Q4 2020 Gladstone Commercial Corp Earnings Call
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At this time I'll turn the conference over to Mr. David Gladstone, Mr. Gladstone you may begin.
Yeah.
Mr. Gladstone. Please go ahead.
Well. Thank you all for tuning in and thank you Rob I appreciate everybody coming in this morning. It's a this is Gladstone commercial's quarterly shareholder call for the year ending December 31 2020.
And we and we have a good time on these will hopefully get some good questions at the end and now we hear from Michael accounts say, our general counsel and secretary to give the legal and regulatory matters concern about this call Michael Yeah. Thanks, David and good morning. Today's report May include forward looking statements under the Securities Act of 1933 total secure.
These exchange rate from 1934, including those regarding our future performance.
Forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable for 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 in our forms 10-Q, 10-K, and other documents filed with the SEC, saying you can find these on our website at <unk>.
W. W Dot Gladstone commercial dotcom, specifically on the investors page.
<unk> website, which is www dot FCC dot G. O V that 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 today, we will discuss <unk>, which is funds from operations that <unk> was 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 and will also discuss <unk> as adjusted for comparability and core <unk>, which are generally <unk> adjusted for certain other nonrecurring revenues and expenses that we believe these.
Metrics are a better indication of our operating results and allow better comparability of our period over period performance now please take the opportunity to visit our website once again Gladstone commercial dotcom sign up for our email notification service you can also find us on Facebook keyword. There is the Gladstone companies and our Twitter handle is at Gladstone.
Solid comps that today's call is an overview of our results. So we ask that you review our press release and form 10-K, both issued yesterday for more detailed information again, you can find them on the investors page of our website now I'll turn the baton over to Gladstone Commercial's, President Bob Cutlip, Bob. Thank you Michael Good morning, everyone. During.
The fourth quarter, we acquired three industrial properties totaling 674000 square feet and $46 $9 million of investment volume in Pittsburgh, Pennsylvania, Montgomery, Alabama, Huntsville, Alabama.
Sold a three property single storey office portfolio in Champaign, Illinois for $13 $4 million, resulting in a gain of $4 1 million.
Sold a 52000 square foot single story office property in Austin, Texas for $8 6 million, resulting in a gain of $2 8 million <unk>.
Extended the lease for our 21000 square foot industrial tenant in Bolingbrook, Illinois for an additional seven years.
Executed a lease for 21000 square feet at our Akron, Ohio single story office property for seven years.
Standard and expanded the lease for five years for an office tenant in our Indianapolis anchored multi tenant property and collected 99% are scheduled rental income during 2020 with the remaining 1% representing deferred rent to be paid over time.
Subsequent to the end of the quarter, we acquired a 180000 square foot distribution property in Findlay, Ohio for $11 million with a GAAP cap rate of eight 4%.
We collected 98% of January cash base rents no amounts have been abated through the pandemic.
As stated on earlier calls, we're continuing our investment strategy to increase our portfolio's industrial allocation, which we believe will improve our property operating efficiencies.
During 2020, we acquired nine properties, all industrial and a total investment of $130 million with a weighted average lease term of 12, two years and an average GAAP cap rate of seven 4%.
Since January of 2019, our total investment volume has been 200, just under $270 million all of which is industrial providing further evidence of that commitment.
Our industrial allocation has increased from 33% in January of 2019% to 47% today with an objective of achieving a 60% allocation within the next 18 to 24 months.
We will continue to overweight industrial acquisitions, and our primary focus has been and will be acquisition candidates ranging in size from 50000 to 300000 square feet.
The investment opportunities improve during the fourth quarter I know as I noted earlier, we acquired $46 $9 million of industrial properties in targeted locations.
241000 square foot property, along the I 65 quarter in Montgomery, Alabama.
Total investment was $14 two $5 million with seven two years of remaining lease term and a GAAP cap rate of seven 3%.
