Peakstone Realty Trust

And welcome to Peekstone Realty Trust fourth quarter 2023 earnings webcast conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michaela Lynch, Head of Investor Relations. Thank you, Ms. Lynch. You may begin.

Thank you. Good afternoon, and thank you for joining us for Peakstone Realty Trust's fourth quarter 2023 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 than those expressed in any forward-looking statement 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 or quarterly report 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 the 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 Batar, CFO. With that, I'll hand the call over to Mike. Mike?

Good afternoon, and thank you for joining our call today. Throughout 2023, we continued optimizing our portfolio and balance sheet. Despite challenging market conditions, we made meaningful progress on our strategic disposition program. selling 11 assets for over $336 million in gross proceeds. Through these asset sales, we significantly reduced leverage and began to evolve our portfolio towards our industrial segment. Ongoing proactive engagement with our high-quality tenant base drove significant leasing activity, which virtually eliminated all near-term rollover. I want to spend a few minutes sharing highlights from the quarter and our full year. We ended the year with a portfolio that is 96.4% lease and with a WALT of 6.5 years. During the quarter, we executed four leases totaling over 1 million square feet at weighted average gap and cash releasing spreads of 26% and 9% respectively. Our leasing activity in the fourth quarter included two lease extensions in our industrial segment and two new leases in our office segment. In the industrial segment, Our sole 2024 expiration was Samsonite, which leases the entirety of our Jacksonville, Florida asset, accounting for 8% of segment AVR. This key facility for Samsonite is located proximate to the port of Jacksonville, the primary port of entry for Samsonite's products. During the quarter, Samsonite exercised the first of its two five-year renewal options. The rent for the renewal term is a to-be-negotiated fair market rent with a floor of the expiring rent. As we work through negotiating the fair market rental increase with the tenant, for gap purposes, we've recorded the rent for the extension period equal to the expiring rent, resulting in a 14% gap and 0% cash releasing spread. We will provide additional detail on the fair market rent in the coming quarters. We also completed an early 10-year lease extension with Transline, which leases the entirety of our Whippany, New Jersey property accounting for 2% of segment AVR. This important light manufacturing and assembly facility is used by the tenant to produce actuation solutions for the aerospace industry. The extension includes a rent increase effective June 2026, which is nearly two years earlier than rent was scheduled to increase under the original lease. As of that date, base rent will increase over $5.50 per square foot and escalate 3.5% annually thereafter. resulting in outsized 91% gap and 50% cash releasing spreads. In the office segment at our Largo, Florida property, we completed a new 7.7-year full building lease commencing June 2024 with Spectrum, a subsidiary of Charter Communications. This lease was executed simultaneously with the early termination of the former lease with Paralon which was scheduled to expire in March 2025. We collected a termination fee from Parallon of just under $1 million, which offset 30% of the out-of-pocket costs associated with the new Spectrum lease. The new lease includes 3% annual rent escalation and was executed at a 6% cap and negative 3% cash releasing spread compared to Parallon's expiring rent at termination. We also completed a 9.4 year lease commencing March 2028 with the existing subtenant at our Pima Road asset in Scottsdale, Arizona. This subtenant is expanding on a direct basis concurrently with the expiration of its sublease. The new lease includes 2.4% annual rent escalations and was executed at a 33% gap and 14% cash releasing spread. With these leases now signed, Our only office segment lease expiration in 2024 expires in the fourth quarter, which accounts for only 50 basis points of total portfolio ABR. Turning to dispositions, our experience and industry connections furthered the ongoing successful execution of our strategic disposition program. For the year, we sold 11 properties for gross disposition proceeds of $336 million at an average cash cap rate for the stabilized assets of 7.6%. During the quarter, we sold two office assets for gross disposition proceeds of $27.2 million. First, we sold one office segment property located in Tyler, Texas for total proceeds of $21.4 million, inclusive of the lease termination fee received from the tenant. Our team creatively structured this deal, which required the simultaneous early termination of the existing lease, and a zoning change in order to sell the asset to the new owner-user. We sold a second office property from our other segment, which is located in Houston, Texas, for gross proceeds of approximately $5.8 million. The property was subject to a lease expiring without renewal in January 2024. This property was secured from one of our non-reforce AIG loans and was the first asset we have sold in this loan pool since we documented our agreement with AIG, which is intended to facilitate the dispositions of the mortgage properties under the loans. Subsequent to year end, we sold another office segment property located in Johnson, Iowa, to Corteva, the existing tenant, for gross proceeds of $30 million. At the time of the sale, Corteva's lease had 2.8 years remaining. To further this closing, we issued a one-year note for one half of the purchase price, or $15 million. This asset was classified as held for sale at year end. We had one other segment property classified as held for sale at year end, which relates to a purchase by the existing tenant. This asset is the Hitachi Energy Manufacturing Facility located in Jefferson City, Missouri. During the quarter, the tenant exercised its fixed price purchase option to acquire the property for $26.1 million. The sale is scheduled to close towards the end of the first quarter of 2024. At closing, we will pay off the balance of the secured debt relating to this asset, being approximately $11 million. Overall, I am excited about the momentum our experienced team generated during the first year as a listed company. With that, I will turn the call over to Javier to review our financial results.

