Peakstone Realty Trust (NYSE:PKST) Q1 2024 Earnings Call Transcript

Peakstone Realty Trust (NYSE:PKST) Q1 2024 Earnings Call Transcript May 10, 2024

Peakstone Realty Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to 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. [Operator Instructions] 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: 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 ir@pkst.com 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 from those expressed in any 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 our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed with the SEC. We disclaim any obligation to publicly update or revise any forward-looking statements 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, EBITDA RE and adjusted EBITDA RE. 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 Escalante: Good afternoon, and thank you, for joining our call today. April 13th was our one 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 three 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 square feet 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 five-year, 81,000 square foot lease extension with MGM in Las Vegas, Nevada, with a 33% GAAP and 26% cash re-leasing spread. A five year 99,000 square foot lease extension with Northrop Grumman in Beaver Creek, Ohio, with a 23% GAAP and 5% cash re-leasing spread.

And a five-year 61,000 square foot 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 15-year 100,000 square foot 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 four 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 square feet. The properties were sold for a total of $23.4 million.

Aerial shot of a modern skyline with REIT building projects in downtown.

We also sold one manufacturing property totaling 660,000 square feet. 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 square foot 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 one 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: Thanks, Mike. We would first like to highlight the continued reduction of leverage for our consolidated portfolio, which resulted in a 6.2 times net debt-to-normalized EBITDA RE 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 11th 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 onto our balance sheet, as of March 31st, 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 EBITDA RE ratio is 6.2 times. Regarding our total outstanding debt, approximately 86% debt 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%. And 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 twenty two and a half cents 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 Escalante: 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 re-leasing 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 are 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?

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Q&A Session

Operator: [Operator Instructions] The first question comes from Josh Dennerlein with Bank of America. Please go ahead.

Farrell Granath `: 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?

Javier Bitar: Yes, sure. This was one of our leases in the 11th year. So we back-ended the rent abatement and that happened to occur in this last quarter for one of our industrial properties.

Farrell Granath `: And one thing, the 11th year is this the ending of their lease?

Javier Bitar: The ending of the original term. They’ve opted for a five year extension beyond that.

Farrell Granath `: 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 have closed last quarter?

Michael Escalante: So, hello Farrell, it’s Mike Escalante. Hope we can see one another out at NAREIT. So, we generally not commented 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 had 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, that came when it was current 7.6%, something like that. So, a little bit off.

Farrell Granath `: Okay. Thank you for that. And I guess, just when thinking about 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 cycling?

Michael Escalante: Yeah, I’m not sure I fully understand your question. But we have a legacy portfolio that has been very heavily weighted towards investment-grade tenancy. Our Industrial segment I guess, 74%, taken into consideration the three components of arriving at that and our Office segment is nearly 70% itself. So, Industrial and Office segment, which is more of our core holdings are just under 70% combined. We are more active seller in our Other segment, and that segment is only 42% investment-grade across the properties that’s remaining and you can see that on slide 5 of – I think it’s in our IP. And 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. So I think if that answers your question, if not, do you have a follow-on?

Farrell Granath `: No, no, that’s great. Thank you. That’s it for me.

Michael Escalante: Thank you.

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

Michael Escalante: 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 marketplace. And I think the performance that we’ve achieved, both on the leasing on 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 time and attending the call. We’ll see on the next turn. Operator?

Operator: This concludes today’s teleconference. You may disconnect your lines at this time.