Gladstone Commercial Corp. Q3 FY2024 earnings call

Key Points

• Concerned for hurricane-impacted communities, portfolio sustained minimal impact.
• Fed cut rates in September, job growth surged but labor market strength and inflation may affect rate cuts.
• Industrial real estate as growth driver; net absorption in US industrial market, supply side slowdown.
• Portfolio performance: increased industrial concentration, leased/extended over 242,000 sq ft, acquired industrial asset in Midland, TX, sold medical office assets, 100% cash base rent collection, 98.5% occupancy.
• Plans: Aim to increase industrial concentration to over 70% in next 12 months, dispose of non-core office assets, use office sale proceeds for industrial, leverage in-house credit underwriting for sale-leasebacks.

For the third quarter, industrial real estate concentration increased to 63% of annualized straight-line rent from 62%, while office decreased to 33% from 34%. FFO and core FFO per share available to common stockholders were both $0.38 per share for Q3 2024, similar to Q3 2023. Total operating revenues in Q3 2024 were $39.2 million vs $36.5 million in Q3 2023. Same-store rents increased 10.2% in Q3 2024 over Q3 2023 due to a settlement.

Forward-Looking

• Aim to exceed 70% industrial concentration in the next 12 months.
• Actively disposing of non-core office assets, with one industrial opportunity under contract to close in Q4.
• Intend to use proceeds from office sales to reinvest in industrial assets, leveraging in-house credit underwriting for sale-leaseback opportunities.

Risks

• Market volatility due to election, economic uncertainties, and potential impact on interest rates affecting cap rates and acquisitions.

Q: What was the amount of the settlement revenue?

A: The total amount was $2 million.

Q: What is the expected timing for selling the three properties held for sale?

A: One property is expected to sell by the end of 2024 and the other around mid-2025.

Q: What's the outlook for the acquisition market?

A: Activity is seen toward the end of 2024, with expectations of picking up in Q1 2025.

Q: Timing and cap rate of the industrial property under contract?

A: Closing in early Q4, cap rate over 9% over term.

Q: Thoughts on cap rate spread between office and industrial?

A: Competition in the market, but working to reduce cost of capital by recycling from office to industrial.

Q: Will the company continue tapping the ATM?

A: Likely to continue tapping the ATM for acquisitions, maintaining leverage, and possibly reducing leverage.

Q: Reason for increase in CapEx and leasing commissions?

A: Due to re-tenancy of a large asset in the Lehigh Valley with a new tenant, no large CapEx foreseen.

Q: Mix of lease expirations?

A: Mix of office and industrial, more office, some handled by dispositions.

Q: Competitive environment for buyers?

A: Some cautious, but seeing opportunities for sale-leasebacks.