Q1 2022 Gladstone Commercial Corp Earnings Call
Greetings welcome to Gladstone Commercial's first quarter earnings call at.
At this time, all participants are in listen only mode.
Question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
At this time I will turn the conference over to Mr. David Gladstone, Chief Executive Officer, Mr. Gladstone you may begin.
Okay. Thank you, Rob nice introduction and thanks to all of you for calling in this morning.
We enjoy this time that we have with you and.
Unfortunately, it's on the phone so we'll just get to hear your voice when you ask a question.
We will first start with Michael the counsel, he's our general counsel and secretary to give us a legal and regulatory matters concerning this call that we're doing today Michael go ahead.
Thanks, David and good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933 and 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 and many factors may cause our actual results to.
Would be materially different from any future results expressed or I'm glad these forward looking statements, including all the risk factors in our forms 10-Q, 10-K, and other documents that we filed with the SEC you can find them on the.
Investors page of our website at Www Dot Gladstone commercial dotcom.
Or on the SEC's website at Www Dot FCC Dot G O V.
The company undertakes 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 that football 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.
So discuss core <unk>, which are generally epic all adjusted for certain other nonrecurring revenues and expenses and we believe these metrics are a better indication of our operating results and allow better comparability of our period over period performance, we ask everybody to take the opportunity to visit our website once again Gladstone commercial dot com.
Sign up for email notification service you also find us on Facebook keyword. There is the Gladstone companies and our Twitter handle is at Gladstone comps and today's call is an overview of our results. So we will advise everybody to review our press release and Form 10-Q issued yesterday for more detailed information again go to the investors page of our web.
Site to check those out with that I'll hand, the baton over to Gladstone Commercial's, President, Bob Cutlip, and Buzz Cooper Bob.
Thank you Michael.
Good morning, everyone. During the first quarter of 2022, we continued our focus on industrial acquisitions and improving our operations.
Acquired an 80000 square foot industrial facility in Wilkesboro, North Carolina for $7 $4 million with $12 seven years remaining lease term.
Acquired a 56000 square foot industrial facility in Oklahoma City for $5 $9 million with seven years of remaining lease term renewed and extended the lease and removed a termination option at our 127400 square foot industrial facility.
He has been assembly plant in Vance, Alabama through December of 2032.
Renewed and extended the lease at our 50900 square foot office facility in New Albany, Ohio through March of 2037, and renewed and extended 73960 square foot office lease in the Minneapolis MSA through July of 2028.
Subsequent to the end of the quarter, we acquired two industrial facilities totaling 260, 719 square feet in Fort Payne, Alabama, and Cleveland, Ohio for $19 $3 million with 11, four years of remaining lease term and lease to 29500 square feet and our 92187 square feet.
Blaine, Minnesota industrial building raising the occupancy at that property, 100%.
These investments in re leasing activity further reinforce our strategy to increase our portfolio's industrial allocation and to improve property operations.
Acquisition activity since July of 2021 has been steady and consistent in spite of the uncertain market conditions, driven by rising inflation a war in Europe , and pandemic challenges our team averaged $10 million of investments per month with a strong average GAAP cap rate of six 8%.
The acquisition volume since 2019 is approaching 400 million.
And all of the assets have been industrial in nature.
Our industrial allocation has increased from 32% to 51% during this period.
And the team's near term objective is to reach 60% within the next 12 to 18.
Our success has been with actually good acquisition candidates in the 50000 to $300 a square foot range with a predominance of sale leasebacks and we expect to continue this focus.
Our asset management team continued to deliver on improving our same store operations.
Year to date ended March 31, the team renewed and extended just under 258000 square feet covering four tenants with a weighted average lease term of 10 six years.
Annualized straight line rent totaled $2 $9 million.
We are also continuing our capital recycling efforts in order to utilize the sale proceeds and industrial asset acquisitions.
These transactions are going to benefit our 2022 operating performance and in the out years as well.
And we have been four 2% of our leases expiring in 2022, which will be quite manageable for the team and will enable us to continue our emphasis on top line rental growth through expansion of our portfolio.
Our rent collection experience continues to be strong.
100% of first quarter 2022 cash rent collections were paid plus the month of April as well and as noted in our prior call. We collected 100% of contractual rents during 2021.
Very pleased with our portfolio and with our tenants performance. During these challenging times for all of us.
We want to highlight again with you some important succession planning decisions that we recently announced Buzz Cooper sitting next to me here will become president effective July one 2020.
