Q4 2024 Peakstone Realty Trust Earnings Call
Greetings and welcome to peak stormed Realty Trust fourth quarter 'twenty 'twenty four earnings webcast conference call.
All participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host Mr. Steve Smith Investor Relations. Thank you. Mr. Smith, you may begin.
Speaker Change: Good afternoon, and thank you for joining us for peak Stone Realty trusts fourth quarter 2024 earnings call and webcast.
Speaker Change: Earlier today, we posted an earnings release supplemental and updated investor presentation. The investors page on our website.
Speaker Change: Www Dot P J S T dot com.
Speaker Change: Please reach out to our Investor relations team and I are at P. J S T dot com with any questions.
Speaker Change: The company will be making forward looking statements, which include any statements that are not historical facts on today's webcast.
Speaker Change: Such forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.
Speaker Change: For a further discussion of risks related to our business. Please see our annual report on Form 10-K, and subsequent filings with the SEC.
Speaker Change: Additionally, on this call the company may refer to certain non-GAAP financial measures such as funds from operations.
Speaker Change: Adjusted funds from operations <unk> normalized EBITDA.
Speaker Change: 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.
Mike: On the call today are Mike <unk>, CEO, and President and Javier Vitol CFO with that I'll hand, the call to Mike.
Mike: Good afternoon, and thank you for joining our call today.
Mike: The company had an extremely successful fourth quarter and full year.
Mike: Significantly advancing our strategic plan to shift our portfolio towards industrial.
Mike: With our industrial ABR now comprising nearly 40% of total ABR.
Mike: Over the course of the year, we acquired a premier 51 property.
Mike: Infill industrial outdoor storage or iOS portfolio for $490 million.
Mike: We divested $317 million of noncore assets, including the elimination of the entire other segments.
Mike: We achieved strong leasing activity with favorable leasing spreads highlighting the strength of our operational capabilities.
Mike: And we took another pivotal step in strengthening our capital structure with the amendment and extension of our credit facility.
Mike: We were excited to enter the Iowa sub sector.
Mike: IOS properties have a low building to land ratio or low coverage.
Mike: Which maximizes yard space for the display movement and storage of materials and equipment.
Mike: This sub sector is characterized by fragmented ownership <unk>.
Mike: Significant supply constraints compelling operating fundamentals and minimal capex requirements.
Mike: Importantly, I owe us assets complement our traditional industrial assets, which include distribution warehouse and light manufacturing properties.
Mike: These asset types share similar market dynamics tenant profiles lease structures and asset management responsibilities.
Mike: The premier infill.
Mike: Iowa portfolio, we acquired in the fourth quarter.
Mike: As the 70% mark to market opportunity with the potential to achieve incremental yields as we stabilize the six redevelopment properties.
Mike: This portfolio significantly enhances the company's growth profile.
With substantial opportunities for sustained growth in the Iowa sub sector and our team's unique iOS expertise, we plan to concentrate our investment strategy on these types of assets, which we believe will drive long term shareholder value.
Mike: Turning to our dispositions I'm very pleased that we achieved our stated goal of disposing of our other segment of assets by year end 2024.
Mike: In the fourth quarter, we sold the remaining 10 assets in that segment completing this important milestone.
Mike: For the year, we sold a total of 19 assets for $317 million, including 17 other segment properties and two office segment properties.
Mike: One of the key reasons, our office property dispositions have been so successful is that our office buildings are generally newer vintage and contain functions that are central to tenant operations.
Mike: Given these attributes many of our tenants have expressed interest in purchasing the property as they lease and we've been successful in closing these types of transactions.
Mike: In 2024 tenant purchases accounted for approximately 44% of our gross disposition proceeds as.
Mike: As we continue to divest noncore assets in 2025.
Mike: We will maintain a strong focus on engaging with tenants as potential buyers of our properties.
Mike: Moving to leasing activity, we had a successful year marked by strong results. We leased a total of approximately 837000 square feet with a weighted average lease term of four five years and achieved favorable re leasing spreads 32% on a GAAP basis and 23% on a cash basis.
Mike: Several of these leases were for other segment assets that were sold shortly after the leases were completed in.
Mike: In these cases, we strategically structured the leases to maximize potential sales proceeds.
Mike: And minimize out of pocket leasing costs incurred prior to the anticipated sale date.
Mike: Our solid leasing activity for the year highlights our operational expertise and reflects the continued strong demand for our properties in the market.
