Postal Realty Trust Inc. Aktie

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.

Andrew, at the beginning of the call, you mentioned widening your acquisition opportunities, and you discussed the San Diego acquisition as one with a higher mark-to-market and growth potential in the coastal market. So I was wondering if you could just expand on that a little bit, especially the growth potential and the asset in the West Coast market. Is that something that's important to you given it's a region that you're relatively underweight and land costs maybe a little bit higher, but again, potentially has higher growth?

Sure. I appreciate it. The -- like I said to Greg, the fundamentals of these properties are all relatively similar, right? We are still driving to buy things at a good basis, important to the Postal Service and that are accretive in day 1 and have long-term growth potential. Now that applies everywhere. But what we do is we underwrite each asset within its particular market. And so we just highlighted San Diego just to show everybody that there's a wide breadth types of properties that we buy in San Diego or types of properties like that, especially in the location at the basis that we buy them in with the growth was something that I wanted the investor universe to really understand.

Okay. And as the USPS evaluates both its cost structure and the monetization of its network, including the recent DHL eCommerce deal, how are you seeing that impact either your current portfolio or acquisitions that you're looking at?

Yes. Again, you used the word monetization of the last-mile. We spoke about a process that they put in place a few months ago around trying to monetize the last-mile. After that announcement, we saw Amazon and DHL renew and extend their relationships. I think it just shows how important these assets are to the Postal Service. These are -- as Andrew described, those are our bread and butter. And as we continue to look at acquisition opportunities, the breadth of opportunities continues to expand. And as I described, the Postal Service is showing us that these are the assets that are critical and important and that they want to make sure we're secure.

Maybe one quick last one for Steve. Your pro forma leverage is at 4x. To maximize your cost of capital, are you looking to further reduce leverage going forward? Or are you comfortable at these levels?

I think a short answer to your question is comfortable at these levels. We made an intentional decision to equitize acquisitions this quarter because we see a number of benefits from running with lower leverage with minimal impact on our forward earnings trajectory. We enhanced the stability of our cash flows. It adds optionality for us to potentially zig while others are zagging in a challenging economic environment and continue to deploy capital maybe when others are on the sideline.

And lastly, to the point you made, we think that our overall cost of capital, including both debt and equity, can be lower by running at lower leverage levels.

[Operator Instructions] Our next question is coming from the line of Anthony Paolone with JPMorgan.

You have Nahom on for Tony this morning. I guess my first question, it looks like cap rates came down from 1Q to 2Q. I guess, was that driven by the industrial asset you guys purchased in the quarter? And maybe if you guys could give any color on as to what you guys are seeing in the transaction market in terms of pricing would be helpful as well.

Thanks for the question. So, like I've said in the prepared remarks and like I've said before, our North Star is growing earnings per share. It's not based on the type of particular asset, right? We are going to buy assets that make sense, not just today out of the gate that are accretive, but that have long-term potential.

The lowering of the cap rate is not specifically tied to that asset. We are going to -- as you see volumes rise and cap rates compress somewhat, we are -- just understand that we're solving for that higher earnings growth, not just currently, but in the future years. If we didn't do that, we would be settling for a lower volume, and some are higher cap rates, it would be less accretive to earnings. And that's really what we're driving for.

Got it. And I guess looking at, like, portfolio expirations, I think for about 40% of the portfolio that the USPS has the option to renew with sort of the older legacy terms, like the flat 5-year lease terms. I guess, how long will it take for those to burn off? And is it when they expire on the next term that you'll be able to mark those to market?

It really depends, Nahom. We have -- in 2027, we have a large master lease that is footnoted in our investor presentation. That one, in particular, has one more 5-year extension before that rent, which is materially below market, has a chance to be mark-to-market, but it depends asset by asset. I mean, one thing we could do or look into in the future is providing a fully extended expiration schedule to give you a better sense. But I think for the next few years, we have ample growth opportunity simply within the mark-to-market leases.

It appears we have no additional questions at this time. So I'd like to pass the floor back over to management for any closing comments.

Thank you, everybody, for joining us. Look, we've built a scalable platform designed to maximize the value of postal real estate backed by a growing rent stream from a tenant who pays 100% of the rent 100% of the time. Our North Star has continued delivering strong compound AFFO per share growth over time. We have never been more confident in our ability to consolidate the postal real estate market given our access to capital, momentum in our acquisition pipeline, and the team and platform we have in place. We look forward to sharing our progress next quarter. Thank you, everybody.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation, and you may disconnect your lines at this time.

Greetings, and welcome to the Postal Realty Trust First 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 First 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 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, pro forma adjusted EBITDA, pro forma annualized adjusted EBITDA, same-store cash NOI, same-store cash revenue, net debt, adjusted net debt and pro forma adjusted 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. In a couple of weeks, we will be celebrating our seventh anniversary as a public company. Over the past 7 years, we've created a purpose-built platform to unlock the value inherent in U.S. postal real estate. As we have developed and continue to refine this platform, we have delivered on multiple fronts. It starts with the 6.1% average annual AFFO per share growth we are on track to achieve from 2021 to 2026 based on AFFO guidance we increased yesterday. This performance ranks us second among net lease REITs.

Our progression continued last year with the introduction of AFFO per share guidance made possible by refining our leasing approach with the Postal Service. Today, we are taking another step by sharing our forward-looking top line revenue outlook for 2027 despite being only 5 months into 2026. It is a testament to the unique leasing approach we have developed with the Postal Service that gives us this much visibility into 2027, and it speaks to the benefit of having primarily a single high credit tenant who consistently pays us 100% of contractual rent across our 99.8% occupied portfolio.

We are expecting same-store cash revenue growth of approximately 6.5% in 2027, which is approximately 30 basis points higher than what we're expecting for 2026. Higher expected growth in 2027 reflects the increased presence of annual rent escalators across the portfolio as well as the rental mark-to-market tailwind.

On our first quarter 2025 earnings call, I shared that we have the systems and people in place to ramp up acquisitions should our cost of capital and opportunity set align. With a stock price improvement of over 70% since then, this symmetry has materialized, allowing us to accelerate the pace of acquisition activity relative to the last few years.

