Q4 2024 Gladstone Commercial Corp Earnings Call
Thank you for tuning in.
Speaker Change: Now, we'll hear from Michael accounts, He's our general counsel and Secretary to give you the legal and regulatory matters concerning the call of this report I call them short term okay. Thanks, David and good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933.
Speaker Change: Securities Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable and many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all the risk fat.
Speaker Change: And our forms 10-Q, 10-K, and other documents, we file with the SEC and find them on our website at Gladstone commercial dotcom, specifically go to the investors page you can go to the Sec's website, which is www dot FCC that GL rate now we undertake no obligation to publicly update or revise any of these forward looking.
Speaker Change: <unk>, 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.
Speaker Change: I thought it was 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.
Speaker Change: Metrics are a better indication of our operating results and allow better comparability of our period over period performance.
Speaker Change: Please visit our website once again, that's Gladstone commercial dotcom sign up for our email notification service you can also find yourself Facebook. The keyword. There is the Gladstone companies and Twitter, which is now works at Gladstone comps today's call is an overview of our results. So we ask that you will review our press release and Form 10-K, both issued yes.
Speaker Change: Today for more detailed information now with that I'll hand, it over to Gladstone Commercial's President Busskohl per bus.
Busskohl: Hey, Michael and thank you all for joining today's call.
Busskohl: We look forward to updating you on our quarter and year end results current portfolio and our 2025 outlook.
Focusing first on the broader economic environment last month, Donald trying to send office ushering in a new administration policy goals and economic agenda.
Busskohl: Currently thereafter, the federal reserve announced a pause in interest rate cuts after progress toward a 2% long term inflation target stalled.
Busskohl: Length of the pause is still to be determined but in the meantime, U S treasury yields remain volatile.
Busskohl: Looking back on 2020 for industrial real estate continues to outperform in spite of numerous headwinds, including interest rate volatility inflation and labor disputes.
Busskohl: According to Cushman and Wakefield net absorption totaled 135 million square feet for the year on par with forecast Q4, 2024, industrial vacancy rose by 160 basis points.
Speaker Change: Page seven.
Speaker Change: This pace of increase was the slowest in two years.
Speaker Change: It wasn't that we may approach peak vacancy in the near future finding new deliveries.
Speaker Change: Fell in Q4 2024 for the lowest level since mid 2021, driven by high interest rates and the excess new supply we saw coming online post COVID-19.
Speaker Change: Well industrial fundamentals held up during the year, we have yet to see capital markets fully return.
Speaker Change: According to CBRE for the yearend December 31, 2020 for single asset investment volume increased by five 1% year over year to $67 9 billion in.
Speaker Change: Total commercial rate real estate volume over the same period increased by six 4%.
Moving on to our portfolio. We are once again very confident heading into the new year and quarter three.
Speaker Change: During 2024, we collected 100% of cash base rents acquire.
Speaker Change: Acquired campus properties for $26 8 million totaling 316 727 square feet.
Speaker Change: Increased portfolio of industrial concentration as a percentage of annualized straight line rent to 63%.
Speaker Change: Renewed or extended more than $2 9 million square feet of leases at 11 properties, resulting in a $3 8 million net increase in GAAP rent we.
Speaker Change: We sold seven properties, consisting of five office and two medical office properties.
Speaker Change: We increased portfolio occupancy to 98, 7% as of December 31, 2024.
Speaker Change: And we closed on a 75 million private placement of senior unsecured notes.
Speaker Change: We remain focused on increasing our industrial concentration to at least 70% in the near term we will.
Speaker Change: Not compromise our underwriting standards to achieve this goal.
Speaker Change: Over the past year, we reviewed and under a hundreds of opportunities many of which did not meet our target criteria. We saw numerous opportunities with credits that showed cracks in the face of rate increases are real estate that was over price due to inflation or eager purchasers will not loosen our underwriting standards to acquire.
Are those assets and we are confident our disciplined approach will drive long term value as evidenced by the private placement we did closed in December.
Speaker Change: Looking forward to 2025, we firmly believe that we are well positioned to capitalize on the right opportunities regardless of the economic environment.
Speaker Change: With more than $98 million in availability.
Speaker Change: Our line of credit and cash on hand, we remain well positioned to deploy capital into accretive industrial acquisitions.
Speaker Change: Opportunities are currently under exclusivity or contract with closing expected in the coming months.