This appointment coincides with my retirement on June 30th.
As I shared with you on our last call. This role has truly been the pinnacle of my career.
And I think David the board and the team for their support and their guidance.
We've been on a great journey together, improving our metrics and delivering on what we said we would do this team that is in place today.
Take us to the next level under buzzes, and Gary's leadership and will result in increasing shareholder wealth.
My eye.
We'll miss the competition with our peers, our collective engagement on transactions and the success, we have achieved and I do wish everyone. The very best going forward now.
Now I'd like to ask Buzz to summarize our acquisitions for the first quarter, our assessment of current market conditions, and our acquisition pipeline opportunities.
Thank you Bob and it's been a great experience working with you to grow the company. These past many years, we have a great team in place and I look forward to building upon my more than 20 years with David Gladstone to deliver strong results and grow the company. Further as stated this is reinforced by our first quarter 2022 results, which came on top of it.
Very strong 2021.
In the first quarter, we closed two transactions for a total of $13 3 million.
The first is an wilkesboro, North Carolina unless for $7 4 million carries a term of $12 seven years, the GAAP cap rate of six five for the.
The second closing is in Oklahoma City, Oklahoma and West for a $5 9 million and carries a seven year term.
GAAP cap rate there 665.
Subsequent to the end of the quarter, we acquired two industrial facilities totaling 260719 square feet.
With the same tenant in Fort Payne, Alabama, and Cleveland, Ohio. The acquisition price was $19 3 million with 11 four years remaining of lease term the GAAP rate was $6 six 9%.
Market conditions are worthy of comment, particularly with the continued effect of COVID-19, rising inflation and supply chain and world upheaval.
A review of research reports relating to industrial and office statistics for the fourth quarter reflects both improvements and continued challenges per CBRE investment sales volume for all property types. It was approximately 750 billion for 2021 and it's the highest since 2007.
Prices for all property types increased by approximately 23% this year according to real capital analytics and industrial pricing recorded a 29, 2% increase.
Industrial overall activity continues to be strong with vacancy at about three to four level on a national basis and of course this depends on which research analysts report one reviews.
Net absorptions exceeded 100 million square feet per quarter for the entire year and approximately the same amount Q1, 'twenty two and over 500 million square feet is currently under construction.
Although supply chain disruptions are creating challenges for all products.
Sectors E Commerce and logistics demand continues to drive the industrial sector.
Office vacancy in the fourth quarter of 2021 saw an increase in demand. However, it came with a drop in rental rates and an increase in landlord concessions per CBRE net absorption totaled $18 7 million in the fourth quarter with overall vacancy rates dropping 20 basis points to 16 six quarter over quarter.
This is the first drop in vacancies since mid 2019, and the first positive absorption compared to the prior six quarters.
Vacancy level does not include significant sublease space available on a national basis.
New supply activity continues as approximately 90 million square feet is under construction as of the end of 2021.
As it relates to our growth opportunities. We are recently seeing a reduction in sale listing activity and investment sales brokers are indicating that the number of acquisition candidates on a per property type basis has been reduced we continue to monitor the market conditions to see if the increase in interest rates on debt will tell.
<unk> expansion of cap rates over time.
Our current pipeline of acquisition candidates is approximately $310 million in volume representing 19 properties and.
And all of which are industrial.
Of the 19 properties on property is in due diligence totaling $18 8 million six property has handled that letter of intent stage totaling $104 million and the balance are under initial review.
Our team is staying actively engaged in the markets as we believe acquisition opportunities will continue to rise and we can pursue.
So in summary, our first quarter activities reflected continued strong leasing and rental collection success continued active engagement to identify industrial acquisition opportunities.
And collectively position us well to pursue growth opportunities now.
Now, let's turn it over to Gary for report on the financial results included in our capital markets activities, Gary. Thank you Bob.
First I want to say, it's been great working with you I've learned a great deal from you and I wish you all the best.
Start my remarks regarding our financial results. This morning by reviewing our operating results for the first quarter of 2022 all per share numbers I reference are based on fully diluted weighted average common shares <unk> and core <unk> available to common stockholders were <unk> 39, and <unk> 40 per share for the quarter respectively.
<unk> available to common stockholders during the first quarter of 2021 were 40 42 cents.
Per share, respectively, which was elevated a bit with termination fees in that quarter.