Mike: As a result of our acquisition disposition and leasing activities in 2024, our portfolio had the following key characteristics at year end.
Mike: We owned a total of 103 properties reported in two segments industrial and office. Our portfolio consisted of 97 operating properties and six redevelopment properties, which are properties, we are designated for redevelopment or repositioning.
Mike: Our operating portfolio includes 64 industrial segment properties made up of 45 ius locations in 19 traditional industrial assets.
Mike: These properties span 18 states 31 markets and roughly 58% concentrated in coastal and sunbelt markets.
Mike: Our industrial segment ABR now accounts for nearly 40% of our total ABR.
Mike: Up from 25% at the beginning of 2024.
Mike: Looking at our iOS asset specifically.
Mike: The 45 iOS properties are approximately 100% leased with 47% investment grade tenancy.
Mike: A walter for four years, and a potential 70% mark to market opportunity.
Mike: And our traditional industrial assets are 100% leased with 58% investment grade tenancy of Walter of six years, and a potential 24% mark to market opportunity.
Mike: Our operating portfolio also includes 33 office segment properties, which are 99% leased with 60% investment grade tenancy and our Walt of six nine years.
Mike: These buildings are generally newer.
Mike: With an average age of 12 years and have minimal near term capital requirements.
Mike: This segment is limited near term rollover with only 1% of the office segment ABR expiring in 2025, and 18% expiring over the next three years.
Mike: Our redevelopment portfolio consists of.
Mike: Six industrial segment I O S assets encompassing eighty-two usable acres across four states with targeted stabilized yields in the seven 5% to 8% range additional.
Mike: Details about our redevelopment properties are provided in our quarterly supplemental.
Mike: With that I will turn the call over to Javier who will review, our financial results and capital markets activity Javier.
Javier: Thanks, Mike I'd like to begin by sharing a few highlights of our financial results for the quarter.
Javier: Total revenue was approximately $58 million in cash NOI was approximately $48 million net.
Javier: Net income attributable to common shareholders was approximately $12 $7 million.
Javier: Or <unk> 35 per share.
Javier: <unk> was approximately $29 $2 million or <unk> 74.
Javier: Per share on a fully diluted basis.
Javier: <unk> was approximately $25 $6 million or <unk> 65 per share on a fully diluted basis.
Javier: And same store cash NOI was approximately $39 million.
Javier: 0.4% increase compared to the same quarter last year.
Javier: Same store NOI for our industrial segment was primarily impacted by a continuing rent abatement in the 11th year of a preexisting industrial segment lease which ended in November 2024.
Javier: And a one time reversal of non tenant reimbursement income.
Javier: But for these items same store cash NOI would have grown by two 8%.
Javier: For full year, 2024, and I thought it was approximately $106 $6 million or $2 69 per share on a fully diluted basis.
And same store cash NOI for the overall portfolio was approximately $154 $9 million.
Javier: Moving onto our balance sheet.
Javier: As of December 31.
Javier: Total liquidity was approximately $229 million consisting of cash and available revolver capacity.
Javier: Our cash balance excluding restricted cash was approximately $147 million and we earned approximately $1 $5 million of interest income in the quarter.
Javier: Available revolver capacity was approximately $82 million.
Javier: Before we begin further debt metrics, let me first walk you through the evolution of our debt structure throughout the year.
Javier: As we began 2024, we focused on strengthening our capital structure.
Javier: A key initiative being the successful amendment and extension of our credit facility.
Javier: During the first half of the year.
Javier: We further reduced our net debt to normalized EBITDAR from six two times at the start of the year to five nine times at the end of the second quarter.
Javier: And we retained excess cash to manage our operational needs and continue our strategic engagement with our banking partners in the third quarter with the assistance of our highly supportive Bank group, we executed a beneficial amendment and extension.
Javier: Through this amendment among other things, we extended over $750 million of near term maturities to 2028, and incorporated updated covenants, which facilitate asset dispositions and the naval iOS properties to be added to our borrowing base.
Javier: In connection with this amendment, we entered into new forward, starting floating to fixed interest rate swaps with a notional amount of $550 million.
Javier: These swaps will take effect on the maturity date of our existing $750 million of swaps, which is July one 2025.
Javier: They mature on July one 2029 and have the effect of converting sulfur to a weighted average fixed rate of 358%.