Based on the strength of our pipeline, we are increasing our acquisition guidance by $15 million to $130 million to $140 million for the year, and we will revisit this guidance as the year progresses. In the first quarter, we acquired $35 million at a 7.5% weighted average cap rate. In the second quarter to date, we have acquired and have under definitive contracts $17 million, putting us at $52 million year-to-date with a strong pipeline of anticipated transactions behind it.

We are capitalizing on the opportunity in front of us from a position of strength. Our revised acquisition guidance is fully funded with liquidity of approximately $250 million at the end of the quarter, consisting of unused revolver capacity and $48 million of unsettled forward equity proceeds.

We are laser-focused on maintaining a strong liquidity profile, supported by our access to equity and our recent BBB investment-grade rating from Kroll, KBRA. In summary, our internal growth, supported by our robust acquisition pipeline and access to capital places us in a strong position to generate continued earnings growth.

Earlier this week, we attended the Postal Service's National Postal Forum in Phoenix, a conference that brings together the broader logistics ecosystem surrounding the Postal Service. For us, the conference confirms that as the logistics marketplace continues to evolve, the U.S. Postal Service's facilities will remain a critical tool for accessing the American people. These facilities form the backbone of the Postal Service's delivery infrastructure and are the very assets we invest in. This network enables the Postal Service to provide universal service across 170 million delivery points nationwide and is utilized 6 days a week by logistics providers and online retailers.

As we'd like to remind investors, the cost to lease the real estate backbone of this network is only 1.5% of the Postal Service's annual operating expenses. This annual expense equates to $1.4 billion of annual rent, resulting in a $12 billion to $15 billion market for Postal real estate, creating a long runway for future acquisitions.

With that, I will turn the call over to Steve.

Thank you, Andrew. I'll make a few comments on the multiyear earnings growth opportunity at Postal Realty before unpacking first quarter results and our updated guidance in more detail. When considering Postal Realty's medium-term earnings growth algorithm, we see 4 primary drivers. First is the mark-to-market opportunity. From 2027 to 2030, approximately 33% of our rental income is expected to reset to market. This represents a meaningful source of embedded growth beyond 2026. Second, annual rent escalators are becoming an increasingly significant driver of organic growth. In 2022, approximately 3% of our rental income experienced an annual escalation. By 2027, that figure will have increased significantly to approximately 53% experiencing an escalation.

Moving from a portfolio with predominantly flat leases to one with the majority 3% plus annual escalators signifies a major shift into the visibility of our annual growth for years to come. To that point, our visibility into annual escalations in our mark-to-market allows us to provide a 2027 same-store cash revenue growth outlook of approximately 6.5%. Third is retained cash flow. As we have scaled, we have reduced our pay out ratio while continuing to grow the dividend. In 2026, we expect to pay out only 70% of our AFFO, which is one of the lowest pay out ratios among net lease REITs.

Our Board has balanced retained cash flow with a dividend yield above the REIT median at approximately 4.5%. Moreover, retained cash flow, which we can deploy into acquisitions or to repay debt is a meaningful source of recurring growth for us, increasing our per share growth rate by about 15% in 2026. Fourth is day 1 accretion. Our improved cost of capital in conjunction with our increased access to capital has led us to begin accelerating the velocity of acquisitions relative to the last few years. With our weighted average cost of capital currently standing at approximately 6.1%, day 1 accretion from acquisitions is becoming an even more meaningful source of AFFO per share growth. In summary, we remain focused on utilizing these 4 growth levers to drive attractive AFFO per share growth in the coming years.

Turning to first quarter results. Yesterday, we reported AFFO per share of $0.33, which is $0.01 ahead of the first quarter of 2025. Note that last year's quarter benefited from holdover payments and prior year property tax reimbursements totaling $0.02 per share. In comparison, in this year's first quarter, we realized $11,000 of holdover payments from recent acquisitions.

We ended the quarter with net debt to pro forma annualized adjusted EBITDA of 5.2x, within the leverage target we updated last quarter of under 6x. Giving effect to approximately $53 million of unsettled forward equity raised year-to-date at an initial forward price of $18.44 per share, our pro forma adjusted net debt to pro forma annualized adjusted EBITDA is 4.5x. A brief note on our leverage metrics. This quarter's supplemental includes metrics based on pro forma annualized adjusted EBITDA. The only difference with the prior metric is that it gives effect to acquisitions and dispositions as if they took place at the start of the quarter, consistent with many peers' reporting methodologies. As it relates to sources and uses, the midpoint of our guidance implies $100 million of acquisitions for the remaining 3 quarters of 2026, which we plan to fund on a leverage-neutral basis using unsettled equity and retained cash flow.

In terms of debt funding specifically, we are focused on limiting floating rate exposure and adding duration to our maturity schedule. We anticipate refinancing our floating rate revolver and term loan balances with longer-term fixed rate private placements or term loans in the coming months.

Turning to our expectations for the remainder of 2026. With yesterday's earnings release, we raised the AFFO per share guidance range we provided last quarter by $0.01 to $1.40 to $1.42 per share, representing 6.8% growth at the midpoint for the year. The increase is supported by higher acquisition volume.

Related to additional guidance items, cash G&A and same-store cash NOI are tracking in line with our forecast. Recurring capital expenditures of approximately $143,000 for the first quarter was within our guidance range, and we are expecting $150,000 to $200,000 in the second quarter.

Lastly, guidance includes approximately $0.01 per share of dilutive impact from unsettled forward equity compared to the $0.05 assumption we shared on the fourth quarter call, calculated in accordance with the treasury stock method, largely due to a higher stock price. Our Board of Directors has approved a quarterly dividend of $0.2450 per share, representing a 1% increase from last year. Our dividend pay out ratio for the first quarter is approximately 74% and our dividend yield as of yesterday was approximately 4.5%.

With that, I will turn the call over to Jeremy.

Thank you, Steve. I will provide an update on our re-leasing efforts, followed by more detail on first quarter acquisition activity. All 2020 rents have been agreed upon and are currently in lease production. In addition, we have substantially agreed on 2027 expirations that do not include renewal options. These leases have also commenced lease production. All 2026 and 2027 leases will have 3% escalators and the vast majority will have 10-year terms.

As of quarter end, 53% of leases in our portfolio contain annual rent escalators. The first escalation takes place in year 2. Therefore, 41% of leases will get the benefit of an escalator in 2026. Shifting to 10-year leases, 45% of our portfolio consists of leases with 10-year terms based on executed and agreed-upon leases as of March 31, 2026. The increase in rent subject to 10-year terms compared to last quarter was predominantly a result of successfully amending the majority of our 2022 expirations to 10 years from 5 years. By the end of 2026, we expect the weighted average lease term of our current portfolio will extend to over 6 years compared to the 3 years when we went public.