Speaker Change: Months, our portfolio continues to generate sustainable cash flow, we have more than 98% occupied as of December 31st and we have not seen our tenant credit quality deteriorated.
Speaker Change: In the face of higher for longer interest rates.
Speaker Change: Our portfolio management team has done a superb job over the last year and will continue to see.
Speaker Change: Those are noncore office assets.
Speaker Change: Finally, our balance sheet is further strengthened by other private placement with a potential for follow on offerings in the future.
Speaker Change: We will continue to be mindful of our overall leverage as we grow our balance sheet and portfolio of mission critical assets I will now turn the call over to Gary.
Speaker Change: Our financial results for the quarter and liquidity position Gary. Thank you Bose. Good morning, everyone. I'll start my remarks regarding our financial results. This morning by reviewing our operating results for the fourth quarter of 2020.
Gary: All per share numbers referenced are based on fully diluted weighted average common shares.
Gary: <unk> and core <unk> per share available to common stockholders were both 35 per share for the quarter.
Gary: S S O and core SSO available to common stockholders during the fourth quarter of 2023.
Gary: <unk> 36 per share and <unk> for the 12 months ended December 31 were $1.41 and $1 42 per share respectively.
Gary: Core <unk> for the same period in 2023, $1 46, and $1 47 per share respectively.
Gary: Same store rents increased by 5% in the three months ended December 31st over the same period in 2023 due to increased straight line rent rates and recovery revenue associated with one of our properties are.
Gary: Our same store rent for the year ended December 2024 increased by two 3% over the same time period in 2023 due to an increase in recovery revenue from our property operating expenses.
Gary: The settlement received at one of our properties related to deferred maintenance during the current period, partially offset by accelerated rent attributable to a lease terminated in a prior period, our fourth quarter results reflected total operating revenues of $37.
Gary: $4 million with operating expenses of $25 million as compared to operating revenues of $35 $9 million and operating expenses of $28 1 million for the same period in 2023.
Gary: Operating revenues were higher in 2024 due to increased straight line rental rates and recovered revenue associated with one of our properties expenses were higher in 2023, and the 'twenty three period, mainly due to larger impairment charges offset by higher proper.
Operating expenses in 2024.
Gary: Looking at our debt profile 40 set 49% is fixed rate, 50% is hedged floating rate and 1% is floating rate, which is the amount drawn on our revolving credit facility and one mortgage note.
Gary: As of December 31st.
Gary: Active average chauffeur rate was 4.49% and 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 2025 loan maturities are manageable at 10 four.
Gary: Yeah.
Gary: As at the end of the quarter, we had $1 $9 million of revolver borrowings outstanding.
Gary: Comparing year end 2024 to 2023, we reduced overall leverage from 46, 1% of gross assets to 44, 1%, we reduced secured mortgage debt from.
Gary: From $283 $9 million to $258 $6 million and reduced total net debt from $726 $9 million to $682 4 million.
Gary: We issued $75 million of senior unsecured notes in a private placements with institutional investors entering a new market for raising long term debt capital and as Bob mentioned, we've increased our percentage of industrial from 60% to 63% and reduced our office from 36% to 33%.
Gary: During the year ended December 31, 2024, we sold 3 million 699, and 597 shares of common stock under our ATM program, raising net proceeds of $53 $5 million.
Gary: We also received net proceeds of $1 $1 million from the sales of our series F preferred stock through December 31st we continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements for new acquisition at present, we have two properties held for sale as of today, we have approximately $8 million in cash and 90 million.
Gary: Availability under our line of credit we encourage you to review our quarterly financial supplement posted on our website, which provides more detail more detailed financial and portfolio information for the quarter common stock dividend is <unk> 30 per share per quarter or $1.20 per year, our stock closed yesterday at $16.04 with.
Gary: A yield of approximately seven 5% and now I'll return the program back to David.
David: Well that was a good report Gary.
Speaker Change: One from Buzz and Michael to that the team that we've got now is performing very well overall, a very nice quarter.
Speaker Change: You heard today in summary during the fourth quarter, we acquired an industrial facility in St player in Missouri.
Speaker Change: We spent about $5 $2 million doing that so we may have some more this month.
Speaker Change: That's the one that we did in the last quarter.
Speaker Change: Sold one nonperforming core property so that's gone.
Speaker Change: And we renewed leases two of our properties. So we are still in very good shape.
