Prepared remarks
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. 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 and wish we had more time to talk to you. Now, we'll hear from Michael LiCalsi, 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, and many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all the risk factors in our Forms 10-Q, 10-K, and other documents we file with the SEC, and find on our website at gladstonecommercial.com. Specifically to the Investors page, you can go to the SEC's website, which is www.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.
And 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. And we believe these metrics are a better indication of our operating results and allow better comparability of our period-over-period performance. 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 keyword there is the Gladstone Companies and Twitter, which is now X at Gladstone Comps. Today's call is an overview of our results, so we ask that you review our press release and Form 10-K, 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% long-term inflation target stalled. The length of the pause is still to be determined, but in the meantime, US treasury yields remain volatile. Looking back on 2024, industrial real estate continued to outperform despite 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 forecast. Q4 2024 industrial vacancy rose by 150 basis points to 6.7.
This pace of increase was the slowest in 2 years, signaling that we may approach peak vacancy in the near future. Finally, new deliveries fell in Q4 2024 to the lowest levels since mid-2021, driven by 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 year-end December 31, 2024, single-asset investment volume increased by 5.1% year-over-year to $67.9 billion. Total commercial real estate volume over the same period increased by 6.4%. Moving on to our portfolio, we are once again very confident heading into the new year and quarter. During 2024, we collected 100% of cash-based 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%.
We renewed or extended more than 2.9 million square feet of leases at 11 properties, resulting in a $3.8 million net increase in GAAP rent. We sold seven properties consisting of five office and two medical office properties. We increased portfolio occupancy to 98.7% 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% 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 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 90% occupied as of December 31, and we have not seen our tenant credit quality deteriorate in the face of higher 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, and good morning, everyone. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the fourth quarter of 2024. 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 $0.35 per share for the quarter. FFO and core FFO available to common stockholders during the fourth quarter of 2023 were both $0.36 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% 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 31, 2024, increased by 2.3% over the same time period in 2023 due to an increase in recovery of 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 recovery revenue associated with one of our properties. Expenses were higher in the 2023 period, mainly due to larger impairment charges offset by higher property operating expenses in 2024. Looking at our debt profile, 49% is fixed rate, 50% is hedged floating rate, and 1% is floating rate, which is the amount drawn on our revolving credit facility and one mortgage note. As of December 31, the effective average SOFR rate was 4.49%. Our outstanding bank term loans are hedged with $310 million of interest 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% of gross assets to 44.1%. 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. And as Buzz mentioned, we've increased our percentage of industrial from 60% to 63% and reduced our office from 36% to 33%. During the year ended December 31, 2024, we sold 3.699 million and 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 in 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 acquisitions. 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%. And now, I'll return the program back to David.
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 that 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 are 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 partnership entities that we own, 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. How do people talk about being location, location, location? We are always interested in who is the team that's running the business. Okay. Let's stop here, and operator, if you'll come on and help some of our listeners ask a lot of good questions for this time.
Questions and answers
Yes, sir. Our first question is from Gaurav Mehta with Alliance Global Partners. Please proceed.
Yes. Thank you. Good morning.
Good morning.
Good morning.
I wanted to ask you about your balance sheet. I was hoping to get some more color on your leverage expectations. I think you said it's 44.1% as of 4Q. And just wanted to hear if that's close to your target number or you expect your leverage to go over—and then as a follow-up on the balance sheet, I also wanted to learn what your expectations were between secured and unsecured debt mix within your capital structure?
Gaurav, our goal is to continue to deleverage, 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 secured debt, we continue to decrease that as an overall proportion of our debt on an absolute basis. So that's really where we're going with that. We're going to build up on the unsecured debt but overall, less debt on the balance sheet.
Okay. 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?
Gaurav, 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 achieve that relative to straight-line rent.
Okay. Thank you. That’s all I have.
Thank you.
Thanks, Gaurav.
Do we have another question, operator?
Yes. Our next question is from Rob Stevenson with Janney Montgomery 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 does the pricing look 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 about our sales. We are not looking to just sell to sell. Our office portfolio has a vacancy factor of 7%. But as we look to sell, it's going to be opportunistic at this point in time. 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 this year. But if we see something opportunistically on the sales side related to office, we will 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 more assets and what's the prospects for re-leasing or selling those in 2025?
