Gladstone Commercial - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was operationally solid with 100% rent collections and 98.4% occupancy; revenue was $37.50M and diluted EPS was $0.04, essentially in-line with S&P Global consensus, while EBITDA missed consensus, and Core FFO/share slipped to $0.34 from $0.35 sequentially.*
• Management accelerated the industrial pivot, acquiring six fully occupied properties for $73.7M at an 8.39% cap rate, and raised industrial concentration to 65% of annualized straight-line rent, targeting ≥70% near term.
• Capital recycling continued: two non-core assets were sold for $23.6M post quarter, $7.2M variable-rate mortgage debt was repaid, and Q2 common distributions totaling $0.30/share were declared (maintained).
• Liquidity and risk posture improved: $99M capacity via revolver and cash on hand, swaps hedge term loans to maturity (late ’27/early ’28), and 2025 remaining maturities are ~$3.1M, supporting additional accretive industrial acquisitions.
• Macro commentary noted tariff uncertainty and higher-for-longer rates; management emphasized reshoring tailwinds, tenant credit depth, and disciplined underwriting as key drivers for stability and growth.

What Went Well and What Went Wrong

What Went Well

• Acquisition pace and discipline: “one of our most active quarters to date” with $73M deployed into mission-critical industrial assets, while passing on deals that didn’t meet credit, pricing, or location criteria.
• Portfolio durability: 100% cash rent collections in Q1 and April, and 98.4% leased as of March 31; same-store rents increased 6.6% YoY in Q1.
• Balance sheet and liquidity: ~$99M availability (revolver + cash), hedged floating-rate exposure, and manageable 2025 maturities (~$3.1M); swaps extend to loan maturities in ’27/’28.

What Went Wrong

• Profitability headwinds: Core FFO/share declined to $0.34 from $0.35 QoQ, driven by a higher net incentive fee (partially offset by interest income on sales-type leases).
• Earnings quality mix: Other expense increased to $(8.51)M vs $(5.21)M QoQ (+63.3%), contributing to net income decline to $5.14M from $7.19M.
• Leasing spread on a 3-year renewal was modestly down on a straight-line basis due to shorter term; management expects potential pickup if re-leasing is needed given market strength.

Transcript

Speaker 0

As a reminder, this conference is being recorded. It is now my pleasure to introduce Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

David Gladstone (CEO)

Thank you, LaTonya. That was a nice introduction, and thank all of you for calling in and listening to our pitch. We enjoy this time that we get with you and on the phone, and wish we had more time to talk to you, but only do this once a quarter. Now we'll hear from Michael LiCalsi. He's our General Counsel and Secretary to give the legal and regulatory matters concerning this report. Michael, go ahead.

Michael LiCalsi (General Counsel and Secretary)

Thanks, David. Good morning, everybody. 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 on our current plans, which we believe to be reasonable. There are many factors that may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors in our Forms 10-Q, 10-K, and other documents that we file with the SEC. These can be found on our website, which is gladstonecommercial.com. Specifically, look on the Investors page or on the SEC's website, which is www.sec.gov. Now, 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. Now, 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 non-recurring 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 once again. That's gladstonecommercial.com. Sign up for our email notification service. You can also find us on Facebook. The keyword there is the Gladstone Companies, and Twitter, which is @gladstonecomps. Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information.

With that, I'll hand it over to Gladstone Commercial's President, Buzz Cooper.

Buzz Cooper (President)

Thank you, Michael, and thank you all for joining today's call. We look forward to updating you on our first quarter of 2025 results, our current portfolio, and our 2025 outlook. Starting with the broader economic environment, the first quarter of 2025 has been marked by growing uncertainty followed by recent tariff announcements. These announcements have added pressure to global trade flows and extended decision timelines for many businesses. Companies are reassessing their disorder to manufacture and distribute their goods, especially those companies with exposure to Asia. U.S. Treasury yields remain volatile as markets absorb shifting policy signals and evaluate the outlook for inflation and economic growth. Despite an uncertain macroeconomic outlook, the industrial real estate sector continues to perform. According to Cushman & Wakefield, net absorption reached 23.1 million sq ft in the first quarter of 2025, matching levels from a year ago.

Vacancy rose modestly to 7%, driven by speculative deliveries, but remains in line with historical averages. This suggests the market is approaching a more balanced state. New construction completions during the quarter declined to the lowest level in nearly four years, reflecting higher capital costs and a slowdown in the development pipeline. We anticipate this construction slowdown will bring upward pressure on industrial rental rates and downward pressure on vacancy as industrial users compete for additional square footage to grow their businesses. Moving on to our portfolio, we remain confident heading into the second quarter. During the first quarter of 2025, we collected 100% of our cash-based rents, acquired industrial properties encompassing 355,778 sq ft for $73.25 million. We increased portfolio industrial concentration as a percentage of annualized straight-line rent to 65%, maintained portfolio occupancy at 98.4% as of March 31st.

