Peakstone Realty Trust Q1 FY2025 Earnings Call

Greetings. And welcome to the Peakstone Realty Trust First Quarter 2025 Earnings Webcast Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Swett, Investor Relations. Please go ahead, sir. Good afternoon, and thank you for joining us for Peakstone Realty Trust First Quarter 2025 Earnings Call and Webcast. Earlier today, we posted an earnings release, supplemental and updated investor presentation to the Investors page on our website at www.pkst.com. Please reach out to our investor relations team at ir@pkst.com with any questions. The company will be making forward-looking statements, which include any statements that are not historical facts on today's webcast. Such forward-looking statements are based on expectations that involve risks and uncertainties, it could cause actual results to differ materially. For a further discussion of risks related to our business, please see our annual report on Form 10-K and subsequent filings with the SEC. Additionally, on this call, the company may refer to certain non-GAAP financial measures such as funds from operations, core funds from operations, adjusted funds from operations, EBITDAre, and adjusted EBITDAre. You can find a tabular reconciliation of these non-GAAP financial measures comparable to the most currently GAAP numbers in the company's earnings release and filings with the SEC. On the call today are Mike Escalante, CEO and President, and Javier Bitar, CFO. With that, I'll hand the call over to Mike. Good afternoon, and thank you for joining our call today.

We continue to make meaningful progress on our strategic transition to an industrial REIT, with growth in the industrial outdoor storage or iOS subsector serving as the cornerstone of this transformation. As part of this strategy, we are actively reshaping the portfolio through the targeted iOS growth initiatives and strategic asset sales, primarily focused on the office segment. This quarter, we increased industrial segment ABR by $2,400,000 quarter over quarter, driven by a 10% rise in AVR from our iOS properties, underscoring the strong fundamentals and the compelling growth trajectory of our high-quality iOS assets. On the disposition front, we've closed $144,000,000 of office asset sales year to date, advancing our efforts to better align the portfolio with our long-term strategic goals. Thanks to strong leasing across our iOS portfolio, and the continued execution of these office sales, the industrial segment ABR represented 41% of total ABR at quarter-end and 43% on a pro forma basis after giving effect to office dispositions completed subsequent to quarter-end. Leasing activity related to our iOS assets played a central role in this quarter's industrial ABR growth, and we'd like to provide more detail on the transactions that drove this performance. Most notably, we fully leased our largest iOS redevelopment property, 37 usable acres in Everett, Washington, largely on a no-cost basis to a local lumber mill operator. This full-site 9.8-year lease contributed approximately $1,700,000 of incremental ABR to our industrial segment and contains 8% annual rent escalations on average. While the initial rent is below market, completing this lease without the anticipated redevelopment spend enabled us to drive a meaningful increase in our iOS AVR and quickly achieve in-place yields of 5.9% on a cash basis and 8.8% on a GAAP basis. This lease provides a path to higher rent and enhances the internal growth profile of our iOS portfolio. Additional leasing activity highlighting the strong mark-to-market opportunities in our iOS portfolio included the commencement of a new 6.5-year lease for 3.3 usable acres at our Mableton, Georgia property, which added $300,000 in ABR during the quarter. This lease includes 3.5% annual escalations and resulted in weighted average releasing spreads of 85% on a cash basis and 218% on a GAAP basis. Moving on to dispositions, as I mentioned earlier, year to date, we've closed approximately $144,000,000 of office asset sales, underscoring both the successful execution of our office disposition strategy and the continued investor demand for the office assets in our portfolio. During the first quarter, we completed the sale of two properties totaling 251,000 square feet for approximately $34,000,000. These included our 40 White property in Baltimore and our Heritage Three property in Dallas Fort Worth. Subsequent to quarter-end, we closed on the sale of three additional properties totaling 520,000 square feet for approximately $110,000,000. These sales consisted of our LPL properties in Charlotte and our Cigna property in Pittsburgh. All three assets were classified as held for sale at quarter-end. Now I'd like to take a moment to provide some additional detail on what we're seeing in the market as it relates to our office dispositions. We've been highly effective in generating strong outcomes from the sale of our office assets. Over the past three years, we've completed over $2,000,000,000 in office sales across more than 30 markets, with buyers including both third-party investors and existing tenants. These sales have provided greater clarity around market pricing expectations and transaction timing. While we don't provide formal guidance on cap rates or pricing, closed transaction data suggests that depending on tenancy, market, and asset characteristics, our office assets with more than five years of remaining term have generally been priced on a cap rate basis in the range of 7.5% to 12.5% on in-place NOI. Office assets with shorter lease terms have generally been priced on a per square foot basis ranging from $50 to $175. The pricing reflects a combination of estimated vacant building value and the net present value of the remaining rental stream. We continue to see solid interest in our office and remain committed to maintaining or potentially accelerating the pace of our office dispositions through year-end. We recognize the capital markets environment may evolve, but we are well-positioned to adapt and continue executing thoughtfully on these sales. With that, I will turn the call over to Javier to review our financial results and capital markets activity. Javier?

