Gladstone Commercial Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Dollar amounts are in millions unless noted. The company is an externally managed REIT focused primarily on office and industrial properties.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total operating revenue | $26.6 | $24.4 | $79.5 | $69.5 |
| Net income | $2.7 | $2.4 | $9.8 | $7.4 |
| Net income (loss) available to common shareholders | $(0.17) | $(0.38) | $1.30 | $(0.67) |
| Basic FFO per common share | $0.40 | $0.38 | $1.21 | $1.16 |
| Common distributions declared per share | $0.375 | $0.375 | $1.125 | $1.125 |
- Q3 rental revenue rose 8.1%; nine-month rental revenue rose 12.8%. Nine-month tenant recovery revenue increased 94.5% to $2.5 million.
- Operating expenses were $17.4 million for Q3 and $52.4 million for the nine months. Depreciation and amortization increased year over year; there was no 2018 impairment charge, versus $4.0 million in the 2017 nine-month period.
- Interest expense increased to $6.5 million for Q3 and $19.3 million for the nine months. Management cited higher debt and roughly 100 basis points of LIBOR increase as contributing factors.
- Nine-month net cash from operations was $40.8 million, versus $34.8 million. Investing used $14.8 million; financing used $30.0 million. Cash, cash equivalents and restricted cash ended at $5.1 million, including $2.5 million unrestricted cash.
- At September 30, total assets were $904.2 million and total liabilities were $571.5 million. Debt carrying amounts included $437.1 million of mortgage notes, $30.3 million under the revolver and $74.6 million under the term loan. Total debt principal was approximately $547.6 million; weighted-average rate on all debt was 4.52%.
- Available liquidity was $51.8 million: $2.5 million cash and $49.3 million revolver capacity. Revolver and term-loan commitments were $85 million and $75 million, respectively; the company reported compliance with facility covenants.
Changes, portfolio and capital activity
- Nine-month FFO available to common shareholders increased 15.4% to $34.6 million; FFO per share rose 4.3% to $1.21. These are non-GAAP measures and do not represent operating cash flow.
- Common shareholders moved from a nine-month loss to positive earnings, partly reflecting the absence of the prior-year impairment charge. The prior period also had larger property-sale gains ($4.0 million versus $1.8 million in 2018), partly offsetting the improvement.
- The company acquired two properties for $22.8 million and sold two non-core properties for $11.1 million, recognizing a $1.8 million net gain. Same-store rental revenue was nearly flat, up 0.3% for the nine months; acquisitions and leasing activity drove much of the overall revenue growth.
- As of October 30, 2018, the company reported 101 properties totaling 11.8 million square feet across 24 states, 99.1% occupancy and a 7.1-year average remaining lease term. Its largest tenant represented 4.7% of nine-month rental income.
- During the nine months, common-stock ATM sales generated $10.1 million net proceeds and Series D preferred sales generated $2.2 million. The common dividend remained $0.375 per share per quarter. Subsequent to quarter-end, the company raised $1.1 million through common-stock ATM sales and acquired a Detroit portfolio for $21.3 million, funded with cash, assumed debt and partnership units.
Outlook, risks and notable items
- No specific earnings or revenue guidance is provided. Management said available liquidity was sufficient for near-term distributions, debt service and operating costs, and expected to refinance upcoming mortgage maturities; these expectations depend on financing access and market conditions.
- Mortgage principal payments scheduled were $10.3 million for the remainder of 2018 and $52.3 million in 2019. Management expected to address maturities with refinancing and potentially additional equity. Rising interest rates, tighter credit, tenant creditworthiness and property-market conditions were identified as risks.
- Interest-rate sensitivity analysis estimated that a 1% LIBOR increase would reduce net income by about $1.0 million annually, based on the stated assumptions. The company uses caps and swaps to manage variable-rate exposure.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements. Disclosure controls were assessed as effective.
- The company is externally managed by affiliates controlled by its chairman and CEO. Q3 related-party charges included $1.2 million base management fee, $0.8 million incentive fee and $0.4 million administration fee.
- Four ground leases entail $6.0 million of future minimum payments. The company expected the January 1, 2019 lease-accounting standard to have minimal financial-statement impact, while potentially increasing G&A expense because certain leasing costs would be expensed.
Key facts for investors to verify
- Cash available for distributions after debt service, capital spending and other obligations; FFO is not cash flow and common earnings remain sensitive to preferred and senior-common distributions.
- Ability to refinance 2018–2019 maturities, maintain revolver availability and comply with covenants as interest rates and credit conditions change.
- Lease rollover and tenant performance, including the five leases expiring in 2019 and 13 in 2020, and progress leasing the small amount of vacant space.
- Returns and funding terms for acquisitions and dispositions, including the subsequent Detroit acquisition and use of partnership units and ATM equity.
- Costs and governance implications of external management, incentive fees and other related-party arrangements.