Gladstone Commercial Corporation (GOOD) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Gladstone Commercial is an externally managed REIT focused primarily on owning and managing office and industrial properties. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Lease revenue | $36.4 | $33.4 | $71.9 | $68.0 |
| Net income | $1.6 | $2.1 | $5.0 | $2.2 |
| Net income margin | 4.3% | 6.4% | 6.9% | 3.2% |
| Net loss attributable to common stockholders | $(1.5) | $(3.0) | $(1.2) | $(6.0) |
| Diluted FFO per common share and OP unit | $0.39 | $0.30 | $0.78 | $0.71 |
| Cash from operating activities | — | — | $34.6 | $34.4 |
- Second-quarter revenue rose 9.1%; first-half revenue increased 5.7%. First-half net income more than doubled, while common stockholders still recorded a loss after preferred and senior common distributions.
- First-half operating cash flow was nearly flat year over year. Investing used $57.8 million, primarily for acquisitions; financing provided $25.3 million. Cash, cash equivalents and restricted cash totaled $15.2 million at June 30.
- Total assets were $1.19 billion and total liabilities $809.2 million at June 30. Debt carrying value was $734.0 million, comprising $462.8 million of mortgage debt, $47.0 million drawn on the revolver and $224.2 million of term loans, net.
- Mortgage debt principal totaled $465.8 million, with a 4.18% weighted average rate and 3.7-year weighted average maturity. Credit Facility borrowings totaled $272.0 million at a weighted average 3.68% rate. The company reported covenant compliance.
- June 30 available liquidity was $29.1 million: $10.7 million cash and $18.4 million available Credit Facility capacity. Capacity was reported as $34.6 million on August 1.
- Common and OP-unit distributions declared were $0.37620 per share/unit for Q2, versus $0.37545 a year earlier. First-half distributions paid across common, senior common, preferred and OP-unit interests totaled $35.0 million.
Material changes and operating developments
- The company acquired seven industrial properties for $51.9 million in the first half, totaling 742,303 square feet with an 11.7-year weighted-average lease term. It acquired two properties for $19.3 million in the first half of 2021.
- Revenue growth was supported by acquisitions and leasing activity. Same-store revenue increased 1.0% in Q2 but declined 1.0% for the first half; acquisitions and properties with vacancy contributed to reported growth.
- Interest expense increased 9.8% in Q2, primarily from higher costs on variable-rate debt. First-half interest expense was up 0.4%.
- A $1.4 million impairment was recorded on a Parsippany, New Jersey property classified as held for sale. Three properties, with $18.4 million of assets, were held for sale at quarter-end; the Jupiter, Florida property was sold July 1 for $19.0 million, with an $8.0 million net gain.
- The company raised $31.7 million net through common-stock ATM sales and $2.9 million through Series F preferred stock issuance in the first half. Common-share issuance increased shares outstanding.
Outlook, commentary and risks
- No formal numerical earnings or FFO guidance is provided. Management said near-term liquidity was adequate and expects to meet upcoming mortgage maturities through refinancing, operating cash, Credit Facility availability and/or equity issuance. It expects to continue using its common-stock ATM program.
- As of August 1, management reported 135 properties totaling 16.9 million square feet in 27 states, 97.5% occupancy, and a 7.0-year average remaining lease term. It reported collecting all outstanding rent for 2021 and the first half of 2022, with no COVID-related rent modifications outstanding.
- Management cited inflation, higher interest rates, supply-chain disruption, labor shortages, possible recession, geopolitical uncertainty and continuing COVID-19 effects as potential pressures on tenants, property values, financing costs and access to capital. It also noted weaker office demand and stronger industrial-space demand.
- Variable-rate exposure is material: the filing estimates that a 1% LIBOR increase would raise annual interest expense and reduce net income by about $1.9 million; increases of 2% and 3% would reduce net income by about $2.6 million and $3.3 million, respectively. Caps and swaps hedge some exposure. Management is monitoring LIBOR’s transition to SOFR.
- Mortgage principal payments scheduled for the remainder of 2022 and 2023 were $72.9 million and $83.6 million, respectively. Management believes it can refinance maturities, but execution depends on capital-market and lender availability.
- Other items: the Adviser and Administrator agreements were renewed through August 31, 2023; the company is externally managed by affiliates of its chairman/CEO and pays management, incentive and administration fees. The filing reported no material legal proceedings, material risk-factor changes, or material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether rent collection, occupancy and leasing trends remain strong, particularly for office properties and vacant space (2.7% of square footage vacant at June 30; approximately $4.2 million annual carrying costs).
- How 2022–2023 debt maturities are refinanced, and the effect of rising rates, variable-rate debt and the LIBOR-to-SOFR transition on interest expense and liquidity.
- Whether acquisitions and leasing produce sufficient recurring cash flow to cover distributions, debt service and external-management fees; GAAP common-stockholder losses persisted despite higher FFO.
- Completion and proceeds of planned property sales, including the reported Jupiter sale, and any further impairment charges or changes in property values.
- Equity issuance and dilution, distribution coverage, and the continued availability and terms of debt and equity financing.