Peakstone Realty Trust (PKST) has a Clear Catalyst on the Horizon
Their shift into a pure-play industrial operator should unlock value over time
By looking at Peakstone’s stock chart over the last couple weeks, you’d think something bad just happened in their business, causing a sharp sell-off. The truth is that nothing bad happened. In fact, they seem to now be on a much clearer path to unlocking value over time, which I’ll get into.
The reason the price dropped, however, is because they cut the dividend from $.225/quarter to $.10/quarter. Since REIT investors are typically focused on income, this can create opportunity for those with a longer-term view.
My belief is that Peakstone’s dividend cut was not for any reason, other than to align the dividend with the earnings from their industrial segment, as they have now stated their plan to fully exit the office sector and are accelerating the pace to get there.
That now presents a very clear catalyst to unlock value that was not visible until now.
Background
Peakstone began in 2009 as a non-traded REIT and has gone through a few mergers and name changes since that time until listing on NYSE in April 2023. Here is a good synopsis of their history.
They have historically owned a blend of net lease office properties, industrial properties, and a hodge podge of “other” assets. My belief is that their jumbled asset mix has been the reason for the steep discount to their NAV.
For the past few years the company has been divesting their non-core assets and stated last week that they plan to now fully exit the office space, which gives this one a clear catalyst to unlock value, in my opinion.
Their properties and valuation
The company owns 94 properties as of 6/30/25. 72 are industrial, 22 are office.
Office segment
For their office properties, they have a WALT of 6.3 years, which indicates this is not junky office similar to what ONL owns. These are primarily single-tenant net lease properties that serve as a headquarters or some other mission-critical asset for the companies that operate there.
If we take their Q2 ‘25 run rate NOI (which is based on straight line rent, so discount slightly if you’d like), we arrive at $97.28 million. Applying a 10% cap rate to this, which should be conservative based on their decent quality office portfolio, gets us a gross value of $972.8 million for their book of office properties. Now, they recently sold 7 properties in Q2 at an aggregate price of $189/sf. Using a 10% cap rate value puts us at an implied price/sf of $225. My guess based on following these kinds of liquidation scenarios is that they are selling off the inferior assets first and waiting until conditions are optimal to sell the higher-quality ones. I plan to check in with management to confirm that. My gut tells me that a blended 10% cap rate applied is conservative given their asset quality, although I will confirm that.
Industrial segment
Their industrial portfolio consists primarily of industrial outdoor storage (IOS) properties, which is an asset class that has been doing very well and growing in popularity lately as it tends to be in infill areas where supply is scarce. They made a nearly $500 million acquisition of an IOS portfolio in November 2024 and it seems like this is now their main focus.
In addition, they own traditional industrial properties as well. Their run rate NOI for their industrial segment is $84.29 million (again, straight line). Applying a 6% cap rate to this gives us a gross value of $1.405 billion for their industrial properties. This seems conservative based on the asset quality, contractual rent escalations and mark-to-market opportunities for this portfolio.
Sum of the parts
Adding their cash, debt and G&A drag (capitalized at 10x) looks like this: (‘000’s omitted)
$972,760 - Office portfolio at 10% cap rate
$1,404,867 - Industrial portfolio at 6% cap rate
$272,711 - Cash and restricted cash
$(337,960) - G&A capitalized at 10x
$(1,246,767) - Debt (majority of maturities don’t begin until 2028)
$1,065,611 - NAV or $29/share
Peakstone is objectively cheap
The REIT owns 92.6% of the OP, which puts NAV/share at $26.85, while this trades around $11-12. FFO/share on a run rate basis is $2.40, which puts the price/FFO right below 5x. Their dividend payout ratio, after cutting it, is 16.65%.
This all points to this one being incredibly undervalued given that it trades for less than half of NAV, less than half the REIT median price/FFO ratio around 13-17x historically, and has an anemic payout ratio well below what would be considered a safe payout ratio of 70%.
Cap rate value
If we invert this to get the implied cap rate their blended portfolio is trading for, we end up at 12.9%. This is from taking their run rate NOI1 and dividing by enterprise value (EV).2 This number is objectively cheap, although if we try to isolate their office portfolio, it appears it is trading absurdly cheap.
Let’s take the entire industrial segment’s run rate NOI, including the IOS and traditional industrial properties, and assume it would trade privately for a 6% cap rate, which should be fairly conservative. For conservatism’s sake, let’s also take the run rate corporate G&A of $33.796 million3 and capitalize this at 10x.
These assumptions give us an implied cap rate for Peakstone’s entire office portfolio equal to a mind-blowing 25.9%.4 Now, I understand the office sector has taken a hit on valuation in the last few years, but even the worst properties in distressed situations don’t trade this cheaply.
Peakstone has quality office assets and this implied value given by the market is very low.
I believe there is a lot of value here, the question is….how does it get unlocked?
