Gladstone Commercial Corporation - REIT 2026 Q2 Earnings Call

Well, thank you, Christian. That was a nice introduction, thank all of you for calling in today. We really do enjoy this time with you guys, I hope you have a lot of questions for us today. We'll hear from Katherine Kirkos. She's our Director of Investor Relations, 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.

Katherine, go ahead. Thanks, David, 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, 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 Comp, as well as Facebook and LinkedIn. Keyword for both is The Gladstone Companies.

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. Let's turn the presentation to Buzz Cooper, Gladstone Commercial's CEO and President.

Thank you, Katherine, 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 continued to improve during the quarter. According to Cushman & 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. 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 build-to-suits, which keep speculative supply in check. The overall health of the industrial market remains 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 sq ft industrial property in Newport News, Virginia, leased to Huntington Ingalls Industries for $22.75 million. This facility supports Huntington's Newport News shipbuilding operation, and we funded the purchase with internally generated cash flow without issuing equity. We sold a 161,458 sq ft 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, we increased portfolio WALT and added another mission-critical location at a great basis.

With respect to our existing portfolio, we renewed or leased over 126,000 sq ft of office retail and over 34,000 sq ft of industrial with an increase in straight-line rent of $169,500 annually. We purchased a land parcel adjacent to our Clintonville, Wisconsin facility and simultaneously entered into a lease amendment into which we provide the funding for an approximate expansion of 86,000 sq ft and significant improvements to the existing 521,000 sq ft facility. The completion of these improvements expected to be in the second quarter of 2027. This lease will commence with a new 15-year term. We've collected 100% of the cash base rents in this period and this month. We leased 82,000 sq ft or the second floor at our Austin, Texas office property.

We also acquired 146,650 square foot industrial property in Red Bud, 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. When office buildings are as mission-critical and well-located as those in our portfolio, we are able to minimize those dollars such that we receive an accretive return on our investment. When we evaluate any office re-leasing, we review payback period, IRR, and ROI, as well as 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.

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 WALT on that portfolio was 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, 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 WALT, maintain strong occupancy rates, increase straight-line rent growth across portfolio, and decrease 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 portfolio, 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. Presently, we believe our current stock price does not reflect the quality of our portfolio, tenant credit, or overall shareholder returns. We are positioned to deploy capital into accretive industrial acquisitions and portfolio improvements. In closing, the team executed well in the first half of the year, and we are focused on continuing that momentum through the remainder of 2026. I will now turn the call over to Gary Garrison to review our financial results for the quarter and the Quiddity acquisition.

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 were both $0.38 per share respectively for the quarter. FFO and Core FFO available to common stockholders during the same period in 2025 were $0.33 and $0.35 respectively. FFO and Core FFO per share for the six months ended June 30, 2026 were both $0.72. FFO and Core FFO for the same period in 2025 were $0.67 and $0.69 per share respectively. Same store lease revenue increased by 1.2% in the six months ended June 30, 2026.