leases representing approximately 118,000 net leasable interior square feet, and $1.3 million in annualized rent. We anticipate these renewals will yield annual increases in NOI of 2% to 3%. As we look ahead, our total return profile remains well positioned. We have a long improvement history of tenant creditworthiness and a 98% historical lease renewal rate contributing to stable cash flows. Additionally, we have a well-positioned balance sheet further enhanced by new unsecured credit facilities providing increased capacity and flexibility that will allow us to execute on our robust pipeline of USPS last mile flex and industrial facilities.

Robert Klein, CFO

Thank you, Jeremy. And thank you, everyone for joining us on today's call. I want to reiterate Andrew's comments on our consistency in executing our growth plans while continuing to strengthen our capital structure. We remain focused on consolidating this fragmented industry and are taking the right steps to grow our position. The second quarter's results reflect this with funds from operations of $0.25 per diluted share, and adjusted funds from operations of $0.26 per diluted share. At June 30, 2021, we had $4.9 million of cash and approximately $116 million of gross debt with a weighted average interest rate of 2.13% comprised of $82.5 million of floating rate debt on our prior credit facility, and approximately $33 million of fixed rate mortgages. At quarter end, our net debt to enterprise value was just under 26%. Net debt to annualized adjusted EBITDA was 4.8 times, and our fixed charge coverage ratio was 8.7 times. As Andrew touched upon, subsequent to quarter end, we entered into a new senior unsecured revolving credit facility and term loan facility with Bank of Montreal, People's United, JPMorgan and Truist as joint lead arrangers and joint book runners. Other participants included Stifel as well as TriState Capital. The new facility includes a lower pricing grid, maturity dates in January 2026 and 2027 for the revolver and term loan respectively, accordion features up to $200 million in aggregate, and a number of other features that provide flexibility to our operations and capital needs as we continue to grow our platform. Concurrently, we entered into an interest rate swap having a notional amount of $50 million through January 2027. These actions will continue to drive our overall cost of debt lower, which will benefit earnings going forward. Regarding our ATM activity, for the three months ended June 30, 2021, we raised approximately $6 million of net proceeds issuing just under 320,000 shares of common stock at an average gross sales price of $20.02 per share. Additionally, we issued approximately 481,000 common units in our operating partnership as part of the consideration for properties acquired during the quarter. Given the ongoing growth of our business, we continue to invest in our platform of people, technology and infrastructure to support that growth. Our G&A expense for the quarter represents a good approximation of a quarterly run rate for the remainder of 2021. We expect to benefit from our scale. And while there may be some variability quarter-to-quarter, on an annual basis, we expect cash G&A as a percentage of revenues will decline. Our key competitive advantages include our experience in the postal sector, platform scalability, and our ability to provide compelling options for sellers including the use of OP units. We remain focused on driving earnings growth, and our judicious approach to maintain a conservative balance sheet affords us ready access to capital, positioning us to continue to execute on our strategic plan. This concludes our prepared remarks. Operator, we'd like to open the call for questions.

Operator, Operator

Ladies and gentlemen, we will now conduct a question-and-answer session. Our first question is from Michael Gorman with BTIG.

Michael Gorman, Analyst

Andrew, if I could just follow-up on your discussion about the pricing in the acquisitions market. To the extent that you talk about the lower cap rate range, the 7% to 8%, how much of that is driven by increased pricing at the property level versus maybe some shift in the property type weighting in your acquisition pipeline? If it's leaning more towards the industrial distribution type assets versus just overall you're seeing compression across all property types?

Andrew Spodek, CEO

That’s a great question, Michael. Thanks. I appreciate it. I believe that is really all over the board. I think that there's been a flight to yield in general. And I think there's been a compression not just in our industry, but across the real estate sector in general.

Operator, Operator

Michael, any more questions?

Michael Gorman, Analyst

Yes, sorry. And then the follow-up on that one is, for the increased competition that's maybe causing the lower yields, where are you seeing most of that competition coming from? Is it increased institutional interest in the asset type? Or are you seeing more of the retail buyers starting to aggregate as well?

