Gladstone Commercial Corporation Stock

Greetings, and welcome to the Gladstone Commercial Corporation Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Chairman, David Gladstone. Thank you. You may begin.

Well, thank you, [ Kristen ]. That was a nice introduction, and thank all of you for calling in today. We really do enjoy this time with you guys, and I hope you have a lot of questions for us today. Now we'll hear from Catherine Gerkis. She's our Director of Investor Relations, and 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. Catherine, go ahead.

Thanks, David, and 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, 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 e-mail notification service and find information on how to contact our Investor Relations department. We are also on X @GladstoneComps as well as Facebook and LinkedIn. The 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 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 presentation to Buzz Cooper, Gladstone Commercial's CEO and President.

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 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 and 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 1/3 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 square foot 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 square foot 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 square feet of office, retail and over 34,000 square feet of industrial with an increase in straight-line rent of $169,500 annually purchased a land parcel adjacent to our Clintonville, Wisconsin facility and simultaneously entered into a lease amendment in which we provide the funding for an approximate expansion of 86,000 square feet and significant improvements to the existing 521,000 square foot facility.

The completion of these improvements is expected to be in the second quarter of 2027. The lease will commence with a new 15-year term. Also, we've collected 100% of the cash-based rents in this period and this month. Subsequent, we leased 82,000 square feet 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. Again, we evaluate each opportunity on a case-by-case basis, and we target payback periods between 6 and 9 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 is 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 and disposing of noncore 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 the portfolio and decreased 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 all 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 noncore 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, although 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 Gerson to review our financial results for the quarter and liquidity position.

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 6 months ended June 30, 2026, were both $0.72. FFO and core FFO for the same period in 2025 was $0.67 and $0.69 per share, respectively.

Same-store lease revenue increased by 1.2% in the 6 months ended June 30, 2026, over the same period in 2025 due to an increase in recovery revenue from property expenses and an increase in rental rates from leasing activity subsequent to the 6 months ended June 30, 2025. Our second quarter results reflected total operating revenues of $44 million with operating expenses of $26.2 million as compared to operating revenues of $39.5 million and operating expenses of $25.1 million for the same period in 2025. Operating revenues were higher in 2026 due to an increased portfolio size, increased recovery revenues, higher rental rates and a onetime termination fee recognized in relation to the sale of a property.

Expenses were higher in the second quarter of 2026 versus the same period in 2025, mainly due to higher depreciation from a larger portfolio and the payment of the majority of the incentive fee in the second quarter of 2026. At the end of the quarter, we had no properties held for sale. As of today, we have $17.7 million of loan maturities in 2026 and $51.9 million of loan maturities through the second quarter of 2027. As of the end of the quarter, we had $51.57 million of revolver borrowings outstanding.

Looking at our debt profile, as of June 30, 47% was fixed rate, 47% was hedged floating rate and 6% was floating rate, which is the amount drawn on our revolving credit facility. As of June 30, our effective average SOFR was 3.68%. Our outstanding bank 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 6 months ended June 30, 2026, we did not sell any shares of common stock under our ATM. We continue to manage our equity activity to ensure that we have sufficient liquidity for all upcoming capital requirements and new acquisitions. As of today, we have approximately $8.4 million in cash and $68.8 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.

And now I'll turn the program back to David.

Well, that was a good report, Gary, and a good one from Buzz and Catherine. The team has performed very well. Overall, again, a very nice quarter. You've heard a lot today in summary, during the second quarter of '26, we acquired 153,000 square foot industrial property in Newport News using proceeds from the sale of an industrial property in Monroe, North Carolina, and that resulted in increase in the straight-line rent and FFO per share. We renewed a lease for 34,000 square feet at an industrial property and 126,000 square feet in office and retail.

Again, the company just continues to go along making more money. Subsequent to the end of the quarter, we acquired 146,000 square foot industrial property in Red Bud, Illinois and that was for $6.55 million. So a small one, but again, just adds to the ability to pay more dividends. Now paying about $1.20 per share per year. It's 9.8% yield. That's a great yield for such solid company like this.

Gladstone's commercial team is growing the real estate we own at a good pace. And the team is doing a great job of managing the properties we own, especially during some of these challenging times that comes up. Our team of strong professionals continues to pursue quality properties on the list of acquisitions. They are reevaluating what we own in order to get us closer to all properties that are for -- projects that are critical to some of the tenants that we have. Our acquisition team is seeking strong credit tenants, and we are getting that done very well.

Okay. Let's just stop here for a while and get some questions from our listeners. So operator, if you come on and ask some questions for us.

[Operator Instructions]Our first question comes from the line of Rob Stevenson with [ Huntington ].

I think Gary said that there was no properties held for sale. How are you guys thinking about funding future transactions given the commentary also about how undervalued the stock price is?

Well, Rob, I mean, we did a redeployment this last time around. We had a sale and then we redeployed the assets into a new property. We intend to do that going forward. If we have a potential acquisition that is accretive at the stock price, wherever we are, we would consider selling stock at that price to make that acquisition. But right now, I mean, it's a little tough, but we continue to grow, and we're going to invest more into our existing properties as a way to increase our revenues and capital deployment.

Okay. And at this point, do you think that you guys have any excess preferred capacity to be able to do any issuance there versus the common?

We're really not considering doing any more preferred at this time.

Okay. And then you guys have done a good job of maintaining the occupancy level in the portfolio. But can you talk about some of the current vacancy? Are you in process on some of that in terms of signed but not commenced leases? Are you getting close to some new tenants in some places? How should we be thinking about where some of that, I guess, 1.3% of vacancy goes over the next 4 quarters or so?

Sure, Rob. Thank you. And as I've mentioned in the past, our portfolio management and asset management team does a great job staying on top of our tenancies, both obviously occupied, unoccupied and the historical occupancy that we've maintained over the last several years, it's got to be one of the top in the marketplace. So yes, we are actively engaged with everything within the next 24 months. As I mentioned, with the added space taken down in Austin.

Our office occupancy is going to be north of 95% here going forward for a period of time. Our industrial is 99.8%, which we do have lease there that will bring it to 100% occupancy at the end of the year. In remainder of '26, we've got 4 properties that we are working on as it relates to upping tenancy, if you will. And all of those have RFPs or documentation that we are negotiating out.

And secondly, going into '27, we have 11%. Again, all have been addressed in conversations with paper going in some cases, back and forth, whether it's an RFP, whether it is nits within a lease. So we feel very confident of those, I see one, and it is an office building that I have concern over, but I believe that we will get something done there before the maturity at the end of 2027. So I appreciate that question, but we are ahead of the curve as it relates to those properties. And I believe we will maintain a high occupancy going forward.

Our next question comes from the line of Craig Kucera with Lucid Capital Markets.

You made mention that there was a termination fee recognized on the North Carolina disposition sold during the quarter. Can you give us a sense of how much that termination fee was?

I believe that was $1.9 million.

Okay. That's helpful. And then I think you have in the Q, there's an additional $1.6 million of what you refer to as accelerated rent. None of it's been recognized. When do you expect to recognize that?

Over a period of time, this is a termination and this will be through, I think, the mid of next year. So this won't be -- yes, I'm sorry, this is through '29. So this won't be -- because of the straight-line rent requirements, this won't be something you'll see in a block. This will be a small amount every month for a couple of years.

Okay. That's helpful. And given the leasing at the Austin asset this quarter, what does that bring occupancy to at that building? Does that bring it up closer to 60% or 70%?

Well, the occupancy currently is at 69%, but this is going to bring it north of 90%.

Okay. Perfect. And just given your commentary about capital, the Austin asset that has been out there for a while, it sounds like that's not one that you're looking to sell that you're expecting based on your leasing commentary that, that will be renewed?