278000 square foot property in Huntsville, Alabama also along the I 65 quarter. The total investment was $19 9 million with nine two years of remaining lease term and a GAAP cap rate of seven five per cent.
And we acquired a 155000 square foot property in Pittsburgh, Pennsylvania. The total investment was $12 8 million with 10 years of remaining lease term and a GAAP cap rate of seven 9%.
Our asset management team continued to deliver on improving our same store operations.
During the fourth quarter the team executed two lease extensions and one new lease comprised of two office properties and one industrial property.
For the full year. The team completed 20 lease transactions totaling $1 1 million square feet 10 of which are office properties.
The weighted average straight line rent increased by four 7% and the overall tenant improvement allowance was approximately $3 per square foot.
Our asset management team continued our capital recycling program.
We are focusing on selling our single storey office properties and redeploying the proceeds into industrial product in our target markets.
We sold three such properties in Champaign, Illinois, and one single storey office asset in Austin, resulting in gross proceeds of $22 million and a gain of $6 9 million.
We will continue this program as disposition opportunities arise.
Our rent collection experience continues to be strong 90.
99% of fourth quarter cash rent collections were paid in January collections were 98%.
We're very pleased with our portfolio in Tennant's 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 tenant.
The key objectives for us are to offer rent deferrals and or lease extensions to maintain or increase core <unk> per share and to return cash flow to the proper previous level as soon as possible.
We did have a day care provider request additional interim rent relief and we agreed to do so.
In return they extended their lease an additional year and during that extension period their cash rent will increase by 10%.
A 6000 square foot medical office provider in Houston informed us they are closing their business and we are now marketing in that space for lease.
They rent represents 0.01% of our annual rental income.
Anticipating that many on the call are interested in lease expirations through 2021, I wanted to summarize the team's thoughts and activities.
We're encouraged about our same store performance over the next two years as we average about 5% lease explorations for each of those years.
For 2021, we have $5 7 million of annualized straight line rent expiring.
And $3 $7 million of that total expires at the end of November and the end of December so future exploration issue should be quite manageable.
Our largest vacancy is.
Austin is I have related previously.
Property, formerly leased to G M, who vacated at the end of August.
Our active marketing of the property with assistance from the local chamber of Commerce has resulted in five viable current prospects for the building ranging from 40000 square feet to 250000 square feet.
Activity has increased since the beginning of the year, which is encouraging and as I've noted earlier, 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.
Market conditions are worthy of comment, particularly with the adverse effects from the onset of the COVID-19 virus.
Euro year over year through the fourth quarter investment sales volume across all property types is down approximately 30%. According to real capital analytics National Research reports also reflect office property sublease space is on the rise.
Cushman <unk> Wakefield is forecasting negative off office absorption over the near term.
However, the continued interest in industrial properties, particularly those related to E Commerce and last mile has resulted in no increase in cap rates for this product type in many markets and in fact compressed cap rates.
Select locations.
And Cushman and Wakefield and CBRE. Both report the industrial space absorption is up during 2020 compared to 2019 and 2019 was the highest absorption for the industrial product.
As it relates to growth opportunities investment sales listings have moderated with the pandemic. Although we are seeing increased activity in the Midwest markets.
Our current pipeline of acquisition candidates is approximately $280 million in volume representing 16 properties.
One of which is an office building and the balance are industrial.
Of the 16 properties three are in the letter of intent stage and the balance are under initial review.
Our team is staying actively engaged in the markets as we believe acquisition acquisition opportunities will arise that we can and we will pursue.
So in summary, our fourth quarter activities reflected excellent leasing and rental collection success.
Continued active engagement to identify industrial acquisition opportunities and we believe collectively positions us well to pursue growth opportunities now.
Now, let's turn it over to Mike for a report on the financial results, including our capital market activities. Thanks, Bob Good morning, I'll start by reviewing our operating results for the fourth quarter of 2020, all per share numbers I reference are based on fully diluted weighted average common shares.
