Gladstone Commercial - Earnings Call - Q2 2025

Executive Summary

• Revenue of $39.53M, up 5.4% QoQ and above Wall Street consensus of $38.32M; EPS of $0.03 missed consensus $0.063 due to higher interest expense and elevated G&A, while Core FFO rose to $0.35 per share (+2.9% QoQ).*
• Portfolio occupancy remained strong at 98.7% with 100% cash rent collections; acquisitions of two fully-occupied industrial facilities totaled $79.3M at an 8.88% cap rate, and non-core dispositions continued as part of capital recycling.
• Balance sheet actions included increased revolver borrowings ($94.4M at quarter-end), ongoing interest rate hedging (swaps on $310M) and readiness to use equity ATM, terming out debt, and potential private placements to manage leverage (goal not to press leverage).
• Distributions were maintained at $0.30 for Q3 (July–September); management continues to target higher industrial mix (~67% of straight-line rent in Q2, with a near-term goal of 70%) and emphasizes reshoring/onshoring tailwinds.

What Went Well and What Went Wrong

What Went Well

• Core FFO increased to $16.1M ($0.35 per share) on higher revenues from acquisitions and a lower net incentive fee; same-store rent growth and 100% rent collections underpin stabilized revenue.
  Quote: “Our financial results reflect consistent performance and stabilized revenues… accretive real estate investments… our ability to renew tenants, and our deleveraging.” — Buzz Cooper
• Strategic capital deployment: acquired two industrial facilities for $79.3M at an 8.88% cap rate; occupancy 98.7%; industrial concentration rose to 67% of annualized straight-line rent.
• Continued capital recycling: sold two non-core assets (one office for $5.1M and one industrial for $18.5M), realized gains on sale, and renewed/leased additional space; pipeline active with multiple LOIs.

What Went Wrong

• EPS declined QoQ ($0.03 vs $0.04) and missed consensus, driven by higher interest expense from variable-rate debt and elevated G&A (annual meeting expenses, write-offs).
• Leverage ticked up with higher revolver usage ($94.4M), though management prefers deleveraging and is exploring refinancing, ATM equity sales, and term loans to reduce floating exposure.
• Macro uncertainty (tariffs, rates) lengthened decision cycles; management highlighted cautious underwriting despite competitive acquisition markets and cap rates trending in the high-8s.

Transcript

Speaker 4

Greetings, and welcome to the Gladstone Commercial Corporation's second quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. It is now my pleasure to turn the conference over to David Gladstone, Chief Executive Officer. Thank you. You may begin.

Speaker 3

Thank you for that nice introduction. You always do such a good job when you're heading up ours. We enjoy this time that we have with all of the people on the phone and wish we had more time to talk with all of you. Now, I'll hear from Katherine Girkus. She's our Director of Investor Relations and ESG, and she'll provide a brief disclosure regarding certain regulatory matters concerning this call today. Katherine, go ahead.

Speaker 6

Thank you, David, and good morning. Today's call aims towards forward-looking statements, which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance, as full results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the investors' page of our website, gladstonecommercial.com. We assume no obligation to update any of these statements, as required by law. Please visit our website for a copy of our Form 10-Q and Earnings Press Release, both issued yesterday, for more detailed information. You can also sign up for our email notification service and find information on how to contact our Investor Relations Department. We are also on X at GladstoneComps as well as Facebook and LinkedIn. Keyword for both is the Gladstone Companies.

Today, we'll discuss FFO, which is Funds From Operations, 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 may also discuss core FFO, which is generally FFO adjusted for certain other non-recurring revenues and expenses. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now, let's turn the presentation to Buzz Cooper, Gladstone Commercial's President.

Speaker 1

Thank you, Katherine, and thank you all for joining today's call. We look forward to updating you on our results for the quarter ending June 30, 2025, our current portfolio, and our 2025 outlook. Starting with the broader economic environment, the second quarter of 2025 was shaped by continued uncertainty. While the April 2 tariff announcements created initial volatility, the focus has since shifted toward a slower pace of decision-making across the market. The businesses continue to evaluate how policy changes, financing conditions, and global supply chain dynamics may impact their long-term plans. Larger businesses with enough scale have turned to build to suit opportunities, reducing any tariff noise for the foreseeable future.

