Peakstone Realty Trust Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Peakstone completed two iOS acquisitions totaling $52 million in Atlanta and Port Charlotte, boosting its industrial outdoor storage portfolio.
  • Positive Sentiment: The company’s iOS annual base rent increased by over 25% year-to-date, driven by new acquisitions and a redevelopment lease in Savannah.
  • Positive Sentiment: YTD office asset dispositions reached $216 million across 11 properties, reducing office assets to 35% of book value and accelerating the shift to industrial.
  • Negative Sentiment: Management recorded a $286 million noncash impairment on 18 office properties, contributing to a $265 million net loss for the quarter.
  • Neutral Sentiment: As of quarter-end, the company held $356 million of liquidity and reported a pro forma net debt/EBITDAre of 6.6x, with a board-approved Q3 dividend of $0.10 per share.
AI Generated. May Contain Errors.
Earnings Conference Call
Peakstone Realty Trust Q2 2025
00:00 / 00:00

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Peakstone Realty Trust Second Quarter twenty twenty five Earnings Conference Call and Webcast. 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, Steve Sweet, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Good afternoon, and thank you for joining us for Peakstone Realty Trust's Second Quarter twenty twenty five Earnings Call and Webcast. Earlier today, we posted an earnings release, supplemental and updated investor presentation to the Investor Relations page on our website at www.pkst.com. Please reach out to our Investor Relations team at irbqst dot 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.

Speaker 1

For a further discussion of risks related to our business, please see our annual report on Form 10 ks and subsequent filings with the SEC. This call, the company may refer to certain non GAAP financial measures, such as funds from operations, core funds from operations, adjusted funds from operations, EBITDAre and adjusted EBITDAre. 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 Mike Escalante, CEO and President and Javier Bitter, CFO. With that, I'll hand the call over to Mike.

Speaker 2

Good afternoon. Thank you for joining our call today. We continue to advance our strategic transformation into an industrial REIT. Growth in the industrial outdoor storage or iOS subsector remains central to this strategy. Our focus is on scaling our iOS platform through acquisitions and leasing, divesting our remaining office assets, and reducing leverage.

Speaker 2

During and subsequent to quarter end, we made meaningful progress across each of these focus areas. Let me start with the recent activity across our iOS platform where we continue to drive both external and internal growth. We expanded our iOS portfolio with two acquisitions totaling approximately $52,000,000. First, we acquired a 27 usable acre property in an infill submarket at Atlanta for approximately $42,000,000. This site is located along one of Atlanta's most active and established industrial corridors and features upgraded yard space and a combination of renovated and newly constructed buildings just to support yard operations.

Speaker 2

It is fully leased to two tenants, each having long term contracts in the logistics or municipal services sectors. On a combined basis, the leases have a weighted average term of five years and include 3.8% average annual rent escalations. Second, we acquired a 9.2 usable acre property in Port Charlotte, Florida for approximately $10,400,000. The property is located within the growth corridor stretching from Tampa through Fort Myers, an area experiencing strong economic and demographic momentum. It is fully leased to three tenants, including a national equipment rental company as the anchor.

Speaker 2

On a combined basis, the leases have a weighted average term of six point eight years and include 3% average annual escalations. In addition to acquisitions, we continue to demonstrate execution across our iOS redevelopment program. Shortly after quarter end, we completed the redevelopment of another iOS property. We executed a full site, two and a half year lease at our property in Savannah, which commenced in July. The lease delivers over 1 half a million dollars of incremental ABR with 4% annual rent escalations.

Speaker 2

It is also notable that this was one of the largest iOS leases in the Savannah market year to date. The transaction reflects our continued ability to execute on redevelopment and drive growth across the iOS platform. As a result of this activity, we have increased our iOS ABR by over 25% since the beginning of the year. Turning to office, we have taken meaningful steps towards monetizing our office portfolio, a priority we expect to execute at an even more accelerated pace. Through quarter end, we sold seven office properties for a $158,000,000.

Speaker 2

Subsequent to quarter end, we closed on two additional sales located in Platteville, Colorado and Andover, Massachusetts totaling $24,000,000, bringing our year to date office sales to 11 properties totaling $216,000,000. We also took steps to further align book values with expected sale outcomes. During the quarter, we recognized a noncash impairment of approximately $286,000,000, primarily related to 18 office properties. These noncash impairments reflect shortened anticipated hold periods and updated expectations for sale pricing consistent with our strategy to sell all of our office assets in the coming quarters. As a result, the office segment now represents just 35% of the net book value of our real estate assets or approximately $615,000,000, while the industrial segment accounts for approximately 65%, reflecting the ongoing success transforming our portfolio.

