Gladstone Commercial - Earnings Call - Q4 2024
February 19, 2025
Executive Summary
- Q4 2024 was operationally solid but softer sequentially: Core FFO/share of $0.35 fell from $0.38 in Q3 as Q3 benefited from a one-time deferred maintenance settlement; total operating revenue declined 4.7% q/q to $37.4M while occupancy improved to 98.7%.
- Balance sheet strengthened: Year-end leverage reduced to 44.1% of gross assets (from 46.1% in 2023) and $75M of senior unsecured notes were issued; management targets “lower 40s” leverage and a higher unsecured mix over time.
- Strategy execution continued: 2024 rent collections were 100%, industrial mix increased to 63% of rent, and seven non-core assets were sold; management reiterated a near-term goal to reach at least 70% industrial.
- No formal 2025 quantitative guidance was issued; dividends for Jan–Mar 2025 were declared at $0.30/quarter in total on common (paid monthly), and management highlighted a ~$100M annual acquisitions run-rate aspiration with dispositions of select office assets.
- Street estimates context: S&P Global consensus data for Q4 2024 was unavailable at time of analysis due to an access limitation, so beat/miss vs consensus cannot be assessed at this time (see Estimates Context).
What Went Well and What Went Wrong
What Went Well
- Occupancy and collections: Portfolio was 98.7% leased at year-end and the company collected 100% of 2024 base rent; management emphasized “stabilized revenues” from high occupancy and collections.
- Industrial mix rising with disciplined capital recycling: Industrial concentration increased to 63% of annualized straight-line rent; the team sold seven non-core assets in 2024 (recognizing meaningful gains) and is targeting ≥70% industrial near term. “We will continue to opportunistically sell non-core assets and redeploy the proceeds into stronger target growth markets with a focus on industrial”.
- Balance sheet progress and market access: Overall leverage declined to 44.1%, secured net mortgage debt and total net debt were reduced, and GOOD accessed a new market via a $75M unsecured private placement; “we intend to continue on with private placements…the interest rate we got…was pretty strong for a first-time issuer”.
What Went Wrong
- Sequential earnings pressure: Core FFO/share decreased to $0.35 from $0.38 as Q3 included a deferred maintenance settlement; total operating revenue fell 4.7% q/q to $37.4M and net income declined to $7.2M from $11.7M.
- Other income/expense volatility and impairment: “Other (expense) income, net” swung to a $(5.2)M loss vs +$1.0M in Q3; the quarter also included a $1.8M impairment charge on one property.
- Office remains a managed headwind: While performing, office exposure (33% of rent at year-end) remains a focus for dispositions over the next 12–18 months; vacancy is concentrated in one or two assets, with one NC office lease expiring end of March and slated for sale.
Transcript
Operator (participant)
Greetings. Welcome to Gladstone Commercial Corporation Year-End Earnings 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, please press star zero on your telephone keypad. 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 (Chairman, CEO and President)
Thank you, Sherry. That was a nice introduction, and thanks to all of you for calling in this morning. We enjoy the time that we have with you on the phone and wish we had more time to talk to you. Now we'll hear from Michael LiCalsi. He's our General Counsel and Secretary to give you the legal and regulatory matters concerning the call of this report. Michael, it's your turn.
Michael LiCalsi (Chief Administrative Officer, Co-General Counsel, and Co-Secretary)
Thanks, David, and 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. The many factors 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 we file with the SEC. You can find them on our website at gladstonecommercial.com. Specifically, go to the investors' page, or you can go to 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.
Now, today we will discuss FFO, which is funds from operations. The 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. Now, we believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance. Now, 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 now X, @GladstoneComps. Today's call is an overview of our results, so we ask that you review our press release and Form 10-K, both issued yesterday, for more detailed information.
Now, with that, I'll hand it over to Gladstone Commercial's President, Buzz Cooper. Buzz.
Buzz Cooper (President)
Thank you, Michael, and thank you all for joining today's call. We look forward to updating you on our quarter and year-end results, current portfolio, and our 2025 outlook, focusing first on the broader economic environment. Last month, Donald Trump assumed office, ushering in a new administration, policy goals, and economic agenda. Shortly thereafter, the Federal Reserve announced a pause in interest rate cuts after progress toward the 2% long-term inflation target stalled. The length of the pause is still to be determined, but in the meantime, U.S. Treasury yields remain volatile. Looking back on 2024, industrial real estate continued to outperform in spite of numerous headwinds, including interest rate volatility, inflation, and labor disputes. According to Cushman & Wakefield, net absorption totaled 135 million sq ft for the year, on par with forecasts. Q4 2024, industrial vacancy rose by 160 basis points to 6.7%.
