Gladstone Commercial Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. The company is an externally managed REIT focused primarily on long-term net-leased commercial and industrial properties. It owned 72 properties at year-end and 73 as of February 28, 2012; it had no mortgage loans outstanding at year-end.
Financial performance and key metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Operating revenue | $43.976 million | $41.928 million |
| Net income | $5.714 million | $4.928 million |
| Net income available to common stockholders | $1.558 million; $0.15 per share | $0.814 million; $0.09 per share |
| FFO available to common stockholders | $15.707 million; $1.53 per share | $14.078 million; $1.64 per share |
| Common distributions declared | $1.50 per share | $1.50 per share |
| Cash from operating activities | $19.662 million | $18.113 million |
Rental income rose 6% to $43.632 million, primarily reflecting seven 2011 acquisitions and a full year of rent from a property acquired in late 2010; vacancies partly offset growth. Total operating expenses fell 9% to $21.270 million, including a $2.113 million adviser incentive-fee credit. Interest expense was $17.076 million. The company reported a 9.4% weighted-average portfolio yield, including vacant properties; this measure excludes mortgage interest expense. A conventional operating-margin figure is not clearly provided.
Fourth quarter: Operating revenue was $11.468 million, net income was $1.116 million, and net income available to common stockholders was $76,000 ($0.01 per share). Compared with Q3 2011, revenue increased from $11.173 million while net income available to common stockholders declined from $709,000.
Year-end balance sheet and liquidity: Total assets were $453.147 million; total liabilities were $317.833 million; stockholders’ equity was $135.314 million. Debt comprised $285.350 million of mortgage notes and $18.700 million drawn on the line of credit. Cash and cash equivalents were $3.329 million. Reported available liquidity was $14.7 million, including cash and $11.4 million of undrawn line capacity. Operating cash flow covered cash distributions paid of $19.610 million only narrowly.
Mortgage debt had a 5.70% weighted-average interest rate. The company reported $49.631 million of scheduled principal payments in 2012, including a $45.233 million balloon loan it expected to extend through October 2013. It also identified $58.5 million payable in 2013 in its liquidity discussion. The $50 million credit facility was increased to $75 million in January 2012; year-end availability was constrained by collateral and borrowing-base requirements. The company was covenant-compliant at December 31, 2011.
Material changes versus the prior period
- Revenue increased 5% and net income increased 16% year over year; FFO per common share decreased from $1.64 to $1.53 as weighted-average common shares rose from 8.576 million to 10.237 million following equity issuance.
- Common shares issued in 2011 generated approximately $37.0 million net proceeds. Proceeds supported acquisitions, repayment of credit-line borrowings and general corporate purposes.
- Investing cash flow shifted from $8.061 million provided in 2010 to $46.007 million used in 2011, primarily due to property acquisitions. Financing cash flow was $22.612 million provided, versus $22.209 million used in 2010.
- Two vacant properties—Hazelwood, Missouri, following tenant bankruptcy, and Richmond, Virginia—accounted for 2.3% of annualized rental income; reported annual carrying costs were $177,000. The company was seeking replacement tenants.
- The common distribution remained $1.50 per share, equal to 98% of reported FFO per share. The credit facility limits distributions to 95% of FFO for covenant purposes; the adviser waived part of its incentive fee to support distributions.
Outlook, risks and unusual items
- No numerical earnings, acquisition or distribution guidance is provided. Management said near-term liquidity was sufficient for distributions, debt service and operating costs, and expected operating cash flow and future financing to meet longer-term needs; these expectations depend on access to capital.
- Management described capital markets as improving but still challenging. It expected to rely on regional banks, insurers and other non-bank lenders, with more limited and volatile CMBS availability, to finance investments and refinance debt.
- Material risks include tenant defaults or lease nonrenewals, concentrated tenant and industry exposure, refinancing and balloon-payment risk, line-of-credit covenants and collateral capacity, interest-rate changes, illiquid or specialized properties, environmental liabilities, and reliance on the external adviser. The five largest tenants represented approximately 23.5% of rental income; the largest tenant represented 6.9%.
- In 2010, the company recognized $3.3 million of income and prepayment fees from early repayment of its mortgage loan; this did not recur in 2011. A 2011 out-of-period adjustment related to the Orange City acquisition increased 2010 net income by $250,000, or $0.03 per share; management deemed it immaterial to both years.
- After year-end, the company issued 7.125% Series C cumulative term preferred stock, with approximately $38.5 million gross proceeds and mandatory redemption on January 31, 2017. The filing states this instrument is recorded as a liability. The auditor and management reported effective internal control over financial reporting; no material legal proceedings were reported.
Investor verification priorities
- Confirm the timing, extension terms and refinancing plan for the $45.233 million mortgage balloon and other 2013 maturities.
- Assess whether liquidity and collateral availability remain adequate after acquisitions, distributions and the line-of-credit expansion.
- Track re-leasing progress and carrying costs for vacant properties, and verify lease status and tenant credit quality for major rent contributors.
- Reconcile distributions with FFO, covenant limits and adviser fee waivers; verify whether future distributions depend on continued waivers.
- Review the terms and liability classification of the Series C preferred stock, including its mandatory redemption requirement, and monitor the effects of equity issuance on per-share FFO.