Subsequent to the end of the quarter, we sold one office property for a gain of $377,000, and one industrial property previously recognized a selling profit of $3.9 million from a sales-type lease. This was one of our most active quarters to date, with over $73 million in capital deployed for new industrial acquisitions. While we remain focused on increasing our industrial concentration and hope to get to at least 70% in the near term, we continue to maintain a disciplined underwriting approach. This discipline was on display in the acquisitions we completed this quarter, and the numerous acquisitions we chose not to pursue. We evaluated hundreds of opportunities over the last year and passed on many that did not meet our criteria, whether due to credit concerns, overpricing, or location risk.

Our ability to act decisively reflects our continued focus on high-quality mission-critical assets that align with our investment thesis. In particular, we are seeing long-term tailwinds from reshoring and onshoring activity. The private placement we completed in the fourth quarter of 2024 helped position us to execute with confidence, and we believe our disciplined approach will continue to create long-term value. Moving ahead to the second quarter, we remain focused on acquiring high-quality industrial assets that are mission-critical to tenants and industries and accretive to our long-term strategy. At the same time, we will continue to selectively dispose of non-core assets to further improve our portfolio. Our team is actively working to extend lease terms, capture mark-to-market opportunities, and support tenant growth through targeted expansions and capital improvement initiatives. We remain mindful of our overall leverage and are continuing to strengthen our balance sheet.

With over $99 million in availability via our line of credit and cash on hand, we are well-positioned to deploy capital into accretive industrial acquisitions. Several opportunities are currently under exclusivity or contract, with closings expected to come in the next few months. Our portfolio continues to generate sustainable cash flow. We remain more than 98% occupied as of March 31st, and we've not seen any material deterioration in tenant credit quality, even in the face of higher-for-longer interest rates. I will now turn the call over to Gary to review our financial results for the quarter and liquidity position. Gary?

Gary Gerson (CFO)

Thank you, Buzz. I'll start my remarks this morning regarding our financial results by reviewing our operating results for the first quarter of 2025. All per-share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO per share available to common shareholders were both $0.34 per share for the first quarter of 2025, as well as the first quarter of 2024. Same-store rents increased by 6.6% in the three months ended March 31st over the same period in 2024 due to increased property expense recovery revenue and increased rental rates from leasing activity subsequent to the first three months of 2024. Our first quarter results reflected total operating revenues of $37.5 million, with operating expenses of $23.9 million as compared to operating revenues of $35.7 million and operating expenses of $23.3 million for the same period in 2024.

Operating revenues were higher in 2025 due to increased recovery and higher rental rates for the same properties, slightly offset by lower variable lease payments from the seven property sales during and subsequent to the first quarter of 2024. Expenses were higher in the first quarter of 2025 versus the same period in 2024, mainly due to increased costs created by the inflationary environment, as well as higher net incentive fee paid in Q1 2025. In Q1 2025, we increased net assets from $1.09 billion to $1.16 billion, which was a result of the two acquisitions this quarter. Looking at our debt profile, 45% is fixed rate, 47% is hedged floating rate, and 8% is floating rate, which is the amount drawn on a revolving credit facility, mortgage note, and one of our small-term loans. As of March 31st, our effective average SOFR was 4.41%.

Our outstanding bank term loans were hedged with $310 million of interest rate swaps. We continue to monitor interest rates closely and update our hedging strategy as needed. As of today, our remaining 2025 loan maturities are very manageable at $3.1 million. As of the end of the quarter, we had $51.3 million of revolver borrowings outstanding. During the quarter ended March 31st, 2025, we sold 1.77 million common shares under our ATM program, raising net proceeds of $27.7 million. We also received net proceeds of $300,000 from sales of our Series F preferred stock through March 31st. 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 $18.4 million in cash and $80.6 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 $0.30 per share per quarter or $1.20 per year. Our common stock closed yesterday at $13.83, and our yield at that price was 8.68%. Now I'll turn the program back to David.

David Gladstone (CEO)

Thank you, Gary. That was a good one. We had a good one from Buzz and Michael too. The team of Commercial is really performing well. They're renting more of our buildings, and so we're continuing to grow. You've heard a lot today. In summary, we acquired two industrial facilities for a total of $73 million, a nice addition to our group. Subsequent to the end of the quarter, we sold one office property with about a $377,000 profit. Previously recognized this as a selling profit of $3.9 million from sales-type lease. Commercial team is continuing to grow our real estate, add more deals, and beef high and redo things. We just continue to march along at the same pace we've marched at for a long time now.

