Peakstone Realty Trust (PKST) Earnings Call Transcript & Summary

Welcome to the Peakstone Realty Trust webcast to discuss their recent listing on the New York Stock Exchange. Hosting the call today is President and CEO, Michael Escalante. With that, I turn the call to Mr. Escalante.

This is Mike Escalante, President and CEO of Peakstone Realty Trust. Thank you for joining us today. During this recorded webcast, we will be making forward-looking statements that are based on current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors contained in our SEC filings for additional details. Thursday last week, April 13, our company took a very important step. We listed the company's shares on the NYSE under the ticker symbol PKST. The listing, among other things, provides investors the option to access liquidity and positions the company for long-term growth. The listing was not an IPO. The company did not issue new shares. Instead, the company's existing class of shares became tradable to the extent there are willing sellers and willing buyers. Because this was not an IPO, in which new shares would be issued, we did not set the opening price for trading. Instead, the price is determined by, again, willing sellers and willing buyers. This is one of several misconceptions we addressed in our frequently asked questions, or FAQs, recently updated and uploaded to the Investors section of our website at www.pkst.com. If you haven't read those, we strongly encourage you to do so. Also, management has not purchased or sold any shares since the listing. The only people who have sold shares are investors who agreed to the price that someone offered to pay for their shares. Currently, our portfolio consists primarily of office assets, and the office sector is facing unique challenges. Since the beginning of the pandemic, there have been substantial changes in the way Americans works. These new work trends have negatively impacted the perception and value of office assets. In addition, borrowing rates for commercial properties have risen dramatically, and lenders generally do not want office properties as collateral if they can avoid them. Despite these market challenges, there are key strengths that we intend to capitalize upon. Our wholly owned portfolio consists of high-quality, newer-vintage, predominantly single-tenant industrial and office properties located in diverse strategic growth markets. Our business plan is generally self-funded through capital recycling and free cash flow, and we have an experienced, cycle-tested management team that knows our properties and markets and who have long-term relationships with our tenants. Management has strong financial alignment and the real estate skills to make the best of current market conditions and capitalize on opportunities. Our high-quality portfolio, self-funded business plan and the strength of our team are among the key elements we highlighted in the investor presentation, we publicly posted March 24 on our website for use by existing investors, analysts and potential new investors during our prelisting roadshow. For those of you who have not viewed it, again, I strongly encourage you to do so. And while on our website, please sign up for e-mail updates to be sure that you stay abreast of what we're doing moving forward. You can do that in the Investors section of the website as well. This listing is not a final step. It is an important step along a path toward maximizing shareholder value while providing liquidity for those shareholders who choose it. I'm confident in our future, and I hope you will continue to be or become a shareholder with us. Thank you for listening to my prepared remarks. Now I will answer some questions we received from our legacy shareholders and/or their financial advisers.

First, we want to thank those who've submitted questions ahead of time. We won't get through them all today, but management intends to continue to update the FAQs as and if necessary to address additional unanswered frequently asked questions. You can continue to submit your questions to either webcast at pkst.com or [email protected]. Mike, first up, the choice to list versus IPO. You covered some of this in your opening remarks, but could you explain the listing in comparison to an IPO?

Yes. Thanks, [ Dave ]. And again, thanks to all of you who have joined us today. I am hopeful we can clear up some of the common misconceptions during our time together today. As to the IPO question, as we mentioned in our narrated investor presentation, we are confident in our ability to deliver on our business plan through a self-funded model in the near term. And so that is without the need to raise primary third-party equity and, therefore, without dilution of the existing shareholders. Our listing is different than an IPO. In an IPO, the shares of the company are sold to new investors at a price that's negotiated between the company and/or selling shareholders and the underwriters of the IPO who then resell those shares to investors. In our listing, there was no primary issuance of shares by the company. And again, thus, no dilution of the ownership and no underwriters were involved. Neither the company nor its financial advisers are involved in establishing the market price for the shares since neither of them are sellers of shares. Transactions in our listing may occur between willing sellers, i.e., at the outset, those of our existing shareholders who decided to sell and willing buyers at a price that both parties determined to be acceptable.

Thanks for that, Mike. Now related to that topic, we got questions about the steps that management took to build demand for the shares to support the share price once listed. Some asked why the company didn't implement a lockup to prevent existing investors from selling. Can you address that, please?

Yes, sure. So I'm going to answer the second part first. So preventing investors from selling runs against our primary objective of providing liquidity. So that is enabling our investors to freely sale -- sell, excuse me, at a price of their choosing. Again, as the investors' choice or option to sell and they only do so if they choose to accept the price that they are being paid. I know that other firms such as Phillips Edison implemented a 6-month lockup, but they did so in conjunction with an IPO where the company sold new shares that were initially traded shares, so that's an entirely different scenario. So as for the second part -- really, the first part of the question, sorry, and that is the building demand for the potential new investors. What we did was known as a nondeal roadshow, which involved meeting with over 40 institutions and analysts over a 2-week period. And when I say we met them, we met them mostly via Zoom, although we did have in-person meetings. In those meetings, we shared our plans and optimism for the company and emphasized the extensive granular information that we provided in our investor presentation and all of our other filings and then further encouraged them to underwrite the intrinsic value of our company. We think that by segmenting our economics for each of the 4 pillars of value within our company, again, our Industrial segment, our Office segment, our Other segment and our joint venture investment, we're providing investors the tools necessary to evaluate the company's valuation, either by themselves or in conjunction with their advisers. That information is all spelled out on Page 6 of our narrated investor presentation, which, again, can be found in the Investors section of our website.

