Q4 2022 Gladstone Commercial Corp Earnings Call

Greetings welcome to Gladstone commercial corporations urine conference call.

This time off just Mr and listen only mode.

A brief question and answer session will file a formal presentation.

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Please note that this conference is being recorded.

At this time I'll turn the conference over to Mister, David Gladstone, Chief Executive Officer.

Gladstone you may now begin.

No. Thank you Rob a nice introduction and we thank all of you for calling in and we certainly enjoy this time, we have with you and.

We're on the phone and wished there were more time to talk to you and we're going to start off as we always do with Michael accounts. He he is a general counsel and secretary.

Give us the legal and regulatory matters concerning the call today. Michael go ahead. This morning, everybody. Today's report May include forward monthly statements under the Securities Act of life.

The Securities Exchange Act 1934.

Hello, This is hurting.

Farmers. These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable genetic factors may cause the actual results to be materially different from any future results expressed or implied by these forward looking statements, including all risk factors a Form 10-Q10 came out the documents. We followed seem you can find them on our website.

[noise] Www dot Gladstone commercial dot com, specifically the investors page.

She she's website, which is W. W. W. Dot S exceed that G. O V. We undertake no obligation to publicly update or bugs any of these forward looking statements.

As a result of new information future events or otherwise, except as required by law today, we will lose a F F O, which was false from operations F. F O as in dog out the counter address on file as net income excluding the gains or losses from the deal with real estate in any way.

Plus depreciation and amortization of real estate assets will also discuss Cora football, which is generally F. F O adjusted for certain other non recurring revenues and expenses. We believe these metrics or a better indication of our operating results well better compare ability of our period over period performance. Please take the opportunity to visit.

Our website once again glanced sell commercial dot com startup or email notification service, you'll also find us on Facebook keyword. There is the Gladstone companies and on Twitter handle there is at Gladstone cops today's calls an overview of our results. So we ask that you review our press release and Form 10-K issued yesterday for more detailed.

Information again, you can find them on the investors page of our website with that I'll hand, it back to Gladstone commercials, President Buzz Cooper bumps. Thank you Michael Thank you all for calling in today.

Today, we will discuss economic and portfolio topics that are top of mind as well as our recent dividend Unraped reduction.

Course of action is never desirable as a result of a careful decision.

And its board of directors.

Took this step with a forward looking view in it too hot.

Hospital turbulent economic environment twenty-three.

Twenty-three.

Fashion will allow us to be prepared for any global economic storm a lot.

Be more flexible in our ability to increase the percentage of our portfolio.

Hopefully increase eppo per share, even though the prospects of a less forgiving economic circumstances.

Taking a look at how much change has occurred over the past year have had to confront continue to address the lingering effects of the pandemic on our office portfolio now.

Navigation at the unprecedented rise in interest rates and the negative impact and inflation is placed on the economy.

Many economists believe there is a high risk of a recession in the near future as interest rates continue to increase in manufacturing ability activity continues to decrease based on a variety of fed surveys.

Recent inflation data covering January 20, twenty-three, which was released in February revealed that although the rate of inflation is D. Celebrating it remains well above the fed's longterm target rate.

On February 2nd at the Federal Reserve raised rates again by 25 basis points, rather than the 50 basis points signaling that the rates will continue to rise, but perhaps at a slower pace.

All of these factors have had and are expected to continue to have a challenge in effect on the commercial real estate market overall.

Regarding the economic environment for office properties. That's fantastic. We originally believed in understanding was over a broad returned to the office environment would bring utilization of office space back toward pre pandemic levels, albeit impacted by hybrid arrangements any ongoing fight quality.

<unk> industry players also anticipated that office would begin to fill back up once COVID-19 was in the rear view mirror.

Supporters of returned to office predicted that companies could not function properly without collaborating and social benefits of in person work.

However, with increasing layoffs and the reduction of many workers.

Sorry, excuse me reluctant so many workers to return to an office work full time or part time <unk>.

Most of US now see a full scale return to pre pandemic office utilization and office space leasing demands is unrealistic for the foreseeable future.

But these factors in mind, we made the decision to lower the dividend to 10 cents per share per month in effect, a run rate of $1.20 per year.

Concerning the dividend adjustment company is sensitive to the stockholders expectations and appreciate the understanding and support we have received by many for the prudent action taken by the company.

This is a forward looking to judgment to improve the company's competitive position in a tight and somewhat unpredictable marketplace to continue our capital recycling efforts away from office into industrial acids, and it bring our dividend payout ratio in line with our <unk> Pier set.

