Gladstone Commercial Corporation (Nasdaq: GOOD) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties. As of July 27, it owned 121 properties totaling 14.7 million square feet across 28 states; occupancy was 97.2%, and the portfolio’s average remaining lease term was 7.5 years.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Lease revenue | $33.5 million | $28.2 million | $67.1 million | $56.3 million |
| Net income | $1.0 million | $2.2 million | $3.2 million | $6.9 million |
| Net income (loss) available to common stockholders | $(1.9) million | $(0.6) million | $(2.5) million | $1.2 million |
| Common earnings (loss) per share, diluted | $(0.06) | $(0.02) | $(0.07) | $0.04 |
| FFO per common share and OP unit, basic | $0.41 | $0.38 | $0.80 | $0.78 |
| Cash from operating activities | — | $35.4 million | $29.0 million |
- Q2 operating expenses were $25.9 million, up 35.7%; the reported figures include a $1.7 million impairment charge. The filing does not provide a single overall operating margin measure.
- Six-month investing cash outflow was $70.7 million, mainly for acquisitions and property improvements. Financing provided $38.3 million; cash, cash equivalents and restricted cash rose by $3.1 million to $14.6 million.
- At June 30, total assets were $1.086 billion, total liabilities $723.3 million, and total equity $208.6 million. Debt carrying values were $465.4 million of mortgages, $42.4 million on the revolver and $159.1 million on the term loan.
- Available liquidity at June 30 was $29.1 million: $9.6 million cash and $19.5 million available credit-facility capacity. The company reported $36.0 million of facility capacity as of July 27 and compliance with credit-facility covenants at June 30.
Changes versus the prior comparable period
- Lease revenue rose 18.9% in Q2 and 19.2% in the first half. Growth reflected acquisitions and same-store revenue increases; the filing attributes same-store gains partly to lease renewals and expense recoveries.
- Common-stockholder results weakened despite higher revenue. Management cites higher depreciation and amortization following acquisitions, the $1.7 million impairment, and greater operating expenses, partly offset by lower interest expense.
- First-half net income was also affected by the absence of the $3.0 million real-estate sale gain recorded in the first half of 2019.
- Property operating expenses more than doubled year over year. The company began reporting expenses and tenant reimbursements gross for certain third-party asset-managed triple-net properties in 2020; prior-period figures were not restated, limiting comparability. Vacant properties also contributed to expense growth.
- FFO per share increased to $0.41 in Q2 and $0.80 for the first half, while GAAP common earnings per share turned negative for the first half. FFO is a non-GAAP supplemental measure, not a substitute for cash flow or GAAP earnings.
Outlook, risks and unusual items
- COVID-19 and rent collection: As of July 27, the company had collected approximately 99% of July cash base rent obligations. It had granted deferrals to three tenants representing about 2% of portfolio rents; deferred amounts were scheduled for repayment from July 2020 through March 2021. Further requests may arise, and their impact could not be quantified.
- Management said near-term liquidity was adequate and expected to address mortgage maturities through refinancing, operating cash, equity offerings and credit availability. Mortgage principal payments include $13.2 million in the second half of 2020 and $33.6 million in 2021. These are management expectations, not earnings guidance; the filing gives no quantified full-year outlook.
- The company cited uncertainty around the duration and economic effects of COVID-19, including potential effects on tenants, rents, occupancy, property values, financing access and distributions. It also highlighted interest-rate exposure and the expected transition from LIBOR to SOFR.
- Vacant space represented 4.5% of total square footage at June 30, with annual carrying costs of approximately $1.7 million. Two leases expiring in the remainder of 2020 accounted for 3.9% of first-half lease revenue.
- Subsequent events included the July 1 sale of the Maple Heights property for $11.4 million, with a reported $1.2 million gain, and repayment of its $4.0 million variable-rate debt. The company also changed its base management fee formula effective for the quarter ending September 30: from 1.5% of defined total equity to an annual 0.425% of gross tangible real estate. Incentive and other fee calculations remain unchanged.
- The company reported no material legal proceedings, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30.
Important facts for investors to verify
- Whether rent collections remain strong and deferred rents are repaid as scheduled, and whether additional tenant concessions are granted.
- How vacancy, lease expirations and the economic effects of COVID-19 affect occupancy, rental income and property valuations.
- Availability and terms of refinancing for 2020–2021 maturities, credit-facility capacity, and compliance with debt covenants.
- Cash available for distributions relative to distributions paid, given first-half common-stockholder losses and reliance on debt and equity financing.
- The effect of the new management-fee basis, ongoing incentive fees, equity issuance and potential dilution on per-share results.