Gladstone Commercial Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 14, 2018. This is an annual filing, not a standalone Q4 report. The company is an externally advised REIT focused primarily on office and industrial properties. At year-end it owned 99 properties totaling 11.5 million square feet in 24 states; occupancy was 98.0%, with a 7.6-year average remaining lease term.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Operating revenue | $94.8 million | $86.4 million | +9.8% |
| Net income | $5.9 million | $4.0 million | +50.0% |
| Net loss attributable to common stockholders | $(4.9) million | $(3.7) million | Loss increased |
| Basic FFO available to common stockholders | $40.7 million; $1.54/share | $35.6 million; $1.53/share | +14.3% total; +0.7% per share |
| Net cash from operating activities | $46.8 million | $41.2 million | Increased |
- Rental revenue rose 9.8% to $92.8 million. Same-store rental revenue declined 0.3%; acquisitions and expansion drove much of the overall increase.
- Operating expenses increased 22.9% to $68.3 million, including $6.8 million of impairment charges, versus $2.0 million in 2016. Interest expense declined 5.1% to $24.6 million.
- Net cash used in investing was $99.2 million, principally reflecting acquisitions and property improvements, partly offset by disposition proceeds. Financing activities provided $54.4 million. Cash and cash equivalents were $6.7 million at year-end.
- Total assets were $928.5 million. Year-end debt obligations were approximately $548.9 million, including $452.5 million of mortgage principal and $96.4 million outstanding under the credit facility. The weighted average rate on mortgages was 4.56%; the average rate on all debt was 4.42%.
- Available liquidity at year-end was $44.4 million, including cash and $37.7 million of revolver capacity; available revolver capacity was $43.2 million as of February 14, 2018. The company reported compliance with credit facility covenants.
- Common distributions remained $1.50 per share for the year. Basic FFO per share of $1.54 exceeded that distribution, but FFO is a non-GAAP measure and is not cash flow.
Material changes and notable items
- Acquired seven properties for an aggregate $132.2 million, with 10.1-year weighted average lease terms, and sold four non-core properties for $30.3 million. The sales generated a $4.0 million net gain, alongside impairment charges.
- Raised $84.1 million net through common-stock offerings and the common ATM program, and Series D preferred-stock sales. Common shares outstanding rose from 24.9 million to 28.4 million during 2017.
- Amended the credit facility in October: the term loan increased from $25 million to $75 million, the $85 million revolver was retained, maturities were extended to 2022 and 2021, respectively, and pricing was reduced by 25 basis points at each leverage tier. Amendment fees were about $0.9 million.
- Q4 2017 operating revenue was $25.3 million, versus $22.0 million in Q4 2016. Q4 net loss was $1.5 million; loss attributable to common stockholders was $4.3 million, compared with Q4 2016 net income of $2.3 million and common-stockholder loss of $0.3 million.
- Series D preferred stock issuance increased preferred distributions attributable to Series A, B and D to $9.9 million from $6.6 million. Series D is classified as mezzanine equity and carries a 7.00% stated rate.
Outlook, risks and contingencies
- Management gave no quantified earnings or acquisition guidance. It said current liquidity should cover near-term distributions, debt service and operating costs, and expects to refinance 2018–2019 mortgage maturities using new debt and equity. Mortgage principal due in 2018 was $55.3 million, including balloon payments; the filing separately cites $38.3 million of balloon payments due during the remainder of 2018.
- Management intends to continue acquiring leased properties in target secondary markets and selling non-core assets when suitable disposition opportunities arise. The fully vacant Tewksbury property and an Arlington property were under contract for sale, with closings expected in Q1 2018. Vacant space represented 2.0% of year-end square footage and carried about $0.6 million in annual costs.
- Key risks include tenant default and lease rollover, tenant and industry concentration (the five largest tenants represented about 17.1% of rental income), property illiquidity and re-leasing costs, refinancing and balloon-payment risk, variable interest rates, and covenant or collateral requirements. Telecommunications, healthcare and automobile tenants contributed 16.7%, 14.0% and 12.0% of rental revenue, respectively.
- Other risks include environmental liabilities, uninsured losses, REIT qualification and distribution requirements, dependence on the external adviser and related-party conflicts. The adviser received $5.0 million in base fees and $2.4 million in incentive fees in 2017. The company reported no material legal proceedings or material off-balance-sheet arrangements.
- The filing discusses the Tax Cuts and Jobs Act and potential effects beginning in 2018, including changes to tax rates and interest deductibility; the company stated the effects were uncertain. New lease accounting rules could also influence tenants’ leasing decisions. Management and its auditor concluded internal control over financial reporting was effective as of year-end; the auditor issued unqualified opinions on the financial statements and controls.
Investor verification priorities
- Review the debt maturity schedule, the stated 2018 balloon obligations, refinancing progress, and current revolver availability.
- Assess whether recurring operating cash flow and FFO support distributions after debt service, preferred distributions, capital needs and adviser fees.
- Check tenant credit, concentration, lease expirations, occupancy and progress leasing or selling vacant and held-for-sale properties.
- Reconcile 2017 impairment charges, property sale gains, acquisition accounting and the effects of increased share and preferred-stock issuance.
- Review credit facility covenant headroom, variable-rate exposure and effectiveness of rate caps and swaps, as well as adviser-related fees and conflicts.