Postal Realty Trust, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is based on, and should be read in conjunction with, the unaudited Consolidated Financial Statements and the related notes thereto of Postal Realty Trust, Inc. contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020. As used in this section, unless the context otherwise requires, references to “we,” “our,” “us,” and “our company” refer to Postal Realty Trust, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Postal Realty LP, a Delaware limited partnership, of which we are the sole general partner and which we refer to in this section as our Operating Partnership. Prior to the closing of our initial public offering (our “IPO”) on May 17, 2019, Andrew Spodek, our chief executive officer and a member of our Board of Directors, directly or indirectly controlled 190 properties owned by the Predecessor that were contributed as part of the Formation Transactions (as defined below). Of these 190 properties, 140 were held indirectly by our Predecessor through a series of holding companies, which we refer to collectively as “UPH.” The remaining 50 properties were owned by Mr. Spodek through 12 limited liability companies and one limited partnership, which we refer to collectively as the “Spodek LLCs.” References to our “Predecessor” consist of UPH, the Spodek LLCs and Nationwide Postal Management, Inc., a property management company whose management business we acquired in the Formation Transactions, collectively. Forward-Looking Statements We make statements in this Quarterly Report that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, acquisitions, property performance and results of operations contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: • change in the status of the United States Postal Service (“USPS”) as an independent agency of the executive branch of the U.S. federal government; • change in the demand for postal services delivered by the USPS; • our ability to come to an agreement with the USPS regarding new leases or lease renewals; • the solvency and financial health of the USPS; • defaults on, early terminations of or non-renewal of leases by the USPS; • the competitive market in which we operate; • changes in the availability of acquisition opportunities; • our inability to successfully complete real estate acquisitions or dispositions on the terms and timing we expect, or at all; • our failure to successfully operate developed and acquired properties; 26 Table of Contents • adverse economic or real estate developments, either nationally or in the markets in which our properties are located; • decreased rental rates or increased vacancy rates; • change in our business, financing or investment strategy or the markets in which we operate; • fluctuations in mortgage rates and increased operating costs; • changes in the method pursuant to which reference rates are determined and the elimination of the London Interbank Offered Rate (“LIBOR”) after June 2023; • general economic conditions; • financial market fluctuations; • our failure to generate sufficient cash flows to service our outstanding indebtedness; • our failure to obtain necessary outside financing on favorable terms or at all; • failure to hedge effectively against interest rate changes; • our reliance on key personnel whose continued service is not guaranteed; • the outcome of claims and litigation involving or affecting us; • changes in real estate, taxation, zoning laws and other legislation and government activity and changes to real property tax rates and the taxation of real estate investment trusts (“REITs”) in general; • operations through joint ventures and reliance on or disputes with co-venturers; • cybersecurity threats; • uncertainties and risks related to adverse weather conditions, natural disasters and climate change; • exposure to liability relating to environmental and health and safety matters; • governmental approvals, actions and initiatives, including the need for compliance with environmental requirements; • lack or insufficient amounts of insurance; • limitations imposed on our business in order to qualify and maintain our status as a REIT and our failure to qualify or maintain such status; and • public health threats such as the coronavirus (COVID-19) pandemic. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, you should carefully review and consider (i) the information contained under Item 1A titled “Risk Factors” herein and in our Annual Report on Form 10-K and (ii) such similar information as may be contained in our other reports and filings that we make with the Securities and Exchange Commission (the “SEC”). 