Postal Realty Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered 28% YoY revenue growth to $22.15M, diluted EPS of $0.06, FFO/share of $0.28 and AFFO/share of $0.32; occupancy remained 99.8% and re‑leasing visibility improved with 3% annual escalators on newly negotiated USPS leases.
• Versus consensus, revenue beat ($22.15M vs $19.85M*) and EPS beat ($0.06 vs $0.053*), while EBITDA missed ($11.27M* vs $11.94M*); management kept full‑year AFFO/share guidance at $1.20–$1.22 and acquisition volume at $80–$90M.
• Acquisition cadence remained healthy: 36 USPS properties for ~$15.8M at a 7.6% cap in Q1; subsequent to quarter-end, 25 properties for ~$12.7M and 35 under definitive contracts; cap rates holding around 7.5%–7.6%.
• Balance sheet stayed conservative: net debt ~$307M, WA interest 4.41%, ~92% fixed; revolver $126M undrawn; dividend declared at $0.2425 per share (annualized $0.97), up 1% YoY.
• Catalysts: continued programmatic re‑leasing (10‑year terms, 3% escalations), same‑store cash NOI growth of 4%–6% for 2025 (tone), and off‑market acquisition pipeline supported by OP unit currency.

What Went Well and What Went Wrong

What Went Well

• Programmatic re‑leasing and visibility: agreed new rents for 2025 and 2026 expirations; turning attention to 2027 re‑leasing. “We’ve agreed to new rents for leases through 2026 and are turning our attention to 2027 re‑leasing”.
• Internal growth drivers: inclusion of 3% annual escalators and 10‑year leases; management guided to same‑store cash NOI growth of 4%–6% for 2025 (prepared remarks).
• External growth maintained: acquired 36 properties for ~$15.8M at 7.6% cap in Q1; subsequent acquisitions and contracts indicate continued pipeline momentum.

What Went Wrong

• EBITDA below consensus: EBITDA actual was ~$11.27M* vs ~$11.94M* estimate, likely reflecting higher operating and G&A costs (G&A $4.94M vs $4.29M YoY; property operating and real estate taxes also up) despite revenue beat.
• Interest expense headwind: net interest expense rose to $3.64M from $2.82M YoY, modestly pressuring operating earnings.
• Non‑cash and fair value adjustments: AFFO reconciliation included negative fair value lease adjustments (‑$0.83M) and straight‑line rent and other adjustments (‑$0.33M), which can add quarter‑to‑quarter volatility in non‑GAAP metrics.

Transcript

Operator (participant)

Welcome to Postal Realty Trust first quarter 2025 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 FP&A and Capital Markets. Welcome, Jordan.

Jordan Cooperstein (VP of FP and A and Capital Markets)

Thank you, and good morning, everyone. Welcome to Postal Realty Trust First quarter 2025 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 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 regulatory 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 (CEO)

Good morning, and thank you for joining us today. The first quarter saw a continuation of the advances we have made over the last several quarters in all key aspects of our business. As we sit here today, occupancy is at 99.8%, and we have the greatest level of visibility into re-leasing since our inception. Our re-leasing momentum from last year has continued into 2025. In addition to agreeing to new rents for the 2025 expirations, we also recently agreed to new rents for the 2026 expirations and are turning our attention with the Postal Service to 2027 releasing. The high level of visibility we have into our internal growth has resulted from the multi-tiered programmatic approach with the Postal Service, which I have discussed with you on our last few calls.

Importantly, the program leads not only to more efficient and timely re-leasing but also has resulted in the inclusion of 3% annual escalators in ten-year leases. This new approach drives greater efficiency for both us and the Postal Service. Within our organization, this process has allowed internal resources to expand into other value-added areas such as automation in our acquisitions and operations. We have been working diligently with the Postal Service to have fully executed leases in hand prior to upcoming expirations and are fully up to date for 2025 leases. As a result, we provided annual AFFO guidance last quarter, and we remain on track to achieve $1.20-$1.22 per share.

