Peakstone Realty Trust (PKST) 2025 Q3 法說會逐字稿

Good day and welcome to Peekstone Realty Trust's 3rd quarter of 2025 earnings call on webcast.

All participants will be in a listen-only mode, and should you need any assistance, please send my conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and 1 on your telephone keypad. If you withdraw a question, please press star, then 2. Also, please be aware that today's call is being recorded.

I would now like to train call over to Steve Sweat investor relations. Please go ahead.

Good afternoon and thank you for joining us for Peakstone Realty Trust's 3rd 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 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 materially.

For a 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 or funds from operations, adjusted funds from operations, EBITDA, adjusted EBITDA, and same store cash net operating income.

You can find a tabular reconciliation of these non-GAAP financial measures to the most currently comparable GAAP numbers in the company's earnings release and filings with the SEC. On the call today are Michael Escalante, CEO and President, and Javier Bitar, CFO. With that, I'll hand the call over to Michael.

Good afternoon and thank you for joining our call today. Our strategic transformation into an industrial only REIT focused on growth in the industrial outdoor storage sector continues to advance.

As of October 31st, our industrial portfolio generates more than 60% of our ABR. Through disciplined office sales, strong IOS leasing, and targeted IOS acquisitions, we have strengthened our balance sheet, reducing debt by approximately $450 million and improving total leverage to 5.4 times on a pro forma basis. With solid liquidity and a growing IOS investment pipeline, we remain confident in our strategy and our ability to continue creating value for shareholders.

During and after the 3rd quarter, we continued making progress on our office dispositions. As of October 31st, we've sold 12 office properties totalling approximately $363 million leaving just 12 remaining office properties in our portfolio.

Buyer interest, including from existing tenants, has been strong, and we expect to complete the sale of a majority of these properties by the end of this year, with a few transactions potentially closing in the first quarter of 2026.

Let me now turn to our IOS portfolio where market fundamentals remain solid, characterized by strong tenant demand and persistent supply constraints. These dynamics continue to keep vacancies low and support healthy rent growth. Against that backdrop, we continue to deliver strong results across both our IOS operating and redevelopment portfolios.

During the quarter, we executed new leases, renewals, and proactive lease modifications across our IOS portfolio, generating more than $1 million of incremental IOS ABR. These transactions brought the IOS operating portfolio to 100% leased and overall achieved weighted average releasing spreads of 116% on a cash basis and 120% on a GAAP basis.

Let me provide more detail on the transactions that drove these results. In Philadelphia, we signed a new 8- year lease for 1.6 usable acres that is expected to commence in the first quarter of 2026 following the completion of landlord improvements.

The lease includes 7.7% average annual rent escalations and filled what has been our only vacancy in the IOS operating portfolio. In Houston, we executed a new 5.1-year full site lease for 10 usable acres. The prior lease was set to expire in 2028 and included a below market fixed rate renewal option. The capture embedded value, we proactively terminated that lease and simultaneously replaced it with a new lease at releasing spreads of 9% on a cash basis and 7% on a GAAP basis. The new lease includes 3.5% annual rent escalations.

And in Norcross, Georgia, we proactively downsized the existing tenant, renewing them for 2 years and simultaneously signing a new 2-year lease for the remaining acreage, keeping the 8.7 usable acres fully leased. Together these transactions produce strong releasing spreads of 239% on a cash basis and 251% on a GAAP basis with Weighted average annual escalations of 3.3%. In our IOS redevelopment portfolio, we executed a full site lease at our property in Savannah, Georgia, which commenced in July. The lease, which delivers over $500,000 of incremental ABR with 4% annual rent escalations was previously disclosed.

Overall, this performance highlights our ability to drive internal growth and capture the market-to-market opportunity within our IOS portfolio. We intend to build on this progress as we advance our strategy. Turning now to acquisitions, let me briefly describe the three IOS properties we acquired this quarter for a total of approximately $58 million. The Atlanta property is a 27 usable acre site acquired for approximately $42 million. At closing, it was 100% leased by two tenants with a 5 year walt and 3.8% weighted average annual rent escalations.

The Port Charlotte property is a 9.2 usable acre site acquired for approximately $10.4 million. At closing, it was 100% leased by three tenants with a 6.8-year wall and a 3% weighted average annual rent escalations. Both of these latter acquisitions were previously disclosed. Our third acquisition was a 2.5 usable acre site in Fort Pierce along Florida's east coast.

We acquired the property for $5.3 million. It includes upgraded yard space and a newly renovated building that supports yard operations. The site is fully leased by a single tenant that utilizes it to store and distribute HVAC and plumbing supplies. The lease has a remaining term of approximately 10 years and includes 2.5% annual rent escalations.

