Gladstone Commercial Corporation (GOOD) Earnings Call Transcript & Summary

Greetings, and welcome to the Gladstone Commercial Corporation First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Well, thank you, Latonia. That was a nice introduction and thank all of you for calling in and listening to our pitch. We enjoy this time that we get with you on the phone and wish we had more time to talk to you. But only do this once a quarter. And now we'll hear from Michael LiCalsi, he's our General Counsel and Secretary, to give the legal and regulatory matters concerning this report. Michael, go ahead.

Thanks, David. Good morning, everybody. Today's report may include forward-looking statements in the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable, and many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors in our Forms 10-Q, 10-K and other documents that we filed with the SEC, these can be found on our website, which is gladstonecommercial.com, specifically in the Investors page or on the SEC's website, which is www.sec.gov. Now we undertake no obligation to publicly update revise any of these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. And today, we will discuss FFO, which is funds from operations. Now FFO is a non-GAAP accounting term defined as net income, including the gains or losses from the sale of real estate and any impairment losses on property plus depreciation and amortization of real estate assets. We'll also discuss core FFO, which is generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe these metrics are a better indication of our operating results will have better comparability of our period-over-period performance. And please visit our website, once again, that's gladstonecommercial.com, sign up for our e-mail notification service. Can also find us on Facebook. The keyword there is the Gladstone Companies and Twitter, which is @GladstoneComps. Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q both issued yesterday for more detailed information. With that, I'll hand it over to Gladstone Commercial's President, Buzz Cooper.

Thank you, Michael, and thank you all for joining today's call. We look forward to updating you on our first quarter of 2025 results, our current portfolio and our 2025 outlook. Starting with the broader economic environment, the first quarter of 2025 has been marked by a growing uncertainty followed by recent tariff announcements. These announcements have added pressure to global trade flows and extended decision time lines for many [indiscernible]. Companies are reassessing [indiscernible] manufacture and distribute their goods, especially those companies to exposure to Asia. U.S. Treasury yields remain volatile as markets absorb shifting policy signals and evaluate the outlook for inflation and economic growth. Despite an uncertain macro economic outlook, the industrial real estate sector continues to perform. According to Cushman & Wakefield, net absorption reached 23.1 million square feet in the first quarter of 2025, matching levels from a year ago. Vacancy rose modestly to 7% and driven by speculative deliveries but remains in line with historical averages. This suggests the market is approaching a more balance state. New construction completions during the quarter declined to the lowest level in nearly 4 years. reflecting higher capital costs and a slowdown in the development pipeline. We anticipate this construction slowdown will bring upward pressure on industrial rental rates and downward pressure on vacancy as industrial users compete for additional square footage to grow their businesses. Moving on to our portfolio. We remain confident heading into the second quarter. During the first quarter of 2025, we collected 100% of our cash-based rents, acquired industrial properties encompassing 355,778 square feet for $73.25 million. We increased portfolio industrial concentration as a percentage of annualized straight-line rent to 65%, maintained portfolio occupancy at 98.4% as of March 31. And subsequent to the end of the quarter, we sold 1 office property for a gain of $377,000 and 1 industrial property previously recognized as selling profit of $3.9 million from a sales type lease. This was one of our most active quarters to date with over $73 million in capital deployed for new industrial acquisitions. While we remain focused on increasing our industrial concentration, hope to get to at least 70% in the near term, we continue to maintain disciplined underwriting approach. This discipline was on display in the acquisitions we completed this quarter and the numerous acquisitions we chose not to pursue. We evaluated hundreds of opportunities over the last year and passed on many that did not meet our criteria, whether due to credit concerns, overpricing or location risk. Our ability to act decisively reflects our continued focus on high-quality mission-critical assets that align with our investment thesis. In particular, we are seeing long-term tailwinds from reshoring and onshoring activity. The private placement we completed in the fourth quarter of 2024, helped position us to execute with confidence, and we believe our disciplined approach will continue to create long-term value. Moving ahead to the second quarter, we remain focused on acquiring high-quality industrial assets that are mission-critical to tenants and industries accretive to our long-term strategy. At the same time, we will continue to selectively dispose of noncore assets to further improve our portfolio. Our team is actively working to extend lease terms, capture mark-to-market opportunities and support tenant growth through target expansions and capital improvement initiatives. We remain mindful of our overall leverage and are continuing to strengthen our balance sheet. With over $99 million in availability via our line of credit and cash on hand, we are well positioned to deploy capital into accretive industrial acquisitions. Several opportunities are currently under exclusivity or contract with closings expected to come in the next few months. Our portfolio continues to generate sustainable cash flow. We remain more than 98% occupied as of March 31, and we've not seen any material deterioration in tenant credit quality in the face of higher for longer interest rates. I will now turn the call over to Gary to review our financial results for the quarter and liquidity position. Gary?