Moving on to acquisitions. In the first quarter, we acquired 61 properties for $34.6 million at a weighted average cap rate of 7.4%, adding 195,000 square feet to our portfolio. First quarter acquisitions consisted of 48,900 square feet from 34 -- last-mile post offices and 146,200 square feet from 27 Flex properties. As Andrew mentioned, based on acquisition volume closed in the first quarter, plus our robust forward pipeline, we are increasing our acquisition guidance to $130 million to $140 million for the year.

This concludes our prepared remarks. Operator, we would like to open the call for questions.

[Operator Instructions] Our first question comes from John Kim with BMO Capital Markets.

I wanted to ask what drove the decision to provide '27 same-store revenue guidance at this time? And how should we think about cash same-store NOI? Will it be a similar improvement of 30 basis points that you're seeing on the revenue side from '27 to '26.

This is Steve. To answer your question, the reason we're providing 2027 same-store cash revenue relates back to Jeremy's point that we have substantially completed all of our 2027 lease expiration negotiations with USPS. So given this high level of visibility we have into 2027, we felt it appropriate to share it with the market.

To your second question on how that filters down to same-store NOI, it's early in the year. You can make -- early in 2026, I should say, so hard for us to have visibility into 2027, but you can use a range of inflationary or maybe slightly above inflationary expense assumptions to get to a same-store NOI estimate for modeling purposes.

And what are your expenses this year?

Yes. We expect them to be in the 5% range. That's what's underpinning our guidance assumption.

Okay. And then you mentioned roughly 1/3 of your portfolio going to market over the next few years and the mark-to-market opportunity. How much of -- what is the mark-to-market, first of all? And second of all, how much of that can you capture given you have one tenant that's essentially a partner?

Yes, it's a great question. We don't provide too much specific quantitative detail on the mark-to-market given the nature of having one primary tenant. But fair to say the mark-to-market has been healthy. And at least as it relates to '26, '27, it's been a pretty consistent mark-to-market opportunity. We have a really efficient leasing approach that we've developed with USPS. It works well for them, and it works well for us. And at least for the next couple of years, it will continue.

Our next question comes from Jon Petersen with Jefferies.

Congrats guys on another strong quarter. Can you -- on the same-store revenue guidance for 2027, can you break down the components there? Like how much of that is coming from escalators? How much of that is upside on lease renewals?

Yes, great question. So to answer your question, of the 6.5%, 25% of that growth is due to the escalators. So as Jeremy mentioned in his remarks, a little more than 50% of our portfolio will experience an escalator in 2027. The remainder of the growth is derived from the mark-to-market.

Okay. All right. That's helpful. And then maybe on acquisitions, good to see the acquisition volume rise and your cost of capital improving. For a number of years, the question was when does your cost of capital get to a point when you can be more aggressive on acquisitions. Now we're there. And I guess it raises the question of what's the total addressable market for you guys now? Like at what point do you start to run out of post offices to buy, I guess, is the short way to ask that question. So just talk about the opportunity and how many years of opportunity there is out there for you.

Sure. I appreciate the question. Yes, we're very happy that we have the access to the capital and the cost of capital that we have today, and we're looking forward to continuing to grow the business and acquire postal assets. The runway is very long. You've got -- as I stated before, you've got about $1.4 billion in rent paid by the Postal Service. Any cap rate or margin you want to put on that makes it a $12 billion to $15 billion market. We probably want to address probably $6 billion to $8 billion of that. So I believe we have a lot of opportunities sitting in front of us. And I'm happy to say that the conversations we've had and the pipeline is looking very good. We're -- these are deals that I've been talking to for decades and some new ones, but we're looking forward to the year ahead.

Okay. Outside of your improved ability to transact, is there any change on the seller side of things, the way that they're positioning, the way that their conversations with you are changing and their willingness to transact?

The reality is that the properties that we're looking at today are similar to the properties that we've always looked at. Sellers' tone is somewhat similar. The only thing that has changed is the buzz around us and our stock price, which has, I guess, created sellers' motivation to facing off with us. We're constantly in front of owners. As everybody knows, I've been in the space my whole life. And so interacting with them is nothing new for being able to transact given our access and cost of capital is really what's going to change.

Our next question -- our next question comes from Greg McGinniss from Scotiabank.

We understand you don't want to provide too many details on the mark-to-market. But looking at the kind of forward opportunity, could you provide some color on how it tends to compare between assets that you've controlled for years versus those that you're acquiring?

So the opportunity set on the mark-to-market is interesting, and it varies deal by deal, right? So we underwrite each deal individually. Some of the properties that we acquire have a more significant mark-to-market opportunity and some of them don't. And that's just the nature of any real estate transaction and any real estate lease. As we continue to grow and as we continue to acquire, the mark-to-market opportunity in that particular year changes, and it's constantly fluid. What I could tell you is it seems, at least from what we've done to date and what we're seeing in our pipeline and what we're seeing as our leases are rolling is that, that opportunity still exists. And from our perspective, we look for it to continue to exist.

Okay. And I guess from an acquisition standpoint, is the increased guidance a result of stronger cost of capital opening up the funnel a bit more efficiency on the acquisition side? Or are you seeing some broader macro trends supporting the increased acquisitions?

The guidance is really based on what we're seeing us being able to acquire based on the access and cost of capital. The deals that we are looking at, like I just said, are very similar to the deals that we've always looked to buy, right, primarily properties that are important to the Postal Service's network that have good underlying real estate value. We look to buy deals that are accretive on day 1 and that we can add our internal growth to it as the leases continue to expire. And that's the model for what we're looking to acquire, and that's what we'll continue.

Andrew, on the acquisition cap rate, right, it's been fairly 7.5-ish percent range for few years now. But with the stronger cost of capital that you have, would an increased level of acquisitions necessitate a lower cap rate, meaning should we expect a similar investment spread, although considering how much the WACC has come down, still quite strong to get to a higher acquisition volume that results in ultimately more growth, but just a lower cap rate that we'll see on the face initially?

