Gladstone Commercial Corporation (Nasdaq: GOOD) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; filed November 7, 2022. The company is an externally managed REIT focused primarily on office and industrial properties. Financial amounts below are in millions of dollars unless noted.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Lease revenue | $39.8 | $34.3 | $111.8 | $102.4 |
| GAAP net income | $2.5 | $4.5 | $7.5 | $6.7 |
| Net income (loss) available to common shareholders | ($0.6) | $1.4 | ($1.8) | ($4.5) |
| Basic and diluted common EPS | ($0.02) | $0.04 | ($0.05) | ($0.13) |
| FFO per common share and OP unit, diluted | $0.43 | $0.44 | $1.21 | $1.14 |
| Cash provided by operating activities | Not presented by quarter | $56.9 | $53.7 |
- Q3 revenue rose 16.0%; nine-month revenue rose 9.2%. Nine-month fixed lease payments increased 9.6% and variable lease payments increased 6.2%.
- Q3 operating expenses increased 46.9% to $37.4 million, including a $10.7 million impairment charge. Interest expense rose 36.2% to $9.1 million in Q3 and 12.2% to $22.8 million for the nine months.
- Q3 net income included an $8.9 million net gain on property sales. Nine-month GAAP net income increased 12.0%, while common-stockholder losses narrowed. Nine-month FFO per share increased; Q3 FFO per share declined slightly. FFO is a non-GAAP measure.
- The filing does not provide a clear headline operating-margin measure.
- At September 30, total assets were $1,209.7 million and total liabilities were $822.0 million. Debt carrying value was $741.8 million; mortgage principal was $370.3 million. The weighted-average rate on all debt was approximately 4.31%.
- Cash and cash equivalents were $13.5 million; restricted cash was $4.1 million. Reported available liquidity was $69.5 million, including $56.0 million of credit-facility availability; availability fell to $35.5 million by November 7.
- Common and preferred distributions paid during the first nine months totaled $53.0 million. Common distributions were $1.1286 per share for the period.
Material changes and operating activity
- The company acquired 11 industrial properties for an aggregate $98.3 million, with a 13.8-year weighted-average lease term at acquisition, and sold three non-core properties for $28.0 million in aggregate. It reported an $8.9 million net gain on those sales.
- Same-store lease revenue grew 2.7% in Q3 but only 0.2% over nine months. Acquisitions and dispositions materially contributed to reported revenue growth.
- Common-stock ATM sales generated $40.6 million net proceeds from 2.0 million shares during the nine months; Series F preferred sales generated $3.7 million. Common shares outstanding increased to 39.6 million from 37.5 million at year-end 2021.
- Cash used in investing was $75.5 million, primarily for acquisitions; financing provided $23.1 million, reflecting equity issuance and borrowing activity, partly offset by mortgage repayments and distributions.
- The amended and expanded credit facility added a $150 million Term Loan C, increased the revolver commitment to $125 million, and extended maturities. The company incurred approximately $4.2 million of related fees and reported compliance with facility covenants at quarter-end.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It expects to continue acquiring industrial properties and selling non-core assets, using proceeds for acquisitions or debt repayment. It also expects to use its common-stock ATM program as a source of liquidity.
- Management believes near-term liquidity is adequate and expects to refinance upcoming mortgages. Mortgage principal due was $16.0 million for the remainder of 2022 and $66.1 million in 2023; refinancing may depend on new debt, credit-facility capacity, or equity issuance.
- Two properties were held for sale at September 30. A held-and-used property was written down by $10.7 million, and a separate held-for-sale property incurred a $1.4 million impairment. Management warns further impairments could occur if market conditions weaken or leasing assumptions deteriorate.
- Vacant space represented 3.1% of portfolio square footage, with approximately $3.8 million in annual carrying costs. The portfolio had seven partially vacant and three fully vacant buildings. Management reported no outstanding COVID-19-related rent modifications.
- Management cited inflation, rising and volatile interest rates, potential recession, office-sector weakness, tenant credit risk, construction costs, supply-chain and labor constraints, and LIBOR-to-SOFR transition uncertainty. Variable-rate borrowing increases sensitivity to rate changes, although the company uses caps and swaps.
- Subsequent events included a $12.0 million industrial acquisition in Denver, a $2.3 million Columbus property sale, and $6.6 million of acquisition financing, swapped to a 5.90% fixed rate.
- The company is externally managed by affiliates controlled by its CEO; it recorded $4.7 million of base management fees, $4.2 million of incentive fees and $1.3 million of administration fees for the first nine months. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether recurring property operations and cash generation support distributions, given common-shareholder GAAP losses and the distinction between FFO and cash flow.
- Remaining borrowing capacity, debt maturities, refinancing terms and the effect of higher rates on interest expense and liquidity.
- Leasing progress at vacant properties, tenant retention and credit quality, and the sustainability of same-store revenue growth.
- The assumptions and valuations behind the $12.1 million of impairments, the property-sale gain, and any subsequent dispositions.
- The economics and dilution from ATM equity issuance, preferred-stock financing and related-party management fees.