POSTAL REALTY TRUST, INC. The following discussion and analysis is based on, and should be read in conjunction with, the Consolidated Financial Statements and the related notes thereto of the Company as of and for the years endedDecember 31, 2022 andDecember 31, 2021 . This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. See "Cautionary Statement Regarding Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions associated with those statements. Our actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including, but not limited to, those in Item 1A. "Risk Factors" and included in other portions of this report. Overview Company We were formed as aMaryland corporation onNovember 19, 2018 and commenced operations upon completion of our IPO and the related formation transactions. We conduct our business through a traditional UPREIT structure in which our properties are owned by ourOperating Partnership directly or through limited partnerships, limited liability companies or other subsidiaries. For the year endedDecember 31, 2022 , we acquired 320 properties leased primarily to theUSPS for approximately$123 million , excluding closing costs. As ofDecember 31, 2022 , our portfolio consists of 1,286 owned properties, located in 49 states and one territory and comprising approximately 5.3 million net leasable interior square feet. We are the sole general partner of ourOperating Partnership through which our properties are directly or indirectly owned. As ofMarch 7, 2023 , we owned approximately 80.0% of our outstanding OP Units, including LTIP Units. Our Board of Directors oversees our business and affairs. 32
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ATM Programs
OnDecember 14, 2020 , we entered into separate open market sale agreements for our at-the-market offering program (the "2020 ATM Program"), pursuant to which we may offer and sell, from time to time, shares of our Class A common stock having an aggregate sales price of up to$50.0 million . OnNovember 4, 2022 , we terminated the 2020 ATM Program and entered into separate open market sale agreements with each ofJefferies LLC ,BMO Capital Markets Corp. ,Janney Montgomery Scott LLC, Stifel, Nicolaus & Company, Incorporated andTruist Securities, Inc. as agents (the "2022 ATM Program"), pursuant to which we may offer and sell, from time to time, shares of our Class A common stock having an aggregate sales price of up to$50.0 million . The agreements also provide that we may enter into one or more forward sale agreements under separate master forward confirmations and related supplemental confirmations with affiliates of certain agents. During the year endedDecember 31, 2022 , 751,382 shares were issued under the 2020 ATM Program and the 2022 ATM Program, raising approximately$11.9 million in gross proceeds. As ofDecember 31, 2022 , we had approximately$41.9 million of availability remaining under the 2022 ATM Program.
Executive Overview
We are an internally managed REIT with a focus on acquiring and managing
properties leased primarily to the
Geographic Concentration
As ofDecember 31, 2022 , we owned a portfolio of 1,286 properties located in 49 states and one territory and leased primarily to theUSPS . For the year endedDecember 31, 2022 , approximately 15.1% of our total rental income was concentrated inPennsylvania .
Emerging Growth Company
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in the Securities Act of 1933, as amended (the "Securities Act"), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have availed ourselves of these exemptions; although, subject to certain restrictions, we may elect to stop availing ourselves of these exemptions in the future even while we remain an "emerging growth company." We will remain an "emerging growth company" until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds$1.235 billion (subject to periodic adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our IPO, (iii) the date on which we have, during the previous three-year period, issued more than$1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a "large accelerated filer" under the Exchange Act. We are also a "smaller reporting company" as defined in Regulation S-K under the Securities Act and have elected to take advantage of certain scaled disclosures available to smaller reporting companies. We may continue to be a smaller reporting company even after we are no longer an "emerging growth company."
