Gladstone Commercial Corporation (GOOD) Q3 2026 Earnings Call Transcript

Operator: Greetings, and welcome to the Gladstone Commercial Corporation Third Quarter Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David John Gladstone. Thank you. You may begin.

David John Gladstone: Well, thank you all for calling in. It was a nice introduction. Thank you all for being part of our call. it is obviously early in the morning on the West Coast, so we are going to keep our time at 08:30. Okay. At this time, we have you on the phone, and I would talk with you. We are glad to talk with you, and I will turn you over to Catherine Gerkis She's director of Investor Relations And she's going to provide a brief disclosure regarding certain regulatory matters concerning this call and the report that was given today. Catherine, good morning.

Catherine Gerkis: Good morning. Thank you, David, and good morning. 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 GladstoneComps as well as Facebook and LinkedIn. Keyword for both is the Gladstone company. Today, we will 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 certain other nonrecurring 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 call over to Buzz Cooper, Gladstone Commercial's CEO and President.

Arthur S. Cooper: 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 September 30, 2026, our current portfolio and our future outlook. Before I turn to our results, I will comment briefly on the market. Starting with the broader market, industrial conditions were a bit of a mixed bag during the quarter. On the 1 hand, industrial occupancy continues to strengthen. Which we have observed within our own portfolio as well. According to Cushman Wakefield, net absorption was 76.6 million square feet the strongest quarter since early 23. And the second quarter in a row above 70 million Year to date, net absorption is 203 million square feet up 69% from the same period last year. National vacancy declined to 6.8%, down 20 basis points from its late 25 peak and asking rents rose 4% year over year. Manufacturers were the second most active tenant group behind 3PLs, making up more than a quarter of leasing volume this year, and indicating continued demand for similar assets which we have in our portfolio. Demand remains concentrated in modern, large format buildings supporting onshoring, nearshoring and ongoing supply chain optimization. Cushman notes, it is now starting to spill over into older buildings, as space in newer buildings has become more scarce. New deliveries are 13% below last year's pace. The development pipeline is growing, up 23% from a year ago but about 35% of it is build to suit. Which keeps speculative supply in check. That strength means continued competition for assets of all sizes, particularly those that are well located and mission critical. On the other hand, rates moved sharply higher in the quarter. The Fed raised rates in September for the first time since 2023. And the 10 year treasury ended the quarter at about 5.3% up roughly 87 basis points in the 3 months to the highest level since 2027. Sellers have been slow to adjust their pricing, so the gap between what they ask and what buyers are willing to pay is wide. Thus, acquisition opportunities are not meeting our criteria. Turning to our results during the quarter. We acquired 147 thousand square foot industrial property in Redbud, Illinois leased to Ultra Place Systems for $6.55 million at the time of the acquisition, the lease term was 8+ years. Respect to our existing portfolio, we renewed or leased over 137 thousand square feet of office and over 265 thousand square feet of flex industrial with an increase in straight line rent of approximately $2.5 million annually. We also collected 100% of cash based rents in the period. Positively, subsequent to the end of the quarter, we renewed or leased 153 thousand square feet of industrial and 67.3 thousand square feet of office, with an increase in straight line rent of $2.89 million annually. As we shared last quarter, we leased 82 thousand square feet of space in our Austin office property. This approximates to approximately 25% of the building, and we continue to work on leasing the rest. As it relates to the Austin property and others within our--we acknowledge that office leasing and re leasing requires CapEx dollars When office buildings are as mission critical and well located as those within our portfolio, we are able to maximize those dollars such as we receive an accretive return on our investment. When we evaluate any office release, we review payback period IRR and ROI as well as the alternative of selling the property. We acknowledge that the returns are generally not as attractive to us as industrial properties. But they keep a constant stream of cash flow for our shareholders. We are not looking to grow our office portfolio. But until capital markets return, fully, capital expenditures are typically more accretive and revenue generating than choosing to sell the asset. Again, we evaluate each opportunity on a case by case basis. Although we look to have a targeted payback period between 6 and 9 months. Through the efforts of our asset management team, as of 09/30/2026, our portfolio was 99.3% occupied up from 98.7% last quarter. With a 7.1-year average remaining lease term. As of quarter end, the industrial portfolio represented 69% of our annualized straight line rent. And we continue working toward our near term goal of 70%. Each of these milestones is a testament to mission critical nature of the assets in our portfolio. The quality of the tenant credits in our portfolio, and our underwriting capabilities. Our playback will continue, as it has, to grow our industrial concentration, adding value on our existing portfolio through renewals extensions and strategic capital investments. And disposing of non core assets and strategically redeploying those proceeds into quality industrial assets. I continue to execute on these focus areas over the long term. Again, we will increase our WALT maintain our strong occupancy rates, grow straight line rent across the portfolio and decrease cost of capital. Looking ahead to the last quarter of 26, we remain focused on evaluating opportunities to acquire high quality industrial assets that are mission critical to their tenants and accretive to our long term strategy. We are working toward our near term goal again of 70% plus industrial annualized straight line rent. While we do not have a timeline for the disposition of our office portfolio, we are keenly focused on growing the industrial concentration. 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 targeted expansions, capital improvement initiatives, and we are looking at build to suit opportunities. We remain aware of the challenging office environment. We will be strategic and intentional in evaluating our specific portfolio seeking opportune times to dispose of office and noncore industrial as part of our continued capital recycling efforts. With the availability of our increased line of credit, access to private placement bond market, and cash on hand, we have some ability at our ATM and we are positioned to deploy capital into accretive industrial acquisitions and portfolio improvements. In closing, the team executed well and we are focused on continuing momentum through the remainder of 2026 and into 2027. I will now turn the call over to Gary Gerson, our CFO to review our financial results for the quarter and liquidity position. Gary?

