Peakstone Realty Trust - Q3 2024

Transcript

Operator (participant)

Good afternoon and welcome to Peakstone Realty Trust's Q3 2024 Earnings Webcast. All participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press the star key and then zero on your telephone keypad. Please note that this event is being recorded. I would now like to turn the conference over to Senior Vice President of Corporate Finance and Strategy, Mikayla Lynch. Please go ahead, ma'am.

Mikayla Lynch (SVP of Corporate Finance and Strategy)

Thank you. Good afternoon, and thank you for joining us for Peakstone Realty Trust's Q3 2024 Earnings Call and Webcast. Earlier today, we posted an earnings release, supplemental, and an 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 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 forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, and is 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 could 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 and any subsequent quarterly reports 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, 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 normalized EBITDAre. You can find a tabular reconciliation of these non-GAAP financial measures to the most directly 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 Escalante (CEO and President)

Good afternoon, and thank you for joining our call today. The company had a very productive Q3. We successfully amended and extended our credit facility, generated positive leasing outcomes, continued to sell office assets, and fully exited our office joint venture. These accomplishments are the direct results of our team's exceptional ability to navigate the complex market environment. With a firm foundation established, we are excited to explore areas for industrial expansion. As I announced last quarter, in July, we achieved a key milestone: successfully amending our unsecured credit facility. As a result of this amendment, we extended our debt maturities and lowered our borrowing costs, and most importantly, we have a sustainable capital structure that positions us well for future growth.

At the end of the quarter, our high-quality, well-located industrial segment had a WALT of 6.3 years, 100% economic occupancy, 58% investment-grade tenancy, and a potential 24% mark-to-market opportunity. Our high-quality, newer vintage office segment had a WALT of 7.2 years, 99% economic occupancy, 60% investment-grade tenancy, minimal near-term rollover in the next two years, with only 4% of ABR expiring through 2026, and newer buildings with minimal near-term capital requirements. We have nearly completed the disposition of our other segment assets.

The other segment now accounts for approximately 10% of our portfolio ABR and only 8% of our portfolio NOI. All remaining other segments are in the market for sale, and we are still aiming to close on the sales of these properties by year-end. However, we do not fully control the timing. In the quarter, we sold four properties totaling 338,000 sq ft for approximately $40 million.

We sold three assets from our other segment for $32.2 million, and we sold one asset from our office segment for $7.6 million. With this sale, we have eliminated our 2024 lease expirations in this segment. In addition to these closed sales, at quarter-end, we had four other segment assets classified as held for sale. Now, turning to leasing, we continue to showcase our strategic expertise by achieving strong, positive leasing activity this quarter. The resulting favorable pre-leasing spreads are a testament to the demand for our properties in the market. In the industrial segment, we addressed our sole 2025 lease expiration by executing a 10-year, 121,000 sq ft lease extension at our property in Auburn Hills, Michigan. This extension takes effect October 1, 2025. The terms result in a 41% GAAP and 20% cash pre-leasing spread.

As part of the extension, the rent escalations were increased to 3% annually from 1.75% previously. In the other segment, we executed a two-year, 27,000 sq ft new lease, which commenced in September 2024 at one of our properties in Las Vegas, Nevada, at a 75% GAAP and 71% cash pre-leasing spread. With that, I'll turn over the call to Javier to review our financial results. Javier?

Javier Bitar (CFO)

Thanks, Mike. I'd like to begin by sharing a few highlights of our financial results for the quarter. Total revenue was approximately $55 million, and NOI was approximately $44 million. Net loss attributable to common shareholders was approximately $24.4 million or $0.67 per share, inclusive of an approximately $43 million in non-cash impairment related to potential sales of assets in our other segment. Same-store cash NOI was approximately $42 million, a 0.9% decrease compared to the same quarter last year. But for a continuing rent abatement in the 11th year of a pre-existing lease in our industrial segment, same-store cash NOI would have grown by 1.6%. The abatement period for this lease continues through November 2024.

FFO, as defined by NAREIT, was approximately $23.1 million or $0.58 per share on a fully diluted basis, and AFFO was approximately $25.7 million or $0.65 per share on a fully diluted basis. Moving on to our balance sheet at quarter-end, our cash balance was approximately $242 million. Most of this cash was invested in money market accounts, which generated approximately $3.1 million of interest income in the quarter. Available revolver capacity was approximately $157 million. Total liquidity was approximately $399 million, providing us with ample liquidity and flexibility to support our industrial growth initiatives. We had approximately $1.2 billion of total debt outstanding, comprised of $750 million on our credit facility, with the balance being non-recourse secured mortgage debt. Our total debt outstanding decreased by $231 million quarter-over-quarter as a result of the following activity.

As part of the amendment and extension of our credit facility, we paid down $200 million, including a paydown of $190 million on one of our term loans and a reduction of $10 million on our revolver balance. We fully paid off our $17 million Pepsi Bottling Ventures mortgage loan, and the AIG loans in our other segment were paid down by $14 million with proceeds from asset sales. After deducting for cash, our net debt was approximately $941 million. Including the effect of our interest rate swaps, 100% of our debt has fixed rates, and our weighted average interest rate for all debt, secured and unsecured, was 3.95%, and our net debt to Normalized EBITDAre ratio was 6.2 times. During the quarter, we transferred our interest in our office joint venture and fully exited this investment.

