Q4 2023 Gladstone Commercial Corp Earnings Call
Participants
David Gladstone; Chairman of the Board, Chief Executive Officer; Gladstone Commercial Corp
Michael LiCalsi; General Counsel & Secretary; Gladstone Commercial Corp
Buzz Cooper; President; Gladstone Commercial Corp
Gary Gerson; CFO & Assistant Treasurer; Gladstone Commercial Corp
EJ Wislar; Chief Investment Officer, Head of Southeast and Northeast Regions; Gladstone Commercial Corp
John Massocca; Analyst; B. Riley Securities Inc.
Presentation
Operator
Greetings and welcome to the Gladstone Commercial year end and fourth quarter earnings call. At this time, all participants will be in listen-only mode and a question-and-answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star-zero from your telephone keypad. Please note this conference is being recorded. On that turn the conference over to Mr. David Gladstone, Chief Executive Officer. Mr. Gladstone, you may now begin your presentation.
David Gladstone
Thank you, Rob. That's a nice introduction and thank all of you for calling in this morning. That's there. It's nice of you enjoy the time that you take away from your day to come. Listen to our phone presentation, we shared more time to talk to you. We only get this sort of once a quarter.
Now I hear from Michael LiCalsi, say our general counsel and secretary to give us the 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, 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 and 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 risk factors in our Forms 10 Q, 10 K and other documents we file with the SEC can find them on our website, gladstonecommercial.com, specifically the Investors page on the SEC's website, which is w. w. w. dot SEC dot GLV, 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.
Today, we'll discuss FFO, which is funds from operations and our 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 nonrecurring 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 and please visit our website. Once again, gladstonecommercial.com sign up for our e-mail notification service could also find us on Facebook keyword. There is The Gladstone Companies and on Twitter at GladstoneComps that today's call is an overview of our results. So we ask that you review our press release and Form 10K, 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 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 27. 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, 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. And 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 of primary 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 2020 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 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 31st, 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 tenants, 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 value, both upon lease renewal.
Our balance sheet is healthy and flexible positioning us to continue deploying capital into industrial deals at accretive cap rates as seller expectations normalize since January first, 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 in the first maturity of those five 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 leasebacks in particular to be the primary source of new deals for us and sale-leasebacks 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 Garrison our CFO, to review our financial results for the quarter and our liquidity position. Gary?
Gary Gerson
Thank you. Because 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 36 per cents 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 and FFO and core FFO for the 12 months ended December 31 $1.46 and $1.47, respectively.
FFO and core FFO for the same period in 2020 to $1.54 and $1.56 per share, respectively. Our same-store cash rent in the fourth quarters of 2023 increased by 6.5% over the same period in 2022. This was due to a one-time accelerated rental 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 in 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 hedged 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 silver was 5.38%. Our outstanding bank term loans are hedged with $300 million of interest rate swaps and the remainder with interest rate caps. We continue to monitor and 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 encumber two properties held for sale as of the end of the quarter, we had $75.8 million 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 for ATM 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 $0.3 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
Thank you, Gary. That was a good report, Buzz and Michael had 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, 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 in the fourth quarter, they acquired two new industrial facilities, again, manufacturing oriented. They sold two non-core properties. These were both office properties and we're talking about the end of December 31st, 2023, of course, are off to a good start. We also during the last quarter at least six of our properties subsequent to the end of the quarter, we sold an additional non-core flash office. The commercial team is growing the real estate that we own at a good pace. And the team doing is doing a great job of managing the existing properties. We have a quite a good team of people that are worth those deals that come up and very proud of them. Our team of strong professional continue to pursue the potential quality project problems, 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, but that's really enough from me. Let's stop here and Rob of your come off, then Alaska and show them how to ask questions we'll face questions of Mr.
Question and Answer Session
Operator
Thank you, Mr. Gladstone. If you'd like to ask a question at this time, please press star one from your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you'd like to remove your question from the queue from participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please while we poll for questions. And that’s star one. Thank you. Our first question today is coming from the line of John Massocca with B. Riley Securities.
John Massocca
Are you touching on it somewhere in the call and I missed it, but have you made a decision yet on the incentive fee going forward into 2024? Is that something you are still considering spending or is that going to be essentially back in kind of operating expense next this year?
Buzz Cooper
Hey, John, good morning. It's because, Tom, we are having internal discussions. We have not met with the Board and had any formal recommendations at this point. So I cannot give you a definitive answer, but we are obviously looking at all or alternatives as we did waive it last year. As we look going into 24, we obviously want to be cognizant of doing the right thing if that's understood.
John Massocca
And then in terms of kind of the existing vacancy, can you provide some updates on either you potential your disposition potential or lease up just given the number kind of stayed flat quarter over quarter in terms of both partially vacant assets and fully vacant?
Buzz Cooper
Sure. And I'll hit first obviously at the asset we have discussed previously our asset in Austin on Parmer. We have had some interest there. We continue to work with the tenancy trying to attract new tenancy or expansion.
David Gladstone
There are some requirements in the market that are of good size. I can't disclose who they are that we are certainly running down and trying to work with our hope there is to get tenancy. And then within that building, look to see what is best for us for the stockholders as it relates to hold or sell. But at this point in time, I don't have anything from the standpoint being able that I can report from leasing activity there other than that and I have my CIO. here, EJ Wislar. I can have him comment on some activity, positive activity that we have on our leasing front with with within the portfolio. I do want to state that it's all very positive.
