Postal Realty Trust, Inc. (NYSE:PSTL) Q4 2022 Earnings Call Transcript
Postal Realty Trust, Inc. (NYSE:PSTL) Q4 2022 Earnings Call Transcript March 2, 2023
Operator: Greetings and welcome to Postal Realty Trust Fourth Quarter and Full Year 2022 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 Capital Markets. Please go ahead.
Jordan Cooperstein: Thank you. Good morning, everyone and welcome to the Postal Realty Trust fourth quarter and full year 2022 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 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: Good morning and thank you for joining us. The fourth quarter marked the solid finish to the year as we surpassed our 2022 acquisitions target, acquiring 320 properties for $123 million. This caps another year of strong growth in our portfolio as we have now completed over $400 million of acquisitions since Postal's IPO in 2019. Even amidst challenging capital markets and the uncertain macroeconomic environment, we remain encouraged by our strategic positioning and the strength of our balance sheet. As we discussed last quarter, and as expected, we are navigating a dramatically different environment as compared to a year ago in terms of deal flow and valuation assumptions. Given the significant upward shift in interest rates over the past year, it is taking time for prospective sellers to adjust their price expectations.
We continue to be patient in our approach, setting ourselves up with ample dry powder to take advantage of accretive opportunities that present themselves going forward. As we have highlighted repeatedly over the past year, the conservative and proactive management of our balance sheet puts us in a great position to grow our portfolio with low leverage, minimal exposure to variable rates, and no notable debt maturities until 2026. We are also demonstrating strong organic growth across our portfolio, which Rob will provide more detail on later in the call. In the second half of the year, and most recently the fourth quarter, we transacted at higher cap rates. This impacted volume in line with our expectations and the near-term outlook that we have previously shared.
Looking to 2023, we are continuing with the same measured approach as in recent quarters. As sellers remained slow to adjust their pricing and we continue to pursue higher yielding properties, there will be reduced near-term volume. While we have limited visibility on when this bid/ask spread will resolve, we anticipate 2023 acquisitions could be in the neighborhood of $80 million and are optimistic that our acquisitions will pick up in the second half of the year. Looking out further, the opportunity in front of us remains robust and the main drivers of our business are unchanged, irrespective of the higher interest rate environment. With significant capacity for future growth, we are in a very strong position operationally and financially to be acquisitive when attractive opportunities present themselves.
I will now turn the call over to Jeremy to discuss our operating metrics.
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Jeremy Garber: Thank you, Andrew. For the full year 2022, the company acquired 320 properties for approximately $123 million, excluding closing costs at a weighted average cap rate of approximately 6.8%. These properties comprise 869,000 net leasable interior square feet and have a weighted average rental rate of $11.10 per leasable square foot based on rents in place as of December 31, 2022. In the fourth quarter of 2022, we acquired 54 properties for approximately $20 million, excluding closing costs. These acquisitions added 142,000 net leasable interior square feet to our portfolio, inclusive of 55,000 square feet from 39 last mile properties and 87,000 square feet from 15 flex properties. As we often remind our investors, our tenant has consistently made all of its rent payments on time throughout all economic periods.
In keeping with this track record, we collected 100% of our contractual rents in the fourth quarter. This predictability of cash flow remains a significant differentiator for our company. For the full year 2022, we produced a 33% increase in rental income compared to the full year 2021, reflecting continued growth in our existing portfolio, as well as contributions from the accretive acquisitions made over the last 12 months. We have maintained a 99% historical weighted average lease retention rate over the past 10 plus years, which reflects the strategic importance of these properties to the both the Postal Service and the communities they serve. This high rate continues to validate our due diligence process in identifying locations that are vital to this crucial logistics network.
We did not receive any notices of termination in 2022. While the 2022 lease renewal negotiations are still ongoing, the USPS determined that market rent for the leases and holdover was greater than the rent amount payable under the expired leases and agreed to pass a lump-sum catch-up payment in recognition of the increased rents due from the date of lease expiration. We will continue to receive these increased rents going forward until new leases on the holdover properties are executed. I will now turn the call over to Rob to discuss our fourth quarter and full year 22 financial results.
Robert Klein: Thank you, Jeremy and thank you everyone for joining us on today's call. For the fourth quarter, we delivered funds from operations, or FFO of $0.27 per diluted share and adjusted funds from operations or AFFO of $0.28. For the full year 2022, we delivered FFO of $0.96 per diluted share and AFFO of $1.01. The strong fourth quarter earnings numbers are partially related to lower recurring CapEx combined with the increased rents and lump-sum catch-up payments Jeremy just discussed. Recurring CapEx for the fourth quarter was $0.02 per square foot and we anticipate it to remain around this level for future quarters. As we find more of our CapEx falling into the non-recurring versus recurring CapEx bucket, we have added additional detail to our supplemental on the breakdown of our total capital expenditures this quarter and historically.
As per our guidance last quarter, cash G&A for Q4 was relatively in line with Q3. Going forward, we expect cash G&A for the full year of 2023 to be approximately $9.4 million to $9.9 million, representing an increase of $1 million to $1.5 million over 2022. This is assuming the environment is conducive to make some of the internal investments deferred from last year. We continue to expect cash G&A as a percentage of revenue to decline on an annual basis. In order to provide additional transparency, we are quantifying our internal growth through same-store cash net operating income. Reflecting properties under our ownership as of December 31, 2020, same-store NOI increased 2% when comparing the full year of 2022 to the full year of 2021. While negotiations remain ongoing, this is based on the USPS's most recently determined market rents for the 2022 lease renewals.
Once we have executed these leases with the Postal Service, we will provide an update with the finalized figure. At the end of fourth quarter of 2022, the entirety of our debt outstanding was set to fixed rates at a weighted average interest rate of 3.74% and a weighted average maturity of 5.5 years. At year end, the $150 million senior unsecured revolving credit facility was completely undrawn and as of February 21, 2023, had only $12 million outstanding. For the fourth quarter 2022, net debt to annualized adjusted EBITDA was 5.1x and net debt to enterprise value was 35.7% within our leverage targets of below 7x and 40% respectively. Given the significant shift in interest rates over the past year, we have prudently managed our balance sheet by maintaining low leverage and minimizing our exposure to variable rate debt.
Through our at-the-market program, we issued 523,909 shares of common stock at 63,629 common units in our operating partnership as part of the consideration for property acquired during the quarter at an average gross price of $15.47 for approximately $9.1 million of gross proceeds. Our Board of Directors has approved the quarterly dividend in the amount of $23.75 per share. This represents a 4.4% increase from the fourth quarter 2021 dividend continuing our history of increasing the dividend every quarter since IPO. With our industry leadership as the largest owner of Postal Properties, a well-maintained balance sheet, stable cash flows and a strong internal growth, we are well-positioned to enhance shareholder value in 2023 and beyond. This concludes our prepared remarks.
Operator, we would like to open the call for questions.
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