Q3 2022 Gladstone Commercial Corp Earnings Call
Greetings and welcome to the Gladstone Commercial Corporation third quarter earnings call. At this time, all participants are in a listen only mode a.
A brief question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded it is now my pleasure to introduce your host David Gladstone Chief Executive Officer. Thank you Sir you may begin.
Thank you Latoya that was a nice introduction and thanks to all of you for calling in we appreciate this time, we have with you on the phone wish we had more time to talk with you make sure you understand what we're up to.
Now, we'll hear from Michael of calcium he's our general counsel and secretary to give our legal and regulatory matters concerning this call and the report. Thanks, David Good morning, everybody. Craig's report May include forward looking statements under the Securities Act of $19 33, and the 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 be materially different from any future results expressed or implied by these forward looking statements, including all the risk factors listed on our forms 10-Q, and 10-K and the other documents we filed with the SEC.
All of them on our website, which is Gladstone commercial dotcom, specifically, the investor's page or on the SEC's website, which is www dot FCC that G O V that.
And 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 and today, we'll discuss <unk>, which is funds from operations is a non-GAAP accounting term defined as.
Net income excluding gains or losses from the sale of real estate and any impairment losses on property plus depreciation and amortization of real estate assets. We'll also discuss core F. F O, which is generally <unk> adjusted for certain other nonrecurring 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.
We ask everybody to take the opportunity to visit our website once again Gladstone commercial dot com sign up for our email notification service you can also find us on Facebook keyword. There is the Gladstone companies and on Twitter, where at Gladstone comps that 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 again, if you go to the investors page of our website you can find them there I'll hand, the baton over to Gladstone Commercial's President Buzz Cooper bus. Thank you Michael Good morning, everyone and thank you for dialing in.
I will cover the highlights for the last quarter and provide some comment on the state of the portfolio and market outlook before turning the call over to Gary garrison Gladstone Commercial's CFO .
To review, our financial results for the period, and our capital and liquidity position.
During the third quarter of 2022, we continued our focus on industrial acquisitions, and improving operations, we amended extended and Upsized, our syndicated revolving credit and term loan facility from 325 million to $495 million. We used the net proceeds to pay down mortgage loans and borrowings under our revolver.
Facility.
We acquired a 246000 square foot industrial portfolio with locations in Vineland, New Jersey.
In New Jersey for $32 5 million and a 15 year sale leaseback transaction.
We acquired 67000 square foot industrial building in Jacksonville, Florida for $8 million and a 20 year sale leaseback transaction.
We acquired 49000 square foot industrial building in Fort Payne, Alabama for $5 6 million in an upright transaction.
We sold our Jupiter, Florida office property for $19 million, resulting in a gain on sale of $8 million and a levered IRR of approximately 18%.
We sold 60000 square foot office property in Parsippany, New Jersey for a 15% Levered.
Our.
We sold to patients.
<unk> office property in Boston Heights, Ohio.
41225 square feet at our Parmer, Austin, Texas Office building, the cognizant technology solutions for $5 seven year term at market rates.
Leased or renewed a 120000 square foot at our horse head New York Industrial building for five year term at market rates.
At least 47566 square feet in our Fort Lauderdale, Florida Office building to Moss and associates for $5 three year at market rates.
Subsequent to the end of the quarter, we acquired 69000 square foot Industrial office building in Denver, Colorado for $12 million and a 20 year sale leaseback transaction with a GAAP cap rate of 818%.
We sold our 31000 square foot office building in Columbus, Ohio Lastly.
Lastly, we leased 20682 square feet of our Mason, Ohio office property for seven years, and four months, bringing the property to full occupancy.
These investments dispositions and re leasing activity further reinforce our strategy to increase our portfolio's industrial allocation and improved property operations.
Acquisition activity since July 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 averages $11 9 million of investments per month with a strong average GAAP cap rate of six 9% the acquisition.