Our team of strong professionals continues to pursue potential quality properties on this list of acquisitions that we keep adding to. There is an acquisition team that's just out there seeking only the strong credit tenants, and we're going to continue that process. Let's stop now and have the operator come on and tell listeners how they can ask some questions.

Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question at this time. One moment while we post our first question. The first question comes from Gaurav Mehta with Alliance Global Partners. Please proceed.

Gaurav Mehta (Managing Director and Senior Equity Research Analyst)

Yeah, thank you. Good morning. I wondered if your acquisition pipeline and what you were seeing in the market for industrial properties?

Buzz Cooper (President)

Thanks, Gaurav. We are seeing activity. It's picking up here as the year gets started. For ourselves, we currently have approximately $70 million teed up here that we believe will close into the second quarter and are looking at a backlog that we are reviewing of approximately $140 million, which consists of about 10 assets. Obviously, there is a lot of competition coming from the marketplace, both family offices as well as PE shops. As David referenced, the team is aggressive in the market, looking at every transaction we can find, being very selective in these challenging times. We believe we will continue to be active, certainly through this quarter and into next quarter.

Gaurav Mehta (Managing Director and Senior Equity Research Analyst)

Okay. And the $70 million that you mentioned under contract, can you maybe provide some color on how you expect to fund those acquisitions?

Buzz Cooper (President)

As Gary mentioned, we've got great liquidity. We have adequate cash and availability on hand. We will also and have been going to look at other financing sources as we did a private placement at the end of last year, as well as perhaps other ways of having capital on hand, whether perhaps through a JV or other.

Gaurav Mehta (Managing Director and Senior Equity Research Analyst)

Okay. Thank you. That's all I have.

Buzz Cooper (President)

Thank you.

David Gladstone (CEO)

Next question.

Next question comes from Craig Kucera with Lucid Capital. Please proceed.

Craig Kucera (Managing Director and Equity Research Analyst)

Yeah. Hey, good morning, guys. I want to circle back to the acquisition volume here. Obviously, a big pickup after really a relatively slow couple of years. Are you seeing sellers more willing to budge on price, or are you just seeing more assets that fit what you want the portfolio to look like?

Buzz Cooper (President)

If I may, a little, it's a combination of both. We have been also aggressively trying to stay close with our broker relationships in order to have an early look as well as hopefully a last look at transactions. One of our value adds is we do what we say we're going to do. We don't retrade. Don't like that word. I think it's a function of getting to the transactions earlier rather than later and having early impact back to either seller or broker that's allowing us this success.

Craig Kucera (Managing Director and Equity Research Analyst)

Okay. Great. I know you don't have much in the way of remaining lease expirations here in 2025, but I'm kind of curious to hear if you're starting tackling 2026 and 2027, which are much larger years that are expiring.

Buzz Cooper (President)

As has been our history, Craig, we do, and we are. If you look, the expirations again, as you mentioned, for this year is under 2%, and that represents transactions of which we are working on one and have an RFP out on the other for a longer-term extension. We are in talks as it relates to 2026. We have approximately eight or nine that we are working on. Of those, we really only have one at this point in time that we have not traded paper on or had discussions with. We will hopefully winnow that down quickly and at the appropriate time. We have got a good handle on it. We get out in front of it, and we are, as we work these 2026 expirations, also looking at 2027 and believe that we will be successful there as well.

Many of those are industrial in nature, which we hope will allow us for, obviously, rent pickup.

Craig Kucera (Managing Director and Equity Research Analyst)

Got it. Kind of circling back to the lease you did renew recently, can you talk about leasing spread relative to expiring rent on the asset that you extended for another three years? Did you get a pickup there?

Buzz Cooper (President)

That was not a pickup on a straight-line basis for the term. It was a small drop. The reason for that was, again, we could not get them to extend longer. They have to let us know after an 18-month period if they're going to remain. It is in a market that is strong, and I believe that should we not have success in re-upping them longer, we will have a pickup as it relates to the rental rate.

Craig Kucera (Managing Director and Equity Research Analyst)

Okay. Great. Just one more for me, for Gary. You mentioned the swaps on the floating rate debt. Are any of those expiring this year, or are they swapped through maturity?

Gary Gerson (CFO)

No. All those are swapped to maturity. Those two term loans mature in late 2027 and early 2028.

Craig Kucera (Managing Director and Equity Research Analyst)

Okay. Thanks, guys.

Buzz Cooper (President)

Thank you.

David Gladstone (CEO)

Next question.

Next question comes from John Massocca with B Riley. Please proceed.

John Massocca (Senior Research Analyst)

Good morning.

David Gladstone (CEO)

Morning, John.

