Q3 2025 Gladstone Commercial Corp Earnings Call
Greetings, and welcome to declad Stone commercial Corporation, third quarter earnings conference call.
At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone 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, Mr. David glasstone CEO, thank you. You may begin sir.
Well, thank you. It's a lot of good to hear from you again. That's a nice introduction, and thank you all for calling in this morning.
We enjoy this time. We have with you and
when the phone and I wish we had more time with you now, turn the turn it over to Katherine kirkus, she's our director of investor relations.
And she'll provide a brief overview, regarding certain items.
In this report today, Katherine go ahead.
Good morning, today's call may include forward-looking statements.
Which are based on manage.
Estimates assumptions. And
there are no guarantees of future performance and actual results May differ materially from those expressed or implied. In these statements due to various uncertainties including the risk factors set forth in our SEC filings which you can find on the investors page of our website. Gladstone commercial.com
We assume no obligation to update any of these statements unless required by law.
Please visit our website for a copy of our form, 10 q and earnings, press release for more detailed information. You can also sign up for our email notification service and find information on how to contact our investor Relations Department.
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Today we'll discuss ffo which is funds from operations. 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 may also discuss core ffo.
Is generally ffo adjusted for certain other non-recurring revenues and expenses. We believe these metrics can be a better indication of our operating results and allow better comparability of our period over period performance. Now let's turn the presentation to buzz Cooper Gladstone commercials president
Thank you, Katherine, and thank you all for joining today's call. We look forward to updating you on our results for the quarter ending in September 30th, 2025 our current portfolio, and our 2025 Outlook.
From a macro level Q3 provided a welcome sense of stability and positivity in the capital markets, the FED reduced their funds rate by 50 basis points this year, and long-term rates trended downward as well with the 10-year treasury making its way back to the 4% range.
New acquisition offerings, had the typical summer slowdown with an uptick after Labor Day weekend. We also noticed, a gradual downward Trend in asking cap rates, which we expected, as those tend to move in harmony with long-term treasury yields.
In spite of the standard summer slowdown are team achieved several key accomplishments both at the balance sheet and portfolio levels.
Dealing with a portfolio first, as we have discussed in the past, we remain steadfast in several key, Focus areas.
Adding value to our existing portfolio through renewals, extensions, strategic capital investments, and disposing of non-core assets while strategically redeploying those proceeds into industrial assets.
By concentrating on these. Can you focus areas? We expect to achieve increased portfolio, Walt, strong, occupancy, rates and straight line, rental growth portfolio.
These Focus areas drove our activity in Q3.
Regarding industrial concentration. We acquired a 6 faced Regional industrial manufacturing portfolio via a 54.5 million sale East back transaction.
This brings our acquisition total for the year, through Q3 to 206 million and brings our industrial concentration to 69% of our annualized, straight line rents, compared with industrial concentration of 63% at the start of the Year, we're making great progress along those lines.
As relates to our working, our existing portfolio, our asset management team continues to effectively manage the existing portfolio.
Evidenced by 100% collection of cash-based rents in the period.
Completing leasing activity of 734,000 square feet with remaining lease terms ranging from 7 years to 11.4 years at 14 of our properties provided a total straight-line rental increase of $1.1 million.
And the disposition of 1, non-core, industrial property.
These combined efforts, as of September 30th, the portfolio is 99.1% occupied which is the highest since q1 of 2019.
The weighted average lease turned to 7.5 years as the longest Walt at quarter ends since q1 2020.
Same store, lease revenues increased by 3.1% compared to the same period a year ago.
And each of these milestones is a testament to the mission-critical nature of the assets in our portfolio.
Quality of tenant credit and our underwriting.
In short, our relationship with our tenants at the Capital Market community and our financial capability have allowed us to execute Upon Our focused areas at a high level.
Moving to the balance sheet, I'll allow Gary to share the specifics during his remarks, but we also worked hard on our balance sheet during this quarter as such in addition to increasing our Equity base through, stock issuance throughout the quarter and subsequent to the end of the quarter, we successfully increased our credit facility at 600 million extending and laddering.
