Postal Realty Trust, Inc. (NYSE:PSTL) Q4 2024 Earnings Call Transcript

Postal Realty Trust, Inc. (NYSE:PSTL) Q4 2024 Earnings Call Transcript February 27, 2025

Operator: Greetings, and welcome to Postal Realty Trust fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the prepared remarks. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jordan Cooperstein, Vice President of FPNA, Capital Markets. Welcome, Jordan.

Jordan Cooperstein: Thank you, and good morning, everyone. Welcome to Postal Realty Trust’s fourth quarter 2024 earnings conference call. On the call today, we have Andrew Spodek, Chief Executive Officer; Jeremy Garber, President; Robert Klein, Chief Financial Officer; and Matt Breamwein, Chief Accounting Officer. Please note the company may use forward-looking statements on this conference call, which are 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 that are beyond the company’s control, including but not limited to, those contained in the company’s latest 10-Ks 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, adjusted EBITDA, and net debt. 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 the call over to Andrew Spodek, Chief Executive Officer of Postal Realty Trust.

Andrew Spodek: Good morning, and thank you for joining us today. I’d like to first review some of the key accomplishments of 2024 and describe why we enter 2025 with confidence in our ability to drive internal growth while we continue to pursue our acquisition-driven external growth plan. Our strong releasing performance, which was driven by our new streamlined process established with the Postal Service, contributed to full-year AFFO per share of $1.16, an increase of 8.4% year over year and greater than 9% above the Street consensus at the start of 2024. As I mentioned on our Q3 earnings call, we worked collaboratively with the Postal Service and arrived at a multi-tiered programmatic approach to the releasing process. This methodology, coupled with an increase in allocated Postal Service resources, has improved the timing and efficiency of re-leasing, which enabled us to provide actual same-store cash NOI figures for 2023 and 2024, as well as projections for 2025.

With rents agreed to for our 2025 expirations, we can now update same-store cash NOI guidance for 2025 to be between 4% and 6% versus our prior guidance of at least 3%. But more importantly, keeping current with releasing provides us with the visibility to share AFFO guidance for the first time as a public company. As Rob will describe in more detail, we project 2025 full-year AFFO to be between $1.20 and $1.22 per share. Turning to our balance sheet, during the year, we added $50 million of commitments to our term loan maturing in February 2028 and also increased our term loan accordion by $50 million, further evidence of the supportive partnership we have with our lenders. In 2024, we acquired 197 properties for $91 million at a weighted average cap rate of 7.6%.

We anticipate acquisition volume in 2025 to be $80 to $90 million and will continue to target a weighted average cap rate at or above 7.5%. Other successes in 2024 include our first meaningful dispositions as a public company. In October, the company sold two properties to two independent parties for total gross proceeds of $6.3 million, representing a weighted average exit cap rate of 4.9%. We purchased these properties for $3.6 million. While the two properties were quite different from each other, in both cases, the buyer approached us having been attracted to the steady cash flows and strong underlying real estate. The fundamentals of our business remain very strong as evidenced by our current occupancy of 99.8%. As a reminder, we have averaged a 99% lease retention rate with the Postal Service over the past ten-plus years through multiple presidential administrations and repeated USPS organizational and leadership changes.

We remain confident in the Postal Service’s continued tenancy as evidenced by their recent commitment to ten-year leases. As we like to remind shareholders, lease expenses represent only 1.5% of the Postal Service’s total operating budget, and these buildings are the backbone of their delivery network. The Postal Service plays a critical and multifaceted role within the economy, providing a universal, affordable, reliable, and secure delivery network that reaches every address in the country. It drives commerce by facilitating the distribution of goods and documents, connecting businesses with customers, and supporting rural communities. The Postal Service’s network is considered the largest, most intricate logistics network in the world, serving 169 million delivery points across the country, covering every state, city, and town, six and often seven days a week.

The Postal Service excels at delivery to rural addresses, which make up almost 60% of US ZIP codes. Because of this mature on-the-ground last-mile network, it does so more cost-effectively than any other provider. Its logistics network, primarily comprised of its real estate footprint, is utilized by parcel delivery organizations both large and small, making it a critical, irreplaceable piece of American infrastructure, and these are the buildings we are investing in. We continue to demonstrate the power of our internal growth story, coupled with significant runway to expand our portfolio through our unmatched relationships with postal property owners. The successes achieved this past year and our mutually beneficial relationship with our reliable tenant have us well-positioned for the year ahead.

I’ll now turn the call over to Jeremy.

