Postal Realty Trust Inc
NYSE:PSTL
Earnings Call Analysis
Q4-2023 Analysis
Postal Realty Trust Inc
Postal Realty Trust wrapped up a robust fourth quarter in 2023 with standout achievements despite pressure from the macroeconomic landscape. Chief Executive Officer Andrew Spodek highlighted the acquisition of 223 properties at a favorable weighted average cap rate of 7.7%, underscoring a nearly 100-basis-point improvement from the previous year. Alongside these acquisitions, the company reported a solid 6% year-over-year growth in adjusted funds from operations (AFFO) per share. Spodek attributed this success to the flexibility and efficiency of operations in challenging times, specifically citing an agile approach to the higher interest rate environment.
Postal Realty Trust remains poised for continued growth with a steady strategy going into 2024, eyeing an acquisition volume of around $80 million and targeting a weighted average cap rate of at least 7.5%. With no immediate debt maturities and a net debt to annualized adjusted EBITDA at 5.6x - well beneath their 7x ceiling - they stand on strong financial footing. This foundation not only evidences a conservative approach to leverage but also provides confidence in the core business fundamentals.
The company has maintained an impressive 99% weighted average lease retention rate over the past decade, thanks to the strategic importance of their property portfolio to both the postal service and the local communities. Furthermore, lease negotiations with the Postal Service have been productive, with expectations for finalized leases for 2023 to be confirmed in the near term.
Chief Financial Officer Robert Klein presented the fourth quarter's financial metrics, emphasizing the continuation of a cautious financial approach marked by low leverage and safeguarding against variable rate debt exposure. The $150 million unsecured revolving credit facility remains largely untapped, with 97% of borrowings locked at fixed rates. This disciplined management extended into G&A expenses, which concluded at the bottom of the predicted range for 2023 due to sustained cost savings.
The organization’s commitment to return value to shareholders culminated in a Q4 2023 dividend of $0.24 per share, marking a modest 1.1% increment from the same quarter in 2022. While there isn't a stringent correlation between dividend hikes and earnings growth, the board contemplates both factors to maintain a reasonable payout ratio and provide incremental returns to investors.
The company’s acumen in acquisitions remains astute, with a focus on purchasing properties at accretive prices. While an $80 million target is set for 2024, CEO Spodek made it clear that larger ventures hinge on either favorable shifts in capital costs or seller pricing adjustments, echoing the sentiment that patience is key. Additionally, the company is open to industrial opportunities so long as the assets yield accretive returns; however, given current cap rates, the emphasis remains on Flex and last mile properties.
Long-term lease renewal has balanced the dynamic of maintaining growth while navigating the inflationary climate. The company expressed optimism in potentially achieving rent escalation on renewals in future negotiations. However, these terms are yet to be finalized, with discussions remaining fluid.
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Greetings, and welcome to Postal Realty Trust's Fourth Quarter 2023 Earnings Call. [Operator Instructions] 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 FP&A Capital Markets. Welcome, Jordan.
Thank you, and good morning everyone. Welcome to Postal Realty Trust's fourth quarter 2023 earnings conference call. On the call with me 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 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 and factors that are beyond the company's control, including, but not limited to, those contained in the company's latest 10-K 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.
Good morning, and thank you for joining us today. The fourth quarter marked another period of strong results and concluded a productive year for Postal Realty. We acquired 223 properties for $78 million and came in well above the midpoint of our target weighted average cap rate range at 7.7% for both the fourth quarter and the full year 2023.
The weighted average cap rate for 2023 reflects an almost 100 basis point increase from 2022's cap rate. As a result of the flow-through benefit of acquisitions and lease renewals in prior years as well as efficient operations, AFFO per share increased 6% year-over-year. This was due to the hard work of our dedicated team and is a testament to our ability to be flexible and patient while navigating a challenging interest rate environment. Turning the focus to our capital markets activity during the past year, we were successful in accessing equity through our ATM program and by completing transactions with operating partnership units while also accessing debt through our strong banking relationships. We have significant availability on our revolving credit facility and have maintained conservative leverage with the net debt to annualized adjusted EBITDA at 5.6x at the end of 2023. Looking at 2024, we have a long runway and are still seeing significant opportunities. Absent changes to the current macroeconomic environment and the capital markets, we anticipate a similar year to 2023, with acquisition volume in the neighborhood of $80 million. We will continue to target a going in weighted average cap rate at/or above 7.5% and will provide further updates as the year progresses. With no near-term debt maturities, a solid balance sheet and high collections and retention rates, we are confident in the fundamentals of our business.
