Gladstone Commercial Corporation

and welcome to the Gladstone Commercial Corporation second quarter 2026 earnings conference call. At this time, all participants . A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to Chairman David Gladstone. Thank you. You may begin.

Well, thank you, Kristen. That was a nice introduction, and thank all of you for calling in today. Now, we really do enjoy this time with you guys, and I hope you have a lot of questions for us today. Now we'll hear from Catherine Gerkis. She's our Director of Investor Relations, and she's got a brief disclosure to read to you regarding certain regulatory matters concerning all of these calls and things that we're doing today. Catherine, go ahead.

Thanks, David, and good morning all. Today's call may include forward-looking statements, which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investors page of our website, gladstonecommercial.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our form 10-Q and earnings press release for more detailed information. You can also sign up for our email notification service and find information on how to contact our investor relations department. We are also on X at Gladstone comps as well as Facebook and LinkedIn. Keyword for both is the Gladstone company. Today, we'll discuss FFO, which is Funds From Operations, 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 may also discuss Core FFO, which is generally FFO adjusted for certain other non-recurring revenues and expenses. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now let's turn the presentation to Buzz Cooper, Gladstone Commercial's CEO and President.

Thank you, Catherine, and thank you all for joining today's call. We are pleased to update you on our results for the quarter ended June 30, 2026, our current portfolio and our future outlook. Before I turn to our results, I'll comment briefly on the market. Starting with the broader market, industrial conditions continue to improve during the quarter. According to Coachman Wakefield, Net absorption rose 21% from the prior quarter to 62.1 million square feet. This brings year-to-date net absorption to 113.6 million square feet, the strongest total since 2023. National vacancy declined 10 basis points to 6.9%, which Cushman views as a sign the market has passed the peak of this cycle, and asking rents rose 2.9% year-over-year. Demand remains concentrated in modern, large-format buildings supported by onshoring, nearshoring, and ongoing supply chain optimization. New construction deliveries remain below last year's pace, and while the development pipeline has begun to grow again, roughly a third of it are built-to-suits, which keep speculative supply in check. The overall health of the industrial market remains stable. Continued competition for assets of all sizes, particularly those assets that are well located and mission critical. Turning to our results during the quarter, we acquired 153,890 foot square foot industrial property in Newport News, Virginia, leased to Huntington Ingalls Industries for $22.75 million. This facility supports Huntington's Newport News shipbuilding operations. and we funded the purchase with internally generated cash flow without issuing equity. We sold a 161,458 square foot industrial building in Monroe, North Carolina to the tenant Assa Abloy. We acquired this asset in 2021. Over the term of our hold period, the property was 100% occupied and the sale represents a gain on equity and a highly accretive cap rate. This acquisition and sale together illustrate our ability to generate equity and redeploy proceeds into mission-critical industrial assets. The Newport News acquisition represents nearly double the cash and straight-line rents from our North Carolina assets. We were able to achieve this growth without issuing new shares during a period when our common stock price was not attractive for new issuances. Furthermore, the increased portfolio wall and added another mission critical location at a great basis. With respect to our existing portfolio, we renewed or leased over 126,000 square feet of office retail and over 34,000 square feet of industrial with an increase in straight line rent of $169,500 annually. Purchased a land parcel adjacent to our Clintonville, Wisconsin facility and simultaneously entered into a lease amendment and to which we provide the funding for an approximate expansion of 86,000 square feet and significant improvements to the existing 521,000 square foot facility. The completion of these improvements is expected to be in the second quarter of 2027, so lease will commence with a new 15-year term. Also, we've collected 100% of the cash-based rents in this period and this month. Subsequent, we leased 82,000 square feet or the second floor at our Austin, Texas office property. We also acquired 146,650 square foot industrial property in Redbud, Illinois for $6.5 million. As it relates to the Austin property and other office properties within our portfolio, we acknowledge that office leasing and re-leasing requires CapEx dollars. Thank you for joining us. We are not looking to grow our office portfolio, but until capital markets return fully, capital expenditures are typically more creative and revenue-generating than choosing to sell the asset. Again, we evaluate each opportunity on a case-by-case basis, and we target payback periods between six and nine months. Through the efforts of our asset management team, as of June 30, 2026, the portfolio was 98.7% occupied, and the wealth on that portfolio is over 7.1 years. These transactions bring our industrial concentration to 69% of annualized straight-line rent as we continue working toward our near-term goal of 70%. Each of these milestones is a testament to the mission-critical nature of the assets in our portfolio, the quality of tenant credit in our portfolio, and our underwriting capabilities. As evidenced by our execution during and subsequent to the second quarter, we remain steadfast in several key focus areas. Growing our industrial concentration, adding value in our existing portfolio through renewals, extension, and strategic capital investments, and disposing of non-core assets and strategically redeploying those proceeds into quality industrial assets. By continuing to execute on these focus areas, we expect to, again, increase our wealth, maintained strong occupancy rates, increased straight-line rent growth across portfolio, and decreased cost of capital. Looking ahead into the second half of 2026, we remain focused on evaluating opportunities to acquire high-quality industrial assets that are mission-critical to tenants and industries and accretive to our long-term strategy. We are working toward our near-term goal of 70% industrial annualized straight-line rents. We will look to achieve this goal and push past it during the year. While we do not have a timeline for the disposition of our office portfolio, we are keenly focused on growing the industrial concentration of the overall portfolio. At the same time, we will continue to work with our existing tenants to extend leases, capture mark-to-market opportunities, and support tenant growth through tenant expansions, capital improvement initiatives, and build-to-suit opportunities. While we remain aware of the challenging office environment, we will be strategic and intentional in evaluating our specific portfolios seeking opportune times to dispose of office and non-core industrial as part of our continued capital recycling efforts. With the availability via our increased line of credit, access to private placement bond market, cash on hand, and the ability to raise equity at our ATM, I will now turn the call over to Gary Gerson to review our financial results for the quarter and liquidity position. Thank you, Buzz.

