Q3 2024 Gladstone Commercial Corp Earnings Call
Please press Star zero on your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce David Gladstone Chief Executive Officer. Thank you. Mr. Gladstone you may begin.
David Gladstone: Well. Thank you for that nice introduction and we thank all of you for calling in today, we certainly enjoy the time, we have with you on the phone and wish there were more time to talk with you.
Now, we'll hear from Michael accounts, He's our general counsel and secretary to give us a legal and regulatory matters concerning this call. This morning, Michael It's David Good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933, the Securities Exchange Act of <unk> 34, including those regarding our future performed.
These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable and many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all the risk factors in our forms 10-Q, 10-K, and other documents that we filed with the SEC.
Finally, as on our website and that's Gladstone commercial dot com, specifically go to the investors page or on the Sec's website, which is www dot SEC Dot 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 discuss <unk>, which is funds from operations.
<unk> 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. We'll also discuss core <unk>, which is generally <unk> adjusted for certain other nonrecurring revenues and expenses and we believe these metrics.
Or a better indication of our operating results and allow better comparability of our period over period performance.
We ask that you visit our website, which is Gladstone commercial dot com sign up for our email notification service also find us on Facebook keyword. There is the Gladstone companies and Twitter, which is at Gladstone comps that today's call is an overview of our results. So we ask that you will review our press release and Form 10-Q.
Both issued yesterday for more detailed information now with that I'll turn it over to Gladstone Commercial's President Buzz Cooper.
Buzz Cooper: Thank you Michael and thank you all for joining today's call. We have several key updates regarding our operations and the broader economic environment first I'd like to share our concern for all those impacted by the recent hurricanes that swept through communities in the southeast our thoughts are with all those affected as it relates to our portfolio.
We fortunately sustained minimal impact our team has been proactive in reaching out supporting tenants in responding promptly to any needs turning to the broader economic environment. The fed in September implemented its first rate cut marketing a change in policy since rate hikes began in 2022 and lowered the bench Mark Fedor.
David Gladstone: Funds rate by 50 basis points to a range of $4, 75% to 5% down from its prior range of $5 25 to five 5%, which had been the highest level in 23 years. This marks a significant reversal after a prolonged period of high rates that negatively impacted capital markets.
We expect additional cuts to follow though the timing and magnitude of those cuts depends on economic indicators.
David Gladstone: September U S job growth surge with employers, adding 254000 jobs significantly surpassing expectations, while unemployment rate also get to $4 one from $4 two.
David Gladstone: While this is positive for the overall economy, the strength of the labor market and the higher than expected inflation in September may push out any further rate cuts continued momentum could create challenges in balancing the inflation concerns with market expectations for lower interest rates.
His election is likely to bring further volatility to the market as fiscal and regulatory policies are debated. We believe our portfolio is well positioned regardless of which party is in office.
David Gladstone: Despite broader economic uncertainties, our portfolio continues to perform well with industrial real estate has been a key growth driver.
David Gladstone: According to Colliers industrial market statistics for the third quarter net absorption in the United States totaled three 9 million square feet, bringing the year to date total to 115 million square feet.
This compares to 180 million square feet of absorption recorded during the same period of time last year and this reflects a 36% decline due primarily to a particularly slow first quarter.
David Gladstone: Of the 77 markets tracked by COVID-19 saw net absorption over 1 million square feet in Q3, while 26 markets turned negative we expect leasing to pick up in the fourth quarter driven by increased economic activity.
On the supply side, new construction slowed to 76 million square feet in Q3, which was 54% lower than last year. This has tempered the rise in vacancy rates, which increased by only 19 bids.
David Gladstone: Which points to a six 6%.
David Gladstone: However for longer rate environment has discouraged new starts from last year and led to declining new completions. So we expect vacancies to begin to decline in 2025.
David Gladstone: Although the broader economic outlook has its challenges we have not observed any significant decline in tenant credit quality across our portfolio.
David Gladstone: And the longer term industrial real estate, specifically manufacturing related real estate is poised for continued growth driven by reissuing and near shoring.
David Gladstone: We are well positioned to capitalize on new opportunities utilizing our expertise in underwriting middle market credits to grow our portfolio of well located mission critical industrial assets.
David Gladstone: Now moving onto a few company portfolio specifics for the third quarter during the quarter, we increased our industrial concentration as a percentage of annualized straight line rent from 62% to 63% and we decreased our office from 34% to 33%.
David Gladstone: We successfully leased or extended more than 242000 square feet across five assets for weighted averaged seven two years. These new leases and extensions resulted in a more than 100000 straight up rent plus up.
