Q1 2021 Gladstone Commercial Corp Earnings Call
Greetings and welcome to the Gladstone commercial first quarter earnings call. At this time, all participants are in a listen only mode.
The question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please.
Please note this conference is being recorded.
At this time I'll now turn the conference over to Mr. David Gladstone, Chief Executive Officer, Mr. Gladstone you may begin.
Thank you, Rob Nice introduction and thanks to all of you for calling in this morning, we always enjoy this time with you on the phone.
I wish there was more time to talk with you.
Cutting the president will be along in a few minutes, but first we're going to hear from Michael accounts. The he's our general counsel and secretary to give us of legal and regulatory matters concerning this report Michael Yeah. Thanks, David and good morning, everybody. Today's report May include forward looking statements under the Securities Act of $19 33, and the Securities Exchange Act of the 19th.
34, 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 there are many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all the risk factors listed of our.
Forms 10-Q, 10-K and love the documents that we filed with the SEC and you can find all of these on our website at Www Dot Gladstone commercial dotcom, specifically on the investors page could always go to the SEC's website as well at Www Dot SEC the G.
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 today, we will discuss the <unk>. That's funds from operations <unk> of non-GAAP accounting term defined as net income excluding the gains or losses from the sale.
On the real estate and any impairment losses on property, plus depreciation and amortization of real estate assets will also discuss <unk> as adjusted for comparability and core of football, which are generally <unk> adjusted for certain other nonrecurring revenues and expenses and that we believe these metrics are a better indication of our <unk>.
Operating results and allow better comparability of our period over period performance now please take the opportunity to visit our website. Once again, that's Gladstone commercial dotcom sign up of our email notification service you can also find us on Facebook keyword. There is the Gladstone companies and our Twitter handle is at Gladstone.
Non comps at today's call as always an overview of our results. So we ask the he will review our press release and form 10-Q, both issued yesterday from more information again find them on the investors page of our website now with that I'll hand, the baton to Gladstone Commercial's, President Bob Cutlip, Bob Thanks, Mike Good morning every.
One of them one of our activities through the first quarter and subsequent period ended April 30, we acquired a 180000 square foot district distribution property in Findlay, Ohio for $11 million.
Like the 98% of cash base rents during the first quarter no.
No amounts have been abated throughout the pandemic.
The extended the lease at our 69000 square foot office facility in Wichita, Kansas through 2027 expanded our tenant into the entire 123000 square foot industrial facility in Raleigh, North Carolina and extended their lease through 2032.
Replace the tenant in our 189000 square foot Denver industrial facility with a full building tenant and extended the lease through 2026th experiencing no downtime.
Standard the term loan and our credit facility by $55 million $225 million.
The 61000 square feet in our 92000 square foot Blaine, Minnesota Industrial facility through 2028 sold of our single storey office facility in Rancho Cordova, California and sold our single storey office facility in Champaign, Illinois.
As noted in our recently released form Ecu from early March our previous CFO is the part of the company we.
We have an interim CFO in place Garry Gerson, who is presenting with David and me today is <unk>.
<unk> as treasurer for the Gladstone company several years ago and has recent CFO experience at this time, we are in the process of interviewing CFO candidates with public REIT experience and we'll be patient and do the knowledge and experience of Gary.
Two acquisitions people, who were regional leaders have also depart the company. However, the strength of our existing staff is apparent as EJ Whistler a current team member has been appointed as senior Vice President and the regional leader for the South East region.
Karen <unk> and Perry Finney had been appointed as senior Vice President of asset management for their assigned Midwest and west regions.
Adding Greg Jozwiak, who is responsible for the north East and South East asset management programs. These three leaders leaders are accountable for achieving same store portfolio of F. F O per share objectives.
And Buzz Cooper and EVP in our South Central region leader leads our acquisitions team as he has the knowledge and experience of acquiring a significant percentage of our current portfolio of properties across several regions and has been with us since the IPO.
Today, our measured growth execution strategy continues with no change in executive leadership.
