Gladstone Commercial Corporation — Q1 2014 Form 10-Q
Business context and reporting period. This externally managed REIT invests primarily in net-leased industrial, commercial and retail properties. This unaudited filing covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. At quarter-end, the company reported 89 properties totaling 9.3 million square feet.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total operating revenue | $17.1 million | $14.0 million; up 22% |
| Rental revenue | $16.6 million | $13.7 million; up 21% |
| GAAP net income (loss) | $(13.5) million | $0.4 million |
| Net loss attributable to common stockholders; diluted loss per share | $(14.6) million; $(0.93) | $(0.6) million; $(0.06) |
| FFO available to common stockholders; diluted FFO per share | $6.0 million; $0.38 | $4.3 million; $0.37 |
| Cash provided by operating activities | $6.2 million | $3.1 million |
| Cash and cash equivalents | $5.8 million | $8.5 million at Dec. 31, 2013 |
| Mortgage notes and line of credit | $450.9 million | $447.0 million at Dec. 31, 2013 |
| Total assets; total liabilities | $678.9 million; $509.0 million | $690.5 million; $507.4 million at Dec. 31, 2013 |
Amounts above are rounded; filing financial statements are generally stated in thousands. Q1 investing cash outflow was $6.3 million and financing cash outflow was $2.6 million; cash declined $2.7 million during the quarter. Reported total liabilities include $38.5 million of Series C mandatorily redeemable preferred stock. The mortgage portfolio’s weighted-average interest rate was 5.4%; the line of credit balance was $24.1 million at approximately 3.2%. Management reported $24.7 million of available liquidity at March 31, comprising cash and $18.9 million of additional line-of-credit borrowing capacity.
Material changes and notable items
- Revenue increased mainly because eight properties had been acquired since Q1 2013. Depreciation and amortization rose 37%, property operating expenses rose 80%, and interest expense increased 11%.
- A $14.0 million impairment charge on the Roseville, Minnesota property drove the swing to a GAAP loss. A prospective tenant did not sign a lease, and management revised its expected holding period to the June 2014 mortgage maturity. FFO, a non-GAAP measure that adds back real-estate depreciation and impairment, rose 42%; diluted FFO per share was $0.38 versus $0.37.
- Q1 acquisitions in Allen and Colleyville, Texas totaled $10.0 million, with $6.3 million of mortgage debt assumed. Subsequent to quarter-end, the company acquired a Rancho Cordova, California property for $8.2 million, partly funded with $4.9 million of new mortgage debt.
- The Sterling Heights, Michigan property was classified as held for sale after its tenant exercised a right of first refusal; the company anticipated a Q2 2014 closing. The agreed price exceeded carrying value, but the sale had not closed at filing.
- Shares issued through the at-the-market common-stock program generated approximately $7.2 million of net proceeds in the quarter; senior common issuance generated another $0.3 million net.
Outlook, risks and contingencies
- Management said available liquidity was sufficient for near-term distributions, debt service and operating costs, and expected operating cash flow and future financing to meet longer-term needs. No quantified earnings or FFO guidance was provided.
- The company had a $17.5 million balloon mortgage payment due in June 2014 on the impaired Roseville property and was in discussions with the lender for a mutually acceptable solution. Total scheduled mortgage principal payments were $22.8 million for the remainder of 2014 and $42.6 million in 2015.
- South Hadley, Massachusetts may require impairment if the company cannot extend the lease or find a replacement tenant; its lease had been extended through January 2015. A Newburyport, Massachusetts tenant subsequently declined its renewal option; rent and operating expenses continue through April 30, 2015.
- Two buildings, in Baytown, Texas and Richmond, Virginia, were fully vacant; together they represented less than 1% of portfolio square footage, with annual carrying costs of about $0.3 million. Management was seeking tenants.
- Management identified dependence on external debt and equity financing, interest-rate exposure, tenant credit and leasing risks, and economic and real-estate market conditions. A 1% increase in one-month LIBOR was estimated to increase annual interest expense by $327,000. The company was in compliance with its line-of-credit covenants at quarter-end.
- The line-of-credit covenant limits stockholder distributions to 100% of FFO, with specified acquisition costs added back. The adviser waived $1.205 million of incentive fees in Q1, leaving a net incentive fee of about $40,000; the filing says future waivers are not required. Common distributions declared were $0.375 per share for the quarter, compared with diluted FFO of $0.38 per share. FFO is non-GAAP and is not cash flow from operations.
- The company disclosed $3.6 million of committed tenant-improvement payments for 2014, primarily for the Canton, North Carolina expansion. It also reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress and terms of the Roseville loan maturity resolution, and whether the property or South Hadley requires further impairment.
- Whether the Sterling Heights sale closed as anticipated and the effect of the Newburyport non-renewal on occupancy and rental income.
- Actual liquidity and borrowing availability after subsequent acquisitions, debt transactions, and distributions; also monitor upcoming mortgage maturities and covenant compliance.
- Whether distributions remain supported by recurring cash flows and FFO, including the adviser’s future incentive-fee waivers; assess FFO alongside GAAP results and operating cash flow.
- Performance of recent acquisitions and vacant properties, and the company’s ability to refinance or raise capital on acceptable terms.