Peakstone Realty Trust Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 7 speakers on the call.

Operator

Greetings, and welcome to Peakstone Realty Trust 4th 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mikaela Lynch, Head of Investor Relations.

Operator

Thank you, Ms. Lynch. You may begin.

Speaker 1

Thank you. Good afternoon and thank you for joining us for Peakstone Realty Trust's Q4 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 atirpkst.com with any questions. Please note that the use of forward looking statements by the company on this webcast.

Speaker 1

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 ks 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, EBITDAre and adjusted EBITDAre.

Speaker 1

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 Vittar, CFO. With that, I'll hand the call over to Mike. Mike?

Speaker 2

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 $336,000,000 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.

Speaker 2

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 percent leased and with a WALT of 6.5 years. During the quarter, we executed 4 leases totaling over 1,000,000 square feet at weighted average GAAP and cash releasing spreads of 26% and 9%, respectively. Our leasing activity in the 4th quarter included 2 lease extensions in our Industrial segment and 2 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 ABR.

Speaker 2

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 2 5 year renewal options. The rent for the renewal term is a to be negotiated fair market rent with a floor of the expiring rent. We work through negotiating the fair market rental increase with the tenant, for GAAP purposes, we've recorded the rent for the extension period equal to the expiring rent, resulting in a 14% GAAP and 0% cash releasing spread. We will provide additional detail on the fair market rent in the coming quarters.

Speaker 2

We also completed an early 10 year lease extension with TransCon, which leases the entirety of our Whippany, New Jersey property accounting for 2% of segment ABR. This important light manufacturing 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 2 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% GAAP 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.

Speaker 2

This lease was executed simultaneously with the early termination of the former lease with Parallon, which was scheduled to expire in March 2025. We collected a termination fee from Parallon of just under $1,000,000 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% GAAP and negative 3% cash releasing spread compared to Paralums expiring rent at termination. We also completed a 9.4 year lease commencing March 20 28 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.

Speaker 2

The new lease includes 2.4% annual rent escalations and was executed at a 33% GAAP and 14% cash releasing spread. With these leases now signed, our only office segment lease expiration in 2024 expires in the Q4, which accounts for only 50 basis points of total portfolio ABR. Turning to dispositions, our experience and industry connections further the ongoing successful execution of our strategic disposition program. For the year, we sold 11 properties for gross disposition proceeds of $336,000,000 at an average cash cap rate for the stabilized assets of 7.6%. During the quarter, we sold 2 office assets for gross disposition proceeds of $27,200,000 First, we sold 1 office segment property located in Tyler, Texas for total proceeds of $21,400,000 inclusive of the lease termination fee received from the tenant.

Speaker 2

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 $5,800,000 The property was subject to a lease expiring without renewal in January 2024. This property was secured from 1 of our non recourse 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 $30,000,000 At the time of the sale, Corteva's lease had 2.8 years remaining. To further disclosing, we issued a 1 year note for 1 half of the purchase price or $15,000,000 This asset was classified as held for sale at year end.

Speaker 2

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 $26,100,000 The sale is scheduled to close towards the end of Q1 2024. At closing, we will pay off the balance of the secured debt relating to this asset being approximately $11,000,000 Overall, I am excited about the momentum our experienced team generated during the 1st year as a listed company. With that, I will turn the call over to Javier to review our financial results.

Speaker 2

Javier?

Speaker 3

Thanks, Mike. Leverage for our consolidated portfolio improved 1.5 turns from 7.7 times net debt to normalized EBITDAre 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 $63,100,000 and NOI was $50,300,000 inclusive of approximately $1,000,000 of lease termination fee.

Speaker 3

Net loss attributable to common shareholders was approximately $19,900,000 or $0.55 per share, inclusive of 2 non cash impairments. $12,000,000 relating to the now sold Corteva property Mike mentioned earlier and $16,000,000 relating to goodwill associated with our other reporting segment. Same store cash NOI was approximately $48,200,000 a 4.5% increase compared to the same quarter last year. FFO as defined by NAREIT was approximately 11 point $3,000,000 or $0.29 per share on a fully diluted basis. Excluding the non cash goodwill impairment, FFO for the quarter would have been $0.69 per share on a fully diluted basis.