Javier? Thanks, Mike. Leverage for our consolidated portfolio improved one and a half turns from 7.7 times net debt to normalized EBITDA RE at the start of last year to 6.2 times at year end. We ended the year with ample liquidity and balance sheet flexibility as we advance our business plan. Turning to financial performance in the quarter, Total revenue was $63.1 million and NOI was $50.3 million, inclusive of approximately $1 million of lease termination fee. Net loss attributable to common shareholders was approximately $19.9 million or 55 cents per share, inclusive of two non-cash impairments. $12 million relating to the now sold Corteva property Mike mentioned earlier, and $16 million relating to goodwill associated with our other reporting segment. Same-store cash NOI was approximately $48.2 million, a 4.5% increase compared to the same quarter last year. FFO, as defined by NAREAP, was approximately $11.3 million, or 29 cents per share, on a fully diluted basis. Excluding the non-cash goodwill impairment, FFO for the quarter would have been 69 cents per share on a fully diluted basis. AFFO was approximately $31.7 million, or 80 cents per share on a fully diluted basis. And exclusive of $1.7 million of employee severance, G&A was approximately $10 million, which is consistent with our quarterly run rate for the year. For full year 2023, AFFO was approximately $118.1 million, or $2.99 per share on a fully diluted basis. And same-store cash NOI was approximately $189.4 million, a 3.6% increase compared to the prior year. Moving on to our balance sheet. As of December 31, 2023, we had approximately $392 million in cash, and $159 million of available undrawn capacity on our revolver for total liquidity of approximately $551 million. A significant portion of our cash is being held in money market accounts, earning interest in the 5% range. Regarding our consolidated debt, we had approximately $1.44 billion outstanding consisting of $950 million on our credit facility with the balance being secured mortgage debt. After deducting for cash, net debt was approximately $1.05 billion. Regarding our total outstanding debt, approximately 86% has fixed rates, inclusive of interest rate swaps, which limits our exposure to near-term interest rate volatility. Including the effect of these interest rate swaps, the weighted average interest rate was 4.16%. The interest rate swaps have a maturity date of July 2025. The weighted average term to maturity was nearly three years, assuming all available extensions under our credit facility are exercised. And we have no significant debt maturities until the end of 2025. During the quarter, we entered into an agreement with AIG relating to our non-recourse AIG mortgage loans which are secured by 12 of the 17 assets in our other segments. As Mike mentioned earlier, the agreement is intended to facilitate the disposition of the mortgage properties under the loan without regard to the original release prices and support the repayment of both loans. The agreement did not result in any changes to the loan amounts, interest rates, or maturity. Finally, for the fourth quarter, we paid a dividend of 22.5 cents for common share on January 17, 2024. While the company expects to continue paying dividends on a quarterly basis, all future dividend decisions will be made by the Board of Trustees. Now I'll turn the call back to Mike for closing remarks.

Thanks, Javier. Our fourth quarter and full year activity demonstrates our team's ability to execute our go-forward strategy. Our high-quality assets and our collective expertise continue to be positive differentiators as we position our portfolio for growth and maximize value for our shareholders. Our outlook on the industrial market remains positive. As demonstrated by our leasing activity in the quarter, our portfolio is well-positioned to capture past and future rent growth and realize strong leasing spreads. We have strategically located industrial assets that are central to the business operations of our tenants, and many of our tenants continue to invest significant new capital in their operations at our properties. On the office side, companies are more frequently making longer-term decisions about their office occupancy requirements. The two new office leases we sign in the quarter illustrate this point. We believe the quality of our tenants and the assets in our office segment are attributes that will provide stable cash flow with limited near-term rollover exposure. As I mentioned in the release, we ended 2023 on a high note with a materially stronger cash position, an enhanced portfolio composition, and continued operational excellence across our industrial and office segments. We have entered the new year on solid footing and leasing momentum remains positive. Thank you for your time today. We look forward to seeing many of you at the upcoming conferences. We will now turn it over to the operator to take a few questions from analysts. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. The first question comes from the line of Joshua Dennerlein with Bank of America. Please go ahead.

