GOOD earnings call transcript, November 4, 2026

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 form of 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 your host.

Okay. At this time, we have you on the phone. Glad to talk with you. Glad to talk with you. And I'm going to turn you over to Catherine Kirkus. 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 we're giving today. Catherine, good morning. Come on.

Thank you very much. We are also on X, at Gladstone Comp, 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 Poor FFO, which is generally FFO adjusted for certain other non-recurring revenues and expenses. We believe these metrics can be a better indication.

Thank you, Kathryn, 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'll comment briefly on the market. Starting with the broader market, industrial conditions were a bit of a mixed bag during the quarter. On the one hand, industrial occupancy continues to strengthen, which we have observed within our own portfolio.

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 2025 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. Pushman's note 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%. All right.

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 three months to the highest level since 2007. Sellers have been slow to adjust their pricing. So the gap between what they ask and what buyers are willing to pay is why.

The term at the time of the acquisition was eight plus years. With respect to our existing portfolio, we renewed or leased over 137,300 square feet of office and over 365,200 square feet of flex industrial with an increase in straight line rent of approximately $2.5 billion annually. We also collected 100% of cash-based rents in the period. Positively, subsequent to the end of the quarter, we renewed or leased. 453,234 square feet of industrial and 67,287 square feet of office with an increase in straight line rent of $2.89 million annually. As we shared last quarter, we leased 82,000 square feet of vacant space in our Austin office. This approximates to probably 25% of the building, and we continue to work on leasing the rest. As it relates to the Austin property and others within our portfolio, 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 receiving accretive return on our investment. When we evaluate any office re-leasing, we review payback period, IRR, and ROI, as well as alternative to 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 creative and very regenerating than choosing to sell the asset. Again, we evaluate each opportunity on a case-by-case basis.

So we look to have a targeted payback period of between six and nine months. Through the efforts of our asset management team, as of September 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 the mission-critical nature of the assets in our portfolio, the quality of tenant credits in our portfolio. And our underwriting capabilities. Our playback will continue as it has to grow our industrial concentration, adding value in 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. By continuing 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 2026, we remain focused on evaluating opportunities to acquire high quality industrial assets that are mission critical to 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

development. 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 non-core 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 the momentum through the remainder of 2026 and into 27. I'll now turn the call over to Gary Gearson, our CFO, to review our financial results core quarter and liquidity position. Gary? Thank you, Buzz. I'll start my remarks regarding our financial results this morning by reviewing

this morning. Our operating results for the third 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 were both 35 cents per share for the quarter. FFO and core FFO available to common stockholders during the same period.

FFO and core FFO per share for the nine 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. Or lease revenue increased by 0.2% in the nine months ended September 30, 2026 were the same period in 2025 due to an increase in recovery revenue from property expenses and an increase in revenue rates from leasing activity subsequent to nine 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. Increased recovery revenues and higher rental rates. Expenses were higher in the third quarter of 2026 versus the same period in 2025, mainly due to higher depreciation from a larger portfolio, partial payment of a part of an incentive and the impairment charge on our Lake Mary, Florida office property in the third quarter of 2026. 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 $59.47 million in revolver bonds. Looking at our debt profile, as of September 30, 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 silver was 3.9%.

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 nine months ended September 30, 2026, we sold 168,868 shares of common stock for net proceeds of $2.2 million under our... 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 in 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, $0.10 per month, or $1.20 per year. And now I'll turn the program back to David. 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 146,000 square foot industrial property in Redbud, Illinois. Yes, that is the same. The city is Redbud. I didn't know that before. We renewed or released a 137,000 square foot office and over 365,000 square feet of flex industrial with an increase in straight line rent to $2.5 million. The Paddingstone team is growing the real estate that they have. We're an industrial side mostly. Our team is strong professionals continue to pursue potential quality properties on the list of acquisition. They're reviewing our acquisition team is renewing, reviewing, and seeking strong credit tenants.

So I'm going to stop here and for the quarter we can have some questions from the people who have called in and we'll go from there to operating with you and tell them about how they can ask a question. Thank you. 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 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys.

And our first question comes from the line of Gaurav Mata with Alliance Global Partners.

Next question.