Speaker 3

AFFO was approximately $31,700,000 or $0.80 per share on a fully diluted basis. And exclusive of $1,700,000 of employee severance, G and A was approximately $10,000,000 which is consistent with our quarterly run rate for the year. For full year 2023, AFFO was approximately $118,100,000 or $2.99 per share on a fully diluted basis. And same store cash NOI was approximately $189,400,000 a 3.6% increase compared to the prior year. Moving on to our balance sheet.

Speaker 3

As of December 31, 2023, we had approximately $392,000,000 in cash $159,000,000 of available undrawn capacity on our revolver for total liquidity of approximately $551,000,000 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 $1,440,000,000 outstanding consisting of $950,000,000 on our credit facility with the balance being secured mortgage debt. After deducting for cash, net debt was approximately $1,050,000,000 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.

Speaker 3

The weighted average term to maturity was nearly 3 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 dispositions 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.

Speaker 3

Finally, for the Q4, we paid a dividend of $0.225 per 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.

Speaker 2

Thanks, Javier. Our Q4 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 re leasing spreads.

Speaker 2

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 2 new office leases we signed 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 and enhanced portfolio composition and continued operational excellence across our Industrial and Office segments.

Speaker 2

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?

Operator

Thank you. We will now be conducting a question and answer session. The first question comes from the line of Joshua Dennerlein with Bank of America. Please go ahead.

Speaker 4

Hi, this is Farrell Granoff on behalf of Josh. Great to hear about you guys again. My first question is about the 2024 lease maturities in the other segment. 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?

Speaker 5

Yes. 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.

Speaker 4

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?

Speaker 5

Yes. So we had a great year, right? We sold 11 properties over the year with $336,000,000 of proceeds in our stabilized cap rate for the cap rate for our stabilized assets was 7.6%. 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.

Speaker 5

So we're somewhat of the wins of the marketplace. Clearly, at the end of the year, we've 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 the 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 of quarters.

Speaker 4

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

Speaker 5

Thank you, Farrell.

Operator

Thank you. The final question comes from the line of Anthony Hau with Tuohy Securities. Please go ahead.

Speaker 6

Good afternoon. Thanks for taking my question. You guys have around like $400,000,000 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?

Speaker 5

Sure. Look, we're

Speaker 3

we like where we sit in terms of our total cash position and 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 in the on the investment side.

Speaker 6

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

Speaker 5

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 putting 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 in a way from the office segment.

Speaker 6

So in terms of like the industrial acquisition 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?

Speaker 5

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. I think it's all you have to do is look at what we did relative to the Samsonite renewal and the TransDigm renewals in terms of our performance there and in terms of the re leasing 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 to add those types of properties for sure.

Speaker 6

Okay. And can you provide any color on the upcoming exploration of the Tech Data Corp release in San Antonio?

Speaker 5

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

Speaker 6

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

Speaker 5

Yes, I think we're very active with all of our tenants and all of our buildings. And I think if you look at the 1,000,000 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 relative to the TransDigm transaction, we were able to do an early extension almost 2 years in advance of what would have been a natural expiration there and meet their needs and our needs and increase our rent almost 2 years in advance of what 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 very active operators of our real estate and push our leasing forward.

Speaker 6

And just last one for me. For the Tyler, Texas asset, what was the termination income associated with the sale, the value amount?

Speaker 5

The value of the termination?

Speaker 6

Yes.

Speaker 2

I don't think we've disclosed that.

Speaker 5

I think the best thing that I could tell you is that we sold that for a combined 26 point no, excuse me, I'm off on that one. I think it was $21,400,000

Speaker 4

Okay.

Speaker 5

And that was inclusive of the lease termination fee, yes. Okay.

Speaker 6

Thank you.

Operator

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.

Speaker 5

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.

Operator

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

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Earnings Conference Call
Peakstone Realty Trust Q4 2023
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