Postal Realty Trust, Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our Class A common stock trades on the NYSE under the symbol “PSTL”. As of March 30, 2021, there were 13,326,514 shares of Class A common stock issued and outstanding and three stockholders of record. This number of stockholders of record does not represent the actual number of beneficial owners of our Class A common stock because shares of our Class A common stock are frequently held in “street name” by securities dealers and others for the benefit of beneficial owners who may vote the shares. In addition, as of March 30, 2021, there were 27,206 shares of Voting Equivalency stock issued and outstanding and 2,987,063 OP Units and LTIP units held by limited partners other than the Company outstanding. All shares of Voting Equivalency stock issued and outstanding are held by Mr. Spodek and his affiliates. No public trading market exists for such shares. We intend to continue to declare quarterly dividends on our Class A common stock. The actual amount and timing of dividends, however, will be at the discretion of our Board of Directors and will depend upon our financial condition in addition to the requirements of the Code, and no assurance can be given as to the amounts or timing of future distributions. Securities Authorized for Issuance Under Equity Compensation Plans The information required by Item 5 is incorporated by reference to our Definitive Proxy Statement for our 2021 annual stockholders’ meeting. ITEM 6. RESERVED ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is based on, and should be read in conjunction with, the Consolidated and Combined Consolidated Financial Statements and the related notes thereto of the Company as of and for the year ended December 31, 2020 and as of December 31, 2019 and of the Company and the Company’s accounting Predecessor for the year ended December 31, 2019. As used in this section, unless the context otherwise requires, references to “we,” “our,” “us,” and “our company” refer to Postal Realty Trust, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Postal Realty LP, a Delaware limited partnership (“our Operating Partnership”), of which we are the sole general partner and which we refer to in this section as our Operating Partnership. Prior to the closing of our IPO on May 17, 2019, Andrew Spodek, our chief executive officer and a member of our Board of Directors, directly or indirectly controlled 190 properties owned by the Predecessor that were contributed as part of the Formation Transactions. Of these 190 properties, 140 were held indirectly by our Predecessor through a series of holding companies, which we refer to collectively as “UPH.” The remaining 50 properties were owned by Mr. 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, the Spodek LLCs and Nationwide Postal Management, Inc., a property management company whose management business we acquired in the Formation Transactions, collectively. 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 “Risk Factors” and included in other portions of this report. 31 Overview Company We were formed as a Maryland corporation on November 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 our Operating Partnership directly or through limited partnerships, limited liability companies or other subsidiaries. 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 the USPS. For the year ended December 31, 2020, we acquired 261 postal properties leased primarily to the USPS for approximately $130 million, excluding closing costs. As of December 31, 2020, our portfolio consists of 726 owned postal properties, located in 47 states and comprising approximately 2.7 million net leasable interior square feet. The following charts show certain statistics of our portfolio as of December 31, 2020: Portfolio by % of Aggregate Interior Square Feet Portfolio by % of Aggregate Gross Rent We are the sole general partner of our Operating Partnership through which our postal properties are directly or indirectly owned. As of March 30, 2021, we own approximately 81.8% of our outstanding OP Units, including LTIP Units. Our Board of Directors oversees our business and affairs. Follow on Offering and ATM Program On July 15, 2020, we priced a public offering of 3.5 million shares of our Class A common stock, or the July Follow-on Offering, at $13.00 per share. On July 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, or the July Additional Shares. The July Follow-on Offering, including the July Additional Shares, closed on July 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 July Follow-on Offering. 32 On December 14, 2020, we entered into separate open market sale with each of Jefferies LLC, Stifel, Nicolaus & Company, Incorporated, BMO Capital Markets Corp., Janney Montgomery Scott LLC and D.A. Davidson & Co., pursuant to which we may offer and sell, from time to time, shares our Class A common stock having an aggregate sales price of up to $50,000,000. As of December 31, 2020, we had $50.0 million of availability remaining under the ATM Program. Pursuant to the open market sale agreements, shares of our Class A common stock may be offered and sold through the sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions. Executive Overview We are an internally managed REIT with a focus on acquiring and managing properties primarily leased to the USPS. We believe the overall opportunity for consolidation that exists within the postal logistics network is very attractive. We continue to execute