The 10-year Treasury yield fell briefly below 4% following the tariff announcements, but mostly hovered in the mid-fours for the remainder of the quarter as markets adjusted to mixed signals around inflation, interest rates, and future policy direction. Despite a more cautious environment, the industrial real estate sector, which our company is a part of, remains steady. According to Cushman & Wakefield, net absorption reached 29.6 million square feet in the second quarter of 2025, reflecting moderate growth quarter over quarter. For the industry, vacancy rate rose modestly to 7.1%, 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 since the first quarter of 2019, reflecting higher capital costs and a slowdown in the development pipeline.

Cushman expects the construction pipeline to continue declining given market uncertainty, and we expect this slowdown will place upward pressure on industrial rental rates and gradually reduce vacancies as industrial users compete for additional square footage to grow their businesses. Moving on to our company's portfolio, we remain confident headed into our next quarter beginning July 2025. During Q2 2025, we collected 100% of cash-based rents, acquired two industrial facilities encompassing 519,093 square feet for $78.95 million, increased portfolio industrial concentration as a percentage of annualized straight-line rents to 67%, maintained portfolio occupancy at 98.7% as of June 30, 2025. We sold one office property for a gain of $377,000 and completed the sale transaction of one industrial property where we previously recognized a selling profit of $3.9 million from a sales-type lease. We increased our weighted average remaining lease term, or WALT, to 7.1 years.

This was another active quarter with $79 million in capital deployed for new industrial acquisitions, along with strategic and accretive capital deployment into our existing portfolio. This marks our second consecutive quarter of increased acquisition volume, making the last two quarters our most active to date. We continue to be competitive in the market while maintaining a disciplined underwriting approach focused on credit quality, location, and long-term value. That 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 declined 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.

We are seeing long-term tailwinds from reshoring and onshoring activity, and we believe these trends will continue to support demand for well-located industrial space. The private placement bond issuance 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. Looking ahead to the third 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 the portfolio. Our team is actively working to extend leases, capture mark-to-market opportunities, and support tenant growth through targeted expansions, capital improvement initiatives, and build-to-suit opportunities. We remain mindful of our overall leverage and are continuing to strengthen our balance sheet.

With the ability via our line of credit, cash on hand, and ability to raise equity on our ATM, we are well-positioned to deploy capital into accretive industrial acquisitions. Our portfolio continues to generate sustainable cash flow. We remain almost 99% occupied as of June 30, 2025, and we have not seen a 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.

Speaker 0

Thank you, Buzz, and good morning, everyone. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the second 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 stockholders were $0.33 and $0.35 per share, respectively, for the quarter. FFO and core FFO available to the common stockholders during the second quarter of 2024 were both $0.36. FFO and core FFO for the six months ended June 30, 2025 were $0.67 and $0.69 per share, respectively. FFO and core FFO for the same period in 2024 were $0.69 and $0.70 per share, respectively.

Same-store rents increased by 6.4% in the six months ended June 30 over the same period in 2024 due to increased property expense recovery revenue and increased rental rates from leasing activity subsequent to the first six months of 2024. Our second quarter results reflected total operating revenues of $39.5 million, with operating expenses of $25.1 million as compared to operating revenues of $37.1 million and operating expenses of $26.0 million for the same period in 2024. Operating revenues were higher in 2025 due to increased recovery and higher rental rates. Expenses were lower in the second quarter of 2025 versus the same period in 2024, mainly due to the crediting back of all the incentive fee in 2025 and lower depreciation and amortization expense offset by higher property operating expenses.

