Q3 2020 Gladstone Commercial Corp Earnings Call
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Hello, and welcome to the Gladstone Commercial Corporation earnings call for the quarter ended September Thirtyth Twentytwenty at this time, all participants on a listen only mode. A question and answer session will follow the formal presentation. If he would like to ask a question you May press star one on your telephone keypad, if anyone should require operator assistance during the conference. Please press.
Third zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr., David Gladstone Chief Executive Officer. Thank you Sir you may begin.
Okay. Thank you Donna nice introduction for us. Thank you all for calling in.
Do enjoy this time, we have with you on the phone and wish we had more time to talk to you [laughter] now lets hear first from Michael account see our general counsel and secretary to give us some legal and regulatory matters concerning the call report Michael.
Yeah, Thanks, David and good morning. Today's report May include forward looking statements under the Securities Act of 933, and the Securities Exchange Act of 934, 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 risk factors on forms 10-Q, 10-K, and other documents we file with the SEC. These can be found on our website.
W.W. Dot Gladstone commercial dotcom, specifically, the Investor Relations page on the EPS exceeds web site, which is www dot thats exceed that GE old Navy and 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.
A lot, but today, we will discuss AFFO, which as funds from operations FFO is 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 will also discuss our FFO as adjusted.
Adjusted for comparability and core FFO, which are generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe these metrics are a better indication of our operating results and allows better comparability of our period over period performance. So please take the opportunity to visit our web site one.
Again, Thats Gladstone commercial outcome and sign up for our email notification service. We also find us on Twitter keyword. There is the Gladstone companies and our Twitter handle at Gladstonecomps.
His calls an overview of our results. So we ask that you review our press release and form 10-Q, both issued yesterday more detailed information again, you can find them on the investors page of our web site.
I'll hand, the baton over to Gladstone Commercial's, President Bob Cutlip Bob.
Thank you Michael and good morning, everyone.
During the third quarter, we acquired a 153000 square foot industrial property in the Indianapolis MSC for $10.6 million excess.
Extended the leases for four tenants totaling 617000 square feet with revised lease expiration dates ranging from 2026 to 2030 to.
Executed an 8000 square foot office lease in our partially vacant fiddly, Minnesota property.
Told our 347000 square foot industrial property in Maple Heights, Ohio for $11.4 million, resulting in a net gain of $1.2 million and collected 99% of scheduled rental income in the third quarter without providing any.
Subsequent to the end of the quarter, we acquired a 241000 square foot industrial property in Montgomery, Alabama.
It's all the three properties single storey office portfolio in Champaign, Illinois, or $13.4 million, resulting in a gain of $4.1 million and collected 100% of scheduled rental income in October.
As noted on earlier calls our investment strategy is emphasizing an increase in our portfolios industrial allocation.
Which we believe will improve our property operating efficiencies reduce capital expenditure levels and potentially result in improved valuation over time.
During 2020, Weve acquired seven properties all industrial at a total investment of 96.5 million with.
With a weighted average lease term of 13.1 years, and an average GAAP cap rate of 7.3%.
Since January of 2019, our total investment volume has been $225 million all of which is industrial providing further evidence of that commitment.
Our industrial allocation has increased from 33% in January 2019% to 45% today with an objective that Mike and I have of achieving a 60% allocation within the next 18 to 24 months.
We will continue to overweight industrial acquisitions market conditions permitting of course in the develop submarkets of our targeted locations. Our primary focus has been and will be acquisition candidates ranging in size from 50000 to 300000 square feet.
Investment opportunities during the July through October timeframe were limited due to the effects of COVID-19, we.
We did however acquired two properties. During this time period as I previously mentioned, a 153000 square foot industrial property in the I 70 quarter of the Indianapolis MSA.
The total investment was $10.6 million with a 10 year remaining lease term and a GAAP cap rate of 8%.
And we acquired a 241000 square foot industrial property, along the I 55 quarters in Montgomery, Alabama the.