our strategy to acquire and consolidate postal properties that will generate strong earnings for our shareholders. Geographic Concentration As of December 31, 2020, we owned a portfolio of 726 postal properties located in 47 states leased primarily to the USPS. For the year ended December 31, 2020, 10.0% of our total of rental income was concentrated in Pennsylvania. Such geographical concentration could expose the Company to certain downturns in the economies of those states or other changes in such states’ respective real estate market conditions. Any material changes in the current payments programs or regulatory, economic, environmental or competitive conditions in any of these areas could have an effect on our overall business results. In the event of negative economic or other changes in any of these markets, our business, financial condition and results of operations, our ability to make distributions to our shareholders and the trading price of our common shares may be adversely affected. Emerging Growth Company We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or 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 $1.07 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 Securities Exchange Act of 1934, as amended (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 ending December 31, 2019. As long as we qualify 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. 33 Factors That May Influence Future Results of Operations The USPS We are dependent on the USPS’s financial and operational stability. The USPS 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. The USPS is constrained by laws and regulations that restrict revenue sources, mandate certain expenses and cap its borrowing capacity. As a result, the USPS 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. The USPS 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. Further, although the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as amended by Public Law 116-260, the Consolidated Appropriations Act, 2021, includes a $10.0 billion loan to the USPS, there can be no assurances that this financing will be sufficient to sustain USPS operations in light of current shortfalls resulting from reduced mail volumes. The ongoing COVID-19 pandemic and measures being taken to prevent its spread has resulted in a reduction in foot traffic in many public places, including postal properties. A continued reduction in the use of in-person services may reduce the demand for postal properties by the USPS and our results of operations could decline as a result. The ongoing COVID-19 pandemic has also caused a decline in mail volume, particularly in advertising conducted through the mail, which may adversely affect the USPS’s financial condition, and therefore the demand for postal properties. Continued reduction or permanent changes to mail volume could reduce demand for postal properties and materially adversely affect our result of operations. Finally, as a result of the proposed and executed operational, managerial and strategic changes within the USPS and the ongoing COVID-19 pandemic, which significantly increased the number of absentee ballots utilized for the 2020 presidential election, the USPS is the focal point of recent litigation. As of the date of this report, several lawsuits have been filed against Mr. DeJoy, the USPS and former President Donald Trump pertaining to operational changes at the USPS, mail delays and mail-in voting for the 2020 presidential election. If, as a result of any backlogs, political rhetoric or litigation, the USPS suffers reputational or financial harm or an increase in regulatory scrutiny, the demand for USPS services may decline, which may lead to reduced demand for USPS properties. The results of these changes or any future changes could lead to additional delays or financing shortfalls for the USPS. 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 which includes the impact of above and below market lease intangibles. Tenant reimbursements primarily represents 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 is a percentage of the lease revenue for the managed property. As of December 31, 2020, all properties leased to the USPS had an average remaining lease term of 3.7 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, postal 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 “Lease Renewal” for further discussion. 34 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 cash flow and results of operations. General and Administrative General and administrative expense represents personnel costs, professional fees, legal fees, insurance, consulting fees, portfolio servicing costs and other expenses related to corporate governance, filing reports with 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. Equity-Based Compensation Expense All equity-based compensation expense is recognized in our consolidated statements of operations as components of general and administrative expense and property operating expenses. We issue share-based awards to align our employees’ interests with those of our investors. 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 5—Debt of the accompanying financial statements 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. On September 27, 2019, we entered into a credit agreement, as amended the Credit Agreement with People’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 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, or the Accordion Feature. On January 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. On June 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 Tangible Net Worth (as defined in such amendment). On November 24, 2020, we amended the Credit Agreement to revise, among other items, certain definitions and borrowing base calculations to allow Leases other than the USPS at a Real Property subject to certain limitations (as defined in such amendment). 