In Q2, we increased net assets from $1.16 billion to $1.2 billion, which was mainly a result of the two acquisitions this quarter. Looking at our debt profile, 42% is fixed rate, 39% is hedged floating-rate, and 19% is floating rate, which is the amount drawn on our revolving credit facility and the term loan B and term loan D, which was the new term loan which we closed with KeyBank this last quarter, $20 million with a term of two years. As of June 30, our effective average SOFR was 4.45%. Two of our outstanding bank term loans were hedged with $310 million of interest rate swaps, and we continue to monitor interest rates closely and update our hedging strategy as needed. As of today, our remaining 2025 loan maturities are manageable at $3.1 million. At the end of the quarter, we had $94.4 million of revolver borrowings outstanding.

During the six months ended 2025, we sold 2.5 million shares of common stock under our ATM equity issuance program, raising net proceeds of $38.1 million. We also received net proceeds of $357,000 from sales of our Series F preferred stock through May 31. As of May 31, 2025, our Series F preferred offering matured, and we will no longer be selling this issue. We continue to manage our equity activity to ensure that we have sufficient liquidity for all upcoming capital requirements and new acquisitions. As of today, we have approximately $6 million in cash and $25 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. Common stock dividend is $0.30 per share per quarter, or $1.20 per year.

Now, I'll turn the program back to David.

Speaker 3

Thank you, Gary. That was a good report, and that was a good one from Buzz and Katherine too. The team has performed very well overall, just a very nice quarter. As you heard today, in summary, during the second quarter, we acquired two industrial facilities for a total of just under $79 million. We sold one of our office properties. One more is gone, so that's good. We had a gain of about $377,000 on that one. We previously had recognized selling profit of about $3.9 million from a sales-type lease, and that's gone as well. I think the commercial team is really good at real estate. We own a good pace. We're going at a good pace, and the team is doing a great job managing the properties we own.

You know, we own a lot of properties, so you've got to have a lot of people going out and making sure they're getting paid. Our team is a strong group of professionals that continue to pursue potential quality properties. We've got a good list of acquisitions that they're reviewing now. Our acquisition team is seeking strong credit tenants. That's the first thing we look for. I will stop here, and we'll have the operator come back on and tell people how they can call in.

Speaker 4

Thank you. We'll now be conducting 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 the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Gaurav Mehta with Alliance Global Partners. Please proceed with your question.

Speaker 2

Thank you. Good morning.

Speaker 1

Morning.

Speaker 2

Morning. Can you guys talk about the acquisition pipeline? What are you guys seeing in the market, and how's the volume?

Speaker 1

Thanks, Gaurav. We currently have six letters of intent out. We are active in the market looking at, at this point in time, some 20 transactions. Of the six letters of intent 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. We are hopeful one of those transactions in the neighborhood of approximately $50 million will come our way next week. 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.

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.

Speaker 2

Okay. Second question, can you remind us the background of the sales transaction of the industrial property that you guys sold?

Speaker 1

If I understood your question, information on the industrial property we did sell?

Speaker 2

Yeah.

Speaker 1

Yes. That was a property down in Georgia, and they had a purchase option within the lease. They exercised that and purchased.

Speaker 2

Okay. Understood. Lastly, on the incentive fee waiver, it looks like the 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?

Speaker 1

We certainly have discussions with our management. As you know, the company is very aligned with the stockholder. 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. We look at that again on a quarterly basis to do what's right for all parties concerned.

Speaker 2

Okay, thank you. That's all I had.

Speaker 1

Thank you. Okay, next question.

Speaker 4

Thank you. Our next question comes from the line of Craig Kucera with Lucid Capital Markets. Please proceed with your question.

Speaker 5

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

Speaker 0

Yeah, that's correct. Also, in the second quarter, we have some additional expenses due to our annual meetings.

Speaker 5

Got it. Okay. You've been very aggressive here in the first half of the year as far as the acquisition market. Your leverage has kicked 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 the $50 million transaction or in excess of that, or how are you thinking about funding growth going forward?

Speaker 0

Rather not press leverage. If we had to a little bit, we would, but I think our goal here is to try to get that leverage down again. We did, as you said, go up a little bit, but that was to digest all of those acquisitions.

