POSTAL REALTY TRUST, INC. The following discussion and analysis is based on, and should be read in conjunction with, the unaudited Consolidated and Combined Consolidated Financial Statements and the related notes thereto ofPostal Realty Trust, Inc. contained in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year endedDecember 31, 2019 and other reports filed withSecurities and Exchange Commission As used in this section, unless the context otherwise requires, references to "we," "our," "us," and "our company" refer toPostal Realty Trust, Inc. , aMaryland corporation, together with our consolidated subsidiaries, includingPostal Realty LP , aDelaware limited partnership ("ourOperating Partnership "), of which we are the sole general partner and which we refer to in this Quarterly Report as ourOperating Partnership . Prior to the closing of our initial public offering (our "IPO") onMay 17, 2019 ,Andrew Spodek , our chief executive officer and a member of our board of directors (the "Board"), directly or indirectly controlled 190 properties owned by the Predecessor that were contributed as part of the Formation Transactions (as defined below). Of these 190 properties, 140 were held indirectly by the Predecessor through a series of holding companies, which we refer to collectively as "UPH." The remaining 50 properties were owned byMr. Spodek through 12 limited liability companies and one limited partnership, which we refer to collectively as the "Spodek LLCs." References to our "Predecessor" consist of UPH, theSpodek LLCs and Nationwide Postal Management, Inc. , a property management company whose management business we acquired in the Formation Transactions (as defined below), collectively. Forward-Looking Statements We make statements in this Quarterly Report that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, property performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
? change in the status of the
branch of the U.S. federal government;
? change in the demand for postal services delivered by the USPS ;
? our ability to come to an agreement with the USPS regarding new leases;
? the solvency and financial health of the USPS ;
? defaults on, early terminations of or non-renewal of leases by the
? the competitive market in which we operate;
? changes in the availability of acquisition opportunities;
? our inability to successfully complete real estate acquisitions or
dispositions on the terms and timing we expect, or at all;
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? our failure to successfully operate developed and acquired properties;
? adverse economic or real estate developments, either nationally or in the
markets in which our properties are located;
? decreased rental rates or increased vacancy rates;
? change in our business, financing or investment strategy or the markets in
which we operate;
? fluctuations in mortgage rates and increased operating costs;
? changes in the method pursuant to which reference rates are determined and the
phasing out of LIBOR after 2021;
? general economic conditions;
? financial market fluctuations;
? our failure to generate sufficient cash flows to service our outstanding
indebtedness;
? our failure to obtain necessary outside financing on favorable terms or at
all;
? failure to hedge effectively against interest rate changes;
? our reliance on key personnel whose continued service is not guaranteed;
? the outcome of claims and litigation involving or affecting us; ? changes in real estate, taxation, zoning laws and other legislation and
government activity and changes to real property tax rates and the taxation of
REITs in general;
? operations through joint ventures and reliance on or disputes with
co-venturers;
? cybersecurity threats;
? environmental uncertainties and risks related to adverse weather conditions
and natural disasters;
? governmental approvals, actions and initiatives, including the need for
compliance with environmental requirements;
? lack or insufficient amounts of insurance;
? limitations imposed on our business in order to qualify and maintain our
status as a REIT and our failure to qualify for or maintain such status; and
? public health threats such as COVID-19. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Item 1A titled "Risk Factors" in this Quarterly Report and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 19 Overview Company
We were formed as aMaryland corporation onNovember 19, 2018 and commenced operations upon completion of our IPO onMay 17, 2019 and the related formation transactions (the "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. We will elect to be treated as a REIT under the Code beginning with our short taxable year endedDecember 31, 2019 , upon the filing of our federal income tax return for such year. As long as we qualify and maintain our qualification as a REIT, we generally will not be subject to federal income tax to the extent that we distribute our taxable income for each tax year to our stockholders. Initial Public Offering