The total investment was $14.25 million with 7.2 years of remaining lease term GAAP cap rate of 7.3%. It's interesting to note that we are very interested and excited about high 65 quarter that extends from the affordable deal up through Birmingham with increased container volumes coming into.
The southern part of the country.
Our asset management team continued to deliver on improving our same store operations during the third quarter. The team executed four lease extensions and one new lease two office properties three industrial our 42000 square foot office tenant in Richmond, Virginia extended their lease through 2026.
The 67000 square foot industrial tenant in our shelf on Pennsylvania property extended their lease through 2026 as well right.
3900 square foot industrial tenant in Indianapolis property extended their lease through 2029, and our 504000 square foot tenant at the northwest, Georgia inland port extended their lease through 2032.
And we executed a five year 8000 square foot lease in our fairly Minnesota office property with a lease start date of November Onest.
The tenant improvement allowance for the industrial properties averaged 95 cents per square foot and the office properties averaged $2.65 per square foot.
Reflecting on the first nine months of the year. The team completed 13 leasing transactions totaling 987000 square feet eight of which were office properties. The weighted average lease term was 7.9 years weighted average straight line rent increased by 3% and the overall tenant improvement allowance was approximately $3.
The square foot excuse me, which is very favorable with a large percentage of office versus industrial transactions.
Our rent collection experience continues to be strong 99% of third quarter cash rent collections were paid in October collections were 100%.
We're very pleased with our tenant performance during these challenging times for all industries.
We continue to stay closely connected to our tenants operations there have been and we expect there will be requests from tenants for rent relief and we will address them as we are notified by the respective tenants.
There is no doubt that each agreement will have unique business terms. However, our key objectives are to offer rent deferrals not rent abatement to maintain or increase core AFFO per share and to return cash flow to the proper previous level as soon as possible.
As noted on the second quarter call. The company granted rent deferrals to three tenants in April representing approximately 2% of total monthly rental income throughout the second quarter and 1% in the third quarter.
For the ongoing presence of the COVID-19 virus, we expect to continue to have conversations with other tenants requesting short term concessions.
Anticipating as many on the call are interested in lease expirations through 2020 and beyond I wanted to summarize the team's thoughts in our current activities.
We have no further lease explorations through year end, and we have $5.9 million of annualized rent expiring during 2021.
And $3.7 million of that total expires at the end of the year, specifically $800000 of annualized rent at the end of November and $2.9 million of annualized rent at the end of December.
So future expirations are quite manageable.
Our largest vacancy is in Austin as most people on the call are aware a property, formerly leased to GM, who vacated the end of August.
Active marketing of the property with assistance from the local chamber of Commerce has resulted in seven current prospects for the building ranging from 65000 square feet to 320000 square feet.
Our previous GAAP rent at the property of $14.50 per square foot compares quite favorably in the Submarket with current space offerings in the low to mid $20 per square foot on a triple net basis.
And with considerable interest from the West coast in Chicago, as well as a large Austin prospect Tesla.
Teslas decision to build a gigafactory their VA east commitment to build a campus in our property Submarket, we expect a positive outcome, but must remain patient and persistent with the ongoing virus impacts.
Long term, we are positive about our same store performance as lease expirations for 2021 in 2020 to average approximately 5% based on projected rental income there.
Therefore, overall cash flow should be stable with limited risk, enabling the team to focus on growth.
Market conditions are worthy of comment, particularly with the adverse effects from the onset of the Cove at 19 virus yeah.
Year over year through the third quarter real capital analytics reports that investment sales volume across all property types is down 57% National Research reports also reflect office property sublease space is on the rise and Cushman and Wakefield has forecasted negative office absorption over the next two years.
However, the continued interest in industrial properties, particularly those related to E. Commerce has resulted in no increase in cap rates for this product type in many markets and even some compressed cap rates in select locations.
There is however, some expansion of cap rates for smaller properties and those being saved from 50000 to 200000 square feet in size that are more manufacturing in nature, particularly for sale leaseback transactions in select markets.
