Gladstone mercial (GOOD) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Total operating revenues for Q2 2023 were $38.7 million, compared to$ 36.4 million in Q2 2022 [17] - Operating expenses increased to $33.7 million in Q2 2023 from$ 27.8 million in Q2 2022, primarily due to a $6.8 million impairment charge on three office properties [17] - FFO and core FFO per share for Q2 2023 were both$ 0.41, compared to $0.39 in Q2 2022 [38] - Same-store cash rent increased by 9.5% in the first two quarters of 2023 compared to the same period in 2022, driven by a one-time accelerated rental payment from a lease termination [17] - The company repurchased$ 1 million of common stock, approximately 80,000 shares at an average price of $12.40 [61] Business Line Data and Key Metrics - The industrial portfolio allocation based on straight-line rent increased from 32% in 2019 to 59% in Q2 2023, while office allocation decreased to 37% [34] - The company aims to increase its industrial allocation to at least 60% within the next 6 to 12 months [34] - Same-store lease revenues increased by 9.5% in Q2 2023 compared to Q2 2022 [12] - Rent collections remained strong, with 100% of cash rents collected through July [12] Market Data and Key Metrics - Transaction volumes in the commercial real estate market decreased by over 60% year-over-year due to higher interest rates and tightened credit standards [6] - The industrial sector normalized in Q2 2023 after two record-setting years in 2021 and 2022, but fundamentals remain strong [35] - Office development activity has significantly decreased, with only 5 million square feet of office space breaking ground year-to-date [14] Company Strategy and Industry Competition - The company continues to pivot towards industrial assets, divesting non-core office properties to reduce exposure to the weakened office market [10] - The company focuses on acquiring industrial properties in the 50,000 to 300,000 square foot range, predominantly through sale-leaseback transactions [34] - The company is actively managing its portfolio to maximize value, with a focus on improving same-store operations and capital recycling into industrial assets [12][15] Management Commentary on Operating Environment and Future Outlook - The company acknowledges the economic uncertainty and volatility in Q2 2023, driven by higher interest rates and tightened credit standards [6] - Management remains optimistic about the industrial sector, citing strong fundamentals and attractive acquisition opportunities [35] - The company expects to continue its focus on industrial acquisitions and improving operations, with a pipeline of approximately$ 408 million in potential acquisitions [77] Other Important Information - The company identified errors in the calculation of depreciation for tenant-funded improvement assets, which were corrected in the financial statements for Q2 2023 [39] - The company has manageable loan maturities, with $9 million due in 2023 and$ 19.7 million due in 2024 [19] - The company has $6.9 million in cash and$ 44.1 million of availability under its line of credit as of Q2 2023 [41] Q&A Session Summary Question: Timing and pricing of remaining dispositions - The company expects most dispositions to close by the end of 2023, with one potentially spilling over into Q1 2024 due to repositioning in the marketplace [23] - Pricing for dispositions is uncertain, with some properties requiring adjustments during due diligence [23] Question: Credit quality of industrial tenants - The company maintains its historical underwriting standards for tenant credit quality, even as it shifts focus to industrial assets [24] - Industrial tenants, particularly in manufacturing, are often middle-market businesses but are considered mission-critical, leading to higher renewal probabilities [25] Question: Use of proceeds from dispositions - The company plans to redeploy proceeds from dispositions into higher accretive industrial acquisitions, with stock buybacks remaining an option [59] Question: Acquisition pipeline and expectations - The company has a pipeline of approximately $408 million in potential acquisitions, with two deals under LOI and several others under review [77] - The company is cautious about acquisition timing due to market conditions, including cap rate expansion and availability of capital [78] Question: Lease termination details - The lease termination in Q2 2023 involved a Fort Lauderdale office property, where the company negotiated a direct lease with a new tenant, resulting in a$ 2 million cash value [64]