Gladstone Commercial Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. The company is a REIT focused primarily on owning net-leased industrial, commercial and retail properties. At quarter-end it owned 77 properties totaling 7.6 million square feet; reported gross and net carrying values, including lease intangibles, were $549.2 million and $464.9 million.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $12.410 million | $10.816 million | $24.507 million | $21.334 million |
| Net income | $0.854 million | $1.370 million | $2.155 million | $2.850 million |
| Net income available to common shareholders | $(0.192) million | $0.331 million | $0.067 million | $0.772 million |
| Diluted EPS, common | $(0.02) | $0.04 | $0.01 | $0.08 |
| FFO available to common shareholders | $3.800 million | $3.806 million | $7.963 million | $7.617 million |
| Diluted FFO per common share | $0.35 | $0.39 | $0.73 | $0.80 |
Amounts are in U.S. dollars. The filing presents FFO as a non-GAAP supplemental measure, not as a substitute for GAAP income or operating cash flow.
- Cash flow: Six-month operating cash flow was $10.767 million, versus $9.560 million a year earlier. Investing used $46.296 million, chiefly for property acquisitions; financing provided $36.473 million. Cash ended at $4.273 million.
- Assets and liabilities: Total assets were $497.335 million at June 30, up from $453.147 million at December 31, 2011. Mortgage notes were $314.769 million; the $75 million revolving credit facility had no borrowings. Series C term preferred stock of $38.5 million is classified as a liability and its distributions as interest expense. Total liabilities were $369.697 million.
- Debt and liquidity: Mortgage debt was fixed-rate, with a 5.72% weighted-average rate. Reported available liquidity was $26.4 million, comprising $4.3 million cash and $22.1 million available under the line, net of facility constraints; $6.1 million of letters of credit were outstanding. Only two properties were unencumbered, limiting potential collateral for additional line availability.
- Margins: The filing does not provide a clearly defined operating-margin measure. Total operating expenses were $6.027 million for the quarter and $11.824 million for the half-year. Interest expense was $4.885 million and $9.458 million, respectively.
Changes versus comparable periods
- Revenue increased 15% for both the quarter and half-year, primarily reflecting ten properties acquired after June 30, 2011. The company acquired five properties during the first half of 2012.
- Net income fell 38% for the quarter and 24% for the half-year. Common-shareholder income fell to a quarterly loss and declined 91% for the half-year, mainly because of higher interest expense and distributions on newly issued Series C preferred stock, partly offset by higher rents.
- Interest expense rose 16% for the quarter and 13% for the half-year. Depreciation and amortization rose 15% in each period, reflecting acquisitions. Due diligence expense increased, including costs related to acquisitions and potential transactions.
- FFO available to common shareholders was nearly flat for the quarter and up 5% for the half-year, while diluted FFO per share declined 11% and 8%, respectively.
Outlook, risks and unusual items
- Capital allocation and distributions: Common distributions were $0.375 per share for the quarter and $0.750 for the half-year, compared with diluted FFO per share of $0.35 and $0.73. The Adviser waived portions of incentive fees to support distributions; it indicated an intention to continue, but is not obligated to do so. The waivers are not recoupable.
- Refinancing: A $45.2 million mortgage was due to mature in 2012 and had an extension option through 2013, subject to covenant compliance. Management said it intended to extend or refinance it. The filing also identifies substantial mortgage principal maturities in 2013–2017. The line of credit matures December 2013.
- Tenant and property exposure: Two properties were vacant—Hazelwood, Missouri, following a tenant bankruptcy, and Richmond, Virginia. Together they represented 2.0% of annualized rental income; annual carrying costs were $0.2 million. The company was seeking replacement tenants. Management reported the other properties occupied and tenants paying under leases.
- Market and interest-rate risks: Management described continuing economic uncertainty and constrained, volatile real-estate financing markets. The principal market risk identified was interest rates; variable-rate line borrowings were zero at quarter-end, but fixed-rate debt’s fair value is rate-sensitive. The company had no derivatives. Tenant credit deterioration, vacancies, refinancing conditions and real-estate values could adversely affect results.
- Acquisitions and leasing: Five first-half acquisitions had purchase prices totaling approximately $42.6 million, before acquisition expenses. Reported acquisition-related diligence expenses were charged as incurred. Roseville, Minnesota remained only partly leased under an extension; management was seeking tenants for the remainder.
- Other items: The company issued $38.5 million of 7.125% Series C term preferred stock, mandatorily redeemable January 31, 2017. A nonmaterial out-of-period adjustment for 2010 acquisition-related errors was recorded in Q1 2011; the filing states it understated 2010 net income by $0.3 million, or $0.03 per share. No property impairment was recorded. No material legal proceedings or off-balance-sheet arrangements were reported.
- Subsequent event: On July 24, 2012, the company borrowed $9.8 million at 5.6%, secured by a property, for future acquisitions and working capital.
- Guidance: The filing provides no specific numerical earnings or FFO guidance.
Investor verification priorities
- Confirm the status and refinancing terms of the $45.2 million mortgage maturity and the broader upcoming debt schedule.
- Assess whether operating cash flow and FFO can sustain distributions, particularly given common distributions per share exceeded reported diluted FFO per share in both periods.
- Verify the Adviser’s future incentive-fee waivers and the company’s compliance with the line-of-credit distribution covenant.
- Review tenant credit, lease rollover and re-leasing progress for the vacant properties and the partly leased Roseville building.
- Track leverage, collateral availability, acquisition funding needs and access to mortgage and equity markets.