Q1 2024 Gladstone Commercial Corp Earnings Call
No.
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Operator: Greetings, and welcome to the Gladstone Commercial Quarter-Ending March 31, 2024 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone has to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Please proceed.
Speaker Change: Greetings and welcome to the Gladstone commercial quarter, ending March 31st 'twenty 'twenty four conference call.
Speaker Change: This time, all participants are in a listen only mode.
Speaker Change: We have question and answer session will follow the formal presentation, if anyone should be quite a I forget synthetic topics. Please press star zero on your telephone keypad.
Speaker Change: Reminder, this cost is being recorded it is my pleasure to introduce your host David Gladstone Chief Executive Officer. Please proceed.
David John Gladstone: Well, thank you, LaTonya. Again, you did a nice introduction, and we thank all of you for calling in this morning to hear what we've been doing. We enjoy the time we have with you and wish we had a lot more time to talk back and forth, but we don't. First, we're going to hear from Eric Hemel, who is our Deputy General Counsel, to give you the legal and regulatory matters concerning the call and report today. Eric, go ahead.
David John Gladstone: Thank you Latanya again, you do a nice introduction and we thank all of you for calling in this morning to hear.
David John Gladstone: We've been doing we enjoy the time, we have with you and wish we had a lot more time to talk back and forth, but we don't.
David John Gladstone: First we're going to hear from Eric Hamil, and ease our deputy General counsel.
Eric Hamil: To give you the legal and regulatory matters concerning the call and poor today Eric.
Eric Hemel: Thank you and good morning. 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. These forward-looking statements involve certain risks and uncertainties that are based upon our current plans, which we believe to be reasonable. Many factors may cause our actual results to be material different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-Q, 10-K, and other documents we file with the SEC.
Eric Hamil: Thank you and good morning. Today's report May include forward looking statements under the Securities Act of 1933, and the Securities Exchange Act was 1934, including those regarding our future performance.
Eric Hemel: Those can be found on our website, www.gladstonecommercial.com, specifically the Investors section, or on the SEC's website, at www.sec.gov. 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 discuss FFO, which is funds from operations. FFO is a 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.
Eric Hamil: Forward looking statements involve certain risks and uncertainties that are based upon our current plans, which we believe to be reasonable. 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 in our forms 10-Q, 10-K, and other documents we file with the SEC.
Eric Hemel: We'll also discuss core FFO, which is generally FFO adjusted for certain other non-recurrent revenues 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 visit our website www.gladstonecommercial.com and sign up for our email notification service. You can also find us on Facebook, keyword Gladstone Companies, and Twitter 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 issued yesterday for more detailed information. Now I'll turn it over to Gladstone Commercial's President, Buzz Cooper.
Eric Hamil: Those can be found on our website www dot Gladstone commercial dot com, specifically to the investors section.
Eric Hamil: Or on the Sec's website at Www Dot S E C Dot Gov.
Eric Hamil: We undertake no obligation to publicly update or revise any of these forward looking statements.
Eric Hamil: Whether as a result of new information future events or otherwise, except as required by law.
Eric Hamil: Today, we will discuss F F O, which is funds from operations F. O is a non-GAAP accounting term defined as net.
Eric Hamil: 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. We'll also discuss core F. F O, which is generally F. F O adjusted for certain other nonrecurring revenues and expenses. We believe these metrics are a better indication of our operating results.
Eric Hamil: Better comparability of our period over period performance.
Eric Hamil: Please visit our website www dot Gladstone commercial dot com and sign up for our email notification service also find us on Facebook keyword, the Gladstone companies and Twitter at Gladstone comps.
Eric Hamil: Today's call is an overview of our results. So we ask that you were in our press release and Form 10-Q issued yesterday for more detailed information.
Eric Hamil: Now I'll turn it over to Gladstone Commercial's, President Buzz Cooper.
Arthur S. Cooper: Thank you, Eric, and thank you all for calling in. Today, we will discuss our operations and topics that are top of mind. Interest rates continue to have outsized impacts on capital markets and real estate. Last quarter, we noted that the 10-year U.S. Treasury had declined from 5 percent in October of 2023 to 4.3 percent as of February 2024. After a couple of hot CPI prints, the 10-year increased again to nearly 4.7 as of April 2024 and, as of yesterday, closed at a 4.49 number.
Arthur S. Cooper: Thank you Eric and thank you all for calling in.
Arthur S. Cooper: Today, we will discuss our operations and topics that are top of mind.
Arthur S. Cooper: Interest rates continue to have outsized impacts on capital markets and real estate.
Arthur S. Cooper: Last quarter, we noted that the 10 year U S. Treasury had declined from 5% in October of 2023 to four 3% as of February 2024.
Arthur S. Cooper: After a couple of hot CPI prints, the 10 year increased again to nearly $4 seven as of April 2024, and as of yesterday closed at a 4.49 number.
Arthur S. Cooper: This volatility has impacted net lease investment volume across the industry. According to CBRE, net lease investment volume fell 51% year over year for full year 2023. Total commercial real estate volume fell by 52%. Sale leasebacks, which are a hallmark of our value proposition focusing on tenant credit, performed relatively better than traditional third-party acquisitions. However, compared to a 52% decline in total commercial real estate volume, sale leaseback volume fell by 21% in 2023, according to CBRE.
Arthur S. Cooper: This volatility has impacted the net lease investment volume across the industry. According to CBRE net lease investment volume fell 51% year over year for full year 2023.
Arthur S. Cooper: Total commercial real estate volume fell by 52%.
