Q2 2021 Gladstone Commercial Corp Earnings Call
[music].
Greetings and welcome to Gladstone commercial second quarter earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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At this time I'll now turn the conference over to Mr. David Gladstone Mr. Gladstone. Please go ahead.
Thank you Rob that was a nice introduction and instructions and thank all of you on the line for calling in and listening to US. This morning, we enjoy this time together and.
On the phone wish there was more times like this to talk to you kind of start out as we always do with Michael accounts see our general Counsel and Secretary.
Give us some legal and regulatory matters, starting the call today, Michael and thanks, David and good morning. Today's report May include forward looking statements under the Securities Act of 1933, and the Securities Exchange Act from 1930 for including those regarding our future performance and other use forward looking statements involve certain risks and uncertainties that are based on our current plans.
We believe to be reasonable.
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 we filed with the SEC you can find them on our website at Gladstone commercial dotcom, specifically go to the investors page or on the FCC.
<unk> website, which is www dot FCC Dot G. O V. 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.
We will discuss <unk> well, that's fun funds from operations <unk> is a non-GAAP accounting term defined as net income excluding the gains or losses from the sale of real estate than the impairment losses on property, plus depreciation and amortization of real estate assets. We will also discuss <unk> as adjusted for <unk>.
Her ability and core <unk>, which are generally <unk> adjusted for certain other nonrecurring revenues and expenses and that we believe these metrics are a better indication of our operating results and allow better comparability of our period over period for please take the opportunity to visit our website once again Gladstone commercial dotcom.
Sign up for our email notification service could also find us on Facebook keyword. There is the Gladstone companies, we even have our own Twitter handle and that's at Gladstone comps today's call is simply an overview of our results. So we ask that you review our press release and form 10-Q, both issued yesterday for more detailed information again you can find.
I'm on the investors page of our website and now with that I'll pass it over to Gladstone Commercial's, President Bob Cutlip, Bob. Thank you Michael Good morning, everyone. During the second quarter, we acquired a 25200 square foot industrial service facility in Baytown, Texas for $8.1 million.
Collected 100% of cash base rents during the second quarter no amounts have been abated throughout the pandemic.
61000 square feet in our Blaine, Minnesota industrial facility through 2028 leased at 238000 square foot industrial facility at the Port of <unk> in Tulsa, Oklahoma for 12, and a half years renewed a lease or a 315000 square foot industrial facility in Monroe, Michigan, which is a Detroit suburb through August of 2000.
29, and issued $100 million of series G. Preferred stock were proceeds were used primarily to redeem all of our outstanding series D preferred stock.
Subsequent to the end of the quarter, we acquired an 80600 square foot industrial facility in St. Louis, Missouri, MSA for $22 million renewed a lease of 12600 square feet in our office property in Burnsville, Minnesota through December 2029, and renewed a lease of a 60200.45000.
For 245 square foot Flex office building in San Antonio, Texas through November of 2031.
On the personnel front, we appointed Gary <unk> is our Chief Financial Officer in June and as you know Gary is with US today. He had been our interim CFO since March and was previously the company's treasurer several years ago.
We're very pleased to have him on board as our permanent CFO as he is seamlessly stepped right into the capital markets leadership role.
In addition, we have appointed Buzz Cooper is our chief investment Officer.
Buzz isn't executive Vice President in the firm and our South Central region leader.
He leads our acquisitions team and has the knowledge and experience of acquiring a significant percentage of our current portfolio of properties across several regions and buzz has been with us since the IPO in 2003.
As noted on earlier calls we are continuing our investment strategy to increase our portfolio's industrial allocation, which we believe will improve our property operating efficiencies.
Since January 2019, our total investment volume has been $299 million.
All of which is industrial providing further evidence of that commitment.
Our industrial allocation has increased from 33% in January of 2019% to 49% today.
With an objective of achieving a 60% allocation within the next 18 plus months.
We will continue to overweight industrial acquisitions in 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 second quarter and subsequent there too.
We acquired a 25200 square foot industrial service facility storage yard in Baytown, Texas. The total investment was $8.1 million with 12.6 years remaining lease term and a GAAP cap rate of 7.1%.
We also acquired an 80600 square foot industrial facility and product storage yard in the St. Louis Missouri MSA.
The total investment was $22 million was $17 for years of remaining lease term and a GAAP cap rate of 7.5%.
