Peakstone Realty Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $57.0M, down 3.8% year over year due to strategic office dispositions; Core FFO per share came in at $0.62, and AFFO per share was $0.62.
• Results vs consensus: revenue beat by ~$2.5M (actual $56.97M vs $54.52M consensus)* and Core FFO/FFO per share beat by ~$$0.03 (actual $0.62 vs $0.594 consensus); GAAP EPS was a significant miss driven by a ~$52M non‑cash real estate impairment (actual $(1.35) vs $(0.085) consensus).
• Strategic shift to industrial/IOS accelerated: Industrial ABR rose by $2.4M QoQ; IOS ABR grew 10% QoQ, supported by full-site leasing of a 37-acre Everett, WA IOS redevelopment; average annual IOS rent escalations increased to 2.8%.
• Balance sheet improved post quarter-end with ~$144M office sales YTD and pro forma net debt/Adjusted EBITDAre at ~6.8x; Q2 dividend maintained at $0.225 per share.

What Went Well and What Went Wrong

What Went Well

• Fully leased largest IOS redevelopment (37 acres, Everett, WA) on a 9.8-year term, driving ~10% QoQ growth in IOS ABR and improving industrial mix: “We fully leased our largest IOS redevelopment site, driving a 10% quarter-over-quarter increase in IOS annualized base rent (ABR)”.
• Strong execution on dispositions and deleveraging trajectory: “Year-to-date, we have completed over $144 million of office property dispositions…we remain committed to maintaining—or potentially accelerating—this pace of office sales through year-end”.
• Same Store Cash NOI grew 4.0% YoY overall (Industrial +5.8%, Office +3.1%), evidencing operating strength amid portfolio repositioning.

What Went Wrong

• GAAP net loss of $(49.4)M and EPS of $(1.35) driven by ~$51.96M non-cash real estate impairment tied to planned/suspected office asset sales; this created a sharp GAAP miss vs EPS consensus*.
• Revenue fell YoY to ~$57.0M from $59.2M as office dispositions reduced rent base; Office revenue was $32.94M in Q1 2025 vs $32.999M in Q1 2024; Other segment revenue contribution was eliminated vs prior year.
• AFFO per share declined to $0.62 from $0.70 YoY as dispositions and non-cash adjustments (including straight-line rent and amortization items) reduced run-rate FFO/AFFO versus the prior year.

Transcript

Operator (participant)

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. If anyone should require operator assistance, please press star then zero on your telephone keypad. 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.

Steve Swett (Head of Investor Relations)

Good afternoon, and thank you for joining us for Peakstone Realty Trust's 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 [email protected] 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 that could cause actual results to differ materially. For 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, EBITDA RE, and adjusted EBITDA RE.

You can find a tabular reconciliation of these non-GAAP financial measures comparable to 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.

Mike Escalante (CEO and President)

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 $2.4 million quarter over quarter, driven by a 10% rise in ABR 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 million 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, 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 $1.7 million 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 ABR 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 $0.3 million in ABR during the quarter. This lease includes 3.5% annual escalations and resulted in weighted average releasing spreads of 105% 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 million 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 sq ft for approximately $34 million. 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 sq ft for approximately $110 million. 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 billion 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%-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-$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 properties and remain committed to maintaining or potentially accelerating the pace of our office dispositions through year end. While we recognize the capital markets environment may evolve, we're 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.

Javier Bitar (CFO)

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 EBITDA RE. 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 million, and cash NOI was approximately $46 million. Net Loss Attributable to common shareholders was approximately $49.4 million or $1.35 per share, inclusive of an approximately $52 million non-cash impairment related to potential sales of assets in our office segment. Each FFO and Core FFO were approximately $24.6 million or $0.62 per share on a fully diluted basis.

AFFO was approximately $24.8 million or, coincidentally, also $0.62 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 Q and in our supplemental. Given the $110 million 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 million to pay down our revolver, resulting in the following: total liquidity of approximately $336 million consisting of cash and available Revolver Capacity, a cash balance excluding restricted cash of approximately $213 million, and available Revolver Capacity of approximately $123 million.

We now have approximately $1.26 billion in Total Debt Outstanding, including $900 million of unsecured debt on our credit facility, reflecting the $100 million paydown subsequent to quarter end. The remaining approximately $360 million of debt is non-recourse secured debt. After deducting cash, our net debt would be approximately $1.048 billion, and our net debt to adjusted EBITDA RE would be 6.8 times. 88% of our debt is fixed, including the effect of our existing $750 million of interest rate swaps, which mature on July 1, 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 with a notional amount of $550 million. These swaps will take effect on the day our existing swaps mature.