The majority of the vacancy is in one or two assets, a couple of which will experience 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 re-lease or have to worry about. The majority is one or two assets. 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 coming due to be sold or have a lease in place where they have an option to purchase. The others that we have specific to office, we have turned proposals on two of those buildings and are waiting for responses 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 million 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 higher incentive fee this year? How should we be thinking about that as we play with our models over the next few days?
As you can imagine, everyone here would like to go back to the original. 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 employees here. But you know our position. We don't pay ourselves when 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 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.
Do we have any more questions?
Yes. Our next question is from John Massocca with B. Riley Securities. Please proceed.
Good morning.
Good morning, John.
Maybe starting off the balance sheet. Given the private placement and security issuance recently completed, I mean, is that kind of how we should expect funds to go forward? And I guess that pricing is kind of the correct pricing, at least in the current market in terms of interest rates?
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, and we have bank term loans. But yes, we intend to continue with private placements if the market allows. The interest rate we got, we thought was pretty strong for a first-time issuer. So it might hopefully be indicative and maybe even less in the future.
That's helpful. And then on the leasing front, can you provide a little color on leasing activity in 4Q? I know you gave numbers and metrics. But were those industrial assets, office properties, and how did rents trend versus what was in place before renewal or re-leasing?
They were both office and industrial, and really, it was mainly industrial. They also came with increases in rates as it relates to industrial, but also in the office. The office deals were mostly on five-year terms. We see that trend continuing as we look to renew current office buildings. And on the industrial side, various pockets around the country, we did see a large one last year up in Pennsylvania. We are seeing an increase in rents regarding those renewals.
Okay. And then I know I talked on the last earnings call, but maybe more in the context of 2025, just broad strokes, what's the CapEx expectations, just balancing the relatively small amount of leases expiring in the current year versus some more meaningful lease expirations in 2026 and 2027? Just trying to think about how spending there might go in the current year?
Obviously, the 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 expenses from a capital exposure point within our buildings. The majority of it is leasing expenses and improvements to the buildings. Of that, we have budgeted it. It's very manageable. But again, a majority of it has been for those dollars that we had to spend in leasing commissions in order to have the nice increase we had coming out of 2024.
Okay. That's helpful. And that’s it for me. Thanks 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. I would like to get an update on the timing for the two held-for-sale assets. Any information on that?
As to timing, one is going to be in the April 1, 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 spread in cap rates between those held-for-sale assets and what you might have in the acquisition pipeline?
Dave, I'm not sure I understand that question unless you're asking about the cap rate difference between sale and acquisition.
Yes, essentially.
Okay. So, obviously, on the acquisition side, we are seeing cap rates in need to play in an area of 7.5% to 8% 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 don’t have the pressure of needing to sell office assets 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 the implementation of those tariffs?
Yes. Thank you for that. We've canvassed our tenants. We do not see an immediate impact relating to the potential threat of tariffs. However, we've got to see where they hit. But our tenants currently have not expressed any such fear. We are looking for it to create more industrial opportunities with reshoring and onshoring. 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 Craig Kucera with Lucid Capital Markets. Please proceed.
Yes, 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 we had in 2024. We're looking forward to getting back to what I'll call, what I think is more normal production of $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. As it relates to disposition, that will allow us to be more discerning in our sells, looking to get rid of some of the office assets that we feel might be problematic down the road as it relates to market demand. We've been pleasantly surprised with some of our dispositions regarding the creative activity of the buyers, either turning it into new developments, like Pickleball facilities or single-family and apartments. And again, just to remind, we don't have properties in central business districts. So as a result, there are some local buyers that find some of our properties attractive for repositioning.
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 for me. You did reclassify a lease as a sales type this quarter. Is that going to still be a component of the base management fee calculation?
Yes, that will be. It's an odd kind of addition to the accounting under this new ASC 842. This is the property, the industrial property that Buzz mentioned. When they entered into the lease in November with our expectation of the sale, we had to give guidance to 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 sheet and 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.
Got it. That's what I figured. I just wanted to double-check. Thank you, that's all for me.
Okay. Any more questions today?
There are no further questions.
Well, that was a little bit better than last quarter in terms of the 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. All right. That's the end of this presentation. 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.