OnMay 17, 2019 , we completed our IPO, pursuant to which we sold 4,500,000 shares of our Class A common stock, par value$0.01 per share (our "Class A common stock"), at a public offering price of$17.00 per share. We raised$76.5 million in gross proceeds, resulting in net proceeds to us of approximately$71.1 million after deducting approximately$5.4 million in underwriting discounts and before giving effect to$6.4 million in other expenses relating to our IPO. Our Class A common stock began trading on theNew York Stock Exchange (the "NYSE") under the symbol "PSTL" onMay 15, 2019 . In connection with our IPO and the Formation Transactions, we also issued 1,333,112 OP Units, 637,058 shares of Class A common stock and 27,206 shares of Class B common stock, par value$0.01 per share (our "Class B common stock" or "Voting Equivalency stock"), toMr. Spodek and his affiliates in exchange for the Predecessor properties and interests. We are the sole general partner of ourOperating Partnership through which our postal properties are directly or indirectly owned. As ofJune 30, 2020 , we owned approximately 65.7% of the outstanding common units of limited partnership interest in theOperating Partnership (each, an "OP Unit," and collectively, the "OP Units") including long term incentive units of theOperating Partnership (each, an "LTIP Unit" and collectively, the "LTIP Units"). Our Board oversees our business and affairs. Follow-on Offering
OnJuly 15, 2020 , we priced a public offering of 3.5 million shares of our Class A Common Stock (the "Follow-on Offering") at$13.00 per share. OnJuly 17, 2020 , the underwriters purchased an additional 521,840 shares pursuant to a 30-day option to purchase up to an additional 525,000 shares at$13.00 per share (the "Additional Shares"). The Follow-on Offering, including the Additional Shares, closed onJuly 20, 2020 resulting in$52.2 million in gross proceeds and approximately$49.4 million in net proceeds after deducting approximately$2.9 million in underwriting discounts and before giving effect to$0.9 million in other estimated expenses relating to the Follow-on Offering. Executive Overview
We are an internally managed REIT with a focus on acquiring and managing
properties leased to the
At the completion of our IPO and the Formation Transactions, we owned a portfolio of 271 postal properties located in 41 states comprising approximately of 872,000 net leasable interior square feet, all of which were leased to theUSPS . As ofJune 30, 2020 , our portfolio consisted of 568 owned postal properties, located in 47 states and comprising approximately 1.8 million net leasable interior square feet. Q2 2020 Highlights
Acquisitions and Related Financings
? Closed on the acquisition of a 13-property portfolio leased to the USPS
for approximately $7.2 million , including closing costs. Inconnection,
with the purchase we obtained $4.5 million of mortgage financing at a
fixed interest rate of 4.25%, with interest-only payments due for the
first 18 months. The financing matures in April 2040 .
? Closed on the acquisition of 6 additional postal properties leased to
the USPS in individual or smaller portfolio transactions for
approximately $3.4 million , including closing costs.
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Debt
? On
interest rate of 4.25%, with interest-only payments due for the first 18
months. The financing matures in June 2040 .
? On
among other items, certain definitions and borrowing base calculations to
increase available capacity, the restrictive covenants related to Consolidated
Tangible Net Worth .
Equity
? Our Board of Directors approved and we declared a first quarter common stock
dividend of
record on May 11, 2020 .
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. 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 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 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 $1.07 billion (subject to adjustment for inflation), (ii) December 31,
2024 , (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.
Factors That May Influence Future Results of Operations
COVID-19 Pandemic The ongoing COVID-19 pandemic continues to present uncertainty and risk with respect to the Company's operations and the operations of theUSPS , which could adversely affect the Company and its financial performance Although the Company has received all of its July rents and payments due from holdover tenants and has not received any request for rent concessions as of the date of this Quarterly Report, our ability to continue to collect rents as they become due is unclear and rent concessions may be forthcoming. In addition, while the Company has maintained its operations during the pandemic and state-mandated lock-downs, some of the Company's operations may be negatively impacted should the duration and effects of the pandemic or state-required lock-downs become longer or more severe. Specifically, should state imposed lock-downs be re-implemented in certain areas, the Company's ability to identify and complete property and portfolio acquisitions may be
delayed or disrupted. TheUSPS We are dependent on theUSPS's 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, mandate certain expenses and cap its borrowing capacity. As a result, theUSPS is unable to fund its mandated expenses and continues to be subject to mandated payments to its retirement system and health benefits for current workers and retirees. TheUSPS has taken the position that productivity improvements and cost reduction measures alone without legislative and regulatory intervention will not be sufficient to maintain the ability to meet all of its existing
obligations when due.