We elected to be treated as a REIT under the Code beginning with our short
taxable year ended
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Factors That May Influence Future Results of Operations
The
We are dependent on theUSPS' financial and operational stability. TheUSPS is currently facing a variety of circumstances that are threatening its ability to fund its operations and other obligations as currently conducted without intervention by the federal government. TheUSPS is constrained by laws and regulations that restrict revenue sources and pricing, mandate certain expenses and cap its borrowing capacity. As a result, among other consequences, theUSPS is unable to fund its mandated expenses and continues to be subject to mandated payments to its retirement system and benefits. While theUSPS has recently undertaken, and proposes to undertake, a number of operational reforms and cost reduction measures, such as higher rates and slower deliveries for certain services and potential closure, relocation or consolidation of certain facilities and delivery units, theUSPS has taken the position such measures alone will not be sufficient to maintain its ability to meet all of its existing obligations when due or allow it to make the critical infrastructure investments that have been deferred in recent years. These measures have also led to significant criticism and litigation, which may result in reputational or financial harm or increased regulatory scrutiny of theUSPS or reduced demand for its services. The ongoing COVID-19 pandemic (including new or mutated variants of COVID-19) and measures taken to prevent its spread also continue to have a material and unpredictable effect on theUSPS' operations and liquidity, including significant additional operating expenses caused by pandemic-related disruptions. The COVID-19 pandemic and other geopolitical and economic factors have also created significant inflationary pressures resulting in higher compensation, benefits, transportation and fuel costs for theUSPS . If theUSPS becomes unable to meet its financial obligations or its revenue declines due to reduced demand for its services, theUSPS may reduce its demand for leasing postal properties, which would have a material adverse effect on our business and operations. For additional information regarding the risks associated with theUSPS , see Item 1A. "Risk Factors-Risks Related to theUSPS ".
Revenues
We derive revenues primarily from rent and tenant reimbursements under leases with theUSPS for our properties and fee and other from the management of postal properties owned byMr. Spodek and his affiliates, income recognized from properties accounted for as financing leases and revenue from providing certain advisory services. Rental income represents the lease revenue recognized under leases primarily with theUSPS which includes the impact of above and below market lease intangibles as well as tenant reimbursements for payments made by our tenants under the leases to reimburse us for the majority of real estate taxes paid at each property. Fee and other principally represent (i) revenue our TRS received from postal properties owned byMr. Spodek and his affiliates pursuant to the management agreements and is a percentage of the lease revenue for the managed properties, (ii) revenue our TRS received from providing advisory services to third-party owners of postal properties and (iii) income recognized from properties accounted for as financing leases. As ofDecember 31, 2022 , properties leased to our tenants had an average remaining lease term of approximately three years. Factors that could affect our rental income and fee and other in the future include, but are not limited to: (i) our ability to renew or replace expiring leases and management agreements; (ii) local, regional or national economic conditions; (iii) an oversupply of, or a reduction in demand for, postal space; (iv) changes in market rental rates; (v) changes to theUSPS' current property leasing program or form of lease; and (vi) our ability to provide adequate services and maintenance at our properties and managed properties.
Operating Expenses
We lease our properties primarily to theUSPS . The majority of our leases are modified double-net leases, whereby the tenant is responsible for utilities, routine maintenance and reimbursement of property taxes and the landlord is responsible for insurance, roof and structure. Thus, an increase in costs related to the landlord's responsibilities under these leases could negatively influence our operating results. Refer to "Lease Renewal" below for further discussion. Operating expenses generally consist of real estate taxes, property operating expenses, which consist of insurance, repairs and maintenance (other than those for which the tenant is responsible), property maintenance-related payroll and depreciation and amortization. Factors that may affect our ability to control these operating costs include but are not limited to: the cost of periodic repair, renovation costs, the cost of re-leasing space, inflation and the potential for liability under applicable laws. Recoveries from the tenant are recognized as revenue on an accrual basis over the periods in which the related expenditures are incurred. Tenant reimbursements and the related property operating expenses are recognized on a gross basis, because (i) generally, we are the primary obligor with respect to the real estate taxes and (ii) we bear the credit risk in the event the tenant does not reimburse the real estate taxes. 34
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The expenses of owning and operating a property are not necessarily reduced when circumstances, such as market factors and competition, cause a reduction in income from the property. If revenues drop, we may not be able to reduce our expenses accordingly. Costs associated with real estate investments generally will not be materially reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. As a result, if revenues decrease in the future, static operating costs may adversely affect our future cash flow and results of operations. General and Administrative General and administrative expense represents personnel costs, professional fees, legal fees, insurance, consulting fees, information technology costs and other expenses related to our day-to-day activities of being a public company. While we expect that our general and administrative expenses will continue to rise as our portfolio grows, we expect that such expenses as a percentage of our revenues will decrease over time due to efficiencies and economies of scale.
