Gladstone Commercial Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unless otherwise noted, financial amounts are in millions. The company is an externally managed REIT focused primarily on office and industrial properties.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Lease revenue | $33.4 | $33.5 | $68.0 | $67.1 |
| Net income | $2.1 | $1.0 | $2.2 | $3.2 |
| Net loss attributable to common stockholders | $(3.0) | $(1.9) | $(6.0) | $(2.5) |
| Basic/diluted common loss per share | $(0.08) | $(0.06) | $(0.17) | $(0.07) |
| Diluted FFO per share and OP unit | $0.30 | $0.40 | $0.71 | $0.80 |
| Diluted FFO per share and OP unit, adjusted for comparability | $0.36 | $0.40 | $0.76 | $0.80 |
- Q2 operating expenses were $25.0 million, down 3.3%; interest expense was $6.5 million, down 3.4%. For the six months, expenses rose 3.9% to $51.9 million, while interest expense declined 2.3% to $13.7 million.
- Cash provided by operations was $34.4 million for the first half, versus $35.4 million a year earlier. Investing used $17.1 million and financing used $14.1 million. Cash, cash equivalents and restricted cash totaled $19.2 million at June 30.
- At June 30, total assets were $1.089 billion, total liabilities $714.2 million, and total equity including non-controlling interests $204.7 million. Net real estate was $902.5 million.
- Debt carrying value was $660.1 million; mortgage principal was $454.4 million and Credit Facility borrowings were $210.0 million. Weighted-average rates were 4.20% on mortgages and approximately 3.50% on all debt. The company had $22.9 million of additional Credit Facility capacity at June 30.
- Available liquidity was reported as $37.5 million at June 30, comprising $14.6 million cash and $22.9 million available borrowing capacity; capacity was $18.4 million as of August 9. The company reported compliance with Credit Facility covenants.
Changes versus the comparable period
- Q2 revenue was nearly flat year over year. First-half revenue increased 1.3%, supported by same-store rent growth and acquisitions; same-store revenue rose 4.0% for the half.
- Q2 net income increased, but common-stockholder losses widened, reflecting preferred distributions and a $2.1 million write-off of Series D offering costs. First-half net income declined 33.0%; the common loss also included a $0.9 million net loss on property sales.
- First-half FFO per share fell 11.3% to $0.71; adjusted diluted FFO per share fell 5.0% to $0.76. Q2 adjusted diluted FFO per share was $0.36 versus $0.40.
- The company acquired two industrial properties for $19.3 million and sold two non-core properties for $5.5 million gross proceeds, recording an $0.9 million loss. The prior-year half included five acquisitions totaling $72.0 million and a $1.7 million impairment charge; no impairment was recorded in 2021.
Outlook, commentary and risks
- No formal earnings or FFO guidance is provided. Management said it expects to continue selling non-core properties when reasonable opportunities arise and to redeploy proceeds to acquisitions or debt repayment.
- Management reported collecting 100% of June 2021 cash base rent and approximately 99% of July rent as of August 9. Occupancy was 96.5% as of that date; vacant space represented 3.5% of area and carried approximately $4.2 million in annual expenses.
- COVID-19 effects remain uncertain, including tenant payment capacity, office-space demand, leasing, property values, financing availability and distributions. Management cited continued industrial demand but weaker office-market conditions. It stated near-term liquidity was adequate.
- Mortgage principal due was $16.9 million in the second half of 2021 and $105.9 million in 2022. Management expects to address maturities through refinancing, operating cash, equity issuance and Credit Facility availability; refinancing and capital-market access remain risks.
- Interest-rate exposure is partly managed with caps and swaps. Management’s sensitivity analysis estimates a 1% LIBOR increase would raise annual interest expense and reduce net income by $2.4 million. LIBOR’s anticipated transition to SOFR is being monitored.
- On June 28, the company issued $100.0 million gross of 6.00% Series G preferred stock, receiving approximately $96.6 million net, and used the proceeds to redeem all Series D preferred stock, which carried a 7.00% rate. Subsequent events included a $22.1 million industrial acquisition in Missouri and a $15.0 million Term Loan B draw in July.
Most important facts for investors to verify
- Whether FFO and cash generation adequately cover distributions: Q2 diluted FFO was $0.30 per share/OP unit versus a common distribution of $0.37545; first-half figures were $0.71 and $0.75090, respectively.
- Leasing progress, occupancy and tenant retention, particularly given vacant-space costs, lease contractions or terminations, and the company’s office-market exposure.
- Execution and cost of refinancing the 2021–2022 mortgage maturities, available facility capacity, and effects of higher rates or the LIBOR-to-SOFR transition.
- Performance of acquired properties and the Missouri portfolio, and results from planned non-core property sales and capital recycling.
- Effects of equity issuance and preferred-stock financing on dilution, distributions and the company’s capital costs.