On the acquisition front, our $16 million acquired in Q1 is consistent with our historical cadence, and Q2 is off to a good start with $13 million acquired subsequent to quarter end and additional $22 million under definitive contracts. We continue to anticipate acquisition volume for the year of $80-$90 million at or above our targeted 7.5% weighted average going-in cap rate. Our faith in our tenancy, business execution, and our ability to drive internal growth through executing new leases and more efficient management of acquired Postal assets gives us confidence to continue pursuing attractive deals as they arise. Given our blended cost of capital, our targeted acquisitions make sense today and become even more accretive over time, as illustrated in our strong same-store cash NOI results and forward guidance of 4-6% for 2025.

We are encouraged by our active dialogue with owners and the growth in our acquisition pipeline. We are confident that we have the systems and people in place to ramp up acquisitions in the event that our cost of capital and opportunity set are aligned. One of the reasons sellers transact with Postal Realty is our UPREIT structure, which provides the ability to transact with operating partnership units in lieu of cash. In addition to the potential tax benefits, sellers are choosing to invest in our platform of diversified Postal assets. This past quarter, we acquired additional properties from one of the larger Postal owners in exchange for units, and we have a definitive agreement in place to acquire the remainder of their portfolio as well. They are one of the many owners that have taken OP units over the years.

11% of acquisitions since IPO have been completed with these units, and the medium of exchange creates deal flow for many others, even if we elect to instead close with cash. It is also a factor that contributes to approximately 75% of our acquisitions being sourced off-market. Especially in periods of uncertainty, whether exchanging property for OP units or cash, it is becoming increasingly apparent to sellers, both large and small, that the gap between our platform and their go-it-alone plan has materially widened. Postal Realty's unmatched ability to operate and administer properties, including an efficient re-leasing process, improves our results as we continue to innovate and drive efficiencies as we scale the business.

We have been in active dialogue with members of Congress, including recent meetings with Congressman Pete Sessions, co-chair of DOGE Caucus, and recently attending presentations by other congressional leaders at the annual Association of United States Postal Lessors Conference in Washington, D.C. While there have been no updates on the DOGE GSA engagement to share, their resounding bipartisan support of the Postal Service real estate network and the acknowledgment of the critical nature of it to their constituents was very encouraging. As a reminder, lease expenses represent only 1.5% of the Postal Service's total operating budget, and these facilities are the backbone of their delivery network, enabling them to serve 169 million delivery points across the country.

We remain confident in the value of our properties to the Postal Service's mission, the security and visibility of our cash flows, and our ability to generate strong internal growth while continuing to consolidate this highly fragmented market. I will now turn the call over to Jeremy.

Jeremy Garber (President)

Thank you, Andrew. As mentioned, rents for all leases set to expire in 2025 and 2026 have been agreed upon, with 2025 lease production progressing ahead of expiration dates. When all agreed-to leases through 2026 are fully executed, 32% of our portfolio will be 10 years in duration, and 56% of the portfolio will contain annual rent escalations. As a result of a few outstanding expired leases from 2023 and 2024 that had new leases executed during the first quarter, the company has received a total net lump sum catch-up payment of $426,000. Aside from recent or prospective acquisitions that are acquired in holdover status, lump sum catch-up payments should continue to diminish in frequency and value as we continue to sign leases ahead of their expiration dates.

In the first quarter of 2025, we acquired 36 properties for approximately $16 million at a 7.6% weighted average cap rate, which added approximately 100,000 net leasable interior sq ft to our portfolio, inclusive of 33,000 sq ft from 22 last-mile post offices and 67,000 sq ft from 14 flex properties. Subsequent to quarter end and through April 16, we acquired 25 properties for approximately $13 million and placed an additional 35 properties totaling $22 million under definitive contracts. I'll now turn the call over to Rob to discuss our first quarter financial results.

Robert Klein (CFO)

Thank you, Jeremy, and thank you everyone for joining us for today's call. During the first quarter, we delivered funds from operations, or FFO, of $0.28 and adjusted funds from operations, or AFFO, of $0.32 per diluted share. Thanks to our re-leasing successes over the past few years, the bottom-line impact from contractual rent escalations is projected to result in $0.02 of AFFO per share in 2025. We have maintained low leverage and minimized our exposure to variable-rate debt. At the end of the first quarter, our debt outstanding had a weighted average interest rate of 4.4% and a weighted average maturity of 3 years. The company's $150 million senior unsecured revolving credit facility had $24 million outstanding, and fixed-rate debt comprised 92% of all borrowings.