Yes. I think that we can expect the cap rate to come down a little bit because what we are going to do is acquire some larger properties, some larger portfolios. These are things that we weren't able to acquire in the past few years given our cost of capital. And so as time goes on, we don't -- we believe the cap rates will constrain slightly. But again, keeping in mind that it needs to be accretive on day 1, and we need to be able to have some internal growth on the acquisitions that we're buying.

Just to supplement Andrew's answer to your point you made, what we're solving for is higher per share growth in future years. So the total dollar value of accretion is going to be higher by making more acquisitions at potentially somewhat lower cap rate than it would have if we pass up on those opportunities.

Right. Makes sense. And then just a final one for me. With the stock price performance the recent time frame, have you seen an increased preference for OP Unit from sellers?

Yes, we have, and we're constantly in conversations with owners interested in using the Operating Partnership Unit currency. And we're always balancing that between our sources of debt and equity. But we have definitely seen an increased appetite for the Operating Partnership Units given our stock price growth.

Our next question comes from Anthony Paolone with JPMorgan.

I guess my first question just goes back to the Postal Service and the back and forth they had with Amazon earlier in the year. And I was just wondering if you can maybe just summarize kind of how that played out just to someone that's not in the weeds on those machinations and just any implications back to your portfolio?

Yes. This is Jeremy. This was a 5-year contract that was coming due in October of 2026. As we've seen in the past, a lot of these discussions are played out in the public domain. But we were happy to see that they reached a final agreement. They are going to keep the lion's share of their capacity with the Postal Service. As we stated before, this really doesn't have an impact on our business, right? The scale and size of this industry in terms of other users doesn't change how critical these assets are for the American people. And just to give you some context, we were just, as Andrew mentioned, at the Postal Forum with over 4,000 industry professionals who touch the Postal Service. I mean this is a massive industry, $1.9 trillion mailing industry and 7.9 million jobs associated with this industry and the Postal Service plays a much broader role in the U.S. economy than any of us really appreciate. So the Amazon contract was important. It has been renewed, and we're looking forward to seeing other logistics providers take advantage of this critical network.

Okay. Got it. And then on the leases, you've been so successful with the rent increases, the bumps, the duration. What's the impediment to full net lease pass-through of expenses?

It's a somewhat complicated question. I don't know that there's an impediment to it. The Postal Service lease structure has been in place the way it is for a very long time. As a government agency, I think they have some difficulty in general with a full pass-through on the insurance side. But like we've said before, the vast majority of our leases are this modified double net structure where we're predominantly responsible for roof structure and insurance. I think this works well for us and it works well for them. And so I think the current structure of the lease is going to stay in place.

Okay. And then if I could sneak one last one in. You mentioned maybe tapping private placement debt to extend out some duration. Just can you give us any color around maybe cost and what you're being quoted or what that might look like?

Tony, this is Steve. It depends on the duration. I think if we're looking to issue anywhere from 5 to 10 years, the cost could be anywhere from the low 5% range to high 5%, low 6% range, depending on where the markets are. Treasury yields have expanded coming out of late February, early March. We also had a rise in spreads that have since contracted. So I think somewhere, if you estimate 5.5% to 5.7% for a coupon, that's our best guess at the current time.

[Operator Instructions] Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Andrew Spodek for the closing remarks.

We believe the unique platform we've built to maximize the value of Postal real estate in addition to the inherent stability and growth of the real estate we own offers a unique investment profile in the public REIT space. We look forward to speaking with many of you in the coming months and updating you on our progress next quarter. Thank you again for joining us.

Ladies and gentlemen, the conference of Postal Realty Trust has now concluded. Thank you for your participation. You may now disconnect your lines.

Greetings, and welcome to Postal Realty Trust Fourth Quarter 2025 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, Senior Vice President of Finance and Capital Market. Welcome, Jordan.

Thank you, and good morning, everyone. Welcome to Postal Realty Trust's Fourth Quarter 2025 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 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.

Good morning, and thank you for joining us today. In 2025, we exceeded expectations on all fronts. Our results reflect the stability and growth inherent in our portfolio of critical logistics infrastructure leased to the U.S. Postal Service and our unique operating approach. It was the successful execution of our business plan, coupled with the strength of the Postal Service's tenancy that enabled us to exceed our 2025 guidance. We're building on these results with the strong 2026 guidance we issued yesterday. Our business is benefiting more than ever from economies of scale resulting from the growth of our portfolio and the technology and systems investments we've made in recent years. We grew our asset base by approximately 20% last year, increasing our gross real estate value by 10x since IPO. Our access to capital to fund growth is deeper than it's ever been, bolstered by a BBB investment-grade rating from Kroll, KBRA.

Our year-end liquidity rises to $271 million, including the revolver upsize we announced yesterday as well as the successful equity raising activity we have completed to date in the first quarter. Looking to the future, we have a strong pipeline of acquisitions to fuel our value creation machine. We generate substantial value through acquisitions by applying our efficient operating approach, marking rents to market and extending lease terms to 10 years with annual rent escalators. Our acquisition strategy remains unchanged for volume to be day 1 accretive and furnish meaningful growth over time. Based on our robust pipeline, we are introducing initial guidance of $115 million to $125 million at a mid-7% weighted average cap rate, fully funded by recent capital markets activity. As our cost of capital continues to improve and our pipeline of deals continues to expand, we will revisit acquisition guidance as needed in future quarters. 2025 brought with it changes at the Postal Service.

A new Postmaster General took the reins in July and has been vocal about the value of the last mile. The launch of the auction process to broaden last mile access only reinforces what we've been saying for years. These real estate locations are the backbone of the U.S. Postal Service's delivery network. This infrastructure enables universal service across more than 170 million delivery points nationwide and is utilized 6 days a week by logistics providers and online retailers. As we like to remind investors, through government shutdowns, recessions and pandemics, the Postal Service pays 100% of the monthly rent 100% of the time. Lease expenses represent 1.5% of the Postal Service's total operating expenses, and they have remained in our building 99% of the time. I believe that in uncertain times, the consistency of the Postal Service's tenancy can be of even more value. I'm proud of our progress and our strong position to start the year. I'll now turn the call over to Steve.