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 where do you expect to refinance that debt? I'll start and I'll let Jay Beckhorn, our treasurer, continue. I mean, we have, as we've said, we've 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's a, that would be a temporary measure. Jay, some of our alternatives? Yeah. As Gary said, we can take it down using the revolving line of credit, and then we'll 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're looking at those alternatives actively. And I guess for Q1, we've got about half that exposure is the touring, and then the rest of the balances over the other half that we're working on. And as we repay those loans, given the amortization and the way our credit facility works, as we add those to the credit facility, they actually increase our availability.

All right, thank you.

Okay, next question. Thank you. Our next question comes from the line of Rob Stevenson with Huntington. You may proceed with your question.

We haven't had anybody ask for relief. And then, as it relates to your question on the maturities, we are currently in discussions and 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 40,000 square feet 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 over 50 percent occupancy. It also covers all expenses within the property so we don't have a burn and we're 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 eight properties. However, within that and subsequent issues within the quarter, three were renewed at the end of the third quarter for a plus. Approximately 2.8 million. So that took those of concern from 12 down to eight. And into that eight, all have been in contact. We have discussions with many of them. One, I believe, is a lease out and fortunately for a large office building. Um, so I feel. I'm confident that what currently would be going into 2027, a 5%, that that's going to drop in a very short period of time down to 2.66% as relates to 2027 figures. So your question, will it go be out low 99%? It will.

We're going to work hard to get it back up, but I still would submit it to a very strong number. Okay. And then last one for me, Gary, the NARIT 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? Don't see, Rob, don't see anything out of the ordinary coming up. We don't give forward guidance, but that's pretty much the best I could do. I don't think there's going to be anything that would do anything significant either way. Okay. Thanks, guys. Appreciate the time.

Our next question comes from the line of Dave Storms with Stonegate. Your line is now live. Morning and thank you for taking my questions. I want to actually circle back to the comment around the plus up of I believe it was 2.8 million on the three that you worked on.

I just want to make sure there wasn't. Yeah. And I also maybe just ask one more. You mentioned earlier that you have nothing in your pipeline that you're maybe too actively looking to dispose of. Just curious, is that maybe a product of not being as much on the acquisition side? So it may be a little more challenging to reallocate those funds. Is it just a widening of the bid-ask spreads or is it, you know, the competition? With the portfolio, right around that 70% for office, just maybe any more information there would be helpful. Sure. And we do look at our dispositions and we look out, looking out into 27-28. Yes, we do want to match up what we can with acquisitions with dispositions so that that cash doesn't 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 and especially now with inflation with what we, you know, want to vote the war and where we are from an economic standpoint for the country, we've seen a pullback of opportunity. 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. I really appreciate you taking my question. And good luck in the next work. Thank you. Okay, next question. Thank you. And just as a reminder, if anyone has any questions, you may press star one to join the queue. Our next question comes from the line of John Masaka with B Riley Securities. You may proceed with your question.

No, I would say repricing. And again, I think the disconnection as relates to on the purchase side. So they, you know, we did not retrade, but I know there's been retrading going on in the marketplace. And I think that helped create a little pullback. And then, you know, going back to the Austin asset, I mean, is it kind of fair at this point to assume? We're going to have a meaningful period of 2027 where that 3% of ABR essentially goes away. I know you have another tenant in the building who 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 just, you know, fair to kind of assume. You're losing that ABR for a period of time. And I guess how quickly at this point do you think, you know, you can backfill the remainder of the space or a significant portion of the space in that Texas office asset? As you, I'm sure, are 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're going to see a down tick 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 40,000. Again, creative in nature as it relates to the cash flow within the building. And we are working hard to fill it all, but it's taking time. But the activity in Austin has increased in the last four months greatly. And then the impairment of

on the office asset in, I think you said Lake Mary, Florida. What drove that? Is that just, you know, market comparability? I thought I remembered that lease being a couple more years left on it. Just was kind of curious why the impairment for that asset. Oh, it's just a change in the lease velocity in that area. You know, really where we are with leasing on that building is what drove us to impair it. But the tenant is still in there for a couple more years, correct? We have a tenant in there. That tenant will be in there through the middle of next year. And then we have some additional tenancy. Potentially going forward. But they're going to downsize the amount that they have. So the tenant will be in there longer, but in the majority of the building, they'll downsize into a significantly smaller portion of it. Okay. That's it for me. Thank you very much.

Thank you. Thank you. And we have reached the end of the question and answer session. Therefore, I'll now turn the call back over to David Gladstone for those remarks. Oh, shucks. We didn't get enough questions this time. We like questions, so we'd be happy if you'll save up some for next meeting.

We'll see you next quarter. That's the end of this call. Thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.