Net debt to annualized adjusted EBITDA remained flat quarter over quarter at 5.2 times, well within our target of below 7 times. During the first quarter, we raised approximately $3 million of equity, issuing nearly 140,000 shares of common stock through our ATM offering program at an average price of $14.20 per share and approximately 73,000 common units in our operating partnership at a price of $14.03 per unit as part of consideration for a portfolio acquisition. Recurring capex in Q1 was $168,000. Looking forward to Q2, we anticipate the figure to be between $150,000 and $250,000, depending on the timing of projects. As stated on our Q4 earnings call, we expect total cash G&A expense to be between $10.5 million and $11 million for the full year 2025. We continue to prioritize decreasing cash G&A as a percentage of revenue on an annual basis.

Our board of directors has approved a quarterly dividend of $0.2425 per share, representing a 1% increase from the Q1 2024 dividend and remains well covered by AFFO. We continue to strengthen our position as the market leader in the postal real estate space as we execute our business plan of acquiring new assets and improving the cash flow. This concludes our prepared remarks. Operator, we'd like to open the call for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it 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 Jon Petersen with Jefferies. Please go ahead.

Jon Petersen (Managing Director)

Good morning, guys. Congrats on all the lease renewals and being done for 2025. Can you give us—apologize if I missed this—but can you give us the gap in cash leasing spreads on the 2025 lease renewals? In the press release, you said you've already agreed to rents for 2026. Can you give us some indication of what the leasing spreads will be into next year?

Jeremy Garber (President)

Hey, Jon. This is Jeremy. As you know, we historically haven't provided leasing spreads. We have been putting out our same-store numbers for the past few quarters and have an estimate for 2025.

Jon Petersen (Managing Director)

Okay. All right. That's fine. You mentioned productive conversations in Washington, D.C. around DOGE and kind of some support for the USPS. Maybe can you talk a little bit more about that? I mean, are there any specific things that you're worried about? Or maybe on the flip side, are there some opportunities that would come from more focus on the budget and maybe improving efficiencies at the post office?

Andrew Spodek (CEO)

Yeah. We get this question a lot. Jon, this is Andrew. Look, as I'm sure everybody can imagine, we are constantly monitoring any and all news regarding DOGE and the Postal Service and speaking with members of Congress. The reality is not much has been said. There really hasn't been anything material said or done as it relates to the Postal Service and DOGE. What we do know is that we're working very efficiently with the leasing department at the Postal Service, and we've been working with the same people there for the same few years. Their focus is the same as it has been, which is securing these facilities, executing leases, getting them done before lease expiration, which we've been very successful in working with them to get done. We've even been able to secure these properties for 10-year lease terms.

All indications that we've been having working with the Postal Service is kind of business as usual and really just moving forward with trying to make this leasing process as efficient as possible. I do believe that DOGE, looking at the Postal Service, may bring about some opportunities, but it's yet to be seen. And we're looking forward to them as they present themselves.

Jon Petersen (Managing Director)

Okay. Great. All right. That's all for me. Thank you.

Andrew Spodek (CEO)

Thank you.

Operator (participant)

Thank you. Next question comes from the line of Steve Dumanski with Janney Montgomery Scott. Please go ahead.

Steve Dumanski (Equity Research Analyst)

Good morning, gentlemen. Approximately 32% of the portfolio is currently subjected to 3% annual rent escalators. Firstly, congratulations on your diligent efforts in executing these leases incorporating the increases. I just wanted to see, do you have a potential figure of what is attainable for the overall portfolio to have these annual increases by year-end in terms of a targeted percentage?

Andrew Spodek (CEO)

Yeah. Hi. Just to clarify, our lease structure today is 56% of the portfolio when all 2025 and 2026s are executed will contain rent escalations. The 32% number is the percentage of leases that are 10-year in term.

Steve Dumanski (Equity Research Analyst)

Thank you. Thank you for correcting me. I appreciate it.

Operator (participant)

Mr. Dumanski, are you done with the question?

Steve Dumanski (Equity Research Analyst)

Yes. Yes. That's all for me.

Operator (participant)

Thank you. A reminder to all the participants that you may press Star and 1 to ask a question. Once again, a reminder to all the participants that you may press Star and 1 to ask a question. Next question comes from the line of Barry Oxford with Colliers. Please go ahead.

