Gladstone Commercial Corporation Q2 FY2025 earnings call

• Broader economic environment: Second quarter 2025 was shaped by uncertainty, but industrial real estate remained steady with net absorption of 29.6 million square feet, vacancy rate at 7.1%, and new construction completions at lowest since Q1 2019.
• Portfolio performance: Collected 100% of cash-based rents in Q2 2025, acquired two industrial facilities, increased industrial concentration, maintained 98.7% occupancy, sold one office property for a gain and completed sale of an industrial property, increased weighted average remaining lease term to 7.1 years, deployed $79 million in capital for new industrial acquisitions.
• Future focus: Remain focused on acquiring high-quality industrial assets, selectively dispose of noncore assets, extend leases, capture mark-to-market opportunities, and strengthen balance sheet.

In the second quarter of 2025, Gladstone Commercial Corporation's industrial segment was a key focus. They acquired two industrial facilities totaling 519,093 square feet for $78.95 million. The industrial portfolio concentration as a percentage of annualized straight-line rents increased to 67%. Portfolio occupancy was 98.7% as of June 30, 2025. Financial results: FFO per share for Q2 2025 was $0.33, core FFO was $0.35 per share. In Q2 2024, both FFO and core FFO were $0.36 per share. For the 6 months ended June 30, 2025, FFO was $0.67 per share and core FFO was $0.69 per share, compared to $0.69 and $0.70 per share in the same period of 2024. Same-store rents increased by 6.4% in the 6 months ended June 30, 2025, over the same period in 2024 due to increased property expense recovery revenue and higher rental rates from leasing activity.

• Focus on acquiring high-quality industrial assets that are mission-critical to tenants and industries and accretive to long-term strategy.
• Continue to selectively dispose of noncore assets to further improve the portfolio.
• Actively work to extend leases, capture mark-to-market opportunities, and support tenant growth through targeted expansions, capital improvement initiatives, and build-to-suit opportunities.
• Strengthen balance sheet with ability to deploy capital into accretive industrial acquisitions using line of credit, cash on hand, and ATM equity.

• Economic uncertainty including tariff impacts and mixed signals around inflation, interest rates, and policy direction.
• Market uncertainty affecting construction pipeline, which could impact industrial rental rates and vacancies.
• Potential risks to tenant credit quality if interest rates remain high for longer.

Q: Can you guys talk about the acquisition pipeline? What are you guys seeing in the market? And how is the volume?

A: Thanks, Gaurav. We currently have 6 LOIs out. We are active in the market looking at some 20 transactions. Of the 6 LOIs that are out, hoping to hear on awarding of said transactions next week or the week thereafter. As you know, we've hit the summer period, so it does slow down a bit, but we are hopeful of one of those transactions in the neighborhood of approximately $50 million will come our way next week. And then behind that, we've got some '18, '19 in initial review, and we will work those diligently and as mentioned previously, subject to our credit requirements as well as returns and hopefully land a few of those as well. But we anticipate also seeing an uptick as is generally the case coming out of the summer period heading back into school, if you will, with people back in the office.

Q: Can you remind us the background of the sales transaction of the industrial property that you guys sold?

A: Yes. So that was a property down in Georgia, and they had a purchase option within the lease. So we -- obviously, they exercised that and purchased.

Q: On the incentive fee waiver, it looks like incentive fee was waived this quarter. Can you maybe talk about how you guys decide how much incentive fee is going to get waived? And how should we think about the waiver going forward?

A: Well, we certainly have discussions with our management. As you know, the company is very aligned with the stockholder. So as a result of that, we take that into consideration on a quarterly basis and discuss with management. We obviously want to reward our employee base and retain them. And so we look at that again on a quarterly basis to do what's right for all parties concerned.

Q: You had a pretty healthy increase in your G&A. I'm guessing that's related to a few core FFO adjustments such as prepaid offering cost write-offs and the closing costs on sales. Is that the correct way to read through on that?

A: Yes, that's correct. And also in the second quarter, we have some additional expenses due to our annual meetings.

Q: You've been very aggressive here in the first half of the year as far as the acquisition market. Your leverage has ticked up, but it's still flat year-over-year. Are you looking to maybe press leverage a little further in the back half of the year to close that $50 million transaction or in excess of that? Or how are you thinking about funding growth going forward?

A: Rather not press leverage. I mean, if we had to a little bit, we would, but I think we're trying to -- our goal here is to try to get that leverage down again. I mean we did, again, as you said, go up a little bit, but that was to digest all of those acquisitions.

Q: Can you give some color on the lease renewal you completed this quarter, maybe the spread relative to the prior rents and what the term is on this the lease that you did get done this quarter?

A: Sure. The uptick on it was, I believe, it's 2.5% an extended term. And as it relates to our renewals that are coming up, we have one left here in 2025 that actually we are working on a lease of a 10-plus year lease on it at an uptick within that of approximately 2%, I believe it is, and that will take the building out for another 10-plus years. And then looking at '26, we have some 10 expirations. And as David referenced, our portfolio management team is actively in front of these expirations, both '26 and '27. In '26 of the 10, they've all been contacted. We're confident that at a minimum, 6 out of the 10 are going to renew as they have renewal options. And of the other 4, one is going to be signed up, we feel very confident on a lease to buy. We have had tours specific at our GM building down in Austin, looking for a 45,000 plus or minus square foot occupant there. And looking at '27, we've got 13 of which they've all been contacted and confident, honestly, that 12 of those are going to renew and they have renewal options, but we are in discussions getting ahead of that curve, if you will, with all of them.

Q: Can you give us a sense of what you're seeing in the market regarding cap rates, if they could get into the 9s this year?

A: I don't see them getting into the 9s. Obviously, on the average cap rate basis, too many. There is a lot of competition out there, David, as I'm sure you're aware. And so as we look at it, we are not purchasing in what I will call in the downtown/very hot industrial pockets of the West Coast and some others. We look to be in the path of growth. And so our cap rates, I think, will be 8.5% plus on an average basis.

Q: Are you having to make any changes to your underwriting process to make sure you're still getting the tenant quality that you need? Are you seeing any meaningful impacts from the macro environment on your tenants?

A: We are not seeing any meaningful impact at this point. Again, 100% collections of our rent. We will not change our underwriting criteria and qualifications, if you will, relevant to the tenancy. We certainly are focused on what impact, again, the macro may have, obviously, tariffs and otherwise, but we are not going to change our underwriting criteria.

Q: What's kind of potential plans regarding the amount outstanding on the revolver?

A: Well, we have a number of options. And one of them in the most immediate will probably be sales on the ATM, paying it down with equity. We are in talks with our lender group to refinance our credit facility. So there's a potential of transferring some of that to a term loan as well. And then obviously, we've done one private placement. And if rates cooperate, we could potentially do another.

Q: In terms of capital recycling front, are you seeing any change in kind of cap rates there just given some of the macro narratives, maybe a little more interest rate uncertainty, return to office, et cetera?

A: Relative to cap rates, again, as mentioned previously, our average cap, I think, is moving up a bit. We certainly are not looking to buy any office, and I don't think you're implying that. But we have recycled capital out of and then into industrial, and we'll continue to deploy capital into the properties we do own, provided that, that capital is going to be accretive to our shareholders to the company.

Q: Is there anything kind of onetime in 2Q that wouldn't flow through to 3Q in either a reimbursement perspective or maybe even a top line rental revenue perspective?

A: I mean the variable rents, if you look at, they do vary at variable. And again, a lot of it is due to the expenses that, that are being incurred. So I wouldn't say that you can kind of track those on an apples-for-apples basis on a going-forward basis.