Gladstone Commercial Corporation — Q3 2016 Form 10-Q
Business context and reporting period
Externally managed REIT focused primarily on office and industrial properties. This unaudited filing covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. As of October 31, 2016, the company reported 97 properties totaling 11.0 million square feet, 97.7% occupancy, and a 7.9-year average remaining lease term.
Financial performance and condition
- Revenue: Q3 operating revenue was $21.6 million, up 1.0% from $21.4 million a year earlier. Nine-month revenue was $64.4 million, up 3.8% from $62.0 million. Rental revenue increased 2.7% for the quarter and 4.7% year to date.
- Profit and per-share results: Q3 net loss was $73,000, versus a $96,000 loss; the loss attributable to common stockholders widened to $2.33 million, or $0.10 per share, from $1.38 million, or $0.06 per share. Nine-month net income was $1.67 million, versus $1.03 million, while the common-stockholder loss widened to $3.39 million from $2.79 million, or $0.15 versus $0.13 per share.
- FFO: Non-GAAP FFO available to common stockholders was $8.9 million, or $0.38 per share, for Q3, compared with $8.2 million, or $0.39 per share. Nine-month FFO was $26.4 million, or $1.15 per share, compared with $24.0 million, or $1.15 per share. Common distributions were $0.375 per share for Q3 and $1.125 for nine months. FFO is not a substitute for GAAP earnings or operating cash flow.
- Cash flow: Nine-month operating cash flow was $29.8 million, up from $24.9 million. Investing used $35.2 million, compared with $76.5 million, chiefly reflecting lower acquisition spending and proceeds from asset sales and collection of the mortgage note. Financing provided $9.0 million, versus $46.7 million. Cash and cash equivalents were $8.7 million at quarter-end.
- Debt and liquidity: Mortgage principal was $449.3 million; $72.3 million was outstanding under the line of credit and term loan facility. The company reported a 4.71% weighted-average mortgage rate and 6.4-year remaining weighted-average mortgage maturity; the weighted-average rate on all debt was approximately 4.47%. Available liquidity at September 30 was $36.1 million, including $27.4 million of line-of-credit availability; availability increased to $38.9 million by October 31. The company reported compliance with facility covenants.
- Other balance-sheet items: Total assets were $838.6 million and total liabilities were $545.5 million at September 30. Five properties were classified as held for sale, with $11.7 million of related assets.
Changes versus the prior comparable period
- Rental revenue growth reflected acquisitions; same-store rental revenue rose only 0.6% in Q3 and 0.7% for nine months. The company acquired two properties for $40.9 million during the nine-month period, compared with five properties for $71.2 million in the prior-year period.
- Operating expenses increased 11.2% in Q3 and 10.2% for nine months. Depreciation and amortization rose, and impairment charges were $1.8 million in Q3 and $2.0 million for nine months, principally related to properties held for sale.
- Interest expense fell 11.3% in Q3 and 6.0% for nine months, reflecting refinancing at lower rates and debt amortization. The Series C term preferred stock was fully redeemed during 2016, reducing related distributions; Series D preferred stock was issued, increasing preferred distributions attributable to stockholders.
- Net loss attributable to common stockholders worsened despite higher revenue and lower interest expense, primarily due to impairments and increased preferred distributions. Nine-month results also compare against a $2.5 million prior-year incentive-fee credit.
- Capital activity included $55.1 million of net proceeds from Series D preferred placements, $12.5 million from Series D ATM sales, $17.7 million from common-stock ATM sales, and $2.8 million from Series B preferred ATM sales. Proceeds helped redeem $38.5 million of Series C and repay debt.
Outlook, commentary, and risks
- Management stated that near-term liquidity was sufficient for distributions, debt service, and operating costs and expected to refinance 2016 and 2017 maturities. Mortgage principal payments scheduled were $10.2 million for the remainder of 2016 and $70.4 million for 2017. This is management’s expectation, not a guarantee.
- The company anticipated selling four of the five held-for-sale properties during Q4 2016 and the Hazelwood, Missouri property in Q2 2017. These are stated expectations; actual timing and proceeds may differ.
- Management cited uncertainty in the U.S. and global economies, potentially rising interest rates and financing costs, tighter lender spreads, and weaker investment-sales activity. Higher LIBOR would increase financing costs; the filing estimates a $1.4 million annual net-income reduction for a 1-percentage-point LIBOR increase, based on September 30 balances and assumptions.
- Vacant space was 2.3% of portfolio square footage at September 30, with estimated annual carrying costs of approximately $0.7 million. Management identified one fully vacant building and five partially vacant buildings. Lease expirations in 2017 and 2018 represented 0.7% and 1.3% of nine-month rental income, respectively.
- Subsequent events included declared October–December distributions at the reported rates, a $7.0 million commitment to expand the Vance, Alabama property in connection with a new 10-year lease, and a five-year extension of the Wichita, Kansas lease. The incoming CFO appointment was effective November 1, 2016.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the expected sales of held-for-sale properties closed on schedule and at values consistent with the impairment estimates.
- Debt refinancing progress and access to equity or credit markets, particularly for the $70.4 million of 2017 scheduled mortgage principal payments.
- Occupancy, lease renewals, and leasing outcomes for vacant or partially vacant properties, including the Vance expansion and Wichita lease extension.
- Whether FFO and cash generation support distributions after debt service, preferred distributions, and capital requirements; FFO is a non-GAAP measure.
- The effect of preferred and common equity issuance on per-share results, capital costs, and the adviser’s fee calculations.