Arthur S. Cooper: Sale leasebacks, which are a hallmark of our value proposition focusing on tenant credit performed relatively better than traditional third party acquisitions compared to a 52% decline in total commercial real estate I am sale leaseback volume fell by 21% in 2023 according to CBRE.
Arthur S. Cooper: We plan to continue leveraging on our credit underwriting expertise to capitalize on sale leaseback opportunities through the remainder of 2024.
Arthur S. Cooper: We plan to continue leveraging our credit underwriting expertise to capitalize sale leaseback opportunities through the remainder of 2024. In terms of specific asset classes, industrial real estate continues to perform and now accounts for 60% of our annualized straight-line rent.
Arthur S. Cooper: In terms of specific asset classes industrial real estate continues to perform and now accounts for 60% of our annualized straight line rent. According.
Arthur S. Cooper: According to CBRE, average industrial asking rents in Q4 2023 rose 6% year-over-year, and the industrial vacancy rate at the end of the year was 4.8%. However, vacancy is left, particularly in the manufacturing sector, where we see an issue of demand driven by nearshoring and reshoring initiatives and tenant stickiness. Any softness in fundamentals, excuse me, industrial fundamentals is driven by record leases to big box distribution centers, a sub-asset class that we largely avoid. Moving on to office, the broader market continues to struggle with early signs of bottoming out. According to JLL, office groundbreaking in Q1 2024 declined below 300,000 square feet, the lowest volume on record.
Arthur S. Cooper: According to CBRE average industrial asking rents in Q4, 2023 rose, 6% year over year and the industrial vacancy rate at the end of the year was four 8%.
Arthur S. Cooper: Vacancy is left particularly in the manufacturing sector, where we see demand driven by near shoring and reassuring initiatives and tenant stickiness.
Arthur S. Cooper: Any softness in fundamentals excuse me industrial fundamentals is driven by record I'm pleased our big box distribution centers.
Arthur S. Cooper: Sub asset class that we largely avoid.
Arthur S. Cooper: Moving on to office the broader market continues to struggle with early signs of bottoming out according to J O L office groundbreaking in Q1 2024 decline below 300000 square feet the lowest volume on record.
Arthur S. Cooper: We made tremendous progress through 2023 in delivering on our current core strategy, divesting Non-Core Offices, acquiring mission-critical industrial assets in the path of growth markets, renewing expiring leases, and diligently underwriting our tenants' credit. We exited seven non-core markets and properties, located and completed nearly $30 million in new acquisitions, an increased portfolio industrial concentration from 56 percent to annualize straight line rent as of December 2022 to 60% as of December 2023. Currently, we have multiple actionable opportunities in the pipeline, and one opportunity under contract for closing this month.
Arthur S. Cooper: Made tremendous progress through 2023 of delivering on our current core strategies divesting non core office assets.
Arthur S. Cooper: Mission critical industrial assets in the path of growth markets, renewing expiring leases and diligently underwriting our tenants credit.
Arthur S. Cooper: We exited seven noncore markets and properties located.
Arthur S. Cooper: And completed nearly $30 million in new acquisitions and increased portfolio industrial concentration from 56%.
Arthur S. Cooper: So annualized straight line rent as of December.
Arthur S. Cooper: December 2022% to 60% as of December 2023.
Arthur S. Cooper: Currently we have multiple actionable opportunities in the pipeline.
Arthur S. Cooper: And one opportunity under contract for closing this month.
Arthur S. Cooper: These opportunities include lease renewals with increased rent and added terms, as well as potential dispositions. However, we remain disciplined, particularly on tenant credit. While we've seen a number of opportunities this year, we believe that many credits are too risky in these economic times. In addition to new acquisitions, our asset management team led more than 1.4 million square feet of leases, resulting in more than 1.26 million, or 13% net increase in same store gap rent.
Arthur S. Cooper: These opportunities include lease renewals with increased rent and added term as well as potential dispositions.
Arthur S. Cooper: We remain disciplined particularly on tenant credit.
Arthur S. Cooper: While we've seen a number of opportunities. This year, we believe that many credits are too risky in these economic times.
Arthur S. Cooper: In addition to new acquisition, our asset management team led more than one 4 million square feet of leases, resulting in a more than $1, two 6 million or 13% net increase in same store GAAP rent.
Arthur S. Cooper: The annualized state line rent of these transactions totaled $10.7 million in 2023. In the first quarter of 2024, we continued to reposition our portfolio with the sale of three non-core office properties, and subsequent to the end of the quarter, we sold an additional non-Kucera office building.
Arthur S. Cooper: Annualized straight line rent of these transactions totaled $10 7 million in 2023.
Arthur S. Cooper: In the first quarter of 2024, we continued to reposition our portfolio with the sale of three non core office properties and subsequent to the end of the quarter, we sold an additional non core.
Arthur S. Cooper: Also, subsequent to the end of the quarter, we renewed three leases with a weighted average term of 6.4 years and an additional straight line rent of $681,000. While we cannot control the Fed or predict exactly where interest rates may go, we remain confident that all of our developments have better positioned our portfolio for 2024 and beyond. Portfolio occupancy was at 98.9% as of March 31, 2024, and we collected 100% of cash base rents since February 2022.
Arthur S. Cooper: Also subsequent to the end of the quarter, we renewed three leases with a weighted average term of six four years, an additional straight line rent of $681000, while we cannot control the fed or predict exactly where interest rates may go we remain confident that all of our developments are better positioned.
Arthur S. Cooper: <unk> in our portfolio for 2024 and beyond.
