Postal Realty Trust, Inc. 10-Q

Item 1. Financial Statements POSTAL REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except par value and share data) June 30, 2023 December 31, 2022 Assets Investments: Real estate properties, at cost: Land $ 96,063 $ 90,020 Building and improvements 405,927 378,596 Tenant improvements 6,643 6,375 Total real estate properties, at cost 508,633 474,991 Less: Accumulated depreciation ( 37,286 ) ( 31,257 ) Total real estate properties, net 471,347 443,734 Investment in financing leases, net 16,083 16,130 Total real estate investments, net 487,430 459,864 Cash 2,191 1,495 Escrow and reserves 751 547 Rent and other receivables 3,936 4,613 Prepaid expenses and other assets, net 15,225 15,968 Goodwill 1,536 1,536 Deferred rent receivable 1,356 1,194 In-place lease intangibles, net 14,340 15,687 Above market leases, net 385 399 Total Assets $ 527,150 $ 501,303 Liabilities and Equity Liabilities: Term loans, net $ 163,887 $ 163,753 Revolving credit facility 29,000 — Secured borrowings, net 32,822 32,909 Accounts payable, accrued expenses and other, net 7,996 9,109 Below market leases, net 11,875 11,821 Total Liabilities 245,580 217,592 Commitments and Contingencies Equity: Class A common stock, par value $ 0.01 per share; 500,000,000 shares authorized; 20,002,769 and 19,528,066 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 200 195 Class B common stock, par value $ 0.01 per share; 27,206 shares authorized: 27,206 shares issued and outstanding as of June 30, 2023 and December 31, 2022 — — Additional paid-in capital 258,331 254,107 Accumulated other comprehensive income 7,934 7,486 Accumulated deficit ( 40,754 ) ( 32,557 ) Total Stockholders’ Equity 225,711 229,231 Operating Partnership unitholders’ non-controlling interests 55,859 54,480 Total Equity 281,570 283,711 Total Liabilities and Equity $ 527,150 $ 501,303 The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 Table of Contents POSTAL REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (in thousands, except share and per share data ) For the Three Months Ended June 30, For the Six Months Ended June 30, 2023 2022 2023 2022 Revenues: Rental income $ 14,762 $ 12,135 $ 29,261 $ 23,484 Fee and other 695 589 1,344 1,171 Total revenues 15,457 12,724 30,605 24,655 Operating expenses: Real estate taxes 2,029 1,705 4,012 3,295 Property operating expenses 1,414 1,230 3,038 2,760 General and administrative 3,610 3,309 7,769 6,950 Depreciation and amortization 4,781 4,219 9,618 8,329 Total operating expenses 11,834 10,463 24,437 21,334 Income from operations 3,623 2,261 6,168 3,321 Other income 125 187 239 674 Interest expense, net: Contractual interest expense ( 2,302 ) ( 1,111 ) ( 4,347 ) ( 1,797 ) Write-off and amortization of deferred financing fees ( 165 ) ( 155 ) ( 330 ) ( 284 ) Interest income 1 1 1 1 Total interest expense, net ( 2,466 ) ( 1,265 ) ( 4,676 ) ( 2,080 ) Income before income tax expense 1,282 1,183 1,731 1,915 Income tax expense ( 21 ) ( 18 ) ( 37 ) ( 29 ) Net income 1,261 1,165 1,694 1,886 Net income attributable to Operating Partnership unitholders’ non-controlling interests ( 249 ) ( 212 ) ( 334 ) ( 338 ) Net income attributable to common stockholders $ 1,012 $ 953 $ 1,360 $ 1,548 Net income per share: Basic and Diluted $ 0.03 $ 0.04 $ 0.04 $ 0.06 Weighted average common shares outstanding: Basic and Diluted 19,544,833 18,398,808 19,417,304 18,383,544 Comprehensive income: Net income $ 1,261 $ 1,165 $ 1,694 $ 1,886 Unrealized gain on derivative instruments 3,399 504 562 3,015 Comprehensive income 4,660 1,669 2,256 4,901 Comprehensive income attributable to Operating Partnership unitholders’ non-controlling interests ( 921 ) ( 304 ) ( 448 ) ( 869 ) Comprehensive income attributable to common stockholders $ 3,739 $ 1,365 $ 1,808 $ 4,032 The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 Table of Contents POSTAL REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (in thousands, except share and per share data) Number of shares of Common Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ equity Operating Partnership unitholders’ non-controlling interests Total Equity Balance – December 31, 2022 19,555,272 $ 195 $ 254,107 $ 7,486 $ ( 32,557 ) $ 229,231 $ 54,480 $ 283,711 Net proceeds from sale of common stock 55,082 1 709 — — 710 — 710 Shares issued upon redemption of operating partnership units ("OP Units") 22,798 — 409 — — 409 ( 409 ) — Issuance and amortization of equity-based compensation 146,627 1 1,376 — — 1,377 568 1,945 Issuance and amortization under the employee stock purchase plan ("ESPP") 6,446 — 94 — — 94 — 94 Restricted stock withholdings ( 21,310 ) — ( 327 ) — — ( 327 ) — ( 327 ) Dividends and distributions — — — — ( 4,787 ) ( 4,787 ) ( 1,176 ) ( 5,963 ) Unrealized loss on derivative instrument — — — ( 2,279 ) — ( 2,279 ) ( 558 ) ( 2,837 ) Net income — — — — 348 348 85 433 Reallocation of non-controlling interest — — ( 2,338 ) — — ( 2,338 ) 2,338 — Balance – March 31, 2023 19,764,915 $ 197 $ 254,030 $ 5,207 $ ( 36,996 ) $ 222,438 $ 55,328 $ 277,766 Net proceeds from sale of common stock 265,225 3 3,840 — — 3,843 — 3,843 Issuance of OP Units in connection with transaction — — — — — — 548 548 Cash redemption for non-controlling interests — — — — — — (558) (558) Issuance and amortization of equity-based compensation, net of forfeitures ( 165 ) — 684 — — 684 558 1,242 Issuance and amortization under ESPP — — 6 — — 6 — 6 Dividends and distributions — — — — ( 4,770 ) ( 4,770 ) ( 1,167 ) ( 5,937 ) Unrealized gain on derivative instrument — — — 2,727 — 2,727 672 3,399 Net income — — — — 1,012 1,012 249 1,261 Reallocation of non-controlling interest — — ( 229 ) — — ( 229 ) 229 — Balance – June 30, 2023 20,029,975 $ 200 $ 258,331 $ 7,934 $ ( 40,754 ) $ 225,711 $ 55,859 $ 281,570 Balance - December 31, 2021 18,591,627 $ 186 $ 237,969 $ 766 $ ( 18,879 ) $ 220,042 $ 45,431 $ 265,473 Issuance of OP Units in connection with acquisition transactions — — — — — — 3,238 3,238 3 Table of Contents Issuance and amortization of equity-based compensation 199,102 2 1,426 — — 1,428 371 1,799 Issuance and amortization under ESPP 5,387 — 100 — — 100 — 100 Restricted stock withholdings ( 3,492 ) — ( 62 ) — — ( 62 ) — ( 62 ) Dividends and distributions — — — — ( 4,295 ) ( 4,295 ) ( 902 ) ( 5,197 ) Accumulated other comprehensive income — — — 2,072 — 2,072 439 2,511 Net income — — — — 595 595 126 721 Reallocation of non-controlling interest — — 346 — — 346 ( 346 ) — Balance – March 31, 2022 18,792,624 $ 188 $ 239,779 $ 2,838 $ ( 22,579 ) $ 220,226 $ 48,357 $ 268,583 Net proceeds from sale of common stock — — — — — — — — Issuance of OP Units in connection with acquisition transactions — — — — — — 1,987 1,987 Issuance and amortization of equity-based compensation, net of forfeitures ( 471 ) — 618 — — 618 366 984 Issuance and amortization under ESPP — — 2 — — 2 — 2 Restricted stock withholdings ( 14,590 ) — ( 221 ) — — ( 221 ) — ( 221 ) Dividends and distributions — — — — ( 4,342 ) ( 4,342 ) ( 963 ) ( 5,305 ) Accumulated other comprehensive income — — — 412 — 412 92 504 Net income — — — — — 953 953 212 1,165 Reallocation of non-controlling interest — — 225 — — 225 ( 225 ) — Balance – June 30, 2022 18,777,563 $ 188 $ 240,403 $ 3,250 $ ( 25,968 ) $ 217,873 $ 49,826 $ 267,699 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 Table of Contents POSTAL REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) For the Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net income $ 1,694 $ 1,886 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,071 4,865 Amortization of in-place intangibles 3,547 3,464 Write-off and amortization of deferred financing costs 330 284 Amortization of above/below market leases ( 1,176 ) ( 1,022 ) Amortization of intangible liability ( 49 ) ( 41 ) Equity based compensation 3,207 2,691 Deferred rent receivable ( 162 ) ( 293 ) Deferred rent expense payable 2 5 Other 23 23 Changes in assets and liabilities: Rent and other receivables 884 834 Prepaid expenses and other assets 1,171 964 Accounts payable, accrued expenses and other ( 935 ) ( 603 ) Net cash provided by operating activities 14,607 13,057 Cash flows from investing activities: Acquisition of real estate ( 32,863 ) ( 79,879 ) Investment in financing leases — ( 10 ) Escrows for acquisition and construction deposits ( 222 ) ( 568 ) Capital improvements ( 968 ) ( 1,781 ) Insurance proceeds related to property damage claims — 557 Other investing activities ( 28 ) ( 591 ) Net cash used in investing activities ( 34,081 ) ( 82,272 ) Cash flows from financing activities: Repayments of secured borrowings ( 97 ) ( 92 ) Proceeds from term loans — 75,000 Proceeds from revolving credit facility 32,000 92,000 Repayments of revolving credit facility ( 3,000 ) ( 87,000 ) Redemption of OP Units ( 558 ) — Net proceeds from issuance of shares 4,561 — Deferred