I'll now turn the call over to Jeremy.
Thank you, Andrew. In the fourth quarter of 2023, we acquired 75 properties, which added approximately 153,000 net leasable interior square feet to our portfolio inclusive of 71,000 square feet from 55 last mile post offices and 82,000 square feet from 20 Flex properties. The fourth quarter brought our 2023 acquisition total to 223 properties. Subsequent to quarter end and through February 23, the company acquired 8 properties for $4.5 million and placed an additional 20 properties totaling $13.9 million under definitive contracts. We have maintained a 99% historical weighted average lease retention rate over the past 10-plus years, reflecting the strategic importance of these properties to both the postal service and the communities they serve. As we have previously shared, our lease negotiations with the Postal Service are progressing, and we are hoping to receive 2023 leases over the coming months.
I'll now turn the call over to Rob to discuss our fourth quarter financial results.
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 $0.24 per diluted share and adjusted funds from operation, or AFFO, was $0.26 per diluted share. We've 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 4.14%, a weighted average maturity of 4 years and no significant debt maturities until 2027. As of February 23, 2024, our $150 million senior unsecured revolving credit facility had $142 million undrawn and 97% of all borrowings were set to fixed rates. Net debt to annualized adjusted EBITDA ratio was 5.6x at the end of the year, well within our target of remaining below 7x. Recurring CapEx for the fourth quarter was $211,000 as we completed additional projects prior to year-end. Looking forward to Q1 2024, we anticipate the figure to be between $125,000 and $175,000, depending on timing of projects. Cash G&A expense came in at the bottom of our stated range for the fourth quarter and the full year 2023 due to cost savings and efficiencies achieved throughout the year. As a percentage of revenue, it declined on an annual basis for the full year 2023, and we anticipate this continuing in 2024. As for Q1 2024, we expect cash G&A to between $2.1 million and $2.3 million.
Our Board of Directors approved a quarterly dividend of $0.24 per share, representing a 1.1% increase from the Q4 2022 dividend. Our business provides investors with stable cash flows each quarter. We continue to execute on our strategy, exhibiting patients with acquisitions and prudence in the capital markets, which should reassure investors that our business will continue to thrive across all economic cycles.
This concludes our prepared remarks. Operator, we'd like to open the call for questions.
[Operator Instructions] The first question comes from the line of Steve Domanski with Janney Montgomery.
Can you please talk about the difference between rental rate increases you're seeing going on recent acquisitions when they come up for renewal versus properties that you've owned for several years? Also, are you still getting a noticeable bump in your first lease renegotiation with the UPS -- USPS on newly acquired assets? Or has that gap closed in the last couple of years?
So we typically get a better bump in rental rates when we're negotiating the lease for the first time. Our second bite of the apple is typically smaller. But we're still getting good rent increases, and we're marking these leases to market. In the current environment, we're very happy to have 5-year leases that we can mark to market as quickly as possible.
Can you also please expand on the go game cap rate differential today between last mile and Flex acquisitions?
Sure. So the reason why we've always stated that we buy things within a large range is because not just the different asset classes for last mile, Flex, and industrial properties, but also the geographies and the individual markets that they serve. Every asset kind of speaks for itself and every market speaks for itself. And so the cap rates while logically would be higher for last mile than it would be for Flex. It really is more driven by what the underlying rent is and use for the property in that particular market for that particular deal.
And just one last one. In terms of sourcing acquisitions, do you project to transact on more industrial opportunities for the new year?
I would like to, but it's really a question of the accretion of those assets. We've seen the industrial assets get very expensive over the past couple of years. And so unless the cap rates for those assets rise, those are not assets that we're very focused on. And the Flex and last mile buildings are really the bread and butter of the business.
Next question comes from the line of Barry Oxford with Colliers.
Just to build on the acquisition, you guys kind of indicated around $80 million for '24. What type of -- what would you need to see in the environment today to maybe move that to $150 million? What would it take? Would it be a downward move in the 10-year? I mean, what would cause you guys to do $150 million in '24?
So there's a lot of opportunity there. We're still seeing a lot of deals. The problem is we're not really happy with the pricing. And so either our cost of capital needs to come down or sellers' expectation of pricing needs to be adjusted. We want to and we will continue to buy accretively, and that's really what drives our pipeline. And so unless something changes in either 1 of those 2 fronts, we're going to continue to buy the way we are, and we're going to be patient and wait for the opportunities to present themselves.