Volume since 2019 has exceeded $450 million and all assets have been industrial in nature.
Our industrial allocation has increased from 32% to 54% during this period, while pure office allocation has been reduced to 42%.
The team's near term objective is to reach an industrial allocation of 60% within the next 12 to 18 months.
Our success has been with acquisition candidates in the 50000 to $300 square foot range with a predominance of sale leaseback transactions and we expect to continue this focus now.
Now I'd like to comment on the portfolio.
Our asset management team continued to deliver on improving our same store operations.
Year to date through September 30, the team leased renewed and extended 501501 square feet covering nine tenants with a weighted average lease term of eight one years, the annualized straight rent totaled $5 7 million.
We are also continuing our capital recycling efforts in order to redeploy the sale proceeds into industrial assets.
These transactions will benefit our 2022 operating performance and in the out years as well.
Our rent collection experience continues to be strong 100% of cash rents were collected through October 31, we.
We are very pleased with our portfolio and with our tenants performance. During these challenging times for all industries.
Personnel side, we continue to grow our talent pool, both in size and experience Judy Carter has joined the company as a senior VP of asset management.
In the third quarter, we closed three transactions for a total of $46 1 million again. The first was a two property portfolio located in Vineland, New Jersey, and bridged in New Jersey purchase price $32 5 million GAAP cap rate was seven 7%.
Closing was in Jacksonville, Florida purchase price $8 million with a GAAP cap rate of 792.
And the final one.
At closing in Fort Payne, Alabama purchase price was $5 6 million and a GAAP cap rate was $6 76.
And this was an upright transaction.
Important to mention that since January of 2022, the average GAAP cap rate on our $97 $5 million of acquisition, 688%.
Transactions and due diligence currently scheduled to close within the next 45 days or above 7%, which we expect will be very accretive to our shareholders.
Market conditions are worthy of comment, particularly with the continued effects of COVID-19 virus rising inflation supply chain challenges.
Rapid and consistent interest rate increases and the war in Europe .
A review of research reports relating to industrial and office statistics for the third quarter reflects both the improvement and continued challenges.
Most industrial property types continue to outperform expectations and the fundamentals remained strong despite the economic.
Volatility, creating a disconnect between the property markets and capital markets.
<unk> are beginning to take a risk off approach long term quality real estate investment opportunities remain.
Despite headwinds indicated an economic slowdown.
<unk> industrial market remains resilient.
It was slightly slowing fundamentals for cushman and Wakefield net absorption exceeded 100 million square feet for the eighth straight quarter driving vacancy down to three 2%.
Demand continues to outpace deliveries and rising construction costs are driving the average industrial asking rates to new heights up 22% year over year, which is the strongest growth rate ever recorded.
National rents are poised to continue growing ahead of inflation over the next several months given the record low vacancy rate.
Deliveries picked up in the third quarter is nearly 150 million square feet was delivered the highest quarterly total on record.
Despite these record deliveries the construction pipeline continued to increase dramatically 760 million square feet in the third quarter as developers remain bullish on the industrial market.
Apply chain labor and inflationary pressures have delayed development schedule is contributing to a record high construction pipeline.
The industrial market is expected to remain robust.
The office market has continued to evolve and gradually recover from the pandemic per cushman and Wakefield third quarter office absorption continued to be negative.
Negative quarter out over the past 10 dating back to Q2 'twenty 'twenty.
In Q3 2022, there was a net negative absorption of $18 5 million square feet across the United States.
According to J O L leasing activity slightly decreased during QC.
Approximately 45 million square feet leased a three 6% decrease from Q2.
After lengthening for several quarters average lease.
And beginning to decline as companies reconsider short term space needs with the average lease term decreasing to just six two years.
Office sector recorded $11 8 million square feet of new deliveries for the third quarter, bringing year to date completions to $38 3 million square feet.
Marking a slight decline from the six 2 million square feet of space delivered in 2021.