offering costs ( 107 ) ( 242 ) Debt issuance costs — ( 612 ) Proceeds from issuance of ESPP shares 79 83 Value of shares withheld for payment of taxes related to employee stock compensation ( 467 ) ( 383 ) Dividends and distributions ( 11,900 ) ( 10,502 ) Other financing activities ( 137 ) ( 116 ) Net cash provided by financing activities 20,374 68,136 Net increase (decrease) in Cash and Escrows and Reserves 900 ( 1,079 ) Cash and Escrows and Reserves at the beginning of period 2,042 7,026 Cash and Escrow and Reserves at the end of period $ 2,942 $ 5,947 Supplemental Disclosure of Non-Cash Investing and Financing Activities Reallocation of non-controlling interest 2,567 571 Unrealized gain on interest rate swaps, net 562 3,015 5 Table of Contents OP Units issued for property acquisitions 548 3,773 Shares issued upon redemption of OP Units 409 — Accrued capital expenditures included in accounts payable and accrued expenses 235 846 Reclassification of acquisition deposits included in prepaid expenses and other assets 205 504 Write-off of fixed assets no longer in service 151 129 Reclassification of construction deposits included in prepaid expenses and other assets 113 12 Accrued costs of capital included in accounts payable and accrued expenses 8 11 Right of use assets — 38 OP Units issued for business acquisition — 1,451 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Organization and Description of Business Postal Realty Trust, Inc. (the “Company”) was organized in the state of Maryland on November 19, 2018. On May 17, 2019, the Company completed its initial public offering (“IPO”) of the Company’s Class A common stock, par value $ 0.01 per share (the “Class A common stock”). The Company contributed the net proceeds from the IPO to Postal Realty LP, a Delaware limited partnership (the “Operating Partnership”), in exchange for common units of limited partnership interest in the Operating Partnership (the “OP Units”). Both the Company and the Operating Partnership commenced operations upon completion of the IPO and certain related formation transactions. Prior to the completion of the IPO and the formation transactions, the Company had no operations. The Company’s interest in the Operating Partnership entitles the Company to share in distributions from, and allocations of profits and losses of, the Operating Partnership in proportion to the Company’s percentage ownership of OP Units. As the sole general partner of the Operating Partnership, the Company has the exclusive power under the partnership agreement to manage and conduct the Operating Partnership’s business, subject to limited approval and voting rights of the limited partners. As of June 30, 2023, the Company held an approximately 80.2 % interest in the Operating Partnership. As the sole general partner and the majority interest holder, the Company consolidates the financial position and results of operations of the Operating Partnership. The Operating Partnership is considered a variable interest entity (“VIE”) in which the Company is the primary beneficiary. As of June 30, 2023, the Company owned a portfolio of 1,364 properties located in 49 states and one territory. The Company’s properties are leased primarily to a single tenant, the United States Postal Service (the “USPS”). In addition, through its taxable REIT subsidiary (“TRS”), Real Estate Asset Counseling, LLC (“REAC”), the Company provides fee-based third party property management services for an additional 397 properties, which are owned by Andrew Spodek, the Company's chief executive officer ("CEO"), and his affiliates, and certain advisory services to third-party owners of postal properties. Pursuant to the Company’s articles of amendment and restatement, the Company is currently authorized to issue up to 500,000,000 shares of Class A common stock, 27,206 shares of Class B common stock, $ 0.01 par value per share (the “Voting Equivalency stock”), and up to 100,000,000 shares of preferred stock. The Company elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the Company's short taxable year ended December 31, 2019, and intends to continue to qualify as a REIT. As a REIT, the Company generally will not be subject to federal income tax to the extent that it distributes its REIT taxable income for each tax year to its stockholders. REITs are subject to a number of organizational and operational requirements. Additionally, any income earned by the TRS and any other TRS the Company forms in the future will be subject to federal, state and local corporate income tax. Pursuant to the Jumpstart Our Business Startups Act, the Company qualifies as an emerging growth company (“EGC”). An EGC may choose, as the Company has done, to take advantage of the extended private company transition period provided for complying with new or revised accounting standards that may be issued by the Financial Accounting Standards Board (“FASB”) or the Securities and Exchange Commission. Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited Consolidated Financial Statements include the financial position and results of operations of the Company, the Operating Partnership and its wholly owned subsidiaries. The Company consolidates the Operating Partnership, a VIE in which the Company is 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. Substantially all of the assets and liabilities of the Company relate to the Operating Partnership. 7 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) A non-controlling interest is defined as the portion of the equity in an entity not attributable, directly or indirectly, to the Company. 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 reflects the income attributed to controlling and non-controlling interests. The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial state ments. This interim financial information should be read in conjunction with the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2023. All material intercompany accounts and transactions have been eliminated. 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. As discussed in the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, t he Company’s most significant assumptions and estimates are related to the valuation of investments in real estate properties and impairment of long-lived assets. Although management believes its estimates are reasonable, actual results could differ from those estimates. Offering and Other Costs Offering costs are recorded in “Total Stockholders’ Equity” on the Consolidated Balance Sheets as a reduction of additional paid-in capital. Deferred Costs Financing costs related to the issuance of the Company’s long-term debt, including the term loan facility component of the Company's existing credit facilities (the "Credit Facilities"), are deferred and amortized as an increase to interest expense over the term of the related debt instrument using the straight-line method, which approximates the effective-interest rate method, and are reported as a reduction of the related debt balance on the Consolidated Balance Sheets. Deferred financing costs related to the revolving credit facility component (the "Revolving Credit Facility") of the Credit Facilities are deferred and amortized as an increase to interest expense over the terms of the Revolving Credit Facility and are included in “Prepaid expenses and other assets, net” on the Consolidated Balance Sheets. Cash and Escrows and Reserves Cash includes unrestricted cash with a maturity of three months or less. Escrows and reserves consist of restricted cash. The following table provides a reconciliation of cash and escrows and reserves reported within the Consolidated Balance Sheets and Consolidated Statements of Cash Flows: As of June 30, 2023 December 31, 2022 (in thousands) Cash $ 2,191 $ 1,495 Escrows and reserves: Maintenance reserve 260 206 Real estate tax reserve 384 240 ESPP reserve 107 101 Cash and escrows and reserves $ 2,942 $ 2,042 8 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Revenue Recognition The Company has operating lease agreements with tenants, some of which contain provisions for future rental increases. Rental income is recognized on a straight-line basis over the term of the lease. In addition, certain lease agreements provide for reimbursements from tenants for real estate taxes and other recoverable costs, which are recorded on an accrual basis as part of “Rental income” in the Consolidated Statements of Operations and Comprehensive Income. The Company’s determination of the probability to collect lease payments is impacted by numerous factors, including the Company's assessment of the tenant’s creditworthiness, economic conditions, historical experience with the tenant, future prospects for the tenant and the length of the lease term. If leases currently classified as probable of