UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019March 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to ___________________

 

Commission File Number: 001-38903

 

POSTAL REALTY TRUST, INC.

(Exact name of registrant as specified in its charter)

 

Maryland 83-2586114
(State or other jurisdiction of (I.R.S.Employer
of incorporation)incorporation or organization) Identification No.)

 

75 Columbia Avenue

Cedarhurst, NY 11516

(Address of principal executive offices) (Zip Code)

 

(516) 295-7820

(Registrant’s telephone number, including area code):code:(516) 295-7820

Former name, former address and former fiscal year, if changed since last report: Not applicable.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Class A Common Stock,
par value $0.01 per share
 PSTL New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ActAct. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The numberAs of June 25, 2020, the registrant had 5,381,564 shares of Class A Common Stock, par value $0.01 per share, of the registrant outstanding at November 11, 2019 was 5,285,904.common stock outstanding.

 

 

 

 

 

  

Explanatory Note

As previously disclosed in the Current Report on Form 8-K filed by Postal Realty Trust, Inc. (the “Company”) with the Securities and Exchange Commission (the “SEC”) on May 15, 2020, the filing of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 (the “Form 10-Q”) was delayed as a result of the disruptions caused by the novel coronavirus (“COVID-19”) pandemic, including the impact of (a) certain employees working from home, which slowed the Company’s routine quarterly close process, (b) delays in communications with various counterparties and (c) the need to perform additional analyses and procedures relating to the COVID-19 pandemic’s impact on the Company’s business and operations and on the financial statements included in the Form 10-Q. The Company has relied on the “Order Under Section 36 of the Securities Exchange Act Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies” dated March 25, 2020 (Release No. 34-88465), issued by the SEC in light of the COVID-19 pandemic, to delay the filing of the Form 10-Q.

TABLE OF CONTENTS

 

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019

Table of Contents

Page
PART I. FINANCIAL INFORMATION1
Item 1.Financial Statements1
Consolidated and Combined Consolidated Balance Sheets at September 30, 2019 (Unaudited)as of March 31, 2020 and December 31, 201820191
Consolidated and Combined Consolidated Statements of Operations for the Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018 (Unaudited)2
Consolidated and Combined Consolidated Statements of Changes in Equity (Deficit) for the Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018 (Unaudited)3
Consolidated and Combined Consolidated Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2020 and 2019 and 2018 (Unaudited)4
Notes to Consolidated and Combined Consolidated Financial Statements (Unaudited)5
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations19
Item 3.Quantitative and Qualitative Disclosures about Market Risk32
Item 4.Controls and Procedures32
PART II. OTHER INFORMATION33
Item 1.Legal Proceedings33
Item 1A.Risk Factors33
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3335
Item 3.Defaults Upon Senior Securities3335
Item 4.Mine Safety Disclosures3335
Item 5.Other Information3335
Item 6.Exhibits3436

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

POSTAL REALTY TRUST, INC.

Postal Realty Trust, Inc. and Predecessor
Consolidated and Combined Consolidated Balance SheetsCONSOLIDATED BALANCE SHEETS

  

  September 30,  December 31, 
  2019  2018 
  (Unaudited)  (Predecessor) 
ASSETS      
Real estate properties      
Land $16,827,724  $7,239,213 
Buildings and improvements  57,177,951   29,550,076 
Tenant improvements  2,114,364   1,646,215 
 Total real estate properties  76,120,039   38,435,504 
Less: accumulated depreciation  (8,180,839)  (7,121,532)
Total real estate properties, net  67,939,200   31,313,972 
         
Cash  10,969,557   262,926 
Escrows and reserves  610,200   598,949 
Rent and other receivables  1,138,621   601,670 
Prepaid expenses and other assets  2,853,298   146,014 
Deferred rent receivable  31,687   14,060 
In-place lease intangibles (net of accumulated amortization of $5,628,459 and $4,388,699, respectively)  4,776,515   2,735,927 
Above market leases (net of accumulated amortization of $16,539 and $8,688, respectively)  9,401   10,914 
         
Total assets $88,328,479  $35,684,432 
         
LIABILITIES AND EQUITY (DEFICIT)        
Liabilities        
Secured borrowings, net $3,237,327  $34,792,419 
Revolving credit facility  17,000,000   - 
Accounts payable, accrued expenses and other  4,224,599   1,869,084 
Below market leases (net of accumulated amortization of $1,860,167 and $1,525,540, respectively)  5,365,118   3,842,495 
Deferred tax liability, net  -   793,847 
Due to affiliates  512,530   - 
         
Total liabilities $30,339,574  $41,297,845 
         
Commitments and contingencies        
         
Equity (deficit)        
Common stock,        
PSTL - $.01 par value per share        
Class A, 500,000,000 shares authorized: 5,285,904 shares issued and outstanding  52,859   - 
Class B, 27,206 shares authorized: 27,206 shares issued and outstanding  272   - 
UPH - no par, 1,000 shares authorized: 1,000 shares issued and outstanding  -   4,000,000 
NPM - no par, 200 shares authorized: 200 shares issued and outstanding  -   200 
Additional paid-in capital  46,502,630   3,441,493 
Accumulated deficit  (1,034,471)  (11,003,876)
Member’s deficit  -   (2,095,823)
Total Stockholders’ and Predecessor Equity (Deficit)  45,521,290   (5,658,006)
Operating Partnership unitholders’ noncontrolling interests  12,467,615   - 
Noncontrolling interest in properties  -   44,593 
Total equity (deficit)  57,988,905   (5,613,413)
         
Total liabilities and equity (deficit) $88,328,479  $35,684,432 

  March 31,
2020
 December 31,
2019
  (Unaudited)  
Assets    
Real estate properties    
Land $29,971,741  $25,147,732 
Building and improvements  117,541,035   92,873,637 
Tenant improvements  2,850,042   2,562,293 
Total real estate properties  150,362,818   120,583,662 
Less: Accumulated depreciation  (9,730,056)  (8,813,579)
Total real estate properties, net  140,632,762   111,770,083 
Cash  2,844,040   12,475,537 
Rent and other receivables  1,741,169   1,710,314 
Prepaid expenses and other assets, net  3,734,438   2,752,862 
Escrow and reserves  691,766   708,066 
Deferred rent receivable  46,052   33,344 
In-place lease intangibles, net  8,660,413   7,315,867 
Above market leases, net  26,166   22,124 
Total Assets $158,376,806  $136,788,197 
         
Liabilities and Equity        
Liabilities:        
Secured borrowings, net $3,184,519  $3,211,004 
Revolving credit facility  68,000,000   54,000,000 
Accounts payable, accrued expenses and other  3,220,430   3,152,799 
Below market leases, net  7,899,853   6,601,119 
Total Liabilities  82,304,802   66,964,922 
         
Commitments and Contingencies        
         
Equity:        
Class A common stock, par value $0.01 per share; 500,000,000 shares authorized, 5,392,906 and 5,285,904 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively  53,929   52,859 
Class B common stock, par value $0.01 per share; 27,206 shares authorized: 27,206 shares issued and outstanding as of March 31, 2020 and December 31, 2019  272   272 
Additional paid-in capital  54,187,591   51,396,226 
Accumulated deficit  (4,176,857)  (2,575,754)
Total Stockholders’ Equity  50,064,935   48,873,603 
Operating Partnership unitholders’ non-controlling interests  26,007,069   20,949,672 
Total Equity  76,072,004   69,823,275 
Total Liabilities and Equity $158,376,806  $136,788,197 

 

(The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.)


POSTAL REALTY TRUST, INC.

Postal Realty Trust, Inc. and Predecessor
Consolidated and Combined Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)CONSOLIDATED AND COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

     Predecessor     Predecessor 
  Three months ended September 30,
2019
  Three months ended
September 30,
 2018
  Nine months ended September 30,
2019
  Nine months ended September 30,
2018
 
Revenues            
Rent income $2,387,082  $1,417,534  $5,735,896  $4,199,767 
Tenant reimbursements  342,419   220,676   852,504   668,502 
Fee and other income  278,846   255,971   842,097   862,317 
Total revenues  3,008,347   1,894,181   7,430,497   5,730,586 
                 
Operating expenses                
Real estate taxes  353,663   227,373   880,117   688,953 
Property operating expenses  332,892   203,994   821,839   639,289 
General and administrative  1,207,197   282,361   2,385,228   1,086,384 
Equity-based compensation  394,530   -   584,873   - 
Depreciation and amortization  1,066,338   457,907   2,314,553   1,363,575 
Total operating expenses  3,354,620   1,171,635   6,986,610   3,778,201 
                 
Income (loss) from operations  (346,273)  722,546   443,887   1,952,385 
                 
Interest expense, net:                
Contractual interest expense  (48,916)  (361,743)  (635,423)  (1,112,353)
Amortization of deferred financing costs  (4,523)  (3,126)  

(9,558

)  (9,375)
Loss on early extinguishment of Predecessor debt  -   -   (185,586)  - 
Interest income  1,136   1,158   3,394   3,370 
Total interest expense, net  (52,303)  (363,711)  (827,173)  (1,118,358)
                 
Income (loss) before income tax (expense) benefit  (398,576)  358,835   (383,286)  834,027 
Income tax (expense) benefit  6,259   143,382   (39,749)  83,742 
Net income (loss)  (392,317)  502,217   (423,035)  917,769 
                 
Less:                
Net income attributable to noncontrolling interest in properties  -   (2,829)  (4,336)  (9,462)
Net (income) loss attributable to Predecessor $-  $499,388  $(463,414) $908,307 
Net loss attributable to Operating Partnership unitholders’ noncontrolling interests  84,348       191,020     
Net income (loss) attributable to common stockholders $(307,969)     $(699,765)    
                 
Net income (loss) per share (basic and diluted) $(0.06)     $(0.14)    
                 
Weighted average common shares outstanding (basic and diluted)  5,164,264       5,164,264     
  For the Three Months Ended
March 31,
  2020 2019
Revenues:    
Rental income $4,300,771  $1,492,386 
Tenant reimbursements  601,346   236,856 
Fee and other income  295,519   286,926 
Total revenues  5,197,636   2,016,168 
Operating expenses:        
Real estate taxes  641,944   249,789 
Property operating expenses  407,048   251,706 
General and administrative  2,301,543   376,891 
Depreciation and amortization  2,034,868   480,443 
Total operating expenses  5,385,403   1,358,829 
(Loss) income from operations  (187,767)  657,339 
Interest expense, net:        
Contractual interest expense  (728,226)  (358,467)
Write-off and amortization of deferred financing fees  (104,462)  (3,181)
Interest income  826   1,134 
Total interest expense, net  (831,862)  (360,514)
(Loss) income before income tax expense  (1,019,629)  296,825 
Income tax expense  (10,197)  (39,749)
Net (loss) income  (1,029,826)  257,076 
Net income attributable to non-controlling interest in properties     (2,843)
Net income attributable to Predecessor    $254,233 
Net loss attributable to Operating Partnership unitholders’ non-controlling interests  352,071     
Net (loss) attributable to common stockholders  (677,755)    
Net (loss) per share:        
Basic and Diluted $(0.14)    
Weighted average common shares outstanding:        
Basic and Diluted  5,174,569     

 

(The accompanying notes are an integral part of these unaudited consolidated and combined consolidated financial statementsstatements.)


POSTAL REALTY TRUST, INC.

Postal Realty Trust, Inc. and Predecessor
Consolidated and Combined Consolidated Statements of Changes in Equity (Deficit)
Periods Ended September 30, 2019 and 2018 (Unaudited)CONSOLIDATED AND COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

  

  Number of common shares  Common Stock  Additional Paid-in Capital  Accumulated Equity (Deficit)  Member’s Equity (Deficit)  Total stockholders’ & Predecessor equity  Operating Partnership unitholders’ noncontrolling interests  Noncontrolling interest in properties  Total equity interest 
Predecessor                           
Balance - December 31, 2018  1,200   4,000,200  $3,441,493  $(11,003,876) $(2,095,823) $(5,658,006)  -  $44,593  $(5,613,413)
Capital contributions  -   -   397,121   -   1,377,758   1,774,879   -   -   1,774,879 
Distributions and dividends  -   -   (150,000)  -   (1,067,515)  (1,217,515)  -   (521)  (1,218,036)
Net income (loss)  -   -   -   (173,554)  427,787   254,233   -   2,843   257,076 
Balance - March 31, 2019  1,200   4,000,200   3,688,614   (11,177,430)  (1,357,793)  (4,846,409)  -   46,915   (4,799,494)
Capital contributions  -   0   0   0   293,373   293,373   -   0   293,373 
Distributions and dividends  -   0   (549,191)  0   (310,174)  (859,365)  -   (5,667)  (865,032)
Net income (loss)  -   0   0   3,210   205,971   209,181   -   1,493   210,674 
Balance- May 16, 2019  1,200   4,000,200   3,139,423   (11,174,220)  (1,168,623)  (5,203,220)  -   42,741   (5,160,479)
Net proceeds from sale of common stock  4,500,000   45,000   64,665,261   -   -   64,710,261   -   -   64,710,261 
Formation transactions  664,264   (3,993,557)  (31,798,499)  11,174,220   1,168,623   (23,449,213)  22,662,907   (42,741)  (829,047)
Issuance and amortization of equity-based compensation  148,529   1,485   126,755   -   -   128,240   62,103   -   190,343 
Dividends declared  -   -   -   (334,706)  -   (334,706)  (91,213)  -   (425,919)
Net income (loss)              (391,796)  -   (391,796)  (106,672)  -   (498,468)
Reallocation of non-controlling interest  -   -   10,117,974   -   -   10,117,974   (10,117,974)  -   - 
Balance- June 30, 2019  5,312,793   53,128   46,250,914   (726,502)      45,577,540   12,409,152   -   57,986,692 
Issuance and amortization of equity-based compensation  317   3   262,181   -  -   262,184   132,346   -   394,530 
Net income (loss)  -   -   -   (307,969)  -   (307,969)  (84,348)  -   (392,317)
Reallocation of non-controlling interest  -   -   (10,465)  -   -   (10,465)  10,465   -   - 
Balance- September 30, 2019  5,313,110  $53,131  $46,502,630  $(1,034,471)  -  $45,521,290  $12,467,615   -  $57,988,905 
                                     
Predecessor                                    
Balance - December 31, 2017  1,200  $4,000,200  $3,650,309  $(10,693,356) $(7,012,369) $(10,055,216)  -  $44,577  $(10,010,639)
Capital contributions  -   -   135,577   -   1,046,284   1,181,861   -   2,651   1,184,512 
Distributions and dividends  -   -   (100,245)  -   (1,904,107)  (2,004,352)  -   (2,651)  (2,007,003)
Net income (loss)  -   -   -   (228,940)  319,581   90,641   -   3,822   94,463 
Balance - March 31, 2018  1,200   4,000,200   3,685,641   (10,922,296)  (7,550,611)  (10,787,066)  -   48,399   (10,738,667)
                                     
Capital contributions  -   -   199,003   -   5,038,920   5,237,923   -   1,854   5,239,777 
Distributions and dividends  -   -   (200,142)  -   (780,516)  (980,658)  -   (1,854)  (982,512)
Net income (loss)  -   -   -   (51,721)  369,999   318,278   -   2,811   321,089 
Balance - June 30, 2018  -   4,000,200   3,684,502   (10,974,017)  (2,922,208)  (6,211,523)  -   51,210   (6,160,313)
Capital contributions  -   -   10,601   -   549,680   560,281   -   6,632   566,913 
Distributions and dividends  -   -   (228,500)  -   (851,888)  (1,080,388)  -   (6,632)  (1,087,020)
Net income (loss)  -   -   -   128,089   371,299   499,388   -   2,829   502,217 
Balance - September 30, 2018  1,200  $4,000,200  $3,466,603  $(10,845,928) $(2,853,117) $(6,232,242)  -  $54,039  $(6,178,203)

  Number of
shares of Common
Stock
 Common Stock Additional Paid-in Capital Accumulated Equity
(Deficit)
 Member’s Equity
(Deficit)
 Total Stockholders’ &
Predecessor equity
 Operating
Partnership unitholders’
non-controlling
interests
 Non-controlling
interests in properties
 Total Equity
Balance - December 31, 2018  -  $4,000,200  $3,441,493  $(11,003,876) $(2,095,823) $(5,658,006) $-  $44,593  $(5,613,413)
Capital contributions  -   -   397,121   -   1,377,758   1,774,879   -   -   1,774,879 
Distributions and dividends  -   -   (150,000)  -   (1,067,515)  (1,217,515)  -   (521)  (1,218,036)
Net income (loss)  -   -   -   (173,554)  427,787   254,233   -   2,843   257,076 
Balance – March 31, 2019  -  $4,000,200  $3,688,614  $(11,177,430) $(1,357,793) $(4,846,409) $-  $46,915  $(4,799,494)
                                     
Balance - December 31, 2019  5,313,110  $53,131  $51,396,226  $(2,575,754) $-  $48,873,603  $20,949,672  $-  $69,823,275 
Issuance of OP Units in connection with transaction  -   -   -   -   -   -   7,921,828   -   7,921,828 
Issuance and amortization of equity-based compensation  103,463   1,035   519,215   -   -   520,250   185,015   -   705,265 
Issuance and amortization under the Employee Stock Purchase Plan (“ESPP”)  3,538   35   53,160   -   -   53,195   -   -   53,195 
Dividends declared ($0.17 per share)  -   -   -   (923,348)  -   (923,348)  (478,385)  -   (1,401,733)
Net loss  -   -   -   (677,755)  -   (677,755)  (352,071)  -   (1,029,826)
Reallocation of non-controlling interest  -   -   2,218,990   -   -   2,218,990   (2,218,990)  -   - 
Balance – March 31, 2020  5,420,111  $54,201  $54,187,591  $(4,176,857) $-  $50,064,935  $26,007,069  $-  $76,072,004 

 

(The accompanying notes are an integral part of these unaudited consolidated and combined consolidated financial statementsstatements.)


Postal Realty Trust, Inc. and Predecessor
Consolidated and Combined Consolidated Statements of Cash Flows
Periods Ended September 30, 2019 and 2018 (Unaudited)POSTAL REALTY TRUST, INC.

