Gladstone Commercial Corp Q1 FY2025 Earnings Call

Greetings, and welcome to the Gladstone Commercial Corporation First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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.

Thank you, Latonya, for the nice introduction, and thanks to everyone for joining us and listening to our presentation. We appreciate the time we have with you on the call and wish we could talk longer, but we only do this once a quarter. Now, we'll hear from Michael LiCalsi, our General Counsel and Secretary, who will address the legal and regulatory matters related to this report. Michael, please go ahead.

Thanks, David. Good morning, everybody. Today’s report may include forward-looking statements under 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. There are many factors that 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 file with the SEC. These can be found on our website, specifically on the Investors page or on the SEC’s website. Now, we undertake no obligation to publicly update or 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, excluding gains or losses from the sale of real estate and net 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 non-recurring revenues and expenses. We believe these metrics are a better indication of our operating results and 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 email notification service. You can also find us on Facebook with the keyword the Gladstone Companies, and Twitter at @GladstoneComps. Now 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 growing uncertainty followed by recent tariff announcements. These announcements have added pressure to global trade flows and extended decision time for manufacturers to distribute their goods, especially those companies with 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 macroeconomic outlook, the industrial real estate sector continues to perform well. 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%, driven by speculative deliveries, but remains in line with historical averages. This suggests the market is approaching a more balanced state. New construction completions during the quarter declined to the lowest level in nearly four 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, which encompassed 355,778 square feet for 73.25 million. We increased portfolio industrial concentration as a percentage of annualized straight line rent to 65% and maintained portfolio occupancy at 98.4% as of March 31. Subsequent to the end of the quarter, we sold one office property for a gain of $377,000 and one industrial property where we previously recognized a 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, hoping to reach at least 70% in the near term, we continue to maintain a disciplined underwriting approach. This discipline was on display in the acquisitions we completed this quarter and in 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 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 re-shoring and on-shoring 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 and accretive to our long-term strategy. At the same time, we will continue to selectively dispose of non-core 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 targeted 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 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 despite higher interest rates. I will now turn the call over to Gary, to review our financial results for the quarter and our liquidity position. Gary?

Thank you, Buzz. I’ll start my remarks this morning regarding our financial results by reviewing our operating performance 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 three months ended March 31 over the same period in 2024 due to increased property expense, recovery revenue, and higher rental rates from leasing activity subsequent to the first three months of 2024. Our first quarter results reflected total operating revenues of $37.5 million with operating expenses of $23.9 million, compared to operating revenues of $35.7 million and operating expenses of $23.3 million for the same period in 2024. Operating revenues were higher in 2025 due to increased recovery and higher rental rates for the same properties, slightly offset by lower variable lease payments from the seven 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 a higher net incentive fee paid in Q1 2025. In Q1 2025, we increased net assets from $1.09 billion to $1.16 billion, resulting from the two 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 the 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 $300,000 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 and new acquisitions. As of today, we have approximately $18.4 million in cash and $80.6 million of availability under our line-of-credit. Our common stock 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 too. And the commercial team is really performing well, renting more of our buildings, and we’re continuing to grow. You’ve heard a lot today. In summary, we acquired two industrial facilities for a total of $73 million, which is a nice addition to our group. Subsequent to the end of the quarter, we sold one office property with about $377,000 profit. We previously recognized a selling profit of $3.9 million from the sales-type lease. The commercial team is continuing to grow our real estate, add more deals and refinance and redo things. So, we just continue to march along at the same pace we've maintained 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. Our acquisition team is out there seeking only strong credit tenants and we’ll continue that process. So, let’s stop now and have the operator come on and tell listeners how they can ask some questions.

Thank you. We will now conduct a question-and-answer session. The first question comes from Gaurav Mehta with Alliance Global Partners. Please proceed.

Yes, thank you. Good morning.

Good morning.

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

Thanks, Gaurav. We are seeing activity pick up here as the year gets started. We currently have approximately $70 million lined up here that we believe will close in the second quarter, and we are looking at 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 private equity 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. We believe we will continue to be active certainly 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 be looking at other financing sources as we did with a private placement at the end of last year, as well as perhaps other ways to have capital on hand, whether through a joint venture or otherwise.

Okay. Thank you. That’s all I have.

Thank you.

Next question?

Next question comes from Craig Kucera with Lucid Capital. Please proceed.

