Peakstone Realty Trust Q1 FY2023 Earnings Call

Good morning, everyone, and welcome to Peakstone Realty Trust's first quarter 2023 earnings webcast. On the call today are Mike Escalante, Chief Executive Officer; and Javier Bitar, Chief Financial Officer. Please note the use of forward-looking statements by the company on this webcast. Statements made on this call may include statements which are not historical facts and are considered forward-looking. The company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is making this statement for the purpose of complying with those safe harbor provisions. Furthermore, actual results may differ materially for those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's 10-K for the year ended December 31, 2022, and its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Additionally, on this call, the company may refer to certain non-GAAP financial measures, such as funds from operations, adjusted funds from operations, EBITDAR, and adjusted EBITDAR. You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP numbers in the company's filings with the SEC. Additional information may be found in the Investors section of the company's website at www.pkst.com. I would now like to turn the call over to Mike Escalante. Mike?

Good afternoon, and thank you for joining us today for our first call as a publicly listed company. Since many of our shareholders are new, I want to start by giving you an overview of who we are and our strategy as a public entity. Then, I will outline our key achievements during and after the first quarter. Javier will follow by reviewing our financial results and balance sheet. Afterwards, I will provide some closing remarks as we look toward the future. We have a high-quality portfolio primarily composed of newer industrial and office properties, mostly leased to creditworthy tenants under long-term net lease agreements that include contractual rent increases. By the end of the quarter, our owned portfolio included 78 properties totaling about 19 million square feet and approximately $213.4 million in annualized base rents. For valuation purposes, think of our portfolio as having four main pillars of value. First, in the Industrial segment, we hold 19 properties totaling around 9 million square feet, all of which are fully occupied, with an average lease term of 6.8 years. About 59% of these properties are leased to investment-grade tenants, and approximately 49% of the Industrial segment's base rent comes from properties near top U.S. ports. Second, in our Office segment, we own 38 properties totaling about 6.2 million square feet, with an economic occupancy of 98.2% and an average lease term of 8.2 years. Around 67% of these properties are leased to investment-grade tenants, and our office properties are newer and of higher quality compared to many of our public peers. Third, we have 21 properties totaling roughly 3.8 million square feet in our Other segment. These are good properties, though some have recently become vacant or have near-term lease expirations, which will require careful analysis to determine the best path forward for our shareholders. Each of these properties will likely need a different strategy, with several having potential upside compared to current market pricing. Fourth, we have a 49% interest in a joint venture that owns 46 office properties, or 59 buildings in total, with an initial equity investment of about $184 million. Looking ahead, I want to highlight several key aspects of our investment strategy aimed at maximizing value. First, we will keep generating consistent cash flow from our highly occupied industrial and office segments, which make up 57 of our 78 total properties. These modern buildings are strategically located in coastal and Sunbelt markets, where nearly three-quarters of the base rent from these segments is derived. Additionally, these properties are generally situated in locations that are hard to replicate and we believe they offer greater growth potential. Within the office and industrial segments, about 65% of our base rent comes from leases with investment-grade tenants, providing a solid and stable foundation for growth. Second, we have a self-funded business model that focuses on capital recycling and free cash flow. In the short term, we aim to reduce debt, which we believe will lead to a stronger balance sheet. Third, while our plan is self-funded, we will selectively sell certain assets and reinvest in existing properties as needed. Our near-term goal is to lower our leverage, enhance our balance sheet, and achieve a better cost of capital. Lastly, we plan to grow our portfolio by acquiring high-quality industrial and select office properties. Shifting our portfolio toward industrial assets will help us benefit from ongoing trends in that sector, such as strong rental growth and lower capital expenditures. In terms of our first quarter 2023 highlights, which are detailed in our earnings release, we successfully executed key items from our business plan, including amending our revolving credit facility to defer near-term debt maturities and adding an extension option through January 2026. This amendment gives us the time and flexibility needed and reflects the strength of our banking relationships. We also completed three property sales that generated gross proceeds of nearly $170 million at an average cap rate of 6.9% for the two stabilized properties. After the quarter ended, we redeemed our preferred shares at par, previously held by an international investor, which will save us approximately $10 million annually in preferred distributions. I want to emphasize that on April 13, we listed our common shares on the New York Stock Exchange. To conclude, I’d like to underline a few advantages of Peakstone compared to others. We believe the quality and competitive positioning of our real estate is distinctive. Our portfolio predominantly consists of modern industrial and office properties, with an average lease term of 6.9 years and around 61.5% of our base rent derived from investment-grade tenants. Many of our properties are essential for our tenants’ operations. The credit facility amendment has notably reduced risk by extending near-term maturities, allowing us flexibility to manage our portfolio effectively and enhance shareholder value. Lastly, I would like to highlight our management team, which I believe is one of our greatest strengths. I'm proud of our experienced and knowledgeable team, who possess deep expertise in real estate and capital markets, as well as a wide network of industry relationships. We do not view real estate as a commodity; we recognize the importance of relationships. Our executive team has an average of 34 years of real estate experience and has operated public companies successfully. We are aligned with our shareholders, as every member of our organization owns shares.

