Postal Realty Trust - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered solid internal growth and external accretion: total revenues rose to $21.368M (+25.7% YoY), Diluted EPS reached $0.17, and AFFO per diluted share was $0.35; management introduced FY2025 AFFO guidance of $1.20–$1.22 per share and updated 2025 same-store cash NOI growth to 4–6% from “at least 3%” previously.
• Leasing execution accelerated with 10-year terms and 3% annual rent escalations; USPS executed leases covering 95% of 2023 and 99% of 2024 expired rent as of Feb 14, 2025, supporting internal growth visibility.
• Balance sheet remained conservative: net debt ≈$296M, 95% fixed-rate, weighted average interest 4.35%, revolver availability of $136M; the Board authorized a $25M buyback and raised the dividend to $0.2425 per share.
• Stock reaction catalysts: initial AFFO guidance, upward revision of same-store NOI outlook, buyback authorization, and visible lease escalators with 10-year terms.

What Went Well and What Went Wrong

What Went Well

• Re-leasing momentum and pricing power: “successful re-leasing including 3% annual rent escalations and the introduction of 10-year lease terms fueling our internal growth,” underpinning AFFO of $1.16 per share (+8.4% YoY) and 2025 AFFO guidance of $1.20–$1.22. CEO: “Postal Realty is well positioned for continued internal and external growth”.
• Strength in same-store metrics and guidance: 2023 same-store cash NOI growth 5.5%; 2024 was 4.4%; 2025 updated to 4–6% (from prior “≥3%”), highlighting operating visibility and lease escalators.
• Balance sheet and capital markets execution: term loan commitments increased by $50M; swaps fixed rates through Feb 2028; ending Q4 with 95% fixed-rate debt and $136M revolver undrawn. CFO emphasized low leverage and deleveraging driven by re-leasing success.

What Went Wrong

• Non-GAAP reliance and lease timing effects: revenue included lump-sum catch-up rent; CFO clarified run-rate should reflect a near-complete execution of 2023/2024 leases (95%/99%), implying quarterly variability as leases are finalized.
• Cash G&A expected to increase in 2025 ($10.5–$11.0M), partially offsetting internal growth; AFFO growth at midpoint “just a touch over 4%” was discussed in Q&A as G&A normalizes.
• Macro USPS questions persist: analysts probed USPS cost-cutting plans and network changes; management reiterated confidence and noted lease expense is ~1.5% of USPS operating budget, but uncertainty around USPS initiatives remains a monitoring item.

Transcript

Operator (participant)

Greetings and welcome to Postal Realty Trust's Q4 2024 Earnings Call. At this time, all participants are in a listen-only mode. A Q&A 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 Capital Markets. Welcome, Jordan.

Jordan Cooperstein (VP of FP&A Capital Markets)

Thank you, and good morning, everyone. Welcome to Postal Realty Trust's Q4 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 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.

Andrew Spodek (CEO)

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 entered 2025 with confidence in our ability to drive internal growth while we continue to pursue our acquisition-driven external growth plan. Our strong re-leasing 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 re-leasing 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 projection 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 re-leasing 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-$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, a 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 10-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 10-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 delivering to rural addresses, which make up almost 60% of U.S. ZIP codes, because of its mature, on-the-ground, last-mile network, and 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're 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 (President)

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 10 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 Q4 was $1.5 million. As of February 14, the company received $400,000 in 2025. Looking only at our executed leases, 31% of the portfolio contains annual rent escalations, and 11% have 10-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 Q4 of 2024, we acquired 63 properties for $31 million, which added approximately 176,000 net leasable interior sq ft to our portfolio, inclusive of 60,000 sq ft from 40 last-mile post offices and 117,000 sq ft from 23 flex properties. This brought our 2024 acquisition total to $91 million, comprised of 197 properties and 571,000 sq ft. Subsequent to quarter-end and through February 14, 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 Q4 financial results.

Robert Klein (CFO)

Thank you, Jeremy, and thank you, everyone, for joining us on today's call. We're pleased to discuss our Q4 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'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 Q4, 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 re-leasing contributed to the delevering from the end of 2023. In addition to our 2025 guidance, we're 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 2024 was 4.4%. Along with these newly executed leases, we're 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 Q4 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-$1.22 per diluted share. Some of the base assumptions behind this include acquisitions ranging from $80-$90 million, same-store NOI growth between 4%-6%, and cash G&A expense between $10.5-$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 6 and 7. Our business provides investors with reliable cash flows each quarter, driven by our internal growth as well as by acquisitions. Our recent re-leasing 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.

Operator (participant)

Thank you. We will now be conducting a Q&A session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 Barry Oxford with Colliers. Please go ahead.

Barry Oxford (Analyst)

Great. Thanks, guys. Andrew, This is more of a question for you. We changed the 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 going to 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 (CEO)

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 with 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.

Barry Oxford (Analyst)

Because of the low expense that it represents?

Andrew Spodek (CEO)

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 big focus.

Barry Oxford (Analyst)

Great. Thanks, guys.

Operator (participant)

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

Steven Dumanski (Analyst)

Thank you. Yesterday, the Postal Service released an update that it projects to save $36 billion over the course of the next 10 years. So one of the proposed cost-cutting measures recited 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 (CEO)

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 going to be any disruption or change to their retail network.

Steven Dumanski (Analyst)

Thank you. That'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 (CEO)

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. We take into account shifts and changes in the Postal Service and the way they're utilizing those buildings. That would take into account any shifts in a regional center or a local or national center. So that's taken into account when we look to buy properties.

Steven Dumanski (Analyst)

Thank you, Andrew. I appreciate it.

Andrew Spodek (CEO)

Thank you.

Operator (participant)

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

Michael Gorman (Managing Director and Research Analyst)

Yeah. Thanks. Good morning. Appreciate the guidance, Rob. Just wanted to make sure that I've got everything square. 4%-6% same store next year. At the midpoint, AFFO looks just a touch over 4%. Looks like some of that's coming out from the G&A line, cash G&A 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 (CFO)

No. That's really it. Obviously, this is a dynamic business, and what's a little bit dynamic about it is, in particular, recurring CapEx, things along those lines that can be adjustments from FFO to AFFO. But in general, yeah, we've given you the largest drivers and components. And obviously, acquisitions can affect the top and the bottom line as well in the current year.

Michael Gorman (Managing Director and Research Analyst)

Okay. Great. Andrew, you've kind of 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? What's a typical post office facility in private hands doing before you're able to bring it onto your lease structure and into your platform? Thanks.

Andrew Spodek (CEO)

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. That just continues as we continue to scale the business.

Michael Gorman (Managing Director and Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. As there are no further questions, ladies and gentlemen, we have reached the end of the Q&A session. We have a question. It's from the line of John Peterson from Jefferies. Please go ahead.

Jonathan Petersen (Analyst)

Sorry. Let me sneak this one in. So I want to make sure I understand. How much catch-up rent payments were in the Q4 top-line revenue, and how do we think about what a run rate is into next year?

Robert Klein (CFO)

Yeah. So let's take the second question because it's more important for everyone to understand. We now have, 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 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 (Analyst)

Okay. All right. Great. That's helpful. Thank you.

Operator (participant)

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

Andrew Spodek (CEO)

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 (participant)

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