CONSOLIDATED AND COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

     Predecessor 
  Nine months
ended
September 30,
2019
  Nine months
ended
September 30,
2018
 
Cash flows from operating activities      
Net (loss) income $(423,035) $917,769 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:        
Depreciation  1,074,793   747,125 
Amortization of in-place intangibles  1,239,760   616,450 
Amortization of deferred financing costs  9,558   9,375 
Amortization of above market leases  7,851   6,319 
Amortization of below market leases  (334,627)  (215,955)
Equity-based compensation  584,873   - 
Loss on extinguishment of debt  185,586   - 
Deferred rent receivable  (17,627)  1,481 
Deferred rent expense payable  (41,374)  - 
Deferred tax liability  (65,895)  (255,224)
Change in assets and liabilities        
Rent and other receivables  (802,618)  2,863 
Prepaid expenses and other assets  (260,038)  (12,737)
Due to affiliates  8,569   - 
Accounts payable, accrued expenses and other  935,122   406,829 
Net cash provided by operating activities $2,100,898  $2,224,295 
         
Cash flows from investing activities        
Acquisition of real estate  

(38,925,771

)  (1,334,591)
Capital improvements  (105,116)  (92,525)
Acquisition deposits  (410,000)  - 
Net cash used in investing activities  (39,440,887)  (1,427,116)
         
Cash flows from financing activities        
Net proceeds from issuance of common stock  66,624,167   - 
Formation transactions  (2,007,417)  - 
Proceeds from mortgage payable  445,000   960,000 
Repayments of mortgages payable  (32,191,238)  (798,179)
Proceeds from revolving credit facility  17,000,000   - 
Debt issuance costs  (1,371,931)  - 
Capital contributions  2,068,252   3,446,987 
Distributions and dividends  (2,508,962)  (4,076,535)
Net cash provided by (used in) financing activities  48,057,871   (467,727)
         
Net increase in cash and restricted cash  10,717,882   329,452 
         
Cash and restricted cash at beginning of period  861,875   694,418 
         
Cash and restricted cash at end of period $11,579,757  $1,023,870 

  For the Three Months Ended
March 31,
  2020 2019
Cash flows from operating activities:    
Net (loss) income $(1,029,826) $257,076 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

        
Depreciation  926,096   264,150 
Amortization of in-place intangibles  1,108,772   216,293 
Write-off and amortization of deferred financing costs  104,462   3,179 
Amortization of above/below market leases  (316,275)  (85,755)
Amortization of intangible liability  (1,105)   
Deferred rent receivable  (12,708)  (5,166)
Deferred rent expense payable  4,771   532 
Deferred tax liability     (65,895)
Equity-based compensation  713,810    
Changes in assets and liabilities:        
Rent and other receivables  (14,372)  109,044 
Prepaid expenses and other assets  103,336   2,067 
Accounts payable, accrued expenses and other  (199,579)  (178,212)
Net cash provided by operating activities  1,387,382   517,313 
         
Cash flows from investing activities:        
Acquisition of real estate  (22,410,688)  (645,120)
Acquisition and other deposits  (689,250)   
Capital improvements  (48,295)  (11,840)
Other investing activities  (63,167)   
Net cash used in investing activities  (23,211,400)  (656,960)
         
Cash flows from financing activities:        
Repayments of secured borrowings  (27,010)  (284,801)
Proceeds from revolving credit facility  14,000,000    
Debt issuance costs  (386,233)   
Capital contributions     1,774,879 
Distributions and dividends  (1,401,733)  (1,218,036)
Other financing activities  (8,803)   
Net cash provided by financing activities  12,176,221   272,042 
         
Net (decrease) increase in Cash and Escrows and Reserves  (9,647,797)  132,395 
         
Cash and Escrows and Reserves at the beginning of period  13,183,603   861,875 
         
Cash and Escrow and Reserves at the end of period $3,535,806  $994,270 

 

(The accompanying notes are an integral part of these unaudited consolidated and combined consolidated financial statementsstatements.)


POSTAL REALTY TRUST, INC.

Postal Realty Trust, Inc. and Predecessor
Notes to Consolidated and Combined Consolidated Financial Statements
(Unaudited)NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Organization and Description of Business

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Postal Realty Trust, Inc. (the “Company” “we”, “us”, or “our”) 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 (our “Class A Common Stock”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 (“OP(each, an “OP Unit,” and collectively, the “OP Units”). Both the Company and the Operating Partnership commenced operations upon completion of the IPO and certain related formation transactions (the “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 common units.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 September 30, 2019,March 31, 2020, the Company held a 78.5%an approximately 65.8% 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 or VIE,(“VIE”) in which we are the primary beneficiary.

 

Our Predecessor (the “Predecessor”) is a combination of limited liability companies (the “LLCs”), one C-Corporation (“UPH”), one S-Corporation (“NPM”) and one limited partnership. The entities that comprise the Predecessor were majority owned and controlled by Mr. Andrew Spodek and his affiliates and were acquired by contribution to, or merger with, the Company and the Operating Partnership.

 

The Predecessor does not represent a legal entity. The Predecessor and its related assets and liabilities arewere under common control and were contributed to the Operating Partnership in connection with the Company’s IPO.

 

For the periods prior to May 17, 2019, the Predecessor, through the LLCs, UPH and the limited partnership, owned 190 post office properties in 33 states.

 

NPM was formed on November 17, 2004, for the purposespurpose of managing commercial real estate properties.

 

As of September 30, 2019,March 31, 2020, the Company owns and managesowned a portfolio of 289549 postal properties located in 4345 states. All of theOur properties were leased to a single tenant, the United States Postal Service (the “USPS”), other than a de-minimisde minimis non-postal tenant that shares space in a building leased to the USPS.

 

In addition, through its taxable REIT subsidiary (“TRS”), Postal Realty Management TRS, LLC (“PRM”), the Company provides fee-based third party property management services for an additional 403401 postal properties, which are owned by Mr. Spodek and his affiliates, his family members and their partners.

 

The Company, is a Maryland corporation formed on November 19, 2018 and until May 15, 2019, was authorized to issue up to 600,000,000 shares of common stock, par value $0.01 per share. On May 15, 2019, in connection with the IPO, wethe Company amended ourits articles of incorporation such that the Company is currently authorized to issue up to 500,000,000 shares of Class A Common Stock,common stock, 27,206 shares of Class B common stock, $0.01 par value per share (our “Class B Common Stock”common stock” or “Voting Equivalency stock”), and up to 100,000,000 shares of preferred stock.

The Company electedbelieves it has been organized in conformity with, and has operated in a manner that has enabled it to be taxed as an S-Corporation undermeet, the Internal Revenue Code of 1986, as amended (the “Code”), effective November 19, 2018, and as such, all federal tax liabilities were the responsibility of the Company’s sole stockholder until the completion of our IPO. In anticipation of the IPO, the Company revoked its S-Corporation election on May 14, 2019. The Company intends to qualify and elect to qualifyrequirements or qualification as a real estate investment trust (“REIT”) under the Code, and will elect to be taxed as a REIT under the Code beginning with its short taxable year endingended December 31, 2019.2019 upon the filing of its federal income tax return for such year. As a REIT, the Company generally will not be subject to federal income tax to the extent that it distributes at least 90% of its REIT taxable income for each tax year to its stockholders. REITs are subject to a number of organizational and operational requirements.

Pursuant to the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company qualifies as an emerging growth company (“EGC”). An EGC may choose, as we have 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 (the “SEC”).


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

Note 2. THE COMPANY’SThe Company’s IPO AND THE FORMATION TRANSACTIONSand Formation Transactions

Both the Company and the Operating Partnership commenced operations upon completion of the IPO and the Formation Transactions on May 17, 2019. The Company’s operations are carried out primarily through the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership.

 

On May 17, 2019, the Company completed theits IPO, pursuant to which it sold 4,500,000 shares of its Class A Common Stockcommon stock at a public offering price of $17.00 per share. The Company raised $76.5 million in gross proceeds, resulting in net proceeds of approximately $71.1 million after deducting approximately $5.4 million in underwriting discounts and before giving effect to $6.4 million in other expenses relating to the IPO. The Company’s Class A Common Stockcommon stock began trading on the New York Stock Exchange under the symbol “PSTL” on May 15, 2019.

 

In connection with the IPO and Formation Transactions, the Company, through its Operating Partnership, used a portion of the net proceeds to repay approximately $31.7 million of outstanding indebtedness related to the Predecessor.

 

Pursuant to the Formation Transactions, the Company, directly or through the Operating Partnership, acquired the entities that comprise the Predecessor. The initial properties and other interests were contributed in exchange for 1,333,112 OP Units, 637,058 shares of our Class A Common Stock,common stock, 27,206 shares of our Class B Common StockVoting Equivalency stock and $1.9 million of cash. In addition, the Operating Partnership purchased 100% interests in 81 post office properties (the “Acquisition Properties”) in exchange for $26.9 million in cash, including approximately $1.0 million paid to Mr. Spodek, the Company’s chief executive officer and a director for his non-controlling ownership in nine of the Acquisition Properties.

 

Because of the timing of the IPO and the Formation Transactions, the Company’s financial condition as of December 31, 2018 and results of operations for the three and nine months ended September 30, 2018 reflect the financial condition and results of operations of the Predecessor. The results of operations for the three months ended September 30, 2019 reflects solely the operations of the Company and the results of operations for the nine months ended September 30,March 31, 2019 reflect the results of operations of the Predecessor together with the Company, while thePredecessor. The financial condition as of September 30,December 31, 2019 reflectsand March 31, 2020 and results of operations for the three months ended March 31, 2020 reflect solely the financial condition and operations of the Company. References in these notes to consolidated financial statements to “Postal Realty Trust, Inc.” signify the Company for the period after the completion of the IPO and the Formation Transactions and the Predecessor for all prior periods.


The following is a summary of the Predecessor Statements of Operations for the period from April 1, 2019 through May 16, 2019 and for the period from January 1, 2019 through May 16, 2019, and the Company’s Statement of Operations for the period from May 17, 2019 through September 30, 2019. These amounts are included in the consolidated and combined consolidated statement of operations herein for the three and Nine months ended September 30, 2019. All balances as of December 31, 2018 and for the three and nine months ended September 30, 2018 are those of the Predecessor.POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

  Predecessor  Postal Realty Trust, Inc. 
  April 1, 
2019 
through
May 16,
2019
  January 1, 
2019 
through
May 16,
2019
  May 17,
2019
through
September 30,
2019
 
Revenues:         
Rent income $756,969  $2,249,355  $3,486,541 
Tenant reimbursements  111,219   348,075   504,429 
Fee and other income  141,033   427,959   414,138 
             
Total revenues $1,009,221  $3,025,389  $4,405,108 
             
Operating Expenses:            
Real estate taxes  114,783   358,693   521,424 
Property operating expenses  117,958   357,779   464,060 
General and administrative  106,549   501,204   1,884,024 
Equity-based compensation  -   -   584,873 
Depreciation and amortization  245,313   725,756   1,588,797 
             
Total operating expenses $584,603  $1,943,432  $5,043,178 
             
Income (loss) from operations  424,618   1,081,957   (638,070)
             
Interest expense, net:            
Contractual interest expense  (212,352)  (570,819)  (64,604)
Amortization of deferred financing costs  (1,592)  (4,773)  (4,785)
Loss on early extinguishment of Predecessor debt  -   -   (185,586)
Interest income  -   1,134   2,260 
 Total interest expense, net  (213,944)  (574,458)  (252,715)
             
Income (loss) before income tax expense  210,674   507,499   (890,785)
             
Income tax (benefit) expense  -   (39,749)  - 
             
Net income (loss) $210,674  $467,750  $(890,785)
             
Less:            
             
Net income attributable to noncontrolling interest in properties  (1,493)  (4,336)  - 
             
Net income attributable to Predecessor $209,181  $463,414   - 
Net loss attributable to Operating Partnership unitholders’ noncontrolling interests          191,020 
             
Net loss attributable to common stockholders         $(699,765)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESUNAUDITED (CONTINUED)

 

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

 

The accompanying consolidatedunaudited Consolidated and combined consolidated financial statements of the CompanyCombined Consolidated Financial Statements include the financial position and results of operations of the Company and its Predecessor, the Operating Partnership and its wholly owned subsidiaries. The Company did not have any operations from the date of formation to May 17, 2019. The Predecessor represents a combination of certain entities holding interests in real estate that were commonly controlled prior to the Formation Transactions. Due to their common control, the financial statements of the separate Predecessor entities which ownowned the properties and the management company are presented on a combined consolidated basis. The effects of all significant intercompany balances and transactions have been eliminated.

 

We consolidateThe Company consolidates the Operating Partnership, a VIE in which we arethe 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.

 

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 and combined consolidated balance sheets.Consolidated Balance Sheets. Accordingly, the presentation of net income is modified to present(loss) reflects the income attributed to controlling and non-controlling interests.

 

The accompanying consolidated and combined 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 statements.

 

TheThis interim financial information furnishedshould be read in conjunction with the accompanying consolidated and combined consolidated financial statements reflectsincluded in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Management believes that all adjustments that, in the opinion of management, area normal, recurring nature considered necessary for a fair presentation of the aforementioned consolidated and combined consolidatedhave been included. This interim financial statements for the interim periods. Operating results for the three and nine months ended September 30, 2019 areinformation does not necessarily indicative ofrepresent or indicate what the operating results that maywill be expected for the year ending December 31, 2019. These interim financial statements should be read in conjunction with,2020. All material intercompany accounts and follow the same policies and procedures as outlined in the audited combined consolidated financial statements for the year ended December 31, 2018, included in the Company’s final prospectus dated May 14, 2019.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, andthe disclosure of commitmentscontingent assets and contingencies at the date of the consolidated and combined consolidated financial statementsliabilities and the reported amounts of revenues and expenses during the reporting period. ActualAlthough management believes its estimates are reasonable, actual results could differ materially from thesethose estimates.

Cash and Escrows and Reserves

 

Cash included unrestricted cash with a maturity of three months or less. Escrows and reserves consisted of restricted cash. The following table provides a reconciliation of cash and escrows and reserves reported within the Company’s Consolidated Balance Sheets and Consolidated and Combined Consolidated Statements of Cash Flows:

  As of 
  March 31,
2020
  December 31,
2019
 
Cash $2,844,040  $12,475,537 
Escrows and reserves:        
Maintenance reserve  664,165   663,339 
ESPP reserve  27,601   44,727 
Cash and escrows and reserves $3,535,806  $13,183,603 


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

Offering and Other CostsFair Value of Financial Instruments

 

CertainThe 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 costs related toamounts the IPO and the Formation Transactions paid by an affiliateCompany could realize on disposition of the Company’s initial sole shareholder were reimbursed byassets and liabilities as of March 31, 2020 and December 31, 2019. The use of different market assumptions and/or estimation methodologies may have a material effect on the Company from the proceedsestimated fair value amounts. Cash, escrows and reserves, receivables, prepaid expenses, accounts payable and accrued expenses are carried at amounts which reasonably approximate their fair values as of the IPO. Offering costs were recorded in stockholders’ equity as a reduction of additional paid-in capital. Transaction costs relatedMarch 31, 2020 and December 31, 2019 due to asset acquisitions were capitalized as part of the acquisition. As of September 30, 2019, approximately $0.5 million of offering and other costs are owed to an affiliate of the Company’s initial sole shareholder.their short maturities. 

Investments in Real Estate

Upon the acquisition of real estate, the purchase price is allocated based upon theThe fair value of the assets acquired and liabilities assumed.Company’s borrowings under its Credit Facility approximates carrying value. The allocation of the purchase price to the fair value of the tangible assetsCompany’s secured borrowings aggregated approximately $3.3 million and $3.2 million as compared to the principal balance of an acquired property is derived$3.2 million and $3.2 million as of March 31, 2020 and December 31, 2019, respectively. The fair value of the Company’s debt was categorized as a Level 3 basis (as provided by valuingASC 820, Fair Value Measurements and Disclosures). The fair value of these financial instruments was determined by using a discounted cash flow analysis based on the property as if it were vacant. All real estate acquisitions inborrowing rates currently available to the periods presented qualified as asset acquisitionsCompany for loans with similar terms and as such, acquisition-related feesmaturities. The fair value of the mortgage debt was determined by discounting the future contractual interest and acquisition-related expenses related to these asset acquisitions were capitalized and allocated to tangible and intangibleprincipal payments by a market rate.   

Disclosure about fair value of assets and liabilities.


Investments in real estate generally include land, buildings, tenant improvementsliabilities is based on pertinent information available to management as of March 31, 2020 and identified intangible assets, such as in-place lease intangibles and above or below-market lease intangibles. Direct and certain indirect costs clearly associated with the development, construction, leasing or expansion of real estate assets are capitalized as a cost of the property. Repairs and maintenance costs are expensed as incurred. Depreciation on buildings generallyDecember 31, 2019. Although management is provided on a straight-line basis over 40 years. Tenant improvements are depreciated over the shorter of their estimated useful lives or the term of the related lease. The acquired in-place lease values are amortized to expense over the average remaining non-cancellable term of the respective in-place leases. The acquired above or below-market lease intangibles are amortized to rent income over the applicable lease term, inclusivenot aware of any option periodsfactors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for below-market leases.purposes of these financial statements since March 31, 2020 and current estimates of fair value may differ significantly from the amounts presented herein.

Impairment 

The carrying value of real estate investments and related intangible assets isare 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. For the three and nine months ended September 30, 2019 and 2018, no impairment loss was recorded.

DuringNo impairments were recorded during the three months ended September 30, 2019,March 31, 2020 and 2019. 

Concentration of Credit Risks 

As of March 31, 2020, the Company acquired eighteenCompany’s properties forwere leased to a purchase price of $11.1 million, inclusive of acquisition costs of $0.1 million. Duringsingle tenant, the USPS, other than a de minimis non-postal tenant that shares space in a building leased to the USPS. For the three months ended June 30, 2019, the Company acquired the Acquisition Properties in connection with the IPO forMarch 31, 2020, no state had a purchase priceconcentration of $27.3 million, inclusiverental income over 10% as a percentage of acquisition costs of $0.4 million. Duringtotal rental income. For the three months ended March 31, 2019, the Predecessor acquired one property for a purchase priceour total rental income of $645,120, inclusive of acquisition costs of $10,120. The purchase prices 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$1.5 million was allocated as follows:

  Three months ended 
  September 30,
2019
  June 30,
2019
  March 31,
2019
 
Land $2,619,719  $6,789,589  $179,202 
Building and improvements  8,301,678   18,774,918   456,550 
Tenant improvements  190,343   259,640   18,166 
In-place lease intangibles  982,974   2,227,870   69,504 
Above-market leases  -   6,338   - 
Below market leases  (1,024,644)  (754,300)  (78,302)
Total $11,070,070  $27,304,055  $645,120 

During the nine months ended September 30, 2018, the Predecessor acquired seven properties for an aggregate purchase price of $1,334,591, inclusive of acquisition costs of $19,598. The purchase price was 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 was allocated as follows:

  Nine months ended 
  September 30,
2018
 
Land $502,667 
Building and improvements  825,811 
Tenant improvements  29,029 
In-place lease intangibles  171,713 
Above-market leases  19,602 
Below market leases  (214,231)
Total $1,334,591 

Cash and Restricted Cash

Cash and cash equivalents include cash and highly liquid investment securities with maturities at acquisition of three months or less. Restricted cash is presented as escrows and reservesconcentrated in the accompanying consolidatedfollowing states: Texas (13.8%), Massachusetts (13.4%), Wisconsin (12.3%) and combined consolidated balance sheets. Cash and restricted cash consistOhio (10.4%). The ability of the following:

  September 30,
2019 (Unaudited)
  December 31,
2018
 
Cash $10,969,557  $262,926 
Restricted cash:        
Maintenance reserve  602,306   598,949 
ESPP reserve  7,894   - 
Total cash and restricted cash $11,579,757  $861,875 

Fair ValueUSPS to honor the terms of Financial Instruments

The following disclosuretheir leases is dependent upon regulatory, economic, environmental or competitive conditions in any of estimated fair value was determined by management using available market informationthese areas 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 realize on disposition of the assets and liabilities at September 30, 2019 and December 31, 2018. The use of different market assumptions and/or estimation methodologies may have a materialan effect on the estimated fair value amounts. Cash, escrows and deposits, receivables, prepaid expenses, accounts payable and accrued expenses and due to affiliates are carried at amounts which reasonably approximate their fair values as of September 30, 2019 and December 31, 2018 due to their short maturities. The fair value of the Company’s borrowings under its senior revolving credit facility approximates carrying value. The fair value of the Company’s secured borrowings aggregated approximately $3,208,680 and $33,586,000, as compared to the principal balance of $3,272,911 and $35,019,149 as of September 30, 2019 and December 31, 2018, respectively. The fair value of the Company’s debt was categorized as a level 3 basis (as provided by ASC 820,Fair Value Measurements and Disclosures). The fair value was estimated using a discounted cash flow analysis valuation based on the borrowing rates currently available to the Company for loans with similar terms and maturities. The fair value of the mortgage debt was determined by discounting the future contractual interest and principal payments by a market rate.

Disclosure about fair value of assets and liabilities is based on pertinent information available to management as of September 30, 2019 and December 31, 2018, respectively. 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 September 30, 2019 and current estimates of fair value may differ significantly from the amounts presented herein.

Revenue Recognition

our overall business results. 

The Company has operating lease agreementsdeposited cash and maintains its bank deposits with tenants, some of which contain provisions for future rent increases. Rental income is recognized on a straight-line basis over the term of the lease. In addition, certain lease agreements provide for reimbursements from tenants for real estate taxes and other recoverable costs, which are recorded on an accrual basis as tenant reimbursement revenue.