27 Table of Contents Overview Company We were formed as a Maryland corporation on November 19, 2018 and commenced operations upon completion of our IPO and the related formation transactions (the “Formation Transactions”). We conduct our business through a traditional UPREIT structure in which our properties are owned by our Operating Partnership directly or through limited partnerships, limited liability companies or other subsidiaries. During the nine months ended September 30, 2021, we acquired 184 postal properties leased to the USPS for approximately $77.1 million, including closing costs. As of September 30, 2021, our portfolio consists of 911 owned properties, located in 49 states and comprising approximately 3.7 million net leasable interior square feet. We are the sole general partner of our Operating Partnership through which our postal properties are directly or indirectly owned. As of September 30, 2021, we owned approximately 78.1% of our outstanding common units of limited partnership interest in our Operating Partnership (each, an “OP Unit,” and collectively, the “OP Units”), including long term incentive units of our Operating Partnership (each, a “LTIP Unit,” and collectively, the “LTIP Units”). Our Board of Directors oversees our business and affairs. ATM Program and Follow-on Offering On December 14, 2020, we entered into separate open market sale agreements for its at-the-market offering program (the "ATM Program") with each of Jefferies LLC, Stifel, Nicolaus & Company, Incorporated, BMO Capital Markets Corp., Janney Montgomery Scott LLC and D.A. Davidson & Co. ("D.A. Davidson"), pursuant to which we may offer and sell, from time to time, shares our Class A common stock having an aggregate sales price of up to $50.0 million. On May 14, 2021, we delivered to D.A. Davidson a notice of termination of the open market sale agreement with D.A. Davidson, which termination became effective May 14, 2021. 344,717 shares were issued under the ATM Program during the nine months ended September 30, 2021. As of September 30, 2021, we had approximately $43.1 million of availability remaining under the ATM Program. On January 11, 2021, we priced a public offering of 3.25 million shares of our Class A common stock (the “January Follow-on Offering”) at $15.25 per share. On January 11, 2021, the underwriters purchased the full allotment of 487,500 shares pursuant to a 30-day option at $15.25 per share (the “January Additional Shares”). The January Follow-on Offering, including the January Additional Shares, closed on January 14, 2021 resulting in $57.0 million in gross proceeds, and approximately $53.9 million in net proceeds after deducting approximately $3.1 million in underwriting discounts and before giving effect to $0.6 million in other expenses relating to the January Follow-on Offering. Executive Overview We are an internally managed REIT with a focus on acquiring and managing properties primarily leased to the USPS, ranging from last mile post offices to larger industrial facilities. We believe the overall opportunity for consolidation that exists within the postal logistics network is very attractive. We continue to execute our strategy to acquire and consolidate postal properties that will generate strong earnings for our shareholders. Geographic Concentration As of September 30, 2021, we owned a portfolio of 911 properties located in 49 states leased primarily to the USPS. For the nine months ended September 30, 2021, 18.3% of our total of rental income was concentrated in Pennsylvania. Such geographical concentration could expose us to certain downturns in the economies of those states or other changes in such states’ respective real estate market conditions. Any material changes in the current payments programs or regulatory, economic, environmental or competitive conditions in any of these areas could have an effect on our overall business results. In the event of negative economic or other changes in any of these markets, our business, financial condition and results of operations, our ability to make distributions to our shareholders and the trading price of our common shares may be adversely affected. Emerging Growth Company We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor 28 Table of Contents attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have availed ourselves of these exemptions; although, subject to certain restrictions, we may elect to stop availing ourselves of these exemptions in the future even while we remain an “emerging growth company.” We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to periodic adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our IPO, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are also a “smaller reporting company” as defined in Regulation S-K under the Securities Act and have elected to take advantage of certain scaled disclosures available to smaller reporting companies. We may continue to be a smaller reporting company even after we are no longer an “emerging growth company.” We elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with our short taxable year ending December 31, 2019. As long as we qualify as a REIT, we generally will not be subject to federal income tax to the extent that we distribute our taxable income for each tax year to our stockholders. Factors That May Influence Future Results of Operations The USPS We are dependent on the USPS’ financial and operational stability. The USPS is currently facing a variety of circumstances that are threatening its ability to fund its operations and other obligations as currently conducted without intervention by the federal government. The USPS is constrained by laws and regulations that restrict revenue sources and pricing, mandate certain expenses and cap its borrowing capacity. As a result, among other consequences, the USPS is unable to fund its mandated expenses and continues to be subject to mandated payments to its retirement system and health benefits. While the USPS has undertaken, and proposes to undertake, a number of operational reforms and cost reduction measures, including those outlined in its ten-year plan entitled Delivering for America: Our Vision and