Peakstone Realty Trust Q2 FY2025 earnings call

• Advancing strategic transformation into an industrial REIT with growth in the industrial outdoor storage (IOS) subsector central. - Expanded IOS portfolio with 2 acquisitions totaling ~$52 million: a 27-acre property in Atlanta for ~$42 million and a 9.2-acre property in Port Charlotte, FL for ~$10.4 million. - Completed redevelopment of an IOS property in Savannah, executing a full site 2.5-year lease with over $0.5 million incremental ABR and 4% annual escalations. - Sold 11 office properties year-to-date totaling $216 million, recognized noncash impairment of ~$286 million on 18 office properties. - Focus on reducing leverage, with Board approving $0.10 per common share dividend for Q3.

For the quarter ended June 30, total revenue was approximately $54 million and cash NOI was approximately $43 million. Net loss attributable to common shareholders was approximately $265 million or $7.22 per share. FFO was approximately $23.9 million or $0.60 per share on a fully diluted basis. Core FFO was approximately $23.8 million or $0.60 per share. AFFO was approximately $24.3 million or $0.61 per share. Same-store cash NOI increased 9.3% in the Industrial segment and 4.7% in the Office segment. The Office segment now represents 35% of the net book value of real estate assets, while the Industrial segment accounts for approximately 65%.

• Board approved a dividend of $0.10 per common share for the third quarter, payable on October 17. - Remain focused on reducing leverage, expect to continue progress with Office dispositions. - Dividend aligns with cash flow characteristics of the industrial portfolio and supports scaling the IOS platform.

Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks, see the annual report on Form 10-K and subsequent SEC filings.

Q: 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 like a stabilized AFFO payout ratio or something of the sort?

A: I think it's much more straightforward than I think that your question implies. I mean we're basically just looking forward to a post-Office environment and looking at our Industrial segment overall, which includes traditional and IOS. So looking at how that's been established 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.

Q: Can you provide the cap rates of where you've been buying the IOS during the quarter and where you've been selling the office?

A: Yes. So we don't provide them on an individual basis. But on an aggregated basis, you have in our -- what you call it, in our IP excuse me, the data to be able to calculate that if you want to on an aggregated basis. We've -- so that's relative to the acquisitions. And then relative to our office, we've identified again on an aggregate basis and an 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 all together relative to the aggregate numbers that we give you. And we just haven't done that on an individual basis. But I think last quarter, we gave you some guidelines relative to the makeup of leases that are less than 5 years in terms of what those sales will look like. And then we also gave you some direction on leases that had more than 5 years, and we've been sitting right in between the goalposts that we provided you in that instance.

Q: Just curious like what specific variables changed that triggered the $286 million 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?

A: I'll let Javier take the shot at that one, and I'll fill in behind him. Yes. No, I think it's really driven by the acceleration of our sales and really taking a shorter hold period and really looking at our controls and accounting processes with respect to that. So as you -- from a GAAP standpoint, when you look at the acceleration of sales, you've got to look at the fair value calculation at the time. So that's really what drove the acceleration of these impairments.

Q: Can you share about what's currently in your IOS pipeline in terms of volume, maybe geography or even deal stages?

A: Yes, we're not going to -- we're not at that stage. I mean we're operating typically right now in a market that we're competing with private buyers. And so in that sense, we would be giving away the secret recipe. So I'll just tell you that we are -- our pipeline is sufficient, and it is -- we've got a great opportunity to look at a variety of things in terms of making out a portfolio. I mean I think we're going to be -- you know the market fundamentals are going to drive what we're looking at. We continue to look at markets with persistent supply constraints, strong demand, growth from tenants, rent growth potentials. We're looking for 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 use small building and support their yard operations. And then we're looking across -- to maintain our tenant industry diversification, and we're looking to expand our relationship with our existing tenants. So we're going to do core infill, growth corridors, strategic growth in MSAs where certain of our tenants have a desire to grow, 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 and leveraging off of that portfolio and platform and the relationships that we have as a result of that reach, is really what's going to allow us to continue to drive this business forward and really accelerate growth as well.