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Revenues
We derive revenues primarily from rent and tenant reimbursements under leases
with the USPS for our properties, and fee and other income under the management
agreements with respect to the postal properties owned by Mr. Spodek , his family
members and their partners managed by PRM, our TRS. Rental income represents the
lease revenue recognized under leases with the USPS . Tenant reimbursements
represent payments made by the USPS under the leases to reimburse us for the
majority of real estate taxes paid at each property. Fee and other income
principally represent revenue PRM receives from postal properties owned by Mr.
Spodek , his family members and their partners pursuant to the management
agreements and typically is a percentage of the lease revenue for the managed
property. As of June 30, 2020 , all properties leased to the USPS had an average
remaining lease term of 2.41 years. Factors that could affect our rental income,
tenant reimbursement and fee and other income 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, post office space; (iv) changes in
market rental rates; (v) changes to the USPS's 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 to the USPS . The majority of our leases are modified
double-net leases, whereby the USPS is responsible for utilities, routine
maintenance and the reimbursement of property taxes and the landlord is
responsible for insurance and 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 "Current Lease Renewal and Revised
USPS Lease Form" 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 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 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.
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 cashflow and results of operations. General and Administrative General and administrative expenses include employee compensation costs (including equity-based compensation), professional fees, legal fees, insurance, consulting fees, portfolio servicing costs and other expenses related to corporate governance, filing reports with theUnited States Securities and Exchange Commission (the "SEC") and the NYSE, and other compliance matters. Our Predecessor was privately owned and historically did not incur costs that we incur as a public company. In addition, 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. 22
Depreciation and Amortization
Depreciation and amortization expense relate primarily to depreciation on properties and improvements and to amortization of certain lease intangibles.
Indebtedness and Interest Expense
Interest expense for our Predecessor related primarily to three mortgage loans payable and related party interest-only promissory notes, See Note 6. Debt for further details. As a result of the Formation Transactions, we assumed certain indebtedness of the Predecessor, a portion of which was repaid without penalty using a portion of the net proceeds from our IPO. OnSeptember 27, 2019 , we entered into a credit agreement (as amended, the "Credit Agreement") withPeople's United Bank, National Association , individually and as administrative agent,BMO Capital Markets Corp. , as syndication agent, and certain other lenders. The Credit Agreement provides for a senior revolving credit facility (the "Credit Facility") with revolving commitments in an aggregate principal amount of$100.0 million and, subject to customary conditions, the option to increase the aggregate lending commitments under the agreement by up to$100.0 million (the "Accordion Feature"). OnJanuary 30, 2020 , we amended the Credit Agreement in order to exercise a portion of the Accordion Feature to increase the maximum amount available under the Credit Facility to$150.0 million , subject to the borrowing base properties identified therein remaining unencumbered and subject to an executed lease.. OnJune 25, 2020 , the Company further amended the Credit Agreement to revise, among other items, certain definitions and borrowing base calculations to increase available capacity, as well as the restrictive covenant pertaining to Consolidated TangibleNet Worth (as defined in such amendment). As ofJune 30, 2020 , the leases at 43 of our properties had expired and theUSPS was occupying such properties as a holdover tenant, thereby excluding such properties from being part of the borrowing base under our Credit Facility We intend to use the Credit Facility for working capital purposes, which may include repayment of mortgage indebtedness, property acquisitions and other general corporate purposes. Consistent with the method adopted by our Predecessor, we amortize on a non-cash basis the deferred financing costs associated with its 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 if 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 PRM and any other TRS we form in the future, will be subject to federal, state and
local corporate income tax.