I'll start my remarks regarding our financial results this morning by reviewing our operating results for the second quarter of 2026. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO per share available to common stockholders for both 38 cents per share respectively for the quarter. FFO and core FFO available to common stockholders during the same period in 2025 were 33 cents and 35 cents respectively. FFO and Core FFO per share for the six months ended June 30, 2026 were both 72 cents. FFO and Core FFO for the same period in 2025 was 67 and 69 cents per share respectively. Same store, lease revenue increased by 1.2% in the six months ended June 30, 2026. Over the same period in 2025, due to an increase in recovery revenue from property expenses and an increase in rental rates from a from leasing activity subsequent to the six months ended June 30, 2025. Our second quarter results reflected total operating revenues of $44 million with operating expenses of $26.2 million as compared to operating revenues of $39.5 million and operating expenses of $25.1 million for the same period in 2025. Operating revenues were higher in 2026 due to an increased portfolio size, increased recovery revenues, higher rental rates, and a one-time termination fee recognized in relation to the sale of a property. Expenses were higher in the second quarter of 2026 versus the same period in 2025, mainly due to higher depreciation from a larger portfolio and the payment of the majority of the incentive fee in the second quarter of 2026. At the end of the quarter, we had no properties held for sale. As of today, We have $17.7 million of loan maturities in 2026 and $51.9 million of loan maturities through the second quarter of 2027. As of the end of the quarter, we had $51.57 million of revolver borrowings outstanding. Looking at our debt profile, as of June 30, 47% was fixed rate, 47% was hedged floating rate, and 6% was floating rate, which is the amount drawn on a revolving credit facility. As of June 30, our effective average so far was 3.68%. Our outstanding bank term loans are all hedged to maturity with interest rate swaps. We continue to monitor interest rates closely and update our hedging strategy as needed. During the six months ended June 30, 2026, we did not sell any shares of common stock under our ATM. We continue to manage our equity activity to ensure that we have sufficient liquidity for all upcoming capital requirements and new acquisitions. As of today, we have approximately $8.4 million in cash and $68.8 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. And now I'll turn the program back to David.