collection are subsequently reclassified as not probable, any outstanding lease receivables (including straight-line rent receivables) would be written-off with a corresponding decrease in rental income. Fee and other primarily consists of (i) property management fees, (ii) income recognized from properties accounted for as financing leases and (iii) fees earned from providing advisory services to third-party owners of postal properties. The management fees arise from contractual agreements with entities that are affiliated with the Company’s CEO. Management fee income is recognized as earned under the respective agreements. Revenue from direct financing leases is recognized over the lease term using the effective interest rate method. At lease inception, the Company records an asset within "Investment in financing leases, net" on the Consolidated Balance Sheets, which represents the Company’s net investment in the direct financing lease. This initial net investment is determined by aggregating the total future minimum lease payments attributable to the direct financing lease and the estimated residual value of the property, if any, less unearned income. Over the lease term, the investment in the direct financing lease is reduced and interest is recognized as revenue in “Fee and other” in the Consolidated Statements of Operations and Comprehensive Income and produces a constant periodic rate of return on the "Investment in financing leases, net". Revenue from advisory services is generated from service contracts generally based on (i) time and expense arrangements (where the Company recognizes revenues based on hours incurred and contracted rates), (ii) fixed-fee arrangements (where the Company recognizes revenues earned to date by applying the proportional performance method) or (iii) performance-based or contingent arrangements (where the Company recognizes revenues at a point in time when the client receives the benefit of the promised service). Reimbursable expenses for the advisory services, including those relating to travel, out-of-pocket expenses, outside consultants and other outside service costs, are generally included in revenues and in general and administrative expenses in the period in which the expense is incurred. Fair Value Measurements The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could have realized on disposition of the assets and liabilities as of June 30, 2023 and December 31, 2022. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash, escrows and reserves, receivables, prepaid expenses and other assets (excluding derivatives), accounts payable and accrued expenses are carried at amounts which reasonably approximate their fair values as of June 30, 2023 and December 31, 2022 due to their short maturities. The fair value of the Company’s borrowings under its Credit Facilities approximates carrying value because such borrowings are subject to a variable market rate, which reprices frequently. The fair value was determined using the Adjusted Term SOFR (as defined below) as of June 30, 2023 and December 31, 2022, plus an applicable spread under the Credit Facilities, a Level 2 classification in the fair value hierarchy. The fair value of the Company’s secured borrowings aggregated approximately $ 27.8 million and $ 27.5 million as compared to the principal balance of $ 33.0 million and $ 33.1 million as of June 30, 2023 and December 31, 2022, respectively. The fair value of the Company’s secured debt was categorized as a Level 3 fair value estimate (as provided by ASC 820, Fair Value Measurements and Disclosures). The fair value of the mortgage debt was determined by discounting the future contractual interest and principal payments by a market rate. The Company's derivative assets and liabilities, comprised of interest rate swap derivative instruments entered into in connection with the Credit Facilities, are recorded at fair value based on a variety of observable inputs, including contractual terms, interest rate curves, yield curves, measure of volatility and correlations of such inputs. The Company measures its 9 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) derivatives at fair value on a recurring basis based on the expected amount of future cash flows on a discounted basis and incorporating a measure of non-performance risk. The fair value of the Company's derivative assets and liabilities was categorized as a Level 2 fair value estimate (as provided by ASC 820, Fair Value Measurements and Disclosures). The Company considers its own credit risk, as well as the credit risk of its counterparties, when evaluating the fair value of its derivative assets and liabilities. As of June 30, 2023 and December 31, 2022, the fair value of the Company’s interest rate swap derivative assets was approximately $ 9.8 million and $ 9.2 million, respectively, included in “Prepaid expenses and other assets, net” on the Consolidated Balance Sheets. Disclosures about fair value of assets and liabilities are based on pertinent information available to management as of June 30, 2023 and December 31, 2022. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since June 30, 2023 and current estimates of fair value may differ significantly from the amounts presented herein. Derivative Instruments and Hedging Activities In accordance with ASC 815, Derivatives and Hedging, the Company records all derivative instruments on the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. See Note 6. Derivatives and Hedging Activities for further details. Impairment of Long-Lived Assets The carrying value of real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the asset’s carrying amount over its estimated fair value. Impairment analyses will be based on current plans, intended holding periods and available market information at the time the analyses are prepared. If estimates of the projected future cash flows, anticipated holding periods or market conditions change, the evaluation of impairment losses may be different and such differences may be material. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. No impairments were recorded during the three and six months ended June 30, 2023 and 2022. Concentration of Credit Risks As of June 30, 2023, the Company’s properties were leased primarily to a single tenant, the USPS. For the six months ended June 30, 2023, approximately 13.3 % of the Company’s total rental income, or $ 3.9 million, was concentrated in Pennsylvania. For the six months ended June 30, 2022, approximately 16.1 % of the Company's total rental income, or $ 3.8 million, was concentrated in Pennsylvania. The ability of the USPS to honor the terms of its leases is dependent upon regulatory, economic, environmental or competitive conditions in Pennsylvania or other regions where the Company operates in and could have a material effect on the Company’s overall business results. The Company has deposited cash and maintains its bank deposits with large financial institutions in amounts that, from time to time, exceed federally insured limits. The Company has not experienced any losses in such accounts. Equity-Based Compensation The Company accounts for equity-based compensation in accordance with ASC Topic 718 Compensation – Stock Compensation, which requires the Company to recognize an expense for the grant date fair value of equity-based awards. Equity-classified stock awards granted to employees and non-employees that have a service condition and/or a market condition 10 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) are measured at fair value at date of grant and remeasured at fair value only upon a modification of the award. The Company records forfeitures as a reduction of equity-based compensation expense as such forfeitures occur. The Company recognizes compensation expense on a straight-line basis over the requisite service period of each award, with the amount of compensation expense recognized at the end of a reporting period at least equal to the portion of fair value of the respective award at grant date or modification date, as applicable, that has vested through that date. For awards with a market condition, compensation cost is not reversed if a market condition is not met so long as the requisite service has been rendered, as a market condition does not represent a vesting condition. See Note 11. Stockholders’ Equity for further details. Insurance Accounting The Company carries liability insurance to mitigate its exposure to certain losses, including those relating to property damage and business interruption. The Company records the estimated amount of expected insurance proceeds for property damage and other losses incurred as an asset (typically a receivable from the insurer) and income up to the amount of the losses incurred when the amount is determinable and approved