Our asset management team continued to deliver on improving our same store operations year to date ending July 31, the team extended expanded <unk> leased 127 million square feet covering 12 tenants with an average weighted lease term of 886 excuse me 8.
6 years in a tenant improvement allowance of just $2.56 per square foot.
The annualized straight line rent of these transactions totaled $8.4 million.
As an example of the successful performance we leased a previously vacant facility at the Port of <unk> in Oklahoma. This 238000 square foot industrial facility had been vacant during the pandemic.
This lease not only increased our straight line lease payments by over $1 million per year, but the increased occupancy also reduced our vacancy rate by 1.5%.
Our rent collection experience continues to be strong with 100% of second quarter cash rent collections were paid in July collections were 99%.
We're very pleased with our portfolio in Tennant's performance during these challenging times for all industries.
Anticipating that many on the call are interested in lease expirations through 2021.
I wanted to summarize the team's thoughts and activities going forward.
We are encouraged about our same store performance over the next 2 years as we currently have 2.9% of our leases expiring through year end 2021, and 4.5% in 2022.
For the balance of 2021, we have $3.3 million of annualized straight line rent expiring and $2.9 million of this total expires at the end of December.
So future explorations should be quite manageable.
Our Austin office vacancy remains our largest.
Activity in the Austin market has increased significantly during the second quarter.
Our previous GAAP rent at the property of $14.50 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 Bae's decision to create a campus in the same submarket as our property is generating interest we.
We are currently exploring dual strategies of either re leasing and we're selling the property and have active tenant and by our prospects with an expectation to have a significant transaction announced by the end of the third quarter.
Market conditions are worthy of comment, particularly with the adverse effects from the onset of the Covid virus.
A review of research reports relating to industrial and office statistics for the second quarter reflects both improvements and some continued challenges.
Investment sales volume for both product types were higher compared to the second quarter of 2020.
Overall industrial activity continues to be strong.
With second quarter vacancy at a 4 to 4.5% level.
Net absorption exceeding 100 million square feet and over 400 million square feet under construction with approximately 40% of this total pre leased according to CBRE.
E Commerce and logistics demand continue to drive the industrial sector.
Office vacancy increased to 16, 5% with negative absorption of 8 million square feet, but that's an interesting number because the last few quarters. The negative absorption has been over 30 million square feet. So maybe we've got some improvement taking place in the office sector.
Net vacancy level does not include however, over 150 million square feet of sublease space available on a national basis.
Office rents increased approximately 1% quarter over quarter, However, net effective rents they declined by over 4% due to increased concessions.
And new supply activity continues as over 100 million square feet of office product is currently under construction.
And as it relates to growth opportunities, we are seeing an increased and invest investment sales listings.
Our current pipeline of acquisition candidates is approximately $360 million in volume representing 21 candidates excuse me 21 properties 2 of which are office and the balance for industrial.
For the 21 properties 1 property is in due diligence.
3 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 opportunities will arise that we can and we will pursue.
So in summary, our second 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, let's turn it over to Gary for report on the financial results, including our capital markets activities.
You, Bob and good morning, everyone I'll start my remarks by reviewing our operating results for the second quarter of 2021, all per share numbers I reference are based on fully diluted weighted average common shares.
<unk> adjusted for comparability and core <unk> available to common stockholders were <unk> 36, and <unk> 37 per share for the quarter, respectively. SFO Corp, <unk> available to common stockholders. During the second quarter of 2020 were 40.41 per share respectively <unk> adjusted for for <unk>.
Operability and core assets available to common stockholders for the first 6 months of 2021 were <unk> 76 and 78.
<unk> and core <unk> available to common stockholders during the first 6 months of 2020, where both <unk> 80 per share respectively. Our same store cash rent in Q2 at 2.8% over the second quarter of 2020 and for this first 6 months of 2021 it grew at 4% over the.
First 6 months 2012.
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Second quarter results reflected stable total operating revenues of $33.4 million with operating expenses of $25 million as compared to operating revenues of $33.5 million.
Operating expense of $25.9 million for the same period in 2020, we continue to enhance our 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 6 years by over 20% to 44, 8% through refinancing maturing debt.
And financing new acquisitions at lower leverage levels. We believe that we are within 1% to 2% of our target leverage level during the quarter, we issued $100 million.
