Peakstone Realty Trust Price & Performance (PKST)

Additionally, on this call, 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 currently comparable GAAP numbers in the company's filings with the SEC.

On the call today are Mike Escalante, CEO and President Javier Vitar, 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 ABR. Over the course of the year, we acquired a premier 51 property Infill Industrial, Outdoor Storage or iOS portfolio for $490,000,000 We divested $317,000,000 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 infield iOS portfolio we acquired in the fourth quarter We 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 twenty twenty four. In the fourth quarter, we sold the remaining 10 assets in that segment completing this important milestone.

The year, we sold a total of 19 assets for $317,000,000 including 17 other segment properties, and two 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 divest 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 four point five years and achieved favorable re leasing 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 six 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. [indiscernible] Looking at our iOS assets specifically, The 45 iOS properties are approximately 100% leased, with 47% investment grade tenancy. A Walt of four point four years, and a potential 70% mark to market opportunity In our traditional industrial assets are 100% leased with 58% investment grade tenancy a wealth of six years, and a potential 24% mark to market opportunity. Our operating portfolio also includes 33 office segment properties, which are 99% leased, with 60% investment grade tenancy and a walt of six point nine 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 ABR and 18% expiring over the next three years.

Our redevelopment portfolio consists Of six industrial segment IOS assets, encompassing 82 usable acres across four 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, 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 $58,000,000 and cash NOI was approximately $48,000,000 Net income attributable to common shareholders was approximately $12,700,000 or $0.35 per share. FFO was approximately $29,200,000 or $0.74 Per share on a fully diluted basis AFFO was approximately $25,600,000 or $0.65 per share on a fully diluted basis.

And same store cash NOI was approximately $39,000,000 a 0.4% increase compared to the same quarter last year.

Same store NOI for our Industrial segment was primarily impacted by a continuing rent abatement the eleventh year of a pre existing industrial segment lease, which ended in November 2024. And a one time reversal of non tenant reimbursement income. Same store cash NOI would have grown by 2.8%. For full year 2024, AFFO was approximately $106,600,000 or $2.69 per share on a fully diluted basis.

Same store cash NOI for the overall portfolio was approximately $154,900,000 Moving on to our balance sheet. As of December 31, total liquidity was approximately $229,000,000 consisting of cash and available revolver capacity. Our cash balance excluding restricted cash was approximately $147,000,000 and we earned approximately $1,500,000 of interest income in the quarter.

Available revolver capacity was 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 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 5.9x 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 third quarter, with the assistance of our highly supportive bank group, we executed a beneficial amendment and Peakstone. Through this amendment, among other things, we extended over $750,000,000 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. Connection with this amendment, we entered into new forward starting floating to fixed interest rate swaps with a notional amount of $550,000,000 These swaps will take effect on the maturity date of our existing $750,000,000 of swaps is 07/01/2025.

They mature on 07/01/2029 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 ILS, and 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 hundred and $75,000,000 term loan The term loan matures in 2028 inclusive of the extension option and is priced at sulfur 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 of My 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 $183,000,000 Additionally, we added three separate mortgage loans totaling $110,000,000 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 02/1932. As a result of these actions, our year end debt metrics were as follows: $1,360,000,000 in total debt outstanding, with $1,000,000,000 of unsecured debt on our credit facility and the remainder in non recourse secured mortgage debt. After deducting cash, our net debt was approximately $1,200,000,000 and our net debt to 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 $0.225 per common share on January 17, and the Board of Trustees approved a dividend for the first quarter in the amount of $0.225 per common share that is payable on April 17, to holders of record on March 31, 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, remain focused on maintaining a disciplined approach to our debt levels. Our revolving credit facility provides the 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 to drive 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. [indiscernible] Thank you.

The first question comes from the line of Farel Granite with Bank of America. Please go ahead.