Okay. Next one, please talk about the net asset value, the NAV prelisting. Some submitted questions said that the $66 number that appeared on client account statements appear to be a new updated NAV. Is that the case?

No. That $66.87 NAV was just the $7.43 NAV, which was calculated as of June 30, 2022. Adjusted for the 1:9 reverse share split, so $7.43 x 9 equals $66.87. As we said in our FAQs, after we published the June NAV in August 2022, we transitioned to publishing NAV on an annual basis, in part because the NAV could have been materially impacted by the various strategic transactions the company was pursuing.

Mike, we've gotten a few questions on the timing of the listing and why management didn't wait and instead move forward and list months or a year from now.

I think we've opened through times where access to markets, interest rates and the economy take exogenous hits and change overnight. I think we've been living that reality for the past few years now. It's not a foregone conclusion in my mind, at least, that conditions will be better 6 months from today. I believe that's pure speculation and no one can be certain that their view is the only correct view. Our Board, working with management and its financial advisers, unanimously determined in its business judgment that listing now is the best path forward for the company. Again, I'd like to reemphasize what we indicated as to why we listed now, and that was really to provide an opportunity for liquidity for our existing shareholders; to provide the ability for our investors to retain the embedded upside in the portfolio to the extent they desire; and then the potential for Peakstone to gain access to additional sources of capital in the longer term; and then finally, just to provide an attractive investment opportunity for investors.

Thanks for that. Mike, some people are asking why management was recently able to sell its shares back to the company for NAV, while others were not. Can you address that?

That's an important question. In connection with the annual vesting of prior year's equity awards, management and all companies received shares net of taxes. So the vesting of these equity awards, that triggers federal and state taxes. And Peakstone, like many companies, permits employees to simultaneously forfeit a number of shares the employee is otherwise entitled to receive in order to pay those tax. As a result, employees receive a smaller number of shares at vesting, meaning the shares are received net of taxes. Certain members of management and the trustees are required to file reports with the SEC to report changes in shares owned, but the entire company received shares net of taxes, not just management. Except for these shares forfeited to cover taxes, management has not recently sold any shares.

Okay. Second to last question here, Mike, is about dividends. I'm combining a few questions here. What was the thought in lowering the dividend to its current level of $0.90 per share per year? And what are your thoughts on future dividends?

I'd like to point out again that we're relying on a self-funded business model, at least in the near term. So our primary goal is to reduce our leverage and aim towards achieving an investment-grade balance sheet. So to do that, we're going to be relying on limited capital recycling and free cash flow. Lowering our dividend augments free cash flow, and having the dividend well covered by cash and operations is prudent. We are aiming to increase dividends over time, but no promises. I should reiterate that Peakstone's Board of Trustees has already declared a cash dividend for the month of March 2023, and that was at $0.075 per common share, and that's payable on May 12, 2023, to the holders of record as of May 2, 2023. And while the company expects to pay regular dividends on a quarterly basis going forward, all dividend decisions, including amount and frequency will be made by the Board of Trustees. So a dividend for the second quarter has not yet been declared.

Okay. Finally, some advisers and investors have said it's been difficult getting a response from Peakstone over the past several days. Any comments on that?

Well, I think we fell down there, and I'm sorry for any delayed response. I don't mean to sound defensive, but we have 60,000 legacy investors and 8,500 financial advisers. And while we expected an elevated level of inbound calls and e-mails, the actual volume on the first few days far exceeded our expectations. So I believe that our enhanced system now accounts for this volume and that we can provide more timely assistance in the coming days. I know that everyone prefers to use the phone, but the fastest way to get an answer to your question is via e-mail. And again, that's [email protected]. We log all our e-mails. They are prioritized and responded to, and in many cases, we're doing so with a return phone call. It's not that we don't want to speak with our shareholders and their advisers. It's just more efficient for us to respond to questions submitted in an e-mail format.

Mike, any final comment?

Well, I'd like to end by thanking everyone for joining us today. We are very excited about the future of the company. This listing provides us with the foundation and capital structure to unlock value prudently over time. Further, our management team can shoulder-to-shoulder with our investors, and we are 100% aligned as shareholders. I hope all our current shareholders will continue to be investors in our company as we implement our go-forward and self-funded strategy. Thank you.

Just in advance of concluding today's webcast, I'd like to reiterate that for those whose questions were not answered today and for people who have new questions, you are welcome to submit those new questions to [email protected] or [email protected]. Thank you.