Gladstone Commercial Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company is an externally managed REIT focused primarily on office and industrial properties.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Lease revenue | $28.2 | $26.6 | $56.3 | $52.9 |
| Net income | $2.2 | $2.5 | $6.9 | $7.1 |
| Net income (loss) available to common stockholders and OP unitholders | $(0.6) | $(0.3) | $1.2 | $1.5 |
| Basic FFO per share/unit, non-GAAP | $0.38 | $0.40 | $0.78 | $0.81 |
| Net cash provided by operating activities | — | $29.0 | $26.0 |
- Q2 common EPS was $(0.02), versus $(0.01) in Q2 2018; six-month EPS was $0.04, versus $0.05.
- For the six months, total operating expenses rose 9.7% to $38.3 million and interest expense rose 11.7% to $14.2 million. The filing reports no standalone operating or net margin measure.
- At June 30, total assets were $969.8 million; total liabilities were $620.1 million; stockholders’ equity was $259.4 million, plus $4.7 million of non-controlling OP interests.
- Debt carrying values were $451.5 million of mortgage notes, $50.6 million under the revolver and $74.7 million under the term loan. Total debt principal was approximately $581.9 million; the weighted-average rate on all debt was 4.52%. The company reported covenant compliance.
- Cash and cash equivalents were $7.6 million, with $2.8 million restricted. Reported available liquidity was $30.6 million, including $23.0 million of facility availability at quarter-end.
- Operating cash flow was $29.0 million; investing activities used $41.9 million and financing activities provided $14.3 million. Cash, cash equivalents and restricted cash increased $1.3 million to $10.4 million.
Material changes versus the prior comparable period
- Six-month lease revenue increased 6.4%, principally reflecting acquisitions and contractual rent increases. Same-store lease revenue rose 1.0%; acquired and disposed properties contributed a larger increase.
- Six-month net income declined 3.5%, while income available to common stockholders and OP unitholders fell 18.3%. Higher interest expense and depreciation/amortization partly offset revenue growth. The 2019 period included a $3.0 million gain on sale, compared with $1.8 million in 2018.
- Six-month FFO increased 3.9% in total to $23.9 million, but basic FFO per share/unit decreased 3.7% to $0.78, reflecting a higher share/unit base. Q2 basic FFO per share/unit was $0.38, compared with the $0.375 common distribution per share/unit.
- Six properties were acquired for $46.6 million, with 13.7 years of weighted-average lease term and $3.8 million annualized GAAP rent. One non-core property was sold for $6.85 million, producing a $2.95 million gain.
- The company raised $33.3 million net through its common-stock ATM program, selling 1.6 million shares. Common shares outstanding increased from 29.3 million at year-end to 30.9 million at June 30.
Outlook, risks and notable items
- No quantified earnings or FFO guidance was provided. Management said near-term liquidity should cover distributions, debt service and operating costs, and expects to refinance upcoming mortgage maturities using new debt and additional equity as needed.
- On July 2, 2019, after quarter-end, the credit facility was amended and upsized: the revolver commitment increased to $100 million and the term loan to $160 million, with maturities in 2023 and 2024, respectively. The amendment reduced pricing by 10 basis points at each leverage tier; fees were approximately $1.3 million. Available borrowing capacity was reported as $40.6 million at July 30.
- Management cited uncertain economic conditions, potentially peaking property pricing and transaction volumes, tenant and real estate market risks, refinancing needs, and interest-rate exposure. Variable-rate debt was based on LIBOR; management was monitoring the anticipated LIBOR-to-SOFR transition. Derivatives include caps and swaps.
- Occupancy was 98.8% as of July 30; vacant space was 1.2% of square footage, with annual carrying costs of about $0.4 million. Lease expirations represented 2.4% of first-half lease revenue for the rest of 2019, 8.1% for 2020 and 8.0% for 2021.
- Quarter-end mortgage principal due included $24.2 million in the second half of 2019 and $32.9 million in 2020. Management expects to address maturities through refinancing, operating cash, equity offerings and facility availability.
- Subsequent to quarter-end, the company acquired a fully leased industrial property in Denton, Texas, for $6.5 million, with a 12-year lease and $0.5 million annualized GAAP rent. It also raised $2.6 million net from common-stock ATM sales through July 30.
- Four ground leases resulted in a $5.9 million operating lease liability. The company reported no material off-balance-sheet arrangements, material legal proceedings or material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether acquisition-driven rent growth and high occupancy can offset rising interest, depreciation and property operating costs.
- Debt refinancing timing and terms, facility availability after the July amendment, floating-rate exposure and the LIBOR transition.
- Common-share issuance and dilution from ATM activity, and whether FFO per share/unit continues to cover distributions.
- Tenant credit quality, lease rollover outcomes, vacant-property leasing progress and concentration by industry and geography.
- Related-party management arrangements and fees: the adviser recorded a $0.9 million Q2 incentive fee and a $1.3 million base fee; the adviser agreement was renewed through August 31, 2020.