Business context and reporting period
Gladstone Commercial Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The externally managed REIT invests primarily in commercial and industrial properties under long-term net leases. At quarter-end it owned 67 properties totaling 6.9 million square feet.
Financial performance and condition
Amounts below are in millions of dollars except per-share data.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total operating revenue | $10.816 | $10.681 | $21.334 | $21.366 |
| Net income | $1.370 | $1.006 | $2.850 | $2.093 |
| Net income available to common stockholders | $0.331 | $(0.017) | $0.772 | $0.046 |
| Basic and diluted EPS | $0.04 | $0.00 | $0.08 | $0.01 |
| Net cash from operating activities | Not presented quarterly | $9.560 | $7.065 | |
| FFO available to common stockholders (non-GAAP) | $3.806 | $3.373 | $7.617 | $6.758 |
| FFO per common share | $0.39 | $0.39 | $0.80 | $0.79 |
At June 30, total assets were $428.0 million, mortgage notes payable were $267.1 million, and line-of-credit borrowings were $8.2 million. Total debt, including the line, was $275.3 million; the weighted-average rate on mortgage debt was 5.68%. Cash and cash equivalents were $2.3 million. The company reported $32.3 million of remaining line capacity and total available liquidity of $34.6 million; $5.1 million of letters of credit were also outstanding.
Six-month operating cash flow was $9.6 million; investing activities used $16.4 million, chiefly for property acquisitions, while financing activities provided $2.1 million. Cash declined from $7.1 million at year-end 2010 to $2.3 million. Common-stock distributions were $0.375 per share in Q2, versus FFO per share of $0.39; the company reported distributions at 95% of quarterly FFO and 94% for the first half.
Changes versus the prior comparable period
- Q2 revenue rose 1% and net income rose 36%; first-half revenue was essentially flat, while net income increased 36%.
- Rental income increased with acquisitions, partly offset by two vacant properties. Mortgage-note interest income disappeared after the company’s sole mortgage loan was repaid in July 2010.
- Interest expense declined 4% in Q2 and 3% for the first half, reflecting a lower rate on a renewed mortgage and principal amortization, partly offset by assumed mortgage debt.
- Common shares issued and outstanding rose to 10.77 million from 8.72 million at December 31, 2010, following equity offerings. Stockholders’ equity increased to $139.9 million from $111.4 million.
Outlook, risks and unusual items
- Management said near-term liquidity was sufficient for distributions, debt service and operating costs, and expected operating cash flow and potential financing to support longer-term needs. No specific earnings or revenue guidance was provided.
- The company acquired two leased properties in 2011 for stated purchase prices of $10.65 million and $15.85 million. It reported a 9.4% weighted-average portfolio yield, or 9.6% assuming full occupancy.
- Two properties were vacant, representing 2.4% of annualized rental income; annual carrying costs were approximately $223,000. One vacancy followed a tenant bankruptcy and lease rejection. The company was seeking replacement tenants.
- A $45.2 million mortgage balloon was due in September 2011. The loan had extension options through 2013; management intended to exercise an option, subject to covenant compliance. The company reported compliance at quarter-end.
- The Adviser waived $445,000 of Q2 incentive fees and $931,000 for the first half to support distributions. Waivers are irrevocable and not recoupable, but future waivers are not guaranteed. The line-of-credit agreement limits distributions to 95% of FFO, subject to specified adjustments.
- Management recorded a $250,000 out-of-period adjustment in Q1 2011 related to a 2010 property acquisition, correcting an understatement of 2010 net income. Management judged it immaterial to 2010 and not expected to be material to full-year 2011.
- Interest-rate exposure includes variable-rate line borrowings; management estimated that a 1% LIBOR increase would reduce quarterly net income by about $35,000. Economic weakness, tenant credit deterioration, refinancing access and capital-market conditions remain risks. No material legal proceedings or real-estate impairments were reported.
Important facts for investors to verify
- Whether the company exercised the extension on the $45.2 million mortgage and the resulting maturity and financing terms.
- Leasing progress, tenant credit and carrying costs for the two vacant properties.
- Whether operating cash flow and future financing can sustain distributions, given common distributions near 95% of FFO and reliance in part on voluntary Adviser fee waivers.
- The impact of equity issuance and share-count growth on per-share FFO, earnings and distribution coverage.
- Acquisition performance and the assumptions behind reported portfolio yields and purchase-price allocations.