Gladstone Commercial Corporation (Nasdaq: GOOD) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 16, 2021. The company is an externally advised REIT focused primarily on owning and leasing office and industrial real estate. At year-end it owned 121 properties totaling 15.4 million rentable square feet in 28 states; occupancy was 95.3%, with a 7.3-year average remaining lease term.
Financial performance and position
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Lease revenue | $133.2 million | $114.4 million | +16.4% |
| Net income | $15.0 million | $9.5 million | +57.1% |
| Net income available to common stockholders | $3.1 million; $0.09/share | $(4.8) million; $(0.16)/share | Returned to positive earnings |
| Diluted FFO per share | $1.56 | $1.46 | +6.8% |
| Diluted FFO per share, adjusted for comparability | $1.56 | $1.55 | +0.6% |
| Cash from operating activities | $65.5 million | $60.2 million | +$5.3 million |
- Lease revenue growth reflected acquisitions, same-store rent increases and expense recoveries. The company acquired nine properties for $130.0 million and sold six non-core properties for $37.5 million, recording an $8.1 million net gain.
- Operating expenses rose 24.5% to $99.9 million. Property operating expenses more than doubled to $26.0 million, in part because certain triple-net property expenses and tenant reimbursements shifted from net to gross presentation beginning in 2020; this limits direct comparability with 2019. The company also recorded $3.6 million of impairment charges, versus $1.8 million in 2019.
- Interest expense declined to $26.8 million from $28.3 million, largely as one-month LIBOR fell. Net income also benefited from property-sale gains. Adjusted diluted FFO per share was nearly flat year over year.
- Year-end assets were $1.10 billion, including $900.2 million of net real estate. Total liabilities were $722.6 million. Mortgage principal was $459.8 million; borrowings under the revolver and term loan totaled $213.9 million. Weighted average mortgage interest rate was 4.24%; weighted average interest rate on all debt was 3.45%.
- Available liquidity at year-end was $30.2 million: $11.0 million cash and $19.2 million available on the revolver. As of February 16, 2021, revolver availability was $20.3 million. Net operating cash flow exceeded cash distributions paid of $63.8 million, though investing activities used $100.3 million.
- Common distributions declared were $1.5018 per share in 2020, versus $1.50 in 2019. The company reported it had not reduced or missed a scheduled common distribution since inception, but future distributions remain subject to board discretion, liquidity, covenants and other constraints.
Material changes, outlook and risks
- COVID-19 affected economic conditions and tenant operations. By February 16, 2021, the company had collected 98% of January and 97% of February cash base rent obligations. Three tenants, representing about 2% of portfolio rents, received deferrals; two repaid in full by year-end, while the remaining tenant’s deferral was to be repaid beginning May 2021.
- Management said near-term liquidity was adequate and expected to refinance 2021–2022 mortgage maturities through a combination of new mortgages, the credit facility and equity issuance. Mortgage principal payments were scheduled at $23.1 million in 2021 and $105.8 million in 2022; the credit facility also had a $53.9 million revolver balance and $160.0 million term loan balance at year-end.
- On February 11, 2021, after year-end, the company added a $65.0 million term-loan component, including $15.0 million of delayed funding, to its credit facility. It also acquired a fully leased Ohio industrial property for $11.1 million in January 2021.
- No quantified earnings or FFO guidance was provided. Management highlighted continued leasing, refinancing, acquisitions and capital recycling, while noting uncertainty about the pandemic, office-space demand, property values, financing availability and the pace of economic recovery. Industrial demand was described as more resilient, supported in part by e-commerce.
- Principal risks include tenant defaults or rent concessions, vacancies and lease rollover, tenant and industry concentration, property illiquidity, refinancing and balloon-payment exposure, variable-rate debt and LIBOR transition, covenant compliance, and potential further impairments. Four properties were fully vacant and two partially vacant at year-end; vacant space represented 4.7% of square footage with about $4.2 million in annual carrying costs.
- Governance and capital structure warrant attention: the business is externally managed by affiliates, with related-party fees and potential conflicts; the base-management-fee formula changed in 2020. Common and preferred ATM offerings raised capital, including $52.8 million net from common shares, increasing the common share count and potentially diluting existing holders. The company was compliant with credit-facility covenants at year-end; those covenants limit distributions to 98% of FFO.
Important facts for investors to verify
- Track rent collections, tenant deferrals and any subsequent concessions or defaults, particularly as pandemic effects and lease expirations evolve.
- Review refinancing plans and lender terms for 2021–2022 maturities, revolver availability, covenant headroom and the effect of the new term loan.
- Reconcile reported revenue and property-cost growth with the 2020 gross-presentation change; distinguish recurring operating trends from acquisitions, dispositions, impairments and sale gains.
- Assess the sustainability of common and preferred distributions against FFO, operating cash flow, debt service and covenant limits; note that 2020 common distributions included a substantial return-of-capital tax component.
- Evaluate vacancy, tenant/industry concentration and impairment assumptions, including management’s estimated property cash flows, rental rates and capitalization rates.