by the insurance company. Any amount of insurance recovery in excess of the amount of the losses incurred is considered a gain contingency and is not recorded in other income until the amount is determinable and approved by the insurance company. Insurance recoveries for business interruption for lost revenue or profit are accounted for as gain contingencies in their entirety, and therefore are not recorded in income until the amount is determinable and approved by the insurance company. Earnings per Share The Company calculates earnings per share ("EPS") based upon the weighted average shares outstanding less issued and outstanding non-vested shares of Class A common stock. As of June 30, 2023 and 2022, the Company had unvested restricted shares of Class A common stock, long term incentive units of the Operating Partnership ("LTIP Units") and certain restricted stock units (“RSUs”), which provide for non-forfeitable rights to dividend and dividend equivalent payments. Accordingly, these unvested restricted shares of Class A common stock, LTIP Units and RSUs are considered participating securities and are included in the computation of basic and diluted EPS pursuant to the two-class method. Diluted EPS is calculated after giving effect to all potential dilutive shares outstanding during the period. See Note 10. Earnings Per Share for further details. Recently Adopted Accounting Pronouncements In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and in November 2018 issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses . The guidance changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaced the previous "incurred loss" model with an "expected loss" approach. The guidance also requires entities to disclose information about how they developed the allowances, including changes in the factors that influenced estimate of expected credit losses and the reasons for those changes. ASU No. 2018-19 excludes operating lease receivables from the scope of this guidance. This guidance became effective for the Company and was adopted by the Company on January 1, 2023. Upon adoption of this guidance, the Company had two direct financing leases with a net investment balance aggregating approximately $ 16.1 million prior to any credit loss adjustment. Historically, the Company has had no collection issues related to these direct financing leases and its other leases in which the Company is the lessor; therefore, the Company assessed the probability of default on these leases based on the lessee’s status as an independent agency of the executive branch of the U.S. federal government, financial condition and business prospects and the remaining term of the leases. Based on the aforementioned, the Company did not recognize any credit loss adjustment for such leases. 11 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 3. Real Estate Acquisitions The following tables summarizes the Company’s acquisitions for the six months ended June 30, 2023. The purchase prices including transaction costs were allocated to the separately identifiable tangible and intangible assets and liabilities based on their relative fair values at the date of acquisition. The total purchase price including transaction costs was allocated as follows (in thousands, except for the number of properties): Three Months Ended Number of Properties Land Building and Improvements Tenant Improvements In-place lease intangibles Above- market leases Below- market leases Other Total (1) 2023 March 31, 2023 (2) 39 $ 2,802 $ 14,271 $ 152 $ 1,134 $ 43 $ ( 826 ) $ — $ 17,576 June 30, 2023 (3) 39 $ 3,241 $ 12,054 $ 117 $ 1,066 $ 24 $ ( 483 ) $ — $ 16,019 Total 78 $ 6,043 $ 26,325 $ 269 $ 2,200 $ 67 $ ( 1,309 ) $ — $ 33,595 Explanatory Notes : (1) Includes closing costs of approximately $ 0.3 million for the three months ended March 31, 2023 and $ 0.2 million for the three months ended June 30, 2023. (2) Includes the acquisition of 39 properties in various states for cash consideration in individual or portfolio transactions for a price of approximately $ 17.6 million, including closing costs. (3) Includes the acquisition of 39 properties in various states in individual or portfolio transactions for a price of approximately $ 16.0 million, including closing costs, which was funded with both the issuance of OP Units to the sellers (valued at approximately $ 0.5 million using the share price of Class A common stock on the date of each issuance of such OP units) and cash consideration. Note 4. Intangible Assets and Liabilities The following table summarizes the Company’s intangible assets and liabilities: As of Gross Asset (Liability) Accumulated Amortization Net Carrying Amount (in thousands) June 30, 2023: In-place lease intangibles $ 42,274 $ ( 27,934 ) $ 14,340 Above-market leases 623 ( 238 ) 385 Below-market leases ( 20,386 ) 8,511 ( 11,875 ) December 31, 2022: In-place lease intangibles $ 40,074 $ ( 24,387 ) $ 15,687 Above-market leases 556 ( 157 ) 399 Below-market leases ( 19,077 ) 7,256 ( 11,821 ) Amortization of in-place lease intangibles was $ 1.8 million and $ 3.5 million for the three and six months ended June 30, 2023, respectively, and $ 1.7 million and $ 3.5 million for the three and six months ended June 30, 2022, respectively. This amortization is included in “Depreciation and amortization” in the Consolidated Statements of Operations and Comprehensive Income. Amortization of acquired above-market leases was $ 0.04 million and $ 0.08 million for the three and six months ended June 30, 2023, respectively, and $ 0.02 million and $ 0.04 million for the three and six months ended June 30, 2022, respectively, 12 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) and is included in “Rental income” in the Consolidated Statements of Operations and Comprehensive Income. Amortization of acquired below-market leases was $ 0.6 million and $ 1.3 million for the three and six months ended June 30, 2023, respectively, and $ 0.5 million and $ 1.1 million for the three and six months ended June 30, 2022, respectively, and is included in “Rental income” in the Consolidated Statements of Operations and Comprehensive Income. Future amortization/accretion of these intangibles is below (in thousands): Year Ending December 31, In-place lease intangibles Above-market leases Below-market leases 2023-Remaining $ 3,208 $ 81 $ ( 1,233 ) 2024 5,085 124 ( 2,143 ) 2025 3,203 89 ( 1,566 ) 2026 1,837 67 ( 1,266 ) 2027 694 15 ( 990 ) Thereafter 313 9 ( 4,677 ) Total $ 14,340 $ 385 $ ( 11,875 ) Note 5. Debt The following table summarizes the Company’s indebtedness as of June 30, 2023 and December 31, 2022 (dollars in thousands): Outstanding Balance as of June 30, 2023 Outstanding Balance as of December 31, 2022 Interest Rate at June 30, 2023 Maturity Date Revolving Credit Facility (1) $ 29,000 $ — SOFR+ 148 bps (2) January 2026 2021 Term Loan (1) 50,000 50,000 SOFR+ 143 bps (2) January 2027 2022 Term Loan (1) 115,000 115,000 SOFR+143 bps (2) February 2028 Secured Borrowings: Vision Bank (3) 1,409 1,409 3.69 % September 2041 First Oklahoma Bank (4) 324 333 3.63 % December 2037 Vision Bank – 2018 (5) 844 844 3.69 % September 2041 Seller Financing (6) 194 282 6.00 % January 2025 AIG (7) 30,225 30,225 2.80 % January 2031 Total Principal 226,996 198,093 Unamortized deferred financing costs ( 1,287 ) ( 1,431 ) Total Debt $ 225,709 $ 196,662 Explanatory Notes : (1) On August 9, 2021, the Company entered into the Credit Facilities, which included the $ 150.0 million Revolving Credit Facility and the $ 50.0 million senior unsecured term loan facility (the "2021 Term Loan"). On May 11, 2022, the Company amended the Credit Facilities to, among other things, add a new $ 75.0 million senior unsecured delayed draw term loan facility (the "2022 Term Loan" and, together with the 2021 Term Loan, the "Term Loans"), replace the London Interbank Offered Rate with the Secured Overnight Financing Rate ("SOFR") as the benchmark interest rate and allow for a decrease in the applicable margin by 0.02 % if the Company achieves certain sustainability targets. On December 6, 2022, the Company exercised $ 40.0 million of term loan accordion under the 2022 Term Loan. On July 24, 2023, the Company amended the Credit Facilities (the "Second Amendment") to, among other things, add a daily simple SOFR-based option to the term SOFR-based floating interest rate option as a benchmark rate for borrowings under the Credit Facilities and further exercised $25.0 million of term loan accordion under the 2021 Term Loan and, on a delayed-draw basis, $10.0 million of term loan accordion under the 2022 Term Loan. 13 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) The Credit Facilities include an accordion feature which permits the Company to borrow up to an additional $ 150.0 million under the Revolving Credit Facility, subject