Gary Gerson: Thank you, Buzz. I will start my remarks regarding our financial results this morning by reviewing our operating results for the third quarter of 26. All per share numbers referenced are based on fully diluted weighted average common shares. FFO per share available to common stockholders were both $0.35 per share for the quarter. FFO and core FFO available to common stockholders during the same period in 2025 were both $0.35 per share. FFO and core FFO per share for the 9 months ended September 30, 2026 were both $1.07 per share. FFO and core FFO for the same period in 2025 were $1.02 and $1.03 per share respectively. Same store lease revenue increased by 0.2% in the 9 months ended September 30, 2026, with same period in 2025 due to an increase in recovery revenue from property expenses and an increase in straight-line rent from leasing activity subsequent to the 9 months ended September 30, 2025. Our third quarter results reflected total operating revenues of $42.4 million and operating expenses of $32.9 million as compared to operating revenues of $40.8 million and operating expenses of $26 million for the same period in 2025. Operating revenues were higher in 2026 due to an increase in portfolio size, increased recovery revenues and higher rental rates. Expenses were higher in the third quarter of 26 versus the same period in 2025, mainly due to higher depreciation from a larger portfolio and partial payment of an incentive fee and the impairment charge on our Lake Mary, Florida office property in the third quarter of 26. At the end of the quarter, we had no properties held for sale. As of today, we have $7.4 million of loan maturities in 2026 and $99.9 million of loan maturities in 2027. As of the end of the quarter, we had $59.5 million in revolver borrowings outstanding. Looking at our debt profile, 47% 47% was fixed rate, 46% was hedged floating rate, and 7% was floating rate, which is the amount drawn on the revolving credit facility. As of September 30, our effective average SOFR was 3.9%. Our outstanding bank term loans are all hedged to maturity with interest rate swaps. Continue to monitor interest rates closely and update our hedging strategy as needed. During the 9 months ended September 30, 2026, we sold 169 thousand shares of common stock for net proceeds of $2.2 million under our ATM. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. As of today, we have approximately $7.7 million in cash and $70.2 million 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 quarter or $1.20 per share. And now I will turn the program back to David.

