Gladstone Commercial Corporation (NASDAQ:GOOD) Q4 2023 Earnings Call Transcript
Gladstone Commercial Corporation (NASDAQ:GOOD) Q4 2023 Earnings Call Transcript February 22, 2024
Gladstone Commercial Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Gladstone Commercial Year-End and Fourth Quarter Earnings Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I'll now turn the conference over to Mr. David Gladstone, Chief Executive Officer. Mr. Gladstone, you may now begin your presentation.
David Gladstone: Okay, thank you, Rob. That's a nice introduction, and thank all of you for calling in this morning. It's nice of you. We enjoy the time that you take away from your day to come listen to our phone presentation. Wish I had more time to talk to you. We only get this sort of once a quarter. Now we’ll hear from Michael LiCalsi, our General Counsel and Secretary, give us legal and regulatory matters concerning the call today. Michael?
Michael LiCalsi: 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. 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, gladstonecommercial.com, specifically the Investors page, or on the SEC's website, which is www.sec.gov.
And 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'll 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. And 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, gladstonecommercial.com, sign-up for our email notification service.
You can also find us on Facebook, key word there is The Gladstone Companies. And on Twitter, @gladstonecomps. Today's call is an overview of our results. So we ask that you review our press release and Form 10-K, again, both issued yesterday for more detailed information. And with that, I'll hand the baton over to Gladstone Commercial’s President, Buzz Cooper. Buzz?
Buzz Cooper: Thank you, Michael, and thank you all for calling in. Today, we will discuss our operations and topics that are top of mind. Interest rates continue to have outsized impacts on capital markets and real estate. In October 2023, the benchmark 10-year treasury yield peaked above 5% for the first time since 2007. Rates remained volatile through the end of the year with the 10-year yield finishing below 4% and increasing to 4.32% as of yesterday. This volatility translated directly to capital markets and investment volumes as sellers' pricing expectations lagged real-time changes in rates. According to CBRE, the net lease investment volume fell 55% year-over-year through Q3 of 2023. Despite volatile capital markets, industrial real estate, which now accounts for more than 60% of our annualized straight line rent, continues to perform.
According to CBRE, average industrial asking rents in Q4 of 2023 rose 6% year-over-year, and the industrial vacancy rates at the end of the year were just 4.8% despite record annual completions of 612 million square feet. Moving on to office, the broader market continued to struggle in 2023. According to Cushman Wakefield, office net absorption in Q4 of 2023 was negative for the eighth consecutive quarter. We made tremendous progress throughout the year of delivering on our current core strategies, divesting non-core office assets, acquiring mission-critical industrial assets in the path of growth markets, and diligently underwriting our tenants' credits. We exited seven non-core markets and properties, completed nearly $30 million in new acquisitions and increased portfolio industrial concentration from 56% of annualized straight-line rent as of December 2022 to 60% as of December 2023.
All of our acquisitions throughout the year were completed in established growing markets including Chicago, Dallas-Fort Worth, Indianapolis, and the Lehigh Valley in Pennsylvania. Furthermore, the acquisitions improved portfolio WALT with a weighted average lease term at closing of 19.3 years. In addition to new acquisitions during the year, our asset management team led more than 1.4 million square feet of leases, resulting in a more than [$1.2 million] (ph) or 13% net increase in same-store GAAP rent. The annualized straight line rent of these transactions totaled $10.7 million. While we cannot control the Fed or predict exactly where interest rates will go, we remain confident that all of these developments have better positioned our portfolio for 2024.
Portfolio occupancy was at 96.8% as of December 31, 2023, and we collected 100% of cash base rents during the year. This is a testament to the mission-critical nature of our assets and quality credits of our tenant, both of which position us well to weather any economic storms we may face. In addition, we believe there are levers which we have yet to fully realize. Most of our industrial assets have fixed annual escalations of 1.5% to 3.5%. Industrial rent growth over the last few years has exceeded these escalation rates, resulting in rents that are below market and valuable upon lease renewal. Our balance sheet is healthy and flexible, positioning us to continue deploying capital into industrial deals at accretive cap rate as seller expectations normalize.
