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Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-07 · 83 added, 50 removed, 226 unchanged (37% of the section changed)

49 unchanged sentences

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.

During the three months ended March 31, 2024, we acquired 29 properties leased to the USPS for approximately $18.9 million, including closing costs.

As of March 31, 2024, our portfolio consists of 1,537

owned properties, located in 49 states and one territory and comprising approximately 6.0 million net leasable interior square feet.

During the six months ended June 30, 2024, we acquired 99 properties leased to the USPS for approximately $47.7 million, including closing costs.

As of June 30, 2024, our portfolio consists of 1,607 owned properties, located in 49 states and one territory and comprising approximately 6.2 million net leasable interior square feet.

We are the sole general partner of our Operating Partnership through which our properties are directly or indirectly owned.

As of May 7, 2024, we owned approximately 79.2% of outstanding common units of limited partnership interest in our Operating Partnership (the “OP Units”), including long term incentive units of our Operating Partnership (the “LTIP Units”).

As of August 2, 2024, we owned approximately 79.4% of outstanding common units of limited partnership interest in our Operating Partnership (the “OP Units”), including long term incentive units of our Operating Partnership (the “LTIP Units”).

Our Board of Directors oversees our business and affairs.

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On August 8, 2023, we amended the ATM Program to increase the aggregate offering amount under the program from up to $50.0 million to up to $150.0 million.

During the three months ended March 31, 2024, 576,087 shares were issued under the ATM Program for approximately $8.2 million in gross proceeds.

As of March 31, 2024, we had approximately $105.8 million of availability remaining under the ATM Program.

During the six months ended June 30, 2024, 634,080 shares were issued under the ATM Program for approximately $9.0 million in gross proceeds.

As of June 30, 2024, we had approximately $105.0 million of availability remaining under the ATM Program.

Executive Overview

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Geographic Concentration

As of March 31, 2024, we owned a portfolio of 1,537 properties located in 49 states and one territory and leased primarily to the USPS.

For the three months ended March 31, 2024, approximately 12.4% of our total rental income was concentrated in Pennsylvania.

As of June 30, 2024, we owned a portfolio of 1,607 properties located in 49 states and one territory and leased primarily to the USPS.

For the six months ended June 30, 2024, approximately 12.2% of our total rental income was concentrated in Pennsylvania.

Emerging Growth Company

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Spodek and his affiliates pursuant to the management agreements and is a percentage of the lease revenue for the managed properties, (ii) revenue our TRS received from providing advisory services to third-party owners of postal properties and (iii) income recognized from properties accounted for as financing leases.

As of March 31, 2024, properties leased to our tenants had an average remaining lease term of approximately three years.

As of June 30, 2024, properties leased to our tenants had an average remaining lease term of approximately three years.

Factors that could affect our rental income and fee and other in the future include, but are not limited to:

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the cost of periodic repair, age and durability of our properties, renovation costs, landlord’s responsibilities under the leases, the cost of re-leasing space, inflation and the potential for liability under applicable laws.

Recoveries from the tenant are recognized

as revenue on an accrual basis over the periods in which the related expenditures are incurred.

Recoveries from the tenant are recognized as revenue on an accrual basis over the periods in which the related expenditures are incurred.

Tenant reimbursements and the related property operating expenses are recognized on a gross basis, because (i) generally, we are the primary obligor with respect to the real estate taxes and (ii) we bear the credit risk in the event the tenant does not reimburse the real estate taxes.

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Equity-Based Compensation Expense

All equity-based compensation expense is recognized in our Consolidated Statements of Operations and Comprehensive Income (Loss) as components of general and administrative expense and property operating expenses.

All equity-based compensation expense is recognized in our Consolidated Statements of Operations and Comprehensive Income as components of general and administrative expense and property operating expenses.

We issue share-based awards to align our directors' and employees’ interests with those of our investors.

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Lease Renewal

As of May 7, 2024, the leases at 101of our properties, representing approximately 673,000 net leasable interior square feet, had expired and the USPS was occupying such properties as a holdover tenant.

