Gladstone Commercial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are against December 31, 2014. Amounts below are USD millions unless otherwise noted. Gladstone Commercial is an externally managed REIT focused primarily on net-leased commercial, industrial and retail properties, with selective mortgage lending. At quarter-end it reported 98 properties totaling 10.8 million square feet and one mortgage loan receivable of $5.6 million.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total operating revenue | $19.9 | $17.1; up 16% |
| Rental revenue | $19.3 | $16.6; up 16% |
| Net income (loss) | $0.7 | $(13.5) |
| Net loss attributable to common stockholders | $(0.6), or $(0.03) per share | $(14.6), or $(0.93) per share |
| FFO available to common stockholders | $7.7; diluted FFO $0.37 per share | $6.0; diluted FFO $0.38 per share |
| Net cash from operating activities | $8.9 | $6.2 |
| Cash and cash equivalents at quarter-end | $5.8 | $8.6 at December 31, 2014 |
| Total assets / stockholders’ equity | $807.3 / $227.2 | $787.8 / $217.7 at December 31, 2014 |
| Mortgage notes and line of credit | $510.3 carrying value | $502.6 at December 31, 2014 |
| Weighted-average interest rate on debt | About 5.07% overall; mortgage notes 5.26% | Comparable prior-period rate not stated here |
Operating expenses were $11.8 million, including $8.2 million of depreciation and amortization; interest expense was $6.8 million. Common-stock distributions declared were $0.375 per share, equal to reported basic FFO per share of $0.38 after rounding. The company reported that cash provided by operations increased, while investing used $30.7 million and financing provided $18.9 million.
Material changes versus the prior comparable period
- Revenue increased with acquisitions and a full quarter of revenue from properties acquired in 2014. Same-property rental revenue declined about $131,000, or 0.8%, reflecting lower rents on renewals or replacement leases.
- Common-stock net loss narrowed substantially, mainly because Q1 2014 included a $14.0 million impairment charge on the Roseville, Minnesota property. No impairment was recorded in Q1 2015.
- FFO available to common stockholders rose 27% to $7.7 million, but diluted FFO per share edged down to $0.37 from $0.38, reflecting a higher share count.
- Interest expense increased $0.5 million, primarily due to mortgage debt issued or assumed over the prior 12 months. Depreciation and amortization also rose with portfolio growth.
- The company acquired two properties for a total of $28.3 million, adding 186,834 square feet and annualized straight-line rent of approximately $3.0 million. It issued $14.6 million of mortgage debt for the Richardson, Texas acquisition.
Outlook, risks and unusual items
- Management said near-term liquidity was sufficient for distributions, debt service and operating costs, and believed operating cash flow and future financing could meet longer-term needs. It provided no quantified earnings or acquisition guidance.
- At March 31, stated available liquidity was $18.3 million, comprising $5.8 million cash and $12.5 million available on the line of credit. Separately, the company reported a maximum additional draw of $18.9 million as of May 4. Line-of-credit borrowings were $41.3 million; the $75 million facility matures in August 2017 and is subject to covenants.
- Scheduled mortgage principal payments were $40.3 million for the remainder of 2015 and $96.8 million in 2016. Management expected to refinance 2015 and 2016 maturities using a combination of new mortgage debt and equity. The filing notes that access to financing and favorable terms are not assured.
- The Dayton, Ohio tenant’s lease expires June 30, 2015; management said the property could become impaired if no replacement tenant is found. The Columbus, Ohio property was classified as held for sale, with a sale anticipated in November 2015 after the tenant planned to vacate.
- Management cited vacant properties, upcoming tenant departures, uncertain economic conditions, competition for acquisitions and potential increases in borrowing costs. Three 2015 lease expirations were expected to leave; management said the affected properties represented less than 3% of projected 2015 rental income.
- The adviser waived $1.2 million of incentive fees in Q1 2015, leaving a net incentive fee of approximately $0.5 million. The waiver supported distributions and was not required to continue; the adviser’s waived fees are not recoupable.
- Interest-rate sensitivity analysis estimated that a 1% LIBOR increase would raise annual interest expense and reduce net income by about $0.5 million, assuming the balance sheet remained constant. The company had no off-balance-sheet arrangements and reported no material legal proceedings.
Important facts for investors to verify
- Whether Dayton and other vacant or soon-to-be-vacant space is re-leased, and whether any impairment is recorded.
- Completion and proceeds of the planned Columbus property sale, and the company’s expected use of proceeds.
- Refinancing plans and terms for 2015–2016 mortgage maturities, covenant compliance and actual line-of-credit availability.
- Whether adviser fee waivers continue and whether distributions remain supported by FFO and cash flow.
- Effects of share issuance on per-share FFO, and the company’s ability to sustain rental income amid lease renewals and tenant space reductions.