Gladstone Commercial Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context and reporting period
Gladstone Commercial is an externally advised REIT focused primarily on owning and managing office and industrial properties, generally under long-term net leases. At December 31, 2018, it owned 101 properties totaling approximately 11.7 million square feet across 24 states; occupancy was 99.1%, and the portfolio’s average remaining lease term was 7.0 years. The company reported no mortgage loans receivable.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total operating revenue | $106.8 million | $94.8 million |
| Net income | $12.3 million | $5.9 million |
| Net income (loss) attributable to common stockholders and non-controlling OP unitholders | $1.0 million | $(4.9) million |
| Basic FFO per common share and OP unit | $1.59 | $1.54 |
| Diluted FFO per common share and OP unit | $1.58 | $1.54 |
| Cash provided by operating activities | $55.6 million | $46.8 million |
| Cash used in investing activities | $(34.4) million | $(99.9) million |
| Cash used in financing activities | $(21.2) million | Cash provided: $54.4 million |
Rental revenue was $103.3 million, up 11.3%; tenant recovery revenue was $3.5 million, up 77.6%. Total operating expenses rose 4.1% to $71.1 million, including $47.6 million of depreciation and amortization. Interest expense increased 6.5% to $26.2 million. The filing does not present a single operating-margin measure.
For fourth-quarter 2018, operating revenue was $27.3 million and net income was $2.5 million. Net loss attributable to common stockholders was $0.3 million, or $(0.01) per share.
At year-end, total assets were $938.8 million and total liabilities were $598.8 million. Debt carrying amounts were $441.3 million of mortgage notes, $50.1 million under the revolver, and $74.6 million under the term loan. Mortgage principal was $445.7 million; the weighted-average rate on mortgages was 4.69%, and on all debt 4.59%. Of mortgage debt, $10.2 million, or 2.3%, was recourse to the company.
Cash and cash equivalents were $6.6 million. Reported available liquidity at December 31 was $39.0 million, comprising cash and $32.4 million of revolver availability. The filing gives conflicting February 13, 2019 revolver-availability figures—$51.9 million in one passage and $32.4 million in another; verify against the credit-facility disclosures.
Material changes versus the prior comparable period
- Revenue increased 12.7%, driven mainly by property acquisitions and a full year of revenue from properties acquired in 2017. Same-store rental revenue grew 0.5%.
- Net income more than doubled, while income available to common stockholders and OP unitholders improved from a loss to a small profit. The 2018 result included a $2.8 million net gain on property sales and no impairment charge, compared with $6.8 million of impairment charges in 2017.
- FFO available to common stockholders and OP unitholders increased 12.6% to $45.8 million; diluted FFO per share increased 2.6% to $1.58.
- Operating cash flow rose $8.8 million. Investing cash use declined as acquisitions were lower than in 2017; financing cash flow shifted from a $54.4 million inflow to a $21.2 million outflow, principally reflecting distributions and debt repayments.
- Interest expense rose amid higher revolver borrowings and rates; the weighted-average rate on all debt increased to 4.59% from 4.42%.
Capital activity, distributions, outlook and risks
- The company acquired five properties for $63.2 million and sold three non-core properties for $13.4 million in aggregate, recording a $2.8 million net gain. It issued $16.1 million net from common-stock ATM sales and $2.2 million net from Series D preferred-stock sales. It also issued 742,937 OP units as partial consideration for a Detroit property portfolio.
- Common distributions remained $1.50 per share for the year; diluted FFO per share of $1.58 exceeded that amount. The company declared first-quarter 2019 common distributions of $0.125 per share monthly. Management stated it had never reduced or missed a scheduled common distribution, but future distributions remain subject to board discretion, liquidity, covenants and other conditions.
- Management said available liquidity was sufficient for near-term operating costs, debt service and distributions, and expected to refinance 2019–2020 maturities using mortgage financing, the credit facility and/or equity. These are expectations, not guarantees. Scheduled 2019 mortgage principal was $59.8 million, including $48.9 million of balloon payments cited by the filing.
- As of December 31, 2018, the company was in compliance with credit-facility covenants, including a distribution limit of 100% of FFO. Revolver and term-loan maturities were October 2021 and October 2022, respectively. Interest-rate increases, refinancing access and collateral values remain material risks; variable-rate mortgage principal was $60.7 million, with caps or swaps used to manage exposure.
- Portfolio risks include tenant default and lease renewal, single-tenant exposure, specialized-property re-leasing risk, tenant and industry concentration, environmental liabilities, real-estate valuation and illiquidity, and reliance on external affiliates. The five largest tenants generated about 16.5% of rental income; telecommunications was the largest industry at 15.4%.
- The company identified the January 2019 lease-accounting standard adoption as potentially affecting tenants’ lease decisions; it expected minimal direct financial-statement impact but anticipated higher general and administrative expense from certain leasing costs. No material legal proceedings or material off-balance-sheet arrangements were reported. Management and the auditor concluded internal control over financial reporting was effective, and the auditor issued an unqualified opinion.
Most important facts for investors to verify
- Reconcile the conflicting February 2019 revolver-availability disclosures and assess capacity after near-term maturities.
- Review the $59.8 million of scheduled 2019 mortgage principal, including the stated $48.9 million in balloon payments, and the company’s refinancing progress and terms.
- Assess distribution coverage using FFO, cash available after debt service and capital needs, and the credit-facility distribution covenant.
- Track tenant credit, lease expirations and concentration, including the 2019–2021 expirations representing 3.6%, 10.3% and 8.7% of 2018 rental revenue, respectively.
- Monitor the impact of higher interest rates, refinancing costs, equity issuance and potential dilution, as well as the related-party adviser fee structure.