Equity-Based Compensation Expense
All equity-based compensation expense is recognized in our Consolidated Statements of Operations and Comprehensive Income as components of general and administrative expense and property operating expenses. We issue share-based awards to align our directors' and employees' interests with those of our investors.
Indebtedness and Interest Expense
OnAugust 9, 2021 , we entered into a$150.0 million senior unsecured revolving credit facility (the "2021 Revolving Credit Facility") and a$50.0 million senior unsecured term loan facility (the "2021 Term Loan"). OnMay 11, 2022 , we amended the Credit Facilities (the "First Amendment") to, among other things, add a new$75.0 million senior unsecured delayed draw term loan facility (the "2022 Term Loan" and, together with the 2021 Revolving Credit Facility and the 2021 Term Loan, the "Credit Facilities"), replace LIBOR with SOFR as the benchmark interest rate and allow for a decrease in the applicable margin by 0.02% if we achieve certain sustainability targets. We intend to use the Credit Facilities for working capital purposes, which may include repayment of mortgage indebtedness, property acquisitions and other general corporate purposes. We amortize on a non-cash basis the deferred financing costs associated with our debt to interest expense using the straight-line method, which approximates the effective interest rate method over the terms of the related loans. Any changes to the debt structure, including debt financing associated with property acquisitions, could materially influence the operating results depending on the terms of any such indebtedness.
Income Tax Benefit (Expense)
As a REIT, we generally will not be subject to federal income tax on our net taxable income that we distribute currently to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. Even though we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned by our existing TRS and any other TRS we form in the future will be subject to federal, state and local corporate income tax.
Lease Renewal
As ofMarch 7, 2023 , the leases at 100 of our properties, representing approximately 320,000 net leasable interior square feet and$4.0 million in annual contractual rental revenue, were expired and theUSPS was occupying such properties as a holdover tenant. See Item 2. "Properties-Lease Expiration Schedule". As of the date of this report, theUSPS had not vacated or notified us of its intention to vacate any of these properties. When a lease expires, theUSPS becomes a holdover tenant on a month-to-month basis typically paying the greater of estimated market rent or the rent amount under the expired lease. In 2022, in connection with our ongoing lease renewal negotiations with theUSPS , we filed claims with theUSPS regarding market rent and other amounts due under the expired leases during the holdover period. TheUSPS subsequently determined that market rent for the expired leases was generally greater than the rent amount under the expired leases and agreed to pay us (i) a lump sum catch-up payment for increased rents from the date of lease expiration and (ii) increased rents reflecting the market rent 35
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determined byUSPS going forward. However, becauseUSPS did not accept market rent based on our estimate and other amounts in our claims, we appealed such decisions before the Postal ServiceBoard of Contract Appeals ("PSBCA") within the period prescribed in the Contract Disputes Act of 1978. The PSBCA subsequently granted a joint request by theUSPS and us to stay the appeals to enable further negotiations between the parties regarding the renewal of the expired leases. While we currently anticipate that we will renew the leases that have expired or will expire, there can be no guarantee that we will be successful in renewing these leases, obtaining positive rent renewal spreads or renewing the leases on terms comparable to those of the expiring leases. Even if we are able to renew these expired leases, the lease terms may not be comparable to those of the previous leases. If we are not successful, we will likely experience reduced occupancy, rental income and net operating income, as well as diminished borrowing capacity under our Credit Facilities, which could have a material adverse effect on our financial condition, results of operations and ability to make distributions to stockholders. For additional information regarding the risks associated with theUSPS , see Item 1A. "Risk Factors-Risks Related to theUSPS ". Results of Operations
Comparison of the years ended
(Amounts in thousands) For the Year Ended December 31,
2022 2021 $ Change % Change
Revenues
Rental income $ 50,876 $ 38,276 $ 12,600 33 %
Fee and other 2,454 1,662 792 48 %
Total revenues 53,330 39,938 13,392 34 %
Operating expenses
Real estate taxes 7,168 5,399 1,769 33 %
Property operating expenses 5,625 3,987 1,638 41 %
General and administrative 13,110 10,643 2,467 23 %
Depreciation and amortization 17,727 13,990 3,737 27 %
Total operating expenses 43,630 34,019 9,611 28 %
Income from operations 9,700 5,919 3,781 64 %
Other income 1,029 401 628 157 %
Interest expense, net
Contractual interest expense (5,378) (2,739) (2,639) 96 %
Write-off and amortization of deferred
financing fees (596) (714) 118 (17) %
Loss on early extinguishment of debt - (202) 202 100 %
Interest income 1 2 (1) (50) %
Total interest expense, net (5,973) (3,653) (2,320) 64 %
Income before income tax expense 4,756 2,667 2,089 78 %
Income tax expense (12) (111) 99 (89) %
Net income $ 4,744 $ 2,556 $ 2,188 86 %
Revenues
Rental income - Rental income includes net rental income as well as the recovery
of certain operating costs and property taxes from tenants. Rental income
increased by $12.6 million to $50.9 million for the year ended December 31, 2022
from $38.3 million for the year ended December 31, 2021 , primarily due to the
volume of our acquisitions.
