Q2 2023 Peakstone Realty Trust Earnings Call
Greetings and welcome to the peak Stone Realty Trust second quarter 2023 earnings call.
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A question and answer session will filed a formal presentation.
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I would now like to turn the conference over to Investor relations to begin.
Thank you good morning, everyone you walk on the beach somewhere there'll be trust.
<unk>, 20th twenty-three earnings call them, but.
Earlier today, we pose an unusual leafs supplemental and updated.
Presentation.
Page on our website Www Dot T K S T.
Please note the use of forward looking statements by the company on this front desk.
Payments made on this call may include statements, which are not historical facts.
And forward looking.
Pretty intense for all these forward looking statements discovered by the state obligations.
Statements contained.
Friday litigation format 1995.
Making these statements.
This is a combined with those things.
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Furthermore, the forward looking statements reflect that guarantees about future events and a Sunday numerous known and unknown risks uncertainties assumptions and changes in circumstances.
The actual results are significantly.
Expressed in any forward looking statements and it will be affected by a variety of risks and factors that are beyond the company's control, including without limitation.
And our most recent annual report on Form 10-K accordingly.
Nine Q filed with the S. P C.
Disclaim any obligations and publicly update or advise any forward looking statements to reflect changes.
In underlying assumptions and factors of new information data on that.
<unk> or other changes after the date of this call except as required by applicable.
Additionally, on this call the company.
Certain non-GAAP financial measures such as funds from operations.
Funds from operations.
Even though Ari and adjusted EBITDA Orey.
You can find the tabular reconciliation non-cash financial measures.
Currently comparable gap numbers in the company's filings with the SEC.
On the golf today on my <unk>, Chief Executive Boston.
<unk> Chief Financial Officer.
With that I'll hand, the call over the months.
Thank you and welcome to <unk> second quarter of 2023 earnings call and webcast.
I'll begin by providing an overview of our kids cheapens during and subsequent to the second quarter.
Javier will then follow with a review of our financial results in a balance sheet and finally I'll return with closing comments as we look to the future.
We had a very active quarter, we listed our shares on N Y S. C redeemed our preferred shares and made meaningful progress in executing our disposition and deleveraging strategy.
However, our financial results for the quarter were impacted by non-cash charges, primarily related to office asset impairments and nonrecurring expenses related to the listing.
Overall are high quality newer vintage industrial and office portfolio continues to deliver consistent with performance.
At the end of the quarter are wholly owned portfolio consisted of 73 property.
Approximately 18.2 million square feet.
The annualized base rents or a P R of approximately $202 million.
63% of our tenants, there guarantors or non guarantor apparent entities as applicable.
An investment grade rating.
The portfolio had a weighted average lease term of 6.5 years and was.
96% leased up from 95.3% last quarter.
During the quarter, we strengthen our balance sheet by continuing to successfully execute our business plan.
As previously previously disclosed we use cash on hand to redeem our 125 million dollar series a preferred shares at par.
The shares were issue too and held by a third party international Investor.
The redemption generates annual savings of approximately $10 million and preferred distributions.
Sold five office properties for gross proceeds pulling $131 million, bringing the year to date gross disposition proceeds to approximately $300 million.
And an average cash cap rate of 7.6%.
Stabilized assets.
Following the redemption and the property sales this quarter leverage for a consolidated portfolio improved a 665 <unk>.
Improving by one half of the term during the quarter.
The cash for holding as a result of these dispositions afford this maximum flexibility to prudently allocate capital for uses the line with our go forward strategy.
Since the start of the year, we have reduced our office concentration.
Improved our leveraged by over one turned from seven seven times the $6 six times.
And we're moving closer to our near term target of six times for our net debt to EBITDA.
Turning to our segments.
And our industrial segment, which consists of 19 properties totaling approximately 9 million square feet.
We ended the quarter with 100 per cent economic occupancy and a wealth of $6 six years.
We continue to see sound fundamental in.
In our industrial markets.
As an example, approximately 49 per cent of our segment AVR is generated by properties proximate to talk to you a sports.
Many of these port markets in which we own properties are exhibiting robust economic activity in.
And the ports are realizing growth in container volumes normally.
The east coast ports of Savannah, Norfolk.
New York in New Jersey in Charleston.
Container volume growth is an important demand driver for industrial space in these markets and we believe our properties will continue to benefit from strong fundamentals stemming from this activity.
Our nearest exploration in this segment is the samsonite lease in Jacksonville, which expires in the fourth quarter of 2024.
This asset accounts for 8% of our industrial.
