Gladstone Commercial Corporation (NASDAQ:GOOD) Q2 2024 Earnings Call Transcript May 7, 2024
Gladstone Commercial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Gladstone Commercial Quarter Ending March 31, 2024 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Please proceed.
David Gladstone: Well, thank you, Latonia [ph]. Again, you do 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 Erich Hellmold and he’s our Deputy General Counsel, to give you the legal and regulatory matters concerning the call and report today. Erich?
Erich Hellmold: 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 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. 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. We’ll also discuss core FFO which is generally FFO adjusted for certain other nonrecurring 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 e-mail notification service.
You can also find us on Facebook. Keyword there is the Gladstone Companies and Twitter @GladstoneComps. 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.
Buzz Cooper: Thank you, Erich 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% in October of 2023 to 4.3% 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. 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. 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.
Compared to a 52% decline in total commercial real estate volume, sale-leaseback volume fell by 21% in 2023, according to CBRE. 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. 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%. Vacancy is less, particularly in the manufacturing sector, where we see plenty of demand driven by near-shoring 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 ground-breaking in Q1 2024 declined below 300,000 square feet, the lowest volume on record. We made tremendous progress through 2023 of delivering on our current core strategies, divesting noncore office assets, acquiring mission-critical industrial assets in the path of growth markets, renewing expiring leases and diligently underwriting our tenants’ credit. We exited 7 noncore markets and properties located — and completed nearly $30 million in new acquisitions and increased portfolio industrial concentration from 56% to annualized straight-line rent as of December 2022 to 60% as of December 2023. Currently, we have multiple actionable opportunities in the pipeline and 1 opportunity under contract for closing this month.
These opportunities include lease renewals with increased rent and added term as well as potential dispositions. 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 acquisition, our asset management team led more than 1.4 million square feet of leases, resulting in a more than $1.26 million or 13% net increase in same-store GAAP rent. The annualized straight-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 3 noncore office properties. And subsequent to the end of the quarter, we sold an additional noncore office property.
Also subsequent to the end of the quarter, we renewed 3 leases with a weighted average term of 6.4 years and 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-based rents since February 2022. 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. Most of our industrial assets have fixed annual escalations in the 1.5, 3.5 range.
Industrial rent growth over the last few years has exceeded these escalation rates, resulting in rents that are below market for us and are valuable 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%. Only 6 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.
As that normalization happens, we expect we will be well positioned to capitalize on accretive new opportunities. We expect sale leasebacks in particular to be a primary source of new deals. Sale 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. 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.
Gary Gerson: Thank you, Buzz. 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. 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 — the first 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 were 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. 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 our revolving credit facility. As of March 31, our effective average SOFR was 5.34%. 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 1 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 $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 3 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 detailed financial and portfolio information for the quarter.
Our common stock dividend is $0.30 per share per quarter or $1.20 per year. And now, I’ll turn the program back to David.
David Gladstone: Okay. Thank you. That was a good report, Gary and a good one from Buzz and Michael — not Michael; Michael is not here. He’s home with a 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 records of doing good things for our shareholders. During the first quarter, as you heard, we sold 3 office properties. So we’re out of those. Subsequent to the end of the quarter, we sold an additional office property and renewed 3 leases while we’re working on that. And since January of 2023, we’ve sold 11 office properties and presently have — is it 2 or 3 for sale?
Buzz Cooper: 2.
David Gladstone: Just 2. I thought you had another one. We have become an industrial real estate company. We’re away from the office properties that we had. Sold most of those and 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 rate this year and I said it doesn’t make much difference if they cut a quarter in July, 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. Latonia [ph].
Operator: [Operator Instructions] Our first question comes from Gaurav Mehta with Alliance Global Partners.
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