Postal Realty Trust, Inc 17th Annual Midwest IDEAS Conference

Afternoon, everyone. Thank you for joining us. I'm Jeff Elliott with Three Part Advisors. Next presenting company today is Postal Realty, PSTL. With us today here from the company, we have Jeremy Gar- Garber.

I was about to say Gerber. Jeremy Garber, he's President. Steve Bakke, CFO, and Jordan Cooperstein, VP of Finance and Capital Markets. Postal is a Three Part Advisors client, and if anyone would like a follow-up meeting or a call with them, please reach out to me directly. I'm happy to set that up. With that, I'll just turn it over to Jeremy.

Thank you, Jeff. We've been coming to these conferences the past few years. We think that Three Part does really an amazing job bringing interesting and unique companies together. We think we really fit that bill. I see some familiar faces in the audience, some people who it looks like we haven't met before. I would ask for your indulgence, those of you who know the history and know the story, and let me spend a few minutes talking about who we are, why we're here. Like many of you, about 10 years ago, I learned that the Postal Service does not own their facilities. Our CEO and his dad, his dad actually started or uncovered these assets in the 1980s and started acquiring assets leased to the Postal Service.

Our CEO took over continuing that strategy in the 2000s, and we joined them as a private company about 10 years ago, helping them institutionalize the business. The Postal Service is a 250-year-old United States. Somewhere in the Constitution, they decided that every American had the right to receive mail, and that's been the driving force behind the Postal Service's mission for 250 years. When you think about the Postal Service, what you're probably thinking about is your local post office, typically located on Main and Main or off Main and Main. The question is, how did all these facilities appear, and why do individuals own them?

Well, in the 1940s, the '50s, '60s, when they started building out this portfolio of buildings, the Postal Service, for some reason, decided instead of hiring a master contractor to build facilities all over the country, they were going to every community with an RFP, and anyone could have answered the RFP to build a facility for the Postal Service on a site that they pre-selected in that community, according to specs that they gave the individual who won the RFP. That individual could have been a plumber, could have owned the hardware store, could have known nothing about real estate. They won the bid, and that person built that facility in that community. So you fast-forward today, there are 17,000 owners of approximately 23,000 leased facilities across the country, and it's because of how the Postal Service decided to roll out this network of buildings.

Now, the Postal Service owns 8,500 assets as well. Those are separate from the leased portfolio. And what we saw is that as they were building assets, they started on the East Coast, moving to the West Coast. As they crossed the Mississippi, they started building buildings and owning them as opposed to having local people build these assets for them and lease them back. So again, our strategy as a public company is acquiring these leased assets from this fragmented ownership. And when Andrew and I came to the public markets about seven years ago, it was really about a roll-up strategy, right? We looked at it and we said, "Wow, look at this completely fragmented market. There's no institutional player here.

As a private company, we're the biggest player in a space that nobody's familiar with, and we think there's a tremendous opportunity." So we pitched that to Wall Street, and a few banks agreed to take us public. And again, it was all about aggregating leases and aggregating buildings, and all the growth was going to be externally driven. A few years into that strategy, what had happened is we hit this sort of inflationary environment where rates went against everybody and your cost of capital really was impacted. So we sat in front of the Postal Service and said, "We need lease renewals that have some type of adjustment, inflationary adjustment, some type of escalator, to allow us to continue to support and maintain these buildings the way that you need them supported." And their response was a government response. "No.

This is how things are done here." It took a few rounds of negotiation, and starting in 2022, they agreed to giving us annual escalators in our leases. And once we got that in 2022, we came back in 2023 and said, "We'd like an annual escalator." From that point on, through 2024, 2025, 2026, and now through 2027, all of our leases that we renew have a 3% escalator. And we've also been able to move from five-year flat leases, which is what most postal landlords have with the Postal Service, we now have 10-year term. So we've completely changed the dynamic of leasing, and what that started to create was this whole internal earnings momentum. And we were surprised that investors and research analysts didn't pick up on it, didn't recognize it. It wasn't reflected on our stock price for years.

About a year ago, which is around the same time that Steve, who I will introduce in a second, joined us, we decided that we really needed to come up with a different way to tell the story to the street so that they could understand that the earnings power and the earnings momentum that we had created was real and sustainable. You can predict it into the future based on all the new lease structures that we put in place. I think when research analysts finally understood what was going on here, it started to resonate with the investor community, and that is why you have seen our stock perform really well over the past year.

I am going to let Steve talk a little bit about his transition to the company, what he saw, what his drivers were, and what he has been able to accomplish over the past year in terms of helping us improve our balance sheet and our positioning in the market. Then, we can go into some Q&A.

Thank you, Jeremy. It is actually a great transition, talking about the improvements made in the business over the last five years. I got the call about this opportunity a year ago. I remember pulling open the supplemental and looking at it with my REIT-focused vision. I have been in REITs my entire career, first as a research analyst, then as an investor at a hedge fund and a mutual fund, and then more recently at a corporate. I said, "Well, there is one tenant. It is a strong tenant, U.S. Postal Service, but still, it is one tenant." Additionally, I noticed around 30% of the lease revenue was expiring in the next few years. I said, "Ooh, that is kind of risky.

You have one tenant, and you have a lot of the leases expiring soon." I had a view of skepticism, but as I peeled back the onion, it kind of reminds me of what Charlie Munger says about inverting everything. I realized as I talked with Andrew and Jeremy that much of the power of this business model is the opportunity presented by that 30% of leases that expire in the next few years. We have a very unique approach to negotiating those rents with the U.S. Postal Service, and we have something that no other landlord in the Postal Service space has, which is 10-year leases with 3% annual escalators. As we mark these leases to market, we are creating a substantial amount of value for our shareholders by doing that. The approach we are taking with U.S. Postal is offering a substantial amount of value for them.

It is a very unique win-win situation for us, for our landlords, and for our shareholders. As I learned more about the opportunity, I got excited because I said, "This is a really powerful, differentiated business model within real estate." We can provide outsized returns with less risk than many other real estate platforms offer. I thought there was a massive opportunity to help Jeremy and Andrew spread the word and tell investors who, especially on the REIT side, may have forgotten about the Postal Realty platform, that IPO'd as a very small company, and had grown substantially since IPO. I got here, and we have really made it a focus to meet with existing and new investors. I think it is reflected in the performance of the stock over the last year, that more and more investors are appreciating the power of this platform.

We are in a place today where we have, for the first time in a few years, I think since we emerged from COVID and rates rose, we are in a position where we have a multi-pronged growth strategy. We not only have the mark-to-markets of leases that we have been effectuating for a number of years, we have a growing presence of these 3% annual escalators. In 2022, we had no annual escalators. As we move to 2026, 45% of our portfolio today has that annual growth, which is a great base to start from. When we IPO'd, we were paying out 100% of our cash flow in dividends. Today, that is around 70%. That excess cash we can deploy adds about 2% per year to our annual growth. It builds on that base of the annual escalators.