Gladstone Commercial Corporation Q3 FY2024 earnings call

Key Points

• Expressed concern for those impacted by recent hurricanes, with minimal impact on portfolio.
• Fed implemented first rate cut in September, lowering benchmark federal funds rate; job growth surged but strong labor market and inflation may affect rate cuts.
• Industrial real estate market: net absorption in US totaled 39 million sq ft in Q3, new construction slowed to 76 million sq ft (54% lower than last year), vacancy rates increased by 19 bps to 6.6%.
• Portfolio specifics: increased industrial concentration, successfully leased/extended over 242,000 sq ft across five assets, re-leased/renewed over 2.6 million sq ft across 10 assets, no remaining expiring leases in 2024.
• Plans: Aim to exceed 70% industrial concentration in next 12 months, dispose of non-core office assets, use office sale proceeds to redeploy into industrial assets, leverage in-house credit underwriting for sale-leaseback opportunities, maintain healthy flexible balance sheet.

Industrial real estate was a key growth driver. During the third quarter, industrial concentration as a percentage of annualized straight-line rent increased from 62% to 63%, while office decreased from 34% to 33%. The company acquired an industrial asset in Midland, Texas for $10 million and sold two medical office assets in Georgia, resulting in a gain on sale of more than $10.3 million. Portfolio occupancy remained at 98.5% and 100% of cash base rents were collected.

Forward-Looking Statements

• Aim to exceed 70% of annualized straight-line rent in industrial within 12 months.
• Actively disposing of non-core office assets and have one new industrial opportunity under contract for $12.1 million set to close in Q4.
• Will use office sale proceeds to redeploy into industrial assets.
• Will leverage in-house credit underwriting expertise for sale-leaseback opportunities.
• Focus on keeping a healthy and flexible balance sheet, with $80.7 million liquidity as of September 30.

Risks

• Broader economic uncertainties, including potential volatility from election-related fiscal and regulatory policy debates.
• Strength of labor market and higher-than-expected inflation may impact timing and magnitude of rate cuts.
• Competition in the market, which could affect cap rates and acquisition opportunities.

Q: Can you provide color how much the settlement revenue was at one of your properties?

A: The total amount was $2 million.

Q: Any color on the timing expected timing of the sale of those three properties held for sale?

A: One of them we're looking to sell by the end of the year and the other one probably mid-next year.

Q: Can you provide some color on what you were seeing in the acquisition market?

A: Acquisitions are proceeding underwriting, with two currently, expecting to pick up into Q1 2025, and lots of competition but seeing actionable deals.

Q: Is there any more you can give us maybe around the sense of timing or the anticipated cap rate for the one new property under contract?

A: Closing should occur in early Q4, cap rate over term is going to be over 9%.

Q: What do you see kind of going forward as you implement that plan as far as the cap rate spread between industrial and office?

A: Agree with cap rate spread issue due to market competition, but making ourselves more competitive by recycling out of office into industrial and improving stock performance to bring down cost of capital.

Q: Are you guys going to continue over the next few quarters to have sort of an elevated, tapping the ATM at an elevated level or not necessarily?

A: Will probably continue to tap the ATM to fund acquisitions, maintain leverage level, and maybe reduce leverage.

Q: Was there something specific driving the jump in CapEx and leasing commissions quarter-over-quarter? And what's the outlook for those items?

A: A large asset in Lehigh Valley re-tenanted with a new tenant at almost double income, carrying large lease commission and TI dollars; no foreseen large CapEx items ahead, but some CapEx is profitable.

Q: Are the lease expirations over the next 15 months mostly office or industrial?

A: Mix between the two, more office than industrial, with some taken care of by dispositions.

Q: Are you seeing more competition from smaller PE funds and finance-oriented buyers getting back into the market?

A: Somewhat cautious, but seeing opportunities for sale-leasebacks and brokers giving opinion of value, with competitive marketplace.