Gladstone Commercial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties. As of May 3, 2023, it owned 138 properties totaling 17.3 million square feet across 27 states, with 96.0% occupancy and a 6.9-year average remaining lease term.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Lease revenue | $36.6 million | $35.5 million; up 2.9% |
| Operating expenses | $25.4 million | $25.7 million; down 0.9% |
| Interest expense | $8.8 million | $6.6 million; up 34.0% |
| Net income | $2.4 million | $3.4 million; down 29.3% |
| Net income (loss) available to common stockholders | $(0.7) million; $(0.02) per share | $0.3 million; $0.01 per share |
| FFO per common share and OP Unit, diluted | $0.37 | $0.39; down 5.1% |
| Cash from operations | $14.9 million | $17.2 million |
Operating cash flow fell 13.2%. Q1 cash and cash equivalents were $14.3 million, with restricted cash of $4.5 million. Reported available liquidity was $91.8 million at March 31, comprising cash and $77.5 million of credit-facility availability; availability was $75.0 million as of May 3.
At March 31, total debt was approximately $753.3 million before unamortized financing costs and discounts (balance-sheet carrying amount: $747.5 million). Mortgage principal was $357.0 million at a weighted average rate of 4.24%; credit-facility borrowings were $396.3 million at approximately 6.32%. The weighted average rate on all debt was approximately 5.33%. The company reported compliance with all credit-facility covenants.
Total assets were $1.19 billion and total liabilities were $825.9 million. Stockholders’ equity was $189.0 million; redeemable Series E and G preferred stock was reported separately as $170.0 million of mezzanine equity.
Material changes versus Q1 2022
- Revenue increased $1.0 million, reflecting same-store lease revenue growth and properties acquired after March 2022; same-store lease revenue rose 5.8%.
- Interest expense increased $2.2 million, primarily due to higher rates on variable-rate debt. This outweighed revenue growth and contributed to lower net income and common-stockholder results.
- No properties were acquired in Q1 2023, compared with two industrial acquisitions totaling $13.5 million in Q1 2022. The company said nine properties acquired after March 31, 2022 contributed to year-over-year operating comparisons.
- The incentive fee was contractually eliminated for Q1 and Q2 2023; Q1 2022 included a $1.3 million fee. This reduced operating expenses year over year.
- Unrealized losses on interest-rate hedges produced a $5.9 million other comprehensive loss, versus a $4.3 million gain in Q1 2022.
- Q1 2023 financing cash outflow was $12.8 million, versus $1.9 million of financing cash inflow in Q1 2022. Distributions paid were $15.1 million, compared with $17.4 million.
Outlook, risks and notable items
- Management outlook: The company said near-term liquidity was adequate and expected to refinance mortgages coming due in 2023 and 2024 using new mortgage debt, credit-facility capacity and/or equity issuance. It provided no formal earnings or revenue guidance.
- Maturities: Mortgage principal payments are $64.5 million for the remaining nine months of 2023, including five balloon payments, and $20.5 million in 2024. Management believes these obligations can be addressed through refinancing, operating cash, equity offerings and facility capacity.
- Interest-rate exposure: Rising rates increased borrowing costs. Variable-rate debt is largely based on SOFR; $20.7 million of hedged variable-rate mortgages remained based on LIBOR, which the company was working to transition before the mid-2023 phaseout. Derivatives include caps and swaps.
- Property and tenant risks: Management cited possible office-market weakening, inflation, construction-cost pressures, tighter financing and recession risk. Four buildings were fully vacant and five partially vacant; available vacant space was 4.1% of total square footage, with about $4.3 million in annual carrying costs. Management said 2023 lease expirations were manageable at 3.3% of Q1 lease revenue and reported collecting all outstanding cash rents for 2022.
- Portfolio actions: Two non-core properties, in Columbia, South Carolina and Baytown, Texas, were classified as held for sale. Subsequent to quarter-end, the company bought a fully leased 76,089-square-foot industrial property in Riverdale, Illinois for $5.3 million and repaid $2.7 million of mortgage debt.
- Equity and distributions: The company raised $4.0 million net from common-stock ATM sales and $0.5 million net from Series F preferred shares during Q1. It had a new common-stock ATM program authorizing up to $250 million of sales. Subsequent to quarter-end, the board declared April–June distributions, including $0.30 total per common share and $0.375 total per Series F share.
- Other disclosures: No material legal proceedings, material off-balance-sheet arrangements or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective; no material internal-control changes occurred.
Important facts for investors to verify
- Whether refinancing or other funding is secured for the $64.5 million of mortgage principal due in the remainder of 2023, and the $20.5 million due in 2024.
- How much of the reported credit-facility availability remains after subsequent borrowing, letters of credit and other changes; the filing reports $75.0 million available as of May 3.
- The sensitivity of earnings and cash flow to rates, including hedge coverage, SOFR exposure and completion of the LIBOR transition.
- Leasing progress and potential sale outcomes for vacant and held-for-sale properties, including the stated $4.3 million annual carrying costs for vacant space.
- Whether operating cash generation can support debt service and distributions as interest costs and property expenses evolve; Q1 common-stockholder results were negative despite positive net income and FFO.
- The dilution and cost implications of future ATM equity issuance and the external-management fee arrangements, including the temporary incentive-fee waiver.