Gladstone Commercial Corporation Q3 2023 Earnings Call
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It is not my pleasure to introduce your host David Gladstone.
Please proceed sir.
Oh. Thank you so much for that nice introduction and thanks to all of you for calling in.
Enjoy this time, we have with you all.
On the phone and wish you had more time to talk with you know our first hear from Michael accounts, He's our general counsel and Secretary.
It gives us good legal and regulatory information. So Michael go ahead. Thanks, David Good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933, and the Securities Exchange Act of 1934, including those regarding our future performance.
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 risk factors. Our forms 10-Q, 10-K, and other documents we file with the SEC.
I noticed on the investors page of our website Gladstone commercial dot com or on the Sec's website, which is www dot said that G. O V 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 today, we will.
<unk> F F O, which is funds from operations. It is a non-GAAP accounting term defined as net income excluding the gains or losses from the sale of real estate level of impairment losses on property, plus depreciation and amortization of real estate assets.
We'll also discuss core F F L, which is generally F F O 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. Please go to our website once again Gladstone commercial dotcom sign up for our email notification service.
You'll also find us on Facebook keyword, the Gladstone companies and Twitter and that's 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 with that I'll hand, it over to Gladstone Commercial's President Buzz Cooper. Thank you Michael and thank you all for calling in.
Today, we will discuss our operations and topics that are top of mind.
Before discussing portfolio developments I would like to briefly highlight the broader economic backdrop in which we operate.
In July 2023 had raised rates by 25 basis points, raising that target policy rate to its highest level in 22 years.
Impacts of the fed's policies are becoming more pronounced in the real estate world with new construction starts across all asset classes slowing significantly.
The office market continues to feel the impact of work from home dynamic while despite a slight slowing in rent absorption. The industrial market continues to outperform which is driven primarily by e-commerce demand and reassuring initiatives uncertainty and geopolitics capital markets and fed policy.
Continue contributing too volatile real estate markets today.
Despite this uncertainty we are sticking to our core strategies.
Vesting noncore office assets acquiring mission critical industrial assets in the path of growth markets and diligence underwriting tenants credits by focusing on these strategies. We believe we position our portfolio for growth and outperformance with that I would like to highlight a few portfolio developments.
For the third quarter.
First as of September 30th our industrial concentration as a percent of annual straight line rent increase to 59%.
The strategy, we initiated and have stated since before 2019.
We acquired a 100000 square foot industrial manufacturing and distribution facility Cedar Hill, Texas for $9 1 million and a 20 year sale leaseback transaction and a GAAP cap rate of 10, 1%.
We acquired 7714 square.
Square foot medical property in Burleson, Texas.
With a 10 year lease in place, we sold three office assets, and Pittsburgh, Pennsylvania, Eatontown, New Jersey, and Taylorsville, Utah for a COVID-19 million in three separate transactions.
We extended two leases on our Wilmington, North Carolina, industrial asset and new Albany off, Ohio Office property and new leases resulted in term extensions through 2037, and 2042, respectively and straight line rent increases.
During the quarter, our asset management team grew same store revenues by five 4% Q3, 2022 to Q3 2023.
Subsequent to the end of the quarter, we acquired a 69920 square foot industrial manufacturing and distribution facility in Allentown, Pennsylvania for $7 8 million and a 20 year sale leaseback transaction at a GAAP cap rate of nine 2%.
Again subsequent to the end of the quarter. We also acquired a 67709 square foot industrial manufacturing distribution facility in Indianapolis, Indiana for $4 5 million and a 20 year sale leaseback transaction at a GAAP cap rate of 10, 8%.
These developments are all consistent with our strategy and our team continues to create value through the repositioning and sustain disposition of our legacy office.
Assets year to date, we have sold six office asset and executed new leases or extensions and an additional five office assets.
Combined GAAP cap rate on new acquisitions during the third quarter was 95, 4% and the disposition cap rate on stabilized office sales was 823%, resulting in 830 basis point increase in yield. This capital recycling is highly accretive to the portfolio in the short term.
Better positions the portfolio and the long term.
Another example of the strength of our portfolio, we were able to generate the same store GAAP rent increase of 38% at our Fort Lauderdale office asset by executing a full building lease. This was a tremendous outcome for our shareholders and allows us to be strategic with our long term plans for that asset.
Since 2019, our industrial concentration as a percentage of annualized straight line rent has increased from 32% to 59%.
Furthermore, all industrial acquisitions are mission critical to quality tenants and well located growing MSA.
Our new acquisitions are all poised to benefit from Richard and initiatives as corporations try to insulate themselves from geopolitical tensions to bring their manufacturing operations back to the United States.