As it relates to our growth opportunities. We recently had been seen a reduction in sales listing activity in the investment sales brokers are indicating that the number of acquisition candidates on a per property basis has been reduced.
We are slowly beginning to see cap rate expansion in the market due to the continued rise in interest rates and cost of debt.
Current pipeline of acquisition candidates is approximately $300 million in volume, representing 20 properties all of which are industrial.
Of the 20 properties one property is in due diligence totaling $5 5 million three properties in the letter of intent stage totaling $68 million and the balance are under initial review.
Our team is staying actively engaged in our markets as we believe acquisition opportunities will continue to arise that we can and will pursue.
So in summary, our third quarter activities reflected continued strong leasing and rent collection success continued active engagement to identify industrial acquisition opportunities.
And have collectively positioned us well to pursue growth opportunities now.
Now, let's turn it over to Gary our CFO .
<unk> results, including our capital market activities, Gary Thank you Buzz.
Everyone.
I will start my remarks regarding our financial results. This morning by reviewing our operating results for the third quarter of 2022.
All per share numbers I reference are based on fully diluted weighted average common shares.
<unk> available to common stockholders was <unk> <unk> per share and core <unk> available to common stockholders was <unk> 44 per share for the quarter, respectively, <unk> adjusted for comparability and core <unk> common stockholders during the third quarter of 2021 were 44 39.
<unk> per share respectively.
<unk> available to common stockholders for the three quarters ended September 32022.
$1 21, and core <unk> available to common stockholders for the same period was $1 22, <unk> adjusted for comparability and core <unk> for the three quarters ended September 32021 were $1 2 million or $1 17, respectively. Our same store cash rent in the first three quarters of 2022 increased by.
<unk>, 2% over the first three quarters of 2021.
Our third quarter results reflected total operating revenues of $39 8 million with operating expenses of 37 4 million, which included an impairment charge of $10 $7 million on our Columbia, South Carolina Office property.
As compared to operating revenues of $34 3 million in operating expenses was $25 5 million for the same period in 2021.
Moving on to the balance sheet, we continue to grow our assets and focus on reducing our leverage in the third quarter. We increased total assets by approximately $16 $3 million, we continue to reduce our debt to gross assets and are now down to 44, 8% as of the end of the quarter leave we are 1% to 2% away from our target leverage level.
During the third quarter, we amended extended and Upsized, our syndicated credit facility, we increased term loans from $225 million to $370 million and increased our revolving credit facility commitment from $100 million to $125 million net proceeds we used to.
Retire maturing mortgages and fund acquisitions, we want to thank our lenders for making this upsized credit facility success. Those include Keybanc Banc of America Huntington National Bank Fifth third Bank, United Bank, Synovus Bank first financial Bank and S&P Bank as we grow through disciplined investments. We also continue to expand.
Our secured property pool with additional high quality assets over time, we expect this will increase our debt financing options.
Looking at our debt profile 49, 5% is fixed rate 49, 5% is hedged floating rate and 1% is floating rate, which is the amount drawn on our revolving credit facility. We have seen increased expenses this quarter due to the rise in interest rates and the expensing of deferred financing costs.
Associated with the amended credit facility.
As of September 30, our effective average silver was rate was 298%.
<unk> bank debt hedged with $210 million of interest rate swaps and the remainder with interest rate caps, we continue to monitor interest rates closely and update our hedging strategy as needed.
As of today, our 2022 and 2023 loan maturities are manageable with $16 million due 2000.
22% and $66 $1 billion coming due in 2023, we have a number of options and we will finance. These amounts the broker time as of the end of the quarter, we had $7 8 million revolving borrowings volver borrowings outstanding while entering the fourth quarter sufficient liquidity, we have been active in issuing equity through our at.
