Gladstone Commercial Corporation — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties. As of May 1, it owned 98 properties totaling 11.4 million square feet across 24 states, with 99.1% occupancy and a 7.4-year average remaining lease term.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total operating revenue | $26.4 million | $22.3 million |
| Net income | $4.6 million | $4.4 million |
| Net income available to common stockholders | $1.8 million | $1.7 million |
| Common EPS, basic and diluted | $0.06 | $0.07 |
| FFO available to common stockholders | $11.5 million; $0.41 per basic share | $9.5 million; $0.38 per basic share |
| Cash from operating activities | $12.6 million | $10.5 million |
Revenue increased 18.1%, primarily reflecting acquisitions, leasing of previously vacant space and property expansions. Operating expenses were $17.4 million, down 1.7%; operating income before other items was approximately $9.0 million, or 34.0% of revenue, versus approximately $4.6 million, or 20.6%, in the prior-year quarter. The comparison reflects no impairment charge in Q1 2018 versus $3.7 million in Q1 2017. Net income also included a $1.8 million gain on property sales in Q1 2018, compared with $5.9 million in Q1 2017. Interest expense was $6.2 million, slightly higher year over year.
At March 31, total assets were $923.1 million and total liabilities were $579.7 million. Debt carrying value, net of financing costs and discounts, was $544.3 million; gross principal obligations were approximately $550.5 million. Cash and cash equivalents were $4.1 million, with total available liquidity of $50.4 million, including $46.3 million of Revolver capacity. The company reported compliance with credit-facility covenants. Cash, cash equivalents and restricted cash totaled $7.0 million.
Material changes and capital allocation
- Acquired one 127,444-square-foot Alabama property for $14.3 million, with a 9.8-year lease and $1.1 million in annualized GAAP rent.
- Sold two non-core properties for $11.1 million gross proceeds, recognizing a $1.8 million net gain; one Massachusetts property remained classified as held for sale.
- Repurchased or repaid mortgage principal while issuing $9.4 million of new fixed-rate mortgage debt. The company also increased Revolver borrowings.
- Raised $0.6 million net through common-stock ATM sales and $0.9 million through Series D preferred-stock sales. Common distributions declared were $0.375 per share for the quarter, unchanged from Q1 2017; basic FFO per share was $0.41.
Outlook, risks and notable items
Management said available liquidity should cover near-term distributions, debt service and operating costs, and expects to refinance mortgage maturities using new debt and additional equity issuance. Mortgage principal scheduled for payment was $36.3 million for the remainder of 2018 and $47.6 million in 2019. Subsequent to quarter-end, two variable-rate mortgages totaling $13.0 million were extended from July 2018 to July 2020.
Management cited rising financing costs, interest-rate volatility, uncertain economic conditions and potential office-market vacancy increases as risks. A 1% increase in LIBOR was estimated to raise annual interest expense and reduce net income by approximately $1.7 million, based on quarter-end exposures. The company had four ground leases with future minimum payments totaling $6.2 million. No material legal proceedings, material off-balance-sheet arrangements or material changes to previously disclosed risk factors were reported.
The company is externally managed by affiliates controlled by its chairman and CEO. Q1 expenses included a $1.3 million base management fee, $0.7 million incentive fee and $0.4 million administration fee. Management stated that the 2019 lease expirations represented 3.9% of Q1 rental revenue and 2020 expirations represented 11.3%. No full-year earnings or FFO guidance was provided.
Key facts investors should verify
- Refinancing progress and funding costs for the 2018–2019 mortgage maturities, as well as remaining Revolver availability.
- Whether acquisitions and leasing support recurring revenue and FFO, apart from property-sale gains and other nonrecurring items.
- Dividend coverage, including the comparison of $0.375 quarterly common distributions with $0.41 quarterly basic FFO per share.
- Occupancy, tenant credit quality, upcoming lease expirations and the leasing or sale outcome for the remaining held-for-sale property.
- Interest-rate exposure and the impact of variable-rate debt; also review related-party management fees and the adviser’s incentive-fee arrangement.