We are looking at all opportunities there, whether it be, again, additional tenancy or sale, but we also are looking to get good value out of it. It has been a good asset for us, obviously, troubling with the vacancy within it during COVID, but we will entertain offers, and we are exploring quietly in the marketplace.

Okay. That's helpful. And obviously, your cost of capital is a little bit high to do a lot with equity right now, but I'm curious sort of what you're screening as far as your investment pipeline right now and what you're seeing in the marketplace?

We have one deal that we have an LOI out on for approximately $32 million. We should hear about that transaction here in the next few weeks. We, of course, always are evaluating the marketplace. We've got 15 that we currently are digging into their financials upon and looking to see if the property makes sense for us. So we've got a healthy pipeline and having just closed that one deal here subsequent to the end of the quarter. Obviously, we look to backfill that, make it stronger. But we will evaluate, as we always have, making sure that these are accretive transactions.

Our next question comes from the line of Dave Storms with Stonegate Capital.

Sticking with the acquisition pipeline, we're going to get my head maybe around the cap rates in the industrial market. It looks like Newport was high 6s, Red Bud, low 9s. Obviously, there's some variance between those 2 properties. But just any of the puts and takes that we should be thinking about to maybe get a better view on cap rates?

Sure. And as you know, Dave, we are not able to compete down in the 6s at this point in time, although we are -- as we sell noncore assets, able to take the cash from those sales, put them into new deals, obviously, it doesn't cost us to raise that money. So it makes the transaction more accretive for us. But the cap rates that we're seeing are going to be 7.5% north. That 9% that you referenced was an average as it relates over the term of the lease, longer the term, the better for us. So we are looking at transactions that have a cap rate going in the door approximately 7.5%, looking to get to averages north of 9%.

Understood. Very helpful. It also looked like tenant improvements, existing real estate maybe came in a little bit lower. I know you mentioned this in your prepared remarks. Is that mostly a timing thing there? Or is there anything else we should read into that?

I don't believe there's anything else you would read into that. Yes, it is a matter of timing. And as I mentioned, we look to try to -- we're not going to spend money that's not going to be accretive to us at the end of the day. We look to have a payback period on our tenant improvements as a general rule of between 6 to 9 months. We want to make sure those dollars are obviously recaptured because we want to be cognizant. And again, tenancy and cash flow is important.

Understood. And then maybe just last one on the land purchase. If I remember right, that was right next to an existing property. Is that the kind of profile that you're looking for in land purchases? Or are there other variables that you try to keep in mind there?

That property, the purchase was, again, for the expansion. It will come along at the end of the day with a 15-year lease. The average cap rate on that transaction is north of 9.5%. I'm not sure because I got a little garbled there exactly if I hit all of your question, but that is a very opportune purchase for us. We'll build it out here and hope to have that completed by second quarter of next year.

Our next question comes from the line of Gaurav Mehta with Alliance Global Partners.

I wanted to ask you on the industrial asset that you guys decided to sell. I just want to get some more color on why you sold that asset. And are there any more industrial assets in your portfolio that you may look to sell?

We had that asset. We purchased it in 2021, Gaurav. The reason for the sale is the tenant came to us with a very profitable number, and we were able to redeploy those assets into the Huntington transaction that doubled the straight-line rent and the current rent. So it made all the sense in the world, and we didn't have to raise equity to do the transaction.

Any more industrial properties in your portfolio that you could look to sell to redeploy that into other industrial assets?

We have certainly within our portfolio, some of the leases carry a purchase option. I don't have any at the moment that I would classify that are going to happen any time imminently. But are there a few out there that could happen? Yes, but nothing that I have today, although certainly, we are looking at some to see if we could sell them at economics that make sense, we would.

Our next question comes from the line of John Massocca with B. Riley.

Technical one. If I think about the accelerated rent versus the lease termination fee and understanding those are separate things. Is there a GAAP impact from that accelerated rent as well? Or is that like even like the top line impact of that will be kind of over time? I'm just trying to determine if the cash and GAAP -- like different kind of cash and GAAP kind of impact from the accelerated rent. And I'm assuming that is when we can all hit in the current quarter.

Yes. The termination fee was a onetime hit in the quarter. The accelerated rent, and you can call that, it's a variation on the same theme. This will be -- this will have a GAAP effect. It will be -- you take the amount of that termination fee, divide it by the total amount of months that you have left on your lease and then you straight line it through. So yes, it will have a small GAAP impact. It's not a significant amount.

But the $1.9 million...

The cash has already been received.

The $1.9 million, though, was all impacting in 2Q, correct?

Yes, correct.

And then apologies if I missed this earlier in the call, I kind of was cutting in and out. The leasing activity, can you maybe provide a little color on where kind of rents moved for kind of all the leasing activity you discussed and if there is any kind of significant CapEx associated with any of those leases?

As I mentioned, we look for the CapEx to get a payback on that, obviously, as quickly as we can, and we try to keep that CapEx and lease commissions as low as we can. On average, we see a payback of between 6 to 9 months. The approximately $200,000 that we had in leases that were renewed as a plus up prior to the end of the quarter is an average across the portfolio of the leases that we renewed. We always look to do what we can to, I hate to put it this way, get as much as we can.

And the market is improving, as referenced in my remarks, that lease rates are going up. So we are very cognizant of the CapEx dollars needed, but I'd rather have the property occupied and paying and creating cash flow for us versus obviously vacancy.

Okay. And then I guess as we look out on the kind of future lease expiration schedule maybe out over the next 2 years, where do those assets maybe sit versus kind of market roughly? -- exact numbers, just kind of up or down?

They are all positioned and with the numbers that we are discussing with the tenancies, they are all -- gee, except maybe 2 are up. So we've got 15 between this year and next year that we're looking at, 2 of which are going to go vacant. We have had tours within the buildings. So I feel confident that at the end of the day, the net-net, it's going to be a plus up. And again, I have one office building down in Florida that we are working on, and that does not mature until September '27.

So I don't want to say we have time, we are aggressively addressing it. But I do worry about that one. And it's not a large property. It's approximately 80,000 square feet within the portfolio, but we're going to do what we can to keep these buildings occupied and/or sold.

Our next question comes from the line of [ Francois Swanepoel ], a private investor.

I would like to ask about if you could clarify our current payout ratio. What is our current payout ratio with the dividend at $0.10 a month?

It's in the -- we get this for you. It is in the low 80s. Actually, it was what, 79%, I think, this time around, hold on. I believe it was -- our payout ratio is just under 80% this last quarter, yes.

Yes. So my question on that is, as a REIT, shouldn't we be keeping that as a percentage of profit at closer to 90% to keep us at...

As a triple net, we typically are paying more than a non-triple net as far as a distribution ratio of dividends over to FFO. But we would like to maintain more internal cash flow. And you see the triple nets are probably in the low -- the mid-70s to low 80s as a general group. We would like to kind of get our distribution ratio a little lower. It's better for the shareholders in the long run as we can redeploy the capital into our portfolio and grow the portfolio and earnings over time.

So then eventually, we can then increase the dividend. But if you can maintain -- if you look at some of the bigger REITs, their yields and they have a much lower distribution than we -- so over time, if you can do that, you can reinvest those proceeds or that cash into new properties without having to sell new equity and thus potentially dilute the shareholders.

I understand that. I understand that. My question on that is according to the IRS rule, what's the rule of keeping that at 90% for us to qualify -- corporation to not pay high taxes on that income?

Yes, that's a 90% of taxable income, not of GAAP income. So we probably pay out probably, in many cases, way above the 90% required to maintain REIT status. So we're definitely doing that. Oh yes, absolutely. We will not lose our REIT status there.

