Gladstone Commercial Corporation — Q2 2013 Form 10-Q
Business context and period. The externally managed REIT invests primarily in net-leased industrial, commercial and retail properties. This unaudited report covers the three and six months ended June 30, 2013, compared with the same 2012 periods. At quarter-end, the company reported 85 properties totaling 9.0 million square feet.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $14.3 | $12.4 | $28.3 | $24.5 |
| Operating income before other expense | $6.9 | $6.4 | $13.7 | $12.7 |
| Operating margin, calculated | 48.3% | 51.4% | 48.2% | 51.8% |
| Net income | $0.45 | $0.85 | $0.88 | $2.16 |
| Net income (loss) available to common stockholders | $(0.64) | $(0.19) | $(1.29) | $0.07 |
| Diluted common EPS | $(0.05) | $(0.02) | $(0.11) | $0.01 |
| FFO available to common stockholders | $4.58 | $3.80 | $8.84 | $7.96 |
| Diluted FFO per common share | $0.36 | $0.34 | $0.74 | $0.72 |
| Common dividends declared per share | $0.375 | $0.375 | $0.750 | $0.750 |
- Cash flow: Six-month cash from operations was $7.5 million, down from $10.8 million. Investing used $38.3 million, primarily for property acquisitions and improvements; financing provided $29.3 million, including equity proceeds. Cash and cash equivalents ended at $4.0 million, versus $5.5 million at year-end 2012.
- Debt and liquidity: June 30 mortgage notes totaled $359.2 million and the line of credit had $11.2 million drawn; reported weighted-average interest rates were 5.62% on mortgages and about 3.0% on the line. The $75 million credit facility had $26.3 million of additional borrowing capacity and $5.6 million of letters of credit outstanding. Management reported $30.3 million of available liquidity, including cash and available line capacity. Series C mandatorily redeemable preferred stock was recorded as a $38.5 million liability.
- Portfolio: Net real estate was $492.2 million; total assets were $594.1 million and stockholders’ equity was $166.4 million. The weighted-average portfolio yield was reported as 9.0%, before mortgage interest expense.
Material changes versus the prior comparable periods
- Revenue rose 15% in both the quarter and six-month period, principally reflecting acquisitions, partly offset by vacancies. Six-month rental income increased 14% to $27.9 million.
- Common FFO increased 21% in Q2 and 11% for the first six months. However, GAAP net income declined, and common-stockholder results moved to a loss, as higher interest expense, depreciation and preferred distributions more than offset higher rental revenue. Six-month interest expense rose 21% to $11.4 million.
- Calculated operating margin declined from 51.4% to 48.3% in Q2 and from 51.8% to 48.2% for the first half, reflecting faster growth in operating expenses than revenue.
- During the first half, the company acquired three properties and completed an expansion at an existing property; reported acquisition and expansion spending totaled $36.7 million. Two common-stock offerings and ATM sales materially increased equity funding; common shares outstanding rose to 14.0 million from 11.1 million at December 31, 2012.
Outlook, commentary, risks and unusual items
- No specific earnings or FFO guidance was provided. Management said near-term liquidity was sufficient for distributions, debt service and operating costs, and expected operating cash flow and future financing to support longer-term needs.
- The $75 million line of credit matures in December 2013. The company was negotiating replacement financing and anticipated a new facility of similar size, but stated that failure to obtain replacement financing could require an extension request, reduced capital spending, cost reductions, an equity raise or asset sales.
- Mortgage principal payments due were $12.1 million for the remainder of 2013 and $24.5 million in 2014, including balloon maturities of $8.5 million in December 2013 and $17.3 million in June 2014. Management anticipated extending or refinancing these maturities.
- Only two properties were unencumbered at quarter-end, limiting collateral available to support additional borrowing. The company also cited competition for acquisitions and cap-rate compression amid low interest rates, alongside continuing weakness in some markets.
- Four buildings were fully or partially vacant; the associated leases represented 4.2% of annualized rental income and carrying costs were approximately $0.6 million annually. A new Hazelwood lease was signed after quarter-end. The South Hadley lease expires in January 2014; management warned the property could require impairment if it cannot extend the lease or find a replacement tenant. No properties were impaired at June 30.
- Adviser incentive-fee waivers reduced fees by $0.9 million in Q2 and $1.5 million for the first half. The waivers were irrevocable and not recoverable, but the Adviser was not obligated to continue waiving fees. Reported common dividends of $0.375 per share in Q2 exceeded diluted FFO per share of $0.36.
- After quarter-end, the company acquired office properties in Austin and Allen, Texas, for $57.0 million and $15.2 million, respectively, using cash and new mortgage debt. It also arranged additional mortgage financing and signed the Hazelwood lease.
Most important facts for investors to verify
- Progress and final terms for refinancing the December 2013 credit-facility maturity and the 2013–14 mortgage balloon payments.
- Whether operating cash flow and FFO can support the current common dividend, particularly given Q2 FFO per share below the dividend and reliance on Adviser fee waivers.
- Leasing outcomes for the remaining vacancies and the South Hadley property before its January 2014 lease expiry; assess any resulting impairment exposure.
- Acquisition funding, debt costs and dilution from recent and subsequent equity issuances, and the effect of new assets on per-share results and liquidity.