Arthur S. Cooper: Portfolio occupancy was at 98, 9% as of March 31, 2024, and we collected 100% of cash base rents since February 2022.
Arthur S. Cooper: This is a testament to the mission-critical nature of our assets and quality credits for our tenants, both of which position us to weather any economic storm we may face. In addition, we believe there are other levers which we have yet to fully realize.
Arthur S. Cooper: This is a testament to the mission critical nature of our assets and quality credits for our tenants both of which position us to weather any economic storm, we may face.
Arthur S. Cooper: In addition, we believe there are other levers, which we have yet to fully realize.
Arthur S. Cooper: Most of our industrial assets have fixed annual escalations in the 1.5 to 3.5 range. However, industrial rent growth over the last few years has exceeded these escalation rates, resulting in rents that are below market for us and available upon lease renewal. Our balance sheet is healthy and flexible, positioning us to continue deploying capital into industrial deals at accretive cap rates as seller expectations normalize. Since January 1, 2022, we've repaid net $174 million of mortgage debt and grown our unencumbered asset base by over 60%.
Arthur S. Cooper: Most of our industrial assets have fixed annual escalations in the $1 five $3 five range industrial rent growth over the last few years has exceeded these escalation rates, resulting at rents that are below market for us and a valuable upon lease renewal or.
Arthur S. Cooper: Our balance sheet is healthy and flexible positioning us to continue deploying capital into industrial deals at accretive cap rates as seller expectations normalize.
Arthur S. Cooper: Since January one 2022, we've repaid net of 174 million of mortgage debt and grown our unencumbered asset base by over 60%.
Arthur S. Cooper: Only six office mortgages remain, and the first maturity of these is in 2026. We have $56.1 million in available liquidity via our revolving credit facility and cash on hand and remain below 50% levered as of March 31, 2024. We cannot predict the short-term course of interest rates, but we can expect some sort of normalization with time.
Arthur S. Cooper: Only six offices mortgages remain and the first maturity of these in 2026 we.
Arthur S. Cooper: We have $56 1 million in available liquidity via our revolving credit facility and cash on hand, and remain below 50% Levered as of March 31 2024.
Arthur S. Cooper: We cannot predict the short term course of interest rates, but we can expect some sort of normalization with time is that normalization happens. We expect we will be well positioned to capitalize on accretive new opportunities. We expect sale leasebacks in particular, the primary source of new deals sale leasebacks provide additional credit deliver.
Gary Gerson: As that normalization happens, we expect we will be well positioned to capitalize on a creative new opportunity. We expect sale ASPACs, in particular, to be a primary source of new deals. SAIL Leasebacks provide additional credit, diligence, and term, both hallmarks of our value proposition. Our balance sheet is flexible, driven by more than $174 million of net mortgage debt reduction since January 2022. And again, we have more than $56 million of liquidity on hand to continue growing our industrial base.
Arthur S. Cooper: And term both hallmarks of our value proposition.
Arthur S. Cooper: Our balance sheet is flexible driven by more than 174 million of net mortgage debt reduction since January 2022, and.
Arthur S. Cooper: And again, we have more than $56 million of liquidity on hand to continue growing our industrial base.
Gary Gerson: Since 2019, our industrial concentration as a percentage of annualized straight line rent has increased from 32% to 60%, and we expect to further increase this concentration in the next 6 to 12 months. I will now turn the call over to Gary Gerson, our CFO, to review our financial results for the quarter and liquidity position. Thank you, Buzz.
Arthur S. Cooper: Since 2019, our industrial concentration as a percentage of annualized straight line rent has increased from 32% to 60% and we expect to further increase this concentration in the next six to 12 months.
Arthur S. Cooper: I will now turn the call over to Gary Gerson, our CFO to review, our financial results for quarter and liquidity position. Thank you buzz.
Gary Gerson: I'll start my remarks regarding our financial results this morning by reviewing our operating results for the first quarter of 2024. All per-share numbers referenced are based on fully diluted weighted average common shares.
Gary Gerson: Start my remarks regarding our financial results. This morning by reviewing our operating results for the first quarter of 2024 all per share numbers referenced are based on fully diluted weighted average common shares.
Gary Gerson: FFO and core FFO per share available to common stockholders were both $0.34 per share for the quarter. FFO and core FFO available to common stockholders during the fourth quarter of 2023 were both $0.37 per share. FFO per share was lower in Q1 2024 versus Q1 2023 due to lower revenues in Q1 2024 attributable to leases expiring prior to Q1 2024 and additional expenses in Q1 2024 attributable to increases in interest rates. Our same store cash rent in the first quarter of 2024 increased by 0.8% over the same period in 2023. This was mostly due to increases in rental rates from leasing activity subsequent to Q1 2023.
Gary Gerson: <unk> and core <unk> per share available to common stockholders were both <unk> 34 per share for the quarter <unk> and core <unk> available to common stockholders during the fourth during the fourth quarter. The first the first quarter of 2023 were both 37 per share <unk> <unk> per share it was lower in Q1 2012.
Gary Gerson: Q4 versus Q1 2023 due to lower revenues in Q1 2024 attributable to leases expiring.
Gary Gerson: Prior to Q1, 2024, and additional expenses in Q1 'twenty.
Gary Gerson: <unk> to increases in interest rates, our same store cash rent in the first quarter of 2024 increased by <unk>.
Gary Gerson: 8% over the same period in 2023.
Gary Gerson: It was mostly due to increases in rental rates from leasing activity subsequent to Q1 2000.
