Gladstone Commercial Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is an externally managed REIT focused primarily on office and industrial properties.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Lease revenue | $34.3m | $33.1m | $102.4m | $100.3m |
| GAAP net income | $4.5m | $2.8m | $6.7m | $6.1m |
| Net income margin | 13.1% | 8.6% | 6.5% | 6.1% |
| Net income (loss) available to common shareholders | $1.4m | $(0.1)m | $(4.5)m | $(2.6)m |
| FFO per common share and non-controlling OP unit, diluted | $0.44 | $0.39 | $1.14 | $1.19 |
- Q3 lease revenue rose 3.6% year over year; nine-month revenue rose 2.1%. Nine-month same-store lease revenue increased 3.4%.
- Nine-month net cash from operations was $53.7m, versus $52.4m. Investing used $46.0m and financing used $8.6m. Cash, cash equivalents and restricted cash totaled $15.2m at period end.
- At September 30, total assets were $1.105bn and total liabilities $733.0m. Net carrying value of mortgage notes was $448.0m; term loans, net, were $224.0m; revolver borrowings were $2.1m. Gross debt obligations were approximately $678.1m. Weighted average interest rates were 4.19% on mortgages and 3.45% on all debt.
- Reported available liquidity was $36.3m: $10.2m cash and $26.1m available credit capacity. Credit facility availability was $28.2m on November 1. The company reported compliance with credit facility covenants.
- Quarterly common distributions were $0.37545 per share. Nine-month diluted FFO per share was $1.14, compared with distributions of $1.12635 per share.
Material changes and notable items
- Q3 net income increased 58.2%, aided by $2.4m net income from legal settlements recorded in other income and higher lease revenue. The settlements are non-recurring; they also contributed to higher incentive fees payable to the Adviser.
- Nine-month common shareholders’ loss widened, primarily reflecting an $882,000 net property-sale loss and a $2.1m write-off of Series D preferred issuance costs. The latter followed the June redemption of all Series D preferred shares.
- The company issued $100.0m gross of 6.00% Series G preferred stock and used net proceeds of approximately $96.6m to redeem the 7.00% Series D preferred stock. It also raised $24.1m net through common-stock ATM sales and $4.9m net from Series F preferred sales during the nine months.
- Eight properties were acquired for $46.2m in the first nine months; two non-core properties were sold for $5.5m gross proceeds. At November 1, the company reported 127 properties, 15.7m rentable square feet, 97.5% occupancy and a 7.2-year average remaining lease term.
- Depreciation and amortization rose 8.5% for the nine months, while interest expense declined slightly. No impairment charge was recorded in 2021, compared with $2.9m in 2020.
Outlook, risks and contingencies
- No quantified earnings or FFO guidance is provided. Management expects to continue acquiring industrial properties and selling non-core assets as opportunities arise, and plans to use ATM programs as a liquidity source.
- Management expects to address mortgage maturities through refinancing, operating cash flow, equity issuance and credit availability. Mortgage principal due was $13.6m for the remainder of 2021 and $105.8m in 2022.
- Management reported collection of 100% of September cash base rent and approximately 100% of October cash base rent as of November 1. It cited near-term liquidity as adequate, while noting that pandemic effects, tenant payment capacity and future rent-relief requests remain uncertain.
- Risks include office-sector weakness and vacancy, rising construction costs and delivery delays, interest-rate volatility, refinancing access, and the expected LIBOR transition. The company reported six partially vacant and two fully vacant buildings at the time of its discussion; vacant space was 2.3% of portfolio area and carried approximately $2.6m in annual costs.
- Management disclosed no material off-balance-sheet arrangements and no material legal proceedings. Letters of credit outstanding were $18.7m and were not recorded on the balance sheet. The company is externally managed by affiliates of its chairman and CEO, with related-party management and administration fees.
Important facts for investors to verify
- Whether legal-settlement income materially overstates recurring earnings and FFO trends.
- Tenant retention, leasing progress and costs associated with vacant properties and lease terminations.
- Refinancing plans and funding for 2022 mortgage maturities, alongside remaining credit capacity and covenant headroom.
- The sustainability of common distributions relative to recurring cash flow and FFO, considering preferred distributions and financing needs.
- Potential dilution and cost of further common or preferred issuance, and the implications of related-party management arrangements.