AVR and we continue to have an active dialogue with a tenant regarding a potential lease renewal.
It's worth noting the Jacksonville market has experienced meaningful leasing activity of late.
Our team is actively evaluating industrial investment opportunities and when appropriate we intend to acquire additional high quality industrial acids, but further enhance our portfolio composition.
Now turning to our office segment, which consists of 35 properties totaling approximately 5.7 million square feet.
We ended the second quarter with 97% economic occupancy.
And a wall for 7.9 years.
Segment continues to provide stability.
With limited near term rollover exposure, we have no remaining lease explorations of 2023 leaves.
Least is expiring in 2024 account for less than 1% of office segment AVR at least is expiring in 2025 only account for 2.9%.
Economic occupancy in the office segment declined by 1.2% from the prior quarter due to the exploration of a 60000 square foot lease at our terraces accompli point property in San Diego.
This class a building contains modern specifications and is prominently located at a key highway intersection with excellent visibility.
We liked the fundamentals and demand prospects in this market and currently we are optimistic about our releasing prospect.
Across our office markets, we're starting to see some green shoots on the demand side with increases in tour activity and Rfps.
We're also encouraged by continued upticks in daily physical occupancy as tenants prioritize and office work.
Largely due to the following attribute we believe are differentiated office assets are well positioned to provide ongoing stability moving forward.
Our average office building age is 11 years and many of our properties offer market, leading specifications and amenities, which offer a competitive advantage.
Over 81% of our office segment AVR is generated from coastal or sunbelt markets, which are generally experiencing strong net migration and superior leasing fundamentals.
And finally over 55% of our buildings contain the essential functions such as corporate headquarters.
Critical R&D.
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Turning to our other segment.
We owned 19 properties totaling approximately 3.6 million square feet.
14 of these properties are encumbered by nonrecourse loan to provide downside protection.
We continue to evaluate the remaining five properties on a case by case basis and determine the best way to maximize value.
Whether to invest additional capital or sell them as is.
To that point, we disposed of two vacant properties in this segment during the quarter.
Finally in addition to the three segments, we also own a 49% interest.
Joint venture, which contains 46 office properties or 59 buildings.
Towards mentioning that subsequent to quarter and the board of Trustees approved 200 million dollar at the market program to provide additional flexibility to manage our balance sheet diversify our capital sourcing options and offer an efficient mechanism to access capital in the future.
With that let me turn the call over to Javier to review our financial results.
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Thanks, Mike.
And the second quarter total revenue was $62.5 million in total NOI was $49.6 million.
The change compared to the same quarter in the prior year was primarily due to the disposition.
48 properties in 2022, and eight properties in the first half of 2023.
Net loss attributable to common shareholders was approximately 416.
Point $5 million or $11.59 per share primarily attributable to the following <unk>.
Cash real estate impairments of $397.4 million, resulting from changes related to anticipated hold periods estimated selling prices.
And potential they can see that impacted their recoverability at eight other segment assets and eight office second assets.
We had nonrecurring expenses $28.3 million, consisting of $21.3 million per transaction expenses related to listing of the company is chairs on the new chunk of change.
That's gonna be $5 million.
And a non-cash charge to write off deferred costs from the initial issuance of our now redeem prefer chairs and $2 million relating to employee separate.
And we also had a 17.5 million dollar net loss from investment in our joint venture primarily due to interest expense depreciation and amortization.
We anticipate the J V will continue to have similar quarterly net losses for the remainder of the year.
F F O with negative approximately $10.7 million or negative 27 cents per share on a fully diluted basis.
Please note that excluding the $28.3 million of nonrecurring expenses.
<unk> for the second quarter, it would have been approximately $17.6 million.
Or 45 cents per basic and diluted share.
<unk> was approximately $28.7 million or 73 cents per share on a fully diluted basis.
Same store cash in Hawaii was approximately 48, $9, which represents a 2.5% <unk>.
Increase on an annual basis after explaining a one time termination fee received in the same quarter of the prior year.
Moving onto our balance sheet.
As of June 30, 2023.
We had approximately $361 million in cash on hand and.
$34 million of available capacity on a revolving credit facility.
For total liquidity of approximately $395 million.
We also have unencumbered assets that we could add to the facility to increase our available capacity or liquidity.
More than $100 million.
In regards to our consolidated that total consolidated that was approximately $1.47 billion.
$950 million on a credit facility and the balance consisting of secured debt.
We are holding the $361 million in cash as it provides is maximum flexibility going forward and.