Speaker 5

Got it. Changing gears, can you give some color on the lease renewal you completed this quarter? You know, maybe the spread relative to the prior rents and what the term is on the lease that you did get done this quarter?

Speaker 1

Sure. The uptick on it was, I believe it's 2.5% and extended term. 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. That will take the building out for another 10-plus years. Looking at 2026, we have some 10 expirations. As David referenced, our portfolio management team is actively in front of these expirations, both 2026 and 2027. In 2026 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. Of the other four, 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. Looking at 2027, 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. We are in discussion getting ahead of that curve, if you will, with all of them.

Speaker 5

Great. I appreciate the color. That's it for me. Thank you.

Speaker 1

Thank you.

Speaker 3

We got a third question.

Speaker 4

Thank you. Our next question comes from the line of Dave Storms with Stonegate. Please proceed with your question.

Speaker 0

Morning, and thank you for taking my questions. I just want to start. It looks like cap rates are starting to maybe climb up into the high 8%. Just curious if you could give us a sense of what you're seeing in the market, if they could get into the 9% this year, anything like that?

Speaker 1

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. As we look at it, we are not purchasing in what I will call the downtown slash very hot industrial pockets of the West Coast and some others. We look to be in the path of growth. Our cap rates, I think, will be 8.5% plus on an average basis.

Speaker 5

That's very helpful. Thank you. Just thinking, given some of the macro uncertainties, 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? Anything like that?

Speaker 1

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.

Speaker 5

That's very helpful. Thank you for taking my questions.

Speaker 1

You bet, David. Thank you.

Speaker 3

We have a fourth question.

Speaker 4

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of John Massocca with B. Riley. Please proceed with your question.

Speaker 5

Good morning, everyone.

Speaker 1

Morning.

Speaker 2

Morning.

Speaker 5

As we think about the amount outstanding on the revolver, what's kind of potential plans there to either term that out or repay it with some other form of debt or other capital?

Speaker 0

We have a number of options, and one of them, in the most immediate, will probably be sales on the ATM equity issuance, paying it down with equity. We are in talks with our lender group to refinance our revolving credit facility. There is a potential of transferring some of that to a term loan as well. Obviously, we've done one private placement, and if rates cooperate, we could potentially do another.

Speaker 5

Okay. In terms of you talked a little bit about office and on the leasing front, maybe in terms of the 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, your turn to office, etc.?

Speaker 1

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.

Speaker 5

I guess the question is, are you seeing them tighten or maybe even widen as you look to potentially sell office assets to kind of redeploy into industrial?

Speaker 1

Our recent sales show, I wouldn't say tightening, but cap rates that work for us as it relates to the exit of those to be able to recycle into industrial.

Speaker 5

Okay. It was kind of the same case in Q1, but a little bit more elevated variable rental revenue offsetting elevated expenses. Is there something specific driving that?

Speaker 0

Not really. I mean, sometimes it's seasonal. There's nothing.

Speaker 5

Is there anything kind of maybe one time in Q2 that wouldn't flow through to Q3 in either a reimbursement perspective or maybe even a top-line rental revenue perspective?

Speaker 0

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

Speaker 5

there anything kind of one time in rental revenue, either lease termination fees or?

Speaker 0

That's not going to go into the variable rents, no. That's not a recovery.

Speaker 5

No, I understand. Just in general, in the rental revenue in two queues.

Speaker 0

I'll say that again.

Speaker 5

Anything in total rental revenue in Q2 2025 that was one time?

Speaker 0

There's nothing in there that was elevated or one time, no.

Speaker 5

Okay, I appreciate that. That's it for me. Thank you very much.

Speaker 1

Thank you.

Speaker 3

Hey, operator, do we have a fifth question?

Speaker 4

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Speaker 3

Okay. Thank you very much. Nice, nice list of questions. We hope next quarter we'll get twice that many. This is very good when you guys start following us and asking questions. That's the end of this. We had a good quarter, and we're looking forward to the rest of the year being good. That's the end of this conversation.

Speaker 4

This concludes today's teleconference. Thank you for your participation and have a wonderful day.

Speaker 3

Thank you.