<unk> per share was down a little this quarter, primarily due to a onetime charge associated with the exploration of our 2019 shelf registration and prepaid ATM expenses, our same store cash rent in the first quarter of 2022 grew at two 5% over the first quarter.
'twenty one.
Our first quarter results reflected total operating revenues of $35 $5 million with operating expenses of $25.
$7 million as compared to operating revenues of $34 7 million and operating expenses of $6 9 million for the same period in 2021 moving onto the balance sheet, we continue to grow our assets and focus on reducing our leverage in the first quarter, we increased total assets by over $11 million, primarily due to the.
Two acquisitions, Bob and Buzz described earlier, we continue to reduce our debt to gross assets and are now down to 44, 6% as of the end of the quarter and have reduced this leverage metric for 10 consecutive years. We believe that we are 1% to 2% away from our target leverage level, we continue to use long term mortgage.
Debt to make acquisitions as we grow through disciplined investments. We also continue 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, 61% is fixed rate, 33% is hedged floating rate and 6% is floating rate as of today, our 2022, and 2023 loan maturities are manageable with $79 million due.
Due in 2022 and $64 million coming due in 2023, we have a number of options and we'll refinance these amounts at the appropriate time as of the end of the quarter, we had $34 6 million.
Dollars of revolving revolver borrowings outstanding while entering the first quarter with sufficient liquidity, we have been active in issuing equity through our aftermarket or ATM program. During the first quarter of 2022 and net of issuance cost we raised $23 million through common stock sales. We also raised net proceeds of $1 four.
From sales of our series F preferred stock we continue manage our equity activity to ensure that we have sufficient liquidity upcoming capital requirements as of today, we have approximately $4 $4 million in cash and $21 $7 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 we have sufficient incremental flexibility to fund our current operations.
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 49, 6% as of March 31, which is a significant increase over the past three years, we continue to be very act.
<unk> and meeting with current and potential investors portfolio managers coverage analysts and investment banks, we look forward to establishing new relationships as the company grows.
Our common stock dividend is 37, six <unk> per share per quarter or $1.
<unk> per year, we have not cut or suspended the dividend since our IPO 22003.
Our common stock closed yesterday at 20 137.
The distribution yield on our stock is approximately 7% many Reits are trading.
And now I'll turn the program back to David well. Thank you. Thank you very much that was a good report Gary and certainly good report from Bob and Buzz and Michael.
The team has performed very well.
I know this marketplace scares me to death inflation is one that it's going to hurt all of us over time, but the good news is you get about a 7% yield why you'll watch US work and then second of all you are in a hard asset and hard assets do perform much better in <unk>.
That kind of inflation that we're expecting over the next couple of years.
Heard a lot today number of new transactions, new leases quarter has been good the company collected about 100%.
The cash base rent during the first quarter. The team acquired two industrial assets during the quarter for a total investment of $13 3 million as we continue to build that substantial portfolio of hard assets.
We renewed leases on two office properties and one industrial property subs.
Subsequent to the end of the quarter. The team acquired two industrial properties for a total investment of about $19 million.
The commercial group here is growing the real estate that we own at a very nice pace team is doing a great job of managing the properties that we buy especially during this pandemic they performed admirably.
As I mentioned inflation is the biggest asset problem that today and over time I think you'll see this hard asset group.
We continue to increase the value of the thing.
We're looking at a couple of salespeople are bidding up the properties that they are buying these days.
Our team of strong professionals continues to pursue potential quality properties on the list of acquisitions. They are viewing our acquisition team is seeking strong.
Very strong credit tenants, that's the basis of our whole business here. They know the quality tenants. The real estate makes excellent investments for us the asset managers are actively managing the properties that the company owns in order to maximize their value.
It is a different environment that we're in but we seem to be away from the big challenges that we all watch during this pandemic.
We are in the middle market business, many of our tenants and they've been challenged with previous government restrictions as small and medium sized business.
Related to the pandemic in inflation.
Inflation in supply change disruptions. So we're all looking at what's going to happen in the future and I think today this asset base that we are.
We are working with is really top.
At top condition for meeting any kind of inflationary.
Around this.
No.
<unk> Buzz move up to president.
One that I have.
Thought it was just a wonderful thing mainly because he has worked with the <unk>.
Group of people that we've put together so long I'm not sure. He could do any other kind of deal other than the ones. We've been doing for the last 25 years.
And missing Bob on the one hand, we all know that people have to retire although I think I'm immune from that.
