Gladstone Commercial Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Gladstone Commercial is an externally managed REIT focused primarily on net-leased industrial, commercial and retail properties. At quarter-end it owned 81 properties totaling 8.1 million square feet; it reported no mortgage loan receivables. Its leases are generally long-term, with tenants typically responsible for property operating costs and taxes.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $14.035 | $12.100 |
| Operating expenses, net of Adviser credit | $7.273 | $5.797 |
| Net income | $0.433 | $1.301 |
| Net income (loss) available to common stockholders | $(0.643) | $0.259 |
| Diluted common EPS | $(0.06) | $0.02 |
| FFO available to common stockholders | $4.258 | $4.163 |
| Diluted FFO per common share | $0.37 | $0.38 |
| Cash provided by operating activities | $3.054 | $5.627 |
- Revenue rose 16%, reflecting properties acquired after Q1 2012; operating expenses increased 25%. Net income declined 67%, while common-stockholder results moved to a loss, principally due to higher interest expense and preferred-stock distributions.
- Interest expense was $5.661 million, up 24%. Depreciation and amortization rose 26% to $4.901 million. The reported net income margin was approximately 3.1% of revenue; operating income before other income and expense was $6.762 million.
- FFO increased 2%, but diluted FFO per share declined by $0.01. Common distributions declared were $0.375 per share, versus diluted FFO of $0.37 per share.
- Cash and cash equivalents were $7.279 million at March 31, up from $5.546 million at December 31, 2012. Management reported available liquidity of $11.2 million, including $3.9 million of remaining line capacity.
- Mortgage notes had a $360.2 million principal balance; the $75 million revolving credit facility had $26.4 million drawn and $6.1 million in letters of credit. Combined mortgage and line borrowings were $387.4 million. The $38.5 million Series C term preferred stock is classified as a liability and is mandatorily redeemable in 2017. Total liabilities were $445.6 million; stockholders’ equity was $123.6 million.
Material changes and operating developments
- The company acquired a New Jersey office property for $5.65 million on March 28, funded partly by a $3.7 million, 10-year mortgage at 4.16%. Rental income increased with portfolio growth; acquisition-related depreciation, amortization and financing costs also increased.
- Operating cash flow fell to $3.1 million from $5.6 million, primarily due to changes in payables and leasing-commission payments, partly offset by rental receipts from acquired properties. Investing cash use was $5.3 million; financing provided $4.0 million.
- Common equity issuance generated approximately $5.6 million gross under the ATM program. The company also received net proceeds from senior common stock issuance.
- Lease extensions in Champaign, Illinois, extended the term through 2024; the company paid $0.4 million in leasing commissions. After quarter-end, it reported extensions in Akron, Ohio, and a Wisconsin property expansion and lease amendment.
Outlook, risks and contingencies
- No formal earnings or FFO guidance was provided. Management said available liquidity was sufficient for near-term distributions, debt service and operating costs, and expected operating cash flow and future financing to support longer-term needs.
- The revolving credit facility matures in December 2013. The company was discussing replacement financing and expected a new facility, but noted fallback measures if refinancing is unavailable, including seeking an extension, reducing capital spending, cutting costs, raising equity or selling assets.
- Mortgage principal payments scheduled for the remainder of 2013 and 2014 were $13.9 million and $24.5 million, including balloon maturities of $8.5 million in December 2013 and $17.3 million in June 2014. Management was discussing extensions or refinancing.
- At quarter-end, two buildings were fully vacant and one partially vacant; together, these represented 3.3% of annualized rental income and $1.3 million of annual carrying costs. A Baytown, Texas tenant had given notice of nonrenewal for an April 2013 lease expiry. A post-quarter Hazelwood lease remained subject to tenant due diligence and termination rights.
- No property impairment was recorded, but management warned the South Hadley, Massachusetts property could require impairment if a lease expiring in January 2014 is not extended. The company also disclosed interest-rate exposure from its variable-rate credit line and property valuation/refinancing exposure to economic conditions and tenant credit quality.
- The Adviser waived $0.585 million of incentive fees in the quarter, as in Q1 2012, to support distributions and the credit-facility covenant. The waivers are irrevocable and cannot be recouped, but future waivers are not guaranteed. The company reported compliance with line-of-credit covenants and effective disclosure controls; no material legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Progress and terms of replacement financing for the December 2013 credit-line maturity, and refinancing or extension of the 2013–2014 mortgage balloons.
- Whether vacant properties are re-leased, including Baytown and the due-diligence-dependent Hazelwood lease, and whether the South Hadley tenant renews.
- Whether recurring operating cash flow and FFO can sustain distributions, especially given quarterly common distributions of $0.375 versus diluted FFO per share of $0.37.
- Availability of equity and debt financing, and the effect of additional issuance, borrowing costs and interest-rate changes on per-share results and liquidity.
- Potential impairment, leasing costs and tenant-credit exposure across the portfolio; the filing reports no clear quantified estimate of any future South Hadley impairment.