As we continue to expand our platform additional acquisitions asset management and accounting professionals will be added to the team.
As noted on earlier calls we are continuing our investment strategy to increase our portfolio of industrial allocation, which we believe will improve our property operating efficiencies.
Since January 2019, our total investment volume has been just under $270 million all of which is industrial providing further evidence of that commitment.
The industrial allocation of increased from 33% in 2019, the 48% 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.
We continued our industrial acquisition strategy during the first quarter, we acquired a 180000 square foot facility and Findlay, Ohio. The total investment was $11 million with 14 years of remaining lease term and of GAAP cap rate of eight 4%.
Our asset management team continued to deliver on improving our same store operations for.
For the first quarter and subsequent period ended April 30, the team extended expanded and or at least 178000 square feet covering six tenths of the annualized straight line rent of these transactions totaled $3 3 million.
As an example of the successful performance of our team we expanded our 93000 square foot lead tenant into the entire 123000 square foot facility in Raleigh, North Carolina with the lease extension through 2032, which reinforces and validates our anchored multi tenant strategy.
Our asset management team also continued our capital recycling program, we're focusing on selling our non core single storey office properties and redeploying the proceeds into industrial product in our target markets.
We sold two such properties during the first quarter of single story office property in Champaign, Illinois, and a single story office property in Rancho Cordova, California.
Combining the fourth quarter of 2020, and the first quarter of 2021 six single storey office properties were sold resulting in a total net gain of $6 million and an ability to redeploy the proceeds in industrial assets.
We will continue this program as disposition opportunities arise.
Our rent collection experience continues to be strong.
98% of first quarter cash rent collections were paid in April collections were 98% as well.
We are very pleased with our portfolio and our tenants performance. During these challenging times for all the industries.
Anticipating the many on the call are interested in lease expirations through 2021, I wanted to summarize the team's thoughts of activities.
Long term, we are encouraged about our same store performance over the next two years as we average less than 5% lease explorations for years.
For the balance of 2021, we have $4 4 million 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 explorations should be quite manageable.
Our Austin office vacancy remains our largest our active marketing of the property with assistance from the local chamber of Commerce has resulted in four of the viable current prospects for the building ranging from 80000 square feet to 320000 square feet.
Activity has increased since the beginning of the new year, which is encouraging our.
Our previous GAAP rent of the property of $14 of 50 cents per square foot compares quite favorably as I've indicated in the past in our Submarket with current space offerings in the low to mid $20 per square foot on a triple net basis.
And Tesla's decision to build the Giga factory in Austin and be a use decision to create a campus in the same submarket as our property is generating interest and property tours.
Market conditions are worthy of comment, particularly with the adverse effects from the onset of the COVID-19 virus.
Year over year through the fourth quarter of 2020 investment sales volume across all property types was down approximately 30% according to real capital analytics.
All of this product has been challenged as Couche Cushman and Wakefield reports over 100 million square feet of net negative absorption for 2020.
However, the continued interest in industrial properties, particularly those related to E Commerce and logistics has resulted in no increase in cap rates for this product type in many markets and compressed cap rates at select locations.
<unk> reported an increase in industrial absorption when comparing 2020 to 2019 and.
And Jay LLS recently released industrial real estate overview reported record first quarter net absorption.
And as it relates to growth opportunities investment sales listings have moderated with the pandemic, although we're seeing some increased activity recently.
The current pipeline of acquisition candidates is approximately $280 million in volume representing 17 properties, one of which is an office building and the balance are industrial.
Of the 17 properties one properties in due diligence to are in the letter of intent stage and the balance of under initial review.
Our team of staying actively engaged in the markets as we believe acquisition opportunities will arise that we can and we will pursue.
So in summary, our first quarter activities reflected strong leasing and rental collection success continued active engagement to identify industrial acquisition opportunities and collectively positions us well to pursue growth opportunities now.
Now, let's turn it over to Gary for report on the financial results, including our capital markets activities. Gary. Thank you Bob and good morning, everyone I'll start by reviewing the operating results for the first quarter of 2021 all per share numbers I reference are based on fully diluted weighted average common shares.