to customary terms and conditions. Subsequent to June 30, 2023, the accordion feature under the Term Loans has been fully exercised. The Revolving Credit Facility matures in January 2026, which may be extended for two six-month periods subject to customary conditions, the 2021 Term Loan matures in January 2027 and the 2022 Term Loan matures in February 2028. Borrowings under the Credit Facilities carry an interest rate of, (i) in the case of the Revolving Credit Facility, either a base rate plus a margin ranging from 0.5 % to 1.0 % per annum or Adjusted Term SOFR (as defined below) plus a margin ranging from 1.5 % to 2.0 % per annum, or (ii) in the case of the Term Loans, either a base rate plus a margin ranging from 0.45 % to 0.95 % per annum or Adjusted Term SOFR plus a margin ranging from 1.45 % to 1.95 % per annum, in each case depending on the Company's consolidated leverage ratio. With respect to the Revolving Credit Facility, the Company will pay, if the usage is equal to or less than 50 %, an unused facility fee of 0.20 % per annum, or if the usage is greater than 50 %, an unused facility fee of 0.15 % per annum, in each case on the average daily unused commitments under the Revolving Credit Facility. The Credit Facilities contain a number of customary financial and non-financial covenants. During the three and six months ended June 30, 2023, the Company incurred $ 0.07 million and $ 0.1 million, respectively, and, during the three and six months ended June 30, 2022, the Company incurred $ 0.06 million and $ 0.1 million, respectively, of unused facility fees related to the Revolving Credit Facility. As of June 30, 2023, the Company was in compliance with all of the Credit Facilities’ debt covenants. (2) Based upon the one-month Adjusted Term SOFR, which is SOFR plus a term SOFR adjustment of 0.10 %, subject to a 0 % floor (the “Adjusted Term SOFR”) . Upon the Company's achievement of certain sustainability targets for 2022, the applicable margins for the Credit Facilities were reduced by 0.02 % for the year ending December 31, 2023, which is reflected in the margins noted in the table above. (3) Five properties are collateralized under this loan and Mr. Spodek also provided a personal guarantee of payment for 50 % of the outstanding amount thereunder. The loan has a fixed interest rate of 3.69 % for the first five years with interest payments only (ending in October 2026), then adjusting every subsequent five year period thereafter with principal and interest payments to the rate based on the five year weekly average yield on United States Treasury securities adjusted to a constant maturity of five years , as made available to the Board of Governors of the Federal Reserve System (the "Five-Year Treasury Rate"), plus a margin of 2.75 %, with a minimum annual rate of 2.75 %. (4) The loan is collateralized by first mortgage liens on four properties and a personal guarantee of payment by Mr. Spodek. The loan has a fixed interest rate of 3.625 % for the first five years (ending in August 2026), then adjusting annually thereafter to a variable annual rate of Wall Street Journal Prime Rate with a minimum annual rate of 3.625 %. (5) The loan is collateralized by first mortgage liens on one property and a personal guarantee of payment by Mr. Spodek. The loan has a fixed interest rate of 3.69 % for the first five years with interest payments only (ending in October 2026), then adjusting every subsequent five year period thereafter with principal and interest payments to the rate based on the Five-Year Treasury Rate, plus a margin of 2.75 %, with a minimum annual rate of 2.75 %. (6) In connection with the acquisition of a property, the Company obtained seller financing secured by the property in the amount of $ 0.4 million requiring five annual payments of principal and interest of $ 0.1 million with the first installment due on January 2, 2021 based on a 6.0 % interest rate per annum through January 2, 2025. (7) The loan is secured by a first mortgage lien on an industrial property located in Warrendale, Pennsylvania. 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. The weighted average maturity date for the Company's indebtedness as of June 30, 2023 and December 31, 2022 was approximately 4.7 years and 5.5 years, respectively. 14 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) The scheduled principal repayments of indebtedness as of June 30, 2023 are as follows (in thousands): Year Ending December 31, Amount 2023 - Remaining $ 9 2024 112 2025 118 2026 29,636 2027 50,774 Thereafter 146,347 Total $ 226,996 Note 6. Derivatives and Hedging Activities As of June 30, 2023, the Company had five interest rate swaps with a total notional amount of $ 165.0 million that are used to manage its interest rate risk and fix the SOFR component on the Credit Facilities. Within the $ 165.0 million, $ 50.0 million of the swaps mature in January 2027 and fix the interest rate of the 2021 Term Loan at 2.27 % as of June 30, 2023. An additional $ 50.0 million of the swaps mature in February 2028 and fix the first $ 50.0 million amount outstanding under the 2022 Term Loan at 4.217 % as of June 30, 2023. An additional $ 25.0 million of the swaps mature in February 2028 and fix the additional $ 25.0 million amount outstanding under the 2022 Term Loan at 4.79 % as of June 30, 2023. The remaining $ 40.0 million of the swaps mature in February 2028 and fix the remaining $ 40.0 million amount outstanding under the 2022 Term Loan at 4.932 % as of June 30, 2023. On July 24, 2023, in connection with the exercise of $ 25.0 million term loan accordion under the 2021 Term Loan, the Company further entered into an interest rate swap that effectively fixed the interest rate on the additional $ 25.0 million of the 2021 Term Loan through January 2027 at 5.736 %. The Company’s objectives in using the interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company uses the interest rate swaps as part of its interest rate risk management strategy. The interest rate swaps are designated as cash flow hedges, with any gain or loss recorded in “Accumulated other comprehensive income” on the Consolidated Balance Sheets and subsequently reclassified into interest expense as interest payments are made on the Credit Facilities. During the next twelve months, the Company estimates that an additional $ 4.7 million will be reclassified from “Accumulated other comprehensive income” as a decrease to interest expense. The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges. The table below presents the effect of the Company’s interest rate swap derivative instruments in the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2023 and 2022 (in thousands): For the Three Months Ended June 30, For the Six Months Ended June 30, Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps) 2023 2022 2023 2022 Amount of (loss) gain recognized on derivative in "Accumulated other comprehensive income" $ 4,491 $ 375 $ 2,553 $ 2,801 Amount of gain (loss) reclassified from "Accumulated other comprehensive income" into interest expense $ 1,092 $ ( 129 ) $ 1,991 $ ( 214 ) "Interest expense, net" presented in the Consolidated Statements of Operations and Comprehensive Income, in which the effects of cash flow hedges are recorded, totaled $ 2.5 million and $ 4.7 million for the three and six months ended June 30, 2023, respectively, and $ 1.3 million and $ 2.1 million for the three and six months ended June 30, 2022, respectively. 15 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 7. Leases Lessor Accounting As of June 30, 2023, the Company's properties were leased primarily to the USPS, with leases expiring at various dates through May 31, 2031. Certain leases had expired and were in holdover status as of June 30, 2023 as discussed below. Certain leases contain renewal, termination and/or purchase options exercisable at the lessee’s election. Therefore, such options are only recognized once they are deemed reasonably certain, typically at the time the option is exercised. All of the Company’s leases are operating leases with the exception of two that are direct financing leases. The Company's operating leases and direct financing leases are described below. Rental income related to the Company’s leases is recognized on a straight-line basis over the remaining lease term. The Company’s total revenue includes fixed base rental payments provided under the lease and variable payments which principally consist of tenant expense reimbursements for certain property operating expenses, including real estate taxes. The Company elected the practical expedient to account for its lease and non-lease components as a single combined operating lease component under Topic 842. As a result, rental income and tenant reimbursements were aggregated into a single line within rental income