6% series G perpetual preferred stock.
Primarily used to redeem our 7% series D preferred stock in addition to reducing our dividend expense the offering provided us with over $8 million of additional investable capital. Our bank group led by Stifel Nicholas Goldman Sachs and B Riley did a wonderful job.
We continue to primarily use long term mortgage debt to make acquisitions as we grow through disciplined investments. We also continued to expand our unsecured property pool with additional high quality assets over time, we expect this will increase our debt financing options looking at our debt profile, 65% is fixed.
33% is hedged floating rate and 2% is floating as of today, our 2021 and 2022 low maturities are manageable with $11 million due in 2021 and $97 million coming due in 2022, we will refinance these amounts at the appropriate time.
Upsize, our credit facility last quarter.
Which consisted of a $65 million term loan with a $15 million delayed draw component subsequent to the end of the quarter, we drew down on the remaining $15 million. The proceeds were utilized to acquire properties.
As of the end of the quarter there were no revolver borrowings outstanding.
While entering the second quarter with sufficient liquidity, we've been active in issuing equity through our ATM program. During the 6 months ending June 32020, and net of issuance cost we raised $19.4 million through common stock sales, we continue to manage our equity actively activity to ensure that we have sufficient liquidity.
For upcoming capital requirements as of today, we have approximately $11 million in 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 program. We believe that we have sufficient 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 for our stock has increased over time to 54, 3% as of June 30, which is a 7% increase over the last 5 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.
Listeners ask some questions for us.
Thank you well now be conducting a question and answer session.
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Thank you. Our first question comes from the line of Rob Stevenson with Janney. Please proceed with your questions.
Good morning, guys.
Gary can you talk a little bit more about what's the sequential revenue drop and what caused that and.
To what extent has the leasing that you guys done here in the second and third quarters sort of caused that bump back up.
Hello.
I think 2 of the 2 of the biggest issues here.
We're we had some accelerated ramps from Q1 that didn't follow into Q2, and we had some.
Additional we had to reduce G&A costs in Q1 due to reduced due diligence costs and increased G&A costs in Q2 due to some professional legal and.
Stockholder related costs, but to get to the point of your question, yes. The unfortunate part of the Q2 numbers. They don't include a lot of what you just heard today because of timing for example, the $30 million of acquisitions, the $8 million acquisition was done in the middle of June.
The 30 million at a $22 million acquisition was done in the middle of July so not really reflected in Q2 numbers supportive katusha vacancy, which was resolved that lease didn't get signed up until the end of June so that is not in the numbers. So yes going forward Youll see a lot of the things that we did in this.
Quarter, which unfortunately werent represented in the numbers because of timing will be represented in our numbers going forward.
Okay.
On the 310 million square feet of vacant space that you guys have leased.
How much free rent et cetera is in there when does that actually start paying effectively cash rents for you guys is that already started is that sometime later this year, how should we be thinking about that.
The.
The the Wellman doesn't start until the I think it's November Rob everything else is starting as I can recall.
Okay, and then last 1 from me what was the spread on the rents on the roughly 600000 of square feet of renewals that you guys have done since the end of first quarter.
Let me, let me tell you I've got the information from January.
And we had you know.
When we we had 12 properties that we did transactions 10 of those properties, representing about $6.3 million of straight line rent went up about 8.5%. They went up about 560000, so thats good plus up that we're going to add.
Actually realize going forward and then theres 2 other assets that had reductions in rent, but theyre actually a plus up and I do want to address those 1 is the Blaine.
Minnesota property debt we converted.
From a single storey office to an industrial property that property had been vacant for over a year.
And was costing us approximately $550000 and Opex bleed as I call it.
But we converted that to an industrial property.
Karen <unk>, the head of asset management from the Midwest region.
And once she wants she reposition that property. She leaves 2 thirds of that property and now we've got a plus up of about close to 800.800000 on it when you consider the opex and the and the leasing so that's going to be a good plus up for us over the next.
12 months and then the other 1 that.
That Gary was talking about this was our ported kutusov property that property was costing us about 500000.
In op ex bleed.
And now with it being leased and the lease is over a $1 million as I referenced in my comments you add the Opex bleed of 500 with that million. That's a $1.5 million dollar shift going forward starting in July now.
Now, it's not cash as I indicated there is still cash.
Free rent, but that will burn off in the <unk> of core stops starts right now.
