Peakstone Realty Trust (PKST) 2024 Q4 法說會逐字稿

Greetings and welcome to Peakstone Realty Trust fourth-quarter 2024 earnings webcast conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Steve Smith, Investor Relations.

Thank you, Mr. Smith.

You may begin.

Good afternoon and thank you for joining us for Peakstone Realty Trust fourth quarter 2024 earnings call and webcast.

Earlier today, we posted an earnings release, supplemental, and updated investor presentation the investor's 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 that could cause actual results to differ materials.

For a further discussion of risks related to our business, please see our annual report on Form 10k and subsequent filings with the SEC.

Additionally, on this call, the company may refer to certain non-gap financial measures such as funds from operations, adjusted funds from operations, EBITDARE, and normalized EBITDARE.

You can find a tabular reconciliation of these non-gap 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 to Mike.

Good afternoon and thank you for joining our call today.

The company had an extremely successful fourth quarter and full year.

Significantly advancing our strategic plan to shift our portfolio towards industrial.

With our industrial ABR now comprising nearly 40% of total AVR.

Over the course of the year we acquired a Premier 51 property.

Infill industrial outdoor storage or IOS portfolio for $490 million.

We divested $317 million of non-core assets, including the elimination of the entire other segment.

We achieved strong leasing activity with favorable leasing spreads, highlighting the strength of our operational capabilities.

And we took another pivotal step in strengthening our capital structure with the amendment and extension of our credit facility.

We were excited to enter the IOS subsector.

IOS properties have a low building to land ratio or low coverage, which maximizes yard space for the display, movement, and storage of materials and equipment.

This subsector is characterized by fragmented ownership, significant supply constraints, compelling operating fundamentals, and minimal CapEx requirements.

Importantly, IOS assets complement our traditional industrial assets which include distribution warehouse, and light manufacturing properties.

These asset types share similar market dynamics, tenant profiles, lease structures, and asset management responsibilities.

The premier in-field IOS portfolio we acquired in the 4th quarter.

As a 70% mark to market opportunity with the potential to achieve incremental yields as we stabilize the six redevelopment properties.

This portfolio significantly enhances the company's growth profile.

With substantial opportunities for sustained growth in the IOS subsector and our team's unique IOS expertise, we plan to concentrate our investment strategy on these types of assets which we believe will drive long term shareholder value.

Turning to our dispositions, I'm very pleased that we achieved our stated goal of disposing of our other segment assets by year end 2024.

In the 4th quarter, we sold the remaining 10 assets in that segment, completing this important milestone.

For the year, we sold a total of 19 assets for $317 million including 17 other segment properties and 2 office segment properties.

One of the key reasons our office property dispositions have been so successful is that our office buildings are generally newer vintage and contain functions that are central to tenant operations.

Given these attributes, many of our tenants have expressed interest in purchasing the properties they lease, and we have been successful in closing these types of transactions.

In 2024, tenant purchases accounted for approximately 44% of our gross disposition proceeds as we continue to do our best non-core assets in 2025.

We will maintain a strong focus on engaging with tenants as potential buyers of our properties.

Moving to leasing activity, we had a successful year marked by strong results.

We leased a total of approximately 837,000 square feet with a weighted average lease term of 4.5 years and achieved favorable releasing spreads, 32% on a GAAP basis and 23% on a cash basis.

Several of these leases were for other segment assets that were sold shortly after the leases were completed.

In these cases, we strategically structured the leases to maximize potential sales proceeds and minimize out of pocket leasing costs incurred prior to the anticipated sale date.

Our solid leasing activity for the year highlights our operational expertise and reflects the continued strong demand for our properties in the market.

As a result of our acquisition, disposition, and leasing activities in 2024, our portfolio had the following key characteristics at year end.

We owned a total of 103 properties reported in two segments, industrial and office.

Our portfolio consisted of 97 operating properties and 6 redevelopment properties, which are properties we have designated for redevelopment or repositioning.

Our operating portfolio includes 64 industrial segment properties made up of 45 IOS locations and 19 traditional industrial assets.

These properties span 18 states, 31 markets, and roughly 58% concentrated in coastal and sunbelt markets.

Our industrial segment ABR now accounts for nearly 40% of our total ABR, up from 25% at the beginning of 2024.

Looking at our IOS assets specifically.

The 45 IOS properties are approximately 100% leased with 47% investment grade tenancy.

A walt of 4.4 years and a potential 70% mark to market opportunity.