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Fee and other - Fee and other revenue increased by
Operating Expenses
Real estate taxes - Real estate taxes increased by
Property operating expenses - Property operating expenses increased by$1.6 million to$5.6 million for the year endedDecember 31, 2022 from$4.0 million for the year endedDecember 31, 2021 . Property management expenses are included within property operating expenses and increased by$0.6 million to$2.1 million for the year endedDecember 31, 2022 from$1.5 million for the year endedDecember 31, 2021 , due to expanding our property management staff as a result of our continued growth as well as an increase in equity-based compensation expense related to awards that have been granted to our property management employees throughout 2021 and 2022. The remainder of the increase of$1.0 million is for expenses related to repairs and maintenance and insurance, which increase is primarily due to the volume of our acquisitions. General and administrative - General and administrative expenses increased by$2.5 million to$13.1 million for the year endedDecember 31, 2022 from$10.6 million for the year endedDecember 31, 2021 , primarily due to expanding our staff and increase in information technology costs as a result of our continued growth as well as an increase in equity-based compensation expense related to awards that have been granted to our employees throughout 2021 and 2022. Depreciation and amortization - Depreciation and amortization expense increased by$3.7 million to$17.7 million for the year endedDecember 31, 2022 from$14.0 million for the year endedDecember 31, 2021 , primarily due to the volume of our acquisitions. Other Income Other income primarily includes insurance recoveries related to property damage claims. Other income increased by$0.6 million to$1.0 million for the year endedDecember 31, 2022 from$0.4 million for the year endedDecember 31, 2021 , primarily due to higher insurance recoveries.
Total Interest Expense, Net
During the year endedDecember 31, 2022 , we incurred total interest expense, net of$6.0 million compared to$3.7 million for the year endedDecember 31, 2021 . The increase in interest expense of$2.3 million was primarily related to higher amount of borrowings under our Credit Facilities to finance our acquisitions and increased interest rates.
Cash Flows
Comparison of the year ended
We had
Cash flow from operating activities - Net cash provided by operating activities increased by$7.5 million to$24.6 million for the year endedDecember 31, 2022 compared to$17.1 million for the year endedDecember 31, 2021 . The increase is primarily due to the volume of our acquisitions, all of which have generated additional rental income and related changes in working capital. Cash flow from investing activities - Net cash used in investing activities of$120.1 million for the year endedDecember 31, 2022 primarily consisted of$119.9 million of acquisitions and capital improvements offset by$0.8 million of insurance proceeds that were received. Net cash used in investing activities for the year endedDecember 31, 2021 primarily consisted of$91.4 million of acquisitions and capital improvements and$15.7 million of investment in a financing lease offset by$1.2 million of insurance proceeds that were received. Cash flow from financing activities - Net cash provided by financing activities decreased by$2.8 million to$90.6 million for the year endedDecember 31, 2022 compared to$93.4 million for the year endedDecember 31, 2021 . The decrease was primarily related to a reduction in net proceeds from issuance of shares, increased payments of dividends and 37
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distributions and a decrease in net proceeds received from the 2021 Revolving Credit Facility during the year endedDecember 31, 2022 , partially offset by an increase in net proceeds received from the 2022 Term Loan and lower amount of repayments under the 2021 Revolving Credit Facility during the year endedDecember 31, 2022 .