Gary Gerson: Our first quarter results reflected total operating revenues of $35.7 million, with operating expenses of $23.3 million, as compared to operating revenues of $36.6 million and operating expenses of $34.7 million for the same period in 2023. Looking at our debt profile, 38% is fixed rate, 51% is hedged floating rate, and 11% is floating rate, which is the amount drawn on a revolving credit facility. As of March 31st, our effective average SOFR was 5.34%.
Gary Gerson: Our first quarter results reflected total operating revenues of $35 7 million with operating expenses of $23 3 million as compared to operating revenues of $36 6 million in operating expenses of $34 7 million for the same period in 2023 looking at our debt profile, 38%.
Gary Gerson: As fixed rate, 51% is hedged floating rate and 11% is floating rate, which is the amount drawn on our revolving credit facility as of March 31, our effective average sofa.
Gary Gerson: Was 534% our outstanding Bank term loans are hedged with $310 million of interest rate swaps and the remainder with interest rate caps. We continue to monitor interest rates closely and update our hedging strategy is needed as of today. Our 2024 loan maturities are manageable with $7 4 million.
Gary Gerson: Our outstanding bank term loans are hedged with $310 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 2024 loan maturities are manageable with $7.4 million due, which encumbers one property held for sale. As of the end of the quarter, we had $75.9 million of revolver borrowings outstanding. We had no common stock sales this quarter.
Gary Gerson: Dollars, due which encumbering one property held for sale as of the end of the quarter, we had $75 9 million of revolver borrowings outstanding we had no common stock sales. This quarter. We received net proceeds of $200000 from sales of our series a preferred stock we continue to manage our equity activity to ensure that we.
Gary Gerson: We received net proceeds of $200,000 from sales of our Series Preferred F stock. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. Presently, we have three properties held for sale. As of today, we have approximately $56 million in cash and availability under our line of credit. We encourage you to also review our quarterly financial supplement posted on the investor section of our website, which provides more detailed financial and portfolio information for the quarter. Our common stock dividend is $0.30 per share per quarter, or $1.20 per year.
Gary Gerson: We have sufficient liquidity for upcoming capital requirements and new acquisitions presently we have three properties held for sale as of today, we have approximately $56 million in cash and availability under our line of credit. We encourage you to also review our quarterly financial supplement posted on the investors section of our website, which provides more.
Gary Gerson: More detailed financial and portfolio information for the quarter.
Gary Gerson: Our common stock dividend is <unk> 30 per share per quarter or $1 20 per year and now I will turn the program back to David.
David John Gladstone: And now, I'll turn the program back to David. Okay.
David John Gladstone: Okay, thank you. That was a good report from Gary, and a good one from Buzz and Michael. Not Michael. Michael's not here. He's home with the stomach flu. So our team has really performed very well. Overall, a very nice quarter, and we see this as continuing to add to our record of doing good things for our shareholders. During the first quarter, as you heard, we sold three office properties, so we're out of
David John Gladstone: Okay. Thank you that was a good report Gary and a good one from Buzz and Michael Michael.
David John Gladstone: Michael it's not here he's home with a stomach flu.
David John Gladstone: So our team is really performing very well.
David John Gladstone: Overall, I'm very nice quarter, and we see this as continuing to add to our records of doing good things for our shareholders. During the first quarter as you heard sold three office properties. So we out of those.
David John Gladstone: Subsequent to the end of the quarter, we sold an additional office property and renewed three leases while we were working on that. And since January of 2023, we've sold 11 office properties and presently have, is it two or three for sale? um... Just two. Just two.
David John Gladstone: Subsequent to the end of the quarter, we sold an additional office property and renewed three leases, while we're working on that.
David John Gladstone: And since January 2023, we sold 11 office properties and presently have is it two or three for sale.
David John Gladstone:
David John Gladstone: To give us too okay I thought you had another one.
David John Gladstone: Okay. We have become an industrial real estate company. We're away from the office properties that we had, sold most of those, and are still working those off. And the commercial team is growing the real estate we own at a good pace, and the team is doing a great job managing the properties we own. Somebody asked me if the Fed was going to cut interest rates this year, and I said it wouldn't make much difference if they cut a quarter in... July.
David John Gladstone: We have become an industrial real estate company were away from the office properties that we had so most of those and still working those off and the commercial team is growing the real estate, we own a good pace and the team is doing a great job managing the properties we have.
David John Gladstone: One.
David John Gladstone: Somebody asked me if the fed was going to cut interest rates this year and that's it and then make much difference if they kind of quarter.
David John Gladstone: What's that going to do for us? Not much. So our team is strong professionals. They continue to pursue properties that fit into what we're looking for, which is industrial properties. Our acquisition team is seeking strong credit tenants, so we're doing a good job there. So rather than me continuing to talk, let's get the operator on and get some great questions from the people who follow our company. LaToya?
David John Gladstone: July what's that going to do for us not much. So our team is strong professionals. They continue to pursue properties that.
David John Gladstone: Fit into what we're looking for which is industrial properties at.
David John Gladstone: Acquisition team is seeking strong credit tenants that we're doing a good job there so rather than me continuing to talk and that's get the operate on and get some great questions from the people who follow our company Latoya.
Operator: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 keys. One moment while we vote for questions. Our first question comes from Guava Mesa with Alliance Global Partners. Please proceed.
LaToya: Thank you we will now conduct a question answer session. If you would like to ask a question. Please press star one on your telephone keypad.
LaToya: Formation tone will indicate your line is in the question queue.