Now turning to our traditional industrial portfolio. This quarter, as part of our ongoing portfolio optimization, we sold 3 properties for approximately $72 million. These assets, 2 Flex properties and 1 manufacturing facility, are located in Baltimore, Detroit and Cleveland markets.

And we sold at a combined cap rate of 6.9%. Each asset was sold to a long-term net lease focused buyer. These transactions reflect our continued effort to enhance the overall quality of our traditional industrial portfolio. We remain disciplined and opportunistic in managing these assets consistent with our approach across all of our real estate. Going forward, we do not anticipate broad sales activity within our traditional industrial portfolio, and with that, I'll turn the call over to Javier to walk through our financial results and capital markets activity. Javier.

Thanks, Mike.

To begin, I'd like to explain a nuance to our reporting this quarter. The 16 remaining office properties we owned as of September 30th, all of which were classified as held for sale. And 11 of the office properties we sold prior to that date were classified as discontinued operations. As a result, these assets and related results are reported separately on our financial statements for all periods presented.

Now I'll cover several key financial highlights for the quarter before turning to a few pro forma metrics that reflect activity completed after quarter end. For the quarter, total revenue was approximately $25.8 million from continuing operations, which excludes revenue from office discontinued operations of approximately $25.2 million. Net income attributable to common shareholders was approximately $3.5 million or $0.09 per share.

AFFO was approximately $18.3 million or $0.46 per share on a fully diluted basis. For AFFO was approximately $19.1 million or $0.48 per share on a fully diluted basis. AFFO was approximately $18.6 million or $0.47 per share on a fully diluted basis, and same store cash NOI increased 3.7% compared to the same quarter last year.

Moving on to our balance sheet.

At quarter end, total liquidity was approximately $438 million consisting of cash and available revolver capacity. Our cash balance excluding restricted cash was approximately $326 million. An available revolver capacity was approximately $112 million.

We had approximately $1.05 billion of total debt outstanding consisting of $800 million of unsecured debt on our credit facility and the remainder being non-recourse secured mortgage debt.

After deducting cash, our net debt was approximately $725 million. As the quarter ends, 76% of our debt was fixed, including the effect of our forward starting floating to fixed interest rate swaps totaling $550 million which converts sulfur on our unsecured debt to a fixed rate of 3.58%. These swaps took effect July 1st of this year and will remain in place through July 1st, 2029 unless we choose to terminate them in connection with future debt paydowns.

After giving effect to these swaps, our weighted average interest rate for all debt, both secured and unsecured, was approximately 5.46%. Next, I'd like to mention the impact of certain post quarter activity.

Subsequent to quarter end, we utilize proceeds from office dispositions to pay down an additional $240 million on our unsecured credit facility. On a pro forma basis after giving effect to this paydown and other post quarter activity, our total debt outstanding is $811 million. Our net debt is $615 million. Our total liquidity is $420 million and our net debt to adjust to the EARE ratio is approximately 5.4 times. Which is below our target level of 6 times.

Additionally, we want to provide some clarity around the timing, amount, and use of proceeds from our remaining office sales. As Mike mentioned, we expect to complete a majority of these sales by the end of this year. With a few transactions potentially closing in the 1st quarter of 2026. Total proceeds from these transactions are expected to range from $300 to $350 million and we intend to further strengthen our balance sheet by using approximately $250 to $300 million of those proceeds to pay down debt.

Finally, for the 3rd quarter, as previously announced, we paid a dividend of $0.10 per common share on October 17th. The board of trustees also approved 1/4 quarter dividend in the amount of $0.10 per common share that is payable on January 19th to shareholders of record on December 31st.

With that, I'll turn the call back over to Mike.

Thanks, Javier.

This quarter marks another milestone for Peakstone. With industrial assets now generating 60% of our ABR.

Our strategy remains focused on growth in the IOS sector, supported by strong supply and demand fundamentals. Our IOS market insight, tenant relationships. And execution capabilities position us to capture opportunity, drive growth, and create value for our shareholders. With that, we'll now open the call for questions.

Operator.

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your headset before pressing the keys. And to withdraw a question, please press star, then 2. At this time, we'll pause just momentarily to assemble our roster.

And our first question here will come from Dan Boeh with Bank of America. Please Go ahead.

Hey guys, thanks for taking my question. From the prepared remarks, it sounds like you will pay down an additional $250 to $300 million of debt. When should we expect an acceleration IOS acquisitions or our current levels a good run rate for that?

Yeah, so I, Dan, thanks for joining the call. I think that the reality of what we have right now is, as you can tell and mentioned, we've got ample liquidity and our debt ratios, are below long-term targets, so. We'll continue to do disciplined in our management of our growth.