Since January 1st of 2022, we have repaid more than $194 million of mortgage debt and grown our unencumbered asset base by 61% from $51 million -- excuse me, $510 million to $822 million. Following the completion of the four office building sales currently under contract, we'll have only five office mortgages remaining and the first maturity of those five is in 2026. We have $56.5 million in available liquidity via our revolving credit facility and cash on hand and remain below 50% levered as of December 2023. In short, 2023 was a successful year for selling legacy non-core office assets and redeploying proceeds into mission-critical industrial assets. Seller expectations have yet to fully normalize to the new standards set by the Federal Reserve, but as we do, we will be well positioned to capitalize on accretive new opportunities.
We expect sale lease backs in particular to be the primary source of new deals for us and sale lease backs provide additional credit diligence and term, which are both hallmarks of our value proposition. Our balance sheet is flexible, driven by more than $154 million of net mortgage debt reduction since January of 2022. And again, we have more than $56 million of liquidity on hand to continue growing our industrial base. Since 2019, our industrial concentration as a percentage of annualized straight-line rents has increased from 32% to 60%, and we expect to further increase this concentration in the next six to 12 months. I will now turn the call over to Gary Gerson, our CFO, to review our financial results for the quarter and our liquidity position.
Gary?
Gary Gerson: Thank you, Buzz. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the fourth quarter of 2023. 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 $0.36 per share for the quarter. FFO and core FFO available to common stockholders during the fourth quarter of 2022 were both $0.34 per share. FFO and core FFO for the 12 months ended December 31st were $1.46 and $1.47 respectively. FFO and core FFO for the same period in 2022 were $1.54 and $1.56 per share respectively. Our same store cash rent in the [four quarters] (ph) of 2023 increased by 6.5% over the same period in 2022.
This was due to a one-time accelerated rent and increased recovery. Fourth quarter results reflected total operating revenues of $35.9 million with operating expenses of $28.1 million as compared to operating revenues of $37.2 million and operating expenses of $25.7 million for the same period in 2022. Expenses were higher in this period mainly due to impairment charges offset by the waiver of the incentive fee in 2023. Looking at our debt profile, 40.1% is fixed rate, 49.7% is hedge floating rate, and 10.2% is floating rate, which is the amount drawn on our revolving credit facility. As of December 31st, our effective average SOFR was 5.38%. 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 2024 loan maturities are manageable with $15.6 million due, which encumbered two properties held for sale. As of the end of the quarter, we had $75.8 million dollars of revolver borrowings outstanding. We sold 1,776 shares of common stock this quarter, resulting in net proceeds of $24,000 through our at-the-market program or ATM. We received net proceeds of $400,000 from sales of our Series F Preferred Stock. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. Presently, we have four properties held for sale. As of today, we have approximately $3.4 million in cash and $51.5 million of availability under our line of credit.
We encourage you to also 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 $12.51. The distribution yield is about 9.59%. And now I'll turn the program back to David.
David Gladstone: Well, thank you, Gary. That was a good report, and Buzz and Michael did good reports as well. This team has performed very well and reacted admirably to the various changes presented by the lasting impact of the pandemic changes in the economy. Overall, I just have to tell you, it's a very nice quarter. So you heard today of some of the things that they've been doing. In summary, during the fourth quarter, they acquired two new industrial facilities, again, manufacturing-oriented. They sold two non-core properties. These were both office properties. We also, during the last quarter, leased six of our properties. Subsequent to the end of the quarter, we sold an additional non-core [Technical Difficulty]. The commercial team is growing the real estate that we own at a good pace and the team is doing a great job of managing the existing properties.
We have a quite a good team of people that are working those deals that come up and very proud of them. Our team of strong professional continue to pursue the potential quality projects on the list of acquisitions that they are reviewing. They've got quite a list to go through now. Our acquisition team is seeking only strong credit tenants, not going after the marginal ones. Well, that's really enough from me. Let's stop here and, Rob, if you'll come on and ask and show them how to ask questions, we'll take some questions from those who are listening.
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