Jeremy Garber: Thank you, Andrew. Except for some recent 2024 acquisitions, rents for all expired leases and those set to expire in 2025 have been agreed upon with lease production almost complete. The majority of agreed-upon leases are ten years in duration, and all contain 3% annual rent escalations. These longer-term leases demonstrate the Postal Service’s commitment to remaining in our buildings and underscore the importance of the facilities to this crucial logistics network. The total net lump sum catch-up payment received by the company during the fourth quarter was $1.5 million. As of February 14th, the company received $400,000 in 2025. Looking only at our executed leases, 31% of the portfolio contains annual rent escalations, and 11% have ten-year lease terms.

If we include the 2025 expirations with the agreed-upon rents, these figures increase by approximately another 10%. Our focus continues to be on lease execution for the 2025 expirations, as well as turning to the negotiation of rents for the 2026 expirations. In the fourth quarter of 2024, we acquired 63 properties for $31 million, which added approximately 176,000 net leasable interior square feet to our portfolio. Inclusive of 60,000 square feet from 40 last-mile post offices and 117,000 square feet from 23 flex properties. This brought our 2024 acquisition total to $91 million, comprised of 197 properties and 571,000 square feet. Subsequent to quarter-end and through February 14th, we acquired 18 properties for $8.4 million and placed an additional 14 properties totaling $8.9 million under definitive contracts.

Additionally, we had one disposition of a vacant property in Indiana, which was sold after realizing a marginal profit, leaving us with one remaining vacancy across our portfolio of 1,720 properties. I’ll now turn the call over to Rob to discuss our fourth-quarter financial results.

Robert Klein: Thank you, Jeremy, and thank you everyone for joining us on today’s call. We are pleased to discuss our fourth-quarter financial results. Funds from operations, or FFO, was $0.30 per diluted share, and adjusted funds from operations, or AFFO, was $0.35 per diluted share. Our board of directors approved a quarterly dividend of $0.2425 per share, up 1% from Q4 2023’s dividend. This is the seventh consecutive year the dividend has increased. Additionally, they have approved the common stock repurchase program for up to $25 million. This is a tool we are pleased to have available. We have continued to manage our balance sheet prudently by maintaining low leverage and minimizing our exposure to variable rate debt. At the end of the fourth quarter, our debt outstanding had a weighted average interest rate of 4.35%, a weighted average maturity of three years, and no significant debt maturities until 2027.

Our $150 million senior unsecured revolving credit facility had $136 million undrawn, and 95% of all borrowings were set to fixed rates. Net debt to annualized adjusted EBITDA ratio was 5.2 times at the end of the year, and our success in releasing contributed to the deleveraging from the end of 2023. In addition to our 2025 guidance, we are updating our 2023 and 2024 same-store cash NOI growth to account for additional executed leases. Our same-store cash NOI growth for 2023 was 5.5% and for 2024 was 4.4%. Along with these newly executed leases, we are planning some capital projects at some of these assets in 2025 and will provide further updates as the year progresses. 2024 cash G&A expense came in within our expected range and it continued to decline as a percentage of revenue on an annual basis.

Recurring CapEx for the fourth quarter was $184,000, as we completed projects prior to year-end. Looking forward to Q1 2025, we anticipate the figure to be around $100,000. As Andrew stated, our AFFO guidance for this year is between $1.20 and $1.22 per diluted share. Some of the base assumptions behind this include $90 million, same-store NOI growth between 4% and 6%, and cash G&A expense between $10.5 and $11 million. One of the key drivers to our earnings is our internal growth story. Accounting only for leases that have been executed, we have $700,000, $1.4 million, and $1.8 million of contractual rent escalations that will be realized in 2025, 2026, and 2027, respectively. With 48% of current leases expiring over that same period, the opportunity for further contractual rent increases through marking rents to market and additional rent escalations is powerful.

You’ll see further detail on this in our latest investor presentation on pages six and seven. Our business provides investors with reliable cash flows each quarter, driven by our internal growth as well as by acquisitions. Our recent releasing successes will provide revenue increases year over year, and we remain confident that our acquisition pipeline will continue to enhance our earnings going forward. This concludes our prepared remarks. Operator, we’d like to open the call for questions.

Q&A Session

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Participants using speaker equipment may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question comes from the line of Barry Oxford with Colliers. Please go ahead.

Barry Oxford: Great. Thanks, guys. Andrew, I think this is more of a question for you. We changed postmaster general. We have a new one. When you look at your leases, I’m not talking about the leases that are kind of signed and executed. But going forward, as you’re signing new leases, have they indicated that they’re gonna sign the same type of leases or are they obligated to sign the same type of leases that you currently have in place and are getting signed?

Andrew Spodek: Hey, Barry. Yeah. The new postmaster general, whoever that may be, I don’t believe changes anything about our lease documents. We are constantly executing and moving forward the process of trying to get as ahead of our leases as possible. And we’ve been working with the Postal Service very well to do that. I don’t believe there’ll be a change in the document, and I very much don’t believe that the postmaster general is focused on this at all because of the low expense that it represents.