The market or ATM program during the third quarter of 2022, and net of issuance cost, we raised $8 $9 million through common stock sales. We also raised net proceeds of $9 million from sales of our series F preferred stock continued to manage our equity activity to ensure that we have sufficient liquidity for upcoming cap.
Requirements as of today, we have approximately $6 $6 million in cash and $36 million.
The ability under our line of credit with our current availability the strong performance of our portfolio of access to the ATM program. We believe we have significant incremental flexibility to fund our current operations near and long term. We encourage you to also review our quarterly financial supplement posted on our website, which provides more detailed financial port.
Folio information for the quarter institutional ownership of our stock has increased over time to 46, 6% as of September 30, which is a significant increase over the last eight 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.
Chips.
We continue to grow our common stock dividend is $37 60 per share per quarter or $1 54 eight per year.
Our common stock closed yesterday at $17 33, the distribution yield on our stock is 868% and now I'll turn the program back over to David.
That was a good report Gary and a good one from Baas and Michael to the.
Team has performed very well.
Reacted admirably to all the various changes presented by the pandemic and the economy.
Overall, given all of these changes that are going on I think we have had a very nice quarter and look forward to a good quarter going forward.
<unk> heard a lot today numbers of new transactions new leases in the quarterly numbers are impressive team.
Team amended and extended our credit facility, which was coming due anyway and they've done a great job of pushing it on up to $495 million. We've collected all of our cash rents that were accruing.
So the team acquired also for industrial assets during the quarter four and total investment of $46 1 million sold three office buildings again, that's our goal is to.
Push out.
Office properties. So we so three during the quarter also lease renewals 208791 square feet, which is part of our 501501 in total leases renewals to date.
Subsequent to the end of the quarter the team acquired industrial properties for about $12 million and sold an additional office properties. So we're.
Changing to a rollover and become almost purely operational oriented toward the industrial or commercial side.
The commercial team continues to growing its real estate, we own a good pace. The team is doing a great job very happy to say that.
Company is in great shape as all of you know we're in the middle market. Most of our tenants are middle market companies Thats, where we perform best our other funds have always been oriented towards the middle market.
Like many of our tenants are being challenged now with inflation.
Brutal when they move the inflation rate up so quick by spending so much money.
Rising interest rates are big threat to everyone. In this business, that's doing real estate transaction the recession, while it might be categorized as a light recession is still here and the supply chain disruption seems to be getting better, but it's still there as well.
I'm really proud to say that our tenants continue to pay their rents.
These are times have never been seen before.
There will be future challenges.
You have a first class team and I am glad to say that they are up to the challenge.
Personally I have been around long enough to do seven or eight of these recession. So I think we'll make it through this one as well.
I'm going to stop now and what are your if you'll come on and tell people how they can ask us some questions.
<unk> tried to give a little bit better.
Answer to these questions that come up first question.
Thank you we will now conduct a question and answer session.
We would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith.
One moment, while we poll for our first question.
Our first question comes from Barbara <unk> with Meda.
Please proceed.
Thanks, Good morning.
First question on your lease exploration can you maybe provide some color on the one lease that you have expiring in <unk> and then maybe some early color on the leases expiring in 2023.
Yes, Rob Im happy to do that.
Yes.
We are actively managing and obviously the leases that are coming due we have one property that lease.
Down in South Carolina is a property that we are aggressively working.
To re lease it we've had a couple of interested parties, although they have not come through they are government in nature.
Very slow so with that property, we're looking to see what other alternatives we have.
That being said it is.
Going to be a challenge for US we are working through it and aggressively monitoring it and trying to again affect a change with that property, whether perhaps through sale or occupancy.
On the others that we have coming due in 'twenty three and again that one is the only one in 'twenty two.
We believe that several of them we are either.
We have sold or.
Working to occupy.
Specifically down in Texas, we have one or two that we are holding for sale currently.
And.
Another one in Richardson were looking to exit.
We believe that the total we have is manageable.
