Peakstone Realty Trust - Q1 2024

Transcript

Operator (participant)

Greetings, and welcome to the Peakstone Realty Trust First Quarter 2024 Earnings Webcast. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mikayla Lynch. Thank you. You may begin.

Mikayla Lynch (Head of Investor Relations)

Thank you. Good afternoon, and thank you for joining us for Peakstone Realty Trust First Quarter 2024 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 [email protected] with any questions. Please note that 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 for all 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 are making these statements for purposes of complying with those safe harbor provisions.

Furthermore, the forward-looking statements reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause actual results to differ significantly than those expressed in any forward-looking statement, and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in our most recent annual report on Form 10-K or quarterly report on Form 10-Q filed with the SEC. 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 call, except as required by applicable law.

Additionally, on this call, the company may refer to certain non-GAAP financial measures, such as funds from operations, adjusted funds from operations, EBITDAre, and adjusted EBITDAre. 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. On the call today are Mike Escalante, CEO and President, and Javier Bitar, CFO. With that, I'll hand the call over to Mike.

Michael J. Escalante (CEO and President)

Good afternoon, and thank you for joining our call today. April 13 was our 1-year anniversary as a listed company. As we mark this occasion, I am proud of the progress we have made, executing on our strategic plan aimed at bolstering our balance sheet and optimizing our portfolio to further align with our long-term growth objectives. In alignment with this plan, during the first quarter, we progressed the elimination of our other segment, driven by effective disposition and leasing strategies and sustainable tenant relationships. At the close of the quarter, our other segment now only accounts for 13% of our ABR in our portfolio. Our high-quality industrial and office segments continue to provide stability with a combined WALT of 7.3 years. Minimal near term rollover in the next 3 years, representing 7.5% of the ABR for these two segments.

Significant credit tenancy and newer buildings with minimal capital requirements. Moving on to leasing activity. In this evolving market environment, we had strong lease execution, securing three lease extensions in our other segment, which sets the stage for successful sales of these assets. These leasing accomplishments in our non-core segment underscore our team's agility, market acumen, and the potential for further success within our core portfolio. We secured lease extensions totaling approximately 241,000 sq ft, with minimal or no leasing costs and strong weighted average GAAP and cash re-leasing spreads of 27% and 13%, respectively. These leases consisted of a 5-year, 81,000 sq ft lease extension with MGM in Las Vegas, Nevada, with a 33% GAAP and 26% cash re-leasing spread.

A five-year, 99,000 sq ft lease extension with Northrop Grumman in Beavercreek, Ohio, with a 23% GAAP and 5% cash re-leasing spread. In a five-year, 61,000 sq ft lease extension with Owens Corning in Concord, North Carolina, with a 17% GAAP and 5% cash re-leasing spread. In addition to this leasing activity during the quarter, our previously executed fifteen-year, 100,000 sq ft lease commenced at our Nashville, Tennessee, office segment property. Turning now to our dispositions. Again, our team's experience, industry relationships, and proactive tenant engagement initiatives drove the successful dispositions of 4 assets in the quarter for nearly $80 million. These sales meaningfully reduced the size of our other segment and improved our overall portfolio metrics. In the other segment, we sold two non-stabilized office properties totaling 389,000 sq ft.

The properties were sold for a total of $23.4 million. We also sold one manufacturing property totaling 660,000 sq ft.... This property was sold to the existing tenant for $26.1 million pursuant to a fixed price purchase option. In our office segment, proactive communication and collaboration with Corteva, the tenant of our 184,000 sq ft property located in Johnston, Iowa, resulted in the sale of this building to Corteva for $30 million. At the time of the sale, the lease had 2.8 years remaining. To facilitate the closing, we issued a 1-year note for one half of the disposition price. I am pleased with the disposition and leasing activity in the quarter. Overall, our innovative and experienced team continues to be a differentiator.

With that, I will turn the call over to Javier to review our financial results. Javier?

Javier Bitar (CFO)

Thanks, Mike. We would first like to highlight the continued reduction of leverage for our consolidated portfolio, which resulted in a 6.2x net debt to normalized EBITDAre ratio at the end of the quarter. Moving on to our financial results. Total revenue for the quarter was $59.2 million, and NOI was $47.6 million. Net income attributable to common shareholders was approximately $5 million or $0.14 per share. This result is inclusive of two non-cash impairments: a $1.4 million impairment relating to a pending sale in our other segment, which was classified as held for sale at quarter end, and $4.6 million relating to goodwill associated with our other reporting segment as a result of first quarter asset sales.

Same-store cash NOI was approximately $44.8 million, a 0.7% increase compared to the same quarter last year. But for the commencement of a rent abatement in the eleventh year of an existing lease, same-store cash NOI would have grown by 1.5%. FFO, as defined by Nareit, was approximately $21.2 million, or $0.54 per share on a fully diluted basis. Excluding the non-cash goodwill impairment, FFO for the quarter would have been $0.65 per share. AFFO was approximately $27.8 million or $0.70 per share on a fully diluted basis, and G&A was approximately $9.7 million, a 3% improvement compared to our normalized 2023 quarterly run rate. Moving on to our balance sheet.

As of March 31, 2024, we had $436 million in cash, a $44 million increase from year-end 2023, and $160 million of available undrawn capacity on our revolver, for total liquidity of nearly $600 million. A significant portion of our cash is being held in money market accounts, earning interest in the 5% range, which generated approximately $4 million of interest income in the quarter. Regarding our consolidated debt, we had approximately $1.4 billion outstanding, consisting of $950 million on our credit facility, with the balance being secured mortgage debt.

