Q3 2021 Gladstone Commercial Corp Earnings Call
Greetings and welcome to the Gladstone commercial third quarter earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference being recorded I would now like to.
The conference over to your host Mr. David Gladstone, Chairman and Chief Executive Officer. Thank you Sir Please proceed.
Thank you Latanya and that was a nice introduction and thanks to all of you for calling in.
As I mentioned every time, we enjoy these times with you and have a chance for you to ask questions and.
I wish we had more time to talk with you, but yeah, we only do it once a quarter now we will start out by hearing from Michael of counsel, He's our general Counsel and Secretary, who will give you the legal and regulatory matters concerning their call report Michael Thanks, David and good morning, everybody. Today's call May include forward looking statements under the securities.
Active licensed 30 break.
Securities Exchange Act of 1934, 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 now many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements.
Putting all risk factors in our forms 10-Q, 10-K, and other documents, we file with the SEC filing on our website Www Dot Gladstone commercial dotcom, specifically you would go to the investors page or on the SEC's website www SEC that jewelry 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 focus we will discuss <unk>, which is funds from operations.
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 <unk>.
Non recurring revenue and expenses.
We believe these metrics are a better indication of our operating results and allow better comparability of our period over period performance.
Ask that you visit our website Gladstone commercial dot com sign up for email notification service could also find us on Facebook keyword. There is the Gladstone companies and the Twitter handle is at Gladstone com.
Today's call is 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 that again there are on the investors page of our website with that I'll hand, it over to Gladstone Commercial's, President Bob Cutlip, Bob. Thank you Mike Good morning, everyone. During the third quarter, we continued.
Our focus on industrial acquisitions, and increasing occupancy we acquired an 80600 square foot industrial facility in product storage yard in St. Louis, Missouri for $22 million from $17 four years of remaining lease term and a GAAP cap rate of seven 5%.
Acquired in 81700 square foot industrial facility in Peru, Illinois, which is just west of Chicago for $4 $7 million with 15 years of remaining lease term and a GAAP cap rate of seven 6%.
We leased 176000 square feet at our Austin, Texas property through 2026 to a rated investment grade tenants.
Commenced the 12 and a half year lease of our 238000 square foot industrial facility at the Tulsa support of Tusa.
Renewed a lease of a 60000 square foot Flex office building in San Antonio, Texas through November 2031.
And collected 100% of cash base rents during the third quarter and 100% of October scheduled rents.
Our recent investments further reinforce our strategy to increase our portfolio's industrial allocation.
The acquisition volume since 2019 is approaching $350 million and all assets have been industrial in nature.
Our industrial allocation has increased from 33% to within striking distance of 50% today.
Our near term objective is to reach 60% within the next 12 plus months and a long term project objective is to reach 70% to 75% within the next two plus years.
Our success has been with acquisition candidates in the 50000 to 300000 square foot range and we expect to continue this size focus.
On the personnel front, we hired Ryan Carter as an executive Vice President to lead our Midwest and West regions Ryan.
Brian possesses over 20 years of experience as a principal acquiring and developing commercial properties and as a senior investment sales professionals.
He has a long prior history with our company, having sold several properties to us through the years and it has a strong familiarity with our investment strategy.
We're extremely excited that Ryan has agreed to join the team.
Our asset management team continued to deliver on improving our same store operations year to date ending September 30th the team extended expanded and or leased one 4 million square feet covering 13 tenants with an average weighted lease term of seven and a half years and it ended tenant.
<unk> allowance of just $2 99 per square foot.
The annualized straight line rent of these transactions totaled $12 $8 million.
As noted in the introduction the re leasing of our 238000 square foot industrial facility in Tulsa, and the 176000 square foot lease in Austin are two very positive outcomes for the quarter.
These leases not only increased our straight line lease payments by over $5 million per year, but the increased occupancy also reduced our vacancy rate by two 6%.
And will result in a very positive impact on same store performance going forward.
Anticipating that many on the call are interested in lease expirations through 2022, I wanted to summarize the team's thoughts and activities.
We have about four 5% of our leases expiring in 2022 and the expiration dates are at the end of June end of July and end of October so.
So future explorations should be quite manageable and we will be able to continue our emphasis on top line rent growth through the expansion of our portfolio.
As everyone knows the Austin office vacancy has been our largest and our team has achieved excellent recent lease up success.
