Gladstone Commercial Corporation — Q1 2022 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2022. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties, generally leased on a net basis. As of May 4, 2022, it owned 133 properties totaling 16.6 million square feet across 27 states; occupancy was 97.2%, and the portfolio’s average remaining lease term was 7.1 years.
Financial performance and condition
- Revenue: Lease revenue was $35.5 million, up 2.5% from $34.7 million. Fixed lease payments increased 1.9% and variable lease payments increased 7.1%.
- Profit: GAAP net income was $3.4 million, versus $38,000 a year earlier. Net income available to common stockholders was $322,000, compared with a $3.0 million loss; preferred and senior common distributions materially reduce earnings available to common holders. Basic and diluted EPS was $0.01 versus a loss of $0.08.
- FFO: Non-GAAP FFO available to common stockholders and non-controlling OP unitholders was $15.0 million, up 2.9%; FFO per share and unit was $0.39 versus $0.40. Distributions declared per common share and OP unit were $0.3762.
- Cash flow: Operating cash flow was $17.2 million versus $16.9 million. Investing used $17.6 million, primarily for two acquisitions and property improvements; financing provided $1.9 million. Cash, cash equivalents and restricted cash totaled $14.7 million at quarter-end.
- Debt and interest: Mortgage notes and credit-facility borrowings totaled $705.4 million net of financing adjustments. The weighted-average rate on all debt was 3.52%; mortgage debt averaged 4.19%, and credit-facility debt averaged 2.35%. Credit-facility borrowings were $259.6 million; $20.5 million of letters of credit were outstanding.
- Liquidity: Available liquidity at March 31 was $35.2 million: $9.6 million of cash and $25.6 million of additional credit-facility capacity. Capacity was $21.7 million as of May 4. Management said near-term liquidity was adequate and the company was in compliance with debt covenants.
Material changes versus Q1 2021
- Revenue rose 2.5%, reflecting acquisitions and leasing of previously vacant space. Same-store lease revenue fell 3.0%, primarily because Q1 2021 included accelerated rent from early lease terminations.
- Total operating expenses fell 4.6%, mainly because depreciation and amortization declined after prior-year accelerated charges. Interest expense decreased 8.1%; the prior-year quarter also included a $0.9 million net loss on property sales.
- The company acquired two industrial properties for $13.5 million, with a weighted-average remaining lease term of 10.2 years. It sold no properties during the quarter.
- It raised $20.3 million net through its common-stock ATM program and $1.4 million net from Series F preferred stock sales. Common shares outstanding increased during the quarter.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management intends to continue acquiring industrial properties, leasing vacant space, renewing leases and refinancing debt maturities.
- Management reported collection of 100% of rent due for calendar 2021 and Q1 2022 as of May 4, 2022. Vacant space represented 3.0% of total square footage at March 31, with approximately $3.6 million in annual carrying costs. 2022 lease expirations represented 4.2% of lease revenue.
- Mortgage principal payments of $101.7 million were scheduled for the remaining nine months of 2022 and $72.7 million for 2023. Management expects to address maturities through refinancing, facility availability, operating cash flow and equity issuance.
- Key risks include rising interest rates, inflation, supply-chain disruption, labor shortages, COVID-19 effects on office demand and tenants, and the ability to refinance debt and access capital markets. LIBOR-based variable-rate debt also faces the anticipated transition to SOFR. The filing estimates that a 1% increase in LIBOR would raise annual interest expense and reduce net income by $2.8 million, based on March 31 balances and stated assumptions.
- After quarter-end, the company acquired a two-property portfolio for $19.3 million, refinanced $14.8 million of debt with a two-year variable-rate note, and issued $10.0 million of fixed-rate debt at 4.0% to finance the acquisition. It also reported additional ATM equity proceeds through May 4.
- The company is externally managed by affiliates controlled by its chairman and CEO; Q1 recorded base management, incentive and administration fees of $1.5 million, $1.3 million and $0.5 million, respectively. No material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the scheduled 2022–2023 mortgage maturities are refinanced on acceptable terms, particularly as interest rates rise.
- Whether occupancy, lease renewals and new leasing can offset same-store revenue declines and the carrying costs of vacant properties.
- How much liquidity remains after subsequent acquisitions, debt refinancing, distributions and further equity issuance.
- The sensitivity of earnings and cash flows to variable rates, hedge coverage and the LIBOR-to-SOFR transition.
- The impact of continued common and preferred stock issuance on dilution, distributions and capital costs; FFO is a non-GAAP measure and is not equivalent to operating cash flow.