Of.
The core of available to common shareholders was <unk> 40, <unk> 42 per share from the water segment.
So in the core of affordable the common shareholders during the first quarter of 2020 or $39 40 per share.
The increase demonstrates the accretive net premium growth of the company as well as the performance of the in place portfolio. In addition, our same store cash rent grew at one point of 4% over the first quarter of 2021.
Our first quarter results reflect stable total operating revenues of $34 7 million with operating expense of $26 9 million as compared to operating revenues of $33 6 million and operating expense of $24 1 million from the same period in 2020.
We continue to enhance the strong balance sheet as we grow our assets and continue to focus on reducing our leverage we have reduced our debt to gross assets over the past five years by over 20% to 45, 4% 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, we continue to primarily use long term mortgage debt to make acquisitions as we grow through disciplined investments. We also continue to expand our unsecured property pool.
Additional high quality assets over time, we expect this will increase our financing alternatives looking at our debt profile of 65% of fixed rate, 34% is hedged floating rate and what percentage of loans as of today, our 2021 and 2020 to low maturities are manageable 11.
<unk> million dollars due in 2021 and $98 million coming due in 2022, we will refinance those amounts at the appropriate time the up.
The <unk> of our credit facility this quarter, which consisted of a $65 million five year term loans with a 55 net of the $15 million delayed draw from continues to speak to lender recognition of the quality and performance of our portfolio the.
The proceeds were utilized to repay our revolver borrowings outstanding as of the end of the quarter. There were no revolver borrowings outstanding.
Entering the first quarter of the sufficient liquidity, we have been active in issuing equity during the first quarter and net of issuance cost we raised $11 3 million through common stock sales. We continue to manage our equity actively to ensure that we have sufficient liquidity for upcoming capital requirements as of.
We have approximately $11 million of cash and $18 3 million of availability under our line of credit with our current availability the strong performance of our portfolio and access to our ATM programs. We believe that we have sufficient incremental flexibility to fund our current operations near.
Long term, we encourage you to also review of our quarterly financial supplement posted on our website, which provides more detailed financials net portfolio of information for the core institutional ownership of our stock has increased over time to 55, 3% as of March 31, which is the 46% increase over.
Of the past five years, we continue to be very active in meeting with current and potential investors portfolio managers coverage analysts and investment banks, we look forward to establishing new relationships as the company growth. We continue to pay our common stock dividend of 37 545 per quarter or one.
<unk> 52 per year, we have not cut or suspended the dividend since our IPO in 2003.
Our stock closed yesterday at $21 19.
The distribution yield on our stock is about seven 9%. Many reach are trading at much lower yields and now I'll turn the program back to David.
Okay. Thank you Gary that was a good one out of the government from Bob and Michael team has performed very well, we have not been hurt much by the various government reactions to the the.
The Corona virus and this is just the very nice quarter, we heard a lot today about the number of new transactions and new leases in quarterly things that are going on Bob has reported that he and his team have coded 98% of the cash base rents due due during the first quarter.
The acquired one industrial asset the AG.
Exceeded the executed six lease transactions during the period.
And represented about $3 3 million of annualized straight line rent. So they are moving right along and they also added $65 million term loan of $15 million delayed draw component. That's a nice piece of financing force and finally, they sold to core non asset non core assets in Champaign.
Illinois and range of Condor Cordova.
Core Dover in California, the <unk>.
Commercial team is growing the real estate, we own at I mean of <unk>.
Really good pace and the team is doing a great job of managing properties that we own the especially during this time of the pandemic, where lots of our non ones who are out there.
Our team is strong professionals.
Continued to pursue.
Potential quality properties on the list of acquisitions that they are viewing our acquisition team is seeking strong credit tenants.
One of the the holiday of the tenants in the real estate make excellent of investments and our asset managers are actively managing the properties that the company owns the.
The middle market.
Businesses like many of our tenants is being challenged with the government restrictions related to the virus, but our team is paying there.