Andrew Spodek, CEO

I don't think it's specifically related to competition. I think it's just general market conditions. There are people out there that were never really focused on Postal assets and when cap rates are constraining across all real estate sectors, whether you're a 1031 buyer or just a general real estate buyer in a local market, when there's a flight to yield and Postal properties are trading at higher yield, if you have more competition on any deal, it's going to drive the yield down and the cap rates down. So it's not a particular specific answer. I think it's just all over the place.

Michael Gorman, Analyst

Could you explain how including OP units in a transaction benefits you, either in terms of yield or the issue price for the units, and how it helps in providing value to the seller by deferring their taxable events?

Robert Klein, CFO

Yes, good question. We price those operating partnership units effectively at market price. So, we've generally done those in some kind of volume weighted average pricing. And so they will reflect where the stock is, at the moment that transaction happens or in the prior days. So the benefit really has been, as Andrew has mentioned on prior calls that the ability to use the operating partnership unit helps to drive some of our interest from sellers. And sometimes it ends up with the transaction using an OP unit. And sometimes it ends up being a cash transaction. But those OP units really end up with the same yield as the common stock does. And so we don't really price them differently.

Operator, Operator

Our next question is from Ed Groshan with Height Capital Markets.

Ed Groshan, Analyst

I just have a couple. And I guess so we have the guidance of $100 million for the year. And I just want to make sure I heard you right. Andrew, it looks like you might be doing a little bit better than that, or at least on pace to do that. Is that fair?

Andrew Spodek, CEO

That is correct.

Ed Groshan, Analyst

Okay. And then just on the debt facilities, can you talk about, is it $100 million between the floating and the unsecured or for the senior facilities, can you just give a little more color, and specifically on pricing of both of those as well?

Robert Klein, CFO

Sure. So the facility allows for two things. We have a revolver, which $150 million is committed. And we have a term loan of $50 million as well. The $150 million revolver has an accordion where we can ratchet it up to another $150 million. And the term loan as well has an accordion that can increase it by $50 million, both of which were executed on a floating rate basis. However, we did enter into a swap to effectively fix the rate on the term loan. So the pricing at the low end of the grid, which is where we are at the low end of leverage, is 150 basis points over LIBOR for the revolver. And it's 145 basis points over for the term loan.

Ed Groshan, Analyst

And this is just an aside, LIBOR is going away. Will the facility switch to SOFR or something else when that happens?

Robert Klein, CFO

Yes, there'll be more details to come but there is provisions for how to transfer from LIBOR to the surviving rate or the replacement rate in 2023 or earlier when that event does happen.

Ed Groshan, Analyst

I'm surprised the banks are still using LIBOR since regulators have been urging them to move away from it. That was just a side note. I'll get back in the queue. Thank you.

Operator, Operator

Our next question is from Kevin Stein with Stifel.

Kevin Stein, Analyst

Hey Andrew. So I know in the earnings release you started breaking out, the type of assets you have, 525 last mile, 323 flex and 4 industrial properties. I was just wondering how you think about that mix going forward and if you're focused on a particular property type?

Andrew Spodek, CEO

Thanks, Kevin. Since we've gone public, we've really attempted to educate the market on the different types of asset classes that the Postal Service leases. And breaking it down into those three buckets is a further explanation of those different types of asset classes. From our perspective, we're interested in purchasing properties in all three of those buckets, assuming, first and foremost that the properties are important to the Postal Service and their logistics network; and secondly, that those properties can be underwritten at or below what we believe is to be marketed. And above that fit into those two categories, we are interested in purchasing in all three of those buckets. As you know, because of the preferential lease structure, we're able to purchase these properties throughout the entire country. So we aren't limited by geography, either.

Operator, Operator

Our next question comes again from Ed Groshan with Height Capital Markets.