Speaker 2

With that, I'll turn the call over to Javier to walk you through our financial results and capital markets activity. Javier?

Speaker 3

Thanks, Mike. To begin, I'll cover several key financial highlights for the quarter ended June 30 before turning to a few pro form a metrics that reflect activity completed after quarter end. For the quarter ended June 30, total revenue was approximately $54,000,000 and cash NOI was approximately $43,000,000. Net loss attributable to common shareholders was approximately $265,000,000 or $7.22 per share inclusive of noncash impairments of approximately $286,000,000 recorded during the quarter. As Mike explained, the vast majority of these noncash impairments related to 18 office segment properties.

Speaker 3

FFO was approximately $23,900,000 or $0.60 per share on a fully diluted basis. Core FFO was approximately $23,800,000 or $0.60 per share on a fully diluted basis, and AFFO was approximately $24,300,000 or 61¢ per share on

Speaker 2

a fully diluted

Speaker 3

basis. Same store cash NOI increased 9.3% in our industrial segment and 4.7% in our office segment or an overall increase of 6.3% compared to the same quarter last year. Moving on to our balance sheet. At quarter end, total liquidity was approximately $356,000,000 consisting of cash and available revolver capacity. Our cash balance, excluding restricted cash, was approximately $264,000,000, and available revolver capacity was approximately $92,000,000.

Speaker 3

We had approximately $1,260,000,000 of total debt outstanding, including $900,000,000 of unsecured debt on our credit facility with the remainder in nonrecourse secured mortgage debt. After deducting cash, our net debt was approximately $1,000,000,000. As of quarter end, 88% of our debt was fixed, including the effect of $750,000,000 of interest rate swaps that matured on July 1. Next, I'd like to mention the impact of certain post quarter activity. As we've previously disclosed, our forward starting floating to fixed interest rate swaps totaling $550,000,000 took effect on July 1, converting sulfur on our unsecured debt to a fixed rate of 3.58%.

Speaker 3

These swaps will mature on 07/01/2029. After giving effect to these swaps, our weighted average interest rates on all debt, both secured and unsecured, is approximately 5.47%. Also, following the post quarter leasing acquisition and disposition activity that Mike described, our net debt to adjusted EBITDAre increased modestly from 6.4 times at quarter end to 6.6 times on a pro form a basis, but remains below our first quarter level of seven times. We remain focused on reducing leverage over time and expect to continue making progress as we execute on our plan. In light of the continued execution of our office dispositions and the resulting evolution of our earnings profile, the board has approved a dividend of 10¢ per common share for the third quarter.

Speaker 3

This dividend is payable on October 17 to holders of record as of September 30. The updated dividend level reflects the ongoing transition of our portfolio to an exclusively industrial strategy and is designed to align with the cash flow characteristics of that portfolio. It also provides a foundation as we continue to scale the iOS platform. With that, I'll turn the call back over to Mike.

Speaker 2

Thanks, Javier. As we look ahead, we remain confident in our strategy and our ability to execute. We're reshaping the portfolio with intention, simplifying the platform, reallocating capital to higher growth iOS opportunities, and strengthening the balance sheet. We believe this positions the company to maximize value for its shareholders. With that, we'll now open the call for questions.

Speaker 2

Operator?

Operator

Thank you. We will now be conducting a question and answer session. The first question we have is from Jaina Galan of Bank of America. Please go ahead.

Speaker 4

Thank you. Good afternoon. Just wanted to get a little bit more color on the Board's thinking around the dividend and when you kind of mentioned align with the cash flow characteristics of industrial outdoor storage. Can you just help us better understand what that means? And maybe at what scale would they go back to something of more of, a stabilized, AFFO payout ratio or something of the sort?

Speaker 2

Hello, Yana. Appreciate, appreciate you joining the call. You know, I I think it's a it's much more straightforward than I think that that, you know, your question implies. I mean, we're we're basically just looking forward to a post office environment and, looking at our industrial sector, segment overall, which includes traditional and, and iOS. So looking at, how that's been established is is really in keeping with the fact that, we've made an announcement that we're accelerating our shift to an industrial REIT and, monetizing fully the office, segment.