As noted in the introduction, we leased approximately 176000 square feet or nearly 55% of the building.
The end result of that transaction alone is that we have replaced approximately 95% of the former straight line rent when the property was 100% occupied by GM.
Since the property was completely vacant from September 2020 until September 15th of this year. This transaction will have a sizable positive impact on same store performance going forward.
And with Austin leasing activity, increasing since the second quarter, we have additional prospects for the balance of the space and we therefore expect final straight line rents at this property to be considerably higher than with the prior occupant.
Market conditions are worthy of comment, particularly with the adverse effects from the onset of the COVID-19 virus.
A review of research reports relating to industrial and office statistics for the third quarter reflects both improvements and some continued challenges.
<unk> sales volume for all product types.
<unk> $450 billion during the first three quarters and is the highest for the first nine months of any year since 2007.
Prices for all property types increased by about 16% according to real capital analytics.
Industrial overall activity continues to be strong with vacancy at about the 4% level net absorption exceeding 100 million square feet for the fourth straight quarter and over 500 million square feet under construction.
Although supply chain disruption is creating challenges for all product sectors E Commerce and logistics demand continued to drive the industrial sector.
Office vacancy on the other hand increased as negative absorption was estimated to be about 10 million square feet. According to <unk> research.
This figure however, it is an improvement over the prior three quarters, which witness negative absorption of approximately 20 million square feet per quarter.
And the vacancy level does not include over 150 million square feet of sublease space available on a national basis.
And new supply activity continues for office product is over 100 million square feet is currently under construction.
And as it relates to growth opportunities. We are seeing increased investment sales listings. Our current pipeline of acquisition candidates is approximately $350 million in volume representing.
Representing 18 properties, one of which is office and the balance of industrial.
The 18 properties three properties are in due diligence totaling about $54 million three properties are in the letter of intent stage exceeding $60 million and the balance are under initial review.
Our team is staying actively engaged in our target markets as we believe acquisition opportunities will continue to arise that we can and we will pursue.
So in summary, our third quarter activities reflected strong leasing and rental collection success continued active engagement to identify and close industrial acquisitions and collectively positions us well to pursue growth opportunities.
Now I'd like to turn it over to Gary for a report on the financial results, including our capital markets activities.
Thank you Bob and good morning, everyone I'll start my remarks by reviewing our operating results for the third quarter all per share numbers I reference are based on fully diluted weighted average common shares <unk> and core <unk> available to common shareholders were <unk> 44, and <unk> 39 per share for the quarter respect.
<unk>.
<unk> and core <unk> available to common share shareholders. During the third quarter of 2020, we're 39.
And <unk> 40 per share respectively, <unk> adjusted for comparability and core <unk> available to common shareholders for the first nine months of 2021 or $1 20, and $1 17, respectively, <unk> and core <unk> adjusted for comparability available to common shareholders. During the first.
Nine months of 2020 were $1 19, and $1 20 per share respectively.
Our same store cash rent in the third quarter grew at two 2% over the third quarter 2020 and for the first nine months of 2021. It grew at three 4% over the first nine months of 2020, our third quarter results reflected total operating revenues of $34 $3 million with.
<unk> expenses of $25 5 million as compared to operating revenues of $33 1 million and operating expenses of $25 3 million for the same period in 2020.
We continued to enhance our strong balance sheet as we grow our assets and continue to focus on reducing our leverage.
Our debt to gross assets over the past six years to 44, 8% through refinancing maturing debt and financing new acquisitions at lower leverage levels. We believe we are between 1% to 2% away from our target leverage level. We continue to primarily use long term mortgage debt to make acquisitions.
<unk> as we grow through disciplined investments.
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, 63% is fixed rate 34, 5% is hedged floating rate and two 5% is floating rate as of today are <unk>.
21% in 2022 loan maturities are manageable with seven $5 million due in 2021 and $96 million coming due in 2022, we will finance these.
Amounts at the appropriate time, we upsized our credit facility in the first quarter of 2021, which consisted of a $65 million term loan with a $15 million delayed draw component. This quarter, we drew down on the remaining $15 million. The proceeds were utilized to acquire accretive properties as of the.
End of the quarter, we had $2 $1 million a revolver borrowings outstanding.
While entering the third quarter with sufficient liquidity, we've been active in issuing equity through our ATM program. During the nine months ended September 32021, and net of issuance cost, we raised $24 $1 million through common stock sales, we continue to manage our equity equity actively to ensure that we have.