in the Consolidated Statements of Operations and Comprehensive Income. The following table represents rental revenue that the Company recognized related to its operating leases (in thousands): For the Three Months Ended June 30, For the Six Months Ended June 30, 2023 2022 2023 2022 Fixed payments $ 12,854 $ 10,482 $ 25,404 $ 20,146 Variable payments 1,908 1,653 3,857 3,338 $ 14,762 $ 12,135 $ 29,261 $ 23,484 Future minimum lease payments to be received as of June 30, 2023 under non-cancellable operating leases for the next five years and thereafter are as follows (in thousands): Year Ending December 31, Amount (1)(2) 2023 - Remaining $ 21,551 2024 40,391 2025 33,838 2026 25,414 2027 14,190 Thereafter 15,716 Total $ 151,100 Explanatory Notes : (1) The above minimum lease payments to be received do not include reimbursements from tenants for real estate taxes and other reimbursed expenses. (2) As of June 30, 2023, the leases at 115 of the Company's properties were expired, and the USPS was occupying such properties as a holdover tenant. As such, the above minimum lease payments to be received do not include payments under these holdover leases. Holdover rent is typically paid as the greater of estimated market rent or the rent amount due under the expired lease. Purchase Option Provisions As of June 30, 2023, operating leases for 67 of the Company’s properties provided the USPS with the option to purchase the underlying property either at fair market value or at fixed prices, in each case as of dates set forth in the lease agreement. As of June 30, 2023, 64 of these properties had an aggregate carrying value of approximately $ 49.2 million with an 16 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) aggregate purchase option price of approximately $ 61.9 million and the remaining three properties had an aggregate carrying value of approximately $ 2.6 million with purchase options exercisable at fair market value. Investment in Financing Leases, Net As of June 30, 2023 and December 31, 2022, financing leases for two of the Company's properties provide the USPS with the option to purchase the underlying property at fixed prices as of dates set forth in the lease agreement. The components of the Company’s net investment in financing leases as of June 30, 2023 and December 31, 2022 are summarized in the table below (in thousands): As of June 30, 2023 As of December 31, 2022 Total minimum lease payment receivable $ 32,646 $ 33,215 Less: unearned income ( 16,563 ) ( 17,085 ) Investment in financing leases, net $ 16,083 $ 16,130 Revenue earned under direct financing leases for the three and six months ended June 30, 2023 were $ 0.3 million and $ 0.5 million, respectively, and for the three and six months ended June 30, 2022 were $ 0.3 million and $0.6 million, respectively, which is recorded in "Fee and other" in the Consolidated Statements of Operations and Comprehensive Income. Future lease payments to be received under the Company’s direct financing leases as of June 30, 2023 for the next five years and thereafter are as follows (in thousands): Year Ending December 31, Amount 2023 – Remaining $ 568 2024 1,137 2025 1,137 2026 1,137 2027 1,137 Thereafter 27,530 Total $ 32,646 Lessee Accounting As a lessee, the Company has ground and office leases which were classified as operating leases. As of June 30, 2023, these leases had remaining terms, including renewal options, of one to 56 years and a weighted average remaining lease term of 22.1 years. Operating right-of-use ("ROU") assets and lease liabilities are included in “Prepaid expenses and other assets, net” and “Accounts payable, accrued expense and other, net” on the Consolidated Balance Sheets as follows (in thousands): As of June 30, 2023 As of December 31, 2022 ROU asset – operating leases $ 908 $ 1,010 Lease liability – operating leases $ 914 $ 1,014 The difference between the recorded ROU assets and lease liabilities is mainly due to the reclassification of the below market ground lease intangible asset which was included within the ROU assets recognized upon transition. Operating lease assets and liabilities are measured at the commencement date based on the present value of future lease payments. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The Company used a discount rate ranging from 4.25 % to 6.37 % based on the yield of its current borrowings in determining its lease liabilities. 17 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend or terminate the lease if it is reasonably certain that the Company will exercise that option. Operating lease expense for each of the three and six months ended June 30, 2023 and 2022 was $ 0.06 million and $ 0.1 million, respectively. See Note 9. Related Party Transactions for more details. Future minimum lease payments to be paid by the Company as a lessee for operating leases as of June 30, 2023 for the next five years and thereafter are as follows (in thousands): 2023 — Remaining $ 124 2024 121 2025 46 2026 43 2027 43 Thereafter 1,387 Total future minimum lease payments 1,764 Interest discount ( 850 ) Total $ 914 Note 8. Income Taxes TRS In connection with the IPO, the Company and REAC jointly elected to treat REAC as a TRS. REAC performs management services, including for properties the Company does not own, and advisory services to third-party owners of postal properties. REAC generates income, resulting in federal and state corporate income tax liability for REAC. For the three and six months ended June 30, 2023, income tax expense related to REAC was $ 0.01 million and $ 0.03 million, respectively. For the three and six months ended June 30, 2022, income tax expense related to REAC was $ 0.02 million and $ 0.03 million, respectively. Other In connection with the IPO, the indirect sole shareholder of United Postal Holdings, Inc. ("UPH"), a portion of the Company's predecessor, agreed to reimburse the Company for unrecognized tax benefits primarily related to the utilization of certain loss carryforwards at UPH. The Company recorded an indemnification asset in the same amount as the unrecognized tax benefits. The indirect sole shareholder of UPH will be responsible for all tax related matters related to UPH. As of December 31, 2022, the Company had remaining unrecognized tax benefits of $ 0.02 million, which were inclusive of interest and penalties, and a corresponding indemnification asset, which were included in "Prepaid expenses and other assets, net" on the Consolidated Balance Sheets. During the six months ended June 30, 2023, the Company reversed the remaining $ 0.02 million of unrecognized tax benefits and the corresponding indemnification asset due to the expiration of statute of limitations. Note 9. Related Party Transactions Management Fee Income REAC recognized management fee income of $ 0.3 million and $ 0.6 million for the three and six months ended June 30, 2023 and 2022, respectively, from various parties which were affiliated with the Company's CEO. These amounts are included in “Fee and other” in the Consolidated Statements of Operations and Comprehensive Income. Accrued management fees receivable of $ 0.3 million as of June 30, 2023 and December 31, 2022, respectively, are included in “Rent and other receivables” on the Consolidated Balance Sheets. 18 Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Related Party Lease On May 17, 2019, the Company entered into a lease for office space in Cedarhurst, New York with an entity affiliated with the Company’s CEO (the “Office Lease”). Pursuant to the Office Lease, the monthly rent is $ 15,000 subject to escalations. The term of the Office Lease is five years commencing on May 17, 2019 and will expire on May 16, 2024. Rental expenses associated with the Office Lease for each of the three and six months ended June 30, 2023 and 2022 were $ 0.05 million and $ 0.1 million, respectively, and was recorded in “General and administrative expenses” in the Consolidated Statements of Operations and Comprehensive Income. The Company determined this Office Lease was an operating lease. For further details, see Note 7. Leases. Guarantees As disclosed above in Note 5. Debt, Mr. Spodek personally guaranteed a portion of or the entire amount outstanding under the Company's loans with First Oklahoma Bank and Vision Bank, totaling $ 1.9 million and $ 1.9 million as of June 30, 2023 and December 31, 2022, respectively. As a guarantor, Mr. Spodek's interests with respect to the amount of debt he is guaranteeing (and the terms of any repayment or default) may not align with the Company’s interests and could result in a conflict of interest. Note 10. Earnings Per Share EPS is calculated by dividing net income attributable to common stockholders by the weighted average number of shares outstanding for the period. The following table presents a reconciliation of income