And a significant portion.
Of our cash as in money market accounts, earning interest in the range of five per cent.
<unk> inclusive of cash was approximately $1.1 billion.
Weighted average term to maturity was 3.1 years, assuming all available extensions are exercise.
Approximately 86% of our total outstanding consolidated that has six rapes inclusively the effect of our interest rate swaps.
Limiting our near term exposure to interest rate volatility.
The interest rate swaps, having a maturity date of July 2025.
Including the effect of interest rate swaps.
With a notional amount of $750 million waited.
Weighted average interest rate was 4.16%.
For our fixed rate and variable rate debt combined.
And net debt plus preferred to normalize <unk> for our consolidated portfolio was six six times.
Improving from 7.1 times as a quarter and 2023.
And from 7.7 times as an ear and 2022 <unk>.
The improvement in the current quarter resulted from sales proceeds offset by the redemption of our <unk>.
<unk>, resulting in a small change in cash.
And a reduction of $125 million on our total debt plus preferred balances.
For the remainder of 2023, we have one small 17.4 million dollar secured property law and.
In our industrial segment, which matures in September .
We have the ability to pay off alone at maturity with available cash on hand or proceeds from a revolving credit facility.
Beyond that we have no material that mature it until the end of 2025 <unk>.
Including our 409 dollar facility term loan and.
R. A I G two mortgage loan which is in our other segments.
And we'll have a balance of approximately $159 at maturity.
Finally for the second quarter, we painted distribution in the amount of 22 and a half cents common sure on July 17 2023.
Shareholders of record as of June 30th 2023.
While the company expects to pay dividends on a quarterly basis going forward, all dividend decisions, including amount and frequency will be made by the board of trustees.
Now I will turn the call back over to my closing remarks.
Thanks Javier.
Our cycle tested teams experience and the quality of our assets continue to be positive differentiators as we continue to operate our portfolio.
Execute on property sales and reduce our leverage.
Looking forward, we will continue to focus on strengthening our balance sheet with the goal to achieve an investment grade rating in a more favorable cost of capital as soon as we can.
We were close to achieving the upper end of our deleveraging goal and we are optimistic about the pace at which we will get that dark.
We continue to have a positive outlook on the industrial market.
As I mentioned previously our team continues to assess investment opportunities in the industrial sector.
We remain committed to a disciplined capital allocation strategy and when appropriate.
We intend to incredibly deploy capital saline into industrial and further shift our portfolio composition overtime.
Despite the varying degrees of volatility in the capital markets and macroeconomic environment.
We believe are stable high quality portfolios resilient and positions as well to execute on our strategy to maximize value for our shareholders.
Please reach out to our Investor relations team at I R. At P. K S T Dot com.
With any questions or or visit the investors section.
Of our website at T K S T dot com.
Now turn it over to the operator to take a few questions from analysts.
Brighter.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad and a confirmation total indicate your lines and the question queue.
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Participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while I pull for questions.
And our first question comes from the line of Joshua Denner line with Bank of America. Please proceed.
Hey, Hey, guys. Thanks for the time I'm just curious on <unk>.
Asset sales I guess.
What else are you marketing today, and then what's just the general appetite out there for for office out everything.
<unk> you are talking to University office.
Yeah, Josh Thanks for joining us.
So.
Active in the marketplace.
We're not really giving you guidance as you as you well know.
We have a pretty early in her life cycle at the moment and.
You know given the uncertainty of timing and the quantity of sales you know we're going to look to provide guidance at a later date.
But as you know we did we did execute on $131 million worth of sales this last quarter.
Roughly $300 million in total.
And when you look at all of that I I think you know we've been pretty surprised by our ability to access the market at the pricing levels that are attractive to us in terms of clarity clearing the marketplace. So.
You know I think there's one key element that is as difficult out. There is is buyer financing the death side of the equation and.
And we've been making sure that as we process.
You know the as we process our buyers if you will.
We're very keen on understanding exactly how deftly.
Financing is gonna play a part in the transaction many of our buyers have been very very local sharpshooters and they have long standing.
Ah line relationships with local community and regional banks. So that has worked in our favour so.
I don't know if.
I guess I would tell you that's a lot of diligence on our part and a lot of handholding and we've been able to execute today at a pretty pretty good pace there.
Okay I appreciate that color and then just thinking about the portfolio. So yep, 12% of the leases expiring next year just.
Or 12 per cent of the portfolio sorry.
Alright next year, just kind of curious how those conversations are going with tenants.
Any known move outs at this point.