Sufficient liquidity for upcoming capital investments.
As of today, we have approximately $84 million in cash and $36 5 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 cigna.
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 51, 5%. We continue to be very active in meeting with current and potential investors portfolio managers.
<unk> coverage analysts and investment banks, we look forward to establishing new relationships as the company grows we have raised our common stock dividend to <unk> $37 5825 cents per share per quarter or $1 53, three cents per year, we have not cut or suspended the dividend since our <unk>.
In 2003, our common stock closed yesterday at $22 the distribution yield on our stock is at 6.83% and now I will turn the program back to David.
Thank you very much that was a good report Gary and a good one from Bob Cutlip and Michael accounts he too.
Our team has performed very well this quarter and we have not.
Not so much by the various government reactions to the virus.
We ended up with a very nice quarter.
You've heard a lot today and the numbers of new transactions new leases in our core.
<unk> was impressive.
Teams collected 100% of the cash base rents during the quarter and the team also acquired two industrial assets during the quarter.
And leased over half of our Austin Austin property.
It was one that had drug us down for quite a while and now it's back paying and we're in good shape at lead to us thinking about increasing the dividend, which we did.
Including the Austin property and the team executed 13 lease transactions year to date, ending September 30, and represents about $12 8 million in annualized straight line rents.
Commercial teams growing the real estate, we own at a really good.
The team is doing a great job managing the properties, we already own, especially during the pandemic time.
This team has a strong professional group and continues to pursue quality properties on the list of acquisitions. They are reviewing.
The acquisition team is seeking strong credit tenants, we look at the credit first in our real estate second they.
They know the quality tenants and real estate.
Make excellent investments.
And the asset managers that we have a very active managing the properties that the company owns in order to maximize their value.
It's a different environment, we're in today, but the team has been up to the challenges and has done a great job.
The outlook well, we're in the middle market business like many of our tenants we've been challenged with previous government restrictions related to the virus.
Our teams continue to pay there are tenants continue to pay the rents.
These times, we are and have never been seen before in.
There will be future challenges I'm sure, but our first class team is doing a fantastic job, okay, let's stop here and have our operator come on and help our listeners.
Ask a few questions.
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Our first question comes from Greg <unk> with B Riley and Securities. Please proceed.
Okay.
Yeah, Hey, good morning, guys.
I just want to make sure im connecting the dots here and thinking about Austin, which I think is a big part of the story here this quarter.
So GM shows back up as your top tenants.
It looks like the leased about half of the building, but pretty close to the same total rent should we infer from that that whereas before they were paying 14 15, you're talking you could get close to $20, but that was actually closer to maybe the high twenty's and how to think about you know what the ramp might be at that building or I guess, just additional color on that.
Building would be great.
Sure Craig.
As I've indicated in.
We've got a nondisclosure in a confidentiality agreement with the tenant so I can't disclose specific numbers, but if you look at the last couple of quarters, where I indicated that.
Rents, new asking rents, which of course are less than straight line, but new asking rents were in the low to mid twenties, where we ended up at that location and we feel very very good about it and.
As it relates to the balance of the building.
We think that we're going to still be in that price range. So.
Since we've got.
45, 45% of the building still to lease we're very excited about what the ultimate outcome will be with that building and activity has picked up.
We have one.
RFP out right now on through a tenant.
And so we're just going to see how things unfold, but we are definitely encouraged because the activity in Austin. It has in fact picked up and when you you see some of the research reports that have just recently been released.
<unk> indicates that tech leasing comprised I think over over a fourth of all all leases that were done in the third quarter in Austin with signal out as one of the strongest the strongest market. So we're encouraged of course, we participated in that third quarter with us leasing that <unk>.
Pretty but we think going forward its still its going to be very very strong for us.
Got it and is there of course.
Seeing that there is a non disclosure agreement here, but can you give us any additional color as far as the.
It may be a period of free rent or at what point that tenant mites.
Take occupancy and start paying rent and it starts to hit your income statement.
All I can say is it was minimal and our tenant improvements were very low. So we're very excited about the outcome team did an absolutely phenomenal job.
In the negotiations and we are encouraged about this new tenant who we believe we can be in there for a long time.
And one more for me on the same topic.
Over the past year is that building has been or those assets have been taken.