We are confident that this action will allow for future equity appreciation as well as continued strong dividend turns.

Notably the company's external advisor is also a line with the shareholder.

Given the nonrecoverable contractual waiver of incentive he's through.

At least 130 of this year.

I would also like to highlight several positive developments is mentioned on previous calls we have extended amended an upsized our corporate credit facility with the addition of multiple new banks since the initial recast. We also add another bank and most recently amended or Berlin based calculation to allow more availability in a higher interest rate environment with.

Change our availability increased by more than 30 million to approximately $84 million.

Overall portfolio remained stable and we continue to see attractive acquisition candidates. Further we continue to have success with <unk> and capa recycling into industrial acids with.

These facts in mind, let me move on to a discussion covering results for last quarter and provide some comments on the state and the portfolio and market outlook before turning the call over to Gary garrison are CFO to review, our financial results for the period and our capital positions.

Physicians.

During the fourth quarter of 2022, we continued our focus on industrial acquisitions and improving operations.

We acquired a 69000 square foot industrial buildings in Denver, Colorado.

Dollars and a 20 year say at least back transaction does the gap caffeine too.

Acquired a 65000 square foot industrial building in Greenville, South Carolina.

12 years, they at least back transaction with a gas cap rate of nine.

Sold or 31000 square foot office building in Columbus, Ohio.

You sold 115200 square foot two story office building and now in Texas <unk>.

At least.

20682 square feet at our Mason, Ohio office property for seven years, and four months, bringing that property the full occupancy.

We extended the lease at our 63243 square foot Grand Rapids Mission office property for seven years, increasing the total lease period to 9.3 years.

Extended our lease of 15816 square feet of industrial space and Bolingbrook, Illinois for two additional years.

Extended our lease of 29626 square feet of office space in Egg Harbor, New Jersey, four two additional years.

We announced our sale repurchase program of our $6, 625% series, a cumulative redeemable preferred stock and our six per cent series G. G motive redeemable preferred stock for up to 20 million of each issue.

Further we collected 100 per cent of cash base rents during the fourth quarter.

These investments disposition and releasing activities further reinforce our strategy to increase our portfolios industrial allocation and improve property operations.

Acquisition activity in 822 was strong spiders uncertain market conditions, driven by rising inflation a war in Europe and pandemic challenges. Our team finished the year with 114.4 million in acquisitions totaling 1.2 million square feet.

Fries and a 13 properties.

Seven tenants with an average remaining lease term at acquisition of 14.5 years.

Okay acquisition volume since 2019 has exceeded 465 million and all assets have been industrial in nature.

Our industrial allocation has increased from 32 per cent to 56 per cent. During this period will appear office application has been reduced to 40 per cent.

The teams near term objective is to reach an industrial allocation of at least 60% within the next 12 to 18 months.

Our success has been with acquisition candidates in the 50000 to 300000 square foot range with her for dominance of sale leaseback transactions and we expect to continue this focus.

Now I'd like to comment on the portfolio or asset management team continued deliver unimproved in our same store operations for the calendar year and the team least renewed and extended 628499 square feet covering 13 tenants with a weight average lease term of 7.8 ears the annualized straight.

<unk> totaled 7.7 million.

This compares to 2021 team least renewed or extended.

1.7 million square feet, covering 16 tenants with an average lease term of eight years. The annualized straight-line rent then was a total of 14.7 million.

We're also continue our camper recycling efforts in order to redeploy sale proceeds into industrial acids. These.

These transactions will benefit our go forward operating performance.

Ah rent collection experience continues to be strong 100 per cent cash rents were collected through January 31st and in fact into February as well.

We are very pleased with our portfolio and with our tenants performance. During these challenging times for all industries.

Fourth quarter clothes do transactions for a total of $16.9 million.

Again, the first was a 20 year sale leaseback located in Denver, Colorado purchase price was 12 noon.

<unk> It was 8.2 seconds.

South Carolina purchase price was four 9 million.

Get cap rate of 9%, so 12 year term.

It's appropriate dimension that since January 2020th the average gap cap right on our 114 million of acquisitions seven point.

Two 6%.

Transactions currently in due diligence scheduled to close within the next 45 days or above 7.5 per cent, which we expect b very accretive to our shareholders.

Market conditions are worthy of comment, particularly with the continued effect of COVID-19 on the office market elevated inflation supply chain challenges rabbit and consistent interest rate increases and the war in Europe.

A review of research reports relating to industrial and office statistics for the fourth quarter reflects both some improvement and continued challenges.

