Postal Realty Trust, Inc. (PSTL) Earnings Call Transcript & Summary

Greetings, and welcome to the Postal Realty Trust's Second Quarter 2026 Earnings Conference 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, Senior Vice President of Finance and Capital Markets. Welcome, Jordan.

Thank you, and good morning, everyone. Welcome to Postal Realty Trust's Second Quarter 2026 Earnings Conference Call. On the call today, we have Andrew Spodek, Chief Executive Officer; Jeremy Garber, President; Steve Bakke, 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 10-Q and its other regulatory filings with the SEC. 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, pro forma adjusted EBITDA, pro forma annualized adjusted EBITDA, net debt, adjusted net debt, portfolio occupancy, same-store cash NOI, same-store cash revenue, and pro forma adjusted net debt. You can find the definitions and, to the extent available, tabular reconciliations 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. In the second quarter, we experienced strong momentum as we closed $45 million of acquisitions at a 7.3% weighted average cash cap rate. This was the highest volume quarter since June 2022. Our current improved access to capital allows us to expand the breadth of acquisition targets, including larger assets and portfolios that have strong postal specs and attractive growth profiles while maintaining a very attractive spread. A recent acquisition in San Diego is a perfect illustration. We acquired a $9.6 million facility located west of Interstate 805, locking in an attractive basis for a below-market lease with meaningful growth potential in Coastal California. Our disciplined approach to acquiring properties has not changed. We target properties that are day 1 accretive and offer embedded upside over time. With an improved cost of capital, we now acquire a broader universe of these high-quality assets, supporting the strong internal growth profile we have consistently delivered. Year-to-date through July, we have acquired $88 million at a 7.4% cap rate. As a result of our acquisition volume so far this year and our visibility into a large pipeline of opportunities, we are increasing our acquisitions guidance to $150 million to $160 million. We have increased our acquisition guidance by 30% so far this year, and we will update you later in the year as our pipeline progresses. The $110 million of equity we have sold through July sets us up to fully fund our acquisition pipeline. In addition, we recently increased the size and reduced the borrowing cost of our revolving credit facility, adding to our financial strength. Our decades of experience in the postal real estate market continues to fuel our growth and consistency. By marking rents to market, securing 3% annual escalators on new leases, and extending leases to 10-year terms, we have driven strong performance. We have delivered 5.5% average same-store cash NOI growth over the last 5 years, inclusive of this year, which is tracking to a range of 6% to 7%. Most recently, we have used our unique operational approach to solidify a same-store cash revenue growth outlook for 2027 of approximately 6.5%. Alongside this growth, we are achieving robust retention and occupancy rates that exceed 99%. The North Star that guides our efforts is delivering robust AFFO growth per share, which has been 6.2% annually over the last 5 years. With the AFFO per share guidance increase we announced yesterday, our midpoint for 2026 implies growth of 7.6%. With our expanded access to capital, the momentum we are seeing in our acquisition pipeline and the strength of our team, I've never felt more confident in our ability to scale the platform accretively. With that, I will turn the call over to Steve.

