Postal Realty Trust's Q3 2025: Contradictions Emerge on Same-Store NOI Guidance, Cap Rate Targets, Acquisition Strategy, Lease Terms, and Postal Service Infrastructure

Business Commentary:

• AFFO Growth and Leasing Strategy:
• Postal Realty Trust reported AFFO of $0.33 per share in Q3, representing 10% growth year-on-year.

• The growth was driven by the success of the company's 3-pillar strategy, including programmatic leasing with the Postal Service, accretive acquisitions, and deepening access to capital.

• Acquisition Activity and Capital Allocation:

• The company completed $42.3 million in acquisitions in Q3, with a weighted average cash cap rate of 7.7%, bringing the year-to-date total to over $100 million.

• Acquisitions were funded by a mix of debt and equity capital, aligning with the company's capital allocation strategy for accretive growth.

  

• Same-Store Cash NOI and Operational Efficiency:

• Postal Realty updated its 2025 same-store cash NOI guidance to a range of 8.5% to 9.5%, reflecting operational efficiencies and lease renewal strategies.

• The updated guidance reflects the company's ability to drive long-term revenue growth with the efficient programmatic leasing approach.

• Capital Markets and Financial Flexibility:

• Through a recast, Postal Realty increased credit facility commitments by $40 million to $440 million.

• The company extended the maturity dates of its revolver and term loan, enhancing financial flexibility and demonstrating a strong balance sheet.

• Leadership and Strategic Vision:

• Steve Bakke joined the team as Chief Financial Officer, bringing deep perspective in capital markets, corporate finance, and strategy.
• His appointment emphasizes the company's commitment to the research community and investors in understanding its growth potential.

Contradiction Point 1

Same-Store NOI Guidance and Sources of Growth

It involves changes in financial forecasts and expectations for same-store NOI growth, which is a critical performance metric for the company and investors.

Can you quantify or provide guidance on the profit margins in the new leases with the Postal Service, specifically mark-to-market adjustments, annual escalators, and lease term extensions? - Nahom Tesfazghi(JPMorgan Chase & Co)

2025Q3: Same-store NOI growth has been 6% over the past three years, indicating internal growth potential. - Andrew Spodek(CEO), Steve Bakke(CFO)

Can you explain the increase in same-store NOI guidance and how it's progressing compared to previous expectations? - Kyle Bonci(Truist Securities)

2025Q2: Same-store NOI is influenced by both revenue (re-leasing success) and expenses. Lower-than-anticipated expenses and favorable revenue performance led to the increase in same-store NOI guidance. - Unidentified Company Representative

Contradiction Point 2

Purpose and Strategy Behind Cap Rate Targets

It involves the company's strategy regarding cap rate targets, which directly impacts acquisition and investment decisions and financial performance.

What are your updated views on cap rate trends through 2026? Will they follow the 10-year yield decline or remain in the 7.5%-7.8% range? - Eric Borden(BMO Capital Markets)

2025Q3: Cap rates do not trade in lockstep with the 10-year and are typically lagging. Sellers have expectations based on interest rate movements but haven't adjusted pricing fully. The current target remains 7.5% or better, but adjustments may be made as the year progresses. - Andrew Spodek(CEO)

Can you discuss the efficiencies in these properties and where stable yields are located? - Nahom Tesfazghi(JPMorgan Chase & Co)

2025Q2: The company acquires properties at or above a 7.5% cap rate, which are accretive from inception. - Andrew Spodek(CEO)

Contradiction Point 3

Acquisition Strategy and Market Conditions

It involves the company's acquisition strategy and market conditions, which are crucial for understanding the company's growth prospects and financial health.

What are the expectations for acquisitions in the remainder of the year and the reasons for the perceived slowdown? What does the acquisition pipeline look like? - Nahom Tesfazghi (JPMorgan Chase & Co, Research Division)

2025Q3: Q3 volume has surprised on the upside, and we had 5 acquisitions close in August. One of these was the Newtonville transaction...We feel a little bit better about the year due to the strength of the Q3 acquisitions. - Andrew Spodek(CEO)

What are the cash leasing spreads for 2025 renewals? Additionally, with the press release mentioning 2026 rents, what are the expected leasing spreads for next year? - Jon Petersen (Jefferies)

2025Q1: As we look through the current year, we continue to expect strong acquisition volume. As we've said before, we expect to complete between $110 million and $125 million in acquisitions - Andrew Spodek(CEO)

Contradiction Point 4

Lease Terms and Escalators

It involves the company's lease terms and escalators, which are critical for understanding the company's financial stability and growth potential.

What is the targeted percentage for annual rent increases across the overall portfolio by year end? - Unidentified Analyst (Janney Montgomery Scott)

2025Q3: We have now 56% of the portfolio, when all 2025 and 2022s are executed, will contain rent escalations. The 32% number is the percentage of leases that are 10 year and term. - Andrew Spodek(CEO)

What are the current cap rates in the market? Have they changed significantly, or have they remained stable compared to the beginning of the year? - Barry Oxford (Colliers)

2025Q1: 56% of our portfolio now has escalators, and we expect to get there by year-end when all the '25 and '22 deals are closed. - Andrew Spodek(CEO)

Contradiction Point 5

Postal Service Infrastructure and Asset Strategy

It involves the company's understanding and strategy regarding changes in Postal Service infrastructure, which directly impacts the company's acquisition and asset management strategy.

How has the Regional Transportation Optimization Initiative impacted your acquisition or asset management strategy? - Nahom Tesfazghi(JPMorgan Chase & Co, Research Division)

2025Q3: Our acquisition strategy considers shifts in Postal Service operations. We focus on properties critical to their delivery network. Regional and local center shifts are included in our underwriting process. - Andrew Spodek(CEO)

How has the Regional Transportation Optimization Initiative impacted your acquisition or asset management strategy? - Steven Dumanski(Janney)

2024Q4: We do not believe there are any changes to the infrastructure related to postal facilities, as the Postal Service has consistently stated they won't disrupt their retail network. - Andrew Spodek(CEO)