David John Gladstone: Okay. That was a good report, Gary. And good ones from Buzz and Catherine. The team has performed very well. Overall, very nice quarter, I would say. During the quarter, we acquired 146 thousand square foot industrial property in Redbud, Illinois. Yes, that is the same city as Red Bud. I did not know that before. We renewed or leased 137 thousand square feet of office and over 365 thousand square feet of flex industrial with increase in straight line rent to $2.5 million. The Gladstone team is growing the real estate that they have. Remember, we are in industrial side mostly. Our team is strong professionals, and they continue to pursue potential quality properties on the list of acquisitions. We are reviewing our acquisition team is reviewing seeking strong credit tenants. I am going to stop here and the quarter we can have some questions from the people who have called in and we will go from there. Operator, we can come in and tell them about how they can ask a question.

Operator: Thank you. And our first question comes from the line of Gaurav Mehta with Alliance Global Partners. You may proceed with your question.

Gaurav Mehta: Thank you. Good morning. I wanted to ask you if you could comment on the acquisition pipeline what are you guys seeing in the market and maybe some comments on the cap rates. Sure. Gaurav,

Arthur S. Cooper: Good morning. Obviously, the pipeline as we have heard from our competitors as well it is very competitive. From the standpoint of acquisitions. With the rise in interest rates, we have seen a little pullback. As it relates to opportunities also have seen a little deterioration in the credit, not that we have booked, but as we analyze, obviously, people go and use sale leasebacks as a financing form. So the market is still robust, very competitive. But at this point in time, we are not seeing the tight and quality of assets that we want to put on our books at the moment. We have got about 15 opportunities within our pipeline that we are reviewing. For a combined total of over $200 million. And obviously, of that, we hope that some will meet our criteria. But as I stated before, we are not going to lower our underwriting standards And we need to look for cap rates going in the door of 7.5% and an average cap over the term of the lease of 10-plus years, north of 9.

Operator: Next question.

Gaurav Mehta: Second question I have on the balance sheet. Can you maybe comment on the interest rates on the debt that is maturing in 4Q and next year? And where do you expect to refinance that debt?

Arthur S. Cooper: I will start and I will let Jay Beckhorn our Treasurer continue. I mean, we have as we have said, we have got about almost $100 million of mortgage debt coming due. And we are we have enough availability on our line to take that all down, but that is a that will be a temporary measure. Jay, some of our alternatives?

Jay Beckhorn: Yes. As Gary said, we can take it down using revolving line of credit, and then we will look at how to put something out there more permanently, whether it be term loan or private placement, depends on the interest rates. But we are looking at those alternatives actively. And I guess for Q1, we have got about half that exposure is maturing and then the rest of the balances. Over the other half. And when, as we repay those loans, given the amortization, the way our credit facility works, as we add those to the credit facility, they actually increase our availability.

Arthur S. Cooper: Alright. Thank you, Jay. All right.

Gaurav Mehta: Thank you.

Operator: Okay. Next question. Thank you. Our next question comes from the line of Robert Stevenson with Huntington. You may proceed with your question.

Robert Stevenson: Good morning, guys. Buzz, taking the sort of opposite side of the transaction question, hearing a lot about significant demand from 1.03 thousand and special servicers heading into year end. Is there an opportunity here for you guys to take advantage of that and sell some of the noncore assets here in fourth quarter And improve the portfolio that way?

Arthur S. Cooper: Certainly, Robert. We take a look at that and then we track that of course, we want to take advantage where we can. We do not have anything at the moment that we are looking to dispose of. Toward the end of the year, but we are team out in the field, both asset managers as well as our producers from the standpoint of new originations, certainly have that in mind. But there is nothing I can tell you today that we are looking to flip out before the end of the year.