Liquidity and Capital Resources
We had approximately
Revolving Credit Facility and Term loans
OnAugust 9, 2021 , we entered into the Credit Facilities, which include the$150.0 million 2021 Revolving Credit Facility and the$50.0 million 2021 Term Loan, with Bank of Montreal, as administrative agent, andBMO Capital Markets Corp. , M&T Bank,JPMorgan Chase Bank, N.A . andTruist Securities, Inc. as joint lead arrangers and joint book runners. Additional participants in the Credit Facilities includeStifel Bank & Trust andTriState Capital Bank . OnMay 11, 2022 , we entered into the First Amendment to, among other things, add the 2022 Term Loan (and, together with the 2021 Term Loan, the "Term Loans"). OnDecember 6, 2022 , we further exercised$40.0 million of accordion feature under the 2022 Term Loan. As ofDecember 31, 2022 , we had$165.0 million of aggregate principal amount outstanding under our Credit Facilities, with$50.0 million drawn on the 2021 Term Loan and$115.0 million drawn on the 2022 Term Loan and$150.0 million of borrowing capacity remaining under the 2021 Revolving Credit Facility. The Credit Facilities include an accordion feature which permit us to borrow up to an additional$150.0 million under the 2021 Revolving Credit Facility and up to an additional$35.0 million under the Term Loans (after our exercise of the$40.0 million term loan accordion inDecember 2022 ), in each case subject to customary terms and conditions. The 2021 Revolving Credit Facility matures inJanuary 2026 , which may be extended for two six-month periods subject to customary conditions, the 2021 Term Loan matures inJanuary 2027 and the 2022 Term Loan matures inFebruary 2028 . Borrowings under the Credit Facilities carry an interest rate of, (i) in the case of the 2021 Revolving Credit Facility, either a base rate plus a margin ranging from 0.5% to 1.0% per annum or Adjusted Term SOFR (as defined below) plus a margin ranging from 1.5% to 2.0% per annum, or (ii) in the case of the Term Loans, either a base rate plus a margin ranging from 0.45% to 0.95% per annum or Adjusted Term SOFR plus a margin ranging from 1.45% to 1.95% per annum, in each case depending on a consolidated leverage ratio. With respect to the 2021 Revolving Credit Facility, we will pay, if the usage is equal to or less than 50%, an unused facility fee of 0.20% per annum, or if the usage is greater than 50%, an unused facility fee of 0.15% per annum, in each case on the average daily unused commitments under the 2021 Revolving Credit Facility. The Credit Facilities are guaranteed, jointly and severally, by us and certain of our indirect subsidiaries and contain customary covenants that, among other things, restrict, subject to certain exceptions, our ability to incur indebtedness, grant liens on assets, make certain types of investments, engage in acquisitions, mergers or consolidations, sell assets, enter into certain transactions with affiliates and pay dividends or make distributions. The Credit Facilities require compliance with consolidated financial maintenance covenants to be tested quarterly, including a minimum fixed charge coverage ratio, maximum total leverage ratio, minimum tangible net worth, maximum secured leverage ratio, maximum unsecured leverage ratio, minimum unsecured debt service coverage ratio and maximum secured recourse leverage ratio. The Credit Facilities also contain certain customary events of default, including the failure to make timely payments under the Credit Facilities, any event or condition that makes other material indebtedness due prior to its scheduled maturity, the failure to satisfy certain covenants and specified events of bankruptcy and insolvency. As ofDecember 31, 2022 , we were in compliance with all of the Credit Facilities' debt covenants. We have five interest rate swaps with a total notional amount of$165.0 million that are used to manage our interest rate risk and fix the SOFR component on the Credit Facilities (together, the "Interest Rate Swaps"). Within the$165.0 million ,$50.0 million of the swaps mature inJanuary 2027 and fix the interest rate of the 2021 Term Loan at 2.291% as ofDecember 31, 2022 . An additional$50.0 million of the swaps mature inFebruary 2028 and fix the first$50.0 million amount outstanding under the 2022 Term Loan at 4.237% as ofDecember 31, 2022 . An additional$25.0 million of the swaps mature inFebruary 2028 and fix the additional$25.0 million amount outstanding under the 2022 Term Loan at 4.81% as ofDecember 31, 2022 . The remaining$40.0 million of the swaps mature inFebruary 2028 and fix the remaining$40.0 million amount outstanding under the 2022 Term Loan at 4.952% as ofDecember 31, 2022 .
