Business Context and Reporting Period
Company: Gladstone Commercial Corporation (GLADSTONE COMMERCIAL CORP)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2009
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 to creditworthy entities. As of June 30, 2009, the portfolio consisted of 65 properties totaling approximately 6.3 million square feet and one $10.0 million mortgage loan.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Operating Revenues | $21,309,670 | $19,687,188 |
| Net Income | $2,206,505 | $2,636,148 |
| Net Income Available to Common Stockholders | $159,630 | $589,273 |
| Funds From Operations (FFO) Available to Common | $6,760,483 | $6,762,050 |
| Net Cash Provided by Operating Activities | $8,141,688 | $8,502,629 |
| Cash and Cash Equivalents (End of Period) | $2,920,611 | $1,775,274 |
| Total Debt (Mortgage Notes + Line of Credit) | $285,750,925 | $286,611,173 |
| Stockholders' Equity | $124,239,364 | $130,495,260 |
Dividends: Distributions paid per common share were $0.75 for the six months ended June 30, 2009. The Company paid approximately $8.5 million in total distributions to common and preferred stockholders during the period.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by 8% ($1.6 million) compared to the prior year, driven primarily by rental income from properties acquired in late 2008 and full-year contributions from 2008 acquisitions.
- Net Income Decline: Net income decreased by 16% ($430,000) and net income available to common stockholders dropped 73% ($430,000). This was primarily due to a 15% increase in interest expense resulting from higher outstanding balances on the line of credit and long-term financings held for the full period in 2009.
- Expense Increases: Depreciation and amortization increased by 7% due to the expanded portfolio. Due diligence expenses surged 673% due to the adoption of SFAS 141(R), which requires expensing acquisition costs rather than capitalizing them.
- Investing Activity: Net cash used in investing activities dropped significantly from $39.8 million in 2008 to $1.0 million in 2009. The Company made no property acquisitions since August 2008 due to constrained capital markets.
- Debt Structure: The Company repaid a $20.0 million short-term loan in March 2009 using proceeds from its line of credit. The line of credit commitment was reduced from $95.0 million to $50.0 million in June 2009.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the U.S. recession and dislocated credit markets have increased the cost of capital and limited access to long-term mortgage financing (CMBS market is frozen). The Company intends to focus on medium-term mortgages and utilizing its line of credit until long-term markets stabilize. The Company is actively renegotiating leases and making capital improvements to build portfolio value.
Outlook: The Company plans to extend its $50.0 million line of credit, which matures in December 2009, for an additional year. It intends to fund future acquisitions through equity issuances (up to $300 million available under shelf registration) and debt once markets improve.
Risks and Contingencies:
- Liquidity Risk: Continued weak economic conditions could impair the ability to obtain debt or equity capital. The Company relies on cash flows from operations and its line of credit to meet obligations.
- Interest Rate Risk: The Company has variable-rate debt (line of credit) and a variable-rate mortgage loan receivable. A 1% increase in LIBOR would decrease net income available to common stockholders by approximately 100% for the six-month period.
- Tenant Credit Risk: While all tenants are currently current, economic downturns increase the risk of tenant bankruptcy or default.
Unusual Items: The Company recorded a credit to the incentive fee of $365,000 for the six months ended June 30, 2009, due to a voluntary waiver by the Adviser to support distribution levels. A property in Norfolk, Virginia, was classified as held for sale and subsequently sold in July 2009 for a gain of approximately $160,000.
Investor Verification Checklist
- Debt Maturities: Verify the status of the $50.0 million line of credit maturing December 2009 and the $48.0 million mortgage note maturing October 2010 (which has extension options).
- Capital Markets Access: Monitor the Company's ability to refinance short-term debt into long-term fixed-rate mortgages given the frozen CMBS market.
- Dividend Coverage: Confirm that FFO continues to cover the 95% distribution payout ratio required by the line of credit covenant.
- Portfolio Yield: Review the weighted-average yield of 9.68% and the impact of lease renewals (e.g., Eatontown, NJ extension) on future cash flows.
- Asset Sales: Track the disposition of the Norfolk, Virginia property and any future sales of assets held for sale.