Product type that matches, our interest in underwriting strength, particularly for middle market non rated companies seeking capital to reinvest in our business. We will continue to monitor the evolving conditions and adjust our strategy accordingly.
And as it relates to growth opportunities investment sales listings have moderated driven primarily by the way the virus. Our current pipeline of acquisition candidates is approximately $270 million in volume, representing 16 properties, all but one of which our industrial.
The 16 properties two properties are in due diligence totaling approximately $24 million three properties are the in the letter of intent stage totaling approximately $40 million in the balance are under initial review.
Our team is staying actively engaged in the markets as we believe acquisition opportunities will arise that we can and we will pursue.
So in summary, our third quarter activities reflected stock strong leasing and rental collection success continued active engagement to identify industrial acquisition opportunities and collectively positions us well pursue growth opportunities.
Now I'd like to turn it over to Mike for report on the financial results, including our capital markets activities.
Good morning, I'll start by reviewing our operating results for the third quarter of 2020, all per share numbers I referenced are based on fully diluted weighted average common shares.
FFO and core FFO available to common stockholders were 39 cents and 40 cents per share for the quarter, respectively, AFFO and core FFO available to common stockholders were $1.19 and $1.20 per share for the first nine months of the year, respectively. This performance demonstrates the accretive yet prudent growth of the company as well as the performance of the in place portfolio.
In addition to these accretive deals our same store cash rent continues to grow at 2% on annualized basis, our third quarter results reflected stable total operating revenues of 33.1 million as compared to total operating expenses of $24.1 million for the period, excluding two property impairment charges.
As Bob laid out our team is actively engaged with every tenant of ours as we intend to maximize shareholder value through and beyond the COVID-19 pandemic. We're pleased with the teams and portfolios performance through October and believe we've performed exceptionally but these are unchartered times.
We continue to enhance our strong balance sheet as we grow our assets and focus on decreasing our leverage we have reduced our debt to gross assets by nearly 15% to 46% over the past five years through refinancing maturing debt and financing new acquisitions at lower leverage levels. We believe that we are 1% to 2% away from our target leverage level long term.
We continue to primarily use long term mortgage debt to make acquisitions as we grow through disciplined investments will also look to expand our unsecured property pool with additional high quality assets overtime. We expect this will increase our financing alternatives looking at our debt profile as of today, our 2020 and 21 loan maturities are very manageable with non do.
In 2020, and only $11 million coming due in 2021, we continue to minimize our exposure to rising interest rates with over 90% of our existing debt being fixed rate or hedged to fixed through interest rate swaps and caps, while entering the third quarter with sufficient liquidity weve been modestly active in issuing our common stock and preferred series Easter.
Using our ATM programs during the third quarter and net of issuance costs, we opportunistically raised $4 billion through common stock sales and $3.6 million through preferred series E stock sales.
We also raised $1 million grew our new preferred series F program, we continue to manage liquidity in the balance sheet to ensure that we have sufficient liquidity for upcoming capital requirements.
As of today, we have approximately $3 million in cash and $30 million of availability under our line of credit with our current availability of the strong performance of our portfolio and access to our ATM programs. We believe that we have significant incremental flexibility to fund our current operations near and long term. We encourage you to also review our quarterly financial supply.
Posted on our website, which provides more detailed financial and portfolio information for the quarter.
Institutional ownership of our stock has increased by over 20% since.
The last since 2016% to 60% as of September Thirtyth, Bob and I continue to be very active in meeting with current.
And potential investors portfolio managers coverage analysts investment banks and the like.
We look forward to establishing new relationships as the company moves forward to its next chapter right.
Regarding the common stock dividend, we did increase it in the first quarter and while the increase was small we have also announced that we are leaving it as is we have not cut or suspended the dividend since our IPO in 2003.
Our stock closed yesterday at $16.60 per share the dividend yield on our stock is around 9%. Many Reits are trading at significantly lower yields now I will turn the program back to David Okay. Thank you that was a good report, Mike and certainly a good one from Bob Cutlip and Michael account seats.
Has performed very well.
