Gladstone Commercial Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Dollar amounts are in millions unless noted. The company is an externally managed REIT focused primarily on long-term net-leased commercial real estate. At quarter-end it owned 69 properties totaling 7.0 million square feet; it reported no mortgage loans outstanding.
Financial performance and position
- Q3 revenue: $11.17 million, up 8% from $10.33 million a year earlier. Rental income rose 9% to $11.09 million, mainly from acquisitions, partly offset by two vacant properties.
- Q3 earnings: Net income was $1.75 million versus $2.03 million; net income available to common stockholders was $0.71 million versus $1.00 million. Basic and diluted EPS were $0.07 versus $0.12.
- Nine-month results: Revenue was $32.51 million, up 3%; net income was $4.60 million versus $4.12 million, and income available to common stockholders was $1.48 million versus $1.05 million. EPS was $0.15 versus $0.12.
- FFO: FFO available to common stockholders was $4.34 million in Q3 versus $4.28 million; per-share FFO was $0.40 basic and $0.39 diluted, compared with $0.50. For nine months, FFO was $11.96 million versus $11.04 million; per-share FFO was $1.20 basic and $1.19 diluted versus $1.29.
- Cash flow: Nine-month operating cash flow was $14.40 million versus $13.87 million. Investing used $18.36 million, largely for acquisitions; financing used $0.69 million. Cash fell to $2.41 million from $7.06 million at year-end 2010.
- Assets, debt and liquidity: Total assets were $427.09 million. Mortgage notes payable were $266.01 million and line-of-credit borrowings $9.10 million; total debt carrying value was $275.11 million. Mortgage debt’s weighted-average rate was 5.71%; the line rate was 3.2%. Available liquidity was reported as $33.7 million, including $2.4 million cash and $31.3 million of line capacity. The company reported covenant compliance.
- Distributions: Common distributions remained $0.375 per share per quarter. Common distributions were 94% of FFO per share in both the Q3 and nine-month comparisons for 2011, versus 75% and 87%, respectively, in 2010.
Changes versus comparable periods
- Q3 common-stockholder income declined 29%, principally because 2010 included $3.31 million of other income and prepayment fees on a mortgage loan repaid early. Nine-month common-stockholder income rose 42%, reflecting lower net incentive fees, interest expense and G&A, partly offset by that prior-year income.
- Operating expenses after adviser credits were $5.18 million in Q3, down from $7.28 million; the comparison includes an $0.83 million incentive-fee credit in 2011. Nine-month expenses were $15.38 million versus $17.99 million, including $1.76 million of 2011 credits.
- Common shares outstanding increased from 8.72 million at December 31, 2010 to 10.95 million at September 30, 2011, following two public offerings that generated $37.0 million net proceeds. The proceeds were used partly to repay the credit line and fund acquisitions and general purposes.
Outlook, commentary, 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 future financing to support longer-term needs. No formal earnings or FFO guidance was provided.
- Management intended to exercise the remaining extension option on a $45.2 million mortgage in 2012, extending maturity to October 2013, subject to covenant compliance. The company had already exercised one extension through 2012. Scheduled mortgage principal payments were $49.19 million in 2012, including this balloon before the expected extension.
- At quarter-end, two properties were vacant, together representing 2.4% of annualized rental income, with annual carrying costs of $238,000. One tenant rejected its lease in bankruptcy; the company was seeking replacement tenants. A short-term South Hadley lease ran through February 2012.
- Economic weakness, tenant bankruptcy or default, constrained real-estate financing and capital-market access, and interest-rate changes were identified risks. A 1% increase in LIBOR was estimated to reduce nine-month net income by $71,000. The company had no interest-rate derivatives.
- The adviser waived $0.83 million of Q3 incentive fees and $1.76 million for the nine months; the waivers are irrevocable and not recoverable, but future waivers are not required. The line-of-credit covenant limits distributions to 95% of FFO, subject to specified adjustments.
- A $250,000 out-of-period adjustment recorded in Q1 2011 corrected an acquisition-related error that had understated 2010 net income by $250,000, or $0.03 per share. Management judged it immaterial to 2010 and not expected to be material to full-year 2011.
- Two acquisitions after quarter-end totaled $15.48 million: a Paychex-leased Ohio building and a New Jersey building, partly financed with $7.2 million of mortgage debt. The company reported no material legal proceedings, off-balance-sheet arrangements or property impairments.
Important facts for investors to verify
- Whether the expected extension of the $45.2 million mortgage is completed and how near-term maturities are refinanced.
- Leasing progress and carrying costs for vacant properties, including the status after the South Hadley lease expires.
- Distribution coverage and the effect of any reduction or cessation of discretionary adviser fee waivers.
- Remaining borrowing capacity, collateral availability, covenant headroom and the terms of financing for post-quarter acquisitions.
- Tenant credit quality, lease expirations and the assumptions underlying property valuations and impairment reviews.