Gladstone Commercial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparison is with the three months ended March 31, 2023. Gladstone Commercial is an externally managed REIT focused primarily on industrial and office properties. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Lease revenue | $35.721 | $36.554 | Down 2.3% |
| Operating expenses, net of incentive-fee waiver | $23.315 | $24.664 | Down 5.5% |
| Interest expense | $9.497 | $8.828 | Up 7.6% |
| Net income | $3.526 | $3.167 | Up 11.3% |
| Net income available to common stockholders | $0.304 | $0.041 | Up $0.263 |
| Basic and diluted common EPS | $0.01 | $0.00 | Higher |
| FFO per common share and OP Unit, basic and diluted | $0.34 | $0.37 | Down 8.1% |
| Cash from operating activities | $15.023 | $14.919 | Up $0.104 |
Net income margin was approximately 9.9% of lease revenue, versus 8.7% in Q1 2023. FFO, a non-GAAP measure, declined despite higher GAAP net income; management cites lower revenue, higher interest costs, current-period incentive fees and other factors.
- Cash flow: Investing activities provided $18.468 million, principally from property sales. Financing activities used $34.708 million, including $19.797 million of mortgage principal repayments and $15.181 million of distributions paid. Cash, cash equivalents and restricted cash ended at $14.918 million.
- Debt and liquidity: Debt carrying value was $719.356 million at quarter-end; gross principal was approximately $724.0 million. Credit Facility borrowings were $446.0 million, at a weighted average rate of approximately 6.80%. Mortgage debt carried a weighted average rate of 4.16%; weighted average interest rate on all debt was 5.78%. Available liquidity was $57.8 million, including $10.5 million cash and $47.3 million available Credit Facility capacity. Capacity was $49.1 million on May 6, 2024.
- Balance sheet: Total assets were $1.105 billion, down from $1.133 billion at December 31, 2023. Total liabilities were $786.9 million; redeemable preferred stock classified as mezzanine equity was $170.0 million; total equity was $148.3 million.
Material changes and notable items
- Lease revenue fell by $0.833 million. Same-store lease revenue increased 0.8%, but revenue from acquired and disposed properties declined 45.7%, principally reflecting sales of properties since March 2023. Fixed lease payments declined 1.1% and variable lease payments declined 10.9% year over year.
- Interest expense increased $0.669 million, primarily from higher costs on variable-rate debt and interest-rate-cap maturities. Management reported a 5.34% SOFR rate at March 31.
- The company sold three non-core properties during the quarter for aggregate gross proceeds of $19.523 million, recording a $0.283 million net gain on sale, a $0.300 million gain on debt extinguishment and a $0.493 million impairment on a held-for-sale property. It repaid two mortgages totaling $17.674 million. Two properties remained classified as held for sale at quarter-end.
- The company recorded a $1.171 million incentive fee, partly offset by a $0.771 million adviser waiver. Q1 2023’s incentive fee had been contractually eliminated.
- The filing revises previously reported Q1 2023 results for errors in depreciation calculations on certain tenant-funded improvements. The correction increased reported Q1 2023 net income by $0.770 million to $3.167 million and changed common-stockholder results from a $0.729 million loss to $0.041 million income. Management said the errors were immaterial to the affected periods’ financial statements; FFO was unchanged.
- Subsequent to quarter-end, the company sold its Egg Harbor, New Jersey property on April 30 for $2.6 million, realizing a $0.05 million loss. Through May 6, it raised $0.7 million net from common-stock sales.
Outlook, risks and management commentary
- No specific earnings, revenue or FFO guidance is provided. Management expects to continue selling non-core properties when reasonable opportunities arise, using proceeds for target-market acquisitions or debt reduction. It continues to pursue industrial growth and to re-lease vacant space.
- Management reported collecting 100% of outstanding cash rents in Q1. As of May 6, the portfolio comprised 131 properties across 27 states, with 98.9% occupancy and a 6.9-year average remaining lease term. At March 31, vacant space was 1.1% of total square footage, with approximately $1.8 million in annual carrying costs. Remaining-2024 lease expirations represented 4.8% of Q1 lease revenue.
- Management believes near-term liquidity is adequate and says it expects to refinance upcoming maturities. Mortgage principal scheduled for payment was $14.3 million for the remainder of 2024 and $27.1 million in 2025. The company was in compliance with Credit Facility covenants at March 31; $47.3 million was then available to draw.
- Key risks include uncertain interest rates and inflation, variable-rate borrowing costs, refinancing and capital-market access, tighter lending standards, tenant credit and leasing conditions, and office-sector weakness. Management characterized industrial fundamentals as comparatively resilient and office conditions as challenged. A 1-percentage-point increase in SOFR was estimated to reduce annual net income by $0.770 million, based on the filing’s assumptions.
- The company is externally managed by affiliates controlled by its chairman and CEO. Q1 fees included base management, administration and incentive fees; amounts due to the adviser and administrator were $2.9 million at March 31. Management reported effective disclosure controls, no material change in internal controls, no material legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Review the Q1 2023 depreciation correction and its effects on previously filed results and future comparative disclosures.
- Assess whether operating cash flow and available borrowing capacity can support distributions, debt service and maturities amid elevated variable rates and refinancing needs.
- Track the timing, proceeds and use of further property sales, and leasing progress for vacant space and upcoming expirations.
- Monitor FFO per share, which declined 8.1%, alongside GAAP income and the effects of adviser incentive fees and waivers.
- Evaluate exposure to office-market weakness, tenant credit, geographic and industry concentration, and the terms and potential dilution of future equity issuance.