We've not been hurt much by the various government reactions to the virus is a really nice quarter.
You've heard a lot of the numbers today, just to summarize again as Mike said.
Team collected all of the rents that were.
Tennants first quarter here.
Per cent and the second quarter and the third quarter, we collected 99%.
And to date in.
October we collected all of the rents are 100% so they've done a good job of collecting from each one of our tenants out there company bought an industrial asset and Indianapolis, We will see some more purchases as time goes on and the team also executed four lease extensions and signed one lease for vacant space.
Yes, I do.
In the quarter finally, the team sold noncore asset Thats that building, we had and Maple Heights, Ohio, and we made money on that we've got a capital gain.
The commercial team is growing and real estate, we own is in good good situation and the team is doing a great job of managing the properties that we own especially doing this pandemic.
Just wanted to hit one item. We are now entering a time of designating management for the future people ask me about that and we elevated three members of the team to executive Vice President and common and they in combination with our Chief Financial Officer, and Michael account see who heads up administration in the future. This fund.
It is really in good hands working together they all have profit loss responsibilities today.
And they are the members of the senior leadership team, ensuring continued success and long term and long term growth for our shareholders and.
Evolve and are not leaving our positions that we just want to show that we have a deep bench of talent within this fund to take us forward.
Team is strong it's good professional people and they continue to pursue quality properties on the list of acquisitions, they're reviewing our acquisition team is seeing strong credit tenants.
And now the quality of the tenant and the real estate make an excellent investment and I think we're probably one of the few that places most emphasis on our tenant and second on our real estate.
Your asset managers are actively managing the properties that the company owns in order to maximize their value.
A different environment, when but the team is up for the challenge.
Middle market businesses like our tenants are being challenged with the government restrictions related to the virus that's in the market now.
Our tenants are paying their rents and committing to pay us in the past and deferred any deferred rent.
So these are times that have never been seen before but the first class team. We have running this company is doing a fantastic job rather.
Rather than continue on lets stop here Ana if you'll come on and help our listeners ask some questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question you may do so by pressing star one your telephone keypad.
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Our first question is coming from Rob Stevenson of Janney Montgomery Scott. Please go ahead.
Good morning, guys.
When you look forward.
On the funding for future acquisitions does it look a lot like what you did in the third quarter asset sale and 10 million ish of combined common and preferred until the point.
What are the common gets back up to more acceptable level is that reasonable to be thinking about it in that direction are you guys have other thoughts on how to finance the business.
In a world where your stock price as Mike said is 16 Bucks and undervalued.
Very good question, Rob I think you hit the nail on the head there. We we are going to be selectively exiting what I consider to be noncore properties and those being primarily a single storey office, which we just did.
Out of Champaign, Illinois.
I think we'll continue to do that I do believe though that Mike and I are kind of forecasting no more than $15 million to $20 million of dispositions in any given year, but we will take advantage of exiting some of these noncore properties I am not a single storey office lover never have been and although our tenants are doing extremely well.
So from a payment standpoint, I think if we can roll out of those types of properties and into.
Industrial properties to to mass portfolios in our our target markets. That's our objective.
And pivoting to the capital piece of it Rob and to your point.
We're at 16 to 60 per share. If you had 17 box thats an eight eight common dividend yield we have modestly raise some preferred predominantly at six and five base. You then get to a blended cost of equity in the low to mid sevens.
Where we are seeing that nowadays is.
Really in the three to three and a half range, but more so three to three and a quarter.
The way we saw for our cost of capital is roughly a 50 50 debt to equity split.
So all in then you are looking at a low fives cost of capital specific to the notional you mentioned in terms of a 10 million dollar equity raise.
That will pivot as a function of how the capital markets are positively or negatively receiving our stock in tandem with how pipeline is going I would say in a normalized environment and it specific to 2021.
We certainly have appetite to be more acquisitive and that will call for more equity, but again as we said and as we all know these are exceptional times and we will pivot as we need to but those would be the general commentary. There long term, we continue to desire to modestly de lever the portfolio doing deals at rough.