Okay. Will the annual increases in rent, if they are implemented and when they are implemented, I'm not sure when you guys implement annual increases on rent. But will that be able -- will we be able to use those proceeds to maybe look at an increase in the dividend?

We'll certainly consider it, but that's something to look at in the future.

Do we have any additional questions -- any questions?

We have no more questions at this time. Mr. Gladstone, I'd like to turn the floor back to you for closing comments.

Well, thank you very much, everybody, for listening to this, and we appreciate the questions. Hope you have a lot more questions next quarter. And that's the end of this. So thank you again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Greetings, and welcome to Gladstone Commercial Corporation First Quarter Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Mr. David Gladstone, Chairman of Gladstone Commercial Corporation. Thank you, Mr. Gladstone, you may begin.

Well, thank you so much for that nice introduction, and thanks to all of you guys on the phone for calling in today. I want to tell you, we do enjoy the time we have with you and on the phone even, and I wish we had more time to talk.

But let's start out with Catherine Gerkis. She is our Director of Investor Relations, to provide a brief disclosure regarding certain regulatory matters that always impact everything we say. So Catherine, go ahead.

Thanks, David. 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 Investor 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 e-mail notification service and find information on how to contact our Investor Relations department. We are also on X@gladstonecomps 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 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 presentation to Buzz Cooper, Gladstone Commercial's CEO and President.

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 March 31, 2026, our current portfolio and our 2026 outlook. During the quarter, we renewed or leased over 773,000 square feet of industrial and 32,000 square feet of office, resulting in an increase in straight-line rent of over $86,000 annually. We did not sell any properties in Q1 '26, but we did sell a portion of one parcel of land with a gain on sale of approximately $1.8 million.

As we have discussed in the past, we remain steadfast in several key focus areas, growing our industrial concentration, adding value in our existing portfolio through renewals, extensions and strategic capital investments and disposing of noncore assets and strategically redeploying those proceeds into quality industrial assets.

By executing on these focus areas, we expect to achieve increased portfolio WALT, strong occupancy rates, straight-line rental growth across the portfolio and a decreased cost of capital. Our asset management team continues to effectively manage the existing portfolio as evidenced by 100% collection of rents -- of cash-based rents for the period, 98.7% occupancy across the portfolio, 7.3-year average remaining lease term. Each of these milestones is a testament to the mission-critical nature of the assets in our portfolio, the quality of the tenant credit in the portfolio and our underwriting capabilities.

We are grateful to our lenders for their continued trust and partnership with us. These long-standing relationships are critical to our continued investment in the current portfolio and the addition of mission-critical industrial assets going forward. In short, our relationship with our tenants, the capital market community and our financial capacity have allowed us to execute upon our focus areas at a high level.

Looking ahead to 2026, we remain focused on evaluating opportunities for high-quality industrial assets that are mission-critical to tenants and industries and accretive to our long-term strategy. As I mentioned, we're working toward our near-term goal of [ 70% ] industrial annualized straight-line rent. We look to achieve this goal and push past it during the year. While we do not have a time line for the disposition of all of our office properties, we are keenly focused on growing the industrial concentration of our portfolio.

At the same time, we will continue to work with our existing tenants to extend leases, capture mark-to-market opportunities, support tenant growth through targeted 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 noncore 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 ability to raise money at our ATM, we are positioned to deploy capital into accretive industrial acquisitions and portfolio improvements. In closing, 2025 was a great year for the company, and the team is focused on continuing their efforts through the remainder of 2026.

I will now turn the call over to Gary Gerson, our CFO, to review our financial results for the quarter and liquidity position.

Thank you, Buzz. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the first 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 $0.35 per share, respectively, for the quarter. FFO and core FFO available to common stockholders during the same period in 2025 were both $0.34 per share, respectively.

Same-store lease revenue increased by 1% in the 3 months ended March 31, 2026, over the same period in 2025 due to an increase in recovery revenue from property operating expenses and an increase in rental rates from leasing activity subsequent to the quarter ended March 31, 2025. Our first quarter results reflected total operating revenues of $41.9 million with operating expenses of $25.2 million as compared to operating revenues of $37.5 million and operating expenses of $23.9 million for the same period in 2025.

Operating revenues were higher in 2026 due to an increased portfolio size, increased recovery revenues and higher rental rates. Expenses were higher in the first quarter of 2026 versus the same period in 2025, mainly due to higher depreciation from a larger portfolio, partially offset by crediting back all the incentive fee in the first quarter of 2026.

At the end of the quarter, we had one small industrial property in Charlotte, North Carolina, held for sale. As of today, we have $17.9 million of loan maturities in 2026 and $35.2 million of loan maturities in the first quarter of 2027. At the end of the quarter, we had $34.3 million of revolver borrowings outstanding.

Looking at our debt profile, as of March 31, 48% was fixed rate, 48% was hedged floating rate and 4% was floating rate, which is the amount drawn on our revolving credit. As of March 31, our effective average SOFR was 3.68%. Our outstanding bank 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 3 months ended March 31, 2026, we did not sell any shares of common stock 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 $7.8 million in cash and $77 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 $0.10 per month or $1.20 per year.

And now I'll turn the program back to David.

Thank you, Gary. That was a good one and [ that was good from also ] Catherine. Team continues to perform very, very well. Overall, a very nice quarter for us, like we've done for many quarters in the past. So for those of you who like quarterly dividends, this is a great company to buy into [Technical Difficulty] 773,000 square feet of industrial and 32,000 square feet of office. We sold a portion of land parcel, which gave us a gain on sale of about $1.78 million.

Gladstone Commercial's team is growing. Real estate, we own and a good place to be, and the team is doing a great job managing the properties, especially during these challenging times. The good news is we have some very good properties and they're rented to some great tenants. Our team has strong professionals continuing to pursue potential quality properties on the list of acquisitions we have and are reviewing. Our acquisition team is seeking strong credit tenants. That's the key. But let's stop here and ask the operator to come on board and help us listen to some questions from some of the people on the phone. Operator?

[Operator Instructions]

Our first question comes from the line of Craig Kucera with Lucid Capital Markets.

You were pretty active this quarter on the leasing front. Can you talk about the leasing spreads you typically achieve during the quarter versus prior?

In leasing spreads, Craig, are you referring to either plus up or down, in some cases, relative to rent or...

Yes. That's relative to rent.

Relative to rent. So as mentioned, we did have a plus up for the year -- or excuse me, in the quarter. And most of that came from an industrial asset that we renewed. Certainly, we try to get mark-to-market as best as we can when that market is a plus up. We have addressed all of our leases for '26. We have 3 or 4 outstanding that we need to work on, are working on. As I've mentioned in the past, we're in front of all of our expiring leases from '26 and '27.

Obviously, the main concern is our property down in Austin, and we are obviously working that hard. We have had some activity. And hopefully, we'll have some more information on that in the not-too-distant future. But we always look to optimize what we can relative to where we are in the market and obviously, the tenants need within the building.

Got it. And you have a small -- go ahead.

Go ahead.

[indiscernible] next go to Craig.

Okay, sure. So you did have a small sequential decline in occupancy from the fourth quarter. Was that in an office or an industrial property?

It was in an office for a period -- it's going to be for a short period of time due to a building in Pennsylvania, the tenant downsized and beginning in the third quarter, that occupancy will be picked up by a new tenant that is in on a longer-term lease. We hope to expand them within the whole building, but that will come back up, if you will, once we hit the third quarter.

Got it. Okay. And I think last quarter, you thought you might close on maybe a $10 million property this quarter. Is that still in the mix? And kind of what's your near-term appetite and pipeline for acquisitions?