David Gladstone: During the third quarter, our portfolio management team has released a region with more than $2 6 million square feet across 10 assets for an aggregate $3 7 million straight line rent plus that we have no remaining expiry expiring leases in 2024.
We acquired industrial asset in Midland, Texas for $10 million with a weighted GAAP cap rate of 994% and a 15 year term. We successfully sold two medical office assets in Georgia, resulting in more than $10 3 million in gain on sale.
David Gladstone: We've.
100% of cash base rents and portfolio occupancy remains at 98, 5%.
David Gladstone: Before turning the call over to Gary <unk>, our CFO I will highlight our plans and goals for the next 12 months we.
David Gladstone: We are proud of our progress since COVID-19, particularly our shift toward a higher concentration of industrial assets.
David Gladstone: Since 2018, all but two acquisitions have been industrial.
David Gladstone: With almost $565 million invested in this property type.
David Gladstone: As capital markets open up we will continue growing our industrial concentration ending to exceed 70% of annualized straight line rent in the next 12 months. We are actively disposing of noncore office assets and currently have one new industrial opportunity under contract for $12 1 million set to close in the fourth quarter.
David Gladstone: <unk>.
David Gladstone: We will continue disposing of non core office assets, we will use office sale proceeds and our existing cash flow to redeploy into industrial assets.
David Gladstone: We will leverage our proprietary in house credit underwriting expertise to capitalize on sale leaseback opportunities a hallmark of our value proposition. Unlike many of our peers. We have the ability to closely monitor our tenants financial health, allowing us to proactively manage risk.
Additionally, we will have the flexibility to structure, our leases and covenants in ways that provide added protection, ensuring long term stability for both us and our tenants.
David Gladstone: We will focus on keeping a healthy and flexible balance sheet as of September 30, we had liquidity of $80 7 million, including $72 million of availability under our credit facility and $10 5 million in cash.
David Gladstone: We remain below a 50% leverage level as of September 32025.
David Gladstone: Successfully completing these goals will better position us for our next stage of growth, including obtaining a credit rating and a private placement and expanding our industrial portfolio in new and existing markets.
Speaker Change: I'll now turn the call over to Gary to review, our financial results for the quarter and liquidity position.
Speaker Change: Thank you both.
Gary: I'll start with some remarks regarding our financial results. This morning by reviewing our operating results for the third quarter of 2024 all per share numbers referenced are based on fully diluted weighted average common shares.
David Gladstone: <unk> and core <unk> per share available to common stockholders were both <unk> 38 per share for this quarter.
David Gladstone: Core <unk> available to common stockholders during the third quarter of 2023% to <unk> 33 to 34.
David Gladstone: Per share respectively, <unk> <unk> for the nine months ended September 30.
David Gladstone: Our $7 eight per share respectively, SSO in core assets over the same period in 2023 were $1 10, and $1 11 per share respectively same store rents increased by 10, 2% in the three months ended September 30 over the same period in 2023 due to a settlement received by one of our properties related.
David Gladstone: Deferred maintenance or same store rent in the first three quarters of 2024 increased by one 4% over the same period in 2023 due to the previously mentioned 2020 for settlement, partially offset by accelerated rent during the same period in 2023, our third quarter results reflected total operating revenues of $39 two.
David Gladstone: With operating expenses of $28 5 million as compared to operating revenues of $36 5 million and operating expenses of $29 6 million for the same period in 2023 expenses were higher in 2023, mainly due to a larger impairment charges offset by the waiver of each.
David Gladstone: <unk> in 2023 looking at our debt profile, 38% fixed rate, 53% is hedged floating rate of 9% is floating rate, which is the amount drawn on our revolving credit facility and one mortgage note.
David Gladstone: As of September 30, our effective average silver was 496% our outstanding Bank term loans are hedged with $310 million of interest rate swaps because the remainder with interest caps, we continue to monitor interest rates closely and update our hedging strategy.
David Gladstone: As of today, we have no 2024 loan maturities and our 2025 maturities are manageable at $10 $5 million as of the end of the quarter, we had $53 3 million of revolver borrowings outstanding during the nine months ended September 32024, we sold 345 million shares of common stock under our <unk>.
David Gladstone: M program, raising net proceeds of $49 $5 million. We also received net proceeds of $700000 from sales of our series F preferred stock through September 30, we continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions at present, we have three properties held for sale.
David Gladstone: As of today, we have approximately $5 $4 million in cash and $73 $3 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 <unk> 30 per share per quarter one.
David Gladstone: Dollars 20 per year, our stock closed yesterday.
David Gladstone: $16 in <unk> and our distribution yield on our stock is seven 5% and now I'll turn the program back to Dave.