I would also like to point out that the company has collected 100% of rents since the beginning of year.
Going forward, we plan to continue targeting industrial assets, particularly leveraging our experience in negotiating acquisitions.
For sale leaseback transactions.
We have I appreciate these transactions as opportunities to negotiate leases that are mutually favorable for both the buyer and a seller and utilizing our tenant underwriting skills.
We will always evaluate third party transactions as well with the goal of further increasing our industrial concentration in the next six to 12 months.
As of the end of the quarter, our pipeline consist of $366 million of opportunities 45 men. We're in.
The LOI stage with the remainder under initial review.
While the bid ask spread between buyers and sellers narrowed somewhat in the third quarter, we expect to see more opportunities at attractive yields in the new year as seller expectations normalize I will now turn the call over to Gary garrison, our CFO to review our financial results for the quarter and our liquidity position Gary. Thank you Buzz.
I'll start my remarks regarding our financial results. This morning by reviewing our operating results for the third quarter of 2023.
All per share numbers referenced are based on fully diluted weighted average common shares S. S. One core S. S O per share available to common stockholders were 33, and 34 cents per share for the quarter, respectively. S. S. Oncor S. S little available to common stockholders during the third quarter of 2022 were 43 and 44 cents per <unk>.
Share respectively.
So in core F O for the nine months ended September 30 were $1.10 of $1.11, respectively. SSO in core <unk> for the same period in 2022 or $1.21 of the dollar 22 cents per share respectively core F. S. Though was affected this quarter by one time expenses related to property dispute.
Distribution professional fees and increased interest cost <unk> was further affected by derivative maturities in defeasance cost.
Our same store rent in the first three quarters of 2023 increased by five 4% over the same period. In 2022. This was due to a one time accelerated rental increase recovery revenues, our third quarter results reflect the total operating revenues of $36 $5 million with operating expenses of $29 six.
As compared to operating revenues of $39 $8 million and operating expenses of $37 $2 million for the same period in 2022 operating expenses were lower in this period, mainly due to a $6 eight to $6 $8 million of impairment charges taken in 2023 versus 10.72.
<unk> taken in the same period in 2022.
Waiver of the incentive fee in 'twenty 'twenty into 'twenty 23, and reduced depreciation expense in 2023 due to revisions related to tenant funded improvement assets also.
Resulted in lower operating costs.
Looking toward debt profile 41, 6% is fixed rate, 49% is hedged floating rate and nine 4% is floating rate, which is the amount.
<unk> drawn on our revolving credit facility as of September 30, our effective average chauffeur rate was 531% our outstanding Bank term loans are hedged with $310 million of interest rate swaps and the remainder with interest caps. We continue to monitor interest rates very closely and update our hedging strategy as needed.
As of today, our 2023 and 'twenty 'twenty four loan maturities are manageable and we have no further maturities in 2023 and $19 $6 million coming due in 2024 as of the end of the quarter. We had 79 $5 million of revolver borrowings outstanding we had no activity this quarter and issuing equity.
Through our aftermarket or ATM program, we received net proceeds of $900000 from sales of our series F preferred stock we continue manage alright.
Our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions.
As of today, we have approximately $6 million in cash and $43.6 million of availability under our line of credit. 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.
Our common stock dividend is 30 cents per share per quarter or $1.20 per year, our common stock closed yesterday at $12 53 per share with a yield of 958% and now I'll turn the program back to David Wonderful.
Yeah, and good report good one from Buzz and Michael to the team has performed very well and reacted admirably I'd have to say to the various challenges presented by the lasting impact that.
A much higher interest rates with all of them.
For real estate company.
Overall, though very nice quarter and the company is doing well.
And you heard a lot today in summary during the third quarter, we acquired two industrial facilities.
We sold three noncore properties all of them are office buildings. So you see we're continuing to get get out of the business are renting office space.
We also renewed our at least two of our properties subsequent to the end of the quarter, we acquired one industrial facility as well.
The commercial team is growing the real estate, we own at a good pace.
Teams doing a great job of managing the properties, we own, especially during these times with these very high interest rates.
Our team of strong professionals continues to pursue percent potential quality properties.
The list of acquisitions, there with you then.
<unk> team seems a little pick up in.
Opportunities for us so I'm going to stop at this point in time and have the operator come on and we get some questions from the people.
Thank you we will now conduct a question and answer session.
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Once again Thats star one to ask a question at this time, one moment, while we poll for our first question.
Our first question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed.
Hi, good morning, guys.
The buyers of your office assets today are there any key users are still 10 31 demand in your various markets for these types of smaller assets.
Good morning, Rob.