This pace of increase was the slowest in two years, signaling that we may approach peak vacancy in the near future. Finally, new deliveries fell in Q4 2024 to the lowest level since mid-2021, driven by high interest rates and the excess new supply we saw coming online post-COVID. While industrial fundamentals held up during the year, we have yet to see capital markets fully return. According to CBRE, for the year-end December 31, 2024, single-asset investment volume increased by 5.1% year-over-year to $67.9 billion. Total commercial real estate volume over the same period increased by 6.4%. Moving on to our portfolio, we are once again very confident heading into the new year and quarter.
During 2024, we collected 100% of cash-based rents, acquired campus properties for $26.8 million, totaling 316,727 sq ft, increased portfolio industrial concentration as a percentage of annualized straight-line rent to 63%, renewed or extended more than 2.9 million sq ft of leases at 11 properties, resulting in a $3.8 million net increase in GAAP rent. We sold seven properties consisting of five office and two medical office properties. We increased portfolio occupancy to 98.7% as of December 31st, 2024, and we closed on a $75 million private placement of senior unsecured notes. While we remain focused on increasing our industrial concentration to at least 70% in the near term, we will not compromise our underwriting standards to achieve this goal. Over the past year, we reviewed and underwrote hundreds of opportunities, many of which did not meet our target criteria.
We saw numerous opportunities with credits that showed cracks in the face of rate increases or real estate that was overpriced due to inflation or eager purchasers. We will not loosen our underwriting standards to acquire those assets, and we are confident our disciplined approach will drive long-term value, as evidenced by the private placement we did close in December. Looking forward to 2025, we firmly believe that we are well-positioned to capitalize on the right opportunities regardless of the economic environment. With more than $98 million in availability via our line of credit and cash on hand, we remain well-positioned to deploy capital into accretive industrial acquisitions. Several opportunities are currently under exclusivity or contract, with closing expected in the coming months. Our portfolio continues to generate sustainable cash flow.
We are more than 98% occupied as of December 31st, and we have not seen our tenant credit quality deteriorate in the face of higher for longer interest rates. Our portfolio management team has done a superb job over the last year and will continue to dispose of non-core office assets. Finally, our balance sheet is further strengthened by the private placement, with the potential for follow-on offerings in the future. We will continue to be mindful of our overall leverage as we grow our balance sheet and portfolio of mission-critical assets. I will now turn the call over to Gary to review our financial results for the quarter and liquidity position. Gary?
Gary Gerson (CFO and Asisistant Treasurer)
Thank you, Buzz. Good morning, everyone. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the first quarter of 2024. 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 both $0.35 per share for the quarter. FFO and core FFO available to common stockholders during the fourth quarter of 2023 were both $0.36 per share. FFO and core FFO for the 12 months ended December 31st were $1.41 and $1.42 per share, respectively. FFO and core FFO for the same period in 2023 were $1.46 and $1.47 per share, respectively. Same-store rents increased by five percent in the three months ended December 31st over the same period in 2023 due to increased straight-line rent rates and recovery revenue associated with one of our properties.
Our same-store rent for the year ended December 2024 increased by 2.3% over the same time period in 2023 due to an increase in recovery revenue from property operating expenses and a settlement received at one of our properties related to deferred maintenance during the current period, partially offset by accelerated rent attributable to a lease terminated in the prior period. Our fourth quarter results reflected total operating revenues of $37.4 million, with operating expenses of $25 million, as compared to operating revenues of $35.9 million and operating expenses of $28.1 million for the same period in 2023. Operating revenues were higher in 2024 due to increased straight-line rental rates and recovered revenue associated with one of our properties. Expenses were higher in 2023 for the 2023 period, mainly due to larger impairment charges offset by higher property operating expenses in 2024.
Looking at our debt profile, 49% is fixed rate, 50% is hedged floating rate, and one percent is floating rate, which is the amount drawn on our revolving credit facility and one mortgage note. As of December 31st, our effective average SOFR rate was 4.49%. Our outstanding bank term loans are hedged with $310 million of interest rate swaps and the remainder with interest rate caps. We continue to monitor interest rates closely and update our hedging strategy as needed. As of today, our 2025 loan maturities are manageable at $10.4 million. As of the end of the quarter, we have $1.9 million of revolving borrowings outstanding. Comparing year-end 2024 to 2023, we reduced overall leverage from 46.1% of gross assets to 44.1%. We reduced secured net mortgage debt from $283.9 million-$258.6 million and reduced total net debt from $726.9 million-$682.4 million.