Thanks, Andrew. There are 4 pillars to our sector-leading AFFO per share growth. First, our lease mark-to-market opportunity is significant, representing a clear opportunity to capture embedded upside in our portfolio. Between 2027 and 2030, 28% of our rental income will expire with no remaining renewal options. Second, annual rent escalators provide a compounding tailwind. In 2027, approximately 52% of our rent will experience an escalation, a substantial increase from 5% in 2023, and higher than 37% in 2026. Moving forward, replacing legacy flat leases with new leases with escalators will further bolster our annual internal growth. Third, we benefit from retained cash flow. As we have scaled the business, this funding source has grown with our AFFO available after dividend payments expected to increase to $16 million in 2026, up considerably from $3 million 3 years ago. This provides us flexible capital we can selectively use to repay debt or to pursue acquisitions that further accelerate our growth. Fourth, we are crystallizing day 1 accretion from acquisitions. While the majority of our AFFO growth has been and continues to be internally driven, our significantly improved cost of capital is making upfront accretion, a more significant contributor to earnings growth. Our second quarter results reflect the strong growth foundation that these pillars establish. Yesterday, we reported AFFO per share of $0.36. This is a $0.03 increase from the first quarter and a $0.03 increase from 2025's second quarter. Note that in last year's second quarter, we earned approximately $0.005 from onetime lump sum catch-up payments compared to a de minimis amount this year. Reviewing our balance sheet, we ended the second quarter with net debt to pro forma annualized adjusted EBITDA of 4.6x, down from 5.2x last quarter. As of yesterday, $48 million of gross forward equity proceeds remain unsettled at a weighted average share price of $22.05 per share. Including unsettled forwards and sales post quarter end, pro forma adjusted net debt to pro forma annualized adjusted EBITDA was 4x. Leverage declined in the second quarter due to the expansion of our EBITDA as well as our decision to further equitize acquisitions. Operating with a low leverage balance sheet increases the stability of our cash flows and positions us to acquire accretively in a variety of environments. As a result, we plan to maintain balance sheet leverage no higher than 5.5x net debt to pro forma annualized adjusted EBITDA going forward, a level consistent with our approach the last 3-plus years. We further improved our balance sheet through a credit facility recast in July. In addition to increasing our facility size by $60 million, we further laddered our maturity schedule by bifurcating our prior 2028 maturity of $190 million into a $90 million maturity in 2028, and a $100 million maturity in 2029. Our largest maturity tower has been pushed out to 5 years in 2031. Our goal is to have no more than 25% of debt maturing in a given year. We also extended our weighted average maturity from 2.8 to 3.5 years, closer to our goal of 5 years or more. It is important to note the additional term loan borrowings and tenor extension have been fully hedged on a fixed rate basis, keeping our floating rate exposure at less than 10% of debt after the recast. Lastly, we reduced our interest rate margin by 30 basis points, a meaningful cost savings. Turning to guidance. We are raising our AFFO per share range by $0.01 to $1.41 to $1.43 per share, representing 7.6% growth at the midpoint for the year. The increase is supported by higher acquisition volume, our improved borrowing costs, and G&A efficiencies. Turning to additional guidance items. Cash G&A is tracking below the midpoint of our previously stated range. Same-store cash NOI remains in line with our forecast. And for the third quarter, we expect recurring capital expenditure in the range of $250,000 to $350,000. Our guidance includes de minimis dilution from treasury stock method accounting for unsettled forward equity. To quantify the impact, a $2 per share increase in our stock price from June 30 through year-end would result in a negative $0.002 impact on earnings. Similarly, a $2 per share decrease in our stock price over the period would result in a positive $0.002 benefit to earnings. Lastly, our Board of Directors has approved a quarterly dividend of $0.245 per share, representing a 1% increase from last year. Our dividend payout ratio for the second quarter is approximately 68%, and our dividend yield as of yesterday was 4.3%. I will now turn it over to Jeremy.

Thanks, Steve. As we like to remind investors, the real estate we own is critical American logistics infrastructure. These last-mile facilities form the backbone of the Postal Service's delivery network. These properties enable the Postal Service to meet its congressionally mandated obligation to provide universal service to approximately 170 million delivery points, 6 and often 7 days a week. The cost to lease this real estate backbone of this network is only 1.5% of the U.S. Postal Service's annual operating expenses. Turning to this quarter's leasing update. We have executed 90% of 2026 new leases by rent, and we anticipate executing the remaining 10% in the normal course of the back half of the year. As it relates to 2027 leases, substantially all rents have been agreed upon, and we are beginning the lease execution phase. All 2026 and 2027 new leases will have 3% escalators and the vast majority will have 10-year terms. This excludes leases subject to renewal options. As a result of leasing activities, 59% of leases in our portfolio contain annual escalators. 54% of our portfolio consists of leases with 10-year terms, and our weighted average lease term was 6.4 years at the end of the quarter, including executed and agreed-upon leases through 2027, more than doubling the 3-year WALT we reported a couple of years ago. Shifting to acquisitions. In the second quarter, we acquired 37 properties for $45 million at a weighted average cash cap rate of 7.3%. This brings our year-to-date total through July to $88 million at a weighted average cash cap rate of 7.4%. In the second quarter, we added 237,000 square feet to our portfolio, consisting of 29,600 square feet from 20 last-mile post offices, 141,500 square feet from 16 flex properties and 62,000 square feet from 1 industrial property. This concludes our prepared remarks. Operator, we would like to open the call for questions.