Most industrial properties continue.

To outperform expectations and the fundamentals remains strong despite the economic volatility, creating a disconnection between the property markets and capital markets well investors are beginning to take a risk off approach longterm quality real estate investment opportunities remain.

Fight the headwinds, indicating the economic slowdown the national industrial market remains resilient, albeit with slightly slowing fundamentals <unk>. The industrial market finished 2022 468 million square feet of net absorption second highest you're on record behind 2021 <unk>.

Demand continues to be strong had been by us asking rents increasing 19.1% year over year <unk>.

However, due to the record breaking some of new deliveries vacancy rate increased by 10 basis points quarter over quarter to $3 four per cent.

There is 632 million square feet currently under construction, which remains a record breaking number but is mostly unchanged from the previous quarter.

We have also begun to see a slowdown in new proposed projects, which could cause a pipeline.

Under construction assets to shrink through 2023.

2020 to finish the year with 480 million square feet deliveries at 35 per cent increase from 2021 and there is currently over 600 million square feet slated for delivery in 2023.

Industrial transaction volume total of 136 billion in 2022, despite the slowdown in the second half of the year due to steep interest rate increases. However, the market has seen a promising start to twenty-three as more investors Irene gauging as pricing expectation come more realistic.

The office market. However has continued to evolve per J O L. The office sector posted negative net absorption of 37 million square feet.

Versus negative 59 million square feet in 2021.

<unk> activity totaled over 180 million square feet for the year, a 15.1% increase over 2021 and reflects 20th two per cent of pre pandemic leasing volume.

Nearly 100 million square feet of product is currently under construction.

But only $3.9 million a square feet broke ground in the fourth quarter decreasing the total construction volume by 7.5 quarter Overbore.

Tenants continued with their space up for sublease to reduce costs.

With your in sublease, vacancies totally and 136 million square feet.

Expectations are for increase in office vacancy rates as leases rollover.

The next few years, which will lead to downsizing and lower the dual rates for space is currently offered for sublease.

As it relates to our growth opportunities. We recently had been seeing a reduction in sale leasing activity and investment sale brokers are indicated that a number of acquisition candidates on a per property basis has been reduced.

We've seen cap right expansion in the market due to the continued rise in interest rates and cost of debt.

Our current pipeline of acquisitions credits is approximately 300 million in volume representing 20 properties all of which are industrial.

Of the 20 properties to properties during due diligence totaling $20 billion three properties or in the letter of intent stage totaling $68 million and the balance or under initial review.

Our team is Dane actively engaged in our markets as we believe acquisition opportunities will continue to arise that we can and will pursue.

So in summary, our fourth quarter activities reflected continue strong leasing and rental collection Seth continued active engagement to identify industrial acquisition opportunities.

And have correctly position as well to pursue growth opportunities.

Now, let's turn it over to Gary R. CFO report on the financial results, including our capital activities. Gary. Thank you wasn't good morning, everyone I'll start my remarks.

Regarding our financial results. This morning by reviewing our operating results for the fourth quarter of 2022, all for sheer numbers are referenced are based on fully diluted weighted average common shares F. S. O in <unk> available to common stockholders was 34 cents per share for the quarter, respectively <unk> available to <unk>.

Colors during the fourth quarter of 2021, or both 40 cents per share respectively, <unk> available to common stock holders for the year ended December 31, 2022 was one dollar and 54 cents a <unk> available to common stockholders for the same period was $1.56 <unk> adjusted compare ability.

And <unk> for the year ended December 31, 2021 were $1.60 and $1.57, respectively. Our same store cash rent and the full year 2022 increased by 1.5% over the full year 2021.

Our fourth quarter results reflect the total operating revenues $37.2 million with operating expenses of $26.8 million as compared to operating revenues of $35.3 million in operating expenses of $25.4 million for the same period in 2021 moving onto the back.

<unk>, we continue to grow our assets and focus on reducing our leverage for the year 2022, we increased real estate before depreciation by $74 $3 million, we continue to reduce our debt to gross assets and are now down to 45.3% as of the end of the quarter. We believe we are a few percent away from her target level.

Level as we grow through accretive investments. We also continued to expand our unsecured property pool with additional high quality assets.

Time, we expect this will increase our debt financing options.

Looking at our debt profile, 47.9%. This fixed 49% is hedged floating rate and 3.1% is floating rage, which is the amount drawn on a revolving credit facility.

We have seen increased expenses this quarter due to the rise in interest rates and the expensing of hedge related costs as of December 31 are effective average sofa rate was 4.3% are outstanding bank term loans are hedged with 200 million $210 million of interest rate swaps and the remainder with interest rate cats.