If you recall, in the Q3 2023, we took a complete write-off of this investment, and therefore there was no gain or loss on this transaction. For the Q3, we paid a dividend of $0.225 per common share on October 17th, and the Board of Trustees approved a dividend for the Q4 in the amount of $0.225 per common share that is payable on January 17th to holders of record on December 31st. While the company expects to continue paying dividends on a quarterly basis, all future dividend decisions will continue to be made by the Board of Trustees. With that, I will pass the call back to Mike.

Michael Escalante (CEO and President)

Thank you, Javier. Building on our past successes, we are strategically positioned to capitalize on opportunities in the industrial real estate market. We are optimistic about the future of the industrial sector, projecting that longer-term favorable tailwinds will persist. We will now turn the call over to the operator to take a few questions from analysts. Operator?

Operator (participant)

Thank you, sir. Ladies and gentlemen, we will now be conducting the question-and-answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 to leave the question queue. For participants making use of speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Joshua Dennerlein of Bank of America. Please go ahead.

Farrell Granath (Equity Research Analyst)

Good evening. This is Farrell Granath on behalf of Josh. I wanted to ask, you made a comment about the industrial expansion and how that would be a kind of plan going forward. So I was wondering if you could characterize maybe some of the hurdles that you would be looking to overcome or different benchmarks to reach before you turn to the offensive and entering more into an expansionary process into more industrial.

Michael Escalante (CEO and President)

Thanks, Farrell. So relative to that, I think we've been messaging that for quite some time now. But the truth of the matter is that we've been looking at doing all the things that we've been doing since listing, right? So we've identified that we wanted to reach a deleveraging marker that was 6:1 debt to EBITDA, and we were able to affect that, obviously, starting in Q2. Or not starting, but we effectively got to a 5.9 time ratio as of Q2 of this last year. We are continuing to create positive cash flow out of the portfolio, and we keep looking for opportunities to, in essence, outperform the market relative to what people are thinking relative to office valuations.

I think the performance that we've been able to achieve, both on a leasing and a sales side on the office, has been quite good and far in excess of the valuation that people are giving us. So all of this is sort of setting up the portfolio for our purposes to eventually make the lean in the direction of industrial, which, again, as we've stated, as far as we're concerned, in spite of some minor headwinds that are occurring right now on the supply side and some specific markets, overall, we think the fundamentals associated with industrial going forward are quite good. I think we're also quite happy with the fact that the market has given us back an opportunity, if you will.

Cap rates have moderated over time. In 2021, they were quite low, maybe extremely low, overly low, and are much more normalized today.

We've fixed our cost of debt capital. We've got some longevity there. The portfolio has really a sustainable capital structure for the foreseeable future. We like our cost of debt capital relative to what we think we're seeing in the marketplace in terms of our ability to buy in terms of going in cap rates. Then ultimately, what the stabilized values will be or yields would be as a result of sort of the below-market rent rolls that you see sort of predominantly in the industrial marketplace. We're quite active in looking, and we've created a lot of dry powder in taking care of everything that we think we need to do. We're looking through the front of the vehicle now instead of out of the back of the vehicle.

Farrell Granath (Equity Research Analyst)

Definitely. Great. Thank you. And just one more. So you've had strong re-leasing spreads coming into for your industrial segment. I was curious to know, how are you seeing those conversations play out? I think there was a slight decrease to the top end of your escalators just from last quarter. I was curious if that's either a trend or if you're seeing kind of more strength in kind of the re-signing of these leases.

Michael Escalante (CEO and President)

I mean, as you know, we don't have a lot of data points because our portfolio is extremely strong in terms of its occupancy and the lack of rollover in any of our core segments, really, if you will, industrial and office. So not a lot of data points to work off. But I think, frankly, we've been very pleased with what we've been able to achieve.

And the numbers that we got in terms of rent escalators on the one executed 10-year deal that we did in Auburn Hills, Michigan, I think our annual escalators went up from what was a 1.75% number to 3% in that lease. So it's a pretty dramatic increase in terms of our ability to increase rents there. And so I don't know what you were specifically referring to, but I feel like the one thing we did do was quite positive.

Farrell Granath (Equity Research Analyst)

Great. Yes. Thank you very much. That's it for me.

Michael Escalante (CEO and President)

Okay. Thank you again, Farrell. Operator.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes our Q&A session. I will now hand over to the CEO, Michael Escalante, for closing remarks.

Michael Escalante (CEO and President)

Thank you once again for your support and interest in our firm. I think we're continuing to do everything that we said we would do at the time of listing. We're quite pleased with.

Speaker 5

I didn't even allow that, but.

Michael Escalante (CEO and President)

Excuse us. Brad, you're coming through. So sorry for that interruption. So I'll just restate. Thank you for joining us today. I appreciate your interest in our organization and very, very pleased with the performance of the organization from listing through today. I'm very excited about the future for the company as we lean into industrial. Thank you for that. Operator, conclude the call.

Operator (participant)

Thank you, sir. Thank you. That concludes today's event. Thank you for attending and you may now disconnest your line.