Thanks, Andrew. Yesterday, we reported AFFO per share of $0.33 for the fourth quarter of 2025, bringing full year AFFO per share to $1.32. This was at the high end of our most recent guidance and represents growth of 13.8% for the year. Reviewing 2025 guidance items, acquisitions totaled $123.1 million, slightly ahead of our December guidance and nearly $40 million above the midpoint of our guidance at the start of the year. Full year cash G&A of $10.9 million came in slightly better than the guidance midpoint of $11 million. As a share of total revenue, cash G&A declined by nearly 130 basis points in 2025, an indicator of the scale efficiencies we are experiencing. Lastly, our 2025 same-store cash NOI performance was 8.9%. For 2026, we are providing AFFO per share guidance of $1.39 to $1.41, which represents 6.1% growth from last year at the midpoint. This is above our annual growth rate since 2020 of 5.8% per year.

Guidance assumptions include the following: acquisitions of $115 million to $125 million; same-store cash NOI growth of 6.0% to 7.0% and cash G&A of $11.5 million to $12.5 million. For the first quarter, we expect recurring capital expenditures of approximately $125,000 to $200,000. Lastly, guidance includes approximately $0.05 per share of dilutive impact from forward equity calculated in accordance with the treasury stock method since the company's stock price is above the net price of outstanding forwards. Turning to sources and uses of capital. In 2025, we raised $55 million via ATM and OP unit issuance, $40 million via term loans, borrowed on our revolver and utilized retained cash flow to fund acquisitions. For 2026, as Andrew mentioned, we have fully funded the entirety of our acquisition guidance at the high end on a leverage-neutral basis through equity and debt raise as well as growing retained free cash flow.

In 2026, we've raised a total of $44 million of equity at an average gross price of $17.67 per share, of which $36 million was sold on a forward basis at a gross price of $17.88 per share. We executed via the forward ATM to match share issuance with future acquisition closings. As it relates to debt funding, on February 20, we closed on $115 million of new revolving credit facility commitments, welcoming Scotiabank as a new lender. The added liquidity puts our balance sheet in an even stronger position to support the growth of our business. Turning to balance sheet metrics. We ended the year with net debt to annualized adjusted EBITDA of 5.2x or 4.6x after giving effect to unsettled forward equity. Our philosophy as a public company and even before that, when we were private, has been to operate at a low leverage level. Our net debt to annualized adjusted EBITDA has averaged in the low to mid-5x range over the past 5 years.

And going forward, we plan to continue operating in the same range. As such, we are updating our leverage target for net debt to adjusted EBITDA to below 6x from a prior target of below 7x. At year-end, our balance sheet consisted of 89% fixed rate debt, 91% unsecured debt and $113 million of liquidity, which rises to about $270 million, including capital raised in the first quarter. Going forward, we plan to borrow predominantly with fixed rate unsecured debt and to maintain ample liquidity. Finally, in January, we increased our dividend by 1% to $0.245 per quarter, continuing our track record of raising the dividend each year since our IPO. We are committed to growing the dividend while utilizing retained cash flow to reinvest in the business and maintain a strong financial position. With that, I'll turn it over to Jeremy.

Thank you, Steve. I will provide an update on our re-leasing efforts, followed by more detail on our fourth quarter acquisition activity. Starting with re-leasing. As of today, we have executed all new leases for properties that expired in 2025, except for 5 properties acquired during 2025 and 1 acquired in holdover status during 2026. The 5 properties acquired during 2025 have agreed upon rents and the leases are in lease production. As it relates to 2026 re-leasing, other than 4 recently acquired properties, all rents have been agreed upon and are currently in lease production. We are currently negotiating rents for the 2027 leases. All leases will have 3% escalators and the vast majority will have 10-year terms. Finally, as part of our shared goal with the USPS to get further ahead of expirations, we have already started discussions on the 2028, and we look forward to updating on our progress in the coming quarters.

The rollout of 10-year terms and annual escalators in our leases continues to bolster the visibility and growth of our cash flow. 53% of our portfolio rent is subject to annual rent escalations and 37% consists of leases with 10-year terms based on executed and agreed-upon leases as of February 13. Inclusive of executed and agreed-upon rents for new leases through 2026, the weighted average lease term of our current portfolio will extend to over 5 years compared to 3 years when we went public. The company received no lump sum catch-up payments in the fourth quarter. As we look to 2026, aside from prospective acquisitions that are acquired in holdover status, lump sum catch-up payments should continue to diminish in frequency and value as we sign leases ahead of their expiration dates.

Moving on to acquisitions. In 2025, we acquired 216 properties for $123 million, achieving our most recent 2025 guidance of over $120 million. The weighted average initial cash cap rate for last year's acquisitions was 7.7%. Unpacking fourth quarter acquisitions, we acquired 65 properties for approximately $29.1 million at a 7.5% weighted average initial cash cap rate, which added approximately 142,000 net leasable interior square feet to our portfolio. Fourth quarter acquisitions consisted of 55,000 square feet from 42 last mile post offices and 87,000 square feet from 23 flex properties. Our continued earnings momentum is driven by accretive acquisitions, a pipeline of near-term lease mark-to-market opportunities, a growing contribution from annual rent escalators and a disciplined approach to expenses. This concludes our prepared remarks. Operator, we would like to open the call for questions.

[Operator Instructions] Your first question comes from Anthony Paolone with JPMorgan.

You guys have Nahom on for Tony. I guess, could you guys expand on some of the color you guys gave on the transaction market and what's really stopping you guys from, I guess, turning the gas on, on this front? It seems that the midpoint of $120 million was more or less in line with what was completed in 2025.

Sure. I appreciate the question. So I feel very confident with where our pipeline is today. We -- our initial guidance for this year is over 40% higher than our initial guidance from last year. The pipeline is very strong. We are very confident in what this year is going to bring us. Happy to have our debt and equity accounted for. We're really at the strongest position that we've ever been in. And I'm hoping that as our cost of capital continues to get better, that our ability to grow our pipeline and our acquisitions will grow with it, and we'll keep you updated as the year progresses.

Got it. Okay. And I guess the second one for me is in the investor deck, you guys gave some good color and background on the post office. But could you guys expand on what you meant when you said the USPS' revenue model is evolving and they're pursuing competitive bidding processes?