35 As of December 31, 2020, the leases at 15 of our properties were expired and the USPS was occupying such properties as a holdover tenant, thereby excluding such properties from being part of the borrowing base under our Credit Facility. Subsequent to December 31, 2020, we executed all leases for these 15 properties. 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 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 PRM and any other TRS we form in the future, will be subject to federal, state and local corporate income tax. Lease Renewal As of December 31, 2020, the leases at 15 of our properties were expired and the USPS was occupying such properties as a holdover tenant. See “Item 2. Properties— Lease Expiration Schedule”. As of March 30, 2021, 11 leases were in holdover status representing $0.2 million of annual rental revenue. We might not be successful in renewing the leases that are in holdover status or that are expiring in 2021, or obtaining positive rent renewal spreads, or even renewing the leases on terms comparable to those of the expiring leases. If we are not successful, we will likely experience reduced occupancy, traffic, rental revenue and net operating income, which could have a material adverse effect on our financial condition, results of operations and ability to make distributions to shareholders. Results of Operations Comparison of the year ended December 31, 2020 and December 31, 2019 Our results of operations for the year ended December 31, 2020 include our consolidated results for the year ended December 31, 2020. Our results of operations for the year ended December 31, 2019 include our consolidated results for the period from our IPO on May 17, 2019 through December 31, 2019 and combined consolidated results of our Predecessor for the period from January 1, 2019 through May 16, 2019. We incurred a net loss of $0.6 million in 2020 and a loss of $2.0 million since the completion of our IPO on May 17, 2019 through December 31, 2019, which includes the loss on early extinguishment of our Predecessor’s debt of $0.2 million and equity-based compensation of approximately $1.0 million. See Note 3—Real Estate Acquisitions of the accompanying financial statements for information regarding our real estate acquisition activity during the years ended December 31, 2020 and 2019. 36 For the Year Ended December 31, 2020 2019 $ Change % Change Revenues Rental income $ 20,268,761 $ 8,865,868 $ 11,402,893 129 % Tenant reimbursements 3,046,234 1,311,121 1,735,113 132 % Fee and other income 1,360,877 1,112,367 248,510 22 % Total revenues 24,675,872 11,289,356 13,386,516 119 % Operating expenses Real estate taxes 3,095,435 1,366,892 1,728,543 127 % Property operating expenses 1,924,405 1,207,486 716,919 59 % General and administrative 8,229,753 4,846,392 3,383,361 70 % Depreciation and amortization 9,162,934 3,800,059 5,362,875 141 % Total operating expenses 22,412,527 11,220,829 11,191,698 100 % Income from operations 2,263,345 68,527 2,194,818 3203 % Interest expense, net Contractual interest expense (2,345,532 ) (1,098,788 ) (1,246,744 ) 114 % Write-off and amortization of deferred financing fees (472,094 ) (242,763 ) (229,331 ) 95 % Loss on extinguishment of debt - (185,586 ) 185,586 (100 )% Interest income 2,745 5,928 (3,183 ) (54 )% Total interest expense, net (2,814,881 ) (1,521,209 ) (1,293,672 ) 85 % Loss before income tax expense (551,536 ) (1,452,682 ) 901,146 (62 )% Income tax expense (89,342 ) (39,749 ) (49,593 ) 125 % Net loss $ (640,878 ) $ (1,492,431 ) $ 851,553 (57 )% Revenues Total revenues increased by $13.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase in revenue is attributable to the properties that we acquired in connection with the Formation Transactions being part of our portfolio for all of 2020 and the effects of the properties that we acquired since the completion of our IPO. Rental income – Rental income increased $11.4 million year over year primarily due to the properties that we acquired in connection with the Formation Transactions being part of our portfolio for all of 2020 and the effects of the properties that we acquired since the completion of our IPO. Tenant reimbursements – Tenant reimbursements increased $1.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to the properties that we acquired in connection with the Formation Transactions being part of our portfolio for all of 2020 and the effects of the properties that we acquired since the completion of our IPO. Fee and other income . Other revenue increased by $0.2 million, to $1.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to higher insurance recoveries for the year ended December 31, 2020, offset by lower miscellaneous income. 37 Operating Expense Real estate taxes – Real estate taxes increased by $1.