Yes. Hey, good morning, guys. I want to circle back to the acquisition volume here. Obviously, a significant increase after 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 say, it’s a combination of both. We have been aggressively trying to stay close with our broker relationships to have early looks as well as hopefully a last look at transactions. One of our advantages is we do what we say we will do. We don’t retrade. I think it’s a function of getting to the transactions earlier rather than later and having early impact back to either the 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 to tackle 2026 and 2027 which are much larger years that are expiring?

As has been our history, Craig, we are in talks related to 2026. We have approximately 8% or 9% that we are working on, and of those, we really only have one at this point in time that we have not traded paper on or had discussions with. So, we will hopefully narrow that down quickly at the appropriate time. We’ve got a good handle on it, and as we work on these 2026 expirations we are also looking at 2027 and believe we will be successful there as well. Many of those are industrial in nature, which we hope will allow for rent pickup.

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

There was not a pickup on a straight line basis. For the term, it’s a small drop due to not being able to secure a long-term extension. They have to let us know after an 18 month period if they are going to remain. It’s in a strong market, and we believe that if we do not have success with renewing them longer, we will have an increase in the rental rate.

Okay, great. And just one more from 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 two term loans mature in late 2027 and early 2028.

Okay. Thanks, guys.

Thank you.

Next question?

Next question comes from John Massocca with B. Riley. Please proceed.

Good morning.

Good morning, John.

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

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

Correct.

Okay. We had two sales right at the beginning of April. One was industrial, and the tenant had an option to buy, so they did. That was the realization of the gain there that we had. The other was an office property that was purchased and incurred 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 non-core, and maybe an update on the situation with the Austin office property?

As it relates to non-core, I assume you’re referring to office. Our office occupancy is north of 93% at the moment. I would say a very small amount would be considered non-core, but we do have some property types within that office that we wish to move on from and redeploy those into industrial assets. We have two call centers that we are working on. Most of the offices today are healthy, and I couldn’t grasp the property you were referencing.

Sorry, the Austin office property. Any update on lease up there?

Sure. Austin is always top of mind. It does generate positive cash flow for us. At the moment, we currently have a few requirements out in the marketplace that we are tracking, as well as two unsolicited RFPs. Austin is improving. The office market is also returning, so we are hopeful that we will be able to add tenants there and then make a decision regarding a long-term plan.

Okay. And then bigger picture, any changes in the acquisition parameters given the changes in government policy? Specifically, does light manufacturing look more attractive relative to warehouse distribution today in your view?

Yes, absolutely. We don’t have a lot of distribution in our portfolio. We don’t own large boxes that are going to be affected by tariffs and incoming products. We are light manufacturing in nature, so we feel confident. If you look back at our previous calls, we have focused on re-shoring and on-shoring for the last two years. We believe we’re in a good position to take advantage of that occurrence.

Okay. That’s it for me. Thank you very much.

Thank you.

Okay. We have any more questions? One more. Okay.

Yes. The next question comes from Dave Storms with Stonegate. Please proceed.

Good morning.

Good morning, Dave.

Just going back to the renewal process, with your average lease term down a couple of months sequentially and your top five tenants' lease terms down to about five years. Just curious as to what your thoughts are and how you feel about the duration of your contracts as you start preparing for the 2026 and 2027 negotiations?

We do feel good about our term, and I believe with these closings I mentioned coming up, we will move back above a seven-year weighted average lease term. They are good long-term sale-leaseback transactions. We also have to keep in mind that you get a little more return on the shorter-term deals, which is also important to us. We continue and will maintain our focus on underwriting the ability of the tenant to pay their rent and the stickiness of the real estate being mission-critical or C-suite oriented, which makes us comfortable they will renew even with a shorter-term lease. So, hopefully, that answers your question.

That’s very helpful. Thank you. And then, just one more for me and apologies if I missed this at the beginning. I know you mentioned that there’s additional competition in the market for purchasing properties. I’m curious about the competition you’re seeing on the leasing front. Are there any new tenants coming into the market that haven’t historically been there just due to some macro changes?

For us on the leasing front, most of the current activity is from end users, which is true on the purchase side. That’s a positive indicator. The competition for these leases matches similar patterns where we might be losing deals to is normal. They are looking for properties that fit their needs, so I believe we are very competitive within the markets where our current leases are coming due.

Very helpful. Thank you for taking my questions.

Thank you.

Any more questions?

Mr. Gladstone, there are no further questions in the 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. That’s 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.