Ten-Year Plan to Achieve Financial Sustainability and Service Excellence , such as higher rates and slower deliveries for certain services , the USPS has taken the position such measures alone will not be sufficient to maintain its ability to meet all of its existing obligations when due or allow it to make the critical infrastructure investments that have been deferred in recent years. These measures have also led to significant criticism and litigation, which may result in reputational or financial harm or increased regulatory scrutiny of the USPS or reduced demand for its services. The ongoing COVID-19 pandemic (including new or mutated variants of COVID-19) and measures being taken to prevent its spread also continue to have a material and unpredictable effect on the USPS’ operations and liquidity, including volatility in demand for mail services, significant changes in the mix of mail and packages processed through the USPS’ network and significant additional operating expenses caused by pandemic-related disruptions. Further, although the USPS received a $10.0 billion loan under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as amended by Public Law 116-260, the Consolidated Appropriations Act, 2021, there can be no assurances that this financing will be sufficient to sustain USPS operations in light of current shortfalls. If the USPS becomes unable to meet its financial obligations or its revenue declines due to reduced demand for its services, the USPS may reduce its demand for leasing postal properties, which would have a material adverse effect on our business and operations. For additional information regarding the risks associated with the USPS, see the section entitled “Risk Factors - Risks Related to the USPS” under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. Revenues We derive revenues primarily from rent and tenant reimbursements under leases with the USPS for our properties, and fee and other income under the management agreements with respect to the postal properties owned by Mr. Spodek, his family members and their partners managed by Postal Realty Management TRS, LLC (“PRM”), our taxable REIT subsidiary (“TRS”). Rental income represents the lease revenue recognized under leases with the USPS which includes the impact of above and below market lease intangibles as well as tenant reimbursements for payments made by our tenants under the leases to reimburse us for the majority of real estate taxes paid at each property. Fee and other principally represent revenue PRM 29 Table of Contents receives from postal properties owned by Mr. Spodek, his family members and their partners pursuant to the management agreements and is a percentage of the lease revenue for the managed properties. As of September 30, 2021, properties leased to our tenants had an average remaining lease term of approximately 4.0 years. Factors that could affect our rental income, tenant reimbursement and fee and other income in the future include, but are not limited to: (i) our ability to renew or replace expiring leases and management agreements; (ii) local, regional or national economic conditions; (iii) an oversupply of, or a reduction in demand for, postal space; (iv) changes in market rental rates; (v) changes to the USPS’ current property leasing program or form of lease; and (vi) our ability to provide adequate services and maintenance at our properties and managed properties. Operating Expenses We lease our properties primarily to the USPS. The majority of our leases are modified double-net leases, whereby the tenant is responsible for utilities, routine maintenance and the reimbursement of property taxes and the landlord is responsible for insurance and roof and structure. Thus, an increase in costs related to the landlord’s responsibilities under these leases could negatively influence our operating results. Refer to “Lease Renewal” below for further discussion. Operating expenses generally consist of real estate taxes, property operating expenses, which consist of insurance, repairs and maintenance (other than those for which the tenant is responsible), property maintenance-related payroll and depreciation and amortization. Factors that may affect our ability to control these operating costs include but are not limited to: the cost of periodic repair, renovation costs, the cost of re-leasing space and the potential for liability under applicable laws. Recoveries from the tenant are recognized as revenue on an accrual basis over the periods in which the related expenditures are incurred. Tenant reimbursements and operating expenses are recognized on a gross basis, because (i) generally, we are the primary obligor with respect to the real estate taxes and (ii) we bear the credit risk in the event the tenant does not reimburse the real estate taxes. The expenses of owning and operating a property are not necessarily reduced when circumstances, such as market factors and competition, cause a reduction in income from the property. If revenues drop, we may not be able to reduce our expenses accordingly. Costs associated with real estate investments generally will not be materially reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. As a result, if revenues decrease in the future, static operating costs may adversely affect our future cash flow and results of operations. General and Administrative General and administrative expense represents personnel