And our traditional industrial assets are 100% leased with 58% investment grade tenancy, a walt of 6 years, and a potential 24% market market opportunity.

Our operating portfolio also includes 33 office segment properties which are 99% leased with 60% investment grade tenancy and a walt of 6.9 years.

These buildings are generally newer, with an average age of 12 years and have minimal near term capital requirements.

This segment has limited near-term rollover with only 1% of the office segment AVR expiring in 2025 and 18% expiring over the next 3 years.

Our redevelopment portfolio consists of 6 industrial segment IOS assets encompassing 82 usable acres across 4 states with targeted stabilized yields in the 7.5% to 8% range.

Additional details about our redevelopment properties are provided in our quarterly supplemental.

With that, I will turn the call over to Javier, who will review our financial results and capital markets activity.

Javier?

Thanks, Mike.

I'd like to begin by sharing a few highlights of our financial results for the quarter.

Total revenue was approximately $58 million and cash NOI was approximately $48 million.

Net income attributable to common shareholders was approximately $12.7 million.

For $0.35 per share.

FFO was approximately $29.2 million or $0.74 per share on a fully diluted basis.

AFFO was approximately $25.6 million or $0.65 per share on a fully diluted basis.

And same store cash NOI was approximately $39 million a 0.4% increase compared to the same quarter last year.

Same store NOI for our industrial segment was primarily impacted by a continuing renovatement in the 11th year of a pre-existing industrial segment lease, which ended in November 2024 and a one-time reversal of non-tenant reimbursement income.

But for these items, same store cash NOI would have grown by 2.8%.

For full year 2024, AFFfo was approximately $106.6 million or $2.69 per share on a fully deleted basis.

And thanks to our cash NOI for the overall portfolio was approximately $154.9 million.

Moving on to our balance sheet.

As of December 31st, total liquidity was approximately $229 million consisting of cash and available revolver capacity.

Our cash balance, excluding restricted cash, was approximately $147 million and we earned approximately $1.5 million of interest income in the quarter.

Available revolver capacity was approximately $82 million.

Before reviewing further debt metrics, let me first walk you through the evolution of our debt structure throughout the year.

As we began 2024, we focused on strengthening our capital structure, with a key initiative being the successful amendment and extension of our credit facility.

During the first half of the year, we further reduced our net debt to normalized EBITDARE from 6.2 times at the start of the year to 5.9 times at the end of the second quarter.

And we retained excess cash to manage our operational needs and continue our strategic engagement with our banking partners.

In the 3rd quarter, with the assistance of our highly supportive bank group, we executed a beneficial amendment and extension.

Through this amendment, among other things, we extended over $750 million of near-term maturity to 2028 and incorporated updated covenants which facilitate asset dispositions and enable IOS properties to be added to our borrowing base.

In connection with this amendment, we entered into new forward starting, floating to fixed interest rate swaps with a notional amount of $550 million.

These swaps will take effect on the maturity date of our existing $750 million of swaps, which is July 1, 2025.

They mature on July 1, 2029 and have the effect of converting sulfur to a weighted average fixed rate of 3.58%.

The amendment also resulted in a more favorable valuation of the industrial assets, including IOS in our borrowing base, and the new swaps assured a competitive interest rate, making this financing both cost effective and essential for executing our growth and deleveraging strategies.

In the fourth quarter, our lenders continued to support our growth plan, allowing us to utilize the accordion feature in our credit facility to secure a new $175 million term loan.

The term loan matures in 2028, inclusive of the extension option and is priced at Sofer plus 175 basis points based on our consolidated leverage at the end of the year.

Proceeds from the term loan were utilized to acquire the IOS portfolio Mike mentioned earlier.

On the secured debt side, following the sales of the other segment assets, we extinguished all associated AIG debt, which had a remaining balance of $183 million.

Additionally, we added three separate mortgage loans totaling $110 million at a weighted average interest rate of 5.64%.

These loans are secured by our traditional industrial properties, with two maturing in 2029 and one maturing in 2032.

As a result of these actions, our year-end debt metrics were as follows $1.36 billion in total debt outstanding with $1 billion of unsecured debt on our credit facility and the remainder in non-recourse secured mortgage debt.

After deducting cash, our net debt was approximately $1.2 billion and our net debt for normalized EBITDARE ratio was 7.5 times.

Including the effect of our interest rate swaps, 82% of our debt was fixed, and our weighted average interest rate for all debt secured and unsecured at year end was 4.4%.

