Gladstone Commercial Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties.
Financial results and position
- Revenue: Q2 operating revenue was $22.9 million, up 7.6% year over year; six-month revenue was $45.2 million, up 5.6%. Rental revenue rose 7.6% in Q2 and 7.0% year to date. Same-store rental revenue was nearly flat, down 0.4% in Q2 and 0.1% for six months.
- Profit: Q2 net income was $0.7 million, versus $0.9 million; after preferred and senior common distributions, the common-stockholder loss was $2.0 million, or $0.08 per share, versus a $0.6 million loss, or $0.03 per share. Six-month net income was $5.0 million, versus $1.7 million; the common-stockholder loss narrowed to $0.3 million, or $0.01 per share, from $1.1 million, or $0.05 per share.
- FFO: FFO available to common stockholders, a non-GAAP measure, was $10.1 million ($0.40 per basic share) in Q2, up from $8.8 million ($0.39 per share). Six-month FFO was $19.6 million ($0.78 per basic share), versus $17.5 million ($0.77 per share).
- Cash flow: Six-month operating cash flow was $21.4 million, versus $17.8 million. Investing activities provided $14.9 million, mainly from property sales; financing used $35.9 million. Cash and cash equivalents ended at $5.0 million.
- Debt and liquidity: June 30 debt principal was approximately $490.3 million, including $427.5 million of mortgage principal and $62.8 million under the credit facility. Weighted-average mortgage and total-debt interest rates were 4.65% and 4.50%, respectively. Available liquidity was $41.1 million: $5.0 million cash and $36.1 million revolver capacity. The company reported compliance with credit-facility covenants.
- Balance sheet and distributions: Total assets were $831.6 million and total liabilities were $515.2 million. Common distributions were $0.375 per share for Q2, unchanged year over year. Preferred-stock distributions increased, including as Series D issuance expanded.
Material changes and notable transactions
- Q2 rental growth reflected acquisitions, leasing of previously vacant space, and an expansion; same-store rents were slightly lower. The six-month revenue increase also included a $0.6 million lease-termination fee.
- Three non-core properties were sold in the first half for aggregate proceeds of $25.8 million. The company reported a $4.0 million net gain on sales for the six-month period, but a $1.9 million net loss on sales in Q2.
- Six-month impairment charges were $4.0 million, largely recorded in Q1 on properties in Ohio and Massachusetts. A further $0.3 million impairment was recorded in Q2 on the Newburyport, Massachusetts property, which was under contract for sale.
- Common and Series D preferred ATM sales raised $17.9 million and $6.9 million, respectively, net, in the first half. Common shares outstanding increased; the company also issued additional common and Series D shares after quarter-end.
Outlook, risks, and contingencies
- Management said available liquidity and expected operating cash flow and financing were sufficient for near-term operating needs and distributions, and expected to refinance 2017–2018 mortgage maturities. Scheduled mortgage principal was $26.8 million for the remainder of 2017 and $47.1 million in 2018, including two 2017 balloon payments. These are expectations, not guarantees.
- Management cited volatile interest rates, potentially rising borrowing costs, uncertain economic conditions, tighter lender standards, and possible effects on tenants and access to capital. A 1% increase in one-month LIBOR was estimated to increase annual interest expense by $1.34 million; the filing also presents larger effects for 2% and 3% increases.
- At July 31, 2017, the portfolio comprised 98 properties across 24 states, with 97.1% occupancy and a 7.7-year average remaining lease term. Vacant space was 3.1% of square footage at June 30, with approximately $0.9 million in annual carrying costs. Tenant concentration was limited: the largest tenant represented 5.4% of first-half rental income.
- After quarter-end, Gladstone acquired a Philadelphia property for $26.4 million and a three-property Florida portfolio for $51.4 million, funded with cash, equity, and mortgage debt. It also completed a common-stock offering and overallotment, raising $26.1 million net in total. These subsequent events affect financing and portfolio scale but are not included in June 30 results.
- Other items: four ground leases carried $6.6 million of future minimum payments; $1.0 million of letters of credit was outstanding. The company reported no material off-balance-sheet arrangements, material legal proceedings, or material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the Newburyport sale closed as expected and the final proceeds and any further impairment or sale gain/loss.
- Refinancing terms and funding for the scheduled 2017–2018 mortgage maturities, and current revolver availability and covenant headroom.
- Post-quarter acquisitions’ financing, lease termination provisions, tenant concentration, and contribution to rent and cash flow.
- Common and preferred share issuance, dilution, distribution coverage, and the sustainability of distributions relative to recurring cash flow and FFO.
- How much reported earnings and FFO depend on property sales, impairments, acquisition activity, and other non-recurring items.