Sure. We have 2 transactions currently that we are working on that we do believe will close within this quarter, both industrial and use of proceeds from the sale of one of our buildings we've referenced in the past that, in fact, is very accretive for us, both the straight line and current rent on that transaction doubles. So it's very accretive to us.

The pipeline, there's a lot of competition, as everyone knows. We look to differentiate ourselves via our underwriting as well as performance. There's been a little bit of a slowdown starting to come back now as things do coming out of the first quarter acquisitions. Obviously, the private credit is a little in flux. So people are looking back at sale leasebacks as a way to finance their operations. So we anticipate a more robust second and third quarter.

Okay. Great. And just circling back to the Austin property, is that GM lease, is that expiring in the second half of '26? And I guess, kind of when you think about the lease expirations you have ahead of you in '26 and '27, can you give us a sense of the mix between office and industrial?

Sure. And that lease there in Austin expires 12/31 of '26. So we will have addressed this prior to that -- as we move through that building, I trust. In the '26 lease expirations, we have one sale that will occur, as Gary mentioned, held for sale. Then the office building I mentioned where the tenant is taking over 7/1 of '26. The other 3, 2 are office. They're in the process of renewal. One is with the U.S. government, of which they're obviously, with the shutdown and so forth is they're still paying, but thrown back the completion of the renewal there.

And in one building, there will be a bit of a downsize with the tenant taking 50% of the building, 50% plus. And then going into '27, we have, again, as we always will, been in contact with all the tenancy. Some of them have fixed renewal right and notices. We feel confident that we'll have positive results coming out of that and some have already been renewed. So we're working them hard.

But again, the office and industrial side of that, one industrial, absolutely, I'm certain that's going to renew for 245,000 square feet. Another one for 240 industrial, that's going to renew. Our office would be Delta down in Atlanta. We are in discussions with them on renewal as well as we are showing the space. They're very slow to make a decision. Again, we're pushing out until 12/31 of '27. So it's a mix currently of approximately 60-40, 60% is industrial, 40% office.

Our next question comes from the line of David Storms with Stonegate.

To start with the parcel sale in the quarter. Just curious, is this a structural shift? Is this opportunistic? And maybe what's kind of the profile of a buyer that would come in for a parcel? Does it vary by geography? Or is there a typical kind of buyer you would see here?

David, I'm sorry, I missed the first part of your question. Who -- what's the profile of the buyer?

Yes, apologies. Just around the parcel sales, maybe what's the profile of a buyer that would come in for a parcel sale? And is this something that was just opportunistic? Or are you starting to look at this with more intent?

It was opportunistic. In fact, the municipality came in, wanted that strip of land, if you will, to the back and not used by the property, to put in a bike path.

Understood. That's perfect. And then just curious, you mentioned some of the macro stuff and some of the challenges in underwriting as well. Just curious as to how your underwriting processes have changed, maybe how you're evaluating tenants with their maybe energy needs in relation to AI, gas or geopolitical exposure, anything like that?

As you have heard consistently, we have not changed our credit underwriting and won't, which is one reason our occupancy within our portfolio has always been so strong. We have not had any tenants ask for relief. And as we stay in front of our tenants, we do quarterly reviews and annual where appropriate. So we have not seen a drop in credit quality. We have 2 or 3 that we keep an eye on. However, they've been improving. And again, no miss rental payments and no ask for relief. So we will stick to our knitting as it relates to our underwriting.

Understood. That's great commentary. And one more. It sounds like in the last round of questions, you had mentioned you're seeing maybe more sale-leaseback transactions. Is there a particular type of tenant that you're seeing this in? Just trying to maybe gauge what kind of momentum there would be for these kind of transactions?

Well, as you know, we look for mission-critical real estate, obviously, in the industrial side of the business. And with that comes manufacturing. We're not looking for big box distribution per se. At the right cap rate, we would look hard at it. But we are looking for those properties that have heavy bolt-down cost, heavy equipment within the building which leads to, obviously, the tenant very expensive to move. So they're industrial in nature and manufacturing with heavy need within the building, whether it's cranes or production lines or so forth. So that's what we look for.

Our next question comes from the line of John Massocca with B. Riley.

Apologies if I missed this earlier in the call. Can you lay out kind of what the kind of brackets on the acquisition pipeline are and kind of what you're seeing in terms of the cap rate environment?

Sure, John. And the brackets around -- we're not going to, as I mentioned, move our credit requirements within the analysis of the tenant. We are looking at deals in the [ mid-6.5 ] cap going in. There's a great deal of competition, and I know our competitors have referenced that as well. I think one of the differentiating points for us is we do what we say we're going to do. We don't look to get into a deal and then try to make a deal. We're going to stick to what we commit to do. We're going to do our underwriting. We're going to stick to our underwriting.

And the profile is, again, middle market companies in hopeful locations where we see some value out of the real estate as evidenced by one of the properties we're holding for sale. So we're going to continue as we have in the past. And one of the places, I believe, where we have some opportunity to take advantage are portfolio tenants at the moment that are looking to expand that we can provide the capital to expand, so we can keep them in our portfolio.

Any change to the size of the pipeline versus the 4Q earnings call -- at the time of the 4Q earnings call?

No. It's -- we're always in the range of $300 million to $350 million under review. We have 2 LOIs -- actually 3 LOIs currently for approximately $87 million. So it generally remains in that $300 million on an ongoing basis, and we're under reviewing currently 13 opportunities.

And maybe in light of the kind of comments on potential tenants or tenants moving back to favoring the sale-leaseback model. I mean, was your tenant base or kind of targeted acquisition base using the private capital that was out there using kind of the private lending funds that was out there? Was that a competing source of kind of capital versus you all? Or is -- if those vehicles kind of pull back, do you think it impacts your investments both yields and/or kind of the amount of acquisition volume you can do?

I don't believe that it is a great competitor to us, honestly. They're always going to find some owe money that will go chase deals, but those don't work for us as it relates to return as well as the type of tenancy they might end up with. Again, as evidenced by our performance over 20-plus years, we're going to be thoughtful both in the type of tenancy, where it's located, the fungibility of the real estate. And of course, as you've heard before, it's credit first and credit second and the real estate as we get into the analysis of our deals.

Okay. And then anything onetime to kind of be aware of in the 1Q results? I just thought I saw a little bit of accelerated rent, but I wanted to kind of confirm that?

No, there's -- John, there's no accelerated rent in Q1. I mean the only thing that's you would call onetime event would be that sale of the parcel for the gain. That would pretty much be it. Otherwise, it's a pretty standard quarter.

Our next question is a follow-up question from the line of David Storms.

Apologies. I did not meant it.

David, do you have another question?

Apologies. I do not have another question. I'm not too sure I got back in queue.

Okay. I don't know. Next question from operator.

There are no further questions at this time. I'd like to turn the floor back over to Mr. Gladstone for closing comments.

That's really sad. We like to have lots of questions, but we get 3 or 4, and that's about it. We've got to get a different ownership base that ask us a lot of questions. So right now, we're -- you might say we're fat and happy. Everything is working as it should work, and we've got some really interesting things we're working on. So with that, I'll close it down and say thank you all for tuning in, and we'll see you again next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.

Greetings, and welcome to Gladstone Commercial Corporation Year-End and Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Please go ahead.

Well, thank you for that nice introduction, and thanks to all of you who called in today to hear from us. We always enjoy these times with you and on the phone and wish there were more times to talk about it. Now we'll hear from Catherine Gerkis first, our Director of Investor Relations, to provide a brief disclosure regarding certain regulatory matters. Catherine, go ahead.

Thanks, David. Good morning, everyone. 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-K and earnings press release for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X, @GladstoneComps 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 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 presentation to Buzz Cooper, Gladstone Commercial's President.