Capital Resources and Financing Strategy
Our short-term liquidity requirements primarily consist of operating expenses
and other expenditures associated with our properties, distributions to our
limited partners and distributions to our stockholders required to qualify for
REIT status,
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capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, cash, borrowings under our Credit Facilities and the potential issuance of securities. We have an effective shelf registration statement on file with theSEC under which we may issue equity financing through the instruments and on the terms most attractive to us at such time, including through our$50.0 million 2022 ATM Program. Our long-term liquidity requirements primarily consist of funds necessary for the repayment of debt at maturity, distributions to our limited partners and distributions to our stockholders required to qualify for REIT status, property acquisitions and non-recurring capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term indebtedness including our Credit Facilities and mortgage financing, the issuance of equity and debt securities and proceeds from select sales of our properties. We also may fund property acquisitions and non-recurring capital improvements using our Credit Facilities pending permanent property-level financing. We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, in the future, there may be a number of factors that could have a material and adverse effect on our ability to access these capital sources, including unfavorable conditions in the overall equity and credit markets, our degree of leverage, our unencumbered asset base, borrowing restrictions imposed by our lenders, general market conditions for REITs, our operating performance, liquidity and market perceptions about us. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital sources. In addition, we continuously evaluate possible acquisitions of postal properties, which largely depend on, among other things, the market for owning and leasing postal properties and the terms on which theUSPS will enter into new or renewed leases. To maintain our qualification as a REIT, we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income determined without regard to the deduction for dividends paid and excluding capital gains. As a result of this requirement, we cannot rely on retained earnings to fund our business needs to the same extent as other entities that are not REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways to fund those needs. Such alternatives may include, among other things, divesting ourselves of properties (whether or not the sales price is optimal or otherwise meets our strategic long-term objectives), incurring indebtedness or issuing equity securities in public or private transactions, the availability and attractiveness of the terms of which cannot be assured.
Consolidated Indebtedness
As ofDecember 31, 2022 , we had approximately$198.1 million of outstanding consolidated principal indebtedness. The following table sets forth information as ofDecember 31, 2022 and 2021 with respect to our outstanding indebtedness (in thousands): Interest Amount Outstanding Amount Outstanding Rate as of December 31, as of December 31, as of 2022 2021 December 31, 2022 Maturity Date
Revolving Credit Facility(1):
2021 Revolving Credit Facility $ -$ 13,000 SOFR+150 bps(2) January 2026 2021 Term Loan 50,000 50,000 SOFR+145 bps(2) January 2027 2022 Term Loan 115,000 - SOFR+145 bps(2) February 2028
Secured Borrowings: Vision Bank(3) 1,409 1,409 3.69 % September 2041 First Oklahoma Bank(4) 333 349 3.63 % December 2037 Vision Bank - 2018(5) 844 844 3.69 % September 2041 Seller Financing(6) 282 366 6.00 % January 2025 AIG - December 2020(7) 30,225 30,225 2.80 % January 2031 Total Principal$ 198,093 $ 96,193 39
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Explanatory Notes:
(1)See above under "-Revolving Credit Facility and Term loans" for details regarding the Credit Facilities. During the years endedDecember 31, 2022 and 2021, we incurred$0.3 million and$0.1 million , respectively, of unused facility fees related to our previous credit facility and the 2021 Revolving Credit Facility.