Bob has been with US a long time, he's a wonderful personality and it will be with us some more because we are working out is.
As a.
Retirement.
Keeping working with us on all the transactions that we look at it it's got a good brain for that so okay. Here, we will stop in the operator, if you'll come on we'll listen to some questions and try to answer them.
Thank you.
This time, we'll be conducting a question and answer session.
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One moment, please pull for questions and whats going to Starwood. Thank you.
Thank you and our first question comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your questions.
Good morning, guys base.
Basically did a six six cap rate on the first quarter acquisitions, what's the cap rate on the two property portfolio you closed thus far in the second quarter and where are cap rates on the acquisition pipeline that buzz spoke about.
Roughly.
Give me one moment, Rob the one we closed yesterday was at six 7% on a straight line basis.
Okay.
That's helpful. Rob just to tell you a little bit.
Since the beginning of 2021.
We are our average cap rate in 2021 was seven <unk>.
Just over 7% with a weighted average lease term of 13 four years.
But if you go from let's say January of 'twenty, one through our most recent acquisition yesterday. The weighted average lease term is a very great 12, eight years and our cap rate of six eight.
8%, so very favorable as I indicated in our comments, but I wanted to add some of that on that too. Yes. Thank you, Bob and what we're seeing relative to our market and cap rates as some compression in certainly in the <unk>.
<unk> areas and hot areas throughout the country.
We actually can't play and to the extent we wish so we are having to look more in the secondary markets, where cap rates carry a little greater spread for us, but we've seen compression.
And as Bob mentioned, we are we are shooting for deals that are north of six on an average basis.
But the market is very tough right now so we're being selective we're underwriting the tendency.
But we also are in the secondary markets looking for long term sale leaseback transactions because they work the best for us.
And given the upward move in interest rates I mean is it just time to flow through or you just think that right. Now this asset class is going to wind up being somewhat immune from.
The backup in interest rates that we've had here.
Over the last call it three four months.
Obviously, youre seeing rental rates right now on top of that bumps that historically may have been at the one 5% to 2% have jumped up to two 5% to 3% in anticipation and obviously as a result of the inflation and interest rates rise. So.
We believe we will be able to still garner good returns as it relates to that structure.
Okay, and then Gary.
Of these near term deals the debt coming from the line in the near term.
We have we have been mortgaging. These these are properties so yes.
So those have been all of those have been mortgage they are good long term mortgages on them.
And what are you seeing what have you been seeing in terms of term and rate out. There. If you were the next few deals that the guys come up with I mean, what are you expecting there from a rate and what type of timeframe are you going to be financing it for what.
So we do have we do have some in the pipeline that we have actually locked in rates on but I mean going forward you could probably see rates in the high fours low fives for a mortgage debt.
And then how long is that are 10 years at a five year.
Probably five to seven okay.
Alright, that's very helpful. And then just lastly for me Bob just wanted to say that you will be missed.
Well. Thank you. Thank you Rob it's been a great ride this is a great team.
And I really am excited about buzzard, Gary really taken us to the next level it will take place.
Alright, Thanks, guys have a good.
Thank you next question next question is from Craig Kucera with B Riley Securities.
Okay.
Hey, good morning.
Bob you had a number of acquisitions that you had mentioned you thought were close to closing in the first quarter somewhere north of 60 million under LOI did market turbulence.
Rising interest rates caused you to reconsider or renegotiate those are those deals still in process and then the pool that's under LOI.
Well as I indicated right now we've got six properties that totaled about just about little over $100 million veteran letter of intent.
And those I think I feel very good about.
But as is.
As Gary has indicated and Buzz has indicated there is a lot of pressure out there.
Some deals have been returned.
The deals that we're pursuing but I still do we're very feel very confident about.
That $104 million.
Typically and traditionally we have closed a third of those to maybe closer to 50% of those that reach the letter of intent stage and so I don't see that percentage changing.
If suddenly interest rates explode as Gary indicated since we use mortgage debt, we will back off because as I've stated in prior.
Calls.
We rely on a margin over our cost of capital, Gary and Jay Our Treasurer said that cost of capital for Us and Buzzard I have traditionally made sure that we were 25% to 50 basis points above that in the going in cap rate or we walk away from it because if it's not accretive it doesn't makes sense to do the deal.
Got it and I appreciate the color there.
Last quarter I think we had thought that you were going to do maybe close to $140 million of acquisitions. This year.