Barry Oxford: Correct. Right. All of the leases only represent 1.5% of their total operating expenses. And so I don’t think that this is a very good focus.

Andrew Spodek: Great. Thanks, guys.

Operator: Thank you. Next question comes from the line of Steven Dumanski with Janney. Please go ahead.

Steven Dumanski: Thank you. Yesterday, the Postal Service released an update that it projects to save $36 billion over the course of the next ten years. So one of the proposed cost-cutting measures verbatim from the text is to eliminate unnecessary facilities. Do you have any insight if the aforementioned facilities refer to processing centers or also post offices?

Andrew Spodek: I appreciate the question. The Postal Service is constantly going through cost-cutting and efficiency exercises. From everything that I understand, and as you can imagine, we track the Postal Service’s press releases and we’re talking to them every day all day. We don’t believe that there’s any changes to the infrastructure as it relates to the postal facilities, especially the ones that we invest in. The Postal Service, every statement that I’ve heard them make included in that press release itself, was that they don’t believe there’s gonna be any disruption or change to their retail network.

Steven Dumanski: Thank you. It’s very helpful. And I guess just to add on to that, so with the Postal Service implementation of the regional transportation optimization initiative, how has that affected your acquisition or asset management strategy if it has at all?

Andrew Spodek: So in general, when we look at the acquisition of assets, primary to any underwriting is our view and belief that those properties are critical to the Postal Service or needed for them to deliver to the 169 million delivery points that they do on a daily basis. And we take into account shifts and changes in the Postal Service in their utilizing those buildings. And that would take into account any shifts in a regional center or a local or national center. And so that’s taken into account when we look to buy properties.

Steven Dumanski: Thank you, Andrew. I appreciate it.

Operator: Thank you. Next question comes from the line of Michael Gorman with BTG Pactual. Please go ahead.

Michael Gorman: Yeah. Thanks. Good morning. Appreciate the guidance, Rob. Just wanted to make sure that I’ve got everything square. Four to six percent same-store next year. At the midpoint, AFFO looks just a touch over four percent. Looks like some of that’s coming out from the G&A line going up in 2025. Are there any other kind of offsets to the internal growth and the growth through acquisitions that we should be thinking about as we think about 2025 growth?

Robert Klein: No. I mean, that’s really it. There’s obviously a dynamic business and what’s a little bit dynamic about it is particular recurring CapEx, things along those lines that can be adjustments from FFO to AFFO. But in general, yeah, I mean, I think we’ve given you the large drivers component. And, obviously, acquisitions can affect the top and the bottom line as well in the current year.

Michael Gorman: Okay. Great. And I think maybe, Andrew, you’ve kinda talked about this in the past just given the scale of the business and the quality of the platform. Now that you’re seeing a little bit more of a current same-store NOI process with the post office, can you give us a sense for kind of how what you’re seeing from properties in your portfolio compare with properties before you bring them onto the platform? Like, what’s a typical post office facility in private hands doing before?

Andrew Spodek: No. I appreciate the question. So in general, I’m a firm believer that this platform adds value. It adds value in economies of scale. It adds value in operation and administration of the properties and the leases. And in negotiation with leases, executing documents really across the board from when it enters our domain through our ownership period. And I think that just continues as we continue to scale the business.

Michael Gorman: Great. Thank you.

Operator: Thank you. As there are no further questions, ladies and gentlemen, we have reached the end of the question and answer session. We have a question from the line of Jonathan Petersen from Jefferies. Please go ahead.

Jonathan Petersen: Sorry. Let me sneak this one in. So I’m just I wanna make sure I understand. How much catch-up rent payments were in the fourth quarter top-line revenue? And how do we think about, like, what a run rate is into next year?

Andrew Spodek: Yeah. So let’s take the second question because I think it’s more important for everyone to understand. We now have, you know, if you look at our expiration schedule, we can show you now the run rate for this year based on all the leases where we’re pretty much caught up at this point. With 95% of the 2023s and 99% of the 2024 leases all executed. And so I think that’s the important line to look at, and then, excuse me, the contractual rent escalators, which we’ve outlined now in our presentation, which gives you a little bit of flavor into this coming year and the success from the leasing and how it carries forward.

Jonathan Petersen: Okay. Alright. Great. That’s helpful. Thank you.

Operator: Thank you. As there are no further questions, ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to Andrew Spodek for closing comments.

Andrew Spodek: Thank you. And on behalf of the entire team, we want to thank you all for your continued support and taking the time for joining us today. Looking forward to following up with you in the next couple of days and weeks.

Operator: Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.