Gladstone Commercial Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties.
Financial and operating highlights
| Metric | Q1 2020 | Q1 2019 / prior balance date |
|---|---|---|
| Lease revenue | $33.6 million | $28.1 million; up 19.5% |
| Net income | $2.3 million | $4.7 million |
| Net income (loss) available to common stockholders | $(0.6) million; $(0.02) per share | $1.8 million; $0.06 per share |
| FFO available to common stockholders and non-controlling OP unitholders | $13.5 million; $0.39 per share | $11.9 million; $0.39 per share |
| Net cash provided by operating activities | $20.3 million | $12.6 million |
| Cash and cash equivalents | $9.9 million | $6.8 million at December 31, 2019 |
| Total assets | $1.10 billion | $1.04 billion at December 31, 2019 |
| Debt carrying value, net | $666.2 million | $626.6 million at December 31, 2019 |
Operating expenses rose 25.0% to $24.1 million. Property operating expenses more than doubled to $6.2 million, partly because certain triple-net property costs and tenant reimbursements began to be reported gross in 2020 rather than net. Accordingly, year-over-year revenue and expense comparisons include a presentation change. Interest expense was nearly flat at $7.3 million. A $3.0 million property-sale gain in Q1 2019 did not recur; Q1 2020 recorded a $12,000 loss on sale.
Operating cash flow improved, while investing activities used $68.7 million, principally for acquisitions; financing activities provided $51.5 million. The company acquired five properties for approximately $72.0 million, totaling 890,038 square feet, with a 14.8-year weighted-average lease term. It sold one non-core property for $4.1 million. The common distribution was $0.37545 per share for the quarter; basic FFO per share was $0.39.
Material changes and capital position
- As of April 28, 2020, the company reported 122 properties totaling 15.1 million square feet across 28 states, 96.6% occupancy, and a 7.5-year average remaining lease term.
- Available liquidity at March 31 was $27.1 million: $9.9 million cash and $17.2 million available under the credit facility. Facility availability was reported at $29.5 million as of April 28.
- Debt included $490.6 million of mortgage principal and $181.6 million outstanding under the revolver and term loan, with $12.6 million in letters of credit. The company reported covenant compliance. Weighted-average rates were 4.32% on mortgages and approximately 2.60% on the credit facility.
- During the quarter, Gladstone raised $27.9 million net by issuing 1.3 million common shares through its ATM program, and borrowed $37.7 million on the term loan and $35.9 million in mortgage debt. Common shares outstanding increased to 33.9 million at March 31 from 32.6 million at year-end.
- Debt principal payments scheduled for the remainder of 2020 were $28.5 million, including balloon maturities. On April 24, the company repaid $18.0 million of mortgage debt using cash and credit-facility borrowings.
Outlook, risks, and unusual items
- COVID-19: Management said it collected all Q1 cash base rent. By April 28, it had collected approximately 98% of April cash base rent and granted deferrals to three tenants representing about 2% of portfolio rents. Deferred amounts were scheduled for repayment from July 2020 through March 2021. Further requests and their financial effects were uncertain.
- Management described near-term liquidity as adequate and said credit-facility capacity could cover near-term obligations and operating costs. It expected to address upcoming mortgage maturities through refinancing, operating cash, equity offerings, and facility availability; these are expectations, not assured outcomes.
- The filing identifies pandemic-related risks to tenant rent payments, occupancy, rental rates, property values, financing access, debt refinancing, distributions, and capital-market access. Management cited a diversified tenant base and limited exposure to retail, hospitality, airlines, and oil and gas.
- There is no specific earnings or FFO guidance in the supplied filing text. The company said it would monitor liquidity and the pandemic. Its ATM plans are subject to market conditions: management said it did not anticipate using the programs until share prices stabilized, while also describing ATM issuance as a potential 2020 liquidity source.
- Interest-rate exposure remains relevant: debt includes variable-rate borrowings, partly hedged by caps and swaps. The filing also discusses the anticipated transition from LIBOR to SOFR. Derivative-related other comprehensive loss was $2.5 million for the quarter.
- No held-and-used property impairments were identified in Q1. Management cautioned that future impairments could be significant if market conditions deteriorate or leasing assumptions weaken. No material legal proceedings or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether April rent collections remained strong and whether tenant deferrals, modifications, or defaults increased after the April 28 disclosure.
- Actual refinancing or repayment of 2020–2021 mortgage maturities, subsequent facility availability, and continued covenant compliance.
- How much of reported revenue growth reflects acquired properties and contractual rent increases versus the 2020 gross presentation of tenant reimbursements.
- Whether operating costs at vacant and triple-net properties, lease expirations, and leasing activity affect occupancy and cash flow.
- Future ATM or preferred-stock issuance, dilution and associated costs, including the status and terms of any Series F offering.
- Whether FFO and cash generation continue to cover distributions, debt service, and planned investment needs.