(2)Based upon the one-month Adjusted Term SOFR, which is SOFR plus a term SOFR adjustment of 0.10%, subject to a 0% floor (the "Adjusted Term SOFR").
(3)Five properties are collateralized under this loan andMr. Spodek also provided a personal guarantee of payment for 50% of the outstanding amount thereunder. The loan has a fixed interest rate of 3.69% for the first five years with interest payments only (ending inOctober 2026 ), then adjusting every subsequent five year period thereafter with principal and interest payments to the rate based on the five-year weekly average yield on United States Treasury securities adjusted to a constant maturity of five years, as made available to theBoard of Governors of theFederal Reserve System (the "Five-Year Treasury Rate"), plus a margin of 2.75%, with a minimum annual rate of 2.75%. (4)The loan is collateralized by first mortgage liens on four properties and a personal guarantee of payment byMr. Spodek . The loan has a fixed interest rate of 3.625% for the first five years (ending inAugust 2026 ), then adjusting annually thereafter to a variable annual rate of Wall Street Journal Prime Rate with a minimum annual rate of 3.625%. (5)The loan is collateralized by first mortgage liens on one property and a personal guarantee of payment byMr. Spodek . The loan has a fixed interest rate of 3.69% for the first five years with interest payments only (ending inOctober 2026 ), then adjusting every subsequent five year period thereafter with principal and interest payments to the rate based on the Five-Year Treasury Rate, plus a margin of 2.75%, with a minimum annual rate of 2.75%.
(6)In connection with the acquisition of a property, we obtained seller
financing secured by the property in the amount of
(7)The loan is secured by a first mortgage lien on an industrial property
located in
Secured Borrowings as of
As of
Contractual Obligations and Other Long-Term Liabilities
The following table provides information with respect to our commitments as ofDecember 31, 2022 , including any guaranteed or minimum commitments under contractual obligations. Payments Due by Period More than Contractual Obligations Total 2023 2024 to 2025 2026 to 2027 five years Credit Facilities$ 165,000 $ - $ -$ 50,000 $ 115,000 Principal payments on mortgage loans 33,093 106 229 1,412 31,346 Interest payments(1) 41,543 7,800 15,583 13,858 4,302 Operating lease obligations(2) 1,885 245 167 86 1,387 Total$ 241,521 $ 8,151 $ 15,979 $ 65,356 $ 152,035 Explanatory Notes: (1)The amounts shown relate to (i) the 2021 Revolving Credit Facility based on the outstanding balance and interest rate in effect as ofDecember 31, 2022 and assuming an unused facility fee under the 2021 Revolving Credit Facility through the remainder of the term based on such outstanding balance, (ii) the Term Loans based on the interest rate fixed through the 40
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Interest Rate Swaps and outstanding balance as ofDecember 31, 2022 and (iii) the mortgage loans based on the outstanding balance and interest rate in effect as ofDecember 31, 2022 .
(2)Operating lease obligations relate to two leases for our corporate headquarters and seven ground leases at certain of our properties.
Dividends
To maintain our qualification as a REIT, we are required to pay dividends to stockholders at least equal to 90% of our REIT taxable income determined without regard to the deduction for dividends paid and excluding net capital gains. During the year endedDecember 31, 2022 , we paid cash dividends of$0.925 per share. Subsequent Events 2023 Financing Activity We had net credit facility activity of$17.0 million during the period subsequent toDecember 31, 2022 . As of the date of this report, we had$182.0 million drawn on the Credit Facilities, with$50.0 million drawn on the 2021 Term Loan,$115.0 million drawn on the 2022 Term Loan and$17.0 million drawn on the 2021 Revolving Credit Facility.
