PKST - NYSE

Good morning, everyone, and welcome to Peakstone Realty Trust's first quarter 2023 earnings webcast. On the call today are Mike Escalante, Chief Executive Officer; and Javier Bitar, Chief Financial Officer. Please note the use of forward-looking statements by the company on this webcast. Statements made on this call may include statements which are not historical facts and are considered forward-looking. The company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is making this statement for purpose of complying with those safe harbor provisions. Furthermore, actual results may differ materially for those described in the forward-looking statements and will be affected by a variety of risks and factors that are beyond the company's control, including, without limitation, those contained in the company's 10-K for the year ended December 31, 2022, and its other SEC filings. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Additionally, on this call, the company may refer to certain non-GAAP financial measures, such as funds from operations, adjusted funds from operations, EBITDAR, and adjusted EBITDAR. 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. Additional information may be found in the Investors section of the company's website at www.pkst.com. I would now like to turn the call over to Mike Escalante. Mike?

Good afternoon, and thank you for joining us today for our first call as a listed company. Since a growing number of shareholders are new to our company, I want to begin by providing more details around who we are and our strategy as a public company. Next, I will describe our key achievements during and subsequent to the first quarter. Javier will then review our financial results and our balance sheet. Then I'll return with some closing comments as we look ahead to the future. We own a high-quality, newer-vintage portfolio of predominantly single-tenant industrial and office assets, which are generally leased to creditworthy tenants under long-term net lease agreements with contractual rent escalations. At the end of the quarter, our wholly owned portfolio consisted of 78 properties with a total of approximately 19 million square feet and annualized base rents or ABR of approximately $213.4 million. For purposes of valuation, you can think about our portfolio as having 4 separate pillars of value. First, in our Industrial segment, we own 19 properties totaling approximately 9 million square feet. These properties have an economic occupancy of 100% and have a weighted average lease term or WALT of 6.8 years. Within the Industrial segment, approximately 59% of our properties are leased to investment-grade tenants. In addition, approximately 49% of our Industrial segment ABR is generated by properties proximate the top U.S. ports. Second, in our office segment, we own 38 office properties totaling approximately 6.2 million square feet. These properties have an economic occupancy of 98.2% and a WALT of 8.2 years. Within this office segment, approximately 67% of our properties are leased to investment-grade tenants. In addition, our office properties are newer and higher quality than many of our public peers. Third, we own 21 properties containing approximately 3.8 million square feet within our other segment. These are generally good properties, but have recently become vacant, have a near-term expiration, or are contained within cross-collateralized loan pools and will require time and analysis to determine the best outcome for our shareholders. The bottom line is that each of these properties will likely have a different solution, with several having upside relative to pricing we see in today's markets. And fourth, we own a 49% interest in a joint venture that owns 46 office properties or 59 buildings in total. The initial book value of our equity contribution was approximately $184 million. Looking forward, I'd like to emphasize several important components of our investment strategy to maximize value. First, continuing to generate consistent cash flow from our highly occupied industrial and office segments comprised of 57 of our 78 total assets. These are modern buildings with market-leading specifications, strategically located in coastal and Sunbelt markets. Nearly 3/4 of the ABR from our industrial and office segments is generated from properties located in these markets. In addition, these properties are generally located in difficult to replicate locations that we believe offer higher growth opportunities. Within the office and industrial segments, approximately 65% of our ABR is generated from leases with investment-grade tenants. These 2 segments provide us a strong and stable base on which to build. Number two, we have a self-funded business plan that relies on capital recycling and free cash flow. In the near term, we are focused on continued debt reductions, which we believe will lead to an investment-grade balance sheet. Three, while our business plan is self-funded, we intend to selectively sell certain assets. We intend to invest capital in existing assets where warranted. But as I mentioned, our near-term goal is to reduce our leverage, improve our balance sheet, and achieve a favorable cost of capital. And four, when appropriate, we intend to build upon our portfolio by acquiring high-quality industrial and potentially certain very select office properties. A further shift of our portfolio towards industrial assets will allow us to benefit more from secular tailwinds of that sector. By way of example, strong market rent growth and lower CapEx. So moving on to our first quarter 2023 highlights, which are discussed in our earnings release and further detailed in our supplemental. During the subsequent to our first quarter, we are pleased to execute on several key items in our business plan, including -- so during the quarter, we amended our existing revolving credit facility to reduce near-term debt maturity and add an additional extension option for our revolver through January 2026. We are pleased that we were able to execute this extension, which provides us with the time and flexibility to execute our business plan and also demonstrates the strength of our banking relationships. We also closed on 3 property sales producing gross disposition proceeds approaching $170 million at an average cap rate of 6.9% for the 2 stabilized properties. And subsequent to quarter end, we redeemed our preferred shares at par, which were issued to and previously held by a third-party international investor. This redemption will generate a savings of approximately $10 million in preferred distributions per year. And importantly, as I mentioned earlier, on April 13, we listed the company's common shares on the New York Stock Exchange. I'd like to close by emphasizing a few very important points that we believe benefit Peakstone relative to others. We believe the real estate we own is differentiated in its high quality and competitive positioning. Our portfolio primarily consists of modern industrial and office properties. Our average lease term is 6.9 years and approximately 61.5% of our ABR is generated from leases with investment-grade tenants. Many of our buildings provide critical infrastructure for our tenants. The credit facility amendment significantly reduced risk by pushing out near-term maturities and thereby providing us flexibility to operate our portfolio and maximize value for our shareholders. And finally, I want to mention one of our most significant advantages, that's our management team. I'm very proud of our experienced cycle-tested team. They have proven real estate and capital markets experience and extensive knowledge of the existing portfolio and a broad network of long-standing industry relationships. We do not believe that real estate is a commodity business. We believe that relationships matter. Our executive team averages 34 years of real estate experience, and importantly, we have experienced operating public companies. We are financially aligned with our fellow shareholders as everyone within our organization owns shares. With that, let me turn the call over to Javier to review our first quarter financial results. Javier?