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 as a result of the properties that we acquired in connection with the Formation Transactions being part of our portfolio for all of 2020 and the effects of the properties that we acquired since the completion of our IPO. Property operating expenses – Property operating expenses increased by $0.7 million to $1.9 million for December 31, 2020 from $1.2 million for the year ended December 31, 2019. Property management expenses are included within property operating expenses and increased by $0.1 million to $0.8 million for the year ended December 31, 2020 from $0.7 million for the year ended December 31, 2019. The remainder of the increase of $0.6 million is related to expenses related to repairs and maintenance and insurance that we were acquired in connection with the Formation Transactions being part of our portfolio for all of 2020 and the effects of the properties that we acquired since the completion of our IPO. General and administrative – General and administrative expenses increased by $3.4 million to $8.2 million for the year ended December 31, 2020 from $4.8 million for the year ended December 31, 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 $1.2 million for year ended December 31, 2020 compared to the year ended December 31, 2019, due to additional equity-based compensation expense for awards that have been granted since our IPO. Depreciation and amortization – Depreciation and amortization expense increased by $5.4 million to $9.2 million for the year ended December 31, 2020 from $3.8 million for the year ended December 31, 2019, and is primarily related to the properties that we acquired as part of the Formation Transactions being part of our portfolio for all of 2020 and the effects of the properties that we acquired since the completion of our IPO. Total Interest Expense, Net During the year ended December 31, 2020, we incurred total interest expense, net of $2.8 million compared to $1.5 million for the year ended December 31, 2019. The increase in interest expense is primarily related to the interest incurred on increased borrowings from the Credit Facility entered into in September 2019 and the amortization of deferred financing costs related to the Credit Facility. This increase is offset by a loss on early extinguishment of debt of $0.2 million incurred in connection with the IPO during the year ended December 31, 2019. Cash Flows Comparison of the year ended December 31, 2020 and the year ended December 31, 2019 The Company had $2.2 million of cash and $1.1 million of escrows and reserves as of December 31, 2020 compared to $12.5 million of cash and $0.7 million of escrows and reserves as of December 31, 2019. Cash flow from operating activities – Net cash provided by operating activities increased by $6.5 million to $9.4 million for the year ended December 31, 2020 compared to $2.9 million for the same period in 2019. The increase is primarily due to the addition of postal properties that were acquired since the IPO, all of which have generated additional rental income and related changes in working capital. Cash flow to investing activities – Net cash used in investing activities increased by $53.5 million to $126.2 million for the year ended December 31, 2020 compared to $72.7 million for the same period in 2019. The increase was primarily due to the 261 postal properties that we acquired during 2020. Cash flow from financing activities – Net cash provided by financing activities increased by $24.7 million to $106.8 million for the year ended December 31, 2020 compared to $82.1 million provided by the same period in 2019. The increase was primarily related to higher net borrowings during the year ended December 31, 2020 offset by lower proceeds from equity offerings and higher payments of dividends since our IPO. 38 Liquidity and Capital Resources Analysis of Liquidity and Capital Resources We had approximately $2.2 million of cash and $1.1 million of escrows and reserves as of December 31, 2020. As of December 31, 2020, we had $78.0 million outstanding under our Credit Facility. On January 30, 2020, we exercised the accordion feature on the Credit Facility to increase permitted borrowings to $150.0 million from $100.0 million subject to the borrowing base properties identified therein remaining unencumbered and subject to an executed lease. On June 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 Tangible Net Worth (as defined in such amendment). On November 24, 2020, we amended the Credit Agreement to revise, among other items, certain definitions and borrowing base calculations to allow Leases other than the USPS at a Real Property subject to certain limitations (as defined in such amendment). We intend to use our Credit Facility for working capital purposes, which may include repayment of indebtedness, property acquisitions and other general corporate purposes. As of December 31, 2020, the leases at 15 of our properties had expired and the USPS was occupying such properties as a holdover tenant, thereby excluding such properties from being part of the borrowing base under our Credit Facility. The Credit Facility is guaranteed, jointly and severally, by the Company and certain indirect subsidiaries of the Company, or 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 the 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. 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 the USPS will enter into new or renewed leases. 