Our debt maturities.
We are grateful to our lenders for their continued, trust and partnership with us.
The long-standing relationships are critical to our continued investment in the current portfolio.
and the addition of mission critical industrial real estate going forward,
Also looking ahead to the fourth quarter, we remain focused on evaluating opportunities to acquire high quality industrial assets that our mission critical to tenants and industries and accredited to our long-term strategy.
At the same time, we will work to continue with our existing tenants to extend, leases capture Mark to Market opportunities and support tenant growth through targeted, expansions Capital Improvement initiatives, and build a suit opportunities.
While we may know aware of the challenging loss environment, we will be strategic and intentional and evaluating our specific portfolio.
Seeking opportune times to dispose of office and non-core Industrial as part of our continued Capital recycling efforts.
With the availability of via increase line of credit and access to private placement, bond market, cash on hand, and the ability to raise Equity at our ATM. Although currently, we believe our stock price, does not reflect the quality of our portfolio. Tenant credit and shareholder returns. We are positioned to deploy Capital into a creative industrial Acquisitions and portfolio improvements.
In closing, these last several quarters have seen a lot of activity in the team is focused on continuing their efforts as if we head toward 2026.
We are pleased with their efforts and their accomplishments.
I'll now turn the call over to Gary to review our financial results for the quarter and liquidity position. Thank you buzz. I'll start my remarks regarding our financial results. This morning by reviewing our operating results. For the third quarter of 2025 all per share numbers referenced are based on fully diluted weighted average, common shares ffo and core ffo, share available to Common stockholders. For both, 35 cents per share respectively,
20252 and 1 and 3 cents per share respectively, ffo and core ffo. For the same period in 2024 were $17 and 1 and 8 cents per share respectively.
Same store, lease Revenue increased by 3.1% in the 9 months, ended September 30th in 2024 due to an increase in recovery revenue from property expenses and an increase in rental rates from leasing activity, subsequent to the 9 months, ended, September 3020 24th. Partially offset by a
Settlement received at 1 of our properties related to deferred maintenance in the prior period.
Our third quarter results, reflect the total operating revenues of 40.8 million. With operating expenses of 26 million as compared to operating revenues of 39.2 million and operating expenses of 28.5 million for the same period in 2024 operating revenues were higher in 2025 due to increased recovery and higher rental rates. Expenses were lower in the third quarter of 2025 versus the same period in 2024 mainly due to an impairment charge in 2024 and crediting back all the incentive fee in, 2025 offset by higher depreciation and property operating expenses in 2025, in Q3 we increased net assets from 1.1 from 1.21 billion to 1.265 billion, which was the result of the portfolio acquisition in this quarter. During the quarter, we increased our revolving
Commitment by $30 million to $155 million. Subsequent to the end of the quarter, we extended an upsized bank credit facility to $450 million in term loans and a $100 million revolver. The revolving credit facility maturity was extended to October 2029, and the maturity dates for Term Loan and Term Loan B components were extended until October 2029 and February 2030, respectively. The amended credit facility also provides the company with options to extend the maturity dates of the revolving line of credit and Term Loan C components until October 2030.
October 2030 and February 2029 respectively. The transaction led by KeyBank as joint leader Ranger and book manager, as well. As Bank of America, the Huntington National Bank and Fifth Third Bank, National Association, as joint leader Rangers, sonova bank and S&T also renewed. Their commitments. In addition PNC Bank, and Webster Bank, both joined as lenders as of today. We have no remaining 2025 loan maturities and 28.28 million of loan maturities in 2026. As of the end of the quarter, we had 145.4 million and revolver. Borrowings outstanding looking at our debt profile. As of September 30th 39% was fixed rate. 37% 37% was hedge floating rate and 24% was floating rate which is the amount drawn on our revolving credit facility and the amounts outstanding on
Term loans, B, and D. As of today, all of our term loans are hedged to maturity. And only 13% is floating rate as of September 30th. So for was 4.4, 4.24%, our outstanding Bank term loans are all hitched to maturity with interest rate swaps. We continue to monitor interest rates closely and update our hedging strategy as needed during the 9 months, ended September. 30 2025 we sold 4.4 million shares of common stock under our ATM program, raising net proceeds of 61 million. We continue to manage our Equity, activity to ensure that we have sufficient liquidity for upcoming Capital requirements and new acquisitions. As of today, we have approximately 6 million dollars in cash and 63 million of availability under our line of credit. We encourage you to review our quarterly Financial supplement posted on our website, which provides more detailed financial and portfolio information for the quarter. Our common stock dividend is 30 cents.