from operations used in the basic and diluted EPS calculations (dollars in thousands, except share and per share data). For the Three Months Ended June 30, For the Six Months Ended June 30, 2023 2022 2023 2022 Numerator for earnings per share – basic and diluted: Net income attributable to common stockholders $ 1,012 $ 953 $ 1,360 $ 1,548 Less: Income attributable to participating securities ( 346 ) ( 241 ) ( 652 ) ( 470 ) Numerator for earnings per share — basic and diluted $ 666 $ 712 $ 708 $ 1,078 Denominator for earnings per share – basic and diluted (1) 19,544,833 18,398,808 19,417,304 18,383,544 Basic and diluted earnings per share $ 0.03 $ 0.04 $ 0.04 $ 0.06 Explanatory Note : (1) Diluted EPS reflects the potential dilution of the conversion of obligations and the assumed exercises of securities including the effects of restricted shares and RSUs issued under the Company’s 2019 Equity Incentive Plan (the “Plan”) (See Note 11. Stockholders’ Equity). The effect of such shares and RSUs would not be dilutive and were not included in the computation of weighted average number of shares outstanding for the periods presented in the table above. OP Units and LTIP Units are redeemable for cash or, at the Company’s option, shares of Class A common stock on an one-for-one basis. The income allocable to such OP Units and LTIP Units is allocated on this same basis and reflected as non-controlling interests in these unaudited Consolidated Financial Statements. As such, the assumed conversion of these OP Units and LTIP Units would have no net impact on the determination of diluted EPS. Note 11. Stockholders’ Equity ATM Program On November 4, 2022, the Company entered into separate open market sale agreements for its at-the-market offering program (the "ATM Program") with each of Jefferies LLC, BMO Capital Markets Corp., Janney Montgomery Scott LLC, Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Stifel, Nicolaus & Company, Incorporated and Truist Securities, Inc., as agents, pursuant to which the Company may offer and sell, from time to time, shares of its Class A common stock having an aggregate sales price of up to $ 50.0 million. The agreements also provide that the Company may enter into one or more forward sale agreements under separate master forward confirmations and related supplemental confirmations with affiliates of certain agents. The following table summarizes the activity under the ATM Program for the period presented (dollars in thousands, except per share amounts). During the year ended December 31, 2022, 751,382 shares were issued under the ATM Program and the Company's previous at-the-market offering program. During the three and six months ended June 30, 2023, 265,225 shares and 320,307 shares were issued under the ATM program, respectively. During the three and six months ended June 30, 2022, the Company did not issue any shares under its previous at-the-market offering program. As of June 30, 2023, the Company had approximately $ 37.0 million remaining that may be issued under the ATM Program. Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Shares issued 265,225 320,307 Gross proceeds $ 3,996 $ 4,823 Fees and issuance costs ( 153 ) ( 270 ) Net proceeds received $ 3,843 $ 4,553 Average gross sales price per share $ 15.07 $ 15.06 Dividends During the three and six months ended June 30, 2023, the Company's Board of Directors approved and the Company declared and paid dividends of $ 5.9 million and $ 11.8 million, respectively, to Class A common stockholders, Voting Equivalency stockholders, OP unitholders and LTIP unitholders, or $ 0.2375 per share or unit and $0.475 per share or unit, respectively, as shown in the table below. Declaration Date Record Date Date Paid Amount Per Share or Unit February 1, 2023 February 15, 2023 February 28, 2023 $ 0.2375 April 24, 2023 May 5, 2023 May 31, 2023 $ 0.2375 Non-controlling Interests Non-controlling interests in the Company represent OP Units held by the Company's prior investors and certain sellers of properties to the Company and LTIP Units primarily issued to the Company’s employees and the Board of Directors in connection with the IPO and/or in lieu of their cash compensation. During the six months ended June 30, 2023, the Company issued 143,288 LTIP Units to the Company’s CEO for his 2022 incentive bonus, his election to defer 100 % of his 2023 annual salary and for long term incentive compensation, 75,489 LTIP Units to the Company’s president for his 2022 incentive bonus and his election to defer 50% of his 2023 annual salary, 57,057 LTIP Units to the Company's Chief Financial Officer for his 2022 incentive bonus and for long term incentive compensation, 40,635 LTIP Units in June 2023 to the Board of Directors for their annual retainers as compensation for their services as directors, 25,510 LTIP Units to an employee for his 2022 incentive bonus, his election to defer a portion of his 2023 annual salary and for long term incentive compensation and 3,304 LTIP Units to a consultant under the consultancy agreement with the Company. As of June 30, 2023 and December 31, 2022, non-controlling interests consisted of 4,110,602 OP Units and 882,151 LTIP Units and 4,133,619 OP Units and 536,868 LTIP Units, respectively. This represented approximately 19.8 % and 19.2 % of the outstanding Operating Partnership units as of June 30, 2023 and December 31, 2022, respectively. OP Units and shares of Class A common stock generally have the same economic characteristics, as they share equally in the total net income or loss and distributions of the Operating Partnership. Beginning on or after the date which is 12 months after the date on which a person first became a holder of common units, each limited partner and assignees of limited partners will generally have the right, subject to the terms and conditions set forth in the partnership agreement, to require the Operating Partnership to redeem all or a portion of the OP Units held by such limited partner or assignee in exchange for cash, or at the Company's sole discretion, shares of Class A common stock, on an one -for-one basis determined in accordance with and subject to adjustment under the partnership agreement. Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) During the six months ended June 30, 2023, 22,798 OP Units were redeemed for 22,798 shares of Class A common stock. For redemption of OP Units using shares of Class A common stock, the Company adjusted the carrying value of non-controlling interests to reflect its share of the book value of the Operating Partnership reflecting the change in the Company’s ownership of the Operating Partnership. Such adjustments are recorded to additional paid-in capital as a reallocation of non-controlling interest in the Consolidated Statements of Changes in Equity. During the six months ended June 30, 2023, 37,500 OP Units were also redeemed for cash for the total amount of $0.6 million. The Operating Partnership unitholders are entitled to share in cash distributions from the Operating Partnership in proportion to their percentage ownership of OP Units. Restricted Stock and Other Awards Pursuant to the Company’s Plan, the Company may grant equity incentive awards to its directors, officers, employees and consultants. As of June 30, 2023, the remaining shares available under the Plan for future issuance was 1,038,299 . The Plan provides for grants of stock options, stock awards, stock appreciation rights, performance units, incentive awards, other equity-based awards (including LTIP Units) and dividend equivalents in connection with the grant of performance units and other equity-based awards. The following table presents a summary of the Company's outstanding restricted shares of Class A common stock, LTIP Units and RSUs. The balance as of June 30, 2023 represents unvested restricted shares of Class A common stock and LTIP Units and RSUs that are outstanding, whether vested or not: Restricted Shares (1)(2) LTIP Units (3) RSUs (4) Total Shares/Units/RSUs Weighted Average Grant Date Fair Value Outstanding, as of January 1, 2023 449,076 536,868 229,500 1,215,444 $ 16.12 Granted 123,801 345,283 110,968 580,052 $ 15.56 Vesting of restricted shares and RSUs (5) ( 56,940 ) — ( 27,456 ) ( 84,396 ) $ 12.17 Forfeited ( 5,004 ) — ( 11,216 ) ( 16,220 ) $ 8.51 Outstanding, as of June 30, 2023 510,933 882,151 301,796 1,694,880 $ 16.20 Explanatory Notes : (1) Represents restricted shares awards included in Class A common stock. (2) The time-based restricted share awards granted to the Company's officers and employees typically vest in three annual installments or cliff vest at the end of three years or eight years . (3) Includes 143,288 LTIP Units granted to the Company’s CEO, 75,489 LTIP Units granted to the Company’s president and 57,057 LTIP Units granted to the Company's Chief