Sure. This is Jeremy. So as you heard in Andrew's comments, the new PMG joined the Postal Service in July and announced last month that they were going to be allowing access to their last mile. When you go through our presentation, historically, you'll see we referenced the ability for the big logistics providers like UPS, FedEx, Amazon, DHL to actually enter the last mile and achieve better pricing. And what the Postal Service has recognized is the value embedded in that last mile and the revenue opportunity in the last mile and they have now opened up a process for others to participate in entering the last mile. And so that's what they've referenced. There's a portal where they're now accepting potential customers to bid for access. And as of their last commentary, there were over 1,200 requests for participation.

Next question, John Kim with BMO Capital Markets.

I was just wondering, your cost of capital has improved pretty meaningfully over the last few months, both on the equity side and with interest rates coming down as well. Does that change your investment strategy at all in terms of targeted yields and size of portfolios you may acquire?

So we're happy to see that our cost of capital has gotten better. And I've always stated that as our cost of capital gets better, our ability to acquire will get better with it. Our goal has been and continues to be to be day 1 accretive for our acquisition and our internal growth from there on. And that will continue to be our strategy going forward. As I said to -- in the previous question, I'm very excited about what this year is going to bring and where our cost of debt and equity are today and our ability to execute on our pipeline.

Okay. And then I wanted to ask about the '27 lease expirations. I think you mentioned you're still working through them and focusing on '28 as well. But what do you see is the most likely outcome in terms of how much of that rent will be renewed? Is there a upside or downside to that rent level of $59 million and anything else you could share in terms of likely outcome?

Yes. Thanks for the question. This is Steve. As it stands today, we expect all of that, all those leases to be renewed for the next couple of years. And looking at 2027, the setup is very similar to 2026. So I think that what you saw today from where we stand today should continue over 2027.

And how many -- just like how many different leases are there as part of the expirations?

I can pull up my supplemental, but it's in the sub -- it is 470 leases. Now it's important to note that a large portion of that, I think, 160 leases are a master lease that we're working through with the Postal Service at the current time.

Next question, Jon Petersen with Jefferies.

Okay. I was hoping on acquisitions. So when you guys acquire a property and then you apply your lease structure to it with the escalators and the 10-year term, can you quantify like what that unlocks for you on the underwriting side in terms of a higher IRR and how that makes you, I guess, more competitive in the acquisition market for underwriting deals?

Sure. So it's a great question. We haven't really articulated what the value of our rent spreads are or our mark-to-markets are. But they're substantial. And I would point you to our same-store numbers and where we are guiding our same-store for this coming year.

Yes. And just to add to Andrew's point, this is Steve. I think a shortcut you can use to back into an unlevered IRR is that initial yield we've been acquiring at the 7.5% cash cap rate. And then looking at our average trailing same-store NOI growth the last few years, which has been around 6%. It gets you to a 13% to 14% unlevered IRR.

Okay. All right. That's helpful. And then in the past, you guys have purchased warehouses that are leased to the USPS. Is that something that you might consider again if your cost of capital improves to a level that allows that to make sense?

Yes, that's a great question. We are always looking at the industrial market. It's not something that is what I refer to as the bread and butter of the business. We really focus the majority of our attention on flex and last mile facilities. But as our cost of capital continues to improve, our opportunity to purchase some of those industrial facilities definitely improves with it.

Okay. Maybe one last one for me for Jeremy. You mentioned earlier in response to another question about logistics providers entering the USPS' last mile. I guess, are there any real estate implications there that we should foresee with kind of more of the -- more supply chain going through the USPS last mile facilities?

In terms of the existing infrastructure and...

Medium, larger stores or different types of stores or anything like that?

Right. So what they identify is their delivery units, that's 22,000 out of the 30-plus thousand facilities that are out there. So those facilities are already built and equipped to handle that type of logistics.

I would like to turn the floor over to Andrew Spodek for closing remarks.

Thank you. With our debt and equity accounted for and a robust pipeline, we're in a stronger position than we have ever been as a public company to capitalize on the opportunity ahead. Looking forward to speaking to you all in the coming months. Thank you all for joining us.

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

Greetings, and welcome to Postal Realty Trust Third Quarter 2025 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 Third Quarter 2025 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 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.

Good morning, and thanks for joining us today. Our strong third quarter results build on the last several quarters' momentum as we continue to solidify our position as the leading owner of U.S. postal real estate. Our team remains highly focused on 3 areas of our business to create value for shareholders.

First, driving organic growth within our portfolio through programmatic leasing with the Postal Service; second, sourcing and executing postal property acquisitions that are accretive day 1 to per share earnings and which become significantly more accretive over time. And third, deepening our access to capital to fund accretive growth. These 3 pillars form the foundation of our high-quality portfolio leased to the Postal Service, which provides a critical universal service to all Americans that is mandated in the constitution.

This service was not interrupted during the most recent federal government shutdown and our rental payments have been unaffected. As we like to remind investors, lease expenses represent only 1.5% of the Postal Services total operating budget, and these real estate locations are the backbone of their entire delivery network, enabling it to provide universal service across 169 million delivery points nationwide.

Turning to third quarter results. The team's success executing on the aforementioned 3 pillars resulted in the company reporting AFFO of $0.33 per share or growth of 10% compared to last year. In addition, we are increasing 2025 AFFO guidance by $0.06, which represents annual growth of 13% at the midpoint.

Looking at per share AFFO growth from 2022 through 2025, our guidance implies compound annual growth of 9% over the 3-year period. Starting with leasing, we have worked with the Postal Service to create a highly efficient and repeatable framework to negotiate, process and execute new leases across both our existing portfolio and future acquisitions. This approach has yielded important benefits for both parties.

For Postal Realty, this framework has improved the predictability of our long-term revenue growth with our new leases offering a mix of 10-year term and 3% annual rent escalations. We are also now able to anticipate rental rate timing and ranges for future lease commencements further in advance than ever before.

Starting this year, greater revenue visibility enabled us to provide annual AFFO per share guidance to investors for the first time, and we will do so again for 2026 on our fourth quarter call. Another benefit of this efficient programmatic leasing approach is that paired with our unmatched ability to manage, operate and administer a diverse portfolio of over 2,200 postal properties nationally.

We serve as a highly responsive single contact point for the Postal Service. Based on our success advancing our new leasing approach and driving property operating efficiencies, we are updating our 2025 same-store cash NOI guidance to a range of 8.5% to 9.5% from our prior guidance of 7% to 9%.