Speaker Change: Commercial team is growing the real estate that we own at a good pace and the team is doing a great job managing the partnership the parties that will come.
Speaker Change: Especially during these challenging times our team a strong professionals continues to pursue potential quality properties and the list of acquisitions that were reviewing continues to grow nicely. The acquisition team is seeking strong credit tenants out of people talk about being location.
Speaker Change: And location, we're always into.
Speaker Change: Who is the team that's running the business.
Speaker Change: Let's stop here and the operator, if you'll come on and help some of our listeners ask a lot of good questions for this time, yes, Sir.
Speaker Change: If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question finally, Q and for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys one moment.
Speaker Change: We poll for questions.
Speaker Change: Our first question is from Ravi Mehta with Alliance Global Partners. Please proceed.
Ravi Mehta: Yeah. Thank you good morning.
Speaker Change: Good morning, good morning.
Speaker Change: I wanted to ask you on your balance sheet.
We're going to get some more color.
Speaker Change: Our leverage expectations I think you said, it's 44, 1% as of <unk>.
Speaker Change: Hum.
Speaker Change: Just wanted to hear if that's close to your target number or do you expect your leverage to go lower.
Speaker Change: Then.
Speaker Change: Follow up on the balance sheet also wanting to learn what's your extra expectations are between secured and unsecured debt mix within your current structure.
Speaker Change: Oh, well our goal is to continue to delever.
Speaker Change: Getting down were 44, 1%, we'd like to get that down further probably in the lower forties.
Speaker Change: And then as far as secured debt, we continued to decrease that as an overall proportion of our debt and an absolute basis. So that's really where we're going with that we will get a buildup on the unsecured debt and and but overall less debt on the balance sheet.
Speaker Change: Yeah.
Speaker Change: Okay second question.
Speaker Change: And then a follow up on your industrial focus I think you said, 70% in the near term or do you expect to achieve that 70% this year.
Speaker Change: Garage, we're very hopeful of that obviously, it's going to be in combination of acquisitions as well as dispositions.
Speaker Change: But I believe that we will as it relates to the percentage relative to straight line rent.
Speaker Change: Okay. Thank you that's all I had.
Speaker Change: Thank you. Thanks, a lot okay do we have another question operator, yes. Our next question is from Rob Stevenson with Janney Montgomery Scott. Please proceed.
Rob Stevenson: Hi, Good morning, guys, but given your acquisition commentary can you talk about the market depth today for the office assets that you want to sell over the next 12 months to 18 months are the transactions happening and you know what the sort of pricing looks like these days relative to <unk>.
Rob Stevenson: 612, 18 months ago on the office side.
Speaker Change: Sure. Thanks, Robin as you know we've been very selective on our sales we are.
Rob Stevenson: Are not looking to just sell to sell.
Rob Stevenson: We our office portfolio as a vacancy factor of 7%, but as we look to sell it's going to be opportunistic at this point in time.
Rob Stevenson: As well as we want to make sure that we backfill that income that we may be losing with industrial income.
Rob Stevenson: So I think we will identify a four or five that we will sell here during the year, but if we see something opportunistically on the sales side relative to office will take it.
Rob Stevenson: We know it's important to continue to drive down that alpha <unk> portfolio, but again I would.
Reiterate it is performing.
Speaker Change: Okay, and where is the 130 basis points of vacancy today is that aggregated in one or two assets and what's the prospects for re leasing or selling those in 'twenty five.
Speaker Change: The majority of the occupancy excuse me vacancy is in one or two assets, a couple of which that Oh.
Speaker Change: From expiring rents here for instance.
Speaker Change: The property and Carolina, that's going to fall off the books at the end of March at.
Speaker Change: At the expiration of that lease so.
Speaker Change: So we won't have that office property to re lease or have to worry about majority is one or two.
Speaker Change: Assets, but as it relates to our overall.
Concerns over this year, we have a two of the properties that make up approximately 3% of those leases that are coming due or scheduled to be sold.
Speaker Change: Or have a lease in place that they have an option to purchase.
Speaker Change: Hum.
Speaker Change: The others that we have specific to office, we have turn proposals on two of those buildings and are waiting response to extending the leases.
David: Okay. That's helpful and then one for you David.
David: How should we be thinking about the incentive fee waivers going forward as twenty-five likely to look a lot like how you did it in 'twenty four is there something fundamentally flips in 2025 and commercial goes back to paying the entire incentive fee. This year, how should we be thinking about that as we are.