You've contemplated leasing it off or selling it and you believe step about half of it.
Are you thinking once that once that those assets are leased up that they were going to be long term holds or is that still potentially.
Something you might sell downloads down the line once you get it all leased up.
Well, we don't all the options are on the table I think right now.
Our objective is is to lease the balance of the building.
And then at that point, I think David and I, and Gary will make a decision as to whether or not we want to exit that property and redeploy it into industrial assets I'm more of an industrial player as you know and so long term I think you know as I indicated our goal is to get to 75% on on the industrial.
Real side and this could be a very very huge sale for us that can be redeployed into another.
Industrial portfolio, which from an operating efficiency standpoint, as we all know industrial re leasing is much less expensive compared to office re leasing.
Got it and then one more for me sorry, just thinking about acquisitions for 2021 kind of where you're thinking you're going to settle in as far as.
Accumulative closings for the year versus where we were kind of your thoughts last quarter or so.
We've been saying and we've been kind of sticking to the thought that we wanted to be somewhere between 101 hundred $20 million. This year with some of the disruption we had at the beginning of the year. The team has now come back extremely strong win when I think that we've got $54 million in the barn, so to speak and another.
$63 million under letter of intent.
Those would all be probably by the end of January 1st part of February we may not finish this year much more over 100 million, but but we start off.
2022, really with the wind at our back, particularly with a number of properties that will close within the first two months of 2022.
And we're seeing a lot more listings are being the team is staying extremely focused on our target markets. We are staying within our let's say five to let's say $20 million range and and are successful and we do participate a lot on sale leasebacks as you saw those two leases that we did.
In excess of $1 17, and $1 15 years, we like that we liked that middle market kind of <unk>.
Non traded company that we can underwrite the credit and worked with private equity companies to offload those assets. So they can put the money into the operating business.
Okay. Appreciate the color. Thanks.
Other questions.
Our next question comes from John Masako with Ladenburg. Please proceed.
Good morning.
Good morning, John how are you doing.
Not bad.
Exploration for I know you touched a bit on 2022, but there's still left for 2021.
Can you maybe just give any color on how that is progressing and maybe what that is composed of.
Yes, we have a we have an 86000 square foot office property in Salt Lake City occupied by a strong tenant they are going to move right now we have a prospect for a third of the building.
And then the other property is it's like the 16 16000 square foot tenant in Tampa, Florida.
And we're talking to the lead tenant in that building to.
To take the balance of the space, which were somewhat encouraged about.
But until we get it across the goal line as you know it's not done.
But.
I still feel very good about what we have done so far but those those two leases John and expire at the very end of December.
So we've got a little bit of headway, yet, but you know we we don't have it across the go line.
And then the next year, we have just three three leases that are expiring as I indicated in June July and October one of which we are already in conversations that tenant is moving out but we have another tenant that we are in final negotiations that they would they would move in actually before.
That tenant moves out in July so.
Somewhat encouraged about whats going on there.
Okay and then.
Obviously, we've kind of talked about a little bit with Austin, specifically, but what's kind of a bigger appetite or maybe recycling out of office properties in redeploying that capital into industrial and I guess, how do you balance maybe what could potentially be headwind from the cap rate environment for office versus industrial.
Real versus that desire to get to.
75% or more.
Real exposure in a couple of years sure.
As you probably know as you do know the last six properties. We've sold have been single storey office properties, which everybody on our team knows that.
Despise and Thats why we have exited some of those properties and we're going to continue to do that Gary and I have done an assessment and I think probably over the next two to three years.
I am still interested in.
Suburban office veteran mixed use environments, I think thats, a great long term play regardless, particularly the type of assets that we buy which are mission critical.
But we will continue to exit those single storey office properties. The re leasing costs are just too high per square foot basis, and I think we'll probably move out of anywhere from $15 million to $20 million a year most of those John.
Well under $10 million or smaller facilities.
But we will move out of them and then redeploy the capital and yes, I agree there's going to be some cap rate, let's say arbitrage, but if we can keep it to just the $15 million to $20 million, it's not going to be a major impact to us and.
More of a long term looker at our at our strategy and bringing on properties that have much better operating efficiencies less cost to renew <unk> release stickier product, we're going to go industrial.
Okay, and I guess today and kind of specific areas you look at what's maybe the cap rate mix between industrial some of the office that looks attractive to you and then some of the office that you might potentially be looking to kind of capital recycle out of.
