Peakstone Realty Trust Q4 FY2024 earnings call

• The company had an extremely successful fourth quarter and full year, shifting its portfolio towards industrial with industrial ABR now nearly 40% of total ABR.
• Acquired a premier 51-property infill industrial outdoor storage (IOS) portfolio for $490 million and divested $317 million of non-core assets, eliminating the entire other segment.
• Achieved strong leasing activity with favorable leasing spreads. Leased approximately 837,000 square feet with a weighted average lease term of 4.5 years and favorable re-leasing spreads.
• Strengthened capital structure with amendment and extension of credit facility, including entering new forward starting floating to fixed interest rate swaps and utilizing accordion feature to secure a new $175 million term loan for IOS portfolio acquisition.
• IOS properties have a low building-to-land ratio, complement traditional industrial assets, and the acquired IOS portfolio has a 70% mark-to-market opportunity with potential to achieve incremental yields as properties are stabilized.

The company has two main segments: Industrial and Office. The Industrial segment's ABR now comprises nearly 40% of total ABR. The 45 IOS properties within the Industrial segment are approximately 100% leased with 47% investment-grade tenancy, a weighted average lease term (WALT) of 4.4 years, and a potential 70% mark-to-market opportunity. The 19 traditional industrial assets in the Industrial segment are 100% leased with 58% investment-grade tenancy, a WALT of 6 years, and a potential 24% mark-to-market opportunity. The Office segment has 33 properties which are 99% leased with 60% investment-grade tenancy and a WALT of 6.9 years. These office buildings are generally newer with an average age of 12 years and have minimal near-term capital requirements, with only 1% of the Office segment ABR expiring in 2025 and 18% expiring over the next three years.

• The company remains focused on maintaining a disciplined approach to debt levels, with the revolving credit facility providing flexibility to adjust debt as needed and proceeds from non-core asset sales to pay down debt.
• Plans to continue pursuing strategic IOS acquisitions to expand portfolio and improve growth trajectory.
• Aiming for a net debt to normalized EBITDAre ratio of 6:1, with a proven track record of reducing leverage and balancing growth with deleveraging.

• Risks related to business include market uncertainties, interest rate fluctuations, and potential challenges with lease expirations and rollover in certain segments like office.

Q: Hi, good evening. Thank you for taking my questions. I first wanted to get a few comments on your appetite when looking forward at acquisitions in either having a mix of the IOS or traditional industrial type 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?

A: 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.

Q: Thanks 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? It seems like the comments from the press release indicate you could be using it to pay down debt or to make targeted IOS investments? Just trying to get a little bit more color on how we think – how you guys are thinking about debt repayment versus continued investment.

A: Hi, Michael, it's Javier. The majority or almost two-thirds of the proceeds from the sales were dedicated to pay off the AIG debt. So we're fully extinguished there. And there was also one smaller loan of approximately $11 million that got paid off as part of the sales proceeds there. The balance it did go to increase our cash balance over the year. And really on a net-net debt basis improved our leverage slightly. Even though we – as you saw in 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.

Q: Hey guys. Congrats on selling the other segment and you guys done a fantastic job in 2024. Just one quick question for you, Javier, you mentioned that like two-third of the proceeds from the sale of the other segment went towards paying down the AIG loan, right? But when I check the supplemental in the third quarter AIG loan was -- had an outstanding balance of $183 million. Just curious like what -- can you help me bridge the gap?

A: Yeah. I think I just said generally two-thirds. The balance was $183 million at the end of the third quarter. But if you look at the beginning of the year I think we were in the $200 million range. I believe it was -- I think we started in the $212 million range.

Q: Hey guys. Congrats on selling the other segment and you guys done a fantastic job in 2024. Just one quick question for you, Javier, you mentioned that like two-third of the proceeds from the sale of the other segment went towards paying down the AIG loan, right? But when I check the supplemental in the third quarter AIG loan was -- had an outstanding balance of $183 million. Just curious like what -- can you help me bridge the gap?

A: I'm sorry. It was up to $317 million total sales proceeds for the year. That's what I meant to say.

Q: Good afternoon. Thanks for all 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? It seems like the comments from the press release indicate you could be using it to pay down debt or to make targeted IOS investments? Just trying to get a little bit more color on how we think – how you guys are thinking about debt repayment versus continued investment.

A: Hi, Michael, it's Javier. The majority or almost two-thirds of the proceeds from the sales were dedicated to pay off the AIG debt. So we're fully extinguished there. And there was also one smaller loan of approximately $11 million that got paid off as part of the sales proceeds there. The balance it did go to increase our cash balance over the year. And really on a net-net debt basis improved our leverage slightly. Even though we – as you saw in 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.

Q: Thanks for that. And as a follow-up, it sounds like you're continuing to look at divesting non-core assets. Do you define non-core assets as the office assets? Or does that also include some of the traditional industrial assets as well?

A: Yes. I think – by the way thanks for joining us Michael and I appreciate you picking us up in coverage. I think from our perspective, certainly really our approach is maximizing value. And if 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 heavy weight on office. So from that perspective I think that that would be the larger component of our non-core asset pool if you will.

Q: 10% of your industrial ABR is set to expire in 2026. Do you just have a sense of how likely tenants are to renew? Are you starting to have those conversations? And what are the conversations like with your current tenants?

A: Yes. 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.

Q: Hey guys. Congrats on selling the other segment and you guys done a fantastic job in 2024. Just one quick question for you, Javier, you mentioned that like two-third of the proceeds from the sale of the other segment went towards paying down the AIG loan, right? But when I check the supplemental in the third quarter AIG loan was -- had an outstanding balance of $183 million. Just curious like what -- can you help me bridge the gap?

A: Yeah. I think I just said generally two-thirds. The balance was $183 million at the end of the third quarter. But if you look at the beginning of the year I think we were in the $200 million range. I believe it was -- I think we started in the $212 million range.

Q: And just one last question, have you guys started marketing the office portfolio? And just curious, like what are you seeing in terms of buyer demand or interest in those assets?

A: Yeah. 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, but 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 a quote in the last couple of days from somebody that said that maybe that's pushing up 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 buyer's going forward, if that effect holds.