Collecting their rents are committing to pay offs and past deferred rents in the coming months. These times that have never been seen before.
But we have of first class team, that's doing a fantastic job and since most of our properties are financed with long term fixed rate.
We're not hearing the inflation that people keep writing about and the internet. So I'm going to stop now and see who we've got.
That might want to ask a few questions of us operator would you come back onto the <unk>.
Thank you Mr. Gladstone at this time, we'll be conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad and the confirmation tone of indicate your line is in the question queue.
Give me the first start to if you would like to remove your question from the queue from.
The participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question is coming from the line of Gaurav Mehta with National Securities. Please proceed with your questions.
Thanks, Good morning.
The borrowing.
Good morning first question on your acquisition, Bob I was wondering if you could maybe talk about.
Our target acquisition.
Part of the ear at the in the last call you had talked about it.
The acquired one study the $140 million of acquisitions this year.
Are you sort of like are you guys still.
I can break wire supplier of that.
Well as I indicated we're seeing a pickup in the activity.
The inflation.
Everybody is concerned about may slow things down, but I still believe with with right now right now I'm thinking about where we are at this point, we've got like 30 about $34 million.
<unk> any of their due diligence or letter of intent and those of letter of intents have been executed. So we'll be moving forward on those transactions. So if we look at that and what we have in the pipeline I still believe that we should be in the $110 million to $130 million. This year I really do I think.
The.
The activity has been picked picking up for us and I do believe that in the secondary growth markets. We are seeing.
More opportunities.
The cap rates are compressing as we all know even in the secondary markets, but we're able to compete I think and I think we'll be successful.
The second question on your lease expirations for 2021 can you talk about where the ex.
Barring dense or of compared to the market.
The current rents are at market with the exception of <unk>.
An asset that's in Salt Lake City, which is a little bit of above market, but not by much and I can get you the specifics on that Gaurav. So that you have the actuals for the year analysis.
And then lastly on Austin I think on the last call you had talked about maybe some kind of selling that property.
And then the part on the on putting the asset sales given that you know that that's up to the mid seven over a year now.
Are you talking about the Austin asset.
Yes, yes.
What we're doing.
It's interesting the with Austin opening up we're now starting to get a lot more foot traffic at the building. We have three tours that are scheduled for this week, but definitely you know Buzz Cooper, who is leading our effort there if.
If we can see an opportunity to sell the asset and it makes sense of it we can redeploy that capital into an industrial portfolio quite quickly. We will do that there is no doubt about it.
Okay. Thank you that's all I had.
Mhm. Okay. Next question. Please the next question comes from the line of Rob Stevenson with Janney.
Hi, Good morning, guys just to follow up on the Austin asset is at this point. If you guys were to come up with the leaf for that property in the near future is the.
The expectation of the cash rents wouldn't start really until 2022 at this point given the free rent component and any time that you would need to make any tenant improvements required of the lease.
Yeah, probably but theyre looking at right now is anywhere from a half to a single months per year, and we believe that the transactions that are going to take place there are going to be somewhere between seven and 10 years.
So in it and it also depends on on the rental rate. The one thing that we have going for US Rob is that we are way under market and so we can attract someone at a lower rental rate, which in fact would probably either lower the tenant improvements or lower the concession.
<unk>.
We know what's going on in the market and if those competitors are at 24 2020, let's say 'twenty two to 'twenty four 'twenty $5 and we can do a really good deal at 20, or <unk> 19, and being really plus up on our core <unk> I think we will get much better, let's say overall capital improvement.
Cost as well as leasing and other lease concessions.
Okay.
And then given your capital raising the cash position, what's the excuse me acquisition capacity you have today, the so called dry powder available to close the acquisition.
Right now, we have $11 million free cash of about $18 $3 million of the availability on our credit facility.
Okay perfect.
The loss.
Okay and then.
If you guys start to hit on more of that $280 million pipeline, Bob you accelerate dispositions look to raise more capital how are you thinking about that.
You know, David and I think we're going to talk about it but I would not be averse to us doing a follow on I'm, let David chat about that as well.