Barry Oxford (Managing Director)

Thanks, guys. Real quick, could you talk about the cap rates that you're seeing in the marketplace right now? Has there been any real changes, or are they kind of holding pretty steady from what you were seeing at the beginning of the year?

Andrew Spodek (CEO)

I appreciate the question, Barry.

Barry Oxford (Managing Director)

Yeah. Yeah.

Andrew Spodek (CEO)

Cap rates have maintained for the most part where they have been. As we've articulated, we're looking to complete the year at or above a 7.5% capitalization rate. Closing Q1 at 7.6% is right within that range, and we expect that to continue. We're very happy with the conversations we're having and the pipeline and deal flow that we are seeing.

Barry Oxford (Managing Director)

Andrew, I know you've said this many times, but external factors in the economy generally don't affect the acquisition volume because people are selling for different reasons. Is it fair to say that that still remains true in regards to tariffs, that, look, the people who are going to be selling just aren't making decisions based on that?

Andrew Spodek (CEO)

Yeah. I'm happy to say that we're really not affected by tariffs, and sellers, I don't believe, are particularly motivated by that as well. We have seen a big uptick in conversations and people considering selling their properties after the election, but I don't believe it's tied to tariffs or anything of the like. Most of the people that sell are typically drawn to the liquidity or life event or for the people that are interested in the operating partnership units and diversifying themselves in our portfolio. As we said in the earnings call, I think as we've progressed our story, people are seeing the gap between what they're able to accomplish with their properties widening as opposed to what we're able to do within our portfolio and our platform.

Barry Oxford (Managing Director)

Right. Andrew, you mentioned the underwriting, and if we were, if capital I, capital F, were to get into an environment where the government might be reducing their real estate footprint, again, capital I, capital F, are you underwriting right now in regards to taking extra care, for lack of a better word, to make sure that the properties that you're going after and acquiring are, for lack of a better word, mission-critical?

Andrew Spodek (CEO)

Yeah. We spend a lot of time, effort, focus on the properties that we buy and choosing them and underwriting them, and we continue to do so. We pass on deals every day. The first and most critical component of everything we buy is our belief that the Postal Service either needs or wants to be in the facility that we're buying. Second to that is the real estate and the value. We definitely are taking that into account. Our numbers are our numbers, right? Having a 99% plus retention rate over the 10-plus years really speaks to that. We very strongly believe that in any version of the Postal Service these properties are critical to their delivery business. They need these buildings in order to deliver to the American people, to touch the 169 million delivery points that they touch every day.

We very much view this as critical American infrastructure that we're investing in.

Barry Oxford (Managing Director)

Great. Thanks for the call, guys.

Jeremy Garber (President)

Appreciate it, Barry.

Barry Oxford (Managing Director)

Yep.

Operator (participant)

Thank you. Next question comes from the line of Jon Petersen with Jefferies. Please go ahead.

Jon Petersen (Managing Director)

Great. Thanks. Hello again. Just want to follow up on acquisitions. You mentioned one of the acquisitions in Q1, you used OP units, and it was from a seller you'd used OP units for previously. Can you remind us in 2024, what % of acquisitions were funded with OP units? I know it's probably an impossible thing to give guidance on, but maybe just some guideposts on how to think about how often you might use OP units on future acquisitions.

Andrew Spodek (CEO)

Sure. From our perspective, this currency is very, very valuable. It's valuable because it creates deal flow. As I said in the script, 75% of the deals that we do are done off-market. A lot of Postal owners and sellers are driven to us because we have this currency, even if we don't use it to complete the transaction. On average, we're doing between 10% and 15% of our deal flow with the use of this currency. Very often, transactions are done with a portion cash and a portion of the currency. It's a very valuable tool for people. It's very flexible and accommodating for estate planning, especially because the average owners in this space are in their 60s to 80s. We only use the operating partnership unit when it makes sense to us. That is based on stock price.

That is based on the transaction. We take all those variables into account when we're deciding whether we're going to transact using operating partnership units.

Jon Petersen (Managing Director)

Okay. Super helpful. All right. Thank you. That's all.

Andrew Spodek (CEO)

Thank you, Jon.

Operator (participant)

Thank you. 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 (CEO)

Thank you. On behalf of the entire team, thank you all for your continued support and for taking the time to join us today. Have a great day.

Operator (participant)

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