<unk> Corp, <unk> available to common stockholders were <unk> 37 from 38 per share for the quarter, respectively, <unk> and core <unk> available to common stockholders were $1 56, and $1 57 per share for the year, respectively. This performance.
<unk> 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 fourth quarter results reflected stable total operating revenues of $32 9 million as compared to total operating expenses of $24 million for the period.
Excluding one property impairment charge 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 continued exceptional performance, 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've reduced our debt to gross assets by nearly 15% to 49.
9% 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. We'll also expand our unsecured property pool with additional high quality assets through efficiently utilizing our recently Upsized credit facility, which I'll describe further over time, we expect this will increase our financing alternatives looking at our debt profile as of today our 2000.
21, 2022 loan maturities are manageable with $11 million coming due in 'twenty, one and $99 million coming due in 'twenty. Two we will refinance these amounts at the appropriate time, the efficient upsizing of our credit facility. This month continues to speak to lender recognition of the quality and performance of the portfolio specific to this upside.
We did execute last week on a new $65 million five year term loan, including a $15 million delayed draw component. The proceeds were utilized to repay all revolver borrowings outstanding while entering the fourth quarter with sufficient liquidity, we've been active in issuing equity during the fourth quarter and net of issuance costs, we opportunistically raised $24 million.
Through common stock sales $1 $5 million through preferred series E stock sales and we also raised $1 $6 million through our preferred series out program. We continued to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements, including our most recent acquisitions as of today, we have approximately four.
$4 million in cash and $20 million of availability under our line of credit with our current availability the strong performance of the 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 supplement posted on our website, which provides more detailed financial and portfolio information for the quarter.
Institutional ownership of our stock has increased over time to 58% as of December 31, nearly a 20% increased over the past four years.
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.
Regarding the common stock dividend, we did increase it in the first quarter of 2020 and while the increase was small we have also announced that we are leaving the dividend unchanged. As we begin 2021, we have not cut or suspended the dividend since our IPO in 2003.
Stock closed on Wednesday, excuse me Tuesday at $19 17.
The distribution yield on our stock is about seven 8%. Many Reits are trading at much lower yields and now I'll turn the program back to David Alright, Mike that was a good report and so good one from Bob Cutlip and Michael accounts. It to the team continues to perform in this company has not been hurt much by the various government.
Reactions to COVID-19, it was a very nice quarter nice year altogether, considering we came through some difficult times, you've heard a lot today about the numbers for new transactions and new leases in the quarter really is impressive we could.
Did all of the rents that were due from tenants in the first quarter, 98% in the second quarter third quarter rents collection was a strong 99% and we're 98% collected in the fourth quarter, So very strong performance.
We bought three industrial assets during the quarter, we executed two lease extensions and one new lease during the quarter and finally, we sold three noncore assets in Champaign, Illinois and at the same time, we sell one property in Austin, Texas, That's a smaller building in Texas.
The commercial team is growing the real estate, we own at a really good pace now and the team is doing a great job managing the properties, we own especially during the pandemic.
Our team is strong professionals continue to pursue potential quality properties on the list of acquisitions, they're reviewing our acquisition team is seeking strong credit tenants. That's the first thing we look at they know that the quality of the tenant is the reason we buy the real estate and make it makes excellent investments when we.
Spend time, there are asset managers are actively managing the properties that the company owns today in order to maximize their value.
A different environment that we're living in today, the middle market business, which is where we are that's most of our tenants like many of our tenants is being challenged with the government's restrictions related to COVID-19.
But our tenants are paying their rents.
And committing to pay any past deferred rents that we've stacked up on the balance sheet. This is this is the times that we've become very good at negotiating with our first class tenants.
So we'll see if that works out over time, and I think it will I'm going to stop here and have Rob come on and let's get some questions from those of you that are listening in today.
Thank you Mr Gladstone.
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One moment please poll for questions.
Thank you and our first question today is coming from the line of Barry Oxford with D. A Davidson. Please proceed with your questions.