Thanks, Mike. I'd like to take a moment to highlight two reporting metrics that we are introducing in our financial materials beginning this quarter: Core FFO and adjusted EBITDAre. These metrics are intended to enhance comparability and consistency in evaluating the ongoing performance of our business. Definitions and calculations can be found in our supplemental materials and quarterly filings. With that, I'd like to share a few highlights of our financial results for the quarter ended March 31. Total revenue was approximately $57,000,000, and cash NOI approximately $46,000,000. Net loss attributable to common shareholders was approximately $49,400,000 or $1.35 per share, inclusive of an approximately $52,000,000 non-cash impairment related to potential sales of assets in our office segment. Each FFO and core FFO were $24,600,000 or 62¢ per share on a fully diluted basis. AFFO was approximately $24,800,000 or coincidentally also 62¢ per share on a fully diluted basis. Same store cash NOI increased 5.8% for our industrial segment and 3.1% in our office segment for an overall increase of 4% compared to the same quarter last year. Moving on to our balance sheet, our quarter-end metrics can be found in our quarterly filings and our supplemental. Given the $110,000,000 of office dispositions after quarter-end, I would like to provide quarter-end metrics on a pro forma basis reflecting these sales and the use of proceeds. We used $100,000,000 to pay down our revolver, resulting in the following: total liquidity of approximately $330,000,000 consisting of cash and available revolver capacity, a cash balance excluding restricted cash of approximately $213,000,000, and available revolver capacity of approximately $123,000,000. We now have approximately $1,260,000,000 in total debt outstanding, including $900,000,000 of unsecured debt on our credit facility reflecting the $100,000,000 pay down subsequent to quarter-end. The remaining approximately $360,000,000 of debt is non-recourse secured debt. After deducting cash, our net debt would be approximately $1,048,000,000 and our net debt to adjusted EBITDAre would be 6.8 times. 88% of our debt is fixed, including the effect of our existing $750,000,000 of interest rate swaps which mature on 07/01/2025. The weighted average interest rate for all debt, both secured and unsecured, remains at 4.4%. As a reminder, we previously entered into forward starting floating to fixed interest rate swaps of a notional amount of $550,000,000. These swaps will take effect on the day our existing swaps mature. The new swaps will convert to a weighted average fixed rate of 3.58% and are set to mature on 07/01/2029. For the first quarter, as previously announced, we paid a dividend of 22.5 cents per common share on April 17, and the Board of Trustees approved a dividend for the second quarter in the amount of $0.0225 per common share that is payable on July 17 to holders of record on June 30. While the company expects to continue paying dividends on a quarterly basis, all future dividend decisions will be made by the Board of Trustees. With that, I will pass the call back to Mike.

Thank you, Javier. As we look ahead, our primary focus remains on advancing our strategic shift to an industrial REIT, with particular emphasis on the iOS subsector. We believe that high-quality iOS properties in supply-constrained markets present significant long-term growth opportunities regardless of broader economic fluctuations. In line with our strategy, we will continue to divest office assets, allowing us to reallocate capital to higher growth opportunities within the iOS space and further reduce our leverage. We expect these actions to drive sustainable growth and enhance shareholder value over the long term. We will now turn the call over to the operator to take a few questions from analysts. Operator?

Thank you, Sue. At this time, we will be conducting a question and answer session. The first question we have comes from Yana Galam of Bank of America. Please go ahead. Thank you. Good afternoon. Congrats on leasing the Everett site. I was hoping if you could help us think about the ABR opportunity at the remaining five IOS sites. How should we think about the ranges in rent per acre in that segment?

It's great to have you on the call, Fiona. So we're not really providing guidance at that level. I would say it’s a little bit difficult given the variety of locations that we have there. But one thing I would leave you with is that relative to the returns on cost that we've previously indicated and included in this round, we're comfortable with the ranges that we provided. Some of them will be a little bit below, while some will be higher than our anticipated numbers. Our spend is typically lower than we originally forecasted, at least at the outset. We do have a considerable amount of activity underway, so fingers crossed. We don't like jinxing ourselves, but fingers crossed that we should be able to have some announcements forthcoming, provided we can get through the details on those leases or prospective leases.

Great. Thank you. And could you comment on additional acquisition opportunities and what you're seeing in the market? Do you have the liquidity to move forward on more opportunities?