As of July 29, 2024, the leases at 83 of our properties, representing approximately 701,000 net leasable interior square feet, had expired and the USPS was occupying such properties as a holdover tenant.

As of the date of this report, the USPS had not vacated or notified us of its intention to vacate any of these properties.

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Even if we are able to renew these expired leases, the lease terms may not be comparable to those of the previous leases.

If we are not successful, we will likely experience reduced occupancy, rental income and net operating income, as well as diminished borrowing capacity under our Credit Facilities, which could have a

material adverse effect on our financial condition, results of operations and ability to make distributions to shareholders.

If we are not successful, we will likely experience reduced occupancy, rental income and net operating income, as well as diminished borrowing capacity under our Credit Facilities, which could have a material adverse effect on our financial condition, results of operations and ability to make distributions to shareholders.

Refer to “Risk Factors - Risks Related to the USPS” under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding the risks associated with the USPS.

Results of Operations

Comparison of the Three Months Ended March 31, 2024 and the Three Months Ended March 31, 2023

Comparison of the Three Months Ended June 30, 2024 and the Three Months Ended June 30, 2023

For the Three Months Ended

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Rental income – Rental income includes net rental income as well as the recovery of certain operating costs and property taxes from tenants.

Rental income increased by $2.1 million to $16.6 million for the three months ended March 31, 2024 from $14.5 million for the three months ended March 31, 2023, primarily due to the volume of our acquisitions.

Fee and other – Fee and other revenue increased by $0.03 million to $0.7 million for the three months ended March 31, 2024 from $0.6 million for the three months ended March 31, 2023, primarily due to an increase in income received from advisory services.

Rental income increased by $2.6 million to $17.4 million for the three months ended June 30, 2024 from $14.8 million for the three months ended June 30, 2023, primarily due to the volume of our acquisitions.

Operating Expenses

Real estate taxes – Real estate taxes increased by $0.3 million to $2.3 million for the three months ended March 31, 2024 from $2.0 million for the three months ended March 31, 2023, primarily due to the volume of our acquisitions.

Property operating expenses – Property operating expenses increased by $0.7 million to $2.4 million for the three months ended March 31, 2024 from $1.6 million for the three months ended March 31, 2023.

Property management expenses are included within property operating expenses and increased by $0.1 million to $0.9 million for the three months ended March 31, 2024 from $0.8 million for the three months ended March 31, 2023.

Real estate taxes – Real estate taxes increased by $0.4 million to $2.4 million for the three months ended June 30, 2024 from $2.0 million for the three months ended June 30, 2023, primarily due to the volume of our acquisitions.

Property operating expenses – Property operating expenses increased by $0.7 million to $2.1 million for the three months ended June 30, 2024 from $1.4 million for the three months ended June 30, 2023.

Property management expenses are included within property operating expenses and increased by $0.2 million to $0.7 million for the three months ended June 30, 2024 from $0.5 million for the three months ended June 30, 2023.

The remainder of the increase in property operating expenses of $0.5 million was related to an increase in insurance and repairs and maintenance expenses.

General and administrative – General and administrative expenses increased by $0.1 million to $4.3 million for the three months ended March 31, 2024 from $4.2 million for the three months ended March 31, 2023, primarily due to an increase in net compensation costs, partially offset by a decrease in public company-related expenses.

Depreciation and amortization – Depreciation and amortization expense increased by $0.5 million to $5.3 million for the three months ended March 31, 2024 from $4.8 million for three months ended March 31, 2023, primarily due to the volume of our acquisitions.

General and administrative – General and administrative expenses increased by $0.3 million to $3.9 million for the three months ended June 30, 2024 from $3.6 million for the three months ended June 30, 2023, primarily due to an increase in net compensation costs, partially offset by a decrease in public company-related expenses.

Depreciation and amortization – Depreciation and amortization expense increased by $0.7 million to $5.5 million for the three months ended June 30, 2024 from $4.8 million for three months ended June 30, 2023, primarily due to the volume of our acquisitions.