Per share per quarter or 1 dollar and 20 cents per year and now I'll turn the program back to David.
Well good morning, okay have a good 1, buzz and Catherine too.
The teams are really performing very well overall, a very nice quarter for all of us. I enjoy those dividends. I'm sure you guys do.
We acquired a 6, facial portfolio for a total of 54.5 million during the quarter and we sold 1 industrial property.
Completed leasing activities on 14 properties, comprising of 70 734, ft.
As an annual increase in our straight line rents of about 1.1 million dollars. So that's nice to see.
Subsequent to the end of the quarter, we extended an increased, our bank credit facility, which is now at about 600 million.
The commercial team is growing. The real estate we own.
and a nice paste and we're doing a good job of
Properties. We own especially doing some of these challenging times that we have,
Our team is strong professionals and continue to pursue potential quality properties and list of Acquisitions. They are reviewing and our acquisition team is seeking strong credit tenants.
Well, that's a good summary. And let's move on now to some good questions from those. So operator Catania, could you come on and call on these people and let's hear some questions from them.
Sure, 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 light is in the question queue.
You may press star 2. If you would like to remove your question from the queue, for participants use to speak recruitment, it may be necessary to pick up your handset before pressing the star Keys. Once again, that's star 1 1 moment while we post our first question.
The first question comes from gurava with Alliance Global. Please proceed.
Thank thank you. Good morning. Hi morning. I wanted to ask on your industrial allocation it's uh it's running close to 70% Target that that you've talked about in the past. Uh once we get some more color on on what you expect going forward, you expect that industrial allocation will uh keep increasing Beyond 70%, or are you around where it won't want you to want it to be?
Thank you rob. Yes, we do anticipate that increasing going forward. Obviously there may be some ups and downs as relates to dispositions within the portfolio. Uh but our intent is to uh, increase our industrial percentage as it relates to the straight line, rent going forward. Uh certainly uh for the foreseeable future.
Okay, second question, I want to ask is on your expenses the same property, uh, operating operating expenses for third quarter and year to date are running uh, and more than 20%, just want to get some more color. On the expense, increase your sing in your portfolio.
I've never had some Capital expense items. Are you talking about operating expenses?
Yeah, same property. Operating expenses.
And we have you know unfortunately we've seen uh it increases in expenses mainly due to uh things like inflation and uh and that's that's 1 of the main drivers.
Insurance. Yeah. And that's and those. Yeah, those are the and and insurance is is that's being driven by, you know, returns for insurance companies, as well as.
Uh, insulation. And as, you know, garage, we pass on to the tenant and, uh, what we can and charge them back, uh, as it relates to the structure of the lease. But as Gary references, we have seen obviously a little effect of, uh,
Inflation and and costs Rising.
okay, and then lastly on the capital expenditure for third quarter, at more than 10 million, it's can you provide some more color on wardrobe that higher,
Uh, what drove that higher was, uh, renewals you notice? We had several, uh, renewals both from the second quarter into the third quarter. And so as a result of that that's positive capex, a creative 2 uh company as relates to those dollars. Put out, obviously our uh keeping tenants adding tenants.
Um, and with increased rents.
Okay, thank you. That's all I had.
Thank you.
The operator. Do you have some more questions?
Next question. Comes from Barry Oxford with colleagues please proceed.
Great thanks. Uh Dave just to uh build on that uh uh capex um being higher in the quarter. How how do you think of that in relation um to the dividend? Are you confident in dividend? When you look at your capex expenditures going out? Now I realize that that's kind of, you know, good capex because on the renewals you're going to be getting higher income going forward. But how do you think about the dividend in relation, uh, to the capex?