costs, professional fees, legal fees, insurance, consulting fees, information technology costs, and other expenses related to our day-to-day activities of being a public company. While we expect that our general and administrative expenses will continue to rise as our portfolio grows, we expect that such expenses as a percentage of our revenues will decrease over time due to efficiencies and economies of scale. Equity-Based Compensation Expense All equity-based compensation expense is recognized in our Consolidated Statements of Operations and Comprehensive Income (Loss) as components of general and administrative expense and property operating expenses. We issue share-based awards to align our employees’ interests with those of our investors. Depreciation and Amortization Depreciation and amortization expense relates primarily to depreciation on our properties and capital improvements to such properties and the amortization of certain lease intangibles. Other Income Other income relates primarily to insurance recoveries related to property damage claims. Indebtedness and Interest Expense On September 27, 2019, we entered into a credit agreement, as amended, which provided for a senior revolving credit facility (the “2019 Credit Facility”) with revolving commitments in an aggregate principal amount of $100.0 million and the option to increase the aggregate lending commitments under the agreement by up to $100.0 million. 30 Table of Contents On August 9, 2021, we entered into a $150.0 million senior unsecured revolving credit facility (the "2021 Revolving Credit Facility") and a $50.0 million senior unsecured term loan facility (the "2021 Term Loan" and, together with the 2021 Revolving Credit Facility, the “2021 Credit Facilities”). In connection with entering into the 2021 Credit Facilities, we terminated the 2019 Credit Facility and paid off the outstanding loans thereunder. We intend to use the 2021 Credit Facilities for working capital purposes, which may include repayment of mortgage indebtedness, property acquisitions and other general corporate purposes. We amortize on a non-cash basis the deferred financing costs associated with its debt to interest expense using the straight-line method, which approximates the effective interest rate method over the terms of the related loans. Any changes to the debt structure, including debt financing associated with property acquisitions, could materially influence the operating results depending on the terms of any such indebtedness. Income Tax Benefit (Expense) As a REIT, we generally will not be subject to federal income tax on our net taxable income that we distribute currently to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. Even though we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned by PRM and any other TRS we form in the future will be subject to federal, state and local corporate income tax. Lease Renewal As of November 11, 2021, the leases at 34 of our properties, representing approximately 74,000 net leasable interior square feet and $0.7 million in annual contractual rental revenue, were 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. When a lease expires, the USPS becomes a holdover tenant on a month-to-month basis typically paying the greater of estimated market rent or the rent amount under the expired lease. As of the date of this report, we renewed leases at 12 of our properties with leases that had expired or were scheduled to expire in 2021. For the rest of properties with leases that are expired or are scheduled to expire in 2021, we have entered into letters of intent on preliminary terms for rental rates; however, we had not entered into any definitive documentation with respect to these properties and there can be no guarantee that any new leases that we enter into with the USPS will reflect our expectations with respect to terms or timing. We might not be successful in renewing the leases that are in holdover status or that are expiring, or obtaining positive rent renewal spreads, or even renewing the leases on terms comparable to those of the expiring leases. If we are not successful, we will likely experience reduced occupancy, traffic, rental revenue and net operating income, which could have a material adverse effect on our financial condition, results of operations and ability to make distributions to shareholders. 31 Table of Contents Results of Operations Comparison of the three months ended September 30, 2021 and three months ended September 30, 2020 For the Three Months Ended September 30, 2021 2020 $ Change % Change Revenues Rental income $ 10,204 $ 6,014 $ 4,190 69.7 % Fee and other 325 276 49 17.8 % Total revenues 10,529 6,290 4,239 67.4 % Operating expenses Real estate taxes 1,625 798 827 103.6 % Property operating expenses 983 461 522 113.2 % General and administrative 2,596 2,027 569 28.1 % Depreciation and amortization 3,743 2,394 1,349 56.3 % Total operating expenses 8,947 5,680 3,267 57.5 % Income from operations 1,582 610 972 159.3 % Other income 159 7 152 2,171.4 % Interest expense, net Contractual interest expense (734) (484) (250) 51.7 % Write-off and amortization of deferred financing fees (295) (124) (171) 137.9 % Interest income 1 1 0 0.0 % Total interest expense, net (1,028) (607) (421) 69.4 % Income before income tax expense 713 10 703 7,030.0 % Income tax expense (37) (30) (7) 23.3 % Net income (loss) $ 676 $ (20) $ 696 (3,480.0) % Revenues