Great. That absolutely makes sense. And then on the new leases that you're signing with the post office, are they giving any pushback? Or have you guys kind of settled in on the new terms and the rate and everything, and it's moving smoothly?
Yes. Barry, this is Jeremy. As you can imagine, the growth of our portfolio over the past 5 years, both postal and USPS recognize that we needed to come to a better process, a more efficient process given the volume of leases that we need to negotiate on an annual basis. That process is still going on. And we're making great progress. We're confident that we're going to achieve a successful result for the '23s and beyond.
Next question comes from the line of Ki Bin Kim with Truist Securities.
Can you guys remind us what your long-term lease renewal rate ranges were? And given the more inflationary period that we just went through, if you think as you're negotiating renewals, are you getting the benefit of the inflationary environment?
So I didn't really understand the first part of the question. When you say long-term lease renewal rates, what -- can you be a little more specific on that part?
Yes. I thought I might be getting it wrong, but I thought your kind of stated lease renewal rates were 15% to 20%. I was just curious where it's been landing within that range.
You're asking for rent increases on the renewals. Now I understand. So what we've been stating what we reported was the same store of 2.2%. And once we complete the '23s, we'll update that number going forward. In terms of inflation and annual escalations, we're still dealing with an increase in cost operated properties, and we're hoping that going forward, we'll be able to get a escalation on our leases yet, but we haven't finalized our negotiations. It's all very, very fluid, but we hope to update you in the coming months.
Okay. And -- in terms of G&A, looking ahead, like what -- like to what pace should G&A increase looking ahead? And if there are any atypical expenses to be aware of coming up?
Yes, thanks. This is Rob. There are no atypical expenses that we anticipate this year. And we believe that we're slowing the growth of G&A, and that's reflected in the ratio we keep quoting of cash G&A as a percentage of revenue coming down year-over-year. We gave the guidance for Q1, which you'll find is quite similar to Q4. So we're very -- on top of it, we're very cognizant of our expenses, and we're committed to slowing that growth.
This question comes from the line of John Kim with BioMar Capital Markets.
Looking at your '24 expirations, it looks like leases in holdover were at 91 leases and that's up from 88 that were scheduled to expire as of third quarter. So I'm just wondering what drove that increase sequentially?
Sure. So you're correct. There were 88 leases from the 2023 vintage. The additional 3 leases are '24 leases that have now rolled and have not been renewed as of yet.
Okay. And what's the annual rent of those 91 leases?
The annual rent is approximately $4 million.
Okay. I understand that you don't provide guidance necessarily, but you did increase the dividend by 1%. Is that a good indication of where you think earnings will grow next year or this year?
No. So I think while the 2 go slightly hand-in-hand in terms of as we grow earnings, we believe we can increase the dividend, I don't think the rates will be the same. And our Board does review this on an annual basis, and that is absolutely one of the components they look at is the earnings growth. But the 2 are not completely tied together. And we are also committed to be lowering that payout ratio over time as we grow our earnings.
Final question is on acquisitions this year. You have $80 million as guidance. Just wanted to ask about the timing. Do you think this will be weighted towards any particular quarter? Or will it be spread out evenly?
It's difficult to tell so early in the year. In general, just given the way we saw last year play out, I would say there's probably a slightly heavier weighting towards the end of the year, but I don't think it will be drastic. Thank you.
Next question comes from the line of Jon Petersen with Jefferies.
On the -- I was curious on the industrial leases, there's only 5 of them. I think it's roughly 10% of your revenue. Can you remind us, are those kind of typical industrial lease structures? Or are those more flat lease rent structures like the post offices or most of the post offices are -- were before your new lease contracts?
Yes, those are more typical for postal leases than industrial leases. But one of them does have a CAM reimbursement that is structured more like a typical industrial lease.
Got you. Okay. And then do any of the -- do you have any lease maturities on those 5 properties in the next year or 2 years that we should be aware of that might move, swing revenue more materially one way or the other?
Yes. We do have some lease rolls in the next couple of years. Our 2 typic properties will be rolling and we're hoping to mark those to market. And then, that's going to be a good roll for us and I think we have another property as well. But nothing that is terribly significant in terms of change in our -- in what we've spoken to.
[Operator Instructions] There are no further questions at this time. I would now like to turn the floor over to Andrew Spodek for closing comments.
On behalf of the entire team, I want to thank you for your continued support and taking the time to join us today. We look forward to connecting with you all over the coming months. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.