Gladstone Commercial Corporation Q4 FY2025 earnings call

• 2025 was productive: acquired over $206 million of industrial assets, invested $21 million in existing portfolio for lease renewals/extensions, sold 2 properties and executed an agreement to sell another, amended and extended syndicated bank credit facility, closed on $85 million private placement. • Key focus areas: growing industrial concentration, adding value in existing portfolio, disposing of noncore assets. • Asset management team effective: 100% collection of cash-based rents, 99.1% occupancy, average remaining lease term of 7.3 years, 4% same-store lease revenue increase. • 2026 focus: evaluating opportunities to acquire higher-quality industrial assets, working toward 70% industrial annualized straight-line rent, continuing to work with existing tenants on lease extensions, etc., and positioned to deploy capital into accretive industrial acquisitions and portfolio improvements.

For the fourth quarter of 2025, FFO and core FFO per share available to common stockholders were both $0.37 per share. For the 12 months ended December 31, 2025, FFO was $1.38 per share and core FFO was $1.40 per share. Same-store lease revenue increased by 4% in the 12 months ended December 31, 2025 over the same period in 2024. Total operating revenues in the fourth quarter of 2025 were $43.5 million with operating expenses of $26.4 million, compared to operating revenues of $37.4 million and operating expenses of $25 million for the same period in 2024. In 2025, the company acquired over $206 million of industrial assets, increased industrial concentration as a percent of annualized straight-line rent to 69%, had an occupancy of 99.1%, and same-store lease revenue increased by 4%.

• Aim to achieve increased portfolio WALT, strong occupancy rates, streamline rental growth, continue to delever and decrease cost of capital. • 2026 focus on evaluating opportunities to acquire higher-quality industrial assets that are mission-critical to tenants and industries and accretive to long-term strategy. • Working toward near-term goal of 70% industrial annualized straight-line rent. • Positioned with increased line of credit, access to private placement bond market, cash on hand and ATM to deploy capital into accretive industrial acquisitions and portfolio improvements.

Q: Wanted to start with the occupancy. It looks like occupancy remained the same, though you did lose a tenant. I was just hoping to get a little more color on what happened there.

A: Relative to the occupancy, we're at an all-time high since 2019. We renewed a tenant and have increased our occupancy. And we -- obviously, the portfolio management team has done a great job relative to that. We see continued maintaining that occupancy. Certainly, there'll be some fluctuations as we add property or dispose of property.

Q: Understood. I appreciate that. And then one more. I know you mentioned that you're looking to get the portfolio up to 70% industrial. You don't have a time line for that. Just curious as to what you're seeing in the transaction environment and if anything has changed now that we have a little more clarity about the incoming Fed share and the potential plans to reduce the Fed's balance sheet.

A: It's a very competitive market. And almost every day, you see somebody else coming into the space of triple-net. We play in the middle market and our value-add is underwriting middle market credits. We're not playing in the high range, both size as well as A-rated credits. So we are working hard at adding good properties, good tenancy focused upon the quality of the tenant and quality of the real estate, not just going for the highest return. So we're going to be very discerning as it relates to what we're going to put on our books and what we are going to chase. Well, David, if I could, relative to just thinking through it on your question, the first question, we did have a tenant with a fee we received that may be answering your question relative to the payment as well as the effect on occupancy at that point, but we did have a fee received.

Q: Sorry if I missed this maybe earlier in the call, what's the size of the pipeline today roughly? And I guess if you think about maybe cap rates in the pipeline or how cap rates are trending, where do those stand today? And maybe where you think they're going to trend over the course of the year?

A: We are continually looking at somewhere in the neighborhood of $300 million in transactions. Cap rates generally from where we are competing are at a floor of 7.5%. And certainly, for us, we look between 7.5% and 8.5% is realistic. But the competition is great. One of our -- again, our value add, as we always say, is our underwriting capability, plus we're able to purchase all cash. So we are also competitive in the market. It was a little slow coming out of the gate at the end of 2025 as it relates to opportunities, but we do see that picking up currently.

Q: And maybe kind of cap rate ranges is roughly where you're kind of seeing those today for your target assets?

A: Going in 7.5% and up with an average cap rate north of 9%.

Q: And then in terms of the in-place portfolio, how are you looking at kind of lease maturities over the course of the year? I know you have a relatively sizable one at the very end of the year, but anything else that's kind of noteworthy before then or even maybe in early 2027.