And again the team has done a great job, obviously historically managing these vacancies and problem children. If you will and to highlight what David said. These office properties, we are looking to reposition.
Get occupied or out of as quickly as we can.
Another question.
Yes, one more if I could.
On the acquisition and I look at the cap rate for <unk> at seven 2% and then in <unk>, we acquired another property at eight 1% cap rate the higher cap rate on the <unk> acquisition is that specific to that property or maybe that reflect where the market cap rates are moving with higher interest rates.
You are correct with the statement it was a function of honestly the team doing a great job of having to go back with the high interest rate costs that occurred from the time of commitment with.
With the seller, we discussed with them in order to improve and maintain our economics, making the deal is accretive as possible, but as I mentioned, we are seeing some cap rate expansion, we hope that the sellers.
Good.
Get onboard with that sooner rather than later, but we will maintain our discipline as it relates to obviously, our underwriting but also making sure. Our deals are accretive. The team has had a couple that we've had to look to adjust and we will continue that where we need to do such.
Okay. Thank you that's all I had thank.
Thank you next question. Please once again to ask a question Thats Star one on your telephone keypad. Our next question comes from Tom Masako with Ladenburg Thalmann. Please proceed.
Good morning.
Good morning, John .
So maybe sticking with kind of the acquisition line of questioning what are you seeing in terms of the deal volume, particularly as we get into kind of the bdcs inherent in <unk>.
Heard from some peers that maybe the.
The moves in interest rates have kind of created a buyer seller disconnect is that what youre seeing in <unk>.
Roughly speaking what are you expecting for.
For Q, either what's under PSA and ally or just kind of broader expectations and maybe how are you looking at your 2023 at this point.
So John I agree with what you said in the marketplace we are seeing.
A slowdown of opportunities.
However, the team is.
Look back here for the last.
18 months to two years, it's been very successful with what I'll call off market sale leaseback transactions. We are continuing that focus we are hopeful that the sellers do get a bit of the <unk>.
Understanding that cap rates need to rise due to the cost of obviously borrowing and on.
The transaction themselves there needs to be some.
Realisation by them that they're not going to get what they were going to get nine months 18 months ago.
<unk> is there although again as I mentioned, we are seeing a slowdown in opportunities deals that are coming out at generally happens here towards the end of the year. After we come out of the summer into fall.
But we are seeing some off market opportunities that we continue to pursue and again as mentioned generally sale leaseback transactions with.
The shops, and otherwise and certainly in this environment, we have companies looking to.
Sell their properties in order to generate cash to put into their businesses and part of our underwriting we understand where that money is going and we want to make sure it's going back to a great extent into the business itself.
So I would reference that going into two.
<unk> 2023, I think that we will see.
Be more discerning on the acquisition side, just as it relates to opportunities until these sellers getting a little.
Maybe a little more religion or pain as it relates to selling their properties.
Okay.
And then on your balance sheet, what are you thinking about in terms of cost of debt right now.
Yes.
2023, it looks like it might be kind of a BD.
A year in terms of refinancing so what are you expecting in terms of cost of that debt maybe versus what's in place today.
Well.
I think that.
We have we've swapped a fair amount of our term amount of terminals out we continue to look at doing some more of that I think overall right now everybody expects.
The short term rates to increase I'm looking at the forward curve right now it shows so if we're getting as high as five 1%.
We're seeing mortgages in this in the sixes.
So yes, we expect interest rates to go up.
We expect that if we were to use mortgage debt that we have.
Property that had a high enough cap rate too.
To be able to be financed by that mortgage debt and.
Again.
With our hedging strategy, we were trying to manage any of these interest rate increases, but yes, we certainly see that going up and we do see expenses going up we will have hopefully.
Revenue to offset that.
John I think we lock these together that is.
The interest rate, we're paying on the debt is on the same term.
Long term that we always look for matching the book on these things. So the mortgages. We have in place are in pretty good shape to take care of us over the certainly the next year or two so I think right now we worry about new deals then.