Rental income – Rental income includes net rental income as well as the recovery of certain operating costs and property taxes from tenants. Rental income increased by $4.2 million to $10.2 million for the three months ended September 30, 2021 from $6.0 million for the three months ended September 30, 2020 due to the volume of our acquisitions. Fee and other . Other revenue increased by $0.05 million to $0.3 million for the three months ended September 30, 2021 from $0.3 million for the three months ended September 30, 2020 primarily due to higher management fees and miscellaneous income. Operating Expense Real estate taxes – Real estate taxes increased by $0.8 million to $1.6 million for the three months ended September 30, 2021 from $0.8 million for the three months ended September 30, 2020 due to the volume of our acquisitions. Property operating expenses – Property operating expenses increased by $0.5 million to $1.0 million for the three months ended September 30, 2021 from $0.5 million for the three months ended September 30, 2020. Property management expenses are included within property operating expenses and increased by $0.2 million to $0.4 million for the three months 32 Table of Contents ended September 30, 2021 from $0.2 million for the three months ended September 30, 2020. The remainder of the increase of $0.3 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 $0.6 million to $2.6 million for the three months ended September 30, 2021 from $2.0 million for the three months ended September 30, 2020 primarily due to an increase in equity-based compensation expense related to awards that have been granted to our employees throughout 2020 and 2021. Depreciation and amortization – Depreciation and amortization expense increased by $1.3 million to $3.7 million for the three months ended September 30, 2021 from $2.4 million for three months ended September 30, 2020 due to the volume of our acquisitions. Other Income Other income primarily includes insurance recoveries related to property damage claims. Other income increased by $0.2 million to $0.2 million for the three months ended September 30, 2021 from $0.01 million for the three months ended September 30, 2020, primarily due to higher insurance recoveries. Total Interest Expense, Net During the three months ended September 30, 2021, we incurred total interest expense, net of $1.0 million compared to $0.6 million for the three months ended September 30, 2020. The increase in interest expense is primarily related to higher amount of borrowings under the 2021 Credit Facilities, increased amortization of deferred financing costs under the 2021 Credit Facilities and the 2019 Credit Facility and a write-off of fees related to the termination of the 2019 Credit Facility. Income Tax Expense During the three months ended September 30, 2021, income tax expense increased by $0.01 million to $0.04 million from $0.03 million for the three months ended September 30, 2020, primarily attributable to an increase in income tax expense related to PRM for the three months ended September 30, 2021. 33 Table of Contents Comparison of the nine months ended September 30, 2021 and September 30, 2020 For the Nine Months Ended September 30, 2021 2020 $ Change % Change Revenues Rental income $ 27,668 $ 16,209 $ 11,459 70.7 % Fee and other 1,137 817 320 39.2 % Total revenues 28,805 17,026 11,779 69.2 % Operating expenses Real estate taxes 3,877 2,137 1,740 81.4 % Property operating expenses 2,708 1,261 1,447 114.8 % General and administrative 7,881 6,246 1,635 26.2 % Depreciation and amortization 10,131 6,591 3,540 53.7 % Total operating expenses 24,597 16,235 8,362 51.5 % Income from operations 4,208 791 3,417 432.0 % Other income 276 73 203 278.1 % Interest expense, net Contractual interest expense (2,000) (1,757) (243) 13.8 % Write-off and amortization of deferred financing fees (585) (344) (241) 70.1 % Loss on early extinguishment of debt (202) — (202) 100.0 % Interest income 2 2 0 0.0 % Total interest expense, net (2,785) (2,099) (686) 32.7 % Income (loss) before income tax expense 1,699 (1,235) 2,934 (237.6) % Income tax expense (75) (45) (30) 66.7 % Net income (loss) $ 1,624 $ (1,280) $ 2,904 (226.9) % Revenues Rental income includes net rental income as well as the recovery of certain operating costs and property taxes from tenants. Rental income increased by $11.5 million to $27.7 million for the nine months ended September 30, 2021 from $16.2 million for the nine months ended September 30, 2020 due to the volume of our acquisitions. Fee and other . Other revenue increased by $0.3 million to $1.1 million for the nine months ended September 30, 2021 from $0.8 million for the nine months ended September 30, 2020, primarily due to higher management fees and miscellaneous income. Operating Expense Real estate taxes – Real estate taxes increased by $1.7 million to $3.9 million for the nine months ended September 30, 2021 from $2.1 million for the nine months ended September 30, 2020 due to the volume of our acquisitions. Property operating expenses – Property operating expenses increased by $1.4 million to $2.7 million for the nine months ended September 30, 2021 from $1.3 million for the nine months ended September 30, 2020. Property management expenses are included within property operating expenses and increased by $0.5 million to $1.1 million for the nine months ended September 30, 2021 from $0.6 million for the nine months ended September 30, 2020. The remainder of the increase of $0.9 million is related to expenses for repairs and maintenance and insurance, which increase is due to the volume of our acquisitions. 