Javier: The amendment also resulted in a more favorable valuation of the industrial assets, including iOS and our borrowing base and the new swaps assured a competitive interest rate, making this financing both cost effective and essential for executing our growth and deleveraging strategies.
Javier: In the fourth quarter, our lenders continue to support our growth plan, allowing us to utilize the accordion feature in our credit facility to secure a new $175 million term loan.
Javier: Term loan matures in 2028 inclusive of the extension option and is priced at Sofa, plus 175 basis points based on our consolidated leverage at the end of the year.
Mike: Proceeds from the term loan were utilized to acquire the iOS portfolio, Mike mentioned earlier.
Mike: On the secured debt side following the sales of the other segment assets, we extinguished all associated AIG debt, which had a remaining balance of $183 million.
Mike: Additionally, we added three separate mortgage loans totaling $110 million at a weighted average interest rate of 564%.
Mike: These loans are secured by our traditional industrial properties.
Mike: With two maturing in 2029 and one maturing in 2032.
Mike: As a result of these actions our year end debt metrics were as follows $1 $36 billion in total debt outstanding with $1 billion of unsecured debt on our credit facility and the remainder in nonrecourse secured mortgage debt.
Mike: After deducting cash our net debt was approximately $1 $2 billion and our net debt to normalized EBITDA ratio was seven five times.
Mike: Including the effect of our interest rate swaps, 82% of our debt was fixed and our weighted average interest rate for all debt secured and unsecured at year end was four 4%.
Mike: For the fourth quarter as previously announced we paid a dividend of <unk> 22, and a half cents per common share on January 17th.
Mike: And the board of Trustees approved a dividend for the first quarter and the amount of 2002 and a half cents per common share that is payable on April 17 to holders of record on March 31.
Mike: While the company expects to continue paying dividends on a quarterly basis, all future dividend decisions will continue to be made by the board of trustees.
Mike: With that I will pass the call back to Mike.
Mike: Thank you Javier looking ahead, we remain focused on maintaining a disciplined approach to our debt levels.
Mike: Our revolving credit facility provides the flexibility to adjust that as needed and we are well positioned to pay it down through proceeds from noncore asset sales.
Mike: Additionally, we have the capital flexibility to pursue strategic iOS acquisitions, providing us with a competitive advantage as we seek to expand our portfolio and further improve our growth trajectory.
Mike: We are confident in our ability to continue driving long term growth and value creation and we look forward to another successful year ahead.
Mike: We will now turn the call over to the operator to take a few questions from analysts.
Mike: Operator.
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the studies one moment. Please while we poll for questions.
Speaker Change: The first question comes from the line of Federal Bennett with Bank of America. Please go ahead.
Federal Bennett: Hi, Good evening, Thank you for taking my questions.
Federal Bennett: First I wanted to get a few comments on your appetite when looking forward to acquisitions in either having a mixed with the iOS or traditional industrial type properties that you already have in your portfolio is.
Federal Bennett: Is there one way that you're leaning and also what type of price differential or competition or are you also seeing in the market.
Federal Bennett: Thanks for joining us federal it's good to hear you.
Federal Bennett: So as we sit here today.
Federal Bennett: The mix that we find most compelling is really related to iOS.
Federal Bennett: While iOS cap rates of 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.
Federal Bennett: Overall at the embedded growth in the iOS portfolios were finding that.
Federal Bennett: There's just a better dynamic.
Federal Bennett: Going on there so for the month for the moment.
Federal Bennett: Overall, we're saying that we're investing in industrial but primarily our focus is on the iOS assets.
Speaker Change: Okay. Thank you and also just following up on your comment about capital recycling and the focus on the office portfolio. I was curious if you are receiving any direct imbalance.
Speaker Change: You are seeing any further appetite, especially as newsround offices turned a little bit later.
Speaker Change: By lighter I mean, you mean better yes.
Speaker Change: Okay.
Speaker Change: You know I think one of the themes that we're seeing.
Speaker Change: So I guess theres two things that are out there what we're finding in terms of interest.
Speaker Change: At it was really at the local level local sharp sharpshooters specialists in a specific location that already have a presence in the marketplace.
Speaker Change: Or funding prices today to be very.
Speaker Change: You know very very much of a pickup and appeal to them.
Speaker Change: And then I think the second thing that we're seeing and I. If you look at what we were able to do that in the last year.
Speaker Change: 44% of our gross proceeds came from existing tenants.