The new swaps will convert SOFR to a weighted average fixed rate of 3.58% and are set to mature on July 1, 2029. For the first quarter, as previously announced, we paid a dividend of $0.225 per common share on April 17, and the Board of Trustees approved a dividend for the second quarter in the amount of $0.225 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.

Mike Escalante (CEO and President)

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?

Operator (participant)

Thank you, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove your question from the queue. Again, if you would like to ask a question, please press star and then one now. The first question that we have comes from Jana Galan of Bank of America. Please go ahead.

Jana Galan (Research Analyst)

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, kind of how should we think about the ranges in rent per acre in that segment?

Mike Escalante (CEO and President)

Good to have you on the call, Jana. We're not really providing guidance of that level. I think it's a little bit difficult given the variety of locations that we have there. I would say the one thing I would leave you with is that relative to the returns on costs that we've previously indicated and included in this go-round, we're comfortable, in essence, with the ranges that we provided. Some of them will be a little bit below. Some of them are going to be higher than our anticipated numbers. Our spend has typically been a little bit lower than we originally anticipated, at least at the outset. We do have a considerable amount of activity underway, so we're 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.

Jana Galan (Research Analyst)

Great. Thank you. Maybe if you could just kind of comment on additional acquisition opportunities, kind of what you're seeing in the market, seems like you have the liquidity to kind of move forward on more opportunities.

Mike Escalante (CEO and President)

Yeah, for sure. I mean, that's going to be a balancing act. I think we said strategically we've got to balance two things: growth, which is pretty important for us to catch or capture a good cost of capital. The second part is making sure that our leverage is within line. That's going to be a balancing act as we recycle capital out of our strategic disposition program and what that looks like going forward. I would tell you that our pipeline is good. It's full. We are seeing a lot of individual one-off deals, both marketed and through our relationships. We're also continuing to see portfolios. I guess it's no surprise that in taking on the assets that we took on, we have been concentrating and focusing on making sure that we hit our numbers on those pieces.

At the same time, we're out and active in the market looking at additional transactions. Stay tuned again in that regard. Very much a 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.

Jana Galan (Research Analyst)

Great. Thank you for taking my questions.

Mike Escalante (CEO and President)

Thanks, Jana.

Operator (participant)

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

Kathryn Graves (Equity Research)

Hi. Good afternoon. Thank you for taking my questions. My first—so can you hear me?

Mike Escalante (CEO and President)

Yeah. Hi, Kathryn.

Kathryn Graves (Equity Research)

Oh, great. Hi. As I remember, I think your leverage was about 7.9 times after the IOS acquisition, brought down to, I think, 7.5 times at the end of 2024. I believe you said you're at 6.8 times now. Can you just maybe remind us what your sort of target leverage is? I know you don't give guidance, but just sort of what you're thinking about the timeline of bringing your leverage down to a comfortable level.

Javier Bitar (CFO)

Hi, Kathryn. This is Javier. Thanks for being on the call. Yeah, the pro forma numbers that we presented after the acquisition was at 7.9, but the actual quarter end, as you noted there, was 7.5 and 6.8 now that we've completed these $110 million of additional sales subsequent to quarter end. We've said publicly that our target has been to be somewhere in the 6 times range or below, and that continues to be our current target leverage at this point.

Kathryn Graves (Equity Research)

Got it. Thank you.

Mike Escalante (CEO and President)

I would just add, Kathryn, I would just add that we've shown an ability to be at a fairly high number historically and through the recycling of capital and rejiggering our balance sheet, specifically the debt side of the equation. We've been able to do that. I think it was second quarter of last year we actually clipped 6 to 1 debt to EBITDA in a rough sense.

Kathryn Graves (Equity Research)

Got it. Thank you. That's helpful. My second question, you mentioned sort of either maintaining or accelerating the rate of office dispositions this year. I'm just wondering what will determine sort of how much you push the gas on those dispositions? Is there anything in the macro that you're paying attention to, or what's sort of the thought process there?

Mike Escalante (CEO and President)

Yeah. I think it's a case-by-case basis. We take what we can get from the marketplace in terms of disposition activity. I think in the public market, you have to always look at things and say your portfolio is for sale every day one way or another. We're not attached to anything. We're just trying to maximize shareholder value as best we can. Excited is probably too big of a word, but we have been able to achieve numbers that I think are far in excess of what the market's giving us credit for. The pricing of our stock sort of indicates that we should continue to do these types of things until the market understands exactly how we're underwritten.