34 Table of Contents General and administrative – General and administrative expenses increased by $1.6 million to $7.9 million for the nine months ended September 30, 2021 from $6.2 million for the nine months ended September 30, 2020 primarily due to an increase in equity-based compensation expense related to awards that have been granted to our employees throughout 2020 and 2021. Depreciation and amortization – Depreciation and amortization expense increased by $3.5 million to $10.1 million for the nine months ended September 30, 2021 from $6.6 million for the nine months ended September 30, 2020 due to the volume of our acquisitions. Other Income Other income primarily includes insurance recoveries related to property damage claims. Other income increased by $0.2 million to $0.3 million for the nine months ended September 30, 2021 from $0.1 million for the nine months ended September 30, 2020, primarily due to higher insurance recoveries. Total Interest Expense, Net During the nine months ended September 30, 2021, we incurred total interest expense, net of $2.8 million compared to $2.1 million for the nine months ended September 30, 2020. The increase in interest expense is primarily related to the loss on early extinguishment of debt of $0.2 million incurred in connection with the pay down of two mortgage financings during the nine months ended September 30, 2021 and higher amount of borrowings under the 2021 Credit Facilities and, prior to its termination, the 2019 Credit Facility. Income Tax Expense During the nine months ended September 30, 2021, income tax expense increased by $0.03 to $0.08 million from $0.05 million for the nine months ended September 30, 2020, primarily attributable to an increase in expense related to PRM for the nine months ended September 30, 2021. Cash Flows Comparison of the nine months ended September 30, 2021 and the nine months ended September 30, 2020 We had $4.0 million of cash and $0.9 million of escrows and reserves as of September 30, 2021 compared to $7.8 million of cash and $0.7 million of escrows and reserves as of September 30, 2020. Cash flow from operating activities – Net cash provided by operating activities increased by $7.5 million to $13.4 million for the nine months ended September 30, 2021 compared to $6.0 million for the same period in 2020. The increase is primarily due to the volume of postal properties that we have acquired, all of which have generated additional rental income and related changes in working capital. Cash flow to investing activities – Net cash used in investing activities for the nine months ended September 30, 2021 primarily consisted of $60.7 million of acquisitions and $1.9 million of escrow deposits for acquisition, capital improvements and other investing activities, offset by $1.0 million of insurance proceeds that were received. Net cash used in investing activities for the nine months ended September 30, 2020 primarily consisted of $60.6 million of acquisitions and the investment in a financing lease. Cash flow from financing activities – Net cash provided by financing activities decreased by $1.1 million to $49.8 million for the nine months ended September 30, 2021 compared to $50.9 million for the nine months ended September 30, 2021. The decrease was primarily related to the pay down of two mortgage financings and no mortgage borrowings in 2021, higher debt issuance costs and increased payment of dividends and distributions, offset by an increase in net proceeds from issuance of shares and increased net borrowings under our credit facilities during the nine months ended September 30, 2021. Liquidity and Capital Resources Analysis of Liquidity and Capital Resources We had approximately $4.0 million of cash and $0.9 million of escrows and reserves as of September 30, 2021. As of September 30, 2021, we had $94.5 million outstanding under the 2021 Credit Facilities. 35 Table of Contents On August 9, 2021, we entered into the 2021 Credit Facilities with Bank of Montreal, as administrative agent, and BMO Capital Markets Corp., People’s United Bank, National Association, JPMorgan Chase Bank, N.A. and Truist Securities, Inc. as joint lead arrangers and joint book runners. Additional participants in the 2021 Credit Facilities include Stifel Bank & Trust and TriState Capital Bank. In connection with entering into the 2021 Credit Facilities, we terminated the 2019 Credit Facility and paid off the outstanding loans thereunder. The 2021 Credit Facilities include an accordion feature which will permit us to borrow up to an additional $150.0 million under the 2021 Revolving Credit Facility and up to an additional $50.0 million under the 2021 Term Loan, in each case subject to customary terms and conditions. The 2021 Revolving Credit Facility matures in January 2026, which may be extended for two six-month periods subject to customary conditions, and the 2021 Term Loan matures in January 2027. Borrowings under the 2021 Credit Facilities carry an interest rate of, (i) in the case of the 2021 Revolving Credit Facility, either a base rate plus a margin ranging from 0.5% to 1.0% per annum or LIBOR plus a margin ranging from 1.5% to 2.0% per annum, or (ii) in the case of the 2021 