EJ Wislar
And I think, as you know, we stay in front of our tenants on a quarterly and certainly annual basis. So we're ahead of the curve as it relates to our vacancy, EJ, thanks.
But John, as we kind of look at where things stand today and our current held for sale as of 1231. And obviously, it was mentioned that there's an additional asset held for sale currently. A few of those are vacant office assets. So as we kind of look at our capital allocation strategy, making sure we're being the most efficient of whether we want to break those buildings or sell them and redeploy those proceeds. I would expect we'd see that vacancy rate improve over the next few quarters as we dispose of the few Vacon office assets.
John Massocca
Okay, understood. And then maybe just on a line item basis, your property operating expense was paid down in the quarter and you called out some successful real estate tax appeals. Can you maybe just provide some more color on that? And is that something that's sustainable on a go-forward basis? Or is that kind of a one-time true up in 4Q?
Buzz Cooper
I'll let Gary handle that if I may. I will tell you that we are aggressive where we can be as it relates to appeals and we've had successes there.
Gary Gerson
Yes, John, as I mentioned, as a one-time, I think these were appeals. So they lowered the taxes on some of these buildings from, I believe one of them was in Texas, which was significant or two in Texas that were significant, and I think that's going forward. So these are really these are basically reappraisals from a tax perspective.
John Massocca
It's not just a true up in there for what was budgeted in 2013. It's a lower base tax rate essentially.
Buzz Cooper
Yes.
John Massocca
And I will cede the floor.
David Gladstone
Thank you very much, Mr. Frank, thank you for the next question.
Operator
I guess the next question is from the line of Dave with Stonegate.
I just want to start up. Occupancy had a really nice jump subsequent to the end of the quarter. Is that product of a couple of good wins, one giant, when kind of what's the story there.
Buzz Cooper
As mentioned, we do stay in front of the tenants and obviously work with them. We're well ahead of our lease expirations and discussions. So we have had some successes there. As I referenced in my notes, I have several loans exactly on the main four square feet and 1.2 million in that operating increase on the same store GAAP rent. And so we are again actively engaged there and had good success. We will continue that as we go in into 2024.
I also ask you, Jay, to give a comment here on a couple that he has been working as well specific because our concentration Select, but where it light relative to one asset that we are in good stead with.
EJ Wislar
Thanks. The on the occupancy increase was also related to the sale of one vacant office asset in South Carolina. So that was an improvement there. And as I mentioned before, we've got a few more vacant office assets that will be sold here in the next quarter or so.
Very helpful. Thank you. And then you mentioned in the comments that you're focusing more on higher quality credit tenants. Is that comment on just demand being strong enough that you can focus on is higher-quality tenants? Or is that more of a comment on spread shrinking between high-grade and low-grade tenants given kind of what's driving that increased focus, obviously with the market and with our company history.
Buzz Cooper
We've always been focused on credit of our tenancy.
David Gladstone
I'll let EJ take that specific to market from the standpoint of what the market is also providing to us in the way of tenancies? EJ?
EJ Wislar
Yes, Dave, when we say high-quality tenants, it doesn't necessarily mean a rated investment grade tenants. What we mean is when we look to acquire mission critical industrial assets where the underlying tenancy has strong fixed charge coverage ratios, moderate to low leverage, strong EBITDA margins and operates in a countercyclical or defensible industry with a strong moat and so what we like to do is acquire those mission critical assets that are generating an outsized portion of corporate revenue and EBITDA and free cash flow at the asset level and so we certainly do like to acquire them assets leased to rated investment grade tenants. But there's also something to be said for acquiring an asset that is very important to the underlying tenant. So when we say credit tenants, it's not just investment grade, but also those kind of upper middle market tenants that we get additional granular information into their operations that helped us underwrite.
Understood. That's very helpful. And then just one more for me. Do you have a sense of what your geographic focus is going to be in 2024 on one way or another.
David Gladstone
And we have obviously seen as it relates to the health of the country from the standpoint of growth has been Southeast South Central in nature, so we have had good success there. And certainly at the concentration, the more we do, the more that also comes our way. I'll let EJ get more specific on those markets. But that's where we are as well as the Midwest seeing a focus. It's not on the West and it's not certainly in the Northeast at this point in time. And we've had good success.
EJ Wislar
Yes, Dave, when we look at our markets, where we like to see is business-friendly environments with strong demographic inflows as well as business formation. And so that leads us to be focusing on places like the Sunbelt as well as some select Midwest markets. And we like those markets as well. They've got a strong manufacturing base and we like the light manufacturing space and that the tenants are very sticky, meaning they've got significant capital invested into the assets, which increases the renewal probability. So I would expect you'll see us continue to focus on those markets over the next few years.
That's all very helpful. Thank you for taking my questions.
Buzz Cooper
Thanks, Dave.
David Gladstone
Yes, okay, Rob, any more questions?
Operator
There are no additional questions at this time, Mr. Gladstone.
David Gladstone
Oh, that's terrible anymore questions, like when you ask questions. So now you're going to have to hold your question until next quarter. So we'll see you next quarter at the end of this conference call.
Operator
Thank you. This will conclude today's call. You may disconnect your lines at this time. We thank you for your participation.
