Gladstone Commercial Corporation (Nasdaq: GOOD) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in millions of dollars unless stated otherwise. Gladstone Commercial is an externally managed REIT focused primarily on office and industrial properties, generally leased on a net basis.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Lease revenue | $28.667 | $26.591 | $85.001 | $79.538 |
| Net income | $2.191 | $2.677 | $9.068 | $9.807 |
| Net income available to common shareholders | $(0.631) | $(0.170) | $0.543 | $1.304 |
| Common EPS, basic and diluted | $(0.02) | $(0.01) | $0.02 | $0.05 |
| FFO per common share and OP unit, basic | $0.39 | $0.40 | $1.17 | $1.21 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $43.066 | $40.791 |
- Q3 net income margin was approximately 7.6%, compared with 10.1% a year earlier; nine-month net income margin was approximately 10.7%, versus 12.3%.
- At September 30, total assets were $978.0 million, net real estate was $806.0 million, and total equity was $258.3 million. Cash and cash equivalents were $6.2 million, plus $2.8 million of restricted cash.
- Debt carrying amounts were $434.7 million of mortgage notes, $34.9 million under the revolver and $121.2 million under the term loan, or $590.8 million total. The reported weighted-average rate on all debt was approximately 4.33%; mortgage debt averaged 4.58%.
- Management reported available liquidity of $32.0 million at September 30: $6.2 million cash and $25.8 million available credit capacity. Credit-facility covenant compliance was reported. Capacity was $31.3 million as of October 30.
- Distributions per common share were $0.375 for Q3 and $1.125 for the first nine months, unchanged from 2018.
Material changes versus prior comparable periods
- Revenue grew 7.8% in Q3 and 6.9% for the first nine months. Management attributed growth mainly to acquisitions and, for same-store properties, rent escalations and expense recoveries. Same-store revenue increased 1.4% in Q3 and 1.1% year to date.
- Operating expenses increased 11.6% in Q3 and 10.3% year to date, faster than revenue. Depreciation and amortization rose 9.9% and 9.8%, respectively; property operating expense rose 21.4% and 13.1%.
- Interest expense increased 9.8% in Q3 and 11.1% year to date, reflecting additional mortgage and term-loan borrowings. As a result, net income declined 18.2% in Q3 and 7.5% year to date; common-shareholder income for the nine-month period fell to $0.543 million from $1.304 million.
- FFO available to common shareholders and non-controlling OP unitholders increased 6.0% in Q3 and 4.6% year to date, but basic FFO per share/unit declined to $0.39 from $0.40 for Q3 and to $1.17 from $1.21 year to date.
- The company acquired nine properties for $67.3 million during the first nine months, compared with two properties costing $22.8 million in 2018. It sold one non-core property for $6.85 million, recognizing a $2.95 million gain.
Outlook, risks and notable items
- Outlook: No specific earnings or FFO guidance is provided. Management said available liquidity and expected financing sources should support near-term distributions, debt service and operating costs, and expressed confidence in refinancing mortgage maturities. It plans to continue acquisitions, leasing and capital recycling, subject to financing availability.
- Portfolio: As of October 30, 2019, the company reported 109 properties totaling 13.1 million square feet across 24 states, 98.8% occupancy and a 7.1-year average remaining lease term. One building was partially vacant and one fully vacant at the time described; vacancy represented 1.2% of square footage at September 30, with approximately $0.5 million annual carrying costs.
- Debt and interest-rate exposure: The July 2019 credit-facility amendment increased commitments to a $100 million revolver and $160 million term loan, maturing in 2023 and 2024, respectively. Variable-rate debt is exposed to LIBOR; caps and swaps provide some hedging. The filing discusses the expected LIBOR transition to SOFR and related uncertainty.
- Maturities: Scheduled mortgage principal was $8.8 million for the remaining three months of 2019 and $31.1 million in 2020. The company subsequently repaid a $6.3 million mortgage on October 2, 2019.
- Subsequent preferred-stock refinancing: On October 4, the company issued 2.76 million Series E preferred shares at $25 each, raising approximately $66.6 million net. It used proceeds to redeem all Series A and B preferred shares on October 28 for approximately $56.9 million and to pay down the credit facility. Series E carries a 6.625% rate; Series A and B carried 7.75% and 7.50% rates.
- Other items and risks: Adoption of lease accounting added approximately $6.0 million of operating-lease right-of-use assets and liabilities for four ground leases. No impairment of held-and-used assets was identified in the period. The filing reports $8.3 million of letters of credit, no material off-balance-sheet arrangements, and no material legal proceedings. It warns that economic, property-market, tenant-credit, interest-rate and refinancing conditions could affect results and property values.
Important facts for investors to verify
- Track whether acquisitions and rent escalations continue to outpace higher property costs, depreciation and interest expense, and assess the decline in GAAP common EPS against FFO trends.
- Review debt maturities, refinancing progress, available credit capacity, covenant compliance and the effects of variable rates and the LIBOR-to-SOFR transition.
- Confirm the completed Series A/B redemptions, Series E financing costs and the resulting preferred-dividend burden and credit-facility balance.
- Monitor occupancy, lease expirations, vacant-property carrying costs and tenant concentration; the largest tenant represented 4.3% of nine-month lease revenue.
- Assess distributions relative to recurring cash generation and FFO, noting that FFO is a non-GAAP measure and is not equivalent to operating cash flow.