Robert Stevenson: Okay. And then when you look at the portfolio at 99.3 occupancy today, factor in upcoming lease expirations as well as tenants that might be having some financial issues. Is there anything on the horizon that pulls that occupancy back below 99%? Or is this where you expect to be across the portfolio for the foreseeable future?

Arthur S. Cooper: As it relates to tenants and their quality and credit, we are very proud of obviously the collections that we have 100% paying as agreed both office and industrial. Obviously other than the vacancy. As it relates to their quality, have not seen a severe deterioration. Certainly, we look at it on a quarterly basis. We have not had anybody ask for relief As it relates to your question on the maturities, we are currently in discussions in our biggest asset, as you know, office concern is down in Texas. We are actually talking to an existing tenant looking to increase their occupancy within the building by another approximately 40 thousand-square-foot, and believe that, that will occur hopefully, in the early part of the first quarter. We do know GM rolls out Within that building, however, that leaves us at an over 50% occupancy. It also covers all expenses within the property, so we do not have a burn and we are evaluating whether we and we will continue to look to increase occupancy in it or do we at that point in time look at perhaps a sale. So we are trying to maximize that building value. And are continuing to evaluate that. And as it relates to our overall vacancy, specific to 2027, We have 8 properties. However, within that in subsequent issues within the quarter, 3 were renewed at the end of the third quarter for a plus up of $2.8 million So that took those of concern from 12 down to 8 And into that 8, all have been in contact. We are in discussions with many of them 1, I believe, has a lease out and fortunately for a large office building. So I feel confident that currently would be going into 2027 of 5%, that is going to drop in a very short period of time down to 2.66% as it relates to 2027. Figures. So your question, will it go below 99% It will. But we are going to work hard to get it back up, but I still would submit it is a very strong number.

Robert Stevenson: Okay. And then last 1 for me. Gary, the REIT and core FFO was the same in the third quarter. Anything hitting the income statement in fourth quarter that would impact positively or negatively the run rate heading into year end and into the beginning of 2027?

Gary Gerson: Do not see, Robert. Do not see anything out of the ordinary coming up. So we do not give forward guidance, but that is that is pretty much the best I could do. I do not think there is gonna be any anything that would do anything significant. Either way.

Robert Stevenson: Okay. Thanks, guys. Appreciate the time.

Operator: Thank you. Next question. Our next question comes from the line of David Storms with Stonegate. Your line is now live.

David Storms: Morning, and thank you for taking my questions. I want to actually circle back I want to circle back to the comment around the plus up of I believe it was $2.8 million on the 3 that you worked on in the quarter. Is that and I understand that conversation is ongoing. Is that typical of conversations that you are having, or is there anything unusual there? Just trying to think of how we should think of any renewals.

Arthur S. Cooper: there is nothing unusual to it from the standpoint of leases that are coming due that have been on our books for a period of time. As we know within the marketplace, especially industrial, there has been rental rate increases. And so I wish we had more I could point to that are saying are down the line coming. We do have renewals that are coming that will be plus ups, but I cannot tell you, David, that is going to happen with that nice dollar amount here in the next quarter. it is a function of when you are rolling and when they were put on the books.

David Storms: Understood. Just want to make sure there was not Yeah. Can I also maybe just ask 1 more? Sure. You mentioned earlier that you have nothing in your pipeline that you are maybe actively looking to dispose of. Just curious, is that maybe a product of not being as much on the acquisition side? So may be a little more challenging to reallocate those funds. Is it just a widening of the bid ask spreads? Or is it the comparability with the portfolio? Right around that 70% for office? Just any more information there would be helpful.

Arthur S. Cooper: Sure. And we do look at our dispositions, and we look out looking out into 2027-2028. Yes, we do want to match up what we can with acquisitions with dispositions so that cash does not sit idly by that we are putting it to work. So it is a function also as we do come here toward the end of the year especially now with inflation with what we from both the war and where we are from an economic standpoint for the country, we have seen a pullback of opportunities. Where we are looking at potential opportunities would be on the development and construction and origination of sale leasebacks with the developer at the point in time. But that is not going to happen immediately, but we are looking at that deeply.