[Operator Instructions] Our first question is coming from the line of Greg McGinniss with Scotiabank.

Andrew, you mentioned your confidence in scaling the platform accretively. To support the growing acquisition pipeline, how are you adding to or adjusting the investment team? What's the expected impact to G&A there? And maybe Steve can chime in on forward expectations or trends for G&A spend as a percentage of NOI.

Thanks for the question. Our investment team is pretty secure. We've really created a very strong team and a very strong process that gives us the ability to scale the platform and do the volume that we've been doing and that we hope to continue to grow. So I don't think there's going to be a significant change in the investment team.

And adding to that, Greg, thanks for the question. If you look at our cash G&A as a percentage of revenue, we've been on average for the last 5 years reducing that by about 150 basis points a year. Our guidance implies 10% to 10.9% cash G&A as a percentage of revenue for the year. And as we move forward, we continue to look for efficiencies. There's a lot of exciting technology out there. There are improvements to our approach and systems we can also look into that could help us derive additional efficiencies.

Okay. And then one more on transactions. You have 1 big industrial property acquired this quarter. You guys are also talking about an ability to maybe acquire some larger portfolios with improved cost of capital. So just curious what you're seeing out there in terms of more of these industrial properties or more of these potentially larger portfolios. Are these going to be a meaningful contributor to your acquisitions going forward?

Yes. I appreciate the question. We've always been clear that we look at industrial assets. We don't find them to be the bread and butter of the business. But when we do see them, we do underwrite them and try to acquire them as long as they are accretive day 1 and as long as there is some internal growth that can be added over the course of the lease. We look at -- like in all assets, and it doesn't matter if it's industrial or large assets or portfolios or single assets for that matter, we look at the basis that we're buying it, we look at the importance of the property to the Postal Service, and we want to make sure that this is accretive, not just day 1, but over time. And that tracks with everything that we buy. And over the years that we've been doing this, these acquisitions have always been accretive on day 1. And so, as our cost of capital gets better, it gives us the ability to buy more assets that fit those qualifications.

And so just to clarify, with the improved cost of capital, which has come down significantly since the beginning of the year, are we talking about materially more assets that you're able to acquire accretively? And is this the -- investment team is doing what it can in terms of its ability to be acquiring right now, and this is just the best of the best and so we could see material increase in acquisitions, or is this -- it's incremental?

Greg, this is Steve. Andrew in his prepared remarks spoke to some of the momentum we're seeing in our pipeline. I think from a cost of capital perspective, I'll say, last September, when I was in the process of joining the company, we had around a 7.3% weighted average cost of capital, and we were acquiring at a 7.7% cost of capital. So you can back into a 40 basis point investment spread from those numbers. And even with that, we're generating substantial growth because the majority of what we are really driving is internal growth. If you fast forward to today, you can look at our investment presentation, we have a 6% -- 6.0% weighted average cost of capital. And we're, today, this quarter, buying at a 7.3% cap rate. So we're deriving 3x or 4x the investment spread that we were doing a short time ago. And we're feeling as confident as ever, if not more confident about the long-term growth prospects of the properties we're acquiring.

Our next question is coming from the line of John Kim with BMO Capital Markets.