Current Lease Renewal and Revised USPS Lease Form
As ofAugust 11, 2020 , the leases at 55 of our properties (consisting of one lease for which the lease expired in 2018 which we acquired inJuly 2020 , 21 properties for which leases expired in 2019, including two leases that expired as of the date of our acquisition, and 33 properties for which leases expired in 2020) had expired and theUSPS is occupying such properties as a holdover tenant, aggregating approximately 220,000 interior square feet and$2.4 million in annualized rental income. To date, theUSPS has not vacated or notified us of its intention to vacate any of these 55 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 TheUSPS has adopted a revised form of our modified double-net lease, which transfers the responsibility for some additional maintenance expenses and obligations to the landlord, including some components of plumbing and electrical systems. To date, we have not renewed or entered into revised leases for any of our leases with theUSPS that have expired in 2019 or 2020 and the one lease that we acquired that expired in 2018. As ofAugust 11, 2020 , we believe we have tentatively agreed to preliminary terms with theUSPS on an addendum to its revised form of lease for leases requiring annual rent in excess of$25,000 , pursuant to which documentation requirements are streamlined and some of the new responsibilities placed on the landlord by theUSPS' revised form of our modified double-net lease would be mitigated. We also have agreed in letters of intent to preliminary terms on rental rates for 80 out of 90 properties for which leases expired or will expire in 2020 or before, including 48 of 55 properties for which leases have expired, and at which theUSPS is a holdover tenant. Of the remaining ten properties with leases expired or will expire in 2020 or before, six are from properties acquired in 2020. In addition, we believe that in connection with executing revised-form leases, we will generally receive a lump sum reimbursement from theUSPS for increased rents and any real estate taxes the Company paid from the date of expiration to the date of lease execution. We anticipate that we will execute new, revised-form leases for all remaining leases that have expired, and the addendum for such leases requiring annual rent in excess of$25,000 . However, we have not entered into any definitive documentation with respect to this addendum, rental rates or leases for the 55 properties at which theUSPS is a holdover tenant, and there can be no guarantee that any new leases that we enter into with theUSPS will reflect our expectations with respect to terms or timing.
As we adopt theUSPS's revised form of our modified double-net lease going forward, we anticipate that our property operating expenses and initial leasing costs may increase; however, we believe that the net impact of these additional expenses may be generally offset by our ability to negotiate contractual rent increases in excess of such expenses, which, if successful, could result in minimal changes to our projected net income as we adopt this new form of lease as our legacy leases expire. 23 Results of Operations
Comparison of the three months ended
For the Three Months Ended
June 30, %
2020 2019(1) $ Change Change
Revenues
Rental income $ 4,640,403 $ 1,856,428 $ 2,783,975 150.0
Tenant reimbursements 652,748 273,229 379,519 138.9
Fee and other income 311,786 276,325 35,461 12.8
Total revenues 5,604,937 2,405,982 3,198,955 133.0
Operating expenses
Real estate taxes 696,865 288,771 408,094 141.3Property operating expenses 394,434 248,586 145,848 58.7 General and administrative 1,916,905 968,032 948,873 98.0 Depreciation and amortization 2,161,782 767,772 1,394,010 181.6 Total operating expenses 5,169,986 2,273,161
2,896,825 127.4
Income from operations 434,951 132,821 302,130 227.5 Interest expense, net Contractual interest expense (544,915 ) (228,040 ) (316,875 ) 139.0 Write-off and amortization of deferred financing fees (115,399 ) (1,854 ) (113,545 ) >100.0 Loss on extinguishment of debt - (185,586 ) 185,586 (100.0 ) Interest income 661 1,124 (463 ) (41.2 ) Total interest expense, net (659,653 ) (414,356 ) (245,297 ) 59.2 Loss before income tax expense (224,702 ) (281,535 ) 56,833 (20.2 ) Income tax expense (4,925 ) (6,259
) 1,334 (21.3 ) Net loss$ (229,627 ) $ (287,794 ) $ 58,167 (20.2 ) 24 Explanatory Note:
(1) Includes the results of operations of the Predecessor for the period from
April 1, 2019 toMay 16, 2019 . Revenues Total revenues increased by$3.2 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The increase in revenue is attributable to the properties that we acquired in connection with the Formation Transactions and the properties that we acquired since the completion of our IPO.
Rental income- Rental income increased by$2.8 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 and is made up of$0.2 million related to the properties purchased by our Predecessor and$2.6 million for the properties that we acquired in connection with the Formation Transactions and the properties that we acquired since the completion of our IPO.
Tenant reimbursements- Tenant reimbursements increased$0.4 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 , primarily due to the properties that we acquired in connection with the Formation Transactions and the properties that we acquired since the completion of our IPO.
Fee and other income- Fee and other income increased by$35,461 , or 12.8%, to$311,786 for the three months endedJune 30, 2020 from$276,325 for the three months endedJune 30, 2019 , primarily due to higher insurance recoveries for the three months endedJune 30, 2020 , offset by lower miscellaneous income. Operating Expenses Real estate taxes - Real estate taxes increased by$0.4 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 as a result of the properties that we acquired in connection with the Formation Transactions and the properties that we acquired since the completion of our IPO.