Well I would say that on the industrial side, where we're seeing deals that makes sense for us are in the mid fives to low sixes going in you saw the two that we bought.
This last quarter were higher than that and we were fortunate.
But that's really what we're seeing in our target markets as you know theres a lot of cap rate compression completely across the country on the industrial side, but we can still find deals that are between five and a half in lets say six in a quarter that suit our needs.
And you can look at the office product that we're looking at is probably 50 to 75 basis points higher.
We're really not finding much that makes any sense I mean, the people who are selling office product or smart, there's capex requirements were not into <unk>.
A bunch of HVA replacement roof replacement parking replacement redoing lobbies and quite frankly, the smart office sellers or are selling assets that are like that so as you can tell we have one out of 18, our office product and that's that's kind of the way I think we're going to see it going forward. It is.
Going to be less than 20% of our of our total pipeline lets say.
And and the arbitrage.
I do think that the arbitrage is going to be probably 50 basis points anyhow, maybe 75, but I still look at it long term and since we're talking about $15 million to $20 million per year I don't think it has a significant impact on our on our.
Same store performance and going forward <unk> per share.
Okay.
Thanks for taking the questions that's it for me.
Next question please.
Again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question comes from Brian <unk> with <unk>. Please proceed.
Good morning, and thanks for taking my call. Thank.
Thank you Brian.
How much does the Austin asset, 55% sales impact same store revenue I know that your same store revenue was two 2% in the quarter.
What would that have been if the Austin asset was.
Leased for that full quarter.
It would've boy I might have to pay up.
To tell you, but I would say for the full quarter, we're talking about.
About a million and a half about 1 million and a half of rent.
And $1 million and half of rent and we've got 38 million shares. So you can probably do the calculation on that.
But it was only really participating about 15 days because they moved in September 15th.
Okay and then.
Year to date about 13 lease transactions how much of an increase are you getting for industrial versus office when you exclude that Austin asset.
I don't have the specifics all I can tell you is that through September.
Of the 13 assets that were done.
Five of them were office and the balance where industrial and our overall straight line rent on that was in excess of 11% through September we did another lease at the end of.
At the end of October.
Which we.
We had a roll down in the rent down there and so that reduced our our straight line rent increase to the high high single digits, So and that was an industrial property, but it was cold storage and there was a big roll down we bought that property back in 2007.
The rents were well over market. The key for US is that is that we've got the tenant in there for another 10 years.
And I'm going to get 2% to 3% increases in the rents every year.
Thank you and then maybe the last one for me can you just talk a little bit about what youre seeing on the acquisition front. This quarter, maybe in the last couple of quarters. It does look like.
With the three assets in due diligence three LOI that you have quite a pipeline comment over the next few months.
Yes.
What we're seeing is a combination of quasi manufacturing and quasi distribution.
And in our secondary growth markets that is playing well for us.
With 18 properties in due diligence.
What our history has been that if we get something into the letter of intent stage. We typically close on about a third of those for sure at the bottom side.
I expect that we're going to continue to see that amount of <unk>.
Velocity.
As I indicated we average anywhere we ran it was really between 16 and $18 million per copy on our acquisitions over the last couple of years I think that's going to continue.
We stay at that level, then we're not competing against I would say the larger peers and.
A much more competitive there and I still think that we'll have the opportunity to have a pipeline in excess of $300 million and our expectations, Gary and my expectation is for us to grow.
The portfolio by $120 million to $150 million a year going forward.
Thank you.
Next question.
We have a follow up question from Greg <unk> with B Riley. Please proceed.
Okay.
Hey, guys just one more from me just going through a queue.
You did have a $2 $4 million legal settlements.
Booked in other income and I'm just curious do you have any other lawsuits out there are there any other potential legal settlements that might close over the next quarter or two or was that really sort of a unique situation.
That was a very unique situation nonrecurring onetime so no we don't have anything else like that coming out.
Okay. Thanks I appreciate it.
Next question.
Mr. Gladstone, we have no further questions in queue at this time I would like to turn it back over to you for closing comments. Please.
Thank you all for calling in and asking good questions.
Ask a lot more next time, we meet because we only meet once a quarter and we'd love to hear from all of you and your concerns and you bring up some good questions. So that's the end of this thank you for calling in.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.