2023 Real Estate Acquisitions
Subsequent toDecember 31, 2022 , we have acquired 24 properties in individual or small portfolio transactions for approximately$12.7 million , excluding closing costs. Dividends
Our Board of Directors approved, and on
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon the historical consolidated financial statements of the Company that have been prepared in accordance with GAAP. The preparation of these financial statements requires us to exercise our best judgment in making estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Set forth below is a summary of accounting policies and estimates that we believe are critical to the preparation of our Consolidated Financial Statements. We believe that all of the decisions and assessments applied were reasonable at the time made, based upon information available to us at that time. Due to the inherently judgmental nature of the various projections and assumptions used, and unpredictability of economic and market conditions, actual results may differ from estimates, and changes in estimates and assumptions could have a material effect on our financial statements in the future. Our accounting policies and estimates are more fully discussed in Note 2. Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Investments in
Upon the acquisition of real estate, the purchase price is allocated based upon the relative fair value of the assets acquired and liabilities assumed. The allocation of the purchase price to the relative fair value of the tangible and intangible assets of an acquired property is derived by valuing the property as if it were vacant. All real estate acquisitions in the periods presented qualified as asset acquisitions and, as such, acquisition-related fees and acquisition-related expenses related to these asset acquisitions are capitalized as part of the acquisition.
Investments in real estate generally include land, buildings, tenant improvements and identified intangible assets, such as in-place lease intangibles and above or below-market lease intangibles. Direct and certain indirect costs clearly associated with the development, construction, leasing or expansion of real estate assets are capitalized as a cost of the property. Repairs and maintenance costs are expensed as incurred.
We acquired 320 properties for approximately$123 million , excluding closing costs, during 2022 and 238 properties for approximately$103 million , excluding closing costs, during 2021. These transactions were accounted for as asset 41
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acquisitions, and the purchase price of each was allocated based on the relative fair value of the asset acquired and liabilities assumed.
Revenue Recognition
We have operating lease agreements with tenants, some of which contain provisions for future rental increases. Rental income is recognized on a straight-line basis over the term of the lease. In addition, certain lease agreements provide for reimbursements from tenants for real estate taxes and other recoverable costs, which are recorded on an accrual basis as part of "Rental income" in our Consolidated Statements of Operations and Comprehensive Income. The Company's determination of the probability to collect lease payments is impacted by numerous factors, including the Company's assessment of the tenant's creditworthiness, economic conditions, historical experience with the tenant, future prospects for the tenant and the length of the lease term. If leases currently classified as probable are subsequently reclassified as not probable, any outstanding lease receivables (including straight-line rent receivables) would be written-off with a corresponding decrease in rental income. Fee and other primarily consist of (i) property management fees, (ii) income recognized from properties accounted for as financing leases and (iii) fees earned from providing advisory services to third-party owners of postal properties. The management fees arise from contractual agreements with entities that are affiliated with our chief executive officer. Management fee income is recognized as earned under the respective agreements. Revenue from direct financing leases is recognized over the lease term using the effective interest rate method. At lease inception, we record an asset within investments on the Consolidated Balance Sheets, which represents our net investment in the direct financing lease. This initial net investment is determined by aggregating the total future minimum lease payments attributable to the direct financing lease and the estimated residual value of the property, if any, less unearned income. Over the lease term, the investment in the direct financing lease is reduced and income is recognized as revenue in "Fee and other" in the Consolidated Statements of Operations and Comprehensive Income and produces a constant periodic rate of return on the investment in financing leases, net.
Impairment of Long-Lived Assets
The carrying value of real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the asset's carrying amount over its estimated fair value. Impairment analyses will be based on current plans, intended holding periods and available market information at the time the analyses are prepared. If estimates of the projected future cash flows, anticipated holding periods or market conditions change, the evaluation of impairment losses may be different and such differences may be material. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. As ofDecember 31, 2022 and 2021, no impairment related to our long-lived assets was identified.
New Accounting Pronouncements
For a discussion of our adoption of new accounting pronouncements, please see Note 2. Summary of Significant Accountant Policies in the Notes to the Consolidated Financial Statements.
Inflation
Because most of our leases provide for fixed annual rental payments without annual rent escalations, our rental revenues are fixed while our property operating expenses are subject to inflationary increases. A majority of our leases provide for tenant reimbursement of real estate taxes and thus the tenant must reimburse us for real estate taxes. We believe that if inflation increases expenses over time, increases in lease renewal rates will materially offset such increase.
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