We issued $75 million of senior unsecured notes in a private placement with institutional investors and are in a new market for raising long-term debt capital, and as Buzz mentioned, we've increased our percentage of industrial from 60%-63% and reduced our office from 36%-33%. During the year-ended December 31st, 2024, we sold 3,699,597 shares of common stock under our ATM program, raising net proceeds of $53.5 million. We also received net proceeds of $1.1 million from the sales of our Series F preferred stock through December 31st. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. At present, we have two properties held for sale. As of today, we have approximately $8 million in cash and $90 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 stock closed yesterday at $16.04 with a yield of approximately 7.5%, and now I'll return the program back to David.
David Gladstone (Chairman, CEO and President)
Oh, that was a good report, Gary, and a good one from Buzz and Michael too. The team that we've got now is performing very well overall, a very nice quarter. As you heard today, in summary, during the fourth quarter, we acquired an industrial facility in St. Clair, Missouri, and we spent about $5.2 million doing that. So we may have some more this month, but that's the one that we did in the last quarter. We sold one non-performing core property, so that's gone, and we renewed leases of two of our properties, so we are still in very good shape. The commercial team is growing the real estate that we own at a good pace, and the team is doing a great job managing the properties that we own, especially during these challenging times.
Our team of strong professionals continues to pursue potential quality properties, and the list of acquisitions that we're reviewing continues to grow nicely. The acquisition team is seeking strong credit tenants. A lot of people talk about being location, location, location. We're always into who is the team that's running the business. Okay, let's stop here, and the operator, if you'll come on and help some of our listeners ask a lot of good questions for this time.
Operator (participant)
Yes, sir. 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question is from Gaurav Mehta with Alliance Global Partners. Please proceed.
Gaurav Mehta (Managing Director)
Yeah, thank you. Good morning.
David Gladstone (Chairman, CEO and President)
Good morning.
Buzz Cooper (President)
Good morning.
Gaurav Mehta (Managing Director)
I wanted to ask you on your balance sheet. I was hoping to get some more color on your leverage expectations. I think you said it's 44.1% as of 4Q, and just wanted to hear if that's close to your target number or you expect your leverage to go lower, and then, as a follow-up on the balance sheet, also wanted to learn what your expectations were between secured and unsecured debt mix within your capital structure.
Gary Gerson (CFO and Asisistant Treasurer)
Well, our goal is to continue to deliver. Getting down, we're at 44.1%. We'd like to get that down further, probably in the lower 40s. And then, as far as secured debt, we continue to decrease that as an overall proportion of our debt and an absolute basis. So that's really where we're going with that. We want to build up on the unsecured debt, but overall, less debt on the balance sheet.
Gaurav Mehta (Managing Director)
Okay.
Second question.
A follow-up on your industrial focus. I think you said 70% in the near term. Do you expect to achieve that 70% this year?
Buzz Cooper (President)
We're very hopeful of that. Obviously, it's going to be in combination of acquisitions as well as dispositions, but I believe that we will as it relates to the percentage relative to straight-line rent.
Gaurav Mehta (Managing Director)
Okay. Thank you. That's all I had.
Buzz Cooper (President)
Thank you.
Gaurav Mehta (Managing Director)
Thanks, Buzz.
David Gladstone (Chairman, CEO and President)
Okay. Do we have another question, operator?
Operator (participant)
Yes. Our next question is from Rob Stevenson with Janney Montgomery Scott. Please proceed.
Rob Stevenson (Managing Director)
Good morning, guys. Buzz, given your acquisition commentary, can you talk about the market depth today for the office assets that you want to sell over the next 12-18 months? Are the transactions happening and what the sort of pricing looks like these days relative to 6, 12, 18 months ago on the office side?
Buzz Cooper (President)
Sure. Thanks, Robin. As you know, we've been very selective on our sales. We are not looking to just sell to sell. Our office portfolio has a vacancy factor of seven percent. But as we look to sell, it's going to be opportunistic at this point in time, as well as we want to make sure that we backfill that income that we may be losing with industrial income. So I think we will identify four or five that we will sell here during the year. But if we see something opportunistically on the sale side relative to office, we'll take it. We know it's important to continue to drive down that office portfolio. But again, I would reiterate, it is performing.
Rob Stevenson (Managing Director)
Okay. And where is the 130 basis points of vacancy today? Is that aggregated in one or two assets? And what's the prospects for releasing or selling those in 2025?