The bottom line is that we think we've got a portfolio of properties that are desirable to investors and specifically to our tenants. We've said from the very beginning that we own assets that are important to our underlying tenants for whatever reason that might be: headquarters, regional headquarters, national headquarters, R&D facilities, key distribution facilities, whatever the heck it is. We've long considered our properties to be desirable in that sense. Looking at the percentage of transactions that have gone to our tenants, I think that original investment thesis has proven itself. We're seeing a fair amount of interest from our existing tenant base as well. We'll see how that all goes.

What is interesting at the moment is that the cost of capital for the corporates—and we have a pretty still high percentage of S&P 500-oriented tenants, if you will—their cost of capital on the debt side is advantageous as compared to the real estate investment side. All of that sets up pretty well for the comment as to why we think there might be a possible acceleration.

Kathryn Graves (Equity Research)

Got it. Thank you, Mr. Escalante.

Operator (participant)

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

Anthony Howe (Analyst)

Hey, guys. Congrats on the quarter. Mike, thank you for being Mike. In your prepared remarks, you mentioned that for office properties with more than a five-year term, are trading at 7.5%-12.5% cap rate on in-place NOI. 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 portfolio specifically or in general?

Mike Escalante (CEO and President)

Yeah. So we gave two metrics that really what we're seeing in the marketplace and I think relative to our own portfolio and success. We were trying to give you some, I don't know, I guess, goalposts by which to look at our portfolio through a lens that might provide you a little more clarity without giving you individual deal-by-deal guidance. The line of demarcation generally is around five years. The shorter 7.5% cap versus the 12.5% cap is generally going to come down to greater duration. You probably would be safe looking at a midpoint might be a way to look at it. The other part of the guidance we gave you was to say that if you have less than five years, a cap rate really doesn't apply.

It's really looking at the NPV of the remaining cash flow plus a residual value number. That even then provides a pretty wide range on a per sq ft basis. You can do a little bit of math in that sense. If you're closer to five years and have a very high rent, you're at least going to get paid for that. The residual values are arranged depending on the specific property, the specific market, the age of the asset, those types of things. Got it?

Anthony Howe (Analyst)

Yeah. That's very helpful. What's currently in the pipeline in terms of signed PSA or LOIs? Has the buyer pool for office assets been, or are you still seeing reasonably deep interests?

Mike Escalante (CEO and President)

I mean, reasonably deep enough to get it done. I mean, we've sold now over $2 billion worth of property, I think, since listing with them. I don't know what that date is. I think we've been one of the more active sellers of office. I think we've been one of the more successful sellers of office. I think people are surprised from time to time on some of the pricing that we get. I'm not going to tell you exactly what we have under PSA, but I would tell you that it has—I would tell you there's more and more people talking about office investment. I think, as I've said previously in previous quarters, this really comes down to finding the right buyer for the right asset at the right time.

We tend to look for people that are sharp shooters, have banking relationships on a local level, have existing balance sheets where they do not need to borrow. They can borrow after closing, things of that nature. You have that in combination with tenants that have very deep pockets. That is a pretty good, reliable—it has been reliable so far in going with them and their ability to close. Reliability is key in terms of how we are looking at buyers these days.

Anthony Howe (Analyst)

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

Mike Escalante (CEO and President)

Yeah. I mean, I think we have the vacancy that we have is related to what was the six redevelopment assets. We moved as a result of fully leasing the Everett property, our largest property. We moved that. We will be effectively moving that out of our redevelopment to our operating portfolio as part of that process. I mean, we're actively in discussions with a variety of tenants. Demand has not really changed from the time that we took properties over. We've changed a little bit of what we're doing on some of the properties, but I think we've benefited just like we benefited at Everett from not having to spend capital that we originally proformed, at least on the first go-round. That is playing out.

We are actually finding some demand from tenants who are willing to take the properties as is or virtually as is relative to what we could have spent in a particular situation. We have a couple of others that have a little more work going on to them. The interest level in what we are going to bring to market for those deals seems to be spot on to what we anticipated originally. So far, fingers crossed, knock on wood, we have not really seen any change.

Anthony Howe (Analyst)

Okay. Thank you, Mike. Really appreciate it.

Mike Escalante (CEO and President)

Yeah. No worries. Thank you for your time.

Operator (participant)

Thank you. 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 Michael Escalante for closing comments. Please go ahead, sir.

Mike Escalante (CEO and President)

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 make sure that we message a succinct story, and we are trying to make sure that we're delivering on that story as well. Stay tuned. We're very, 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.

Operator (participant)

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