David: Play with our models over the next few days.
David: So as you can imagine everybody here would like to go back to the original and so they're working hard to fill.
David: Fill in where they need to fill in in order to get it back to a stronger payment to the employees here.
David: But you know our position we don't pay ourselves that we're not doing a good job for our shareholders shareholders first.
David: This company.
Rob Stevenson: Rob I wish I knew the projections well enough to say to you when it will.
David: Back to that but I don't have a date, yet and mine and.
David: I think we're gonna be much stronger this year than we were last year. So hopefully that gives you a feeling of security about what we're doing here.
Speaker Change: Okay perfect. Thanks, guys I appreciate the time this morning.
David: Thank you.
Speaker Change: You have any more questions. Yes. Our next question is from John Michel Good with B Riley Securities. Please proceed.
Speaker Change: Good morning.
John Michel: Good morning, good morning, maybe starting off with the balance sheet.
Speaker Change: Given the.
John Michel: Private placement unsecured issuance.
John Michel: You recently completed or is that kind of how we should expect.
John Michel: Funding to go forward and I guess is that pricing kind of the correct.
John Michel: Pricing at least in the current market in.
John Michel: In terms of interest rate.
John Michel: John It's Gary I think we should expect that to be not our primary mode of financing. Obviously, we have the line of credit we have bank term loans, but yes, we intend to continue on with private placements.
John Michel:
John Michel: The market willing that the interest rate, we got we thought was pretty strong for a first time issuer. So.
John Michel: Hopefully indicative and hopefully maybe even less in the future.
John Michel: Okay.
Speaker Change: Helpful. And then on the leasing front can you just provide a little color on leasing activity in <unk>. I know you gave kind of numbers and metrics, but where those industrial assets office properties and kind of maybe I didnt rents trend versus.
John Michel: What was in place before.
John Michel: Renewal or re leasing.
John Michel: They were both office and industrial majority was industrial Ah. They also were.
John Michel: Plus ups as it relates to industrial but also in the office.
John Michel: Steels, we're mostly on five years, we see that trend continue.
John Michel: Continuing.
John Michel: As we look to renew.
John Michel: Current office.
John Michel: Our buildings and then on the industrial side various pockets around the country and again, we did see a large one last year up in Pennsylvania.
John Michel: We are seeing a plus up in rents as it relates to those renewals.
John Michel: And then I know you guys talked of in the law.
Speaker Change: Last earnings call, but maybe more in the context of 2025, just broad strokes, what's kind of the capex expectations just.
Speaker Change: Balancing the relatively small amount of leases expiring.
Speaker Change: In the current year versus maybe some more meaningful lease expirations in 2006 and 2007, just trying to think about how.
Speaker Change: Spending there might go in the current year.
Speaker Change: Obviously your Capex that we have been spending on renewals is what I'll term positive capex for us both with the retention of the tenancy, but it does bring an increase in rent.
Speaker Change: So we don't have a lot of expense from a capital.
Speaker Change: Exposure point within our buildings.
Speaker Change: Majority of it is leasing expenses and improvements.
Speaker Change: Improvements to the buildings.
Speaker Change: Of that we have it budgeted we are it's very manageable.
Speaker Change: But again a majority of it has been or will be here in the certainly next nine months going to be for those dollars that we had to spend in leasing commissions in order to have the nice plus up that we had coming out of 2024.
Speaker Change: Okay.
Speaker Change: That's helpful. That's great. Thank you so much.
Thank you.
Speaker Change: Okay do we have any other questions today, yes, three to our next question is from Dave storms with Stonegate capital. Please proceed.
Speaker Change: Morning.
Speaker Change: Good morning, Dave.
Speaker Change: Good morning, just hoping to maybe get a sense of around the timing for.
Speaker Change: For some that you held for sale.
Speaker Change: I think either.
Speaker Change: Okay.
Speaker Change: As.
Speaker Change: As to timing.
One is going to be in the April 1st.
Speaker Change:
Speaker Change: Per our contract and we don't see a reason for that not to occur.
Speaker Change: And the other would be in the second quarter.
Speaker Change:
Speaker Change: I think early early April most likely.
Speaker Change: Understood. Thank you and then just as it relates to the recycling program.
Speaker Change: Is there any sense of what you're seeing in the spread in cap rates between maybe those held for sale.
Speaker Change: Assets in.
Speaker Change: What you might have in the acquisition pipeline.