Okay, and then actually are in line. This is it 1 more for for Gary.
When you talked about G&A.
First quarter was artificially low second quarter artificially high how much.
The stuff that's in the second quarter number is nonrecurring I mean is it somewhere I think though year to date is somewhere 1.7 or so is it. So about 865 I think is probably the average for that is that a good run rate going forward. The sort of average of the first 2 quarters is there stuff that we need to be removed from that.
To figure out a run rate going forward, how should we be thinking about G&A in the back half of the year.
I think if you look at our G&A from a longer term perspective.
In the mid 8 hundreds is I think where we've been averaging and I think thats, probably reasonable I think a lot of what you were saying you were saying were looking at G&A from.
Was artificially low in Q1, an artificially high in Q2 so.
Okay. Thanks, guys I appreciate the time.
Alright, let's go to the second second person who wants to ask a question that question is coming from Jonathan associated with Ladenburg Thalmann.
Good morning.
Good morning, John.
So last quarter I think you were saying.
That you kind of thought of potential investments in 2021, as being kind of a $110 million to $130 million.
Has that changed at all.
Sure.
Based on what's happened into Q basically going on the interest rate environment out there and what thats very cap rates, just any kind of.
Changes in maybe non changes to those those investment expectation.
Well right now John we've got about $60 million in the letter of intent stage and just under $5 million in due diligence due diligence that were going to close the next week or so so I'm thinking that we're still going to be north of 110, I don't know that we'll get to 130, but I do believe with now the increased activity that we have.
In the markets, we want to be and that we should be able to reach that level for sure.
Sure.
And I guess, maybe since moving kind of last half has there been any kind of market change in the cap rate environment Stickney for your kind of sub sector of kind of smaller assets in non gateway markets.
Well you're still seeing.
In the Gateway markets, you know that they are down in the low fives to high fours, what we're seeing in our secondary markets is that we're able to find product that is in the mid to high fives.
With 7 to 10 year leases that gets us a GAAP cap rate as you saw there about 7% and correct me if I'm wrong here, but I think now with our stock price, where it is now and our capital and our cost of debt we are at about 5%.
Weighted average cost of capital. So so we still have that 50 to 75 basis point spread that I really want to insist upon with our acquisition teams.
Okay.
And then.
On the Austin office asset you kind of mentioned that there might be something.
Actionable, maybe by the end of Q and I understand maybe you can't talk about at this point in time, but any other color you can provide on what's giving you kind of the confidence that there maybe.
Nothing more you can talk about it at the end of the queue.
I think at the end of <unk> for sure. We're just seeing a lot more interest in property tours as well as buyers.
Buyers have come into the Austin market and that's why we're looking at kind of a dual strategy there of potentially releasing it and or selling it and we may we may end up trying to lease part of it and then selling the building and redeploying that capital in industrial.
But at least I'm encouraged that we're getting a lot more foot traffic and a lot more interest on both the tenant prospect side and the buyer prospects side.
And I guess, maybe on a price per square foot basis, roughly what is the difference out there in the market today selling it.
At least partially leased versus.
Yeah completely vacant.
Are you talking about the sale price differences.
Yeah, Yeah, if you were going to try to sell you Austin asset okay.
Now I'd, rather not talk about that publicly because we are in conversation with parties and therefore.
Okay.
Access to it.
And then 1 last quick detail 1 back on Tulsa.
And of the cash rent doesn't start till November, but if we think about that cash rent versus navy dupree vacancy cash rent.
Would that be kind of relatively.
Level with what that asset was doing before no I'm just.
No John.
No John It is you know I'm, a transparent kind of guy.
We released it.
The leaders there Buzz Cooper and Perry Finney.
Found a excellent tenant they only wanted to be in a majority of the building.
And.
When we looked at where they were going to be in the building and the difficulty of potentially leasing the balance buzz was able to convince them to take the entire building it cut us down a little bit in the rent.
But it picked them up paying the balance of the Opex in the building. So we're down a little bit let me put something on the website. So at least you'll know what it is I don't have the specific amount, but it is below where we were before.
Okay that makes sense.
Alright, and Thats. It from me. Thank you all very much.
Thank you John.
Is there a third question.
Yes, that's from the line of Craig Kucera Wunderlich Securities.
Okay.
Hey, good morning, guys.
We're excited about it.