Speaker Change: <unk> tenants from <unk>, who are coming in as users to take over properties. So.
Speaker Change: There is an arbitrage that exists in terms of the the credit cost to the types of tenants that we have which are fortune 500 tenants of large larger more credit worthy tenants.
They have a they have an ability to finance the projects that are at a significant differential to the investors.
Speaker Change: Or traditional investors institutional investors. So I would say those are the two themes.
Speaker Change: Everyone is largely hopeful.
Speaker Change: With a significant.
Speaker Change: At least publicized return office that the demand side is going to come back there.
Speaker Change: And just one more from me just kind of thinking more on the internal grid side.
Speaker Change: Is that and you made a few comments about lease expirations coming up more in 2026 and a further out years. Your key focus more on being able to push the rates on leases escalators going forward and any new lease renewals and how are those negotiations going.
Speaker Change: Yeah.
Speaker Change: So.
Speaker Change: As we identified in our acquisition of the Iowa's portfolio we have.
Speaker Change: Five opportunities in the redevelopment.
Speaker Change: Subsegment, if you will.
Speaker Change: Where we are actively out.
Speaker Change: Repositioning those assets in some way shape or form and the leasing activity has been quite good.
Speaker Change: The six asset is a ground up redevelopment, so that's sort of a different animal.
Speaker Change: But I think that along with some of the discussions that we have with our existing tenants tenants who have some.
Speaker Change: Lease expirations coming up in the next couple of years I think we're we're pretty excited about what's what we're seeing on both ends just in terms of the uplift in rents are anomaly and then also the embedded growth rate within.
Speaker Change: The lease term itself so stay.
Speaker Change: Stay tuned we've got a lot of work ahead of us, but most of our projects are underway and definitely in the marketplace and a lot of interest for those properties.
Speaker Change: Great. Thank you so much and congratulations on Macquarie.
Rocky: Thanks Rocky.
Speaker Change: Thank you.
Speaker Change: Question comes from the line of Michael Goldsmith with UBS. Please go ahead.
Speaker Change: Good afternoon, and thanks, a lot for taking my question.
Speaker Change: First question relates to the proceeds from the sale of the other segments like how should we think about how youre going to be using this seems like the.
Speaker Change: The comments from the press release indicate you could be using it to pay down debt or to make.
Speaker Change: Make targeted iOS investments, just trying to get a little bit more color on how we think.
Speaker Change: You guys are thinking about debt repayment versus continued investment thanks.
Michael Javier: Hey, Michael Javier.
Michael Javier: The majority or almost two thirds of the proceeds from the.
Michael Javier: The sales were dedicated to the pay off the AIG.
Michael Javier: That said, we're fully extinguished there and there was also one smaller loan of approximately $11 million that got paid off as part of that.
Michael Javier: The sales proceeds there the balance.
Michael Javier: It did.
Michael Javier: Go to increase our cash balance.
Michael Javier: Over the year and and really on a net.
Michael Javier: Net debt basis improved our leverage slightly.
Michael Javier: Even though we.
Michael Javier: As you saw in the <unk> filing suite lever it up a bit for the acquisition itself, but will continue to focus on our leverage yeah. We did complete the second quarter down to five nine times or up to seven five times as a result of the acquisition. So it will be well what really.
Michael Javier: Look at.
Michael Javier: Proceeds from sales going forward on a balanced.
Michael Javier: Approach looking at leverage and strengthening the balance sheet and also focused on growth.
Michael Javier: Thanks for that.
It was a follow up.
Michael Javier: It sounds like you're continuing to look at divesting noncore assets.
Michael Javier: Do you define noncore assets is just the office assets or does that also include some of the traditional industrial.
Michael Javier: Uh-huh assets as well.
Michael Javier: Yeah.
Michael Javier: Yeah I think.
By the way, thanks, and thanks for joining us Michael and I appreciate you picking us up in coverage.
Michael Javier: You know I think ever.
Michael Javier: From our perspective certainly.
Michael Javier: Really our approach is maximizing value.
Michael Javier: And you know what.
Michael Javier: I think in todays world. When you look at the returns that are coming out of office.
Michael Javier: The rollover exposure and then the capex exposure to those sorts of things put a pretty pretty heavy weight on an office.
Michael Javier: So from that perspective, you know I think that that would be the the larger component of our of our noncore.
Michael Javier: Asset pool, if you will.
Speaker Change: Got it and maybe just one last one for me.