Thank you, Catherine, and thank you all for joining today's call. We are pleased to update you on our results for the year ended December 31, 2025, our current portfolio and our 2026 outlook. 2025 was a productive year for our portfolio. During the year, we acquired over $206 million of industrial assets across 10 facilities totaling 1.6 million square feet with a weighted average cap rate of 8.88%. At closing, these properties had a weighted average lease term of 15.9 years. We increased portfolio industrial concentration as a percent of annualized straight-line rent to 69% as of December 31, 2025, as compared to 16 -- excuse me, 63% at the same date in 2024.

We invested $21 million in existing portfolio towards renewing or extending 1.2 million square feet of leases at 18 of our properties. These leases resulted in a $2.1 million net increase in GAAP rent. We sold 2 properties consisting of 1 office and 1 industrial property and executed an agreement to sell another industrial property in the coming months. We amended, extended and upsized our syndicated bank credit facility from $505 million to $600 million. We closed on an $85 million private placement at 5.99% senior unsecured notes due December 15, 2030.

As we have discussed in the past, we remain steadfast in several key focus areas: growing our industrial concentration, adding value in our existing portfolio through renewals, extensions and strategic capital investments and disposing of noncore assets and strategically redeploying those proceeds into quality industrial assets. By executing on these focus areas, we expect to achieve increased portfolio WALT, strong occupancy rates, streamline rental growth across the portfolio, continue to delever and decrease the cost of capital.

Our asset management team continues to effectively manage the existing portfolio as evidenced by 100% collection of cash-based rents in the period, and occupancy of 99.1% across the portfolio, average remaining lease term of 7.3 years and a 4% same-store lease revenue increase compared to 2024. 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. We are grateful to our lenders for their continued trust and partnership with us.

These long-standing relationships are critical to our continued investment in the current portfolio and the addition of mission-critical industrial real estate going forward. In short, our relationships with our tenants, the capital market community and our financial capacity have allowed us to execute upon our focus areas at a high level.

Looking ahead to 2026, we remain focused on evaluating opportunities to acquire higher-quality industrial assets that are mission-critical to tenants and industries and accretive to our long-term strategy.

As I mentioned a moment ago, we are working toward our near-term goal of 70% industrial annualized straight-line rent. We will look to achieve this goal and push past it in the coming year. While we do not have a time line for the disposition of all of our office properties, we are keenly focused on growing the industrial concentration of our 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 targeted expansion, 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 noncore industrial as part of our continued capital recycling efforts. With the availability via our increased line of credit, access to the private placement bond market, cash on hand and the ATM, we are positioned to deploy capital into accretive industrial acquisitions and portfolio improvements. In closing, 2025 was a great year for the company, and the team is focused on continuing their efforts as we head into 2026.

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 2025. 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 $0.37 per share, respectively, for the quarter. FFO and core FFO available to common stockholders during the fourth quarter of 2024 were both $0.35, respectively. FFO and core FFO for the 12 months ended December 31, 2025, were $1.38 and $1.40 per share, respectively. FFO and core FFO for the same period in 2024 were $1.41 and $1.42 per share, respectively.

Same-store lease revenue increased by 4% in the 12 months ended December 31, 2025, over the same period in 2024 due to an increase in recovery revenue from property operating expenses and an increase in rental rates from leasing activity subsequent to the year ended December 31, 2024, partially offset by a settlement received at one of our properties related to deferred maintenance in the prior period. Our fourth quarter results reflected total operating revenues of $43.5 million with operating expenses of $26.4 million as compared to operating revenues of $37.4 million and operating expenses of $25 million for the same period in 2024.

Operating revenues were higher in 2025 due to an increased portfolio size, increased recovery revenues and higher rental rates. Expenses were higher in the fourth quarter of 2025 versus 2024, mainly due to the higher depreciation from a larger portfolio, partially offset by an impairment charge and crediting back of all the incentive fee in the fourth quarter of 2024. At the end of the quarter, we had one industrial property and a portion of a land parcel held for sale. During the quarter, we extended and upsized our bank credit facility to $400 million in term loans and a $200 million revolver.

The revolving credit facility maturity was extended to October 2029 and the maturity dates for Term Loan A and Term Loan B components were extended until October 2029 and February 2030, respectively. The amended credit facility also provides the company with options to extend the maturity dates of the revolving line of credit and Term Loan C components until October 2030 and February 2029, respectively. The transaction led by KeyBanc as joint lead arranger and book manager as well as Bank of America, the Huntington National Bank, Fifth Third Bank National Association as joint lead arrangers, Synovus Bank and S&T also renewed their commitments. In addition, PNC Bank and Webster Bank both joined as lenders.

In Q4, we also issued $85 million of 5.99% senior secured notes due December 30, 2030, in the private placement market. Investors included Nuveen and New York Life. This is our second issuance in this market, which allows us to decrease our cost of capital and simplify our balance sheet. As of today, we have $27.6 million of loan maturities in 2026. As of the end of the quarter, we had $37.4 million in revolver borrowings outstanding. Looking at our debt profile. As of December 31, 48% was fixed, 47% was hedged floating rate and 5% was floating rate, which is the amount drawn on our revolving credit facility. As of December 31, our effective average SOFR was 3.87%.

Our outstanding bank 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 12 months ended December 31, 2025, we sold 4.4 million shares of common stock under our ATM program, raising net proceeds of $61 million. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions.

Taking in the year as a whole, we increased net assets from $1.1 billion to $1.25 billion, which was the result of the net portfolio acquisitions and revenue-generating portfolio CapEx during the year. As of today, we have approximately $4 million in cash and $60 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.

And now I'll turn the program back to David.

Thank you, Gary. That was a good report, and it was a good one from Buzz and Catherine did her part as well. The team has performed very well overall in a very nice quarter indeed that we have for our shareholders. As you've heard today, in summary, during the fourth quarter, we amended and extended our bank credit facility, which is now $600 million. We issued $85 million of 5.99% senior unsecured notes in the private placement marketplace.

For 2025, we acquired $206 million of industrial properties that we are gradually becoming a fully industrial real estate investment trust. We increased our industrial percentage on annual straight-line rent to 69%. And here's one you always love to hear, increased occupancy to 99.1%. That is we've got tenants, almost 100% of our stuff is leased out. Gladstone Commercial's team is growing the real estate that we own at a good pace, and the team is doing a great job managing the properties we own, especially during these challenging times.

We don't have a lot of industrial property that's somehow related to the Internet or to the M&A that's going on the stock, but we certainly hope to hit some of those big numbers that are out there. My team of strong professionals continues to pursue potential quality properties on the list of acquisitions they are reviewing. We've got a good strong list of acquisitions that we're looking through.

Okay. I'm going to stop here and let the operator come in and help us listen to some of the questions that people always ask us.

[Operator Instructions] Today's first question is coming from Dave Storms of Stonegate.

I wanted to start with the occupancy. It looks like occupancy remained the same, though you did lose a tenant. I was just hoping to get a little more color on what happened there.

David, nice to talk with you. Relative to the occupancy, we're at an all-time high, if you will, since 2019. We renewed a tenant and have increased our occupancy. And we -- obviously, the portfolio management team has done a great job relative to that. We see continued maintaining that occupancy. Certainly, there'll be some fluctuations as we add property or dispose of property.

Understood. I appreciate that. And then one more. I know you mentioned that you're looking to get the portfolio up to 70% industrial. You don't have a time line for that. Just curious as to what you're seeing in the transaction environment and if anything has changed now that we have a little more clarity about the incoming Fed share and the potential plans to reduce the Fed's balance sheet.

