Peakstone Realty Trust Q2 FY2024 earnings call

• Over the past several quarters, the company has strengthened its balance sheet and optimized its portfolio composition, and amended and extended its unsecured credit facility, pushing the revolver and 2025 term loan maturity out to 2028, lowering borrowing costs, and providing flexibility for growth.
• The portfolio's high-quality industrial and office segments offer stability with minimal near-term rollover. Dispositions of other segment assets continued, with one property sold in the quarter and others advanced for sale.
• In leasing activity, the industrial segment finalized rent increases and escalations for a lease extension, the office segment had a new lease commence, and the other segment had a lease extension with a strong releasing spread.
• On the balance sheet, the amended credit facility details include a total facility of $907 million, extended maturities, improved valuation for industrial assets at a 6% cap rate, pro forma metrics, and a declared dividend of $0.225 per share for the third quarter.

Total revenue was approximately $56 million, and NOI was approximately $45.4 million. Net loss attributable to common shareholders was approximately $3.8 million, or $0.11 per share, inclusive of a $6.5 million non-cash impairment related to a pending other segment sale. Same store cash NOI was approximately $44.2 million, a 1.7% increase compared to the same quarter last year. FFO was approximately $25.6 million, or $0.65 per share, on a fully diluted basis and AFFO was approximately $27.6 million, or $0.70 per share, on a fully diluted basis. The industrial and office segments have a combined weighted lease term of seven years and 99.5% economic occupancy. The other segment had the sale of one property in Mechanicsburg, Pennsylvania, totaling approximately 57,000 square feet for $8.7 million, with total other segment sales in the first half of the year at approximately $58.2 million.

• The amended credit facility provides ample liquidity and flexibility to support industrial growth initiatives.
• Pro forma net debt to normalized EBITDA RE ratio is 6.4 times reflecting cash utilization and associated reduction of interest income.
• The Board of Trustees approved a third quarter dividend of $0.225 per share payable on October 17 to holders of record on September 30.

• Forward-looking statements are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause actual results to differ significantly from those expressed.
• Risks include those in the most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC, such as interest rate changes, market uncertainties, and tenant-related risks.

Q: Can you remind me what your target leverage is and how does the new financing kind of play into your targeting or looking forward into how you're thinking about leverage?

A: Over the long term, targeting six times debt to EBITDA on a pro forma basis, currently at 6.4 times as a result of lost interest income with cash pay down, and will continue to execute on sales program for other segment to reach appropriate ratio.

Q: When thinking about the extensions or the releasing in the different segments, can you comment on strategy when thinking about lease expirations coming up and how you consider or bucket the other segment versus the industrial and office?

A: Core segments (industrial and office) have very little rollover; other segment has more exposure, but renewals have been effectuated to increase recovery and facilitate asset sales.

Q: You mentioned about the sale of the one property, was that a vacant asset and also could you either, if it wasn't, update what you were seeing in terms of cap rates?

A: The sold asset was a longer term asset with seven plus years of term; correction on held for sale assets with one being shorter term. Cap rates tracked on a rolling basis.

Q: What was the reason behind reducing the maximum commitment amount on the revolver? Was it the change in capitalization rate? And did they use like last 12 months NOI or forward 12 months NOI to calculate the portfolio on date?

A: Change in capitalization rate, improved cap rate on industrial assets to 6% from 7%, office to 8%, and leverage capacity considerations; used prior quarter annualized for calculation.

Q: Can you provide any color on the investment-grade tenancy for the portfolio? Saw that drop meaningfully this quarter. Just curious which tenants caused that?

A: Could be related to Restoration Hardware coming and going; tenants move in and out within the quarter based on market conditions.

Q: What are you guys seeing on the ground today in terms of like buyers' appetite for the single tenant office assets? Last time we spoke on NAREIT, you mentioned that you're seeing more of the power pool increase a bit compared to like six months ago. Is that still the same? Has that changed at all?

A: There is significant interest in properties generally, not necessarily net lease assets; bid lists for single tenant office assets are still on the larger side relative to the last couple of years.