Other income primarily includes insurance recoveries related to property damage claims.

Other income decreased by $0.06 million to $0.05 million for the three months ended March 31, 2024 from $0.1 million for the three months ended March 31, 2023, primarily due to a decrease in property related insurance recoveries from claims.

Other income decreased by $0.1 million to $0.02 million for the three months ended June 30, 2024 from $0.1 million for the three months ended June 30, 2023, primarily due to a decrease in property related insurance recoveries from claims.

Total Interest Expense, Net

During the three months ended March 31, 2024, we incurred total interest expense, net of $2.8 million compared to $2.2 million for the three months ended March 31, 2023.

During the three months ended June 30, 2024, we incurred total interest expense, net of $3.1 million compared to $2.5 million for the three months ended June 30, 2023.

The increase in interest expense was primarily due to additional borrowings under the Credit Facilities and increased interest rates.

Comparison of the Three Months Ended March 31, 2024 and the Three Months Ended March 31, 2023

We had $1.9 million of cash and $0.8 million of escrows and reserves as of March 31, 2024 compared to $2.1 million of cash and $0.7 million of escrows and reserves as of March 31, 2023.

Cash flows from operating activities – Net cash provided by operating activities decreased by $1.3 million to $6.4 million for the three months ended March 31, 2024 compared to $7.7 million for the same period in 2023.

The decrease was mainly attributable to the timing of receivables and payables.

Cash flows used in investing activities – Net cash used in investing activities for the three months ended March 31, 2024 primarily consisted of $13.0 million of acquisitions and $0.9 million of escrow deposits for acquisition and construction, capital improvements and other investing activities.

Net cash used in investing activities for the three months ended March 31, 2023 primarily consisted of $17.4 million of acquisitions and $0.6 million of escrow deposits for acquisition and construction, capital improvements and other investing activities.

Cash flows from financing activities – Net cash provided by financing activities decreased by $3.8 million to $7.3 million for the three months ended March 31, 2024 compared to $11.0 million for the three months ended March 31, 2023.

The decrease was primarily related to increased paydown of the Revolving Credit Facility and an increase in dividends and distributions during the three months ended March 31, 2024, partially offset by an increase in net proceeds received from issuance of shares during the same period.

Comparison of the Six Months Ended June 30, 2024 and Six Months Ended June 30, 2023

For the Six Months Ended

2024 2023 $ Change % Change

Rental income $ 33,969 $ 29,261 $ 4,708 16.1 %

Fee and other 1,369 1,344 25 1.9 %

Total revenues 35,338 30,605 4,733 15.5 %

Operating expenses

Real estate taxes 4,687 4,012 675 16.8 %

Property operating expenses 4,471 3,038 1,433 47.2 %

General and administrative 8,213 7,769 444 5.7 %

Depreciation and amortization 10,819 9,618 1,201 12.5 %

Total operating expenses 28,190 24,437 3,753 15.4 %

Income from operations 7,148 6,168 980 15.9 %

Other income 65 239 (174) (72.8) %

Interest expense, net

Contractual interest expense (5,525) (4,347) (1,178) 27.1 %

Write-off and amortization of deferred financing fees (362) (330) (32) 9.7 %

Interest income 6 1 5 500.0 %

Total interest expense, net (5,881) (4,676) (1,205) 25.8 %

Income before income tax expense 1,332 1,731 (399) (23.1) %

Income tax expense (44) (37) (7) 18.9 %

Net income $ 1,288 $ 1,694 $ (406) (24.0) %

Rental income – Rental income includes net rental income as well as the recovery of certain operating costs and property taxes from tenants.

Rental income increased by $4.7 million to $34.0 million for the six months ended June 30, 2024 from $29.3 million for the six months ended June 30, 2023, primarily due to the volume of our acquisitions.

Operating Expense

Real estate taxes – Real estate taxes increased by $0.7 million to $4.7 million for the six months ended June 30, 2024 from $4.0 million for the six months ended June 30, 2023, primarily due to the volume of our acquisitions.