It's a very competitive market. And almost every day, you see somebody else coming into the space of triple-net. We play in the middle market and our value-add is underwriting middle market credits. We're not playing in the high range, if you will, both size as well as A-rated credits. So we are working hard at adding good properties, good tenancy focused upon the quality of the tenant and quality of the real estate, not just going for the highest return. So we're going to be very discerning as it relates to what we're going to put on our books and what we are going to chase. Well, David, if I could, relative to just thinking through it on your question, the first question, we did have a tenant with a fee we received that may be answering your question relative to the payment as well as the effect on occupancy at that point, but we did have a fee received.

Our next question is coming from John Massocca of B. Riley Securities.

Sorry if I missed this maybe earlier in the call, what's the size of the pipeline today roughly? And I guess if you think about maybe cap rates in the pipeline or how cap rates are trending, where do those stand today? And maybe where you think they're going to trend over the course of the year?

Thank you, John. And we are continually looking at somewhere in the neighborhood of $300 million in transactions. Obviously, we would love to do them all. We can't do them all. We won't do them all. Cap rates generally from where we are competing are at a floor of 7.5%. And certainly, for us, we look between 7.5% and 8.5% is realistic. But the competition is great. One of our -- again, our value add, as we always say, is our underwriting capability, plus we're able to purchase all cash. So we are also competitive in the market. It was a little slow coming out of the gate at the end of 2025 as it relates to opportunities, but we do see that picking up currently.

And maybe kind of cap rate ranges is roughly where you're kind of seeing those today for your target assets?

Going in 7.5% and up with an average cap rate north of 9%.

Okay. And then in terms of the in-place portfolio, how are you looking at kind of lease maturities over the course of the year? I know you have a relatively sizable one at the very end of the year, but anything else that's kind of noteworthy before then or even maybe in early 2027.

Sure. Happy to address that. And as mentioned previously, all the property management team, portfolio management has done a great job. We've been in contact with every tenancy that's coming due in the next 2 years. We have 8 in 2026, half for office, half for industrial. Of that, it represents a total of approximately 8% of straight-line rent. But in our discussions with the tenancy and as we have projected out with some agreements in place relative to waiting just having a signed document or their ability within their lease to just automatically have a right to exercise, we are concentrating on 2 out of those 8 because 6 of them have been, in all honesty, we believe very, very much in the barn.

But we have certainly our asset in Austin, where GM is the tenant, which represents approximately 3% of our straight-line rent. It does lease mature at the end of the year. The team is in place and has -- creating a plan that we are going to work relative to leasing, of which we had 2 tours here in the coming week of approximately 50,000 square foot each. But one way or the other, that property will be taken care of. And the other is an industrial -- excuse me, office building of which we do have 2 tours as well. That lease matures at the end of 2026 and 2 full building users are touring in the next 2 weeks.

As it relates to 2027, we have 14. Again, half are office, half are industrial. Of those, we are very confident that all but 3 are, for lack of a better word, perhaps not -- I don't want to say not going to happen, but we don't have the clarity we wish. But again, that only represents 1.2% of the straight-line rent of those maturities. Others, again, have the right to extend, and we have every confidence they will and have been in contact with them, but their notice date is not yet upon us, upon them, so they haven't given us notice. and we are diligently working the other small amount of approximately 85,000 square feet in 2027.

Okay. And then last one for me on the balance sheet. How are you thinking about the need for additional debt capital given some of the activity at quarter end? I mean, does that provide you think sufficient runway for what your kind of target acquisitions are for the year? Or should we be looking for any kind of additional activity in the debt markets? And I guess, how would you maybe look to spread that between either term loan debt or additional kind of private placement or even mortgage debt?

John, this is Gary. Really, the way we look at debt right now, our kind of goal is to use our revolving credit facility to acquire properties and then clean up that facility with an issuance in the private placement market. And so that's what we've done in the last 2 years. That's what we intend to do going forward. As you know, we actually have a couple of mortgages coming due. And once those -- once we pay those off, we'll then put those properties into the unencumbered pool, which will increase our availability. So right now, our liquidity is about $60 million on the credit facility that we expect to go up over time, given new properties. We have plenty of room under the facility to grow our availability. So I think right now, that's our general look on debt going forward.

[Operator Instructions] Our next question is coming from Craig Kucera of Lucid Capital Markets.

I think last quarter, you mentioned that you were working on a couple of transactions that you thought might close in the fourth quarter. Are those still in the mix? Or are those transactions you don't think you're going to execute on?

We have one that we believe we can hopefully get done by the end of this quarter. Still some diligence work to do on that. So yes, some bled over, did have one fall out. Actually, the seller pulled back on it, I believe. So we're hopeful of one and a pickup in activity into the second quarter.

Got it. And can you give us a sense of the dollar amount that might close here in the first quarter?

I would say it's in the range of $10 million.

Okay. That's helpful. And you mentioned a fee earlier. I know we had a discussion about this last quarter about some lease termination income or accelerated rent, but was that recognized here in the fourth quarter at about $1.5 million?

Yes, it was. That was a termination fee, and we had a tenant that came right in after that tenant left. So the building is occupied the same level of occupancy. So there's no loss there. And that -- yes, that was a onetime fee.

Got it. I appreciate that. Another for me. I guess just thinking about the incentive waiver, philosophically, I mean, looking at it, it looks like the Board is sort of targeting maybe a core FFO payout ratio of something around 85%, plus or minus. Is that how we should think about that? Or is there any color that you think you can give us on that?

I mean that's reasonable. I think going forward, we'd like to lower that going forward, but I think that's a reasonable assumption, yes.

Our next question is a follow-up from Dave Storms of Stonegate.

I just wanted to ask one around average lease terms. It looks like they're trickling up to the mid-7s. Is this by design? Is this something that you're seeing in the market? Maybe just any more color on that.

Sure, Dave. And obviously, the longer WALT, the better. So we do look at transactions that allow for that. It gives us more stability within the portfolio. And so yes, we will look at transactions 7 years and up, prefer 15 and up. Of course, that leads to our wheelhouse of sale-leaseback transactions. So yes, the longer we can do, the better.

Okay. Do we have any more questions?

We're showing no additional questions at this time. Mr. Gladstone, I turn it back to you for closing comments.

Thank you very much. And that was pretty puny in terms of number of questions. We like more questions from our folks out there. This really makes a meeting go faster and easier and straight to the point for all of these. So thank you all for calling in, but save up your questions for the next meeting. That's the end of this call. Thank you.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.

Greetings, and welcome to the Gladstone Commercial Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, CEO. Thank you. You may begin, sir.

Well, thank you, Latania. Good to hear from you again. That's a nice introduction, and thank you all for calling in this morning. We enjoy this time we have with you and on the phone, and I wish we had more time with you. Now I turn it over to Catherine Gerkis, and she's our Director of Investor Relations and she will provide a brief overview regarding certain items in this report today. Catherine, go ahead.

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 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 e-mail notification service and find information on how to contact our Investor Relations department. We are also on X at Gladstone Comps 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 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 presentation to Buzz Cooper, Gladstone Commercial's President.

Thank you, Catherine, and thank you all for joining today's call. We look forward to updating you on our results for the quarter ending September 30, 2025, our current portfolio and our 2025 outlook. From a macro level, Q3 provided a welcome sense of stability and positivity in the capital markets. The Fed reduced their funds rate by 50 basis points this year and long-term rates trended downward as well with a 10-year treasury making its way back to the 4% range. New acquisition offerings had the typical summer slowdown with an uptick after Labor Day weekend. We also noticed a gradual downward trend in asking cap rates, which we expected as those tend to move in harmony with long-term treasury yields. .