Term Loan, either a base rate plus a margin ranging from 0.45% to 0.95% per annum or LIBOR plus a margin ranging from 1.45% to 1.95% per annum, in each case depending on a consolidated leverage ratio. With respect to the 2021 Revolving Credit Facility, we will pay, if the usage is equal to or less than 50%, an unused facility fee of 0.20% per annum, or if the usage is greater than 50%, an unused facility fee of 0.15% per annum, in each case on the average daily unused commitments under the 2021 Revolving Credit Facility. The 2021 Credit Facilities are guaranteed, jointly and severally, by us and certain of our indirect subsidiaries and contains customary covenants that, among other things, restrict, subject to certain exceptions, our ability to incur indebtedness, grant liens on assets, make certain types of investments, engage in acquisitions, mergers or consolidations, sell assets, enter into certain transactions with affiliates and pay dividends or make distributions. The 2021 Credit Facilities require compliance with consolidated financial maintenance covenants to be tested quarterly, including a minimum fixed charge coverage ratio, maximum total leverage ratio, minimum tangible net worth, maximum secured leverage ratio, maximum unsecured leverage ratio, minimum unsecured debt service coverage ratio and maximum secured recourse leverage ratio. The 2021 Credit Facilities also contain certain customary events of default, including the failure to make timely payments under the 2021 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 September 30, 2021, we were in compliance with all of the 2021 Credit Facilities’ debt covenants. In addition, on August 9, 2021, we entered into an interest rate swap (the "Interest Rate Swap") that effectively fixed the LIBOR component of the interest rate on $50.0 million portion of the 2021 Credit Facilities through January 2027. The Interest Rate Swap initially applied to the $50.0 million 2021 Term Loan, fixing the interest rate for the 2021 Term Loan at 2.291% as of September 30, 2021 . On March 5, 2021, the Financial Conduct Authority announced that USD LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). The 2021 Credit Facilities provide that, on or about the LIBOR cessation date (subject to an early opt-in election), LIBOR shall be replaced as a benchmark rate in the 2021 Credit Facilities with a new benchmark rate, with such adjustments as set forth in the 2021 Credit Facilities. We are not able to predict when LIBOR will cease to be available or when there will be enough liquidity in the SOFR markets. We are monitoring and evaluating the risks related to changes in LIBOR availability, which include potential changes in interest paid on debt and amounts received and paid on the Interest Rate Swap. In addition, the value of debt or derivative instruments tied to LIBOR may also be impacted as LIBOR is limited and discontinued and contracts must be transitioned to a new alternative rate. Our short-term liquidity requirements primarily consist of operating expenses and other expenditures associated with our properties, distributions to our limited partners and distributions to our stockholders required to qualify for REIT status, capital expenditures and, potentially, acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, cash, borrowings under the 2021 Credit Facilities and the potential issuance of securities. Our long-term liquidity requirements primarily consist of funds necessary for the repayment of debt at maturity, property acquisitions and non-recurring capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term indebtedness including the 2021 Credit Facilities and mortgage financing, the issuance of equity and debt securities and proceeds from select sales of our properties. We also may fund property acquisitions and non-recurring capital improvements using the 2021 Credit Facilities pending permanent property-level financing. We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, in the future, there may be a number of factors that could have a material and adverse effect on our ability to access these capital sources, including unfavorable conditions in the overall equity and credit markets, our degree of leverage, our unencumbered asset base, borrowing restrictions imposed by our lenders, general market conditions for REITs, our operating performance, liquidity and market perceptions about us. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital 36 Table of Contents sources. In addition, we continuously evaluate possible acquisitions of postal properties, which largely depend on, among other things, the market for owning and leasing postal properties and the terms on which the USPS will enter into new or renewed leases. To maintain our qualification as a REIT, we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income determined without regard to the deduction for dividends paid and excluding capital gains. As a result of this requirement, we cannot rely on retained earnings to fund our business needs to the same extent as other entities that are not REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways to fund those needs. Such alternatives may include, among other things, divesting ourselves of properties (whether or not the sales price is optimal or otherwise meets our strategic long-term objectives), incurring indebtedness or issuing equity securities in public or private