Hi, this is on behalf of Josh. Great to hear about you guys again. My first question is about the 2024 lease maturities in the other segment. I was curious if you had any thoughts on how those may be playing out or the expirations going forward or if you've been having active conversations in that area.

Yeah, thanks, Farrell. And please give our best to Josh. So a significant amount of our rollover actually does tie to our other category. We don't spend a lot of time talking about what it is that we're doing in those specific areas, but suffice to say that we are spending significant time with those properties. And as you know, we just effected an agreement with AIG to facilitate the sale of all of the other properties associated with the AIG loans.

Great. Thank you. And I guess also in terms of appetite that you're seeing for these office assets, I know that you were able to, you're holding a few for sale right now. Can you just give a little bit more color on like the landscape that you're seeing?

Yeah. So, you know, we're, we had a great year, right? We sold 11 properties over the year with $336 million of proceeds and our stabilized cap rate for the cap rate for our stabilized assets was 7.6% you know we're clearly selling opportunistically properties that don't align with our go-forward plan and when you look at what we're seeing in the marketplace it's obviously becoming much more dependent on the ability to get credit. So we're somewhat at the whims of the marketplace. Clearly, at the end of the year, we had some relief as a result of the Fed's input. A little bit of that's been given back. But what we're hearing from people is that there's quite a few people who are willing to be active in the marketplace, specifically from the equity side. And we'll see how things unfold as the Fed's picture becomes clearer over the next couple quarters.

Okay. Thank you. That's it for me.

Thank you, Farrell. Thank you. The final question comes from the line of Anthony Howe with Tourist Securities. Please go ahead.

Good afternoon. Thanks for taking my question. You know, you guys have around like $400 million of cash on hand. What type of acquisition opportunities have you guys identified in the pipeline today? And what's stopping you guys from acquiring assets?

Sure. We like where we sit in terms of our total cash position. It affords us great flexibility. on our balance sheet. We continue to focus on our balance sheet, on our strengthening our balance sheet. At the appropriate time, we'll be looking at opportunities on the investment side.

Is there like a target leverage metric that you guys are looking to achieve before you start looking at acquisitions?

In terms of leverage, We've indicated that we've made significant headway from the beginning of last year through this year. We're going to continue to allocate and look at strengthening our balance sheet in that regard. I think Javier's point is that we've got great optionality relative to keeping the cash on our balance sheet, and we're going to continue to actively monitor the market. we're going to continue to weigh our position over time and weigh our options. But as we've told you, our strategy is to evolve our portfolio towards our industrial segment, which we believe has favorable growth prospects and away from the office segment.

So in terms of the industrial application opportunities that you guys are potentially looking at, will these mostly be like infill locations in the coastal markets or more the middle America, let's say the Midwest, like big box assets?

Well, as you know, our portfolio as it stands today is significantly geared toward the coastal markets, which are predominantly geared towards those properties that have access to the ports and I think it's All you have to do is look at what we did relative to the Samsonite Renewal and the trans dime renewals in terms of our performance there and in terms of the the releasing spreads that we were able to achieve so clearly those have performed quite well for us and so I think that We'll continue to look at to add those types of properties for sure

And can you provide any color on the upcoming expiration of the tech data court lease in San Antonio?

We're not really ever providing guidance relative to our specific properties. So, no real guidance for you there.

Okay. But you guys are in active discussion with the tenant about, like, you know, potentially renewing the lease, right? And I'm just curious what those discussions are. How are they going?

Yeah, I think we're very active with all of our tenants and all of our buildings. And I think if you look at the 1 million square feet that we were able to achieve in terms of new leases and extensions, our team has been very creative in being able to fulfill the order, if you will, meet our needs along with our tenant needs. We're very proactive in that regard. And I think you can see that you know, relative to the trans time transaction, we were able to do an early extension almost two years in advance of what would have been a natural expiration there and meet their needs and our needs and, you know, increase our rent almost two years in advance of what it would have naturally expired at. So I really am proud of our team's ability to go out there and nurture the relationships with the tenants be, you know, very active operators of our real estate and push our leasing forward.

And just last one for me. So Tyler Texas asked that, what was the termination income associated with the sale? The value amount.

The value of the termination? Yeah. I don't think we've disclosed that.

I think the best thing that I could tell you is that we, you know, we sold that for a combined 26 point, no, excuse me, I'm off on that one. I think it's $21.4 million. Okay. And that was inclusive of the lease termination fee, yeah.

Okay. Thank you. Thank you.

Ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to management for closing comments.

Thank you everyone for joining our call. Again, we look forward to being in touch with you and very, very happy with the quarter and we look forward to a really fruitful 2024. Thank you, operator.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

And we look forward to a really fruitful 2024.