Gladstone Commercial Corporation

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.

Well, 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. We wish we had more time to talk to you. Now we'll hear from Michael LaCalfe. 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.

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. For many future results expressed or implied by these forward-looking statements, including all the risk factors in our forms 10Q, 10K, and other documents we file with the SEC and find them on our website at GladstoneCommercial.com. Specifically, go to the Investors page. You can go to the SEC's website, which is .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. 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. We believe these metrics are a better indication of our operating results and allow better of our -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 key word there is the Gladstone Companies and Twitter, which is now X, at GladstoneComps. Today's call is an overview of our results, so we ask that you review our press release and form 10K, both issued yesterday for more detailed information. Now with that, I'll hand it over to Gladstone Commercial's president, Buzz Cooper.

Buzz? 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 percent 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 square feet for the year. On par with forecasts, Q4 2024 industrial vacancy rose by .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 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 percent year over year to $67.9 billion. Total commercial real estate volume over the year. Moving on to our portfolio, we are once again very confident heading into the new year and quarter. During 2024, we collected 100 percent of cash base rents, acquired campus properties for $26.8 million totaling 316,727 square feet, increased portfolio industrial concentration as a percentage of annualized straight line rent to 63 percent, renewed or extended more than 2.9 million square feet of leases at 11 properties resulting in a 3.8 million net increase in gap rent. We sold seven properties consisting of five office and two medical office properties. We increased portfolio occupancy to 98.7 percent as of December 31, 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 percent 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 percent occupied as of December 31, 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? Thank you, Buzz. Good morning, everyone. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the fourth quarter of 2025. All per share numbers referenced are based on fully diluted weighted average common shares. FSO and core FSO per share available to common stockholders were both 35 cents per share for the quarter. FFO and core FFO available to common stockholders during the fourth quarter of 2023 were both 36 cents per share. FFO and core FFO for the 12 months ended December 31 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 5 percent in the three months ended December 31 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 percent 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 in the 2023 period mainly due to larger impairment charges offset by higher property operating expenses in 2024. Looking at our debt profile, 49 percent is fixed rate, 50 percent is hedged floating rate and 1 percent is floating rate, which is the amount drawn on our revolving credit facility and one mortgage note. As of December 31, our effective average SOFR rate was 4.49 percent. 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 had $1.9 million of revolver borrowings outstanding. Comparing year-end 2024 to 2023, we reduced overall leverage from 46.1 percent of gross assets to 44.1 percent. We reduced secured net mortgage debt from $283.9 million to $258.6 million and reduced total net debt from $726.9 million to $682.4 million. We issued $75 million of senior unsecured notes in a private placement with institutional investors entering a new market for raising long-term debt capital. As Buzz mentioned, we've increased our percentage of industrial from 60 to 63 percent and reduced our office from 36 to 33 percent. During the year ended December 31, 2024, we sold ,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 31. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisition. 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 percent. And now I'll return the

program back to David. 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. 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're 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 parties that we're going, 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 operate if you'll come on and help some of our listeners ask a lot of good questions for this time.

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 poll for questions. Our first question is from Gurav Mehta with Alliance Global Partners. Please proceed.

Thank you. Good morning.

Good morning.

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 .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.

Gurav, our goal is to continue to de-lever 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 secure 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.

Okay. Second question.

And then 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?

Gurav, 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.

Okay. Thank you. That's all I have.

Thank you. Okay. Do we have another question, operator?

Yes. Our next question is from Rob Stevenson with Janie Moncler-Marie Scott. Please proceed.

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 to 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?

Sure. Thanks, Rob. And as you know, we've been very selective on our sales. We are not looking to just sell to sell. We are looking to see our office portfolio as a vacancy factor of 7%. 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 sales 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.

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 25?

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 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. 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 3% 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 providing response to extending the leases.

Okay. That's helpful. And then one for you, David, how should we be thinking about the incentive fee waivers going forward? Is 25 likely to look a lot like how you did it in 24? 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 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.

Okay. Perfect. Thanks, guys. Appreciate the time this morning.

Thank you. Any more questions?

Yes. Our next question is from John Misoka with the Riley Securities. Please proceed.

Good morning. Good morning,

John.

Let me start off with the balance sheet. Given the private placement and security issue you recently completed, is that kind of how we should expect funding to go forward? I guess is that pricing kind of the correct pricing, at least in the current market in terms of interest rate?

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 hopefully indicative and hopefully maybe even less in the future.

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?

They were both office and industrial. Majority was industrial. They also were plus ups as 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.

Okay. And then, I know we've talked about it 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 26 and 27, just trying to think about how spending there might go in the current year?

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 exposure 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.

That's helpful. That's great. Thank you very much.

Thank you. Okay. Do we have any other questions today? Yes,

we do. Our next question is from Dave Storms with Stonegate Capital. Please proceed. Good morning.

Morning, Dave.

Good morning. Just hoping to maybe get a sense of around the timing for the two health sale assets. Anything you could provide there?

As to timing, one is going to be in the April 1st 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.

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 health sale assets and what you might have in the acquisition pipeline?

Dave, I'm not sure I understand that question unless you're asking the cap rate difference between sale to acquisition.

Yes, essentially.

Okay. So obviously on the acquisition side, we are seeing cap rates need to play in an area of seven and a half to eight 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 are in the industry to get office off our books, we can be selective.

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 them implementing those tariffs?

Yeah. Thank you for that. We've canvassed our tenancy. Do not see an immediate impact as 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 on-shoring. So we are not currently seeing a great deal of stress as a result. That's all for me. Thank you.

Thank you. Okay. Do we have any other questions today?

Yes. Our final question is from Greg Clutera with Lucid Capital Markets. Please proceed.

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?

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. And again, just to remind you, 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.

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?

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 square feet. We do have exchange paper as it relates to renewals.

Got it. And just one more from me. You did reclass a lease as a sales type this quarter. Is that going to still be a component of the base management speed calculation?

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 contract, we had to remember with our expectation of a sale, we had to give them the guidance, reclassify that 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, 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, that's a piece of real estate.

Got it. That's what I figured. I just wanted to double check. Thank you. Thank you. That's all from me.

Okay. Any more questions today?

There are no further questions.

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, I 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.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.