And the strengthening of our balance sheet. So as that's there's not a straight line in the way we've conducted that. But if you look all the way back to first quarter of this year, we were as high as 71, so we're pretty pleased with the fact that we've been able to reduce it down to a 5.4% ratio which gives us a little bit of leverage there.

Got it.

Thank you and congrats on bringing down your leverage, below your goal here.

I guess like just going back to the acquisitions, have you seen any increased competition for the IOS assets?

And if so, like, are you seeing the same private buyers or maybe even

re-players potentially?

Yeah, I don't know that I would call it, increased competition. I just think there's more acceptance, and I think the other way to look at it is that the lender community has been more accepting. I think I mentioned that last quarter as well. That that seems to be perpetuating itself. So, one of the things that we have in terms of our abilities to address these matters is the fact that we've got a very flexible balance sheets with which to respond.

We've shown that we can take down something that was relatively large, not that we're aiming to do that necessarily, but those factors in combination with Really our platform being national in scope allows us to see a lot of activity across the country and really take a very disciplined approach to that.

Got it. Thank you very much.

Sure.

And our next question will come from Michael Goldsmith with UBS. Please go ahead.

Good afternoon. Thanks a lot for taking my question. Another quarter of strong seems to ROI growth as you implement your portfolio optimization, what do you see as a sustainable sameI growth for the portfolio and when do you think you could do you have enough visibility where you could start guiding, around that?

Yeah, Michael, we can appreciate that you're looking for that information. As our business has been going on, undergoing significant change, and we are not providing. A guidance at this time, but I think we do provide a fair amount of Information we're very transparent and so I think we provide you a fair amount of metrics and if you look across our supplement and our IP to try and get you as much information as we can provide in that regard. We laid out in our IP. The growth that we have seen, and I think you've got the tools in essence to sort of put that together.

Got it, thanks for that.

And another quarter of solid leasing with some nice lease spreads and strong escalations, but it also looks like, you have to put a little bit of money in whether one property was under redevelopment, another required a little bit of landlord work. So, I'm just trying to understand kind of like the. If there is like tenant improvement dollars or just to think about the return on the money that you're putting in and then in turn the lease terms that you get out of that.

Yeah, I think on balance honestly, we've been surprised at how little money we've had to spend. Outside of our redevelopment opportunities and even inside of our redevelopment opportunities.

So far, we've been able to achieve in some of our things in some of our leases a fair number of deals with frankly no TI and very little downtime. So, all said and done, the attributes that people have been mentioning about IOS, in our opinion are, frankly, meeting the test of time and certainly that's proven out with our ability to to operate the portfolio over the course of a really a full year now and so. Overall, I would tell you that we're quite happy with the really, what we've been able to achieve all the way across the board in terms of upticks in rents, lack of downtime. Of the interest in our sites and what we've been able to do on a proactive management basis. I could probably go on and on about that, but for now, I'll just leave it at that.

Thank you very much. Good luck in the 4th quarter.

Thanks a lot, Michael.

And again.

If you have a question, you may press start the one to join the queue.

Our next question will come from Anthony Hau Truist Securities. Please go ahead.

Hey, Mike, hey guys, congrats on the quarter.

Mike, I might have misheard this earlier, but I think you mentioned that you guys have around, you guys are going to have around $300 to $350 million from office sales to pay down the debt. Is that additional $300 million of sales in the fourth quarter? Is that what you guys are Engaging?

Yeah, I'll, so yes, you heard that.

You heard that that's the net proceeds from the remaining 12 assets that we're selling.

In the range of $300 to 350 million, Anthony, and with that we said we would plan to pay down debt by somewhere in the range of $250 to $300 million. So that is future sales.

Okay, so that's on top of the $160 million you guys already announced, right?

That's correct.

Okay. So, and how confident are you guys are in achieving that pricing range? Are these, are there like any active LIs or notable like tenant interest that's supporting that evaluation?

Yeah, we're feeling pretty good about that, Anthony. Virtually every asset is engaged at this point in time, and I think officially under control, we say that half of them are officially under control, but all of them are engaged.

Okay. Thank you so much.

You're welcome.

Thank you.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you very much. I appreciate all your time today, it's a very exciting quarter for us to be able to tell you and regale you with all of our successes, across the board. Really disciplined office sales, strong execution across our IOS leasing, and the ability to put some targeted acquisitions to work in the IOS sub-sector. So all of that for us is has really rewarded the investors with great third quarter results. So thank you, and we're looking forward to our future.

Thanks.

The conference is now concluded.

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