39 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 December 31, 2020, we had approximately $125.0 million of outstanding consolidated principal indebtedness. The following table sets forth information as of December 31, 2020 and 2019 with respect to the outstanding indebtedness of the Company: Amount Outstanding as of December 31, 2020 Amount Outstanding as of December 31, 2019 Interest Rate as of December 31, 2020 Maturity Date Credit Facility (1) $ 78,000,000 $ 54,000,000 LIBOR+170bps (2) September 2023 Vision Bank (3) 1,458,450 1,522,672 4.00 % September 2036 First Oklahoma Bank (4) 364,077 378,005 4.50 % December 2037 Vision Bank – 2018 (5) 868,818 900,385 5.00 % January 2038 Seller Financing (6) 445,000 445,000 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 AIG-December 2020 (9) 30,225,000 — 2.80 % January 2031 Total Principal $ 125,035,656 $ 57,246,062 Explanatory Notes : (1) On September 27, 2019, we entered into our Credit Agreement, which provides for revolving commitments in an aggregate principal amount of a $100.0 million and an accordion feature that permits us to borrow up to $200.0 million, subject to customary conditions. During the three months ended March 31, 2020, we amended the Credit Agreement in order to exercise a portion our accordion feature to increase permitted borrowings to $150.0 million from $100.0 million, subject to the borrowing base properties identified therein remaining unencumbered and subject to an enforceable lease. As of December 31, 2020, $150.0 million in aggregate principal amount under the Credit Facility was authorized and $78.0 million was drawn. Our ability to borrow under the Credit Facility is subject to ongoing compliance with a number of customary affirmative and negative covenants. As of December 31, 2020, we were in compliance with all of the Credit Facility’s debt covenants. (2) As of December 31, 2020, the one-month LIBOR rate was 0.15%. (3) Five properties are collateralized under this loan as of December 31, 2020 with Mr. Spodek as the guarantor. On September 8, 2021 and every five years thereafter, the interest rate will reset at a variable annual rate of Wall Street Journal Prime Rate (“Prime”) + 0.5%. 40 (4) The loan is collateralized by first mortgage liens on four properties and a personal guarantee of payment by Mr. Spodek. Interest rate resets on December 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 Mr. Spodek. Interest rate resets on January 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 $0.4 million requiring five annual payments of principal and interest of $105,661 with the first installment due on January 2, 2021 based on a 6.0% interest rate per annum through January 2, 2025. (7) In connection with the purchase of a 13-building portfolio, we obtained $4.5 million of mortgage financing, at a fixed interest rate of 4.25% with interest only for the first 18 months, which resets in November 2026 to the greater of Prime or 4.25%. (8) The loan is collateralized by first mortgage liens on 22 properties. The interest rate resets in January 2027 to the greater of Prime or 4.25%. (9) The loan is secured by a cross-collateralized and cross-defaulted first mortgage lien on the Industrial Property. The loan has a fixed interest rate of 2.80% with interest-only payments for the first five years and fixed payments of principal and interest thereafter based on a 30-year amortization schedule. Secured Borrowings as of December 31, 2020 As of December 31, 2020, we had approximately $47.0 million of secured borrowings outstanding, all of which is fixed rate debt with a weighted average interest rate of 3.34% per annum. During the year ended December 31, 2020, we obtained mortgage loans in the aggregate amount of $44.0 million. Contractual Obligations and Other Long-Term Liabilities The following table provides information with respect to our commitments as of December 31, 2020, including any guaranteed or minimum commitments under contractual obligations. Payments Due by Period Contractual Obligations Total Within 1 year 1-3 Years 3-5 Years More than 5 years Credit facility $ 78,000,000 $ — $ 78,000,000 — $ — Principal payments on mortgage loans 47,035,656 220,497 1,437,066 1,572,077 43,806,016 Interest payments (1) 20,563,866 3,153,035 5,927,164 2,927,487 8,556,180 Operating lease obligations (2) 1,937,019 212,469 442,106 126,244 1,156,200 Total $ 147,536,541 $ 3,586,001 $ 85,806,336 $ 4,625,808 $ 53,518,396 Explanatory Notes : (1) The amounts shown relate to (i) interest on the $78.0 million outstanding under the Credit Facility as of December 31, 2020 at LIBOR plus 1.70%, (ii) assuming the amount outstanding under the Credit Facility remains at the December 31, 2020 level of $78.0 million, an unused facility fee under the Credit Facility of 0.25% through the remainder of the term and (iii) interest on the outstanding mortgage loans. (2) Operating lease obligations relate to the lease for our corporate headquarters and two ground leases at certain of our properties . 41 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 year ended December 31, 2020, we paid cash dividends of $0.79 per share. Subsequent Events 2021 Financing Activity On February 3, 2021, we repaid the First Oklahoma Bank-April 2020 and First Oklahoma Bank-June 2020 with proceeds from a borrowing from our Credit Facility. The Company had net credit facility activity of $10.5 million during the period subsequent to December 31, 2020. As of the date of this report, the Company had $67.5 million drawn on its credit facility. 