Great. Thanks, guys getting back to the capital recycling and selling one storey office buildings and moving into industrial.
Bob how should we think about the cap rate differential.
Well as.
As it relates to <unk>, we're selling those.
At Levered returns of 13 to 15, the cap rates themselves are somewhere around seven 5% to eight and a half and then we're acquiring product in the six and a quarter to six and a half, but with our GAAP rent at about seven 4% to seven six.
Okay. Okay. Thanks.
And then one thing if I could add to that Gary.
One of the key reasons that we plan to do this is that is that <unk>.
Releasing and re tenant a single storey office properties is extremely expensive you have a 60000 square foot single tenant property that has.
Let's say the restrooms all over the place.
And then they move out and you have to break it up into multiple tenants the cost to demise separate electrical service add new restrooms far exceeds what I think is the margin drop when we go from selling them to investing into an asset that has very very low re leasing costs.
Right now that that absolutely makes sense.
Switching gears.
A little bit when we are looking at rent deferrals.
Well, we feel the bulk of that in Europe, and we you shouldn't be seeing two too many quote unquote phone calls coming through and then also a question from Mike How should we think about bad debt expense.
In 'twenty one.
Okay on the rent deferrals.
As I indicated in my comments I do expect to probably receive a few more over the next three to four months until the vaccine rollout really gets gets gets around across the populace.
We are seeing from our office tenants that they are planning to come back to the office of the second quarter second and third quarter of 2021, and that's Covid permitting.
But we are somewhat encouraged and I think very the.
What I think really helps us is that we have always connected with our tenants every quarter. So we have a personal relationship with them.
If we do have upcoming rent deferrals, I know that will either be able to extend the lease or get the return within a very limited period of time.
And very specific to the second piece of your question, Yes that expense I believe you're really.
Referring to our rental collection and the implications of accruals there.
The guidance itself dictates it fairly high bar in terms of probability of ultimate collection that you must.
All forward to continue to accrue for rents.
Our child care tenants that we've given interim deferrals to 2019 was their best year on record. We believe this is an interim event and they are a long term profitable going concern that has resulted us in.
Continuing to accrue rents for that property. So the really the only thing that we would be aware of today would be that 0.0% to 1% that Bob made mention to with that 6000 square foot medical office tenants.
Okay, great. Thanks, guys. Thank you. Thank you Barry.
Thanks.
Yes. The next question is from the line of Gaurav Mehta with National Securities.
Thanks. Good morning, Good morning first question on <unk>.
First question on the Austin market.
I was hoping if you could talk about.
It's all of the supply that's coming in office market in Austin.
How that's impacting your efforts to really zone vacant space there.
Actually you know the new product has slowed down.
And since we were up in the North North East section and we're directly across from where he is going to be putting their upcoming campus. We're actually very encouraged about the demand for the space.
I don't have the specifics, but but I will get the specifics to your gaurav. So that you know how much it is and I will also send it to everyone else on the line.
Okay great.
Kind of feedback are you getting from prospects in regards to that property in terms of why they are not signing of the lease.
Part of it is that they can't get through the property.
You know with whats transpired in Texas.
It was opened and they didnt closed and so getting demand and we have demand from places on the west coast and in Chicago, and so getting those people to tour. The property has been difficult, but as I indicated the five prospects that we have right now too.
Of which were started.
Really collected by the Chamber and then the other is through our brokerage group through their national kind of.
The investment sales side of the business and leasing side of the business.
We're somewhat I'm somewhat encouraged I mean, I think what's going to happen if I had to really place a probability is that it will turn out to be a multi tenant building.
And it will probably have two to three tenants in it but it is set up so well with 40000 square foot floor plates on two wings and most of that most of the prospects that we are seeing are multiples of 40000 square feet. They can need to take a single floor and expand and you had to have security since both wings have.
Their own separate the elevator banks. So so Dell did a great job on the design and construction of the building.