Speaker Change: 10% of your industrial AVR is set to expire in 2026 did you just have a sense of how likely tenants are to renew or are you starting to have those conversations and what are the conversations like with your current tenants.
Speaker Change: Yeah, we have.
Speaker Change: We don't really have a.
Speaker Change: We don't we probably don't have enough rollover, but to get the growth that we wanted to see but we are we have been in discussion.
Relative to the exposure there and so far everything we're hearing has been.
Speaker Change: Positive, but it's still a little bit early.
Speaker Change: Not not quite we're not quite there in terms of timing.
Speaker Change: Great. Thank you very much good luck in 2025.
Speaker Change: Thanks, Michael Thank you Michael.
Speaker Change: Thank you next question comes from the line of Anthony Hau with two Securities. Please go ahead.
Speaker Change: Hey, guys.
Speaker Change: The graph on selling the other segment and you know you guys got a fantastic job in 'twenty four.
Speaker Change: Just one quick question for you Javier Javier you mentioned that like giving out two third of the proceeds from the sale of the other segment went towards paying down the hei, though right, but when I checked the supplemental in the third quarter NCI alone was had a outstanding balance of $183 million just curious like what like can you help me.
Speaker Change: Bridged the gap.
Javier Javier: The yeah, I think I, just said generally two thirds at the balance $183 million at the end of the.
Javier Javier: Third quarter, but if you look at the beginning of the year I think we were in the $200 million range.
Javier Javier: I'll leave us I think we started in the $212 million range.
Javier Javier: Gotcha, but you mentioned that two third of the $190 million went towards paying down the agi along so how they telephone.
Javier Javier: Okay.
Javier Javier: I'm sorry.
Javier Javier: $317 million total sales proceeds for the year, that's what I meant to say.
Javier Javier: Gotcha, Okay that makes a lot more sense, okay, yes.
Javier Javier: Yes, yes, yes, I'm sorry about that.
Javier Javier: Alright.
Javier Javier: What do you think like you guys.
Javier Javier: Net debt to EBITDA right now is like seven.
Javier Javier: What are you guys wanted to be by year end.
Javier Javier: Okay.
We quoted since the time that we listed that we would be aiming for.
Speaker Change: Uh huh.
Speaker Change: Yes, six to one ratio and last year is evidence of that we got down to five nine I think if you look back Anthony at everything that we've done.
Speaker Change: Really before listing.
Speaker Change: And leading.
Speaker Change: Leading right up to the end of this year I mean, we've sold over $2 billion of assets.
Speaker Change: In the last two years, we exited the joint venture.
The office joint venture and then we've completed the sale of the other <unk>.
Speaker Change: Segments, we've really pushed at the same time, we've moved the percentage of the ABR that's attached to industrial as we indicated so I think we have a proven track record of reducing leverage.
Speaker Change: Nothing is going to be linear.
Speaker Change: But we have our eyes on the ball too.
Speaker Change: In essence balance.
Speaker Change: Very effectively continued growth with a deleveraging and we.
Speaker Change: We have all the tools in the tool in order to do it and <unk>.
You've seen us have a commitment to deliver on that.
Speaker Change: That type of number so.
Speaker Change: Okay, and just one last question.
Speaker Change: Hum.
Speaker Change: Have you guys started marketing.
Speaker Change: The office portfolio and just curious like what are you seeing turns up buyers.
Speaker Change: Buyers demand or interest in those.
Assets.
Speaker Change: Yes, I mean, we have we have properties that are on the market and we have properties that are just getting inbound inquiries.
Speaker Change: I would say that we feel.
Speaker Change: 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 as it feels more positive than it has in the past.
Speaker Change: I don't know that we're going to see portfolio of buyers necessarily.
Speaker Change: The debt markets are still a little bit jaundiced, I think most of the CBS.
Speaker Change: Offerings on our conduit basis will allow something in the <unk>.
Speaker Change: 10% was sort of the norm last year I heard.
Speaker Change: And the last couple of days from somebody that said that.
Speaker Change: Maybe that's pushing up too.
Speaker Change: So 20%. So there is some sort of loosening going on on the debt side and I think that will.
Speaker Change: Push forth into the.
Speaker Change: The demand for buyers going forward if that if that.
Speaker Change: In fact holds.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Concludes today's teleconference. You may disconnect your lines at this time, thank you for your participation.
Yeah.
Speaker Change: [music].