It's going to depend on awful lot of what's going on in inflation and how that impacts our stock price.
As we go forward David do you want to answer I think Rob knows most of the people out there that would be delighted to do an underwriting for us. So we don't have any reason to believe that they would run away from we wanted to do and we are looking and have already started selling non traded preferred stock.
Commercial and so I think that will.
It should be a lot and I would do about 1 million to $2 million of weak in that program and Gladstone land as you probably know has done a lot of in that area and so we're moving commercial and of that position as well. So we should get some good money coming in on that one.
I don't know I think the ATM program is not generating nearly as much as we would like and I think we just need to work that a little harder with some of the people that are selling in there, but as you know we've got plenty of people that want to step up and do another preferred force or more importantly.
Some common stock at this range.
How are you guys thinking about the incremental level of preferred that you can put into the cap structure without getting overly weighted in that manner, because obviously with the common is still yielding seven and the preferred yielding lower than that is that it's attractive from a pricing standpoint, but.
Otherwise.
You do face constraints, so that's going.
On the level of some of the guys that are 80% preferred right kind of.
Rob, we're not going to 80% preferreds.
Sorry about that one of the things that we work with as our bankers. They don't like us doing too much preferred and we've worked with them on coming up with a reasonable amount and so we.
We don't have any number we're going to see how it sales and how it works out there in the marketplace and what are the alternatives. We have I would like to see us get the ATM program really rocking along in selling common stock right now it just hasnt happened and I don't know why the marketplaces, so sluggish for.
Of that.
Okay, and then last one from me anecdotally, how much of your acquisition and dispositions over the last few years have been with Counterparties that you guys would classify as 10 31 buyers or sellers that might behave differently. If the if the 10 31 rules changed that a big part of your acquisition.
<unk> pipelines over the last few years is it.
Is it minor how would you guys classify that I think it's minor I don't think some of these larger transactions would have made it to the 10 31 of stage, but who knows you know we also have the ability and have done several times people looking for 10 30 ones have accepted our transaction of.
Giving them up REIT shares, which turn into stock common stock in place of their whatever they're selling so we've done that a few times I think theyre going to be some more out there it gets them out from under the the.
What's going on in the National government to raise taxes and so I think we will we will make a little better this year than we have in prior periods simply because.
The desire to.
To do a tax rate transaction okay.
Welcome to <unk>.
Reinforced with David Sam two of the assets that we're investigating right now.
Moving towards letter of intent would be in fact up REIT transactions and we expect to see in David wants us to push more of those which we will do as we go forward because we think it's going to be an opportunity for us and for the sellers.
Okay. Thanks, guys appreciate the time.
Okay. Next question. Please next question is coming from the line of Rollins.
Brian Holland with aegis capital.
Good morning, and thanks for taking my call.
Morning.
You alluded to it but can you talk a little bit more about what you are seeing on the inflation front and how maybe incremental inflation might affect your company your customers and potential acquisitions.
Yeah, Inflations out there Theres nothing you can say that would diminish my belief that we are in an inflationary period today, given the price of copper in lumber and all of the other commodities out there that have gone up pretty dramatically and the deal has got what was it 10%.
This weekend there was a huge move so.
So we know inflation's there the fed is doing its damnedest to keep the rates low.
Inflation low, but they can't withstand movements in the marketplace. So we will see how it comes out.
What will happen to us because we are so.
Every time, we buy something where the 10 year.
<unk> market.
We put another mortgage on there for 10 years. So these inflationary periods usually asked last about.
Two three years and then the change if you want to see what really happened in that period of time and go back and look at the Jimmy Carter Administration.
When Ford lost.
Jimmy and Hey, jacked up the amount of things that they were going to do with money, we got a good inflationary move.
Movement and of course, when Reagan came in he stopped the the spending dance and things and there was a slight recession and things sort of leveled off so I think for us because we're so well capitalized with long term if inflation really hit hard during the next.
At year this year and next year, we are well positioned to absorb what they throw at US we may have to slow down on what we can buy because the debt marketplace may go away from us.