Ed Groshan, Analyst

Rob, this is for you. Just in your comments on the cash G&A, you mentioned variability. I just want to make sure I understood you correctly. When you talk about variability you're talking about as a percent of revenues, as opposed to G&A for the next few quarters. Is that fair?

Robert Klein, CFO

Yes. I mean, we've given guidance now of this quarter and how it shapes up compared to the remaining quarters in the year, but I did want to qualify it that there is some variability in that ratio and in the G&A, but that's a good proxy for looking at the rest of the year.

Ed Groshan, Analyst

Right. But not that G&A may be absolutely flat dollar for dollar for the next few quarters. But your comment really talked about variability as a percent of revenues, as opposed to like, we would see a material change in G&A in the income statement.

Robert Klein, CFO

Yes, because there's two variables there. There's the revenue, and then there's the cash G&A. And so either one of them can move slightly different in a particular quarter. But in general, that ratio is coming down.

Operator, Operator

Our next question comes from Jon Petersen with Jefferies.

Jon Petersen, Analyst

I was hoping you guys could maybe just talk about how you see inflation impacting your business, and how that impacts like the rent escalators, the operating expenses, just any high level thoughts on inflation?

Robert Klein, CFO

Yes, good question. I'll draw the short straw in talking about inflation, I guess. We're constantly monitoring that and I think we have a very conservative balance sheet. So on that side of the house, I feel pretty comfortable about where we stand on our access to capital. And now with a proportion of our fixed debt being about 66% of our total debt, I feel good about where we stand there. Hard to tell how rents react in another asset classes, I think there's a little bit more correlation to inflation, than particularly than we may notice. But Andrew may have more color about how that side plays out. But in general, I think we've proven that we can perform in all types of environments and that our tenant has been resilient and sticky and has a very high renewal percentage. So we feel good about the protection of our income.

Andrew Spodek, CEO

Thanks, Rob. I'll answer that as it relates to the leases. One of the benefits of having five year term leases is that you have on average around 10% of your leases that roll a year. And that gives you the ability to reprice those leases, depending on how inflation and how the environment is. And I believe that's an advantage that we have that a lot of other, let's call it, double and triple net players don't have just because of the duration of their leases. Our average lease term right now is around four years. And so, it gives us really the ability to keep revisiting to see how the inflationary environment is.

Jon Petersen, Analyst

Okay, great. And then, maybe kind of remind us how negotiations, how market rent is really determined, like are we usually looking at nearby retail properties and logistics type properties to get the right market. I’m just trying to think about these lease renewals like how much of leasing spread we can potentially see going forward?

Andrew Spodek, CEO

Lease, the market is determined on a property basis, right. So whether there are retail comps or logistics comps, whether they're Postal assets or other national or regional retailers, or even mom and pop tenants, we evaluate the market, as does the Postal Service, and we determine what the market is.

Operator, Operator

Our next question comes from Michael Gorman with BTIG.

Michael Gorman, Analyst

Yes, thanks. Just a quick follow-up. Rob, you mentioned the index inclusion, which is clearly a significant milestone. Could you share some of the conversations or progress you've made in reaching out to investors as the company's profile has grown and liquidity has improved over the past few quarters? As you enter new asset classes, how has this index inclusion influenced the discussions you're having with current or potential shareholders?

Robert Klein, CFO

Yes, I believe there was a positive response from our current shareholders; they were pleased with the milestone and the high growth of our company. These achievements are significant for us and for the market as we demonstrate our growth story and expand the company. This aspect was beneficial as it increased our trading volume and liquidity. Our discussions with investors have remained consistent, and I don't think their perspective has shifted with the inclusion. Those who have not yet invested are monitoring our progress and staying informed about our developments. This is just another success for us that illustrates our size and growth potential.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to management for closing remarks.

Andrew Spodek, CEO

Thank you. On behalf of myself and the entire team, we want to thank you all for taking the time out of your busy days to join us for this call today. We hope that everyone is staying safe and healthy and we look forward to connecting with you over the next coming months.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation. Have a great day.