Business Context and Reporting Period
Company: Gladstone Commercial Corporation (GLADSTONE COMMERCIAL CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company is a Maryland corporation operating as a Real Estate Investment Trust (REIT). It invests in net-leased industrial and commercial real estate and makes mortgage loans. As of June 30, 2010, the portfolio consisted of 64 properties totaling approximately 6.3 million square feet and one mortgage loan. The Company is externally managed by Gladstone Management Corporation.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Operating Revenues | $21,366,364 | $21,309,670 |
| Net Income | $2,092,784 | $2,206,505 |
| Net Income Available to Common Stockholders | $45,533 | $159,630 |
| Funds From Operations (FFO) Available to Common | $6,757,895 | $6,760,483 |
| Net Cash Provided by Operating Activities | $7,065,300 | $8,141,688 |
| Total Assets | $411,179,391 | $422,245,782 |
| Total Liabilities | $299,270,553 | $298,414,831 |
| Stockholders' Equity | $111,908,838 | $118,450,542 |
| Cash and Cash Equivalents | $3,312,409 | $2,920,611 |
| Debt Outstanding (Mortgage Notes + Line of Credit) | $287,753,252 | $285,961,651 |
Dividends/Distributions: Distributions paid per share of common stock were $0.75 for the six months ended June 30, 2010. The Company paid approximately $8.46 million in total distributions to common, senior common, and preferred stockholders during the period.
Material Changes vs. Prior Period
- Revenue Stability: Total operating revenues remained relatively flat (up 0.3%) compared to the prior year, driven by stable rental income as no new properties were acquired since 2008 and occupancy remained consistent.
- Net Income Decline: Net income decreased by approximately 5.2% ($113,721) year-over-year. Net income available to common stockholders decreased significantly by 71.5% ($114,097), primarily due to increased professional fees and a higher net incentive fee paid to the Adviser.
- Expense Fluctuations:
- Professional Fees: Increased 4.5% ($16,250) due to legal fees related to ongoing work with existing tenants.
- Base Management Fee: Decreased 16.7% ($121,593) due to a reduction in total common stockholders' equity.
- Incentive Fee: Increased 4.8% ($76,514) due to higher pre-incentive fee FFO relative to equity.
- Debt Position: Total debt increased slightly. Borrowings under the line of credit increased by $3.1 million to $36.3 million. The Company repaid $1.3 million in principal on mortgage notes.
- Discontinued Operations: Income from discontinued operations was $0 in 2010, compared to $38,754 in 2009, following the sale of a Norfolk, Virginia property in July 2009.
Outlook, Risks, and Management Commentary
- Liquidity and Financing: The Company's $50 million line of credit matures in December 2010. Management is actively negotiating a renewal or replacement financing. There is no assurance that replacement financing will be obtained on favorable terms or at all, which could materially adversely affect liquidity and the ability to fund distributions or new investments.
- Capital Markets: The Company notes that the market for long-term mortgages remains extremely limited due to the collapse of the CMBS market. Consequently, the Company is focusing on medium-term mortgages and equity offerings to fund operations.
- Equity Offerings: The Company has two ongoing equity offerings: an Open Market Sale Agreement (up to $25 million) and a continuous private offering of senior common stock. Net proceeds from senior common stock sales in the first half of 2010 were approximately $138,000.
- Lease Expirations: Approximately 3.4% of annualized base rent expires in 2010. Management is optimistic about extending a lease expiring in December 2010.
- Asset Quality: Management performed an impairment analysis on the entire portfolio as of June 30, 2010, and concluded that no properties were impaired. Two buildings (2.6% of annualized rental income) are currently vacant.
- Debt Covenants: The Company is in compliance with all covenants, including a debt service coverage ratio of not less than 1.2 required for extending a $48 million mortgage note maturing in October 2010.
Investor Verification Checklist
- Line of Credit Renewal: Verify the status of negotiations for the $50 million line of credit maturing in December 2010 and the terms of any replacement financing.
- Debt Extension: Confirm the execution of the extension options for the $48 million mortgage note maturing in October 2010 and the resulting interest rate adjustments.
- Equity Capital Raising: Monitor progress on the Open Market Sale Agreement and the senior common stock private offering to assess capital availability for future acquisitions.
- Occupancy and Leasing: Track the status of the two vacant buildings and the lease renewal for the property expiring in December 2010.
- FFO vs. Distributions: Review the ratio of distributions to Funds From Operations (FFO) to ensure sustainability of the current dividend payout rate (95% of FFO).