Speaker 4

Thank you. And I guess maybe just on the looking at the 2026 lease expiration schedule and just if you could help us understand more a little bit about like iOS, when do those kind of renewal, discussions begin? What historically has kind of been the renewal percentage for this product type? Any color there?

Speaker 2

Yeah. No no worries. You know, the great news is is that we've had very little rollover. We have very little vacancy in the operating portfolio. I think it's point 4%.

Speaker 2

It's two of 12 acres in our Philadelphia location, and we're involved in doing a minor redo at at that site and have interest in that in that particular property as well. If you look forward, we only have one more lease that expires in 2025, and, we think that the tenant in that location, is interested in in staying as well for a, at least, for an abbreviated period. They're trying to figure out their long term needs. And then looking forward to 2026, we have eight leases that expire, and it's about 9% of our AVR. And I I think the majority of those leases have fixed rate renewals at at tenant favorable rates.

Speaker 2

So our expectation in that situation is based on their operations to the extent that they're happy with the location, we anticipate that they would, you know, more than likely, be incentivized to renew.

Speaker 4

Thank you.

Speaker 2

You're welcome.

Operator

The next question we have is from Michael Goldsmith of UBS. Please go ahead.

Speaker 5

Good afternoon. Thanks a lot for taking my questions. Can you provide the cap rates of where you've been buying the iOS during the quarter and and where you've been selling the office?

Speaker 2

Yeah. So we don't, we don't provide them on an individual basis, but on an aggregated basis, have, in in our you you have in in our in our, you know, what you call it? In our feed. In our feed. Excuse me.

Speaker 2

The data to be able to calculate that if you, if you want to, on an aggregated basis. You know, we've so that's so that's relative to the acquisitions. And then relative to our our office, we've identified again in on an aggregate basis and in a individual property by property basis in our IP and in our supplement, the very specific properties that were sold. So you can sort of piece that altogether relative to the the aggregate numbers that we give you, and and we just haven't done that on an individual basis. But I think in the last last quarter, we gave you some guidelines relative to the the makeup of, you know, leases that are less than than five years in terms of, you know, what those sales will look like.

Speaker 2

And then we also gave you some direction on leases that had more than five years, and we've been, sitting right in between the goalposts that we provided you in that in that instance.

Speaker 5

Thanks for that. And and as we think about right. Like, you you've got continued visibility into into selling down the office. So, you know, how are you thinking about the the using those proceeds for, you know? And you've gotten the leverage down to about six and a half times, and I I know you were kinda wanna get a little bit lower.

Speaker 5

So can you just, you know, kinda outline how how you're thinking about using that for either paying down debt or acquiring and and, yeah, just just kind of a a framework as you continue to evolve the portfolio?

Speaker 2

Yeah, Michael. I I think we've been very consistent in how we've approached that. It's a very balanced approach for us. As you can see, we were able to do some acquisitions after the quarter. So in our past, we've been very direct in in saying that we're we're looking to get to below six times debt to EBITDA.

Speaker 2

And in this instance, you know, last quarter, we were at seven. If you look how we ended the quarter, I think we were at six four. And then we popped back up to six six as a result of our acquisitions. I think in in those numbers, you'll find somewhat of a microcosm of everything that we're trying to accomplish by balancing a further reduction in our leverage and, by the same time, show that we are active in the acquisition market and and and looking at, you know, continuing to do that. You know, we do have an active pipeline.

Speaker 2

I would say that we have a greater pipeline than the which allows us to be you know, it's a significant pipeline, which allows us to be, picky, if you will.

Speaker 5

One last one for me. We've heard throughout Triple Net reporting season about how there's been increased competition for deals. Recognizing you you you've been buying out of the iOS space, so I was curious if if you've seen competition evolve, you know, or pick up in any way, within the space that you that you now have been acquiring. Thanks.

Speaker 2

Yeah. I I mean, yes. The market is, the market is active. I mean, there's, quite a bit of capital that is increasingly being raised for iOS. You know, I think it's largely with private entities by and large.

Speaker 2

I think there's actually more debt capital that is coming into the market. It's not cheap still, so it keeps pricing sort of elevated. I think we have, you know, we have a construct that allows us to be much more fluid than I think our private competitors in that regard. So, yeah, I would say the market is definitely active, but we by virtue of our experience, our long time frame of being in the marketplace overall, our specific iOS con contact, and the fact that we have a, you know, pretty fairly national portfolio. We get a lot of play from from many people who are interested in discussing dispositions with us.