Dave: Thank you that was a good report Gary and one from Baas and Michael were both good reports the team has performed extremely well overall and very nice quarter.
David Gladstone: Heard a lot today during the third quarter, we acquired one industrial facility in Midland, Texas for about $10 million, we sold two non core properties. These were.
David Gladstone: Medical offices in Georgia, We also renewed our at least five of our properties. So this company has just continued to move along at a great pace.
David Gladstone: The commercial team is growing the real estate, we own at a really good pace.
David Gladstone: The team is doing a great job managing the properties, we own especially doing.
David Gladstone: These times that I'm not sure of what's going on sometimes but they are challenging and we're managing through it.
David Gladstone: Our team is strong professional group and they continue to pursue potential quality properties.
David Gladstone: On the list of acquisitions they are reviewing in.
David Gladstone: Our acquisition team is seeking strong credit tenants.
David Gladstone: We're looking for.
David Gladstone: Okay, we will stop here and take some questions from people on the phone.
Speaker Change: Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
David Gladstone: Press Star two if you would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing Mr. Qi.
Speaker Change: Our first question is from Gaurav Mehta with Alliance Global Partners. Please proceed.
Gaurav Mehta: Thank you good morning.
Gaurav Mehta: I wanted to ask you on yet.
David Gladstone: I wanted to ask on your <unk> results, you talked about et cetera.
David Gladstone: I had one of your properties can you provide some color on how much the government revenue was.
Speaker Change: The total amount was $2 million.
Gaurav Mehta: Yeah.
Gaurav Mehta: Okay.
Gaurav Mehta: The second question I think in your remarks, you said that your property as held for sale.
Gaurav Mehta: Color on the timing expected timing of the sale of those three properties.
Speaker Change: One of them, we're looking to sell by the end of the year and the other one probably mid next year.
Speaker Change: Okay, and lastly, maybe big picture can you provide some color on what youre seeing in the acquisition market.
David Gladstone: Acquisitions are.
Speaker Change: Now towards the end of the year, we've seen quite a few and we're proceeding.
Speaker Change: <unk>.
Speaker Change: Underwriting currently too.
Gaurav Mehta: We expect to pick up into the.
David Gladstone: First quarter of 'twenty five.
David Gladstone: As you know Gaurav theres lots of competition for such but we are seeing our fair share of actionable deals.
Gaurav Mehta: Okay. Thank you that's all I had.
Speaker Change: Thank you. Thank you next question. Our next question is from Dave storms with Stonegate. Please proceed.
Dave Storms: Good morning.
Speaker Change: Good morning.
Dave Storms: Just wanted to.
Dave Storms: Start by touching on the one new property you mentioned you have under contract.
David Gladstone: Is there any more you can give us maybe around the sense of timing or anticipated cap rate for us.
Speaker Change: On the closing that should occur occur here in the fourth quarter early fourth quarter on a straight line basis. The cap rate over term is going to be over 9%.
Speaker Change: Okay. So also.
Speaker Change: High single digits, just curious maybe your overall thoughts around the cap rates in the markets right now.
Speaker Change: Maybe where you see that going.
Speaker Change: We're hopeful of course with interest rates coming down will affect cap rates for us.
Speaker Change: Again, a very competitive market the sellers I think has gotten a little bit of.
Speaker Change: Understanding as to where the market is today.
Speaker Change: We're seeing competition, but cap rates seem to be coming down a bit.
Speaker Change: And then just one more for me it looks like Oh.
Speaker Change: Couple of tenants dropped off quarter over quarter.
Speaker Change: Just two.
Speaker Change: Regular running of the business. The song of the couple offices in Georgia or is there more to the story there.
Speaker Change: No that would be sales.
Speaker Change: Understood. Thank you for taking my questions and good luck in the fourth quarter.
Speaker Change: Thank you.
Speaker Change: Next question.
Speaker Change: Our next question is from Barry, Oxford with Colliers. Please proceed.
Barry Oxford: Great. Thanks, guys.
Barry Oxford: Built on the cap rate question, you guys have been selling industrial.
Barry Oxford: Buying industrial and selling office.
Speaker Change: What do you see kind of going forward as you implement that plan as far as the cap rate spread between.
David Gladstone: That too because it seems like you would probably be losing a little bit on the cap rate spread.
Speaker Change: Barry I would agree with you.
David Gladstone: Because of the competition within the market. However that being said we also with the obviously the way our stock has performed looking to bring down our cost.
David Gladstone: Of capital So we've had some success there.
David Gladstone: As we recycle out of the office into industrial.
David Gladstone: So we are making ourselves more competitive as we are proceeding.
Speaker Change: Great.