Fee and other income primarily consist of property management fees. These fees arise from contractual agreements with entitieslarge financial institutions in amounts that are affiliated with the Company’s CEO. Management fee income is recognized as earned under the respective agreements.

exceed federally insured limits. The Company carries liability insurance to mitigate its exposure to certainhas not experienced any 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 receipt of insurance proceeds is deemed probable. Any amount of insurance recovery in excess of the amount of the losses incurred is considered a gain contingency and is not recorded in fee and other income until the proceeds are received. 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 proceeds are received.

10

such accounts.  

Income Taxes

UPH was subject to federal income tax and state franchise taxes in jurisdictions where it conducts business. See Note 8. Income Taxes for a discussion of the treatment of the deferred tax assets and liabilities in connection with the IPO.

Income taxes or credits resulting from earnings or losses for the LLCs, the limited partnership and NPM were payable by or accrue to the benefit of the members/partners/shareholders of such entities. No provision has been made for income taxes for these pass-through entities in the combined consolidated financial statements.

For periods subsequent to the completion of the IPO and the Formation Transactions, PRM is subject to federal, state and local corporate income taxes to the extent there is taxable income.

Noncontrolling Interests

Noncontrolling interests in the Company represent common units of limited partnership interest of the Operating Partnership (“Common Units”) held by the Predecessor’s prior investors and long term incentive units of the Operating Partnership (“LTIP Units”) held by the Company’s CEO. Upon completion of the IPO and the Formation Transactions, the Operating Partnership issued 1,333,112 Common Units to the Predecessor’s prior investors as partial consideration for the contribution of their interest in the Predecessor to the Operating Partnership and 114,706 LTIP Units to the Company’s CEO. During the three months ended September 30, 2019, the Company issued 5,298 LTIP Units to an employee.

Dividends

On June 26, 2019, the board of directors of the Company approved and the Company declared a pro-rated cash dividend of $0.063 per share and common unit for the period from May 17, 2019, the closing date of the IPO, to September 30, 2019. The dividend was paid on July 31, 2019 to stockholders and common unitholders of record as of the close of business on July 9, 2019 consisting of $0.3 million in dividends to stockholders and $0.1 million to common unitholders. On November 5, 2019, the board of directors of the Company approved and the Company declared a cash dividend of $0.14 per share and common unit for the quarter ended September 30, 2019. The dividend will be paid on December 2, 2019 to stockholders and common unitholders of record as of the close of business on November 15, 2019 consisting of $0.7 million in dividends to stockholders and $0.2 million to common unitholders.

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 are measured at fair value at date of grant and remeasured at fair value only upon a modification of the award. The estimated grant dateCompany will record forfeitures as they 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 the portion of fair value of restricted stock unitsthe 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 amortized over their respectivenot 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 periods. condition. 

See Note 11. Stockholder’s Equity for further details.

Earnings per Share

The Company calculates net income (loss)loss per share based upon the weighted average shares outstanding duringless issued and outstanding non-vested shares of Class A common stock for the period beginning May 17, 2019. Diluted earnings per share is calculated after giving effect to all potential dilutive shares outstanding during the period. There were 1,453,1162,827,737 potentially dilutive shares outstanding related to the issuance of CommonOP Units and LTIP Units held by noncontrollingnon-controlling interests as of September 30, 2019.March 31, 2020.


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

Accounting Standards Adopted in 2019

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers (“ASU 2014-09”) and established Accounting Standards Codification (“ASC”) Topic 606. ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.

This standard is effective for interim and annual reporting periods that begin on or after December 15, 2018 as a result of the Company’s status as an emerging growth company. The Company and the Predecessor adopted ASU 2014-09 on January 1, 2019 using the modified retrospective method however, there was no cumulative effect required to be recognized in retained earnings at the date of application. Substantially all of the Company’s revenue is derived from its tenant leases and therefore falls outside the scope of this guidance. With respect to its fee-based revenue, the Company earns monthly base management fees subject to the terms of the contractual agreements with entities that are affiliated with the Company for the day-to-day operations and administration of its managed properties. These services are provided in exchange for monthly management fees, which are based on a percentage of revenues collected from post offices owned by entities that are affiliated with the Company. The Company determined that there is no change to revenue recognition for base management fees as the underlying services are considered to be individual performance obligations composed of a series of distinct services satisfied over time, for which revenue is recognized monthly as earned over the life of the management agreement as services are provided. The total amount of consideration from the contracts is variable as it is based on monthly revenues, which are influenced by multiple factors, some of which are outside the Company’s control. Therefore, the Company recognizes the revenue at the end of each month once the uncertainty is resolved. Due to the standardized terms of the management agreements, the Company accounts for all management agreements in a similar, consistent manner. Therefore, no disaggregated information relating to management agreements is presented.

11

 

Future Application of Accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02,Leases(“ASU 2016-02”). ASU 2016-02, outlines a new model for accounting by lessees, whereby all leases, existing and new, with lease terms greater than one year will be recognized on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, changes have been made to align certain lessor and lessee accounting guidance and the key aspects of the lessor accounting model with new revenue recognition standard discussed above. Under the new guidance, contract consideration will be allocated to its lease components and non-lease components (such as maintenance). For the Company as a lessor, any non-lease components will be accounted for under ASC Topic 606,Revenue from Contracts with Customers, unless the Company elects a lessor practical expedient to not separate the non-lease components from the associated lease component (see discussion below). The new guidance also includes a definition ofinitial direct costs that is narrower than the prior definitionLeases; in current GAAP (Topic 840,Leases). This will result in a change to the accounting for the Company’s internal leasing costs, which will be expensed as incurred, as opposed to being capitalized and deferred. Commissions subsequent to successful lease execution will continue to be capitalized.

ASU 2016-02 initially provided for one retrospective transition method; however, a second transition method was later added with ASU 2018-11 as described below. To ease the transition, the new lease accounting guidance permits companies to utilize certain practical expedients in their implementation of the new standard:

A package of three practical expedients that must be elected together for all leases and includes: (i) not reassessing expired or existing contracts as to whether they are or contain leases; (ii) not reassessing lease classification of existing leases and (iii) not reassessing the amount of capitalized initial direct costs for existing leases;

ASU 2016-02 also includes a practical expedient to use hindsight in determining the lease term or assessing purchase options for existing leases and in assessing impairment of right of use assets;

ASU 2018-01,Land Easements Practical Expedient for Transition to Topic 842 added a transition practical expedient to not reassess existing or expired land easement agreements not previously accounted for as leases; and

A new practical expedient under ASU 2018-11, described below.

In July 2018, the FASB issued ASU No. 2018-10,Codification Improvements to Topic 842,,Leases,. These amendments provide minor clarifications and corrections to ASU 2016-02,Leases (Topic 842). In July 2018, the FASB issued ASU No. 2018-11,Leases (Topic 842):Targeted Improvements. The amendments in this Update provide entities with an additional optional transition method to adopt ASU 2016-02. Under this new transition method, an entity may apply the new leases standard at the adoption date instead of the earliest comparative period presented in its financial statements and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting under this additional transition method for the comparative periods presented in the financial statements prior to the adoption date of the new leases standard will continue to be in accordance with current GAAP (Topic 840,Leases). The amendments in ASU 2018-11, also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease componentLeases — Targeted Improvements; and instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (“Topic 606”). To elect the practical expedient, the timing and pattern of transfer of the lease and non-lease components must be the same and the lease component must meet the criteria to be classified as an operating lease if accounted for separately. If these criteria are met, the single component will be accounted for under either under Topic 842 or Topic 606 depending on which component(s) are predominant. The lessor practical expedient to not separate non-lease components from the associated component must be elected for all existing and new leases.


As lessor, the Company expects that post-adoption substantially all existing leases will have no change in the timing of revenue recognition until their expiration or termination. The Company expects to elect the package of practical expedients and the lessor practical expedient to not separate non-lease components such as maintenance from the associated lease for all existing and new leases and to account for the combined component as a single lease component. The timing of revenue recognition is expected to be the same for the majority of the Company’s new leases as compared to similar existing leases; however, certain categories of new leases could have different revenue recognition patterns as compared to similar existing leases. As lessee, the Company expects to record a right of use asset and related liability for the office lease disclosed in Note 9. Related Party Transactions.

In December 2018, the FASB issued ASU 2018-20,Leases(Topic 842), Narrow-Scope Improvements for LessorsLessors. This group of ASUs is collectively referred to as Topic 842. Topic 842 supersedes the existing standards for lease accounting (Topic 840, Leases). This ASU modifies ASU No. 2016-02 to permit lessors, as an accounting policy election, not to evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Consequently, a lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all collections from lessees of taxes within the scope of the election and will provide certain disclosures (includes sales, use, value added, and some excise taxes and excludes real estate taxes). The Company has elected not to evaluate whether the aforementioned costs are lessor or lessee costs. ASU 2018-20 also provides that certain lessor costs require lessors to exclude from variable payments, and therefore revenue, specifically lessor costs paid by lessees directly to third parties. The amendments also require lessors to account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue.

Topic 842 will be effective for the Company on January 1, 2021 as a result of its classification as an emerging growth company.

The Company continuesexpects to evaluateelect the FASB’s activitiespractical expedients provided by Topic 842, including: the package of practical expedients that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) whether a lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and as a lessor, the new leasing standardpractical expedient not to separate certain non-lease components, such as common area maintenance, from the lease component if the timing and pattern of transfer are the same for the non-lease component and associated lease component, and the potential impactlease component would be classified as an operating lease if accounted for separately.

Topic 842 requires lessees to record most leases on its financial results, policiestheir balance sheet through a right-of-use (“ROU”) model, in which a lessee records an ROU asset and disclosures upon adoption,a lease liability on their balance sheet. Leases that are less than 12 months do not need to be accounted for under the ROU model. Lessees will account for leases as financing or operating leases, with the classification affecting the timing and pattern of expense recognition in the income statement. Lease expense will be recognized based on the effective interest method for leases accounted for as finance leases and on a straight-line basis over the term of the lease for leases accounted for as operating leases. As of March 31, 2020, the Company was the lessee under one office lease and one ground lease that would require accounting under the ROU model.

The accounting by a lessor under Topic 842 is largely unchanged from that of Topic 840. Under Topic 842, lessors will continue to account for leases as a sales-type, direct-financing, or operating. A lease will be treated as a sale if it is considered to transfer control of the underlying asset to the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control. Otherwise, the lease is treated as an operating lease. Topic 842 requires accounting for a transaction as a financing in a sale leaseback in certain circumstances, including when the seller-lessee is provided an option to purchase the property from the landlord at the tenant’s option. The Company expects that this provision could change the accounting for costs which may be paid bythese types of leases in the lessee directly to a third party,future. Topic 842 also includes the concept of separating lease and non-lease components. Under Topic 842, non-lease components, such as real estate taxes.

In December 2018,common area maintenance, would be accounted for under Topic 606 and separated from the FASB issued ASU No. 2018-20,Leases — Narrow-Scope Improvements for Lessorswhich provides guidancelease payments. However, the Company will elect the lessor practical expedient allowing the Company to not separate these components when certain conditions are met. Upon adoption of Topic 842, in requiring lessorsthe Company expects to recognize certain variable payment amounts in profit or loss in the period when the changes in facts and circumstances on which the variable payment is based occur. The Company is currently assessing the impact this guidance will havecombine tenant reimbursements with rental income on its consolidated financial statements.statements of operations.

  

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 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current ‘incurred loss’ model with an ‘expected loss’ approach. The Company will also be required to disclose information about how it developed the allowances, including changes in the factors that influenced the Company’s 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 will be effective for the Company on January 1, 2023 as a result of its classification as an emerging growth company. The Company is currently in the process of evaluating the impact the adoption of the guidance will have on its consolidated financial statements.


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

Note 4. Real Estate Acquisitions

 

The following tables summarizes the Company’s acquisitions for the three months ended March 31, 2020. 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 allocation. The total purchase price including transaction costs was allocated as follows:

Three Months Ended Number
of Properties
  Land  Building
and Improvements
  Tenant Improvements  In-place lease intangibles  Above-
market leases
  Below-
market leases
  Other (1)  Total (2) 
March 31, 2020(3)(4)(5)  83  $4,824,009  $24,605,963  $287,749  $2,453,318  $7,148  $(1,618,115)  (34,098) $30,525,974 

4. INTANGIBLE ASSETS AND LIABILITIESExplanatory Notes:

  

(1)Includes an intangible liability related to unfavorable operating leases on three properties that is included in “Accounts Payable, accrued expenses and other” on the Company’s Consolidated Balance Sheets.

(2)Includes acquisition costs of $0.3 million for the three months ended March 31, 2020.

(3)Includes the acquisition of a 21-building portfolio leased to the USPS. The contract purchase price for the portfolio was $13.8 million, exclusive of closing costs, and giving effect to 483,333 OP Units issued to the sellers at a value of $17.00 per unit. The closing price of the Company’s common stock on January 10, 2020 was $16.39; therefore, total consideration at closing, including closing costs, was approximately $13.6 million of which $7.9 million represented the non-cash consideration (the value of  the OP Units) issued to the sellers.

(4)Includes the acquisition of a 42-building portfolio leased to the USPS. The aggregate purchase price of such portfolio was approximately $8.8 million, including closing costs, which was funded with borrowings under our Credit Facility.
(5)Includes the acquisition of 20 postal properties in individual or smaller portfolio transactions for approximately  $8.1 million, including closing costs.

Note 5. Intangible Assets and Liabilities 

The following table summarizes our intangible assets and liabilities as a result of the application of acquisition accounting: 

As of Gross Asset (Liability)  Accumulated
(Amortization)/
Accretion
  Net Carrying Amount 
March 31, 2020:         
In-place lease intangibles $16,241,342   (7,580,929)  8,660,413 
Above-market leases  47,768   (21,602)  26,166 
Below-market leases  (10,290,416)  2,390,563   (7,899,853)
             
December 31, 2019:            
In-place lease intangibles $13,788,024  $(6,472,157) $7,315,867 
Above-market leases  40,620   (18,496)  22,124 
Below-market leases  (8,672,301)  2,071,182   (6,601,119)

Amortization of in-place lease intangibles was $1.2$1.1 million and $0.6$0.2 million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. This amortization is included in depreciation“Depreciation and amortization inamortization” on the consolidatedCompany’s Consolidated and combined consolidated statementsCombined Consolidated Statements of operations. Operations. 

Amortization of acquired above market leases was $7,851$3,106 and $6,319$2,370 for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and is included in rent income in“Rental income” on the consolidatedCompany’s Consolidated and combined consolidated statementsCombined Consolidated Statements of operations.Operations. Amortization of acquired below market leases was $334,627$0.3 million and $215,955$0.1 million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and is included in rent income in“Rental income” on the consolidatedCompany’s Consolidated and combined consolidated statementsCombined Consolidated Statements of operations.Operations. 

Future amortization/accretion of these intangibles is below:

Year Ending December 31, In-place lease intangibles  Above-market leases  Below-market leases 
2020 – Remaining $2,803,283  $9,449  $(821,831)
2021  2,813,392   6,695   (993,180)
2022  1,449,153   5,813   (890,128)
2023  835,026   3,139   (809,855)
2024  385,573   1,070   (719,369)
Thereafter  373,986      (3,665,490)
Total  8,660,413   26,166   (7,899,853)


The balance of these intangible assets and liabilities will be amortized as follows:

POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

 

Year ending December 31, In-Place Lease Intangibles  Below Market Leases  Above Market Leases 
2019 – Remaining $567,742  $167,579  $1,372 
2020  1,850,310   622,436   4,903 
2021  1,304,600   555,645   1,975 
2022  516,851   503,120   1,151 
2023  265,875   455,109   - 
Thereafter  271,137   3,061,229   - 
Total $4,776,515  $5,365,118  $9,401 

5. DEBTNote 6. Debt

 

The following table summarizes the Company’s indebtedness as of September 30, 2019March 31, 2020 and December 31, 2018:2019:

 

Borrowing September 30,
2019
  December 31,
2018
 
Revolving Credit Facility (1) $17,000,000  $- 
Vision Bank  1,538,330  15,636,243 
Atlanta Postal Credit Union  -   17,313,481 
First Oklahoma Bank  381,391   389,599 
Vision Bank – 2018  908,190   936,750 
Seller Financing (2)  445,000   - 
First Oklahoma Bank – 2018  -   743,076 
Total debt $20,272,911  $35,019,149 
  Outstanding
Balance as of
March 31,
2020
  Outstanding
Balance as of
December 31,
2019
  Interest Rate
at March 31,
2020
  Maturity Date
Revolving Credit Facility(1) $68,000,000  $54,000,000   LIBOR+170bps(2)September 2023
Vision Bank(3)  1,506,858   1,522,672   4.00% September 2036
First Oklahoma Bank(4)  374,582   378,005   4.50% December 2037
Vision Bank – 2018(5)  892,613   900,385   5.00% January 2038
Seller Financing(6)  445,000   445,000   6.00%  January 2025
Total Principal  71,219,053   57,246,062       
Unamortized deferred financing costs  (34,534)  (35,058)      
Total Debt $71,184,519  $57,211,004       

 

Explanatory Notes:

(1)(1)On September 27, 2019, the Company entered into a $100credit agreement (as amended, the “Credit Agreement”) with People’s United Bank, National Association, individually and as administrative agent, BMO Capital Markets Corp., as syndication agent, and certain other lenders. The Credit Agreement provides for revolving commitments in an aggregate principal amount of $100.0 million Senior Revolving Credit Facility (“Facility”), which includeswith an accordion feature (“the Accordion Feature”) that will permitpermits the Company to borrow up to $200an additional $100.0 million for an aggregate total of $200.0 million, subject to customary terms and conditions. The Facility maturesconditions, and a maturity date of September 27, 2023. On January 30, 2020, the Company amended the Credit Agreement in September 2023. Borrowingsorder to exercise a portion of the Accordion Feature to increase the maximum amount available under the Credit Facility carryto $150.0 million, subject to the borrowing base properties identified therein remaining unencumbered and subject to an interest rate of either aenforceable lease. On June 25, 2020, the Company further amended the Credit Agreement to revise, among other items, certain definitions and borrowing base rate plus a range of 70calculations to 140 basis points or LIBOR plus a range of 170increase available capacity, as well as the restrictive covenant pertaining to 240 basis points, each dependingConsolidated Tangible Net Worth (as defined in such amendment).

The interest rates applicable to loans under the Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.7% to 1.4% per annum or LIBOR plus a margin ranging from 1.7% to 2.4% per annum, each based on a consolidated leverage ratio. In addition, the Company will pay, for the period through and including the calendar quarter ended March 31, 2020, an unused facility fee on the revolving commitments under the Credit Facility of 0.75% per annum for the first $100 million and 0.25% per annum for the portion of revolving commitments exceeding $100.0 million, and for the period thereafter, an unused facility fee of 0.25% per annum for the aggregate unused revolving commitments, with both periods utilizing calculations of daily unused commitments under the Credit Facility.

During the three months ended March 31, 2020, the Company incurred $0.2 million of unused fees related to the Credit Facility. The Company’s ability to borrow under the Credit Facility is subject to ongoing compliance with a number of customary affirmative and negative covenants. As of March 31, 2020, the Company was in compliance with all of the Credit Facility’s debt covenants.

(2)As of September 30, 2019, the Company had $17 million drawn under the Facility and the Facility bore interest at LIBOR (at September 30, 2019,March 31, 2020, the one-month LIBOR rate was 2.02%) plus 170 bps. In addition, the Company will pay, for the period through and including the calendar quarter ending0.99%.

(3)Five properties are collateralized under this loan as of March 31, 2020 an unused facility feewith Mr. Spodek as the guarantor. On September 8, 2021 and every five years thereafter, the interest rate will reset at a variable annual rate of Wall Street Journal Prime Rate (“Prime”) + 0.5%.