As you heard from Baas, it's really hard to talk to some of these sellers because.
There is still a mind fixed on the prices that were floating around six months ago, and it's just not possible and so there's this huge disconnect between what we can borrow at.
And then it allows us to pay and then on the other and what the seller wants to get out of that property.
It'll take a while for that to work its way through People's brains and no. The real problem of mortgages high and we can't go high on the property because that would mean a loss for us. So we're holding steady and I think we will do well this quarter.
It's anybody's guess, where we're going to be in 2023, but I think we will be the same.
Okay, and then on the in place portfolio apologies, if I missed this earlier in the call but.
Any update on kind of the last bit of Austin, the lease up how is that looking and whats the outlook for that property.
If you kind of get it closer to fully leased up.
Can it be kind of interest rate environment changed whether thats, a disposition candidate or not.
We do have a couple of prospects relative to the remaining square feet or approximately 100000 in that building.
The cash flow on that building is now.
Positive as it relates to what it was when GM occupied the full building.
As it relates to Austin itself, there has been a slowdown.
It's occurring there as it relates to both residential as well as there's a great deal of sublet space on the market and that of course creates a drag for us with prime space that being said, we are having some discussions internally as it relates to.
That building, making some assumptions and projections as it relates going forward into 'twenty three.
We love the cash flow coming off that building, but.
Do believe that if we can increase the value there may be a repositioning of it to allow us to again go buy some more industrial product.
Is there still a market too.
To recycle out of that asset given where interest rates are today.
And I didn't catch that a market to to sell.
Cycle out of that.
Property, given where interest rate sorry, yes, I believe there is.
Honestly, we'd like to have that second floor occupied in order to make it more valuable because of the <unk>.
Decrease in potential value as it relates to the interest rate cost.
But that being said, yes, I do believe there is it is well positioned within that parmer space as swing space for the development that's going on around it.
Alright.
Was it for me. Thank you very much. Thank you. Okay. Next question next question comes from Craig Kucera with B Riley. Please proceed.
Yeah, Hey, good morning, guys just one for me.
Given your unique viewpoint into the middle market a lot of which is manufactured based in your portfolio are you seeing any signs of stress. Among your tenants may be categories, where their input costs are outpacing their ability to raise prices and does that give you any pause on acquiring any assets in any particular category.
I think cash flows generally speaking are pretty good shape for us.
We've chosen tenants that are strong or stronger than most in the market. So I think we're in good shape for that.
No question that interest rate hikes hurt everybody in this business. It means we can't add a lot of new transactions and there are plenty of transactions out there, but there's this huge disconnect between what we can pay because of higher interest rates and what the tenants willing to pay so we are.
Treading lightly here I hope it will shake out and people will get some idea that the marketplace is driving everything and it's not something we're trying to gouge somebody to get a better deal.
But I don't think Theres any change on the horizon in terms of interest rates going down in 2023.
So I think we're going to be working hard for our money on 2023, it's not going to be the easy money world that we lived in for so many years.
We are perfectly positioned in order to take.
The.
Whatever comes out of our way we've got good good bankers, we're not wired into one banker only we've diversified our banking group.
And in addition, we have a wonderfully diversified portfolio not only in geography, but also.
In kinds of manufacturing plants that are out there. This is back to buzz is old hometown of.
Looking at small businesses, and making loans to small businesses, because it's really down to the credit quality of the tenant.
It's not so much as a great piece of property is sure you want a great piece of property, but you want a good strong tenant that can keep paying and I think we're in that shape.
Okay. Thank you.
Any other questions. There are no further questions at this time I would like to turn it back to you Mr. Gladstone for closing comments.
Well, we thank all of you for calling in.
Nice time to spend with you and I hope in January when we talk again, you have a lot more questions for us we like the questions.
At the end of this call and thank you Latoya.
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.