Yeah, for sure. I mean, that's going to be a balancing act. We've said strategically we've got to balance two things: growth, which is vital for us to capture a good cost of capital, and the second part is making sure that our leverage is in line. So that's going to be a balancing act as we recycle capital out of our strategic disposition program. I would tell you that our pipeline is solid. We are seeing a lot of individual one-off deals, both marketed and through our relationships. We're also continuing to see portfolios. It's no surprise that in taking on the assets that we took on, we have been concentrating on making sure that we hit our numbers on those pieces. At the same time, we're actively in the market looking at additional transactions. So stay tuned on that front. It's a very balanced approach. We're not going to run out the door, but we do have liquidity to pursue things as we see a risk-adjusted return that is compelling for us.

Great. Thank you for taking my questions.

Thanks, Shanna.

The next question we have comes from Catherine Graves of UBS. Please go ahead.

Good afternoon. Thank you for taking my questions. First, can you remind us what your sort of target leverage is? And I know you don’t give guidance, but what are your thoughts on the timeline of bringing your leverage down to a comfortable level?

Hi, Catherine. Thanks for being on the call. The pro forma numbers that we presented after the acquisition were at 7.9, but the actual quarter end, as you noted, was 7.5, and 6.8 now that we've completed these $110,000,000 of additional sales subsequent to quarter-end. We've publicly stated that our target has been to be somewhere in the six times range or below, and that continues to be our current target leverage at this point.

Got it. Thank you. And I just would add, Mike, is it fair to say the Board of Trustees is open to, you know, maintaining or accelerating the office dispositions this year?

Yeah, that's right. I think it's case by case. We take what we can get from the marketplace in terms of disposition activity. We have to look at everything critically and we are looking to maximize shareholder value as best we can. We’re excited. Excited might be too big of a word, but we have been achieving numbers that are far in excess of what the market is giving us credit for. The pricing of our stock indicates that we should continue doing these types of things until the market fully understands exactly how we're underwritten. The bottom line is we have a portfolio of properties that are desirable to investors and specifically to our tenants. We own assets that are important to our underlying tenants for various reasons. We’re seeing a fair amount of interest from our existing tenant base as well. So we’ll see how that all goes. What's interesting at the moment is that the corporate cost of capital remains advantageous compared to the real estate investment side. So all of that sets up well for possibly accelerating our activity.

Got it. Thank you for the color.

Ladies and gentlemen, just a final reminder. If you would like to ask a question, please press star and then 1. The next question we have comes from Anthony Hau of Truist Securities. Please go ahead.

Hey, guys. Congrats on the quarter. Mike, in your prepared remarks, you mentioned that for office properties with more than a five-year term, they are trading at a 7.5% to 12.5% cap rate on in-place NOI.

So what are the characteristics for assets at the lower end of the range versus the higher end? Also, is this range a reference to Peakstone Realty Trust's portfolio specifically or in general? We gave two metrics regarding what we're seeing in the marketplace. I think this is providing some clarity without giving individual deal guidance. The line of demarcation is generally around five years. The shorter the duration, the cap rate will vary significantly. If you're closer to five years and have a very high lease, you’ll probably see better pricing. The NPV of the remaining cash flow comes into play for assets with shorter terms, and that can result in a broad range on a per square foot basis. Overall, you can do some calculations based on specific factors like property age and market conditions.

Gotcha. Got it? What’s currently in the pipeline in terms of signed TSAs? Has the buyer pool for office assets been reasonably deep interest?

I mean, there's reasonably deep interest to get it done. We've sold over $2,000,000,000 worth of property since listing. We've been one of the more active sellers of Office and more successful at achieving solid pricing. While I'm not going to tell you exactly what we have under PSA, there's a growing conversation about office investment. Finding the right buyer for the right asset at the right time remains crucial. We’re focused on buyers who are financially stable to close transactions smoothly.

And in terms of iOS, how would you characterize tenant demand today? Are there any shifts regarding users such as logistics, construction, or equipment storage?

The vacancy we have relates to the six redevelopment assets we moved following the full leasing of the Everett property. As part of that process, we're effectively moving that out of redevelopment to our operating portfolios. We are actively discussing various potential tenants. Demand has not really changed from the time we took the properties over. Some adjustments to our approach have been made, but we have seen interest from tenants who are willing to take the properties as is. We're maintaining a steady level of interest, consistent with what we anticipated. Fingers crossed, everything seems positive so far. Thank you for your time.

Ladies and gentlemen, we have reached the end of our question and answer session. I would now like to turn the call back over to Mike Escalante for closing comments. Please go ahead, sir.

Thank you, operator. I appreciate everyone joining the call today and, of course, all the time and effort in following us. I appreciate your patience as we work through this transformation. We keep looking at what we're doing as trying to ensure that we communicate a succinct story while delivering on that narrative as well. We're very active in the marketplace on all fronts, and we're excited about our future as we move through this transition. Thanks for your time today.

Thank you, Saul. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.