Buzz Cooper (President)
The majority of the occupancy, excuse me, vacancy, is in one or two assets, a couple of which that will from expiring rents here, for instance, a property in North Carolina that's going to fall off the books at the end of March at the expiration of that lease. So we won't have that office property to release or have to worry about. The majority is one or two assets. But as it relates to our overall concerns over this year, we have two of the properties that make up approximately three percent of those leases that are come and due are scheduled to be sold or have a lease in place that they have an option to purchase. Of the others that we have specific to office, we have turned proposals on two of those buildings and are waiting response to extending the leases.
Rob Stevenson (Managing Director)
Okay. That's helpful. And then one for you, David. How should we be thinking about the incentive fee waivers going forward? Is 2025 likely to look a lot like how you did it in 2024? Is there something that fundamentally flips in 2025 and commercial goes back to paying the entire incentive fee this year? How should we be thinking about that as we play with our models over the next few days?
David Gladstone (Chairman, CEO and President)
As you can imagine, everybody here would like to go back to the original. And so they're working hard to fill in where they need to fill in in order to get it back to a stronger payment to the employees here. But you know our position. We don't pay ourselves if we're not doing a good job for our shareholders. It's shareholders first at this company. Rob, I wish I knew the projections well enough to say to you when we'll be back to that. But I don't have a date yet in mind. And I think we're going to be much stronger this year than we were last year. So hopefully that gives you a feeling of security about what we're doing here.
Rob Stevenson (Managing Director)
Okay. Perfect. Thanks, guys. Appreciate the time this morning.
David Gladstone (Chairman, CEO and President)
Thank you.
Do you have any more questions?
Operator (participant)
Yes. Our next question is from John Massocca with B. Riley Securities. Please proceed.
John Massocca (Senior Research Analyst)
Good morning.
David Gladstone (Chairman, CEO and President)
Morning.
Buzz Cooper (President)
Morning, John.
John Massocca (Senior Research Analyst)
Let me start off with the balance sheet. Given the private placement on secured issuance recently completed, I mean, is that kind of how we should expect funding to go forward? And I guess is that pricing kind of the correct pricing, at least in the current market in terms of interest rate?
Gary Gerson (CFO and Asisistant Treasurer)
John, it's Gary. I think we should expect that to be not our primary mode of financing. Obviously, we have the line of credit. We have bank term loans. But yes, we intend to continue on with private placements, the market willing, that the interest rate we got we thought was pretty strong for a first-time issuer. So it might be hopefully indicative and hopefully maybe even less in the future.
John Massocca (Senior Research Analyst)
Yep. That's helpful. And then on the leasing front, can you just provide a little color on leasing activity in 4Q? I know you gave kind of numbers and metrics, but were those industrial assets, office properties, and kind of maybe how did rents trend versus what was in place before renewal or releasing?
Buzz Cooper (President)
They were both office and industrial. The majority was industrial. They also were plus-ups as it relates to industrial, but also in the office. The office deals were mostly on five years. We see that trend continuing as we look to renew current office buildings. And then on the industrial side, various pockets around the country. And again, we did see a large one last year up in Pennsylvania. We are seeing a plus-up in rents as it relates to those renewals.
John Massocca (Senior Research Analyst)
Okay, and then I know we've had time in the last earnings call, but maybe more in the context of 2025. Just broad strokes, what's kind of the CapEx expectations just balancing the relatively small amount of leases expiring in the current year versus maybe some more meaningful lease expirations in 2026 and 2027? Just trying to think about how spending there might go in the current year.
Buzz Cooper (President)
Obviously, CapEx that we have been spending on renewals is what I'll term positive CapEx for us, both with the retention of the tenancy, but it does bring an increase in rent. So we don't have a lot of expense from a capital expenditure point within our buildings. The majority of it is leasing expenses and improvements to the buildings. Of that, we have it budgeted. It's very manageable. But again, a majority of it has been and will be here in the certainly next nine months going to be for those dollars that we had to spend in leasing commissions in order to have the nice plus-up that we had coming out of 2024.
John Massocca (Senior Research Analyst)
Okay. That's helpful, and that's for me. Thank you very much.
Buzz Cooper (President)
Thank you.
David Gladstone (Chairman, CEO and President)
Okay. Do we have any other questions today?
Operator (participant)
Yes, we do. Our next question is from Dave Storms with Stonegate Capital. Please proceed.
Dave Storms (Director of Research)
Good morning.
Buzz Cooper (President)
Good morning, Dave.
Dave Storms (Director of Research)
Good morning. Just hoping to maybe get a sense of around the timing for some of the two hotel assets. Anything you can provide there?
