Gladstone Commercial Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. The company is an externally managed REIT focused primarily on office and industrial properties. As of May 2, 2017, it owned 94 properties totaling 10.9 million square feet across 24 states; occupancy was 97.9%, and the portfolio’s average remaining lease term was 7.6 years.
Financial performance and position
- Revenue: Operating revenue was $22.3 million, up 3.7% from $21.5 million. Rental revenue increased 6.3% to $22.0 million.
- Profit: Net income was $4.4 million versus $0.9 million. Net income available to common stockholders was $1.7 million, or $0.07 per share, compared with a $0.4 million loss, or ($0.02) per share.
- FFO: FFO available to common stockholders rose 8.5% to $9.5 million, but basic and diluted FFO per share declined to $0.38 from $0.39. Common distributions declared were $0.375 per share for the quarter.
- Cash flow: Operating cash flow was $10.5 million, up from $8.8 million. Investing activities provided $10.0 million, including property-sale proceeds; financing activities used $21.1 million. Cash and cash equivalents ended at $4.1 million.
- Debt and liquidity: Total debt carrying value, net of financing costs, was $496.3 million. Mortgage principal was $412.1 million at a 4.66% weighted-average rate; the Revolver and Term Loan had $89.2 million outstanding at a weighted-average rate of 3.22%. Available liquidity was $23.9 million, including $19.8 million of Revolver capacity at quarter-end; stated capacity increased to $25.0 million by May 2. The company reported covenant compliance.
- Balance sheet: Total assets were $833.0 million and total liabilities were $525.4 million at March 31, 2017.
Material changes versus Q1 2016
- Net income improved by $3.5 million, chiefly reflecting a $5.9 million gain on a property sale and lower interest expense, partly offset by a $3.7 million impairment charge and higher depreciation and amortization.
- Rental revenue rose with acquisitions completed after March 2016 and leasing of previously vacant space. Same-store rental revenue was nearly flat, up 0.1%.
- Interest expense fell to $6.2 million from $6.7 million, reflecting refinancing and debt repayments at lower rates. The company also repaid $35.4 million of mortgages during the quarter.
- FFO per share decreased despite higher total FFO, as the weighted-average common share count increased.
Outlook, risks and unusual items
- Management said near-term liquidity was sufficient for distributions, debt service and operating costs, and expected to refinance mortgages coming due in 2017 and 2018 using new mortgage debt and additional equity. No earnings or FFO guidance was provided.
- The company sold a non-core property for $12.8 million, recognizing a $5.9 million gain, and used proceeds toward debt repayment. Two held-and-used properties incurred $3.7 million in impairment charges after potential buyers expressed interest and revised sale scenarios indicated carrying values were not recoverable.
- A property classified as held for sale at quarter-end was sold on April 7 for $2.1 million, with a $0.1 million loss.
- Interest-rate exposure is material: management estimated that a 1% increase in LIBOR would raise annual interest expense and reduce net income by about $1.5 million. The company uses interest-rate caps on certain variable-rate debt.
- Management cited uncertainty in economic conditions, financing costs, real estate markets and tenant performance. Vacant space represented 2.1% of total square footage, with approximately $0.7 million in annual carrying costs. Two leases expire in 2017 and three in 2018.
- The company is externally managed by affiliates controlled by its CEO; related-party base management and incentive fees were $1.2 million and $0.6 million, respectively, for the quarter.
Investor verification priorities
- Assess how much of the reported earnings improvement depends on the $5.9 million sale gain, and review the assumptions behind the $3.7 million impairment.
- Verify refinancing plans and funding for $27.3 million of mortgage principal due during the remainder of 2017 and $46.5 million due in 2018.
- Monitor Revolver availability, variable-rate exposure, interest-rate-cap coverage and covenant compliance.
- Compare recurring FFO per share with the $0.375 quarterly common distribution and track dilution from ATM equity issuance.
- Track occupancy, vacant-property carrying costs, lease expirations and tenant retention; review related-party management arrangements and fees.