Gladstone Commercial Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless stated otherwise. Amounts are in U.S. dollars. The company is an externally managed REIT focused primarily on net-leased commercial and industrial real estate. At quarter-end it reported 85 properties totaling 9.0 million square feet.
Financial results and key metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $16.19m | $12.97m | $44.48m | $37.48m |
| Net income | $0.31m | $0.99m | $1.19m | $3.15m |
| Net income (loss) available to common shareholders | ($0.80m) | ($0.06m) | ($2.08m) | $0.01m |
| Diluted FFO per common share | $0.38 | $0.38 | $1.11 | $1.10 |
| Common dividends declared per share | $0.375 | $0.375 | $1.125 | $1.125 |
| Cash from operating activities | — | $15.57m | $18.63m |
Revenue increased 25% in Q3 and 19% year to date, chiefly reflecting properties acquired after September 2012. Operating expenses also rose, including depreciation and amortization, and interest expense increased. Revenue less operating expenses was $7.55m in Q3 (about 47% of revenue), versus $6.87m (about 53%) a year earlier; for the nine-month periods it was $21.20m (about 48%) versus $19.55m (about 52%). These are calculated from reported revenue and operating expenses, before other income and expense.
FFO available to common shareholders was $5.46m in Q3 and $14.29m for nine months, up 29% and 17%, respectively. FFO per diluted share was flat in Q3 and up 1% year to date. Common dividends were nearly equal to reported FFO per share in Q3 and slightly above it year to date. FFO is a non-GAAP measure and is not equivalent to operating cash flow.
At September 30, 2013, total assets were $666.41m and stockholders’ equity was $164.86m. Cash and cash equivalents were $4.53m; reported available liquidity was $20.7m, including $16.2m of additional borrowing capacity under the revolving facility. Mortgage notes payable were $409.76m and line-of-credit borrowings were $28.9m; the weighted-average rate on all debt was approximately 5.36%. Series C mandatorily redeemable preferred stock was recorded as a $38.5m liability. Net cash used in investing activities was $110.99m and net cash provided by financing activities was $94.40m for the first nine months.
Material changes and business developments
- The company acquired five properties and completed an expansion during the first nine months, with total purchase and expansion costs reported at $108.9m. Real estate net of depreciation increased to $545.56m from $468.02m at year-end 2012.
- It issued common shares in two public offerings and through its at-the-market program. Net proceeds from the two offerings were $48.9m; the ATM program generated about $7.7m net. Weighted-average common shares outstanding rose to 14.20m in Q3 from 10.95m a year earlier, affecting per-share comparisons.
- In August, the company replaced its prior facility with a $60m senior unsecured revolving credit facility, initially maturing in August 2016, with a one-year extension option. At quarter-end, $28.9m was drawn and $6.4m of letters of credit were outstanding; the company reported covenant compliance.
- Lease extensions included Champaign, Illinois, through 2024; Akron, Ohio, through 2024; Lexington, North Carolina, and Crenshaw, Pennsylvania, through 2026. A tenant at the Dayton, Ohio property exercised an early termination option, with rent payable through June 2015. The Hazelwood, Missouri property was re-leased from August 2013.
Outlook, risks and unusual items
- The filing provides no specific earnings or acquisition guidance. Management said near-term liquidity was sufficient for distributions, debt service and operating costs, and expected operating cash flow and future financing to support longer-term needs.
- Management described acquisition financing as dependent on access to equity and debt markets. It noted higher interest rates, acquisition competition and cap-rate compression, as well as economic and U.S. government debt-ceiling uncertainty that could raise borrowing costs or restrict financing access.
- Management identified $10.5m of mortgage principal due in the remainder of 2013 and $25.2m in 2014, including balloon payments of $8.5m in December 2013 and $17.5m in June 2014. It reported a term sheet to refinance the December maturity and said it was discussing the June maturity with lenders.
- Two buildings were fully vacant and one was partially vacant at quarter-end; together, the vacancies represented 3.3% of portfolio square footage and approximately $1.0m in annual carrying costs. The South Hadley, Massachusetts lease runs only through January 2015; management said impairment could be necessary in 2014 if it cannot extend the lease or secure a replacement tenant. No property impairment was recorded at quarter-end.
- The Adviser waived $0.99m of incentive fees in Q3 and $2.49m year to date to support distributions and comply with the credit-facility distribution covenant. The filing says the waivers cannot be recouped, but future waivers are not required.
- Other exposures include variable-rate borrowing, fixed-rate debt refinancing, tenant credit and property values. Management reported no material legal proceedings and no off-balance-sheet arrangements. The Series C preferred stock has a mandatory redemption date of January 31, 2017.
Important facts for investors to verify
- Progress and final terms for refinancing the December 2013 and June 2014 mortgage maturities.
- Whether vacant space is leased and whether the South Hadley tenant renews or a replacement tenant is found.
- Dividend coverage using FFO and cash flow, including the effect of Adviser fee waivers and the credit-facility distribution covenant.
- Acquisition returns after financing costs, and the continuing effects of share issuance, higher debt and increased interest expense on per-share results.
- Available revolver capacity, covenant compliance and refinancing needs as property collateral and letters of credit change.