In addition, we have 100 million afford starting swaps to replace maturing caps in mid 2023, we continue to monitor interest rates closely and update our hedging strategy is needed.

As of today are 2023, and 2024 low maturities are manageable with $57.7 million due in 2023 and $11.3 million coming due in 2024, we have a number of options and we will refinance these amounts at the appropriate time as of the end of the quarter, we had $23.3 million of <unk>.

All of our borrowings outstanding we entered the first quarter of 2023 with sufficient liquidity, we've been active in issuing equity through her at the market or ATM program. During 2022 and net of issuance costs, we raised $43.2 million through common stock sales. We also raised net proceeds of five $4 million from sales of.

Our series of preferred stock for the year, we continue to manager equity activity to ensure that we have sufficient liquidity for upcoming capital requirements, we repurchased 180 $180000 of our 6% series G preferred stock as of today as of today, we have approximately $4.8 million.

In cash and $86 $4 million of availability under a line of credit with our current availability strong performance of our portfolio and or access to our ATM program. We believe that we have sufficient incremental flexibility to fund our current operations in your long term. We encourage you to also review our quarterly financial supplement posted it.

On our website, which provides more detailed financial and portfolio information for the quarter institutional ownership overstock has increased over time.

4% as of December 31, which is a significant increase over the past eight years.

We continue to be very active in meeting with current and potential investors portfolio manage.

Coverage animals and investment banks, we look forward to establishing new relationships as it continues to grow.

Our common stock dividend is 30 cents per share per quarter for one dollar and 2000.

A common stock closed on it.

Wednesday at $15.60 the distribution yield on our stock at that price was 769% an alternative program back to David.

Oh, Thank you Gary that was a good report bugs buzzing Michael did did good reports as well the team has performed very well and reacted admirably to the various challenges presented the pandemic and the economy overall.

It's easy to say it was a nice quarter didn't like cutting the dividend <unk>.

Second time in 30 years that I've cut the dividend. The last time, we did that we actually earned it back it was on a different company within cut it in this one this one I think will be back paying a higher dividend in a year or so and will be okay.

You've all heard a lot today and the numbers of new transactions in new leases and we acquired two new industrial assets. So two office properties and collected 100 per cent of the cash base rent during the fourth quarter all of that is good news.

Oh, we also least and renewed about 126000 square feet of.

Part of 628000 square feet of total loses leases that renewed for the year.

Commercial team is growing we continue to add people grow the business handle all the assets. So we're in good shape to go forward I think we've pretty much avoided all the problems of the past two years that creeped up on US the team continues to pursue lots of good opportunities.

I think the.

That we had some properties that didn't look as good and are now out of the way and done and sold and we're continuing to grow existing assets.

I know that we all look first at the tenants. These a middle market companies many of them.

This is.

What makes us so strong were tenant oriented and then real estate second asset managers are effectively managing the properties that the company owns in order to maximize their value. Both in terms of income also when we need to sell them I'm Gonna stop at this point and have.

Or.

Person robbed come on and tell everybody how they can ask some good strong questions for us.

Thank you Mister Gladstone.

At this time will be conducting a question and answer session.

If you would like to ask a question. Please press star one from your telephone keypad and a confirmation tone to indicate your line is in the question Q U.

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For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith <unk>.

One moment. Please so we pulled for questions. Thank you.

Our first question comes from the line of Graves met up with <unk>. Please proceed with your questions.

Good morning, I wanted to ask you on your 2023 needs exploration can you maybe provide some color on.

<unk>, how much of those need as often as much as industrial then what'd you guys expecting.

Certainly garage, we've got seven properties that we are actively working that do expire here in 2003.

Of those we have two under a purchase agreement for execution that our office.

Two are in discussions for renewal.

We have one leases mentioned that did bring the property to full occupancy.

One is out for sale or lease <unk>.

And one week standard for two months as the tenant has a contract they are working on with high indication that they will receive this contract, which then we will enter into a long term lease.

So the team is aggressively hitting these properties keeping an eye on them, but I think is stated we've got a good progress on the sale of several as well as <unk>.

The buildings. So we believe we can manage it.

Of those if I could they are.

Oh, 40% industrial 60% office and the two sales our office.

Okay second question on your.

That exploration for 23.

Maybe provide some color on <unk>, what if you knew that if you were to refinance third and other sources of capital that you may use to take care of the dead.

We have all of those of the I'll, let expiring that that's all mortgage debt.