transactions, the availability and attractiveness of the terms of which cannot be assured. Consolidated Indebtedness As of September 30, 2021, we had approximately $127.7 million of outstanding consolidated principal indebtedness. The following table sets forth information as of September 30, 2021 with respect to our outstanding indebtedness (in thousands): Outstanding Balance as of September 30, 2021 Interest Rate at September 30, 2021 Maturity Date Revolving Credit Facility Borrowings (1) : 2021 Revolving Credit Facility $ 44,500 LIBOR+150bps (2) January 2026 2021 Term Loan (1) 50,000 LIBOR+145bps (2) January 2027 Secured Borrowings: Vision Bank (3) 1,409 3.69 % September 2041 First Oklahoma Bank (4) 353 3.625 % December 2037 Vision Bank – 2018 (5) 844 3.69 % September 2041 Seller Financing (6) 366 6.00 % January 2025 AIG – December 2020 (7) 30,225 2.80 % January 2031 Total Principal $ 127,697 Explanatory Notes : (1) See above under "— Analysis of Liquidity and Capital Resources" for details regarding the 2021 Credit Facilities. During the three and nine months ended September 30, 2021, we incurred $0.05 million and $0.2 million, respectively, of unused facility fees related to the 2019 Credit Facility and the 2021 Revolving Credit Facility. During the three and nine months ended September 30, 2020, we incurred $0.1 million and $0.3 million, respectively, of unused facility fees related to the 2019 Credit Facility. (2) As of September 30, 2021, the one-month U.S. Dollar LIBOR rate was 0.08025%. (3) Five properties are collateralized under this loan with a personal guarantee of payment by Mr. Spodek for 50% of the outstanding amount thereunder. On September 30, 2021, we amended this loan to extend its maturity to September 2041 and reduce its interest rate to 3.69% fixed for five years with interest payments only, then adjusting every subsequent 5 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. On July 23, 2021, we amended this loan to reduce its interest rate to 3.625% fixed for five years, then adjusting annually thereafter to a variable annual rate of Wall Street Journal Prime Rate with a minimum annual rate of 3.625%. 37 Table of Contents (5) The loan is collateralized by first mortgage liens on one property and a personal guarantee of payment by Mr. Spodek. On September 30, 2021, we amended this loan to extend its maturity to September 2041 and reduce its interest rate to 3.69% fixed for five years with interest payments only, then adjusting every subsequent 5 year period thereafter with principal and interest payments to the rate based on the Five-Year Treasury Rate, plus a margin of 2.75%, with a minimum annual rate of 2.75%. (6) In connection with the acquisition of a property, we obtained seller financing secured by the property in the amount of $0.4 million requiring five annual payments of principal and interest of $105,661 with the first installment due on January 2, 2021 based on a 6.0% interest rate per annum through January 2, 2025. (7) The loan is secured by a first mortgage lien on the industrial property located in Warrendale, PA. The loan has a fixed interest rate of 2.80% with interest-only payments for the first five years and fixed payments of principal and interest thereafter based on a 30-year amortization schedule. Secured Borrowings as of September 30, 2021 As of September 30, 2021, we had approximately $33.2 million of secured borrowings outstanding, all of which are fixed rate debt with a weighted average interest rate of 2.90% per annum. During the nine months ended September 30, 2021, we repaid two mortgage loans in the aggregate amount of $13.7 million. Dividends To maintain our qualification as a REIT, we are required to pay dividends to stockholders at least equal to 90% of our REIT taxable income determined without regard to the deduction for dividends paid and excluding net capital gains. During the three and nine months ended September 30, 2021, we paid cash dividends of $0.2225 per share and $0.66 per share, respectively. Our Board of Directors approved, and o n November 4, 2021, we declared a third quarter common stock dividend of $0.2250 per share, which will be paid on November 30, 2021 to stockholders of record as of November 15, 2021. Subsequent Real Estate Acquisitions Subsequent to September 30, 2021, we have acquired 17 postal properties in individual or portfolio transactions for an aggregate of approximately $17.9 million, excluding closing costs. Off-Balance Sheet Arrangements As of September 30, 2021, we did not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates Refer to the heading titled “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of the critical accounting policies and estimates of the Predecessor and us, as applicable. New Accounting Pronouncements For a discussion of our adoption of new accounting pronouncements, please see Note 2 of our Consolidated Financial Statements included herein. Inflation Because most of our leases provide for fixed annual rental payments without annual rent escalations, our rental revenues are fixed while our property operating expenses are subject to inflationary increases. A majority of our leases provide for tenant reimbursement of real estate taxes and thus the tenant must reimburse us for real estate taxes. We believe that if inflation increases expenses over time, increases in lease renewal rates will materially offset such increase. 38 Table of Contents