Property operating expenses – Property operating expenses increased by $1.4 million to $4.5 million for the six months ended June 30, 2024 from $3.0 million for the six months ended June 30, 2023.

Property management expenses are included within property operating expenses and increased by $0.3 million to $1.6 million for the six months ended June 30, 2024 from $1.3 million for the six months ended June 30, 2023.

The remainder of the increase of $1.1 million is related to expenses for repairs and maintenance and insurance, which increase is due to the volume of our acquisitions.

General and administrative – General and administrative expenses increased by $0.4 million to $8.2 million for the six months ended June 30, 2024 from $7.8 million for the six months ended June 30, 2023 primarily due to an increase in net compensation costs, partially offset by a decrease in public company-related expenses.

Depreciation and amortization – Depreciation and amortization expense increased by $1.2 million to $10.8 million for the six months ended June 30, 2024 from $9.6 million for the six months ended June 30, 2023, primarily due to the volume of our acquisitions.

Other income primarily includes insurance recoveries related to property damage claims.

Other income decreased by $0.2 million to $0.1 million for the six months ended June 30, 2024 from $0.2 million for the six months ended June 30, 2023, primarily due to lower insurance recoveries.

Total Interest Expense, Net

During the six months ended June 30, 2024, we incurred total interest expense, net of $5.9 million compared to $4.7 million for the six months ended June 30, 2023.

The increase in interest expense is primarily related due to additional borrowings under the Credit Facilities and increased interest rates.

Comparison of the Six Months Ended June 30, 2024 and the Six Months Ended June 30, 2023

We had $1.7 million of cash and $0.9 million of escrows and reserves as of June 30, 2024 compared to $2.2 million of cash and $0.8 million of escrows and reserves as of June 30, 2023.

Cash flows from operating activities – Net cash provided by operating activities increased by $1.7 million to $16.3 million for the six months ended June 30, 2024 compared to $14.6 million for the same period in 2023.

The increase is primarily due to the volume our acquisitions, all of which have generated additional rental income and related changes in working capital, as well as the timing of certain receivables and payables.

Cash flows used in investing activities – Net cash used in investing activities for the six months ended June 30, 2024 primarily consisted of $41.8 million of acquisitions and $1.9 million of escrow deposits for acquisitions , capital improvements and other investing activities.

Net cash used in investing activities for the six months ended June 30, 2023 primarily consisted of $32.9 million of acquisitions and $1.2 million of escrow deposits for acquisitions, capital improvements and other investing activities.

Cash flows from financing activities – Net cash provided by financing activities increased by $6.7 million to $27.1 million for the six months ended June 30, 2024 compared to $20.4 million for the six months ended June 30, 2023.

The increase was primarily related to an increase in net proceeds received from issuance of shares during the same period and increased borrowings under the Revolving Credit Facility;

partially offset by an increase in the payment of dividends and distributions during the six months ended June 30, 2024.

Liquidity and Capital Resources

We had approximately $1.9 million of cash and $0.8 million of escrows and reserves as of March 31, 2024.

We had approximately $1.7 million of cash and $0.9 million of escrows and reserves as of June 30, 2024.

Revolving Credit Facility and Term Loans

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Additional participants in the Credit Facilities include Stifel Bank & Trust and TriState Capital Bank.

As of March 31, 2024, we had $216.0 million of aggregate principal amount outstanding under our

Credit Facilities, with $75.0 million drawn on the 2021 Term Loan, $125.0 million drawn on the 2022 Term Loan and $16.0 million drawn on the Revolving Credit Facility.

As of June 30, 2024, we had $242.0 million of aggregate principal amount outstanding under our Credit Facilities, with $75.0 million drawn on the 2021 Term Loan, $125.0 million drawn on the 2022 Term Loan and $42.0 million drawn on the Revolving Credit Facility.

The Credit Facilities include an accordion feature which permit us to borrow up to an additional $150.0 million under the Revolving Credit Facility subject to customary terms and conditions.