Financial Officer, which vest over three years or cliff vest at the end of eight years . Also includes 25,510 LTIP Units granted to an employee of the Company, a portion of which will vest on December 31, 2023 with the remaining to vest over three years or cliff vest at the end of eight years , 40,635 LTIP Units granted to the Company's independent directors that vest over three years or cliff vest at the end of three years and 3,304 LTIP Units granted to a consultant under the consultancy agreement with the Company that vested on June 30, 2023. (4) Includes 63,512 RSUs granted to certain officers and employees of the Company during the six months ended June 30, 2023, subject to the achievement of a service condition and a market condition. Such RSUs are market-based awards and are subject to the achievement of performance-based hurdles relating to the Company’s specified absolute and relative total stockholder return goals and continued employment with the Company over the approximately three-year period from the grant date through December 31, 2025. The number of market-based RSUs is based on the number of shares issuable upon achievement of the market-based metric at target. Also, includes 46,258 time-based RSUs issued for 2022 incentive bonuses to certain employees that vested fully on January 31, 2023, the date of grant, and 1,197 time-based Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) RSUs granted to certain employees for their election to defer a portion of their 2023 salary that will vest on December 31, 2023. RSUs reflect the right to receive shares of Class A common stock, subject to the applicable vesting criteria. (5) Includes 63,086 of restricted shares and RSUs that vested and 21,310 shares of restricted shares that were withheld to satisfy minimum statutory withholding requirements. During the year ended December 31, 2020, the Company issued 38,672 RSUs (the “2020 Performance-Based Awards”) to certain employees that were market-based awards and subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return goals and continued employment with the Company over the approximately three-year performance period ended December 31, 2022. In January 2023, the Company's Corporate Governance and Compensation Committee of the Board of Directors determined that the Company's total stockholder return for such three-year performance period exceeded the threshold performance hurdles for the 2020 Performance-Based Awards and, as a result, approved the payout of (i) 27,456 RSUs for such awards, which were settled using the Company’s shares of Class A common stock, and (ii) their cash dividends for the three-year performance period. During the three and six months ended June 30, 2023, the Company recognized compensation expense of $ 1.2 million and $ 2.8 million, respectively, in “General and administrative expenses” and $ 0.1 million and $ 0.4 million, respectively, in "Property operating expenses" in the Consolidated Statements of Operations and Comprehensive Income related to all awards. During the three and six months ended June 30, 2022, the Company recognized compensation expense of $ 0.9 million and $ 2.4 million, respectively, in “General and administrative expenses” and $ 0.1 million and $ 0.3 million, respectively, in "Property operating expenses" in the Consolidated Statements of Operations and Comprehensive Income related to all awards. As of June 30, 2023, there was $ 17.4 million of total unrecognized compensation cost related to unvested awards, which is expected to be recognized over a weighted average period of 5.25 years. In July 2023, the Company issued 9,941 RSUs and 7,370 restricted shares of Class A common stock to certain employees for their elections to receive such RSUs and restricted shares in lieu of a portion of their 2023 annual salaries pursuant to the Company's Alignment of Interest Program. The RSUs issued to employees in lieu of salaries will cliff vest on December 31, 2023, while the other restricted shares of Class A common stock issued to employees in lieu of salaries will cliff vest on the fifth or eighth anniversary of July 1, 2023. In addition, in July 2023, the Company issued 5,143 LTIP Units to a consultant under the consultancy agreement with the Company. Employee Stock Purchase Plan The Company's ESPP allows its employees to purchase shares of the Class A common stock at a discount. A total of 100,000 shares of Class A common stock was reserved for sale and authorized for issuance under the ESPP. The Code permits the Company to provide up to a 15 % discount on the lesser of the fair market value of such shares of Class A common stock at the beginning of the offering period and the close of the offering period. As of June 30, 2023 and December 31, 2022, 36,156 and 29,710 shares have been issued under the ESPP since commencement, respectively. During the three and six months ended June 30, 2023, the Company recognized compensation expense of $ 0.01 million and $ 0.02 million, respectively, related to the ESPP. During the three and six months ended June 30, 2022, the Company recognized compensation expense of $ 1,625 and $ 0.02 million, respectively, related to the ESPP. Note 12. Commitments and Contingencies As of June 30, 2023, the Company was not involved in any litigation nor to its knowledge is any litigation threatened against the Company that, in management’s opinion, would result in any material adverse effect on the Company’s financial position and results of operations, or which is not covered by insurance. In the ordinary course of the Company’s business, the Company enters into non-binding (except with regard to exclusivity and confidentiality) letters of intent indicating a willingness to negotiate for acquisitions. There can be no assurance that definitive contracts will be entered into with respect to any matter covered by letters of intent, that the Company will close the transactions contemplated by such contracts on time, or that the Company will consummate any transaction contemplated by any definitive contract. Table of Contents POSTAL REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Note 13. Business Acquisition On March 4, 2022, the Company acquired a postal real estate consulting business and its employees through the issuance of 79,794 OP Units and $ 0.2 million in cash for an aggregate purchase price of approximately $ 1.7 million to complement the Company's core business of acquiring, managing, servicing and being a consolidator of postal properties. In connection with the acquisition, the Company recorded an intangible asset related to the customer relationships and trade name of approximately $ 0.2 million in “Prepaid expenses and other assets, net” on the Consolidated Balance Sheets, which is being amortized over the estimated useful life of four years, and goodwill of approximately $ 1.5 million. The goodwill recorded is deductible for income tax purposes. All assets acquired in connection with the business acquisition were assigned to the Company’s single reportable segment. The results of operations of this acquired business have been included since the acquisition date. Pro forma information has not been presented for this business acquisition because such information is not material to the financial statements. Note 14. Subsequent Events The Company's Board of Directors approved, and on July 26, 2023, the Company declared a second quarter common stock dividend of $ 0.2375 per share, which is payable on August 31, 2023 to stockholders of record as of August 7, 2023. On July 24, 2023, the Company entered into the Second Amendment to the Credit Facilities. See Note 5. Debt for additional details. As of August 7, 2023, the Company had $ 190.0 million drawn on the Credit Facilities, with $ 75.0 million drawn on the 2021 Term Loan, $ 115.0 million drawn on the 2022 Term Loan and no amount drawn on the Revolving Credit Facility. As of August 7, 2023 and d uring the period subsequent to June 30, 2023, the Company issued 514,997 shares of its Class A common stock under the ATM Program for gross proceeds of approximately $ 7.7 million and also entered into forward sales transactions under the ATM Program for the sale of an additional 798,847 shares of its Class A common stock for gross proceeds of approximately $ 12.0 million . As of August 7, 2023 and d uring the period subsequent to June 30, 2023, the Company acquired 15 properties for approximately $ 6.2 million, excluding closing costs. As of August 7, 2023 and d uring the period subsequent to June 30, 2023, the Company had entered into definitive agreements to acquire 15 properties for approximately $ 3.9 million. However, the Company can provide no assurances that the acquisitions of these properties will be consummated on the terms and timing the Company expects, or at all. Table of Contents