Gladstone Commercial Corporation: FY2013 Form 10-K
Reporting period: Year ended December 31, 2013; filed February 18, 2014. The filing also reports fourth-quarter results. Gladstone Commercial is an externally managed REIT focused on long-term net-leased industrial, commercial and retail real estate. At year-end it owned 87 properties totaling approximately 9.3 million square feet; it had no mortgage-loan investments.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Operating revenue | $61.3 million | $51.3 million |
| Net income | $1.5 million | $3.8 million |
| Net income (loss) available to common stockholders | $(2.9) million; $(0.22) per share | $(0.4) million; $(0.04) per share |
| FFO available to common stockholders | $20.0 million; diluted $1.49 per share | $16.4 million; diluted $1.48 per share |
| Cash provided by operating activities | $19.9 million | $23.4 million |
Revenue growth reflected acquisitions and higher tenant recoveries. Operating expenses rose 32% to $32.8 million, including depreciation and amortization of $22.8 million; interest expense increased 20% to $24.4 million. Net income declined 59%, while common-stockholder loss widened, chiefly as financing costs and preferred and senior-common distributions absorbed earnings. FFO is a non-GAAP measure and should not be treated as cash flow.
Fourth-quarter 2013 revenue was $16.9 million and net income was $0.3 million; the loss attributable to common stockholders was $0.8 million, or $0.05 per share. Fourth-quarter 2012 revenue was $13.8 million, net income $0.6 million, and common-stockholder loss $0.5 million.
At December 31, total assets were $690.5 million and stockholders’ equity was $183.1 million. Mortgage notes payable were $422.6 million; the revolving credit line had $24.4 million outstanding; Series C term preferred stock was recorded as a $38.5 million liability. The filing reports total debt, term preferred and line-of-credit obligations of $485.5 million in selected financial data. Mortgage debt carried a 5.4% weighted-average rate; total debt’s weighted-average rate was approximately 5.31%.
Reported available liquidity was $25.6 million at year-end, comprising $8.5 million cash and $17.1 million available under the credit line. As of February 18, 2014, additional line availability was $20.1 million. Operating cash flow decreased year over year; investing activities used $137.1 million and financing activities provided $120.2 million. The filing reports no off-balance-sheet arrangements.
Material changes and portfolio developments
- Rental income increased 17% to $59.8 million; total operating revenue increased 20%. FFO available to common stockholders rose 22%, but diluted FFO per share increased only 1% to $1.49 as the common share count expanded.
- Seven properties were acquired and one existing property expanded. Acquisition and expansion investment was reported at $134.4 million; annualized straight-line rent associated with these activities was $12.4 million.
- The company issued common shares in three follow-on offerings and through its at-the-market program. It reported $73.1 million net proceeds from the follow-on offerings, $7.7 million net ATM proceeds, and $2.6 million net proceeds from senior common stock.
- A new $60 million senior unsecured revolving credit facility replaced the prior $75 million facility. Year-end borrowings were $24.4 million, with $10.3 million in letters of credit outstanding.
- Portfolio occupancy was affected by two fully vacant buildings and one partially vacant building, representing 3.2% of square footage and approximately $1.1 million in annual carrying costs. Five largest tenants generated approximately 17.1% of rental income; telecommunications was the largest industry exposure at 17.0%.
Outlook, risks and unusual items
- Management said it intended to grow FFO through acquisitions and by re-leasing vacant space. No quantified earnings or acquisition guidance was provided. It described financing markets as improving but noted competitive acquisitions, cap-rate compression and uncertainty in borrowing costs.
- Scheduled mortgage principal payments were $24.8 million in 2014 and $42.4 million in 2015. The 2014 amount includes a $17.5 million balloon payment due in June; management was discussing the maturity with the lender. The company expected to fund scheduled amortization with operating cash and credit-line borrowings.
- The common distribution remained $1.50 per share for 2013, or $0.125 monthly. Diluted FFO per share was $1.49. The credit-line covenant limits distributions to 100% of FFO, subject to defined adjustments; the Adviser waived $3.5 million of incentive fees in 2013 to support distributions. Further waivers are not assured.
- Vacancy and lease rollover, tenant credit/default risk, concentration, property illiquidity, refinancing and balloon-payment risk, interest-rate exposure, environmental liabilities, REIT qualification and reliance on the external Adviser are key risks. Management identified South Hadley, Massachusetts and Roseville, Minnesota properties as potentially at risk of impairment in 2014 if leasing did not improve; no impairment was recorded at year-end.
- The Series C term preferred stock has a mandatory redemption date of January 31, 2017. Failure to redeem or call it as required could give its holders rights to elect additional directors.
- The Adviser is affiliated with the company and receives management, incentive and administration fees. The filing also describes related-party financing and dealer-manager arrangements. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion.
Most important facts for investors to verify
- How the June 2014 $17.5 million mortgage balloon was refinanced or repaid, and the full upcoming debt-maturity schedule.
- Whether vacant space was re-leased, the carrying costs continued, or impairment charges were recorded for the South Hadley and Roseville properties.
- Whether common distributions were supported by recurring cash generation and covenant-adjusted FFO, including any subsequent Adviser incentive-fee waivers.
- How acquisition funding, additional share issuance and dilution affected per-share FFO and leverage.
- Tenant credit quality and lease concentration, including the largest tenants, telecommunications exposure and upcoming lease expirations.