Really that leverage in tandem with the scheduled amortization that we have on our 400 plus million dollars of mortgages, the amortization, there plus or minus $13 million a year. That's how we solve to do that modest deleveraging and we would like to long term overweight to comment when we get back to a better cost of common.
Okay, and then Bob you've talked in the past about potentially exploring joint venture opportunities maybe what do you how is the thinking today and are the opportunities there to acquire properties.
Such that that still an avenue that you guys are exploring is that sort of been pushed to the back burner for now.
Hello, how are you guys thinking about that at this point.
Mike and I are continuing to explore it he has been in contact with a number of potential partners.
We are looking at it from the standpoint of.
Of of pursuing a product type that would not be in competition with our balance sheet. So it could be on the development side, whereby we partner with a developer and we do takeouts.
And I think that can and will work, but we're just continuing to explore at Rob I think probably over the next three to six months will either really go forward hard with it or elect to move on and just stay with our current balance sheet.
Okay and.
The the five properties that are classified as held for sale.
Is the expectation that that's you know 2021 business or some of those likely to close in the fourth quarter here.
I would say, it's predominantly took 2021 and just as a refresh accounting guidance stipulates that a a sale within a 12 month time period has to be probable to actually get the designation as a held for sale assets. So vast majority of it if not all will be 21.
Okay perfect. Thanks, guys. Appreciate it have a good weekend.
You too and next question. Thank you. Our next question is coming from Gaurav Mehta of National Securities. Please go ahead.
Yeah. Thanks, good morning.
And.
A question on the GM building was hoping you could provide some color on.
What you have been hearing from people.
But youre talking do random buildings.
Got it and then what about some of the reasons for why the prospects remote plasma for the property.
Certainly.
As you know Austin now has reopened up until probably four to six weeks ago. It was very quiet and we were only getting really virtual tours from our web site on the building, but now with Austin reopening and our asset management team actually has been in Austin. This week, we're starting to see a pickup in activity.
And as you indicated as I indicated there we have like seven prospects and I consider three to four of those really really valid in fact, we are sending out a proposal today.
Two.
Potentially a full building users so.
I can't guarantee whats going to happen all I can tell you is that when I look at our competition and I look at our ability to lease that building at a very profitable position at $20 or even $19 a square foot triple net as compared to what's going on in the market place where the majority.
Of the leases are in the mid Twentys I think we're going to get our fair share of opportunities and pursuits.
But you know cobot still has an impact in the state of Texas and so what we're what we're doing is staying very close to the chamber of Commerce Chamber of Commerce is getting hits now on companies that are wanting to come visit as compared to what they were not.
Let's say, let's say two to three months ago.
Okay.
And I guess before you do that 2021 means expirations.
Are you speaking it down and maybe provide some color on.
Is that office or industrial that's expiring then there are the expiring rents versus market trends.
It It is office it is office and industrial and you know as I indicated.
Aided our experience. This year has been an increase overall and straight line of about 3% and I would anticipate that thats, probably what we're looking at next year.
Do I expect some tenants to come back to me and say, we need to reconfigure our building bomb.
And and do our lay out differently and I will encourage that so long as we can get some additional term.
From those tenants and I think that will happen growth.
I think it really well and remember as I indicated you know the of that $5 million that of annualized rent over 3 million of that really expires. The last two months of the year. So we are not really forced in the first half of the year to have much.
Let's say releasing or or renewal activity.
Okay. Thank you Thats all I had.
Take care a next question. Please. Thank you once again if you do have a question. It is star one on your telephone keypad. Our next question is coming from John Massocca Robert Feldman. Please go ahead.
Good morning.
And on and on.
Just going back maybe his prepared remarks, a little there was some language in there about potential future deferrals is that just a cautionary given the environment. We're in or is there something specific within the portfolio you're seeing today that could cause.
Additional deferral requests or newer deferral request I should say.
