Gladstone Commercial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties. As of April 27, 2016, it owned 99 properties totaling 11.0 million square feet; occupancy was 97.5% and average remaining lease term was 8.3 years.
Financial performance and position
- Revenue: Operating revenue was $21.5 million, up 8.3%. Rental revenue rose 7.1% to $20.7 million. Management attributed growth principally to properties acquired during and after Q1 2015; same-store rental revenue increased 0.4%.
- Profit and FFO: GAAP net income was $0.9 million, up from $0.7 million. After preferred and senior common distributions, the loss attributable to common stockholders was $0.4 million, or $0.02 per share, versus a $0.6 million loss, or $0.03 per share. NAREIT FFO available to common stockholders was $8.8 million, or $0.39 per share, compared with $7.7 million, or $0.38 per share. FFO is a non-GAAP measure and is not operating cash flow.
- Expenses and margins: Operating expenses increased 12.8% to $13.3 million, including depreciation and amortization of $9.1 million (up 11.3%) and property operating expenses of $1.6 million (up 67.4%). Interest expense was $6.7 million, slightly lower year over year. The filing does not provide a single reported operating-margin measure.
- Cash flow: Cash provided by operations was $8.8 million versus $8.9 million. Investing activities provided $5.8 million, mainly from collecting a $5.9 million mortgage note; investing activities used $30.7 million in Q1 2015, mainly for acquisitions. Financing activities used $14.7 million, primarily for distributions and mortgage repayments. Cash and cash equivalents ended the quarter at $5.0 million.
- Debt and liquidity: Debt carrying value was $518.0 million across mortgage notes, the line of credit and term loan; an additional $38.2 million of Series C mandatorily redeemable preferred stock was reported as a liability. Weighted average interest rates were approximately 4.63% on total debt and 4.89% on mortgages. Available liquidity at March 31 was $12.2 million, including $5.0 million cash and $7.2 million undrawn line capacity; undrawn capacity was $14.9 million on April 27. The company reported compliance with credit-facility covenants.
- Balance sheet: Total assets were $811.5 million and stockholders’ equity was $227.6 million at March 31, versus $827.2 million and $233.9 million, respectively, at December 31, 2015.
Material changes and notable items
- Revenue growth reflected acquisitions made after Q1 2015, while same-store rental revenue was nearly flat. The company made no acquisitions in Q1 2016.
- During the prior 12 months, it refinanced $78.7 million of mortgage debt at a 5.7% weighted average rate with $43.6 million of new mortgage debt at a 2.7% weighted average rate. Management said this, along with principal amortization, helped reduce interest expense.
- The company refinanced debt with an $18.5 million variable-rate mortgage in March, secured by four properties, and repaid $21.2 million of prior principal. A subsequent April refinancing added a $9.5 million mortgage on three Texas properties.
- One Dayton, Ohio property was further impaired by $43,000 and classified as held for sale. A sale agreement set a $0.2 million price; management expected the sale to close in Q2 2016. Three other properties were also classified as held for sale.
- Q1 distributions per share were unchanged from Q1 2015: common $0.375; senior common $0.2625; Series A $0.4844; Series B $0.4688; and Series C $0.4453.
Outlook, risks and contingencies
- Outlook: No numerical earnings or FFO guidance was provided. Management said it would continue leasing vacant space, renewing leases and pursuing acquisitions. It believed liquidity and future financing sources would cover near-term obligations and long-term needs, but new investment capacity depends substantially on external financing.
- Vacancy and leasing: Two buildings were fully vacant and five partially vacant; vacant space was 2.5% of total square footage, with estimated annual carrying costs of about $1.3 million. One lease expires in 2016, representing 0.1% of Q1 rental income; seven expire in 2017 (2.3%) and three in 2018 (1.7%).
- Series C redemption: The 7.125% Series C term preferred stock has a mandatory redemption date of January 31, 2017. The company said it planned to refinance it using equity before July 2016. Beginning August 31, 2016, the credit facility may require $38.5 million of liquidity if specified extension or redemption conditions are not satisfied.
- Funding and interest-rate risk: Management cited tighter lending standards, rising financing costs, acquisition competition and uncertainty in the global and U.S. economies. Variable-rate borrowings create exposure to LIBOR increases; the filing estimates a 1% LIBOR increase would raise annual interest expense by $1.2 million, before other actions. Interest-rate caps cover certain variable-rate debt.
- Other matters: The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting. Four ground leases and $3.0 million of letters of credit were disclosed.
Key facts for investors to verify
- Whether the planned equity refinancing of the Series C preferred stock was completed on time and satisfied credit-facility liquidity conditions.
- Actual proceeds and timing from the Dayton sale and disposition plans for the other held-for-sale properties.
- Leasing progress, occupancy, and carrying costs for vacant properties, particularly the two fully vacant buildings.
- Refinancing plans and execution for scheduled mortgage principal payments, including $53.5 million for the remainder of 2016 and $69.7 million in 2017, as described in management’s discussion.
- Whether FFO and operating cash generation continue to support distributions, given the common-stock loss under GAAP and the company’s ongoing financing needs.