Gladstone Commercial Corporation — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed February 15, 2022. The company is an externally managed REIT focused primarily on leased industrial and office properties. At year-end it owned 129 properties totaling 16.2 million square feet across 27 states; occupancy was 97.2%, with a 7.2-year average remaining lease term.
Financial performance and position
- Revenue: Lease revenue was $137.7 million, up 3.4% from $133.2 million in 2020.
- Earnings: Net income was $9.7 million, down 35.0%. Net loss attributable to common stockholders was $4.6 million, or $0.12 per share, versus income of $3.1 million, or $0.09 per share, in 2020. Results included a $1.1 million net loss on property sales and a $2.1 million write-off of Series D preferred-stock issuance costs.
- FFO: Diluted FFO was $57.6 million, or $1.54 per share, versus $55.0 million, or $1.56, in 2020. Diluted FFO adjusted for comparability was $59.7 million, or $1.60 per share. Common distributions declared were $1.5022 per share.
- Cash flow: Operating cash flow was $70.1 million, up from $65.5 million. Investing activities used $94.8 million and financing activities provided $21.8 million. Cash and cash equivalents were $8.0 million at year-end.
- Debt and liquidity: Debt principal was approximately $711.4 million, comprising $452.9 million of mortgage debt and $258.6 million outstanding under the credit facility. The weighted-average interest rate on all debt was 3.39%. Available liquidity was $29.2 million at year-end, including $21.2 million of revolver capacity; revolver capacity was $24.8 million on February 15, 2022. The company reported compliance with credit-facility covenants.
- Margins and assets: Operating expenses were $102.8 million, leaving $34.9 million before interest and other items. Total assets were $1.14 billion and stockholders’ equity was $201.3 million.
Changes versus 2020
- Lease revenue grew 3.4%, with growth from acquisitions and same-store properties; properties with vacancy generated lower lease revenue.
- Operating expenses increased 2.9%, including higher depreciation and incentive fees. No impairment charge was recorded in 2021, compared with $3.6 million in 2020.
- Net income fell as the prior-year property-sale gain was replaced by a 2021 sale loss, and depreciation increased following acquisitions. Other income included $2.4 million, net, from legal settlements.
- Operating cash flow increased, while year-end cash and cash equivalents declined from $11.0 million to $8.0 million.
Outlook, risks and notable items
- Management said near-term liquidity was adequate, expected to refinance 2022 and 2023 mortgage maturities, and intended to continue acquiring industrial properties and recycling capital through non-core property sales. No quantified earnings or FFO guidance was provided.
- Mortgage principal of $105.2 million was scheduled for 2022, including nine balloon payments; the filing separately identifies $95.2 million of balloon payments due during 2022. Management expects to address maturities using refinancing, revolver availability, operating cash and possible equity issuance.
- The company acquired 11 properties for $100.5 million and sold three non-core properties for $9.5 million in 2021. It raised $36.6 million net through common-stock sales and $96.6 million net from Series G preferred stock, using the latter proceeds to redeem Series D preferred stock.
- Management reported collecting 100% of 2021 outstanding rent by February 15, 2022. It highlighted continued uncertainty from COVID-19, office-market weakness, inflation, supply-chain and labor constraints, rising interest rates, and refinancing conditions.
- Key exposures include tenant credit and lease renewals, tenant and industry concentration, leverage and refinancing risk, variable-rate debt and the LIBOR-to-SOFR transition, property illiquidity, environmental liabilities, and reliance on an affiliated external adviser. The five largest tenants contributed 13.1% of lease revenue; telecommunications contributed 16.5%.
- Bob Cutlip planned to retire and resign as president around June 30, 2022; Arthur “Buzz” Cooper was appointed co-president in January 2022. The auditor issued an unqualified opinion and reported effective internal control over financial reporting. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the $105.2 million of 2022 mortgage principal, including balloon maturities, was refinanced or repaid on acceptable terms.
- Subsequent occupancy, lease renewals, tenant credit quality and rent collections, particularly for vacant or expiring space.
- Whether cash flow and FFO support distributions after preferred and senior-common distributions, debt service and capital needs; the credit facility limits distributions to 96% of FFO.
- The effect of additional common or preferred equity issuance on dilution, financing costs and distribution obligations.
- How interest-rate movements and the LIBOR transition affect borrowing costs, and whether adviser fees and other related-party arrangements remain appropriate.