In spite of the standard summer slowdown, our team achieved several key accomplishments both at the balance sheet and portfolio levels. Dealing with the portfolio first. As we have discussed in the past, we remain steadfast in several key focus areas: growing our industrial concentration, adding value on our existing portfolio through renewals, extensions, strategic capital investments, and disposing of noncore assets and strategically redeploying those proceeds into quality industrial assets. By concentrating on these key focus areas, we expect to achieve increased portfolio vault, strong occupancy rates and straight-line rental growth across the portfolio.

These focus areas drove our activity in Q3. Regarding industrial concentration, we acquired a 6-facility cross-regional industrial manufacturing portfolio via a $54.5 million sale-leaseback transaction. This brings our acquisition total for the year through Q3 to $206 million and brings our industrial concentration to 69% of our annualized straight-line rents compared with industrial concentration of 63% at the start of the year. We're making great progress along those lines. As it relates to our working our existing portfolio, our asset management team continues to effectively manage the existing portfolio, evidenced by 100% collection of cash-based rents in the period, completing leasing activity of 734,000 square feet with remaining lease terms ranging from 0.7 years to 11.4 years at 14 of our properties and provided a total straight-line rental increase of $1.1 million and the disposition of 1 noncore industrial property.

These combined efforts as of September 30, the portfolio is 99.1% occupied, which is the highest since Q1 of 2019. The weighted average lease 7.5 years is the longest Walt at quarter end since Q1 2020. The Same-store lease revenues increased by 3.1% compared to the same period a year ago, and each of these milestones is a testament to the mission-critical nature of the assets in our portfolio the quality of tenant credit and our underwriting. In short, our relationship with our tenants, the capital market community and our financial capability have allowed us to execute upon our focused areas at a high level. Moving to the balance sheet. I'll allow Gary to share the specifics during his remarks, but we also worked hard on our balance sheet during this quarter. As such, in addition to increasing our equity base through stock issuance throughout the quarter and subsequent to the end of the quarter, we successfully increased our credit facility to $600 million, extending and laddering our debt maturities.

We are grateful to our lenders for their continued trust and partnership with us. These long-standing relationships are critical to our continued investment in the current portfolio and the addition of mission-critical industrial real estate going forward. Also looking ahead to the fourth quarter, 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. At the same time, we will work to continue with our existing tenants to extend leases, capture mark-to-market opportunities and support tenant growth through targeted 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 noncore industrial as part of our continued capital recycling efforts.

With the availability and very increased line of credit and access to private placement bond market, cash on hand and the ability to raise equity at our ATM, although currently, we believe our stock price does not reflect the quality of our portfolio, tenant credit and shareholder returns, we are positioned to deploy capital into accretive industrial acquisitions and portfolio improvements. In closing, these last several quarters have seen a lot of activity and the team is focused on continuing their efforts as we head towards 2026. We are pleased with their efforts and their accomplishments. I'll now turn the call over to Gary to review our financial results for the quarter and liquidity position.

Thank you, Buzz. I'll start my remarks regarding our financial results this morning. by reviewing our operating results for the third quarter of 2025. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO share available to common stockholders for both $0.35 per share, respectively. For FFO available to common stockholders during the third quarter of 2024 were both $0.38. FFO and core FFO for the 9 months ended September 30, 2025, were $1.02 and $1.03 per share, respectively. FFO and core FFO for the same period in 2024 were $1.07 and $1.08 per share, respectively. Same-store lease revenue increased by 3.1% in the 9 months ended September 30 over the same period in 2024 due to an increase in recovery revenue from property expenses and an increase in rental rates from leasing activity subsequent to the 9 months ended September 30, 2024, partially offset by settlement received at 1 of our properties related to deferred maintenance in the prior period. .

Our third quarter results reflect the total operating revenues of $40.8 million with operating expenses of $26 million as compared to operating revenues of $39.2 million and operating expenses of $28.5 million for the same period in 2024. Operating revenues were higher in 2025 due to increased recovery and higher rental rates, expenses were lower in the third quarter of 2025 versus the same period in 2024, mainly due to an impairment charge in 2024 and crediting back all the incentive fee in 2025 offset by higher depreciation and property operating expenses in 2025. In Q3, we increased net assets from $1.21 billion to $1.265 billion, which was a result of the portfolio acquisition this quarter. During the quarter, we increased our revolver commitment by $30 million to $155 million.

Subsequent to the end of the quarter, we extended and upsized our bank credit facility to $400 million in term loans and a $200 million revolver. The revolving credit facility maturity was extended to October 2029 and the maturity dates for Term Loan A and Term Loan B components were extended until October 2029 and February 2030, respectively. The amended credit facility also provides the company with options to extend the maturity dates of the revolving line of credit and term loan C components until October '30 -- October 2030 and February 2029, respectively. The transaction led by KeyBanc as joint lead arranger and book manager as well as Bank of America, the Huntington National Bank and Fifth Third Bank National Association as joint leader Rangers, Synovus Bank and S&T also renewed their commitments.

In addition, PNC Bank and Webster Bank, both joined as lenders. As of today, we have no remaining 2025 loan maturities and $28 million of loan maturities in 2026. As of the end of the quarter, we had $145.4 million in revolver borrowings outstanding. Looking at our debt profile. As of September 30, 39% was fixed rate, 37% was hedge floating rate and 24% was floating rate, which is the amount drawn on our revolving credit facility and the amounts outstanding on term loans B and D. As of today, all of our term loans are hedged to maturity and only 13% is floating rate. As of September 30, our effective average SOFR was 4.24%. Our outstanding bank 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 9 months ended September 30, 2025, we sold 4.4 million shares of common stock under our ATM program, raising net proceeds of $61 million. 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 $6 million in cash and $63 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. And now I'll turn the program back to David.

Well, it's a good one for Buzz and Catherine too. The teams are really performing very well. Overall, a very nice quarter for all of us, I enjoy those dividends, I'm sure you guys do. We acquired a 6-facility industrial portfolio for a total of $54.5 million during the quarter, and we sold 1 industrial property and completed leasing activities on 14 properties comprising of 734,000 square feet. -- as an annual increase in our straight-line rents of about $1.1 million, so that's nice to see. Subsequent to the end of the quarter, we extended and increased our bank credit facility, which is now at about $600 million. The commercial team is growing the real estate we own at a nice pace, and we're doing a good job of monitoring properties we own, especially during some of these challenging times that we have. .

Our team is strong professionals and continue to pursue potential quality properties on the list of acquisitions they are reviewing and our acquisition team is seeking strong credit tenants. Well, that's a good summary, and let's move on now to some good questions from those. So operator, Catania, could you come on and call on these people, and let's hear some questions from them.

[Operator Instructions] The first question comes from Gaurav Mehta with Alliance Global.

I want to be on your industrial allocation, it's running close to 70% target that you've talked about in the past. I wanted to get some more color on what you expect going forward? Do you expect that industrial allocation will keep increasing beyond 70%? Or are you around where you want it to be?

Thank you, Gaurav. Yes, we do anticipate that increasing going forward. Obviously, there may be some ups and downs as it relates to dispositions within the portfolio. But our intent is to increase our industrial percentage as it relates to the straight-line rent going forward, certainly for the foreseeable future. .

Okay. Second question I want to ask is on your expenses. The same property operating expenses for third quarter and year-to-date are running and more than 20%. I just want to get some more color on the expense increase you're seeing in your portfolio.

We had some capital expense items. Are you talking about operating expenses. .

Yes, same property operating expenses. .

We have -- unfortunately, we've seen increases in expenses mainly due to big like inflation, and that's 1 of the main drivers.

Insurance.

Yes. And that's -- and those are the -- insurance is -- that's been driven by returns for insurance companies as well as inflation.

And as you know, Gaurav, we pass on to the tenant and what we can and charge them back as it relates to the structure of the lease. But as Gary referenced, we have seen obviously a little effect of inflation and costs rising.

