Gladstone Commercial Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. The company is an externally managed REIT focused primarily on net-leased commercial and industrial properties. Dollar amounts below are in millions unless stated otherwise.
Business context and key financial metrics
- Portfolio: 102 properties totaling 11.2 million square feet; gross and net carrying values, including lease intangibles and properties held for sale, were $943.1 million and $784.9 million, respectively. Two mortgage receivables totaled $5.9 million and bore 22% interest.
- Revenue: Q3 operating revenue was $21.4 million, up 12% from $19.0 million; nine-month revenue was $62.0 million, up 14% from $54.5 million. Rental revenue rose 12% in Q3 and 14% year to date.
- Earnings: Q3 GAAP net loss was $0.1 million versus net income of $0.2 million a year earlier; loss attributable to common stockholders was $1.4 million, or $0.06 per share, versus $0.9 million, or $0.05 per share. Nine-month net income was $1.0 million versus a $12.1 million loss; common-stockholder loss was $2.8 million, or $0.13 per share, versus $15.5 million, or $0.93 per share.
- FFO: Non-GAAP FFO available to common stockholders was $8.2 million in Q3 versus $6.9 million; diluted FFO per share was $0.37 versus $0.38. Nine-month FFO was $24.0 million versus $18.6 million; diluted FFO per share was $1.11 versus $1.09. FFO is not a substitute for GAAP earnings or operating cash flow.
- Cash flow: Nine-month cash from operations was $24.9 million versus $18.7 million. Investing used $76.5 million and financing provided $46.7 million. Cash and cash equivalents ended the period at $3.7 million, down from $8.6 million at year-end 2014.
- Balance sheet and debt: Total assets were $838.5 million, liabilities $608.1 million, and stockholders’ equity $230.4 million. Mortgage notes payable were $482.9 million and line-of-credit borrowings $55.5 million, for total reported borrowings of $538.4 million. Weighted-average interest rates were 5.10% on mortgages and approximately 4.87% on total debt; the line-of-credit rate was about 2.94%.
- Liquidity and distributions: As of October 27, 2015, available liquidity was reported at $17.8 million, including $4.0 million of cash and $13.8 million of available line capacity. Common-stock distributions were $0.375 per share for Q3 and $1.125 for the first nine months.
Material changes versus the prior comparable period
- Revenue growth primarily reflected property acquisitions; same-store rental revenue declined 1.4% in Q3 and 1.9% for the first nine months, mainly due to lower rents on lease extensions and modifications.
- Q3 common-stockholder loss increased year over year, affected by the $0.6 million Dayton, Ohio impairment, higher interest expense and higher depreciation, partly offset by acquisition-related rent growth.
- Nine-month results improved substantially from 2014, when the company recorded a $14.2 million impairment charge, largely related to its Roseville, Minnesota property, and a $1.2 million gain on sale. Nine-month interest expense increased by $1.4 million to $20.9 million.
- Five properties were acquired in the first nine months for $71.2 million, compared with eight properties acquired for $93.7 million in the corresponding 2014 period. Acquisitions contributed to higher rental revenue and depreciation.
- The July 2015 amended advisory agreement changed the base and incentive fee calculations and introduced a capital-gains incentive fee. Effective July 1, the base fee became 1.5% annually of adjusted total stockholders’ equity; the incentive fee uses an 8% annualized Core FFO hurdle and a 15% share above the hurdle, subject to a cap.
Outlook, commentary, risks and unusual items
- Management described the economic recovery as uncertain and noted increased competition for acquisitions and potential pressure on borrowing costs. It said 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.
- The company anticipated refinancing 2015 and 2016 mortgage maturities with a combination of new mortgage debt and equity. Scheduled mortgage principal was $5.7 million for the remainder of 2015 and $100.3 million in 2016. Management planned to refinance the $38.5 million Series C term preferred stock with equity before the related liquidity requirement begins in August 2016; the preferred stock is mandatorily redeemable January 31, 2017.
- After quarter-end, on October 5, the company expanded its revolving facility to $85 million, added a $25 million term loan facility, and increased total maximum commitments under the facilities to $150 million. The revolving maturity was extended to August 2018, with a one-year extension option. The filing reports $0.5 million in modification costs.
- Five properties in Ohio, Florida, Missouri and Alabama were classified as held for sale; the company anticipated sales during Q4 2015. Dayton was written down by $0.6 million. Management described the properties as non-core and intended to redeploy sale proceeds into acquisitions.
- Vacant space was less than 2.12% of total square footage, but two buildings were fully vacant and three partially vacant; annual carrying costs were approximately $1.9 million. Management reported 12 leases expiring in 2015, with eight extended and two related properties classified as held for sale.
- Interest-rate exposure is material: the filing estimates a 1% increase in one-month LIBOR would raise annual interest expense and reduce net income by about $0.9 million. The company uses interest-rate caps on certain variable-rate debt. Other cited risks include tenant credit, property-market conditions, access to debt and equity financing, and refinancing obligations.
- No quantitative earnings or FFO guidance was provided. The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the terms and subsequent availability of the expanded credit facilities, including covenants, remaining borrowing capacity, and the effect of $55.5 million already drawn at quarter-end.
- Track refinancing or repayment plans for the $100.3 million of 2016 mortgage principal and the $38.5 million Series C preferred stock due in 2017.
- Verify whether the anticipated Q4 property sales closed, their proceeds, and any resulting gains, losses, or changes to the impairment estimate.
- Assess whether FFO and operating cash flow can sustainably support distributions: Q3 diluted FFO per share of $0.37 was slightly below the $0.375 quarterly common distribution.
- Review vacancy, lease renewal outcomes, tenant credit quality, and leasing costs, particularly for the vacant properties and upcoming maturities.
- Evaluate dilution and related-party costs: the company issued 2.2 million common shares through its ATM program in the first nine months, and the adviser and administrator are affiliates of the company’s chairman and CEO.