Well, that was a good report, Gary, and congratulations. Goodwin from Buzz and Catherine. The team has performed very well. Overall, again, a very nice quarter. You've heard a lot today. In summary, during the second quarter of 26, we acquired 153,000 square foot industrial property in Newport News using proceeds from the sale of an industrial property in Monroe, North Carolina. And that resulted in an increase in the straight line rent and FFL per share. We renewed a lease for 34,000 square feet as an industrial property and 26,000 square feet in office and retail. Again, the company just continues to go along making more money. Subsequent to the end of the quarter, we acquired 146,000 square foot industrial property in Redbud, Illinois. And that was for $6.55 million. So a small one, but again, just adds to their ability to pay more dividends. Now paying about $1.20 per share per year. That's 9.8% yield. That's a great yield for such a solid company like this. Gladstone's commercial team is growing their real estate. We own at a good pace. and the team is doing a great job of managing the properties we own, especially during some of these challenging times that comes up. Our team of strong professionals continues to pursue quality properties on the list of acquisitions. They are re-evaluating what we own in order to get us closer to all properties that are for projects that are critical to some of the Our acquisition team is seeking strong credit tenants and we are getting that done very well. Okay, let's just stop here for a while and get some questions from our listeners. So, Operator, if you come on and ask some questions for us.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please while we poll for questions. Thank you. Our first question comes from the line of Rob Stevenson with Huntington. Here is your question.

Good morning, guys. I think Gary said that there was no properties held for sale. How are you guys thinking about funding future transactions, given the commentary also about how undervalued the stock price is?

Well, Rob, I mean, we did a redeployment this last time around. We had a sale, and then we redeployed the assets into a new property. We intend to do that going forward. If we have a potential acquisition... that is accretive at the stock price. Wherever we are, we would consider selling stock at that price to make that acquisition. But right now, I mean, it's a little tough, but we continue to grow, and we're going to invest more into our existing properties as a way to increase our revenues and capital deployment.

Okay. And at this point, do you think that you guys have any excess preferred capacity to be able to do any issuance there versus the common?

We're really not considering doing any more preferred at this time.

Okay. And then you guys have done a good job of, you know, maintaining the occupancy level in the portfolio, but can you talk about, you know, some of the current vacancy requirements Are you in process on some of that in terms of signed but not commenced leases? Are you getting close to some new tenants in some places? How should we be thinking about where some of that, I guess, 1.3% of vacancy goes over the next four quarters or so?

Sure, Rob. Thank you. And as I mentioned in the past, our portfolio management and asset management team does a great job staying on top of our tenancies, both obviously occupied, unoccupied. And the historical occupancy that we've maintained over the last several years has got to be one of the top in the marketplace. So, yes, we are actively engaged with everything within the next 24 months, as I mentioned with the added space taken down in Austin. Our office occupancy is going to be north of 95 here going forward for a period of time. Our industrial is 99.8, which we do have one lease there that will bring it to 100% occupancy at the end of the year. In remainder of 26, we've got four properties that we are working on as it relates to upping tenancy, if you will. and all of those have RFPs or documentation that we are negotiating out. And secondly, going into 27, we have 11. Again, all have been addressed in conversations with paper going in some cases back and forth, whether it's an RFP, whether it is nits within a lease. So we feel very confident Of those, I see one, and it is an office building that I have concern over, but I believe that we will get something done there before the maturity of the end of 2027. So I appreciate that question, but we are ahead of the curve as it relates to those properties, and I believe we will maintain a high occupancy going forward.

Okay. Thank you.

Appreciate it, guys. Thank you.

Next question.

Our next question comes from the line of Craig Kucera with Lucid Capital Markets. Please proceed with your question.

Hey, good morning. You made mention that there was a termination fee recognized on the North Carolina disposition sold during the quarter. Can you give us a sense of how much that termination fee was?

I believe that was $1.9 million.

Okay, that's helpful. And then I think you have in the queue there's an additional $1.6 million of what you refer to as accelerated rent. None of it's been recognized. When do you expect to recognize that?

Over a period of time. This is a termination. And this will be through, I think, the mid of next year. So this won't be... Yeah. Oh, I'm sorry. This is through 29. So this won't be... because of the straight line rent requirements, this won't be something you'll see in a block. This will be a small amount every month for a couple of years. Okay. That's helpful.