Property operating expenses - Property operating expenses increased by$0.1 million to$0.4 million for the three months endedJune 30, 2020 from$0.3 million for the three months endedJune 30, 2019 . The increase was a result of an increase in property management expenses of$0.02 million to$189,155 for the three months endedJune 30, 2020 from$164,296 for the three months endedJune 30, 2019 . The remainder of the increase of$0.08 million is related to repairs and maintenance and insurance for the 81 properties that were acquired as part of the Formation Transactions and the properties that we have acquired since our IPO.
General and administrative - General and administrative expenses increased by$0.9 million to$1.9 million for the three months endedJune 30, 2020 from$1.0 million for the three months endedJune 30, 2019 , primarily due to higher professional fees and increased personnel and investor relations expenses as a result of being a public company. In addition, equity-based compensation expense increased by$0.3 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 due to additional awards granted during the first quarter of 2020. Our Predecessor did not have any equity-based compensation expense. Depreciation and amortization - Depreciation and amortization expense increased by$1.4 million to$2.2 million for the three months endedJune 30, 2020 from$0.8 million for the three months endedJune 30, 2019 and is primarily related to the properties that we acquired as part of the Formation Transactions and the properties that were acquired since our IPO. 25 Interest Expense During the three months endedJune 30, 2020 , we incurred interest expense of$0.7 million compared to$0.4 million for the three months endedJune 30, 2019 . The increase in interest expense was due to the interest paid on the$67.5 million outstanding balance on our Credit Facility. This increase is offset by a loss on early extinguishment of debt incurred in connection with the IPO.
Comparison of the six months ended
For the Six Months Ended
June 30, %
2020 2019(1) $ Change Change
Revenues
Rental income $ 8,941,174 $ 3,348,814 $ 5,592,360 167.0Tenant reimbursements 1,254,094 510,085 744,009 145.9 Fee and other income 607,305 563,251 44,054 7.8 Total revenues 10,802,573 4,422,150
6,380,423 144.3
Operating expenses Real estate taxes 1,338,809 538,560 800,249 148.6 Property operating expenses 801,482 500,292 301,190 60.2 General and administrative 4,218,448 1,344,923 2,873,525 213.7 Depreciation and amortization 4,196,650 1,248,215 2,948,435 236.2 Total operating expenses 10,555,389 3,631,990
6,923,399 190.6
Income from operations 247,184 790,160 (542,976 ) (68.7 ) Interest expense, net Contractual interest expense (1,273,141 ) (586,507 ) (686,634 ) 117.1 Write-off and amortization of deferred financing fees (219,861 ) (5,035 ) (214,826 ) >100.0 Loss on early extinguishment of predecessor debt - (185,586 ) 185,586 (100.0 ) Interest income 1,487 2,258 (771 ) (34.1 ) Total interest expense, net (1,491,515 ) (774,870 ) (716,645 ) 92.5
(Loss) income before income tax expense (1,244,331 ) 15,290
(1,259,621 ) <100.0 Income tax expense (15,122 ) (46,008 ) 30,886 (67.1 ) Net loss$ (1,259,453 ) (30,718 ) (1,228,735 ) >100.0 Explanatory Note:
(1) Includes the results of operations of the Predecessor for the period from
January 1, 2019 toMay 16, 2019 . Revenues Total revenues increased by$6.4 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The increase in revenue is attributable to the properties that we acquired in connection with the Formation Transactions and the properties that we acquired since the completion of our IPO. Rental income- Rental income increased by$5.6 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 and is made up of$0.4 million related to the properties purchased by our Predecessor and$5.2 million for the properties that we acquired in connection with the Formation Transactions and the properties that we acquired since the completion of our IPO. 26
Tenant reimbursements- Tenant reimbursements increased$0.7 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , primarily due to the properties that we acquired in connection with the Formation Transactions and the properties that we acquired since the completion of our IPO. Fee and other income. Other revenue increased by$44,054 , or 7.8%, to$607,289 for the six months endedJune 30, 2020 from$563,251 for the six months endedJune 30, 2019 , primarily due to higher insurance recoveries for the six months endedJune 30, 2020 , offset by lower miscellaneous income. Operating Expenses
Real estate taxes - Real estate taxes increased by$0.8 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 as a result of the properties that we acquired in connection with the Formation Transactions and the properties that we acquired since the completion of our IPO.
