Gladstone Commercial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; comparisons are with the three and nine months ended September 30, 2019 unless otherwise noted. The company is an externally managed REIT focused primarily on office and industrial properties.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Lease revenue | $33.1 million | $28.7 million | $100.3 million | $85.0 million |
| GAAP net income | $2.8 million | $2.2 million | $6.1 million | $9.1 million |
| Net income (loss) available to common stockholders | $(0.1) million | $(0.6) million | $(2.6) million | $0.5 million |
| GAAP EPS, common | $(0.004) | $(0.02) | $(0.08) | $0.02 |
| FFO per common share and OP Unit, basic | $0.39 | $0.39 | $1.20 | $1.17 |
| Cash from operating activities | Not stated by quarter | Not stated by quarter | $52.4 million | $43.1 million |
Q3 revenue increased 15.6%; nine-month revenue increased 18.0%. Q3 GAAP net income rose 29.8%, while nine-month net income fell 33.1%. Common-stockholder results remained negative in Q3 and turned to a loss for the nine-month period, reflecting preferred and senior common distributions as well as operating results. FFO is a non-GAAP measure and is not a substitute for cash flow or GAAP earnings.
Operating expenses rose 29.9% in Q3 and 30.2% year to date. Property operating expenses more than doubled, in significant part because certain triple-net property expenses and tenant reimbursements began being reported gross in 2020 rather than net. The filing cautions that prior-period lease revenue was not recast, limiting direct comparability for this presentation change. Nine-month results also included $2.9 million of impairment charges, versus none in 2019.
Balance sheet, debt and liquidity
- At September 30, total assets were $1.076 billion and total liabilities were $717.3 million. Cash and cash equivalents were $10.4 million; cash, cash equivalents and restricted cash together were $15.3 million.
- Debt carrying value was $660.7 million: mortgage notes, net, of $458.4 million and credit-facility borrowings, net, of $202.3 million. Principal outstanding was approximately $665.9 million, including $462.1 million of mortgage principal and $203.8 million under the facility.
- Weighted-average interest rates were 4.28% on mortgage notes and 3.51% on total debt. The credit facility had $27.8 million of additional borrowing capacity at September 30; management reported $30.0 million available as of November 5. The company was in compliance with its credit-facility covenants.
- Management reported available liquidity of $38.2 million at September 30, comprising cash and available credit-facility capacity. It said this was adequate for near-term operating needs, distributions and debt service.
- Net cash from operating activities was $52.4 million, investing cash outflow was $73.0 million, and financing cash inflow was $24.4 million for the first nine months. Distributions paid were $47.5 million.
Material changes and business activity
- The company acquired six properties during the first nine months for an aggregate purchase price of $82.6 million, with 14.2 years’ weighted-average lease term and $6.1 million of annualized GAAP fixed lease payments. It sold two non-core properties for $15.5 million, recognizing a net gain of $1.2 million.
- Five properties were classified as held for sale at September 30. After quarter-end, three Champaign, Illinois properties were sold for $13.4 million, with a reported net gain of $4.1 million.
- Common-stock ATM sales raised $32.4 million net, Series E preferred-stock sales raised $5.6 million, and Series F preferred-stock sales raised $1.0 million during the nine-month period. These issuances supported acquisitions, debt repayment and general corporate purposes.
- In July, the base management fee calculation changed from 1.5% annually of defined total equity to 0.425% annually of gross tangible real estate, effective with the Q3 fee calculation. Incentive-fee terms remained in place. The Adviser and Administrator are affiliates, and the company reported $1.1 million of Q3 incentive fees.
- At November 5, the company reported 120 properties across 28 states, 15.0 million square feet, 95.1% occupancy and a 7.3-year average remaining lease term. At September 30, vacant space was 5.0% of total square footage, with approximately $4.2 million in annual carrying costs.
Outlook, risks and unusual items
- COVID-19: As of November 5, the company had collected 100% of October cash base rent and approximately 99% of Q3 cash base rent. Three tenants, representing about 2% of portfolio rents, received deferrals with repayment periods extending from July 2020 through March 2021. Further relief requests could affect cash flows; their potential impact was not quantifiable.
- Management stated it believed near-term liquidity was adequate and expected to address mortgage maturities through refinancing, operating cash, equity offerings and credit-facility availability. It anticipated refinancing 2021 mortgage maturities but provided no formal earnings or operating guidance.
- The company cited pandemic-related uncertainty, possible lower office demand, changes in rental rates and property values, tighter lending standards, refinancing and capital-market access risks, vacancy and tenant credit risk, and interest-rate exposure. LIBOR-based variable debt also faces the planned benchmark transition.
- A 1% increase in one-month LIBOR was estimated to reduce annual net income by $2.4 million, before considering other changes or actions. Derivatives partially mitigate rate exposure.
- Subsequent to quarter-end, the company acquired a fully leased industrial facility in Montgomery, Alabama for $14.3 million and repaid $15.4 million of mortgage debt. The board declared monthly distributions for October through December, including $0.37545 per common share in aggregate for the quarter.
Important facts for investors to verify
- Whether rent collections and repayment of the three tenants’ deferrals remain strong, and whether additional concessions are requested or granted.
- The status, pricing and proceeds of held-for-sale properties, including the reported post-quarter Champaign sale gain.
- Near-term mortgage maturities, refinancing terms, covenant headroom and actual undrawn credit availability.
- How the gross presentation of tenant reimbursements affects revenue and expense comparisons, and the resulting underlying property-level margins.
- Common and preferred distribution sustainability relative to recurring cash generation, debt service and future equity issuance.
- The impact of the revised Adviser fee formula, incentive fees and other related-party arrangements on expenses and shareholder returns.