And given the leasing at the Austin Asset this quarter, what does that bring occupancy to at that building? Does that bring it up closer to 60% or 70%?

Well, the occupancy currently is at 69%, but this is going to bring it north of 90%. Okay.

Okay. Perfect. And just given your commentary about capital, you know, the awesome answer to that has been out there for a while. You know, it sounds like that's not one that you're looking to sell, that you're expecting based on your leasing commentary that that will be renewed.

We are looking at all opportunities there, whether it be, again, additional tenancy or sale. But we also are looking at, you know, get good value out of it. It has been a good asset for us, obviously troubling with the vacancy within it during COVID, but we will entertain offers and we are exploring quietly in the marketplace.

Okay, that's helpful. And obviously your cost of capital is a little bit high to do a lot with equity right now, but I'm curious sort of what you're screening as far as your investment pipeline right now and what you're seeing in the marketplace.

We have one deal that we have an LOI out on for approximately $32 million. We should hear about that transaction here in the next few weeks. We, of course, always are evaluating the marketplace. We've got 15 that we currently are digging into their financials upon and looking to see if the property makes sense for us. So we've got a healthy pipeline, and having just closed that one deal here subsequent to the end of the quarter, Obviously, we look to backfill that, make it stronger. But we will evaluate as we always have, making sure that these are accretive transactions. Okay. Thank you. That's it for me. Thank you.

Our next question comes from the line of Dave Storms with Stonegate Capital. Please proceed with your question.

Morning. Thanks for taking my questions. Speaking with the acquisition pipeline, we're going to get ahead maybe around the cap rates in the industrial market. It looks like Newport was high sixes, red blood, low nines. Obviously, there's some variance between those two properties, but just any of the puts and takes that we should be thinking about to maybe get a better beat on cap rates?

Sure. And as you know, Dave, we're not able to compete down in the sixes at this point in time, although we are, as we – and many more. approximately 7.5% looking to get to averages north of nine.

Understood. Very helpful. Thank you. It also looked like spending improvements existing real estate maybe came in a little bit lower. I know you mentioned this in your remarks. Is that mostly a timing thing there or is there anything else we should read into that?

I don't believe there's anything else you would read into that. Yes, it is a matter of timing. And as I mentioned, we look to try to We're not going to spend money that's not going to be accretive to us at the end of the day. We look to have a payback period on our tenant improvements as a general rule of between six to nine months. We want to make sure those dollars are obviously recaptured because we want to be cognizant and, again, tenancy and cash flow is important.

Understood. Thank you. And then here's just the last one. in a land purchase, if I remember right, that was right next to an existing property. Is that the kind of profile that you're looking for in land purchases, or are there other variables that you try to keep in mind there?

That property, the purchase was, again, for the expansion. It will come along at the end of the day with a 15-year lease. The average cap rate on that transaction is north of 9.5%. I'm not sure because I got a little garbled there exactly if I hit all of your questions, but that is a very opportune purchase for us. We'll build it out here and hope to have that completed by second quarter of next year. That's perfect. Thank you for taking my questions. You bet. Thanks, Dave.

Okay. We've got some more questions.

Our next question comes from the line of Guarav Mehta with Alliance Global Partners. Please receive your questions.

Thank you. Good morning. I wanted to ask you on the industrial asset that you have decided to sell. I just want to get some more color on why you sold that asset and are there any more industrial assets in your portfolio that you may look to sell?

We had that asset. We purchased it in 2021, Gaurav. The reason for the sale is the tenant came to us with a very profitable number and we were able to redeploy those assets into the Huntington transaction that doubled the straight line rent and the current rent. So it made all the sense in the world and we didn't have to raise equity to do the transaction.

Any more industrial properties in your portfolio that you could look to sell to redeploy that into other industrial assets?

We have certainly within our portfolio some of the leases carry a purchase option. I don't have any at the moment that I would classify that are going to happen anytime eminently. But are there a few out there that could happen? Yes. But nothing that I have today, although certainly we are looking at some to see if we could sell them at economics that makes sense, we would.

All right. Thank you. That's all I have.

Thank you. All right. Next question.

Our next question comes from the line of John Masoko with E. Reilly. Please receive your question.