The majority of them are honestly developers looking to reposition the properties in their respective markets. There are a few owner users that we have sold to but majority are looking to reposition the properties they see it as value add more than.
Occupancy of office per se, they're generally going into a multifamily.
That's helpful and any no non removed renewals and move outs that you're planning for over the next 12 to 18 months.
Let me see we've got one that we know is moving out and we are in the process of as we do as you know stay in front of our tenancy.
Very tightly our.
Portfolio managers and asset managers work very hard and closely to know what's happening with our tenants on the ground, but at this point in time I know of one, but we do have that building.
Under due diligence as it relates to a sale.
That's helpful. And then Gary there are a lot of moving parts in the third quarter earnings obviously fourth quarter is going to have the impact of any acquisition.
Dispositions that you do in that you did do here in the third quarter and also higher rates, but anything else that's either carrying over from the third quarter drag wise or alternatively going away that was we should be thinking about when updating your models.
I mean, we did have a thanks, Rob, but we did have an unusual unusually high amount of.
G&A costs this quarter legal associated with dispositions and so forth and then we also had some financial costs related to defeasance of a mortgage as well as.
Cap some realized losses on some cat maturities, so those won't be going forward, but we.
We did have some increase in interest costs, primarily due to our refinancing a couple of mortgages on.
The line of credit instead of going into the mortgage market as the unfortunately the line of credit was.
Cheaper, but more expensive and turn to the mortgages, we refinance with it.
And I'm, hoping to go to the market when the the rates go down on those but that unfortunate drag will continue.
It was far as dispositions as we dispose of our office properties, we'll see less of a drag in operating expenses. So I can't forecast, what that's going to be but hopefully over the next couple of quarters, you'll definitely see that as an increase in okay.
And other than the stuff that you've mentioned in the various releases is there anything that you are expecting to close on.
Acquisition disposition wise in the fourth quarter or are you.
Waiting for pricing to sort of change et cetera, or or financing costs to come down.
We have we have a number of I'll give this to buzz, but we do have a number of buildings right now held for sale.
But in some of those where we're hoping they will close in the fourth quarter, but.
I'll, let you have to work on the acquisition side, Rob here as we hit a two and a half months out if you will before year end.
We had a few under review that we would love to push to get closed in this quarter I'm not sure that's going to occur.
Hum.
So at this point in time, I would say most likely not.
At the end of the year, but as we just close when you saw right at the.
Beginning of this month.
Month I'm sorry.
Just close I guess on Friday, we are doing all we can to push a for lack of better word get those assets on our books in our portfolio, but at this point in time, we've seen a relative's I'll call it less year over year activity going toward the end of the year haven't seen that plethora of packages out for Pratt.
As for sale as people try to dispose of them in 'twenty three versus 24, which tells you that the brokers and the sellers are I think currently sitting on the sidelines a bit we still have several to look at in a good volume of dollars of over 366 million that were looking at but at this point in time I don't.
Foresee.
Close some sales before the end of the year, but I don't see that we will have any new acquisitions, unless something were to fall quickly into our laps.
Okay, and then any proceeds that you have there on dispositions just go towards repaying the line until the acquisitions get teed up.
With that and or the mortgage debt.
Building may be encumbered with okay, alright, guys. Thanks I appreciate the time this morning.
Thank you next question. Please the next question comes from days phones with Stonegate. Please proceed.
Good morning.
Good morning.
Just curious if you could kind of talk to it's not how you think your lease profile term or the acuity of the term of your lease profile will shift over our 2024.
As it relates to new acquisitions of course, as I mentioned, Dave we're looking for long term sale leasebacks.
Recent closings, obviously reflect that a 15 plus years in order to increase our Walt on the renewals we are pushing for longer and have a few that we are looking at but generally they are five year renewals. So that puts the concentration obviously on the origination side versus the renewal to 15 20 year sale.
Lease backs.
But we do not have any great concentration of lease expiring into 24. So I believe we'll be able to keep our Walt and increase our work going forward.
Very helpful. Thank you and then just as it relates to occupancy it's a kind of taken a step up every quarter here in the year and see that filer 80 basis points or so since the end of the quarter.
How much more headroom do you think is there and are you having to give any concessions or anything like that to get to those occupancy numbers up.
With new leases, obviously, where there are some concessions as it relates to Ti dollars. We are not however, going to give away just to get occupancy we need to make sure that these transactions are accretive to our portfolio and.
Help the company overall, but yes, we do see concessions in marketplace, some larger than others, but the team actually has done a great job in negotiating the balance between term and cost to get that term as we know capital expense.
Into an existing deal can create a creative.
Positive numbers to the to the deal itself into the portfolio overall.
