Gladstone Commercial Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; filed October 29, 2014. Amounts are in millions unless otherwise noted. Gladstone Commercial is an externally managed REIT focused primarily on net-leased commercial and industrial real estate, with selective mortgage lending.
Business context and portfolio
- At September 30, the company reported 93 properties totaling 9.8 million square feet, plus one $5.6 million mortgage loan receivable. The Roseville, Minnesota property in receivership is excluded from those portfolio totals.
- During the first nine months, Gladstone acquired eight properties for a total purchase price of $93.7 million and sold its Sterling Heights, Michigan property for $11.4 million, recognizing a $1.24 million gain.
- Portfolio weighted-average yield was 9.0% at September 30. Management said only the Baytown, Texas building remained vacant; available space there was less than 1% of total square footage.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $19.0 | $16.2 | $54.5 | $44.5 |
| Net income (loss) | $0.2 | $0.3 | $(12.1) | $1.2 |
| Net loss attributable to common stockholders | $(0.9) | $(0.8) | $(15.5) | $(2.1) |
| Diluted loss per common share | $(0.05) | $(0.06) | $(0.93) | $(0.16) |
| FFO available to common stockholders | $6.9 | $5.5 | $18.6 | $14.3 |
| Diluted FFO per common share | $0.38 | $0.38 | $1.09 | $1.11 |
- Nine-month rental revenue rose 20%, primarily reflecting properties acquired in the preceding 12 months. Nine-month total operating revenue increased 23%.
- Nine-month operating expenses increased 99% to $46.4 million, including a $14.2 million impairment charge on Roseville. Interest expense increased 8% to $19.5 million.
- Operating cash flow was $18.7 million for the nine months, versus $15.6 million a year earlier. Investing activities used $88.0 million; financing activities provided $66.1 million. Cash and cash equivalents ended at $5.2 million, down from $8.5 million at year-end 2013.
- At September 30, total assets were $759.4 million and total liabilities were $570.2 million. Mortgage notes payable were $460.4 million and line-of-credit borrowings were $45.6 million. The $38.5 million Series C term preferred stock is classified as a liability.
- Weighted-average interest rate was 5.13% across debt outstanding and 5.35% on mortgage notes. The line of credit carried a rate of approximately 2.9%; $5.8 million of letters of credit were outstanding.
- Management reported $29.8 million of available liquidity as of October 29, comprising $5.3 million of cash and $24.5 million of line-of-credit capacity. The company was in compliance with line-of-credit covenants at September 30.
- Common distributions were $0.375 per share for the quarter, compared with diluted quarterly FFO of $0.38 per share. Distributions were unchanged from 2013.
Material changes, outlook, and risks
- The principal driver of the nine-month net loss was the $14.2 million Roseville impairment. A prospective tenant did not execute a lease, and management revised its expected holding period to the June 2014 mortgage maturity. The property was in receivership and management anticipated returning it to the lender through a deed-in-lieu transaction in Q4 2014. A separate $0.28 million Q3 impairment charge was recorded.
- An out-of-period correction related to Roseville understated Q3 net income by $0.3 million; it had no impact on nine-month net income. Management concluded the adjustment was not material to the interim periods presented.
- Management cited an uncertain economic environment, competition for acquisitions, and potential increases in interest rates and borrowing costs. A 1% increase in one-month LIBOR was estimated to increase annual interest expense by approximately $0.5 million, based on the stated assumptions.
- Mortgage principal payments were scheduled at $18.9 million for the remainder of 2014 and $42.7 million in 2015; management anticipated refinancing 2015 maturities. The 2014 amount included a $17.5 million Roseville balloon payment, which management said would be addressed through the deed-in-lieu process.
- Several tenants received temporary rent deferrals: tenants at two Texas properties for September through November 2014, and a Concord Township, Ohio tenant for part of August through December 2014, with repayment scheduled during 2015. The filing said these tenants were current through Q3.
- A Newburyport, Massachusetts tenant elected not to renew and was expected to pay rent through April 2015. The Burnsville, Minnesota lease extension covers about two-thirds of the property, leaving the company to seek a tenant for the remaining space; related tenant improvements include a planned $3.3 million commitment.
- Management stated available liquidity was sufficient for near-term distributions, debt service, and operating costs, and expected operating cash flow and future financing to support longer-term needs. No specific earnings or revenue guidance was provided. Adviser incentive-fee waivers supported distributions, but the Adviser was not obligated to continue waiving fees.
- Subsequent to quarter-end, the company reported a lease for its Richmond property, a 10-year extension associated with the Canton, North Carolina expansion, and a two-year South Hadley, Massachusetts lease extension.
Investor verification priorities
- Confirm completion and final financial consequences of the Roseville deed-in-lieu transaction, including treatment of the $17.5 million mortgage balloon.
- Track collection of deferred rent and leasing progress at Newburyport, Burnsville, and Baytown, including the costs and timing of tenant improvements.
- Verify actual line-of-credit availability, covenant compliance, and refinancing plans for upcoming 2015–2016 mortgage maturities.
- Assess whether FFO continues to cover distributions after considering preferred and senior common distributions, adviser fee waivers, and acquisition-related costs.
- Monitor tenant credit quality and exposure to interest-rate increases; the filing identifies interest rates and tenant/property conditions as key risks.