Speaker Change: You May press Star two if you would 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 starkey one moment, while we poll for questions.
Speaker Change: Our first question comes from Guava, Nathan with Alliance Global Partners. Please proceed.
Guava Mesa: Thank you. Good morning. I wanted to ask you about the transaction market, hoping to get some more color on your acquisition pipeline and what kind of cap rates you're seeing in the market.
Guava Mesa: Thank you good morning, I wanted to ask you on the transaction market, hoping to get some more color on your acquisition pipeline and what kind of cap rates, you're seeing in the market.
Arthur S. Cooper: Morning, Rob. We are seeing some deal activity out there and several; we know the brokers are doing many BOVs. What we are seeing, however, currently, as we look at the financials of the opportunities, and again, we're really strictly looking at industrial, they just don't fit our credit profile at this point in time to the level we wish they would. In these economic times, we take a close look at to make sure that the tenants will be able to pay their rent today and going forward.
Guava Mesa: Good morning, Rob.
Arthur S. Cooper: We are seeing some deal.
Arthur S. Cooper: <unk> out there and several we know the brokers are doing many of these what.
Arthur S. Cooper: What we are seeing however, currently is as we look at the financials of the opportunities and again were really strictly looking at industrial they just don't fit our credit profile at this point in time to the level. We wish they would are these.
Arthur S. Cooper: These economic times, we take a close look at to make sure that the tenants will be able to obviously pay their rent today and going forward.
Arthur S. Cooper: That being said, we do see many good opportunities. We have, uh... A few in the pipeline that we are going to find actionable. We do have one opportunity that should close this month, um... And so we do see the volume coming, but we need some seller expectations to come in as it relates to us to be able to make a creative deal. That being said, obviously depends on our borrowing cost, but generally, we're looking at deals that end up being on a creative basis above about an eight and a half cap.
Arthur S. Cooper: That being said, we do see many good opportunities we have.
Arthur S. Cooper: A few in the pipeline that we are going to find actionable. We do have one opportunity that should close this month.
Arthur S. Cooper:
Arthur S. Cooper: And so we do see the volume coming but it's we need some seller expectations to come in as it relates to us to be able to make accretive deals.
Arthur S. Cooper: That being said and obviously it depends on our borrowing cost, but generally we are looking at deals that.
Arthur S. Cooper: Uh huh.
Arthur S. Cooper: End up being on a.
Arthur S. Cooper: Accretive basis above about eight and a half cat.
Gary Gerson: Okay, the second question I wanted to ask you was about the incentive fee. There was an incentive fee recorded in this quarter, but there was also an incentive fee waiver. And so I just wanted to get some clarification on what we should expect going forward with respect to the incentive fee.
Arthur S. Cooper: Okay.
Speaker Change: The question I wanted to ask you was on the incentive fee.
Speaker Change: They want the incentive fee recorded in.
Gary Gerson: In this quarter, but there was also an incentive dealer.
Gary Gerson: And so I just wanted to get some clarification on what we should expect going forward.
Gary Gerson: Relative to the incentive fee, after discussions between management and the board, the decision was made to begin receiving part of the incentive fee at a reduced rate. At this point in time, I'm not going to comment on where we might be going forward due to the fact that, obviously, at the end of the quarter here, we will make that determination with the board at the end of the next quarter.
Gary Gerson: Relative to the incentive fee.
Gary Gerson: After discussions between management and the board. The decision was made to begin receiving part of the incentive fee at a reduced capacity.
Gary Gerson: At this point in time, I'm, not going to comment on where we might be going forward.
Gary Gerson: Due to the fact that obviously at the end of the quarter here, we will make that determination with.
Gary Gerson: The board at the end of the next quarter.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Operator: Latoya, do we have another question?
Speaker Change: Do we have another question.
Operator: The next question is from Rob Stevenson with Jannie Montgomery Scott. Please proceed.
Operator: The next question is from Rob Stevenson with Janney Montgomery Scott. Please proceed.
Robert Chapman Stevenson: Good morning guys. Can you talk a little bit about the market for well-occupied office assets in your portfolio, if it's got a good tenant and some decent lease term left, and what your thoughts are on accelerating the level of office dispositions in order to redeploy into industrial or reduced leverage, etc. these days?
Robert Chapman Stevenson: Hi, good morning, guys.
Robert Chapman Stevenson: Can you talk a little bit about the market for well occupied.
Robert Chapman Stevenson: Office assets in your portfolio, if it's got a good tenant in some decent lease term left and what your thoughts are on accelerating the level of office dispositions in order to redeploy.
Robert Chapman Stevenson: Two industrial or reduce leverage et cetera. These days.
Arthur S. Cooper: Sure, and as mentioned, we do have two held for sale that are obviously office space. Rob, we are taking a very disciplined approach as it relates to moving assets and looking at the market. Some are more... frothy than others as it relates to opportunities. So that being said, you know, we have more opportunities with some of our office buildings, just as we see on the industrial side in the South, and we are evaluating those. But as it relates to an overall theme within the portfolio, we are being disciplined because, of course, we also want to match up sales with new acquisitions in our recycling program.
Speaker Change: Sure and as mentioned, we do have to held for sale that obviously our office.
Arthur S. Cooper: Rob we are taking a very disciplined.
Arthur S. Cooper: Disciplined approach.
Arthur S. Cooper: As it relates to <unk>.
Arthur S. Cooper: Moving assets looking at the market some are more.
Arthur S. Cooper: Frothy than others as it relates to opportunities so that being said.
Arthur S. Cooper: Hum.