For the fourth quarter, as previously announced, we paid a dividend of $22.5 per common share on January 17th.

And the board of trustees approved a dividend for the first quarter in the amount of $22.5 per common share that is payable on April 17th to holders of record on March 301.

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.

Thank you, Javier.

Looking ahead, we remain focused on maintaining a disciplined approach to our debt levels.

Our revolving credit facility provides flexibility to adjust debt as needed, and we are well positioned to pay it down through proceeds from non-core asset sales.

Additionally, we have the capital flexibility to pursue strategic IOS acquisitions, providing us with a competitive advantage as we seek to expand our portfolio and further improve our growth trajectory.

We are confident in our ability to continue driving long-term growth and value creation, and we look forward to another successful year ahead.

We will now turn the call over to the operator to take a few questions from analysts.

Operator?

Thank you We will now be conducting a question-and-answer session.

(Operator Instructions)

Farrell Granath with Bank of America.

Hi, good evening.

Thank you for taking my questions.

I first wanted to get a few comments on your appetite when looking forward to acquisitions in either having a mix of the IOS or traditional industrial type properties that you already have in your portfolio.

Is there one way that you're leaning and also what type of price differential or competition are you also seeing in the market?

Thanks for joining us, Ferrell.

It's good to hear you.

So as we sit here today, the mix that we find most compelling is really related to IOS.

While IOS cap rates of, I would say, come closer to traditional industrial, they certainly are still, there's still a GAAP in there, and then I think when you look Overall, at the embedded growth in the IOS portfolios, we're finding that there's just a better dynamic going on there.

So for the for the moment, overall we're saying that we're investing in industrial but primarily our focus is on the IOS assets.

Okay, thank you.

And also just following up on your comment about capital recycling, and the focus on the office portfolio, I was curious if you are receiving any direct inbounds and you're seeing any further appetite, especially as news around office has turned a little bit lighter.

A lighter I mean you mean better?

Yes.

Okay.

Yeah, I think one of one of the things that we're seeing, I guess there's two things that are out there.

What we're finding in terms of interest.

Is really at the local level, local sharpshooters, specialists in a specific location that already have a presence in the marketplace are finding prices today to be very much of an appeal to them.

And then I think the second thing that we're seeing and if you look at what we were able to do in the last year.

I think 44% of our gross proceeds came from existing tenants.

Indoor tenants from, who are coming in as users to take over property.

So there's an arbitrage that exists in terms of the credit cost to, the types of tenants that we have which are Fortune 500 tenants of large, larger, more credit worthy tenants.

And they have they have an ability to finance the projects at a significant differential to the investors or traditional investors, institutional investors.

So I would say those are the two themes.

I think everyone is largely hopeful with a significant, at least publicized return to office that, the demand side is going to come back there.

Great.

And just one more for me, just kind of thinking more on the internal growth side.

I noticed that and you made a few comments about lease expirations coming up more in 2026 and further out years.

Is there a key focus more on being able to push the rates on lease escalators going forward and any new lease renewals and how are those negotiations going?

So as we identified in our acquisition of the IOS portfolio, we have 5 opportunities in the redevelopment, subsegment, if you will.

Where we are actively out repositioning those assets in some way, shape, or form, and the leasing activity has been quite good.

The 6th asset is a ground up redevelopment, so that's sort of a different animal, but I think that along with some of the discussions that we have with our existing tenants tenants who have some.

Lease expirations coming up in the next couple of years.

I think we're we're pretty excited about what's what we're seeing on both ends just in terms of the uplift in rents anomaly and then also the embedded growth rate within the lease term itself.

So stay tuned.

We've got a lot of work ahead of us, but most of our projects are underway and definitely in the marketplace and a lot of interest for those properties.

Great, thank you so much and congratulations on the quarter.

Thanks.

Michael Goldsmith, UBS.

Good afternoon.

Thanks a lot for taking my question.

First question relates to the proceeds from the sale of the other segment.

Like, how should we think about how you're going to be using this?

Seems like, the comments from the press release indicate you could be using it to pay down debt or to make targeted IOS investments just trying to get a little bit more color on how we think, how you guys are thinking about, debt repayment versus continued investment.

Thanks.

Hey Michael Javier, the majority, or almost 2/3 of the proceeds from the sales were dedicated to pay off the AIG debt, so we're fully extinguished there, and there was also one smaller loan of approximately $11 million that got paid off as part of that.