2021 Real Estate Acquisitions Subsequent to December 31, 2020, we have acquired 54 postal properties in individual or small portfolio transactions for approximately $25.7 million. Follow-on Offering On January 11, 2021, we priced a public offering of 3,250,000 shares of our Class A common stock, or the January Follow-on Offering, at $15.25 per share. On January 12, 2021, the underwriters purchased an additional 487,500 shares pursuant to a 30-day option to purchase up to an additional 487,500 shares at $15.25 per share, or the January Additional Shares. The January Follow-on Offering, including the January Additional Shares, closed on January 14, 2021 resulting in $57.0 million in gross proceeds, and approximately $53.9 million in net proceeds after deducting approximately $3.1 million in underwriting discounts and before giving effect to $0.3 million in other estimated expenses relating to the January Follow-on Offering. Dividends On January 28, 2021, our Board of Directors approved and we declared a fourth quarter common stock dividend of $0.2175 per share which was paid on February 26, 2021 to stockholders of record on February 12, 2021. Off-Balance Sheet Arrangements As of December 31, 2020, we did not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon the historical consolidated and combined consolidated financial statements of the Company and our Predecessor 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. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates on an ongoing basis, based upon current available information. Actual results could differ from these estimates. Our Consolidated Financial Statements are prepared in conformity with GAAP and the rules and regulations of the SEC. In preparing the Consolidated Financial Statements, management is required to exercise judgment and make assumptions and estimates that may impact the carrying value of assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Set forth below is a summary of our accounting policies that we believe are critical to the preparation of our Consolidated Financial Statements. Our accounting policies are more fully discussed in Note 2. Summary of Significant Accounting Policies in the Notes to the Consolidated and Combined Consolidated Financial Statements. 42 As an “emerging growth company,” we intend to avail ourselves of the extended transition periods for adopting new or revised accounting standards that would otherwise apply to us as a public reporting company, although, subject to certain restrictions we may elect to stop availing ourselves of these exceptions in the future even while we remain an “emerging growth company.” As a result, our financial statements may not be comparable to those of other public reporting companies that either are not emerging growth companies or that are emerging growth companies but have opted not to avail themselves of these provisions of the JOBS Act and investors may deem our securities a less attractive investment relative to those other companies, which could adversely affect our stock price. Basis of Presentation The accompanying Consolidated and Combined Consolidated Financial Statements include the financial position and results of operations of the Company, its Predecessor, the Operating Partnership and its wholly owned subsidiaries. The Predecessor represents a combination of certain entities holding interests in real estate that were commonly controlled prior to the Formation Transactions. Due to their common control, the financial statements of the separate Predecessor entities which owned the properties and the management company are presented on a combined consolidated basis. The effects of all significant intercompany balances and transactions have been eliminated. We have consolidated the Operating Partnership, a VIE in which we are considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. A non-controlling interest is defined as the portion of the equity in an entity not attributable, directly or indirectly, to us. Non-controlling interests are required to be presented as a separate component of equity in the Consolidated Balance Sheets. Accordingly, the presentation of net income (loss) reflects the income attributed to controlling and non-controlling interests. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates. Investments in Real Estate 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 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. 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 “Tenant reimbursement revenue” on our Consolidated and Combined Consolidated Statement of Operations. 43 Fee and other income primarily consist of property management fees. These 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. Non-controlling Interests Non-controlling interests represent OP Units held by the Predecessor’s prior investors and certain sellers of acquisition portfolios and LTIP Units primarily held by our chief executive officer. Upon completion of the IPO and the Formation Transactions, the Operating Partnership issued 1,333,112 OP Units to the Predecessor’s prior investors as partial consideration for the contribution of their interest in the Predecessor to the Operating Partnership and 114,706 LTIP Units to our chief executive officer. During the year ended December 31, 2020, we granted 94,303 LTIP units to our chief executive officer. In addition, during the years ended December 31, 2020 and 2019, we issued 483,333 and 824,350 OP Units, respectively to certain contributors in connection with portfolio acquisitions. New Accounting Pronouncements For a discussion of our adoption of new accounting pronouncements, please see Note 2. Summary of Significant Accountant Principles of to the accompanying Consolidated and Combined 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 44 POSTAL REALTY TRUST, INC. INDEX TO FINANCIAL STATEMENTS