Business context and reporting period
Gladstone Commercial Corporation’s Form 10-K covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. The company is an externally managed REIT focused primarily on owning and leasing office and industrial properties, generally under long-term net leases. At December 31, it reported 99 properties and 11.0 million square feet; occupancy was 97.4% as of February 17, 2016. Its weighted-average remaining lease term was 8.4 years as of that date.
Financial and operating highlights
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total operating revenue | $83.8 million | $73.8 million |
| Net income (loss) | $3.6 million | $(5.9) million |
| Net income (loss) available to common stockholders | $(1.5) million; $(0.07) per share | $(10.5) million; $(0.61) per share |
| FFO available to common stockholders | $32.9 million; $1.55 basic per share, $1.50 diluted | $31.3 million; $1.82 basic per share, $1.77 diluted |
| Cash provided by operating activities | $31.5 million | $28.2 million |
| Cash used in investing activities | $74.5 million | $130.4 million |
| Cash provided by financing activities | $39.5 million | $102.3 million |
Rental revenue rose 13.6% to $80.9 million, largely from acquisitions; same-store rental revenue decreased 1.4%, mainly due to lower rents on lease extensions and modifications. Total operating expenses fell 11.2%, principally because the 2014 period included a $14.2 million impairment, compared with a $0.6 million impairment in 2015. Depreciation and amortization increased 22.3% to $35.3 million. A simple GAAP net margin was approximately 4.3% in 2015, versus negative 8.0% in 2014; these figures reflect, among other items, real-estate depreciation and unusual charges and gains.
Fourth-quarter 2015 revenue was $21.8 million and net income was $2.6 million; income available to common stockholders was $1.3 million, or $0.06 per share. Fourth-quarter results included $1.5 million of gains on real-estate sales.
Debt, liquidity and distributions
- At year-end, mortgage notes payable were $460.8 million, with a 5.02% weighted-average interest rate and 5.6-year weighted-average remaining term. The company also had $45.3 million outstanding on its revolving credit line, $25.0 million on a term loan, and $38.5 million of mandatorily redeemable Series C preferred stock. Total assets were $833.3 million, total liabilities $599.5 million, and stockholders’ equity $233.9 million.
- Year-end available liquidity was reported as $9.3 million, including $5.2 million of cash and $4.1 million of available line capacity. Available line capacity was $19.3 million as of February 17, 2016. The company reported compliance with its credit covenants at year-end.
- Scheduled mortgage principal payments were $76.7 million in 2016 and $69.2 million in 2017; 2016 includes balloon maturities. Management expected to refinance 2016 maturities using a combination of new mortgage debt and equity.
- Common distributions remained $1.50 per share for 2015, or $0.125 monthly. The company reported an uninterrupted distribution history since inception, but future payments remain subject to board discretion, liquidity, covenants, REIT requirements and other conditions. Operating cash flow was below total 2015 distributions paid to common, senior common and preferred holders of $36.9 million.
Material changes, outlook, risks and unusual items
- The company acquired six properties for approximately $77.8 million and sold three non-core properties during 2015. It raised $46.7 million net through its at-the-market common-stock program, issuing approximately 2.9 million shares. FFO available to common stockholders increased 4.9%, while basic FFO per share declined from $1.82 to $1.55, reflecting share growth and, in part, a $5.3 million debt-extinguishment gain included in 2014 FFO.
- The credit facility was expanded in October 2015: the revolving commitment became $85.0 million, a $25.0 million term loan was added, and total commitments under the facilities increased to $150.0 million. The revolving facility maturity was extended to August 2018, with an extension option to August 2019.
- Series C term preferred stock, recorded as a liability, has a mandatory redemption date of January 31, 2017. Management said it planned to refinance it with equity before then. If it remained outstanding under specified circumstances, a $38.5 million liquidity requirement could apply beginning August 31, 2016; failure to meet relevant requirements could also trigger credit and governance consequences.
- Management described improving office and industrial demand in many markets but noted increased acquisition competition, volatile interest rates and potentially rising borrowing costs. Its stated priorities were leasing vacant space, renewing leases and acquiring properties; the filing provides no numerical earnings or FFO guidance. The Dayton, Ohio property was impaired by $0.6 million, classified as held for sale, and expected to be sold in the second quarter of 2016. The $5.9 million Phoenix development loans, including accrued interest and exit fee, were repaid in January 2016; the company reported a 22% internal rate of return on the loans.
- Key risks include tenant defaults and lease rollover, vacant or specialized properties, tenant and industry concentration, refinancing and balloon-payment exposure, variable-rate debt, covenant compliance, access to capital, environmental liabilities, REIT qualification, and conflicts inherent in external management. The five largest tenants generated approximately 19.1% of rental income; telecommunications, healthcare and automobile tenants accounted for 15.8%, 15.4% and 13.0%, respectively. No material legal proceedings were reported. Management and the auditor reported effective internal control over financial reporting, and the auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Confirm the refinancing plan and funding for the $76.7 million of scheduled 2016 mortgage principal payments and the January 2017 Series C mandatory redemption.
- Assess whether occupancy, leasing and rent trends can improve same-store revenue and reduce carrying costs on vacant space.
- Reconcile FFO growth with the decline in per-share FFO, dilution from equity issuance, and the nonrecurring 2014 debt-extinguishment gain.
- Review the sustainability of the $1.50 annual common distribution against FFO, cash flow, debt service and credit-facility distribution limits.
- Track tenant credit quality and the company’s exposure to its largest tenants and concentrated industries.