Thank you, Buzz. I'll start my remarks this morning regarding our financial results by reviewing our operating results for the first quarter of 2025. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO per share available to common shareholders were both $0.34 per share for the first quarter of 2025 as well as the first quarter of 2024. Same-store rents increased by 6.6% in the 3 months ended March 31 over the same period in 2024 due to increased property expense recovery revenue and increased rental rates from leasing activity subsequent to the first 3 months of 2024. Our first quarter results reflected total operating revenues of $37.5 million with operating expenses of $23.9 million as compared to operating revenues of $35.7 million and operating expense of $23.3 million for the same period in 2024. Operating revenues were higher in 2025 due to increased recovery in higher rental same properties, slightly offset by lower variable lease payments from the 7 property sales during and subsequent to the first quarter of 2024. Expenses were higher in the first quarter of 2025 versus the same period in 2024, mainly due to increased costs created by the inflationary environment as well as higher net incentive fee paid in Q1 2025. In Q1, 2025, we increased net assets from $1.09 billion to $1.16 billion, which was a result of the 2 acquisitions this quarter. Looking at our debt profile, 45% is fixed rate, 47% is hedged floating rate and 8% is floating rate, which is the amount drawn on our revolving credit facility, mortgage note and one of our small term loans. As of March 31, our effective average SOFR was 4.41%. Our outstanding bank term loans were hedged with $310 million of interest rate swaps. We continue to monitor interest rates closely and update our hedging strategy as needed. As of today, our remaining 2025 loan maturities are very manageable at $3.1 million. As of the end of the quarter, we had $51.3 million of revolver borrowings outstanding. During the quarter ended March 31, 2025, we sold 1.77 million common shares under our ATM program, raising net proceeds of $27.7 million. We also received net proceeds of $300 from sales of our Series F Preferred Stock through March 31. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements for new acquisitions. As of today, we have approximately $18.4 million in cash and $80.6 million of availability under our line of credit. We encourage you to review our quarterly financial supplement posted on our website, which provides more detailed financial and portfolio information for the quarter. Our common dividend is $0.30 per share per quarter or $1.20 per year. Our common stock closed yesterday at $13.83, and our yield at that price was 8.68%. And now I'll turn the program back to David.

Well, thank you, Gary. That was a good one. We had a good one from Buzz and Michael to. And a team of commercial is really performing well there, renting more of our buildings, and so we're continuing to grow, you've heard a lot today. In summary, we acquired 2 industrial facilities for a total of $73 million, a nice addition to our group. Subsequent to the end of the quarter, we sold 1 office property with about $377,000 profit. previously recognized this is selling profit of $3.9 million from sales type lease. Commercial team is continuing to grow our real estate, add more deals and refi and redo things. So we just continue to march along at the same pace we've marched out for a long time now. Our team of strong professionals continues to pursue potential quality properties on this list of acquisitions that we keep adding to. There are an acquisition team that's just out there seeking only the strong credit tenants, and we're going to continue that process. So let's stop now and have the operator come on and tell listeners how they can ask some questions.

[Operator Instructions] The first question comes from Gaurav Mehta with Alliance Global Partners.

I wanted to ask your acquisition pipeline and what you're seeing in the market for industrial properties?

Thanks, Gaurav. We are seeing activity. It's picking up here as the year gets started. For ourselves, we currently have approximately $70 million teed up here that we believe will close into the second quarter and are looking at -- have a backlog that we are reviewing of approximately $140 million which consists of about 10 assets. Obviously, there is a lot of competition coming from the marketplace, both family offices as well as PE shops. But as David referenced, the team is aggressive in the market, looking at every transaction we can find, being very selective in these challenging times. But we believe we will continue to be active certainly through next quarter -- this quarter and into next quarter.

Okay. And so the $70 million that you mentioned under contract, can you maybe provide some color on how you expect to fund those acquisitions?

As Gary mentioned, we've got great liquidity. We have adequate cash and availability on hand. We will also and have been going to look at other financing sources as we did a private placement at the end of last year as well as perhaps other ways of having capital on hand, whether perhaps through a JV or other.

Next question comes from Craig Kucera with Lucid Capital.

I want to circle back to the acquisition volume here. Obviously, a big hiccup after really a relatively slow couple of years. Are you seeing sellers more willing to budge on price? Or are you just seeing more assets that fit what you want the portfolio to look like?

If I may, a little -- it's a combination of both. We have been also aggressively trying to stay close with our broker relationships in order to have an early look as well as hopefully a lack of transactions. One of our value add is we do what we say, we got to do, we don't re-trade. We don't like that word. So I think it's a function of getting to the transactions earlier rather than later and having early impact back to either seller or broker that's allowing us this success.

Okay. Great. I know you don't have much in the way of remaining lease expirations here in 2025, but I'm kind of curious to hear if you're starting tackling '26 and '27, which are much larger years that are expiring.