(4)The loan is collateralized by first mortgage liens on the revolving commitments under the Facilityfour properties and a personal guarantee of .75% per annum for the first $100 million and .25% per annum for the portion of revolving commitments exceeding $100 million, and for the period thereafter, an unused facility fee of .25% per annum for the aggregate unused revolving commitments, with both periods utilizing calculations of daily unused commitments under the Facility. The Company’s abilitypayment by Mr. Spodek. Interest rate resets on December 31, 2022 to borrow under the Facility is subject to ongoing compliance with a number of customary affirmative and negative covenants. As of September 30, 2019, the Company was in compliance with the Facility’s debt covenants.Prime + 0.25%.


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

(2)(5)The loan is collateralized by first mortgage liens on one property and a personal guarantee of payment by Mr. Spodek. Interest rate resets on January 31, 2023 to Prime + 0.5%.

(6)In connection with the acquisition of a property, the Companywe 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 payableinstallment due on January 2, 2021 based on a 6%6.0% interest rate per annum through January 2, 2025.

 

Principal payments on debt through maturity

The scheduled principal repayments of indebtedness as of March 31, 2020 are as follows:

 

Year Ending December 31, Amount  Amount 
2019 – Remaining $27,409 
2020  109,182 
2020 – Remaining $82,151 
2021  191,562   193,899 
2022  196,553   205,580 
2023  17,204,951   68,218,425 
2024  229,234 
Thereafter  2,543,254   2,289,764 
  20,272,911 
Less: Deferred financing costs, net  35,584 
Total $20,237,327  $71,219,053 

In connection with the IPO, the Company repaid approximately $31.7 million of outstanding indebtedness and wrote off approximately $0.2 million of deferred financing costs which are recorded in loss on extinguishment of debt in the consolidated and combined consolidated statements of operations.

Note 7. Leases

 

The Vision Bank loan, First Oklahoma Bank loan and Vision Bank – 2018 loan contain a personal guarantyAs of payment by Mr. Spodek.

6. LOANS PAYABLE – RELATED PARTY

In June 2018, pursuant to a loan modification agreement, interest-only promissory notes aggregating $3,544,215 bearing interest at 1.9% per annum, requiring interest only payments, and maturing between August 1, 2036 through July 1, 2041 were assumed by an affiliate of the Predecessor and recorded as an increase in equity of the Predecessor. Interest expense incurred for these notes was $33,671 for the nine months ended September 30, 2018.

7. OPERATING LEASE AGREEMENTS

At September 30, 2019,March 31, 2020, all of the properties owned by the Company are leased towere occupied by a single tenant, the USPS, other than a de-minimisde minimis non-postal tenant that shares space in a building leased to the USPS. TheCertain leases have expired and the balance expire at various dates through January 31, 2028.November 30, 2029.

 

Future minimum rental incomelease payments to be received onas of March 31, 2020 under non-cancellable operating leases isfor the next five years and thereafter are as follows:(1)

Year Ending December 31, Amount 
2020 – Remaining(2) $9,531,480 
2021  11,600,963 
2022  8,553,461 
2023  6,471,524 
2024  4,329,108 
Thereafter  5,248,174 
Total $45,734,710 

Explanatory Notes:

 

Year Ending December 31, Amount 
2019 – Remaining $2,313,353 
2020  8,090,250 
2021  6,934,226 
2022  4,403,081 
2023  3,107,616 
Thereafter  4,930,879 
Total $29,779,405 
(1)The above minimum lease payments to be received do not include reimbursements from the USPS for real estate taxes.
(2)

As of March 31, 2020, the leases at 31 of our properties had expired and the USPS was occupying such properties as a holdover tenant. In addition, the lease at one of our properties is a month to month lease.

 

8. INCOME TAXESDuring the three months ended March 31, 2020, the Company assumed an operating ground lease at one of our properties which includes rent escalations throughout the lease term (including renewal options) and expires on September 30, 2059. Ground lease expense is included in “Property Operating Expenses” on the Company’s Consolidated and Combined Consolidated Statements of Operations.

Year Ending December 31, Amount 
2020 – Remaining $16,805 
2021  22,400 
2022  22,400 
2023  22,400 
2024  22,960 
Thereafter  1,159,690 
Total $1,266,655 

POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

 

For the three and nine months ended September 30, 2018, in order to determine the quarterly provision for income taxes for UPH, the Company used an estimated annual effective tax rate (“ETR”), which is based on expected annual income and statutory tax rates in the various jurisdictions. Certain significant or unusual items are separately recognized as discrete items in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.Note 8. Income Taxes

 

Income tax expense (benefit) related to UPH for the three and nine months ended September 30,March 31, 2019 was zero and $39,749 at an effective tax rate of 13.4% and $(143,382) and $(83,742) at an effective tax rate of 6.4% for the three and nine months ended September 30, 2018.. The effective tax rate for the three and nine months ended September 30,March 31, 2019 and September 30, 2018 differs from the statutory rate of 21% due to certain entities included in the consolidated and combined consolidated financial statements that are not subject to tax at the entity level, state taxes and interest and penalties from unrecognized tax benefits primarily related to the utilization of loss carryforwards.

 

In connection with the IPO, the Company and PRM jointly elected to treat PRM as a TRS. PRM performs management services, including for properties the Company does not own. PRM generates income, resulting in federal and state corporate income tax liability for PRM. For the three months ended March 31, 2020, income tax expense related to PRM was $10,197.

The Company has unrecognized tax benefits as of March 31, 2020 of $0.6 million which is inclusive of interest and penalties and a corresponding indemnification asset which is recorded in prepaid expenses and other assets on the consolidated balance sheet.

In connection with the IPO, the indirect sole shareholder of UPH 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 amount will be adjusted going forward as new information becomes available in regard to such liability. The indirect sole shareholder of UPH will be responsible for all tax related matters related to UPH.

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company has unrecognizedCARES Act was enacted to provide economic relief to companies and individuals in response to the COVID-19 pandemic. Included in the CARES Act are tax benefits at September 30,provisions which increase allowable interest expense deductions for 2019 of $516,529, which is inclusive of interest and penalties2020 and increase the ability for taxpayers to use net operating losses. While we do not expect these provisions to have a corresponding indemnification asset which is recorded in prepaid expenses and other assetsmaterial impact on the consolidated balance sheet. DuringCompany’s taxable income or tax liabilities, we will continue to analyze the three months ended September 30, 2019,provisions of the Company reversed $191,391 of unrecognized tax benefitsCARES Act and the corresponding indemnification asset due to the expiration of statute of limitations.related guidance as it is published.

 

In connection with the IPO, the UPH $727,952 deferred tax liability at May 16, 2019 was reversed through equity. Deferred taxes have not been recorded with respect to the Company’s acquired basis differences of UPH due to the Company’s election to be taxed as a REIT in addition to the insignificant state effective tax rate for states that do not conform to federal taxation of REITs.Note 9. Related Party Transactions

In connection with the IPO, the Company elected to treat PRM as a TRS which performs management services for properties the Company does not own. PRM generates income, resulting in Federal and state income tax liability for these entities.

For the three and nine months ended September 30, 2019, income tax benefit related to PRM was $6,259 and zero, respectively.


9. RELATED PARTY TRANSACTIONS

Management Fee Income

 

Prior toPRM recognized management fee income of $0.3 million for the IPO,three months ended March 31, 2020 and the Predecessor recognized management fee income of $249,813$0.3 million for the three months ended September 30, 2018 and $393,030 and $800,557 for the nine months ended September 30, 2019 and 2018, respectively, from various properties which are affiliated with the Company’s CEO and are included in fee and other income in the consolidated and combined consolidated statements of operations. Following the IPO, PRM recognized management fee income of $236,137 and $365,443, respectively, for the three and nine months ended September 30,March 31, 2019 from various properties which arewere affiliated with the Company’s CEO andMr. Spodek. These amounts are included in fee“Fee and other income inincome” on the consolidated statementsCompany’s Consolidated and Combined Consolidated Statements of operations. These amounts include accruedOperations. Accrued management fees receivable of $16,344$0.1 million and zero at September 30,$0.08 million as of March 31, 2020 and December 31, 2019, and 2018, respectively, which isare included in rents“Rents and other receivablesreceivables” on the consolidated and combined consolidated balance sheets.

Company’s Consolidated Balance Sheets.

 

Related Party Lease

 

On October 1, 2018, the Predecessor entered into a lease for office space in Cedarhurst, New York with an entity affiliated with the Predecessor (the “Office Lease”). Pursuant to the Office Lease, the monthly rent was $15,000 subject to escalations. The term of the Office Lease was five years commencing on October 1, 2018 (with rent commencing on January 1, 2019) and was set to expire on September 30, 2023. In connection with the IPO, the Office Lease was terminated. On May 17, 2019, the Company entered into a new lease for office space in Cedarhurst, New York with an entity affiliated with the Company’s CEO (the “New Lease”). Pursuant to the New Lease, the monthly rent is $15,000 subject to escalations. The term of the OfficeNew Lease is five years commencing on May 17, 2019 and will expire on May 16, 2024. ForRental expenses associated with the nineoffice lease for the three months ended September 30, 2019, rent expenseMarch 31, 2020 was $93,626$47,782 and was recorded in general“General and administrative expenses inexpenses” on the consolidatedCompany’s Consolidated and combined consolidated statementsCombined Consolidated Statements of operations.

Operations. As of September 30, 2019, future minimum rental payments on the noncancelable lease is as follows:

Year Ending December 31, Amount 
2019 – Remaining $45,000 
2020  183,368 
2021  188,869 
2022  194,535 
2023  200,371 
Thereafter  76,244 
Total $888,387 

Due to Affiliates

At September 30, 2019, the Company owed $0.5 million to an affiliate of the Company’s CEO for amounts funded in connection with the Company’s IPO (See Note 3. Summary of Significant Accounting Policies).

This amount is non-interest bearingMarch 31, 2020, $3,096 was outstanding and payable and is due on demand.included in “Accounts payable, accrued expenses and other.”


10. EARNINGS PER SHARE

POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

 

The following table showsrepresents the amountsCompany’s future rental payments related to the New Lease:

Year Ending December 31,  Amount 
2020 – Remaining  $138,367 
2021   188,869 
2022   194,535 
2023   200,371 
2024   76,244 
Total  $798,386 

Guarantees

Mr. Spodek, our chief executive officer, has personally guaranteed our loans with First Oklahoma Bank and Vision Bank, totaling $2.8 million. As a guarantor, Mr. Spodek’s interests with respect to the debt he is guaranteeing (and the terms of any repayment or default) may not align with our interests and could result in a conflict of interest.

Note 10. Earnings Per Share

Earnings per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares outstanding for the period. The following table presents a reconciliation of income (loss) from operations used in computing the Company’s basic and diluted earnings per share. As of the three and nine months ended September 30, 2019, there is no dilution to earnings per share because there is a net loss.EPS calculations.(1)

 

  For the Three Months Ended
March 31,
2020
Numerator for earnings per share – basic and diluted:    
Net loss attributable to common stockholders $(677,755)
Less: Income attributable to participating securities  (71,535)
Numerator for earnings per share — basic and diluted $(749,290)
Denominator for earnings per share – basic and diluted  5,174,569 
     
Basic and diluted earnings per share $(0.14)

  Three Months Ended
September 30,
2019
  Nine Months Ended
September 30,
2019
 
Numerator for earnings per share – basic and diluted      
Net loss attributable to common stockholders $(307,969)  (699,765)
Less: income attributable to participating securities  -   (16,715)
         
Numerator for earnings per share – basic and diluted $(307,969) $(716,480)
         
Denominator for earnings per share – basic and diluted $5,164,264  $5,164,264 
         
Basic and diluted earnings per share $(0.06) $(0.14)

Explanatory Note:

 

(1)The combined statements of operations prior to May 17, 2019 represents the activity of the Predecessor and EPS was not applicable.

Note 11. STOCKHOLDER’S EQUITYStockholder’s Equity

The Company issued 4,500,000 shares of Class A Common Sharescommon stock in conjunction with the IPO resulting in net proceeds of approximately $71.1 million after deducting approximately $5.4 million in underwriting discounts and before giving effect to $6.4 million in other expenses relating to the IPO. In addition, the Company issued 637,058 shares of Class A Common Stockcommon stock and 27,206 shares of Class B Common StockVoting Equivalency stock in connection with the Formation Transactions. Each outstanding share of Class B Common StockVoting Equivalency stock entitles its holder to 50 votes on all matters on which Class A common stockholders are entitled to vote, including the election of directors, and holders of shares of Class A Common Stockcommon stock and Class B Common StockVoting Equivalency stock will vote together as a single class. Shares of Class B Common StockVoting Equivalency stock are convertible into shares of Class A Common Stock,common stock, on a one-for-one basis, at the election of the holder at any time. Additionally, one share of Class B Common StockVoting Equivalency stock will automatically convert into one share of Class A common stock for each 49 OP Units transferred (including by the exercise of redemption rights afforded with respect to OP Units) to a person other than a permitted transferee. This ratio is a function of the fact that each share of Class B Common StockVoting Equivalency stock entitles its holder to 50 votes on all matters on which Class A common stockholders are entitled to vote and maintains the voting proportion of holders of Class B Common StockVoting Equivalency stock with the holder’s economic interest in our Company.


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

 

NoncontrollingDividends

During the three months ended March 31, 2020, the Board approved and the Company declared and paid dividends of $1.4 million to Class A common stockholders, Voting Equivalency stockholders, OP unitholders and LTIP unitholders, or $0.17 per share as shown in the table below.

Declaration Date Record Date Date Paid Amount Per Share 
January 30, 2020 February 14, 2020 February 28, 2020 $0.17 

Non-controlling Interests

 

Noncontrolling

Non-controlling interests in the Company primarily represent CommonOP Units held by the Predecessor’s prior investors and certain sellers of properties to the Company and LTIP Units primarily issued to the Company’s CEO in connection with the IPO and in lieu of cash compensation. DuringThe Company issued 483,333 OP Units in connection with a portfolio that the Company acquired, 53,230 LTIP Units to the Company’s CEO for his 2019 incentive bonus and 13,708 LTIP Units to the Company’s CEO during the three months ended September 30,March 31, 2020. As of March 31, 2020, and December 31, 2019, the Company issued 5,298 LTIP Units to an employee. Noncontrollingnon-controlling interests consisted of 1,333,112 Common2,640,795 OP Units and 186,942 LTIP Units and 2,157,462 OP Units and 120,004 LTIP Units, andrespectively. This represented approximately 21.5%34.2% and 30.0% of the outstanding Operating Partnership units as of September 30, 2019.March 31, 2020 and December 31, 2019, respectively. Operating Partnership units and shares of common stock have essentially the same economic characteristics, as they share equally in the total net income or loss distributions of the Operating Partnership. Beginning on or after the date which is 12 months after the later of (i) the completion of the IPO or (ii) the date on which a person first became a holder of common units, each limited partner and assignees of limited partners will 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 CommonOP Units held by such limited partner or assignee in exchange for cash, or at the Company's sole discretion, in shares of the Company’s Class A Common Stock,common stock, on a one-for-one basis or, at the Company’s sole discretion, cash, in an amount per Common Unit equal to the value of one share of Class A Common Stock, determined in accordance with and subject to adjustment under the partnership agreement.

The Operating Partnership unitholders are entitled to share in cash distributions from the Operating Partnership in proportion to itstheir percentage ownership of CommonOP Units.


Restricted Stock and Other Awards

 

Pursuant to the Company’s 2019 Equity Incentive Plan (the “Equity Incentive Plan” or Equity Incentive Plan,the “Plan”), the Company may grant equity incentive awards to ourits directors, officers, employees and consultants. Upon completion of the IPO, the Company issued 73,529 LTIP units to the Company’s CEO, 58,824 restricted shares of Class A Common Stock to the Company’s president, 33,824 restricted shares of Class A Common Stock to other employees and 38,235 restricted shares of Class A Common Stock to the Company’s non-employee directors under the Equity Incentive Plan. In addition, the Company issued 41,177 LTIP Units to the Company’s CEO and an aggregate of 17,647 restricted shares of Class A Common Stock to its non-employee directors, in each case in lieu of cash compensation for the twelve month period following completion of the IPO. During the quarter ended September 30, 2019, the Company issued an aggregate 5,298 LTIP Units and 317 restricted shares of Class A Common Stock to certain employees. The maximum number of shares of Class A Common Stock that is available to be issued under our Equity Incentive Plan is 541,584 shares. To the extent an award grantedwere authorized for issuance under the Equity Incentiveplan were 541,584. As of March 31, 2020, the remaining shares available under the Plan expires or terminates, the shares subject to any portionfor future issuance was 40,237. The Plan provides for grants of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.

Awards issuedstock options, stock awards, stock appreciation rights, performance units, incentive awards, other equity-based awards (including LTIP units) and dividend equivalents in connection with the IPO will vest in three equal, annual installments on eachgrant of the first three anniversariesperformance units and other equity-based awards.


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

The following table presents a summary of the daterestricted stock, LTIP Units and RSUs. The balance as of grant. Awards issued to the Company’s non-employee directors in lieuMarch 31, 2020 represents unvested shares of cash compensation vest on the anniversary of the grantrestricted stock and awards issued as equity compensation vest in three equal, annual installments on each of the first three anniversaries of the date of grant. Awards issued to the Company’s CEO in lieu of cash compensation cliff vest on the eighth anniversary of the date of grant. ForLTIP Units and RSUs that are outstanding, whether vested or not:

  Restricted Shares(1)(2)  LTIP Units (3)  Restricted Stock Units (“RSUs”)(4)  Total Shares  Weighted Average Grant Date Fair Value 
Outstanding, at beginning of period  148,847   120,003      268,850  $16.96 
Granted  104,051   66,938   62,096   233,085  $13.72 
Converted to common stock               
Vesting of restricted stock               
Forfeited  (588)        (588) $17.00 
Outstanding, at end of period  252,310   186,941   62,096   501,347  $15.45 

Explanatory Notes:

(1)Represents restricted shares awards included in common stock.

(2)The time-based restricted share awards granted to our officers and employees typically vest in three annual installments or cliff vest at the end of eight years. The time-based restricted share awards granted to our directors’ vest over one to three years.

(3)LTIP units to our officers and employees typically vest over three to eight years. During the quarter ended March 31, 2020, 2,843 LTIPs issued to an employee vested as a result of a modification of the award.In May 2020, pursuant to the Plan, the Company issued 27,365 LTIP Units to the Company’s CEO in lieu of his salary payable for the period from the one year anniversary of the IPO to December 31, 2020. LTIP Units issued to the Company’s CEO in lieu of cash compensation cliff vest on the eighth anniversary of the date of grant.

(4)Includes 38,672 RSUs granted to certain officers of the Company during the three months ended March 31, 2020 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 hurdles relating to the Company’s absolute total stockholder return and continued employment with the Company over the approximately three-year period from the grant date through December 31, 2022. 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 13,253 time-based RSUs issued for 2019 incentive bonuses to certain employees that vested fully on February 14, 2020, the date of grant and 10,171 time-based RSUs granted to certain employees for their election to defer 2020 salary that vest on December 31, 2020. RSUs reflect the right to receive shares of Class A common stock, subject to the applicable vesting criteria.

During the three and nine months ended September 30, 2019,March 31, 2020, the Company recognized compensation expensesexpense of $0.4 million and $0.6$0.7 million related to all awards respectively. which is recorded in “General and administrative” on the Company’s Consolidated and Combined Consolidated Statements of Operations.

As of September 30, 2019,March 31, 2020, there was $4.0$6.1 million of total unrecognized compensation cost related to unvested awards, which is expected to be recognized over a weighted average period of 3.63.65 years.