First quarter was a little slow in a bit of a pickup here in the second quarter, but just based on your commentary given pricing and just the change in the transactional environment are you thinking that 2022 might be a little bit more back loaded and do you still feel pretty confident in that $1 40 number.
Greg This is buzz and I would say, yes, I do feel confident in that there was some slippage coming out of the first quarter falling into the second with some p/e shops that pulled back a little bit with all the upheaval of approximately two months ago. However, they are back on track if you will and proceeding forward. So we haven't lost any that we have.
Had under the LOI that we have been looking at to the extent that I'm fearful that we're not going to be somewhere in the neighborhood of 120 to 140 for the year.
Okay great.
It wouldn't be an earnings call. If we don't discuss what's going on in Austin.
Appreciate an update on the assets at GM left and then came back to thanks.
Sure I'm happy to give an update there and it's actually exciting we've got current tenancy that were talking to traded paper a few times for 40 60000 square feet.
Obviously with the.
Mr Musk acquiring tittered Twitter theres already.
Uh huh.
Talk in the market of them coming to Austin moving out of California.
So theres a lot of buzz, there's certainly a lot of class a development going on of which is not really competition for us, but certainly creates a vibrant activity.
Beyond the current prospect, we also are in discussion.
Hoping to get paper back on a another user.
To generate additional income into the property and we are taking steps and putting money into the property and position. It as it is going to turn into a multi tenant situation.
With amenities in order to be able to compete with our area. So it's exciting and I think it is going to have some good news here in the not too distant future as it relates to greater occupancy.
Okay, and just one more for me.
<unk>.
I think two of the three leases you have expiring this year are coming up in the next few months I think all of the 2022 lease explorations are sort of known move outs, but can you talk about sort of where things are in that regard.
Sure, we'll and as Bob mentioned in his certainly I focus on the asset management team is doing a great job trying to hunt down tenants and or perhaps dispositions as David referenced.
Property in Utah that is coming due here 630 of 'twenty two.
We've had a few active prospects through the building.
But nothing that I can tell you is eminent and Verizon in South Carolina, we have two prospects there both governmental in nature.
The state government.
Carolina that.
They are slow, but we are in discussions with them in hopes of having one of them.
They are building one maybe.
User buyer the other would just be a tendency.
Okay. Thanks I appreciate it.
Thank you any other questions. Yes, we have a question from the line of Brian Hogan with Aegis capital.
Good morning, and thanks for taking my question.
What you got.
So with all the moving parts, how should investors think about <unk> <unk> per share in 2022 are we looking at sort of mid single digit increases over 2021.
I would say, Gary and I have talked about this past couple of quarters. Our objective is to raise the <unk> per share anywhere from 1.5% to 3% per year.
And I believe that based on what Buzz has in the pipeline and the activity that we're doing on the renewals and re leasing.
And that we should be able to achieve that objective this year.
Okay.
Thank you and then one follow up for me.
With interest rates.
<unk> I guess when do you guys do you see cap rates moving up with rates.
With the rising rates and then.
Have you seen any buyers exit the market is that something that you would anticipate moving forward.
I actually do believe there will be some buyers certainly they may not exit but are going to pause.
What we call our some of the gateway markets ports, and so forth there has actually been cap rate compression.
Dallas Atlanta other markets some of which we obviously do not play in inland Empire and so forth. So there has been cap rate compression. However, we believe there will be for the types of properties and locations that we target.
Hopeful that that stops if you will and that we're able to garner some better cap rates going forward.
Yes.
Alright, Thanks, guys. That's all from me.
Okay, we have any other questions. Okay. Yes, we have one additional question coming from the line of James Villard with Ladenburg Thalmann.
Good morning, guys.
Morning.
Yes, I mean, most of my questions have been answered.
So far I just have one more.
Have you have you seen any change in investor appetite on your series F preferred stock given the recent volatility in interest rates.
No, we really haven't it's been pretty steady.
Awesome.
Yeah, that's it for me thanks.
Any other questions.
No additional questions Mr. Gladstone.
Well one of the things that people.
Mined years that we've owned <unk>.
<unk> assets and in an inflationary environment, we should see the value of these go up with the inflation rate we've had some inquiries about selling some of our assets.
That's going to be something youll see in the future right now we are in good shape strong asset base strong group.
And I'm looking forward to the next.
Beyond next quarter at the end of this call.
Thank you for your participation everyone. This concludes today's conference you may disconnect your lines at this time.