As has been our history, Craig, we do, and we are. If you look, the expirations, again, as you mentioned, for this year, is under 2%, and that represents some transactions on which we are [indiscernible] one and have an RFP out on the other for a longer-term extension. So we're in talks as it relates to '26, we have approximately 8 or 9 that we are working on. And of those, we really only have 1 at this point in time that we have not traded paper on or had discussions with. So we will hopefully winnow that down quickly and at the appropriate time. But we've got a good handle on it. We get out in front of it. And we are -- as we work these '26 expirations also looking at '27 and believe that we will be successful there as well. Many of those are industrial in nature, which we hope will allow us for, obviously, rent pickup.

Got it. And kind of circling back to the lease you did renew recently. Can you talk about leasing spread relative to expiring rent on the asset that you extended for another 3 years? Did you get a pickup there?

That was not a pickup on a straight-line basis for the term. It's a small drop. And the reason for that was, again, we could not get them to extend longer. They have to let us know after an 18-month period, if they're going to remain, but it is in a market that is strong and I believe that should we not have success in re-upping them longer, we will have a pickup as it relates to the rental rate.

Okay. Great. And just one more for me for Gary. You mentioned the swaps on the floating rate debt. Are any of those expiring this year? Or are they swapped through maturity?

No. All those are swapped to maturity. Those 2 term loans mature in late '27 and early '28.

Next question comes from John Massocca with B. Riley.

So I apologize if I missed this in the prepared remarks, but any core on the dispositions completed subsequent to quarter end, kind of what was pricing there maybe and what made those trends on core?

And John, you were cutting up a little bit. I think you're asking about our dispositions that we had here in the first and into the second quarter?

Correct.

Okay. So we had 2 sales right at the beginning of April. And if I may, 1 was industrial, tenant had an option to buy, so they did. And that was the realization of the gain there that we had. And the other was an office property that was purchased had a little loss on that, not great. It did pay through its rent, but it was good to get away from a one-story office.

Okay. And then I guess, maybe just as an update, how much of the portfolio today would you view as noncore? And maybe an update on the situation with the Austin office property.

As it relates to noncore, I assume you're referring to office. Our office occupancy is north of 93% at the moment. I would say of that very small amount would be considered noncore, but we do have some property types within that office wish to get a move on from and redeploy those into industrial assets. We have 2 call centers that we are working on. So most of the offices from the standpoint of office today, healthy. And I could not understand a property you were referencing.

Sorry, the Austin office property, any update on lease-up there?

Sure. Austin always is top of mind. It does throw a lot of positive cash for us. At the moment, we currently have a few requirements out in the marketplace that we are tracking as well as 2 RFPs unsolicited out in the marketplace. Austin is improving. Office is also leading coming back to office work. So we are hopeful that we will be able to add tenancy there and then make a decision relative to a long-term plan.

Okay. And then bigger picture, any changes in the acquisition kind of parameters given some of the changes in government policy. I mean, I guess, specifically, does light manufacturing look more attractive relative to warehouse distribution today in your mind?

Yes, absolutely. And we do not have a lot of distribution in our portfolio. We don't have a large boxes that are going to be affected by, if you will, tariffs and incoming product, we are light manufacturing in nature. So we feel confident. And I think if you look back at our previous calls, we have had a focus for the last 2 years as it relates to reshoring and onshoring. So we believe we're in a good position there to take advantage of that occurrence.

Okay. We have any more questions? One more?

Yes, the next question comes from Dave Storms with Stonegate.

Just going back to the renewal process, with your average lease term, it's just down a couple of months. Sequentially, in your top 5 tenants lease terms down to about 5 years. Just curious as to what your thoughts are and how you feel about the duration of your contracts as start preparing for the '26 and '27 negotiations?

We do feel good about our term and it will, I believe, with these closings I mentioned coming up, going to, for lack for better word, move back up over 7-year WALT, they're good long-term sale-leaseback transactions. Obviously, we also have to keep in mind you get a little more bang for the buck on the shorter-term deals. So that's also important to us. we have continued and will continue our underwriting focus as to the ability of the tenant to pay their rent and the stickiness of the real estate is mission-critical or C-suite an orientation that we feel comfortable they will renew at a shorter-term lease. So hopefully, that answers your question.

That's very helpful. And then just one more for me. And apologies if I missed this in the beginning, I know you mentioned that there's additional competition went out there buying properties. I'm curious what kind of competition are you seeing on the leasing front? Are there any new tenants that are coming into the market that maybe have been historically there, just in light of some of the macro stuff?

For us on the leasing front, and if the question is who's leasing? Most of it currently is end users. And that's also true on the purchase side of the equation. So that's a good thing. The competition for those leases relative to who we might be "losing a deal to," has also been similar. They're looking for, obviously, properties that fit their need. So I think we're very competitive within the market where we have current leases coming due.

Any more questions?

Mr. Gladstone, there are no further questions in queue. I'll turn it back to you for closing comments.

All right. Well, we thank you all for listening to our presentation and asking good questions and we hope you'll save up a lot of good questions for next time because we like the questions at the end of this. Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and thank you for your participation.