 

Employee Stock Purchase Plan

In connection with the IPO, the Company established the Postal Realty Trust, Inc. 2019 Qualified Employee Stock Purchase Plan or the ESPP,(“ESPP”), which allows the Company’s employees to purchase shares of the Company’s Class A Common Stockcommon stock at a discount. A total of 100,000 shares of Class A common stock will be reserved for sale and authorized for issuance under the ESPP. The Code permits us to provide up to a 15% discount on the lesser of the fair market value of such shares of stock at the beginning of the offering period and the codeclose of the offering period. NoAs of March 31, 2020, 3,538 shares have been purchased asissued under the ESPP since commencement. During the three months ended March 31, 2020, the Company recognized compensation expense of September 30, 2019.$8,545 which is recorded in “General and administrative” on the Company’s Consolidated and Combined Consolidated Statements of Operations.


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

 

Note 12. COMMITMENTS AND CONTINGENCIESCommitments and Contingencies

At September 30, 2019,As of March 31, 2020, the Company was not involved in any litigation nor to its knowledge is any litigation threatened against the Predecessor or the Company, as applicable, that, in management’s opinion, would result in any material adverse effect on the Company’s financial position, 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.

 

Note 13. SUBSEQUENT EVENTSSubsequent Events

Recently, the outbreak of a novel strain of coronavirus (COVID-19) has adversely impacted global economic activity and contributed to significant declines and volatility in financial markets. The COVID-19 pandemic and associated government responses are creating disruption in, and adversely impacting, many industries. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of COVID-19. Nevertheless, COVID-19 presents uncertainty and risk with respect to the Company and its tenant, which could adversely affect the Company and its financial performance. The Company received all of its April, May and June rents and payments due from holdover tenants and has not received any request for rent concessions as the date of this Quarterly Report. In addition, given the dislocation and government-imposed travel related limitations as a consequence of the pandemic, the Company’s ability to complete acquisitions in the near-term may be delayed.

 

On October 30, 2019,April 14, 2020, the Company borrowed an additional $20$6.0 million under the Credit Facility.

 

In October 2019,On April 27, 2020, the Board of Directors approved an amendment and restatement of the Alignment of Interest Program of the Company through(as amended and restated, the “Alignment of Interest Program”), previously approved by the Board of Directors and in which the Company’s named executive officers and directors of the Company are eligible to participate. Among other amendments, the Alignment of Interest Program was amended to expand the class of participants eligible to be selected to participate in the Alignment of Interest Program by the Corporate Governance and Compensation Committee of the Board of Directors to include any Company employees or other individuals providing services to the Company or its Operating Partnership, acquired 55 propertiesaffiliates, provided that they are eligible to participate in the Equity Incentive Plan.

On April 27, 2020, the Board of Directors amended the Equity Incentive Plan, subject to the approval of stockholders. Such amendment solely increases the total number of shares of Class A common stock that may be issued pursuant to awards granted under the Equity Incentive Plan from 541,584 shares to 1,291,584 shares. The remainder of the Equity Incentive Plan remains unchanged.

On April 30, 2020, the Company's Board of Directors approved and the Company declared a first quarter common stock dividend of $0.20 per share which was paid on May 29, 2020 to stockholders of record on May 11, 2020.

On April 30, 2020, the Company closed on the acquisition of a 13-building portfolio leased to the USPS located in various states for approximately $9.5$7.1 million. In November 2019,connection with the purchase, the Company throughobtained $4.5 million of mortgage financing, at a fixed interest rate of 4.25% with interest only for the first 18 months, which resets in November 2026 to the greater of Prime or 4.25%. The financing matures in April 2040. In addition, the Company purchased six postal properties in individual or smaller portfolio transactions for approximately $3.4 million.

In May 2020, the Company determined that it had overdrawn its Operating Partnership, acquired 22 propertiesCredit Facility by approximately $5.1 million. The Company satisfied such amount with a portion of the proceeds from the secured mortgage financing described below.

On May 15, 2020, the Company paid down $0.5 million on the Credit Facility.

On May 28, 2020, the Company completed the separation of deed and transfer of the real property attributable to a de minimis non-postal tenant that shares space in a building leased to the USPS. At the time of the IPO a property located in Milwaukee, WI, a portion of which is leased to the USPS, locatedwas contributed to the Company. It was intended that the non-postal portion of the property would revert back to an entity affiliated with Mr. Spodek once a separation of the deed was completed. The portion of the property leased to the USPS remains owned by a wholly owned subsidiary of the Operating Partnership. The independent members of our Board of Directors ratified the no consideration transfer.

On June 8, 2020, the Company obtained $9.2 million of mortgage financing at a fixed interest rate of 4.25% with interest only payable for the first 18 months, which resets in various states for approximately $7.8 million.January 2027 to the greater of Prime or 4.25%. The financing matures in June 2040.


POSTAL REALTY TRUST, INC.
NOTES TO CONSOLIDATED AND COMBINED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED (CONTINUED)

On June 8, 2020, the Company paid down $6.0 million on the Credit Facility.

On June 25, 2020, the Company amended the Credit Agreement to revise, among other items, certain definitions and borrowing base calculations to increase available capacity, as well as the restrictive covenant pertaining to Consolidated Tangible Net Worth (as defined in such amendment).

 

As of November 11, 2019,June 25, 2020, the Company had entered into a definitive agreementsagreement to acquire 98 propertiesone postal property leased to the USPS for approximately $27.6 million, which includes $14.0 million in OP Units valued at $17.00 per unit.$1.7 million. Formal due diligence has been completed and the transactions aretransaction is expected to close induring the fourththird quarter of 2020, subject to the satisfaction of customary closing conditions. 

Current Lease Renewal and Revised USPS Lease Form

As of June 25, 2020, the leases at 43 of our properties (consisting of 20 properties for which leases expired in 2019, including one lease that expired as of the date of our acquisition, and 23 properties for which leases expired in 2020) had expired and the USPS is occupying such properties as a holdover tenant, aggregating $1.9 million in annualized rental income. To date, the USPS has not vacated or notified us of its intention to vacate any of these 43 properties. The Company has received all holdover rent on a month to month basis, with the USPS paying the greater of market rent or the rent amount under the expired lease.

The USPS has adopted a revised form of our modified double-net lease, which transfers the responsibility for additional maintenance expenses and obligations to the landlord, including some components of plumbing and electrical systems. To date, we have not renewed or entered into revised leases for any of our leases with the USPS that expired in 2019 or 2020.

As of June 25, 2020, we have not entered into any definitive documentation with respect to any addendum to the revised form of our modified double-net lease, rental rates or leases for the 43 properties at which the USPS is a holdover tenant, 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.

 

18

 

  

ItemITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of the financial condition and results of operationsanalysis is based on, and should be read in conjunction with, the unaudited consolidatedConsolidated and combined consolidated financial statementsCombined Consolidated Financial Statements and the related notes thereto of the Company and the Company’s accounting Predecessor (the “Predecessor”) for the period ended September 30, 2019 and the Predecessor for the period ended September 30, 2018, included in “Part I, Item 1. Financial Statements”Postal Realty Trust, Inc. contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”).and our Annual Report on Form 10-K for the year ended December 31, 2019.

 

ReferencesAs used in this section, unless the context otherwise requires, references to “we,” “our,” “us,” and “the Company”“our company” refer to Postal Realty Trust, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Postal Realty LP, a Delaware limited partnership (our “Operating(“our Operating Partnership”), of which we are the sole general partner and which we refer to in this Quarterly Report as our “OperatingOperating 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 (the “Board”), directly or indirectly controlled 190 properties owned by the Predecessor that were contributed as part of the Formation Transactions (as defined below). Of these 190 properties, 140 were held indirectly by the Predecessor through a series of holding companies, which we refer to collectively as “UPH.” The remaining 50 properties were owned 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 (as defined below), collectively.

 

Forward-Looking Statements

 

We make statements in this Quarterly Report that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, property performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

 

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

defaults on, early terminations of or non-renewal of leases by the United States Postal Service (the “USPS”);

change in the demand for postal services provided by the USPS;

change in the status of the 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;

the solvency and financial health of the USPS;

 

defaults on, early terminations of or non-renewal of leases by the USPS;

the competitive environmentmarket 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;

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 failure to successfully operate developed and acquired properties;business, financing or investment strategy or the markets in which we operate;

 

fluctuations in mortgage rates and increased operating costs;

changes in the method pursuant to which reference rates are determined and the phasing out of LIBOR after 2021;

 

 general economic conditions;

 

 financial market fluctuations;

 

 lack or insufficient amounts of insurance;

conflicts of interests with our officers and/or directors;failure to generate sufficient cash flows to service our outstanding indebtedness;

 

 our failure to obtain necessary outside financing on favorable terms or at all;

 

 failure to hedge effectively against interest rate changes;

our reliance on key personnel whose continued service is not guaranteed;

the outcome of claims and litigation involving or affecting us;

changes in real estate, taxation, zoning laws and other legislation and government activity and changes to real property tax rates and the taxation of REITs in general;

operations through joint ventures and reliance on or disputes with co-venturers;

cybersecurity threats;

environmental uncertainties and risks related to adverse weather conditions and natural disasters;

 

 difficulties in identifying or completing acquisition opportunities;governmental approvals, actions and initiatives, including the need for compliance with environmental requirements;

 

 other factors affecting the real estate industry generally;

our failure to qualify and maintain our qualification as a real estate investment trust (“REIT”) for federal income tax purposes;lack or insufficient amounts of insurance;

 

 limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify and maintain our status as a REIT and our failure to qualify for federal income tax purposes;or maintain such status; and

 

 changes in governmental regulations or interpretations thereof,public health threats such as real estate and zoning laws and increases in real property tax rates and taxation of REITs.COVID-19.

 

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Item 1A titled “Risk Factors” in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2019.

20

 

Overview

 

The Company

We were formed as a Maryland corporation on November 19, 2018 and commenced operations upon completion of our IPO on May 17, 2019 and the related formation transactions (the “Formation Transactions”). We conduct our business through a traditional UPREIT structure in which our properties are owned by our Operating Partnership directly or through limited partnerships, limited liability companies or other subsidiaries. At the completion of our IPO and the Formation Transactions, we owned and managed a portfolio of 271 postal properties located in 41 states comprising approximately 872,000 net leasable interior square feet, all of which were leased to the USPS. In the quarter ended September 30, 2019, we acquired 18 properties leased to the USPS for approximately $11.1 million. In October and November 2019, we acquired 77 properties leased to the USPS for approximately $17.3 million. As of November 11, 2019, we own a portfolio of 366 postal properties located in 43 states comprising approximately 1,200,000 net leasable interior square feet.

 

We arewill elect to be treated as a REIT under the sole general partnerCode beginning with our short taxable year ended December 31, 2019, upon the filing of our Operating Partnership through whichfederal income tax return for such year. As long as we qualify and maintain our postal properties are directly or indirectly owned. As of November 11, 2019,qualification as a REIT, we own approximately 78.5% ofgenerally will not be subject to federal income tax to the outstanding common units of limited partnership interest in the Operating Partnership (“OP Units”). Our Board overseesextent that we distribute our business and affairs.taxable income for each tax year to our stockholders.


Initial Public Offering

On May 17, 2019, we completed our IPO, pursuant to which we sold 4,500,000 shares of our Class A common stock, par value $0.01 per share (our “Class A Common Stock”common stock”), at a public offering price of $17$17.00 per share. We raised $76.5 million in gross proceeds, resulting in net proceeds to us of approximately $71.1 million after deducting approximately $5.4 million in underwriting discounts and before giving effect to $6.4 million in other expenses relating to our IPO. Our Class A Common Stockcommon stock began trading on the New York Stock Exchange (the “NYSE”) under the symbol “PSTL” on May 15, 2019. In connection with our IPO and the Formation Transactions, we also issued 1,333,112 OP Units, 637,058 shares of Class A Common Stockcommon stock and 27,206 shares of Class B common stock, par value $0.01 per share (our “Class B Common Stock”common stock” or “Voting Equivalency stock”), to Mr. Spodek and his affiliates in exchange for the Predecessor properties and interests.

 

The Company elected to be taxed as an S-Corporation underWe are the Internal Revenue Codesole general partner of 1986, as amended (the “Code”), effective November 19, 2018, and as such, all federal tax liabilities were the responsibilityour Operating Partnership through which our postal properties are directly or indirectly owned. As of March 31, 2020, we owned approximately 65.8% of the Company’s sole stockholder untiloutstanding common units of limited partnership interest in the Operating Partnership (each, an “OP Unit,” and collectively, the “OP Units”) including long term incentive units of the Operating Partnership (each, an “LTIP Unit” and collectively, the “LTIP Units”). Our Board oversees our business and affairs.

Executive Overview

We are an internally managed REIT with a focus on acquiring and managing properties leased to the USPS. We believe the overall opportunity for consolidation that exists in the sector is very attractive. We continue to execute our strategy to acquire and consolidate postal properties that will generate strong earnings for our shareholders.

At the completion of our IPO. In anticipationIPO and the Formation Transactions, we owned a portfolio of the IPO, the Company revoked its S-Corporation election on May 14, 2019. The Company intends to qualify and elect to qualify as a REIT under the Code beginning with its short taxable year ending December 31, 2019. As a REIT, the Company generally will not be subject to federal income tax271 postal properties located in 41 states comprising approximately of 872,000 net leasable interior square feet, all of which were leased to the extent that it distributes at least 90%USPS. As of its taxable income for each tax year to its stockholders. REITs are subject to a numberMarch 31, 2020, our portfolio consisted of organizational549 owned postal properties, located in 45 states and operational requirements.comprising approximately 1.7 million net leasable interior square feet.

 

Q1 2020 Highlights

Acquisitions

Closed on the acquisition of a 21-property portfolio leased to the USPS for approximately $13.6 million, which includes 483,333 OP Units.

Closed on the acquisition of a 42-property portfolio leased to the USPS for approximately $8.8 million.

Closed on the acquisition of 20 additional properties leased to the USPS in individual or smaller portfolio transactions for approximately $8.1 million.

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Debt

We exercised a portion of the accordion feature on the Credit Facility to increase our permitted borrowing capacity up to $150.0 million and borrowed an additional $14.0 million under the Credit Facility, subject to the borrowing base properties identified therein remaining unencumbered and subject to an enforceable lease. Subject to certain conditions and borrowing base limitations, the total aggregate capacity under the Credit Facility is $200.0 million.

Equity

Our Board of Directors approved and we declared a fourth quarter common stock dividend of $0.17 per share which was paid on February 28, 2020 to stockholders of record on February 14, 2020.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

In addition, the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. 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 intend to availhave availed ourselves of these exemptions; although, subject to certain restrictions, we may elect to stop availing ourselves of these exemptions in the future even while we remain an “emerging growth company.”

We are also a “smaller reporting company” as defined in Regulation S-K under the Securities Act and have elected to take advantage of certain scaled disclosures available to smaller reporting companies. We may continue to be a smaller reporting company even after we are no longer an “emerging growth company.”

 

We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to periodic adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our IPO,December 31, 2024, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the 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 of the 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.”Act.

 

Factors That May Influence Future Results of Operations

 

COVID-19 Pandemic

Recently, the outbreak of a novel strain of coronavirus (COVID-19) has adversely impacted global economic activity and contributed to significant declines and volatility in financial markets. The COVID-19 pandemic and associated government responses are creating disruption in, and adversely impacting, many industries. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of COVID-19. Nevertheless, COVID-19 presents uncertainty and risk with respect to the Company’s tenant, which could adversely affect the Company and its financial performance. The Company received all of its April, May and June rents and payments due from holdover tenants and has not received any request for rent concessions as of the date of this Quarterly Report.

In addition, given the dislocation and government-imposed travel related limitations as a consequence of the pandemic, the Company’s ability to complete acquisitions in the near-term may be delayed. The Company has also been affected in that: (i) we have permitted certain employees to work from home, which slowed, for example, the Company’s routine quarterly close process; and (ii) we have been impacted by delays in communications with, and operations of, various counterparties. Although the effectiveness of our work from home practices have improved since implementation, the continued and future improvement of such practices, as well as communications with, and the operations of, various counterparties, is highly uncertain and cannot be predicted.

The USPS

 

We are substantially dependent on the USPS’s financial and operational stability. The USPS is currently facing a variety of circumstances that are threatening its ability to fund its operations and other obligations as currently conducted without intervention by the federal government.

 

The USPS is constrained by laws and regulations that restrict revenue sources, mandate certain expenses and cap its borrowing capacity. As a result, the USPS is unable to fund its mandated expenses and continues to be subject to mandated payments to its retirement system and health benefits for current workers and retirees. The USPS has taken the position that productivity improvements and cost reduction measures alone without legislative and regulatory intervention will not be sufficient to maintain the ability to meet all of its existing obligations when due.


Revenues

 

We derive revenues primarily from rent and tenant reimbursements under leases with the USPS for our properties, and fee and other income under the management agreements with respect to the postal properties owned by Mr. Spodek, his family members and their partners managed by PRM, our taxable REIT subsidiary. RentTRS. Rental income represents the lease revenue recognized under leases with the USPS. Tenant reimbursements represent payments made by the USPS under the leases to reimburse us for the majority of real estate taxes paid at each property. Fee and other income principally represent revenue PRM receives from postal properties owned by Mr. Spodek, his family members and their partners pursuant to the management agreements and typically is a percentage of the lease revenue for the managed property. As of September 30, 2019,March 31, 2020, all properties leased to the USPS had an average remaining lease term of three2.94 years. Factors that could affect our rentrental income, tenant reimbursement and fee and other income in the future include, but are not limited to: (i) our ability to renew or replace expiring leases and management agreements; (ii) local, regional or national economic conditions; (iii) an oversupply of, or a reduction in demand for, post office space; (iv) changes in market rental rates; (v) changes to the USPS’s current property leasing program or form of lease; and (vi) our ability to provide adequate services and maintenance at our properties and managed properties.

 

Operating Expenses

 

We lease our properties to the USPS. The majority of our leases are modified double-net leases, whereby the USPS is responsible for utilities, routine maintenance and the reimbursement of property taxes and the landlord is responsible for insurance and roof and structure. Thus, an increase in costs related to the landlord’s responsibilities under these leases could negatively influence our operating results. Refer to “Current Lease Renewal and Revised USPS Lease Form” for further discussion.

 

Operating expenses generally consist of real estate taxes, property operating expenses, which consist of insurance, repairs and maintenance (other than those for which the tenant is responsible), property maintenance-related payroll and depreciation and amortization. Factors that may affect our ability to control these operating costs include but are not limited to: the cost of periodic repair, renovation costs, the cost of re-leasing space and the potential for liability under applicable laws. Recoveries from the tenant are recognized as revenue on an accrual basis over the periods in which the related expenditures are incurred. Tenant reimbursements and operating expenses are recognized on a gross basis, because (i) generally, we are the primary obligor with respect to the real estate taxes and (ii) we bear the credit risk in the event the tenant does not reimburse the real estate taxes.

 

The expenses of owning and operating a property are not necessarily reduced when circumstances, such as market factors and competition, cause a reduction in income from the property. If revenues drop, we may not be able to reduce our expenses accordingly. Costs associated with real estate investments generally will not be materially reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. As a result, if revenues decrease in the future, static operating costs may adversely affect our future cash flow and results of operations.

 

General and Administrative

 

General and administrative expenses include employee compensation costs (including equity-based compensation), professional fees, legal fees, insurance, consulting fees, portfolio servicing costs and other expenses related to corporate governance, filing reports with the United States Securities and Exchange Commission (the “SEC”) and the NYSE, and other compliance matters. Our Predecessor was privately owned and historically did not incur costs that we incur as a public company. In addition, while we expect that our general and administrative expenses will continue to rise as our portfolio grows, we expect that such expenses as a percentage of our revenues will decrease over time due to efficiencies and economies of scale.

 


Depreciation and Amortization

 

Depreciation and amortization expense relate primarily to depreciation on properties and improvements and to amortization of certain lease intangibles.