Buzz Cooper (President)
As to timing, one is going to be in April first per contract. We don't see a reason for that not to occur. And the other would be in the second quarter, I think early April, most likely.
Dave Storms (Director of Research)
So thank you. And then just as it relates to the recycling program, is there any sense of what you're seeing in the spreading cap rates between maybe those held for sale assets and what you might have in the acquisition pipeline?
Buzz Cooper (President)
Dave, I'm not sure I understand that question unless you're asking the cap rate difference between sale to acquisition.
Dave Storms (Director of Research)
Yes, essentially.
Buzz Cooper (President)
Okay. Obviously, on the acquisition side, we are seeing cap rates need to play in an area of 7.5%-8% going-in basis. Our sales are probably somewhat a little bit higher than that just because they're office, but not dramatically so. Because we don't have the pressure to, other than within the industry, to get office off our books, we can be selective.
Dave Storms (Director of Research)
Understood. That's very helpful. Thank you. And then just one more for me. Are you seeing any early impacts from some of the rhetoric around tariffs and some of the implementation of those tariffs?
Buzz Cooper (President)
Yeah. Thank you for that. We've canvassed our tenancy. Do not see an immediate impact as it relates to the potential threat of tariffs. Of course, we've got to see who and where they hit. But our tenancy currently has not expressed any such fear. We are looking forward that it may help create more industrial opportunities with reshoring and onshoring. So we are not currently seeing a great deal of stress as a result.
Dave Storms (Director of Research)
That's all for me. Thank you.
Buzz Cooper (President)
Thank you.
David Gladstone (Chairman, CEO and President)
Okay. Do we have any other questions today?
Operator (participant)
Yes. Our final question is from Craig Kucera with Lucid Capital Markets. Please proceed.
Craig Kucera (Managing Director)
Yeah. Hey, good morning, guys. Just following up on some of the discussion on capital recycling, can you give us a sense broadly of the dollar amount of what you might be acquiring and selling as you're reviewing things?
Buzz Cooper (President)
On the acquisition side, I'm hoping that it is a good bit more than what we had in 2024. We're looking forward to getting back to our what I'll call what I think is more normal production of, oh, $100 million a year. So I'm hopeful for that. I think we have a pretty good pipeline going in. They're not all booked, obviously. And as it relates to dispositions, that will allow us to be more discerning in our dispositions, looking to get rid of some of the office assets that we feel might be problematic down the road as it relates to what people are looking for in the marketplace. We've been, I think, pleasantly surprised with some of our dispositions on the creative activity of the buyers, either turning it into pickleballs, turning it into single-family and apartments.
Again, just to remind, we don't have properties in CBDs. So as a result, there's some local buyers that find some of our properties attractive to reposition.
Craig Kucera (Managing Director)
Okay. Great. You mentioned you had the North Carolina asset. I think it was an office asset expiring at the end of this quarter, which you expected to sell. But for the remaining 2025 expirations, are those office or industrial?
Buzz Cooper (President)
One is an industrial that is, again, under a lease with a purchase option, which we believe will get exercised. And two others are office, of which we do have, and that's approximately 110,000 sq ft. We do have exchange paper as it relates to renewals.
Craig Kucera (Managing Director)
Got it. And just one more for me. You did reclass a lease as a sales type this quarter. Is that going to still be a component of the base management fee calculation?
Gary Gerson (CFO and Asisistant Treasurer)
Yes, that will be. It's an odd kind of addition to the accounting, this ASC 842. This is the property, the industrial property that Buzz mentioned. And when they entered into the lease in November with our expectation of a sale, we had to, given the guidance, reclassify it as a sales type lease. It's kind of an odd deal. That's one of the reasons we have that large gain on sale on our balance sheet, on our income statement. But yes, to answer your question, we are accounting for that as part of the base management fee. It's still a piece of real estate on our balance sheet, but even though it's not on our balance sheet as a piece of real estate.
Craig Kucera (Managing Director)
Got it. That's what I figured. I just wanted to double-check. Thank you. Thank you. That's all for me.
David Gladstone (Chairman, CEO and President)
Okay. Any more questions today?
Operator (participant)
There are no further questions.
David Gladstone (Chairman, CEO and President)
Well, that was a little bit better than last quarter in terms of number of questions, but we'd love to have more questions. So next quarter, hope you guys get all tuned up and ask us lots of questions because we enjoy answering them. And I know our audience likes to hear it. All right. That's the end of this presentation. And so we'll say goodbye until next quarter.
Operator (participant)
Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.