In fact in a couple of cases, they're much more accretive than they would be on a new deal. So we look at it carefully as it relates to the <unk>.
Ti dollars in capital spend.
Into the existing portfolio because tenant improvement dollars, obviously can be as accretive as new dollars out the door.
Very very helpful. Thank you and then just one more if I could how do you think about geographic focus for acquisitions going forward. It looks like your last two acquisitions were in Pennsylvania and in Indianapolis.
Do you are you focusing more westward south word or kind of right in those core markets and then thank you.
Sure we are not focused west.
The Rockies at this point in time, it's just too expensive to play majority of growth as we've seen in the country from various industries has been more Midwest South Southeast, Texas, If you will to the east So that is where we see the focus because that's where we see the opportunities and as you've heard in the past we looked.
To look for acquisitions in the path of growth. So that we can get the returns that we're looking for but we're not going to get away from our credit necessities as it relates to the evaluation of the tenancy.
But mostly you're going to see this growth not in the northeast, but it's got to be in.
Illinois, Ohio to the South if you will and over to Georgia, Florida.
With a few opportunities being created when I say in the northeast in New Jersey with a couple of assets. We have as we look to build a concentration there, but they've got to be accretive to the portfolio.
Okay.
Okay.
Alright, thank you.
Okay.
Next question please.
Once again to ask a question that star one on your telephone keypad. Our next question comes from Tom <unk> with B Riley. Please proceed.
Good morning.
Good morning, good morning.
So sticking with dispositions where need be assets that were sold either this quarter or subsequent to quarter end.
I guess for ones that were occupied what's kind of the rough.
Disposition cap rate or even kind of.
Gross NOI that went away as a result of the sales.
Yeah.
I've got that answer for you John can me one second.
Yeah.
With the dispositions.
One that we had discussed previously a building down in South Carolina.
Had a tenant that purchase of the building so that one however, we had.
Not not been responsible for the building, but it did indeed close here at the beginning of last quarter.
On other dispositions they are not we have one vacancy that did get sold.
And.
The others that we as Gary mentioned held for sale those are all currently.
Occupied.
I think save one.
I'm not sure that.
The answer that Youre looking for but we feel very.
Good about our dispositions and what we have coming up as of late.
<unk> of that towards the end of the year.
Because they're all under contract and then as we look early into next year. The first six months.
We are.
<unk> engaged with the.
Property as it relates to either having it occupied because we've had several leases sorry, several tours at our buildings as well as sales for repositioning the properties generally for multi tenant.
Okay, I guess, maybe asked another way I mean, how is the cap rate on dispositions comparing to <unk>.
The acquisition cap rates.
As I mentioned earlier and the one that had a I think 100 basis point swing to it.
We are making sure that what we can do is going to be accretive to the portfolio. We also have to weigh that if it is an empty building as it relates to the burn associated with carrying the building. So we have to balance that out but.
But we are increasing the value of the portfolio also has mentioned with a couple of the renewals that we are doing that are again, the office building reference might give us a ability to.
Redeploy that cash as the building has.
It increased in value as a result of a full tenancy.
Okay.
And then on the balance sheet side.
The I think I mentioned on the <unk> call sorry, the <unk> call.
That you had some forward starting swaps that came on are placed caps I mean as the full impact of that reflected in the current quarter or was that kind of mid quarter and I guess is there any kind of other onetime stuff as it relates to kind of.
Popping out interest rates that may be worth noting in the next.
Yeah couple of quarters.
Well right now we had we have $310 million of swaps. The one that was forward starting started at the beginning of July. So that's all within this quarter. So there will be any additional effects ongoing with those swaps. There there are what they are they're owner our term loans.
We would probably you might see a little bit in first quarter. Some.
Some realized losses on some cap maturities in first quarter, but that should be it we don't have any.
We're working on our hedging strategy. If we don't have any plans right at the moment to swap or cap anything right now, but that could change given where interest rates go.
Okay.
And then lastly, the incentive advisors.
Advisory incentive fee.
How should we think about that in the near term.
You've kind of wave.
We have it for the last couple of quarters.
Obviously that discussions occurred or will occur at the board level.
<unk> not made any decisions at this point in time to do anything different than what we are currently doing in waiving it.
But that will be discussed at.
At the right time.
Okay.
That's for me. Thank you very much for your time.
Thanks, Sean Okay next question.
Thank you Mr. Gladstone there are no questions. Thank you at this time I would like to turn it back to you for closing comments.
Okay. Thank you so much all of you for calling in we love all those good questions. You have hope next quarter. We ended with a lot of good questions as well that's the end of this call and we thank you all again.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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