Indebtedness and Interest Expense

 

Interest expense for theour Predecessor related primarily to three mortgage loans payable and related party interest-only promissory notes, which are described under Note 5. Mortgage Loans Payable andSee Note 6. Loans Payable — Related Party in the notes to the Predecessor’s financial statements.Debt for further details. As a result of the Formation Transactions, we assumed certain indebtedness of the Predecessor, a portion of which was repaid without penalty using a portion of the net proceeds from our IPO. On September 27, 2019, we entered into a $100.0 million senior revolving credit facility (the “Facility”agreement (as amended, the “Credit Agreement”) with People’s United Bank, National Association, individually and as administrative agent, BMO Capital Markets Corp., as syndication agent, and certain other lenders. The Credit Agreement provides for a senior revolving credit facility (the “Credit Facility”) with revolving commitments in an aggregate principal amount of $100.0 million and, subject to customary conditions, the option to increase the aggregate lending commitments under the agreement by up to $100.0 million (the “Accordion Feature”). On January 30, 2020, we amended the Credit Agreement in order to exercise a portion of the Accordion Feature to increase the maximum amount available under the Credit Facility to $150.0 million, subject to the borrowing base properties identified therein remaining unencumbered and subject to an enforceable lease. As of March 31, 2020, the leases at 31 of our properties had expired and the USPS was occupying such properties as a holdover tenant, thereby excluding such properties from being part of the borrowing base under our Credit Facility. On June 25, 2020, the Company further amended the Credit Agreement to revise, among other items, certain definitions and borrowing base calculations to increase available capacity, as well as the restrictive covenant pertaining to Consolidated Tangible Net Worth (as defined in such amendment). Refer to Item 5. Other Information of this Quarterly Report for a discussion of such amendment. We intend to use the revolving credit facilityCredit Facility for working capital purposes, which may include repayment of mortgage indebtedness, property acquisitions and other general corporate purposes. Consistent with the method adopted by our Predecessor, we amortize on a non-cash basis the deferred financing costs associated with its debt to interest expense using the straight-line method, which approximates the effective interest rate method over the terms of the related loans. Any changes to the debt structure, including debt financing associated with property acquisitions, could materially influence the operating results depending on the terms of any such indebtedness.

 

Income Tax Benefit (Expense)

 

As a REIT, we generally will not be subject to federal income tax on our net taxable income that we distribute currently to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned by Postal Realty Management TRS, LLC (“PRM”), our taxable REIT subsidiary (“TRS”),PRM and any other TRS we form in the future, will be subject to federal, state and local corporate income tax.

 

Critical Accounting PoliciesCurrent Lease Renewal and EstimatesRevised USPS Lease Form

 

ReferAs of June 25, 2020, the leases at 43 of our properties (consisting of 20 properties for which leases expired in 2019, including one lease that expired as the date of our acquisition, and 23 properties for which leases expired in 2020) had expired and the USPS is occupying such properties as a holdover tenant, aggregating approximately 163,000 interior square feet and $1.9 million in annualized rental income. To date, the USPS has not vacated or notified us of its intention to vacate any of these 43 properties. When a lease expires, the USPS becomes a holdover tenant on a month-to-month basis typically paying the greater of market rent or the rent amount under the expired lease. During this holdover period, all maintenance responsibilities shift back to the heading titled “Critical Accounting Policies and Estimates”USPS while it continues to reimburse property taxes. As of June 25, 2020, monthly rent rates on 42 of 43 holdover properties are approximately 5.8% higher than the rent rate in Company’s final prospectus dated May 14, 2019 foreffect at the time of expiration of the prior lease. The remaining holdover property was a discussionbelow market lease where the rental rate increased significantly.

The USPS has adopted a revised form of our critical accounting policiesmodified double-net lease, which transfers the responsibility for additional maintenance expenses and estimatesobligations to the landlord, including some components of plumbing and electrical systems. To date, we have not renewed or entered into revised leases for any of our leases with the USPS that expired in 2019 or 2020.

As of June 25, 2020, we believe we have tentatively agreed to preliminary terms with the USPS on an addendum to its revised form of lease, pursuant to which documentation requirements are streamlined and some of the Predecessornew responsibilities placed on the landlord by the USPS’ revised form of our modified double-net lease would be mitigated. We also believe we have tentatively agreed to preliminary terms on rental rates for 19 of the 20 leases that expired in 2019 and 7 of the Company, as applicable. During23 leases that have expired in 2020. In addition, we believe that in connection with executing revised form of leases, we will receive a lump sum reimbursement from the nine months ended September 30,USPS for increased rents from the date of expiration to the date of lease execution. We anticipate that we will execute new, revised-form leases with the addendum for the leases that expired in 2019 in the near-term. However, we have not entered into any definitive documentation with respect to this addendum, rental rates or leases for the 43 properties at which the USPS is a holdover tenant, and there werecan be no materialguarantee that any new leases that we enter into with the USPS will reflect our expectations with respect to terms or timing.

As we adopt the USPS’s revised form of our modified double-net lease going forward, we anticipate that our property operating expenses and initial leasing costs may increase; however, we believe that the net impact of these additional expenses may be generally offset by our ability to negotiate contractual rent increases in excess of such expenses, which, if successful, could result in minimal changes to these policies, other than the adoptionour net income as we adopt this new form of the Accounting Standards Codification Topic 606,Revenue from Contracts with Customers, described in Note 2. Significant Accounting Policies to the unaudited consolidated and combined consolidated financial statements in Part I, Item 1 of this Quarterly Report.lease as our legacy leases expire.

 


Results of Operations

 

The three months ended September 30, 2019 represents the consolidated results of the Company. The nine months ended September 30, 2019 represents the period beginning on May 17, 2019, the closing date of our IPO, and ending on September 30, 2019, and the combined results of the Predecessor for the period beginning on January 1, 2019 and ending on May 16, 2019, the day immediately preceding the closing date of our IPO. The comparable three and nine-month periods in 2018 pertain to the combined results of the Predecessor only and accordingly, may not be directly comparable due to the impact of our IPO and the Formation Transactions on May 17, 2019. For the period beginning on May 17, 2019 and ending on September 30, 2019, the Company incurred a loss of $0.9 million, which includes $0.2 million of loss on early extinguishment of debt and $0.6 million of equity-based compensation. In the forthcoming comparison, we have highlighted the impact of our IPO and the Formation Transactions where applicable.

As a result of the completion of our IPO and the Formation Transactions, as of September 30, 2019 we currently own and manage a portfolio of 289 postal properties located in 43 states comprising approximately 984,000 net leasable interior square feet and through PRM, we provide fee-based third party property management services for an additional 403 postal properties and owned by Mr. Spodek and his family members and their partners.


Comparison of the Three Months Ended September 30, 2019 and the Three Months Ended September 30, 2018

The following discussion includes the results of the operations of the Company and Predecessor, as applicable, as summarized in the table below:

     Predecessor    
  Three months ended
September 30,
2019
  Three months ended
September 30,
2018
  %
Change
 
Revenues         
Rent income $2,387,082  $1,417,534   68.4%
Tenant reimbursements  342,419   220,676   55.2%
Fee and other income  278,846   255,971   8.9%
Total revenues  3,008,347   1,894,181   58.8%
             
Operating expenses            
Real estate taxes  353,663   227,373   55.5%
Property operating expenses  332,892   203,994   63.2%
General and administrative  1,207,197   282,361   327.5%
Equity - based compensation  394,530   -   NA 
Depreciation and amortization  1,066,338   457,907   132.9%
Total operating expenses  3,354,620   1,171,635   186.3%
             
Income (loss) from operations  (346,273)  722,546   (147.9)%
             
Interest expense, net:            
             
Contractual interest expense  (48,916)  (361,743)  86.5%
Amortization of deferred financing costs  (4,523)  (3,126)  (44.7)%
Interest income  1,136   1,158   (1.9)%
Total interest expense, net  (52,303)  (363,711)  (85.6)%
             
Income (loss) before income tax (expense) benefit  (398,576)  358,835   (211.1)%
             
Income tax (expense) benefit  6,259   143,382   (95.6)%
             
Net income (loss) $(392,317) $502,217   (178.1)%


For the three months ended September 30,March 31, 2020 and March 31, 2019 and September 30, 2018, approximately 90.7% and 86.5%, respectively, of the Company’s total revenues were attributable to rental revenue and tenant reimbursements under long-term leases with the USPS, with the balance of total revenues in each year consisting of fee and other income as described below.

  For the Three Months Ended
March 31,
   %
  2020 2019(1) $ Change Change
Revenues        
Rental income $4,300,771  $1,492,386  $2,808,835   188.2%
Tenant reimbursements  601,346   236,856   364,490   153.9%
Fee and other income  295,519   286,926   8,593   3.0%
Total revenues  5,197,636   2,016,168   3,181,468   157.8%
                 
Operating expenses                
Real estate taxes  641,944   249,789   392,155   157.0%
Property operating expenses  407,048   251,706   155,342   61.7%
General and administrative  2,301,543   376,891   1,924,652   510.7%
Depreciation and amortization  2,034,868   480,443   1,554,425   323.5%
Total operating expenses  5,385,403   1,358,829   4,026,574   296.3%
                 
(Loss) income from operations  (187,767)  657,339   (845,106)  (128.6)%
Interest expense, net                
Contractual interest expense  (728,226)  (358,467)  (369,759)  103.2%
Write-off and amortization of deferred financing fees  (104,462)  (3,181)  (101,281)  >3000%
Interest income  826   1,134   (308)  (27.2)%
Total interest expense, net  (831,862)  (360,514)  (471,348)  130.7%
(Loss) income before income tax expense  (1,019,629)  296,825   (1,316,454)  (443.5)%
Income tax expense  (10,197)  (39,749)  29,552   (74.3)%
Net (loss) income $(1,029,826) $257,076  $(1,286,902)  (500.6)%

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Explanatory Note:

(1)Reflects the results of operations of the Predecessor for the three months ended March 31,2019.

Revenues

Total revenues increased by $1,114,166, or 58.8%, to $3,008,347$3.2 million for the three months ended September 30, 2019 from $1,894,181 forMarch 31, 2020 compared to the three months ended September 30, 2018, primarily dueMarch 31, 2019. The increase in revenue is attributable to the acquisition of 81 properties that we acquired in connection with the Formation Transactions and 18the properties inthat we acquired since the quarter ended September 30, 2019.completion of our IPO.

 

Rent income.Rental income Rent– Rental income increased by $969,548, or 68.4%,$2.8 million quarter over quarter and is made up of $0.2 million related to $2,387,082the properties purchased by our Predecessor and $2.6 million for the three months ended September 30, 2019 from $1,417,534 for the three months ended September 30, 2018, primarily due to the acquisition of 81 properties that we acquired in connection with the Formation Transactions and 18the properties inthat we acquired since the quarter ended September 30, 2019.completion of our IPO.

 

Tenant reimbursements.reimbursementsTenant reimbursements increased by $121,743, or 55.2%, to $342,419$0.4 million for the three months ended September 30, 2019 from $220,676 forMarch 31, 2020 compared to the three months ended September 30, 2018,March 31, 2019, primarily due to the acquisition of 81 properties that we acquired in connection with the Formation Transactions and 18the properties inthat we acquired since the quarter ended September 30, 2019.

Fee and other income. Other revenue increased by $22,875, or 8.9%, to $278,846 for the three months ended September 30, 2019 from $255,971 for the three months ended September 30, 2018, primarily due to higher insurance recoveries and miscellaneous income for the three months ended September 30, 2019, offset by lower management fees.completion of our IPO.

 

Operating Expenses

 

Real estate taxes.taxesReal estate taxes increased by $126,290, or 55.5%, to $353,663$0.4 million for the three months ended September 30, 2019 from $227,373 forMarch 31, 2020 compared to the three months ended September 30, 2018, primarily due toMarch 31, 2019 as a result of the acquisition of 81 properties that we acquired in connection with the Formation Transactions and 18the properties inthat we acquired since the quarter ended September 30, 2019.completion of our IPO.

 

Property operating expenses.expensesProperty operating expenses includes $185,077 and $155,473 of property management expensesincreased by $0.2 million to $0.4 million for the three months ended September 30, 2019 and 2018, respectively. Property operating expenses increased by $128,898, or 63.2%, to $332,892March 31, 2020 from $0.3 million for the three months ended September 30, 2019 from $203,994March 31, 2019. Property management expenses are included within property operating expenses and increased by $76,685 to $241,536 for the three months ended September 30, 2018, primarily dueMarch 31, 2020 from $164,851 for the three months ended March 31, 2019. The remainder of the increase of $0.2 million is related to repairs and maintenance and insurance for the acquisition of 81 properties in connection withthat were acquired as part of the Formation Transactions and 18the properties in the quarter ended September 30, 2019.that we have acquired since our IPO.

 

General and administrative.administrativeGeneral and administrative expenses increased by $924,836, or 327.5%,$1.9 million to $1,207,197$2.3 million for the three months ended September 30, 2019March 31, 2020 from $282,361$0.4 million for the three months ended September 30, 2018,March 31, 2019, primarily due to higher professional fees and increased personnel and investor relations expenses as a result of being a public company.

Equity-based In addition, $0.3 million of the general and administrative expense is attributable to acquisition related expenses for the postal properties that were acquired. In addition, we had equity-based compensation. Equity-based compensation increased $394,530 primarily due expense of $0.7 million related to the stock awards that were issued in connection with our IPO and in the IPO.first quarter of 2020. Our Predecessor did not have any equity-based compensation expense.

 

Depreciation and amortization.amortizationDepreciation and amortization expense increased by $608,431, or 132.9%,$1.6 million to $1,066,338$2.0 million for the three months ended September 30, 2019March 31, 2020 from $457,907$0.5 million for the three months ended September 30, 2018,March 31, 2019 and is primarily related to the properties that we acquired as part of the Formation Transactions and the properties that were acquired since our IPO.

Income Tax Expense – Income tax expense decreased by $0.03 million to $0.01 million for the three months ended March 31, 2020 from $0.04 million for the three months ended March 31, 2019 and was primarily attributable to a higher taxable income related to UPH. This is offset by income tax expense of $0.01 million related to PRM for the three months ended March 31, 2020.

26

Interest Expense

During the three months ended March 31, 2020, we incurred interest expense of $0.8 million compared to $0.4 million for the three months ended March 31, 2019. The increase in interest expense is primarily due to the Credit Facility we entered into during 2019, which has an outstanding balance of $68.0 million as of March 31, 2020.

Cash Flows

Comparison of the three months ended March 31, 2020 and the three months ended March 31, 2019

The Company had cash of $2.8 million as of March 31, 2020 compared to $0.4 million as of March 31, 2019.

Cash flow from operating activities – Net cash provided by operating activities increased by $0.9 million to $1.4 million for the three months ended March 31, 2020 compared to $0.5 million for the same period in 2019. The increase in net cash provided by operating activities was primarily due to an increase in rental income due to the properties that were acquired as part of our Formation Transactions and the properties since our IPO.

Cash flow to investing activities – Net cash used in investing activities increased by $22.5 million to $23.2 million for the three months ended March 31, 2020 compared to $0.7 million for the same period in 2019. The increase was primarily due to the acquisition of 81postal properties in connection withduring the Formation Transactions and 18 properties in the quarterthree months ended September 30, 2019.March 31, 2020.

 

Interest expense, net.Cash flow from financing activitiesInterest expense, net decreased – Net cash provided by $311,408, or 85.6%,financing activities increased by $11.9 million to $52,303$12.2 million for the three months ended September 30, 2019 from $363,711March 31, 2020 compared to $0.3 million for the same period in 2019. This increase was primarily due to the $14.0 million we borrowed under the Credit Facility, offset by dividends that were paid during the three months ended September 30, 2018, primarily due to reduced contractual interest expense in connection with the repayment of indebtedness in connection with the IPO.

Income tax (expense) benefit.Income tax benefit decreased by $137,123, or 95.6%, to $6,259 for the three months ended September 30, 2019 from $143,382 for the three months ended September 30, 2018, primarily due to the Company’s election to be taxed as a REIT.

Net income (loss). Net income (loss) decreased by $894,534, or 178.1%, to $(392,317) for the three months ended September 30, 2019 from $502,217 for the three months ended September 30, 2018, primarily due to higher general and administrative expenses as a result of being a public company and equity-based compensation.


Comparison of the Nine Months Ended September 30, 2019 and the Nine Months Ended September 30, 2018

The following discussion includes the results of the operations of the Company and Predecessor, as applicable, as summarized in the table below:

  Postal Realty Trust, Inc.  Predecessor    
  Nine Months Ended
September 30,
2019
  Nine Months Ended
September 30,
2018
  % Change 
Revenues:         
Rent income $5,735,896  $4,199,767   36.6%
Tenant reimbursements  852,504   668,502   27.5%
Fee and other income  842,097   862,317   (2.3)%
Total revenues  7,430,497   5,730,586   29.7%
             
Operating Expenses:            
Real estate taxes  880,117   688,953   27.7%
Property operating expenses  821,839   639,289   28.6%
General and administrative  2,385,228   1,086,384   119.6%
Equity-based compensation  584,873   -   NA 
Depreciation and amortization  2,314,553   1,363,575   69.7%
Total operating expenses  6,986,610   3,778,201   84.9%
Income from operations  443,887   1,952,385   (77.3)%
             
Interest expense, net:            
Contractual interest expense  (635,423)  (1,112,353)  (42.9)%
Amortization of deferred financing costs  (9,558)  (9,375)  2.0%
Loss on early extinguishment of Predecessor debt  (185,586)  -   NA  
Interest income  3,394   3,370   0.7%
Total interest expense, net  (827,173)  (1,118,358)  (26.0)%
             
Income (loss) before income tax (expense) benefit  (383,286)  834,027   (146.0)%
Income tax (expense) benefit  (39,749)  83,742   (147.5)%
Net income (loss) $(423,035) $917,769   (146.1)%

For the nine months ended September 30, 2019 and September 30, 2018, approximately 88.7% and 85.0%, respectively, of the Company’s total revenues were attributable to rental revenue and tenant reimbursements under long-term leases with the USPS, with the balance of total revenues in each year consisting of fee and other income as described below. Total revenues increased by $1,699,911, or 29.7%, to $7,430,497 for the nine months ended September 30, 2019 from $5,730,586 for the nine months ended September 30, 2018, primarily due to the acquisition of 81 properties in connection with the Formation Transactions and 18 properties in the third quarter of 2019.

Rent income. Rent income increased by $1,536,129, or 36.6%, to $5,735,896 for the nine months ended September 30, 2019 from $4,199,767 for the nine months ended September 30, 2018, primarily due to the acquisition of 81 properties in connection with the Formation Transactions and 18 properties in the third quarter of 2019.

Tenant reimbursements.Tenant reimbursements increased by $184,002, or 27.5%, to $852,504 for the nine months ended September 30, 2019 from $668,502 for the nine months ended September 30, 2018, primarily due to the acquisition of 81 properties in connection with the Formation Transactions and 18 properties in the third quarter of 2019.

Fee and other income. Other revenue decreased by $20,220, or 2.3%, to $842,097 for the nine months ended September 30, 2019 from $862,317 for the nine months ended September 30, 2018, primarily due to lower management fees and insurance recoveries for the nine months ended September 30, 2019 offset by an increase in miscellaneous income.


Expenses

Real estate taxes.Real estate taxes increased by $191,164, or 27.7%, to $880,117 for the nine months ended September 30, 2019 from $688,953 for the nine months ended September 30, 2018, primarily due to the acquisition of 81 properties in connection with the Formation Transactions and 18 properties in the third quarter of 2019.

Property operating expenses.Property operating expenses includes $514,223 and $460,432 of property management expenses for the nine months ended September 30, 2019 and 2018, respectively. Property operating expenses increased by $182,550, or 28.6%, to $821,839 for the nine months ended September 30, 2019 from $639,289 for the nine months ended September 30, 2018, primarily due to the acquisition of 81 properties in connection with the Formation Transactions and 18 properties in the third quarter of 2019.