Speaker Change: You touched on your stock price that leaves me to my second question.
Speaker Change: Are you guys going to continue over the next few quarters to have sort of an elevated.
Speaker Change: Tapping the tapping the ATM at an elevated level or not necessarily.
David Gladstone: Barry will probably continue to tap the ATM for.
David Gladstone: To fund acquisitions and to maintain leverage level, maybe to reduce leverage we we did a specifically a large amount over the last quarter our leverage level.
David Gladstone: <unk> picked up.
David Gladstone: During all of the dispositions over the last year. So I think it was an unusual amount for us, but we will continue to sell under the ATM again to finance acquisitions and to keep our leverage level and potentially lower.
Speaker Change: Great all of that makes sense. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: Next question.
Speaker Change: A reminder, the star one on your telephone keypad, if you would like to ask a question. Our next question is from John Ms Silver with B Riley Securities. Please proceed.
Speaker Change: Good morning, everyone.
Speaker Change: Good morning.
David Gladstone: So.
Speaker Change: It looks like kind of capex and leasing commissions jumped up a little bit quarter over quarter or was there something specific driving that and maybe what kind of a rule of thumb on.
David Gladstone: On expectations for those two kind of cash flow line items.
David Gladstone: For the remainder of the year and into 'twenty five.
David Gladstone: John specific as you know we had a large asset in Lehigh Valley that we.
David Gladstone: Fully fully tenanted, we re tenanted with a new tenant.
David Gladstone: It almost double income on the rent side, but that carried with it obviously, a large lease commission as well as modest.
David Gladstone: Modest ti dollars going into that property.
David Gladstone: And so that was part of that tick up but.
David Gladstone: We do not have any foreseen large capex items.
David Gladstone: Coming forward, but we do know obviously that that is good accretive money being put out the door.
David Gladstone: As it relates to the tendency so some of that Capex is very profitable for us.
David Gladstone: Okay.
Speaker Change: And then just to clarify I think you may have mentioned it in your prepared remarks, but did you address the one remaining 2024 lease exploration and maybe what's kind of your outlook for some of the lease is expiring in 'twenty five.
David Gladstone: So relative to that that transaction.
Speaker Change: We have.
David Gladstone: Agreement with a new tenant which will take.
David Gladstone: That property that does mature here in November.
David Gladstone: With an option to buy.
David Gladstone: We've written a 10 year, sorry, seven year lease on that but they have an option to exercise to purchase in the beginning of 'twenty five.
David Gladstone: Our expectation is that they will purchase.
David Gladstone: And relative to 2025, we have four properties that do have maturities in 25 of which one is under.
David Gladstone: Sale.
David Gladstone: To close in the first quarter of 'twenty five other one has a five year lease out for signature.
David Gladstone: One is current tenant we are discussing re upping.
David Gladstone: And then another one is also in discussion very preliminary it has a nine month lead to it as relates to notice that we will begin discussions and we're very close with that tenant.
David Gladstone: In the first quarter of 'twenty five.
Speaker Change: So okay.
David Gladstone: We do stay in front of our tenants and try to get to disc.
David Gladstone: Discussions with them in renewables.
David Gladstone: As early as possible.
Speaker Change: And then just broad strokes in terms of the lease explorations over the next call. It 15 months or those kind of mostly office is that industrial I mean, that's kind of the broad mix I don't need an exact number.
Speaker Change: Yes, no I would say, it's a mix between the two more office and industrial.
David Gladstone: And some of those will be taken care of by dispositions.
David Gladstone: Okay.
Speaker Change: And then lastly, the competitive environment are you seeing maybe with interest rates, having particularly on the short end of the curve ticked down more competition from.
David Gladstone: Some of the buyers that were out there pre 2022 smaller p/e funds.
David Gladstone: Finance oriented buyers or are they.
David Gladstone: <unk> been kind of cautious getting back into the market.
Speaker Change: I believe somewhat cautious we have seen as you mentioned the smaller p/e shop. So we haven't seen opportunities there for sale leasebacks that we've seen out there brokers are giving opinion of value. So we are seeing more as it relates to opportunities there, but certainly our marketplace is competitive.
Speaker Change: Okay I appreciate the color that's it for me.
Speaker Change: Thank you Darren.
Speaker Change: Are there questions.
Speaker Change: I would like to turn the conference back over to management for closing remarks.
Speaker Change: Okay. Thank you very much all of you I hope you've all gone out and voted but only voted for people that are pro industrial real estate. So.
David Gladstone: Thank you all for calling in and that's the end of this we'll catch you next quarter.
Speaker Change: Thank you. This will conclude today's conference you may disconnect at this time and thank you for your participation.