A: Sure. Happy to address that. And as mentioned previously, all the property management team, portfolio management has done a great job. We've been in contact with every tenancy that's coming due in the next 2 years. We have 8 in 2026, half for office, half for industrial. Of that, it represents a total of approximately 8% of straight-line rent. But in our discussions with the tenancy and as we have projected out with some agreements in place relative to waiting just having a signed document or their ability within their lease to just automatically have a right to exercise, we are concentrating on 2 out of those 8 because 6 of them have been, in all honesty, we believe very, very much in the barn. But we have certainly our asset in Austin, where GM is the tenant, which represents approximately 3% of our straight-line rent. It does lease mature at the end of the year. The team is in place and has -- creating a plan that we are going to work relative to leasing, of which we had 2 tours here in the coming week of approximately 50,000 square foot each. But one way or the other, that property will be taken care of. And the other is an industrial -- excuse me, office building of which we do have 2 tours as well. That lease matures at the end of 2026 and 2 full building users are touring in the next 2 weeks. As it relates to 2027, we have 14. Again, half are office, half are industrial. Of those, we are very confident that all but 3 are, for lack of a better word, perhaps not -- I don't want to say not going to happen, but we don't have the clarity we wish. But again, that only represents 1.2% of the straight-line rent of those maturities. Others, again, have the right to extend, and we have every confidence they will and have been in contact with them, but their notice date is not yet upon us, upon them, so they haven't given us notice. and we are diligently working the other small amount of approximately 85,000 square feet in 2027.

Q: And then last one for me on the balance sheet. How are you thinking about the need for additional debt capital given some of the activity at quarter end? I mean, does that provide you think sufficient runway for what your kind of target acquisitions are for the year? Or should we be looking for any kind of additional activity in the debt markets? And I guess, how would you maybe look to spread that between either term loan debt or additional kind of private placement or even mortgage debt?

A: John, this is Gary. Really, the way we look at debt right now, our kind of goal is to use our revolving credit facility to acquire properties and then clean up that facility with an issuance in the private placement market. And so that's what we've done in the last 2 years. That's what we intend to do going forward. As you know, we actually have a couple of mortgages coming due. And once those -- once we pay those off, we'll then put those properties into the unencumbered pool, which will increase our availability. So right now, our liquidity is about $60 million on the credit facility that we expect to go up over time, given new properties. We have plenty of room under the facility to grow our availability. So I think right now, that's our general look on debt going forward.

Q: I think last quarter, you mentioned that you were working on a couple of transactions that you thought might close in the fourth quarter. Are those still in the mix? Or are those transactions you don't think you're going to execute on?

A: We have one that we believe we can hopefully get done by the end of this quarter. Still some diligence work to do on that. So yes, some bled over, did have one fall out. Actually, the seller pulled back on it, I believe. So we're hopeful of one and a pickup in activity into the second quarter.

Q: Got it. And can you give us a sense of the dollar amount that might close here in the first quarter?

A: I would say it's in the range of $10 million.

Q: Okay. That's helpful. And你mentioned a fee earlier. I know we had a discussion about this last quarter about some lease termination income or accelerated rent, but was that recognized here in the fourth quarter at about $1.5 million?

A: Yes, it was. That was a termination fee, and we had a tenant that came right in after that tenant left. So the building is occupied the same level of occupancy. So there's no loss there. And that -- yes, that was a onetime fee.

Q: Got it. I appreciate that. Another for me. I guess just thinking about the incentive waiver, philosophically, I mean, looking at it, it looks like the Board is sort of targeting maybe a core FFO payout ratio of something around 85%, plus or minus. Is that how we should think about that? Or is there any color that you think you can give us on that?

A: I mean that's reasonable. I think going forward, we'd like to lower that going forward, but I think that's a reasonable assumption, yes.

Q: I just wanted to ask one around average lease terms. It looks like they're trickling up to the mid-7s. Is this by design? Is this something that you're seeing in the market? Maybe just any more color on that.

A: Sure, Dave. And obviously, the longer WALT, the better. So we do look at transactions that allow for that. It gives us more stability within the portfolio. And so yes, we will look at transactions 7 years and up, prefer 15 and up. Of course, that leads to our wheelhouse of sale-leaseback transactions. So yes, the longer we can do, the better.