Yeah, the sales proceeds there, the balance, it did go to increase our cash balance over the year and and really on a net debt basis improved our leverage slightly.

Even though we, as you saw in the filings, we levered up a bit for the acquisition itself, but we'll continue to focus on leverage, we did complete the second quarter down to 5.9 times.

We're up to 7.5 times as a result of the acquisition.

So we'll be, we're really.

Look at, proceeds from sales going forward on a balanced, approach, looking at leverage and strengthening the balance sheet and also, focused on growth.

Thanks for that and as a follow up, it sounds like you're continuing to to look at divesting non-core assets, do you define non-core assets as as the office assets or does that also include some of the traditional industrial, assets as well.

Yeah, I think, by the way, thanks for joining us, Michael, and I appreciate you picking us up in coverage.

I think from our perspective, certainly, Really our approach is maximizing value.

And I think in today's world when you look at the returns that are coming out of office.

The rollover exposure and the cot and the CapEx exposure, those sorts of things, put a pretty heavy weight on Office.

So from that perspective, I think that that would be the the larger component of our of our non-core asset pool if you will.

Got it.

And maybe just one last one for me.

10% of your industrial ABR is set to expire in 2026.

So do you just have a sense of how likely tenants are to renew?

Are you starting to have those conversations and and what are the conversations like with your current tenants?

Thanks.

Yeah, we have, we don't really have a We don't, we probably don't have enough rollover, but to get the growth that we want to see, but we have been in discussion.

Relative to the exposure there and so far everything we're hearing has been positive, but it's still a little bit early.

Not quite, we're not quite there in terms of timing.

Great.

Thank you very much.

Good luck in 2025.

Thanks, Michael.

Thank you, Michael.

Anthony Howe, Truist securities.

Hey guys, congrats on selling the other segment, and, you guys done a fantastic job in 2024.

Just one quick question for you, Javier.

You mentioned that like, two third of the proceeds from the sale of the other segment went towards paying down the AGI loan, right?

But when I checked the supplemental in the 3rd quarter, HGI loan was, had an outstanding balance of $183 million.

Just curious, like what, like, can you help me bridge the GAAP?

Yeah, I think I just said generally two third of the balance was $183 million at the end of the third quarter, but if you look at the beginning of the year, I think we were in the $200 million dollar range.

I believe I think we started in the $212 million dollar range.

Gotcha.

But you mentioned that two third of the $190 million went towards paying down the ACI loan.

So how did they go from that would be.

Yeah.

I'm sorry, it was of the $317 million total sales proceeds for the year.

That's what I meant to say.

Gotcha.

Okay, that makes a lot more sense.

Okay, yeah, I'm sorry about that.

No worries.

What do you think, like, you guys, I think you're net that to that right now like the 7.

What do you guys want it to be by your end?

I think you know we we've quoted since the time that we listed that we would be aiming for 6 to 1 ratio and last year as evidence of that, we got down to 5.9. I think if you look back, Anthony, at everything that we've done.

Really before listing and leading right up to the end of this year.

I mean we we've sold over $2 billion of assets in the last two years.

We exited the joint venture, the office joint venture, and then we've completed the sale of the other segments.

We've really pushed at the same time, we've moved the percentage of the AVR that's attached to industrial as we indicated, so I think.

We have a proven track record of reducing leverage.

We, nothing's going to be linear, but we have our eyes on the ball to, in essence balance very effectively continued growth with a deleveraging, and we, I think we have all the tools and the tools in order to do it and you've seen us have a commitment to deliver on that type of numbers.

Okay.

And just one last question, Have you guys started marketing the office portfolio, and just curious like what are you seeing in terms of buyers demand or interest in those assets?

Yeah, I mean, we have properties that are on the market and we have properties that are just getting inbound inquiries.

I would say that we feel, I, we've talked about this in the past on these calls and and in person.

I don't know what this year is going to bring us, but I think as Ferrell referred to it feels more positive than it than it has in the past.

I don't know that we're going to see portfolio buyers necessarily.

The debt markets are still a little bit jaundiced.

I think most of the CMBS.

Offerings on a conduit basis will allow something in the, 10% was sort of the norm last year I heard a quote in the last couple of days from somebody that said that maybe that's pushing up to 20%.

So there is some sort of loosening going on on the debt side, and I think that will push forth into the demand for buyers, going forward if that if that effect will.

Thank you.

Thank you.

This concludes our today's teleconference.

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Thank you for your participation.