Moving to external growth. We were active in the quarter, completing $42.3 million of acquisitions at a weighted average cash cap rate of 7.7%. This brings closed volume through October 17 to just over $100 million. Based on this and on what we see in the pipeline for the remainder of the year, we are now guiding 2025 acquisitions to meet or exceed $110 million.

A highlight of our third quarter activity was the acquisition of a high-quality flex property at a prime location in Newtonville, Massachusetts, an affluent suburb just west of Boston. Consistent with the 75% of our portfolio that has been internally sourced, this was an off-market opportunity that came through a relationship formed over many years. We were able to purchase this property accretively using a mix of debt and equity capital.

We closed on the property for $23.5 million. The initial cash cap rate is 7.6% and will increase to 8.3% in 3 years. When our cost of capital aligns with an opportunity, we are prepared to move thoughtfully and efficiently to add strong assets to our portfolio. Our capital allocation approach generates accretion day 1 and enables us to make progress on 2 important long-term goals. The first is to deliver increasing value to the U.S. Postal Service as an efficient single point of contact for their real estate needs.

The second is to drive consistent, healthy organic growth for shareholders by finding mark-to-market opportunities, coupled with enhancing leases with both annual rent escalators and extending their length. Acquisitions have and will continue to be a critical part of our long-term value creation strategy.

Lastly, I would like to address a key addition to our leadership team that we announced in late September. As of October 27, Steve Bakke has now officially stepped into the role of Chief Financial Officer. I can tell you his contributions have been immediate. Steve joins us from Realty Income, where he was SVP of Corporate Finance. His deep perspective in capital markets, corporate finance and strategy will help further Postal Realty's mission.

In addition, Steve is energized and committed to ensure the research community and our current and future investors understand the simplicity, visibility and earnings power of Postal Realty Trust. We are very excited to welcome Steve, and I will now turn the call over to him to go through our third quarter financial results.

Thank you, Andrew. I'm excited to be part of the team and contribute to the growth opportunity here. Before discussing the results, I want to take a moment to outline why I am so excited to join the team at Postal Realty. Within the REIT industry, Postal Realty is part of a group of companies that operate in highly specialized real estate segments. They apply unique industry knowledge accrued over decades across all facets of leasing, operating and most importantly, acquiring assets that are both stable and growth-oriented.

I believe Postal Realty's results the past few years are making it apparent that we have a durable cash flow stream backed by a creditworthy tenant with a 250-year operating history, a portfolio that delivers robust organic growth and a disciplined acquisition strategy with a large addressable market.

With access to multiple forms of debt, a public equity currency and continued use of OP units for owners seeking to join our platform, Postal Realty stands out amongst competitors in this segment for its access to both capital and strategic flexibility. I look forward to meeting many of you in the coming weeks and months to discuss Postal Realty further.

Moving to this quarter's results. We delivered AFFO of $0.33 per diluted share, representing $0.03 growth from the third quarter of last year. We increased the 2025 AFFO guidance range to $1.30 to $1.32 per share, which represents growth of $0.14 at the low end and $0.16 at the high end versus 2024.

We continue to outperform our expectations, driven by a few factors. First, operating expenses have trended lower than expected this year, driven by the timing and scope of R&M projects. Second, revenue has outperformed due partly to even faster lease executions with the USPS as well as re-leasing outcomes, fees and other income exceeding our initial expectations.

In regard to fourth quarter AFFO per share, there are a couple of items to call out when thinking about our sequential cadence. First, in the third quarter, we received a lump sum catch-up payment for an asset we acquired in holdover last December, which resulted in a onetime AFFO benefit of $0.01 per share, which we mentioned on our second quarter call.

Additionally, for the fourth quarter, embedded within guidance, there is an additional $0.02 per share of R&M expense compared to the quarterly pace. It's important to note, we don't expect the fourth quarter's higher R&M expenses to carry forward into 2026.

Shifting to the balance sheet. As Andrew stated, a strong balance sheet is core to our strategy. At the end of the third quarter, net debt to annualized adjusted EBITDA was 5.2x. Fixed rate debt comprised 93% of our borrowings and our weighted average debt maturity was 3.5 years. Through our recently completed recast, we successfully increased credit facility commitments by $40 million to $440 million.

On our additional borrowings, we achieved a weighted average all-in fixed rate borrowing cost of 4.73% through the January 2030 maturity. In addition, we hold ample liquidity to pursue investment opportunities with $125 million of undrawn revolver capacity before giving effect to $250 million of accordion capacity as of quarter end.

Similarly, we extended the maturity dates of both our revolver and our $115 million term loan by approximately 3 years each, enhancing our financial flexibility. Shifting to acquisition funding, we utilized multiple sources of capital in the third quarter, including credit facility borrowing, equity raised via ATM and OP unit issuance totaling $26.7 million at an average gross price of $15.50 per share or unit. And lastly, approximately $3 million of retained AFFO after dividend payments for the quarter.

Retained AFFO has been a growing contributor to acquisition funding as AFFO has outpaced dividend growth since 2023. Recurring capital expenditure in the third quarter was $288,000, within our guidance range of $175,000 to $325,000. Looking forward to the fourth quarter, we anticipate the figure to be between $100,000 and $250,000.

We continue to expect total cash G&A expense to be between $10.5 million and $11.5 million for the full year 2025 as we prioritize platform efficiency and declining cash G&A as a percentage of revenue. Our Board of Directors has approved a quarterly dividend of $0.2425 per share, representing a 1% increase from the third quarter 2024 dividend.

Our dividend payout ratio for the third quarter is approximately 73%, and our dividend yield as of yesterday was in the 6.5% range.

I would now like to turn the call over to Jeremy.

Thank you, Steve. I'll provide an update on our leasing efforts, followed by more detail on our third quarter acquisition activity. Starting with leasing, rents for all leases set to expire in 2025 and 2026 have been agreed with the Postal Service, and we are continuing our discussions of the 2027 expirations, which will include 3% annual rent escalations and a mix of 10-year leases.

As of October 17, 53% of our portfolio rent was subject to annual rent escalations and 38% of our portfolio rent consisted of leases in place with 10-year term based on leases executed and agreed upon through 2026. As we shared on our second quarter earnings call, due to the execution of new leases during the third quarter, the company received a total lump sum catch-up payment of $329,000.

Looking forward to 2026, aside from prospective acquisitions that are acquired in holdover status, lump sum catch-up payments should continue to diminish in frequency and value as we sign leases ahead of their expiration dates. Shifting to acquisitions.