Uh, the dollar is going out, are a creative. Uh, so I don't see that it it has an effect relative to uh the dividend other than at some point in time uh increasing.
Okay.
Um, and then, uh, Switching gears.
The Acquisitions pipeline for now and going out into 26. Do you feel you can match 25?
Or you know or or just too early.
I think it may be a little too early we obviously plan to and hope to, we have uh 2 transactions currently that uh we'd love to see getting the door perhaps by the end of the year, if not into the next, I think 1 may fall into this year. Um, competition is we have referenced previously and I think is all all of us do is strong. Um, but again, as we've, uh, worked on our balance sheet, and look to bring our cost of capital down, we believe will be able to be competitive in the marketplace. And again, the team is doing a, uh, a really strong job uncovering. Uh,
Off-market transactions, as well as repeat transactions.
Okay, great. Appreciate it, guys.
Thank you. Thank you.
The next question comes from.
Sure, the next question comes from Craig. Coutier with Lucid. Please proceed.
Uh, yeah. Hi. Good morning guys. Um,
I saw on the Queue that you had 1 lease termination, uh, can you give us some color on the tenant and what type of asset it is?
And was that?
The termination fee. No, we didn't have a termination fee. We had 1 lease termination. I believe that was the uh
sale of, um,
House of Outdoors. Yeah.
Okay, I thought I saw some accelerated right now. I was just trying to figure out when and how that would be recognized because none of it has been recognized yet here today,
um,
We'll look into that. I, I honestly, it it, uh, I need to
I'm trying to get a little help here.
Oh, okay. We, we did have 1 small 10 in quest that we did, uh, terminate and we're rolling into a new lease within that building. Yeah, so there's a new in Ohio, so, the termination was let the tenant out, but a new tenant jumped, right in and took more of that space in the building.
Got it. So will that will that remaining?
Termination fee, be recognized in the future. Or is that not going to be right? No. No, no, there. There was no fee. We just terminated that and rolled right into the new tenancy. Okay?
Okay, that's helpful. Um, changing gears. Uh, you know, you stepped up and and certainly added to your Automotive exposure here with the with the portfolio acquisition. Uh I think it's now about 15% of your ABR um just given the recent bankruptcy news out there, I'd be curious to hear your thoughts on on the space and how it relates to uh you know, what's in your portfolio.
Uh, 1 Thing, of course, and we've shown this over the years we do extensive underwriting within our Tendencies, as you know, and we have a robust investment committee. We do keep an eye on our concentration, uh,
Yeah, we have 1 asset that, you know, with GM down in Austin, Texas that is not for lack of a better word. Um,
Concerning from a credit standpoint nor are they a manufacturer? It is an office building and that does mature at the end of next year. So we are currently looking to reposition that property as we get into next year with hopeful additional tendency or end user. So when you do calculate that we have to take into consideration, the fact that that's strictly just an office building in a good Market, but unfortunately, in Austin, there currently is about 5 million dollars, both industrial and office under construction.
So we have heavy competition there.
Um,
But as I I mentioned that we do underwrite heavily keep an eye on concentration, but we feel confident with the tendency that we have.
Okay, great.
Um, your Leverage is picked up year-over-year. You've obviously been very active in the acquisition Market, um, issued some Equity but mostly debt. I'm curious. Are you looking to maybe ramp up your assets sales to maybe bring down leverage, or or any
Dispositions on the horizon expected.
no, I mean, we'll we'll continue to
With our Capital recycling program to reinvest into, uh, you know, into more, um, you know more secondary markets from tertiary markets, industrial from office and so forth, but uh, what we will probably be doing is, um, you know, issuing a little more equity and bringing our leverage down up.
Cells and we're going to, you know, we're not going to go higher on the leverage than we are today.
The next question comes from Dave storms with Stonegate please proceed.
Morning. Thank you for taking my questions.
