Gladstone Commercial Corporation — Q2 2014 Form 10-Q
Business context and reporting period. The company is an externally managed REIT focused primarily on net-leased industrial, commercial and retail properties. This filing covers the quarter and six months ended June 30, 2014, compared with the same 2013 periods. At quarter-end, it owned 93 properties totaling 10.0 million square feet.
Financial performance and condition
- Revenue: Q2 operating revenue was $18.4 million, up 29% year over year; six-month revenue was $35.5 million, up 26%. Growth primarily reflected properties acquired over the prior year.
- Profit and per-share results: Q2 net income was $1.2 million and income available to common stockholders was $86,000, or $0.01 per diluted share, versus a $641,000 common-stockholder loss in Q2 2013. Six-month net loss was $12.3 million; loss attributable to common stockholders was $14.6 million, or $0.90 per share, versus a $1.3 million common-stockholder loss in the prior-year period.
- FFO: Funds from operations available to common stockholders, a non-GAAP measure, was $5.7 million in Q2, up 25%; diluted FFO per share was $0.34 versus $0.36. For six months, FFO was $11.8 million, up 33%, while diluted FFO per share was $0.71 versus $0.74. Common distributions were $0.375 per share for Q2 and $0.75 for six months.
- Cash flow: Six-month operating cash flow was $11.0 million, compared with $7.5 million. Investing used $60.9 million and financing provided $43.6 million. Cash and cash equivalents ended at $2.4 million, down from $8.5 million at year-end 2013.
- Balance sheet and debt: Total assets were $735.5 million; mortgage notes were $456.2 million and line-of-credit borrowings were $25.7 million. Including $38.5 million of mandatorily redeemable Series C preferred stock classified as a liability, total liabilities were $545.0 million. Stockholders’ equity was $190.6 million. Mortgage debt’s weighted-average rate was 5.36%; the line of credit rate was approximately 3.2%.
- Liquidity: Management reported $22.1 million of available liquidity at June 30, comprising $2.4 million cash and $19.7 million of additional line-of-credit capacity. The $60 million revolving facility had $25.7 million drawn and $6.8 million in letters of credit outstanding. The company reported covenant compliance.
Material changes and notable items
- Six acquisitions added six properties for a total purchase price of $74.9 million; the largest was a $39.0 million distribution warehouse in Taylor, Pennsylvania. The company sold its Sterling Heights, Michigan property for $11.4 million and recorded a $1.2 million gain.
- A $14.0 million impairment charge was recorded in Q1 against the Roseville, Minnesota property after an anticipated tenant did not sign a lease. The charge drove the six-month GAAP loss; it is excluded from the company’s FFO calculation.
- Debt rose from $447.0 million at December 31, 2013 to $481.9 million at June 30, 2014. The company raised $26.0 million net in a June common-stock offering and $7.6 million net through its at-the-market program during the six-month period.
- The line of credit was amended to extend its maturity to August 2017 and reduce LIBOR margins by 25 basis points at each pricing level.
Outlook, commentary, risks and contingencies
- No formal earnings or revenue guidance is provided. Management said available liquidity should cover near-term distributions, debt service and operating costs, and expects operating cash flow and future financing to support longer-term needs. It anticipates refinancing mortgages due in 2015.
- A $17.5 million mortgage balloon payment on the impaired Roseville property was due in June 2014. The company said it was pursuing a deed-in-lieu transaction and was not subject to cross-default provisions on that loan. The filing does not state that the transaction had closed.
- South Hadley, Massachusetts may require an impairment if the company cannot extend the lease or find a replacement tenant; the lease then ran through January 2015. The company also had two fully vacant buildings, in Baytown, Texas and Richmond, Virginia, totaling less than 1% of portfolio area.
- One Newburyport tenant planned to leave at lease expiry in April 2015. Extensions in Austin and Burnsville improved lease duration, but require tenant-improvement spending of $1.3 million and $3.3 million, respectively. Additional lease extensions and tenant-improvement obligations are described in the filing.
- Management cited competition for acquisitions, potential increases in interest rates and borrowing costs, economic and tenant-credit uncertainty, and dependence on external debt and equity financing. A 1% LIBOR increase was estimated to reduce annual net income by $343,000.
- Adviser incentive-fee waivers supported distributions and were not recoupable, but future waivers are not assured. The credit facility limits distributions to 100% of FFO, with specified acquisition costs added back.
- Subsequent to quarter-end, the company acquired an Aurora, Colorado property for $8.3 million and closed a $5.6 million Phoenix development loan. It also declared third-quarter distributions; these events do not change quarter-end results.
Important facts for investors to verify
- Progress and final terms of the Roseville deed-in-lieu process, and whether the expected debt obligations or property valuation have changed.
- South Hadley leasing progress and the status of other vacancies, lease expirations and tenant renewals.
- Actual tenant-improvement spending and funding needs, especially for Austin and Burnsville.
- FFO and cash available for distributions relative to declared distributions, including the effect of any future adviser fee waivers.
- Debt maturities, refinancing execution, line-of-credit availability and covenant headroom as the portfolio and financing mix change.
- Portfolio performance and tenant concentration following the acquisition growth and common-stock issuance.