General and administrative.General and administrative expenses increased by $1,298,844, or 119.6%, to $2,385,228 for the nine months ended September 30, 2019 from $1,086,384 for the nine months ended September 30, 2018 primarily due to higher professional fees, increased personnel and investor relations expenses as a result of being a public company.

Equity-based compensation. Equity-based compensation increased $584,873 primarily due to the stock awards issued in connection with the IPO.

Depreciation and amortization.Depreciation and amortization expense increased by $950,978, or 69.7%, to $2,314,553 for the nine months ended September 30, 2019 from $1,363,575 for the nine months ended September 30, 2018, primarily due to the acquisition of 81 properties in connection with the Formation Transactions and 18 properties in the quarter ended September 30, 2019.

Interest expense net.Interest expense, net decreased by $291,185, or 26.0%, to $827,173 for the nine months ended September 30, 2019 from $1,118,358 for the nine months ended September 30, 2018, primarily due to loss on extinguishment of debt as a result of the repayment of Predecessor debt offset by lower contractual interest as a result of such repayment.

Income tax (expense) benefit.Income tax benefit decreased by $123,491, or 147.5%, to $(39,749) for the nine months ended September 30, 2019 from $83,742 for the nine months ended September 30, 2018 due to the Company’s election to be taxed as a REIT.

Net income (loss).Net income (loss) decreased by $1,340,804, or 146.1%, to $(423,035) for the nine months ended September 30, 2019 from $917,769 for the nine months ended September 30, 2018 primarily due to higher general and administrative expenses, equity-based compensation and the loss on the extinguishment of debt.March 31, 2020.

 

Non-GAAP Financial Measures

 

Funds From Operations (“FFO”) and Adjusted Funds From Operations (“AFFO”)

 

We calculate FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. NAREIT currently defines FFO as follows: net income (loss) (computed in accordance with GAAP) excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by an entity. Other REITs may not define FFO in accordance with the NAREIT definition or may interpret the current NAREIT definition differently than we do and therefore our computation of FFO may not be comparable to such other REITs.

 

We calculate AFFO by starting with FFO and adjusting for recurring capital expenditures (defined as all capital expenditures that are recurring in nature, excluding capital improvements that are incurred in connection with the acquisition of a property or obtaining a lease or lease renewal) and acquisition related expenses (defined as acquisition-related expenses that are incurred for investment purposes and do not correlate with the ongoing operations of our existing portfolio, including due diligence costs for acquisitions not consummated and certain auditing and accounting fees incurred that were directly related to completed acquisitions or dispositions) that are not capitalized and then adding back non-cash items including: non-real estate depreciation, loss on extinguishment of debt, straight-lined rentswrite-off and amortization of debt issuance costs, straight-line rent adjustments, fair value lease adjustments and non-cash components of compensation expense. AFFO is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that AFFO is widely-used by other REITs and is helpful to investors as a meaningful additional measure of our ability to make capital investments. Other REITs may not define AFFO in the same manner as we do and therefore our calculation of AFFO may not be comparable to such other REITs.

 

These metrics are non-GAAP financial measures and should not be viewed as an alternative measurement of our operating performance to net income. Management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate’ assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the additive use of FFO and AFFO, together with the required GAAP presentation, is widely-used by our competitors and other REITs and provides a more complete understanding of our performance and a more informed and appropriate basis on which to make investment decisions.


The following table provides a reconciliation of net income (loss)loss before allocation to non-controlling interests, the most comparable GAAP measure, to FFO and AFFO:

 

  For the Three Months Ended
March 31,
2020
   
Net loss $(1,029,826)
Depreciation and amortization of real estate assets  2,034,868 
FFO $1,005,042 
     
Recurring capital expenditures  (98,757)
Acquisition related expenses  295,037 
Amortization of debt issuance costs  104,462 
Straight-line rent adjustments  (7,937)
Amortization of above and below market leases  (316,275)
Non-cash stock compensation expense  713,810 
AFFO $1,695,382 

  Three months ended
September 30,
2019
 
    
Net income (loss) $(392,317)
Depreciation and amortization of real estate assets  1,066,338 
FFO $674,021 
     
Recurring capital expenditures  (31,417)

Acquisition related expenses

  82,065 
Amortization of debt issuance costs  4,523 
Straight-line rent adjustments  (5,041)
Amortization of above and below market leases  (135,948)
Non-cash stock compensation expense  394,530 
AFFO $982,733 

Liquidity and Capital Resources

 

Analysis of Liquidity and Capital Resources

As of September 30, 2019, the CompanyWe had approximately $11.0$2.8 million of cash and $0.7 million of escrows and reserves as of November 11, 2019, the Company has approximately $13.3 million of cash.

March 31, 2020.

 

OurOn September 27, 2019, we entered into the Credit Agreement with People’s United Bank, National Association, individually and as administrative agent, BMO Capital Markets Corp., as syndication agent, and certain other lenders. The Credit Agreement provides for the senior revolving Credit Facility matureswith revolving commitments in an aggregate principal amount of a $100.0 million and a maturity date of September 27, 2023. Borrowings

The Credit Agreement provides that, subject to customary conditions, including obtaining lender commitments and compliance with its financial maintenance covenants under the Credit Agreement, we may seek to increase the aggregate lending commitments under the Credit Agreement by up to $100.0 million, with such increase in total lending commitments to be allocated to increasing the revolving commitments. 

The interest rates applicable to loans under the Credit Facility are, at our facility carry an interest rate ofoption, equal to either a base rate plus a range of 70margin ranging from 0.7% to 140 basis points1.4% per annum or LIBOR plus a range of 170margin ranging from 1.7% to 240 basis points,2.4% per annum, each dependingbased on a consolidated leverage ratio. In addition, we paid, for the period through and including the calendar quarter ending March 31, 2020, an unused facility fee on the revolving commitments under the Credit Facility of 0.75% per annum for the first $100.0 million and 0.25% per annum for the portion of revolving commitments exceeding $100.0 million, and will pay for the period thereafter, an unused facility fee of 0.25% per annum for the aggregate unused revolving commitments, with both periods utilizing calculations of daily unused commitments under the Credit Facility. We are permitted to prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, subject to reimbursement of any LIBOR breakage costs of the lenders. 

On January 30, 2020, we amended the Credit Agreement in order to exercise a portion of the accordion feature on the Credit Facility to increase permitted borrowings by $50.0 million to $150.0 million, subject to the borrowing base properties identified therein remaining unencumbered and subject to an enforceable lease. As of September 30, 2019,March 31, 2020, we had $17.0$68.0 million outstanding under our facility.Credit Facility. Also, as of March 31, 2020, the leases at 31 of our properties had expired and the USPS was occupying such properties as a holdover tenant, thereby excluding such properties from being part of the borrowing base under our Credit Facility. On June 25, 2020, the Company further amended the Credit Agreement to revise, among other items, certain definitions and borrowing base calculations to increase available capacity, as well as the restrictive covenant pertaining to Consolidated Tangible Net Worth (as defined in such amendment). Refer to Item 5. Other Information of this Quarterly Report for a discussion of such amendment. We intend to use our Credit Facility for working capital purposes, which may include repayment of indebtedness, property acquisitions and other general corporate purposes.

Our Credit Facility is guaranteed, jointly and severally, by our Company and certain indirect subsidiaries of our Company (the “Subsidiary Guarantors”) and includes a pledge of equity interests in the Subsidiary Guarantors. The Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability to incur indebtedness, grant liens on assets, make certain types of investments, engage in acquisitions, mergers or consolidations, sell assets, enter into hedging transactions, enter into certain transactions with affiliates and make distributions. The Credit Agreement requires compliance with consolidated financial maintenance covenants to be tested quarterly, including a maximum consolidated secured indebtedness ratio, maximum consolidated leverage ratio, minimum consolidated fixed charge coverage ratio, minimum consolidated tangible net worth, maximum dividend payout ratio, maximum consolidated unsecured leverage ratio, and minimum debt service coverage ratio. The Credit Agreement also contains certain customary events of default, including the failure to make timely payments under our Credit Facility, any event or condition that makes other material indebtedness due prior to its scheduled maturity, the failure to satisfy certain covenants and specified events of bankruptcy and insolvency. 

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, and cash equivalents, mortgage financing and borrowings under our Facility.Credit Facility and the potential issuance of securities. 


Our long-term liquidity requirements primarily consist of funds necessary for the repayment of debt at maturity, property acquisitions and non-recurring capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness including our Credit Facility and mortgage financing, the issuance of equity and debt securities and proceeds from select sales of our properties. We also may fund property acquisitions and non-recurring capital improvements using our Credit Facility pending permanent property-level financing.

 

We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, in the future, there may be a number of factors that could have a material and adverse effect on our ability to access these capital sources, including unfavorable conditions in the overall equity and credit markets, our degree of leverage, our unencumbered asset base, borrowing restrictions imposed by our lenders, general market conditions for REITs, our operating performance, liquidity and market perceptions about us. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital sources. In addition, we continuously evaluate possible acquisitions of postal properties, which largely depend on, among other things, the market for owning and leasing postal properties and the terms on which the USPS will enter into new or renewed leases.

 

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. See “Federal Income Tax Considerations—Taxation of Our Company—Distribution Requirements” in our Registration Statement for more information. 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 March 31, 2020

As of March 31, 2020, we had approximately $71.2 million of outstanding consolidated principal indebtedness. The following table sets forth information as of March 31, 2020 with respect to the outstanding indebtedness of the Company:

 

  Amount Outstanding as of March 31,
2020
  Interest Rate at March 31,
2020
  Maturity Date
Credit Facility(1) $68,000,000  LIBOR+170bps(2) September 2023
Vision Bank(3)  1,506,588   4.00% September 2036
First Oklahoma Bank(4)  374,582   4.50% December 2037
Vision Bank – 2018(5)  892,613   5.00% January 2038
Seller Financing(6)  445,000   6.00% January 2025
Total Principal $71,219,053           


29

Explanatory Notes:

(1)On September 27, 2019, we entered into our Credit Agreement, which provides for revolving commitments in an aggregate principal amount of a $100.0 million and an accordion feature that permits us to borrow up to $200.0 million, subject to customary conditions. During the three months ended March 31, 2020, we amended the Credit Agreement in order to exercise a portion our accordion feature to increase permitted borrowings to $150.0 million from $100.0 million, subject to the borrowing base properties identified therein remaining unencumbered and subject to an enforceable lease.  As of March 31, 2020, $150.0 million in aggregate principal amount under the Credit Facility was authorized and $68.0 million was drawn. Our ability to borrow under the Credit Facility is subject to ongoing compliance with a number of customary affirmative and negative covenants. As of March 31, 2020, we were in compliance with all of the Credit Facility’s debt covenants. On April 14, 2020, we borrowed an additional $6.0 million under the Credit Facility.  In May 2020, we determined that we had overdrawn our Credit Facility by approximately $5.1 million. We satisfied such amount with a portion of the proceeds from the secured mortgage financing described below. As of the date of this filing, $67.5 million is outstanding under the Credit Facility. On June 25, 2020, the Company further amended the Credit Agreement to revise, among other items, certain definitions and borrowing base calculations to increase available capacity, as well as the restrictive covenant pertaining to Consolidated Tangible Net Worth (as defined in such amendment). Refer to Item 5. Other Information of this Quarterly Report for a discussion of such amendment.

(2)As of March 31, 2020, the one-month LIBOR rate was 0.99%.

(3)Five properties are collateralized under this loan as of March 31, 2020 with Mr. Spodek as the guarantor.  On September 8, 2021 and every five years thereafter, the interest rate will reset at a variable annual rate of Wall Street Journal Prime Rate (“Prime”) + 0.5%.

(4)The loan is collateralized by first mortgage liens on four properties and a personal guarantee of payment by Mr. Spodek. Interest rate resets on December 31, 2022 to Prime + 0.25%.

(5)The loan is collateralized by first mortgage liens on one property and a personal guarantee of payment by Mr. Spodek. Interest rate resets on January 31, 2023 to Prime + 0.5%.

(6)In connection with the acquisition of a property, we obtained seller financing secured by the property in the amount $0.4 million requiring five annual payments of principal and interest of $105,661 with the first installment due on January 2, 2021 based on a 6.0% interest rate per annum through January 2, 2025.

Secured borrowingsBorrowings as of September 30, 2019March 31, 2020

 

As of September 30, 2019, the CompanyMarch 31, 2020, we had approximately $3.3$3.2 million of secured borrowings outstanding, combined indebtedness, noneall of which was variablefixed rate debt. debt with a weighted average interest rate of 4.61% per annum.

Historically, our Predecessor’s equity capital was principally provided by Mr. Spodek as the majority equity owner of the Predecessor entities and its debt capital was principally provided through first mortgage loans on the properties owned by the Predecessor and promissory notes payable to related parties. Following the completion of our IPO and the Formation Transactions, we repaid approximately $31.7 million of indebtedness of the Predecessor using a portion of the net proceeds from our IPO. We believeDepending on our ability to borrow under our Credit Facility, we may pursue significant secured borrowings in the future; although, we have not entered into any preliminary or binding documentation with respect to any such additional secured borrowings and there is no guarantee that any lender will be willing to lend to us on the completionterms and timing that we expect, if at all.

Dividends

To qualify and maintain our qualification as a REIT, we are required to pay dividends to stockholders at least equal to 90% of our IPO improvedREIT taxable income determined without regard to the deduction for dividends paid and excluding net capital gains. During the three months ended March 31, 2020 we paid cash dividends of $0.17 per share. On April 30, 2020, our financial position by reducing our outstanding indebtednessBoard of Directors approved and providing us various sourceswe declared a first quarter common stock dividend of financing that would not have been available$0.20 per share which was paid on May 29, 2020 to us as a privately owned company.stockholders of record on May 11, 2020.

 

Secured Borrowings Repaid in Connection with Our IPOSubsequent Real Estate Acquisitions and Related Financings

 

AtOn April 30, 2020, we closed on the completionacquisition of our IPO, our Operating Partnership used a portion of13-building portfolio leased to the net proceeds therefrom to repayUSPS in various states for approximately $31.7 million of secured borrowings that we assumed in the Formation Transactions. During the quarter ended September 30, 2019, we obtained seller financing in the amount of $0.4 million in$7.1 million. In connection with the purchase, of a property. As a result, we had approximately $3.3obtained $4.5 million of secured borrowings outstandingmortgage financing at September 30, 2019, with a weighted averagefixed interest rate of 4.6% per annum, all4.25%, with interest only for the first 18 months, which resets in November 2026 to the greater of which is fixed rate debt.Prime or 4.25%. The financing matures in April 2040. In addition, we purchased six postal properties in individual or smaller portfolio transactions for approximately $3.4 million.

 

The following table sets forth information asOn June 8, 2020, we obtained $9.2 million of September 30, 2019mortgage financing at a fixed interest rate of 4.25% with respectinterest only for the first 18 months, which resets in January 2027 to the indebtednessgreater of the Predecessor that was repaid with the net proceeds from our IPO:Prime or 4.25%. The financing matures in June 2040.

 

  Amount
Outstanding at
September 30,
2019
  Amount
Repaid
  Interest Rate Maturity Date
Vision Bank $1,538,330  $13,825,901  

4.0%, Prime + 0.5%(1,2)

 September 2036
Atlanta Postal Credit Union  -   17,117,032  4.15% September 2021
First Oklahoma Bank  381,391   -  

4.5%, Prime + 0.25%(1,3)

 December 2037
Vision Bank—2018  908,190   -  

5.0%, Prime + 0.5%(1,4)

 January 2038
Seller Financing  445,000   -  6.0% January 2025
First Oklahoma Bank—2018  -   739,622  

5.5%, Prime(1)

 October 2043
Total $3,272,911  $31,682,555     

(1)Prime refers to the Wall Street Journal Prime Rate.

(2)Interest rate resets on September 8, 2021.

(3)Interest rate resets on December 31, 2022.

(4)Interest rate resets on January 31, 2023.

The following discussion relates to secured borrowings of the Company as of September 30, 2019.

Vision Bank Loan. The loan from Vision Bank in the aggregate principal amount of approximately $16.9 million requires monthly payments of principal based on a 30-year amortization schedule, plus interest at 4.0% per annum through September 2021, after which the interest rate will reset at a variable rate equal to the Wall Street Journal prime rate, plus 0.5%. The Vision Bank mortgage loan matures on September 8, 2036, at which time all accrued interest and unpaid principal are due. The loan was collateralized by first mortgage liens on 26 properties and a personal guarantee of payment by Mr. Spodek. On May 17, 2019, our Operating Partnership used a portion of the net proceeds from our IPO to repay approximately $13.8 million of outstanding indebtedness under the Vision Bank loan and the loan is now collateralized by first mortgage loans on five properties. As of September 30, 2019, approximately $1.5 million was outstanding under the Vision Bank loan.

First Oklahoma Bank Mortgage Loan. In December 2017, the Predecessor entered into a mortgage loan payable with First Oklahoma Bank in the original amount of $404,000 requiring monthly payments of principal and interest of $2,570 based on a 20-year amortization schedule, and interest at 4.5% per annum through December 31, 2022, after which the interest rate will reset to a variable rate equal to the Wall Street Journal prime rate, plus 0.25%. The mortgage loan matures on December 13, 2037, at which time all accrued interest and unpaid principal are due. This mortgage loan is collateralized by first mortgage liens on four properties and a personal guarantee of payment by Mr. Spodek. As of September 30, 2019, approximately $0.4 million was outstanding under the First Oklahoma Bank mortgage loan.

Vision Bank – 2018. In January 2018, the Predecessor entered into a mortgage loan with Vision Bank in the principal amount of $960,000 requiring monthly payments of principal and interest of $6,374 based on a 20-year amortization schedule, and interest at 5.0% per annum through January 31, 2023, after which the interest rate will reset to a variable rate equal to the Wall Street Journal prime rate, plus 0.5%. The mortgage loan matures on January 31, 2038, at which time all accrued interest and unpaid principal are due. This mortgage loan is collateralized by a first mortgage lien on one property and a personal guaranty of payment by Mr. Spodek. As of September 30, 2019, approximately $0.9 million was outstanding under the Vision Bank – 2018 loan.

Seller Financing. In July 2019, the Company entered into a purchase money mortgage with the seller of the property in the principal amount of $445,000 requiring five annual payments of principal and interest of $105,661 with the first payable on January 2, 2021 based on a 6.0% interest rate per annum through January 2, 2025. This purchase money note is collateralized by a purchase money mortgage of real estate. As of September 30, 2019, approximately $0.4 million was outstanding under seller financing.

None of the indebtedness that our Operating Partnership repaid upon completion of our IPO and the Formation Transactions had any prepayment penalties in connection with repayment prior to maturity.


Cash Flows

Comparison of the nine months ended September 30, 2019 and the nine months ended September 30, 2018

The Company had cash of $10,969,557 and $498,379 as of September 30, 2019 and September 30, 2018, respectively.

The Company’s net cash provided by operating activities decreased by $123,397, or 5.5%, to $2,100,898 for the nine months ended September 30, 2019 from $2,224,290 for the nine months ended September 30, 2018 due to lower net income on account of increased general and administrative expenses resulting from being a publicly traded company.

The Company’s net cash used in investing activities increased by $38,013,771, or 2,663.7%, to $39,440,887 for the nine months ended September 30, 2019 from $1,427,116 for the nine months ended September 30, 2018, primarily due to the acquisition of 81 post office properties in connection with the Formation Transactions and 18 properties in the quarter ended September 30, 2019.

The Company’s net cash provided by (used in) financing activities increased by $48,525,598, or 10,374.8%, to $48,057,871 for the nine months ended September 30, 2019 from $(467,727) for the nine months ended September 30, 2018, primarily due to the net proceeds from the IPO and borrowings under our Facility offset by the repayment of debt in connection with the IPO.

