Gladstone Commercial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial amounts below are in U.S. dollars. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Lease revenue | $34.7 million | $33.6 million; up 3.1% |
| Operating expenses | $26.9 million | $24.1 million; up 11.7% |
| GAAP net income | $38,000 | $2.3 million |
| Net loss attributable to common stockholders | $3.0 million; $0.08 per share | $619,000; $0.02 per share |
| FFO available to common stockholders and non-controlling OP unitholders | $14.6 million; $0.40 per share/unit | $13.5 million; $0.39 per share/unit |
| Cash from operating activities | $16.9 million | $20.3 million |
| Cash and cash equivalents | $9.9 million | $11.0 million at December 31, 2020 |
| Total debt, net | $663.1 million | $669.3 million at December 31, 2020 |
At March 31, debt comprised $454.4 million of mortgage notes and $208.8 million of term loans; there were no revolver borrowings. The weighted-average interest rate on all debt was 3.52%. Available liquidity was $28.2 million, including $9.9 million cash and $18.3 million of additional credit-facility capacity. The company reported compliance with all credit-facility covenants.
Quarterly distributions declared per common share and non-controlling OP unit were $0.37545, unchanged from Q1 2020. The company’s weighted-average portfolio yield was 8.1%, versus 8.4% a year earlier. As of May 10, 2021, it reported 120 properties totaling 15.5 million square feet, 95.5% occupancy, and a 7.1-year average remaining lease term.
Changes and operating developments
- Revenue increased 3.1%, reflecting contractual rent increases and acquisitions, partly offset by lower expense recoveries and vacancy. Same-store revenue rose 5.3%, including $1.2 million of accelerated rent from early lease terminations.
- Operating expenses rose 11.7%, primarily as depreciation and amortization increased 18.5%; property operating expenses increased 5.6%. Management attributed higher vacancy-related property costs to increased vacancies in the portfolio.
- Net income fell substantially, with common-stockholder losses widening to $3.0 million. Higher depreciation and amortization, vacancy costs, and an $882,000 loss on property sales contributed. FFO increased 8.3% and FFO per share/unit rose to $0.40.
- The company acquired one fully leased, 180,152-square-foot Ohio property for $11.1 million, with a 14.2-year lease term. It sold two non-core properties for $5.5 million gross proceeds and recorded an $882,000 net sale loss.
- Five lease extensions or modifications covered 451,917 square feet. Five contractions or terminations reduced 300,641 square feet; the company reported replacement leases for 211,408 square feet with no downtime.
- Common-stock ATM sales raised $11.3 million net from 0.6 million shares. The company also issued $50.0 million under new Term Loan B, using the proceeds to repay revolver borrowings.
Outlook, risks, and unusual items
- No quantified earnings or FFO guidance is provided. Management said near-term liquidity was adequate, expected to refinance 2021–2022 mortgage maturities using refinancing, credit-facility availability, and equity issuance, and planned to continue its capital-recycling and industrial-growth strategies.
- Management reported collecting 98% of outstanding April 2021 cash base rent obligations and approximately 98% of March 2021 obligations as of May 10. It noted that future tenant relief requests and their outcomes remain uncertain.
- COVID-19, office-space demand, tenant payment capacity, vacancies, property values, access to financing, and refinancing requirements remain key uncertainties. Vacant space was 4.5% of portfolio square footage at March 31, with approximately $4.0 million in annual carrying costs.
- Debt maturities include $20.1 million during the remainder of 2021 and $105.8 million in 2022. Management expects to address upcoming maturities through refinancing, facility capacity, and possible equity issuance. Interest-rate exposure is partly managed with caps and swaps; the filing estimates a 1% LIBOR increase would increase annual interest expense by $2.4 million.
- Related-party fees included $1.4 million of base management fees, $1.2 million of incentive fees, and $297,000 of administration fees. The Adviser and Administrator are affiliates controlled by the company’s chairman and CEO.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether rent collections remain strong and tenant relief requests, vacancies, and leasing activity change after the filing date.
- How the company funds the 2021–2022 mortgage maturities and whether refinancing remains available on acceptable terms.
- Whether FFO growth is sustained, given GAAP losses, higher depreciation, property-sale losses, and reliance on accelerated rent in the quarter.
- The effect of further equity issuance on per-share results and distributions, and the terms and costs of related-party management arrangements.
- Exposure to office-market weakness, interest-rate movements, and the transition from LIBOR to a replacement benchmark.