So once we actually can get a lot more people through the building I think when they have a very very positive outcome.
Okay. Thank you thanks.
Any more questions.
The next question comes from the line of Rob Stevenson with Janney.
Hi, good morning, guys running around.
Just a follow up on that on the last question I mean, when you look at the Austin asset is a sale here to a tenant that would occupy the whole building is that on the table at this point you guys explored.
The relevant return.
Of an outright sale versus releasing it oh, you're exactly right Rob that is one of the options.
It definitely could happen and with with our current basis I believe thats in the mid $30 million.
Dollars right now we would we would realize a very strong capital gain that we could redeploy in industrial assets very quickly and as I've indicated to Gaurav I mean, we we have.
I'm not too excited about having a large multi tenant office property long term, it's been a great quarter. The parmer technology corridor has all the high tech companies. There. So it's going to be a successful asset but it also tells me then that we would have a very successful exit from that property that we can go.
And redeploy the assets into our preferred asset class of industrial.
Okay.
And beyond the former GM space, where is the where are the larger pockets of vacancy left in the portfolio today. Okay. We have a property that is in.
And Tulsa, Oklahoma, It's an industrial property at the Port and we have a letter of intent out to a prospect right now for two thirds of the building we have a single story office property, that's been converted to industrial in Minneapolis, and we are right now negotiating.
Our lease for two thirds of the property.
Which I think is very positive we also have another.
Three storey office property and.
In Minneapolis that is two thirds.
Two thirds leased.
We have a property.
Let's see let me share let me make sure I get it right.
We have a property in Houston, that's the lab that we're talking about.
That's 12000 square feet and.
Tenet is going it is actually vacating that space.
And what's very good about that is that the adjacent medical medical provider is interested in expanding into a good portion of that to be vacant space.
Okay.
Then when you take a look.
Including the GM spaces to whatever incremental cost you need to get that into shape for multiple tenants et cetera, how much tenant improvements leasing commissions are you expecting.
Need to lease up your current vacancy what's the sort of ballpark there when you think about it in aggregate as to how meaningful that'll be you were talking about the parmer.
Building, just all just whatever vacancy that youre working on today, I mean, obviously theres a cost right to get a new tenant into not only the gms space, but these other spaces.
How meaningful is that sort of cost to you to take the space from what it is today to what somebody's going to want to sign a lease on it well.
Well if you look at the <unk>, let's let's talk talk about each one of them I'll give it to you in a dollar per square foot basis. The GM of the GM tenant improvements is going to be somewhere between 20 to $25 a square foot. If we have leasing in the 19% to 28 or $21 per square foot, which is $5 more than than the last.
Cash rent and then youre going to have commissions of probably three to $5 depending upon the length of the lease if you go to the port of <unk> Youre looking at probably a three to $4 per square foot.
Our price for the tenant improvements and then the commissions are going to be probably one to $2 per square foot.
Then if we go to the property.
In Houston.
It's only 6000 square feet, but it's probably going to be somewhere between 20 and $25 a square foot and then probably three to $5 four for the.
For the commissions.
And then I didn't talk about another one we have we have a property in Mason that.
Is 18000 square feet vacant out of 60000 were negotiating.
Lease right now for approximately 50% of that vacancy in that single story office and I expect that to come in somewhere between 18 and $20 a square foot plus three to $4 for commissions.
Okay.
That's helpful. Thank you in terms of.
Total wall since you guys have acquired an office asset what's the characteristic of the office assets that you talked about that you were pursuing in the in the acquisition pipeline what makes that one.
Special versus continuing your almost exclusive industrial acquisition.
Well, it's it is a facility that is let me make sure I get this correct, it's in Kansas City, Missouri.
It's a headquarters facility for them.
It's about 150000 square feet, which falls into the sides, we typically like.
And they've got.
Data Center information data center space in there as well, which makes it a pretty sticky assets and leases the leases for 15 years.
If we can underwrite the credit.