Yes, it's cautionary, but but to be honest John I do think that people are going to come to us I mean, if I were them I would do it too when I look at the occupancy in the buildings, which ranges anywhere from lets say on the office side predominantly from 25% to 75% you know that if you're a smart business person you are.
Again to go back to your landlord and ask for some help what we'd do though is we have a very very very very comprehensive checklist that we go through with them related to their financials and everyone that we've done so far we've really been able to arrive at a positive outcome most.
To them other than those three have says well were okay. We can continue to pay but do I expect people to come back to me, Yes, I do I mean, I just think thats the market we're living in today and as I indicated our goal is not rent abatement. We wanted to further rent, but we also want to extend the leases so.
That we keep our core FFO.
The same is it is it has been.
And maybe as you have these conversations with office tenants I mean, what is the dynamic there giving in these properties properties aren't really kind of directly tied off into revenue is being generated but also.
Kind of cuts both ways, writing maybe that makes it more likely for them just to kind of do you as a sunk cost and.
Same point in time, if they stop paying you.
Boston door on them worst case scenario, you are not really cutting them off revenue. Let me just how are those dynamics maybe.
In those conversations you're having has it been pretty receptive and people when you kind of point out that maybe they have the cash flow to pay rent.
Yes, I think it's been it's been very positive and the reason I think it is is that when I look at when I look at our portfolio and I look at our office properties. Most of these tenants have already renewed once and so they're somewhat mission critical and they're at locations that benefit their employees.
So I am definitely recognizing that this is a partnership and our asset managers connect with connect with our tenants at least quarterly so I mean, we have personal relationships with our counterparts. So I take my hat off to our senior asset managers, who are staying engaged and have been engaged with our tenants.
At the end of the day, it's easier to negotiate a fair outcome. When you know each other as compared to not having a relationship at all so.
It's been positive I would say, 90% to 95% of the time, John but you know do I expect to get to get one or two that are not positive, yes, but I'm hopeful that we're going to keep that let's say, 97% to 98% pay rent paying.
So really for the long term, which I think.
Is is a good probability based on what we're seeing in our conversations with our tenants.
Okay and.
And then on the investment side as you guys think about industrial that there's been talk of cap rate compression in the space. I mean is that a trend that has continued through threeq you 20.
Typically with the assets you tend to target, which may be a little bit out of the Ana.
Major coastal markets.
Yes, we're on seeing the compression is and those gateway markets.
In our secondary markets that we are have always pursued and we stay under 200000 square.
Square feet, then we're still going to be able to have a six handle.
Going in and with Mike's comment on what our cost of capital that still gets US 100, 125 basis points over our cost of capital and I think we'll be able to continue to do that going forward. When I look at our current pipeline and the properties that are any other due diligence or letter of intent they are in that.
Mid low to mid six going in and probably in the low sevens load.
Low to mid Sevens for.
The straight line rent.
Are you seeing more competition now in the secondary markets versus pretty covert or less.
I think we're going to see a lot, particularly with what may be happening with tenthirty ones. Because you know a lot of our competition is not the large peers, it's the private owners.
So I anticipate that that that competition will continue but have been very very pleased with what our team has found I think a number of our markets are slow theres no doubt about it but we're seeing strength in some of our Midwest markets.
And as I indicated to you I'm a.
I'm, a big fan of the 65 quarter from the automobile going North we're.
Sure. We are really really very positive on that quarter from a distribution standpoint, and I think you'll hear more from us coming from port Imobile up through up through Birmingham, and even the Huntsville area. So.
Stay tuned on that and I think thats going to be very positive for us.
Very helpful color.
Is it from me. Thank you all very much.
John Thank you Okay next question.
Thank you at this time, we're showing no further questions in queue I would like to turn the floor back over to Mr. Gladstone for closing comments.
Well, thank you off a calling in we had a good time talking but we will see.
Now.
Early.
February February February have a nice Christmas at the end of this call.
Ladies and gentlemen, thank you for your participation. This concludes todays event you may now.
Disconnect your lines at this time and lock up the webcast and have a wonderful weekend.
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