Acquisition Pipeline

 

As of November 11, 2019, the CompanyJune 25, 2020, we had entered into a definitive agreementsagreement to acquire 98 properties leased to the USPS forone additional postal property of approximately $27.6 million, which includes $14.0 million in OP Units valued at $17.00 per unit. The properties comprise9,000 square feet with an average rental ratefor a purchase price of $8.93 per square foot. Formal due diligence has been completed and the transactions are expectedapproximately $1.7 million. Such transaction is anticipated to close byduring the end of the year,third quarter subject to the satisfaction of customary closing conditions.

 

We continue to identify, and are in various stages of reviewing, additional postal properties for acquisition and believe there are strong opportunities to continue growing our pipeline. In addition, given the dislocation and government-imposed travel related limitations as a consequence of the COVID-19 pandemic, the Company’s ability to complete acquisitions in the near-term may be delayed.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2019,March 31, 2020, 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of our critical accounting policies and estimates of the Predecessor and the Company, as applicable.

New Accounting Pronouncements

For a discussion of our adoption of new accounting pronouncements, please see Note 3 of our Consolidated and Combined Consolidated Financial Statements included herein.

 

Inflation

 

Because most of our leases provide for fixed annual rentrental payments without annual rent escalations, our rent revenues arerental income is fixed while our property operating expenses are subject to inflationary increases. A majority of our leases provide for tenant reimbursement of real estate taxes and thus the tenant must reimburse us for real estate taxes. We believe that if inflation increases expenses over time, inflationary increases in expenses will be reflected in increased lease renewal rent rates.rates will materially offset such increase.

 

Recent Developments

On October 30, 2019, the Company borrowed an additional $20 million under the Facility.

On November 5, 2019, the board of directors of the Company approved and the Company declared a cash dividend of $0.14 per share and common unit for the quarter ended September 30, 2019. The dividend will be paid on December 2, 2019 to stockholders and common unitholders of record as of the close of business on November 15, 2019 consisting of $0.7 million in dividends to stockholders and $0.2 million to common unitholders.

In October and November 2019, the Company, through its Operating Partnership, acquired 77 properties leased to the USPS located in various states for approximately $17.3 million. The properties comprise approximately 172,000 square feet with an average rental rate of $9.58 per square foot.


ItemITEM 3. Quantitative and Qualitative Disclosures about Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Our primary market risk results from our indebtedness, which bears interest at both fixed and variable rates. Subject to maintaining our status as a REIT for federal income tax purposes, we may manage our market risk on variable rate debt through the use of derivative instruments such as interest cap agreements to, in effect, cap the interest rate on all or a portion of the debt for varying periods up to maturity. In the future, we may use interest rate swaps or other derivatives that fi x the rate on all or a portion of our variable rate debt for varying periods up to maturity. This in turn, reduces the risks of variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when undertaking such arrangements will be to reduce our floating rate exposure. However, we provide no assurance that our efforts to manage interest rate volatility will successfully mitigate the risks of such volatility in our portfolio and we do not intend to enter into hedging arrangements for speculative purposes. We may utilize swap arrangements in the future.

As of March 31, 2020, our total indebtedness was approximately $71.2 million, consisting of approximately $68.0 million of variable-rate debt and approximately $3.2 million of fixed rate debt. Assuming no increase in the amount of our outstanding variable-rate indebtedness, if the one-month LIBOR were to increase or decrease by 0.50%, our cash flows would decrease or increase by approximately $340,000 on an annualized basis.

 

ItemITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the rules and regulations of the SEC and that such information is accumulated and communicated to management, including our Chief Executive Officer (Principal Executive Officer) and President, Treasurer and Secretary (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

We have carried out an evaluation, under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial Officer, regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Principal Executive Officer and Principal Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

 

Changes in Internal Control Overover Financial Reporting

 

We continue to execute on our plan to remedy the material weakness, described in the Company’s final prospectus dated May 14, 2019, including (i) initiating a full internal review and evaluation of key processes, procedures and documentation and related control procedures, and the subsequent testing of those controls, (ii) hiring additional accounting resources, including our Chief Accounting Officer, Matt Brandwein, who joined us in January 2019, with the appropriate level of technical experience and training in the application of technical accounting guidance to non-routine and complex transactions in order to properly analyze, review, record and report on business transactions and (iii) implementing policies and procedures focusing on enhancing the review and approval of all relevant data to support our assumptions and judgments in non-routine and complex transactions appropriately and timely and documenting such review and approval. We also have made organizational changes and trained our employees in order to strengthen and improve our internal controls over financial reporting.

Management believes that these measures will remediate the previously identified material weakness. While we have completed our initial testing of these new controls and have concluded they are in place and operating as designed, we are monitoring their ongoing effectiveness, and will consider the material weakness remediated after the applicable remedial controls operate effectively for an additional period of time.

Except as otherwise stated above, thereThere was no change in our internal control over financial reporting that occurred during the period covered by this reportour most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may in the future be party to various claims and routine litigation arising in the ordinary course of business. Our management does not believe that any such litigation will materially affect our financial position or operations.

 

Item 1A. Risk Factors

 

ThereExcept as set forth below, there have been no material changes from the risk factors disclosed in the section entitled “Risk Factors” of our final prospectus dated May 14,Annual Report on Form 10-K for the year ended December 31, 2019.

The following risk factor is intended to supplement the risk factors previously disclosed.

We are required going forward to adopt and utilize the USPS’s revised form of our modified double-net lease, which transfers the responsibility for additional maintenance expenses and obligations to the landlord, including some components of plumbing and electrical systems, and compensate third-party brokers of the USPS.

The USPS has adopted a revised form of our modified double-net lease, which transfers the responsibility for additional maintenance expenses and obligations to the landlord, including some components of plumbing and electrical systems. To date, we have not renewed or entered into revised leases for any of our leases with the USPS that expired in 2019 or 2020. We are required going forward to adopt and utilize the USPS’s revised form of our modified double-net lease and pay commissions to third-party brokers of the USPS.

The potential effects and increased costs associated with adopting and utilizing the USPS’s revised form of our modified double-net lease and paying commissions to third-party brokers of the USPS may limit the number of attractive investment opportunities going forward and our financial condition, results of operations, cash flow and growth prospects could be materially adversely affected.

The following risk factor is intended to replace the risk factor previously titled, “Public health threats such as COVID-19 could have a material adverse effect on the demand for post office properties and USPS operations.”

The novel coronavirus (COVID-19) pandemic and measures being taken to prevent its spread, including government-imposed travel related limitations, could (i) negatively impact demand for USPS services and post office properties which would have a material adverse effect on our business, results of operations and financial condition and (ii) delay our ability to complete acquisitions in the near-term.

The ongoing novel coronavirus (COVID-19) pandemic and measures being taken to prevent its spread has resulted in a reduction in foot traffic in many public places, including post office properties. A continued reduction in the use of in-person services may reduce the demand for post office properties by the USPS and our results of operations could decline as a result. The ongoing novel coronavirus (COVID-19) pandemic has also caused a decline in mail volume, particularly in advertising conducted through the mail. Early estimates suggest that mail volume could decline by as much as 60% as compared to the previous year and by as much as 50% in the USPS’s second quarter of 2020, which runs from April through June. The USPS has predicted that it could lose as much as $23 billion in revenues over the next 18 months. Continued reduction or permanent changes to mail volume could reduce demand for postal properties and materially adversely affect our result of operations. Further, although the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was recently signed into law and remains subject to approval by the U.S. Treasury Department, includes a $10 billion loan to the USPS, there can be no assurances that this financing will be approved or sufficient to sustain USPS operations in light of current shortfalls resulting from reduced mail volumes. Additionally, the conditions precedent to receiving the $10 billion loan may include significant increases in fees charged by the USPS to companies such as Amazon, Inc. for package delivery services. Such increase may reduce demand for the USPS's package delivery services and materially adversely affect our results of operations. As of the date of this Quarterly Report, the USPS has not received any portion of the contemplated $10 billion loan.

In addition, the USPS is dependent on the efforts of its employees, many of whom come into contact with a large number of individuals on a daily basis. If USPS employees are unwilling or unable to report to work regularly because of the novel coronavirus (COVID-19) pandemic or USPS services are otherwise diminished as a result of governmental response to the pandemic, the demand for USPS services or the reputation of the USPS may suffer, leading to a reduced need for post office properties and adversely affecting our business and results of operations.

Furthermore, given the dislocation and government-imposed travel related limitations as a consequence of the pandemic, our ability to complete acquisitions in the near-term may be delayed. The Company has also been affected in that: (i) we have permitted certain employees to work from home, which slowed, for example, the Company’s routine quarterly close process; and (ii) we have been impacted by delays in communications with, and operations of, various counterparties. Although the effectiveness of our work from home practices have improved since implementation, the continued and future improvement of such practices, as well as communications with, and the operations of, various counterparties, is highly uncertain and cannot be predicted.

The following risk factor is intended to replace the risk factor previously titled, “As of December 31, 2019, 20 of our leases were either in holdover status or expired on December 31, 2019, and if we are unable to renew these leases on equivalent terms, we might experience lower rental income, net operating income, cash flows and funds available for distributions.”


As of June 25, 2020, the leases at 43 of our properties had expired and the USPS is occupying such properties as a holdover tenant. If we are not successful in renewing these expired leases, we will likely experience reduced occupancy, rental income 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.

As of June 25, 2020, the leases at 43 of our properties (consisting of 20 properties for which leases expired in 2019, including one lease that expired as of the date of our acquisition, and 23 properties for which leases expired in 2020) had expired and the USPS is occupying such properties as a holdover tenant, aggregating approximately 163,000 interior square feet and $1.9 million in annualized rental income. When a lease expires, the USPS becomes a holdover tenant on a month to month basis, typically paying the greater of market rent or the rent amount under the expired lease. To date, the USPS has not vacated or notified us of its intention to vacate any of these 43 properties. As of June 25, 2020, monthly rent rates on 42 of 43 holdover properties are approximately 5.8% higher than the rent rate in effect at the time of expiration of the prior lease. The remaining holdover property was a below market lease where the rental rate increased significantly. Due to the fact that the USPS is occupying 43 of our properties as a holdover tenant, such properties are excluded from being part of the borrowing base under our Credit Facility.

As of June 25, 2020, we believe we have tentatively agreed to preliminary terms with the USPS on an addendum to its revised form of lease, pursuant to which documentation requirements are streamlined and some of the new responsibilities placed on the landlord by the USPS’ revised form of our modified double-net lease would be mitigated. We also believe we have tentatively agreed to preliminary terms on rental rates for 19 of the 20 leases that expired in 2019 and 7 of the 23 leases that have expired in 2020. We anticipate that we will execute new, revised-form leases with the addendum for the leases that expired in 2019 in the near-term. However, we have not entered into any definitive documentation with respect to this addendum, rental rates or leases for the 43 properties at which the USPS is a holdover tenant, 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 in 2020, or obtaining positive rent renewal spreads, or even renewing the leases on terms comparable to those of the expiring leases. 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 which could have a material adverse effect on our financial condition, results of operations and ability to make distributions to shareholders.

The following risk factor is intended to replace the risk factor previously titled, “Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all, which could limit our ability to, among other things, meet our capital and operating needs or make the cash distributions to our stockholders necessary to qualify and maintain our qualification as a REIT.”

Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all, which could limit our ability to, among other things, meet our capital and operating needs or make the cash distributions to our stockholders necessary to qualify and maintain our qualification as a REIT.

Depending on our ability to borrow under our Credit Facility, we may pursue significantly more secured borrowings in the future, although we have not entered into any preliminary or binding documentation with respect to any such additional secured borrowings and there is no guaranty that any lender will be willing to lend to us on the terms and timing that we expect, if at all. In order to qualify and maintain our qualification as a REIT, we are required under the Code to, among other things, distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary capital expenditures, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs. We may not be able to obtain such financing on favorable terms or at all and any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:

general market conditions;

the market’s perception of our growth potential;

our current debt levels;

our current and expected future earnings;

our cash flow and cash distributions; and

the market price per share of our Class A common stock.

Historically, the capital markets have been subject to significant disruptions. If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to qualify and maintain our qualification as a REIT.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On May 17, 2019, we closed our IPO, pursuant to which we sold 4,500,000 shares of our Class A Common Stock toWe contributed the public at a public offering price of $17 per share. We raised $76.5 million in gross proceeds, resulting in net proceeds to us of approximately $71.1 million after deducting approximately $5.4 million in underwriting discounts and before giving effect to $6.4 million in other expenses relating to the IPO. All 4,500,000 shares of our Class A Common Stock were sold pursuant to our registration statement on Form S-11, as amended (File No. 333-230684), that was declared effective by the SEC on May 14, 2019. Stifel, Nicolaus & Company, Incorporated, Janney Montgomery Scott LLC, BMO Capital Markets Corp. and Height Capital Markets, LLC served as bookrunning managers for the offering and as representatives of the several underwriters.

In connection with the closing of our IPO and the Formation Transactions and pursuant to certain merger and contribution agreements, we issued to (i) Mr. Spodek an aggregate of (a) 637,058 shares of our Class A Common Stock with an aggregate value of approximately $10.8 million based on the IPO price and (b) 27,206 shares of our Class B Common Stock with an aggregate value of approximately $0.5 million based on the IPO price, and (ii) Mr. Spodek and his affiliates an aggregate of 1,333,112 OP Units with an aggregate value of approximately $22.7 million based on the IPO price. The issuance of such shares and OP Units, as applicable, was effected in reliance upon exemptions from registration provided by Section 4(a)(2) of the Securities Act and Regulation D of the Securities Act. Pursuant to the limited partnership agreement of our Operating Partnership and subject to the requirements and restrictions set forth therein, limited partners of our Operating Partnership will have the right, commencing one year from the date of issuance of such units, to require our Operating Partnership to redeem part or all of their OP Units in exchange for cash or, at our Operating Partnership’s option, for shares of our Class A Common Stock on a one-for-one basis.

There has beenOP Units. Thereafter, there was no material change in our planned use of proceeds from our IPO as described in the final prospectus filed with the SEC on May 16, 2019. As of March 31, 2020, our Operating Partnership had fully used the net proceeds received from us as described below:

approximately $29.0 million to acquire interests in our initial properties;

approximately $31.7 million to repay mortgage debt secured by some of our initial properties;

approximately $6.1 million for general corporate purposes, including payment of expenses associated with our Formation Transactions, future acquisitions, transfer taxes and potentially, paying distributions.

  

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.On June 25, 2020 (the “Amendment Effective Date”), Postal Realty LP, as the borrower (the “Borrower”), Postal Realty Trust, Inc. and certain subsidiaries, as guarantors, and People’s United Bank, National Association, as administrative agent (the “Administrative Agent”) for the benefit of the lenders (the “Lenders”) party to the Credit Agreement (as defined below) entered into that certain Second Amendment to Credit Agreement (the “Second Amendment”) to the Credit Agreement by and among the Borrower, the Administrative Agent, the Lenders and BMO Capital Markets Corp., as joint lead arranger, dated as of September 27, 2019, as amended by that certain First Amendment to Credit Agreement (the “First Amendment”), dated as of January 30, 2020 (as amended by the First Amendment and the Second Amendment, the “Credit Agreement”).

The Second Amendment provides for certain amendments effective as of the Amendment Effective Date and through the term of the Credit Agreement. The Borrower and Lender agreed to the items listed below. Capitalized terms used in the list below and not defined therein have the meanings ascribed to them in the Second Amendment, a copy of which is attached hereto as Exhibit 10.2 and incorporated herein by reference.

The Borrowing Base is 60.0% of the Borrowing Base Portfolio Value;

The Borrowing Base Portfolio Value and Consolidated Total Real Estate Value calculations utilize a purchase date cutoff of six (6) calendar months; and the Borrowing Base Portfolio Value calculation utilizes an alternate metric for properties purchased at a capitalization rate of 7.0% or less and six (6) calendar months prior to such calculation;

To be classified as a Postal Lease, a Lease to the United States Postal Service does not require that the tenant pay all real estate taxes at the property; and

Consolidated Tangible Net Worth may not be less than (i) as of the last day of each calendar quarter ending September 30, 2019 and December 31, 2019, $50,000,000, and (ii) as of the last day of the calendar quarter ending March 31, 2020, $75,000,000, and (iii) as of the last day of each calendar quarter thereafter, the sum of (x) $75,000,000 plus (y) seventy-five percent (75%) of the aggregate net proceeds received by any Borrower Group Entity in connection with any offering of Equity Interests in the REIT on or after June 25, 2020.

The foregoing description of the Second Amendment is qualified in its entirety by reference to the full text of the Second Amendment.


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Item 6. Exhibits

 

Exhibit Exhibit Description
10.1+*10.1 

First Amendment to Credit Agreement, dated as of Purchase and SaleJanuary 30, 2020, by and among Postal Realty LP, Postal Realty Trust, Inc., the subsidiary guarantors party thereto, certain lenders party thereto and Hugh B. Barwick, Jr., Gary L. Poelstra and Nancy B. Ordway, dated July 16, 2019People’s United Bank, National Association, as administrative agent.*

10.2+*10.2 

Second Amendment to Credit Agreement, dated as of Purchase and SaleJune 25, 2020, by and among Postal Realty LP, Postal Realty Trust, Inc., the subsidiary guarantors party thereto and Hugh B. Barwick, Jr., Benjamin C. Barwick and Gary L. Poelstra, dated July 16, 2019People’s United Bank, National Association, as administrative agent.*

10.3+*10.3 

Agreement of Purchase and Sale by and between Postal Realty LPTrust, Inc. Amended and Coharie, Incorporated dated July 16, 2019Restated Alignment of Interest Program, effective as of April 27, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 29, 2020).†

10.4+*31.1 Agreement of Purchase and Sale by and between Postal Realty LP and HB Barwick, Inc. dated July 16, 2019
10.5+*Agreement of Purchase and Sale by and among Postal Realty LP and Hugh B. Barwick, Jr. dated July 16, 2019
31.1*Certification of Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes Oxley Act of 20022002.*
31.2*31.2 Certification of President, Treasurer and Secretary furnished pursuant to Section 302 of the Sarbanes Oxley Act of 20022002.*
32.1*32.1 Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes Oxley Act of 20022002.*
32.2*32.2 Certification of President, Treasurer and Secretary furnished pursuant to Section 906 of the Sarbanes Oxley Act of 20022002.*
101.INS INSTANCE DOCUMENT**
101.SCH SCHEMA DOCUMENT**
101.CAL CALCULATION LINKBASE DOCUMENT**
101.LAB LABELS LINKBASE DOCUMENT**
101.PRE PRESENTATION LINKBASE DOCUMENT**
101.DEF DEFINITION LINKBASE DOCUMENT**

 

*Exhibits filed with this report.

 

+Certain portions of this Exhibit have been redacted to preserve confidentiality. The registrant hereby undertakes to provide further information regarding such redacted information to the Commission upon request.Compensatory plan or arrangement.

 

**Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets;Sheets as of March 31, 2020 (Unaudited) and December 31, 2019; (ii) Consolidated and Combined Consolidated Statements of Operations;Operations (Unaudited); (iii) Consolidated and Combined Consolidated Statements of Equity;Equity (Unaudited); (iv) Consolidated and Combined Consolidated Statements of Cash Flows;Flows (Unaudited); and (v) Notes to Consolidated and Combined Consolidated Financial Statements.Statements (Unaudited).

3436

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 POSTAL REALTY TRUST, INC.
   
Date: November 12, 2019June 26, 2020By:/s/ Andrew Spodek
  Andrew Spodek
  Chief Executive Officer
  (Principal Executive Officer)
   
Date: November 12, 2019June 26, 2020By:/s/ Jeremy Garber
  Jeremy Garber
  President, Treasurer and Secretary
  (Principal Financial Officer)

 

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