Thanks, Mike. Peakstone's portfolio continues to produce solid results. As Mike mentioned in his remarks, at the end of the first quarter, our portfolio consisted of 78 properties totaling approximately 19 million square feet, and our wholly-owned portfolio at the end of the quarter was 95.3% leased at a WALT of 6.9 years and an ABR or annualized base rent of approximately $213.4 million. In the first quarter, total revenue was approximately $67 million. Net income attributable to common shareholders was approximately $6 million or $0.17 per share. FFO was approximately $14.7 million or $0.37 per share on a fully diluted basis, and AFFO was approximately $26.8 million or $0.68 per share on a fully diluted basis. The change in AFFO compared to the same quarter last year was primarily due to the decrease in rental income as a result of the disposition of 48 properties in 2022 and 3 properties in the first quarter of 2023. Same-store cash NOI was approximately $48.4 million. Moving on to our balance sheet. As of March 31, 2023, we had approximately $368.2 million in cash on hand and $132.3 million of available capacity on our revolving credit facility for total liquidity of $500.5 million. Our net debt was approximately $1.1 billion, and our debt had a weighted average interest rate of 4.2% and a weighted average term to maturity of 3.3 years. During the quarter, we also repaid the $19.1 million outstanding principal balance related to a mortgage loan that was maturing in April 2023. As a result of our recent sales, we continue to improve our balance sheet as demonstrated by our net debt plus deferred to normalized EBITDAre for our consolidated portfolio at 7.1x as of March 31 compared to 7.7x at the end of the year. And our net debt plus deferred to gross real estate was at 36.3% as of quarter end versus 39.5% as of year-end 2022. Interest rates were fixed on approximately 86% of our total outstanding consolidated debt inclusive of the effect of our interest rate swaps, limiting our exposure to interest rate volatility. Our next material debt maturities are at late 2025, with our $400 million facility term loan coming due as well as our AIG II mortgage loan, which will have a balance of approximately $115 million at maturity. Finally, in March, the Board declared a cash dividend for the month of March 2023 of $0.075 per common share, payable on May 12, 2023, to holders of record of its common shares on May 2, 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 Mike for closing remarks.

Thanks, Javier. We're very excited to begin our new chapter as a listed company, and we are laser-focused on operating our portfolio to create value for all shareholders. We intend to use free cash flow and proceeds from sales of certain assets to continue to delever and derisk our balance sheet with the goal of achieving an investment-grade rating as soon as the market allows. Let me summarize our strengths once again as we move forward. We own a great portfolio of high-quality assets with majority investment-grade tenants, a WALT of 6.9 years, and embedded potential for upside. At this time, we are executing a self-funded strategy, which will not require outside capital for the foreseeable future. We have a strong balance sheet with limited near-term maturity risk and ample capacity to support our business plan. And we are a cycle-tested team of experienced real estate professionals with a track record of operational results and 100% alignment with our shareholders. While the macroeconomic environment and public markets continue to be turbulent, we believe our stable, high-quality portfolio is resilient and well positioned, and we are excited and optimistic about executing our strategy to maximize value for our shareholders. We thank you for your time today. And if you have questions, please reach out to Investor Relations at [email protected] or visit the Investors section of our website at pkst.com. We look forward to engaging with you as we move forward. Please have a good day. I'll now turn the call over to the operator.