Gladstone Commercial (GOOD) is a real estate investment trust focused on acquiring, owning and operating net leased industrial and office properties across the US. As of June 30, 2020, Gladstone Commercial’s real estate portfolio consisted of 122 properties located in 28 states, totaling approximately 15.1 million square feet. (GOOD site)
GOOD’s biggest geographic concentration is in the Southeast and Southwest, at 33% and 27%, respectively. Office, 53%, and Industrial, 43%, comprise the lion’s share of its property types.
Telecommunications is GOOD’s largest single industry exposure, at 16%, followed by Auto, 13%, Healthcare, 10%, Buildings/Real Estate, 7%, and Banking, 6%. It also has exposure to diversified Conglomerate services.
84% of GOOD’s tenant revenue is from tenants who on average contribute 1% or less of company revenue.
Unlike many other firms, GOOD has had attractive growth so far in 2020 – revenue was up 19.21%, EBITDA rose 7.67% and FFO was up 14.54%. Net income was down -53.11%, mainly due to a non-cash $1.7M impairment charge and $2.65M in additional, non-cash depreciation and amortization charges.
GOOD’s management is emphasizing an increase in GOOD’s portfolio of industrial allocation, which it believes will improve its property operating efficiencies, reduce capital expenditure levels, and potentially result in improved valuation over time.
The company’s industrial allocation has increased from 33% in January 2019 to 43% in Q2 200, with an objective of achieving a 60% allocation within the next 18 to 24 months. There’s a current pipeline of acquisition candidates of ~$255 million in volume, representing 16 properties, all of which are industrial.
COVID-19 Impact Muted:
Thus far, GOOD’s operations don’t appear to have been affected that much by the pandemic, with the exception of having to do virtual property tours instead of physical ones. They collected 98% of cash rents due during April, May and June during the COVID-19 global pandemic, with the remaining 2% of cash rents being rent deferrals to be paid in full no later than March 2021.
The company granted rent deferrals to three tenants in April representing approximately 2% of total monthly rental income throughout the second quarter. Those tenants continued to pay partial rent, and the deferrals ranged from 1.5 months to 3 months, with payback period ranges of six months to nine months currently scheduled to end in March 2021.
In Q3, they collected 99% of July, August, and September cash rent owed.
In Q2 2020, management executed a lease amendment to extend a 59,000 SF office tenant in Raleigh, North Carolina through 2025, extended a 22,000 SF industrial tenant in Raleigh through 2021, extended a 5,000 SF office tenant in Minneapolis through 2023, executed a lease to expand a tenant by 17,000 SF in Columbus, Ohio, with a lease expiration date of December 2025, and extended a 26,000 SF office in Green Tree Pennsylvania through 2031.
Subsequent to the end of Q2, they executed a lease amendment to extend a 42,000 SF office tenant in Richmond through 2026, and sold a 347,000 SF industrial property in Maple Heights, Ohio, for $11.4M, resulting in a net capital gain of $1.2M.
At $17.23, GOOD’s common shares yield 8.72%, with an FFO payout ratio of 93.90%. This isn’t a dividend growth stock – the monthly payouts had been steady at $.1250 since 2008, then management increased them to $.1252 in January 2020. They issued 25,800 shares for net proceeds of $0.5M in Q2 under their ATM program.
An attractive feature of GOOD’s common and preferred distributions is that management tends to declare the next quarter’s three monthly payout amounts and pertinent dates in the middle of the first month of each quarter.
GOOD has two cumulative preferred series, Gladstone Commercial Corp., 7.00% Series D Cumulative Redeemable Preferred Stock (GOODM), and…
The D shares are currently yielding 6.94%, while the E shares yield 6.59%. Both are hovering near their $25.00 call values. Management issued 67,200 of the E shares for net proceeds of $1.5M in Q2 2020.
Like the common, management already declared the three Q4 2020 monthly preferred distributions this week:
GOOD’s common looks undervalued on a price/FFO and an EV/EBITDA basis, while its P/book is higher than sector medians, and its P/sales is roughly in line.
ROA and ROE ratios are uninspiring, while the debt/equity leverage is a bit lower than sector medians. EBITDA/interest coverage looks reasonable, and the EBITDA margin is better than the median.
Management repaid $5.9M in fixed rate mortgage debt with an interest rate of 6.00% and repaid $12.1M of variable rate mortgage debt at a weighted average rate of LIBOR plus 2.25% in Q2 2020.
GOOD’s first major debt maturity doesn’t occur until 2022, but it’s only 16% of outstanding debt, at $21 million.
GOOD uses a mix of mortgage debt, an LC, a term loan in its debt profile, in addition to its equity mix of preferred and common shares:
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