Hi, good evening. Thank you for taking my questions. First wanted to get a few comments on your appetite when looking forward to in either having a mix of the iOS or traditional industrial 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, Farrell. 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 have I would say, come closer to traditional industrial They certainly are still there's still a gap 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 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 you're seeing any further appetite, especially as news around office is turned a little bit lighter?

By lighter, I mean, you mean better?

Yes. Okay.

Yes, I think 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 at is really at the local level, local sharpshooters, specialists in a specific location that already have a presence in the marketplace. Our funding prices today to be very very much of an appeal to them. And then I think the second thing that we're seeing, and I 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. And or tenants from outs who are coming in as users to take over properties. 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 an ability to finance the projects at a 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 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 [indiscernible] 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 five opportunities in the redevelopment sub segment, if you will, where we are actively out repositioning those assets in some way, shape or form and the leasing activity is been quite good. The sixth 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 who have some lease expirations coming up in the next couple of years.

I think we're we're pretty excited about 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 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, Mark. 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 to try to get a little bit more color how you guys are thinking about debt repayment versus continued investment? Thanks. Hi, Michael, it's Javier. The majority or almost two thirds of the proceeds from the sales were dedicated to the payoff the AIG [indiscernible] So we're fully extinguished there. And there was also one smaller loan of approximately $11,000,000 that got paid off as part of the the sales proceeds there. Did go to increase our cash balance over the year and really on a net debt basis improved our leverage lately. Even though we as you saw in the 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'll 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 look at divesting non core assets. You define non core assets as the office assets or does that also include some of the traditional industrial assets as well? Yes, I think by the way, thanks thanks for joining us, Michael.

And appreciate you 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 capex exposure, those sorts of things. Put a pretty pretty heavy weight on office. So from that perspective, I think that that would be the the larger component 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 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.

Yes, we have we don't really have 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. Okay. We're not quite there in terms of timing.

Great. You very much. Good luck in 2025. Thanks, Michael. Thank you, Michael.

Thank you. Next question comes from the line of Anthony Howe with Truist Securities.

Please go ahead.

Hey, guys. Congrats on selling the other segment. Guys done a fantastic job in twenty point four. Just one quick question for you Javier. Javier, you mentioned that like two thirds of the proceeds from the sale of the other segment went towards paying down the AGI loan, right? But supplemental in the third quarter, AHI loan was had an outstanding balance of $183,000,000 Just curious like what like can you help me bridge the gap? [indiscernible] Yes. I think I just said generally two thirds, the balance was $183,000,000 at the end of third quarter. But if you look at the beginning of the year, I think we were in the $200,000,000 range. I believe it was I think we started in the $212,000,000 range. Got you. But you mentioned that two third of the $190,000,000 went towards paying down the AGI loan. So how they go from I'm sorry, it was up to $317,000,000 total sales proceeds for the year. That's what I meant to say.

Got you. Okay. That makes a lot more sense.

Okay.

Yes. And then last question, I'm sorry about that.

No worries. What do you think like you guys I think your net debt to EBITDA right now is like in the sevens. What do you guys want it to be? By year end?

Think we've quoted since the time that we listed that we would be aiming for six to one 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've sold over $2,000,000,000 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 ABR that's attached to industrial as we indicated. So I think we have a proven track record of reducing leverage. Nothing is going to be linear. But we have the eye 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 in the tools order to do it and and you've seen us have a commitment to deliver on that type of number.

So Okay. And just one last question. Have you guys started marketing the office portfolio And just curious like where are you seeing terms up buyers demand or interest in those assets?

Yes, 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 we've talked about this in the past on these calls and in person. I don't know what this year is going to bring us I think as Farrell, referred to it, it feels more positive 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 of a quote in the last couple of days from somebody that said that maybe that's pushing up to to 20%. So there is some sort of loosening going on in the debt side and I think that will push forth into the demand for buyers going forward if that [indiscernible] Thank you.

Thank you.

This concludes today's teleconference.

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