Arthur S. Cooper: Yeah.
Arthur S. Cooper: We have more opportunities with some of our office buildings, just as we see on the industrial side.
Arthur S. Cooper: In the south and we're evaluating those.
Arthur S. Cooper: But as it relates to an overall theme within the portfolio. We are being disciplined because of course, we also want to match up sales with new acquisitions in our recycling program.
Gary Gerson: Okay, and then Gary, anything other than the incentive fee waiver that you know is non-recurring positive or negative in the first quarter earnings, or was this a fairly clean quarterly run rate other than whatever goes on with the incentive fee going forward?
Arthur S. Cooper: Okay, and then Gary anything other than the.
Gary Gerson: The incentive fee waiver that.
Gary Gerson: As nonrecurring positive or negative in the first quarter earnings or was this a fairly clean quarterly run rate other than whatever goes on with the incentive fee going forward.
Gary Gerson: No, I would say this is a pretty clean, pretty clean quarter. This is, we, yeah, absolutely.
Gary Gerson: I would say this is a pretty clean pretty clean quarter. This was.
Gary Gerson: Yes, absolutely.
Gary Gerson: Okay.
Robert Chapman Stevenson: Alright, thanks guys. I appreciate your time this morning.
Speaker Change: Alright, Thanks, guys I appreciate the time this morning.
David John Gladstone: Thank you. Okay, LaToya, do we have something else?
Robert Chapman Stevenson: Okay, La Toya do we have something else.
Operator: The next question comes from Dave Storms with Stonegate. Please proceed.
LaToya: The next question comes from Dave storms with Stonegate. Please proceed.
David Joseph Storms: Good morning. Just hoping to ask you're seeing really strong numbers in occupancy rates and same store numbers. How much ability do you have to continue to push rent?
David Joseph Storms: Good morning.
David Joseph Storms: Hoping to ask you're seeing really strong numbers in occupancy rates and same store numbers, how much ability do you have to continue to push rents.
Arthur S. Cooper: Dave, good morning. We have a couple opportunities as they are coming up for renewal that will allow for such. However, most of our deals do have fixed escalations, um... However, the opportunity comes when a renewal comes, and we discuss it; the tenant may wish to make improvements or maybe acquire another company or such. So that gives us the ability then to open the lease and, as referenced in our report as it relates to industrial rates today versus a few years ago, gives us an opportunity within the portfolio to push those rates up higher than the contractual rent.
David Joseph Storms: Dave Good morning, we have a couple of opportunities as they are coming up for renewal that will allow for such.
Arthur S. Cooper: However, most of our deals do have.
Arthur S. Cooper: Fixed escalations.
Arthur S. Cooper: However, the opportunity comes when a renewal and we discuss it the tenant may wish to make improvements or.
Arthur S. Cooper: Have a.
Arthur S. Cooper: Acquire a competitor another company or such so that gives us the ability then to open the lease and as referenced in our report as it relates to industrial rates today versus a few years ago gives us an opportunity within the portfolio to push those rates up higher than the contractual rent.
Arthur S. Cooper: Okay.
Arthur S. Cooper: Very helpful. Thank you. And then, just in the acquisition environment, you mentioned credit quality a couple of times. Just trying to get a sense of what the delta is between what you're seeing in the market and what your preferred credit quality rate would be, just to try to get a sense of how close those two might be to converging.
Dave: Very helpful. Thank you and then just in the acquisition environment, you mentioned credit quality a couple of times.
Arthur S. Cooper: Just trying to get a sense of what the Delta is between what Youre seeing in the market and what your preferred credit quality I mean, it would be just to try to get a sense of how close.
Arthur S. Cooper: Those two might be converging.
Arthur S. Cooper: As it relates to that, on the credit side, and we do evaluate every credit separately, we have to make sure that it passes our muster first. And if we could get the pricing to offset some of that risk, we would do so. Otherwise, we are going to pass on an opportunity. But we take into consideration all of the factors, both location, building type, functionality, and, of course, credit. I am not sure if I specifically answered your question, so if you need to follow up, please do.
Arthur S. Cooper: As it relates to that on the credit side, and we do evaluate every credit separately.
Arthur S. Cooper: <unk>.
Arthur S. Cooper: We have to make sure that it pass our muster first and if we could get the pricing to offset some of that risk. We would do so otherwise we are going to pass on an opportunity.
Arthur S. Cooper: But we take into consideration all of the factors both location building type functionality and of course, the credit not sure. If I specifically answered your question. So if you need to follow up please.
David Joseph Storms: That's very helpful. Thank you for taking the time to answer my questions.
Speaker Change: That's very helpful. Thank you for taking my questions sure and just to follow up on what Dave is asking about the group has a long history of underwriting small and midsized businesses, which it turns out are often the.
David John Gladstone: And just to follow up on what Dave is asking about, the group has a long history of underwriting small and mid-sized businesses, which, it turns out, are often the people who are renting our properties. And many times, they're doing it because they want to raise some money to buy something else, not another location, but equipment, or just raise money in order not to have so much debt on their balance sheets. We're very mindful of that, and it sounds like a good thing to do when you sell your property and pay off debt, but... Let's face it, when you enter into a lease, it's almost the same thing as owing money to... to a bank.
David John Gladstone: People, who are renting our properties and many times, they're doing it because they want to raise some money to buy something else.
David John Gladstone: Not another location, but.
David John Gladstone: Equipment or just raise money in order not to have so much debt on their balance sheet.
David John Gladstone: We're very mindful of that and it sounds like a good thing to do when you say.