As Andrew mentioned, in the third quarter of 2025, we acquired 47 properties for approximately $42.3 million at a 7.7% weighted average cash cap rate, which added approximately 160,000 net leasable interior square feet to our portfolio, a 2.3% expansion of our physical footprint, inclusive of 41,000 square feet from 28 last mile post offices and 119,000 square feet from 19 flex properties.

Looking at our Q4 acquisition activity through October 17, we have acquired an additional 19 properties for approximately $7.2 million and placed another 9 properties totaling $5 million under definitive contracts. Postal Realty continues to strengthen its position as the market leader in the postal real estate space, executing its business plan of acquiring new assets and improving the cash flow.

This concludes our prepared remarks. Operator, we would like to open the call for questions.

[Operator Instructions] Our first question comes from Jon Petersen with Jefferies.

Congratulations on the good quarter. I was hoping to maybe get a little more details on the Newtonville, Massachusetts acquisition. It looks pretty interesting. I'm curious how often you see these type of infill post office opportunities come up. And then on something like that with just the volume of it, do you end up bidding against more institutional type investors rather than just the typical cast of buyers of USPS properties?

Thanks, Jon. I appreciate the question. So the Newtonville transaction was unique. It's a unique property that is very well utilized by the Postal Service, very needed for them to serve that area. As some of you may know, it's really an infill location, as you recognize, but it's also a very affluent area right outside of Boston. We see these often. We don't actively and aggressively go after bidding on them or trying to acquire them because typically, they're not accretive out of the gate.

And this was a unique opportunity that was off market that we were able to acquire that was accretive out of the gate given our cost of capital at the time that we thought was something that really was a good asset to add to our portfolio.

Okay. All right. That's helpful. And then I was just curious if in your conversations with potential sellers, how often OP units are part of the conversations these days?

So the operating partnership unit currency has been valuable in general. There are sellers that are interested in them. Sometimes we just use them to start the conversation because on smaller deals or deals that have multiple partners that are not on the larger side, they tend to be a little more complicated for some sellers. But in general, it is a currency that is interesting to postal owners in general.

Our next question comes from Nahom Tesfazghi with JPMorgan.

I guess sticking with acquisitions, if we look at the $106 million you guys have completed inclusive of what's under contract to date, guidance implies that there's only about $4 million left to go, which seems low for the rest of the year. Maybe could you guys talk about what you're expecting for the remainder of the year? Maybe what's driving that slowdown and what you guys see in the pipeline?

Thanks. I appreciate the question. So acquisitions in general are all about timing. So our third quarter was heavier than as usual. Some deals we were able to close quicker like the Newtonville transaction. We closed approximately $94 million in the first 3 quarters of the year. We closed $7 million early on in Q4 and have another $5 million in definitive.

So the $110 million is really just guidance. It's meet or exceed that number. I don't view it as a slowdown. I really view this as an annual story, not a quarterly story. So things just end up leveling out at some point.

Got it. Okay. That makes sense. And the second one for me, it seems like seemingly you guys are able to hit the trifecta on these new leases with the post office getting a mark-to-market annual escalator and then extending the duration of the lease terms as well. But is there any way you guys could quantify or give some guidepost or bounds as to where those marks have been? Maybe if you can't say where they've been currently, you speak to where they've been in the past.

As you know, and we've shared on prior calls with a single tenant, we've steered away from sharing mark-to-markets. We have started providing same-store numbers quarterly. And that's the metric that we've been sharing in order to give you a better understanding on how leases are trending and rolls are trending.

And I want to just to add to that, if you look at our same-store NOI the last 3 years on average, including 2025, we're at 6%. Now it fluctuated around that mean depending on the timing of expenses and expense margins, but I think that should give you some indicator to Jeremy's point of the internal growth potential of the business.

Our next question comes from Eric Borden with BMO Capital Markets.

I was just hoping to get your updated views on the trajectory of cap rates as we look to 2026. There's been some downward trend in the 10-year. I was just curious if you had any indication of if cap rates would trend downward in lockstep with the 10-year or if you still expect to have cap rates trend in the [ 77, 78 ] range.

Thanks, Eric. I appreciate the question. It's a difficult one to answer. It doesn't really trade in lockstep with the 10-year. We're typically lagging to it. Sellers have an expectation of where they want to be with the move in interest rates that we've seen over the past couple of years, the problem is that sellers haven't fully adjusted their expectations with that move.

I think they're probably happy that it's come down and think that their pricing should come down as well. So I don't know what this year is going to bring us. I'm still, from my perspective, looking to do 7.5% or better. But as the year progresses, we may -- we hopefully will be able to adjust that guidance, but that's still where I'm seeing things today.

And Eric, this is Steve. Just to point out, our business, unlike many of our net lease peers is not dependent on external acquisitions to grow. Given the lease expiration schedule that we have over the next few years, 34% of our leases expiring, we have significant growth we can drive as we unlock value there.

And then just on the lease terms, you've extended the WALT to 10 years, up from your previous 4 to 5 years. Is that the goal going forward is to have 10-year leases with rent escalators? Or will you continue to have a mix of 5-year WALT with escalators as well?

So I think we'll continue to see a mix. The 10-year term, once we -- we're in agreement with the Postal Service with the annual escalators, the 10-year term just seemed like the natural next step. It gives investors a security in terms of our lease renewal and our WALT, but there will continue to be a mix of 5- and 10-year leases.

Our next question comes from Steve Dumanski with Janney Montgomery Scott.

Just one real quick one from me. Do you see, I guess, in terms of the space, any of your competitors potentially moving in or I guess, more acquiring properties leased to the USPS. Just wanted to see what the landscape looks out there.

I appreciate the question, Steve. Yes. So there's always been competitors in the space of different sizes and shapes. It really depends on the type of assets that are trading. We are, by far and away, the largest owner in the space. Currently, I think we own about 8% of the market. And yes.

As there are no further questions, I would now like to hand the conference over to Andrew Spodek for closing comments.

In closing, I'd just like to state that we remain confident in the value of our properties to the Postal Services mission, the security and visibility of our cash flows and our ability to generate strong internal growth while continuing to consolidate this highly fragmented industry. On behalf of the entire team, thank you for your interest in Postal Realty Trust.

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