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The Credit Facilities also contain certain customary events of default, including the failure to make timely payments under the Credit Facilities, any event or condition that makes other material indebtedness due prior to its scheduled maturity, the failure to satisfy certain covenants and specified events of bankruptcy and insolvency.

As of March 31, 2024, we were in compliance with all of the Credit Facilities’ debt covenants.

As of March 31, 2024, we had seven interest rate swaps with a total notional amount of $200.0 million that are used to manage our interest rate risk and fix the SOFR component on the Term Loans of the Credit Facilities (together, the "Interest Rate Swaps").

As of June 30, 2024, we were in compliance with all of the Credit Facilities’ debt covenants.

As of June 30, 2024, we had seven interest rate swaps with a total notional amount of $200.0 million that are used to manage our interest rate risk and fix the SOFR component on the Term Loans of the Credit Facilities (together, the "Interest Rate Swaps").

Derivatives and Hedging Activities in the Notes to our unaudited Consolidated Financial Statements included under Item 1 herein for further details regarding the Interest Rate Swaps.

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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.

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.

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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.

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.

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.

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Consolidated Indebtedness

As of March 31, 2024, we had approximately $248.9 million of outstanding consolidated principal indebtedness.

The following table sets forth information as of March 31, 2024 with respect to our outstanding indebtedness (in thousands):

Balance as of March 31, 2024

Rate at March 31, 2024

As of June 30, 2024, we had approximately $274.9 million of outstanding consolidated principal indebtedness.

The following table sets forth information as of June 30, 2024 with respect to our outstanding indebtedness (in thousands):

Balance as of June 30, 2024

Rate at June 30, 2024

Revolving Credit Facility (1)

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(1) See above under "— Revolving Credit Facility and Term Loans " for details regarding the Credit Facilities.

During the three months ended March 31, 2024, we incurred $0.07 million of unused facility fees related to the Revolving Credit Facility.

During the three and six months ended June 30, 2024, we incurred $0.06 million and $0.1 million of unused facility fees related to the Revolving Credit Facility, respectively.

(2) Based upon the one-month Adjusted Term SOFR, which is the applicable Term Secured Overnight Financing Rate plus an adjustment of 0.10%, subject to a 0% floor (the “Adjusted Term SOFR”) .

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The loan has a fixed interest rate of 2.80% with interest-only payments for the first five years (ending in January 2026) and fixed payments of principal and interest thereafter based on a 30-year amortization schedule.

Secured Borrowings as of March 31, 2024

As of March 31, 2024, we had approximately $32.9 million of secured borrowings outstanding, all of which are currently fixed-rate debt with a weighted average interest rate of 2.88% per annum.

Secured Borrowings as of June 30, 2024

As of June 30, 2024, we had approximately $32.9 million of secured borrowings outstanding, all of which are currently fixed-rate debt with a weighted average interest rate of 2.88% per annum.

To maintain our qualification as a REIT, we are required to pay dividends to stockholders at least equal to 90% of our REIT taxable income determined without regard to the deduction for dividends paid and excluding net capital gains.

During the three months ended March 31, 2024, we paid cash dividends of $0.24 per share.

Our Board of Directors approved, and o n April 30, 2024 , we declared a first quarter 2024 common stock dividend of $0.24 per share, which will be paid on May 31, 2024 to stockholders of record as of May 8, 2024.

During the three and six months ended June 30, 2024, we paid cash dividends of $0.24 and $0.48 per share, respectively.

Our Board of Directors approved, and o n July 23, 2024 , we declared a second quarter 2024 common stock dividend of $0.24 per share, which will be paid on August 30, 2024 to stockholders of record as of August 2, 2024.

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.

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Subsequent Real Estate Acquisitions

As of May 7, 2024 and d uring the period s ubsequent to March 31, 2024, we have acquired six properties in individual or portfolio transactions for an aggregate of approximately $4.1 million, excluding closing costs.

As of August 6, 2024 and d uring the period s ubsequent to June 30, 2024, we have acquired nine properties in individual or portfolio transactions for an aggregate of approximately $3.4 million, excluding closing costs.

Critical Accounting Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis