Gladstone Commercial Corp Q1 FY2026 Earnings Call

Greetings, and welcome to Gladstone Commercial Corporation First Quarter Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to Mr. David Gladstone, Chairman of Gladstone Commercial Corporation. Thank you, Mr. Gladstone, you may begin.

Well, thank you so much for that nice introduction, and thanks to all of you on the phone for calling in today. I want to tell you, we do enjoy the time we have with you on the phone even, and I wish we had more time to talk. But let's start out with Catherine Gerkis. She is our Director of Investor Relations, to provide a brief disclosure regarding certain regulatory matters that always impact everything we say. So Catherine, go ahead.

Thanks, David. Good morning. Today's call may include forward-looking statements, which are based on management's estimates, assumptions and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investor page of our website, gladstonecommercial.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X@gladstonecomps as well as Facebook and LinkedIn. Keyword for both is the Gladstone Companies. Today, we'll discuss FFO, which is funds from operations, a non-GAAP accounting term defined as net income, excluding 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 may also discuss core FFO, which is generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now let's turn the presentation to Buzz Cooper, Gladstone Commercial's CEO and President.

Thank you, Catherine, and thank you all for joining today's call. We are pleased to update you on our results for the quarter ended March 31, 2026, our current portfolio and our 2026 outlook. During the quarter, we renewed or leased over 773,000 square feet of industrial and 32,000 square feet of office, resulting in an increase in straight-line rent of over $86,000 annually. We did not sell any properties in Q1 2026, but we did sell a portion of one parcel of land with a gain on sale of approximately $1.8 million. As we have discussed in the past, we remain steadfast in several key focus areas: growing our industrial concentration, adding value in our existing portfolio through renewals, extensions and strategic capital investments, and disposing of noncore assets and strategically redeploying those proceeds into quality industrial assets. By executing on these focus areas, we expect to achieve increased portfolio WALT, strong occupancy rates, straight-line rental growth across the portfolio and a decreased cost of capital. Our asset management team continues to effectively manage the existing portfolio as evidenced by 100% collection of cash-based rents for the period, 98.7% occupancy across the portfolio, and a 7.3-year average remaining lease term. Each of these milestones is a testament to the mission-critical nature of the assets in our portfolio, the quality of the tenant credit in the portfolio and our underwriting capabilities. We are grateful to our lenders for their continued trust and partnership with us. These long-standing relationships are critical to our continued investment in the current portfolio and the addition of mission-critical industrial assets going forward. In short, our relationship with our tenants, the capital market community and our financial capacity have allowed us to execute upon our focus areas at a high level. Looking ahead to 2026, we remain focused on evaluating opportunities for high-quality industrial assets that are mission-critical to tenants and industries and accretive to our long-term strategy. As I mentioned, we're working toward our near-term goal of 70% industrial annualized straight-line rent. We look to achieve this goal and push past it during the year. While we do not have a timeline for the disposition of all of our office properties, we are keenly focused on growing the industrial concentration of our portfolio. At the same time, we will continue to work with our existing tenants to extend leases, capture mark-to-market opportunities, support tenant growth through targeted expansions, capital improvement initiatives and build-to-suit opportunities. While we remain aware of the challenging office environment, we will be strategic and intentional in evaluating our specific portfolio, seeking opportune times to dispose of office and noncore industrial as part of our continued capital recycling efforts. With the availability via our increased line of credit, access to the private placement bond market, cash on hand and ability to raise money at our ATM, we are positioned to deploy capital into accretive industrial acquisitions and portfolio improvements. In closing, 2025 was a great year for the company, and the team is focused on continuing their efforts through the remainder of 2026. I will now turn the call over to Gary Gerson, our CFO, to review our financial results for the quarter and liquidity position.

Thank you, Buzz. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the first quarter of 2026. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO per share available to common stockholders were both $0.35 per share for the quarter. FFO and core FFO available to common stockholders during the same period in 2025 were both $0.34 per share. Same-store lease revenue increased by 1% in the three months ended March 31, 2026, over the same period in 2025 due to an increase in recovery revenue from property operating expenses and an increase in rental rates from leasing activity subsequent to the quarter ended March 31, 2025. Our first quarter results reflected total operating revenues of $41.9 million with operating expenses of $25.2 million as compared to operating revenues of $37.5 million and operating expenses of $23.9 million for the same period in 2025. Operating revenues were higher in 2026 due to an increased portfolio size, increased recovery revenues and higher rental rates. Expenses were higher in the first quarter of 2026 versus the same period in 2025, mainly due to higher depreciation from a larger portfolio, partially offset by crediting back all the incentive fee in the first quarter of 2026. At the end of the quarter, we had one small industrial property in Charlotte, North Carolina held for sale. As of today, we have $17.9 million of loan maturities in 2026 and $35.2 million of loan maturities in the first quarter of 2027. At the end of the quarter, we had $34.3 million of revolver borrowings outstanding. Looking at our debt profile, as of March 31, 48% was fixed rate, 48% was hedged floating rate and 4% was floating rate, which is the amount drawn on our revolving credit. As of March 31, our effective average SOFR was 3.68%. Our outstanding bank term loans are all hedged to maturity with interest rate swaps. We continue to monitor interest rates closely and update our hedging strategy as needed. During the three months ended March 31, 2026, we did not sell any shares of common stock under our ATM. 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 $7.8 million in cash and $77 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 stock dividend is $0.30 per share per quarter or $0.10 per month or $1.20 per year. And now I'll turn the program back to David.

Thank you, Gary. That was a good one and that was good from Catherine also. The team continues to perform very, very well. Overall, a very nice quarter for us, like we've done for many quarters in the past. So for those of you who like quarterly dividends, this is a great company to buy into. We sold a portion of a land parcel, which gave us a gain on sale of about $1.78 million. Gladstone Commercial's team is growing. Real estate we own is a good place to be, and the team is doing a great job managing the properties, especially during these challenging times. The good news is we have some very good properties and they're rented to some great tenants. Our team has strong professionals continuing to pursue potential quality properties on the list of acquisitions we have and are reviewing. Our acquisition team is seeking strong credit tenants. That's the key. But let's stop here and ask the operator to come on board and help us listen to some questions from some of the people on the phone. Operator?

Our first question comes from the line of Craig Kucera with Lucid Capital Markets.

You were pretty active this quarter on the leasing front. Can you talk about the leasing spreads you typically achieve during the quarter versus prior?

In leasing spreads, Craig, are you referring to either mark-up or mark-down, in some cases, relative to prior rent or...?

Yes. That's relative to rent.

Relative to rent. So as mentioned, we did have a mark-up for the quarter. Most of that came from an industrial asset that we renewed. Certainly, we try to get mark-to-market as best as we can when that market is favorable. We have addressed all of our leases for 2026. We have three or four outstanding that we need to work on and are working on. As I've mentioned in the past, we're in front of all of our expiring leases from 2026 and 2027. Obviously, the main concern is our property down in Austin, and we are obviously working that hard. We have had some activity. Hopefully, we'll have some more information on that in the not-too-distant future. But we always look to optimize what we can relative to where we are in the market and, obviously, the tenants' needs within the building.

Got it. And you have a small—go ahead.

Go ahead.

Okay, next go to Craig.

Okay, sure. So you did have a small sequential decline in occupancy from the fourth quarter. Was that in an office or an industrial property?

It was in an office for a short period of time due to a tenant in a building in Pennsylvania downsizing. Beginning in the third quarter, that occupancy will be picked up by a new tenant that is in on a longer-term lease. We hope to expand them within the whole building, but that will come back up once we hit the third quarter.

Got it. Okay. And I think last quarter, you thought you might close on maybe a $10 million property this quarter. Is that still in the mix? And kind of what's your near-term appetite and pipeline for acquisitions?

We have two transactions currently that we are working on that we do believe will close within this quarter, both industrial, and the use of proceeds will include the sale of one of our buildings referenced in the past. In fact, that acquisition is very accretive for us—the straight-line and current rent on that transaction double—so it's very accretive. The pipeline has a lot of competition, as everyone knows. I think one of the differentiating points for us is we do what we say we're going to do. We're going to stick to our underwriting and our commitments. There's been a little bit of a slowdown, but we're starting to see activity come back out of the first quarter. Private credit is a little in flux, so people are looking back at sale-leasebacks as a way to finance operations. We anticipate a more robust second and third quarter.

Okay. Great. And just circling back to the Austin property, is that GM lease expiring in the second half of 2026? And when you think about the lease expirations you have ahead of you in 2026 and 2027, can you give us a sense of the mix between office and industrial?

That lease in Austin expires 12/31/2026. We expect to have addressed it as we move through the year. In the 2026 lease expirations, we have one sale that will occur, as Gary mentioned, a building held for sale. The office building I mentioned has a tenant taking over on July 1, 2026. The other three expirations include two office leases that are in the process of renewal—one is with the U.S. government, which continues to pay but has some delays in completing renewal, and in another building there will be a bit of a downsize with the tenant taking roughly half the building. Going into 2027, we remain in contact with all tenants; some have fixed renewal rights and notices. We feel confident we'll have positive results and some leases have already been renewed. We're working them hard. Currently the portfolio is approximately 60% industrial and 40% office.

Our next question comes from the line of David Storms with Stonegate.

To start with the parcel sale in the quarter, just curious, is this a structural shift or opportunistic? And what's the profile of a buyer that would come in for a parcel? Does it vary by geography or is there a typical buyer you see?

It was opportunistic. In fact, the municipality came in and wanted that strip of land at the back, which was not used by the property, to put in a bike path.

Understood. That's perfect. And then just curious, you mentioned some of the macro stuff and some of the challenges in underwriting as well. How have your underwriting processes changed, and how are you evaluating tenants with respect to their energy needs, AI-related demands, gas or geopolitical exposure, anything like that?

As you have heard consistently, we have not changed our credit underwriting and we won't, which is one reason our occupancy within our portfolio has always been so strong. We have not had any tenants ask for relief. We stay in front of our tenants with quarterly reviews and annual reviews where appropriate. We have not seen a drop in credit quality. We have two or three that we keep an eye on; however, they've been improving. Again, no missed rental payments and no requests for relief. So we will stick to our knitting as it relates to our underwriting.

Understood. And one more: you mentioned you're seeing more sale-leaseback transactions. Is there a particular type of tenant you're seeing this in? Just trying to gauge the momentum for these transactions.

We look for mission-critical real estate on the industrial side, and that often involves manufacturing. We're not focused on big-box distribution per se, although at the right cap rate we would consider it. We prefer properties with heavy bolt-down costs and heavy equipment within the building, which makes the tenant expensive to move. We're looking at industrial and manufacturing properties with cranes, production lines and similar specialized infrastructure. That's where we see opportunity for sale-leasebacks.

Our next question comes from the line of John Massocca with B. Riley.

Apologies if I missed this earlier. Can you lay out the brackets on the acquisition pipeline and what you're seeing in terms of the cap-rate environment?

We're not changing our credit requirements. We are looking at deals in the mid-6.5% cap-rate range going in. There's a great deal of competition. One of our differentiating points is consistency: we do what we say, we stick to our underwriting. The profile is middle-market companies in locations where we see value in the real estate. One area of opportunity is with portfolio tenants that are looking to expand; we can provide the capital to expand and keep them in our portfolio.

Any change to the size of the pipeline versus the 4Q earnings call?

No. It's generally in the range of $300 million to $350 million under review. We have three LOIs currently for approximately $87 million. We are reviewing about 13 opportunities right now, and it generally remains around that $300 million level on an ongoing basis.

In light of comments about tenants favoring the sale-leaseback model, was your targeted acquisition base using private capital a competing source versus you? If those private vehicles pull back, does that impact your investments, yields or acquisition volume?

I don't believe private capital is a great competitor to us. There will always be groups that chase certain deals, but those often don't meet our return requirements or tenancy profile. Over 20-plus years we've been thoughtful about tenancy, location and fungibility of real estate. Credit comes first in our analysis.

Anything one-time to be aware of in the 1Q results? I thought I saw a little bit of accelerated rent, but I wanted to confirm.

No, John, there's no accelerated rent in Q1. The only one-time event would be that sale of the parcel and the gain. Otherwise, it's a pretty standard quarter.

Our next item is a follow-up question from the line of David Storms.

Apologies. I did not mean to re-enter.

David, do you have another question?

Apologies. I do not have another question. I'm not too sure I got back in queue.

That's really sad. We like to have lots of questions, but we get three or four, and that's about it. We've got to get a different ownership base that asks us a lot of questions. Right now, you might say we're fat and happy. Everything is working as it should, and we've got some really interesting things we're working on. So with that, I'll close it down and say thank you all for tuning in, and we'll see you again next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.