David John Gladstone: Sell your property and pay off debt, but.
David John Gladstone: Let's face it when you enter into a lease it's almost the same thing is owing money too.
David John Gladstone: So from my standpoint, we're still underwriting these things. Buzz has been doing underwriting of smaller businesses for a long, long time, and so have I; I grew up in that part of the business.
David John Gladstone: Through a bank so from my standpoint, we're still underwriting these things.
David John Gladstone: <unk> has been doing underwriting are smaller businesses for a long long time, and so have I grew up in that part of the business. So we feel comfortable.
David John Gladstone: So we feel comfortable going after some of these businesses, but I'm going to tell you, it's still an interesting thing going on in the marketplace. I really don't expect us to go back anytime soon to really cheap interest rates. We lived for probably seven years with wonderful low interest rates.
David John Gladstone: Going after some of these businesses but.
David John Gladstone: Im going to tell you that it's still an interesting.
David John Gladstone: Thing going on in the marketplace.
David John Gladstone: I really don't expect us to go back anytime soon to really cheap interest rates. We lived for probably seven years with wonderful low interest rate may not be that way now because the government continues to spend so much money there.
David John Gladstone: It may not be that way now because the government continues to spend so much money there, pushing up everything that's tied to any kind of interest rate. So as we look at the world going forward, I think we can continue just to go along like this. Hopefully, we can increase our dividend at some point, but it's not dependent on interest rates coming back to where they were. We've got a strong balance sheet, and we've got a good production of income. Hopefully, it just continues on this way and doesn't go into a bust kind of atmosphere. So, LaToya, do we have anyone else that wants to ask a question? Yes, the next question comes from John.
David John Gladstone: <unk>.
LaToya: Everything that's tied.
LaToya: Tied to any kind of interest rates. So as we look at the world going forward.
LaToya: I think we can continue just to go along like this hopefully we can increase our dividend at some point, but.
John: It's not dependent on interest rates coming back to where they were.
John: We've got a strong balance sheet and we've got a good producing of income so.
LaToya: Hopefully it just continues on this way and then go into a bust kind of atmosphere.
LaToya: Latoya, we have anyone else who wants to ask a question yes.
Operator: Yes, the next question comes from John Massocca with B. Riley Securities. Please proceed.
David John Gladstone: Yes. The next question comes from John Masako with B Riley Securities. Please proceed.
John Massocca: Good morning.
John Massocca: Morning, John.
John Massocca: So can we just provide any update on releasing Outlook for the three leases that are expiring over the remainder of 2024?
John Massocca: So can you.
John Massocca: Can you provide any update on.
John Massocca: Re leasing outlook for the three leases that are expiring over the remainder of 2000.
John Massocca: Sure.
Arthur S. Cooper: We have one that we are in deep discussions with that will provide a significant upside. It represents, gee, I think approximately Uh.., of the 4.6 we have that is expiring at, uh.., has upwards to 3% of it.
John Massocca: Sure.
Arthur S. Cooper: We have one that we are in deep discussions with that.
Arthur S. Cooper: That will provide a significant.
Arthur S. Cooper: Outside it represents.
Arthur S. Cooper: Gee I think approximately.
Arthur S. Cooper: Uh huh.
Arthur S. Cooper: Of the $4 six we have that is expiring.
Arthur S. Cooper: Expiring.
Arthur S. Cooper: Has upwards to 3% of it so we're looking forward to having that.
Arthur S. Cooper: So we're looking forward to having that behind us very quickly. The others are: We have one that's 6,000 square feet. That's not of great concern, and we're hopeful the current tenant will take that over. And we have another that we are in talks with as relates to a lease. So we feel comfortable. We have one other small vacancy of 3,000 square feet with these leases. Obviously, very manageable, and again, the majority is going to. Hopefully, we'll have something to announce on that in the not too distant future as it relates to a nice plus-up and long-term lease.
Arthur S. Cooper: Behind us here very quickly.
Arthur S. Cooper: The others are.
Arthur S. Cooper: Yes.
Arthur S. Cooper: We have one that's 6000 square feet, that's not of a great concern and we're hopeful the current tenant will take that over.
Arthur S. Cooper: And we have another that.
Arthur S. Cooper: We are in talks with as it relates to.
Arthur S. Cooper: Uh huh.
Arthur S. Cooper: A lease.
Arthur S. Cooper: So we feel comfortable we have one other small vacancy of 3000 square feet.
Arthur S. Cooper: With these leases obviously very manageable.
Arthur S. Cooper: And again the majority is going to hopefully we'll have something to announce on that in the not too distant future as it relates to a nice plus up and long term lease.
Gary Gerson: Okay, and then in terms of the incentive fee credit. He used to be walking us through, you know, how the size of the credit in the quarter was determined. I mean, is there any reason why that specific number was credited back?
Arthur S. Cooper: Okay.
Arthur S. Cooper: And then in terms of the.
Gary Gerson: The incentive fee credits.
Gary Gerson: Can you just maybe walk us through how the size of the credit in the quarter was determined I mean is there any.
Gary Gerson: Just trying to think of.
Gary Gerson: Why that specific number.
Gary Gerson: It was.
Gary Gerson: Was credited back.
Gary Gerson: Obviously, in discussions, we felt it was a correct number, if you will, as we are aligned with the stockholder, also relative to the company itself and our employees, that it kept us aligned with the stockholder, but it was something that we felt we should do and could do relative to proceeding with our staff.
Gary Gerson: Obviously in discussions we felt it was a.
Gary Gerson: Correct number if you will.