Speaker Change: Dave I'm not sure I understand that question unless you're asking the cap rate difference between sale to acquisition.
Dave Storms: Yes, essentially.
Dave Storms: So obviously on the acquisition side, we are seeing cap rates and need to play in an area of seven and a half that.
Eight.
Dave Storms: Going in basis, our sales are.
Dave Storms: Probably somewhat a little bit higher than that just because their office.
Dave Storms: But not dramatically so.
Dave Storms: Because we don't have the pressure to other than within the industry to get office are off our books, we can be selective.
Speaker Change: Understood. That's very helpful. Thank you and then just one more for me.
Speaker Change: Are you seeing any early impact from some of the rhetoric around tariffs.
Speaker Change: And some of them okay.
Speaker Change: Implementation of the tariffs.
Speaker Change: Yes. Thank you for that we've canvassed, our tenancy do not see an immediate impact as it relates to the potential threat of tariffs of course, we've got to see where they are who and where they hit but our tendency currently does not is not expressed any such fear.
Speaker Change: We are looking for that it may help create more industrial opportunities with reassuring onshoring.
Speaker Change: So we are not currently.
Speaker Change: See a great deal of stress as a result.
Speaker Change: That's all for me thank you.
Speaker Change: Thank you.
Speaker Change: Hey, do we have any other questions today, yes. Our final question is from Craig Kucera with loop capital markets. Please proceed.
Craig Kucera: Yeah, Hey, good morning, guys.
Craig Kucera: Just following up on some of the discussion on capital recycling can you give us a sense broadly of the dollar amount of what you might be acquiring and selling.
Craig Kucera: You're as you're reviewing things.
Craig Kucera: On the acquisition side I'm, hoping that it is a good bit more than what we had in 2024.
Craig Kucera: Looking forward to getting back to our what I'll call. What I think is more normal production of.
Craig Kucera: Oh 100, a million a year.
Craig Kucera: So I'm hopeful for that I think we have a pretty good pipeline going in there not all booked obviously.
Craig Kucera: And as it relates to the dispositions that will allow us to be more discerning in our dispositions looking to.
Craig Kucera: Get rid of some of the office assets that we feel might be problematic down the road.
Craig Kucera: As it relates to what people are looking for in the marketplace. We've been I think pleasantly surprised with some of our dispositions on the creative activity of the buyers either turning it into pickle ball is turning it into a single family in apartments.
Craig Kucera: And again just to remind we don't have properties and C. B DS so as a result.
Craig Kucera: There's some local buyers that to find some of our properties attractive to reposition.
Craig Kucera: Okay. Great. You mentioned you had the North Carolina asset I think it was an office asset expiring at the end of this quarter, which you expanded the expected to sell.
Craig Kucera: But for the remaining 2025 explorations are those office or industrial.
Craig Kucera: One is in industrial.
Craig Kucera: That is again under a lease with a purchase option, which we believe will get exercised and two others. Our office of which we do have and that's approximately 101000 is 110000 square feet. We do have have exchange paper as it relates to renewals.
Craig Kucera: Got it and just one more for me you did re class at least as a sales type this quarter.
Craig Kucera: Is that going to still be a component of the base management fee calculation.
Craig Kucera: Yes that that will be.
Speaker Change: It's an odd.
Speaker Change: <unk> kind of addition to the accounting this ASC 842.
Speaker Change: This is the the property and the industrial property that <unk> mentioned and when they entered into the lease in November with our expectation of a sale we had given the guidance.
Speaker Change: Reclassified classified it as a sales type lease it's kind of an odd deal. That's one of the reasons, we have that large gain on sale on our balance sheet on our income statement and.
Speaker Change: So, but yes to answer your question, we are accounting for that as part of the base management fee. It's still a piece of real estate on our balance sheet, but even though it's not on our balance sheet as a piece of real estate.
Speaker Change: Got it that's that's.
Speaker Change: That's what I figured I just wanted to double check. Thank you. Thank you that's all for me.
Speaker Change: Okay any more questions today, there are no further questions.
Speaker Change: Well that was a little bit better than last quarter in terms of number of our questions, but we'd love to have more questions. So next quarter I Hope you guys get all tuned up and ask lots of questions because we enjoy answering them and I know our audience likes to hear.
Speaker Change: Alright, that's the end of this.
Speaker Change: Presentation, and so we'll say goodbye until next quarter.
Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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