Speaker 5

Thank you very much. Good luck in the back half.

Speaker 2

Thank you, Michael.

Operator

The next question we have is from Anthony Howe of Tru Securities. Please go ahead.

Speaker 6

Good afternoon, guys. So Mike, just curious, like what specific variables changed that triggered the $2.00 6,000,000 impairment this quarter? Was it really was it driven by actual bids coming below the book value, or is it third party appraisal or just market comps?

Speaker 3

I'll let Javier take the shot at that one, and I'll fill in behind. Hi, Anthony. Yeah. No. I think it's really driven by, the acceleration of our sales, and really taking a shorter hold period, and really, looking at, you know, our controls and accounting processes with respect to that.

Speaker 3

So as you as you, from a gap standpoint, when you look at the, you know, the acceleration of sales, you've gotta look at the fair value, calculation, you know, at at the time. So that that's really what drove the the, you know, the the acceleration of these impairments.

Speaker 6

Okay. Gotcha. And, I think you guys mentioned that expectation of acceleration in office disposition. Can you elaborate on what's driving the confidence? Is it improved buyer demand, better pricing, a picture, or or something else?

Speaker 2

No. I mean, we've, you know, we've been hinting to the fact that we're leaning towards industrial. We've said that we're gonna be recycling capital. We've come out very very front forward facing today and, you know, highlighted the fact that we're gonna accelerate our shift to industrial league. I'm I I I I think this is just a continuing evolution of our transition, and, you know, I think the market generally is impatient with transitions.

Speaker 2

And so we believe that the faster we can get to the other side and start showing growth And and and and specifically the embedded growth in our portfolio on the l iOS side, you know, from the fact that we're we've got, you know, increasing escalations built in. We've got a mark to market. And then, you know, we've got the redevelopment portion of our portfolio that's starting to, you know, complete and, open itself up for leasing. We've we've shown that we've been successful already in bringing, some of those into the operating portfolio. And then lastly, the, you know, the piece that we're doing relative to the acquisition.

Speaker 2

So all of that, you know, would would sort of go to waste if it was sitting around mired in the the office side of the results. So we're trying to get to the other side as quick you know, as quickly as we can so that the market can look at us, you know, on a more on a go forward basis.

Speaker 6

Fair enough. Yeah. That makes sense. And last question for me. Can you share about what's currently in your iOS pipeline in terms of volume, maybe geography, or even deal stages?

Speaker 2

Yeah. We're not gonna we're we're we're not, at at that stage. I mean, we're, you know, we're operating typically right now in a market that we're we're competing with private buyers. And so in that in that sense, we would be giving away the giving away the secret recipe. So I'll just tell you that we are our pipeline is is sufficient, and it is you know, we've got we've got a great, you know, opportunity to look at, you know, a variety of things in terms of of making out a portfolio.

Speaker 2

I mean, I think we're gonna be you know, the market market fundamentals are gonna drive what we're looking at. We can continue to look at markets with persistent supply constraints, strong demand growth from tenants, rent rent growth potentials. We're looking for, you know, zoning compatibility for the uses relative to our physical characteristics. We're looking for properties that provide us adaptable improvements that we can have tenants that, you know, use a small building and and support their yard operations. And then we're looking across, you know, to maintain our tenant industry diversification, and we're looking to expand our relationship with our existing tenants.

Speaker 2

So we're gonna do, know, core infill, growth corridors, strategic growth in in MSAs where certain of our tenants have, a desire to grow, you know, things of that nature. So all of that's playing into how we're picking our spots, if you will. And, again, I think I said it earlier, when you look at what we own, leveraging off of that portfolio and platform and the relationships that we have as a result of that reach is really what's gonna allow us to continue to drive this business forward and and really accelerate growth as well.

Speaker 6

Thank you.

Speaker 2

You're welcome. At

Operator

this time, we have no further questions, and I would like to turn the floor back over to management for any closing remarks.

Speaker 2

Thank you, operator. I wanna thank everybody, the analysts and investors as well for joining us today. We appreciate your support, and, we continue to work our tails off on behalf of the shareholders and really looking to maximize value, and we think we've got a great, great foundation to move forward in that regard. Thank you again.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.

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