Thanks, Mike. Peakstone's portfolio continues to produce solid results. As Mike mentioned in his remarks, at the end of the first quarter, our portfolio consisted of 78 properties totaling approximately 19 million square feet, and our wholly-owned portfolio at the end of the quarter was 95.3% leased at a WALT of 6.9 years and an ABR or annualized base rent of approximately $213.4 million. In the first quarter, total revenue was approximately $67 million. Net income attributable to common shareholders was approximately $6 million or $0.17 per share. FFO was approximately $14.7 million or $0.37 per share on a fully diluted basis, and AFFO was approximately $26.8 million or $0.68 per share on a fully diluted basis. The change in AFFO compared to the same quarter last year was primarily due to the decrease in rental income as a result of the disposition of 48 properties in 2022 and 3 properties in the first quarter of 2023. Same-store cash NOI was approximately $48.4 million. Moving on to our balance sheet. As of March 31, 2023, we had approximately $368.2 million in cash on hand and $132.3 million of available capacity on our revolving credit facility for total liquidity of $500.5 million. Our net debt was approximately $1.1 billion, and our debt had a weighted average interest rate of 4.2% and a weighted average term to maturity of 3.3 years. During the quarter, we also repaid the $19.1 million outstanding principal balance related to a mortgage loan that was maturing in April 2023. As a result of our recent sales, we continue to improve our balance sheet as demonstrated by our net debt plus deferred to normalized EBITDAre for our consolidated portfolio at 7.1x as of March 31 compared to 7.7x at the end of the year. Our net debt plus deferred to gross real estate was at 36.3% as of quarter end versus 39.5% as of year-end 2022. Interest rates were fixed on approximately 86% of our total outstanding consolidated debt inclusive of the effect of our interest rate swaps, limiting our exposure to interest rate volatility. Our next material debt maturities are at late 2025, with our $400 million facility term loan coming due as well as our AIG II mortgage loan, which will have a balance of approximately $115 million at maturity. Finally, in March, the Board declared a cash dividend for the month of March 2023 of $0.075 per common share, payable on May 12, 2023, to holders of record of its common shares on May 2, 2023. While the company expects to pay dividends on a quarterly basis going forward, all dividend decisions, including amount and frequency, will be made by the Board of Trustees.

Thanks, Javier. We're very excited to begin our new chapter as a listed company, and we are laser-focused on operating our portfolio to create value for all shareholders. We intend to use free cash flow and proceeds from sales of certain assets to continue to deleverage and derisk our balance sheet with the goal of achieving an investment-grade rating as soon as the market allows. Let me summarize our strengths once again as we move forward. We own a great portfolio of high-quality assets with majority investment-grade tenants, a WALT of 6.9 years, and embedded potential for upside. At this time, we are executing a self-funded strategy, which will not require outside capital for the foreseeable future. We have a strong balance sheet with limited near-term maturity risk and ample capacity to support our business plan. We are a cycle-tested team of experienced real estate professionals with a track record of operational results and 100% alignment with our shareholders. While the macroeconomic environment and public markets continue to be turbulent, we believe our stable, high-quality portfolio is resilient and well-positioned, and we are excited and optimistic about executing our strategy to maximize value for our shareholders. We thank you for your time today. If you have questions, please reach out to Investor Relations at [email protected] or visit the Investors section of our website at pkst.com. We looking forward to engaging with you as we move forward. Please have a good day. I'll now turn the call over to the operator.

Thank you. That will conclude today's webcast.