Um, just want to start maybe trying to get a read on where you see cap rates at or go. And I know it was mentioned in prepared remarks that you're seeing rates, move down, uh, with the rate cut the Fed rate cut, uh, but it looks like between last quarter's Acquisitions, uh, to this quarter's Acquisitions. The, you know, weighted average, uh, cap rate expanded by like 65 basis points or so. Uh, is this more 1 off, uh, transactions, or maybe just any thoughts there around cap rates.
Uh, we do see cap rates coming down. I think that, uh, there was anticipation of a greater rate cut than what our current. Uh, so that had an effect obviously, and does at the moment, we'll see what happens. I guess in December. Um, but we do see cap rates and pressing a bit. Uh, so we hope to take advantage of that again from our capital and the cash that we have on hand.
Um, but we are seeing good accretive plus 8.5, uh, on average cap rates for us. Um, and we just hope to find other good solid... and you notice we've moved up as it relates to size of transaction, uh, going forward at the end of this year, but also into 2026.
Very helpful. Thank you.
And then maybe just, uh, circling back to some of your...
My writing, uh, are you seeing any impact from the government shutdown on any for tenants? Uh, maybe getting Club as you know, second order impacts anything like that.
We actually have not. And as you know, we have a very robust property, management team. Uh, 1 of the foundations of this company is our underwriting and the portfolio management team staying in front of our Tendencies and they have not as they've checked in with them. Had expressed. Great concerns. As of this moment, as it relates to the shutdown,
Well, thank you for taking my questions.
Thanks Dave.
The next question comes from. John laka with B Riley. Please proceed.
Good morning. Um, touching on the capex morning, maybe touching on the capex spend, uh, during the quarter a little bit more. I mean, is that typical of what we should expect going forward, as you kind of address some of the
Remaining 26 and 27 lease expirations and get in front of them or um was this corner? Just because the amount of leasing activity. May be a little abnormal relative to what you would expect as we look into 2026.
Uh, yes, I would say, you're correct. Just as we did have great success, uh, with a great number of releasing as we look forward into 26. And even 27, uh, several of our tenants, we've been in contact with all of them. And we feel confident on the renewals and the properties involved. Honestly, we don't see the heavy capex. We've had this past, uh, 9 months, past 3 quarters, uh, we do see a trailing down. So, uh, again, it's good dollars spent but we are not anticipating as heavy a hit.
and now in in the spending in the quarter, is that reflected all the mix of the lease
Leasing activity between office and industrial was it. I guess it was a heavier office component this quarter, or just kind of curious if there's some other factor involved.
Uh, no other factor involved is a combination between the 2 with uh and again offices more expensive than industrial. So it was more weighted toward office which of course extending those terms will become part of our Capital recycling, moving out of office.
And then on the investment front, just given where kind of cost of capital is moving both on the debt and equity side, um, for you all.
How should we think about, um, kind of a return hurdle you're looking at either in terms of a gap cap rate, cash cap rate irr? I mean um are are you still you think in a place where your cost of equity Capital allows you to be um aggressive on the acquisition front and um
A kind of, how is that looking versus what you're seeing in terms of cap rates movements in the pipeline?
And, uh, the cap rates within the pipeline if you will. And what we see is some compression we do believe will and has to, as we analyze our transactions, depending on where our cost of capital goes. We're averaging north of 8 and a half.
Um, and I see that going forward.
Move up the chain is released the size a little bit. Hopefully, we'll have a little better efficiency as it relates to those cap rates.
But I mean, I guess at 8 and a half if that's where Cap rates are today. Do you think you're able to kind of, you know, your cost of capital is at a place where that's
Uh, essentially you have a green light to acquire assets.
Yes.
Um,
yeah, that's it for me. Thank you very much.
Thanks John.
Thank you at this time. I would like to turn the call back over Mr. David glahn for closing comments.
Well, thank you. Oh, we've got a good team and they've done a good job and we continue to grow the assets and pretty soon. We'll catch up with some of those bigger.
Bigger deals out there. But hopefully this next quarter is going to be just as good as the past quarter.
That's the end of this and we thank you all for calling in next time, be more prepared with more questions we like questions because that tells us where you're thinking and where you're going.
Yeah.
Thank you.