Gladstone Commercial Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited financial statements. Dollar amounts below are in millions unless noted. The company is a REIT focused on net-leased industrial, commercial and retail properties. At quarter-end it owned 73 properties totaling 7.1 million square feet.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total operating revenue | $12.10 | $10.52; up 15% |
| Net income | $1.30 | $1.48; down 12% |
| Net income available to common stockholders | $0.259 | $0.442; down 41% |
| Basic and diluted common EPS | $0.02 | $0.05 |
| FFO available to common stockholders | $4.16 | $3.81 |
| Basic and diluted FFO per common share | $0.38 | $0.41 |
| Net cash from operating activities | $5.63 | $4.74 |
| Net cash used in investing activities | $(12.57) | $(1.05) |
| Net cash from financing activities | $9.30 | $3.57 |
Revenue growth primarily reflected eight properties acquired after Q1 2011, including one acquired in January 2012 for $10.8 million. Higher depreciation and amortization, interest expense, and distributions on newly issued Series C preferred stock contributed to lower net income and common EPS. FFO rose in total, but FFO per share declined as weighted-average common shares increased. Common distributions were $0.375 per share, unchanged from Q1 2011.
At March 31, total assets were $467.97 million, mortgage notes payable were $282.07 million, and stockholders’ equity was $131.67 million. The $38.5 million Series C term preferred stock is classified as a liability and its distributions as interest expense. Cash and cash equivalents were $5.69 million; restricted cash was $3.05 million. Reported available liquidity was $27.8 million, including $22.1 million of line-of-credit capacity. Operating cash flow included $1.1 million of leasing commissions paid.
Mortgage debt had a 5.72% weighted-average rate. The $75 million revolving credit facility had no borrowings outstanding, but $6.1 million of letters of credit were outstanding; the company reported $22.1 million of available borrowing capacity and covenant compliance. Seven properties secured the facility, and only four properties were unencumbered and potentially available to support additional capacity.
Changes, outlook and risks
- In February, the company issued 1.54 million shares of 7.125% Series C term preferred stock, generating $38.5 million gross proceeds. Net proceeds were used for line-of-credit repayment, acquisitions and working capital. The stock is mandatorily redeemable January 31, 2017; it is generally not redeemable before January 31, 2016.
- The credit facility was expanded from $50 million to $75 million in January 2012. Subsequent to quarter-end, the company borrowed $19 million under a 6.1% mortgage due May 2022, secured by four properties; proceeds were intended for acquisitions and working capital.
- A $45.2 million mortgage was scheduled to mature in 2012, with one extension option remaining through 2013. Management expected to exercise the option, subject to covenant compliance. The filing also identifies $58.1 million of mortgage principal due in 2013 and says the company had begun discussions with lenders about extensions or refinancing.
- Management said available liquidity should cover near-term distributions, debt service and operating costs, and that operating cash flow and future financing should support longer-term needs. Growth and refinancing capacity depend on access to equity and debt markets. No specific earnings or FFO guidance is provided.
- Two properties were vacant—Hazelwood, Missouri and Richmond, Virginia—representing 2.0% of annualized rental income and $0.3 million in annual carrying costs. Management was seeking tenants. A tenant bankruptcy at Hazelwood had led to the property becoming vacant; other tenants were reported current on rent.
- Leases were extended at South Hadley, Massachusetts; San Antonio, Texas; and Roseville, Minnesota. At Roseville, the renewed lease covers about one-third of the property, and the company continued seeking tenants for the remainder after the existing tenant’s full-building rent obligation ends in 2012.
- Management reported no property impairment at March 31. The filing highlights tenant credit and bankruptcy risk, real-estate and capital-market conditions, refinancing risk, interest-rate exposure, and the subjective estimates used in acquisition purchase-price allocations and impairment reviews. Five of 58 leases had interest-rate-linked escalations; the company had no derivatives.
- The Adviser waived $0.6 million of incentive fees in Q1, leaving a net incentive fee of approximately $0.3 million. The waivers were irrevocable and not recoupable, but future waivers are discretionary and not assured. The filing notes an out-of-period Q1 2011 adjustment related to a 2010 acquisition; management concluded it was not material to 2010 or 2011 results.
Investor verification priorities
- Confirm the extension or refinancing outcome for the $45.2 million 2012 mortgage maturity and the plan for 2013 maturities.
- Track lease-up progress at Hazelwood and Richmond, and occupancy of the unleased portion of the Roseville property.
- Assess liquidity against distributions, debt service and acquisition needs, including the limited unencumbered collateral and actual availability under the credit facility.
- Review the economics and liability treatment of Series C preferred stock, including its 7.125% cost and mandatory 2017 redemption.
- Compare common distributions with FFO and monitor reliance on discretionary Adviser fee waivers to support distributions.