Property operating expenses - Property operating expenses increased by$0.3 million to$0.8 million for the six months endedJune 30, 2020 from$0.5 million for the six months endedJune 30, 2019 . The increase was a result of an increase in property management expenses of$0.1 million to$430,691 for the six months endedJune 30, 2020 from$329,146 for the six months endedJune 30, 2019 . The remainder of the increase of$0.2 million is related to repairs and maintenance and insurance for the 81 properties that were acquired as part of the Formation Transactions and the properties that we have acquired since our IPO. General and administrative - General and administrative expenses increased by$2.9 million to$4.2 million for the six months endedJune 30, 2020 from$1.3 million for the six months endedJune 30, 2019 , primarily due to higher professional fees and increased personnel and investor relations expenses as a result of being a public company. In addition, equity-based compensation expense increased by$1.1 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 due to additional compensation expense for awards that have been granted since our IPO. Depreciation and amortization - Depreciation and amortization expense increased by$2.9 million to$4.2 million for the six months endedJune 30, 2020 from$1.3 million for the six months endedJune 30, 2019 and is primarily related to the properties that we acquired as part of the Formation Transactions and the properties that were acquired since our IPO. Income Tax Expense- Income tax expense decreased by$30,886 to$15,122 for the six months endedJune 30, 2020 from$46,008 for the six months endedJune 30, 2019 and was primarily attributable to a reduction in taxable income related to UPH, offset by an increase in income tax expense related to PRM for the six months endedJune 30, 2020 . 27 Interest Expense
During the six months endedJune 30, 2020 , we incurred interest expense of$1.5 million compared to$0.8 million for the six months endedJune 30, 2019 . The increase in interest expense is due to the interest paid on the$67.5 million outstanding balance on our Credit Facility. This increase is offset by a loss on early extinguishment of debt incurred in connection with the IPO. Cash Flows
Comparison of the six months ended
The Company had$4.9 million of cash and$0.7 million of escrows and reserves as ofJune 30, 2020 compared to$11.7 million of cash and$0.6 million of escrows and reserves as ofJune 30, 2019 . Cash flow from operating activities - Net cash provided by operating activities increased by$2.3 million to$3.2 million for the six months endedJune 30, 2020 compared to$0.9 million for the same period in 2019. The increase in net cash provided by operating activities was primarily due to an increase in rental income due to the properties that were acquired as part of our Formation Transactions and the properties since our IPO. Cash flow from investing activities - Net cash used in investing activities increased by$7.1 million to$34.3 million for the six months endedJune 30, 2020 compared to$27.2 million for the same period in 2019. The increase was primarily due to the acquisition of postal properties during the six months endedJune 30, 2020 . Cash flow from financing activities - Net cash provided by financing activities decreased by$14.3 million to$23.5 million for the six months endedJune 30, 2020 compared to$37.8 million for the same period in 2019. This decrease was primarily due to the proceeds from the IPO during the six months endedJune 30, 2019 offset by higher net borrowings during the six months endedJune 30, 2020 . Non-GAAP Financial Measures
Funds From Operations ("FFO") and Adjusted Funds From Operations ("AFFO")
We calculate FFO in accordance with the currentNational Association of Real Estate Investment Trusts ("NAREIT") definition. NAREIT currently defines FFO as follows: net income (loss) (computed in accordance with GAAP) excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by an entity. Other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do and therefore our computation of FFO may not be comparable to such other REITs. We calculate AFFO by starting with FFO and adjusting for recurring capital expenditures (defined as all capital expenditures that are recurring in nature, excluding beginning with Q2 2020 as a policy change all capital improvements that are planned at the acquisition of a property or obtaining a lease or lease renewal) and acquisition related expenses (defined as acquisition-related expenses that are incurred for investment purposes and do not correlate with the ongoing operations of our existing portfolio, including due diligence costs for acquisitions not consummated and certain auditing and accounting fees incurred that were directly related to completed acquisitions or dispositions) that are not capitalized and then adding back non-cash items including: non-real estate depreciation, loss on extinguishment of debt, write-off and amortization of debt issuance costs, straight-line rent adjustments, fair value lease adjustments and non-cash components of compensation expense. AFFO is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that AFFO is widely-used by other REITs and is helpful to investors as a meaningful additional measure of our ability to make capital investments. Other REITs may not define AFFO in the same manner as we do and therefore our calculation of AFFO may not be comparable to such other REITs. These metrics are non-GAAP financial measures and should not be viewed as an alternative measurement of our operating performance to net income. Management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate' assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the additive use of FFO and AFFO, together with the required GAAP presentation, is widely-used by our competitors and other REITs and provides a more complete understanding of our performance and a more informed and appropriate basis on which to make investment decisions. 28 The following table provides a reconciliation of net loss before allocation to non-controlling interests, the most comparable GAAP measure, to FFO and AFFO: For the Three Months Ended June 30, 2020 Net loss$ (229,627 )
