Gladstone Commercial Corporation (NASDAQ:GOOD) has not yet reported fourth-quarter results, but the industrial real estate investment trust (“REIT”) announced last week that it was cutting its monthly dividend by 20%.
The new dividend payout will be $0.10 per share per month going forward, citing economic headwinds and a desire to conserve capital.
Gladstone Commercial’s cash flow will be relieved as a result of the trust’s investment adviser temporarily lowering its incentive fee.
Based on valuation and yield, I believe the market overreacted to the announcement, and the stock is a contrarian buy.
Adjusted Dividend Payout
According to an announcement made on January 10, 2022, Gladstone Commercial is experiencing economic headwinds, which have resulted in a dividend adjustment.
The REIT will now pay $0.10 per share monthly, up from $0.1254 per share previously. The trust effectively cut the dividend by 20%, but it also announced that the company’s investment advisors will waive the incentive fee for the first two quarters of 2023.
The new record and payment dates for Gladstone Commercial’s 1Q-23 dividends are as follows:
Gladstone Commercial obviously expects the economy to deteriorate, and the dividend adjustments were made out of caution. Gladstone Commercial paid its dividend with funds from operations as of September 30, 2022.
Gladstone Commercial earned $1.61 per share in funds from operations over the previous twelve months while paying out a total of $1.50 per share. The implied payout ratio based on funds from operations was 93.4%, indicating a thin margin of safety, but the trust still paid out its dividend.
Gladstone Commercial’s payout ratio is expected to improve significantly with the new dividend pay-out of $0.10 per share per month. If the trust only paid $1.20 per share in the previous year, the FFO-based pay-out ratio would be 74.5%, providing passive income investors with a much higher margin of safety.
FFO Valuation
Assuming $1.60 per share in funds from operations in 2023, I believe Gladstone Commercial provides value to passive income investors. The stock of the trust is valued at 10.4x 2023 funds from operations (“FFO”), which is more than just a competitive multiple.
STAG Industrial Inc. (STAG) trades at an FFO multiple of 15.2x, assuming $2.30 in 2023 funds from operations, implying 5% YoY growth, so by comparison, Gladstone Commercial’s valuation reflects a high margin of safety as well.
Why Gladstone Commercial Could See A Lower Valuation
Following the announcement of the dividend cut, the real estate investment trust stock dropped by more than 14% on January 11, 2023, bringing the dividend yield based on a new forward dividend rate of $0.10 per share per month back up to 7.2%.
Since the dividend was just cut, I believe the risk of another dividend cut following the one announced last week is very low.
A downturn in the U.S. real estate and industrial markets, on the other hand, is a risk that passive income investors should consider.
My Conclusion
I believe the market is reacting too strongly to Gladstone Commercial’s dividend announcement. The announcement was unexpected, but the reduced dividend results in a much lower FFO-based payout ratio (75% as opposed to 93%), and the dividend is now much more sustainable.
I also believe that the Gladstone Commercial Corporation valuation has been reset at an unreasonably low level, providing passive income investors with a very attractive FFO multiple.
Be the first to comment