Which we spent a tremendous amount of time on and we see the enduring nature of the company in their space.
We'll buy it but.
With only one property out of 16 being being office, our emphasis is definitely going to remain on the industrial side, because Mike and I really think we're going to get to 60% as I indicated in the next 18 to 24 months and I actually want to get to 70% within 24 to 30 months. So.
We're going to still acquire office assets, we're going to keep the multi storey office assets. We will in fact exit the balance of the single storey office properties I am not in.
In favor at that asset class.
Okay, and then just on the assets that are being held for sale are those being marketed currently is that a later in 2021.
As the market conditions.
Low how should we be thinking about those assets being sold.
A very modest amount of assets, Rob those are being marketed for sale or there could be further along in that process I would say for those assets should be thinking about them being sold during the first six months of the year.
Okay. Thanks, guys I appreciate it thank you.
Okay any more questions. Yes. Our next question is from the line of Craig could you share with B Riley.
Hey, good morning, guys.
I appreciate the color on your thoughts future dispositions.
But what is the total size of the single storey office pool that you might look to monetize over the next several years as it is it half of your office exposure or or just some color. There would be helpful. No no I'll tell you what let me get to the specifics, but it is it is a small percentage because we have exited a number of single story office over the last three to four years. It was.
One objective that Mike and I.
Put in our strategy and we're living by it but it's rather small percentage I just don't have the specifics.
In front of me right now, but thematically Craig.
Our net debt our dispositions per year again, we deal that is in the 15 million to $25 million range. So.
Certainly single storey office, probably makes up a half or more of that but it is a very modest number as compared to what we intend to acquire annually.
Got it no that makes sense I appreciate the color.
I just wanted to circle back to the new term loan and your debt capacity.
The 8-K reached that increases the overall credit facility size by 5% to $65 million, but youre not getting that initial.
Vale ability it sounds like can you talk about sort of how mechanically you is that just adding more properties to the line for additional debt capacity or just sort of how you access that incremental capacity overtime.
Sure without doing too much brain damage, so again net $65 million $15 million, but it is delayed draw. So we'll pull that down in the coming months and marry that with new acquisitions and the requisite.
That we need to to fund them.
That $50 million fully paid off the revolver to your point.
Our properties are pledged against the line they are not secured.
So we get a quote unquote value in availability based upon.
It depends whether we just newly bought the assets or they've been in the.
Portfolio for over a year, Craig, but just generically think about it with respect to every asset we buy we get roughly <unk>.
60% leverage.
Within that.
True availability within the aggregate credit facility.
Okay No I appreciate the color. Thanks, that's it from me.
Thanks, Greg any other questions. Yes, we have one more question from the line of John <unk> with Ladenburg Thalmann.
Good morning.
Hey, Good morning, 200, it right you mentioned the $280 million worth of potential investments in the pipeline I guess do you think about the hit rate on that.
What would you kind of maybe expect there and in the context of that.
What do you think that's kind of the 2021 acquisition target if you will.
Well I'll talk about the target first.
I think our target is going to be somewhere between $1 30, and $140 million this year.
We've got one asset in the barn right now.
If I had to look at.
Probabilities are our history has been once we get into letter of intent stage and a letter of intent stage will be somewhere around a third of those.
No actually 3rd% to 50% of them coming to fruition because what we're seeing also is the number of off market opportunities. John that you know because of some of the relationships. We have with the other funds we've been able to identify companies that want to sell those assets and redeploy the money into the business. So I.
I'd say that you could expect once we get into letter of intent stage close to 50% of those will in fact.
Go to actual deals.
Okay.
Okay.
And that's it from me thank you very much.
Any other questions.
No additional questions Mr. Gladstone.
Alright, well, we thank you all for tuning in and asking some good questions and we'll see you next quarter and that's the end of this conference call.
Thank you everyone for joining US today. This concludes today's conference you may disconnect. Your lines at this time and have a great day.
Yeah.
Okay.
Okay.