Depreciation and amortization of real estate assets 2,161,782 FFO
$ 1,932,155 Recurring capital expenditures (123,375 ) Acquisition related expenses 51,345 Amortization of debt issuance costs 115,399 Straight-line rent adjustments (36,284 ) Amortization of above and below market leases (293,287 ) Non-cash stock compensation expense 534,580 AFFO$ 2,180,533
Liquidity and Capital Resources
Analysis of Liquidity and Capital Resources
We had approximately
OnSeptember 27, 2019 , we entered into the Credit Agreement withPeople's United Bank, National Association , individually and as administrative agent,BMO Capital Markets Corp. , as syndication agent, and certain other lenders. The Credit Agreement provides for the senior revolving Credit Facility with revolving commitments in an aggregate principal amount of a$100.0 million and a maturity date ofSeptember 27, 2023 . The Credit Agreement provides that, subject to customary conditions, including obtaining lender commitments and compliance with its financial maintenance covenants under the Credit Agreement, we may seek to increase the aggregate lending commitments under the Credit Agreement by up to$100.0 million , with such increase in total lending commitments to be allocated to increasing the revolving commitments. The interest rates applicable to loans under the Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.7% to 1.4% per annum or LIBOR plus a margin ranging from 1.7% to 2.4% per annum, each based on a consolidated leverage ratio. In addition, we paid, for the period through and including the calendar quarter endingMarch 31, 2020 , an unused facility fee on the revolving commitments under the Credit Facility of 0.75% per annum for the first$100.0 million and 0.25% per annum for the portion of revolving commitments exceeding$100.0 million , and will pay for the period thereafter, an unused facility fee of 0.25% per annum for the aggregate unused revolving commitments, with both periods utilizing calculations of daily unused commitments under the Credit Facility. We are permitted to prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, subject to reimbursement of any LIBOR breakage costs of the lenders. OnJanuary 30, 2020 , we amended the Credit Agreement in order to exercise a portion of the accordion feature on the Credit Facility to increase permitted borrowings by$50.0 million to$150.0 million , subject to the borrowing base properties identified therein remaining unencumbered and subject to an executed lease. As ofJune 30, 2020 , we had$67.5 million outstanding under our Credit Facility. Also, as ofJune 30, 2020 , the leases at 43 of our properties had expired and theUSPS was occupying such properties as a holdover tenant, thereby excluding such properties from being part of the borrowing base under our Credit Facility. We believe that we have agreed to preliminary terms regarding re-leasing 40 of these properties. OnJune 25, 2020 , the Company further amended the Credit Agreement to revise, among other items, certain definitions and borrowing base calculations to increase available capacity, as well as the restrictive covenant pertaining to Consolidated TangibleNet Worth (as defined in such amendment). Our Credit Facility is guaranteed, jointly and severally, by our Company and certain indirect subsidiaries of our Company (the "Subsidiary Guarantors") and includes a pledge of equity interests in the Subsidiary Guarantors. The Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability to incur indebtedness, grant liens on assets, make certain types of investments, engage in acquisitions, mergers or consolidations, sell assets, enter into hedging transactions, enter into certain transactions with affiliates and make distributions. The Credit Agreement requires compliance with consolidated financial maintenance covenants to be tested quarterly, including a maximum consolidated secured indebtedness ratio, maximum consolidated leverage ratio, minimum consolidated fixed charge coverage ratio, minimum consolidated tangible net worth, maximum dividend payout ratio, maximum consolidated unsecured leverage ratio, and minimum debt service coverage ratio. The Credit Agreement also contains certain customary events of default, including the failure to make timely payments under our Credit Facility, 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. 29 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, 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 Facility and the potential issuance of securities. Our long-term liquidity requirements primarily consist of funds necessary for the repayment of debt at maturity, 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 Facility 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 Facility 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 of
As ofJune 30, 2020 , we had approximately$84.3 million of outstanding consolidated principal indebtedness. The following table sets forth information as ofJune 30, 2020 with respect to the outstanding indebtedness of the Company: Amount Outstanding as of Interest Rate at June 30, June 30, 2020 2020 Maturity Date
Credit Facility(1)$ 67,469,056 LIBOR+170bps (2) September 2023 Vision Bank(3) 1,490,882 4.00 % September 2036 First Oklahoma Bank(4) 371,120 4.50 % December 2037 Vision Bank - 2018(5) 884,739 5.00 % January 2038 Seller Financing(6) 445,000 6.00 % January 2025 First Oklahoma Bank - April 2020(7) 4,522,311 4.25 % April 2040 First Oklahoma Bank - June 2020(8) 9,152,000
4.25 % June 2040
Total Principal $ 84,335,108
30
Explanatory Notes:
(1) On
for revolving commitments in an aggregate principal amount of a
ended
portion our accordion feature to increase permitted borrowings to
million from
identified therein remaining unencumbered and subject to an enforceable
lease. On
Credit Facility. In
Facility by approximately
portion of the proceeds from the secured mortgage financing described below.