John Massocca (Senior Research Analyst)

Apologies if I missed any of the parameters, but any color on the dispositions completed subsequent to quarter-end, kind of what was pricing there maybe and what made those kind of non-core?

Buzz Cooper (President)

John, you were cutting up a little bit. I think you're asking about our dispositions that we had here in the first and into the second quarter.

John Massocca (Senior Research Analyst)

That's correct.

Buzz Cooper (President)

Okay. We had two sales right at the beginning of April. If I may, one was industrial. Tenant had an option to buy, so they did. That was the realization of the gain there that we had. The other was an office property that was purchased, had a little loss on that, not great. It did pay through its rent, but it was good to get away from a one-story office.

John Massocca (Senior Research Analyst)

Okay. And then I guess maybe just as an update, how much of the portfolio today would you view as non-core? And maybe an update on the situation with the Austin Office property.

Buzz Cooper (President)

As it relates to non-core, I assume you're referring to office. Our office occupancy is north of 93% at the moment. I would say of that, a very small amount would be considered non-core. We do have some property types within that office we do wish to get or move on from and redeploy those into industrial assets. We have two call centers that we are working on. Most of the office is, from the standpoint of office today, healthy. I could not understand the property you were referencing.

John Massocca (Senior Research Analyst)

Sorry, the Austin Office property and the update on lease up there?

Buzz Cooper (President)

Sure. Austin always is top of mind. It does throw a lot of positive cash for us. At the moment, we currently have a few requirements out in the marketplace that we are tracking as well as two RFPs unsolicited out in the marketplace. Austin is improving. Office is also leading coming back to office work. We are hopeful that we will be able to add tenancy there and then make a decision relative to a long-term plan.

John Massocca (Senior Research Analyst)

Okay. And then bigger picture, any changes in the acquisition kind of parameters given some of the changes in government policy? I mean, I guess specifically, does light manufacturing look more attractive relative to warehouse distribution today in your mind?

Buzz Cooper (President)

Yes, absolutely. We do not have a lot of distribution in our portfolio. We do not have large boxes that are going to be affected by, if you will, tariffs and incoming product. We are light manufacturing in nature. We feel confident. I think if you look back at our previous calls, we have had a focus for the last two years as it relates to reshoring and onshoring. We believe we are in a good position there to take advantage of that occurrence.

John Massocca (Senior Research Analyst)

Okay. That's it for me. Thank you very much.

Buzz Cooper (President)

Thank you.

David Gladstone (CEO)

Okay. Do we have any more questions? One more? Okay.

Yes. The next question comes from Dave Storms with Stonegate. Please proceed.

Dave Storms (Director and Equity Research Analyst)

Morning.

Buzz Cooper (President)

Morning, Dave.

Dave Storms (Director and Equity Research Analyst)

Morning. Just going back to the renewal process, with your average lease term, it's just down a couple of months sequentially, and your top five tenants' lease term is down to about five years. Just curious as to what your thoughts are and how you feel about the duration of your contracts as you start preparing for the 2026 and 2027 negotiations.

Buzz Cooper (President)

We do feel good about our term, and it will, I believe, with these closings I mentioned coming up, move back up over a seven-year wall. They are good long-term sale lease-back transactions. Obviously, we also have to keep in mind you get a little more bang for the buck on the shorter-term deals. That is also important to us. We have continued and will continue our underwriting focus as to the ability of the tenant, obviously, to pay their rent and the stickiness of the real estate as mission-critical or C-suite in orientation that we feel comfortable they will renew if a shorter-term lease. Hopefully that answers your question.

Dave Storms (Director and Equity Research Analyst)

That's very helpful. Thank you. Just one more for me, and apologies if I missed this in the beginning. I know you mentioned that there's additional competition out there buying properties. I'm curious, what kind of competition are you seeing on the lease in front? Are there any new tenants that are coming into the market that maybe haven't been historically there just in light of some of the macro stuff?

Buzz Cooper (President)

For us on the leasing front, and if the question is who's leasing, most of it currently is end users, and that's also true on the purchase side of the equation. That's a good thing. The competition for those leases relative to who we might be "losing a deal to" has also been similar. They're looking for, obviously, properties that fit their need. I think we're very competitive within the market where we have current leases coming due.

Dave Storms (Director and Equity Research Analyst)

Very helpful. Thank you for taking my questions.

Buzz Cooper (President)

Thank you.

David Gladstone (CEO)

Any more questions?

Mr. Gladstone, there are no further questions in queue. I'll turn it back to you for closing comments.

All right. We thank you all for listening to our presentation and asking good questions. We hope you'll save up a lot of good questions for next time because we like the questions at the end of this.

Buzz Cooper (President)

Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and thank you for your participation.