Gary Gerson: As we are aligned with the stockholder also relative for.
Gary Gerson: The company itself and our employees that it.
Gary Gerson:
Gary Gerson: Does not kept us aligned with the stockholder, but it was something that we felt we should do and could do.
Gary Gerson: Relative to proceeding with our staff and.
Gary Gerson:
Gary Gerson: The stockholder.
Gary Gerson: I guess was it based on like a percentage of the incentive fee in the quarter or a gross number? I'm just trying to think of, you know, why $700,000 and something thousand dollars versus the whole amount, half of it, etc.
Speaker Change: Hey, I guess was it based on a percentage of of the incentive fee in the quarter or.
Gary Gerson: On a gross number I'm just trying to think of.
Gary Gerson: Why that why $770000 versus the whole amount half of it et cetera.
Gary Gerson: John, this is Gary. What we're trying to do is, you know, we want to turn on the incentive fee, but not to a degree that would significantly affect income and FFO. And so although we're going to look at how much we would take over the next couple of quarters, it's going to be at a reduced capacity as we've stated, as Buzz has stated, and the idea here being that, you know, although we're going to take some, it's going to be at a rate that doesn't really, you know, we're trying not to affect FFO because, again, we understand, you know, we're trying to be in alignment with the shareholders.
Gary Gerson: John This is Gary.
Gary Gerson: We're trying to do is.
Speaker Change: We want to.
Gary Gerson: Turn on the incentive fee.
Gary Gerson: But not to a degree that would significantly affect.
Gary Gerson: Income and SSO and so although we're going to look at how much we would take over the next couple of quarters.
Gary Gerson: It's going to be at a reduced capacity as we've stated as <unk> stated and the idea here being that although we're going to take some it's going to be.
Gary Gerson: At a rate that doesn't really we're trying not to affect <unk> because again, we understand.
Gary Gerson: We're trying to be in alignment with the shareholders. So we can't give you an exact amount this amount to.
Gary Gerson: So we can't give you an exact amount. This amount, I mean, to be quite honest with you, it's not really quite scientific, but we did take, I mean, basically a third this time around, and, you know, that's a significant rebate. And if we, I would assume that going forward, you know, that would be the case in the next quarter or two.
Gary Gerson: To be quite honest with it's not really quite scientific but we did take basically a third this time around and that's a significant rebate and if we I would assume that going forward.
Gary Gerson: That would be the case in the next quarter or two.
John Massocca: Okay, that's very helpful. And then, lastly, Amanda, you talked a little bit about dispositions and the ability of some office properties. I mean, maybe looking back on the dispositions that were completed in the first quarter and quarter to date, I mean, who's maybe the buyer for these assets? Is it more of a redevelopment play? Is it, you know, financial owners just trying to get a little color on who's the other counterparty in that market today?
Speaker Change: Okay. That's very helpful and then.
John Massocca: Lastly, I mean, I know you talked a little bit about dispositions.
John Massocca: The ability you think office properties that maybe looking back.
John Massocca: On the dispositions that were completed.
John Massocca: In the first quarter and quarter to date.
John Massocca: Maybe the buyer for these assets is it more of a redevelopment play.
John Massocca:
John Massocca: Financial owners, just trying to get a little color on who's the other counterparty in that market today.
Amanda: Sure and.
Arthur S. Cooper: They don't have to tell us that when we come in the door, but generally, what we have seen and heard is, yes, they're being redeveloped. Some are turning into multifamily apartment types. We've seen one that at least states they're going to turn an office building into a pickleball facility. So it's across the gambit. Obviously, it's a value-add play for them, but honest, you know, as long as they can perform, we're not concerned as much as what they're going to do with the property.
John Massocca: They don't have to tell is coming in the door, but generally.
Arthur S. Cooper: What we have seen and heard is yes, they are being redeveloped summer turning into multifamily apartment types. We've seen one that at least states that are going to turn a office building into a pickle ball facility.
Arthur S. Cooper: So it's across the gamut there obviously is a value add play for them.
Arthur S. Cooper: But.
Arthur S. Cooper: Honest.
Arthur S. Cooper: As long as they can perform we're not concerned as much as to what theyre going to do with the property.
David John Gladstone: John, some of these people are tenants, and they're buying the building and getting control of rents for the future. We're happy to do that, of course.
Arthur S. Cooper: On some of these people are the tenant and they are buying the building and getting.
David John Gladstone: Control of rents for the future.
David John Gladstone: We're happy to do that of course.
John Massocca: Okay, that's very useful, and that's it for me. Thank you very much.
David John Gladstone: Okay.
Speaker Change: That's very useful and that's it for me. Thank you very much.
Speaker Change: Thank you.
Operator: Okay, LaTanya, do you have any more?
Speaker Change: Okay Latanya got anymore.
Operator: There are no further questions in queue at this time. I'll turn it back to you, Mr. Gladstone, for closing comments.
Speaker Change: There are no further questions in queue at this time I will turn it back to you Mr. Gladstone for closing comments.
David John Gladstone: Oh shucks, we wanted some more questions, but we're having fun when we come to these meetings because we have such good shareholders and we enjoy talking to them as well as the analysts. That is the end of this, and thank you all for calling in. Thank you. This, that concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
Speaker Change: Oh Shucks, we wanted some more questions but.
David John Gladstone: We're having fun when we come to these meetings because we have such good shareholders and we enjoyed talking to them as well as the analysts that is the end of this and thank you all for calling in.
David John Gladstone: 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.
David John Gladstone: Okay.
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