David Storms: that is great. I appreciate taking my questions, and good luck in the next quarter.

Arthur S. Cooper: Thank you.

Operator: Okay. Next question. Thank you. Our next question comes from the line of John Massocca with B. Riley Securities. You may proceed with your question.

John Massocca: Good morning. Maybe sticking with that line of questioning around your comments around the investment pipeline. Is how kind of wide are you seeing that kind of buyer seller disconnect Is there more opportunity in the sale leaseback side? Sale leaseback potentially counterparties. A little more agnostic around, you know, cap rate pricing? And I guess, long winded way of kind of asking, we saw kind of a reversal in the interest rate moves you have seen over the last, call it, 3 months. I mean, could that cap rate differential between you and third party sellers kind of narrow quickly? Or do you think there is going to be a period of just kind of rediscovery as to where pricing is?

Arthur S. Cooper: I would say a little bit of rediscovery, John. We did see a pullback, of course, because of the uncertainty both of inflation and the very rapid rise over 5% on the interest rates. And heading here into the holidays, the end of the year, generally do see obviously a slowdown. Then once the allocations, if you will, that come out going into the New Year, I believe we will see an absolute uptick both of third party transactions, but also sale leaseback and originations.

John Massocca: And I guess maybe just to put it pretty simply, I mean, you seeing deals in the pipeline in August and just counterparties do not want to budget on price? Or is it like deals actually completely falling out?

Arthur S. Cooper: No. I would say repricing. Again, similar, I think The disconnection as it relates to on the purchase side, So we did not re-trade, but I know there is been re trading going on in the marketplace. I think that helped create a little pullback.

John Massocca: Okay. And then, you know, going back to the Austin asset, I mean, is it kind of fair at this point to assume we are going to have a period of 2027 where that 3% of ABR essentially goes away. I know you have another tenant in the building might take some space. You know, I guess,, how quickly would that rent come on from a cash basis? If you can provide any color there, but is it fair to kind of assume that you are losing that ABR for a period of time? And I guess, how quickly at this point do you think you can backfill the remainder of the space or a significant portion of the space in that Texas office asset.

Arthur S. Cooper: As you are, I am sure, aware, there has been an uptick of activity in Austin specifically. And we have seen that within our building and with the tours and requests for RFPs that we have looked at. Yes, we are going to see a downtick here as it relates to GM, which does leave here at the end of the year. And of their space, again, we are in deep discussions on adding another 40 thousand again, accretive in nature as it relates to the cash flow within the building. And we are working hard to fill it all But it is taking time, but the activity in Austin has increased. In the last 4 months greatly. Okay.

John Massocca: Then the impairment on the office asset in I think you said, Lake Mary Of Florida. What drove that? Is that just market comparability? I thought I remembered that at least being a couple more years left on it. Just was kinda curious why the impairment for that asset?

Gary Gerson: Oh, just a change in the lease velocity in that area and what the really where we are with leasing on that building is what drove us to impair it.

John Massocca: But the tenant is still in there for a couple more years. Correct?

Gary Gerson: We have a tenant in there. That tenant will be in there for the middle of next year. And then we have some additional tenancy potentially going forward. But it is just gonna. They are going to downsize the amount that they have. So the tenant will be in there longer, but majority of the building, they will take a downsizing to a significantly smaller portion of it.

John Massocca: Okay. that is it for me. Thank you very much.

Arthur S. Cooper: Thank you.

Operator: And we have reached the end of the question and answer session.

David John Gladstone: I will now turn the call back over to David John Gladstone for closing remarks. Oh, shucks. We did not get enough questions this time. We like questions, so we would be happy if you will save up some for next meeting and we will see you next quarter. that is the end of this call. Thank you all.

Operator: And this concludes today's conference. And you may disconnect your lines at this time. We thank you for your participation.