But I think we're in pretty good shape today, and I don't worry about this one night worry about others in the business, who have finance things and believing that they can refinance them at lower rates and that's probably not going to happen. During the next year of two years. So my goal is just to keep us well financed.
Long term so that we can out of last any kind of recession or anything that comes right. After the inflationary tech.
You know Ryan and to add to what David just said just from our own let's say our own conversations with our peers as well as with our tenants.
In speaking with our peers, particularly those who are in the development business construction pricing has expanded and the increased dramatically plus the ability to get product. He has been has really extended their construction timeframe and I think we're going to see this come into the market and have an impact probably.
Starting in the second by the second half of this year and then you're talking with manufacturers the raw products are increasing in price.
Is that due at either lowers their margin or requires them to increase the price of their end product, which ultimately is going to result in inflation, there's no doubt about it.
Next question.
The question no questions. Okay, operator, how 'bout question number four.
Yes, that's coming from the line of John <unk> with Ladenburg Thalmann.
Good morning.
Good morning, John John.
So there is the.
The amount of lease termination income in the quarter just trying to think is that kind of typical of what we should see maybe for the rest of the year on the quarter over quarter basis or was it just a little elevated and I guess, maybe if it was elevated could you maybe provide some color as to why that was.
I think it was elevated a little bit.
John because of a couple of things of that took place.
We had a single story office property that went vacant in March of 2020.
Is that.
The strength of of our asset management team that came to me and said listen we need to convert this to a industrial property and we leased 60000 square feet in that property.
It started really in April, but it's going to have the impact and it's included in those numbers that you see plus we also were able in our Denver property too.
Replace an existing tenant and part of that included some accelerated rent. So if I had the gas going forward with us having.
Sure.
$4 $4 million in and quite frankly.
Oh, almost $3 million of that is at the end of December there's going to be a little bit of of trail off in the in the leasing activity. We still have a few vacant spaces that have to be filled plus the big one in Austin.
But I think.
It's going to be a little bit less than what we're talking about after this first quarter through and through April 30.
Amy in terms of termination income in there in terms of kind of just overall leasing activity.
Overall leasing activity, just because we don't have that much to do.
We did in the 189000 square foot building in Denver, We did the 60000 square foot property, there and Blaine, Minnesota. So we're.
The team has done a great job and in leasing the vacant space as well as renewing and extending existing tenants.
We just don't have anything come of net debt that large until near the end of the year.
Okay.
And then on the disposition front can you remind us how big that bucket of single story office is that the potential disposition.
Are you all.
I cannot tell you the exact amount John but I'll get that to you. The thing is we from the fourth quarter through the first quarter of this year, we sold $28 million worth of single story office product and the net gain was six I would think that going forward.
Forward I really I'm not too excited about selling more than maybe 10 to 15 $15 million a year and I would think that probably at least two thirds of that would be the single storey office.
And I guess the.
The third is that just kind of a non core markets or is that reverse inquiries.
Are you seeing some cap rate compression on some industrial assets.
It's probably going to be the.
Exiting non core markets potentially leaving.
One or more of our retail properties and disposing of that.
And then we have of medical facility in Houston, very small that we would probably sell that as well.
But it's going to be focused still on on really the single <unk>.
The story office properties.
Okay.
That's it from me. Thank you all very much John and others on the phone when Bob says he'll get you. The information what he'll do is put it on the website under the questions and answers. So that everybody who is listening plus anybody else who wants to see that information I don't think either of the two questions that we're going to answer.
We're going to be so material to move the shares but I know it places in your models that you like to put those kinds of things. So we will get that to you of this week and go from there operator would you come on and let's have a number of five at this time of Mr. Gladstone as there are no additional questions.
Well that said, we like questions but.
The much more fun, if we could the answers some more questions for you, but since nobody wants to hear from us.
The fourth quarter. So thank you for calling in at the end of this.
Thank you everyone. This will conclude today's conference you may disconnect. Your lines of at this time. Thank you for your participation.