Gladstone Commercial Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Gladstone Commercial is an externally managed REIT focused primarily on net-leased commercial, industrial and retail properties, with selective mortgage lending. At quarter-end, it owned 101 properties totaling 11.1 million square feet.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total operating revenue | $20.7 million, up 13% year over year | $40.6 million, up 14% |
| Net income (loss) | $0.4 million (2014: $1.2 million) | $1.1 million (2014: loss of $12.3 million) |
| Net income (loss) available to common stockholders | Loss of $0.9 million; loss per share $0.04 | Loss of $1.4 million; loss per share $0.07 |
| FFO available to common stockholders | $8.1 million; diluted FFO per share $0.37 | $15.7 million; diluted FFO per share $0.74 |
| Net cash from operating activities | $16.5 million for six months (2014: $11.0 million) |
All dollar amounts are U.S. dollars. Rental revenue increased 14% for the quarter and 15% for the six months, primarily reflecting acquisitions. Same-store rental revenue declined 3.0% and 2.2%, respectively. Quarterly FFO per share was below the $0.375 common distribution per share; six-month FFO per share was below the $0.75 distribution.
At June 30, total assets were $830.3 million, total liabilities $599.5 million and stockholders’ equity $230.9 million. Mortgage notes payable were $487.3 million and line-of-credit borrowings were $45.2 million. The weighted-average mortgage rate was 5.11%; the line rate was approximately 2.94%. Cash and cash equivalents were $3.3 million. Management reported total available liquidity of $14.4 million at quarter-end, comprising cash and $11.1 million of line availability; as of August 3, additional line availability was $9.2 million. The company reported compliance with line-of-credit covenants.
Changes versus prior comparable periods
- Quarterly net income fell to $0.4 million from $1.2 million; common-stockholder results shifted from $0.01 earnings per share to a $0.04 loss per share. The prior-year quarter included a $1.24 million real estate sale gain, while interest expense and depreciation and amortization increased.
- Six-month net income improved to $1.1 million from a $12.3 million loss, and the common-stockholder loss narrowed. The 2014 period included a $13.96 million impairment charge, partly offset by a $1.24 million sale gain.
- FFO available to common stockholders increased 42% in Q2 to $8.1 million and 34% for the six months to $15.7 million. Diluted FFO per share rose to $0.37 from $0.34 for Q2 and to $0.74 from $0.71 for the six months.
- Operating cash flow rose to $16.5 million from $11.0 million, while investing used $63.2 million and financing provided $41.4 million during the first half.
Investments, financing and outlook
- The company acquired four properties in the first half for $58.2 million, financed partly with $32.0 million of associated debt. It also issued $30.4 million of equity net of offering costs and raised mortgage borrowings; cash declined by $5.3 million over the period.
- Management described the economic recovery as uncertain, noted rising acquisition competition and potential increases in borrowing costs, and said it remained focused on leasing vacant space, renewing leases and acquisitions. Vacant space was less than 3% of total square footage, with annual carrying costs of about $0.7 million. Several buildings were fully or partially vacant; management said these properties represented less than 3% of projected 2015 rental income.
- Management said available liquidity should meet near-term needs and anticipated refinancing 2015–2016 mortgage maturities with a combination of new mortgage debt and additional equity. No numerical earnings or FFO guidance was provided.
- On July 24, 2015, the company amended its advisory agreement, effective July 1. The annual base management fee rate changed from 2.0% to 1.5% of adjusted equity. The incentive fee now uses Core FFO, an 8% annualized hurdle and a 15% share above the hurdle, with a fee cap; the agreement also added a 15% capital-gains fee and a termination fee. Management said it expected the revised agreement to support FFO and distribution growth and improve competitiveness in attracting professionals.
- Subsequent events included an Atlanta property acquisition for $13.0 million, a Raleigh lease expected to bring occupancy to approximately 93%, and refinancing activity. One Columbus property was classified as held for sale, with a sale expected in Q4 2015; another Columbus property sale was anticipated in November 2015.
Risks, contingencies and unusual items
- Interest-rate exposure is a principal market risk. The filing estimates that a 1% increase in one-month LIBOR would increase annual interest expense and reduce net income by about $0.7 million, based on quarter-end balances and assumptions. Variable-rate debt includes the line of credit and mortgage loans; interest-rate caps provide partial protection.
- Debt maturities and refinancing access are material risks. Scheduled mortgage principal payments were $19.3 million in the second half of 2015 and $100.1 million in 2016; management discussed refinancing plans. A $38.5 million Series C term preferred stock issue is mandatorily redeemable January 31, 2017.
- Tenant credit, vacancies, lease expirations, property values and economic conditions could affect rental income and refinancing capacity. Management noted upcoming tenant departures and ongoing re-leasing efforts.
- The amended advisory agreement’s no-cause termination fee equals twice the adviser’s average annual base and incentive fees for the preceding 24 months, subject to stated approval and notice requirements. The filing identifies this as a risk that could constrain termination and affect distributions.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It reported no material changes to internal control over financial reporting.
Investor facts to verify
- Whether acquisitions, planned property sales and lease-up efforts convert into sustained rental and same-store revenue growth.
- Coverage and sustainability of common distributions relative to FFO: Q2 diluted FFO was $0.37 per share versus a $0.375 distribution.
- Available liquidity, line-of-credit availability and the company’s ability to refinance upcoming 2015–2016 maturities on acceptable terms.
- Exposure to variable rates and the effectiveness and cost of interest-rate caps as debt levels change.
- The economic and governance effects of the amended adviser fee structure, including the capital-gains and termination fees.