This quarter, we reduced our mortgage debt by paying off our $11.4 million Highway 94 secured loan in connection with the sale of the manufacturing property in our other segment and paying down $10 million of principal on our AIG secured loans. After deducting for cash, net debt was approximately $985 million, or a $65 million reduction compared to our year-end net debt. As a result of this activity, our net debt to gross real estate improved by 200 basis points, from 40.2% to 38.2%. And as I previously mentioned, our net debt to normalized EBITDAre ratio is 6.2 times. Regarding our total outstanding debt, approximately 86% has fixed rates inclusive of our interest rate swaps, which limits our exposure to near-term interest rate volatility.

Including the effect of these interest rate swaps, which with a maturity of July 2025, the weighted average interest rate was 4.16%. Taking into account the recent exercise of our 19-month credit facility extension, the weighted average term to maturity will be approximately 2.5 years, leaving no significant debt maturities until the end of 2025. Finally, for the first quarter, we paid a dividend of $0.225 per common share on April 18. While the company expects to continue paying dividends on a quarterly basis, all future dividend decisions will be made by the Board of Trustees. Overall, we ended the quarter with ample liquidity and balance sheet flexibility, which positions us well to advance our business plan. Now, I will turn the call back to Mike for closing remarks.

Michael J. Escalante (CEO and President)

Thank you, Javier. Our outlook on the industrial market is positive. We are well positioned to capture past and future rent growth, which translates to strong releasing spreads. Our industrial properties generally have modern specifications, are strategically located, and are central to the business operations of our tenants. Given these attributes, we expect the slowdown in industrial construction to benefit our assets.

... We believe that all office portfolios are not created equal. The limited near-term rollover in our office segment, being less than 5% over the next three years, and relatively young age of these assets are key differentiators that provide stability while the markets reach equilibrium. We're confident in our ability to navigate the evolving market, unlock opportunities for growth, and maximize shareholder value. We will now turn the call over to the operator to take a few questions from analysts. Operator?

Operator (participant)

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. The first question comes from Josh Dennerlein with Bank of America. Please go ahead.

Farrell Granath (Equity Research Associate)

Hi, this is Farrell Granath on behalf of Josh. Good afternoon. I was wondering if you could give a little bit more color on the rent abatement in the industrial portfolio?

Michael J. Escalante (CEO and President)

Yeah, sure. This was one of our leases that in the eleventh year, so we backended the rent abatement, and it happened to occur in this last quarter for one of our industrial properties.

Farrell Granath (Equity Research Associate)

When saying the eleventh year, is this the ending or, ending of their lease?

Michael J. Escalante (CEO and President)

The ending of the original term. They've opted for a five-year extension beyond that.

Farrell Granath (Equity Research Associate)

Okay. And I also wanted to ask about the cap rates kind of coming in on the dispositions. Is it possible to walk through cap rates on things that had closed last quarter?

Michael J. Escalante (CEO and President)

So hello, Farrell. It's Mike Escalante. Hopefully, we can see one another out at Nareit. So, you know, we've generally not commented on them on a one-off basis. We've been keeping track since the beginning of last year of the stabilized assets that we have sold, so those are properties that have some remaining term, as opposed to being vacant or nearly vacant. So over that entire timeframe, our stabilized assets, I think the weighted average cap rate is now 7.8%. I think as of last quarter, the number was-

Operator (participant)

Correct.

Michael J. Escalante (CEO and President)

7.6, something like that. So a little bit up.

Farrell Granath (Equity Research Associate)

Okay, thank you for that. And I guess just when thinking about the construction of the portfolio and the split between investment grade and sub-investment grade assets, how are you thinking about that when it's coming to the ability to sell sub-investment grade at a stronger cap rate or, I guess thinking about your capital recycling?

Michael J. Escalante (CEO and President)

Yeah, I'm not sure I fully understand your question. But, you know, we have a legacy portfolio that has been very heavily weighted towards investment-grade tenancy. Our industrial segment, I think, is 74%, taking into consideration the three components of arriving at that, and our office segment is nearly 70% itself. So industrial and office segment, which, you know, is more of our core holdings, are just under 70% combined. We are a more active seller in our other segment, and that segment is only 42% investment grade, across the portfolio, the properties that remain. You can, I think, see that on slide 5 of our. I think it's in our IP. And, you know, so that's where we've been more active on the sales side.

So, I don't know that it's been. It has assisted the potential buyers in getting and attracting community and regional banks for purposes of arranging debt on the buy side. I think if that answers your question. If not, do you have a follow on?

Farrell Granath (Equity Research Associate)

No, no, that's great. Thank you. That's it for me.

Michael J. Escalante (CEO and President)

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I'll now hand back to Michael for closing comments.

Michael J. Escalante (CEO and President)

Thank you, operator, and thank you, everyone, for attending the call. We greatly appreciate your support and following, and just trust that our team is very much engaged in maximizing value for the portfolio. And we've got the right team to be engaged in this particular market marketplace. And I think the performance that we've achieved both on the leasing and the disposition side, and the ability to raise cash and improve the makeup and composition of our balance sheet, all sort of proves up the abilities of our team. So thank you for this for this time and attending the call. We'll see you on the next turn. Operator?

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.