Catalyst in sight: pivoting to pure-play industrial
In their latest earnings release, the company announced they are going to sell all office assets and become a pure industrial REIT. This is a huge catalyst, in my opinion, as the market tends to penalize the multiple for REITs that own a blend of different assets. Here is an excerpt from the recent earnings call from the CEO:
“…We've been hinting to the fact that we're leaning towards industrial. We've said that we're going to be recycling capital. We've come out very front forward-facing today and highlighted the fact that we're going to accelerate our shift to industrial REIT.
I think this is just a continuing evolution of our transition. And I think the market generally is impatient with transitions. And so we believe that the faster we can get to the other side and start showing growth and specifically the embedded growth in our portfolio on the IOS side from the fact that we're -- we've got increasing escalations built in. We've got a mark-to-market, and then we've got the redevelopment portion of our portfolio that's starting to complete and open itself up for leasing.
We've shown that we've been successful already in bringing some of those into the operating portfolio, and then lastly, the piece that we're doing relative to the acquisition. So all of that would sort of go to waste if it was sitting around, mired in the office side of the results. So we're trying to get to the other side as quickly as we can so that the market can look at us more on a go-forward basis.”
For Peakstone, their office assets were a big drag on the price, in all likelihood, as the CEO points out here. Their plan is to dispose of office assets and use the cash generated to reduce debt and acquire more industrial properties. This is an excellent catalyst to get the market to appreciate their industrial assets and (hopefully) reward them with a higher multiple on earnings. I have zero clue where this ends up trading at if they can successfully do this, but given how cheap this is, I would bet they would almost certainly trade at a higher multiple than where they currently are.
REIT 90% rule as a catalyst
Another catalyst is the dividend. A dividend increase would almost certainly serve as a catalyst to bump up the price and with REITs having to pay out at least 90% of GAAP earnings, this gets interesting.
In real estate, depreciation is a non-cash expense that produces a lower bottom line than is likely the economic reality (usually). This is a reason non-GAAP metrics such as FFO and AFFO are used with REITs.
When a property is purchased, an amount is allocated to the land, which is not depreciable, and the rest is allocated to buildings/improvements, which are depreciable.
As of 12/31/24, for Peakstone’s industrial segment, their depreciable buildings/improvement as a percentage of the total is 74.32%, while their office segment is 91.94%. This means that on a relative basis, there is less depreciation to be taken on their industrial portfolio.
And zooming further into their industrial segment to look at their IOS portfolio, which is their focus moving forward, there is an even lower ratio as these properties are primarily land.
My wish for management to consider
Due to the insanely cheap price here, my view is that management should absolutely consider repurchasing shares. Their entire blended portfolio is trading at an implied cap rate of almost 13% when taking their NOI/EV. If someone presented them an opportunity to acquire their exact portfolio for a 13% cap rate, there is no doubt they would pull a muscle trying to sprint to get that deal signed as fast as they could with no questions asked.
At the current price this trades at, they do have that deal presented to them! They have lots of cash and my firm belief is that they have a golden buyback opportunity that they should capitalize on. This is a way to create a ton of value for shareholders and I hope they consider this.
Summary
Peakstone has good assets and is now positioning themselves to gradually become a pure-play industrial REIT, focusing on IOS. They are cheap based on a number of metrics and I see this re-rating as they sell off their office assets over time.
I believe this is a worthy bet and the cherry on top would be if management sets aside some cash for buybacks!
Update 9/3/25
Right after posting this, myself and an investor friend of mine set up a call with management to discuss their plans as it relates to closing the NAV gap. They ramped us off to their outsourced IR team who were largely useless in answering our questions.
After this occurred I gave it some thought and prayer and decided to fully exit the position. I simply do not trust management based on their actions and while it is obvious their assets are undervalued, trusting management to find ways to close the value gap is hard when they have lots of cash and are not buying back shares.
If their goal is to continue growing by acquiring industrial properties at 5 caps while shares can be repurchased for peanuts, this is evidence that management is either not aligned with shareholders or are not intelligent. And both of those are bad.
Important: This information is for general purposes only and is not financial advice. Always seek professional guidance for investment decisions.
Roughly $84,292,000 in NOI for the industrial segment plus $97,276,000 for the office segment. This is given using straight-line rental accounting, not cash accounting.
EV calculation is Market Cap + Net Debt. For Market Cap I am taking the fully-diluted share count of 36,748,176 as of 6/30/25 multiplied by the current price of $11.80. For Net Debt I am taking their debt of $1,246,767,000 as of 6/30/25 and subtracting their cash and restricted cash of $272,711,000 as of 6/30/25.
From Peakstone’s 10-Q for the quarter ending 6/30/25.
Applying a 25.9% cap rate to the run rate office NOI is $375,583,011.58 + the industrial run rate NOI of $1,404,866,666.67 + $272,711,000.00 in cash and restricted cash as of 6/30/25 - capitalized G&A drag of $337,960,000.00 - debt of $1,246,767,000.00 as of 6/30/25 = $468,433,678.25. This is equal to $12.75/share when using the fully diluted share count as of 6/30/25. After adjusting for the REIT’s 92.6% ownership of the OP, this is $11.80/share, which is what this is trading for as I type this.