Hi, good morning. Good morning. Technical one. If I think about accelerated rent versus the lease termination fee and understanding those are separate things, is there a gap impact from that accelerated rent as well, or is that – The Termination Fee was a one-time hit in the quarter. The Accelerated Rent, you can call that a variation on the same theme.

This will have a gap effect. You take the amount of the termination fee, divide it by the total amount of months that you have left on your lease, and then you straight line it through. So, yes, it will have a small gap impact. It's not a significant amount.

The cash has already been received. The $1.9 million, though, was all impacting in 2Q, correct?

Yeah, correct.

And then apologies if I missed this earlier in the call. I kind of was cutting in and out. The leasing activity, can you maybe provide a little color on where kind of rents moved for kind of all the leasing activity you discussed and if there's any kind of significant effects associated with any of those leases?

As I mentioned, we look for the CapEx to get a payback on that, obviously as quickly as we can, and we try to keep that CapEx and lease commissions as low as we can. On average, we see a payback of between six to nine months. The approximately $200,000 that we had in leases that were renewed as a plus-up prior at the end of the quarter is an average across the portfolio of the leases that we renewed. Thank you. Thank you.

And then, yeah, I guess as we look out on the kind of future lease expiration schedule, maybe out over the next two years, where do those assets maybe sit versus kind of market roughly? And, you know, it's like that number is just kind of up or down.

They are all positioned and with the numbers that we are discussing with the tenancies, they are all, oh, gee, except maybe two are up. So we've got 15 between this year and next year that we're looking at, two of which are going to go vacant. We have had tours within the buildings. So I feel confident that at the end of the day, the net-net is going to be a plus-up. And again, I have one office building down in Florida that we are working on. and that does not mature until September of 27. So I don't want to say we have time. We are aggressively addressing it. But I do worry about that one. And it's not a large property. It's approximately 80,000 square feet within the portfolio. But we're going to do what we can to keep these buildings occupied and or sold.

Okay. That's it for me. Thank you very much for taking questions.

Thank you. Is there another question?

Our next question comes from the line of Francois Swanepoel, a private investor. Please proceed with your question.

Good morning. I would like to ask about if you could clarify our current payout ratio. What is our current payout ratio with the dividend at 10 cents a month?

Let me get this for you. It is in the low 80s. Actually, it was, what, 79, I think, this time around. Hold on. I believe it was our payout ratio is just under 80% this last quarter.

Yeah. My question on that is, as a REIT, shouldn't we be keeping that as a percentage of profit at closer to 90% to keep our status as a REIT?

I As a triple net, we typically are paying more than a non-triple net as far as a distribution ratio of dividends over at FFO. But we would like to maintain more internal cash flow. And you see the triple nets are probably in the mid-70s to low-80s as a general group. We would like to kind of get our distribution ratio a little lower. It's better for the shareholders in the long run as we can redeploy the capital into our portfolio and grow the portfolio and earnings over time. So then eventually we can then increase the dividend. But if you can maintain, if you look at some of the bigger REITs, you know, their yields, and they have a much lower distribution than we do. So over time, if you can do that, you can reinvest those proceeds or that cash into new properties without having to sell new equity and thus potentially dilute the shareholders.

I understand that. I understand that. My question on that is, according to the IRA's rule, what's the rule of keeping that at 90% for us to qualify not as a corporation to not pay taxes on that income?

Yes, that's a 90% of taxable income, not of GAAP income. So we probably pay out probably in many cases way above the 90% required to maintain REIT status. So we're definitely doing that. Oh, yeah, absolutely. We will not lose our REIT status there. Okay.

Well, the annual increases in rent, if they are implemented and when they are implemented, I'm not sure when you guys implement annual increases on rent. But will we be able to use those proceeds to maybe look at an increase in the dividend?

We'll certainly consider it, but that's something to look at in the future.

All right. Thank you very much. Appreciate it. Thank you. Thank you.

We have any additional questions?

We have no questions at this time. Mr. Gladstone, I'd like to turn the floor back to you for closing comments.

Well, thank you very much, everybody, for listening to this, and we appreciate the questions. Hope you have a lot more questions next quarter. And that's the end of this, so thank you again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.