Okay. And then lastly, on the capital expenditure for third quarter at more than $10 million. Can you provide some more color on what drove that higher?

What drove that higher was renewals. You noticed we had several renewals both from the second quarter into third quarter. And so as a result of that, that's positive CapEx accretive to company as it relates to those dollars put out, obviously are keeping tenants, adding tenants and with increased rents.

Okay. Operator, do you have some more questions? .

Next question comes from Barry Oxford with Colliers.

David, just to build on that CapEx being higher in the quarter. How do you think of that in relation to the dividend? Are you confident in the dividend when you look at your CapEx expenditures going out. Now I realize that that's kind of good CapEx because on the renewals, you're going to be getting higher income going forward. But how do you think about the dividend in relation to the CapEx? .

The dollars going out are accretive. So I don't see that it has an effect relative to the dividend other than at some point in time. increasing.

Okay. And then switching gears. When you look at the acquisitions pipeline for now and going out into '26, do you feel you can match 25% or just too early? I think it may be a little too early. We obviously plan to and hope to, we have 2 transactions currently that we'd love to see getting the door perhaps by the end of the year, if not into the next I think 1 may fall into this year. Competition, as we have referenced previously and I think as all of us do, is strong. But again, as we've worked on our balance sheet and look to bring our cost of capital down, we believe we'll be able to be competitive in the marketplace. And again, the team is doing a really strong job uncovering off-market transactions as well as repeat transactions.

The next question comes from Craig Kucera with Lucid. .

I saw in the Q that you had on lease termination. Can you give us some color on the tenant and what type of assets it is? And was that the termination fee?

No, we didn't have a termination fee. We had 1 lease termination. I believe that was the sale of ...

Has about doors.

Okay. I thought I saw some accelerated right now. I was just trying to figure out when and how that would be recognized because none of it has been recognized yet year-to-date. .

We'll look into that. Honestly, I need to trying to get a little help here. Okay. We did have 1 small tenant quest that we did terminate and we're rolling into a new lease within that building. in Ohio. So the termination was let the tenant out, but a new tenant jumped right in and took more of that space in the building. .

Got it. So with that remaining termination fee we recognized in the future? Or is that not going to be.

We just terminated that and rolled right into the new tenancy.

Okay. That's helpful. Changing gears, you stepped up and certainly added to your automotive exposure here with the portfolio acquisition. I think it's now about 15% of our -- just given the recent bankruptcy news out there, I'd be curious to hear your thoughts on the space and how it relates to what's in your portfolio.

One thing, of course, and we have shown this over the years, we do extensive underwriting within our tendencies, as you know, and we have a robust investment committee. We do keep an eye on our concentration Yes, we have 1 asset you know with GM down in Austin, Texas, that is not, for lack of a better word, concerned from a credit standpoint nor are they a manufacturer, it is an office building and that does mature at the end of next year. So we are currently looking to reposition that property as we get into next year with hopeful additional tenancy or end user. So when you do calculate that, we have to take into consideration the fact that, that's strictly just an office building in a good market, but unfortunately, in Austin, there currently is about $5 million, both industrial and office under construction. .

So we have heavy competition there. But as I mentioned, that we do underwrite heavily to keep an eye on concentration, but we feel confident with the tendency that we have.

Okay. Great. Your leverage has ticked up year-over-year. You've obviously been very active in the acquisition market, issued some equity but mostly debt. I'm curious, are you looking to maybe ramp up your asset sales to maybe bring down leverage or any dispositions on the horizon expected?

No. I mean we'll continue to with our capital recycling program to reinvest into more secondary markets, from tertiary markets, industrial, from office and so forth. But what we will probably be doing is issuing a little more equity and bringing our leverage down upon new acquisitions. So when we acquire a new acquisition, we'll probably put more equity into it to continue to delever the balance sheet. Yes, we got -- we're a little higher than we want to be. But I think the results speak for themselves, and we're going to -- we're not going to go higher on the leverage than we are today.

The next question comes from Dave Storms with Stonegate. .

Just want to start maybe trying to get a read on where you see cap rates at or going? I know it was mentioned in the prepared remarks that you're seeing rates move down with the rate cut to Fed rate cut. But it looks like between last quarter's acquisitions to this quarter's acquisitions, the weighted average cap rate expanded by like 65 basis points or so. Is this more one-off transactions? Or maybe just any thoughts there around cap rates?

We do see cap rates coming down. I think that there was an anticipation of a greater rate cut than what occurred. So that had an effect, obviously, and does at the moment. We'll see what happens, I guess, in December. But we do see cap rates compressing a bit. So we hope to take advantage of that, again, from our capital and the cash that we have on hand. But we are seeing good accretive plus 8.5% on average cap rates for us, and we just hope to find other good solid and you noticed we've moved up as it relates to the size of transaction going forward at the end of this year, but also into '26. .

That's very helpful. And then maybe just circling back to some of your underwriting. Are you seeing any impact from the government shutdown on for tenants, maybe you can call up a second order impact, anything like that?

We actually have not. And as you know, we have a very robust property management team. One of the foundations of this company is our underwriting and the portfolio management team staying in front of our tenancies -- and they have not, as they've checked in with them, had expressed great concerns as of this moment as it relates to the shutdown.

The next question comes from John Massocca with B. Riley. .

When taking on the CapEx maybe touching on the CapEx spend during the quarter a little bit more. I mean, is that typical of what we should expect going forward as you kind of address some of the remaining '26 and '27 lease expirations and get in front of them? Or was this quarter just because of the amount of leasing activity may be a little abnormal relative to what you would expect as we look into 2026?

Yes, I would say you're correct. Just as we did have great success with a great number of re-leasings as we look forward into '26 and even several of our tenants, we've been in contact with all of them, and we feel confident on the renewals and the properties involved, honestly, we don't see the heavy CapEx we've had this past 9 months, the past 3 quarters. We do see it trailing down. So again, it's good dollars spent, but we are not anticipating as heavy a hit.

And now in the spending in the quarter, does that reflect at all the mix of the lease -- leasing activity being between office and industrial? Is it -- I guess it was a heavier office component this quarter? Or just kind of curious if there's another factor involved.

No other factor involved as a combination between the 2 with and again, office is more expensive than industrial. So it was more weighted toward office, which, of course, extending those terms will become part of our capital recycling moving out of office.

And then on the investment front, just given where kind of cost of capital is moving both on the debt and equity side for you all -- how should we think about kind of a return hurdle you're looking at, either in terms of a GAAP cap rate, cash cap rate IRR, I mean, -- are you still, you think, in a place where your cost of equity capital allows you to be expressive on the acquisition front? And a, kind of how is that looking versus what you're seeing in terms of cap rate movements in the pipeline?

And the cap rates within the pipeline, if you will, and what we see is some compression. We do believe we'll have to -- as we analyze our transactions depending on where our cost of capital goes. We're averaging north of $8.5 million and I see that going forward. And again, as we move up the chain as released the size a little bit, hopefully, we'll have a little better efficiency as it relates to those cap rates.

But I guess at 8.5%, if that's where cap rates are today, do you think you're able to kind of -- your cost of capital is at a place where that's essentially you have a green light to acquire assets?

Yes. .

At this time, I would like to turn the call back over to Mr. David Gladstone for closing comments.

Well, thank you. We've got a good team, and they've done a good job and we continue to grow the assets and pretty soon, we'll catch up with some of those bigger deals out there. But hopefully, this next quarter is going to be just as good as the past quarter. That's the end of this, and we thank you all for calling in. Next time, be more prepared with more questions. We like questions because that tells us where you're thinking and where you're going.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day. .