Yeah, I think it's I think because we we we kind of have that.
Hit that directly in our.
And our commentary you might've missed it but you know we don't really so we looked at it on a segment by segment basis right I think the one key piece that we talked about openly was the samsonite Tran.
Transaction, which is 85% of our industrial segment exposure through 2024.
And you know what we will be told you. There is that we are inactive discussion with that tennis.
I think we're very excited about what's going on in the Jacksonville industrial market overall.
On the office segment, we only have 3.8% or just under 4% expiring through 2025.
And I think that at least pipeline for office.
Properties has been picking up and we've mentioned the notion of green shoots.
And and so we're pretty pretty happy about that.
And really where our exposure that you're referring to as in our other segment as we've mentioned in the past when you have a lot of transparent and clear transparency and clarity so.
That rollover, you'll see it and you know I guess a nurse supplement.
Specifically is where that's called out and I and I think we're.
We're actively engaged in discussions with a fair number of those of those tenants no promises there, but we're actively moving cause see what we can do in that regard.
[noise] because of the time, yes.
Sorry, Josh.
And our final question comes from the lineup Anthony how with true Securities. Please proceed.
Hey, guys. Thanks for taking my question just want to follow up on the ask a question about.
Leaving pipeline for the other segment particular, particularly the K B R building in Huntsville, and Westgate too that'd be crazy and providing a caller on those two pieces.
You know, we're we're generally not providing.
Specific property guidance, we just do it for Samsung is because of the size and the.
You know the.
The percentage of the AVR there.
I'll just I'll, just say that we're actively engaged in as many places at least as we possibly can be.
And and we just really don't go into that level of detail.
On on every property portfolio Ceasar Anthony on on that one.
Alright, how how's the the work space K D portfolio, hopefully you're performing and also when does that for financing cloth Bernard.
Yep.
Hi, Anthony.
Yeah on the.
You know we had a a lost their most of that losses related to the amortization of dancing and appreciation within the financing cause.
About $21.8 million of amortization in the corner.
And that will likely continue through the end of the year.
As you May have noted in our in our queue. We are in in one corner of leg.
With with the reporting.
Jamie So the initial financing that was put in place to acquire that portfolio occurred in September of last year, So and those costs are incurred.
I have a friend so over the next 12 months from September to September you'd see that amortization occur for us that would occur.
Fourth quarter, so I'll always sad and are prepared remarks that they should expect to see a similar.
Amount of amortization flying through the end of the year.
Okay.
How's the how's the the portfolio like performing.
Like in terms of like talking to see or like these Bachelor life.
No NOI crowd.
I think the only thing that I would just tell you is that we're continuing to produce positive castle.
How does that portfolio.
Yeah, along the lines of what we anticipated the positive cash flow of course does not flow through to us.
Because contractually.
We agree with the lender that we would continue to add to.
Reserves as a result of that cash so I don't know if there's anything else you wanted to add on that yeah. No I think that's that's.
That's all we can provide.
Okay and and my last question is like can you talk a little bit more about the athletes get sold in court.
Maybe in terms of like pricing or maybe over all interesting those assets uhm I noticed that the ones from the office of polio World. All 100 per cent leaves and all hot maybe nine to 10 years in eastern whereas the ones who sold in the other aspect went all all bacon.
Yeah, so you're looking for a little bit more.
A little more information on the on the property sales himself.
Yeah Yeah.
And unfortunately, our our communication is a little bit.
Scratchy on this end.
So so relative to the.
The second quarter, we've only really provided information on a.
Really on a more global basis.
What you I think you correctly pointed out that the office assets were Ah.
Generally have a longer term wall and in the other two cases relative to the.
The other portfolio they were vacant assets I think that's probably the best I can.
Give you we've got more detail in the queue specifically.
You'll notice that there's a table that gives you.
I S S.
And information on the sales proceeds Ah for each one of those would be bad.
Two.
Three of the issue.
Does that answer your question Anthony.
Yeah, I didn't realize it but thanks for pointing that out.
Yeah.
Alright.
Thanks for your question.
Thanks, Anthony appreciate it.
Thank you.
This concludes the question and answer session I liked to turn the call back to my story Squanto for closing remarks.
I think the operator I appreciate everyone joining us today and for your time.
And we we will look forward to updating you on our progress.
To achieving our goals during our next quarterly webcast roughly.
Roughly.
Roughly three months from now so again, thank you for your time I appreciate it and.
Thank you goodbye.
This concludes today's conference you may disconnect your lines at this time.
You for your participation.
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