On
among other items, certain definitions and borrowing base calculations to
increase available capacity, as well as the restrictive covenant pertaining
to Consolidated Tangible
Item 5. Other Information of this Quarterly Report for a discussion of such
amendment. As of
under the Credit Facility was authorized and
ability to borrow under the Credit Facility is subject to continued
compliance with a number of customary affirmative and negative covenants. As
of
debt covenants. As of the date of this filing,
under the Credit Facility.
(2) As of
(3) Five properties are collateralized under this loan as of
thereafter, the interest rate will reset at a variable annual rate of Wall
Street Journal Prime Rate ("Prime") + 0.5%.
(4) The loan is collateralized by first mortgage liens on four properties and a
personal guarantee of payment by
31, 2022 to Prime + 0.25%.
(5) The loan is collateralized by first mortgage liens on one property and a
personal guarantee of payment by
31, 2023 to Prime + 0.5%.
(6) In connection with the acquisition of a property, we obtained seller
financing secured by the property in the amount
annual payments of principal and interest of
installment due on
through January 2, 2025 .
(7) In connection with the purchase of a 13-building portfolio, the Company
obtained
4.25% with interest only for the first 18 months, which resets in November
2026 to the greater of Prime or 4.25%. The financing matures in
(8) The loan is collateralized by first mortgage liens on 22 properties. Interest
rates resets in
matures in June 2040 .
Secured Borrowings as of
As ofJune 30, 2020 , we had approximately$16.9 million of secured borrowings outstanding, all of which was fixed rate debt with a weighted average interest rate of 4.3% per annum.
Historically, our Predecessor's equity capital was principally provided byMr. Spodek as the majority equity owner of the Predecessor entities and its debt capital was principally provided through first mortgage loans on the properties owned by the Predecessor and promissory notes payable to related parties. Following the completion of our IPO and the Formation Transactions, we repaid approximately$31.7 million of indebtedness of the Predecessor using a portion of the net proceeds from our IPO. Depending on our ability to borrow under our Credit Facility, we may pursue significant secured borrowings in the future; although, we have not entered into any preliminary or binding documentation with respect to any such additional secured borrowings and there is no guarantee that any lender will be willing to lend to us on the terms and timing that we expect, if at all. Dividends
To qualify and 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 three and six months endedJune 30, 2020 , we paid cash dividends of$0.20 and$0.37 per share, respectively. OnJuly 30, 2020 , our Board of Directors approved and we declared a second quarter common stock dividend of$0.205 per share which is payable onAugust 31, 2020 to stockholders of record onAugust 14, 2020 .
Subsequent Real Estate Acquisitions
As of
31
Acquisition Pipeline
As of
We continue to identify, and are in various stages of reviewing, additional postal properties for acquisition and believe there are strong opportunities to continue growing our pipeline.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Refer to the heading titled "Critical Accounting Policies and Estimates" in Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 for a discussion of our critical accounting policies and estimates of the Predecessor and the Company, as applicable. New Accounting Pronouncements
For a discussion of our adoption of new accounting pronouncements, please see Note 3 of our Consolidated and Combined Consolidated Financial Statements included herein.
Inflation
Because most of our leases provide for fixed annual rental payments without
annual rent escalations, our rental income is 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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