We could we have a lot of.

Options here some of them, we could refinance we could finance some that are on the line replace those with these properties to put them on the line we could draw the line to repay the the mortgages and we could pay some of it with the equity raised on the ATM. So we have plenty of resources to repay those orders.

Next question, Okay that thank you.

But.

I'm sorry. The next question is from the line of James Allen Villard with Ladenburg Thalmann.

Good morning gas.

James.

On the <unk> on the waves incentive fee.

Is there any I guess is the Ah set date for it to restart or as early as possibility that y'all could waive it again in 2023.

Well over the years, we've done a lot of waving and so I can assure you that we're subordinating that to our dividend payments and I think we can waive it many times, if we want to and we should want to if we can't meet our dividends.

A regular way so over the years I don't know what the Gary you remember how much we've waived don't use I know, we we used to give that to the board a little list of things, but be assured that it's always available.

Yeah, I hope you don't have to waive it again, but I guess next question I have is this.

Yes, a little elevated and <unk> and 14th how how should we think about that number for one right in 2023.

And I'm sorry, you were reference have <unk> no capex my bed.

Capital expenses, obviously by the sale of some of these office assets, which are more expensive to return it and obviously keep up we are cutting our exposures relates to operating expenses.

What <unk>.

Where did we have last year, Gary you remember, what we had in Capex last year, but the year before mmm.

No I don't have that right. James do you know that you can do that.

Yeah, Oh, sorry, I guess in four key you're at 4.4 million I guess, we're just supposed to park, we're thinking of around like half of it.

A half a million dollars.

Yeah.

Yeah. These industrial leases, sometimes have more Capex, then office simply because they're growing and they want to expand and we're willing to do that and you might also note that generally when we're doing capex, we charge them for the additional money that we putting into the deal.

So it's not a negative <unk>.

Needing to put it in where generally not on the hook for much in terms of Capex.

Okay. That's helpful. Thank.

Thank you.

Next question.

The next question is from Craig's cause <unk> with be Riley Securities. Please proceed with your questions.

Yeah, Hey, good morning, guys. Thank.

You had a large kenneth in South Carolina that expired in the fourth quarter of last year and I wanted to know if you had an update there.

Certainly do uhm it was occupied by a call centre My Verizon.

They have is you most likely know gone back home or remote.

We have had several inquiry on the property.

Are <unk>.

Currently we have a receiver and placed on that property, we have a buyer for that property and the receiver and buyer need to work out some.

Specifics around the contract.

In order for that to proceed and we're very hopeful of that so we are currently the.

Receiver Bank are taking care of the operating expenses, but we hope to have that completed within the next hopefully less than three months.

Okay, Great and I appreciate the color on the on the 23 lease expirations, but uhm can.

Can you give us a sense of the the cadence of those those lease expirations are they are they waited to the first half a second half any color that'd be helpful.

Give me one second.

There, mostly weighted towards the back end into December .

So we're all good grades Montana.

Got it you know I know last quarter. You you gave an update on on the acid in Austin, where you were still trying to maybe leaks. It up and then spell it I guess kind of what are your current pets there.

Austin has obviously been going through some transition both positive and negative. We currently have had some tours through we have a couple rfps rfps out for approximately 70 to 80000 square feet.

So we not a lot there has changed other than some improvements to the building.

Cognizant is in the process of moving in.

But we are aggressively pursuing leasing it up and then we'll make an assessment as to the holder sale and Craig that's carrying itself now we don't have to put money in every month as we did when it was mostly bacon. So we're not in a negative position. We're just trying to make it more positive.

Got it got it just wanted to circle back for a housekeeping item relates to interest expense I think in your K. You said your current interest rate cap on term loans C as within a range.

Can you just kind of refresh us on what that he has an average preterm loan see an end sort of the the relevant spreads on on your your various floating right that that you <unk>.

Okay. So term loan see we have Ah caps on term loans see those are the three I wanted to see 310 to 370 range.

Those are set to mature in Midtown.

Mid 2023 and will be replaced by a Ford starting swap which is at about 370. The spreads on those term loans are 145 over sofa.

Mmm.

Okay, Great. That's very helpful. That's all for me. Thank you.

Okay any more questions out there no.

No questions at this time Mister Gladstone.

Okay, well glad to hear from everybody wish we had more questions. We enjoy the question. So the delightful if we can have more questions next time, but we'll see you next quarter and that's the end of this call.

Thank you. This will conclude today's conference may disconnect. Your lines at this time. Thank you for your participation.